To provide for youth jobs, and for other purposes.

SA 2177. Mr. SANDERS submitted an amendment intended to be proposed
to amendment SA 2089 submitted by Mr. Alexander (for himself and Mrs.
Murray) to the bill S. 1177, to reauthorize the Elementary and
Secondary Education Act of 1965 to ensure that every child achieves;
which was ordered to lie on the table; as follows:

At the end of title X, insert the following:

PART C--EMPLOYING YOUNG AMERICANS

Subpart 1--Youth Jobs

SEC. 10301. SHORT TITLE.

This subpart may be cited as the ``Employ Young Americans
Now Act''.

SEC. 10302. ESTABLISHMENT OF EMPLOY YOUNG AMERICANS FUND.

(a) Establishment.--There is established in the Treasury of
the United States an account that shall be known as the
Employ Young Americans Fund (referred to in this subpart as
the ``Fund'').
(b) Deposits Into the Fund.--Out of any amounts in the
Treasury not otherwise appropriated, there is appropriated
$5,500,000,000 for fiscal year 2016, which shall be paid to
the Fund, to be used by the Secretary of Labor to carry out
this subpart.
(c) Availability of Funds.--Of the amounts available to the
Fund under subsection (b), the Secretary of Labor shall--
(1) allot $4,000,000,000 in accordance with section 10303
to provide summer and year-round employment opportunities to
low-income youth; and
(2) award $1,500,000,000 in allotments and competitive
grants in accordance with section 10304 to local entities to
carry out work-based training and other work-related and
educational strategies and activities of demonstrated
effectiveness to unemployed, low-income young adults and low-
income youth to provide the skills and assistance needed to
obtain employment.
(d) Period of Availability.--The amounts appropriated under
this subpart shall be available for obligation by the
Secretary of Labor, and shall be available for expenditure by
grantees (including subgrantees), until expended.

SEC. 10303. SUMMER EMPLOYMENT AND YEAR-ROUND EMPLOYMENT
OPPORTUNITIES FOR LOW-INCOME YOUTH.

