No official summary available for this bill.
[Congressional Bills 119th Congress]
[From the U.S. Government Publishing Office]
[H.R. 2621 Introduced in House (IH)]
<DOC>
119th CONGRESS
1st Session
H. R. 2621
To amend the Internal Revenue Code of 1986 to establish deductions for
cash tips, repeal the inclusion of social security benefits in gross
income, and for other purposes.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
April 3, 2025
Mr. Cohen (for himself and Mr. Carson) 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 establish deductions for
cash tips, repeal the inclusion of social security benefits in gross
income, and for other purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE; ETC.
(a) Short Title.--This Act may be cited as the ``Reward Each
American's Labor And Make Every Rich Individual Contribute Again Act''
or the ``REAL AMERICA Act''.
(b) Amendment of 1986 Code.--Except as otherwise expressly
provided, whenever in this Act an amendment or repeal is expressed in
terms of an amendment to, or repeal of, a section or other provision,
the reference shall be considered to be made to a section or other
provision of the Internal Revenue Code of 1986.
SEC. 2. DEDUCTION FOR CASH TIPS.
(a) Deduction Allowed.--
(1) In general.--Part VII of subchapter B of chapter 1 is
amended by redesignating section 224 as section 225 and by
inserting after section 223 the following new section:
``SEC. 224. CASH TIPS.
``(a) In General.--There shall be allowed as a deduction an amount
equal to the cash tips received during the taxable year that are
included on statements furnished to the employer pursuant to section
6053(a).
``(b) Limitation Based on Modified Adjusted Gross Income.--
``(1) In general.--No deduction shall be allowed by this
section for any taxpayer if such taxpayer's modified adjusted
gross income for the taxable year exceeds $450,000 ($900,000,
in the case of a joint return).
``(2) Modified adjusted gross income.--For purposes of this
subsection, the term `modified adjusted gross income' means the
adjusted gross income of the taxpayer for the taxable year
increased by any amount excluded from gross income under
section 911, 931, or 933.''.
(2) Clerical amendment.--The table of sections for part VII
of subchapter B of chapter 1 is amended by redesignating the
item relating to section 224 as relating to section 225 and by
inserting after the item relating to section 223 the following
new item:
``Sec. 224. Cash tips.''.
(b) Deduction Allowed to Non-itemizers.--Section 63(b) is amended
by striking ``and'' at the end of paragraph (3), by striking the period
at the end of paragraph (4) and inserting ``, and'', and by adding at
the end the following new paragraph:
``(5) the deduction provided in section 224.''.
(c) Withholding.--The Secretary of the Treasury (or the Secretary's
delegate) shall modify the tables and procedures prescribed under
section 3402(a) of the Internal Revenue Code of 1986 to take into
account the deduction allowed under section 224 of such Code (as added
by this Act).
(d) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2025.
SEC. 3. REPEAL OF INCLUSION OF SOCIAL SECURITY BENEFITS IN GROSS
INCOME.
(a) In General.--Section 86 is amended by adding at the end the
following new subsection:
``(g) Termination.--This section shall not apply to any taxable
year beginning after December 31, 2025.''.
(b) Social Security Trust Funds Held Harmless.--There are hereby
appropriated (out of any money in the Treasury not otherwise
appropriated) for each fiscal year to each fund under the Social
Security Act (including the Federal Hospital Insurance Trust Fund) or
the Railroad Retirement Act of 1974 an amount equal to the reduction in
the transfers to such fund for such fiscal year by reason of section
86(g) of the Internal Revenue Code of 1986.
SEC. 4. DEDUCTION FOR QUALIFIED OVERTIME COMPENSATION.
(a) Deduction Allowed.--
(1) In general.--Part VII of subchapter B of chapter 1, as
amended by the preceding provisions of this Act, is amended by
redesignating section 225 as section 226 and by inserting after
section 224 the following new section:
``SEC. 225. QUALIFIED OVERTIME COMPENSATION.
``(a) In General.--There shall be allowed as a deduction an amount
equal to the qualified overtime compensation received during the
taxable year.
