A division of earnings in accordance with the partnership agreement in effect at the
time that a partnership return for a taxable year is due, will be recognized for income
tax purposes and for figuring NESE.
Allegations and agreement to the distribution of earnings can usually be accepted.
Further inquiry should be made if:
It appears the percentage has been changed arbitrarily from year to year, or;
Distribution appears unreasonable or arbitrary, or appears designed solely to qualify
one for benefits or avoid work deductions.
NOTE: Real changes in duties and responsibilities often give rise to changes in the percentage
of distribution which are reasonable.
The distribution of income must:
Allow for reasonable compensation for services rendered to the partnership by the
donor before the donee's share is determined; and
Ensure that the share of the partnership income allocated to the donee is not proportionately
greater than the donor's share attributable to the donor's capital.