I 

108TH CONGRESS 

2D SESSION H. R. 4139 

To amend the Internal Revenue Code of 1986 to simplify the taxation of 

partnerships. 

IN THE HOUSE OF REPRESENTATIVES 

APRIL 2, 2004 

Mr. HOUGHTON 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 simplify 

the taxation of partnerships. 

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 ‘‘State Business Law Con5 formity Act of 2004’’. 

6 SEC. 2. REFERENCES TO GENERAL PARTNERS. 

7 (a) EXCLUSION OF CERTAIN ACTIVE BUSINESSES

8 FROM AT RISK RULES.—Subclause (I) of section 

9 465(c)(7)(D)(ii) of the Internal Revenue Code of 1986 
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1 (defining qualified corporate partner) is amended to read 

2 as follows: 

3 ‘‘(I) such corporation is not pro4 hibited or limited under State law 

5 from participation in the management 

6 or business of the partnership.’’. 

7 (b) PAYMENTS TO RETIRING PARTNERS.—Subpara8 graph (B) of section 736(b)(3) of such Code (relating to 

9 limitation on application of paragraph (2)) is amended to 

10 read as follows: 

11 ‘‘(B) any portion of the retiring or de12 ceased partner’s distributive share of partner13 ship income was subject to tax under section 

14 1401.’’. 

15 (c) FOREIGN CURRENCY TRANSACTIONS.—Subclause 

16 (I) of section 988(c)(1)(E)(v) of such Code is amended 

17 to read as follows: 

18 ‘‘(I) CERTAIN GENERAL PART19 NERS.—The interest of a partner in 

20 the partnership shall not be treated as 

21 failing to meet the 20-percent owner22 ship requirements of clause (iii)(I) for 

23 any taxable year of the partnership if 

24 for the taxable year of the partner in 
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1 which such partnership taxable year 

2 ends— 

3 ‘‘(aa) the partner is not lim4 ited as to participation in the 

5 management or activity of the 

6 qualified fund, and 

7 ‘‘(bb) such partner (and 

8 each corporation filing a consoli9 dated return with such partner) 

10 had no ordinary income or loss 

11 from a section 988 transaction 

12 which is foreign currency gain or 

13 loss (as the case may be).’’. 

14 (d) SPECIAL VALUATION RULES FOR GENERATION15 SKIPPING TAX.—Clause (ii) of section 2701(b)(2)(B) of 

16 such Code (relating to partnerships) is amended to read 

17 as follows: 

18 ‘‘(ii) in the case of a limited partner19 ship, the holding of any interest as a part20 ner who is not limited as to participation 

21 in management or activity of the partner22 ship.’’. 

23 (e) TAX MATTERS PARTNER.—Paragraph (7) of sec24 tion 6231(a) of such Code (defining tax matters partner) 

25 is amended to read as follows: 
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1 ‘‘(7) TAX MATTERS PARTNER.— 

2 ‘‘(A) IN GENERAL.—The tax matters part3 ner of any partnership is— 

4 ‘‘(i) the partner designated as the tax 

5 matters partner as provided in regulations, 

6 or 

7 ‘‘(ii) if there is no partner who has 

8 been so designated, the partner having the 

9 largest profits interest in the partnership 

10 at the close of the taxable year involved 

11 (or, where there is more than 1 such part12 ner, the 1 of such partners whose name 

13 would appear first in an alphabetical list14 ing). 

15 ‘‘(B) SELECTION BY SECRETARY.—If there 

16 is no partner designated under subparagraph 

17 (A)(i) and the Secretary determines that it is 

18 impracticable to apply subparagraph (A)(ii), the 

19 partner selected by the Secretary shall be treat20 ed as the tax matters partner. The Secretary 

21 shall, within 30 days of selecting a tax matters 

22 partner under the preceding sentence, notify all 

23 partners required to receive notice under sec24 tion 6223(a) of the name and address of the 

25 person selected. 
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1 ‘‘(C) RESTRICTION ON DESIGNATION OF

2 PARTNER.—A partner may not be designated as 

3 a tax matters partner under subparagraph 

4 (A)(i) unless such partner is not limited as to 

5 participation in management or activity of the 

6 partnership.’’. 

7 (f) EFFECTIVE DATE.—The amendments made by 

8 this section shall apply to taxable years beginning after 

9 December 31, 2004. 

10 SEC. 3. REFERENCES TO LIMITED PARTNERS. 

11 (a) LIMITED ENTREPRENEUR.— 

12 (1) IN GENERAL.—Subparagraph (A) of section 

13 464(e)(2) of the Internal Revenue Code of 1986 (de14 fining limited entrepreneur) is amended by striking 

15 ‘‘other than as a limited partner’’. 

16 (2) CONFORMING AMENDMENTS.— 

17 (A) Section 464(c) of such Code is amend18 ed— 

19 (i) by striking ‘‘limited partners or’’ 

20 in paragraph (1)(B), 

21 (ii) by striking ‘‘a limited partner or’’ 

22 in paragraph (2). 

23 (B) Section 1256 of such Code is amend24 ed— 
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1 (i) by striking ‘‘limited partners or’’ 

2 each place it appears in subsections 

3 (e)(3)(B) and (f)(4), 

4 (ii) by striking ‘‘a limited partner or’’ 

5 in subsection (e)(3)(C), and 

6 (iii) by striking ‘‘limited partner or’’ 

7 both places it appears in the heading and 

8 text of subsection (e)(4)(A)(i). 

