Amends the Internal Revenue Code to: (1) to set forth a special rule for the inclusion in gross income of partnership interests transferred in connection with the performance of services; (2) treat as ordinary income or loss net income or loss from an investment services partnership interest; (3) include income and loss from an investment services partnership interest for purposes of determining net earnings from self-employment; (4) apply the rule treating gain from sales between related persons as ordinary income to certain partnership interests; and (5) exempt income from investment services partnership interests from treatment as qualifying income of publicly traded partnerships.
Defines "investment services partnership interest" as any interest in a partnership held by a person who provides services to a partnership by: (1) advising the partnership about investing in, purchasing, or selling specified assets; (2) managing, acquiring, or disposing of specified assets; or (3) arranging financing with respect to acquiring specified assets.
[Congressional Bills 111th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1935 Introduced in House (IH)]
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 partners providing services.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. PARTNERSHIP INTERESTS TRANSFERRED IN CONNECTION WITH
PERFORMANCE OF SERVICES.
(a) Modification to Election To Include Partnership Interest in
Gross Income in Year of Transfer.--Subsection (c) of section 83 of the
Internal Revenue Code of 1986 is amended by redesignating paragraph (4)
as paragraph (5) and by inserting after paragraph (3) the following new
paragraph:
``(4) Partnership interests.--Except as provided by the
Secretary, in the case of any transfer 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 partnership 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)''.
(c) Effective Date.--The amendments made by this section shall
apply to interests in partnerships transferred after the date of the
enactment of this Act.
SEC. 2. INCOME OF PARTNERS FOR PERFORMING INVESTMENT MANAGEMENT
SERVICES TREATED AS ORDINARY INCOME RECEIVED FOR
PERFORMANCE 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 INVESTMENT 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 interest
for such year, to the extent not disallowed 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 ordinary loss (as the case may
be).
``(2) Treatment of losses.--
``(A) Limitation.--Any net loss with respect 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 respect
to such interest for all prior partnership
taxable years, over
``(ii) the aggregate net loss with respect
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 allowed by reason
of subparagraph (A) shall be treated as an item of loss
with respect to such partnership interest for the
succeeding partnership 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 partnership taxable years to which
this section applies.
``(3) Net income and loss.--For purposes of this section--
``(A) Net income.--The term `net income' means,
with respect to any investment services partnership
interest for any partnership 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 described 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 excess (if any) of--
``(A) the aggregate net income with respect to such
interest for all partnership taxable years, over
``(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 services partnership interest,
the amount of net loss which otherwise would have (but for
subsection (a)(2)(C)) applied to reduce the basis of such
interest shall be disregarded for purposes of this section for
all succeeding partnership taxable years.
``(4) Distributions of partnership property.--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 property
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 determining the taxable
income of the partnership),
``(B) such property shall be treated for purposes
of subpart B of part II as money distributed to such
partner in an amount equal to such fair market value,
and
``(C) the basis of such property in the hands of
such partner shall be such fair market value.
Subsection (b) of section 734 shall be applied without regard
to the preceding sentence.
``(5) Application of section 751.--In applying section
751(a), an investment services partnership interest shall be
treated as an inventory item.
``(c) Investment Services Partnership Interest.--For purposes of
this section--
``(1) In general.--The term `investment services
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 person 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 investing
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 thereof), real estate held for
rental or investment, interests in partnerships, commodities
(as defined in section 475(e)(2)), or options or derivative
contracts with respect to any of the foregoing.
``(2) Exception for certain capital interests.--
``(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 subsection (a) if--
``(i) allocations of items are made by the
partnership to such qualified capital interest
in the same manner as such allocations are made
to other qualified capital interests held by
partners who do not provide 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 capital
interest.
``(B) 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 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 subparagraph
(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 interest 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,
``(ii) any amounts which have been included
in gross income under section 83 with respect
to the transfer of such interest, 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
applies, 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 capital interest of
service providing partners.--For purposes of
this paragraph, an investment services
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
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 relationship between such
persons would result in a disallowance of losses under section
267 or 707(b).
