I 

115TH CONGRESS 

2D SESSION H. R. 5514 

To amend the Internal Revenue Code of 1986 to treat certain income with 

respect to partnership interests held in connection with the performance 

of services as ordinary income. 

IN THE HOUSE OF REPRESENTATIVES 

APRIL 13, 2018 

Mr. GROTHMAN 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 treat certain income with respect to partnership interests held 

in connection with the performance of services as ordinary income. 

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. 

4 This Act may be cited as the ‘‘Tax Fairness Act of 

5 2018’’. 


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1 SEC. 2. ORDINARY INCOME TREATMENT IN THE CASE OF 

2 PARTNERSHIP INTERESTS HELD IN CONNEC3 TION WITH PERFORMANCE OF SERVICES. 

4 (a) IN GENERAL.—Section 1061 of the Internal Rev5 enue Code of 1986 is amended to read as follows: 

6 ‘‘SEC. 1061. PARTNERSHIP INTERESTS HELD IN CONNEC7 TION WITH PERFORMANCE OF SERVICES. 

8 ‘‘(a) IN GENERAL.—If one or more applicable part9 nership interests are held by a taxpayer at any time during 

10 the taxable year, so much of— 

11 ‘‘(1) the taxpayer’s net capital gain with respect 

12 to such interests for such taxable year, as does not 

13 exceed 

14 ‘‘(2) the taxpayer’s recharacterization account 

15 balance for such taxable year, 

16 shall be treated as ordinary income. 

17 ‘‘(b) NET CAPITAL GAIN.— 

18 ‘‘(1) IN GENERAL.—For purposes of subsection 

19 (a)(1), net capital gain shall be determined under 

20 section 1222, except that such section shall be ap21 plied— 

22 ‘‘(A) without regard to the recharacteriza23 tion of any item as ordinary income under this 

24 section, 

25 ‘‘(B) by only taking into account items of 

26 gain and loss— 


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1 ‘‘(i) taken into account by the tax2 payer under section 702 with respect to 

3 any applicable partnership interest, 

4 ‘‘(ii) recognized by the taxpayer on 

5 the disposition of any such interest, or 

6 ‘‘(iii) recognized by the taxpayer 

7 under paragraph (4) on a distribution of 

8 property with respect to such interest, and 

9 ‘‘(C) in the case of a taxable year for 

10 which section 1231 gains (as defined in section 

11 1231(a)(3)(A)) exceed section 1231 losses (as 

12 defined in section 1231(a)(3)(B)), by treating 

13 property which is taken into account in deter14 mining such gains and losses as capital assets 

15 held for more than 1 year. 

16 ‘‘(2) ALLOCATION TO ITEMS OF GAIN.—The 

17 amount treated as ordinary income under subsection 

18 (a) shall be allocated ratably among the items of 

19 long-term capital gain taken into account in deter20 mining net capital gain under paragraph (1). 

21 ‘‘(3) RECOGNITION OF GAIN ON DISPOSITION

22 OF APPLICABLE PARTNERSHIP INTERESTS.—Any 

23 gain on the disposition of any applicable partnership 

24 interest shall be recognized notwithstanding any 

25 other provision of this title. 


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1 ‘‘(4) RECOGNITION OF GAIN ON DISTRIBUTIONS

2 OF PARTNERSHIP PROPERTY.— 

3 ‘‘(A) IN GENERAL.—In the case of any dis4 tribution of property by a partnership with re5 spect to any applicable partnership interest, the 

6 partner receiving such property shall recognize 

7 gain equal to the excess (if any) of— 

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

9 property at the time of such distribution, 

10 over 

11 ‘‘(ii) the adjusted basis of such prop12 erty in the hands of such partner (deter13 mined without regard to subparagraph 

14 (B)). 

15 ‘‘(B) ADJUSTMENT OF BASIS.—In the case 

16 of a distribution to which subparagraph (A) ap17 plies, the basis of the distributed property in 

18 the hands of the distributee partner shall be the 

19 amount determined under subparagraph (A)(i). 

