Partnership Taxation (Graduate Tax Program)Prof. MauleSpring 2009Rev. Rul. 81-3001981-2 C.B. 143ISSUE Are the management fees paid to partners under the circumstances described below distributive shares of partnership income or guaranteed payments under section 707(c) of the Internal Revenue Code? FACTS The taxpayers are the general partners in a limited partnership formed to purchase, develop and operate a shopping center. The partnership agreement specifies the taxpayers'shares of the profit and loss of the partnership. The general partners have a ten percent interest in each item of partnership income, gain, loss, deduction, or credit. In addition, the partnership agreement provides that the general partners must contribute their time, managerial abilities and best efforts to the partnership and that in return for their managerial services each will receive a fee of five percent of the gross rentals received bythe partnership. These amounts will be paid to the general partners in all events. Pursuant to the partnership agreement, the taxpayers carried out their duties as general partners and provided the management services required in the operation of the shopping centers. The management fee of five percent of gross rentals were reasonable in amount for the services rendered. LAW AND ANALYSIS Section 707(a) of the Code provides that if a partner engages in a transaction with a partnership other than in the capacity of a member of such partnership, the transaction shall, except as otherwise provided in this section, be considered as occurring between the partnership and one who is not a partner.