I 

112TH CONGRESS 

2D SESSION H. R. 4016 

To amend the Internal Revenue Code of 1986 to provide for the proper 

tax treatment of personal service income earned in pass-thru entities. 

IN THE HOUSE OF REPRESENTATIVES 

FEBRUARY 14, 2012 

Mr. LEVIN (for himself and Mr. RANGEL) introduced the following bill; which 

was referred to the Committee on Ways and Means 

A BILL 

To amend the Internal Revenue Code of 1986 to provide 

for the proper tax treatment of personal service income 

earned in pass-thru entities. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE; ETC. 

4 (a) SHORT TITLE.—This Act may be cited as the 

5 ‘‘Carried Interest Fairness Act of 2012’’. 

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment 

9 to, or repeal of, a section or other provision, the reference 


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1 shall be considered to be made to a section or other provi2 sion of the Internal Revenue Code of 1986. 

3 (c) TABLE OF CONTENTS.—The table of contents for 

4 this Act is as follows: 

Sec. 1. Short title; etc. 

Sec. 2. Partnership interests transferred in connection with performance of 

services. 

Sec. 3. Special rules for partners providing investment management services to 

partnerships. 

5 SEC. 2. PARTNERSHIP INTERESTS TRANSFERRED IN CON6 NECTION WITH PERFORMANCE OF SERVICES. 

7 (a) MODIFICATION TO ELECTION TO INCLUDE PART8 NERSHIP INTEREST IN GROSS INCOME IN YEAR OF

9 TRANSFER.—Subsection (c) of section 83 is amended by 

10 redesignating paragraph (4) as paragraph (5) and by in11 serting after paragraph (3) the following new paragraph: 

12 ‘‘(4) PARTNERSHIP INTERESTS.—Except as 

13 provided by the Secretary— 

14 ‘‘(A) IN GENERAL.—In the case of any 

15 transfer of an interest in a partnership in con16 nection with the provision of services to (or for 

17 the benefit of) such partnership— 

18 ‘‘(i) the fair market value of such in19 terest shall be treated for purposes of this 

20 section as being equal to the amount of the 

21 distribution which the partner would re22 ceive if the partnership sold (at the time of 

23 the transfer) all of its assets at fair market 


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1 value and distributed the proceeds of such 

2 sale (reduced by the liabilities of the part3 nership) to its partners in liquidation of 

4 the partnership, and 

5 ‘‘(ii) the person receiving such interest 

6 shall be treated as having made the elec7 tion under subsection (b)(1) unless such 

8 person makes an election under this para9 graph to have such subsection not apply. 

10 ‘‘(B) ELECTION.—The election under sub11 paragraph (A)(ii) shall be made under rules 

12 similar to the rules of subsection (b)(2).’’. 

13 (b) EFFECTIVE DATE.—The amendments made by 

14 this section shall apply to interests in partnerships trans15 ferred after the date of the enactment of this Act. 

16 SEC. 3. SPECIAL RULES FOR PARTNERS PROVIDING IN17 VESTMENT MANAGEMENT SERVICES TO 

18 PARTNERSHIPS. 

19 (a) IN GENERAL.—Part I of subchapter K of chapter 

20 1 is amended by adding at the end the following new sec21 tion: 


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1 ‘‘SEC. 710. SPECIAL RULES FOR PARTNERS PROVIDING IN2 VESTMENT MANAGEMENT SERVICES TO 

3 PARTNERSHIPS. 

4 ‘‘(a) TREATMENT OF DISTRIBUTIVE SHARE OF

5 PARTNERSHIP ITEMS.—For purposes of this title, in the 

6 case of an investment services partnership interest— 

7 ‘‘(1) IN GENERAL.—Notwithstanding section 

8 702(b)— 

9 ‘‘(A) an amount equal to the net capital 

10 gain with respect to such interest for any part11 nership taxable year shall be treated as ordi12 nary income, and 

13 ‘‘(B) subject to the limitation of paragraph 

14 (2), an amount equal to the net capital loss 

15 with respect to such interest for any partner16 ship taxable year shall be treated as an ordi17 nary loss. 

18 ‘‘(2) RECHARACTERIZATION OF LOSSES LIM19 ITED TO RECHARACTERIZED GAINS.—The amount 

20 treated as ordinary loss under paragraph (1)(B) for 

21 any taxable year shall not exceed the excess (if any) 

22 of— 

23 ‘‘(A) the aggregate amount treated as ordi24 nary income under paragraph (1)(A) with re25 spect to the investment services partnership inVerDate Mar 15 2010 03:12 Feb 15, 2012 Jkt 019200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\H4016.IH H4016

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1 terest for all preceding partnership taxable 

2 years to which this section applies, over 

3 ‘‘(B) the aggregate amount treated as or4 dinary loss under paragraph (1)(B) with re5 spect to such interest for all preceding partner6 ship taxable years to which this section applies. 

7 ‘‘(3) ALLOCATION TO ITEMS OF GAIN AND

8 LOSS.— 

9 ‘‘(A) NET CAPITAL GAIN.—The amount 

10 treated as ordinary income under paragraph 

11 (1)(A) shall be allocated ratably among the 

12 items of long-term capital gain taken into ac13 count in determining such net capital gain. 

14 ‘‘(B) NET CAPITAL LOSS.—The amount 

15 treated as ordinary loss under paragraph (1)(B) 

16 shall be allocated ratably among the items of 

17 long-term capital loss and short-term capital 

18 loss taken into account in determining such net 

19 capital loss. 

