lent shall be treated as having control of such pay-
ment.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to payments made on or after the 
date that is 90 days after the date of the enactment of 
this Act. 
TITLE VI—OTHER REVENUE 
PROVISIONS 
Subtitle A—Partnership Interests 
Held 
by 
Partners 
Providing 
Services 
SEC. 601. PARTNERSHIP INTERESTS TRANSFERRED IN 
CONNECTION WITH PERFORMANCE OF SERV-
ICES. 
(a) MODIFICATION TO ELECTION TO INCLUDE PART-
NERSHIP INTEREST
IN GROSS INCOME
IN YEAR
OF 
TRANSFER.—Subsection (c) of section 83 is amended by 
redesignating paragraph (4) as paragraph (5) and by in-
serting after paragraph (3) the following new paragraph: 
‘‘(4) PARTNERSHIP
INTERESTS.—Except as 
provided by the Secretary, in the case of any trans-
fer of an interest in a partnership in connection with 
the provision of services to (or for the benefit of) 
such partnership—
‘‘(A) the fair market value of such interest 
shall be treated for purposes of this section as 
being equal to the amount of the distribution 
which the partner would receive if the partner-
ship sold (at the time of the transfer) all of its 
assets at fair market value and distributed the 
proceeds of such sale (reduced by the liabilities 
of the partnership) to its partners in liquidation 
of the partnership, and 
‘‘(B) the person receiving such interest 
shall be treated as having made the election 
under subsection (b)(1) unless such person 
makes an election under this paragraph to have 
such subsection not apply.’’. 
(b) CONFORMING AMENDMENT.—Paragraph (2) of 
section 83(b) is amended by inserting ‘‘or subsection 
(c)(4)(B)’’ after ‘‘paragraph (1)’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to interests in partnerships trans-
ferred after the date of the enactment of this Act.
SEC. 602. INCOME OF PARTNERS FOR PERFORMING IN-
VESTMENT MANAGEMENT SERVICES TREAT-
ED AS ORDINARY INCOME RECEIVED FOR 
PERFORMANCE OF SERVICES. 
(a) IN GENERAL.—Part I of subchapter K of chapter 
1 is amended by adding at the end the following new sec-
tion: 
‘‘SEC. 710. SPECIAL RULES FOR PARTNERS PROVIDING IN-
VESTMENT 
MANAGEMENT 
SERVICES 
TO 
PARTNERSHIP. 
‘‘(a) TREATMENT
OF
DISTRIBUTIVE
SHARE
OF 
PARTNERSHIP ITEMS.—For purposes of this title, in the 
case of an investment services partnership interest— 
‘‘(1) IN
GENERAL.—Notwithstanding section 
702(b)— 
‘‘(A) any net income with respect to such 
interest for any partnership taxable year shall 
be treated as ordinary income, and 
‘‘(B) any net loss with respect to such in-
terest for such year, to the extent not dis-
allowed under paragraph (2) for such year, 
shall be treated as an ordinary loss. 
All items of income, gain, deduction, and loss which 
are taken into account in computing net income or 
net loss shall be treated as ordinary income or ordi-
nary loss (as the case may be).
‘‘(2) TREATMENT OF LOSSES.— 
‘‘(A) LIMITATION.—Any net loss with re-
spect to such interest shall be allowed for any 
partnership taxable year only to the extent that 
such loss does not exceed the excess (if any) 
of— 
‘‘(i) the aggregate net income with re-
spect to such interest for all prior partner-
ship taxable years, over 
‘‘(ii) the aggregate net loss with re-
spect to such interest not disallowed under 
this subparagraph for all prior partnership 
taxable years. 
‘‘(B) CARRYFORWARD.—Any net loss for 
any partnership taxable year which is not al-
lowed by reason of subparagraph (A) shall be 
treated as an item of loss with respect to such 
partnership interest for the succeeding partner-
ship taxable year. 
‘‘(C) BASIS ADJUSTMENT.—No adjustment 
to the basis of a partnership interest shall be 
made on account of any net loss which is not 
allowed by reason of subparagraph (A). 
‘‘(D) PRIOR
PARTNERSHIP
YEARS.—Any 
reference in this paragraph to prior partnership
taxable years shall only include prior partner-
ship taxable years to which this section applies. 