(a) In General.--From the funds available under section
10302(c)(1), the Secretary of Labor shall make an allotment
under subsection (c) to each State that has a modification to
a State plan (referred to in this section as a ``State plan
modification'') (or other State request for funds specified
in guidance under subsection (b)) approved under subsection
(d), and recipient under section 166(c) of the Workforce
Innovation and Opportunity Act (29 U.S.C. 3221(c)) (referred
to in this section as a ``Native American grantee''), that
meets the requirements of this section, for the purpose of
providing summer employment and year-round employment
opportunities to low-income youth.
(b) Guidance and Application of Requirements.--
(1) Guidance.--Not later than 20 days after the date of
enactment of this Act, the Secretary of Labor shall issue
guidance regarding the implementation of this section.
(2) Procedures.--Such guidance shall, consistent with this
section, include procedures for--
(A) the submission and approval of State plan
modifications, for such other forms of requests for funds by
the State as may be identified in such guidance, for
modifications to local plans (referred to individually in
this section as a ``local plan modification''), or for such
other forms of requests for funds by local areas as may be
identified in such guidance, that promote the expeditious and
effective implementation of the activities authorized under
this section; and
(B) the allotment and allocation of funds, including
reallotment and reallocation of such funds, that promote such
implementation.
(3) Requirements.--Except as otherwise provided in the
guidance described in paragraph (1) and in this section and
other provisions of this subpart, the funds provided for
activities under this section shall be administered in
accordance with the provisions of subtitles A, B, and E of
title I of the Workforce Innovation and Opportunity Act (29
U.S.C. 3111 et seq., 3151 et seq., 3241 et seq.) relating to
youth activities.
(c) State Allotments.--
(1) In general.--Using the funds described in subsection
(a), the Secretary of Labor shall allot to each State the
total of the amounts assigned to the State under
subparagraphs (A) and (B) of paragraph (2).
(2) Assignments to states.--
(A) Minimum amounts.--Using funds described in subsection
(a), the Secretary of Labor shall assign to each State an
amount equal to \1/2\ of 1 percent of such funds.
(B) Formula amounts.--The Secretary of Labor shall assign
the remainder of the funds described in subsection (a) among
the States by assigning--
(i) 33\1/3\ percent on the basis of the relative number of
individuals in the civilian labor force who are not younger
than 16 but younger than 25 in each State, compared to the
total number of individuals in the civilian labor force who
are not younger than 16 but younger than 25 in all States;
(ii) 33\1/3\ percent on the basis of the relative number of
unemployed individuals in each State, compared to the total
number of unemployed individuals in all States; and
(iii) 33\1/3\ on the basis of the relative number of
disadvantaged young adults and youth in each State, compared
to the total number of disadvantaged young adults and youth
in all States.
(3) Reallotment.--If the Governor of a State does not
submit a State plan modification or other State request for
funds specified in guidance under subsection (b) by the date
specified in subsection (d)(2)(A), or a State does not
receive approval of such State plan modification or request,
the amount the State would have been eligible to receive
pursuant to paragraph (2) shall be transferred within the
Fund and added to the amounts available for competitive
grants under sections 2(c)(2) and 4(b)(2).
(4) Definitions.--For purposes of paragraph (2), the term
``disadvantaged young adult or youth'' means an individual
who is not younger than 16 but is younger than 25 who
received an income, or is a member of a family that received
a total family income, that, in relation to family size, does
not exceed the higher of--
(A) the poverty line; or
(B) 70 percent of the lower living standard income level.
(d) State Plan Modification.--
(1) In general.--For a State to be eligible to receive an
allotment of funds under subsection (c), the Governor of the
State shall submit to the Secretary of Labor a State plan
modification, or other State request for funds specified in
guidance under subsection (b), in such form and containing
such information as the Secretary may require. At a minimum,
such State plan modification or request shall include--
(A) a description of the strategies and activities to be
carried out to provide summer employment opportunities and
year-round employment opportunities, including linkages to
training and educational activities, consistent with
subsection (f);
(B) a description of the requirements the State will apply
relating to the eligibility of low-income youth, consistent
with section 10302(4), for summer employment opportunities
and year-round employment opportunities, which requirements
may include criteria to target assistance to particular
categories of such low-income youth, such as youth with
disabilities, consistent with subsection (f);
(C) a description of the performance outcomes to be
achieved by the State through the activities carried out
under this section and the processes the State will use to
track performance, consistent with guidance provided by the
Secretary of Labor regarding such outcomes and processes and
with section 10305(b);
(D) a description of the timelines for implementation of
the strategies and activities described in subparagraph (A),
and the number of low-income youth expected to be placed in
summer employment opportunities, and year-round employment
opportunities, respectively, by quarter;
(E) assurances that the State will report such information,
relating to fiscal, performance, and other matters, as the
Secretary may require and as the Secretary determines is
necessary to effectively monitor the activities carried out
under this section;
(F) assurances that the State will ensure compliance with
the requirements, restrictions, labor standards, and other
provisions described in section 10305(a); and
(G) if a local board and chief elected official in the
State will provide employment opportunities with the link to
training and educational activities described in subsection
(f)(2)(B), a description of how the training and educational
activities will lead to the industry-recognized credential
involved.
(2) Submission and approval of state plan modification or
request.--
(A) Submission.--
(i) In general.--The Governor shall submit the State plan
modification or other State request for funds specified in
guidance under subsection (b) to the Secretary of Labor not
later than 30 days after the issuance of such guidance.
(ii) Process.--The Secretary shall--

(I) make copies of the State plan modification or request
available to the public on the Web site of the Department of
Labor and through other electronic means, on the date on
which the Governor submits the State plan modification or
request under this section;
(II) allow members of the public, including representatives
of business, representatives of labor organizations, and
representatives of educational institutions, to submit to the

[[Page S4888]]

Secretary comments on the State plan modification or request,
during a comment period beginning on the submission date and
ending 60 days after the submission date; and
(III) include with the notification of approval or
disapproval of the State plan modification or request,
submitted to the Governor under subparagraph (B), any such
comments that represent disagreement with the plan
modification or request.

