‘‘(1) prevent the avoidance of the purposes of 
this section, and 
‘‘(2) coordinate this section with the other pro-
visions of this subchapter. 
‘‘(f) CROSS REFERENCE.—For 40 percent no fault 
penalty on certain underpayments due to the avoidance 
of this section, see section 6662.’’. 
(b) APPLICATION
TO REAL ESTATE INVESTMENT 
TRUSTS.—Subsection (c) of section 856 is amended by 
adding at the end the following new paragraph: 
‘‘(8) EXCEPTION FROM RECHARACTERIZATION 
OF INCOME FROM INVESTMENT SERVICES PARTNER-
SHIP INTERESTS.— 
‘‘(A) IN GENERAL.—Paragraphs (2), (3), 
and (4) shall be applied without regard to sec-
tion 710 (relating to special rules for partners 
providing investment management services to 
partnership). 
‘‘(B) SPECIAL RULE FOR PARTNERSHIPS 
OWNED BY REITS.—Section 7704 shall be ap-
plied without regard to section 710 in the case 
of a partnership which meets each of the fol-
lowing requirements: 
‘‘(i) Such partnership is treated as 
publicly traded under section 7704 solely 
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by reason of interests in such partnership 
being convertible into interests in a real es-
tate investment trust which is publicly 
traded. 
‘‘(ii) 50 percent or more of the capital 
and profits interests of such partnership 
are owned, directly or indirectly, 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 re-
quirements of paragraphs (2), (3), and (4) 
(applied without regard to section 710).’’. 
(c) IMPOSITION
OF
PENALTY
ON
UNDERPAY-
MENTS.— 
(1) IN
GENERAL.—Subsection (b) of section 
6662 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.— 
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(A) IN GENERAL.—Section 6662 is amend-
ed by adding at the end the following new sub-
section: 
‘‘(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’.’’. 
(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’’. 
(3) REASONABLE CAUSE EXCEPTION NOT AP-
PLICABLE.—Subsection (c) of section 6664 is 
amended— 
(A) by redesignating paragraphs (2) and 
(3) as paragraphs (3) and (4), respectively, 
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(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).’’. 
(d) CONFORMING AMENDMENTS.— 
(1) Subsection (d) of section 731 is amended by 
inserting ‘‘section 710(b)(4) (relating to distribu-
tions of partnership property),’’ before ‘‘section 
736’’. 
(2) Section 741 is amended by inserting ‘‘or 
section 710 (relating to special rules for partners 
providing investment management services to part-
nership)’’ before the period at the end. 
(3) Paragraph (13) of section 1402(a) is 
amended— 
(A) by striking ‘‘other than guaranteed’’ 
and inserting ‘‘other than— 
‘‘(A) guaranteed’’, 
(B) by striking the semi-colon at the end 
and inserting ‘‘, and’’, and 
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(C) by adding at the end the following new 
subparagraph: 
‘‘(B) any income treated as ordinary in-
come under section 710 received by an indi-
vidual who provides investment management 
services (as defined in section 710(d)(2));’’. 
(4) Paragraph (12) of section 211(a) of the So-
cial Security Act is amended— 
(A) by striking ‘‘other than guaranteed’’ 
and inserting ‘‘other than— 
‘‘(A) guaranteed’’, 
(B) by striking the semi-colon at the end 
and inserting ‘‘, and’’, and 
(C) by adding at the end the following new 
subparagraph: 
‘‘(B) any income treated as ordinary in-
come under section 710 of the Internal Revenue 
Code of 1986 received by an individual who 
provides investment management services (as 
defined in section 710(d)(2) of such Code);’’. 
(5) The table of sections for part I of sub-
chapter 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.’’. 
(e) EFFECTIVE DATE.— 
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(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by 
this section shall apply to taxable years ending after 
llll. 
(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 llll, 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 
determined 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.—Except as provided in paragraph (3), section 
710(b) of the Internal Revenue Code of 1986 (as 
added by this section) shall apply to dispositions and 
distributions after llll. 
(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 llll. 
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