I
111th CONGRESS
1st Session
H. R. 1935
IN THE HOUSE OF REPRESENTATIVES
April 2, 2009
Mr. Levin introduced the following bill; which was referred to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to provide for the treatment of partnership interests held by partners providing services.
Partnership interests transferred in connection with performance of services
Modification to election To include partnership interest in gross income in year of transfer
Subsection (c) of section 83 of the Internal Revenue Code of 1986 is amended by redesignating paragraph (4) as paragraph (5) and by inserting after paragraph (3) the following new paragraph:
Partnership interests
Except as provided by the Secretary, in the case of any transfer of an interest in a partnership in connection with the performance of services for (or on behalf of) such partnership—
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
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.
.
Conforming amendment
Paragraph (2) of section 83(b) of such Code is amended
by inserting or subsection (c)(4)(B)
after paragraph
(1)
.
Effective date
The amendments made by this section shall apply to interests in partnerships transferred after the date of the enactment of this Act.
Income of partners for performing investment management services treated as ordinary income received for performance of services
In general
Part I of subchapter K of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new section:
Special rules for partners providing investment management services to partnership
Treatment of distributive share of partnership items
For purposes of this title, in the case of an investment services partnership interest—
In general
Notwithstanding section 702(b)—
any net income with respect to such interest for any partnership taxable year shall be treated as ordinary income, and
any net loss with respect to such interest for such year, to the extent not disallowed under paragraph (2) for such year, shall be treated as an ordinary loss.
Treatment of losses
Limitation
Any net loss with respect to such interest shall be allowed for any partnership taxable year only to the extent that such loss does not exceed the excess (if any) of—
the aggregate net income with respect to such interest for all prior partnership taxable years, over
the aggregate net loss with respect to such interest not disallowed under this subparagraph for all prior partnership taxable years.
Carryforward
Any net loss for any partnership taxable year which is not allowed by reason of subparagraph (A) shall be treated as an item of loss with respect to such partnership interest for the succeeding partnership taxable year.
Basis adjustment
No adjustment to the basis of a partnership interest shall be made on account of any net loss which is not allowed by reason of subparagraph (A).
Prior partnership years
Any reference in this paragraph to prior partnership taxable years shall only include prior partnership taxable years to which this section applies.
Net income and loss
For purposes of this section—
Net income
The term net income means, with respect to any investment services partnership interest for any partnership taxable year, the excess (if any) of—
all items of income and gain taken into account by the holder of such interest under section 702 with respect to such interest for such year, over
all items of deduction and loss so taken into account.
Net loss
The term net loss means, with respect to such interest for such year, the excess (if any) of the amount described in subparagraph (A)(ii) over the amount described in subparagraph (A)(i).
Dispositions of partnership interests
Gain
Any gain on the disposition of an investment services partnership interest shall be treated as ordinary income and shall be recognized notwithstanding any other provision of this subtitle.
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—
the aggregate net income with respect to such interest for all partnership taxable years, over
the aggregate net loss with respect to such interest allowed under subsection (a)(2) for all partnership taxable years.
Disposition of portion of interest
In the case of any disposition of an investment services partnership interest, the amount of net loss which otherwise would have (but for subsection (a)(2)(C)) applied to reduce the basis of such interest shall be disregarded for purposes of this section for all succeeding partnership taxable years.
Distributions of partnership property
In the case of any distribution of property by a partnership with respect to any investment services partnership interest held by a partner—
the excess (if any) of—
the fair market value of such property at the time of such distribution, over
the adjusted basis of such property in the hands of the partnership,
such property shall be treated for purposes of subpart B of part II as money distributed to such partner in an amount equal to such fair market value, and
the basis of such property in the hands of such partner shall be such fair market value.
Application of section 751
In applying section 751(a), an investment services partnership interest shall be treated as an inventory item.
Investment services partnership interest
For purposes of this section—
In general
The term investment services partnership interest means any interest in a partnership which is held by any person if it was reasonably expected (at the time that such person acquired such interest) that such person (or any person related to such person) would provide (directly or indirectly) a substantial quantity of any of the following services:
Advising as to the advisability of investing in, purchasing, or selling any specified asset.
Managing, acquiring, or disposing of any specified asset.
Arranging financing with respect to acquiring specified assets.
Any activity in support of any service described in subparagraphs (A) through (C).
Exception for certain capital interests
In general
In the case of any portion of an investment services partnership interest which is a qualified capital interest, all items of income, gain, loss, and deduction which are allocated to such qualified capital interest shall not be taken into account under subsection (a) if—
allocations of items are made by the partnership to such qualified capital interest in the same manner as such allocations are made to other qualified capital interests held by partners who do not provide any services described in paragraph (1) and who are not related to the partner holding the qualified capital interest, and
the allocations made to such other interests are significant compared to the allocations made to such qualified capital interest.