20 ‘‘(4) TERMS RELATING TO CAPITAL GAINS AND

21 LOSSES.—For purposes of this section— 

22 ‘‘(A) IN GENERAL.—Net capital gain, long23 term capital gain, and long-term capital loss, 

24 with respect to any investment services partner25 ship interest for any taxable year, shall be deVerDate Mar 15 2010 03:12 Feb 15, 2012 Jkt 019200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\H4016.IH H4016

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1 termined under section 1222, except that such 

2 section shall be applied— 

3 ‘‘(i) without regard to the recharacter4 ization of any item as ordinary income or 

5 ordinary loss under this section, 

6 ‘‘(ii) by only taking into account items 

7 of gain and loss taken into account by the 

8 holder of such interest under section 702 

9 with respect to such interest for such tax10 able year, and 

11 ‘‘(iii) by treating property which is 

12 taken into account in determining gains 

13 and losses to which section 1231 applies as 

14 capital assets held for more than 1 year. 

15 ‘‘(B) NET CAPITAL LOSS.—The term ‘net 

16 capital loss’ means the excess of the losses from 

17 sales or exchanges of capital assets over the 

18 gains from such sales or exchanges. Rules simi19 lar to the rules of clauses (i) through (iii) of 

20 subparagraph (A) shall apply for purposes of 

21 the preceding sentence. 

22 ‘‘(5) SPECIAL RULES FOR DIVIDENDS.— 

23 ‘‘(A) INDIVIDUALS.—Any dividend allo24 cated to any investment services partnership inVerDate Mar 15 2010 03:12 Feb 15, 2012 Jkt 019200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6201 E:\BILLS\H4016.IH H4016

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1 terest shall not be treated as qualified dividend 

2 income for purposes of section 1(h). 

3 ‘‘(B) CORPORATIONS.—No deduction shall 

4 be allowed under section 243 or 245 with re5 spect to any dividend allocated to any invest6 ment services partnership interest. 

7 ‘‘(6) SPECIAL RULE FOR QUALIFIED SMALL

8 BUSINESS STOCK.—Section 1202 shall not apply to 

9 any gain from the sale or exchange of qualified small 

10 business stock (as defined in section 1202(c)) allo11 cated with respect to any investment services part12 nership interest. 

13 ‘‘(b) DISPOSITIONS OF PARTNERSHIP INTERESTS.— 

14 ‘‘(1) GAIN.— 

15 ‘‘(A) IN GENERAL.—Any gain on the dis16 position of an investment services partnership 

17 interest shall be— 

18 ‘‘(i) treated as ordinary income, and 

19 ‘‘(ii) recognized notwithstanding any 

20 other provision of this subtitle. 

21 ‘‘(B) GIFT AND TRANSFERS AT DEATH.— 

22 In the case of a disposition of an investment 

23 services partnership interest by gift or by rea24 son of death of the taxpayer— 

25 ‘‘(i) subparagraph (A) shall not apply, 


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1 ‘‘(ii) such interest shall be treated as 

2 an investment services partnership interest 

3 in the hands of the person acquiring such 

4 interest, and 

5 ‘‘(iii) any amount that would have 

6 been treated as ordinary income under this 

7 subsection had the decedent sold such in8 terest immediately before death shall be 

9 treated as an item of income in respect of 

10 a decedent under section 691. 

11 ‘‘(2) LOSS.—Any loss on the disposition of an 

12 investment services partnership interest shall be 

13 treated as an ordinary loss to the extent of the ex14 cess (if any) of— 

15 ‘‘(A) the aggregate amount treated as ordi16 nary income under subsection (a) with respect 

17 to such interest for all partnership taxable 

18 years to which this section applies, over 

19 ‘‘(B) the aggregate amount treated as or20 dinary loss under subsection (a) with respect to 

21 such interest for all partnership taxable years 

22 to which this section applies. 

23 ‘‘(3) ELECTION WITH RESPECT TO CERTAIN EX24 CHANGES.—Paragraph (1)(A)(ii) shall not apply to 

25 the contribution of an investment services partnerVerDate Mar 15 2010 03:12 Feb 15, 2012 Jkt 019200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\H4016.IH H4016

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1 ship interest to a partnership in exchange for an in2 terest in such partnership if— 

3 ‘‘(A) the taxpayer makes an irrevocable 

4 election to treat the partnership interest re5 ceived in the exchange as an investment serv6 ices partnership interest, and 

7 ‘‘(B) the taxpayer agrees to comply with 

8 such reporting and recordkeeping requirements 

9 as the Secretary may prescribe. 

10 ‘‘(4) DISTRIBUTIONS OF PARTNERSHIP PROP11 ERTY.— 

12 ‘‘(A) IN GENERAL.—In the case of any dis13 tribution of property by a partnership with re14 spect to any investment services partnership in15 terest held by a partner, the partner receiving 

16 such property shall recognize gain equal to the 

17 excess (if any) of— 

18 ‘‘(i) the fair market value of such 

19 property at the time of such distribution, 

20 over 

21 ‘‘(ii) the adjusted basis of such prop22 erty in the hands of such partner (deter23 mined without regard to subparagraph 

24 (C)). 


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1 ‘‘(B) TREATMENT OF GAIN AS ORDINARY

2 INCOME.—Any gain recognized by such partner 

3 under subparagraph (A) shall be treated as or4 dinary income to the same extent and in the 

5 same manner as the increase in such partner’s 

6 distributive share of the taxable income of the 

7 partnership would be treated under subsection 

8 (a) if, immediately prior to the distribution, the 

9 partnership had sold the distributed property at 

10 fair market value and all of the gain from such 

11 disposition were allocated to such partner. For 

12 purposes of applying subsection (a)(2), any gain 

13 treated as ordinary income under this subpara14 graph shall be treated as an amount treated as 

15 ordinary income under subsection (a)(1)(A). 

