I 
117TH CONGRESS 
1ST SESSION H. R. 3903 
To amend the Internal Revenue Code of 1986 to treat certain income with 
respect to partnership interests held in connection with the performance 
of services as ordinary income. 
IN THE HOUSE OF REPRESENTATIVES 
JUNE 15, 2021 
Mr. GROTHMAN introduced the following bill; which was referred to the 
Committee on Ways and Means 
A BILL 
To amend the Internal Revenue Code of 1986 to treat cer-
tain income with respect to partnership interests held 
in connection with the performance of services as ordi-
nary income. 
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE. 
This Act may be cited as the ‘‘Tax Fairness Act of 
2021’’. 
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SEC. 2. ORDINARY INCOME TREATMENT IN THE CASE OF 
PARTNERSHIP INTERESTS HELD IN CONNEC-
TION WITH PERFORMANCE OF SERVICES. 
(a) IN GENERAL.—Section 1061 of the Internal Rev-
enue Code of 1986 is amended to read as follows: 
‘‘SEC. 1061. PARTNERSHIP INTERESTS HELD IN CONNEC-
TION WITH PERFORMANCE OF SERVICES. 
‘‘(a) IN GENERAL.—If one or more applicable part-
nership interests are held by a taxpayer at any time during 
the taxable year, so much of— 
‘‘(1) the taxpayer’s net capital gain with respect 
to such interests for such taxable year, as does not 
exceed 
‘‘(2) the taxpayer’s recharacterization account 
balance for such taxable year, 
shall be treated as ordinary income. 
‘‘(b) NET CAPITAL GAIN.— 
‘‘(1) IN GENERAL.—For purposes of subsection 
(a)(1), net capital gain shall be determined under 
section 1222, except that such section shall be ap-
plied— 
‘‘(A) without regard to the recharacteriza-
tion of any item as ordinary income under this 
section, 
‘‘(B) by only taking into account items of 
gain and loss— 
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‘‘(i) taken into account by the tax-
payer under section 702 with respect to 
any applicable partnership interest, 
‘‘(ii) recognized by the taxpayer on 
the disposition of any such interest, or 
‘‘(iii) recognized by the taxpayer 
under paragraph (4) on a distribution of 
property with respect to such interest, and 
‘‘(C) in the case of a taxable year for 
which section 1231 gains (as defined in section 
1231(a)(3)(A)) exceed section 1231 losses (as 
defined in section 1231(a)(3)(B)), by treating 
property which is taken into account in deter-
mining such gains and losses as capital assets 
held for more than 1 year. 
‘‘(2) ALLOCATION
TO
ITEMS
OF
GAIN.—The 
amount treated as ordinary income under subsection 
(a) shall be allocated ratably among the items of 
long-term capital gain taken into account in deter-
mining net capital gain under paragraph (1). 
‘‘(3) RECOGNITION OF GAIN ON DISPOSITION 
OF
APPLICABLE
PARTNERSHIP
INTERESTS.—Any 
gain on the disposition of any applicable partnership 
interest shall be recognized notwithstanding any 
other provision of this title. 
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‘‘(4) RECOGNITION OF GAIN ON DISTRIBUTIONS 
OF PARTNERSHIP PROPERTY.— 
‘‘(A) IN GENERAL.—In the case of any dis-
tribution of property by a partnership with re-
spect to any applicable partnership interest, the 
partner receiving such property shall recognize 
gain equal to 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 such partner (deter-
mined without regard to subparagraph 
(B)). 
‘‘(B) ADJUSTMENT OF BASIS.—In the case 
of a distribution to which subparagraph (A) ap-
plies, the basis of the distributed property in 
the hands of the distributee partner shall be the 
amount determined under subparagraph (A)(i). 
‘‘(c) RECHARACTERIZATION ACCOUNT BALANCE.— 
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘recharacterization account balance’ 
means, with respect to any taxpayer for any taxable 
year, the excess (if any) of— 
‘‘(A) the sum of— 
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‘‘(i) the taxpayer’s aggregate annual 
recharacterization amounts with respect to 
applicable partnership interests for such 
taxable year, plus 
‘‘(ii) the taxpayer’s recharacterization 
account balance for the taxable year pre-
ceding such taxable year, over 
‘‘(B) the sum of— 
‘‘(i) the taxpayer’s net ordinary in-
come with respect to applicable partnership 
interests for such taxable year (determined 
without regard to this section), plus 
‘‘(ii) the amount treated as ordinary 
income of the taxpayer under this section 
for the taxable year preceding such taxable 
year. 
