One of your clients is a dermatologist who is on the staff of a local hospital and also a partner in a medical partnership. He receives a K-1 at the end of the year that lists him as a limited partner and includes amounts identified as Guaranteed Payments. You client explains that the amount listed as Guaranteed Payments is his share of the partnership income and does not represent payment for services provided to or on behalf of the partnership. He contends that they should be reported as passive income and therefore not subject to Self-Employment tax.

Based on your review, formulate a memorandum to your client that explains how the IRS views Guaranteed Payments as well as explains your ethical position on reporting them on Schedule E.