I 

111TH CONGRESS 

1ST SESSION H. R. 1935 

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

of partnership interests held by partners providing services. 

IN THE HOUSE OF REPRESENTATIVES 

APRIL 2, 2009 

Mr. LEVIN 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 treatment of partnership interests held by partners providing services. 

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

3 SECTION 1. PARTNERSHIP INTERESTS TRANSFERRED IN 

4 CONNECTION WITH PERFORMANCE OF SERV5 ICES. 

6 (a) MODIFICATION TO ELECTION TO INCLUDE PART7 NERSHIP INTEREST IN GROSS INCOME IN YEAR OF

8 TRANSFER.—Subsection (c) of section 83 of the Internal 

9 Revenue Code of 1986 is amended by redesignating paraVerDate Nov 24 2008 22:22 Apr 06, 2009 Jkt 079200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\H1935.IH H1935

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1 graph (4) as paragraph (5) and by inserting after para2 graph (3) the following new paragraph: 

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

4 provided by the Secretary, in the case of any trans5 fer of an interest in a partnership in connection with 

6 the performance of services for (or on behalf of) 

7 such partnership— 

8 ‘‘(A) the fair market value of such interest 

9 shall be treated for purposes of this section as 

10 being equal to the amount of the distribution 

11 which the partner would receive if the partner12 ship sold (at the time of the transfer) all of its 

13 assets at fair market value and distributed the 

14 proceeds of such sale (reduced by the liabilities 

15 of the partnership) to its partners in liquidation 

16 of the partnership, and 

17 ‘‘(B) the person receiving such interest 

18 shall be treated as having made the election 

19 under subsection (b)(1) unless such person 

20 makes an election under this paragraph to have 

21 such subsection not apply.’’. 

22 (b) CONFORMING AMENDMENT.—Paragraph (2) of 

23 section 83(b) of such Code is amended by inserting ‘‘or 

24 subsection (c)(4)(B)’’ after ‘‘paragraph (1)’’. 


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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to interests in partnerships trans3 ferred after the date of the enactment of this Act. 

4 SEC. 2. INCOME OF PARTNERS FOR PERFORMING INVEST5 MENT MANAGEMENT SERVICES TREATED AS 

6 ORDINARY INCOME RECEIVED FOR PER7 FORMANCE OF SERVICES. 

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

9 1 of the Internal Revenue Code of 1986 is amended by 

10 adding at the end the following new section: 

11 ‘‘SEC. 710. SPECIAL RULES FOR PARTNERS PROVIDING IN12 VESTMENT MANAGEMENT SERVICES TO 

13 PARTNERSHIP. 

14 ‘‘(a) TREATMENT OF DISTRIBUTIVE SHARE OF

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

16 case of an investment services partnership interest— 

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

18 702(b)— 

19 ‘‘(A) any net income with respect to such 

20 interest for any partnership taxable year shall 

21 be treated as ordinary income, and 

22 ‘‘(B) any net loss with respect to such in23 terest for such year, to the extent not dis24 allowed under paragraph (2) for such year, 

25 shall be treated as an ordinary loss. 


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1 All items of income, gain, deduction, and loss which 

2 are taken into account in computing net income or 

3 net loss shall be treated as ordinary income or ordi4 nary loss (as the case may be). 

5 ‘‘(2) TREATMENT OF LOSSES.— 

6 ‘‘(A) LIMITATION.—Any net loss with re7 spect to such interest shall be allowed for any 

8 partnership taxable year only to the extent that 

9 such loss does not exceed the excess (if any) 

10 of— 

11 ‘‘(i) the aggregate net income with re12 spect to such interest for all prior partner13 ship taxable years, over 

14 ‘‘(ii) the aggregate net loss with re15 spect to such interest not disallowed under 

16 this subparagraph for all prior partnership 

17 taxable years. 

18 ‘‘(B) CARRYFORWARD.—Any net loss for 

19 any partnership taxable year which is not al20 lowed by reason of subparagraph (A) shall be 

21 treated as an item of loss with respect to such 

22 partnership interest for the succeeding partner23 ship taxable year. 

24 ‘‘(C) BASIS ADJUSTMENT.—No adjustment 

25 to the basis of a partnership interest shall be 


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1 made on account of any net loss which is not 

2 allowed by reason of subparagraph (A). 