``(b) Limitation Based on Modified Adjusted Gross Income.--
``(1) In general.--No deduction shall be allowed by this
section for any taxpayer if such taxpayer's modified adjusted
gross income for the taxable year exceeds $450,000 ($900,000,
in the case of a joint return).
``(2) Modified adjusted gross income.--For purposes of this
subsection, the term `modified adjusted gross income' means the
adjusted gross income of the taxpayer for the taxable year
increased by any amount excluded from gross income under
section 911, 931, or 933.
``(c) Qualified Overtime Compensation.--For purposes of this
section, the term `qualified overtime compensation' means overtime
compensation that is paid to an individual as required under section 7
of the Fair Labor Standards Act of 1938 and is in excess of the regular
rate (as used in such section) at which such individual is employed.
Such term shall not include any amount deducted under section 224.''.
(2) Clerical amendment.--The table of sections for part VII
of subchapter B of chapter 1, as amended by the preceding
provisions of this Act, is amended by redesignating the item
relating to section 225 as relating to section 226 and by
inserting after the item relating to section 224 the following
new item:
``225. Qualified overtime compensation.''.
(b) Deduction Allowed to Non-itemizers.--Section 63(b), as amended
by the preceding provisions of this Act, is amended by striking ``and''
at the end of paragraph (4), by striking the period at the end of
paragraph (5) and inserting ``, and'', and by adding at the end the
following new paragraph:
``(6) the deduction provided in section 225.''.
(c) Requirement To Include Overtime Compensation on W-2.--Section
6051(a) 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) the total amount of qualified overtime compensation
(as defined in section 225(b)).''.
(d) Withholding.--The Secretary of the Treasury (or the Secretary's
delegate) shall modify the tables and procedures prescribed under
section 3402(a) of the Internal Revenue Code of 1986 to take into
account the deduction allowed under section 225 of such Code (as added
by this Act).
(e) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2025.
SEC. 5. 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 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--
``(A) In general.--In the case of any transfer of
an interest in a partnership in connection with the
provision of services to (or for the benefit of) such
partnership--
``(i) 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
``(ii) 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) Election.--The election under subparagraph
(A)(ii) shall be made under rules similar to the rules
of subsection (b)(2).''.
(b) 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. 6. SPECIAL RULES FOR PARTNERS PROVIDING INVESTMENT MANAGEMENT
SERVICES TO PARTNERSHIPS.
(a) In General.--Part I of subchapter K of chapter 1 is amended by
adding at the end the following new section:
``SEC. 710. SPECIAL RULES FOR PARTNERS PROVIDING INVESTMENT MANAGEMENT
SERVICES TO PARTNERSHIPS.
``(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) an amount equal to the net capital gain with
respect to such interest for any partnership taxable
year shall be treated as ordinary income, and
``(B) subject to the limitation of paragraph (2),
an amount equal to the net capital loss with respect to
such interest for any partnership taxable year shall be
treated as an ordinary loss.
``(2) Recharacterization of losses limited to
recharacterized gains.--The amount treated as ordinary loss
under paragraph (1)(B) for any taxable year shall not exceed
the excess (if any) of--
``(A) the aggregate amount treated as ordinary
income under paragraph (1)(A) with respect to the
investment services partnership interest for all
preceding partnership taxable years to which this
section applies, over
``(B) the aggregate amount treated as ordinary loss
under paragraph (1)(B) with respect to such interest
for all preceding partnership taxable years to which
this section applies.
``(3) Allocation to items of gain and loss.--
``(A) Net capital gain.--The amount treated as
ordinary income under paragraph (1)(A) shall be
allocated ratably among the items of long-term capital
gain taken into account in determining such net capital
gain.
``(B) Net capital loss.--The amount treated as
ordinary loss under paragraph (1)(B) shall be allocated
ratably among the items of long-term capital loss and
short-term capital loss taken into account in
determining such net capital loss.
