U.S. Code » Title 26 » Subtitle Subtitle A— Income Taxes › Chapter CHAPTER 1— NORMAL TAXES AND SURTAXES › Subchapter Subchapter K— Partners and Partnerships › Part PART II— CONTRIBUTIONS, DISTRIBUTIONS, AND TRANSFERS › Subpart Subpart B— Distributions by a Partnership

26 U.S.C. § 736

Payments to a retiring partner or a deceased partner’s successor in interest

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(a) Payments considered as distributive share or guaranteed paymentPayments made in liquidation of the interest of a retiring partner or a deceased partner shall, except as provided in subsection (b), be considered—(1) as a distributive share to the recipient of partnership income if the amount thereof is determined with regard to the income of the partnership, or(2) as a guaranteed payment described in section 707(c) if the amount thereof is determined without regard to the income of the partnership.(b) Payments for interest in partnership(1) General rule

Payments made in liquidation of the interest of a retiring partner or a deceased partner shall, to the extent such payments (other than payments described in paragraph (2)) are determined, under regulations prescribed by the Secretary, to be made in exchange for the interest of such partner in partnership property, be considered as a distribution by the partnership and not as a distributive share or guaranteed payment under subsection (a).

(2) Special rulesFor purposes of this subsection, payments in exchange for an interest in partnership property shall not include amounts paid for—(A) unrealized receivables of the partnership (as defined in section 751(c)), or(B) good will of the partnership, except to the extent that the partnership agreement provides for a payment with respect to good will.(3) Limitation on application of paragraph (2)Paragraph (2) shall apply only if—(A) capital is not a material income-producing factor for the partnership, and(B) the retiring or deceased partner was a general partner in the partnership.(Aug. 16, 1954, ch. 736, 68A Stat. 248; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 95–600, title VII, § 701(u)(13)(B), Nov. 6, 1978, 92 Stat. 2918; Pub. L. 103–66, title XIII, § 13262(a), (b)(2)(B), Aug. 10, 1993, 107 Stat. 541.)Editorial NotesAmendments

1993—Subsec. (b)(3). Pub. L. 103–66, § 13262(a), added par. (3).

Subsec. (c). Pub. L. 103–66, § 13262(b)(2)(B), struck out heading and text of subsec. (c). Text read as follows: “For limitation on the tax attributable to certain gain connected with section 1248 stock, see section 751(e).”

1978—Subsec. (c). Pub. L. 95–600 added subsec. (c).

1976—Subsec. (b)(1). Pub. L. 94–455 struck out “or his delegate” after “Secretary”.

Statutory Notes and Related SubsidiariesEffective Date of 1993 Amendment

Pub. L. 103–66, title XIII, § 13262(c), Aug. 10, 1993, 107 Stat. 541, provided that:“(1)In general.—The amendments made by this section [amending this section and section 751 of this title] shall apply in the case of partners retiring or dying on or after January 5, 1993.“(2)Binding contract exception.—The amendments made by this section shall not apply to any partner retiring on or after January 5, 1993, if a written contract to purchase such partner’s interest in the partnership was binding on January 4, 1993, and at all times thereafter before such purchase.”

Effective Date of 1978 Amendment

Amendment by Pub. L. 95–600 applicable to transfers beginning after Oct. 9, 1975, and to sales, exchanges, and distributions taking place after Oct. 9, 1975, see section 701(u)(13)(C) of Pub. L. 95–600, set out as a note under section 751 of this title.

Notes of Decisions
Cited in 20 cases (1 in the last 5 years), 1949–2021 · leading case: Pasternack v. Shrader, 863 F.3d 162 (2d Cir. 2017).
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Pasternack v. Shrader, 863 F.3d 162 (2d Cir. 2017). “” 26 U.S.C. § 736 (a), (b). We have no difficulty in concluding that SRP payments fit that description.”
James W. Robertson v. Alexander Grant & Co., 798 F.2d 868 (5th Cir. 1986). “The section 736 exception is a shorthand reference to section 736 of the Internal Revenue Code, 26 U.S.C. § 736 . Three sections of ERISA, sections 1021, 1051, and 1101, incorporate the description contained in section 736 to exempt certain payments to partners.”
V. Zay Smith v. Comm'r, 313 F.2d 16 (10th Cir. 1963). · cites it 2× “39 payment to petitioner was in liquidation of his interest in the partnership and, accordingly, it was taxable as ordinary income under Section 736(a) of the Internal Revenue Code of 1954, 26 U.S.C. § 736 (a). 5 Specifically, the Commissioner contended that the $2,045.”
Wallis v. Comm'r of the Internal Revenue Serv., 391 F. App'x 826 (11th Cir. 2010). · cites it 3× “As such, the Tax Court concluded that the Schedule C payments were “guaranteed payments” under 26 U.S.C. § 736 (a)(2) to be taxed as ordinary income pursuant to 26 U.”
Sokol Bros. Furniture Co. v. Comm'r, 185 F.2d 222 (5th Cir. 1950). “736(a), Internal Revenue Code, 26 U.S.C.A. § 736 (a). 2 . “(1) General rule.”
Lamb v. Connecticut Gen. Life Ins., 509 F. Supp. 560 (D.N.J. 1980). “, a widow) under 26 U.S.C. § 736 ( 29 U.S.C. § 1051 (5)); .”
Ray D. Bateman & Helen C. Bateman v. United States of Am., Dow R. Bateman & Elaine C. Bateman v. United States, 490 F.2d 549 (9th Cir. 1973). “The government urges, however, that good will should be treated differently in a personal service family partnership than in a personal service non-family partnership.”
Est. of Quirk v. Comm'r of Internal Revenue, 928 F.2d 751 (6th Cir. 1991). “The main issue before the tax court was whether QLM’s cash payments to Quirk, and the remaining partners’ satisfaction of Quirk’s share of QLM liabilities, were properly characterized as ordinary taxable income or return of partnership basis under 26 U.S.C. § 736 . 5 The Quirks…”
Hadley Furniture Co. v. United States, 87 F. Supp. 590 (D. Mass. 1949). “In 1943 it elected, under the provisions of 26 U.S.C.A. § 736 (a), to report its income from installment sales for excess profits tax purposes on the accrual basis continuing however to report this income in accordance with Section 44 for income tax purposes.”
White Bros. Co. v. Comm'r, 180 F.2d 451 (5th Cir. 1950). · cites it 2× “Nevertheless, it elected to and did file its excess-profits tax returns for those years on the accrual basis under Section 736(a) of said code, 26 U.S.C.A. § 736 (a). In its excess-profits tax return for 1943, the taxpayer claimed an excess-profits credit based on average…”
Pidot v. State Tax Comm'n, 118 A.D.2d 915 (N.Y. App. Div. 3d Dep't 1986). · cites it 2× “4 (d) applies only to former employees, not former partners, and that the law firm’s payment to petitioner was properly considered a guaranteed payment under 26 USC § 736 (a), so that petitioner continues to be viewed as a partner for tax purposes.”
Carroll Furniture Co. v. Comm'r, 197 F.2d 718 (5th Cir. 1952). “Whether a taxpayer which had elected to compute its income for excess profits tax purposes on the accrual basis in accordance with Section 736(a) of the Internal Revenue Code, 26 U.S.C.A. § 736 (a), rather than on the installment basis in accordance with Section 44(a), could,…”
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26 U.S.C. § 736(a): 1 case
May, Stern & Co. v. Comm'r, 181 F.2d 407 (3d Cir. 1950).
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