3 ‘‘(D) PRIOR PARTNERSHIP YEARS.—Any 

4 reference in this paragraph to prior partnership 

5 taxable years shall only include prior partner6 ship taxable years to which this section applies. 

7 ‘‘(3) NET INCOME AND LOSS.—For purposes of 

8 this section— 

9 ‘‘(A) NET INCOME.—The term ‘net in10 come’ means, with respect to any investment 

11 services partnership interest for any partner12 ship taxable year, the excess (if any) of— 

13 ‘‘(i) all items of income and gain 

14 taken into account by the holder of such 

15 interest under section 702 with respect to 

16 such interest for such year, over 

17 ‘‘(ii) all items of deduction and loss so 

18 taken into account. 

19 ‘‘(B) NET LOSS.—The term ‘net loss’ 

20 means, with respect to such interest for such 

21 year, the excess (if any) of the amount de22 scribed in subparagraph (A)(ii) over the amount 

23 described in subparagraph (A)(i). 

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


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1 ‘‘(1) GAIN.—Any gain on the disposition of an 

2 investment services partnership interest shall be 

3 treated as ordinary income and shall be recognized 

4 notwithstanding any other provision of this subtitle. 

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

6 investment services partnership interest shall be 

7 treated as an ordinary loss to the extent of the ex8 cess (if any) of— 

9 ‘‘(A) the aggregate net income with respect 

10 to such interest for all partnership taxable 

11 years, over 

12 ‘‘(B) the aggregate net loss with respect to 

13 such interest allowed under subsection (a)(2) 

14 for all partnership taxable years. 

15 ‘‘(3) DISPOSITION OF PORTION OF INTEREST.— 

16 In the case of any disposition of an investment serv17 ices partnership interest, the amount of net loss 

18 which otherwise would have (but for subsection 

19 (a)(2)(C)) applied to reduce the basis of such inter20 est shall be disregarded for purposes of this section 

21 for all succeeding partnership taxable years. 

22 ‘‘(4) DISTRIBUTIONS OF PARTNERSHIP PROP23 ERTY.—In the case of any distribution of property 

24 by a partnership with respect to any investment 

25 services partnership interest held by a partner— 


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1 ‘‘(A) the excess (if any) of— 

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

3 property at the time of such distribution, 

4 over 

5 ‘‘(ii) the adjusted basis of such prop6 erty in the hands of the partnership, 

7 shall be taken into account as an increase in 

8 such partner’s distributive share of the taxable 

9 income of the partnership (except to the extent 

10 such excess is otherwise taken into account in 

11 determining the taxable income of the partner12 ship), 

13 ‘‘(B) such property shall be treated for 

14 purposes of subpart B of part II as money dis15 tributed to such partner in an amount equal to 

16 such fair market value, and 

17 ‘‘(C) the basis of such property in the 

18 hands of such partner shall be such fair market 

19 value. 

20 Subsection (b) of section 734 shall be applied with21 out regard to the preceding sentence. 

22 ‘‘(5) APPLICATION OF SECTION 751.—In apply23 ing section 751(a), an investment services partner24 ship interest shall be treated as an inventory item. 


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1 ‘‘(c) INVESTMENT SERVICES PARTNERSHIP INTER2 EST.—For purposes of this section— 

3 ‘‘(1) IN GENERAL.—The term ‘investment serv4 ices partnership interest’ means any interest in a 

5 partnership which is held by any person if it was 

6 reasonably expected (at the time that such person 

7 acquired such interest) that such person (or any per8 son related to such person) would provide (directly 

9 or indirectly) a substantial quantity of any of the 

10 following services: 

11 ‘‘(A) Advising as to the advisability of in12 vesting in, purchasing, or selling any specified 

13 asset. 

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

15 any specified asset. 

16 ‘‘(C) Arranging financing with respect to 

17 acquiring specified assets. 

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

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

20 For purposes of this paragraph, the term ‘specified 

21 asset’ means securities (as defined in section 

22 475(c)(2) without regard to the last sentence there23 of), real estate held for rental or investment, inter24 ests in partnerships, commodities (as defined in secVerDate Nov 24 2008 22:22 Apr 06, 2009 Jkt 079200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\H1935.IH H1935

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1 tion 475(e)(2)), or options or derivative contracts 

2 with respect to any of the foregoing. 

