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subsection (b) shall not apply to any gain or 
loss allocable to invested capital. The portion of 
any gain or loss attributable to invested capital 
is the proportion of such gain or loss which is 
based on the distributive share of gain or loss 
that would have been allocable to invested cap-
ital under subparagraph (A) if the partnership 
sold all of its assets immediately before the dis-
position. 
‘‘(C) INVESTED
CAPITAL.—For purposes 
of this paragraph, the term ‘invested capital’ 
means, the fair market value at the time of con-
tribution of any money or other property con-
tributed to the partnership. 
‘‘(D) TREATMENT OF CERTAIN LOANS.— 
‘‘(i) 
PROCEEDS
OF
PARTNERSHIP 
LOANS NOT TREATED AS INVESTED CAP-
ITAL OF SERVICE PROVIDING PARTNERS.— 
For purposes of this paragraph, an invest-
ment services partnership interest shall not 
be treated as acquired on account of a con-
tribution of invested capital to the extent 
that such capital is attributable to the pro-
ceeds of any loan or other advance made or 
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guaranteed, directly or indirectly, by any 
partner or the partnership. 
‘‘(ii) LOANS FROM NONSERVICE PRO-
VIDING PARTNERS TO THE PARTNERSHIP 
TREATED
AS
INVESTED
CAPITAL.—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 to the part-
nership shall be treated as invested capital 
of such partner and amounts of income 
and loss treated as allocable to invested 
capital shall be adjusted accordingly. 
‘‘(d) 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 
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 
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the investment management services are per-
formed, 
any income or gain with respect to such interest 
shall be treated as ordinary income for the perform-
ance of services. Rules similar to the rules of sub-
section (c)(2) shall apply where such interest was ac-
quired on account of invested capital in such entity. 
‘‘(2) DEFINITIONS.—For purposes of this sub-
section— 
‘‘(A) DISQUALIFIED INTEREST.—The term 
‘disqualified interest’ means, with respect to 
any entity— 
‘‘(i) any interest in such entity other 
than indebtedness, 
‘‘(ii) convertible or contingent debt of 
such entity, 
‘‘(iii) any option or other right to ac-
quire property described in clause (i) or 
(ii), and 
‘‘(iv) any derivative instrument en-
tered into (directly or indirectly) with such 
entity or any investor in such entity. 
Such term shall not include a partnership inter-
est and shall not include stock in a taxable cor-
poration. 
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‘‘(B) TAXABLE CORPORATION.—The term 
‘taxable corporation’ means— 
‘‘(i) a domestic C corporation, or 
‘‘(ii) a foreign corporation subject to a 
comprehensive foreign income tax (as de-
fined in section 457A(d)(4)). 
‘‘(C) INVESTMENT
MANAGEMENT
SERV-
ICES.—The term ‘investment management serv-
ices’ means a substantial quantity of any of the 
services described in subsection (c)(1) which are 
provided in the conduct of the trade or business 
of providing such services. 
‘‘(e) REGULATIONS.—The Secretary shall prescribe 
such regulations as are necessary or appropriate to carry 
out the purposes of this section, including regulations to— 
‘‘(1) prevent the avoidance of the purposes of 
this section, and 
‘‘(2) coordinate this section with the other pro-
visions of this subchapter. 
‘‘(f) CROSS REFERENCE.—For 40 percent no fault 
penalty on certain underpayments due to the avoidance 
of this section, see section 6662.’’. 
(b) APPLICATION
TO REAL ESTATE INVESTMENT 
TRUSTS.—Subsection (c) of section 856 is amended by 
adding at the end the following new paragraph: 
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‘‘(8) EXCEPTION FROM RECHARACTERIZATION 
OF INCOME FROM INVESTMENT SERVICES PARTNER-
SHIP INTERESTS.— 
‘‘(A) IN GENERAL.—Paragraphs (2), (3), 
and (4) shall be applied without regard to sec-
tion 710 (relating to special rules for partners 
providing investment management services to 
partnership). 
‘‘(B) SPECIAL RULE FOR PARTNERSHIPS 
OWNED BY REITS.—Section 7704 shall be ap-
plied without regard to section 710 in the case 
of a partnership which meets each of the fol-
lowing requirements: 
‘‘(i) Such partnership is treated as 
publicly traded under section 7704 solely 
by reason of interests in such partnership 
being convertible into interests in a real es-
tate investment trust which is publicly 
traded. 
‘‘(ii) 50 percent or more of the capital 
and profits interests of such partnership 
are owned, directly or indirectly, at all 
times during the taxable year by such real 
estate investment trust (determined with 
the application of section 267(c)). 
