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[Congressional Bills 111th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1935 Introduced in House (IH)]

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.

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

SECTION 1. PARTNERSHIP INTERESTS TRANSFERRED IN CONNECTION WITH 
              PERFORMANCE OF SERVICES.

    (a) Modification to Election To Include Partnership Interest in 
Gross Income in Year of Transfer.--Subsection (c) of section 83 of the 
Internal Revenue Code of 1986 is amended by redesignating paragraph (4) 
as paragraph (5) and by inserting after paragraph (3) the following new 
paragraph:
            ``(4) Partnership interests.--Except as provided by the 
        Secretary, in the case of any transfer of an interest in a 
        partnership in connection with the performance of services for 
        (or on behalf of) such partnership--
                    ``(A) the fair market value of such interest shall 
                be treated for purposes of this section as being equal 
                to the amount of the distribution which the partner 
                would receive if the partnership sold (at the time of 
                the transfer) all of its assets at fair market value 
                and distributed the proceeds of such sale (reduced by 
                the liabilities of the partnership) to its partners in 
                liquidation of the partnership, and
                    ``(B) the person receiving such interest shall be 
                treated as having made the election under subsection 
                (b)(1) unless such person makes an election under this 
                paragraph to have such subsection not apply.''.
    (b) Conforming Amendment.--Paragraph (2) of section 83(b) of such 
Code is amended by inserting ``or subsection (c)(4)(B)'' after 
``paragraph (1)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to interests in partnerships transferred after the date of the 
enactment of this Act.

SEC. 2. INCOME OF PARTNERS FOR PERFORMING INVESTMENT MANAGEMENT 
              SERVICES TREATED AS ORDINARY INCOME RECEIVED FOR 
              PERFORMANCE OF SERVICES.

    (a) In General.--Part I of subchapter K of chapter 1 of the 
Internal Revenue Code of 1986 is amended by adding at the end the 
following new section:

``SEC. 710. SPECIAL RULES FOR PARTNERS PROVIDING INVESTMENT MANAGEMENT 
              SERVICES TO PARTNERSHIP.

