A partnership makes a liquidating payment to a retiring general partner in a service partnership. The payment is for the partner's share of unrealized receivables. How is this payment classified under IRC §736?

Answer options:

§736(a) Income Payment (Ordinary Income)

§736(b) Property Payment (Capital Gain)

Tax-free return of capital.

Dividend.

How to approach this question

IRC §736 rules: Payments for unrealized receivables to a general partner in a service partnership are §736(a) payments (Ordinary Income/Guaranteed Payment).

Full Answer

A.§736(a) Income Payment (Ordinary Income)✓ Correct

IRC §736(a) vs (b). For service partnerships, payments for unrealized receivables are treated as distributive shares or guaranteed payments (Ordinary), not property payments.

Common mistakes

Treating all liquidation payments as property payments.

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