I 
111TH CONGRESS 
1ST SESSION H. R. 1935 
To amend the Internal Revenue Code of 1986 to provide for the treatment 
of partnership interests held by partners providing services. 
IN THE HOUSE OF REPRESENTATIVES 
APRIL 2, 2009 
Mr. LEVIN 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 treatment of partnership interests held by part-
ners providing services. 
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. PARTNERSHIP INTERESTS TRANSFERRED IN 
CONNECTION WITH PERFORMANCE OF SERV-
ICES. 
(a) MODIFICATION TO ELECTION TO INCLUDE PART-
NERSHIP INTEREST
IN GROSS INCOME
IN YEAR
OF 
TRANSFER.—Subsection (c) of section 83 of the Internal 
Revenue Code of 1986 is amended by redesignating para-
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graph (4) as paragraph (5) and by inserting after para-
graph (3) the following new paragraph: 
‘‘(4) PARTNERSHIP
INTERESTS.—Except as 
provided by the Secretary, in the case of any trans-
fer of an interest in a partnership in connection with 
the performance of services for (or on behalf of) 
such partnership— 
‘‘(A) the fair market value of such interest 
shall be treated for purposes of this section as 
being equal to the amount of the distribution 
which the partner would receive if the partner-
ship sold (at the time of the transfer) all of its 
assets at fair market value and distributed the 
proceeds of such sale (reduced by the liabilities 
of the partnership) to its partners in liquidation 
of the partnership, and 
‘‘(B) the person receiving such interest 
shall be treated as having made the election 
under subsection (b)(1) unless such person 
makes an election under this paragraph to have 
such subsection not apply.’’. 
(b) CONFORMING AMENDMENT.—Paragraph (2) of 
section 83(b) of such Code is amended by inserting ‘‘or 
subsection (c)(4)(B)’’ after ‘‘paragraph (1)’’. 
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(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to interests in partnerships trans-
ferred after the date of the enactment of this Act. 
SEC. 2. INCOME OF PARTNERS FOR PERFORMING INVEST-
MENT MANAGEMENT SERVICES TREATED AS 
ORDINARY 
INCOME 
RECEIVED 
FOR 
PER-
FORMANCE OF SERVICES. 
(a) IN GENERAL.—Part I of subchapter K of chapter 
1 of the Internal Revenue Code of 1986 is amended by 
adding at the end the following new section: 
‘‘SEC. 710. SPECIAL RULES FOR PARTNERS PROVIDING IN-
VESTMENT 
MANAGEMENT 
SERVICES 
TO 
PARTNERSHIP. 
‘‘(a) TREATMENT
OF
DISTRIBUTIVE
SHARE
OF 
PARTNERSHIP ITEMS.—For purposes of this title, in the 
case of an investment services partnership interest— 
‘‘(1) IN
GENERAL.—Notwithstanding section 
702(b)— 
‘‘(A) any net income with respect to such 
interest for any partnership taxable year shall 
be treated as ordinary income, and 
‘‘(B) any net loss with respect to such in-
terest for such year, to the extent not dis-
allowed under paragraph (2) for such year, 
shall be treated as an ordinary loss. 
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All items of income, gain, deduction, and loss which 
are taken into account in computing net income or 
net loss shall be treated as ordinary income or ordi-
nary loss (as the case may be). 
‘‘(2) TREATMENT OF LOSSES.— 
‘‘(A) LIMITATION.—Any net loss with re-
spect to such interest shall be allowed for any 
partnership taxable year only to the extent that 
such loss does not exceed the excess (if any) 
of— 
‘‘(i) the aggregate net income with re-
spect to such interest for all prior partner-
ship taxable years, over 
‘‘(ii) the aggregate net loss with re-
spect to such interest not disallowed under 
this subparagraph for all prior partnership 
taxable years. 
‘‘(B) CARRYFORWARD.—Any net loss for 
any partnership taxable year which is not al-
lowed by reason of subparagraph (A) shall be 
treated as an item of loss with respect to such 
partnership interest for the succeeding partner-
ship taxable year. 
‘‘(C) BASIS ADJUSTMENT.—No adjustment 
to the basis of a partnership interest shall be 
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made on account of any net loss which is not 
allowed by reason of subparagraph (A). 
‘‘(D) PRIOR
PARTNERSHIP
YEARS.—Any 
reference in this paragraph to prior partnership 
taxable years shall only include prior partner-
ship taxable years to which this section applies. 
‘‘(3) NET INCOME AND LOSS.—For purposes of 
this section— 
‘‘(A) NET
INCOME.—The term ‘net in-
come’ means, with respect to any investment 
services partnership interest for any partner-
ship taxable year, the excess (if any) of— 
‘‘(i) all items of income and gain 
taken into account by the holder of such 
interest under section 702 with respect to 
such interest for such year, over 
‘‘(ii) all items of deduction and loss so 
taken into account. 