``(4) Terms relating to capital gains and losses.--For
purposes of this section--
``(A) In general.--Net capital gain, long-term
capital gain, and long-term capital loss, with respect
to any investment services partnership interest for any
taxable year, shall be determined under section 1222,
except that such section shall be applied--
``(i) without regard to the
recharacterization of any item as ordinary
income or ordinary loss under this section,
``(ii) by only taking into account items of
gain and loss taken into account by the holder
of such interest under section 702 (other than
subsection (a)(9) thereof) with respect to such
interest for such taxable year, and
``(iii) by treating property which is taken
into account in determining gains and losses to
which section 1231 applies as capital assets
held for more than 1 year.
``(B) Net capital loss.--The term `net capital
loss' means the excess of the losses from sales or
exchanges of capital assets over the gains from such
sales or exchanges. Rules similar to the rules of
clauses (i) through (iii) of subparagraph (A) shall
apply for purposes of the preceding sentence.
``(5) Special rule for dividends.--Any dividend allocated
with respect to any investment services partnership interest
shall not be treated as qualified dividend income for purposes
of section 1(h).
``(6) Special rule for qualified small business stock.--
Section 1202 shall not apply to any gain from the sale or
exchange of qualified small business stock (as defined in
section 1202(c)) allocated with respect to any investment
services partnership interest.
``(b) Dispositions of Partnership Interests.--
``(1) Gain.--
``(A) In general.--Any gain on the disposition of
an investment services partnership interest shall be--
``(i) treated as ordinary income, and
``(ii) recognized notwithstanding any other
provision of this subtitle.
``(B) Gift and transfers at death.--In the case of
a disposition of an investment services partnership
interest by gift or by reason of death of the
taxpayer--
``(i) subparagraph (A) shall not apply,
``(ii) such interest shall be treated as an
investment services partnership interest in the
hands of the person acquiring such interest,
and
``(iii) any amount that would have been
treated as ordinary income under this
subsection had the decedent sold such interest
immediately before death shall be treated as an
item of income in respect of a decedent under
section 691.
``(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 amount treated as ordinary
income under subsection (a) with respect to such
interest for all partnership taxable years to which
this section applies, over
``(B) the aggregate amount treated as ordinary loss
under subsection (a) with respect to such interest for
all partnership taxable years to which this section
applies.
``(3) Election with respect to certain exchanges.--
Paragraph (1)(A)(ii) shall not apply to the contribution of an
investment services partnership interest to a partnership in
exchange for an interest in such partnership if--
``(A) the taxpayer makes an irrevocable election to
treat the partnership interest received in the exchange
as an investment services partnership interest, and
``(B) the taxpayer agrees to comply with such
reporting and recordkeeping requirements as the
Secretary may prescribe.
``(4) Distributions of partnership property.--
``(A) In general.--In the case of any distribution
of property by a partnership with respect to any
investment services partnership interest held by a
partner, the partner receiving such property shall
recognize gain equal to 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 such partner (determined
without regard to subparagraph (C)).
``(B) Treatment of gain as ordinary income.--Any
gain recognized by such partner under subparagraph (A)
shall be treated as ordinary income to the same extent
and in the same manner as the increase in such
partner's distributive share of the taxable income of
the partnership would be treated under subsection (a)
if, immediately prior to the distribution, the
partnership had sold the distributed property at fair
market value and all of the gain from such disposition
were allocated to such partner. For purposes of
applying subsection (a)(2), any gain treated as
ordinary income under this subparagraph shall be
treated as an amount treated as ordinary income under
subsection (a)(1)(A).
``(C) Adjustment of basis.--In the case of a
distribution to which subparagraph (A) applies, the
basis of the distributed property in the hands of the
distributee partner shall be the fair market value of
such property.
``(D) Special rules with respect to mergers and
divisions.--In the case of a taxpayer which satisfies
requirements similar to the requirements of
subparagraphs (A) and (B) of paragraph (3), this
paragraph and paragraph (1)(A)(ii) shall not apply to
the distribution of a partnership interest if such
distribution is in connection with a contribution (or
deemed contribution) of any property of the partnership
to which section 721 applies pursuant to a transaction
described in section 708(b)(2).
