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‘‘(B) NO
OR
INSIGNIFICANT
ALLOCATIONS 
TO
NONSERVICE
PROVIDERS.—In any case in 
which the requirements of paragraph (1)(B) are 
not satisfied, items of income, gain, loss, and de-
duction 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 PROVIDERS’ 
QUALIFIED
CAPITAL
INTERESTS
WHICH
ARE 
LESS
THAN
OTHER
ALLOCATIONS.—Allocations 
shall not be treated as failing to meet the re-
quirement of paragraph (1)(A) merely because 
the allocations to the qualified capital interest 
represent a lower return than the allocations 
made to the other qualified capital interests re-
ferred to in such paragraph. 
‘‘(3) SPECIAL
RULE
FOR
CHANGES
IN
SERV-
ICES.—In the case of an interest in a partnership 
which is not an investment services partnership inter-
est and which, by reason of a change in the services 
with respect to assets held (directly or indirectly) by 
the partnership, would (without regard to the reason-
able expectation exception of subsection (c)(1)) have 
become such an interest—
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‘‘(A) notwithstanding subsection (c)(1), such 
interest shall be treated as an investment services 
partnership interest as of the time of such 
change, and 
‘‘(B) for purposes of this subsection, the 
qualified capital interest of the holder of such 
partnership interest immediately after such 
change shall not 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 quali-
fied capital interests in any upper-tier partnership. 
‘‘(5) EXCEPTION FOR NO-SELF-CHARGED CARRY 
AND MANAGEMENT FEE PROVISIONS.—Except as oth-
erwise provided by the Secretary, an interest shall not 
fail to be treated as satisfying the requirement of 
paragraph (1)(A) merely because the allocations made 
by the partnership to such interest do not reflect the 
cost of services described in subsection (c)(1) which
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•HR 4213 EAH1S 
are provided (directly or indirectly) to the partner-
ship by the holder of such interest (or a related per-
son). 
‘‘(6) SPECIAL RULE FOR DISPOSITIONS.—In the 
case of any investment services partnership 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— 
‘‘(A) the distributive share of gain or loss 
that would have been allocated to the qualified 
capital interest (consistent with the requirements 
of paragraph (1)) if the partnership had sold all 
of its assets at fair market value immediately be-
fore the disposition, bears to 
‘‘(B) the distributive share of gain or loss 
that would have been so allocated to the invest-
ment services partnership interest of which such 
qualified capital interest is a part. 
‘‘(7) QUALIFIED CAPITAL INTEREST.—For pur-
poses of this subsection— 
‘‘(A) IN
GENERAL.—The term ‘qualified 
capital interest’ means so much of a partner’s 
interest in the capital of the partnership as is 
attributable to—
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•HR 4213 EAH1S 
‘‘(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 interest, 
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, over 
‘‘(II) any items of deduction and 
loss so taken into account. 
‘‘(B) ADJUSTMENT TO QUALIFIED CAPITAL 
INTEREST.— 
‘‘(i) DISTRIBUTIONS
AND
LOSSES.— 
The qualified capital interest shall be re-
duced by distributions from the partnership 
with respect to such interest and by the ex-
cess (if any) of the amount described in sub-
paragraph (A)(iii)(II) over the amount de-
scribed in subparagraph (A)(iii)(I).
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•HR 4213 EAH1S 
‘‘(ii) SPECIAL
RULE
FOR
CONTRIBU-
TIONS OF PROPERTY.—In the case of any 
contribution of property described in sub-
paragraph (A)(i) with respect to which the 
fair market value of such property is not 
equal to the adjusted basis of such property 
immediately before such contribution, prop-
er adjustments shall be made to the quali-
fied capital interest to take into account 
such difference consistent with such regula-
tions or other guidance as the Secretary 
may provide. 
‘‘(8) TREATMENT OF CERTAIN LOANS.— 
‘‘(A) PROCEEDS
OF
PARTNERSHIP
LOANS 
NOT TREATED AS QUALIFIED CAPITAL INTEREST 
OF
SERVICE
PROVIDING
PARTNERS.—For pur-
poses of this subsection, an investment services 
partnership interest shall not be treated as a 
qualified capital interest to the extent that such 
interest is acquired in connection with the pro-
ceeds of any loan or other advance made or 
guaranteed, directly or indirectly, by any other 
partner or the partnership (or any person re-
lated to any such other partner or the partner-
ship).
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•HR 4213 EAH1S 
‘‘(B) 
REDUCTION
IN
ALLOCATIONS
TO 
QUALIFIED
CAPITAL
INTERESTS
FOR
LOANS 
FROM
NONSERVICE
PROVIDING
PARTNERS
TO 
THE PARTNERSHIP.—For purposes of this sub-
section, any loan or other advance to the part-
nership made or guaranteed, directly or indi-
rectly, by a partner not providing services de-
scribed in subsection (c)(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 partner-
ship. 
‘‘(e) 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 payments 
thereunder) is substantially related to the 
amount of income or gain (whether or not real-
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•HR 4213 EAH1S 
ized) from the assets with respect to which the 
investment management services are performed, 
any income or gain with respect to such interest shall 
be treated as ordinary income. Rules similar to the 
rules of subsections (a)(4) and (d) shall apply for 
purposes of this subsection. 
‘‘(2) DEFINITIONS.—For purposes of this sub-
section— 
‘‘(A) DISQUALIFIED INTEREST.— 
‘‘(i) IN GENERAL.—The term ‘disquali-
fied interest’ means, with respect to any en-
tity— 
‘‘(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 subclause 
(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—
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•HR 4213 EAH1S 
‘‘(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). 
‘‘(f) REGULATIONS.—The Secretary shall prescribe 
such regulations or other guidance as is necessary or appro-
priate to carry out the purposes of this section, including 
regulations or other guidance to—
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•HR 4213 EAH1S 
‘‘(1) provide modifications to the application of 
this section (including treating related persons as not 
related to one another) to the extent such modification 
is consistent with the purposes of this section, 
‘‘(2) prevent the avoidance of the purposes of this 
section, and 
‘‘(3) coordinate this section with the other provi-
sions of this title. 