    ``(a) Treatment of Distributive Share of Partnership Items.--For 
purposes of this title, in the case of an investment services 
partnership interest--
            ``(1) In general.--Notwithstanding section 702(b)--
                    ``(A) any net income with respect to such interest 
                for any partnership taxable year shall be treated as 
                ordinary income, and
                    ``(B) any net loss with respect to such interest 
                for such year, to the extent not disallowed under 
                paragraph (2) for such year, shall be treated as an 
                ordinary loss.
        All items of income, gain, deduction, and loss which are taken 
        into account in computing net income or net loss shall be 
        treated as ordinary income or ordinary loss (as the case may 
        be).
            ``(2) Treatment of losses.--
                    ``(A) Limitation.--Any net loss with respect to 
                such interest shall be allowed for any partnership 
                taxable year only to the extent that such loss does not 
                exceed the excess (if any) of--
                            ``(i) the aggregate net income with respect 
                        to such interest for all prior partnership 
                        taxable years, over
                            ``(ii) the aggregate net loss with respect 
                        to such interest not disallowed under this 
                        subparagraph for all prior partnership taxable 
                        years.
                    ``(B) Carryforward.--Any net loss for any 
                partnership taxable year which is not allowed by reason 
                of subparagraph (A) shall be treated as an item of loss 
                with respect to such partnership interest for the 
                succeeding partnership taxable year.
                    ``(C) Basis adjustment.--No adjustment to the basis 
                of a partnership interest shall be made on account of 
                any net loss which is not allowed by reason of 
                subparagraph (A).
                    ``(D) Prior partnership years.--Any reference in 
                this paragraph to prior partnership taxable years shall 
                only include prior partnership taxable years to which 
                this section applies.
            ``(3) Net income and loss.--For purposes of this section--
                    ``(A) Net income.--The term `net income' means, 
                with respect to any investment services partnership 
                interest for any partnership taxable year, the excess 
                (if any) of--
                            ``(i) all items of income and gain taken 
                        into account by the holder of such interest 
                        under section 702 with respect to such interest 
                        for such year, over
                            ``(ii) all items of deduction and loss so 
                        taken into account.
                    ``(B) Net loss.--The term `net loss' means, with 
                respect to such interest for such year, the excess (if 
                any) of the amount described in subparagraph (A)(ii) 
                over the amount described in subparagraph (A)(i).
    ``(b) Dispositions of Partnership Interests.--
            ``(1) Gain.--Any gain on the disposition of an investment 
        services partnership interest shall be treated as ordinary 
        income and shall be recognized notwithstanding any other 
        provision of this subtitle.
            ``(2) Loss.--Any loss on the disposition of an investment 
        services partnership interest shall be treated as an ordinary 
        loss to the extent of the excess (if any) of--
                    ``(A) the aggregate net income with respect to such 
                interest for all partnership taxable years, over
                    ``(B) the aggregate net loss with respect to such 
                interest allowed under subsection (a)(2) for all 
                partnership taxable years.
            ``(3) Disposition of portion of interest.--In the case of 
        any disposition of an investment services partnership interest, 
        the amount of net loss which otherwise would have (but for 
        subsection (a)(2)(C)) applied to reduce the basis of such 
        interest shall be disregarded for purposes of this section for 
        all succeeding partnership taxable years.
            ``(4) Distributions of partnership property.--In the case 
        of any distribution of property by a partnership with respect 
        to any investment services partnership interest held by a 
        partner--
                    ``(A) the excess (if any) of--
                            ``(i) the fair market value of such 
                        property at the time of such distribution, over
                            ``(ii) the adjusted basis of such property 
                        in the hands of the partnership,
                shall be taken into account as an increase in such 
                partner's distributive share of the taxable income of 
                the partnership (except to the extent such excess is 
                otherwise taken into account in determining the taxable 
                income of the partnership),
                    ``(B) such property shall be treated for purposes 
                of subpart B of part II as money distributed to such 
                partner in an amount equal to such fair market value, 
                and
                    ``(C) the basis of such property in the hands of 
                such partner shall be such fair market value.
        Subsection (b) of section 734 shall be applied without regard 
        to the preceding sentence.
            ``(5) Application of section 751.--In applying section 
        751(a), an investment services partnership interest shall be 
        treated as an inventory item.
    ``(c) Investment Services Partnership Interest.--For purposes of 
this section--
            ``(1) In general.--The term `investment services 
        partnership interest' means any interest in a partnership which 
        is held by any person if it was reasonably expected (at the 
        time that such person acquired such interest) that such person 
        (or any person related to such person) would provide (directly 
        or indirectly) a substantial quantity of any of the following 
        services:
                    ``(A) Advising as to the advisability of investing 
                in, purchasing, or selling any specified asset.
                    ``(B) Managing, acquiring, or disposing of any 
                specified asset.
                    ``(C) Arranging financing with respect to acquiring 
                specified assets.
                    ``(D) Any activity in support of any service 
                described in subparagraphs (A) through (C).
        For purposes of this paragraph, the term `specified asset' 
        means securities (as defined in section 475(c)(2) without 
        regard to the last sentence thereof), real estate held for 
        rental or investment, interests in partnerships, commodities 
        (as defined in section 475(e)(2)), or options or derivative 
        contracts with respect to any of the foregoing.
            ``(2) Exception for certain capital interests.--
                    ``(A) In general.--In the case of any portion of an 
                investment services partnership interest which is a 
                qualified capital interest, all items of income, gain, 
                loss, and deduction which are allocated to such 
                qualified capital interest shall not be taken into 
                account under subsection (a) if--
                            ``(i) allocations of items are made by the 
                        partnership to such qualified capital interest 
                        in the same manner as such allocations are made 
                        to other qualified capital interests held by 
