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Tax Court Finds Retired Law Partners Guaranteed Payments Are Reportable As Ordinary Income, Not Capital Gains

The Tax Court found that a retired law firm partner’s guaranteed payments were reportable as ordinary income, not as a capital gain.  In the case, the taxpayer was an equity partner of a law firm.  Each equity partner was entitled to specific amount of Schedule C Unit payments beginning three years after their 68th birthday.  The Tax Court found these units to be awarded equally to each partner.

The size of the partner’s interest in the firm or the firm’s income had no bearing on the Schedule C Unit payments.  These payments were not a part of the partner’s respective shares of partnership income or partnership property and were not reflected in the partner’s respective capital accounts.  The court further found these payments were intended to be treated as retirement benefits.

Points of Interest

  • The Patient Protection and Affordable Health Care Act passed Congress and was signed by the President on March 23, 2010.
  • With the new law comes an obligation for all individuals to be insured. Those individuals who refuse to get coverage will face a fine of up to $695.
  • Not only are there incentives for small businesses to cover employees and new opportunities for individuals to obtain health insurance, a whole host of tax issues have surfaced.

By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors