Generally if payments are in exchange for partnership property, the amount received in excess of the partner’s outside basis in his/her partnership interest is taxed as capital gain. However if the payments represent a distributive share of partnership income or are deemed to be guaranteed payments, the payments are taxed as ordinary income.
According to Tax Court Memo 2009-243 Wallis v. Commissioner, retirement payments to a withdrawing partner as part of the liquidation of his/her partnership interest under §736 were considered essentially the equivalent of guaranteed payments and taxed as ordinary income. Yikes! So be careful to take the time to document.
In order to be allocated and taxed accordingly under Reg. §1.736-1(a) (2), payments for a partner’s interest should be clearly defined as distributions for partnership property or guaranteed payments.