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Keywords

willpartnership

willpartnershiprespondent

Related Cases

Pratt v. Commissioner of Internal Revenue, 64 T.C. 203

Facts

Edward T. and Billie R. Pratt, William D. and Anita Pratt, and Jack E. and Crystal A. Pratt were general partners in two limited partnerships, Parker Plaza Shopping Center, Ltd. and Stephenville Shopping Center, Ltd. They accrued management fees for their services and interest on loans made to the partnerships, but these amounts were not paid to them. The partnerships reported income on an accrual basis, while the petitioners reported on a cash basis. The IRS determined deficiencies in their income taxes for the years 1967 through 1969, questioning the deductibility of the management fees and the treatment of the interest payments.

Issue

Whether the management fees for services performed by the petitioners and the interest earned on loans made by them to the partnerships are deductible by the partnerships and includable in the income of the petitioners who report income on a cash basis.

The issue for decision is whether management fees for services performed by petitioners for, and interest earned on, loans made by petitioners to two limited partnerships, of which petitioners were general partners, are deductible by the partnerships, and, if so, whether these amounts are includable in the income of petitioners who report income on the cash basis in the year accrued and deducted as business expenses by the partnerships which report on an accrual basis, even though petitioners did not receive payment of the amounts in the years of accrual by the partnerships.

Rule

Management fees paid to partners for services rendered are not deductible by the partnership if they are not considered 'guaranteed payments' under section 707(c) of the Internal Revenue Code. Interest payments on loans from partners to partnerships can be treated as guaranteed payments and are includable in the partners' income for the year accrued.

Partnership is not entitled under sec. 707(a) to deduct accrued management fees as being from a transaction by a partner in his capacity other than as a partner, since under the facts here the management fees arose from petitioners' relation as partners to the partnership and, therefore, each petitioner's distributive share of partnership income in each year is increased by the management fees credited to his account by the partnership.

Analysis

The court analyzed whether the management fees were guaranteed payments under section 707(c). It concluded that the fees were based on a percentage of the partnership's gross rentals, which are considered income, thus failing the requirement of being determined without regard to partnership income. Consequently, the management fees were not deductible by the partnerships and instead increased the partners' distributive shares of income. The court agreed with the IRS that the interest payments were guaranteed payments and should be included in the partners' income for the year accrued.

In our view the management fees credited to petitioners were not ‘guaranteed payments' under section 707(c) even though, for reasons hereinafter discussed, we would not agree with petitioners' position that they were not required to include the amounts of the fees in their income for the years here in issue even if they were to be so considered.

Conclusion

The court ruled in favor of the IRS, determining that the management fees were not deductible by the partnerships and that the interest payments were guaranteed payments includable in the partners' income.

Decisions will be entered for the respondent.

Who won?

The Commissioner of Internal Revenue prevailed because the court upheld the IRS's determination that the management fees were not deductible and that the interest payments were includable in the partners' income.

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