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‘‘(iii) Such partnership meets the re-
quirements of paragraphs (2), (3), and (4) 
(applied without regard to section 710).’’. 
(c) IMPOSITION
OF
PENALTY
ON
UNDERPAY-
MENTS.— 
(1) IN
GENERAL.—Subsection (b) of section 
6662 is amended by inserting after paragraph (5) 
the following new paragraph: 
‘‘(6) The application of subsection (d) of section 
710 or the regulations prescribed under section 
710(e) 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: 
‘‘(i) 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)(6), 
subsection (a) shall be applied with respect to such portion 
by substituting ‘40 percent’ for ‘20 percent’.’’. 
(B) CONFORMING
AMENDMENTS.—Sub-
paragraph (B) of section 6662A(e)(2) is 
amended— 
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attributable to the portion of the partnership taxable 
year which is after such date. 
(3) DISPOSITIONS
OF
PARTNERSHIP
INTER-
ESTS.—Section 710(b) of the Internal Revenue Code 
of 1986 (as added by this section) shall apply to dis-
positions and distributions after November 1, 2007. 
(4) OTHER INCOME AND GAIN IN CONNECTION 
WITH INVESTMENT MANAGEMENT SERVICES.—Sec-
tion 710(d) of such Code (as added by this section) 
shall take effect on November 1, 2007. 
(5) PUBLICLY
TRADED
PARTNERSHIPS.—For 
purposes of applying section 7704, the amendments 
made by this section shall apply to taxable years be-
ginning after December 31, 2009. 
SEC. 612. INDEBTEDNESS INCURRED BY A PARTNERSHIP IN 
ACQUIRING SECURITIES AND COMMODITIES 
NOT TREATED AS ACQUISITION INDEBTED-
NESS 
FOR 
ORGANIZATIONS 
WHICH 
ARE 
PARTNERS WITH LIMITED LIABILITY. 
(a) IN GENERAL.—Subsection (c) of section 514 (re-
lating to acquisition indebtedness) is amended by adding 
at the end the following new paragraph: 
‘‘(10) SECURITIES
AND
COMMODITIES
AC-
QUIRED BY PARTNERSHIPS IN WHICH AN ORGANIZA-
TION IS A PARTNER WITH LIMITED LIABILITY.— 
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‘‘(A) IN GENERAL.—In the case of any or-
ganization which is a partner with limited liabil-
ity in a partnership, the term ‘acquisition in-
debtedness’ does not, for purposes of this sec-
tion, include indebtedness incurred or continued 
by such partnership in purchasing or carrying 
any qualified security or commodity. 
‘‘(B) QUALIFIED
SECURITY
OR
COM-
MODITY.—For purposes of this paragraph, the 
term ‘qualified security or commodity’ means 
any security (as defined in section 475(c)(2) 
without regard to the last sentence thereof), 
any 
commodity 
(as 
defined 
in 
section 
475(e)(2)), or any option or derivative contract 
with respect to such a security or commodity. 
‘‘(C) APPLICATION TO TIERED PARTNER-
SHIPS
AND
OTHER
PASS-THRU
ENTITIES.— 
Rules similar to the rules of subparagraph (A) 
shall apply in the case of tiered partnerships 
and other pass-thru entities. 
‘‘(D) REGULATIONS.—The Secretary may 
prescribe such regulations as may be necessary 
or appropriate to carry out the purposes of this 
paragraph, including regulations to prevent the 
abuse of this paragraph.’’. 
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(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
the date of the enactment of this Act. 
SEC. 613. APPLICATION TO PARTNERSHIP INTERESTS AND 
TAX SHARING AGREEMENTS OF RULE TREAT-
ING CERTAIN GAIN ON SALES BETWEEN RE-
LATED PERSONS AS ORDINARY INCOME. 
(a) PARTNERSHIP INTERESTS.—Subsection (a) of 
section 1239 is amended to read as follows: 
‘‘(a) TREATMENT OF GAIN AS ORDINARY INCOME.— 
In the case of a sale or exchange of property, directly or 
indirectly, between related persons, any gain recognized to 
the transferor shall be treated as ordinary income if— 
‘‘(1) such property is, in the hands of the trans-
feree, of a character which is subject to the allow-
ance for depreciation provided in section 167, or 
‘‘(2) such property is an interest in a partner-
ship, but only to the extent of gain attributable to 
unrealized appreciation in property which is of a 
character subject to the allowance for depreciation 
provided in section 167.’’. 