‘‘(2) 
ANNUAL
RECHARACTERIZATION 
AMOUNT.—For purposes of this subsection— 
‘‘(A) IN GENERAL.—The term ‘annual re-
characterization amount’ means, with respect to 
any applicable partnership interest for any 
partnership taxable year, an amount equal to 
the product of— 
‘‘(i) the specified rate determined 
under subparagraph (B) for the calendar 
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year in which such taxable year begins, 
multiplied by 
‘‘(ii) the excess (if any) of— 
‘‘(I) an amount equal to the ap-
plicable percentage of the partner-
ship’s aggregate invested capital for 
such taxable year, over 
‘‘(II) the specified capital con-
tribution of the partner with respect 
to the applicable partnership interest 
for such taxable year. 
If a taxpayer holds an applicable partnership 
interest for less than the entire taxable year, 
the amount determined under the preceding 
sentence shall be ratably reduced. 
‘‘(B) SPECIFIED RATE.—For purposes of 
subparagraph (A), the term ‘specified rate’ 
means, with respect to any calendar year, a per-
centage equal to— 
‘‘(i) the Federal long-term rate deter-
mined under section 1274(d)(1) for the 
last month of the calendar year, plus 
‘‘(ii) 10 percentage points. 
‘‘(C) APPLICABLE PERCENTAGE.— 
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‘‘(i) IN GENERAL.—The term ‘applica-
ble percentage’ means, with respect to any 
applicable partnership interest, the highest 
percentage of profits of the partnership 
that could be allocated with respect to such 
interest for the taxable year (consistent 
with the partnership agreement and as-
suming such facts and circumstances with 
respect to such taxable year as would re-
sult in such highest percentage). 
‘‘(ii) SECRETARIAL AUTHORITY.—The 
Secretary shall prescribe rules for the de-
termination of the applicable percentage in 
cases in which the percentage of profits of 
a partnership that are to be allocated with 
respect to an applicable partnership inter-
est varies on the basis of the aggregate 
amount of such profits. Such rules may 
provide a percentage which may be used in 
lieu of the highest percentage determined 
under clause (i) in cases where such other 
percentage is consistent with the purposes 
of this section. 
‘‘(D) AGGREGATE INVESTED CAPITAL.— 
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‘‘(i) IN GENERAL.—The term ‘aggre-
gate invested capital’ means, with respect 
to any taxable year, the average daily 
amount of invested capital of the partner-
ship for such taxable year. 
‘‘(ii) INVESTED CAPITAL.—The term 
‘invested capital’ means, with respect to 
any partnership as of any day, the total 
cumulative value, determined at the time 
of contribution, of all money or other prop-
erty contributed to the partnership on or 
before such day. 
‘‘(iii) REDUCTION
FOR
LIQUIDATION 
OF
PARTNERSHIP
INTERESTS.—The in-
vested capital of a partnership shall be re-
duced by the aggregate amount distributed 
in liquidation of interests in the partner-
ship. 
‘‘(iv) TREATMENT
OF
CERTAIN
IN-
DEBTEDNESS AS INVESTED CAPITAL.—The 
following amounts shall be treated as in-
vested capital: 
‘‘(I) PARTNER LOANS.—The ag-
gregate value (determined as of the 
time of the loan) of money or other 
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property which a partner loans to the 
partnership. 
‘‘(II) INDEBTEDNESS
ELIGIBLE 
TO SHARE IN EQUITY OF THE PART-
NERSHIP.—The face amount of any 
convertible debt of the partnership or 
any debt obligation providing equity 
participation in the partnership. 
‘‘(E) 
SPECIFIED
CAPITAL
CONTRIBU-
TION.— 
‘‘(i) IN GENERAL.—The term ‘speci-
fied capital contribution’ means, with re-
spect to any applicable partnership interest 
for any taxable year, the average daily 
amount of contributed capital with respect 
to such interest for such year. 
‘‘(ii) CONTRIBUTED
CAPITAL.—The 
term ‘contributed capital’ means, with re-
spect to any applicable partnership interest 
as of any day, the excess (if any) of— 
‘‘(I) the total cumulative value, 
determined at the time of contribu-
tion, of all money or other property 
contributed by the partner to the 
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partnership with respect to such inter-
est as of such day, over 
‘‘(II) the total cumulative value, 
determined at the time of distribution, 
of all money or other property distrib-
uted by the partnership to the partner 
with respect to such interest as of 
such day. 
‘‘(iii) 
TREATMENT
OF
RELATED 
PARTY
BORROWINGS.—Any amount bor-
rowed directly or indirectly from the part-
nership or any other partner of the part-
nership or any person related to such other 
partner or such partnership shall not be 
taken into account under this subpara-
graph. For purposes of the preceding sen-
tence, a person shall be treated as related 
to another person if the relationship be-
tween such persons would be described in 
section 267(b) or 707(b) if such sections 
and section 267(f) were applied by sub-
stituting ‘10 percent’ for ‘50 percent’ each 
place it appears. 
