‘‘(2) EXCEPTION FOR CERTAIN CAPITAL INTER-
ESTS.— 
‘‘(A) IN GENERAL.—If— 
‘‘(i) a portion of an investment serv-
ices partnership interest is acquired on ac-
count of a contribution of invested capital, 
and 
‘‘(ii) the partnership makes a reason-
able allocation of partnership items be-
tween the portion of the distributive share 
that is with respect to invested capital and 
the portion of such distributive share that 
is not with respect to invested capital, 
then subsection (a) shall not apply to the por-
tion of the distributive share that is with re-
spect to invested capital. An allocation will not 
be treated as reasonable for purposes of this 
subparagraph if such allocation would result in 
the partnership allocating a greater portion of 
income to invested capital than any other part-
ner not providing services would have been allo-
cated with respect to the same amount of in-
vested capital. 
‘‘(B) SPECIAL RULE FOR DISPOSITIONS.— 
In any case to which subparagraph (A) applies,
subsection (b) shall not apply to any gain or 
loss allocable to invested capital. The portion of 
any gain or loss attributable to invested capital 
is the proportion of such gain or loss which is 
based on the distributive share of gain or loss 
that would have been allocable to invested cap-
ital under subparagraph (A) if the partnership 
sold all of its assets immediately before the dis-
position. 
‘‘(C) INVESTED
CAPITAL.—For purposes 
of this paragraph, the term ‘invested capital’ 
means, the fair market value at the time of con-
tribution of any money or other property con-
tributed to the partnership. 
‘‘(D) TREATMENT OF CERTAIN LOANS.— 
‘‘(i) 
PROCEEDS
OF
PARTNERSHIP 
LOANS NOT TREATED AS INVESTED CAP-
ITAL OF SERVICE PROVIDING PARTNERS.— 
For purposes of this paragraph, an invest-
ment services partnership interest shall not 
be treated as acquired on account of a con-
tribution of invested capital to the extent 
that such capital is attributable to the pro-
ceeds of any loan or other advance made or
guaranteed, directly or indirectly, by any 
partner or the partnership. 
‘‘(ii) LOANS FROM NONSERVICE PRO-
VIDING PARTNERS TO THE PARTNERSHIP 
TREATED
AS
INVESTED
CAPITAL.—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 to the part-
nership shall be treated as invested capital 
of such partner and amounts of income 
and loss treated as allocable to invested 
capital shall be adjusted accordingly. 
‘‘(d) OTHER INCOME
AND GAIN
IN CONNECTION 
WITH INVESTMENT MANAGEMENT SERVICES.— 
‘‘(1) IN GENERAL.—If— 
‘‘(A) a person performs (directly or indi-
rectly) investment management services for any 
entity, 
‘‘(B) such person holds a disqualified in-
terest with respect to such entity, and 
‘‘(C) the value of such interest (or pay-
ments 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 per-
formed, 
any income or gain with respect to such interest 
shall be treated as ordinary income for the perform-
ance of services. Rules similar to the rules of sub-
section (c)(2) shall apply where such interest was ac-
quired on account of invested capital in such entity. 
‘‘(2) DEFINITIONS.—For purposes of this sub-
section— 
‘‘(A) DISQUALIFIED INTEREST.—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 ac-
quire property described in clause (i) or 
(ii), and 
‘‘(iv) any derivative instrument en-
tered into (directly or indirectly) with such 
entity or any investor in such entity. 
Such term shall not include a partnership inter-
est and shall not include stock in a taxable cor-
poration.
‘‘(B) TAXABLE CORPORATION.—The term 
‘taxable corporation’ means— 
‘‘(i) a domestic C corporation, or 
‘‘(ii) a foreign corporation subject to a 
comprehensive foreign income tax (as de-
fined in section 457A(d)(4)). 
‘‘(C) INVESTMENT
MANAGEMENT
SERV-
ICES.—The term ‘investment management serv-
ices’ means a substantial quantity of any of the 
services described in subsection (c)(1) which are 
provided in the conduct of the trade or business 
of providing such services. 
‘‘(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) prevent the avoidance of the purposes of 
this section, and 
‘‘(2) coordinate this section with the other pro-
visions of this subchapter. 
‘‘(f) CROSS REFERENCE.—For 40 percent no fault 
penalty on certain underpayments due to the avoidance 
of this section, see section 6662.’’. 
(b) APPLICATION
TO REAL ESTATE INVESTMENT 
TRUSTS.—Subsection (c) of section 856 is amended by 
adding at the end the following new paragraph:
‘‘(8) EXCEPTION FROM RECHARACTERIZATION 
OF INCOME FROM INVESTMENT SERVICES PARTNER-
SHIP INTERESTS.— 
‘‘(A) IN GENERAL.—Paragraphs (2), (3), 
and (4) shall be applied without regard to sec-
tion 710 (relating to special rules for partners 
providing investment management services to 
partnership). 