(B) Approval.--The Secretary of Labor shall approve the
State plan modification or request submitted under
subparagraph (A) not later than 90 days after the submission
date, unless the Secretary determines that the plan or
request is inconsistent with the requirements of this
section. If the Secretary has not made a determination with
that 90-day period, the plan or request shall be considered
to be approved. If the plan or request is disapproved, the
Secretary may provide a reasonable period of time in which
the plan or request may be amended and resubmitted for
approval. If the plan or request is approved, the Secretary
shall allot funds to the State under subsection (c) within 90
days after such approval.
(3) Modifications to state plan or request.--The Governor
may submit further modifications to a State plan modification
or other State request for funds specified under subsection
(b), consistent with the requirements of this section.
(e) Within-State Allocation and Administration.--
(1) In general.--Of the funds allotted to the State under
subsection (c), the Governor--
(A) may reserve not more than 5 percent of the funds for
administration and technical assistance; and
(B) shall allocate the remainder of the funds among local
areas within the State in accordance with clauses (i), (ii),
and (iii) of subsection (c)(2)(B), except that for purposes
of such allocation references to a State in subsection
(c)(2)(B) shall be deemed to be references to a local area
and references to all States shall be deemed to be references
to all local areas in the State involved.
(2) Local plan.--
(A) Submission.--In order to receive an allocation under
paragraph (1)(B), the local board, in partnership with the
chief elected official for the local area involved, shall
submit to the Governor a local plan modification, or such
other request for funds by local areas as may be specified in
guidance under subsection (b), not later than 30 days after
the submission by the State of the State plan modification or
other State request for funds specified in guidance under
subsection (b), describing the strategies and activities to
be carried out under this section.
(B) Approval.--The Governor shall approve the local plan
modification or other local request for funds submitted under
subparagraph (A) not later than 30 days after the submission
date, unless the Governor determines that the plan or request
is inconsistent with requirements of this section. If the
Governor has not made a determination within that 30-day
period, the plan shall be considered to be approved. If the
plan or request is disapproved, the Governor may provide a
reasonable period of time in which the plan or request may be
amended and resubmitted for approval. If the plan or request
is approved, the Governor shall allocate funds to the local
area within 30 days after such approval.
(3) Reallocation.--If a local board and chief elected
official do not submit a local plan modification (or other
local request for funds specified in guidance under
subsection (b)) by the date specified in paragraph (2), or
the Governor disapproves a local plan modification (or other
local request), the amount the local area would have been
eligible to receive pursuant to the formula under paragraph
(1)(B) shall be allocated to local areas that receive
approval of their local plan modifications or local requests
for funds under paragraph (2). Each such local area shall
receive a share of the total amount available for
reallocation under this paragraph, in accordance with the
area's share of the total amount allocated under paragraph
(1)(B) to such local areas.
(f) Use of Funds.--
(1) In general.--The funds made available under this
section shall be used--
(A) to provide summer employment opportunities for low-
income youth, with direct linkages to academic and
occupational learning, and may be used to provide supportive
services, such as transportation or child care, that is
necessary to enable the participation of such youth in the
opportunities; and
(B) to provide year-round employment opportunities, which
may be combined with other activities authorized under
section 129 of the Workforce Innovation and Opportunity Act
(29 U.S.C. 3164), to low-income youth.
(2) Program priorities.--In administering the funds under
this section, the local board and chief elected official
shall give priority to--
(A) identifying employment opportunities that are--
(i) in emerging or in-demand occupations in the local area;
or
(ii) in the public or nonprofit sector and meet community
needs; and
(B) linking participants in year-round employment
opportunities to training and educational activities that
will provide such participants an industry-recognized
certificate or credential (referred to in this subpart as an
``industry-recognized credential'').
(3) Administration.--Not more than 5 percent of the funds
allocated to a local area under this section may be used for
the costs of administration of this section.
(4) Performance accountability.--For activities funded
under this section, in lieu of meeting the requirements
described in (before July 1, 2016) section 136 of the
Workforce Investment Act of 1998 (29 U.S.C. 2871) and (after
June 30, 2016) section 116 of the Workforce Innovation and
Opportunity Act (29 U.S.C. 3141), States and local areas
shall provide such reports as the Secretary of Labor may
require regarding the performance outcomes described in
section 10305(b)(5).

SEC. 10304. WORK-BASED EMPLOYMENT STRATEGIES AND ACTIVITIES
OF DEMONSTRATED EFFECTIVENESS.