16 ‘‘(C) ADJUSTMENT OF BASIS.—In the case 

17 a distribution to which subparagraph (A) ap18 plies, the basis of the distributed property in 

19 the hands of the distributee partner shall be the 

20 fair market value of such property. 

21 ‘‘(D) SPECIAL RULES WITH RESPECT TO

22 MERGERS, DIVISIONS, AND TECHNICAL TERMI23 NATIONS.—In the case of a taxpayer which sat24 isfies requirements similar to the requirements 

25 of subparagraphs (A) and (B) of paragraph (3), 


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1 this paragraph and paragraph (1)(A)(ii) shall 

2 not apply to the distribution of a partnership 

3 interest if such distribution is in connection 

4 with a contribution (or deemed contribution) of 

5 any property of the partnership to which sec6 tion 721 applies pursuant to a transaction de7 scribed in paragraph (1)(B) or (2) of section 

8 708(b). 

9 ‘‘(c) INVESTMENT SERVICES PARTNERSHIP INTER10 EST.—For purposes of this section— 

11 ‘‘(1) IN GENERAL.—The term ‘investment serv12 ices partnership interest’ means any interest in an 

13 investment partnership acquired or held by any per14 son in connection with the conduct of a trade or 

15 business described in paragraph (2) by such person 

16 (or any person related to such person). An interest 

17 in an investment partnership held by any person— 

18 ‘‘(A) shall not be treated as an investment 

19 services partnership interest for any period be20 fore the first date on which it is so held in con21 nection with such a trade or business, 

22 ‘‘(B) shall not cease to be an investment 

23 services partnership interest merely because 

24 such person holds such interest other than in 

25 connection with such a trade or business, and 


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1 ‘‘(C) shall be treated as an investment 

2 services partnership interest if acquired from a 

3 related person in whose hands such interest was 

4 an investment services partnership interest. 

5 ‘‘(2) BUSINESSES TO WHICH THIS SECTION AP6 PLIES.—A trade or business is described in this 

7 paragraph if such trade or business primarily in8 volves the performance of any of the following serv9 ices with respect to assets held (directly or indi10 rectly) by the investment partnership referred to in 

11 paragraph (1): 

12 ‘‘(A) Advising as to the advisability of in13 vesting in, purchasing, or selling any specified 

14 asset. 

15 ‘‘(B) Managing, acquiring, or disposing of 

16 any specified asset. 

17 ‘‘(C) Arranging financing with respect to 

18 acquiring specified assets. 

19 ‘‘(D) Any activity in support of any service 

20 described in subparagraphs (A) through (C). 

21 ‘‘(3) INVESTMENT PARTNERSHIP.— 

22 ‘‘(A) IN GENERAL.—The term ‘investment 

23 partnership’ means any partnership if, at the 

24 end of any calendar quarter ending after the 

25 date of enactment of this section— 


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1 ‘‘(i) substantially all of the assets of 

2 the partnership are specified assets (deter3 mined without regard to any section 197 

4 intangible within the meaning of section 

5 197(d)), and 

6 ‘‘(ii) more than half of the capital of 

7 the partnership is attributable to qualified 

8 capital interests which (in the hands of the 

9 owners of such interests) constitute prop10 erty not held in connection with a trade or 

11 business. 

12 ‘‘(B) SPECIAL RULES FOR DETERMINING

13 IF PROPERTY NOT HELD IN CONNECTION WITH

14 TRADE OR BUSINESS.—Except as otherwise 

15 provided by the Secretary, for purposes of de16 termining whether any interest in a partnership 

17 constitutes property not held in connection with 

18 a trade or business under subparagraph 

19 (A)(ii)— 

20 ‘‘(i) any election under subsection (e) 

21 or (f) of section 475 shall be disregarded, 

22 and 

23 ‘‘(ii) paragraph (5)(B) shall not apply. 

24 ‘‘(C) ANTIABUSE RULES.—The Secretary 

25 may issue regulations or other guidance which 


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1 prevent the avoidance of the purposes of sub2 paragraph (A), including regulations or other 

3 guidance which treat convertible and contingent 

4 debt (and other debt having the attributes of 

5 equity) as a capital interest in the partnership. 

6 ‘‘(D) CONTROLLED GROUPS OF ENTI7 TIES.— 

8 ‘‘(i) IN GENERAL.—In the case of a 

9 controlled group of entities, if an interest 

10 in the partnership received in exchange for 

11 a contribution to the capital of the part12 nership by any member of such controlled 

13 group would (in the hands of such mem14 ber) constitute property held in connection 

15 with a trade or business, then any interest 

16 in such partnership held by any member of 

17 such group shall be treated for purposes of 

18 subparagraph (A) as constituting (in the 

19 hands of such member) property held in 

20 connection with a trade or business. 

21 ‘‘(ii) CONTROLLED GROUP OF ENTI22 TIES.—For purposes of clause (i), the term 

23 ‘controlled group of entities’ means a con24 trolled group of corporations as defined in 

25 section 1563(a)(1), applied without regard 


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1 to subsections (a)(4) and (b)(2) of section 

2 1563. A partnership or any other entity 

3 (other than a corporation) shall be treated 

4 as a member of a controlled group of enti5 ties if such entity is controlled (within the 

6 meaning of section 954(d)(3)) by members 

7 of such group (including any entity treated 

8 as a member of such group by reason of 

9 this sentence). 

