‘‘(i) IN
GENERAL.—The term ‘dis-
qualified 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 acquire property described in sub-
clause (I) or (II), and 
‘‘(IV) any derivative instrument 
entered into (directly or indirectly) 
with such entity or any investor in 
such entity. 
‘‘(ii) EXCEPTIONS.—Such term shall 
not include— 
‘‘(I) a partnership interest, 
‘‘(II) except as provided by the 
Secretary, any interest in a taxable 
corporation, and 
‘‘(III) except as provided by the 
Secretary, stock in an S corporation. 
‘‘(B) TAXABLE CORPORATION.—The term 
‘taxable corporation’ means— 
‘‘(i) a domestic C corporation, or 
VerDate Mar 15 2010 
07:05 Jul 12, 2011
Jkt 099200
PO 00000
Frm 00031
Fmt 6652
Sfmt 6201
E:\BILLS\H2495.IH
H2495
mstockstill on DSK4VPTVN1PROD with BILLS
‘‘(ii) a foreign corporation substan-
tially all of the income of which is— 
‘‘(I) effectively connected with 
the conduct of a trade or business in 
the United States, or 
‘‘(II) subject to a comprehensive 
foreign income tax (as defined in sec-
tion 457A(d)(2)). 
‘‘(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). 
‘‘(e) REGULATIONS.—The Secretary shall prescribe 
such regulations or other guidance as is necessary or ap-
propriate to carry out the purposes of this section, includ-
ing regulations or other guidance to— 
‘‘(1) provide modifications to the application of 
this section (including treating related persons as 
not related to one another) to the extent such modi-
fication is consistent with the purposes of this sec-
tion, 
‘‘(2) prevent the avoidance of the purposes of 
this section, and 
‘‘(3) coordinate this section with the other pro-
visions of this title. 
VerDate Mar 15 2010 
07:05 Jul 12, 2011
Jkt 099200
PO 00000
Frm 00032
Fmt 6652
Sfmt 6201
E:\BILLS\H2495.IH
H2495
mstockstill on DSK4VPTVN1PROD with BILLS
‘‘(f) CROSS REFERENCE.—For 40 percent penalty on 
certain underpayments due to the avoidance of this sec-
tion, see section 6662.’’. 
(b) INCOME FROM INVESTMENT SERVICES PART-
NERSHIP INTERESTS NOT TREATED AS QUALIFYING IN-
COME
OF
PUBLICLY
TRADED
PARTNERSHIPS.—Sub-
section (d) of section 7704 is amended by adding at the 
end the following new paragraph: 
‘‘(6) INCOME
FROM
INVESTMENT
SERVICES 
PARTNERSHIP INTERESTS NOT QUALIFIED.— 
‘‘(A) IN GENERAL.—Items of income and 
gain shall not be treated as qualifying income 
if such items are treated as ordinary income by 
reason of the application of section 710 (relat-
ing to special rules for partners providing in-
vestment management services to partnership). 
‘‘(B) SPECIAL RULES FOR CERTAIN PART-
NERSHIPS.— 
‘‘(i) CERTAIN PARTNERSHIPS OWNED 
BY REAL ESTATE INVESTMENT TRUSTS.— 
Subparagraph (A) shall not apply in the 
case of a partnership which meets each of 
the following requirements: 
‘‘(I) Such partnership is treated 
as publicly traded under this section 
VerDate Mar 15 2010 
07:05 Jul 12, 2011
Jkt 099200
PO 00000
Frm 00033
Fmt 6652
Sfmt 6201
E:\BILLS\H2495.IH
H2495
mstockstill on DSK4VPTVN1PROD with BILLS
solely by reason of interests in such 
partnership being convertible into in-
terests in a real estate investment 
trust which is publicly traded. 
‘‘(II) Fifty 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 in-
vestment trust (determined with the 
application of section 267(c)). 
‘‘(III) Such partnership meets 
the requirements of paragraphs (2), 
(3), and (4) of section 856(c). 
‘‘(ii) CERTAIN
PARTNERSHIPS
OWN-
ING OTHER PUBLICLY TRADED PARTNER-
SHIPS.—Subparagraph (A) shall not apply 
in the case of a partnership which meets 
each of the following requirements: 
‘‘(I) Substantially all of the as-
sets of such partnership consist of in-
terests in one or more publicly traded 
partnerships (determined without re-
gard to subsection (b)(2)). 
VerDate Mar 15 2010 
07:05 Jul 12, 2011
Jkt 099200
PO 00000
Frm 00034
Fmt 6652
Sfmt 6201
E:\BILLS\H2495.IH
H2495
mstockstill on DSK4VPTVN1PROD with BILLS
‘‘(II) Substantially all of the in-
come of such partnership is ordinary 
income or section 1231 gain (as de-
fined in section 1231(a)(3)). 
‘‘(C) TRANSITIONAL RULE.—In the case of 
a partnership which is a publicly traded part-
nership on the date of the enactment of this 
paragraph, subparagraph (A) shall not apply to 
any taxable year of the partnership beginning 
before the date which is 10 years after the date 
of the enactment of this paragraph.’’. 
(c) IMPOSITION
OF
PENALTY
ON
UNDERPAY-
MENTS.— 
(1) IN
GENERAL.—Subsection (b) of section 
6662, as amended by section 512, is amended by in-
serting after paragraph (6) the following new para-
graph: 
‘‘(7) The application of subsection (d) of section 
710 or the regulations prescribed under section 
710(e) to prevent the avoidance of the purposes of 
section 710.’’. 
(2) AMOUNT OF PENALTY.— 
(A) 
IN
GENERAL.—Section 
6662, 
as 
amended by section 512, is amended by adding 
at the end the following new subsection: 
VerDate Mar 15 2010 
07:05 Jul 12, 2011
Jkt 099200
PO 00000
Frm 00035
Fmt 6652
Sfmt 6201
E:\BILLS\H2495.IH
H2495
mstockstill on DSK4VPTVN1PROD with BILLS
‘‘(j) INCREASE IN PENALTY IN CASE OF PROPERTY 
TRANSFERRED FOR INVESTMENT MANAGEMENT SERV-
ICES.—In the case of any portion of an underpayment to 
which this section applies by reason of subsection (b)(7), 
subsection (a) shall be applied with respect to such portion 
by substituting ‘40 percent’ for ‘20 percent’.’’. 
(B) CONFORMING
AMENDMENTS.—Sub-
paragraph (B) of section 6662A(e)(2) is 
amended— 
(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) SPECIAL RULES FOR APPLICATION OF REA-
SONABLE CAUSE EXCEPTION.—Subsection (c) of sec-
tion 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 
VerDate Mar 15 2010 
07:05 Jul 12, 2011
Jkt 099200
PO 00000
Frm 00036
Fmt 6652
Sfmt 6201
E:\BILLS\H2495.IH
H2495
mstockstill on DSK4VPTVN1PROD with BILLS