I 
117TH CONGRESS 
1ST SESSION H. R. 1068 
To amend the Internal Revenue Code of 1986 to provide for the proper 
tax treatment of personal service income earned in pass-thru entities. 
IN THE HOUSE OF REPRESENTATIVES 
FEBRUARY 15, 2021 
Mr. PASCRELL (for himself, Mr. LEVIN of Michigan, Ms. PORTER, Mr. 
BEYER, Mr. SUOZZI, and Mr. BLUMENAUER) 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 provide 
for the proper tax treatment of personal service income 
earned in pass-thru entities. 
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE; ETC. 
(a) SHORT TITLE.—This Act may be cited as the 
‘‘Carried Interest Fairness Act of 2021’’. 
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
ment or repeal is expressed in terms of an amendment 
to, or repeal of, a section or other provision, the reference 
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shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986. 
(c) TABLE OF CONTENTS.—The table of contents for 
this Act is as follows: 
Sec. 1. Short title; etc. 
Sec. 2. Partnership interests transferred in connection with performance of 
services. 
Sec. 3. Special rules for partners providing investment management services to 
partnerships. 
SEC. 2. PARTNERSHIP INTERESTS TRANSFERRED IN CON-
NECTION WITH PERFORMANCE OF SERVICES. 
(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— 
‘‘(A) IN
GENERAL.—In the case of any 
transfer of an interest in a partnership in con-
nection with the provision of services to (or for 
the benefit of) such partnership— 
‘‘(i) the fair market value of such in-
terest shall be treated for purposes of this 
section as being equal to the amount of the 
distribution which the partner would re-
ceive if the partnership sold (at the time of 
the transfer) all of its assets at fair market 
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termined under section 1222, except that such 
section shall be applied— 
‘‘(i) without regard to the recharacter-
ization of any item as ordinary income or 
ordinary loss under this section, 
‘‘(ii) by only taking into account items 
of gain and loss taken into account by the 
holder of such interest under section 702 
(other than subsection (a)(9) thereof) with 
respect to such interest for such taxable 
year, and 
‘‘(iii) by treating property which is 
taken into account in determining gains 
and losses to which section 1231 applies as 
capital assets held for more than 1 year. 
‘‘(B) NET CAPITAL LOSS.—The term ‘net 
capital loss’ means the excess of the losses from 
sales or exchanges of capital assets over the 
gains from such sales or exchanges. Rules simi-
lar to the rules of clauses (i) through (iii) of 
subparagraph (A) shall apply for purposes of 
the preceding sentence. 
‘‘(5) SPECIAL RULE FOR DIVIDENDS.—Any div-
idend allocated with respect to any investment serv-
ices partnership interest shall not be treated as 
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qualified dividend income for purposes of section 
1(h). 
‘‘(6) SPECIAL
RULE
FOR
QUALIFIED
SMALL 
BUSINESS STOCK.—Section 1202 shall not apply to 
any gain from the sale or exchange of qualified small 
business stock (as defined in section 1202(c)) allo-
cated with respect to any investment services part-
nership interest. 
‘‘(b) DISPOSITIONS OF PARTNERSHIP INTERESTS.— 
‘‘(1) GAIN.— 
‘‘(A) IN GENERAL.—Any gain on the dis-
position of an investment services partnership 
interest shall be— 
‘‘(i) treated as ordinary income, and 
‘‘(ii) recognized notwithstanding any 
other provision of this subtitle. 
‘‘(B) GIFT AND TRANSFERS AT DEATH.— 
In the case of a disposition of an investment 
services partnership interest by gift or by rea-
son of death of the taxpayer— 
‘‘(i) subparagraph (A) shall not apply, 
‘‘(ii) such interest shall be treated as 
an investment services partnership interest 
in the hands of the person acquiring such 
interest, and 
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‘‘(iii) any amount that would have 
been treated as ordinary income under this 
subsection had the decedent sold such in-
terest immediately before death shall be 
treated as an item of income in respect of 
a decedent under section 691. 