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—
the distributive share of gain or loss that would have been allocable to the qualified capital interest under subparagraph (A) if the partnership sold all of its assets immediately before the disposition, bears to
the distributive share of gain or loss that would have been so allocable to the investment services partnership interest of which such qualified capital interest is a part.
Qualified capital interest
For purposes of this paragraph, the term qualified capital interest means so much of a partner’s interest in the capital of the partnership as is attributable to—
the fair market value of any money or other property contributed to the partnership in exchange for such interest,
any amounts which have been included in gross income under section 83 with respect to the transfer of such interest, and
the excess (if any) of—
any items of income and gain taken into account under section 702 with respect to such interest for taxable years to which this section applies, over
any items of deduction and loss so taken into account.
Treatment of certain loans
Proceeds of partnership loans not treated as qualified capital interest of service providing partners
For purposes of this paragraph, an investment services partnership interest shall not be treated as a qualified capital interest to the extent that such interest is acquired in connection with the proceeds of any loan or other advance made or guaranteed, directly or indirectly, by any partner or the partnership (or any person related to any such partner or the partnership).
Reduction in allocations to qualified capital interests for loans from nonservice providing partners to the partnership
For purposes of this paragraph, any loan or other advance to the partnership made or guaranteed, directly or indirectly, by a partner not providing services described in paragraph (1) to the partnership (or any person related to such partner) shall be taken into account as invested capital of such partner.
Related persons
A person shall be treated as related to another person if the relationship between such persons would result in a disallowance of losses under section 267 or 707(b).
Other income and gain in connection with investment management services
In general
If—
a person performs (directly or indirectly) investment management services for any entity,
such person holds a disqualified interest with respect to such entity, and
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,
Definitions
For purposes of this subsection—
Disqualified interest
In general
The term disqualified interest means, with respect to any entity—
any interest in such entity other than indebtedness,
convertible or contingent debt of such entity,
any option or other right to acquire property described in subclause (I) or (II), and
any derivative instrument entered into (directly or indirectly) with such entity or any investor in such entity.
Exceptions
Such term shall not include—
a partnership interest,
stock in a taxable corporation, and
except as provided by the Secretary, stock in an S corporation.
Taxable corporation
The term taxable corporation means—
a domestic C corporation, or
a foreign corporation substantially all of the income of which is—
effectively connected with the conduct of a trade or business in the United States, or
subject to a comprehensive foreign income tax (as defined in section 457A(d)(2)).
Investment management services
The term investment management services means a substantial quantity of any of the services described in subsection (c)(1).
Regulations
The Secretary shall prescribe such regulations as are necessary or appropriate to carry out the purposes of this section, including regulations to—
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,
prevent the avoidance of the purposes of this section, and
coordinate this section with the other provisions of this title.
Cross reference
For 40 percent no fault penalty on certain underpayments due to the avoidance of this section, see section 6662.
.
Income from investment services partnership interests not treated as qualifying income of publicly traded partnerships
Subsection (d) of section 7704 of such Code is amended by adding at the end the following new paragraph:
Income from investment services partnership interests not qualified
In general
Items of income and gain shall not be treated as qualifying income if such items are treated as ordinary income by reason of the application of section 710 (relating to special rules for partners providing investment management services to partnership).
Special rules for certain partnerships
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:
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.
50 percent or more of the capital and profits interests of such partnership are owned, directly or indirectly, at all times during the taxable year by such real estate investment trust (determined with the application of section 267(c)).
Such partnership meets the requirements of paragraphs (2), (3), and (4) of section 856(c).
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:
Substantially all of the assets of such partnership consist of interests in one or more other partnerships which are traded on an established securities market.
Substantially all of the income of such partnership is ordinary income or section 1231 gain (as defined in section 1231(a)(3)).
Transitional rule
In the case of a partnership in existence on the date of the enactment of this paragraph, subparagraph (A) shall not apply to any taxable year of the partnership beginning before the date which is 10 years after the date of the enactment of this paragraph.
.
Imposition of penalty on underpayments
In general
Subsection (b) of section 6662 of such Code is amended by inserting after paragraph (5) the following new paragraph:
The application of subsection (d) of section 710 or the regulations prescribed under section 710(e) to prevent the avoidance of the purposes of section 710.
.
