Tax Reseach Problem
Alvin Conley has been a partner in a large accounting partnership for 25 years. This year, he decided to retire. Although Alvin's share of partnership capital is only $100,000, the partnership agreed to pay Alvin a total of $500,000 to liquidate his interest in the partnership. The payments will be made over ten years, $50,000 per year. The partnership agreement only requires the partnership to pay Alvin his $100,000 share of partnership capital, so the terms agreed to by Alvin and the remaining partners represent a very generous severence package. The remaining partners are comfortable with the payments, however, because Alvin brought in a lare percentage of the firm's clients over the years, and thus is responsible for a lare part of the firm's revenues, even after he retires. How will the payments be treated for tax purposes by both Alvin and the partnership?