‘‘(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 amount treated as ordi-
nary income under subsection (a) with respect 
to such interest for all partnership taxable 
years to which this section applies, over 
‘‘(B) the aggregate amount treated as or-
dinary loss under subsection (a) with respect to 
such interest for all partnership taxable years 
to which this section applies. 
‘‘(3) ELECTION WITH RESPECT TO CERTAIN EX-
CHANGES.—Paragraph (1)(A)(ii) shall not apply to 
the contribution of an investment services partner-
ship interest to a partnership in exchange for an in-
terest in such partnership if— 
‘‘(A) the taxpayer makes an irrevocable 
election to treat the partnership interest re-
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ceived in the exchange as an investment serv-
ices partnership interest, and 
‘‘(B) the taxpayer agrees to comply with 
such reporting and recordkeeping requirements 
as the Secretary may prescribe. 
‘‘(4) DISTRIBUTIONS OF PARTNERSHIP PROP-
ERTY.— 
‘‘(A) IN GENERAL.—In the case of any dis-
tribution of property by a partnership with re-
spect to any investment services partnership in-
terest held by a partner, 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 
(C)). 
‘‘(B) TREATMENT OF GAIN AS ORDINARY 
INCOME.—Any gain recognized by such partner 
under subparagraph (A) shall be treated as or-
dinary income to the same extent and in the 
same manner as the increase in such partner’s 
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distributive share of the taxable income of the 
partnership would be treated under subsection 
(a) if, immediately prior to the distribution, the 
partnership had sold the distributed property at 
fair market value and all of the gain from such 
disposition were allocated to such partner. For 
purposes of applying subsection (a)(2), any gain 
treated as ordinary income under this subpara-
graph shall be treated as an amount treated as 
ordinary income under subsection (a)(1)(A). 
‘‘(C) ADJUSTMENT OF BASIS.—In the case 
a distribution to which subparagraph (A) ap-
plies, the basis of the distributed property in 
the hands of the distributee partner shall be the 
fair market value of such property. 
‘‘(D) SPECIAL RULES WITH RESPECT TO 
MERGERS
AND
DIVISIONS.—In the case of a 
taxpayer which satisfies requirements similar to 
the requirements of subparagraphs (A) and (B) 
of paragraph (3), this paragraph and paragraph 
(1)(A)(ii) shall not apply to the distribution of 
a partnership interest if such distribution is in 
connection with a contribution (or deemed con-
tribution) of any property of the partnership to 
which section 721 applies pursuant to a trans-
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action described in paragraph (2) of section 
708(b). 
‘‘(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 an 
investment partnership acquired or held by any per-
son in connection with the conduct of a trade or 
business described in paragraph (2) by such person 
(or any person related to such person). An interest 
in an investment partnership held by any person— 
‘‘(A) shall not be treated as an investment 
services partnership interest for any period be-
fore the first date on which it is so held in con-
nection with such a trade or business, 
‘‘(B) shall not cease to be an investment 
services partnership interest merely because 
such person holds such interest other than in 
connection with such a trade or business, and 
‘‘(C) shall be treated as an investment 
services partnership interest if acquired from a 
related person in whose hands such interest was 
an investment services partnership interest. 
‘‘(2) BUSINESSES TO WHICH THIS SECTION AP-
PLIES.—A trade or business is described in this 
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paragraph if such trade or business primarily in-
volves the performance of any of the following serv-
ices with respect to assets held (directly or indi-
rectly) by one or more investment partnerships re-
ferred to in paragraph (1): 
‘‘(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). 
‘‘(3) INVESTMENT PARTNERSHIP.— 
‘‘(A) IN GENERAL.—The term ‘investment 
partnership’ means any partnership if, at the 
end of any two consecutive calendar quarters 
ending after the date of enactment of this sec-
tion— 
‘‘(i) substantially all of the assets of 
the partnership are specified assets (deter-
mined without regard to any section 197 
intangible within the meaning of section 
197(d)), and 
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‘‘(ii) less than 75 percent of the cap-
ital of the partnership is attributable to 
qualified capital interests which constitute 
property held in connection with a trade or 
business of the owner of such interest. 