(b) TAX SHARING AGREEMENTS.—Section 1239 (re-
lating to gain from sale of depreciable property between 
certain related taxpayers) is amended by adding at the 
end the following new subsection: 
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‘‘(f) APPLICATION
TO
TAX
SHARING
AGREE-
MENTS.— 
‘‘(1) IN GENERAL.—If there is a tax sharing 
agreement with respect to any sale or exchange, the 
transferee and the transferor shall be treated as re-
lated persons for purposes of this section. 
‘‘(2) TAX SHARING AGREEMENT.—For purposes 
of this subsection, the term ‘tax sharing agreement’ 
means any agreement which provides for the pay-
ment to the transferor of any amount which is deter-
mined by reference to any portion of the tax benefit 
realized by the transferee with respect to the depre-
ciation (or amortization) of the property trans-
ferred.’’. 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall apply to sales and exchanges after the date of 
the enactment of this Act. 
(2) EXCEPTION
FOR
BINDING
CONTRACTS.— 
The amendment made by subsection (b) shall not 
apply to any sale or exchange pursuant to a written 
binding contract which includes a tax sharing agree-
ment and which is in effect on November 1, 2007, 
and not modified thereafter in any material respect. 
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Subtitle C—Other Provisions 
SEC. 621. DELAY IN APPLICATION OF WORLDWIDE ALLOCA-
TION OF INTEREST. 
(a) IN GENERAL.—Paragraphs (5)(D) and (6) of sec-
tion 864(f) are each amended by striking ‘‘December 31, 
2008’’ and inserting ‘‘December 31, 2017’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2008. 
SEC. 622. BROKER REPORTING OF CUSTOMER’S BASIS IN 
SECURITIES TRANSACTIONS. 
(a) IN GENERAL.— 
(1) BROKER
REPORTING
FOR
SECURITIES 
TRANSACTIONS.—Section 6045 (relating to returns 
of brokers) is amended by adding at the end the fol-
lowing new subsection: 
‘‘(g) ADDITIONAL INFORMATION REQUIRED IN THE 
CASE OF SECURITIES TRANSACTIONS.— 
‘‘(1) IN GENERAL.—If a broker is otherwise re-
quired to make a return under subsection (a) with 
respect to the gross proceeds of the sale of a covered 
security, the broker shall include in such return the 
information described in paragraph (2). 
‘‘(2) ADDITIONAL INFORMATION REQUIRED.— 
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‘‘(A) IN GENERAL.—The information re-
quired under paragraph (1) to be shown on a 
return with respect to a covered security of a 
customer shall include the customer’s adjusted 
basis in such security and whether any gain or 
loss with respect to such security is long-term 
or short-term (within the meaning of section 
1222). 
‘‘(B) 
DETERMINATION
OF
ADJUSTED 
BASIS.—For purposes of subparagraph (A)— 
‘‘(i) IN
GENERAL.—The customer’s 
adjusted basis shall be determined— 
‘‘(I) in the case of any stock 
(other than any stock in an open-end 
fund), in accordance with the first-in 
first-out method unless the customer 
notifies the broker by means of mak-
ing an adequate identification of the 
stock sold or transferred, 
‘‘(II) in the case of any stock in 
an open-end fund acquired before 
January 1, 2011, in accordance with 
any acceptable method under section 
1012 with respect to the account in 
which such interest is held, 
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‘‘(III) in the case of any stock in 
an open-end fund acquired after De-
cember 31, 2010, in accordance with 
the broker’s default method unless the 
customer notifies the broker that he 
elects 
another 
acceptable 
method 
under section 1012 with respect to the 
account in which such interest is held, 
and 
‘‘(IV) in any other case, under 
the method for making such deter-
mination under section 1012. 
‘‘(ii) EXCEPTION FOR WASH SALES.— 
Except as otherwise provided by the Sec-
retary, the customer’s adjusted basis shall 
be determined without regard to section 
1091 (relating to loss from wash sales of 
stock or securities) unless the transactions 
occur in the same account with respect to 
identical securities. 
‘‘(3) COVERED
SECURITY.—For purposes of 
this subsection— 
‘‘(A) IN GENERAL.—The term ‘covered se-
curity’ means any specified security acquired on 
or after the applicable date if such security— 
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‘‘(i) was acquired through a trans-
action in the account in which such secu-
rity is held, or 
‘‘(ii) was transferred to such account 
from an account in which such security 
was a covered security, but only if the 
broker received a statement under section 
6045A with respect to the transfer. 
‘‘(B) SPECIFIED
SECURITY.—The term 
‘specified security’ means— 
‘‘(i) any share of stock in a corpora-
tion, 
‘‘(ii) any note, bond, debenture, or 
other evidence of indebtedness, 
‘‘(iii) any commodity, or contract or 
derivative with respect to such commodity, 
if the Secretary determines that adjusted 
basis reporting is appropriate for purposes 
of this subsection, and 
‘‘(iv) any other financial instrument 
with respect to which the Secretary deter-
mines that adjusted basis reporting is ap-
propriate for purposes of this subsection. 