(a) In General.--From the funds available under section
10302(c)(2), the Secretary of Labor shall make allotments to
States, and award grants to eligible entities, under
subsection (b) to carry out work-based strategies and
activities of demonstrated effectiveness.
(b) Allotments and Grants.--
(1) Allotments to states for grants.--
(A) Allotments.--Using funds described in subsection (a),
the Secretary of Labor shall allot to each State an amount
equal to \1/2\ of 1 percent of such funds.
(B) Grants to eligible entities.--The State shall use the
funds to award grants, on a competitive basis, to eligible
entities in the State.
(2) Direct grants to eligible entities.--Using the funds
described in subsection (a) that are not allotted under
paragraph (1), the Secretary of Labor shall award grants on a
competitive basis to eligible entities.
(c) Eligible Entity.--To be eligible to receive a grant
under this section, an entity--
(1) shall include--
(A) a partnership involving a chief elected official and
the local board for the local area involved (which may
include a partnership with such elected officials and boards
and State elected officials and State boards, in the region
and in the State); or
(B) an entity eligible to apply for a grant, contract, or
agreement under section 166 of the Workforce Innovation and
Opportunity Act (29 U.S.C. 3221); and
(2) may include, in combination with a partnership or
entity described in paragraph (1)--
(A) employers or employer associations;
(B) adult education providers or postsecondary educational
institutions, including community colleges;
(C) community-based organizations;
(D) joint labor-management committees;
(E) work-related intermediaries;
(F) labor organizations that sponsor training or employment
upgrade programs; and
(G) other appropriate organizations.
(d) Application.--To be eligible to receive a grant under
this section, an entity shall submit to the Secretary of
Labor (or to the State, if applying for a grant under
subsection (b)(1)(B)) an application at such time, in such
manner, and containing such information as the Secretary may
require. At a minimum, the application shall--
(1) describe the strategies and activities of demonstrated
effectiveness that the eligible entity will carry out to
provide unemployed, low-income young adults and low-income
youth with skills that will lead to employment upon
completion of participation in such activities;
(2) describe the requirements that will apply relating to
the eligibility of unemployed, low-income young adults and
low-income youth, consistent with section 10302, for
activities carried out under this section, which requirements
may include criteria to target assistance to particular
categories of such adults and youth, such as individuals with
disabilities or individuals who have exhausted all rights to
unemployment compensation;
(3) describe how the strategies and activities will address
the needs of the target populations identified in paragraph
(2) and the needs of employers in the local area;
(4) describe the expected outcomes to be achieved by
implementing the strategies and activities;
(5) provide evidence that the funds provided through the
grant will be expended expeditiously and efficiently to
implement the strategies and activities;
(6) describe how the strategies and activities will be
coordinated with other Federal, State and local programs
providing employment, education and supportive activities;
(7) provide evidence of employer commitment to participate
in the activities funded under this section, including
identification of anticipated occupational and skill needs;
(8) provide assurances that the eligible entity will report
such information relating to fiscal, performance, and other
matters, as the Secretary of Labor may require and as the
Secretary determines is necessary to effectively monitor the
activities carried out under this section;
(9) provide assurances that the eligible entity will ensure
compliance with the requirements, restrictions, labor
standards, and other provisions described in section
10305(a); and
(10) if the entity will provide activities described in
subsection (f)(4), a description of how the activities will
lead to the industry-recognized credentials involved.
(e) Priority in Awards.--In awarding grants under this
section, the Secretary of Labor (or a State, under subsection
(b)(1)(B)) shall give priority to applications submitted

[[Page S4889]]

by eligible entities from areas of high poverty and high
unemployment, as defined by the Secretary, such as Public Use
Microdata Areas designated by the Bureau of the Census.
(f) Use of Funds.--An entity that receives a grant under
this section shall use the funds made available through the
grant to support work-based strategies and activities of
demonstrated effectiveness that are designed to provide
unemployed, low-income young adults and low-income youth with
skills that will lead to employment as part of or upon
completion of participation in such activities. Such
strategies and activities may include--
(1) on-the-job training, registered apprenticeship
programs, or other programs that combine work with skills
development;
(2) sector-based training programs that have been designed
to meet the specific requirements of an employer or group of
employers in that sector and for which employers are
committed to hiring individuals upon successful completion of
the training;
(3) training that supports an industry sector or an
employer-based or labor-management committee industry
partnership and that includes a significant work-experience
component;
(4) activities that lead to the acquisition of industry-
recognized credentials in a field identified by the State or
local area as a growth sector or in-demand industry in which
there are likely to be significant job opportunities in the
short term;
(5) activities that provide connections to immediate work
opportunities, including subsidized employment opportunities,
or summer employment opportunities for youth, that include
concurrent skills training and other supports;
(6) activities offered through career academies that
provide students with the academic preparation and training,
such as paid internships and concurrent enrollment in
community colleges or other postsecondary institutions,
needed to pursue a career pathway that leads to postsecondary
credentials and in-demand jobs; and
(7) adult basic education and integrated basic education
and training for low-skilled individuals who are not younger
than 16 but are younger than 25, hosted at community colleges
or at other sites, to prepare individuals for jobs that are
in demand in a local area.
(g) Coordination of Federal Administration.--The Secretary
of Labor shall administer this section in coordination with
the Secretary of Education, the Secretary of Health and Human
Services, and other appropriate agency heads, to ensure the
effective implementation of this section.

