II
119THCONGRESS
1
STSESSION S. 445
To amend the Internal Revenue Code of 1986 to provide for the proper
tax treatment of personal service income earned in pass-thru entities.
IN THE SENATE OF THE UNITED STATES
FEBRUARY6 (legislative day, FEBRUARY5), 2025
Ms. B
ALDWIN(for herself, Mr. VANHOLLEN, Mrs. MURRAY, Mr. SCHATZ,
Mr. M
ARKEY, Ms. KLOBUCHAR, Mr. KAINE, Mr. MERKLEY, Mr. REED,
Ms. H
IRONO, Ms. WARREN, Mr. SANDERS, Mr. BOOKER, and Mr.
W
ELCH) introduced the following bill; which was read twice and referred
to the Committee on Finance
A BILL
To amend the Internal Revenue Code of 1986 to provide
for the proper tax treatment of personal service income
earned in pass-thru entities.
Be it enacted by the Senate and House of Representa-1
tives of the United States of America in Congress assembled, 2
SECTION 1. SHORT TITLE; ETC. 3
(a) S
HORTTITLE.—This Act may be cited as the 4
‘‘Carried Interest Fairness Act of 2025’’. 5
(b) A
MENDMENT OF 1986 CODE.—Except as other-6
wise expressly provided, whenever in this Act an amend-7
ment or repeal is expressed in terms of an amendment 8
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to, or repeal of, a section or other provision, the reference 1
shall be considered to be made to a section or other provi-2
sion of the Internal Revenue Code of 1986. 3
(c) T
ABLE OFCONTENTS.—The table of contents for 4
this Act is as follows: 5
Sec. 1. Short title; etc.
Sec. 2. Partnership interests transferred in connection with performance of
services.
Sec. 3. Special rules for partners providing investment management services to
partnerships.
SEC. 2. PARTNERSHIP INTERESTS TRANSFERRED IN CON-
6
NECTION WITH PERFORMANCE OF SERVICES. 7
(a) M
ODIFICATION TOELECTIONTOINCLUDEPART-8
NERSHIPINTEREST IN GROSSINCOME IN YEAR OF 9
T
RANSFER.—Subsection (c) of section 83 is amended by 10
redesignating paragraph (4) as paragraph (5) and by in-11
serting after paragraph (3) the following new paragraph: 12
‘‘(4) P
ARTNERSHIP INTERESTS .—Except as 13
provided by the Secretary— 14
‘‘(A) I
N GENERAL.—In the case of any 15
transfer of an interest in a partnership in con-16
nection with the provision of services to (or for 17
the benefit of) such partnership— 18
‘‘(i) the fair market value of such in-19
terest shall be treated for purposes of this 20
section as being equal to the amount of the 21
distribution which the partner would re-22
ceive if the partnership sold (at the time of 23
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the transfer) all of its assets at fair market 1
value and distributed the proceeds of such 2
sale (reduced by the liabilities of the part-3
nership) to its partners in liquidation of 4
the partnership, and 5
‘‘(ii) the person receiving such interest 6
shall be treated as having made the elec-7
tion under subsection (b)(1) unless such 8
person makes an election under this para-9
graph to have such subsection not apply. 10
‘‘(B) E
LECTION.—The election under sub-11
paragraph (A)(ii) shall be made under rules 12
similar to the rules of subsection (b)(2).’’. 13
(b) E
FFECTIVEDATE.—The amendments made by 14
this section shall apply to interests in partnerships trans-15
ferred after the date of the enactment of this Act. 16
SEC. 3. SPECIAL RULES FOR PARTNERS PROVIDING IN-17
VESTMENT MANAGEMENT SERVICES TO 18
PARTNERSHIPS. 19
(a) I
NGENERAL.—Part I of subchapter K of chapter 20
1 is amended by adding at the end the following new sec-21
tion: 22
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‘‘SEC. 710. SPECIAL RULES FOR PARTNERS PROVIDING IN-1
VESTMENT MANAGEMENT SERVICES TO 2
PARTNERSHIPS. 3
‘‘(a) T
REATMENT OF DISTRIBUTIVESHARE OF 4
P
ARTNERSHIPITEMS.—For purposes of this title, in the 5
case of an investment services partnership interest— 6
‘‘(1) I
N GENERAL.—Notwithstanding section 7
702(b)— 8
‘‘(A) an amount equal to the net capital 9
gain with respect to such interest for any part-10
nership taxable year shall be treated as ordi-11
nary income, and 12
‘‘(B) subject to the limitation of paragraph 13
