314 / What are the income tax results of a partnership income continuation plan?

A partnership can agree to make payments to a retiring partner or to the estate or beneficiary of a deceased partner, other than payments in liquidation of that partner’s partnership interest. The payments either may be periodic guaranteed amounts or a share of future profits. In either case, the payments will be taxed as ordinary income to the payee.¹

Payments of a guaranteed amount will be deductible by a partnership.²

Similarly, payments representing a share of profits will reduce the remaining or surviving partners’ share of distributable taxable income.³

This tax treatment applies only to payments made by a partnership as an entity and not to payments made by individual remaining or surviving partners. A partnership, even a two person partnership, will not be considered as having terminated so long as these payments are being made because partners’ interests have not been liquidated.⁴