‘‘(B) LOOK-THROUGH OF CERTAIN WHOL-
LY OWNED ENTITIES FOR PURPOSES OF DETER-
MINING ASSETS OF THE PARTNERSHIP.— 
‘‘(i) IN
GENERAL.—For purposes of 
determining the assets of a partnership 
under subparagraph (A)(i)— 
‘‘(I) any interest in a specified 
entity shall not be treated as an asset 
of such partnership, and 
‘‘(II) such partnership shall be 
treated as holding its proportionate 
share of each of the assets of such 
specified entity. 
‘‘(ii) SPECIFIED
ENTITY.—For pur-
poses of clause (i), the term ‘specified enti-
ty’ means, with respect to any partnership 
(hereafter referred to as the upper-tier 
partnership), any person which engages in 
the same trade or business as the upper- 
tier partnership and is— 
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‘‘(I) a partnership all of the cap-
ital and profits interests of which are 
held directly or indirectly by the 
upper-tier partnership, or 
‘‘(II) a foreign corporation which 
does not engage in a trade or business 
in the United States and all of the 
stock of which is held directly or indi-
rectly by the upper-tier partnership. 
‘‘(C) SPECIAL RULES FOR DETERMINING 
IF
PROPERTY
HELD
IN
CONNECTION
WITH 
TRADE OR BUSINESS.— 
‘‘(i) IN GENERAL.—Except as other-
wise provided by the Secretary, solely for 
purposes of determining whether any inter-
est in a partnership constitutes property 
held in connection with a trade or business 
under subparagraph (A)(ii)— 
‘‘(I) a trade or business of any 
person closely related to the owner of 
such interest shall be treated as a 
trade or business of such owner, 
‘‘(II) such interest shall be treat-
ed as held by a person in connection 
with a trade or business during any 
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taxable year if such interest was so 
held by such person during any 3 tax-
able years preceding such taxable 
year, and 
‘‘(III) paragraph (5)(B) shall not 
apply. 
‘‘(ii) CLOSELY RELATED PERSONS.— 
For purposes of clause (i)(I), a person 
shall be treated as closely related to an-
other person if, taking into account the 
rules of section 267(c), the relationship be-
tween such persons is described in— 
‘‘(I) paragraph (1) or (9) of sec-
tion 267(b), or 
‘‘(II) section 267(b)(4), but solely 
in the case of a trust with respect to 
which each current beneficiary is the 
grantor or a person whose relationship 
to the grantor is described in para-
graph (1) or (9) of section 267(b). 
‘‘(D) ANTIABUSE RULES.—The Secretary 
may issue regulations or other guidance which 
prevent the avoidance of the purposes of sub-
paragraph (A), including regulations or other 
guidance which treat convertible and contingent 
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debt (and other debt having the attributes of 
equity) as a capital interest in the partnership. 
‘‘(E) CONTROLLED
GROUPS
OF
ENTI-
TIES.— 
‘‘(i) IN GENERAL.—In the case of a 
controlled group of entities, if an interest 
in the partnership received in exchange for 
a contribution to the capital of the part-
nership by any member of such controlled 
group would (in the hands of such mem-
ber) constitute property held in connection 
with a trade or business, then any interest 
in such partnership held by any member of 
such group shall be treated for purposes of 
subparagraph (A) as constituting (in the 
hands of such member) property held in 
connection with a trade or business. 
‘‘(ii) CONTROLLED GROUP OF ENTI-
TIES.—For purposes of clause (i), the term 
‘controlled group of entities’ means a con-
trolled group of corporations as defined in 
section 1563(a)(1), applied without regard 
to subsections (a)(4) and (b)(2) of section 
1563. A partnership or any other entity 
(other than a corporation) shall be treated 
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as a member of a controlled group of enti-
ties if such entity is controlled (within the 
meaning of section 954(d)(3)) by members 
of such group (including any entity treated 
as a member of such group by reason of 
this sentence). 
‘‘(F) 
SPECIAL
RULE
FOR
CORPORA-
TIONS.—For purposes of this paragraph, in the 
case of a corporation, the determination of 
whether property is held in connection with a 
trade or business shall be determined as if the 
taxpayer were an individual. 
