Under the ABC partnership agreement, partner A is entitled to a fixed annual payment of $10,000 for services, without regard to the income of the partnership. His distributive share of partnership income is 10 percent.
After deducting the $10,000 guaranteed payment, the partnership has $50,000 of ordinary income. A’s 10 percent distributive share of that amount is $5,000.
A must include $15,000 as ordinary income for his taxable year within or with which the partnership taxable year ends — the $10,000 guaranteed payment plus his $5,000 distributive share.
A’s $10,000 payment for services is fixed and does not depend on partnership income, so it is a guaranteed payment under section 707(c).
The $10,000 guaranteed payment is deducted first, leaving $50,000 of ordinary income to be shared among the partners.
A’s 10 percent distributive share is applied to the $50,000 remaining, giving him $5,000.
A reports $15,000 of ordinary income in total — the $10,000 guaranteed payment plus the $5,000 distributive share.
