A payment to a retiring general partner for his or her share of goodwill of a partnership in which capital is a material income-producing factor is classified as a § 736a) income payment and results in ordinary income to the retiring partner and a current deduction to the partnership as long as the goodwill payment is provided for in the partnership agreement.

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Payments for a retiring partner's share of goodwill are generally considered payments for the partner's interest in the partnership's capital and are treated under § 736(b) as a distribution of property, not as an ordinary income payment under § 736(a). This means the payment does not result in ordinary income to the retiring partner (beyond any amounts considered as guaranteed payments for services or use of capital) and is not deductible by the partnership.

A Payment to a Retiring General Partner for His or Her