20 ‘‘(c) RECHARACTERIZATION ACCOUNT BALANCE.— 

21 ‘‘(1) IN GENERAL.—For purposes of this sec22 tion, the term ‘recharacterization account balance’ 

23 means, with respect to any taxpayer for any taxable 

24 year, the excess (if any) of— 

25 ‘‘(A) the sum of— 


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1 ‘‘(i) the taxpayer’s aggregate annual 

2 recharacterization amounts with respect to 

3 applicable partnership interests for such 

4 taxable year, plus 

5 ‘‘(ii) the taxpayer’s recharacterization 

6 account balance for the taxable year pre7 ceding such taxable year, over 

8 ‘‘(B) the sum of— 

9 ‘‘(i) the taxpayer’s net ordinary in10 come with respect to applicable partnership 

11 interests for such taxable year (determined 

12 without regard to this section), plus 

13 ‘‘(ii) the amount treated as ordinary 

14 income of the taxpayer under this section 

15 for the taxable year preceding such taxable 

16 year. 

17 ‘‘(2) ANNUAL RECHARACTERIZATION

18 AMOUNT.—For purposes of this subsection— 

19 ‘‘(A) IN GENERAL.—The term ‘annual re20 characterization amount’ means, with respect to 

21 any applicable partnership interest for any 

22 partnership taxable year, an amount equal to 

23 the product of— 

24 ‘‘(i) the specified rate determined 

25 under subparagraph (B) for the calendar 


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1 year in which such taxable year begins, 

2 multiplied by 

3 ‘‘(ii) the excess (if any) of— 

4 ‘‘(I) an amount equal to the ap5 plicable percentage of the partner6 ship’s aggregate invested capital for 

7 such taxable year, over 

8 ‘‘(II) the specified capital con9 tribution of the partner with respect 

10 to the applicable partnership interest 

11 for such taxable year. 

12 If a taxpayer holds an applicable partnership 

13 interest for less than the entire taxable year, 

14 the amount determined under the preceding 

15 sentence shall be ratably reduced. 

16 ‘‘(B) SPECIFIED RATE.—For purposes of 

17 subparagraph (A), the term ‘specified rate’ 

18 means, with respect to any calendar year, a per19 centage equal to— 

20 ‘‘(i) the Federal long-term rate deter21 mined under section 1274(d)(1) for the 

22 last month of the calendar year, plus 

23 ‘‘(ii) 10 percentage points. 

24 ‘‘(C) APPLICABLE PERCENTAGE.— 


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1 ‘‘(i) IN GENERAL.—The term ‘applica2 ble percentage’ means, with respect to any 

3 applicable partnership interest, the highest 

4 percentage of profits of the partnership 

5 that could be allocated with respect to such 

6 interest for the taxable year (consistent 

7 with the partnership agreement and as8 suming such facts and circumstances with 

9 respect to such taxable year as would re10 sult in such highest percentage). 

11 ‘‘(ii) SECRETARIAL AUTHORITY.—The 

12 Secretary shall prescribe rules for the de13 termination of the applicable percentage in 

14 cases in which the percentage of profits of 

15 a partnership that are to be allocated with 

16 respect to an applicable partnership inter17 est varies on the basis of the aggregate 

18 amount of such profits. Such rules may 

19 provide a percentage which may be used in 

20 lieu of the highest percentage determined 

21 under clause (i) in cases where such other 

22 percentage is consistent with the purposes 

23 of this section. 

24 ‘‘(D) AGGREGATE INVESTED CAPITAL.— 


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1 ‘‘(i) IN GENERAL.—The term ‘aggre2 gate invested capital’ means, with respect 

3 to any taxable year, the average daily 

4 amount of invested capital of the partner5 ship for such taxable year. 

6 ‘‘(ii) INVESTED CAPITAL.—The term 

7 ‘invested capital’ means, with respect to 

8 any partnership as of any day, the total 

9 cumulative value, determined at the time 

10 of contribution, of all money or other prop11 erty contributed to the partnership on or 

12 before such day. 