‘‘(g) SPECIAL RULES FOR INDIVIDUALS.—In the case 
of an individual— 
‘‘(1) IN GENERAL.—Subsection (a)(1) shall apply 
only to the applicable percentage of the net income or 
net loss referred to in such subsection. 
‘‘(2) DISPOSITIONS, ETC.—The amount which 
(but for this paragraph) would be treated as ordinary 
income by reason of subsection (b) or (e) shall be the 
applicable percentage of such amount. 
‘‘(3) PRO
RATA
ALLOCATION
TO
ITEMS.—For 
purposes of applying subsections (a) and (e) the ag-
gregate amount treated as ordinary income for any 
such taxable year shall be allocated ratably among the 
items of income, gain, loss, and deduction taken into 
account in determining such amount. 
‘‘(4) SPECIAL
RULE
FOR
RECOGNITION
OF 
GAIN.—Gain which (but for this section) would not be
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•HR 4213 EAH1S 
recognized shall be recognized by reason of subsection 
(b) only to the extent that such gain is treated as or-
dinary income after application of paragraph (2). 
‘‘(5) 
COORDINATION
WITH
LIMITATION
ON 
LOSSES.—For purposes of applying paragraph (2) of 
subsection (a) with respect to any net loss for any 
taxable year— 
‘‘(A) such paragraph shall only apply with 
respect to the applicable percentage of such net 
loss for such taxable year, 
‘‘(B) in the case of a prior partnership tax-
able year referred to in clause (i) or (ii) of sub-
paragraph (A) of such paragraph, only the ap-
plicable percentage (as in effect for such prior 
taxable year) of net income or net loss for such 
prior partnership taxable year shall be taken 
into account, and 
‘‘(C) any net loss carried forward to the 
succeeding partnership taxable year under sub-
paragraph (B) of such paragraph shall— 
‘‘(i) be taken into account in such suc-
ceeding year without reduction under this 
subsection, and
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•HR 4213 EAH1S 
‘‘(ii) in lieu of being taken into ac-
count as an item of loss in such succeeding 
year, shall be taken into account— 
‘‘(I) as an increase in net loss or 
as a reduction in net income (includ-
ing below zero), as the case may be, 
and 
‘‘(II) after any reduction in the 
amount of such net loss or net income 
under this subsection. 
A rule similar to the rule of the preceding sentence 
shall apply for purposes of subsection (b)(2)(A). 
‘‘(6) COORDINATION WITH TREATMENT OF DIVI-
DENDS.—Subsection (a)(4) shall only apply to the 
applicable percentage of dividends described therein. 
‘‘(7) APPLICABLE
PERCENTAGE.—For purposes 
of this subsection, the term ‘applicable percentage’ 
means 75 percent (50 percent in the case of any tax-
able year beginning before January 1, 2013). 
‘‘(h) CROSS REFERENCE.—For 40 percent penalty on 
certain underpayments due to the avoidance of this section, 
see section 6662.’’. 
(b) TREATMENT FOR PURPOSES OF SECTION 7704.— 
Subsection (d) of section 7704 is amended by adding at the 
end the following new paragraph:
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•HR 4213 EAH1S 
‘‘(6) INCOME FROM INVESTMENT SERVICES PART-
NERSHIP 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 (relating 
to special rules for partners providing invest-
ment management services to partnership). The 
preceding sentence shall not apply to any item 
described in paragraph (1)(E) (or so much of 
paragraph (1)(F) as relates to paragraph 
(1)(E)). 
‘‘(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.
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•HR 4213 EAH1S 
‘‘(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 taxable 
year by such real estate investment 
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 OWNING 
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 assets 
of such partnership consist of interests 
in one or more publicly traded part-
nerships (determined without regard 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)).
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•HR 4213 EAH1S 
‘‘(C) TRANSITIONAL RULE.—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 UNDERPAYMENTS.— 
(1) IN GENERAL.—Subsection (b) of section 6662 
is amended by inserting after paragraph (7) the fol-
lowing new paragraph: 
‘‘(8) The application of subsection (e) of section 
710 or the regulations prescribed under section 710(f) 
to prevent the avoidance of the purposes of section 
710.’’. 
(2) AMOUNT OF PENALTY.— 
(A) IN GENERAL.—Section 6662 is amended 
by adding at the end the following new sub-
section: 
‘‘(k) 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)(8), 
subsection (a) shall be applied with respect to such portion 
by substituting ‘40 percent’ for ‘20 percent’.’’.
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•HR 4213 EAH1S 
(B) CONFORMING
AMENDMENT.—Subpara-
graph (B) of section 6662A(e)(2) is amended by 
striking ‘‘or (i)’’ and inserting ‘‘, (i), or (k)’’. 
(3) SPECIAL RULES FOR APPLICATION OF REA-
SONABLE CAUSE EXCEPTION.—Subsection (c) of sec-
tion 6664 is amended— 
(A) by redesignating paragraphs (3) and 
(4) as paragraphs (4) and (5), respectively; 
(B) by striking ‘‘paragraph (3)’’ in para-
graph (5)(A), as so redesignated, and inserting 
‘‘paragraph (4)’’; and 
(C) by inserting after paragraph (2) the fol-
lowing new paragraph: 
‘‘(3) SPECIAL RULE FOR UNDERPAYMENTS AT-
TRIBUTABLE
TO
INVESTMENT
MANAGEMENT
SERV-
ICES.— 
‘‘(A) IN
GENERAL.—Paragraph (1) shall 
not apply to any portion of an underpayment to 
which this section applies by reason of subsection 
(b)(8) unless— 
‘‘(i) the relevant facts affecting the tax 
treatment of the item are adequately dis-
closed, 
‘‘(ii) there is or was substantial au-
thority for such treatment, and
274 
•HR 4213 EAH1S 
‘‘(iii) the taxpayer reasonably believed 
that such treatment was more likely than 
not the proper treatment. 
‘‘(B) RULES RELATING TO REASONABLE BE-
LIEF.—Rules similar to the rules of subsection 
(d)(3) shall apply for purposes of subparagraph 
(A)(iii).’’. 