3 ‘‘(2) EXCEPTION FOR CERTAIN CAPITAL INTER4 ESTS.— 

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

6 portion of an investment services partnership 

7 interest which is a qualified capital interest, all 

8 items of income, gain, loss, and deduction which 

9 are allocated to such qualified capital interest 

10 shall not be taken into account under sub11 section (a) if— 

12 ‘‘(i) allocations of items are made by 

13 the partnership to such qualified capital 

14 interest in the same manner as such allo15 cations are made to other qualified capital 

16 interests held by partners who do not pro17 vide any services described in paragraph 

18 (1) and who are not related to the partner 

19 holding the qualified capital interest, and 

20 ‘‘(ii) the allocations made to such 

21 other interests are significant compared to 

22 the allocations made to such qualified cap23 ital interest. 

24 ‘‘(B) SPECIAL RULE FOR DISPOSITIONS.— 

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1 ship interest any portion of which is a qualified 

2 capital interest, subsection (b) shall not apply 

3 to so much of any gain or loss as bears the 

4 same proportion to the entire amount of such 

5 gain or loss as— 

6 ‘‘(i) the distributive share of gain or 

7 loss that would have been allocable to the 

8 qualified capital interest under subpara9 graph (A) if the partnership sold all of its 

10 assets immediately before the disposition, 

11 bears to 

12 ‘‘(ii) the distributive share of gain or 

13 loss that would have been so allocable to 

14 the investment services partnership inter15 est of which such qualified capital interest 

16 is a part. 

17 ‘‘(C) QUALIFIED CAPITAL INTEREST.—For 

18 purposes of this paragraph, the term ‘qualified 

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

20 interest in the capital of the partnership as is 

21 attributable to— 

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

23 money or other property contributed to the 

24 partnership in exchange for such interest, 


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1 ‘‘(ii) any amounts which have been in2 cluded in gross income under section 83 

3 with respect to the transfer of such inter4 est, and 

5 ‘‘(iii) the excess (if any) of— 

6 ‘‘(I) any items of income and 

7 gain taken into account under section 

8 702 with respect to such interest for 

9 taxable years to which this section ap10 plies, over 

11 ‘‘(II) any items of deduction and 

12 loss so taken into account. 

13 The qualified capital interest shall be reduced 

14 by distributions from the partnership to the 

15 partner and by the excess (if any) of the 

16 amount described in clause (iii)(II) over the 

17 amount described in clause (iii)(I). 

18 ‘‘(D) TREATMENT OF CERTAIN LOANS.— 

19 ‘‘(i) PROCEEDS OF PARTNERSHIP

20 LOANS NOT TREATED AS QUALIFIED CAP21 ITAL INTEREST OF SERVICE PROVIDING

22 PARTNERS.—For purposes of this para23 graph, an investment services partnership 

24 interest shall not be treated as a qualified 

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1 terest is acquired in connection with the 

2 proceeds of any loan or other advance 

3 made or guaranteed, directly or indirectly, 

4 by any partner or the partnership (or any 

5 person related to any such partner or the 

6 partnership). 

7 ‘‘(ii) REDUCTION IN ALLOCATIONS TO

8 QUALIFIED CAPITAL INTERESTS FOR

9 LOANS FROM NONSERVICE PROVIDING

10 PARTNERS TO THE PARTNERSHIP.—For 

11 purposes of this paragraph, any loan or 

12 other advance to the partnership made or 

13 guaranteed, directly or indirectly, by a 

14 partner not providing services described in 

15 paragraph (1) to the partnership (or any 

16 person related to such partner) shall be 

17 taken into account as invested capital of 

18 such partner. 

19 ‘‘(3) RELATED PERSONS.—A person shall be 

20 treated as related to another person if the relation21 ship between such persons would result in a dis22 allowance of losses under section 267 or 707(b). 

23 ‘‘(d) OTHER INCOME AND GAIN IN CONNECTION

24 WITH INVESTMENT MANAGEMENT SERVICES.— 

25 ‘‘(1) IN GENERAL.—If— 


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1 ‘‘(A) a person performs (directly or indi2 rectly) investment management services for any 

3 entity, 

4 ‘‘(B) such person holds a disqualified in5 terest with respect to such entity, and 

6 ‘‘(C) the value of such interest (or pay7 ments thereunder) is substantially related to 

8 the amount of income or gain (whether or not 

9 realized) from the assets with respect to which 

10 the investment management services are per11 formed, 

12 any income or gain with respect to such interest 

13 shall be treated as ordinary income. Rules similar to 

14 the rules of subsection (c)(2) shall apply where such 

15 interest was acquired on account of invested capital 

16 in such entity. 

