August 20, 1980

Your client, a nonresident of the Commonwealth of Massachusetts, is a former partner of a national accounting firm which derives some of its income from business conducted within the Commonwealth. Under his retirement contract with the partnership, your client receives fixed monthly payments for a term certain from the partnership. His full share of the partnership capital has already been returned; he no longer has an interest in partnership property; and he no longer provides services to the partnership.

You make the following inquiries regarding the proper tax treatment of these payments by your client and by the partnership: first, whether the partnership may deduct such payments as an expense; second, whether the payments are subject to the Massachusetts income tax; third, whether the payments are subject to Massachusetts income tax withholding; and fourth, whether the retired partner should be listed on the partnership return.

Under Internal Revenue Code Section 736, payments made in liquidation of a retiring partner's interest, but not attributable to such partner's interest in partnership property, and determined without regard to partnership income, are treated as guaranteed payments. Code Section 707(c) grants the partnership a deduction for these payments as an ordinary and necessary business expense. Guaranteed payments are taxable as ordinary income to the retiring partner, and, like the partner's distributive shares, are not generally subject to federal income tax withholding.

The taxation of partnership income under Massachusetts General Laws Chapter 62, Section 17 is similar to the federal treatment. A resident partner will be subject to Massachusetts income tax in his individual capacity on his distributive share of the federal net partnership income and any guaranteed payments.

Under General Laws Chapter 62, Sections 17(b) and 5A, a nonresident partner is subject to income taxation on the sum of his distributive share of the federal net partnership income and any guaranteed payments, to the extent that the partnership income is derived from sources within the Commonwealth. In order to determine such amount, the partnership applies its Massachusetts apportionment percentage, calculated in accordance with General Laws Chapter 63, Section 38, to the nonresident partner's distributive share and guaranteed payments.

Based on the foregoing, it is ruled that: (1) to the extent that guaranteed payments are a deduction for the partnership federally, they area deduction for Massachusetts income tax purposes; (2) the retired partner is subject to income taxation in Massachusetts to the extent that the partnership income is derived from sources within the Commonwealth; (3) these payments are not subject to Massachusetts income tax withholding; and (4) the partnership return should continue to list the partner and the payments to him which are taxable in Massachusetts.

The partnership return (Form 3) should list the retired partner on Schedule A with the active partners and should designate, after his name, that he is retired. Guaranteed payments made to him should be multiplied by the Massachusetts apportionment percentage as calculated in Schedule E. The amount so determined should be entered in Item 3 of Schedule A and should be reported by him on his income tax return (Form 1-NR) as income subject to taxation in Massachusetts. The deduction to the partnership for guaranteed payments will already be reflected in Schedule C, Item 1 of Form 3 and in the active partners' distributive shares in Schedule A.

Very truly yours,

/s/L. Joyce Hampers

L. Joyce Hampers
Commissioner of Revenue

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LR 80-56