(d) INCOME AND LOSS FROM INVESTMENT SERVICES 
PARTNERSHIP INTERESTS TAKEN INTO ACCOUNT IN DE-
TERMINING NET EARNINGS FROM SELF-EMPLOYMENT.— 
(1) INTERNAL REVENUE CODE.—Section 1402(a) 
is amended by striking ‘‘and’’ at the end of para-
graph (16), by striking the period at the end of para-
graph (17) and inserting ‘‘; and’’, and by inserting 
after paragraph (17) the following new paragraph: 
‘‘(18) notwithstanding the preceding provisions 
of this subsection, in the case of any individual en-
gaged in the trade or business of providing services 
described in section 710(c)(1) with respect to any en-
tity, any amount treated as ordinary income or ordi-
nary loss of such individual under section 710 with 
respect to such entity shall be taken into account in 
determining the net earnings from self-employment of 
such individual.’’.
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•HR 4213 EAH1S 
(2) SOCIAL SECURITY ACT.—Section 211(a) of 
the Social Security Act is amended by striking ‘‘and’’ 
at the end of paragraph (15), by striking the period 
at the end of paragraph (16) and inserting ‘‘; and’’, 
and by inserting after paragraph (16) the following 
new paragraph: 
‘‘(17) Notwithstanding the preceding provisions 
of this subsection, in the case of any individual en-
gaged in the trade or business of providing services 
described in section 710(c)(1) of the Internal Revenue 
Code of 1986 with respect to any entity, any amount 
treated as ordinary income or ordinary loss of such 
individual under section 710 of such Code with re-
spect to such entity shall be taken into account in de-
termining the net earnings from self-employment of 
such individual.’’. 
(e) CONFORMING AMENDMENTS.— 
(1) Subsection (d) of section 731 is amended by 
inserting ‘‘section 710(b)(4) (relating to distributions 
of partnership property),’’ after ‘‘to the extent other-
wise provided by’’. 
(2) Section 741 is amended by inserting ‘‘or sec-
tion 710 (relating to special rules for partners pro-
viding investment management services to partner-
ship)’’ before the period at the end.
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•HR 4213 EAH1S 
(3) The table of sections for part I of subchapter 
K of chapter 1 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 provided 
in this subsection, the amendments made by this sec-
tion shall apply to taxable years ending after Decem-
ber 31, 2010. 
(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 December 31, 2010, the amount 
of the net income referred to in such section shall be 
treated as being the lesser of the net income for the 
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 December 31, 2010.
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•HR 4213 EAH1S 
(4) OTHER INCOME AND GAIN IN CONNECTION 
WITH INVESTMENT MANAGEMENT SERVICES.—Section 
710(e) of such Code (as added by this section) shall 
take effect on December 31, 2010. 
SEC. 413. EMPLOYMENT TAX TREATMENT OF PROFES-
SIONAL SERVICE BUSINESSES. 
(a) IN GENERAL.—Section 1402 is amended by adding 
at the end the following new subsection: 
‘‘(m) SPECIAL RULES FOR PROFESSIONAL SERVICE 
BUSINESSES.— 
‘‘(1) SHAREHOLDERS
PROVIDING
SERVICES
TO 
DISQUALIFIED S CORPORATIONS.— 
‘‘(A) IN GENERAL.—In the case of any dis-
qualified S corporation, each shareholder of such 
disqualified S corporation who provides substan-
tial services with respect to the professional serv-
ice business referred to in subparagraph (C) 
shall take into account such shareholder’s pro 
rata share of all items of income or loss described 
in section 1366 which are attributable to such 
business in determining the shareholder’s net 
earnings from self-employment. 
‘‘(B) TREATMENT OF FAMILY MEMBERS.— 
Except as otherwise provided by the Secretary, 
the shareholder’s pro rata share of items referred
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•HR 4213 EAH1S 
to in subparagraph (A) shall be increased by the 
pro rata share of such items of each member of 
such shareholder’s family (within the meaning of 
section 318(a)(1)) who does not provide substan-
tial services with respect to such professional 
service business. 
‘‘(C) DISQUALIFIED S CORPORATION.—For 
purposes of this subsection, the term ‘disqualified 
S corporation’ means— 
‘‘(i) any S corporation which is a 
partner in a partnership which is engaged 
in a professional service business if substan-
tially all of the activities of such S corpora-
tion are performed in connection with such 
partnership, and 
‘‘(ii) any other S corporation which is 
engaged in a professional service business if 
the principal asset of such business is the 
reputation and skill of 3 or fewer employees. 
‘‘(2) PARTNERS.—In the case of any partnership 
which is engaged in a professional service business, 
subsection (a)(13) shall not apply to any partner who 
provides substantial services with respect to such pro-
fessional service business.
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•HR 4213 EAH1S 
‘‘(3) PROFESSIONAL
SERVICE
BUSINESS.—For 
purposes of this subsection, the term ‘professional 
service business’ means any trade or business if sub-
stantially all of the activities of such trade or business 
involve providing services in the fields of health, law, 
lobbying, engineering, architecture, accounting, actu-
arial science, performing arts, consulting, athletics, 
investment advice or management, or brokerage serv-
ices. 
‘‘(4) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or appro-
priate to carry out the purposes of this subsection, in-
cluding regulations which prevent the avoidance of 
the purposes of this subsection through tiered entities 
or otherwise. 
‘‘(5) CROSS REFERENCE.—For employment tax 
treatment of wages paid to shareholders of S corpora-
tions, see subtitle C.’’. 
(b) CONFORMING AMENDMENT.—Section 211 of the So-
cial Security Act is amended by adding at the end the fol-
lowing new subsection: 
‘‘(l) SPECIAL RULES
FOR PROFESSIONAL SERVICE 
BUSINESSES.— 
‘‘(1) SHAREHOLDERS
PROVIDING
SERVICES
TO 
DISQUALIFIED S CORPORATIONS.—
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•HR 4213 EAH1S 
‘‘(A) IN GENERAL.—In the case of any dis-
qualified S corporation, each shareholder of such 
disqualified S corporation who provides substan-
tial services with respect to the professional serv-
ice business referred to in subparagraph (C) 
shall take into account such shareholder’s pro 
rata share of all items of income or loss described 
in section 1366 of the Internal Revenue Code of 
1986 which are attributable to such business in 
determining the shareholder’s net earnings from 
self-employment. 