SEC. 10305. GENERAL REQUIREMENTS.

(a) Labor Standards and Protections.--Activities provided
with funds made available under this subpart shall be subject
to the requirements and restrictions, including the labor
standards, described in section 181 of the Workforce
Innovation and Opportunity Act (29 U.S.C. 3241) and the
nondiscrimination provisions of section 188 of such Act (29
U.S.C. 3248), in addition to other applicable Federal laws.
(b) Reporting.--The Secretary of Labor may require the
reporting of information relating to fiscal, performance and
other matters that the Secretary determines is necessary to
effectively monitor the activities carried out with funds
provided under this subpart. At a minimum, recipients of
grants (including recipients of subgrants) under this subpart
shall provide information relating to--
(1) the number of individuals participating in activities
with funds provided under this subpart and the number of such
individuals who have completed such participation;
(2) the expenditures of funds provided under this subpart;
(3) the number of jobs created pursuant to the activities
carried out under this subpart;
(4) the demographic characteristics of individuals
participating in activities under this subpart; and
(5) the performance outcomes for individuals participating
in activities under this subpart, including--
(A) for low-income youth participating in summer employment
activities under sections 3 and 4, performance on indicators
consisting of--
(i) work readiness skill attainment using an employer
validated checklist; and
(ii) placement in or return to secondary or postsecondary
education or training, or entry into unsubsidized employment;
(B) for low-income youth participating in year-round
employment activities under section 10303 or in activities
under section 10304, performance on indicators consisting
of--
(i) placement in or return to postsecondary education;
(ii) attainment of a secondary school diploma or its
recognized equivalent;
(iii) attainment of an industry-recognized credential; and
(iv) entry into, retention in, and earnings in,
unsubsidized employment; and
(C) for unemployed, low-income young adults participating
in activities under section 10304, performance on indicators
consisting of--
(i) entry into, retention in, and earnings in, unsubsidized
employment; and
(ii) attainment of an industry-recognized credential.
(c) Activities Required To Be Additional.--Funds provided
under this subpart shall only be used for activities that are
in addition to activities that would otherwise be available
in the State or local area in the absence of such funds.
(d) Additional Requirements.--The Secretary of Labor may
establish such additional requirements as the Secretary
determines may be necessary to ensure fiscal integrity,
effective monitoring, and the appropriate and prompt
implementation of the activities under this subpart.
(e) Report of Information and Evaluations to Congress and
the Public.--The Secretary of Labor shall provide to the
appropriate committees of Congress and make available to the
public the information reported pursuant to subsection (b).

SEC. 10306. DEFINITIONS.