17 ‘‘(2) DEFINITIONS.—For purposes of this sub18 section— 

19 ‘‘(A) DISQUALIFIED INTEREST.— 

20 ‘‘(i) IN GENERAL.—The term ‘dis21 qualified interest’ means, with respect to 

22 any entity— 

23 ‘‘(I) any interest in such entity 

24 other than indebtedness, 


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1 ‘‘(II) convertible or contingent 

2 debt of such entity, 

3 ‘‘(III) any option or other right 

4 to acquire property described in sub5 clause (I) or (II), and 

6 ‘‘(IV) any derivative instrument 

7 entered into (directly or indirectly) 

8 with such entity or any investor in 

9 such entity. 

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

11 not include— 

12 ‘‘(I) a partnership interest, 

13 ‘‘(II) stock in a taxable corpora14 tion, and 

15 ‘‘(III) except as provided by the 

16 Secretary, stock in an S corporation. 

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

18 ‘taxable corporation’ means— 

19 ‘‘(i) a domestic C corporation, or 

20 ‘‘(ii) a foreign corporation substan21 tially all of the income of which is— 

22 ‘‘(I) effectively connected with 

23 the conduct of a trade or business in 

24 the United States, or 


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1 ‘‘(II) subject to a comprehensive 

2 foreign income tax (as defined in sec3 tion 457A(d)(2)). 

4 ‘‘(C) INVESTMENT MANAGEMENT SERV5 ICES.—The term ‘investment management serv6 ices’ means a substantial quantity of any of the 

7 services described in subsection (c)(1). 

8 ‘‘(e) REGULATIONS.—The Secretary shall prescribe 

9 such regulations as are necessary or appropriate to carry 

10 out the purposes of this section, including regulations to— 

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

12 this section (including treating related persons as 

13 not related to one another) to the extent such modi14 fication is consistent with the purposes of this sec15 tion, 

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

17 this section, and 

18 ‘‘(3) coordinate this section with the other pro19 visions of this title. 

20 ‘‘(f) CROSS REFERENCE.—For 40 percent no fault 

21 penalty on certain underpayments due to the avoidance 

22 of this section, see section 6662.’’. 

23 (b) INCOME FROM INVESTMENT SERVICES PART24 NERSHIP INTERESTS NOT TREATED AS QUALIFYING IN25 COME OF PUBLICLY TRADED PARTNERSHIPS.—SubVerDate Nov 24 2008 22:22 Apr 06, 2009 Jkt 079200 PO 00000 Frm 00015 Fmt 6652 Sfmt 6201 E:\BILLS\H1935.IH H1935

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1 section (d) of section 7704 of such Code is amended by 

2 adding at the end the following new paragraph: 

3 ‘‘(6) INCOME FROM INVESTMENT SERVICES

4 PARTNERSHIP INTERESTS NOT QUALIFIED.— 

5 ‘‘(A) IN GENERAL.—Items of income and 

6 gain shall not be treated as qualifying income 

7 if such items are treated as ordinary income by 

8 reason of the application of section 710 (relat9 ing to special rules for partners providing in10 vestment management services to partnership). 

11 ‘‘(B) SPECIAL RULES FOR CERTAIN PART12 NERSHIPS.— 

13 ‘‘(i) CERTAIN PARTNERSHIPS OWNED

14 BY REAL ESTATE INVESTMENT TRUSTS.— 

15 Subparagraph (A) shall not apply in the 

16 case of a partnership which meets each of 

17 the following requirements: 

18 ‘‘(I) Such partnership is treated 

19 as publicly traded under this section 

20 solely by reason of interests in such 

21 partnership being convertible into in22 terests in a real estate investment 

23 trust which is publicly traded. 

24 ‘‘(II) 50 percent or more of the 

25 capital and profits interests of such 


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1 partnership are owned, directly or in2 directly, at all times during the tax3 able year by such real estate invest4 ment trust (determined with the ap5 plication of section 267(c)). 