‘‘(B) TREATMENT OF FAMILY MEMBERS.— 
Except as otherwise provided by the Secretary of 
the Treasury, the shareholder’s pro rata share of 
items referred to in subparagraph (A) shall be 
increased by the pro rata share of such items of 
each member of such shareholder’s family (within 
the meaning of section 318(a)(1) of the Internal 
Revenue Code of 1986) who does not provide sub-
stantial services with respect to such professional 
service business. 
‘‘(C) DISQUALIFIED S CORPORATION.—For 
purposes of this subsection, the term ‘disqualified 
S corporation’ means—
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•HR 4213 EAH1S 
‘‘(i) any S corporation which is a 
partner in a partnership which is engaged 
in a professional service business if substan-
tially all of the activities of such S corpora-
tion are performed in connection with such 
partnership, and 
‘‘(ii) any other S corporation which is 
engaged in a professional service business if 
the principal asset of such business is the 
reputation and skill of 3 or fewer employees. 
‘‘(2) PARTNERS.—In the case of any partnership 
which is engaged in a professional service business, 
subsection (a)(12) shall not apply to any partner who 
provides substantial services with respect to such pro-
fessional service business. 
‘‘(3) PROFESSIONAL
SERVICE
BUSINESS.—For 
purposes of this subsection, the term ‘professional 
service business’ means any trade or business if sub-
stantially all of the activities of such trade or business 
involve providing services in the fields of health, law, 
lobbying, engineering, architecture, accounting, actu-
arial science, performing arts, consulting, athletics, 
investment advice or management, or brokerage serv-
ices.’’.
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•HR 4213 EAH1S 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2010. 
Subtitle C—Corporate Provisions 
SEC. 421. TREATMENT OF SECURITIES OF A CONTROLLED 
CORPORATION EXCHANGED FOR ASSETS IN 
CERTAIN REORGANIZATIONS. 
(a) IN GENERAL.—Section 361 (relating to non-
recognition of gain or loss to corporations; treatment of dis-
tributions) is amended by adding at the end the following 
new subsection: 
‘‘(d) SPECIAL RULES FOR TRANSACTIONS INVOLVING 
SECTION 355 DISTRIBUTIONS.—In the case of a reorganiza-
tion described in section 368(a)(1)(D) with respect to which 
stock or securities of the corporation to which the assets are 
transferred are distributed in a transaction which qualifies 
under section 355— 
‘‘(1) this section shall be applied by substituting 
‘stock other than nonqualified preferred stock (as de-
fined in section 351(g)(2))’ for ‘stock or securities’ in 
subsections (a) and (b)(1), and 
‘‘(2) the first sentence of subsection (b)(3) shall 
apply only to the extent that the sum of the money 
and the fair market value of the other property trans-
ferred to such creditors does not exceed the adjusted
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•HR 4213 EAH1S 
bases of such assets transferred (reduced by the 
amount of the liabilities assumed (within the mean-
ing of section 357(c))).’’. 
(b) CONFORMING AMENDMENT.—Paragraph (3) of sec-
tion 361(b) is amended by striking the last sentence. 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall 
apply to exchanges after the date of the enactment of 
this Act. 
(2) TRANSITION RULE.—The amendments made 
by this section shall not apply to any exchange pursu-
ant to a transaction which is— 
(A) made pursuant to a written agreement 
which was binding on March 15, 2010, and at 
all times thereafter; 
(B) described in a ruling request submitted 
to the Internal Revenue Service on or before such 
date; or 
(C) described on or before such date in a 
public announcement or in a filing with the Se-
curities and Exchange Commission.
284 
•HR 4213 EAH1S 
SEC. 422. TAXATION OF BOOT RECEIVED IN REORGANIZA-
TIONS. 
(a) IN GENERAL.—Paragraph (2) of section 356(a) is 
amended— 
(1) by striking ‘‘If an exchange’’ and inserting 
‘‘Except as otherwise provided by the Secretary— 
‘‘(A) IN GENERAL.—If an exchange’’; 
(2) by striking ‘‘then there shall be’’ and all that 
follows through ‘‘February 28, 1913’’ and inserting 
‘‘then the amount of other property or money shall be 
treated as a dividend to the extent of the earnings and 
profits of the corporation’’; and 
(3) by adding at the end the following new sub-
paragraph: 
‘‘(B) CERTAIN REORGANIZATIONS.—In the 
case of a reorganization described in section 
368(a)(1)(D) to which section 354(b)(1) applies 
or any other reorganization specified by the Sec-
retary, in applying subparagraph (A)— 
‘‘(i) the earnings and profits of each 
corporation which is a party to the reorga-
nization shall be taken into account, and 
‘‘(ii) the amount which is a dividend 
(and source thereof) shall be determined 
under rules similar to the rules of para-
graphs (2) and (5) of section 304(b).’’.
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(b) EARNINGS AND PROFITS.—Paragraph (7) of sec-
tion 312(n) is amended by adding at the end the following: 
‘‘A similar rule shall apply to an exchange to which section 
356(a)(1) applies.’’. 
(c) CONFORMING AMENDMENT.—Paragraph (1) of sec-
tion 356(a) is amended by striking ‘‘then the gain’’ and 
inserting ‘‘then (except as provided in paragraph (2)) the 
gain’’. 
(d) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall 
apply to exchanges after the date of the enactment of 
this Act. 
(2) TRANSITION RULE.—The amendments made 
by this section shall not apply to any exchange be-
tween unrelated persons pursuant to a transaction 
which is— 
(A) made pursuant to a written agreement 
which was binding on May 20, 2010, and at all 
times thereafter; 
(B) described in a ruling request submitted 
to the Internal Revenue Service on or before such 
date; or
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(C) described in a public announcement or 
filing with the Securities and Exchange Commis-
sion on or before such date. 