``(c) Investment Services Partnership Interest.--For purposes of
this section--
``(1) In general.--The term `investment services
partnership interest' means any interest in an investment
partnership acquired or held by any person in connection with
the conduct of a trade or business described in paragraph (2)
by such person (or any person related to such person). An
interest in an investment partnership held by any person--
``(A) shall not be treated as an investment
services partnership interest for any period before the
first date on which it is so held in connection with
such a trade or business,
``(B) shall not cease to be an investment services
partnership interest merely because such person holds
such interest other than in connection with such a
trade or business, and
``(C) shall be treated as an investment services
partnership interest if acquired from a related person
in whose hands such interest was an investment services
partnership interest.
``(2) Businesses to which this section applies.--A trade or
business is described in this paragraph if such trade or
business primarily involves the performance of any of the
following services with respect to assets held (directly or
indirectly) by one or more investment partnerships referred to
in paragraph (1):
``(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).
``(3) Investment partnership.--
``(A) In general.--The term `investment
partnership' means any partnership if, at the end of
any two consecutive calendar quarters ending after the
date of enactment of this section--
``(i) substantially all of the assets of
the partnership are specified assets
(determined without regard to any section 197
intangible within the meaning of section
197(d)), and
``(ii) less than 75 percent of the capital
of the partnership is attributable to qualified
capital interests which constitute property
held in connection with a trade or business of
the owner of such interest.
``(B) Look-through of certain wholly owned entities
for purposes of determining assets of the
partnership.--
``(i) In general.--For purposes of
determining the assets of a partnership under
subparagraph (A)(i)--
``(I) any interest in a specified
entity shall not be treated as an asset
of such partnership, and
``(II) such partnership shall be
treated as holding its proportionate
share of each of the assets of such
specified entity.
``(ii) Specified entity.--For purposes of
clause (i), the term `specified entity' means,
with respect to any partnership (hereafter
referred to as the upper-tier partnership), any
person which engages in the same trade or
business as the upper-tier partnership and is--
``(I) a partnership all of the
capital and profits interests of which
are held directly or indirectly by the
upper-tier partnership, or
``(II) a foreign corporation which
does not engage in a trade or business
in the United States and all of the
stock of which is held directly or
indirectly by the upper-tier
partnership.
``(C) Special rules for determining if property
held in connection with trade or business.--
``(i) In general.--Except as otherwise
provided by the Secretary, solely for purposes
of determining whether any interest in a
partnership constitutes property held in
connection with a trade or business under
subparagraph (A)(ii)--
``(I) a trade or business of any
person closely related to the owner of
such interest shall be treated as a
trade or business of such owner,
``(II) such interest shall be
treated as held by a person in
connection with a trade or business
during any taxable year if such
interest was so held by such person
during any 3 taxable years preceding
such taxable year, and
``(III) paragraph (5)(B) shall not
apply.
``(ii) Closely related persons.--For
purposes of clause (i)(I), a person shall be
treated as closely related to another person
if, taking into account the rules of section
267(c), the relationship between such persons
is described in--
``(I) paragraph (1) or (9) of
section 267(b), or
``(II) section 267(b)(4), but
solely in the case of a trust with
respect to which each current
beneficiary is the grantor or a person
whose relationship to the grantor is
described in paragraph (1) or (9) of
section 267(b).
``(D) Antiabuse rules.--The Secretary may issue
regulations or other guidance which prevent the
avoidance of the purposes of subparagraph (A),
including regulations or other guidance which treat
convertible and contingent debt (and other debt having
the attributes of equity) as a capital interest in the
partnership.
``(E) Controlled groups of entities.--
``(i) In general.--In the case of a
controlled group of entities, if an interest in
the partnership received in exchange for a
contribution to the capital of the partnership
by any member of such controlled group would
(in the hands of such member) constitute
property held in connection with a trade or
business, then any interest in such partnership
held by any member of such group shall be
treated for purposes of subparagraph (A) as
constituting (in the hands of such member)
property held in connection with a trade or
business.