In this subpart:
(1) Chief elected official.--The term ``chief elected
official'' means the chief elected executive officer of a
unit of local government in a local area or in the case in
which such an area includes more than one unit of general
government, the individuals designated under an agreement
described in section 107(c)(1)(B) of the Workforce Innovation
and Opportunity Act (29 U.S.C. 3122(c)(1)(B)).
(2) Local area.--The term ``local area'' has the meaning
given the term in section 3 of the Workforce Innovation and
Opportunity Act (29 U.S.C. 3102).
(3) Local board.--The term ``local board'' has the meaning
given the term in section 3 of the Workforce Innovation and
Opportunity Act.
(4) Local plan.--The term ``local plan''--
(A) means a local plan approved, before July 1, 2016, under
section 118 of the Workforce Investment Act of 1998 (29
U.S.C. 2833); and
(B) after June 30, 2016, means a local plan as defined in
section 3 of the Workforce Innovation and Opportunity Act.
(5) Low-income youth.--The term ``low-income youth'' means
an individual who--
(A) is not younger than 16 but is younger than 25;
(B) meets the definition of a low-income individual
provided in section 3(36) of the Workforce Innovation and
Opportunity Act (29 U.S.C. 3102(36)), except that--
(i) States and local areas, subject to approval in the
applicable State plans and local plans, may increase the
income level specified in subparagraph (B)(i) of such section
to an amount not in excess of 200 percent of the poverty line
for purposes of determining eligibility for participation in
activities under section 10303; and
(ii) eligible entities described in section 10304(c),
subject to approval in the applicable applications for funds,
may make such an increase for purposes of determining
eligibility for participation in activities under section
10304; and
(C) is in one or more of the categories specified in
subparagraph (B)(iii) or (C)(iv) of section 129(a)(1) of the
Workforce Innovation and Opportunity Act (29 U.S.C.
3164(a)(1)).
(6) Poverty line.--The term ``poverty line'' means a
poverty line as defined in section 673 of the Community
Services Block Grant Act (42 U.S.C. 9902), applicable to a
family of the size involved.
(7) Registered apprenticeship program.--The term
``registered apprenticeship program'' means an apprenticeship
program registered under the Act of August 16, 1937 (commonly
known as the ``National Apprenticeship Act''; 50 Stat. 664,
chapter 663; 29 U.S.C. 50 et seq.).
(8) State.--The term ``State'' means each of the several
States of the United States, and the District of Columbia.
(9) State plan.--The term ``State plan'' means a State plan
approved--
(A) before July 1, 2016, under section 112 of the Workforce
Investment Act of 1998 (29 U.S.C. 2822); or
(B) after June 30, 2016, under section 102 or 103 of the
Workforce Innovation and Opportunity Act (29 U.S.C. 3112,
3113).
(10) Unemployed, low-income young adult.--The term
``unemployed, low-income young adult'' means an individual
who--
(A) is not younger than 18 but is younger than 35;
(B) is without employment and is seeking assistance under
this subpart to obtain employment; and
(C) meets the definition of a low-income individual
specified in section 3(36) of the Workforce Innovation and
Opportunity Act (29 U.S.C. 3102(36)), except that eligible
entities described in section 10304(c), subject to approval
in the applicable applications for funds, may increase the
income level specified in subparagraph (B)(i) of such section
3(36) to an amount not in excess of 200 percent of the
poverty line for purposes of determining eligibility for
participation in activities under section 10304.

Subpart 2--Carried Interest Fairness

SEC. 10311. SHORT TITLE; ETC.

(a) Short Title.--This subpart may be cited as the
``Carried Interest Fairness Act of 2015''.
(b) Amendment of 1986 Code.--Except as otherwise expressly
provided, whenever in this subpart 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. 10312. PARTNERSHIP INTERESTS TRANSFERRED IN CONNECTION
WITH PERFORMANCE OF SERVICES.

(a) Modification to Election To Include Partnership
Interest in Gross Income in

[[Page S4890]]

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. 10313. 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, divisions, and
technical terminations.--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 paragraph (1)(B) or
(2) of section 708(b).
``(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

[[Page S4891]]

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

[[Page S4892]]

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) Technical terminations, etc., disregarded.--No
increase or decrease in the qualified capital interest of any
partner shall result from a termination, merger,
consolidation, or division described in section 708, or any
similar transaction.
``(8) Treatment of certain loans.--
``(A) Proceeds of partnership loans not treated as
qualified capital 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,
``(B) such person holds (directly or indirectly) 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
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, 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.
``(f) Exception for Domestic C Corporations.--Except as
otherwise provided by the Secretary, in the case of a
domestic C corporation--
``(1) subsections (a) and (b) shall not apply to any item
allocated to such corporation with respect to any investment
services partnership interest (or to any gain or loss with
respect to the disposition of such an interest), and
``(2) subsection (e) shall not apply.
``(g) Regulations.--The Secretary shall prescribe such
regulations or other guidance as is necessary or 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.

[[Page S4893]]

``(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 (7) the following new paragraph:
``(8) 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:
``(k) 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)(8), 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 (k)''.
(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)(8) 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)(3) 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.''.
(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

[[Page S4894]]

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.

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