‘‘(B) SPECIAL RULE FOR PARTNERSHIPS 
OWNED BY REITS.—Section 7704 shall be ap-
plied without regard to section 710 in the case 
of a partnership which meets each of the fol-
lowing requirements: 
‘‘(i) Such partnership is treated as 
publicly traded under section 7704 solely 
by reason of interests in such partnership 
being convertible into interests in a real es-
tate 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)).
(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
UN-
DERPAYMENT PENALTIES’’. 
(3) REASONABLE CAUSE EXCEPTION NOT AP-
PLICABLE.—Subsection (c) of section 6664 is 
amended— 
(A) by redesignating paragraphs (2) and 
(3) as paragraphs (3) and (4), respectively, 
(B) by striking ‘‘paragraph (2)’’ in para-
graph (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) CONFORMING AMENDMENTS.— 
(1) Subsection (d) of section 731 is amended by 
inserting ‘‘section 710(b)(4) (relating to distribu-
tions of partnership property),’’ before ‘‘section 
736’’.
(2) Section 741 is amended by inserting ‘‘or 
section 710 (relating to special rules for partners 
providing investment management services to part-
nership)’’ before the period at the end. 
(3) Paragraph (13) of section 1402(a) is 
amended— 
(A) by striking ‘‘other than guaranteed’’ 
and inserting ‘‘other than— 
‘‘(A) guaranteed’’, 
(B) by striking the semi-colon at the end 
and inserting ‘‘, and’’, and 
(C) by adding at the end the following new 
subparagraph: 
‘‘(B) any income treated as ordinary in-
come under section 710 received by an indi-
vidual who provides investment management 
services (as defined in section 710(d)(2));’’. 
(4) Paragraph (12) of section 211(a) of the So-
cial Security Act is amended— 
(A) by striking ‘‘other than guaranteed’’ 
and inserting ‘‘other than— 
‘‘(A) guaranteed’’, 
(B) by striking the semi-colon at the end 
and inserting ‘‘, and’’, and
(C) by adding at the end the following new 
subparagraph: 
‘‘(B) any income treated as ordinary in-
come under section 710 of the Internal Revenue 
Code of 1986 received by an individual who 
provides investment management services (as 
defined in section 710(d)(2) of such Code);’’. 
(5) The table of sections for part I of sub-
chapter K of chapter 1 is amended by adding at the 
end the following new item: 
‘‘Sec. 710. Special rules for partners providing investment management services 
to partnership.’’. 
(e) EFFECTIVE DATE.— 
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by 
this section shall apply to taxable years ending after 
November 1, 2007. 
(2) PARTNERSHIP TAXABLE YEARS WHICH IN-
CLUDE
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 November 1, 2007, 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 in-
come 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
INTER-
ESTS.—Section 710(b) of the Internal Revenue Code 
of 1986 (as added by this section) shall apply to dis-
positions and distributions after November 1, 2007. 
(4) OTHER INCOME AND GAIN IN CONNECTION 
WITH INVESTMENT MANAGEMENT SERVICES.—Sec-
tion 710(d) of such Code (as added by this section) 
shall take effect on November 1, 2007. 
(5) PUBLICLY
TRADED
PARTNERSHIPS.—For 
purposes of applying section 7704, the amendments 
made by this section shall apply to taxable years be-
ginning after December 31, 2009. 
SEC. 612. INDEBTEDNESS INCURRED BY A PARTNERSHIP IN 
ACQUIRING SECURITIES AND COMMODITIES 
NOT TREATED AS ACQUISITION INDEBTED-
NESS 
FOR 
ORGANIZATIONS 
WHICH 
ARE 
PARTNERS WITH LIMITED LIABILITY. 
(a) IN GENERAL.—Subsection (c) of section 514 (re-
lating to acquisition indebtedness) is amended by adding 
at the end the following new paragraph: 
‘‘(10) SECURITIES
AND
COMMODITIES
AC-
QUIRED BY PARTNERSHIPS IN WHICH AN ORGANIZA-
TION IS A PARTNER WITH LIMITED LIABILITY.—
‘‘(A) IN GENERAL.—In the case of any or-
ganization which is a partner with limited liabil-
ity in a partnership, the term ‘acquisition in-
debtedness’ does not, for purposes of this sec-
tion, include indebtedness incurred or continued 
by such partnership in purchasing or carrying 
any qualified security or commodity. 
‘‘(B) QUALIFIED
SECURITY
OR
COM-
MODITY.—For purposes of this paragraph, the 
term ‘qualified security or commodity’ means 
any security (as defined in section 475(c)(2) 
without regard to the last sentence thereof), 
any 
commodity 
(as 
defined 
in 
section 
475(e)(2)), or any option or derivative contract 
with respect to such a security or commodity. 
‘‘(C) APPLICATION TO TIERED PARTNER-
SHIPS
AND
OTHER
PASS-THRU
ENTITIES.— 
Rules similar to the rules of subparagraph (A) 
shall apply in the case of tiered partnerships 
and other pass-thru entities. 
‘‘(D) REGULATIONS.—The Secretary may 
prescribe such regulations as may be necessary 
or appropriate to carry out the purposes of this 
paragraph, including regulations to prevent the 
abuse of this paragraph.’’.