Rev. Rul. 80-234

ISSUE

Is the full amount of a guaranteed payment under section 707(c) of the Internal Revenue Code includible in the gross income of a partner in the year of receipt, under the circumstances described below?

FACTS

A is a partner in partnership X. In 1979, pursuant to an agreement between A and X, A received 500x dollars as a "finder's fee" for obtaining acceptable applicants for loans. The finder's fee is a part of the acquisition cost of the loans that must be capitalized and amortized over the lives of the loans made to the applicants. See Rev. Rul. 57-400, 1957-2 C.B. 520. A included in gross income for 1979, an amount equal to that amount of the expense amortized by X in 1979. X reports its income on a calendar year basis.

LAW AND ANALYSIS

Section 707(c) of the Code provides that to the extent determined without regard to the income of the partnership, payments to a partner for services or the use of capital shall be considered as made to one who is not a member of the partnership, but only for the purposes of section 61(a) (relating to gross income) and, subject to section 263, for purposes of section 162(a) (relating to trade or business expenses).

Section 1.707-1(c) of the Income Tax Regulations provides that a partner must include such payments as ordinary income for the partner's taxable year within or with which ends the partnership taxable year in which the partnership deducted such payments as paid or accrued under its method of accounting. The partnership must capitalize the expenditure and is recovering the cost through amortization over the life of the asset. A is relying on section 1.707-1(c) of the regulations to include in gross income in 1979, only the amount equal to that being deducted by the partnership in 1979. This statement in section 1.707-1(c) relates to section 706(a) of the Code, which is a timing provision only. In this regard, the Tax Court of the United States in Cagle v. Commissioner, 539 F.2d 409, 414 N. 7 (5th Cir. 1976), aff'g 63 T.C. 86, 95 (1974) commented on the purposes underlying section 1.707-1(c):

We think that all Congress meant was that guaranteed payments should be included in the recipient partner's income in the partnership taxable year ending with or within which the partner's taxable year ends and in which the tax accounting treatment of the transaction is determined at the partnership level.

See also S. Rept. No. 94-938 (Conf. Rep.), 94th Cong., 2d Sess. 93 (1976), 1976-3 C.B. 131.

This language merely reflects the application of the aggregate rather than the entity approach to the question of timing for inclusion of these amounts in the partner's gross income. The amount received as a finder's fee is includible in the partner's gross income under section 61 of the Code. Section 1.707-1(c) of the regulations does not permit a partner to defer inclusion of any portion of the payment received simply because the partnership that paid or accrued the expense must capitalize and amortize the expense.

HOLDING The taxpayer A cannot apportion the amount received, but must include in gross income in 1979 the 500x dollars received in that year as a finder's fee.