‘‘(4) SPECIFIED
ASSET.—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)), cash or cash equivalents, or options 
or derivative contracts with respect to any of the 
foregoing. 
‘‘(5) RELATED PERSONS.— 
‘‘(A) IN
GENERAL.—A person shall be 
treated as related to another person if the rela-
tionship between such persons is described in 
section 267(b) or 707(b). 
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‘‘(B) ATTRIBUTION
OF
PARTNER
SERV-
ICES.—Any service described in paragraph (2) 
which is provided by a partner of a partnership 
shall be treated as also provided by such part-
nership. 
‘‘(d) EXCEPTION
FOR CERTAIN CAPITAL INTER-
ESTS.— 
‘‘(1) IN GENERAL.—In the case of any portion 
of an investment services partnership interest which 
is a qualified capital interest, all items of gain and 
loss (and any dividends) which are allocated to such 
qualified capital interest shall not be taken into ac-
count under subsection (a) if— 
‘‘(A) allocations of items are made by the 
partnership to such qualified capital interest in 
the same manner as such allocations are made 
to other qualified capital interests held by part-
ners who do not provide any services described 
in subsection (c)(2) and who are not related to 
the partner holding the qualified capital inter-
est, and 
‘‘(B) the allocations made to such other in-
terests are significant compared to the alloca-
tions made to such qualified capital interest. 
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‘‘(2) AUTHORITY TO PROVIDE EXCEPTIONS TO 
ALLOCATION
REQUIREMENTS.—To the extent pro-
vided by the Secretary in regulations or other guid-
ance— 
‘‘(A) ALLOCATIONS TO PORTION OF QUALI-
FIED CAPITAL INTEREST.—Paragraph (1) may 
be applied separately with respect to a portion 
of a qualified capital interest. 
‘‘(B) NO OR INSIGNIFICANT ALLOCATIONS 
TO NONSERVICE PROVIDERS.—In any case in 
which the requirements of paragraph (1)(B) are 
not satisfied, items of gain and loss (and any 
dividends) 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
PRO-
VIDERS’ QUALIFIED CAPITAL INTERESTS WHICH 
ARE LESS THAN OTHER ALLOCATIONS.—Alloca-
tions shall not be treated as failing to meet the 
requirement of paragraph (1)(A) merely be-
cause the allocations to the qualified capital in-
terest represent a lower return than the alloca-
tions made to the other qualified capital inter-
ests referred to in such paragraph. 
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‘‘(3) SPECIAL RULE FOR CHANGES IN SERVICES 
AND CAPITAL CONTRIBUTIONS.—In the case of an 
interest in a partnership which was not an invest-
ment services partnership interest and which, by 
reason of a change in the services with respect to as-
sets held (directly or indirectly) by the partnership 
or by reason of a change in the capital contributions 
to such partnership, becomes an investment services 
partnership interest, the qualified capital interest of 
the holder of such partnership interest immediately 
after such change shall not, for purposes of this sub-
section, 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 
qualified capital interests in any upper-tier partner-
ship. 
‘‘(5) 
EXCEPTION
FOR
NO-SELF-CHARGED 
CARRY
AND
MANAGEMENT
FEE
PROVISIONS.—Ex-
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cept as otherwise provided by the Secretary, an in-
terest 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 sub-
section (c)(2) which are provided (directly or indi-
rectly) to the partnership by the holder of such in-
terest (or a related person). 
‘‘(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 en-
tire 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 require-
ments of paragraph (1)) if the partnership had 
sold all of its assets at fair market value imme-
diately before 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. 
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‘‘(7) QUALIFIED CAPITAL INTEREST.—For pur-
poses of this section— 
‘‘(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— 
‘‘(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, 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-
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duced by distributions from the partner-
ship with respect to such interest and by 
the excess (if any) of the amount described 
in subparagraph (A)(iii)(II) over the 
amount 
described 
in 
subparagraph 
(A)(iii)(I). 
‘‘(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 prop-
erty immediately before such contribution, 
proper adjustments shall be made to the 
qualified capital interest to take into ac-
count such difference consistent with such 
regulations or other guidance as the Sec-
retary may provide. 