9 (C) Section 1258(d)(5)(C) of such Code is 

10 amended— 

11 (i) by striking ‘‘limited partner or’’ in 

12 the matter preceding subclause (i), 

13 (ii) by striking ‘‘limited partner’s (or 

14 limited entrepreneur’s) in subclause (i) and 

15 inserting ‘‘limited entrepreneur’s’’, and 

16 (iii) by striking ‘‘partners and lim17 ited’’ in the heading. 

18 (b) PASSIVE LOSS RULES.— 

19 (1) Subsection (h) of section 469 of such Code 

20 is amended by striking paragraph (2) and by redes21 ignating paragraphs (3), (4), and (5) as paragraphs 

22 (2), (3), and (4), respectively. 

23 (2) Subparagraph (A) of section 469(c)(7) of 

24 such Code is amended by striking the last sentence. 
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1 (3) Paragraph (6) of section 469(i) of such 

2 Code is amended by striking subparagraph (C) and 

3 by redesignating subparagraph (D) as subparagraph 

4 (C). 

5 (4) Subsection (f) of section 772 of such Code 

6 (relating to special rules for applying passive loss 

7 limitations) is amended to read as follows: 

8 ‘‘(f) SPECIAL RULES FOR APPLYING PASSIVE LOSS

9 LIMITATIONS.— 

10 ‘‘(1) IN GENERAL.—If any person holds an in11 terest in an electing large partnership other than as 

12 a partner described in paragraph (3)— 

13 ‘‘(A) paragraph (2) of subsection (c) shall 

14 not apply to such partner, and 

15 ‘‘(B) such partner’s distributive share of 

16 the partnership items allocable to passive loss 

17 limitation activities shall be taken into account 

18 separately to the extent necessary to comply 

19 with the provisions of section 469. 

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

21 apply to any items allocable to an interest held as 

22 a partner described in paragraph (3). 

23 ‘‘(3) PARTNER DESCRIBED.—For purposes of 

24 this subsection, a partner is described in this para25 graph if the partner is a person whose participation 
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1 in the management or business activity of the part2 nership is limited under applicable State law.’’. 

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

4 this section shall apply to taxable years beginning after 

5 December 31, 2004. 

6 SEC. 4. PARTNERSHIP INCOME ATTRIBUTABLE TO CAPITAL 

7 EXCLUDED FROM NET EARNINGS FROM 

8 SELF-EMPLOYMENT. 

9 (a) IN GENERAL.—Paragraph (13) of section 

10 1402(a) of the Internal Revenue Code of 1986 is amended 

11 to read as follows: 

12 ‘‘(13) there shall be excluded the distributive 

13 share of net income of a partner attributable to cap14 ital;’’. 

15 (b) PARTNERSHIP INCOME ATTRIBUTABLE TO CAP16 ITAL.—Section 1402 of such Code is amended by adding 

17 at the end the following new subsection: 

18 ‘‘(l) PARTNERSHIP INCOME ATTRIBUTABLE TO CAP19 ITAL.— 

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

21 (a)(13), the following amounts shall be treated as in22 come attributable to capital— 

23 ‘‘(A) the amount, if any, in excess of what 

24 would constitute reasonable compensation for 
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1 services rendered by such partner to the part2 nership, and 

3 ‘‘(B) an amount equal to a reasonable rate 

4 of return on unreturned capital of the partner 

5 determined as of the beginning of the taxable 

6 year. 

7 ‘‘(2) DEFINITIONS.—For purposes of paragraph 

8 (1)— 

9 ‘‘(A) UNRETURNED CAPITAL.—The term 

10 ‘unreturned capital’ means the excess of the ag11 gregate amount of money and the fair market 

12 value as of the date of contribution of other 

13 consideration (net of liabilities) contributed by 

14 the partner over the aggregate amount of 

15 money and the fair market value as of the date 

16 of distribution of other consideration (net of li17 abilities) distributed by the partnership to the 

18 partner, increased or decreased for the part19 ner’s distributive share of all reportable items 

20 as determined in section 702. If the partner ac21 quires a partnership interest and the partner22 ship makes an election under section 754, the 

23 partner’s unreturned capital shall take into ac24 count appropriate adjustments under section 

25 743. 
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1 ‘‘(B) REASONABLE RATE OF RETURN.—A 

2 reasonable rate of return on unreturned capital 

3 shall equal 150 percent (or such higher rate as 

4 is established in regulations) of the highest ap5 plicable Federal rate, as determined under sec6 tion 1274(d)(1), at the beginning of the part7 nership’s taxable year. 

8 ‘‘(3) REGULATIONS.—The Secretary shall pre9 scribe such regulations as may be necessary to carry 

10 out the purposes of this subsection.’’. 

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

12 this section shall apply with respect to services performed 

13 in taxable years beginning after December 31, 2004. 

14 SEC. 5. REPEAL OF ABILITY TO ELECT LARGE PARTNER15 SHIP REPORTING RULES. 

16 (a) IN GENERAL.—Paragraph (2) of section 775(a) 

17 of the Internal Revenue Code of 1986 (relating to election) 

18 is amended by adding at the end the following: ‘‘No elec19 tion under this subsection shall be made after December 

20 31, 2004.’’. 

21 (b) EFFECTIVE DATE.—The amendment made by 

22 this section shall apply to partnership taxable years begin23 ning after December 31, 2004. 

Æ