‘‘(F) MULTIPLE
INTERESTS.—If at any 
time during a taxable year a taxpayer holds di-
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rectly or indirectly more than 1 applicable part-
nership interest in a single partnership, such in-
terests shall be treated as 1 applicable partner-
ship interest for purposes of applying this para-
graph. 
‘‘(3) NET ORDINARY INCOME.—For purposes of 
this subsection, the net ordinary income with respect 
to applicable partnership interests for any taxable 
year is the excess (if any) of— 
‘‘(A) the taxpayer’s distributive share of 
items of income and gain under section 702 
with respect to applicable partnership interests 
for such taxable year (determined without re-
gard to any items of gain taken into account in 
determining net capital gain under subsection 
(b)(1)), over 
‘‘(B) the taxpayer’s distributive share of 
items of deduction and loss under section 702 
with respect to such interests for such taxable 
year (determined without regard to any items of 
loss taken into account in determining net cap-
ital gain under subsection (b)(1)). 
‘‘(d) APPLICABLE PARTNERSHIP INTEREST.—For 
purposes of this section— 
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‘‘(1) IN GENERAL.—The term ‘applicable part-
nership interest’ means any interest in a partnership 
which, directly or indirectly, is transferred to (or is 
held by) the taxpayer in connection with the per-
formance of services by the taxpayer, or any other 
person, in any applicable trade or business. 
‘‘(2) APPLICABLE TRADE OR BUSINESS.— 
‘‘(A) IN GENERAL.—The term ‘applicable 
trade or business’ means any trade or business 
conducted on a regular, continuous, and sub-
stantial basis which, regardless of whether the 
activities are conducted in one or more entities, 
consists, in whole or in part, of— 
‘‘(i) raising or returning capital, 
‘‘(ii) investing in (or disposing of) 
trades or businesses (or identifying trades 
or businesses for such investing or disposi-
tion), and 
‘‘(iii) developing such trades or busi-
nesses. 
‘‘(B) TREATMENT OF RESEARCH AND EX-
PERIMENTATION ACTIVITIES.—Any activity in-
volving research or experimentation (within the 
meaning of section 469(c)(4)) shall be treated 
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as a trade or business for purposes of clauses 
(ii) and (iii) of subparagraph (A). 
‘‘(e) TRANSFER OF APPLICABLE PARTNERSHIP IN-
TEREST TO RELATED PERSON.— 
‘‘(1) IN GENERAL.—If a taxpayer transfers any 
applicable partnership interest, directly or indirectly, 
to a person related to the taxpayer, the taxpayer 
shall include in gross income (as ordinary income) so 
much of the taxpayer’s recharacterization account 
balance for such taxable year as is allocable to such 
interest (determined in such manner as the Sec-
retary may provide and reduced by any amount 
treated as ordinary income under subsection (a) with 
respect to the transfer of such interest). 
‘‘(2) RELATED PERSON.—For purposes of this 
paragraph, a person is related to the taxpayer if— 
‘‘(A) the person is a member of the tax-
payer’s family within the meaning of section 
318(a)(1), or 
‘‘(B) the person performed a service within 
the current calendar year or the preceding three 
calendar years in any applicable trade or busi-
ness in which or for which the taxpayer per-
formed a service. 
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‘‘(f) REPORTING BY ENTITY OF TAXPAYER’S AN-
NUAL RECHARACTERIZATION AMOUNT.—A partnership 
shall report to the Secretary, and include with the infor-
mation required to be furnished under section 6031(b) to 
each partner, the amount of the partner’s annual re-
characterization amount for the taxable year, if any. A 
similar rule applies to any entity that receives a report 
of an annual recharacterization amount for the taxable 
year. 
‘‘(g) REGULATIONS.—The Secretary shall issue such 
regulations or other guidance as necessary to carry out 
this section, including regulations— 
‘‘(1) to prevent the abuse of the purposes of 
this section, including through— 
‘‘(A) the allocation of income to tax indif-
ferent parties, or 
‘‘(B) a reduction in the invested capital of 
the partnership (including attempts to under-
value contributed or loaned property), 
‘‘(2) which provide that partnership interests 
shall not fail to be treated as transferred or held in 
connection with the performance of services merely 
because the taxpayer also made contributions to the 
partnership, 
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‘‘(3) which provide for the application of this 
section in cases where the taxpayer has more than 
1 applicable interest in a partnership, and 
‘‘(4) which provide for the application of this 
section in cases of tiered structures of entities.’’. 
(b) COORDINATION WITH SECTION 83.—Subsection 
(e) of section 83 is amended by striking ‘‘or’’ at the end 
of paragraph (4), by striking the period at the end of para-
graph (5) and inserting ‘‘, or’’, and by adding at the end 
the following new paragraph: 
‘‘(6) a transfer of a partnership interest to 
which section 1061 applies.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2021. 
Æ 
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