‘‘(C) MERGER, CONSOLIDATION, DIVISION, 
ETC., DISREGARDED.—No increase or decrease 
in the qualified capital interest of any partner 
shall result from a merger, consolidation, or di-
vision described in section 708, or any similar 
transaction. 
‘‘(8) TREATMENT OF CERTAIN LOANS.— 
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‘‘(A) PROCEEDS OF PARTNERSHIP LOANS 
NOT TREATED AS QUALIFIED CAPITAL INTER-
EST OF SERVICE PROVIDING PARTNERS.—For 
purposes of this subsection, an investment serv-
ices partnership interest shall not be treated as 
a qualified capital interest to the extent that 
such interest 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 re-
lated to any such other partner or the partner-
ship). The preceding sentence shall not apply to 
the extent the loan or other advance is repaid 
before the date of the enactment of this section 
unless such repayment is made with the pro-
ceeds of a loan or other advance described in 
the preceding sentence. 
‘‘(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)(2) to the partnership 
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(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. 
‘‘(9) SPECIAL
RULE
FOR
QUALIFIED
FAMILY 
PARTNERSHIPS.— 
‘‘(A) IN
GENERAL.—In the case of any 
specified family partnership interest, paragraph 
(1)(A) shall be applied without regard to the 
phrase ‘and who are not related to the partner 
holding the qualified capital interest’. 
‘‘(B) SPECIFIED FAMILY PARTNERSHIP IN-
TEREST.—For purposes of this paragraph, the 
term ‘specified family partnership interest’ 
means any investment services partnership in-
terest if— 
‘‘(i) such interest is an interest in a 
qualified family partnership, 
‘‘(ii) such interest is held by a natural 
person or by a trust with respect to which 
each beneficiary is a grantor or a person 
whose relationship to the grantor is de-
scribed in section 267(b)(1), and 
‘‘(iii) all other interests in such quali-
fied family partnership with respect to 
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which significant allocations are made 
(within the meaning of paragraph (1)(B) 
and in comparison to the allocations made 
to the interest described in clause (ii)) are 
held by persons who— 
‘‘(I) are related to the natural 
person or trust referred to in clause 
(ii), or 
‘‘(II) provide services described 
in subsection (c)(2). 
‘‘(C) QUALIFIED FAMILY PARTNERSHIP.— 
For purposes of this paragraph, the term 
‘qualified family partnership’ means any part-
nership if— 
‘‘(i) all of the capital and profits in-
terests of such partnership are held by— 
‘‘(I) specified family members, 
‘‘(II) any person closely related 
(within the meaning of subsection 
(c)(3)(C)(ii)) to a specified family 
member, or 
‘‘(III) any other person (not de-
scribed in subclause (I) or (II)) if 
such interest is an investment services 
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partnership interest with respect to 
such person, and 
‘‘(ii) such partnership does not hold 
itself out to the public as an investment 
advisor. 
‘‘(D) SPECIFIED FAMILY MEMBERS.—For 
purposes of subparagraph (C), individuals shall 
be treated as specified family members if such 
individuals would be treated as one person 
under the rules of section 1361(c)(1) if the ap-
plicable date (within the meaning of subpara-
graph (B)(iii) thereof) were the latest of— 
‘‘(i) the date of the establishment of 
the partnership, 
‘‘(ii) the earliest date that the com-
mon ancestor holds a capital or profits in-
terest in the partnership, or 
‘‘(iii) the date of the enactment of this 
section. 
‘‘(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 
investment entity, 
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‘‘(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 subsections (a)(5) 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 ‘dis-
qualified interest’ means, with respect to 
any investment entity— 
‘‘(I) any interest in such entity 
other than indebtedness, 
‘‘(II) convertible or contingent 
debt of such entity, 
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‘‘(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 
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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)(2). 
‘‘(D) INVESTMENT ENTITY.—The term ‘in-
vestment entity’ means any entity which, if it 
were a partnership, would be an investment 
partnership. 