10 ‘‘(E) SPECIAL RULE FOR CORPORA11 TIONS.—For purposes of this paragraph, in the 

12 case of a corporation, the determination of 

13 whether property is held in connection with a 

14 trade or business shall be determined as if the 

15 taxpayer were an individual. 

16 ‘‘(4) SPECIFIED ASSET.—The term ‘specified 

17 asset’ means securities (as defined in section 

18 475(c)(2) without regard to the last sentence there19 of), real estate held for rental or investment, inter20 ests in partnerships, commodities (as defined in sec21 tion 475(e)(2)), cash or cash equivalents, or options 

22 or derivative contracts with respect to any of the 

23 foregoing. 

24 ‘‘(5) RELATED PERSONS.— 


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1 ‘‘(A) IN GENERAL.—A person shall be 

2 treated as related to another person if the rela3 tionship between such persons is described in 

4 section 267(b) or 707(b). 

5 ‘‘(B) ATTRIBUTION OF PARTNER SERV6 ICES.—Any service described in paragraph (2) 

7 which is provided by a partner of a partnership 

8 shall be treated as also provided by such part9 nership. 

10 ‘‘(d) EXCEPTION FOR CERTAIN CAPITAL INTER11 ESTS.— 

12 ‘‘(1) IN GENERAL.—In the case of any portion 

13 of an investment services partnership interest which 

14 is a qualified capital interest, all items of gain and 

15 loss (and any dividends) which are allocated to such 

16 qualified capital interest shall not be taken into ac17 count under subsection (a) if— 

18 ‘‘(A) allocations of items are made by the 

19 partnership to such qualified capital interest in 

20 the same manner as such allocations are made 

21 to other qualified capital interests held by part22 ners who do not provide any services described 

23 in subsection (c)(2) and who are not related to 

24 the partner holding the qualified capital inter25 est, and 


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1 ‘‘(B) the allocations made to such other in2 terests are significant compared to the alloca3 tions made to such qualified capital interest. 

4 ‘‘(2) AUTHORITY TO PROVIDE EXCEPTIONS TO

5 ALLOCATION REQUIREMENTS.—To the extent pro6 vided by the Secretary in regulations or other guid7 ance— 

8 ‘‘(A) ALLOCATIONS TO PORTION OF QUALI9 FIED CAPITAL INTEREST.—Paragraph (1) may 

10 be applied separately with respect to a portion 

11 of a qualified capital interest. 

12 ‘‘(B) NO OR INSIGNIFICANT ALLOCATIONS

13 TO NONSERVICE PROVIDERS.—In any case in 

14 which the requirements of paragraph (1)(B) are 

15 not satisfied, items of gain and loss (and any 

16 dividends) shall not be taken into account under 

17 subsection (a) to the extent that such items are 

18 properly allocable under such regulations or 

19 other guidance to qualified capital interests. 

20 ‘‘(C) ALLOCATIONS TO SERVICE PRO21 VIDERS’ QUALIFIED CAPITAL INTERESTS WHICH

22 ARE LESS THAN OTHER ALLOCATIONS.—Alloca23 tions shall not be treated as failing to meet the 

24 requirement of paragraph (1)(A) merely be25 cause the allocations to the qualified capital inVerDate Mar 15 2010 03:12 Feb 15, 2012 Jkt 019200 PO 00000 Frm 00017 Fmt 6652 Sfmt 6201 E:\BILLS\H4016.IH H4016

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1 terest represent a lower return than the alloca2 tions made to the other qualified capital inter3 ests referred to in such paragraph. 

4 ‘‘(3) SPECIAL RULE FOR CHANGES IN SERVICES

5 AND CAPITAL CONTRIBUTIONS.—In the case of an 

6 interest in a partnership which was not an invest7 ment services partnership interest and which, by 

8 reason of a change in the services with respect to as9 sets held (directly or indirectly) by the partnership 

10 or by reason of a change in the capital contributions 

11 to such partnership, becomes an investment services 

12 partnership interest, the qualified capital interest of 

13 the holder of such partnership interest immediately 

14 after such change shall not, for purposes of this sub15 section, be less than the fair market value of such 

16 interest (determined immediately before such 

17 change). 

18 ‘‘(4) SPECIAL RULE FOR TIERED PARTNER19 SHIPS.—Except as otherwise provided by the Sec20 retary, in the case of tiered partnerships, all items 

21 which are allocated in a manner which meets the re22 quirements of paragraph (1) to qualified capital in23 terests in a lower-tier partnership shall retain such 

24 character to the extent allocated on the basis of 


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1 qualified capital interests in any upper-tier partner2 ship. 

3 ‘‘(5) EXCEPTION FOR NO-SELF-CHARGED

4 CARRY AND MANAGEMENT FEE PROVISIONS.—Ex5 cept as otherwise provided by the Secretary, an in6 terest shall not fail to be treated as satisfying the 

7 requirement of paragraph (1)(A) merely because the 

8 allocations made by the partnership to such interest 

9 do not reflect the cost of services described in sub10 section (c)(2) which are provided (directly or indi11 rectly) to the partnership by the holder of such in12 terest (or a related person). 

13 ‘‘(6) SPECIAL RULE FOR DISPOSITIONS.—In the 

14 case of any investment services partnership interest 

15 any portion of which is a qualified capital interest, 

16 subsection (b) shall not apply to so much of any 

17 gain or loss as bears the same proportion to the en18 tire amount of such gain or loss as— 

19 ‘‘(A) the distributive share of gain or loss 

20 that would have been allocated to the qualified 

21 capital interest (consistent with the require22 ments of paragraph (1)) if the partnership had 

23 sold all of its assets at fair market value imme24 diately before the disposition, bears to 


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1 ‘‘(B) the distributive share of gain or loss 

2 that would have been so allocated to the invest3 ment services partnership interest of which such 

4 qualified capital interest is a part. 