(3) RELATED PERSONS.—For purposes of this 
subsection, a person shall be treated as related to an-
other person if the relationship between such persons 
is described in section 267 or 707(b) of the Internal 
Revenue Code of 1986. 
Subtitle D—Other Provisions 
SEC. 431. MODIFICATIONS WITH RESPECT TO OIL SPILL LI-
ABILITY TRUST FUND. 
(a) EXTENSION OF APPLICATION OF OIL SPILL LI-
ABILITY TRUST FUND FINANCING RATE.—Paragraph (2) of 
section 4611(f) is amended by striking ‘‘December 31, 2017’’ 
and inserting ‘‘December 31, 2020’’. 
(b) INCREASE IN OIL SPILL LIABILITY TRUST FUND 
FINANCING RATE.—Subparagraph (B) of section 4611(c)(2) 
is amended to read as follows: 
‘‘(B) the Oil Spill Liability Trust Fund fi-
nancing rate is 34 cents a barrel.’’. 
(c) INCREASE IN PER INCIDENT LIMITATIONS ON EX-
PENDITURES.—Subparagraph (A) of section 9509(c)(2) is 
amended— 
(1) by striking ‘‘$1,000,000,000’’ in clause (i) 
and inserting ‘‘$5,000,000,000’’;
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(2) by striking ‘‘$500,000,000’’ in clause (ii) and 
inserting ‘‘$2,500,000,000’’; and 
(3) by striking ‘‘$1,000,000,000 PER INCIDENT, 
ETC’’ in the heading and inserting ‘‘PER INCIDENT 
LIMITATIONS’’. 
(d) EFFECTIVE DATE.— 
(1) EXTENSION OF FINANCING RATE.—Except as 
provided in paragraph (2), the amendments made by 
this section shall take effect on the date of the enact-
ment of this Act. 
(2) INCREASE IN FINANCING RATE.—The amend-
ment made by subsection (b) shall apply to crude oil 
received and petroleum products entered during cal-
endar quarters beginning more than 60 days after the 
date of the enactment of this Act. 
SEC. 432. TIME FOR PAYMENT OF CORPORATE ESTIMATED 
TAXES. 
The percentage under paragraph (2) of section 561 of 
the Hiring Incentives to Restore Employment Act in effect 
on the date of the enactment of this Act is increased by 
36 percentage points.
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TITLE 
V—UNEMPLOYMENT, 
HEALTH, AND OTHER ASSIST-
ANCE 
Subtitle A—Unemployment 
Insurance and Other Assistance 
SEC. 501. EXTENSION OF UNEMPLOYMENT INSURANCE 
PROVISIONS. 
(a) IN GENERAL.—(1) Section 4007 of the Supple-
mental Appropriations Act, 2008 (Public Law 110–252; 26 
U.S.C. 3304 note) is amended— 
(A) by striking ‘‘June 2, 2010’’ each place it ap-
pears and inserting ‘‘November 30, 2010’’; 
(B) in the heading for subsection (b)(2), by strik-
ing ‘‘JUNE
2, 2010’’ and inserting ‘‘NOVEMBER
30, 
2010’’; and 
(C) in subsection (b)(3), by striking ‘‘November 
6, 2010’’ and inserting ‘‘April 30, 2011’’. 
(2) Section 2002(e) of the Assistance for Unemployed 
Workers and Struggling Families Act, as contained in Pub-
lic Law 111–5 (26 U.S.C. 3304 note; 123 Stat. 438), is 
amended— 
(A) in paragraph (1)(B), by striking ‘‘June 2, 
2010’’ and inserting ‘‘November 30, 2010’’;
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‘‘(F) the amendments made by section 
501(a)(1) of the American Jobs and Closing Tax 
Loopholes Act of 2010; and’’. 
(c) CONDITIONS FOR RECEIVING EMERGENCY UNEM-
PLOYMENT
COMPENSATION.—Section 4001(d)(2) of the 
Supplemental Appropriations Act, 2008 (Public Law 110– 
252; 26 U.S.C. 3304 note) is amended, in the matter pre-
ceding subparagraph (A), by inserting before ‘‘shall apply’’ 
the following: ‘‘(including terms and conditions relating to 
availability for work, active search for work, and refusal 
to accept work)’’. 
(d) EFFECTIVE DATE.—The amendments made by this 
section shall take effect as if included in the enactment of 
the Continuing Extension Act of 2010 (Public Law 111– 
157). 
SEC. 502. COORDINATION OF EMERGENCY UNEMPLOYMENT 
COMPENSATION WITH REGULAR COMPENSA-
TION. 
(a) CERTAIN INDIVIDUALS NOT INELIGIBLE BY REA-
SON OF NEW ENTITLEMENT TO REGULAR BENEFITS.—Sec-
tion 4002 of the Supplemental Appropriations Act, 2008 
(Public Law 110–252; 26 U.S.C. 3304 note) is amended by 
adding at the end the following: 
‘‘(g) COORDINATION OF EMERGENCY UNEMPLOYMENT 
COMPENSATION WITH REGULAR COMPENSATION.—
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‘‘(1) If— 
‘‘(A) an individual has been determined to 
be entitled to emergency unemployment com-
pensation with respect to a benefit year, 
‘‘(B) that benefit year has expired, 
‘‘(C) that individual has remaining entitle-
ment to emergency unemployment compensation 
with respect to that benefit year, and 
‘‘(D) that individual would qualify for a 
new benefit year in which the weekly benefit 
amount of regular compensation is at least either 
$100 or 25 percent less than the individual’s 
weekly benefit amount in the benefit year re-
ferred to in subparagraph (A), 
then the State shall determine eligibility for com-
pensation as provided in paragraph (2). 