``(d) Other Income and Gain in Connection With Investment
Management Services.--
``(1) In general.--If--
``(A) a person performs (directly or indirectly)
investment management services for any entity,
``(B) such person holds a disqualified interest
with respect to such entity, and
``(C) the value of such interest (or payments
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 performed,
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 subsection--
``(A) Disqualified interest.--
``(i) In general.--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 acquire property described in
subclause (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) stock 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 substantially
all of the income of which is--
``(I) effectively connected with
the conduct of a trade or business in
the United States, or
``(II) subject to a comprehensive
foreign income tax (as defined in
section 457A(d)(2)).
``(C) Investment management services.--The term
`investment management services' means a substantial
quantity of any of the services described in subsection
(c)(1).
``(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) provide modifications to the application of this
section (including treating related persons as not related to
one another) to the extent such modification is consistent with
the purposes of this section,
``(2) prevent the avoidance of the purposes of this
section, and
``(3) coordinate this section with the other provisions of
this title.
``(f) Cross Reference.--For 40 percent no fault penalty on certain
underpayments due to the avoidance of this section, see section
6662.''.
(b) Income From Investment Services Partnership Interests Not
Treated as Qualifying Income of Publicly Traded Partnerships.--
Subsection (d) of section 7704 of such Code is amended by adding at the
end the following new paragraph:
``(6) Income from investment services partnership interests
not qualified.--
``(A) In general.--Items of income and gain shall
not be treated as qualifying income if such items are
treated as ordinary income by reason of the application
of section 710 (relating to special rules for partners
providing investment management services to
partnership).
``(B) Special rules for certain partnerships.--
``(i) Certain partnerships owned by real
estate investment trusts.--Subparagraph (A)
shall not apply in the case of a partnership
which meets each of the following requirements:
``(I) Such partnership is treated
as publicly traded under this section
solely by reason of interests in such
partnership being convertible into
interests in a real estate 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)).
``(III) Such partnership meets the
requirements of paragraphs (2), (3),
and (4) of section 856(c).
``(ii) Certain partnerships owning other
publicly traded partnerships.--Subparagraph (A)
shall not apply in the case of a partnership
which meets each of the following requirements:
``(I) Substantially all of the
assets of such partnership consist of
interests in one or more other
partnerships which are traded on an
established securities market.
``(II) Substantially all of the
income of such partnership is ordinary
income or section 1231 gain (as defined
in section 1231(a)(3)).
``(C) Transitional rule.--In the case of a
partnership in existence on the date of the enactment
of this paragraph, subparagraph (A) shall not apply to
any taxable year of the partnership beginning before
the date which is 10 years after the date of the
enactment of this paragraph.''.
(c) Imposition of Penalty on Underpayments.--
(1) In general.--Subsection (b) of section 6662 of such
Code 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 of such Code is
amended by adding at the end the following new
subsection:
``(i) Increase in Penalty in Case of Property Transferred for
Investment Management Services.--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.--Subparagraph (B) of
section 6662A(e)(2) of such Code is amended--
(i) by striking ``section 6662(h)'' and
inserting ``subsection (h) or (i) of section
6662'', and
(ii) by striking ``gross valuation
misstatement penalty'' in the heading and
inserting ``certain increased underpayment
penalties''.
(3) Reasonable cause exception not applicable.--Subsection
(c) of section 6664 of such Code is amended--
(A) by redesignating paragraphs (2) and (3) as
paragraphs (3) and (4), respectively,
(B) by striking ``paragraph (2)'' in paragraph (4),
as so redesignated, and inserting ``paragraph (3)'',
and
(C) by inserting after paragraph (1) the following
new paragraph:
``(2) Exception.--Paragraph (1) shall not apply to any
portion of an underpayment to which this section applies by
reason of subsection (b)(6).''.
