Even if both partners are S corporations the other tax preparer wants to issue the payments to them as consulting expense, which according section 707(a) I don't believe will fly.  I believe the payments for services to the partners needs to be reported on line 1 of the K-1 as ordinary income, not as expenses of the partnership.

Yes once it feeds into an S corp there will be salaries and other expenses but my concern is how that income feeds into the individual return, or S corp if we incorporated my client.

When a partnership has the flexibility to modify their income allocation based on the 761 regulation why would there be consulting expense paid to the partners....that is what I can't find support for.  Whether or not a 1099 is issued, I don't see that using consulting expense is an acceptable method of reporting income to the partners.