``(ii) Controlled group of entities.--For
purposes of clause (i), the term `controlled
group of entities' means a controlled group of
corporations as defined in section 1563(a)(1),
applied without regard to subsections (a)(4)
and (b)(2) of section 1563. A partnership or
any other entity (other than a corporation)
shall be treated as a member of a controlled
group of entities if such entity is controlled
(within the meaning of section 954(d)(3)) by
members of such group (including any entity
treated as a member of such group by reason of
this sentence).
``(F) Special rule for corporations.--For purposes
of this paragraph, in the case of a corporation, the
determination of whether property is held in connection
with a trade or business shall be determined as if the
taxpayer were an individual.
``(4) Specified asset.--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)), cash or cash equivalents, or options or
derivative contracts with respect to any of the foregoing.
``(5) Related persons.--
``(A) In general.--A person shall be treated as
related to another person if the relationship between
such persons is described in section 267(b) or 707(b).
``(B) Attribution of partner services.--Any service
described in paragraph (2) which is provided by a
partner of a partnership shall be treated as also
provided by such partnership.
``(d) Exception for Certain Capital Interests.--
``(1) In general.--In the case of any portion of an
investment services partnership interest which is a qualified
capital interest, all items of gain and loss (and any
dividends) which are allocated to such qualified capital
interest shall not be taken into account under subsection (a)
if--
``(A) 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 subsection (c)(2) and
who are not related to the partner holding the
qualified capital interest, and
``(B) the allocations made to such other interests
are significant compared to the allocations made to
such qualified capital interest.
``(2) Authority to provide exceptions to allocation
requirements.--To the extent provided by the Secretary in
regulations or other guidance--
``(A) Allocations to portion of qualified capital
interest.--Paragraph (1) may be applied separately with
respect to a portion of a qualified capital interest.
``(B) No or insignificant allocations to nonservice
providers.--In any case in which the requirements of
paragraph (1)(B) are not satisfied, items of gain and
loss (and any dividends) shall not be taken into
account under subsection (a) to the extent that such
items are properly allocable under such regulations or
other guidance to qualified capital interests.
``(C) Allocations to service providers' qualified
capital interests which are less than other
allocations.--Allocations shall not be treated as
failing to meet the requirement of paragraph (1)(A)
merely because the allocations to the qualified capital
interest represent a lower return than the allocations
made to the other qualified capital interests referred
to in such paragraph.
``(3) Special rule for changes in services and capital
contributions.--In the case of an interest in a partnership
which was not an investment services partnership interest and
which, by reason of a change in the services with respect to
assets held (directly or indirectly) by the partnership or by
reason of a change in the capital contributions to such
partnership, becomes an investment services partnership
interest, the qualified capital interest of the holder of such
partnership interest immediately after such change shall not,
for purposes of this subsection, be less than the fair market
value of such interest (determined immediately before such
change).
``(4) Special rule for tiered partnerships.--Except as
otherwise provided by the Secretary, in the case of tiered
partnerships, all items which are allocated in a manner which
meets the requirements of paragraph (1) to qualified capital
interests in a lower-tier partnership shall retain such
character to the extent allocated on the basis of qualified
capital interests in any upper-tier partnership.
``(5) Exception for no-self-charged carry and management
fee provisions.--Except as otherwise provided by the Secretary,
an interest 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 subsection (c)(2) which are
provided (directly or indirectly) to the partnership by the
holder of such interest (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 entire 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 requirements of paragraph
(1)) if the partnership had sold all of its assets at
fair market value immediately before the disposition,
bears to
``(B) the distributive share of gain or loss that
would have been so allocated to the investment services
partnership interest of which such qualified capital
interest is a part.
``(7) Qualified capital interest.--For purposes 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 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, over
``(II) any items of deduction and
loss so taken into account.
