rived in taxable years beginning more than 2 years 
after the date of the enactment of this subsection.’’. 
TITLE V—BUSINESS RELATED 
TAX EXPENDITURES 
Subtitle A—Partnership Interests 
Held 
by 
Partners 
Providing 
Services 
SEC. 501. 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 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, in the case of any trans-
fer of an interest in a partnership in connection with 
the provision of services to (or for the benefit 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 
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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) is amended by inserting ‘‘or subsection 
(c)(4)(B)’’ after ‘‘paragraph (1)’’. 
(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. 502. INCOME OF PARTNERS FOR PERFORMING IN-
VESTMENT MANAGEMENT SERVICES TREAT-
ED AS ORDINARY INCOME RECEIVED FOR 
PERFORMANCE OF SERVICES. 
(a) IN GENERAL.—Part I of subchapter K of chapter 
1 is amended by adding at the end the following new sec-
tion: 
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‘‘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. 
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— 
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‘‘(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 
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 
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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.— 
‘‘(1) GAIN.—Any gain on the disposition of an 
investment services partnership interest shall be 
treated as ordinary income and shall be recognized 
notwithstanding any other provision of this subtitle. 
‘‘(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 net income with respect 
to such interest for all partnership taxable 
years, over 
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‘‘(B) the aggregate net loss with respect to 
such interest allowed under subsection (a)(2) 
for all partnership taxable years. 
‘‘(3) DISPOSITION OF PORTION OF INTEREST.— 
In the case of any disposition of an investment serv-
ices partnership interest, the amount of net loss 
which otherwise would have (but for subsection 
(a)(2)(C)) applied to reduce the basis of such inter-
est shall be disregarded for purposes of this section 
for all succeeding partnership taxable years. 
‘‘(4) DISTRIBUTIONS OF PARTNERSHIP PROP-
ERTY.—In the case of any distribution of property 
by a partnership with respect to any investment 
services partnership interest held by a partner— 
‘‘(A) 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 the partnership, 
shall be taken into account as an increase in 
such partner’s distributive share of the taxable 
income of the partnership (except to the extent 
such excess is otherwise taken into account in 
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