‘‘(f) EXCEPTION FOR DOMESTIC C CORPORATIONS.— 
Except as otherwise provided by the Secretary, in the case 
of a domestic C corporation— 
‘‘(1) subsections (a) and (b) shall not apply to 
any item allocated to such corporation with respect 
to any investment services partnership interest (or 
to any gain or loss with respect to the disposition of 
such an interest), and 
‘‘(2) subsection (e) shall not apply. 
‘‘(g) 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— 
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‘‘(1) require such reporting and recordkeeping 
by any person in such manner and at such time as 
the Secretary may prescribe for purposes of enabling 
the partnership to meet the requirements of section 
6031 with respect to any item described in section 
702(a)(9), 
‘‘(2) 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, 
‘‘(3) prevent the avoidance of the purposes of 
this section (including through the use of qualified 
family partnerships), and 
‘‘(4) coordinate this section with the other pro-
visions of this title. 
‘‘(h) CROSS REFERENCE.—For 40-percent penalty 
on certain underpayments due to the avoidance of this sec-
tion, see section 6662.’’. 
(b) APPLICATION OF SECTION 751 TO INDIRECT DIS-
POSITIONS OF INVESTMENT SERVICES PARTNERSHIP IN-
TERESTS.— 
(1) IN
GENERAL.—Subsection (a) of section 
751 is amended by striking ‘‘or’’ at the end of para-
graph (1), by inserting ‘‘or’’ at the end of paragraph 
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(2), and by inserting after paragraph (2) the fol-
lowing new paragraph: 
‘‘(3) investment services partnership interests 
held by the partnership,’’. 
(2) CERTAIN
DISTRIBUTIONS
TREATED
AS 
SALES OR EXCHANGES.—Subparagraph (A) of sec-
tion 751(b)(1) is amended by striking ‘‘or’’ at the 
end of clause (i), by inserting ‘‘or’’ at the end of 
clause (ii), and by inserting after clause (ii) the fol-
lowing new clause: 
‘‘(iii) investment services partnership 
interests held by the partnership,’’. 
(3) APPLICATION OF SPECIAL RULES IN THE 
CASE OF TIERED PARTNERSHIPS.—Subsection (f) of 
section 751 is amended— 
(A) by striking ‘‘or’’ at the end of para-
graph (1), by inserting ‘‘or’’ at the end of para-
graph (2), and by inserting after paragraph (2) 
the following new paragraph: 
‘‘(3) an investment services partnership interest 
held by the partnership,’’, and 
(B) by striking ‘‘partner.’’ and inserting 
‘‘partner (other than a partnership in which it 
holds an investment services partnership inter-
est).’’. 
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(4) INVESTMENT SERVICES PARTNERSHIP IN-
TERESTS; QUALIFIED CAPITAL INTERESTS.—Section 
751 is amended by adding at the end the following 
new subsection: 
‘‘(g) INVESTMENT SERVICES PARTNERSHIP INTER-
ESTS.—For purposes of this section— 
‘‘(1) IN GENERAL.—The term ‘investment serv-
ices partnership interest’ has the meaning given 
such term by section 710(c). 
‘‘(2) ADJUSTMENTS
FOR
QUALIFIED
CAPITAL 
INTERESTS.—The amount to which subsection (a) 
applies by reason of paragraph (3) thereof shall not 
include so much of such amount as is attributable 
to any portion of the investment services partnership 
interest which is a qualified capital interest (deter-
mined under rules similar to the rules of section 
710(d)). 
‘‘(3) EXCEPTION FOR PUBLICLY TRADED PART-
NERSHIPS.—Except as otherwise provided by the 
Secretary, in the case of an exchange of an interest 
in a publicly traded partnership (as defined in sec-
tion 7704) to which subsection (a) applies— 
‘‘(A) this section shall be applied without 
regard to subsections (a)(3), (b)(1)(A)(iii), and 
(f)(3), and 
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‘‘(B) such partnership shall be treated as 
owning its proportionate share of the property 
of any other partnership in which it is a part-
ner. 
‘‘(4) RECOGNITION OF GAINS.—Any gain with 
respect to which subsection (a) applies by reason of 
paragraph (3) thereof shall be recognized notwith-
standing any other provision of this title. 