6 ‘‘(III) Such partnership meets 

7 the requirements of paragraphs (2), 

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

9 ‘‘(ii) CERTAIN PARTNERSHIPS OWN10 ING OTHER PUBLICLY TRADED PARTNER11 SHIPS.—Subparagraph (A) shall not apply 

12 in the case of a partnership which meets 

13 each of the following requirements: 

14 ‘‘(I) Substantially all of the as15 sets of such partnership consist of in16 terests in one or more other partner17 ships which are traded on an estab18 lished securities market. 

19 ‘‘(II) Substantially all of the in20 come of such partnership is ordinary 

21 income or section 1231 gain (as de22 fined in section 1231(a)(3)). 

23 ‘‘(C) TRANSITIONAL RULE.—In the case of 

24 a partnership in existence on the date of the en25 actment of this paragraph, subparagraph (A) 


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1 shall not apply to any taxable year of the part2 nership beginning before the date which is 10 

3 years after the date of the enactment of this 

4 paragraph.’’. 

5 (c) IMPOSITION OF PENALTY ON UNDERPAY6 MENTS.— 

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

8 6662 of such Code is amended by inserting after 

9 paragraph (5) the following new paragraph: 

10 ‘‘(6) The application of subsection (d) of section 

11 710 or the regulations prescribed under section 

12 710(e) to prevent the avoidance of the purposes of 

13 section 710.’’. 

14 (2) AMOUNT OF PENALTY.— 

15 (A) IN GENERAL.—Section 6662 of such 

16 Code is amended by adding at the end the fol17 lowing new subsection: 

18 ‘‘(i) INCREASE IN PENALTY IN CASE OF PROPERTY

19 TRANSFERRED FOR INVESTMENT MANAGEMENT SERV20 ICES.—In the case of any portion of an underpayment to 

21 which this section applies by reason of subsection (b)(6), 

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

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


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1 (B) CONFORMING AMENDMENTS.—Sub2 paragraph (B) of section 6662A(e)(2) of such 

3 Code is amended— 

4 (i) by striking ‘‘section 6662(h)’’ and 

5 inserting ‘‘subsection (h) or (i) of section 

6 6662’’, and 

7 (ii) by striking ‘‘GROSS VALUATION

8 MISSTATEMENT PENALTY’’ in the heading 

9 and inserting ‘‘CERTAIN INCREASED UN10 DERPAYMENT PENALTIES’’. 

11 (3) REASONABLE CAUSE EXCEPTION NOT AP12 PLICABLE.—Subsection (c) of section 6664 of such 

13 Code is amended— 

14 (A) by redesignating paragraphs (2) and 

15 (3) as paragraphs (3) and (4), respectively, 

16 (B) by striking ‘‘paragraph (2)’’ in para17 graph (4), as so redesignated, and inserting 

18 ‘‘paragraph (3)’’, and 

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

20 following new paragraph: 

21 ‘‘(2) EXCEPTION.—Paragraph (1) shall not 

22 apply to any portion of an underpayment to which 

23 this section applies by reason of subsection (b)(6).’’. 


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1 (d) INCOME AND LOSS FROM INVESTMENT SERVICES

2 PARTNERSHIP INTERESTS TAKEN INTO ACCOUNT IN DE3 TERMINING NET EARNING FROM SELF-EMPLOYMENT.— 

4 (1) INTERNAL REVENUE CODE.—Section 

5 1402(a) of such Code is amended by striking ‘‘and’’ 

6 at the end of paragraph (16), by striking the period 

7 at the end of paragraph (17) and inserting ‘‘; and’’, 

8 and by inserting after paragraph (17) the following 

9 new paragraph: 

10 ‘‘(18) notwithstanding the preceding provisions 

11 of this subsection, any amount treated as ordinary 

12 income or ordinary loss of any individual under sec13 tion 710 shall be taken into account in determining 

14 the net earnings from self-employment of such indi15 vidual.’’. 

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

17 the Social Security Act is amended by inserting after 

18 paragraph (16) the following new paragraph: 

19 ‘‘(17) Notwithstanding the preceding provisions 

20 of this subsection, any amount treated as ordinary 

21 income or ordinary loss of any individual under sec22 tion 710 of the Internal Revenue Code of 1986 shall 

23 be taken into account in determining the net earn24 ings from self-employment of such individual.’’. 

25 (e) CONFORMING AMENDMENTS.— 


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1 (1) Subsection (d) of section 731 of the Inter2 nal Revenue Code of 1986 is amended by inserting 

3 ‘‘section 710(b)(4) (relating to distributions of part4 nership property),’’ after ‘‘to the extent otherwise 

5 provided by’’. 

