§736 Payments to a Retiring Partner or a Deceased Partner’s Successor in Interest

Summary

Payments made to buy out a retiring partner or to pay a deceased partner’s heir are treated one of two main ways. If the amount is figured by looking at the partnership’s income, it counts as the partner’s share of that income. If the amount is fixed without regard to partnership income, it counts as a guaranteed payment under the tax rules. But if, under rules made by the Secretary, the payment is really for the partner’s share of partnership property, it is treated as a distribution instead of income or a guaranteed payment. Payments for "unrealized receivables" (rights to income not yet collected) or for goodwill are not treated as payments for partnership property, except if the partnership agreement says otherwise for goodwill. That exception only applies when capital is not a main way the partnership makes money and the partner was a general partner.