13 ‘‘(iii) REDUCTION FOR LIQUIDATION

14 OF PARTNERSHIP INTERESTS.—The in15 vested capital of a partnership shall be re16 duced by the aggregate amount distributed 

17 in liquidation of interests in the partner18 ship. 

19 ‘‘(iv) TREATMENT OF CERTAIN IN20 DEBTEDNESS AS INVESTED CAPITAL.—The 

21 following amounts shall be treated as in22 vested capital: 

23 ‘‘(I) PARTNER LOANS.—The ag24 gregate value (determined as of the 

25 time of the loan) of money or other 


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1 property which a partner loans to the 

2 partnership. 

3 ‘‘(II) INDEBTEDNESS ELIGIBLE

4 TO SHARE IN EQUITY OF THE PART5 NERSHIP.—The face amount of any 

6 convertible debt of the partnership or 

7 any debt obligation providing equity 

8 participation in the partnership. 

9 ‘‘(E) SPECIFIED CAPITAL CONTRIBU10 TION.— 

11 ‘‘(i) IN GENERAL.—The term ‘speci12 fied capital contribution’ means, with re13 spect to any applicable partnership interest 

14 for any taxable year, the average daily 

15 amount of contributed capital with respect 

16 to such interest for such year. 

17 ‘‘(ii) CONTRIBUTED CAPITAL.—The 

18 term ‘contributed capital’ means, with re19 spect to applicable partnership interest as 

20 of any day, the excess (if any) of— 

21 ‘‘(I) the total cumulative value, 

22 determined at the time of contribu23 tion, of all money or other property 

24 contributed by the partner to the 


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1 partnership with respect to such inter2 est as of such day, over 

3 ‘‘(II) the total cumulative value, 

4 determined at the time of distribution, 

5 of all money or other property distrib6 uted by the partnership to the partner 

7 with respect to such interest as of 

8 such day. 

9 ‘‘(iii) TREATMENT OF RELATED

10 PARTY BORROWINGS.—Any amount bor11 rowed directly or indirectly from the part12 nership or any other partner of the part13 nership or any person related to such other 

14 partner or such partnership shall not be 

15 taken into account under this subpara16 graph. For purposes of the preceding sen17 tence, a person shall be treated as related 

18 to another person if the relationship be19 tween such persons would be described in 

20 section 267(b) or 707(b) if such sections 

21 and section 267(f) were applied by sub22 stituting ‘10 percent’ for ‘50 percent’ each 

23 place it appears. 

24 ‘‘(F) MULTIPLE INTERESTS.—If at any 

25 time during a taxable year a taxpayer holds diVerDate Sep 11 2014 02:06 Apr 18, 2018 Jkt 079200 PO 00000 Frm 00010 Fmt 6652 Sfmt 6201 E:\BILLS\H5514.IH H5514

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1 rectly or indirectly more than 1 applicable part2 nership interest in a single partnership, such in3 terests shall be treated as 1 applicable partner4 ship interest for purposes of applying this para5 graph. 

6 ‘‘(3) NET ORDINARY INCOME.—For purposes of 

7 this subsection, the net ordinary income with respect 

8 to applicable partnership interests for any taxable 

9 year is the excess (if any) of— 

10 ‘‘(A) the taxpayer’s distributive share of 

11 items of income and gain under section 702 

12 with respect to applicable partnership interests 

13 for such taxable year (determined without re14 gard to any items of gain taken into account in 

15 determining net capital gain under subsection 

16 (b)(1)), over 

17 ‘‘(B) the taxpayer’s distributive share of 

18 items of deduction and loss under section 702 

19 with respect to such interests for such taxable 

20 year (determined without regard to any items of 

21 loss taken into account in determining net cap22 ital gain under subsection (b)(1)). 

23 ‘‘(d) APPLICABLE PARTNERSHIP INTEREST.—For 

24 purposes of this section— 


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1 ‘‘(1) IN GENERAL.—The term ‘applicable part2 nership interest’ means any interest in a partnership 

3 which, directly or indirectly, is transferred to (or is 

4 held by) the taxpayer in connection with the per5 formance of services by the taxpayer, or any other 

6 person, in any applicable trade or business. 

