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that the payments are rental income to petitioners and an
additional rental expense of the Bitker partnership.
Payments a partner receives from a partnership generally fall
into one of three categories. First, a partner may receive
payments representing distributions of his/her distributive share
of partnership income. See sec. 731. Second, a partner may
receive payments in circumstances where he/she is not treated as a
partner. Sec. 707(a). And third, a partner may receive
guaranteed payments for services or use of capital that do not
represent distributions of partnership income. Sec. 707(c).
Payments made to a partner either in his capacity other than
as a partner under section 707(a) or as guaranteed payments under
section 707(c) must satisfy the requirements of section 162(a)
before such payments may be deducted by the partnership. Cagle v.
Commissioner, 63 T.C. 86, 91, 95 (1974) (no deduction is allowed if
the payment by the partnership to a partner constitutes a capital
expenditure), affd. 539 F.2d 409 (5th Cir. 1976).
Section 1.707-1(a), Income Tax Regs., provides in part:
Where a partner retains the ownership of property but
allows the partnership to use such separately owned
property for partnership purposes (for example, to obtain
credit or to secure firm creditors by guaranty, pledge,
or other agreement), the transaction is treated as one
between partnership and a partner not acting in his
capacity as a partner.
Here, petitioners retained ownership of their farmland but
allowed the Bitker partnership to use the land in connection with
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