``(B) Adjustment to qualified capital interest.--
``(i) Distributions and losses.--The
qualified capital interest shall be reduced by
distributions from the partnership 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 contributions of
property.--In the case of any contribution of
property described in subparagraph (A)(i) with
respect to which the fair market value of such
property is not equal to the adjusted basis of
such property immediately before such
contribution, proper adjustments shall be made
to the qualified capital interest to take into
account such difference consistent with such
regulations or other guidance as the Secretary
may provide.
``(C) Mergers, consolidations, etc., disregarded.--
No increase or decrease in the qualified capital
interest of any partner shall result from a 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 interest of service providing
partners.--For purposes of this subsection, 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 other
partner or the partnership (or any person related to
any such other partner or the partnership). 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 proceeds 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 subsection,
any loan or other advance to the partnership made or
guaranteed, directly or indirectly, by a partner not
providing services described 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
partnership.
``(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 interest.--For
purposes of this paragraph, the term `specified family
partnership interest' means any investment services
partnership interest 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 whose
relationship to the grantor is described in
section 267(b)(1), and
``(iii) all other interests in such
qualified 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 partnership if--
``(i) all of the capital and profits
interests 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
``(III) any other person (not
described 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 applicable date (within the meaning
of subparagraph (B)(iii) thereof) were the latest of--
``(i) the date of the establishment of the
partnership,
``(ii) the earliest date that the common
ancestor holds a capital or profits interest 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--
``(A) a person performs (directly or indirectly)
investment management services for any investment
entity or special purpose acquisition company,
``(B) such person holds (directly or indirectly) a
disqualified interest with respect to such entity or
such company (as the case may be), 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
subsections (a)(5) and (d) shall apply for purposes of this
subsection.
``(2) Definitions.--For purposes of this subsection--
``(A) Disqualified interest.--
``(i) In general.--The term `disqualified
interest' means, with respect to any investment
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) except as provided by the
Secretary, any interest in a taxable
corporation (other than a special
purpose acquisition company), 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)(2).
``(D) Investment entity.--The term `investment
entity' means any entity which, if it were a
partnership, would be an investment partnership.
``(E) Special purpose acquisition company.--The
term `special purpose acquisition company' means any
corporation that--
``(i) is formed for the purpose of
acquiring a privately held company,
``(ii) is publicly traded on an established
securities market or its interests are readily
tradable on a secondary market (or the
substantial equivalent thereof), and
``(iii) is required to report an
acquisition under Item 2.01 or make a
disclosure under Item 5.06 of Form 8-K (or any
successor form) with the Securities and
Exchange Commission.
``(f) Exception for Domestic C Corporations.--Except as otherwise
provided by the Secretary, in the case of a domestic C corporation
(other than a special purpose acquisition company, as defined in
subsection (e)(2)(E))--
``(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 appropriate to carry out the
purposes of this section, including regulations or other guidance to--
``(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 modification is consistent with
the purposes of this section,
``(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 provisions of
this title.
``(h) Cross Reference.--For 40 percent penalty on certain
underpayments due to the avoidance of this section, see section
6662.''.
(b) Application of Section 751 to Indirect Dispositions of
Investment Services Partnership Interests.--
(1) In general.--Subsection (a) of section 751 is amended
by striking ``or'' at the end of paragraph (1), by inserting
``or'' at the end of paragraph (2), and by inserting after
paragraph (2) the following new paragraph:
``(3) investment services partnership interests held by the
partnership,''.
(2) Certain distributions treated as sales or exchanges.--
Subparagraph (A) of section 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
following 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 paragraph (1),
by inserting ``or'' at the end of paragraph (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 interest).''.
(4) Investment services partnership interests; qualified
capital interests.--Section 751 is amended by adding at the end
the following new subsection:
``(g) Investment Services Partnership Interests.--For purposes of
this section--
``(1) In general.--The term `investment services
partnership interest' has the meaning given such term by
section 710(c).
``(2) Adjustments for qualified capital interests.--The
amount to which subsection (a) applies by reason of paragraph
(3) thereof shall not include so much of such amount as is
attributable to any portion of the investment services
partnership interest which is a qualified capital interest
(determined under rules similar to the rules of section
710(d)).