‘‘(B) NET
LOSS.—The term ‘net loss’ 
means, with respect to such interest for such 
year, the excess (if any) of the amount de-
scribed in subparagraph (A)(ii) over the amount 
described in subparagraph (A)(i). 
‘‘(b) DISPOSITIONS OF PARTNERSHIP INTERESTS.— 
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‘‘(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 a 
partnership which is held by any person if it was 
reasonably expected (at the time that such person 
acquired such interest) that such person (or any per-
son related to such person) would provide (directly 
or indirectly) a substantial quantity of any of the 
following services: 
‘‘(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). 
For purposes of this paragraph, 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-
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tion 475(e)(2)), or options or derivative contracts 
with respect to any of the foregoing. 
‘‘(2) EXCEPTION FOR CERTAIN CAPITAL INTER-
ESTS.— 
‘‘(A) IN
GENERAL.—In the case of any 
portion of an investment services partnership 
interest which is a qualified capital interest, all 
items of income, gain, loss, and deduction which 
are allocated to such qualified capital interest 
shall not be taken into account under sub-
section (a) if— 
‘‘(i) allocations of items are made by 
the partnership to such qualified capital 
interest in the same manner as such allo-
cations are made to other qualified capital 
interests held by partners who do not pro-
vide any services described in paragraph 
(1) and who are not related to the partner 
holding the qualified capital interest, and 
‘‘(ii) the allocations made to such 
other interests are significant compared to 
the allocations made to such qualified cap-
ital interest. 
‘‘(B) SPECIAL RULE FOR DISPOSITIONS.— 
In the case of any investment services partner-
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ship 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— 
‘‘(i) the distributive share of gain or 
loss that would have been allocable to the 
qualified capital interest under subpara-
graph (A) if the partnership sold all of its 
assets immediately before the disposition, 
bears to 
‘‘(ii) the distributive share of gain or 
loss that would have been so allocable to 
the investment services partnership inter-
est of which such qualified capital interest 
is a part. 
‘‘(C) QUALIFIED CAPITAL INTEREST.—For 
purposes of this paragraph, 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, 
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‘‘(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 for 
taxable years to which this section ap-
plies, over 
‘‘(II) any items of deduction and 
loss so taken into account. 
The qualified capital interest shall be reduced 
by distributions from the partnership to the 
partner and by the excess (if any) of the 
amount described in clause (iii)(II) over the 
amount described in clause (iii)(I). 
‘‘(D) TREATMENT OF CERTAIN LOANS.— 
‘‘(i) 
PROCEEDS
OF
PARTNERSHIP 
LOANS NOT TREATED AS QUALIFIED CAP-
ITAL
INTEREST
OF
SERVICE
PROVIDING 
PARTNERS.—For purposes of this para-
graph, an investment services partnership 
interest shall not be treated as a qualified 
capital interest to the extent that such in-
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terest is acquired in connection with the 
proceeds of any loan or other advance 
made or guaranteed, directly or indirectly, 
by any partner or the partnership (or any 
person related to any such partner or the 
partnership). 
‘‘(ii) REDUCTION IN ALLOCATIONS TO 
QUALIFIED
CAPITAL
INTERESTS
FOR 
LOANS
FROM
NONSERVICE
PROVIDING 
PARTNERS
TO
THE
PARTNERSHIP.—For 
purposes of this paragraph, any loan or 
other advance to the partnership made or 
guaranteed, directly or indirectly, by a 
partner not providing services described in 
paragraph (1) to the partnership (or any 
person related to such partner) shall be 
taken into account as invested capital of 
such partner. 
‘‘(3) RELATED
PERSONS.—A person shall be 
treated as related to another person if the relation-
ship between such persons would result in a dis-
allowance of losses under section 267 or 707(b). 
‘‘(d) OTHER INCOME
AND GAIN
IN CONNECTION 
WITH INVESTMENT MANAGEMENT SERVICES.— 
‘‘(1) IN GENERAL.—If— 
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‘‘(A) a person performs (directly or indi-
rectly) investment management services for any 
entity, 
‘‘(B) such person holds a disqualified in-
terest 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 subsection (c)(2) shall apply where such 
interest was acquired on account of invested capital 
in such entity. 
‘‘(2) DEFINITIONS.—For purposes of this sub-
section— 
‘‘(A) DISQUALIFIED INTEREST.— 
‘‘(i) IN
GENERAL.—The term ‘dis-
qualified interest’ means, with respect to 
any entity— 
‘‘(I) any interest in such entity 
other than indebtedness, 
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