5 ‘‘(7) QUALIFIED CAPITAL INTEREST.—For pur6 poses of this section— 

7 ‘‘(A) IN GENERAL.—The term ‘qualified 

8 capital interest’ means so much of a partner’s 

9 interest in the capital of the partnership as is 

10 attributable to— 

11 ‘‘(i) the fair market value of any 

12 money or other property contributed to the 

13 partnership in exchange for such interest 

14 (determined without regard to section 

15 752(a)), 

16 ‘‘(ii) any amounts which have been in17 cluded in gross income under section 83 

18 with respect to the transfer of such inter19 est, and 

20 ‘‘(iii) the excess (if any) of— 

21 ‘‘(I) any items of income and 

22 gain taken into account under section 

23 702 with respect to such interest, over 

24 ‘‘(II) any items of deduction and 

25 loss so taken into account. 


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1 ‘‘(B) ADJUSTMENT TO QUALIFIED CAPITAL

2 INTEREST.— 

3 ‘‘(i) DISTRIBUTIONS AND LOSSES.— 

4 The qualified capital interest shall be re5 duced by distributions from the partner6 ship with respect to such interest and by 

7 the excess (if any) of the amount described 

8 in subparagraph (A)(iii)(II) over the 

9 amount described in subparagraph 

10 (A)(iii)(I). 

11 ‘‘(ii) SPECIAL RULE FOR CONTRIBU12 TIONS OF PROPERTY.—In the case of any 

13 contribution of property described in sub14 paragraph (A)(i) with respect to which the 

15 fair market value of such property is not 

16 equal to the adjusted basis of such prop17 erty immediately before such contribution, 

18 proper adjustments shall be made to the 

19 qualified capital interest to take into ac20 count such difference consistent with such 

21 regulations or other guidance as the Sec22 retary may provide. 

23 ‘‘(C) TECHNICAL TERMINATIONS, ETC., 

24 DISREGARDED.—No increase or decrease in the 

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1 sult from a termination, merger, consolidation, 

2 or division described in section 708, or any 

3 similar transaction. 

4 ‘‘(8) TREATMENT OF CERTAIN LOANS.— 

5 ‘‘(A) PROCEEDS OF PARTNERSHIP LOANS

6 NOT TREATED AS QUALIFIED CAPITAL INTER7 EST OF SERVICE PROVIDING PARTNERS.—For 

8 purposes of this subsection, an investment serv9 ices partnership interest shall not be treated as 

10 a qualified capital interest to the extent that 

11 such interest is acquired in connection with the 

12 proceeds of any loan or other advance made or 

13 guaranteed, directly or indirectly, by any other 

14 partner or the partnership (or any person re15 lated to any such other partner or the partner16 ship). The preceding sentence shall not apply to 

17 the extent the loan or other advance is repaid 

18 before the date of the enactment of this section 

19 unless such repayment is made with the pro20 ceeds of a loan or other advance described in 

21 the preceding sentence. 

22 ‘‘(B) REDUCTION IN ALLOCATIONS TO

23 QUALIFIED CAPITAL INTERESTS FOR LOANS

24 FROM NONSERVICE-PROVIDING PARTNERS TO

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1 section, any loan or other advance to the part2 nership made or guaranteed, directly or indi3 rectly, by a partner not providing services de4 scribed in subsection (c)(2) to the partnership 

5 (or any person related to such partner) shall be 

6 taken into account in determining the qualified 

7 capital interests of the partners in the partner8 ship. 

9 ‘‘(e) OTHER INCOME AND GAIN IN CONNECTION

10 WITH INVESTMENT MANAGEMENT SERVICES.— 

11 ‘‘(1) IN GENERAL.—If— 

12 ‘‘(A) a person performs (directly or indi13 rectly) investment management services for any 

14 investment entity, 

15 ‘‘(B) such person holds (directly or indi16 rectly) a disqualified interest with respect to 

17 such entity, and 

18 ‘‘(C) the value of such interest (or pay19 ments thereunder) is substantially related to 

20 the amount of income or gain (whether or not 

21 realized) from the assets with respect to which 

22 the investment management services are per23 formed, 

24 any income or gain with respect to such interest 

25 shall be treated as ordinary income. Rules similar to 


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1 the rules of subsections (a)(5) and (d) shall apply 

2 for purposes of this subsection. 

3 ‘‘(2) DEFINITIONS.—For purposes of this sub4 section— 

5 ‘‘(A) DISQUALIFIED INTEREST.— 

6 ‘‘(i) IN GENERAL.—The term ‘dis7 qualified interest’ means, with respect to 

8 any investment entity— 

9 ‘‘(I) any interest in such entity 

10 other than indebtedness, 

11 ‘‘(II) convertible or contingent 

12 debt of such entity, 

13 ‘‘(III) any option or other right 

14 to acquire property described in sub15 clause (I) or (II), and 

16 ‘‘(IV) any derivative instrument 

17 entered into (directly or indirectly) 

18 with such entity or any investor in 

19 such entity. 

20 ‘‘(ii) EXCEPTIONS.—Such term shall 

21 not include— 

22 ‘‘(I) a partnership interest, 

23 ‘‘(II) except as provided by the 

24 Secretary, any interest in a taxable 

25 corporation, and 


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1 ‘‘(III) except as provided by the 

2 Secretary, stock in an S corporation. 

3 ‘‘(B) TAXABLE CORPORATION.—The term 

4 ‘taxable corporation’ means— 

5 ‘‘(i) a domestic C corporation, or 

6 ‘‘(ii) a foreign corporation substan7 tially all of the income of which is— 

8 ‘‘(I) effectively connected with 

9 the conduct of a trade or business in 

10 the United States, or 

11 ‘‘(II) subject to a comprehensive 

12 foreign income tax (as defined in sec13 tion 457A(d)(2)). 