‘‘(C) APPLICABLE DATE.—The term ‘appli-
cable date’ means— 
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‘‘(i) January 1, 2009, in the case of 
any specified security which is stock in a 
corporation, and 
‘‘(ii) January 1, 2011, or such later 
date determined by the Secretary in the 
case of any other specified security. 
‘‘(4) OPEN-END FUND.—For purposes of this 
subsection, the term ‘open-end fund’ means a regu-
lated investment company (as defined in section 
851) which is offering for sale or has outstanding 
any redeemable security of which it is the issuer and 
the shares of which are not traded on an established 
securities exchange.’’. 
(2) BROKER INFORMATION REQUIRED WITH RE-
SPECT TO OPTIONS.—Section 6045, as amended by 
subsection (a), is amended by adding at the end the 
following new subsection: 
‘‘(h) APPLICATION TO OPTIONS ON COVERED SECU-
RITIES.— 
‘‘(1) EXERCISE OF OPTION.—For purposes of 
this section, in the case of any exercise of an option 
on a covered security where the taxpayer is the 
grantor of the option and the option was acquired in 
the same account as the covered security, the 
amount received for the grant of an option on a cov-
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ered security shall be treated as an adjustment to 
gross proceeds or as an adjustment to basis, as the 
case may be. A similar rule shall apply in the case 
of the exercise of an option where the taxpayer is 
not the grantor of the option. 
‘‘(2) LAPSE OR CLOSING TRANSACTION.—For 
purposes of this section, in the case of the lapse (or 
closing 
transaction 
(as 
defined 
in 
section 
1234(b)(2)(A))) of an option on a covered security 
where the taxpayer is the grantor of the option, this 
section shall apply as if the premium received for 
such option were gross proceeds received on the date 
of the lapse or closing transaction, and the cost (if 
any) of the closing transaction shall be taken into 
account as adjusted basis. A similar rule shall apply 
in the case of a lapse or closing transaction where 
the taxpayer is not the grantor of the option. 
‘‘(3) PROSPECTIVE APPLICATION.—Paragraphs 
(1) and (2) shall not apply to any option which is 
granted or acquired before January 1, 2011. 
‘‘(4) COVERED
SECURITY.—For purposes of 
this subsection, the term ‘covered security’ shall 
have the meaning given such term in subsection 
(g)(3).’’. 
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(3) EXTENSION OF PERIOD FOR STATEMENTS 
SENT TO CUSTOMERS.— 
(A) IN GENERAL.—Subsection (b) of sec-
tion 6045 is amended by striking ‘‘January 31’’ 
and inserting ‘‘February 15’’. 
(B) STATEMENTS
RELATED
TO
SUB-
STITUTE PAYMENTS.—Subsection (d) of section 
6045 is amended— 
(i) by striking ‘‘at such time and’’, 
and 
(ii) by inserting after ‘‘other item.’’ 
the following new sentence: ‘‘The written 
statement required under the preceding 
sentence shall be furnished on or before 
February 15 of the year following the cal-
endar year during which such payment was 
made.’’. 
(C) OTHER STATEMENTS.—Subsection (b) 
of section 6045 is amended by adding at the 
end the following: ‘‘In the case of a consolidated 
reporting statement (as defined in regulations) 
with respect to any account which includes the 
statement required by this subsection, any 
statement which would otherwise be required to 
be furnished on or before January 31 under 
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103 
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‘‘(J) subsections (c) and (e) of section 
6045B (relating to returns relating to actions 
affecting basis of specified securities).’’. 
(3) CLERICAL AMENDMENT.—The table of sec-
tions for subpart B of part III of subchapter A of 
chapter 61 of such Code, as amended by subsection 
(b)(3), is amended by inserting after the item relat-
ing to section 6045A the following new item: 
‘‘Sec. 6045B. Returns relating to actions affecting basis of specified securi-
ties.’’. 
(e) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on January 1, 2009. 
SEC. 623. MODIFICATION OF PENALTY FOR FAILURE TO 
FILE PARTNERSHIP RETURNS. 
Section 6698 is amended by adding at the end the 
following new subsection: 
‘‘(e) MODIFICATIONS.—In the case of any return re-
quired to be filed after the date of the enactment of this 
subsection— 
‘‘(1) the dollar amount in effect under sub-
section (b)(1) shall be increased by $25, and 
‘‘(2) the limitation on the number of months 
taken into account under subsection (a) shall not be 
less than 12 months.’’. 
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