Wally Byam is a retired partner of RV Partners, a personal service partnership. Wally has not rendered any services to RV Partners since his retirement over 10 years ago. Under the provisions of Wallys retirement agreement, RV Partners is obligated to pay Wally 10 percent of the partnerships net income each year. In compliance with this agreement, RV Partners paid Wally $25,000 this year. How should Wally treat this $25,000?

(A)

a) Not taxable

b) Ordinary income

c) Short-term capital gain

d) Long-term capital gain

(B) Explain your source of authority for your answer in QUESTION 12 (A)