A is a retired partner of ABC a personal service partnership

A is a retired partner of ABC, a personal service partnership. A has NOT rendered services to ABC since her retirement. Under the provisions of A\'s retirement agreement, ABC is obligated to pay A 10% of the partnership\'s net income each year. In compliance with this agreement, ABC paid A $25,000 during the current year. The partnership earned ordinary income of $200,000 and capital gains of $50,000 during the current year. How should A treat this $25,000? A) As $20,000 ordinary income and $5,000 capital gain, B) as capital gain, C) as not taxable, D) as ordinary income.

Solution

$25000 received by A a retired partner will be treated as ordinary income because Mr. A is receiving a income from partnership firm on the basis of considtion mentioned in aggrement so it can not be trated as capital gain and can be treated as other income/ordinary income.