‘‘(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) stock in a taxable corpora-
tion, 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 
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‘‘(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 as are necessary or appropriate to carry 
out the purposes of this section, including regulations 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 no fault 
penalty on certain underpayments due to the avoidance 
of this section, see section 6662.’’. 
(b) INCOME FROM INVESTMENT SERVICES PART-
NERSHIP INTERESTS NOT TREATED AS QUALIFYING IN-
COME
OF
PUBLICLY
TRADED
PARTNERSHIPS.—Sub-
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section (d) of section 7704 of such Code 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 
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 
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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 
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 other partner-
ships which are traded on an estab-
lished securities market. 
‘‘(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 in existence on the date of the en-
actment of this paragraph, subparagraph (A) 
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shall not apply to any taxable year of the part-
nership 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 of such Code is amended by inserting after 
paragraph (5) the following new paragraph: 
‘‘(6) 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 of such 
Code is amended by adding at the end the fol-
lowing new subsection: 
‘‘(i) 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)(6), 
subsection (a) shall be applied with respect to such portion 
by substituting ‘40 percent’ for ‘20 percent’.’’. 
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(B) CONFORMING
AMENDMENTS.—Sub-
paragraph (B) of section 6662A(e)(2) of such 
Code 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) REASONABLE CAUSE EXCEPTION NOT AP-
PLICABLE.—Subsection (c) of section 6664 of such 
Code 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).’’. 
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(d) INCOME AND LOSS FROM INVESTMENT SERVICES 
PARTNERSHIP INTERESTS TAKEN INTO ACCOUNT IN DE-
TERMINING NET EARNING FROM SELF-EMPLOYMENT.— 
(1) 
INTERNAL
REVENUE
CODE.—Section 
1402(a) of such Code is amended by striking ‘‘and’’ 
at the end of paragraph (16), by striking the period 
at the end of paragraph (17) and inserting ‘‘; and’’, 
and by inserting after paragraph (17) the following 
new paragraph: 
‘‘(18) notwithstanding the preceding provisions 
of this subsection, any amount treated as ordinary 
income or ordinary loss of any individual under sec-
tion 710 shall be taken into account in determining 
the net earnings from self-employment of such indi-
vidual.’’. 
(2) SOCIAL SECURITY ACT.—Section 211(a) of 
the Social Security Act is amended by inserting after 
paragraph (16) the following new paragraph: 
‘‘(17) Notwithstanding the preceding provisions 
of this subsection, any amount treated as ordinary 
income or ordinary loss of any individual under sec-
tion 710 of the Internal Revenue Code of 1986 shall 
be taken into account in determining the net earn-
ings from self-employment of such individual.’’. 
(e) CONFORMING AMENDMENTS.— 
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(1) Subsection (d) of section 731 of the Inter-
nal Revenue Code of 1986 is amended by inserting 
‘‘section 710(b)(4) (relating to distributions of part-
nership property),’’ after ‘‘to the extent otherwise 
provided by’’. 
(2) Section 741 of such Code is amended by in-
serting ‘‘or section 710 (relating to special rules for 
partners providing investment management services 
to partnership)’’ before the period at the end. 
(3) The table of sections for part I of sub-
chapter K of chapter 1 of such Code is amended by 
adding at the end the following new item: 
‘‘Sec. 710. Special rules for partners providing investment management services 
to partnership.’’. 
(f) 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 
lll. 
(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 lll, the amount of 
the net income referred to in such section shall be 
treated as being the lesser of the net income for the 
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entire partnership taxable year or the net income de-
termined by only taking into account items attrib-
utable 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 lll. 
(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 lll. 
(5) PUBLICLY
TRADED
PARTNERSHIPS.—The 
amendment made by subsection (b) shall apply to 
taxable years beginning after lll. 
SEC. 3. APPLICATION TO PARTNERSHIP INTERESTS AND 
TAX SHARING AGREEMENTS OF RULE TREAT-
ING CERTAIN GAIN ON SALES BETWEEN RE-
LATED PERSONS AS ORDINARY INCOME. 
(a) PARTNERSHIP INTERESTS.— 
(1) IN
GENERAL.—Subsection (a) of section 
1239 of the Internal Revenue Code of 1986 is 
amended to read as follows: 
‘‘(a) TREATMENT OF GAIN AS ORDINARY INCOME.— 
In the case of a sale or exchange of property, directly or 
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indirectly, between related persons, any gain recognized to 
the transferor shall be treated as ordinary income if— 
‘‘(1) such property is, in the hands of the trans-
feree, of a character which is subject to the allow-
ance for depreciation provided in section 167, or 
‘‘(2) such property is an interest in a partner-
ship, but only to the extent of gain attributable to 
unrealized appreciation in property which is of a 
character subject to the allowance for depreciation 
provided in section 167.’’. 
(2) TREATMENT OF AMORTIZABLE SECTION 197 
INTANGIBLES AS DEPRECIABLE PROPERTY.—Section 
1239 of such Code is amended by adding at the end 
the following new subsection: 
‘‘(f) TREATMENT OF AMORTIZABLE SECTION 197 IN-
TANGIBLES AS DEPRECIABLE PROPERTY.—For treatment 
of amortizable section 197 intangibles as depreciable prop-
erty, see section 197(f)(7).’’. 
(b) TAX SHARING AGREEMENTS.—Section 1239 of 
such Code (relating to gain from sale of depreciable prop-
erty between certain related taxpayers) is amended by 
adding at the end the following new subsection: 
‘‘(f) APPLICATION
TO
TAX
SHARING
AGREE-
MENTS.— 
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‘‘(1) IN GENERAL.—If there is a tax sharing 
agreement with respect to any sale or exchange, the 
transferee and the transferor shall be treated as re-
lated persons for purposes of this section. 
‘‘(2) TAX SHARING AGREEMENT.—For purposes 
of this subsection, the term ‘tax sharing agreement’ 
means any agreement which provides for the pay-
ment to the transferor of any amount which is deter-
mined by reference to any portion of the tax benefit 
realized by the transferee with respect to the depre-
ciation (or amortization) of the property trans-
ferred.’’. 
(c) EFFECTIVE DATE.—The amendment made by 
this section shall apply to sales and exchanges after 
lll. 
Æ 
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