``(3) Exception for publicly traded partnerships.--Except
as otherwise provided by the Secretary, in the case of an
exchange of an interest in a publicly traded partnership (as
defined in section 7704) to which subsection (a) applies--
``(A) this section shall be applied without regard
to subsections (a)(3), (b)(1)(A)(iii), and (f)(3), and
``(B) such partnership shall be treated as owning
its proportionate share of the property of any other
partnership in which it is a partner.
``(4) Recognition of gains.--Any gain with respect to which
subsection (a) applies by reason of paragraph (3) thereof shall
be recognized notwithstanding any other provision of this
title.
``(5) Coordination with inventory items.--An investment
services partnership interest held by the partnership shall not
be treated as an inventory item of the partnership.
``(6) Prevention of double counting.--Under regulations or
other guidance prescribed by the Secretary, subsection (a)(3)
shall not apply with respect to any amount to which section 710
applies.
``(7) Valuation methods.--The Secretary shall prescribe
regulations or other guidance which provide the acceptable
methods for valuing investment services partnership interests
for purposes of this section.''.
(c) Treatment for Purposes of Section 7704.--Subsection (d) of
section 7704 is amended by adding at the end the following new
paragraph:
``(6) Income from certain carried interests not
qualified.--
``(A) In general.--Specified carried interest
income shall not be treated as qualifying income.
``(B) Specified carried interest income.--For
purposes of this paragraph--
``(i) In general.--The term `specified
carried interest income' means--
``(I) any item of income or gain
allocated to an investment services
partnership interest (as defined in
section 710(c)) held by the
partnership,
``(II) any gain on the disposition
of an investment services partnership
interest (as so defined) or a
partnership interest to which (in the
hands of the partnership) section 751
applies, and
``(III) any income or gain taken
into account by the partnership under
subsection (b)(4) or (e) of section
710.
``(ii) Exception for qualified capital
interests.--A rule similar to the rule of
section 710(d) shall apply for purposes of
clause (i).
``(C) Coordination with other provisions.--
Subparagraph (A) shall not apply to any item described
in paragraph (1)(E) (or so much of paragraph (1)(F) as
relates to paragraph (1)(E)).
``(D) 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) Fifty 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 publicly
traded partnerships (determined without
regard to subsection (b)(2)).
``(II) Substantially all of the
income of such partnership is ordinary
income or section 1231 gain (as defined
in section 1231(a)(3)).
``(E) Transitional rule.--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.''.
(d) Imposition of Penalty on Underpayments.--
(1) In general.--Subsection (b) of section 6662 is amended
by inserting after paragraph (10) the following new paragraph:
``(11) The application of section 710(e) or the regulations
or other guidance prescribed under section 710(g) to prevent
the avoidance of the purposes of section 710.''.
(2) Amount of penalty.--
(A) In general.--Section 6662 is amended by adding
at the end the following new subsection:
``(m) 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)(10), subsection (a) shall be applied with respect to such portion
by substituting `40 percent' for `20 percent'.''.
(B) Conforming amendment.--Subparagraph (B) of
section 6662A(e)(2) is amended by striking ``or (i)''
and inserting ``, (i), or (m)''.
(3) Special rules for application of reasonable cause
exception.--Subsection (c) of section 6664 is amended--
(A) by redesignating paragraphs (3) and (4) as
paragraphs (4) and (5), respectively;
(B) by striking ``paragraph (3)'' in paragraph
(5)(A), as so redesignated, and inserting ``paragraph
(4)''; and
(C) by inserting after paragraph (2) the following
new paragraph:
``(3) Special rule for underpayments attributable to
investment management services.--
``(A) In general.--Paragraph (1) shall not apply to
any portion of an underpayment to which section 6662
applies by reason of subsection (b)(11) unless--
``(i) the relevant facts affecting the tax
treatment of the item are adequately disclosed,
``(ii) there is or was substantial
authority for such treatment, and
``(iii) the taxpayer reasonably believed
that such treatment was more likely than not
the proper treatment.
