II

106TH CONGRESS

1ST SESSION S. 1952

To amend the Internal Revenue Code of 1986 to provide a simplified method

for determining a partner’s share of items of a partnership which is

a qualified investment club.

IN THE SENATE OF THE UNITED STATES

NOVEMBER 17, 1999

Mr. ABRAHAM introduced the following bill; which was read twice and referred

to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to provide

a simplified method for determining a partner’s share

of items of a partnership which is a qualified investment

club.

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 ‘‘Small Investors Tax

5 Simplification Act of 1999’’.
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S 1952 IS

1 SEC. 2. ELECTION TO USE SIMPLIFIED METHOD FOR

2 QUALIFIED INVESTMENT CLUBS.

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

4 1 of the Internal Revenue Code of 1986 (relating to deter5 mination of tax liability of partners and partnerships) is

6 amended by inserting after section 704 the following new

7 section:

8 ‘‘SEC. 704A. ELECTION TO USE SIMPLIFIED METHOD FOR

9 QUALIFIED INVESTMENT CLUBS.

10 ‘‘(a) IN GENERAL.—Notwithstanding any other pro11 vision of this subchapter, a partner’s distributive share of

12 all items of income, gain, loss, deduction, or credit of a

13 qualified investment club shall be determined under the

14 simplified method.

15 ‘‘(b) SIMPLIFIED METHOD.—For purposes of this

16 section—

17 ‘‘(1) IN GENERAL.—The term ‘simplified meth18 od’ means a method pursuant to which a partnership

19 allocates each of the items of income, gain, loss, de20 duction, and credit for its taxable year to its part21 ners based on their proportionate interests on the

22 last day of such taxable year in partnership profits.

23 ‘‘(2) EXCEPTION FOR DISTRIBUTIONS DURING

24 YEAR.—The partnership may take into account the

25 partners’ varying interests in partnership profits re26 sulting from distributions during the taxable year in
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1 determining the partners’ interests in partnership

2 profits for purposes of paragraph (1).

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

4 ‘‘(1) QUALIFIED INVESTMENT CLUB.—The

5 term ‘qualified investment club’ means, with respect

6 to any taxable year, any partnership—

7 ‘‘(A) which is not required to be registered

8 under the Investment Company Act of 1940,

9 ‘‘(B) for which no person who is registered

10 as an investment adviser under the Investment

11 Advisers Act of 1940 substantially participates

12 in the management or investment decisions

13 thereof,

14 ‘‘(C) all of the partners of which are quali15 fied partners for the calendar year in which the

16 taxable year of the partnership ends,

17 ‘‘(D) at least 90 percent of the gross in18 come of which is derived from items described

19 in section 851(b)(2),

20 ‘‘(E) at least 90 percent of the value of the

21 total assets of which, at the end of each quarter

22 of such year, consists of cash, cash items (in23 cluding receivables), and securities,

24 ‘‘(F) the taxable year of which is the cal25 endar year, and
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1 ‘‘(G) for which an election under sub2 section (e) is in effect.

3 ‘‘(2) QUALIFIED PARTNER.—

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

5 partner’ means—

6 ‘‘(i) any individual other than a non7 resident alien,

8 ‘‘(ii) any individual retirement plan,

9 and

10 ‘‘(iii) any education individual retire11 ment account (as defined in section 530).

12 ‘‘(B) LIMITATION ON CONTRIBUTIONS BY

13 INDIVIDUALS.—An individual shall not be a

14 qualified partner for any calendar year if the

15 aggregate contributions by such individual to

16 qualified investment clubs (determined without

17 regard to paragraph (1)(C)) during such cal18 endar year exceeds $3,000 or exceeds $3,000

19 during any of the 5 preceding calendar years.

20 ‘‘(C) LIMITATION ON CONTRIBUTIONS BY

21 TRUSTS.—

22 ‘‘(i) IN GENERAL.—A plan or account

23 referred to in subparagraph (A) (hereafter

24 in this subparagraph referred to as a

25 ‘trust’) shall not be a qualified partner for
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1 any calendar year if the aggregate con2 tributions to qualified investment clubs

3 (determined without regard to paragraph

4 (1)(C)) during such calendar year by such

5 trust exceeds the excess of—

6 ‘‘(I) the product of $3,000 and

7 the number of years before such cal8 endar year that such trust held any

9 asset, over

10 ‘‘(II) the aggregate contributions

11 made to qualified investment clubs (as

12 so determined) by such trust during

13 all prior calendar years.