‘‘(3) NET INCOME AND LOSS.—For purposes of 
this section— 
‘‘(A) NET
INCOME.—The term ‘net in-
come’ means, with respect to any investment 
services partnership interest for any partner-
ship taxable year, the excess (if any) of— 
‘‘(i) all items of income and gain 
taken into account by the holder of such 
interest under section 702 with respect to 
such interest for such year, over 
‘‘(ii) all items of deduction and loss so 
taken into account. 
‘‘(B) NET
LOSS.—The term ‘net loss’ 
means, with respect to such interest for such 
year, the excess (if any) of the amount de-
scribed in subparagraph (A)(ii) over the amount 
described in subparagraph (A)(i). 
‘‘(b) DISPOSITIONS OF PARTNERSHIP INTERESTS.— 
‘‘(1) GAIN.—Any gain on the disposition of an 
investment services partnership interest shall be 
treated as ordinary income and shall be recognized 
notwithstanding any other provision of this subtitle.
‘‘(2) LOSS.—Any loss on the disposition of an 
investment services partnership interest shall be 
treated as an ordinary loss to the extent of the ex-
cess (if any) of— 
‘‘(A) the aggregate net income with respect 
to such interest for all partnership taxable 
years, over 
‘‘(B) the aggregate net loss with respect to 
such interest allowed under subsection (a)(2) 
for all partnership taxable years. 
‘‘(3) DISPOSITION OF PORTION OF INTEREST.— 
In the case of any disposition of an investment serv-
ices partnership interest, the amount of net loss 
which otherwise would have (but for subsection 
(a)(2)(C)) applied to reduce the basis of such inter-
est shall be disregarded for purposes of this section 
for all succeeding partnership taxable years. 
‘‘(4) DISTRIBUTIONS OF PARTNERSHIP PROP-
ERTY.—In the case of any distribution of property 
by a partnership with respect to any investment 
services partnership interest held by a partner— 
‘‘(A) the excess (if any) of— 
‘‘(i) the fair market value of such 
property at the time of such distribution, 
over
‘‘(ii) the adjusted basis of such prop-
erty in the hands of the partnership, 
shall be taken into account as an increase in 
such partner’s distributive share of the taxable 
income of the partnership (except to the extent 
such excess is otherwise taken into account in 
determining the taxable income of the partner-
ship), 
‘‘(B) such property shall be treated for 
purposes of subpart B of part II as money dis-
tributed to such partner in an amount equal to 
such fair market value, and 
‘‘(C) the basis of such property in the 
hands of such partner shall be such fair market 
value. 
Subsection (b) of section 734 shall be applied with-
out regard to the preceding sentence. 
‘‘(5) APPLICATION OF SECTION 751.—In apply-
ing section 751(a), an investment services partner-
ship interest shall be treated as an inventory item. 
‘‘(c) INVESTMENT SERVICES PARTNERSHIP INTER-
EST.—For purposes of this section— 
‘‘(1) IN GENERAL.—The term ‘investment serv-
ices partnership interest’ means any interest in a 
partnership which is held (directly or indirectly) by
any person if it was reasonably expected (at the time 
that such person acquired such interest) that such 
person (or any person related to such person) would 
provide (directly or indirectly) a substantial quantity 
of any of the following services with respect to assets 
held (directly or indirectly) by the partnership: 
‘‘(A) Advising as to the advisability of in-
vesting in, purchasing, or selling any specified 
asset. 
‘‘(B) Managing, acquiring, or disposing of 
any specified asset. 
‘‘(C) Arranging financing with respect to 
acquiring specified assets. 
‘‘(D) Any activity in support of any service 
described in subparagraphs (A) through (C). 
For purposes of this paragraph, 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)), or options or derivative contracts 
with respect to any of the foregoing. 
‘‘(2) EXCEPTION FOR CERTAIN CAPITAL INTER-
ESTS.—
‘‘(A) IN
GENERAL.—In the case of any 
portion of an investment services partnership 
interest which is a qualified capital interest, all 
items of income, gain, loss, and deduction which 
are allocated to such qualified capital interest 
shall not be taken into account under sub-
section (a) if— 
‘‘(i) allocations of items are made by 
the partnership to such qualified capital 
interest in the same manner as such allo-
cations are made to other qualified capital 
interests held by partners who do not pro-
vide any services described in paragraph 
(1) and who are not related to the partner 
holding the qualified capital interest, and 
‘‘(ii) the allocations made to such 
other interests are significant compared to 
the allocations made to such qualified cap-
ital interest. 