``(B) Rules relating to reasonable belief.--Rules
similar to the rules of subsection (d)(4) shall apply
for purposes of subparagraph (A)(iii).''.
(e) Income and Loss From Investment Services Partnership Interests
Taken Into Account in Determining Net Earnings From Self-Employment.--
(1) Internal revenue code.--
(A) In general.--Section 1402(a) 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, in the case of any individual engaged in the trade
or business of providing services described in section
710(c)(2) with respect to any entity, investment services
partnership income or loss (as defined in subsection (m)) of
such individual with respect to such entity shall be taken into
account in determining the net earnings from self-employment of
such individual.''.
(B) Investment services partnership income or
loss.--Section 1402 is amended by adding at the end the
following new subsection:
``(m) Investment Services Partnership Income or Loss.--For purposes
of subsection (a)--
``(1) In general.--The term `investment services
partnership income or loss' means, with respect to any
investment services partnership interest (as defined in section
710(c)) or disqualified interest (as defined in section
710(e)), the net of--
``(A) the amounts treated as ordinary income or
ordinary loss under subsections (b) and (e) of section
710 with respect to such interest,
``(B) all items of income, gain, loss, and
deduction allocated to such interest, and
``(C) the amounts treated as realized from the sale
or exchange of property other than a capital asset
under section 751 with respect to such interest.
``(2) Exception for qualified capital interests.--A rule
similar to the rule of section 710(d) shall apply for purposes
of applying paragraph (1)(B).''.
(2) Social security act.--Section 211(a) of the Social
Security Act is amended by striking ``and'' at the end of
paragraph (15), by striking the period at the end of paragraph
(16) and inserting ``; and'', and by inserting after paragraph
(16) the following new paragraph:
``(17) Notwithstanding the preceding provisions of this
subsection, in the case of any individual engaged in the trade
or business of providing services described in section
710(c)(2) of the Internal Revenue Code of 1986 with respect to
any entity, investment services partnership income or loss (as
defined in section 1402(m) of such Code) shall be taken into
account in determining the net earnings from self-employment of
such individual.''.
(f) Separate Accounting by Partner.--Section 702(a) is amended by
striking ``and'' at the end of paragraph (7), by striking the period at
the end of paragraph (8) and inserting ``, and'', and by inserting
after paragraph (8) the following:
``(9) any amount treated as ordinary income or loss under
subsection (a), (b), or (e) of section 710.''.
(g) Conforming Amendments.--
(1) Subsection (d) of section 731 is amended by inserting
``section 710(b)(4) (relating to distributions of partnership
property),'' after ``to the extent otherwise provided by''.
(2) Section 741 is amended by inserting ``or section 710
(relating to special rules for partners providing investment
management services to partnerships)'' before the period at the
end.
(3) The table of sections for part I of subchapter K of
chapter 1 is amended by adding at the end the following new
item:
``Sec. 710. Special rules for partners providing investment management
services to partnerships.''.
(4)(A) Part IV of subchapter O of chapter 1 is amended by
striking section 1061.
(B) The table of sections for part IV of subchapter O of
chapter 1 is amended by striking the item relating to section
1061.
(h) 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 the date of the enactment of this
Act.
(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 date of the
enactment of this Act, the amount of the net capital gain
referred to in such section shall be treated as being the
lesser of the net capital gain for the entire partnership
taxable year or the net capital gain 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.--
(A) In general.--Section 710(b) of such Code (as
added by this section) shall apply to dispositions and
distributions after the date of the enactment of this
Act.
(B) Indirect dispositions.--The amendments made by
subsection (b) shall apply to transactions after the
date of the enactment of this Act.
(4) Other income and gain in connection with investment
management services.--Section 710(e) of such Code (as added by
this section) shall take effect on the date of the enactment of
this Act.
<all>
Introduced in House
Introduced in House
Referred to the House Committee on Ways and Means.
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