‘‘(2) For individuals described in paragraph (1), 
the State shall determine whether the individual is to 
be paid emergency unemployment compensation or 
regular compensation for a week of unemployment 
using one of the following methods: 
‘‘(A) The State shall, if permitted by State 
law, establish a new benefit year, but defer the 
payment of regular compensation with respect to 
that new benefit year until exhaustion of all
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emergency unemployment compensation payable 
with respect to the benefit year referred to in 
paragraph (1)(A); 
‘‘(B) The State shall, if permitted by State 
law, defer the establishment of a new benefit year 
(which uses all the wages and employment which 
would have been used to establish a benefit year 
but for the application of this paragraph), until 
exhaustion of all emergency unemployment com-
pensation payable with respect to the benefit 
year referred to in paragraph(1)(A); 
‘‘(C) The State shall pay, if permitted by 
State law— 
‘‘(i) regular compensation equal to the 
weekly benefit amount established under the 
new benefit year, and 
‘‘(ii) emergency unemployment com-
pensation equal to the difference between 
that weekly benefit amount and the weekly 
benefit amount for the expired benefit year; 
or 
‘‘(D) The State shall determine rights to 
emergency unemployment compensation without 
regard to any rights to regular compensation if
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the individual elects to not file a claim for reg-
ular compensation under the new benefit year.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to individuals whose benefit years, as 
described in section 4002(g)(1)(B) the Supplemental Appro-
priations Act, 2008 (Public Law 110–252; 26 U.S.C. 3304 
note), as amended by this section, expire after the date of 
enactment of this Act. 
SEC. 503. EXTENSION OF THE EMERGENCY CONTINGENCY 
FUND. 
(a) IN GENERAL.—Section 403(c) of the Social Secu-
rity Act (42 U.S.C. 603(c)) is amended— 
(1) in paragraph (2)(A), by inserting ‘‘, and for 
fiscal year 2011, $2,500,000,000’’ before ‘‘for pay-
ment’’; 
(2) by striking paragraph (2)(B) and inserting 
the following: 
‘‘(B) AVAILABILITY AND USE OF FUNDS.— 
‘‘(i) FISCAL YEARS 2009 AND 2010.—The 
amounts appropriated to the Emergency 
Fund under subparagraph (A) for fiscal 
year 2009 shall remain available through 
fiscal year 2010 and shall be used to make 
grants to States in each of fiscal years 2009 
and 2010 in accordance with paragraph
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(3), except that the amounts shall remain 
available through fiscal year 2011 to make 
grants and payments to States in accord-
ance with paragraph (3)(C) to cover ex-
penditures to subsidize employment posi-
tions held by individuals placed in the posi-
tions before fiscal year 2011. 
‘‘(ii) FISCAL
YEAR
2011.—Subject to 
clause (iii), the amounts appropriated to 
the Emergency Fund under subparagraph 
(A) for fiscal year 2011 shall remain avail-
able through fiscal year 2012 and shall be 
used to make grants to States based on ex-
penditures in fiscal year 2011 for benefits 
and services provided in fiscal year 2011 in 
accordance with the requirements of para-
graph (3). 
‘‘(iii) RESERVATION
OF
FUNDS.—Of 
the amounts appropriated to the Emergency 
Fund under subparagraph (A) for fiscal 
year 2011, $500,000 shall be placed in re-
serve for use in fiscal year 2012, and shall 
be used to award grants for any expendi-
tures described in this subsection incurred 
by States after September 30, 2011.’’;
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(3) in paragraph (2)(C), by striking ‘‘2010’’ and 
inserting ‘‘2012’’; 
(4) in paragraph (3)— 
(A) in clause (i) of each of subparagraphs 
(A), (B), and (C)— 
(i) by striking ‘‘year 2009 or 2010’’ 
and inserting ‘‘years 2009 through 2011’’; 
(ii) by striking ‘‘and’’ at the end of 
subclause (I); 
(iii) by striking the period at the end 
of subclause (II) and inserting ‘‘; and’’; and 
(iv) by adding at the end the following: 
‘‘(III) if the quarter is in fiscal 
year 2011, has provided the Secretary 
with such information as the Secretary 
may find necessary in order to make 
the determinations, or take any other 
action, 
described 
in 
paragraph 
(5)(C).’’; and 
(B) in subparagraph (C), by adding at the 
end the following: 
‘‘(iv) LIMITATION
ON
EXPENDITURES 
FOR
SUBSIDIZED
EMPLOYMENT.—An ex-
penditure for subsidized employment shall 
be taken into account under clause (ii) only
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if the expenditure is used to subsidize em-
ployment for— 
‘‘(I) a member of a needy family 
(without regard to whether the family 
is receiving assistance under the State 
program funded under this part); or 
‘‘(II) an individual who has ex-
hausted (or, within 60 days, will ex-
haust) all rights to receive unemploy-
ment compensation under Federal and 
State law, and who is a member of a 
needy family.’’; 
(5) by striking paragraph (5) and inserting the 
following: 
‘‘(5) LIMITATIONS ON PAYMENTS; ADJUSTMENT 
AUTHORITY.— 
‘‘(A) FISCAL
YEARS
2009
AND
2010.—The 
total amount payable to a single State under 
subsection (b) and this subsection for fiscal years 
2009 and 2010 combined shall not exceed 50 per-
cent of the annual State family assistance grant. 
‘‘(B) FISCAL
YEAR
2011.—Subject to sub-
paragraph (C), the total amount payable to a 
single State under subsection (b) and this sub-
section for fiscal year 2011 shall not exceed 30
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percent of the annual State family assistance 
grant. 
‘‘(C) ADJUSTMENT AUTHORITY.—If the Sec-
retary determines that the Emergency Fund is at 
risk of being depleted before September 30, 2011, 
or that funds are available to accommodate addi-
tional State requests under this subsection, the 
Secretary may, through program instructions 
issued without regard to the requirements of sec-
tion 553 of title 5, United States Code— 
‘‘(i) 
specify 
priority 
criteria 
for 
awarding grants to States during fiscal 
year 2011; and 
‘‘(ii) adjust the percentage limitation 
applicable under subparagraph (B) with re-
spect to the total amount payable to a sin-
gle State for fiscal year 2011.’’; and 
(6) in paragraph (6), by inserting ‘‘or for ex-
penditures described in paragraph (3)(C)(iv)’’ before 
the period. 
(b) CONFORMING AMENDMENTS.—Section 2101 of di-
vision B of the American Recovery and Reinvestment Act 
of 2009 (Public Law 111–5) is amended— 
(1) in subsection (a)(2)—
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(A) by striking ‘‘2010’’ and inserting 
‘‘2011’’; and 
(B) by striking all that follows ‘‘repealed’’ 
and inserting a period; and 
(2) in subsection (d)(1), by striking ‘‘2010’’ and 
inserting ‘‘2011’’. 
