Final answer:
Disability buyout premiums paid by partners are not tax deductible, and the benefit received is not taxable as income. Therefore, the correct answer is D.
Step-by-step explanation:
When a disability buyout is funded by the partners, the premiums paid are generally not tax-deductible, and the value of the benefit received is not taxable as income. , and the value of the benefit is not taxable as income. The rationale behind this taxation approach is that since the premiums are paid with after-tax dollars, the benefits received—used to buy out the disabled partner's interest in the business—are received tax-free.
This encourages business continuity planning and provides a clear exit strategy for partners without additional tax burdens at the time of the buyout. This means that the correct answer is D: Not deductible