                        partners who do not provide any services 
                        described in paragraph (1) and who are not 
                        related to the partner holding the qualified 
                        capital interest, and
                            ``(ii) the allocations made to such other 
                        interests are significant compared to the 
                        allocations made to such qualified capital 
                        interest.
                    ``(B) Special rule for dispositions.--In the case 
                of any investment services partnership interest any 
                portion of which is a qualified capital interest, 
                subsection (b) shall not apply to so much of any gain 
                or loss as bears the same proportion to the entire 
                amount of such gain or loss as--
                            ``(i) the distributive share of gain or 
                        loss that would have been allocable to the 
                        qualified capital interest under subparagraph 
                        (A) if the partnership sold all of its assets 
                        immediately before the disposition, bears to
                            ``(ii) the distributive share of gain or 
                        loss that would have been so allocable to the 
                        investment services partnership interest of 
                        which such qualified capital interest is a 
                        part.
                    ``(C) Qualified capital interest.--For purposes of 
                this paragraph, the term `qualified capital interest' 
                means so much of a partner's interest in the capital of 
                the partnership as is attributable to--
                            ``(i) the fair market value of any money or 
                        other property contributed to the partnership 
                        in exchange for such interest,
                            ``(ii) any amounts which have been included 
                        in gross income under section 83 with respect 
                        to the transfer of such interest, and
                            ``(iii) the excess (if any) of--
                                    ``(I) any items of income and gain 
                                taken into account under section 702 
                                with respect to such interest for 
                                taxable years to which this section 
                                applies, over
                                    ``(II) any items of deduction and 
                                loss so taken into account.
                The qualified capital interest shall be reduced by 
                distributions from the partnership to the partner and 
                by the excess (if any) of the amount described in 
                clause (iii)(II) over the amount described in clause 
                (iii)(I).
                    ``(D) Treatment of certain loans.--
                            ``(i) Proceeds of partnership loans not 
                        treated as qualified capital interest of 
                        service providing partners.--For purposes of 
                        this paragraph, an investment services 
                        partnership interest shall not be treated as a 
                        qualified capital interest to the extent that 
                        such interest is acquired in connection with 
                        the proceeds of any loan or other advance made 
                        or guaranteed, directly or indirectly, by any 
                        partner or the partnership (or any person 
                        related to any such partner or the 
                        partnership).
                            ``(ii) Reduction in allocations to 
                        qualified capital interests for loans from 
                        nonservice providing partners to the 
                        partnership.--For purposes of this paragraph, 
                        any loan or other advance to the partnership 
                        made or guaranteed, directly or indirectly, by 
                        a partner not providing services described in 
                        paragraph (1) to the partnership (or any person 
                        related to such partner) shall be taken into 
                        account as invested capital of such partner.
            ``(3) Related persons.--A person shall be treated as 
        related to another person if the relationship between such 
        persons would result in a disallowance of losses under section 
        267 or 707(b).
    ``(d) Other Income and Gain in Connection With Investment 
Management Services.--
            ``(1) In general.--If--
                    ``(A) a person performs (directly or indirectly) 
                investment management services for any entity,
                    ``(B) such person holds a disqualified interest 
                with respect to such entity, and
                    ``(C) the value of such interest (or payments 
                thereunder) is substantially related to the amount of 
                income or gain (whether or not realized) from the 
                assets with respect to which the investment management 
                services are performed,
        any income or gain with respect to such interest shall be 
        treated as ordinary income. Rules similar to the rules of 
        subsection (c)(2) shall apply where such interest was acquired 
        on account of invested capital in such entity.
            ``(2) Definitions.--For purposes of this subsection--
                    ``(A) Disqualified interest.--
                            ``(i) In general.--The term `disqualified 
                        interest' means, with respect to any entity--
                                    ``(I) any interest in such entity 
                                other than indebtedness,
                                    ``(II) convertible or contingent 
                                debt of such entity,
                                    ``(III) any option or other right 
                                to acquire property described in 
                                subclause (I) or (II), and
                                    ``(IV) any derivative instrument 
                                entered into (directly or indirectly) 
                                with such entity or any investor in 
                                such entity.
                            ``(ii) Exceptions.--Such term shall not 
                        include--
                                    ``(I) a partnership interest,
                                    ``(II) stock in a taxable 
                                corporation, and
                                    ``(III) except as provided by the 
                                Secretary, stock in an S corporation.
                    ``(B) Taxable corporation.--The term `taxable 
                corporation' means--
                            ``(i) a domestic C corporation, or
                            ``(ii) a foreign corporation substantially 
                        all of the income of which is--
                                    ``(I) effectively connected with 
                                the conduct of a trade or business in 
                                the United States, or
                                    ``(II) subject to a comprehensive 
                                foreign income tax (as defined in 
                                section 457A(d)(2)).
                    ``(C) Investment management services.--The term 
                `investment management services' means a substantial 
                quantity of any of the services described in subsection 
                (c)(1).
    ``(e) Regulations.--The Secretary shall prescribe such regulations 
as are necessary or appropriate to carry out the purposes of this 