(c) PROGRAM GUIDANCE.—The Secretary of Health 
and Human Services shall issue program guidance, without 
regard to the requirements of section 553 of title 5, United 
States Code, which ensures that the funds provided under 
the amendments made by this section to a jurisdiction for 
subsidized employment do not support any subsidized em-
ployment position the annual salary of which is greater 
than, at State option— 
(1) 200 percent of the poverty line (within the 
meaning of section 673(2) of the Omnibus Budget 
Reconciliation Act of 1981, including any revision re-
quired by such section 673(2)) for a family of 4; or 
(2) the median wage in the jurisdiction. 
Subtitle B—Health Provisions 
SEC. 511. EXTENSION OF SECTION 508 RECLASSIFICATIONS. 
(a) IN GENERAL.—Section 106(a) of division B of the 
Tax Relief and Health Care Act of 2006 (42 U.S.C. 1395 
note), as amended by section 117 of the Medicare, Medicaid, 
and SCHIP Extension Act of 2007 (Public Law 110–173),
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section 124 of the Medicare Improvements for Patients and 
Providers Act of 2008 (Public Law 110–275), and sections 
3137(a) and 10317 of Public Law 111–148, is amended by 
striking ‘‘September 30, 2010’’ and inserting ‘‘September 
30, 2011’’. 
(b) APPLICATION.—For fiscal year 2011, the Secretary 
of Health and Human Services may implement the amend-
ment made by subsection (a) by posting on the Internet 
website of the Centers for Medicare & Medicaid Services a 
list of the areas and the hospitals whose reclassifications 
will be extended pursuant to such amendment. Hospitals 
located in or reclassified to labor market areas that are af-
fected by such extension may terminate or withdraw their 
reclassifications by following the procedures included in sec-
tion 412.273 of title 42, Code of Federal Regulations, except 
that any request for such termination or withdrawal must 
be received by the Medicare Geographic Classification Re-
view Board not later than the date that is 5 business days 
after the day of such posting on the Internet website of the 
Centers for Medicare & Medicaid Services or June 18, 2010, 
whichever date is later. 
(c) CONFORMING AMENDMENT.—Section 117(a)(3) of 
the Medicare, Medicaid, and SCHIP Extension Act of 2007 
(Public Law 110–173)), is amended by inserting ‘‘in fiscal
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years 2008 and 2009’’ after ‘‘For purposes of implementa-
tion of this subsection’’. 
SEC. 512. REPEAL OF DELAY OF RUG-IV. 
Effective as if included in the enactment of Public Law 
111–148, section 10325 of such Act is repealed. 
SEC. 513. LIMITATION ON REASONABLE COSTS PAYMENTS 
FOR CERTAIN CLINICAL DIAGNOSTIC LAB-
ORATORY TESTS FURNISHED TO HOSPITAL 
PATIENTS IN CERTAIN RURAL AREAS. 
Section 3122 of Public Law 111–148 is repealed and 
the provision of law amended by such section is restored 
as if such section had not been enacted. 
SEC. 514. FUNDING FOR CLAIMS REPROCESSING. 
For purposes of carrying out the provisions of, and 
amendments made by, this Act that relate to title XVIII 
of the Social Security Act, and other provisions of such title 
that involve reprocessing of claims, there are appropriated 
to the Secretary of Health and Human Services for the Cen-
ters for Medicare & Medicaid Services Program Manage-
ment Account, from amounts in the general fund of the 
Treasury 
not 
otherwise 
appropriated, 
$175,000,000. 
Amounts appropriated under the preceding sentence shall 
remain available until expended.
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SEC. 515. MEDICAID AND CHIP TECHNICAL CORRECTIONS. 
(a) REPEAL OF EXCLUSION OF CERTAIN INDIVIDUALS 
AND ENTITIES FROM MEDICAID.—Section 6502 of Public 
Law 111–148 is repealed and the provisions of law amend-
ed by such section are restored as if such section had never 
been enacted. Nothing in the previous sentence shall affect 
the execution or placement of the insertion made by section 
6503 of such Act. 
(b) INCOME LEVEL FOR CERTAIN CHILDREN UNDER 
MEDICAID.—Effective as if included in the enactment of 
Public Law 111–148, section 2001(a)(5)(B) of such Act is 
amended by striking all that follows ‘‘is amended’’ and in-
serting the following: ‘‘by inserting after ‘100 percent’ the 
following: ‘(or, beginning January 1, 2014, 133 percent)’.’’. 
(c) CALCULATION
AND PUBLICATION
OF PAYMENT 
ERROR RATE MEASUREMENT FOR CERTAIN YEARS.—Sec-
tion 601(b) of the Children’s Health Insurance Program Re-
authorization Act of 2009 (Public Law 111–3) is amended 
by adding at the end the following: ‘‘The Secretary is not 
required under this subsection to calculate or publish a na-
tional or a State-specific error rate for fiscal year 2009 or 
fiscal year 2010.’’. 
(d) CORRECTIONS TO EXCEPTIONS TO EXCLUSION OF 
CHILDREN OF CERTAIN EMPLOYEES.—Section 2110(b)(6) 
of the Social Security Act (42 U.S.C. 1397jj(b)(6)) is 
amended—
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(1) in subparagraph (B)— 
(A) by striking ‘‘PER PERSON’’ in the head-
ing; and 
(B) by striking ‘‘each employee’’ and insert-
ing ‘‘employees’’; and 
(2) in subparagraph (C), by striking ‘‘, on a 
case-by-case basis,’’. 