14 ‘‘(C) INVESTMENT MANAGEMENT SERV15 ICES.—The term ‘investment management serv16 ices’ means a substantial quantity of any of the 

17 services described in subsection (c)(2). 

18 ‘‘(D) INVESTMENT ENTITY.—The term ‘in19 vestment entity’ means any entity which, if it 

20 were a partnership, would be an investment 

21 partnership. 

22 ‘‘(f) REGULATIONS.—The Secretary shall prescribe 

23 such regulations or other guidance as is necessary or ap24 propriate to carry out the purposes of this section, includ25 ing regulations or other guidance to— 


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1 ‘‘(1) provide modifications to the application of 

2 this section (including treating related persons as 

3 not related to one another) to the extent such modi4 fication is consistent with the purposes of this sec5 tion, 

6 ‘‘(2) prevent the avoidance of the purposes of 

7 this section, and 

8 ‘‘(3) coordinate this section with the other pro9 visions of this title. 

10 ‘‘(g) CROSS REFERENCE.—For 40 percent penalty on 

11 certain underpayments due to the avoidance of this sec12 tion, see section 6662.’’. 

13 (b) APPLICATION OF SECTION 751 TO INDIRECT DIS14 POSITIONS OF INVESTMENT SERVICES PARTNERSHIP IN15 TERESTS.— 

16 (1) IN GENERAL.—Subsection (a) of section 

17 751 is amended by striking ‘‘or’’ at the end of para18 graph (1), by inserting ‘‘or’’ at the end of paragraph 

19 (2), and by inserting after paragraph (2) the fol20 lowing new paragraph: 

21 ‘‘(3) investment services partnership interests 

22 held by the partnership,’’. 

23 (2) CERTAIN DISTRIBUTIONS TREATED AS

24 SALES OR EXCHANGES.—Subparagraph (A) of sec25 tion 751(b)(1) is amended by striking ‘‘or’’ at the 


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1 end of clause (i), by inserting ‘‘or’’ at the end of 

2 clause (ii), and by inserting after clause (ii) the fol3 lowing new clause: 

4 ‘‘(iii) investment services partnership 

5 interests held by the partnership,’’. 

6 (3) APPLICATION OF SPECIAL RULES IN THE

7 CASE OF TIERED PARTNERSHIPS.—Subsection (f) of 

8 section 751 is amended— 

9 (A) by striking ‘‘or’’ at the end of para10 graph (1), by inserting ‘‘or’’ at the end of para11 graph (2), and by inserting after paragraph (2) 

12 the following new paragraph: 

13 ‘‘(3) an investment services partnership interest 

14 held by the partnership,’’, and 

15 (B) by striking ‘‘partner.’’ and inserting 

16 ‘‘partner (other than a partnership in which it 

17 holds an investment services partnership inter18 est).’’. 

19 (4) INVESTMENT SERVICES PARTNERSHIP IN20 TERESTS; QUALIFIED CAPITAL INTERESTS.—Section 

21 751 is amended by adding at the end the following 

22 new subsection: 

23 ‘‘(g) INVESTMENT SERVICES PARTNERSHIP INTER24 ESTS.—For purposes of this section— 


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1 ‘‘(1) IN GENERAL.—The term ‘investment serv2 ices partnership interest’ has the meaning given 

3 such term by section 710(c). 

4 ‘‘(2) ADJUSTMENTS FOR QUALIFIED CAPITAL

5 INTERESTS.—The amount to which subsection (a) 

6 applies by reason of paragraph (3) thereof shall not 

7 include so much of such amount as is attributable 

8 to any portion of the investment services partnership 

9 interest which is a qualified capital interest (deter10 mined under rules similar to the rules of section 

11 710(d)). 

12 ‘‘(3) EXCEPTION FOR PUBLICLY TRADED PART13 NERSHIPS.—In the case of an exchange of an inter14 est in a publicly traded partnership (as defined in 

15 section 7704) to which subsection (a) applies— 

16 ‘‘(A) this section shall be applied without 

17 regard to subsections (a)(3), (b)(1)(A)(iii), and 

18 (f)(3), and 

19 ‘‘(B) such partnership shall be treated as 

20 owning its proportionate share of the property 

21 of any other partnership in which it is a part22 ner. 

23 ‘‘(4) RECOGNITION OF GAINS.—Any gain with 

24 respect to which subsection (a) applies by reason of 


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1 paragraph (3) thereof shall be recognized notwith2 standing any other provision of this title. 

3 ‘‘(5) COORDINATION WITH INVENTORY

4 ITEMS.—An investment services partnership interest 

5 held by the partnership shall not be treated as an 

6 inventory item of the partnership. 

7 ‘‘(6) PREVENTION OF DOUBLE COUNTING.— 

8 Under regulations or other guidance prescribed by 

9 the Secretary, subsection (a)(3) shall not apply with 

10 respect to any amount to which section 710 applies. 

11 ‘‘(7) VALUATION METHODS.—The Secretary 

12 shall prescribe regulations or other guidance which 

13 provide the acceptable methods for valuing invest14 ment services partnership interests for purposes of 

15 this section.’’. 