‘‘(5) 
COORDINATION
WITH
INVENTORY 
ITEMS.—An investment services partnership interest 
held by the partnership shall not be treated as an 
inventory item of the partnership. 
‘‘(6) PREVENTION
OF
DOUBLE
COUNTING.— 
Under regulations or other guidance prescribed by 
the Secretary, subsection (a)(3) shall not apply with 
respect to any amount to which section 710 applies. 
‘‘(7) VALUATION
METHODS.—The Secretary 
shall prescribe regulations or other guidance which 
provide the acceptable methods for valuing invest-
ment services partnership interests for purposes of 
this section.’’. 
(c) TREATMENT
FOR
PURPOSES
OF
SECTION 
7704.—Subsection (d) of section 7704 is amended by add-
ing at the end the following new paragraph: 
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‘‘(6) INCOME FROM CERTAIN CARRIED INTER-
ESTS NOT QUALIFIED.— 
‘‘(A) IN GENERAL.—Specified carried in-
terest income shall not be treated as qualifying 
income. 
‘‘(B) SPECIFIED
CARRIED
INTEREST
IN-
COME.—For purposes of this paragraph— 
‘‘(i) IN GENERAL.—The term ‘speci-
fied carried interest income’ means— 
‘‘(I) any item of income or gain 
allocated to an investment services 
partnership interest (as defined in 
section 710(c)) held by the partner-
ship, 
‘‘(II) any gain on the disposition 
of an investment services partnership 
interest (as so defined) or a partner-
ship interest to which (in the hands of 
the partnership) section 751 applies, 
and 
‘‘(III) any income or gain taken 
into account by the partnership under 
subsection (b)(4) or (e) of section 
710. 
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‘‘(ii) EXCEPTION FOR QUALIFIED CAP-
ITAL
INTERESTS.—A rule similar to the 
rule of section 710(d) shall apply for pur-
poses of clause (i). 
‘‘(C) COORDINATION WITH OTHER PROVI-
SIONS.—Subparagraph (A) shall not apply to 
any item described in paragraph (1)(E) (or so 
much of paragraph (1)(F) as relates to para-
graph (1)(E)). 
‘‘(D) 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) Fifty percent or more of 
the capital and profits interests of 
such partnership are owned, directly 
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or indirectly, at all times during the 
taxable year by such real estate in-
vestment 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
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 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)). 
‘‘(E) 
TRANSITIONAL
RULE.—Subpara-
graph (A) shall not apply to any taxable year 
of the partnership beginning before the date 
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which is 10 years after the date of the enact-
ment of this paragraph.’’. 
(d) IMPOSITION
OF
PENALTY
ON
UNDERPAY-
MENTS.— 
(1) IN
GENERAL.—Subsection (b) of section 
6662 is amended by inserting after paragraph (7) 
the following new paragraph: 
‘‘(8) The application of section 710(e) or the 
regulations or other guidance prescribed under sec-
tion 710(g) to prevent the avoidance of the purposes 
of section 710.’’. 
(2) AMOUNT OF PENALTY.— 
(A) IN GENERAL.—Section 6662 is amend-
ed 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’.’’. 
(B) CONFORMING AMENDMENT.—Subpara-
graph (B) of section 6662A(e)(2) is amended 
by striking ‘‘or (i)’’ and inserting ‘‘, (i), or (k)’’. 
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(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 
following 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 section 6662 applies by reason of sub-
section (b)(8) unless— 
‘‘(i) the relevant facts affecting the 
tax treatment of the item are adequately 
disclosed, 
‘‘(ii) there is or was substantial au-
thority for such treatment, and 
‘‘(iii) the taxpayer reasonably believed 
that such treatment was more likely than 
not the proper treatment. 
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‘‘(B) RULES
RELATING
TO
REASONABLE 
BELIEF.—Rules similar to the rules of sub-
section (d)(3) shall apply for purposes of sub-
paragraph (A)(iii).’’. 