‘‘(B) SPECIAL RULE FOR NO OR INSIGNIFI-
CANT
ALLOCATIONS
TO
NONSERVICE
PRO-
VIDERS.—To the extent provided by the Sec-
retary in regulations or other guidance, in any 
case in which the requirements of subparagraph 
(A)(ii) are not satisfied, items of income, gain,
loss, and deduction shall not be taken into ac-
count under subsection (a) to the extent that 
such items are properly allocable under such 
regulations or other guidance to qualified cap-
ital interests. 
‘‘(C) SPECIAL RULE FOR DISPOSITIONS.— 
In the case of any investment services partner-
ship interest any portion of which is a qualified 
capital interest, subsection (b) shall not apply 
to so much of any gain or loss as bears the 
same proportion to the entire amount of such 
gain or loss as— 
‘‘(i) the distributive share of gain or 
loss that would have been allocable to the 
qualified capital interest under subpara-
graph (A) if the partnership sold all of its 
assets immediately before the disposition, 
bears to 
‘‘(ii) the distributive share of gain or 
loss that would have been so allocable to 
the investment services partnership inter-
est of which such qualified capital interest 
is a part. 
‘‘(D) QUALIFIED CAPITAL INTEREST.—For 
purposes of this paragraph, the term ‘qualified
capital interest’ means so much of a partner’s 
interest in the capital of the partnership as is 
attributable to— 
‘‘(i) the fair market value of any 
money or other property contributed to the 
partnership in exchange for such interest 
(determined without regard to section 
752(a)) , 
‘‘(ii) any amounts which have been in-
cluded in gross income under section 83 
with respect to the transfer of such inter-
est, and 
‘‘(iii) the excess (if any) of— 
‘‘(I) any items of income and 
gain taken into account under section 
702 with respect to such interest for 
taxable years to which this section ap-
plies, over 
‘‘(II) any items of deduction and 
loss so taken into account. 
The qualified capital interest shall be reduced 
by distributions from the partnership with re-
spect to such interest for taxable years to which 
this section applies and by the excess (if any)
of the amount described in clause (iii)(II) over 
the amount described in clause (iii)(I). 
‘‘(E) TREATMENT OF CERTAIN LOANS.— 
‘‘(i) 
PROCEEDS
OF
PARTNERSHIP 
LOANS NOT TREATED AS QUALIFIED CAP-
ITAL
INTEREST
OF
SERVICE
PROVIDING 
PARTNERS.—For purposes of this para-
graph, an investment services partnership 
interest shall not be treated as a qualified 
capital interest to the extent that such in-
terest is acquired in connection with the 
proceeds of any loan or other advance 
made or guaranteed, directly or indirectly, 
by any other partner or the partnership (or 
any person related to any such other part-
ner or the partnership). 
‘‘(ii) REDUCTION IN ALLOCATIONS TO 
QUALIFIED
CAPITAL
INTERESTS
FOR 
LOANS
FROM
NONSERVICE
PROVIDING 
PARTNERS
TO
THE
PARTNERSHIP.—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 described in 
paragraph (1) to the partnership (or any
person related to such partner) shall be 
taken into account in determining the 
qualified capital interests of the partners 
in the partnership. 
‘‘(3) RELATED
PERSONS.—A person shall be 
treated as related to another person if the relation-
ship between such persons would result in a dis-
allowance of losses under section 267 or 707(b). 
‘‘(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 (directly or indi-
rectly) a disqualified interest 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. Rules similar to
the rules of subsection (c)(2) shall apply for pur-
poses of this subsection. 
‘‘(2) DEFINITIONS.—For purposes of this sub-
section— 
‘‘(A) DISQUALIFIED INTEREST.— 
‘‘(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 
‘‘(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. 
‘‘(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.—
100 
‘‘(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 
solely by reason of interests in such 
partnership being convertible into in-
terests in a real estate investment 
trust which is publicly traded. 
‘‘(II) 50 percent or more of the 
capital and profits interests of such 
partnership are owned, directly or in-
directly, at all times during the tax-
able year by such real estate invest-
ment trust (determined with the ap-
plication 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
101 
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)). 
‘‘(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:
102 
‘‘(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: 
‘‘(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’’.