16 (c) TREATMENT FOR PURPOSES OF SECTION

17 7704.—Subsection (d) of section 7704 is amended by add18 ing at the end the following new paragraph: 

19 ‘‘(6) INCOME FROM CERTAIN CARRIED INTER20 ESTS NOT QUALIFIED.— 

21 ‘‘(A) IN GENERAL.—Specified carried in22 terest income shall not be treated as qualifying 

23 income. 

24 ‘‘(B) SPECIFIED CARRIED INTEREST IN25 COME.—For purposes of this paragraph— 


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1 ‘‘(i) IN GENERAL.—The term ‘speci2 fied carried interest income’ means— 

3 ‘‘(I) any item of income or gain 

4 allocated to an investment services 

5 partnership interest (as defined in 

6 section 710(c)) held by the partner7 ship, 

8 ‘‘(II) any gain on the disposition 

9 of an investment services partnership 

10 interest (as so defined) or a partner11 ship interest to which (in the hands of 

12 the partnership) section 751 applies, 

13 and 

14 ‘‘(III) any income or gain taken 

15 into account by the partnership under 

16 subsection (b)(4) or (e) of section 

17 710. 

18 ‘‘(ii) EXCEPTION FOR QUALIFIED CAP19 ITAL INTERESTS.—A rule similar to the 

20 rule of section 710(d) shall apply for pur21 poses of clause (i). 

22 ‘‘(C) COORDINATION WITH OTHER PROVI23 SIONS.—Subparagraph (A) shall not apply to 

24 any item described in paragraph (1)(E) (or so 


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1 much of paragraph (1)(F) as relates to para2 graph (1)(E)). 

3 ‘‘(D) SPECIAL RULES FOR CERTAIN PART4 NERSHIPS.— 

5 ‘‘(i) CERTAIN PARTNERSHIPS OWNED

6 BY REAL ESTATE INVESTMENT TRUSTS.— 

7 Subparagraph (A) shall not apply in the 

8 case of a partnership which meets each of 

9 the following requirements: 

10 ‘‘(I) Such partnership is treated 

11 as publicly traded under this section 

12 solely by reason of interests in such 

13 partnership being convertible into in14 terests in a real estate investment 

15 trust which is publicly traded. 

16 ‘‘(II) Fifty percent or more of 

17 the capital and profits interests of 

18 such partnership are owned, directly 

19 or indirectly, at all times during the 

20 taxable year by such real estate in21 vestment trust (determined with the 

22 application of section 267(c)). 

23 ‘‘(III) Such partnership meets 

24 the requirements of paragraphs (2), 

25 (3), and (4) of section 856(c). 


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1 ‘‘(ii) CERTAIN PARTNERSHIPS OWN2 ING OTHER PUBLICLY TRADED PARTNER3 SHIPS.—Subparagraph (A) shall not apply 

4 in the case of a partnership which meets 

5 each of the following requirements: 

6 ‘‘(I) Substantially all of the as7 sets of such partnership consist of in8 terests in one or more publicly traded 

9 partnerships (determined without re10 gard to subsection (b)(2)). 

11 ‘‘(II) Substantially all of the in12 come of such partnership is ordinary 

13 income or section 1231 gain (as de14 fined in section 1231(a)(3)). 

15 ‘‘(E) TRANSITIONAL RULE.—Subpara16 graph (A) shall not apply to any taxable year 

17 of the partnership beginning before the date 

18 which is 10 years after the date of the enact19 ment of this paragraph.’’. 

20 (d) IMPOSITION OF PENALTY ON UNDERPAY21 MENTS.— 

22 (1) IN GENERAL.—Subsection (b) of section 

23 6662 is amended by inserting after paragraph (7) 

24 the following new paragraph: 


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1 ‘‘(8) The application of section 710(e) or the 

2 regulations or other guidance prescribed under sec3 tion 710(f) to prevent the avoidance of the purposes 

4 of section 710.’’. 

5 (2) AMOUNT OF PENALTY.— 

6 (A) IN GENERAL.—Section 6662 is amend7 ed by adding at the end the following new sub8 section: 

9 ‘‘(k) INCREASE IN PENALTY IN CASE OF PROPERTY

10 TRANSFERRED FOR INVESTMENT MANAGEMENT SERV11 ICES.—In the case of any portion of an underpayment to 

12 which this section applies by reason of subsection (b)(8), 

13 subsection (a) shall be applied with respect to such portion 

14 by substituting ‘40 percent’ for ‘20 percent’.’’. 

15 (B) CONFORMING AMENDMENT.—Subpara16 graph (B) of section 6662A(e)(2) is amended 

17 by striking ‘‘or (i)’’ and inserting ‘‘, (i), or (k)’’. 

18 (3) SPECIAL RULES FOR APPLICATION OF REA19 SONABLE CAUSE EXCEPTION.—Subsection (c) of sec20 tion 6664 is amended— 

21 (A) by redesignating paragraphs (3) and 

22 (4) as paragraphs (4) and (5), respectively; 

23 (B) by striking ‘‘paragraph (3)’’ in para24 graph (5)(A), as so redesignated, and inserting 

25 ‘‘paragraph (4)’’; and 


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1 (C) by inserting after paragraph (2) the 

2 following new paragraph: 

3 ‘‘(3) SPECIAL RULE FOR UNDERPAYMENTS AT4 TRIBUTABLE TO INVESTMENT MANAGEMENT SERV5 ICES.— 

6 ‘‘(A) IN GENERAL.—Paragraph (1) shall 

7 not apply to any portion of an underpayment to 

8 which section 6662 applies by reason of sub9 section (b)(8) unless— 

10 ‘‘(i) the relevant facts affecting the 

11 tax treatment of the item are adequately 

12 disclosed, 

13 ‘‘(ii) there is or was substantial au14 thority for such treatment, and 

15 ‘‘(iii) the taxpayer reasonably believed 

16 that such treatment was more likely than 

17 not the proper treatment. 