Amount of penalty
In general
Section 6662 of such Code is amended by adding at the end the following new subsection:
Increase in penalty in case of property transferred for investment management services
In the case of any portion of an underpayment to which
this section applies by reason of subsection (b)(6), subsection (a) shall be
applied with respect to such portion by substituting 40 percent
for 20
percent
.
.
Conforming amendments
Subparagraph (B) of section 6662A(e)(2) of such Code is amended—
by
striking section 6662(h)
and inserting subsection (h) or
(i) of section 6662
, and
by
striking gross
valuation misstatement penalty
in the heading and
inserting certain
increased underpayment penalties
.
Reasonable cause exception not applicable
Subsection (c) of section 6664 of such Code is amended—
by redesignating paragraphs (2) and (3) as paragraphs (3) and (4), respectively,
by striking
paragraph (2)
in paragraph (4), as so redesignated, and
inserting paragraph (3)
, and
by inserting after paragraph (1) the following new paragraph:
Exception
Paragraph (1) shall not apply to any portion of an underpayment to which this section applies by reason of subsection (b)(6).
.
Income and loss from investment services partnership interests taken into account in determining net earning from self-employment
Internal Revenue Code
Section 1402(a) of such Code is amended by striking
and
at the end of paragraph (16), by striking the period at the
end of paragraph (17) and inserting ; and
, and by inserting
after paragraph (17) the following new paragraph:
notwithstanding the preceding provisions of this subsection, any amount treated as ordinary income or ordinary loss of any individual under section 710 shall be taken into account in determining the net earnings from self-employment of such individual.
.
Social Security Act
Section 211(a) of the Social Security Act is amended by inserting after paragraph (16) the following new paragraph:
Notwithstanding the preceding provisions of this subsection, any amount treated as ordinary income or ordinary loss of any individual under section 710 of the Internal Revenue Code of 1986 shall be taken into account in determining the net earnings from self-employment of such individual.
.
Conforming amendments
Subsection (d) of
section 731 of the Internal Revenue Code of 1986 is amended by inserting
section 710(b)(4) (relating to distributions of partnership
property),
after to the extent otherwise provided
by
.
Section 741 of
such Code is amended by inserting or section 710 (relating to special
rules for partners providing investment management services to
partnership)
before the period at the end.
The table of sections for part I of subchapter K of chapter 1 of such Code is amended by adding at the end the following new item:
.
Effective date
In general
Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years ending after ___.
Partnership taxable years which include effective date
In applying section 710(a) of the Internal Revenue Code of 1986 (as added by this section) in the case of any partnership taxable year which includes ___, the amount of the net income referred to in such section shall be treated as being the lesser of the net income for the entire partnership taxable year or the net income determined by only taking into account items attributable to the portion of the partnership taxable year which is after such date.
Dispositions of partnership interests
Section 710(b) of the Internal Revenue Code of 1986 (as added by this section) shall apply to dispositions and distributions after ___.
Other income and gain in connection with investment management services
Section 710(d) of such Code (as added by this section) shall take effect on ___.
Publicly traded partnerships
The amendment made by subsection (b) shall apply to taxable years beginning after ___.
Application to partnership interests and tax sharing agreements of rule treating certain gain on sales between related persons as ordinary income
Partnership interests
In general
Subsection (a) of section 1239 of the Internal Revenue Code of 1986 is amended to read as follows:
Treatment of gain as ordinary income
In the case of a sale or exchange of property, directly or indirectly, between related persons, any gain recognized to the transferor shall be treated as ordinary income if—
such property is, in the hands of the transferee, of a character which is subject to the allowance for depreciation provided in section 167, or
such property is an interest in a partnership, but only to the extent of gain attributable to unrealized appreciation in property which is of a character subject to the allowance for depreciation provided in section 167.
.
Treatment of amortizable section 197 intangibles as depreciable property
Section 1239 of such Code is amended by adding at the end the following new subsection:
Treatment of amortizable section 197 intangibles as depreciable property
For treatment of amortizable section 197 intangibles as depreciable property, see section 197(f)(7).
.
Tax sharing agreements
Section 1239 of such Code (relating to gain from sale of depreciable property between certain related taxpayers) is amended by adding at the end the following new subsection:
Application to tax sharing agreements
In general
If there is a tax sharing agreement with respect to any sale or exchange, the transferee and the transferor shall be treated as related persons for purposes of this section.
Tax sharing agreement
For purposes of this subsection, the term tax sharing agreement means any agreement which provides for the payment to the transferor of any amount which is determined by reference to any portion of the tax benefit realized by the transferee with respect to the depreciation (or amortization) of the property transferred.
.
Effective date
The amendment made by this section shall apply to sales and exchanges after ___.