section, including regulations to--
            ``(1) provide modifications to the application of this 
        section (including treating related persons as not related to 
        one another) to the extent such modification is consistent with 
        the purposes of this section,
            ``(2) prevent the avoidance of the purposes of this 
        section, and
            ``(3) coordinate this section with the other provisions of 
        this title.
    ``(f) Cross Reference.--For 40 percent no fault penalty on certain 
underpayments due to the avoidance of this section, see section 
6662.''.
    (b) Income From Investment Services Partnership Interests Not 
Treated as Qualifying Income of Publicly Traded Partnerships.--
Subsection (d) of section 7704 of such Code is amended by adding at the 
end the following new paragraph:
            ``(6) Income from investment services partnership interests 
        not qualified.--
                    ``(A) In general.--Items of income and gain shall 
                not be treated as qualifying income if such items are 
                treated as ordinary income by reason of the application 
                of section 710 (relating to special rules for partners 
                providing investment management services to 
                partnership).
                    ``(B) Special rules for certain partnerships.--
                            ``(i) Certain partnerships owned by real 
                        estate investment trusts.--Subparagraph (A) 
                        shall not apply in the case of a partnership 
                        which meets each of the following requirements:
                                    ``(I) Such partnership is treated 
                                as publicly traded under this section 
                                solely by reason of interests in such 
                                partnership being convertible into 
                                interests in a real estate investment 
                                trust which is publicly traded.
                                    ``(II) 50 percent or more of the 
                                capital and profits interests of such 
                                partnership are owned, directly or 
                                indirectly, at all times during the 
                                taxable year by such real estate 
                                investment trust (determined with the 
                                application of section 267(c)).
                                    ``(III) Such partnership meets the 
                                requirements of paragraphs (2), (3), 
                                and (4) of section 856(c).
                            ``(ii) Certain partnerships owning other 
                        publicly traded partnerships.--Subparagraph (A) 
                        shall not apply in the case of a partnership 
                        which meets each of the following requirements:
                                    ``(I) Substantially all of the 
                                assets of such partnership consist of 
                                interests in one or more other 
                                partnerships which are traded on an 
                                established securities market.
                                    ``(II) Substantially all of the 
                                income of such partnership is ordinary 
                                income or section 1231 gain (as defined 
                                in section 1231(a)(3)).
                    ``(C) Transitional rule.--In the case of a 
                partnership in existence on the date of the enactment 
                of this paragraph, subparagraph (A) shall not apply to 
                any taxable year of the partnership beginning before 
                the date which is 10 years after the date of the 
                enactment of this paragraph.''.
    (c) Imposition of Penalty on Underpayments.--
            (1) In general.--Subsection (b) of section 6662 of such 
        Code is amended by inserting after paragraph (5) the following 
        new paragraph:
            ``(6) The application of subsection (d) of section 710 or 
        the regulations prescribed under section 710(e) to prevent the 
        avoidance of the purposes of section 710.''.
            (2) Amount of penalty.--
                    (A) In general.--Section 6662 of such Code is 
                amended by adding at the end the following new 
                subsection:
    ``(i) Increase in Penalty in Case of Property Transferred for 
Investment Management Services.--In the case of any portion of an 
underpayment to which this section applies by reason of subsection 
(b)(6), subsection (a) shall be applied with respect to such portion by 
substituting `40 percent' for `20 percent'.''.
                    (B) Conforming amendments.--Subparagraph (B) of 
                section 6662A(e)(2) of such Code is amended--
                            (i) by striking ``section 6662(h)'' and 
                        inserting ``subsection (h) or (i) of section 
                        6662'', and
                            (ii) by striking ``gross valuation 
                        misstatement penalty'' in the heading and 
                        inserting ``certain increased underpayment 
                        penalties''.
            (3) Reasonable cause exception not applicable.--Subsection 
        (c) of section 6664 of such Code is amended--
                    (A) by redesignating paragraphs (2) and (3) as 
                paragraphs (3) and (4), respectively,
                    (B) by striking ``paragraph (2)'' in paragraph (4), 
                as so redesignated, and inserting ``paragraph (3)'', 
                and
                    (C) by inserting after paragraph (1) the following 
                new paragraph:
            ``(2) Exception.--Paragraph (1) shall not apply to any 
        portion of an underpayment to which this section applies by 
        reason of subsection (b)(6).''.
    (d) Income and Loss From Investment Services Partnership Interests 
Taken Into Account in Determining Net Earning From Self-Employment.--
            (1) Internal revenue code.--Section 1402(a) of such Code is 
        amended by striking ``and'' at the end of paragraph (16), by 
        striking the period at the end of paragraph (17) and inserting 
        ``; and'', and by inserting after paragraph (17) the following 
        new paragraph:
            ``(18) notwithstanding the preceding provisions of this 
        subsection, any amount treated as ordinary income or ordinary 
        loss of any individual under section 710 shall be taken into 
        account in determining the net earnings from self-employment of 
        such individual.''.
            (2) Social security act.--Section 211(a) of the Social 
        Security Act is amended by inserting after paragraph (16) the 
        following new paragraph:
            ``(17) Notwithstanding the preceding provisions of this 
        subsection, any amount treated as ordinary income or ordinary 
        loss of any individual under section 710 of the Internal 
        Revenue Code of 1986 shall be taken into account in determining 
        the net earnings from self-employment of such individual.''.
    (e) Conforming Amendments.--
            (1) Subsection (d) of section 731 of the Internal Revenue 
        Code of 1986 is amended by inserting ``section 710(b)(4) 
        (relating to distributions of partnership property),'' after 
        ``to the extent otherwise provided by''.
            (2) Section 741 of such Code is amended by inserting ``or 
        section 710 (relating to special rules for partners providing 
        investment management services to partnership)'' before the 
        period at the end.
            (3) The table of sections for part I of subchapter K of 
        chapter 1 of such Code is amended by adding at the end the 
        following new item:

