(i) by striking ‘‘limited partners or’’ 
each place it appears in subsections 
(e)(3)(B) and (f)(4), 
(ii) by striking ‘‘a limited partner or’’ 
in subsection (e)(3)(C), and 
(iii) by striking ‘‘limited partner or’’ 
both places it appears in the heading and 
text of subsection (e)(4)(A)(i). 
(C) Section 1258(d)(5)(C) of such Code is 
amended— 
(i) by striking ‘‘limited partner or’’ in 
the matter preceding subclause (i), 
(ii) by striking ‘‘limited partner’s (or 
limited entrepreneur’s) in subclause (i) and 
inserting ‘‘limited entrepreneur’s’’, and 
(iii) by striking ‘‘partners and lim-
ited’’ in the heading. 
(b) PASSIVE LOSS RULES.— 
(1) Subsection (h) of section 469 of such Code 
is amended by striking paragraph (2) and by redes-
ignating paragraphs (3), (4), and (5) as paragraphs 
(2), (3), and (4), respectively. 
(2) Subparagraph (A) of section 469(c)(7) of 
such Code is amended by striking the last sentence.
(3) Paragraph (6) of section 469(i) of such 
Code is amended by striking subparagraph (C) and 
by redesignating subparagraph (D) as subparagraph 
(C). 
(4) Subsection (f) of section 772 of such Code 
(relating to special rules for applying passive loss 
limitations) is amended to read as follows: 
‘‘(f) SPECIAL RULES FOR APPLYING PASSIVE LOSS 
LIMITATIONS.— 
‘‘(1) IN GENERAL.—If any person holds an in-
terest in an electing large partnership other than as 
a partner described in paragraph (3)— 
‘‘(A) paragraph (2) of subsection (c) shall 
not apply to such partner, and 
‘‘(B) such partner’s distributive share of 
the partnership items allocable to passive loss 
limitation activities shall be taken into account 
separately to the extent necessary to comply 
with the provisions of section 469. 
‘‘(2) EXCEPTION.—Paragraph (1) shall not 
apply to any items allocable to an interest held as 
a partner described in paragraph (3). 
‘‘(3) PARTNER DESCRIBED.—For purposes of 
this subsection, a partner is described in this para-
graph if the partner is a person whose participation
in the management or business activity of the part-
nership is limited under applicable State law.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2004. 
SEC. 4. PARTNERSHIP INCOME ATTRIBUTABLE TO CAPITAL 
EXCLUDED 
FROM 
NET 
EARNINGS 
FROM 
SELF-EMPLOYMENT. 
(a) IN
GENERAL.—Paragraph (13) of section 
1402(a) of the Internal Revenue Code of 1986 is amended 
to read as follows: 
‘‘(13) there shall be excluded the distributive 
share of net income of a partner attributable to cap-
ital;’’. 
(b) PARTNERSHIP INCOME ATTRIBUTABLE TO CAP-
ITAL.—Section 1402 of such Code is amended by adding 
at the end the following new subsection: 
‘‘(l) PARTNERSHIP INCOME ATTRIBUTABLE TO CAP-
ITAL.— 
‘‘(1) IN GENERAL.—For purposes of subsection 
(a)(13), the following amounts shall be treated as in-
come attributable to capital— 
‘‘(A) the amount, if any, in excess of what 
would constitute reasonable compensation for
services rendered by such partner to the part-
nership, and 
‘‘(B) an amount equal to a reasonable rate 
of return on unreturned capital of the partner 
determined as of the beginning of the taxable 
year. 
‘‘(2) DEFINITIONS.—For purposes of paragraph 
(1)— 
‘‘(A) UNRETURNED
CAPITAL.—The term 
‘unreturned capital’ means the excess of the ag-
gregate amount of money and the fair market 
value as of the date of contribution of other 
consideration (net of liabilities) contributed by 
the partner over the aggregate amount of 
money and the fair market value as of the date 
of distribution of other consideration (net of li-
abilities) distributed by the partnership to the 
partner, increased or decreased for the part-
ner’s distributive share of all reportable items 
as determined in section 702. If the partner ac-
quires a partnership interest and the partner-
ship makes an election under section 754, the 
partner’s unreturned capital shall take into ac-
count appropriate adjustments under section 
743.
‘‘(B) REASONABLE RATE OF RETURN.—A 
reasonable rate of return on unreturned capital 
shall equal 150 percent (or such higher rate as 
is established in regulations) of the highest ap-
plicable Federal rate, as determined under sec-
tion 1274(d)(1), at the beginning of the part-
nership’s taxable year. 
‘‘(3) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary to carry 
out the purposes of this subsection.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply with respect to services performed 
in taxable years beginning after December 31, 2004. 
SEC. 5. REPEAL OF ABILITY TO ELECT LARGE PARTNER-
SHIP REPORTING RULES. 
(a) IN GENERAL.—Paragraph (2) of section 775(a) 
of the Internal Revenue Code of 1986 (relating to election) 
is amended by adding at the end the following: ‘‘No elec-
tion under this subsection shall be made after December 
31, 2004.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to partnership taxable years begin-
ning after December 31, 2004. 
Æ