‘‘(II) such interest shall be treat-
ed as held by a person in connection 
with a trade or business during any 
taxable year if such interest was so 
held by such person during any 3 tax-
able years preceding such taxable 
year, and 
‘‘(III) paragraph (5)(B) shall not 
apply. 
‘‘(ii) CLOSELY RELATED PERSONS.— 
For purposes of clause (i)(I), a person 
shall be treated as closely related to an-
other person if, taking into account the 
rules of section 267(c), the relationship be-
tween such persons is described in— 
‘‘(I) paragraph (1) or (9) of sec-
tion 267(b), or 
‘‘(II) section 267(b)(4), but solely 
in the case of a trust with respect to 
which each current beneficiary is the 
grantor or a person whose relationship 
to the grantor is described in para-
graph (1) or (9) of section 267(b). 
‘‘(D) ANTIABUSE RULES.—The Secretary 
may issue regulations or other guidance which 
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prevent the avoidance of the purposes of sub-
paragraph (A), including regulations or other 
guidance which treat convertible and contingent 
debt (and other debt having the attributes of 
equity) as a capital interest in the partnership. 
‘‘(E) CONTROLLED
GROUPS
OF
ENTI-
TIES.— 
‘‘(i) IN GENERAL.—In the case of a 
controlled group of entities, if an interest 
in the partnership received in exchange for 
a contribution to the capital of the part-
nership by any member of such controlled 
group would (in the hands of such mem-
ber) constitute property held in connection 
with a trade or business, then any interest 
in such partnership held by any member of 
such group shall be treated for purposes of 
subparagraph (A) as constituting (in the 
hands of such member) property held in 
connection with a trade or business. 
‘‘(ii) CONTROLLED GROUP OF ENTI-
TIES.—For purposes of clause (i), the term 
‘controlled group of entities’ means a con-
trolled group of corporations as defined in 
section 1563(a)(1), applied without regard 
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pamtmann on DSKBFK8HB2PROD with BILLS
to subsections (a)(4) and (b)(2) of section 
1563. A partnership or any other entity 
(other than a corporation) shall be treated 
as a member of a controlled group of enti-
ties if such entity is controlled (within the 
meaning of section 954(d)(3)) by members 
of such group (including any entity treated 
as a member of such group by reason of 
this sentence). 
‘‘(F) 
SPECIAL
RULE
FOR
CORPORA-
TIONS.—For purposes of this paragraph, in the 
case of a corporation, the determination of 
whether property is held in connection with a 
trade or business shall be determined as if the 
taxpayer were an individual. 
‘‘(4) SPECIFIED
ASSET.—The term ‘specified 
asset’ means securities (as defined in section 
475(c)(2) without regard to the last sentence there-
of), real estate held for rental or investment, inter-
ests in partnerships, commodities (as defined in sec-
tion 475(e)(2)), cash or cash equivalents, or options 
or derivative contracts with respect to any of the 
foregoing. 
‘‘(5) RELATED PERSONS.— 
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‘‘(A) IN
GENERAL.—A person shall be 
treated as related to another person if the rela-
tionship between such persons is described in 
section 267(b) or 707(b). 
‘‘(B) ATTRIBUTION
OF
PARTNER
SERV-
ICES.—Any service described in paragraph (2) 
which is provided by a partner of a partnership 
shall be treated as also provided by such part-
nership. 
‘‘(d) EXCEPTION
FOR CERTAIN CAPITAL INTER-
ESTS.— 
‘‘(1) IN GENERAL.—In the case of any portion 
of an investment services partnership interest which 
is a qualified capital interest, all items of gain and 
loss (and any dividends) which are allocated to such 
qualified capital interest shall not be taken into ac-
count under subsection (a) if— 
‘‘(A) allocations of items are made by the 
partnership to such qualified capital interest in 
the same manner as such allocations are made 
to other qualified capital interests held by part-
ners who do not provide any services described 
in subsection (c)(2) and who are not related to 
the partner holding the qualified capital inter-
est, and 
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‘‘(B) the allocations made to such other in-
terests are significant compared to the alloca-
tions made to such qualified capital interest. 
‘‘(2) AUTHORITY TO PROVIDE EXCEPTIONS TO 
ALLOCATION
REQUIREMENTS.—To the extent pro-
vided by the Secretary in regulations or other guid-
ance— 
‘‘(A) ALLOCATIONS TO PORTION OF QUALI-
FIED CAPITAL INTEREST.—Paragraph (1) may 
be applied separately with respect to a portion 
of a qualified capital interest. 
‘‘(B) NO OR INSIGNIFICANT ALLOCATIONS 
TO NONSERVICE PROVIDERS.—In any case in 
which the requirements of paragraph (1)(B) are 
not satisfied, items of gain and loss (and any 
dividends) shall not be taken into account under 
subsection (a) to the extent that such items are 
properly allocable under such regulations or 
other guidance to qualified capital interests. 
‘‘(C) ALLOCATIONS
TO
SERVICE
PRO-
VIDERS’ QUALIFIED CAPITAL INTERESTS WHICH 
ARE LESS THAN OTHER ALLOCATIONS.—Alloca-
tions shall not be treated as failing to meet the 
requirement of paragraph (1)(A) merely be-
cause the allocations to the qualified capital in-
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terest represent a lower return than the alloca-
tions made to the other qualified capital inter-
ests referred to in such paragraph. 
‘‘(3) SPECIAL RULE FOR CHANGES IN SERVICES 
AND CAPITAL CONTRIBUTIONS.—In the case of an 
interest in a partnership which was not an invest-
ment services partnership interest and which, by 
reason of a change in the services with respect to as-
sets held (directly or indirectly) by the partnership 
or by reason of a change in the capital contributions 
to such partnership, becomes an investment services 
partnership interest, the qualified capital interest of 
the holder of such partnership interest immediately 
after such change shall not, for purposes of this sub-
section, be less than the fair market value of such 
interest 
(determined 
immediately 
before 
such 
change). 
‘‘(4) SPECIAL
RULE
FOR
TIERED
PARTNER-
SHIPS.—Except as otherwise provided by the Sec-
retary, in the case of tiered partnerships, all items 
which are allocated in a manner which meets the re-
quirements of paragraph (1) to qualified capital in-
terests in a lower-tier partnership shall retain such 
character to the extent allocated on the basis of 
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