18 ‘‘(B) RULES RELATING TO REASONABLE

19 BELIEF.—Rules similar to the rules of sub20 section (d)(3) shall apply for purposes of sub21 paragraph (A)(iii).’’. 

22 (e) INCOME AND LOSS FROM INVESTMENT SERVICES

23 PARTNERSHIP INTERESTS TAKEN INTO ACCOUNT IN DE24 TERMINING NET EARNINGS FROM SELF-EMPLOYMENT.— 

25 (1) INTERNAL REVENUE CODE.— 


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1 (A) IN GENERAL.—Section 1402(a) is 

2 amended by striking ‘‘and’’ at the end of para3 graph (16), by striking the period at the end of 

4 paragraph (17) and inserting ‘‘; and’’, and by 

5 inserting after paragraph (17) the following 

6 new paragraph: 

7 ‘‘(18) notwithstanding the preceding provisions 

8 of this subsection, in the case of any individual en9 gaged in the trade or business of providing services 

10 described in section 710(c)(2) with respect to any 

11 entity, investment services partnership income or 

12 loss (as defined in subsection (m)) of such individual 

13 with respect to such entity shall be taken into ac14 count in determining the net earnings from self-em15 ployment of such individual.’’. 

16 (B) INVESTMENT SERVICES PARTNERSHIP

17 INCOME OR LOSS.—Section 1402 is amended by 

18 adding at the end the following new subsection: 

19 ‘‘(m) INVESTMENT SERVICES PARTNERSHIP INCOME

20 OR LOSS.—For purposes of subsection (a)— 

21 ‘‘(1) IN GENERAL.—The term ‘investment serv22 ices partnership income or loss’ means, with respect 

23 to any investment services partnership interest (as 

24 defined in section 710(c)) or disqualified interest (as 

25 defined in section 710(e)), the net of— 


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1 ‘‘(A) the amounts treated as ordinary in2 come or ordinary loss under subsections (b) and 

3 (e) of section 710 with respect to such interest, 

4 ‘‘(B) all items of income, gain, loss, and 

5 deduction allocated to such interest, and 

6 ‘‘(C) the amounts treated as realized from 

7 the sale or exchange of property other than a 

8 capital asset under section 751 with respect to 

9 such interest. 

10 ‘‘(2) EXCEPTION FOR QUALIFIED CAPITAL IN11 TERESTS.—A rule similar to the rule of section 

12 710(d) shall apply for purposes of applying para13 graph (1)(B).’’. 

14 (2) SOCIAL SECURITY ACT.—Section 211(a) of 

15 the Social Security Act is amended by striking 

16 ‘‘and’’ at the end of paragraph (15), by striking the 

17 period at the end of paragraph (16) and inserting ‘‘; 

18 and’’, and by inserting after paragraph (16) the fol19 lowing new paragraph: 

20 ‘‘(17) Notwithstanding the preceding provisions 

21 of this subsection, in the case of any individual en22 gaged in the trade or business of providing services 

23 described in section 710(c)(2) of the Internal Rev24 enue Code of 1986 with respect to any entity, invest25 ment services partnership income or loss (as defined 


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1 in section 1402(m) of such Code) shall be taken into 

2 account in determining the net earnings from self3 employment of such individual.’’. 

4 (f) CONFORMING AMENDMENTS.— 

5 (1) Subsection (d) of section 731 is amended by 

6 inserting ‘‘section 710(b)(4) (relating to distribu7 tions of partnership property),’’ after ‘‘to the extent 

8 otherwise provided by’’. 

9 (2) Section 741 is amended by inserting ‘‘or 

10 section 710 (relating to special rules for partners 

11 providing investment management services to part12 nerships)’’ before the period at the end. 

13 (3) The table of sections for part I of sub14 chapter K of chapter 1 is amended by adding at the 

15 end the following new item: 

‘‘Sec. 710. Special rules for partners providing investment management services 

to partnerships.’’. 

16 (g) EFFECTIVE DATE.— 

17 (1) IN GENERAL.—Except as otherwise pro18 vided in this subsection, the amendments made by 

19 this section shall apply to taxable years ending after 

20 the date of the enactment of this Act. 

21 (2) PARTNERSHIP TAXABLE YEARS WHICH IN22 CLUDE EFFECTIVE DATE.—In applying section 

23 710(a) of the Internal Revenue Code of 1986 (as 

24 added by this section) in the case of any partnership 


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1 taxable year which includes the date of the enact2 ment of this Act, the amount of the net capital gain 

3 referred to in such section shall be treated as being 

4 the lesser of the net capital gain for the entire part5 nership taxable year or the net capital gain deter6 mined by only taking into account items attributable 

7 to the portion of the partnership taxable year which 

8 is after such date. 

9 (3) DISPOSITIONS OF PARTNERSHIP INTER10 ESTS.— 

11 (A) IN GENERAL.—Section 710(b) of such 

12 Code (as added by this section) shall apply to 

13 dispositions and distributions after the date of 

14 the enactment of this Act. 

15 (B) INDIRECT DISPOSITIONS.—The amend16 ments made by subsection (b) shall apply to 

17 transactions after the date of the enactment of 

18 this Act. 

19 (4) OTHER INCOME AND GAIN IN CONNECTION

20 WITH INVESTMENT MANAGEMENT SERVICES.—Sec21 tion 710(e) of such Code (as added by this section) 

22 shall take effect on the date of the enactment of this 

23 Act. 

Æ 


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