7 ‘‘(2) APPLICABLE TRADE OR BUSINESS.— 

8 ‘‘(A) IN GENERAL.—The term ‘applicable 

9 trade or business’ means any trade or business 

10 conducted on a regular, continuous, and sub11 stantial basis which, regardless of whether the 

12 activities are conducted in one or more entities, 

13 consists, in whole or in part, of— 

14 ‘‘(i) raising or returning capital, 

15 ‘‘(ii) investing in (or disposing of) 

16 trades or businesses (or identifying trades 

17 or businesses for such investing or disposi18 tion), and 

19 ‘‘(iii) developing such trades or busi20 nesses. 

21 ‘‘(B) TREATMENT OF RESEARCH AND EX22 PERIMENTATION ACTIVITIES.—Any activity in23 volving research or experimentation (within the 

24 meaning of section 469(c)(4)) shall be treated 


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1 as a trade or business for purposes of clauses 

2 (ii) and (iii) of subparagraph (A). 

3 ‘‘(e) TRANSFER OF APPLICABLE PARTNERSHIP IN4 TEREST TO RELATED PERSON.— 

5 ‘‘(1) IN GENERAL.—If a taxpayer transfers any 

6 applicable partnership interest, directly or indirectly, 

7 to a person related to the taxpayer, the taxpayer 

8 shall include in gross income (as ordinary income) so 

9 much of the taxpayer’s recharacterization account 

10 balance for such taxable year as is allocable to such 

11 interest (determined in such manner as the Sec12 retary may provide and reduced by any amount 

13 treated as ordinary income under subsection (a) with 

14 respect to the transfer of such interest). 

15 ‘‘(2) RELATED PERSON.—For purposes of this 

16 paragraph, a person is related to the taxpayer if— 

17 ‘‘(A) the person is a member of the tax18 payer’s family within the meaning of section 

19 318(a)(1), or 

20 ‘‘(B) the person performed a service within 

21 the current calendar year or the preceding three 

22 calendar years in any applicable trade or busi23 ness in which or for which the taxpayer per24 formed a service. 


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1 ‘‘(f) REPORTING BY ENTITY OF TAXPAYER’S AN2 NUAL RECHARACTERIZATION AMOUNT.—A partnership 

3 shall report to the Secretary, and include with the infor4 mation required to be furnished under section 6031(b) to 

5 each partner, the amount of the partner’s annual re6 characterization amount for the taxable year, if any. A 

7 similar rule applies to any entity that receives a report 

8 of an annual recharacterization amount for the taxable 

9 year. 

10 ‘‘(g) REGULATIONS.—The Secretary shall issue such 

11 regulations or other guidance as necessary to carry out 

12 this section, including regulations— 

13 ‘‘(1) to prevent the abuse of the purposes of 

14 this section, including through— 

15 ‘‘(A) the allocation of income to tax indif16 ferent parties, or 

17 ‘‘(B) a reduction in the invested capital of 

18 the partnership (including attempts to under19 value contributed or loaned property), 

20 ‘‘(2) which provide that partnership interests 

21 shall not fail to be treated as transferred or held in 

22 connection with the performance of services merely 

23 because the taxpayer also made contributions to the 

24 partnership, 


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1 ‘‘(3) which provide for the application of this 

2 section in cases where the taxpayer has more than 

3 1 applicable interest in a partnership, and 

4 ‘‘(4) which provide for the application of this 

5 section in cases of tiered structures of entities.’’. 

6 (b) COORDINATION WITH SECTION 83.—Subsection 

7 (e) of section 83 is amended by striking ‘‘or’’ at the end 

8 of paragraph (4), by striking the period at the end of para9 graph (5) and inserting ‘‘, or’’, and by adding at the end 

10 the following new paragraph: 

11 ‘‘(6) a transfer of a partnership interest to 

12 which section 1061 applies.’’. 

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

14 this section shall apply to taxable years beginning after 

15 December 31, 2017. 

Æ 


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