(e) ELECTRONIC HEALTH RECORDS.—Effective as if 
included in the enactment of section 4201(a)(2) of the 
American Recovery and Reinvestment Act of 2009 (Public 
Law 111–5), section 1903(t) of the Social Security Act (42 
U.S.C. 1396b(t)) is amended— 
(1) in paragraph (3)(E), by striking ‘‘reduced by 
any payment that is made to such Medicaid provider 
from any other source (other than under this sub-
section or by a State or local government)’’ and in-
serting ‘‘reduced by the average payment the Sec-
retary estimates will be made to such Medicaid pro-
viders (determined on a percentage or other basis for 
such classes or types of providers as the Secretary 
may specify) from other sources (other than under 
this subsection, or by the Federal government or a 
State or local government)’’; and 
(2) in paragraph (6)(B), by inserting before the 
period the following: ‘‘and shall be determined to have
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met such responsibility to the extent that the payment 
to the Medicaid provider is not in excess of 85 percent 
of the net average allowable cost’’. 
(f) CORRECTIONS OF DESIGNATIONS.— 
(1) Section 1902 of the Social Security Act (42 
U.S.C. 1396a) is amended— 
(A) in subsection (a)(10), in the matter fol-
lowing subparagraph (G), by striking ‘‘and’’ be-
fore ‘‘(XVI) the medical’’ and by striking ‘‘(XVI) 
if’’ and inserting ‘‘(XVII) if’’; and 
(B) in subsection (ii)(2), by striking ‘‘(XV)’’ 
and inserting ‘‘(XVI)’’. 
(2) Section 2107(e)(1) of the Social Security Act 
(42 U.S.C. 1397gg(e)(1)) is amended by redesignating 
the subparagraph (N) of that section added by 
2101(e) of Public Law 111–148 as subparagraph (O). 
SEC. 516. ADDITION OF INPATIENT DRUG DISCOUNT PRO-
GRAM TO 340B DRUG DISCOUNT PROGRAM. 
(a) ADDITION OF INPATIENT DRUG DISCOUNT.—Title 
III of the Public Health Service Act is amended by insert-
ing after section 340B (42 U.S.C. 256b) the following:
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‘‘SEC. 340B–1. DISCOUNT INPATIENT DRUGS FOR INDIVID-
UALS WITHOUT PRESCRIPTION DRUG COV-
ERAGE. 
‘‘(a) REQUIREMENTS FOR AGREEMENTS WITH THE 
SECRETARY.— 
‘‘(1) IN GENERAL.— 
‘‘(A) AGREEMENT.—The Secretary shall 
enter into an agreement with each manufacturer 
of covered inpatient drugs under which the 
amount required to be paid (taking into account 
any rebate or discount, as provided by the Sec-
retary) to the manufacturer for covered inpatient 
drugs (other than drugs described in paragraph 
(3)) purchased by a covered entity on or after 
January 1, 2011, does not exceed an amount 
equal to the average manufacturer price for the 
drug under title XIX of the Social Security Act 
in the preceding calendar quarter, reduced by the 
rebate percentage described in paragraph (2). 
For a covered inpatient drug that also is a cov-
ered outpatient drug under section 340B, the 
amount required to be paid under the preceding 
sentence shall be equal to the amount required to 
be paid under section 340B(a)(1) for such drug. 
The agreement with a manufacturer under this 
subparagraph may, at the discretion of the Sec-
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retary, be included in the agreement with the 
same manufacturer under section 340B. 
‘‘(B) CEILING PRICE.—Each such agreement 
shall require that the manufacturer furnish the 
Secretary with reports, on a quarterly basis, of 
the price for each covered inpatient drug subject 
to the agreement that, according to the manufac-
turer, represents the maximum price that covered 
entities may permissibly be required to pay for 
the drug (referred to in this section as the ‘ceil-
ing price’), and shall require that the manufac-
turer offer each covered entity covered inpatient 
drugs for purchase at or below the applicable 
ceiling price if such drug is made available to 
any other purchaser at any price. 
‘‘(C) ALLOCATION
METHOD.—Each such 
agreement shall require that, if the supply of a 
covered inpatient drug is insufficient to meet de-
mand, then the manufacturer may use an alloca-
tion method that is reported in writing to, and 
approved by, the Secretary and does not dis-
criminate on the basis of the price paid by cov-
ered entities or on any other basis related to the 
participation of an entity in the program under 
this section.
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‘‘(2) REBATE PERCENTAGE DEFINED.— 
‘‘(A) IN GENERAL.—For a covered inpatient 
drug purchased in a calendar quarter, the ‘rebate 
percentage’ is the amount (expressed as a per-
centage) equal to— 
‘‘(i) the average total rebate required 
under section 1927(c) of the Social Security 
Act (or the average total rebate that would 
be required if the drug were a covered out-
patient drug under such section) with re-
spect to the drug (for a unit of the dosage 
form and strength involved) during the pre-
ceding calendar quarter; divided by 
‘‘(ii) the average manufacturer price 
for such a unit of the drug during such 
quarter. 
‘‘(B) OVER THE COUNTER DRUGS.— 
‘‘(i) IN
GENERAL.—For purposes of 
subparagraph (A), in the case of over the 
counter drugs, the ‘rebate percentage’ shall 
be determined as if the rebate required 
under section 1927(c) of the Social Security 
Act is based on the applicable percentage 
provided under section 1927(c)(3) of such 
Act.
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‘‘(ii) DEFINITION.—The term ‘over the 
counter drug’ means a drug that may be 
sold without a prescription and which is 
prescribed by a physician (or other persons 
authorized to prescribe such drug under 
State law). 
‘‘(3) DRUGS PROVIDED UNDER STATE MEDICAID 
PLANS.—Drugs described in this paragraph are drugs 
purchased by the entity for which payment is made 
by the State under the State plan for medical assist-
ance under title XIX of the Social Security Act. 
‘‘(4) REQUIREMENTS FOR COVERED ENTITIES.— 
‘‘(A) PROHIBITING DUPLICATE DISCOUNTS 
OR REBATES.— 
‘‘(i) IN
GENERAL.—A covered entity 
shall not request payment under title XIX 
of the Social Security Act for medical as-
sistance described in section 1905(a)(12) of 
such Act with respect to a drug that is sub-
ject to an agreement under this section if 
the drug is subject to the payment of a re-
bate to the State under section 1927 of such 
Act. 
‘‘(ii) 
ESTABLISHMENT
OF
MECHA-
NISM.—The Secretary shall establish a