14 ‘‘(ii) AGGREGATION OF RELATED

15 TRUSTS.—For purposes of this

16 subparagraph—

17 ‘‘(I) all trusts having the same

18 beneficiary shall be treated as 1 trust,

19 and

20 ‘‘(II) only the trust having the

21 longest period described in clause

22 (i)(I) shall be taken into account

23 thereunder.
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1 ‘‘(iii) FRACTIONS OF A YEAR.—For

2 purposes of clause (i)(I), a fraction of a

3 year shall be counted as a whole year.

4 ‘‘(D) NO ATTRIBUTION BETWEEN INDIVID5 UALS AND TRUSTS.—Notwithstanding any other

6 provision of this title, there shall be no attribu7 tion of contributions between a trust and an in8 dividual.

9 ‘‘(3) SECURITIES.—

10 ‘‘(A) DEFINITION.—The term ‘security’

11 has the meaning given to such term by section

12 475(c)(2) (determined without regard to sub13 paragraph (F) thereof).

14 ‘‘(B) CERTAIN RULES TO APPLY.—For

15 purposes of paragraph (1)(E), rules similar to

16 the rules of paragraphs (4) and (5) of section

17 851(c), shall apply.

18 ‘‘(d) INFLATION ADJUSTMENT.—In the case of cal19 endar years after 1999, the $3,000 amounts contained in

20 subsection (c)(2) shall each be increased for any calendar

21 year after 2000 by an amount equal to—

22 ‘‘(1) $3,000, multiplied by

23 ‘‘(2) the cost-of-living adjustment under section

24 1(f)(3) for such calendar year, determined by sub-
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1 stituting ‘calendar year 1999’ for ‘calendar year

2 1992’ in subparagraph (B) thereof.

3 Any increase under this subsection which is not a multiple

4 of $50 shall be rounded to the nearest multiple of $50.

5 ‘‘(e) ELECTION.—An election under this subsection

6 shall be made on the return for the taxable year for which

7 it is made and shall apply to such taxable year and all

8 subsequent taxable years for which the partnership is a

9 qualified investment club, unless the election is revoked

10 with the consent of the Secretary.

11 ‘‘(f) TERMINATION OF QUALIFIED INVESTMENT

12 CLUB STATUS.—An election under subsection (e) shall

13 terminate as of the 1st day of any taxable year during

14 which the partnership ceases to be a qualified investment

15 club and, solely for purposes of section 704(c), each part16 ner shall be treated as contributing on such first day such

17 partner’s pro rata share of the partnership’s assets and

18 liabilities on such first day to a new partnership.

19 ‘‘(g) INADVERTENT INVALID ELECTIONS OR TERMI20 NATIONS.—The Secretary shall provide a relief mechanism

21 for treating a partnership as a qualified investment club

22 in circumstances where—

23 ‘‘(1) an election under subsection (e) was not

24 effective for the taxable year for which made by rea-
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1 son of an inadvertent failure to satisfy any require2 ment of subsection (c), or

3 ‘‘(2) there is an inadvertent termination under

4 subsection (f) of such an election.

5 ‘‘(h) ELECTION AFTER TERMINATION.—If an elec6 tion under subsection (e) by a partnership is terminated

7 or revoked, such partnership shall not be eligible to make

8 an election under subsection (e) for any taxable year be9 fore its 5th taxable year which begins after the 1st taxable

10 year for which such termination or revocation is effective,

11 unless the Secretary consents to such election.

12 ‘‘(i) REGULATIONS.—The Secretary shall prescribe

13 such regulations as may be necessary to carry out the pur14 poses of this section, including regulations regarding the

15 status of an individual or trust as a qualified partner.’’.

16 (b) CLERICAL AMENDMENT.—The table of sections

17 for part I of subchapter K of chapter 1 of such Code is

18 amended by inserting after the item relating to section

19 704 the following new item:

‘‘Sec. 704A. Election to use simplified method for qualified investment clubs.’’

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

21 this section shall apply to taxable years ending after the

22 date of the enactment of this Act.

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