qualified capital interests in any upper-tier partner-
ship. 
‘‘(5) 
EXCEPTION
FOR
NO-SELF-CHARGED 
CARRY
AND
MANAGEMENT
FEE
PROVISIONS.—Ex-
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 
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‘‘(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. 
‘‘(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. 
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‘‘(B) ADJUSTMENT TO QUALIFIED CAPITAL 
INTEREST.— 
‘‘(i) DISTRIBUTIONS
AND
LOSSES.— 
The qualified capital interest shall be re-
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) TECHNICAL
TERMINATIONS, 
ETC., 
DISREGARDED.—No increase or decrease in the 
qualified capital interest of any partner shall re-
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sult from a termination, merger, consolidation, 
or division described in section 708, or any 
similar transaction. 
‘‘(8) TREATMENT OF CERTAIN LOANS.— 
‘‘(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-
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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 
(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 
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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 
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 
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‘‘(III) any other person (not de-
scribed in subclause (I) or (II)) if 
such interest is an investment services 
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— 
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‘‘(A) a person performs (directly or indi-
rectly) investment management services for any 
investment entity, 
‘‘(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, 
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‘‘(II) convertible or contingent 
debt of such entity, 
‘‘(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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