I agree.  That is the issue and I've been telling my client (one of the partners) that this is not an acceptable way to prepare the K-1s for the partnership.  I'm concerned also in an audit the auditor could say those 1099 payments should really be guaranteed payments....

I've been pushing instead for them to either modify the partnership agreement or to plan, according to the 761 regulations, to annually agree to a payout that they can either memorialize or at least verbally agree on.

The other tax preparer has said since the other partner is an S corps there won't be a need a 1099 for them, the preparer will just treat payments as consulting expense.  But I can't find anything that supports treating as consulting/contractor expense.  I don't think it matters whether or not the partner is incorporated or not.  I can't find anything that supports treating that way.