6 (2) Section 741 of such Code is amended by in7 serting ‘‘or section 710 (relating to special rules for 

8 partners providing investment management services 

9 to partnership)’’ before the period at the end. 

10 (3) The table of sections for part I of sub11 chapter K of chapter 1 of such Code is amended by 

12 adding at the end the following new item: 

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

to partnership.’’. 

13 (f) EFFECTIVE DATE.— 

14 (1) IN GENERAL.—Except as otherwise pro15 vided in this subsection, the amendments made by 

16 this section shall apply to taxable years ending after 

17 lll. 

18 (2) PARTNERSHIP TAXABLE YEARS WHICH IN19 CLUDE EFFECTIVE DATE.—In applying section 

20 710(a) of the Internal Revenue Code of 1986 (as 

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

22 taxable year which includes lll, the amount of 

23 the net income referred to in such section shall be 

24 treated as being the lesser of the net income for the 


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1 entire partnership taxable year or the net income de2 termined by only taking into account items attrib3 utable to the portion of the partnership taxable year 

4 which is after such date. 

5 (3) DISPOSITIONS OF PARTNERSHIP INTER6 ESTS.—Section 710(b) of the Internal Revenue Code 

7 of 1986 (as added by this section) shall apply to dis8 positions and distributions after lll. 

9 (4) OTHER INCOME AND GAIN IN CONNECTION

10 WITH INVESTMENT MANAGEMENT SERVICES.—Sec11 tion 710(d) of such Code (as added by this section) 

12 shall take effect on lll. 

13 (5) PUBLICLY TRADED PARTNERSHIPS.—The 

14 amendment made by subsection (b) shall apply to 

15 taxable years beginning after lll. 

16 SEC. 3. APPLICATION TO PARTNERSHIP INTERESTS AND 

17 TAX SHARING AGREEMENTS OF RULE TREAT18 ING CERTAIN GAIN ON SALES BETWEEN RE19 LATED PERSONS AS ORDINARY INCOME. 

20 (a) PARTNERSHIP INTERESTS.— 

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

22 1239 of the Internal Revenue Code of 1986 is 

23 amended to read as follows: 

24 ‘‘(a) TREATMENT OF GAIN AS ORDINARY INCOME.— 

25 In the case of a sale or exchange of property, directly or 


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1 indirectly, between related persons, any gain recognized to 

2 the transferor shall be treated as ordinary income if— 

3 ‘‘(1) such property is, in the hands of the trans4 feree, of a character which is subject to the allow5 ance for depreciation provided in section 167, or 

6 ‘‘(2) such property is an interest in a partner7 ship, but only to the extent of gain attributable to 

8 unrealized appreciation in property which is of a 

9 character subject to the allowance for depreciation 

10 provided in section 167.’’. 

11 (2) TREATMENT OF AMORTIZABLE SECTION 197

12 INTANGIBLES AS DEPRECIABLE PROPERTY.—Section 

13 1239 of such Code is amended by adding at the end 

14 the following new subsection: 

15 ‘‘(f) TREATMENT OF AMORTIZABLE SECTION 197 IN16 TANGIBLES AS DEPRECIABLE PROPERTY.—For treatment 

17 of amortizable section 197 intangibles as depreciable prop18 erty, see section 197(f)(7).’’. 

19 (b) TAX SHARING AGREEMENTS.—Section 1239 of 

20 such Code (relating to gain from sale of depreciable prop21 erty between certain related taxpayers) is amended by 

22 adding at the end the following new subsection: 

23 ‘‘(f) APPLICATION TO TAX SHARING AGREE24 MENTS.— 


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1 ‘‘(1) IN GENERAL.—If there is a tax sharing 

2 agreement with respect to any sale or exchange, the 

3 transferee and the transferor shall be treated as re4 lated persons for purposes of this section. 

5 ‘‘(2) TAX SHARING AGREEMENT.—For purposes 

6 of this subsection, the term ‘tax sharing agreement’ 

7 means any agreement which provides for the pay8 ment to the transferor of any amount which is deter9 mined by reference to any portion of the tax benefit 

10 realized by the transferee with respect to the depre11 ciation (or amortization) of the property trans12 ferred.’’. 

13 (c) EFFECTIVE DATE.—The amendment made by 

14 this section shall apply to sales and exchanges after 

15 lll. 

Æ 


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