135 
‘‘(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 2006 but only to the extent that such dis-
tribution, when added to all other distributions 
of the entity to the individual after March 31, 
2006, 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, 2006. 
‘‘(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. 
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136 
‘‘(d) SPECIAL RULES FOR PROPRIETORSHIPS.— 
‘‘(1) OLD
PROPRIETORSHIP.—A proprietor’s 
basis in any business activity conducted before Janu-
ary 1, 2007, 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, 2006, 
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 
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137 
to an individual’s basis in an interest in a business 
entity. 
‘‘(4) 
PROPRIETORSHIP.—‘Proprietorship’ 
in-
cludes— 
‘‘(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 2006 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, 2007, 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, 2006, a 
taxpayer receives any property by gift, inheritance, or 
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138 
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 
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139 
shall be treated as a dividend and included in gross 
income. 
‘‘(3) DISTRIBUTIONS OF STOCK OR OTHER EQ-
UITY OWNERSHIP.—If a taxpayer receives with re-
spect to its ownership interest in a business entity 
stock or other ownership interests in such business 
entity (as reorganized) or in another business entity 
that is controlled by such business entity or is ac-
quiring or merging with such business entity, no 
gain or loss shall be recognized on the distribution. 
‘‘(b) BASIS IN BUSINESS DIVISIONS.—In the case of 
a spin-off, split-off, or split-up of a business entity in 
which a taxpayer has basis, the taxpayer’s basis in the 
original business entity shall be allocated among the new 
and surviving entities in accordance with the relative fair 
market values of the taxpayer’s interests in those entities. 
If interests in the entities are publicly traded, fair market 
values shall be based on public trading prices. In other 
cases, the Secretary shall accept any reasonable allocation 
made by the taxpayer if the taxpayer notifies the Secretary 
of the allocation in an attachment to its tax return for 
the taxable year of the transaction. 
‘‘(c) DISTRIBUTIONS CONSTITUTING RETURN
OF 
BASIS.— 
‘‘(1) COMPLETE LIQUIDATIONS.— 
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140 
‘‘(A) IN GENERAL.—In the case of a dis-
tribution in complete liquidation of a business 
entity, a taxpayer shall be treated as receiving 
cash and assets of the entity in exchange for 
the taxpayer’s equity in the business entity. In 
such case, the taxpayer shall recognize gain to 
the extent that the sum of the cash and fair 
market value of assets received exceeds the tax-
payer’s basis in its interest in the business enti-
ty or shall recognize loss to the extent that the 
basis exceeds the fair market value of cash and 
assets received. 
‘‘(B) DISTRIBUTION
OF
EQUITY
INTER-
ESTS.—In the case of a complete liquidation in 
which at least 90 percent of the value of assets 
and cash distributed to an equity holder is eq-
uity interests in other business entities con-
trolled by the distributing entity— 
‘‘(i) subparagraph (A) shall not apply, 
‘‘(ii) paragraph (3) of subsection (a) 
shall apply, 
‘‘(iii) the cash and fair market value 
of assets other than equity interests in 
controlled entities shall be applied to re-
duce the taxpayer’s basis in the distrib-
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