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Issues

Buddy and Andrew have been in talks with a lawyer and the lawyer has suggested them to talk to their accountant to discuss the tax treatment of 7% returns. He was uncertain whether those would reflect guaranteed payments for capital or would be included in the partner’s allocable share of partnership income or loss.

Conclusion

In this case, according to Andrew Kreisberg in tax analysis the periodical “Tax notes” in July of 2011 state the payments are dependent on profits to an extent, such as fixed percentage of partnership net income.They are generally treated as allocations under section 704(b) when recognized and as distributions under section 731 when paid.
To an extent the payments redetermined without regard to income of the partnership and are payable in all events.They are generally treated as guaranteed payments under section 707(c) provided that they are paid to one acting in his capacity as a partner, rather than a third party,in which case they would fall under section 707(a)).

The legislative history of section 707(c)

The congress found the differing treatment to be unrealistic and unnecessarily complicated...................

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