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terest as of December 31, 2001, as determined
under the Internal Revenue Code of 1986.
‘‘(3) CROSS REFERENCES.—See section 75 for
rules relating to the effect of certain business trans-
actions on a taxpayer’s basis.
‘‘(4) SPECIAL
RULE
FOR
CONTRIBUTION
OF
PERSONAL USE PROPERTY.—If a taxpayer contrib-
utes personal-use property (as defined in section
210(b)(3)(B)), the taxpayer’s basis in the property
shall not be increased by an amount in excess of the
fair market value of the property contributed.
‘‘(b) SPECIAL RULES
FOR PARTNERSHIP INTER-
ESTS.—
‘‘(1) INITIAL BASIS IN OLD PARTNERSHIPS.—A
partner’s basis in a partnership interest as of Janu-
ary 1, 2002, equals—
‘‘(A) the partner’s basis in the partnership
as of the end of the taxable year ending on De-
cember 31, 2001, minus
‘‘(B) the amount of the partner’s share of
the indebtedness of the partnership taken into
account in determining such basis.
‘‘(2) NEGATIVE BASIS.—If the amount deter-
mined under paragraph (1) is negative, the taxpayer
has a negative basis in the partnership and such
133
negative basis shall increase the gain on the sale or
disposition of the partnership interest (except to the
extent such negative basis has been adjusted by rea-
son of capital contributions).
‘‘(3) ADJUSTMENT TO BASIS.—Except as other-
wise provided in this section, a partner’s basis in a
partnership interest shall be determined in accord-
ance with the general principles of this chapter ap-
plicable to an individual’s basis in an interest in a
business entity. A partner’s basis in a partnership
shall not be adjusted by reason of any—
‘‘(A) distribution from the partnership (ex-
cept to the extent such distribution is treated as
distribution of basis in accordance with the gen-
eral principles of this chapter applicable to an
individual’s basis in an interest in a business
entity),
‘‘(B) income, earnings, or loss of the part-
nership, or
‘‘(C) any change in the partner’s share of
the partnership’s indebtedness.
‘‘(4) SPECIAL RULE FOR TRANSITION DISTRIBU-
TIONS.—
134
‘‘(A) EFFECT OF TRANSITION DISTRIBU-
TION.—A transition distribution from partner-
ship to a partner shall—
‘‘(i) reduce the partner’s basis in the
partnership, and
‘‘(ii) not be included in gross income.
‘‘(B) DEFINITION.—A ‘transition distribu-
tion’ is a distribution by a business entity to an
individual made during the first three months
of 2002 but only to the extent that such dis-
tribution, when added to all other distributions
of the entity to the individual after March 31,
2001, does not exceed the amount of taxable in-
come allocated by the entity to the individual
during the taxable year of the entity ending on
December 31, 2001.
‘‘(5) PARTNERSHIP.—For purposes of this sec-
tion, ‘partnership’ includes a limited liability com-
pany that was taxable as a partnership under the
Internal Revenue Code of 1986.
‘‘(c) SPECIAL RULES FOR SHARES OF S CORPORA-
TIONS.—Rules similar to those contained in subsection (b)
shall apply with respect to the basis of stock of a corpora-
tion that was treated as an S corporation under the Inter-
nal Revenue Code of 1986.
135
‘‘(d) SPECIAL RULES FOR PROPRIETORSHIPS.—
‘‘(1) OLD
PROPRIETORSHIP.—A proprietor’s
basis in any business activity conducted before Janu-
ary 1, 2002, which is treated as a business activity
as of such date equals—
‘‘(A) the proprietor’s adjusted basis in the
assets of such business entity as of the end of
the taxable year ending on December 31, 2001,
minus
‘‘(B) the balance of any indebtedness the
interest on which the proprietor had treated as
business interest under section 163(h)(2)(A) of
the Internal Revenue Code of 1986.
‘‘(2) NEGATIVE BASIS.—If the amount deter-
mined under paragraph (1) is negative, the propri-
etor has a negative basis in the proprietorship and
such negative basis shall increase the gain on the
sale or disposition of the entity (except to the extent
such negative basis has been adjusted by reason of
capital contributions).
‘‘(3) ADJUSTMENT TO BASIS.—Except as other-
wise provided in this section, a proprietor’s basis in
a proprietorship shall be determined in accordance
with the general principles of this chapter applicable
136
to an individual’s basis in an interest in a business
entity.
‘‘(4) 
PROPRIETORSHIP.—‘Proprietorship’
includes—
‘‘(A) any family business that is not a
partnership, and
‘‘(B) any business activity conducted by a
taxpayer other than as an employee if such ac-
tivity constitutes a business entity.
‘‘(e) ANTI-AVOIDANCE RULE.—
‘‘(1) IN GENERAL.—If a pass-through entity’s
distributions to an individual in its taxable year or
taxable years ending in 2001 exceeds 125 percent of
the individual’s distributive share of income for such
period, the amount of such excess distribution shall
be treated as a cash distribution to the partner on
January 1, 2002, and shall not reduce the partner’s
basis in his partnership interest.
‘‘(2) PASS THROUGH ENTITY.—‘Pass through
entity’ means a partnership, proprietorship, or S
corporation.
‘‘SEC. 74. GRATUITOUS TRANSFERS.
‘‘(a) IN GENERAL.—If after December 31, 2001, a
taxpayer receives any property by gift, inheritance, or
137
other gratuitous transfer, the taxpayer’s basis in the prop-
erty shall be the lesser of—
‘‘(1) the fair market value of the property at
the time of transfer, or
‘‘(2) the transferee’s basis in the property at
the time of transfer.
‘‘(b) PROOF REQUIRED.—A taxpayer’s basis in an
asset received by gift, inheritance, or other gratuitous
transfer shall be presumed to be zero unless the taxpayer
can demonstrate to the satisfaction of the Secretary the
basis claimed by the taxpayer.
‘‘SEC. 75. DISTRIBUTIONS FROM BUSINESS ENTITIES.
‘‘(a) IN GENERAL.—Except as otherwise provided in
this section or in regulations issued by the Secretary in
accordance with this section—
‘‘(1) CASH
DISTRIBUTIONS.—Distributions of
cash by a business entity with respect to its equity
ownership shall be treated as dividends and included
in gross income.
‘‘(2) DISTRIBUTIONS OF PROPERTY.—If a busi-
ness entity distributes property (other than stock or
other equity ownership described in paragraph (3) in
connection with a merger, acquisition or reorganiza-
tion), the fair market value of the property received