(2), an amount equal to the net capital loss 14
with respect to such interest for any partner-15
ship taxable year shall be treated as an ordi-16
nary loss. 17
‘‘(2) R
ECHARACTERIZATION OF LOSSES LIM -18
ITED TO RECHARACTERIZED GAINS .—The amount 19
treated as ordinary loss under paragraph (1)(B) for 20
any taxable year shall not exceed the excess (if any) 21
of— 22
‘‘(A) the aggregate amount treated as ordi-23
nary income under paragraph (1)(A) with re-24
spect to the investment services partnership in-25
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terest for all preceding partnership taxable 1
years to which this section applies, over 2
‘‘(B) the aggregate amount treated as or-3
dinary loss under paragraph (1)(B) with re-4
spect to such interest for all preceding partner-5
ship taxable years to which this section applies. 6
‘‘(3) A
LLOCATION TO ITEMS OF GAIN AND 7
LOSS.— 8
‘‘(A) N
ET CAPITAL GAIN.—The amount 9
treated as ordinary income under paragraph 10
(1)(A) shall be allocated ratably among the 11
items of long-term capital gain taken into ac-12
count in determining such net capital gain. 13
‘‘(B) N
ET CAPITAL LOSS.—The amount 14
treated as ordinary loss under paragraph (1)(B) 15
shall be allocated ratably among the items of 16
long-term capital loss and short-term capital 17
loss taken into account in determining such net 18
capital loss. 19
‘‘(4) T
ERMS RELATING TO CAPITAL GAINS AND 20
LOSSES.—For purposes of this section— 21
‘‘(A) I
N GENERAL.—Net capital gain, long- 22
term capital gain, and long-term capital loss, 23
with respect to any investment services partner-24
ship interest for any taxable year, shall be de-25
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termined under section 1222, except that such 1
section shall be applied— 2
‘‘(i) without regard to the recharacter-3
ization of any item as ordinary income or 4
ordinary loss under this section, 5
‘‘(ii) by only taking into account items 6
of gain and loss taken into account by the 7
holder of such interest under section 702 8
(other than subsection (a)(9) thereof) with 9
respect to such interest for such taxable 10
year, and 11
‘‘(iii) by treating property which is 12
taken into account in determining gains 13
and losses to which section 1231 applies as 14
capital assets held for more than 1 year. 15
‘‘(B) N
ET CAPITAL LOSS.—The term ‘net 16
capital loss’ means the excess of the losses from 17
sales or exchanges of capital assets over the 18
gains from such sales or exchanges. Rules simi-19
lar to the rules of clauses (i) through (iii) of 20
subparagraph (A) shall apply for purposes of 21
the preceding sentence. 22
‘‘(5) S
PECIAL RULE FOR DIVIDENDS .—Any div-23
idend allocated with respect to any investment serv-24
ices partnership interest shall not be treated as 25
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qualified dividend income for purposes of section 1
1(h). 2
‘‘(6) S
PECIAL RULE FOR QUALIFIED SMALL 3
BUSINESS STOCK.—Section 1202 shall not apply to 4
any gain from the sale or exchange of qualified small 5
business stock (as defined in section 1202(c)) allo-6
cated with respect to any investment services part-7
nership interest. 8
‘‘(b) D
ISPOSITIONS OFPARTNERSHIPINTERESTS.— 9
‘‘(1) G
AIN.— 10
‘‘(A) I
N GENERAL.—Any gain on the dis-11
position of an investment services partnership 12
interest shall be— 13
‘‘(i) treated as ordinary income, and 14
‘‘(ii) recognized notwithstanding any 15
other provision of this subtitle. 16
‘‘(B) G
IFT AND TRANSFERS AT DEATH .— 17
In the case of a disposition of an investment 18
services partnership interest by gift or by rea-19
son of death of the taxpayer— 20
‘‘(i) subparagraph (A) shall not apply, 21
‘‘(ii) such interest shall be treated as 22
an investment services partnership interest 23
in the hands of the person acquiring such 24
interest, and 25
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‘‘(iii) any amount that would have 1
been treated as ordinary income under this 2