(d) Income and Loss From Investment Services Partnership Interests
Taken Into Account in Determining Net Earning From Self-Employment.--
(1) Internal revenue code.--Section 1402(a) of such Code is
amended by striking ``and'' at the end of paragraph (16), by
striking the period at the end of paragraph (17) and inserting
``; and'', and by inserting after paragraph (17) the following
new paragraph:
``(18) notwithstanding the preceding provisions of this
subsection, any amount treated as ordinary income or ordinary
loss of any individual under section 710 shall be taken into
account in determining the net earnings from self-employment of
such individual.''.
(2) Social security act.--Section 211(a) of the Social
Security Act is amended by inserting after paragraph (16) the
following new paragraph:
``(17) Notwithstanding the preceding provisions of this
subsection, any amount treated as ordinary income or ordinary
loss of any individual under section 710 of the Internal
Revenue Code of 1986 shall be taken into account in determining
the net earnings from self-employment of such individual.''.
(e) Conforming Amendments.--
(1) Subsection (d) of section 731 of the Internal Revenue
Code of 1986 is amended by inserting ``section 710(b)(4)
(relating to distributions of partnership property),'' after
``to the extent otherwise provided by''.
(2) Section 741 of such Code is amended by inserting ``or
section 710 (relating to special rules for partners providing
investment management services to partnership)'' before the
period at the end.
(3) The table of sections for part I of subchapter K of
chapter 1 of such Code is amended by adding at the end the
following new item:
``Sec. 710. Special rules for partners providing investment management
services to partnership.''.
(f) Effective Date.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall apply to
taxable years ending after ___.
(2) Partnership taxable years which include effective
date.--In applying section 710(a) of the Internal Revenue Code
of 1986 (as added by this section) in the case of any
partnership taxable year which includes ___, the amount of the
net income referred to in such section shall be treated as
being the lesser of the net income for the entire partnership
taxable year or the net income determined by only taking into
account items attributable to the portion of the partnership
taxable year which is after such date.
(3) Dispositions of partnership interests.--Section 710(b)
of the Internal Revenue Code of 1986 (as added by this section)
shall apply to dispositions and distributions after ___.
(4) Other income and gain in connection with investment
management services.--Section 710(d) of such Code (as added by
this section) shall take effect on ___.
(5) Publicly traded partnerships.--The amendment made by
subsection (b) shall apply to taxable years beginning after
___.
SEC. 3. APPLICATION TO PARTNERSHIP INTERESTS AND TAX SHARING AGREEMENTS
OF RULE TREATING CERTAIN GAIN ON SALES BETWEEN RELATED
PERSONS AS ORDINARY INCOME.
(a) Partnership Interests.--
(1) In general.--Subsection (a) of section 1239 of the
Internal Revenue Code of 1986 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 transferee, of
a character which is subject to the allowance for depreciation
provided in section 167, or
``(2) such property is an interest in a partnership, 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.''.
(2) Treatment of amortizable section 197 intangibles as
depreciable property.--Section 1239 of such Code is amended by
adding at the end the following new subsection:
``(f) Treatment of Amortizable Section 197 Intangibles as
Depreciable Property.--For treatment of amortizable section 197
intangibles as depreciable property, see section 197(f)(7).''.
(b) Tax Sharing Agreements.--Section 1239 of such Code (relating to
gain from sale of depreciable property between certain related
taxpayers) is amended by adding at the end the following new
subsection:
``(f) Application to Tax Sharing Agreements.--
``(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 related 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 payment to the transferor of
any amount which is determined by reference to any portion of
the tax benefit realized by the transferee with respect to the
depreciation (or amortization) of the property transferred.''.
(c) Effective Date.--The amendment made by this section shall apply
to sales and exchanges after ___.
<all>
Introduced in House
Introduced in House
Referred to the House Committee on Ways and Means.
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