``Sec. 710. Special rules for partners providing investment management 
                            services to partnership.''.
    (f) Effective Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years ending after ___.
            (2) Partnership taxable years which include effective 
        date.--In applying section 710(a) of the Internal Revenue Code 
        of 1986 (as added by this section) in the case of any 
        partnership taxable year which includes ___, the amount of the 
        net income referred to in such section shall be treated as 
        being the lesser of the net income for the entire partnership 
        taxable year or the net income determined by only taking into 
        account items attributable to the portion of the partnership 
        taxable year which is after such date.
            (3) Dispositions of partnership interests.--Section 710(b) 
        of the Internal Revenue Code of 1986 (as added by this section) 
        shall apply to dispositions and distributions after ___.
            (4) Other income and gain in connection with investment 
        management services.--Section 710(d) of such Code (as added by 
        this section) shall take effect on ___.
            (5) Publicly traded partnerships.--The amendment made by 
        subsection (b) shall apply to taxable years beginning after 
        ___.

SEC. 3. APPLICATION TO PARTNERSHIP INTERESTS AND TAX SHARING AGREEMENTS 
              OF RULE TREATING CERTAIN GAIN ON SALES BETWEEN RELATED 
              PERSONS AS ORDINARY INCOME.

    (a) Partnership Interests.--
            (1) In general.--Subsection (a) of section 1239 of the 
        Internal Revenue Code of 1986 is amended to read as follows:
    ``(a) Treatment of Gain as Ordinary Income.--In the case of a sale 
or exchange of property, directly or indirectly, between related 
persons, any gain recognized to the transferor shall be treated as 
ordinary income if--
            ``(1) such property is, in the hands of the transferee, of 
        a character which is subject to the allowance for depreciation 
        provided in section 167, or
            ``(2) such property is an interest in a partnership, but 
        only to the extent of gain attributable to unrealized 
        appreciation in property which is of a character subject to the 
        allowance for depreciation provided in section 167.''.
            (2) Treatment of amortizable section 197 intangibles as 
        depreciable property.--Section 1239 of such Code is amended by 
        adding at the end the following new subsection:
    ``(f) Treatment of Amortizable Section 197 Intangibles as 
Depreciable Property.--For treatment of amortizable section 197 
intangibles as depreciable property, see section 197(f)(7).''.
    (b) Tax Sharing Agreements.--Section 1239 of such Code (relating to 
gain from sale of depreciable property between certain related 
taxpayers) is amended by adding at the end the following new 
subsection:
    ``(f) Application to Tax Sharing Agreements.--
            ``(1) In general.--If there is a tax sharing agreement with 
        respect to any sale or exchange, the transferee and the 
        transferor shall be treated as related persons for purposes of 
        this section.
            ``(2) Tax sharing agreement.--For purposes of this 
        subsection, the term `tax sharing agreement' means any 
        agreement which provides for the payment to the transferor of 
        any amount which is determined by reference to any portion of 
        the tax benefit realized by the transferee with respect to the 
        depreciation (or amortization) of the property transferred.''.
    (c) Effective Date.--The amendment made by this section shall apply 
to sales and exchanges after ___.
                                 <all>
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