(e) INCOME AND LOSS FROM INVESTMENT SERVICES 
PARTNERSHIP INTERESTS TAKEN INTO ACCOUNT IN DE-
TERMINING NET EARNINGS FROM SELF-EMPLOYMENT.— 
(1) INTERNAL REVENUE CODE.— 
(A) IN
GENERAL.—Section 1402(a) is 
amended by striking ‘‘and’’ at the end of para-
graph (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, in the case of any individual en-
gaged in the trade or business of providing services 
described in section 710(c)(2) with respect to any 
entity, investment services partnership income or 
loss (as defined in subsection (m)) of such individual 
with respect to such entity shall be taken into ac-
count in determining the net earnings from self-em-
ployment of such individual.’’. 
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(B) INVESTMENT SERVICES PARTNERSHIP 
INCOME OR LOSS.—Section 1402 is amended by 
adding at the end the following new subsection: 
‘‘(m) INVESTMENT SERVICES PARTNERSHIP INCOME 
OR LOSS.—For purposes of subsection (a)— 
‘‘(1) IN GENERAL.—The term ‘investment serv-
ices partnership income or loss’ means, with respect 
to any investment services partnership interest (as 
defined in section 710(c)) or disqualified interest (as 
defined in section 710(e)), the net of— 
‘‘(A) the amounts treated as ordinary in-
come or ordinary loss under subsections (b) and 
(e) of section 710 with respect to such interest, 
‘‘(B) all items of income, gain, loss, and 
deduction allocated to such interest, and 
‘‘(C) the amounts treated as realized from 
the sale or exchange of property other than a 
capital asset under section 751 with respect to 
such interest. 
‘‘(2) EXCEPTION FOR QUALIFIED CAPITAL IN-
TERESTS.—A rule similar to the rule of section 
710(d) shall apply for purposes of applying para-
graph (1)(B).’’. 
(2) SOCIAL SECURITY ACT.—Section 211(a) of 
the Social Security Act is amended by striking 
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‘‘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 fol-
lowing 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)(2) of the Internal Rev-
enue Code of 1986 with respect to any entity, invest-
ment services partnership income or loss (as defined 
in section 1402(m) of such Code) shall be taken into 
account in determining the net earnings from self- 
employment of such individual.’’. 
(f) SEPARATE ACCOUNTING BY PARTNER.—Section 
702(a) is amended by striking ‘‘and’’ at the end of para-
graph (7), by striking the period at the end of paragraph 
(8) and inserting ‘‘, and’’, and by inserting after para-
graph (8) the following: 
‘‘(9) any amount treated as ordinary income or 
loss under subsection (a), (b), or (e) of section 
710.’’. 
(g) CONFORMING AMENDMENTS.— 
(1) Subsection (d) of section 731 is amended by 
inserting ‘‘section 710(b)(4) (relating to distribu-
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tions of partnership property),’’ after ‘‘to the extent 
otherwise provided by’’. 
(2) Section 741 is amended by inserting ‘‘or 
section 710 (relating to special rules for partners 
providing investment management services to part-
nerships)’’ before the period at the end. 
(3) 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 partnerships.’’. 
(4) Part IV of subchapter O of chapter 1 is 
amended by striking section 1061, and the table of 
sections for such part is amended by striking the 
item relating to section 1061. 
(h) 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 
the date of the enactment of this Act. 
(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 the date of the enact-
ment of this Act, the amount of the net capital gain 
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referred to in such section shall be treated as being 
the lesser of the net capital gain for the entire part-
nership taxable year or the net capital gain deter-
mined by only taking into account items attributable 
to the portion of the partnership taxable year which 
is after such date. 
(3) DISPOSITIONS
OF
PARTNERSHIP
INTER-
ESTS.— 
(A) IN GENERAL.—Section 710(b) of such 
Code (as added by this section) shall apply to 
dispositions and distributions after the date of 
the enactment of this Act. 
(B) INDIRECT DISPOSITIONS.—The amend-
ments made by subsection (b) shall apply to 
transactions after the date of the enactment of 
this Act. 
(4) OTHER INCOME AND GAIN IN CONNECTION 
WITH INVESTMENT MANAGEMENT SERVICES.—Sec-
tion 710(e) of such Code (as added by this section) 
shall take effect on the date of the enactment of this 
Act. 
Æ 
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