Choice "D" is correct. The guaranteed payment increases Peters' ordinary income by $16,000 but does not affect Peters' tax basis because guaranteed payments are not undistributed earnings (they are distributed to the partner). The answer is "II only."Rule: Guaranteed payments are reasonable compensation paid to a partner for services rendered without regard to the partner's ratio of income. They are allowable tax deductions to the partnership and ordinary income to the partner receiving them.Note: A guaranteed payment will not increase a partner's basis in the partnership because the payment has been distributed to the partner.Choices "b", "a", and "c" are incorrect, per the above rule and note.