subsection had the decedent sold such in-3
terest immediately before death shall be 4
treated as an item of income in respect of 5
a decedent under section 691. 6
‘‘(2) L
OSS.—Any loss on the disposition of an 7
investment services partnership interest shall be 8
treated as an ordinary loss to the extent of the ex-9
cess (if any) of— 10
‘‘(A) the aggregate amount treated as ordi-11
nary income under subsection (a) with respect 12
to such interest for all partnership taxable 13
years to which this section applies, over 14
‘‘(B) the aggregate amount treated as or-15
dinary loss under subsection (a) with respect to 16
such interest for all partnership taxable years 17
to which this section applies. 18
‘‘(3) E
LECTION WITH RESPECT TO CERTAIN EX -19
CHANGES.—Paragraph (1)(A)(ii) shall not apply to 20
the contribution of an investment services partner-21
ship interest to a partnership in exchange for an in-22
terest in such partnership if— 23
‘‘(A) the taxpayer makes an irrevocable 24
election to treat the partnership interest re-25
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ceived in the exchange as an investment serv-1
ices partnership interest, and 2
‘‘(B) the taxpayer agrees to comply with 3
such reporting and recordkeeping requirements 4
as the Secretary may prescribe. 5
‘‘(4) D
ISTRIBUTIONS OF PARTNERSHIP PROP -6
ERTY.— 7
‘‘(A) I
N GENERAL.—In the case of any dis-8
tribution of property by a partnership with re-9
spect to any investment services partnership in-10
terest held by a partner, the partner receiving 11
such property shall recognize gain equal to the 12
excess (if any) of— 13
‘‘(i) the fair market value of such 14
property at the time of such distribution, 15
over 16
‘‘(ii) the adjusted basis of such prop-17
erty in the hands of such partner (deter-18
mined without regard to subparagraph 19
(C)). 20
‘‘(B) T
REATMENT OF GAIN AS ORDINARY 21
INCOME.—Any gain recognized by such partner 22
under subparagraph (A) shall be treated as or-23
dinary income to the same extent and in the 24
same manner as the increase in such partner’s 25
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distributive share of the taxable income of the 1
partnership would be treated under subsection 2
(a) if, immediately prior to the distribution, the 3
partnership had sold the distributed property at 4
fair market value and all of the gain from such 5
disposition were allocated to such partner. For 6
purposes of applying subsection (a)(2), any gain 7
treated as ordinary income under this subpara-8
graph shall be treated as an amount treated as 9
ordinary income under subsection (a)(1)(A). 10
‘‘(C) A
DJUSTMENT OF BASIS.—In the case 11
a distribution to which subparagraph (A) ap-12
plies, the basis of the distributed property in 13
the hands of the distributee partner shall be the 14
fair market value of such property. 15
‘‘(D) S
PECIAL RULES WITH RESPECT TO 16
MERGERS AND DIVISIONS .—In the case of a 17
taxpayer which satisfies requirements similar to 18
the requirements of subparagraphs (A) and (B) 19
of paragraph (3), this paragraph and paragraph 20
(1)(A)(ii) shall not apply to the distribution of 21
a partnership interest if such distribution is in 22
connection with a contribution (or deemed con-23
tribution) of any property of the partnership to 24
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which section 721 applies pursuant to a trans-1
action described in section 708(b)(2). 2
‘‘(c) I
NVESTMENTSERVICESPARTNERSHIPINTER-3
EST.—For purposes of this section— 4
‘‘(1) I
N GENERAL.—The term ‘investment serv-5
ices partnership interest’ means any interest in an 6
investment partnership acquired or held by any per-7
son in connection with the conduct of a trade or 8
business described in paragraph (2) by such person 9
(or any person related to such person). An interest 10
in an investment partnership held by any person— 11
‘‘(A) shall not be treated as an investment 12
services partnership interest for any period be-13
fore the first date on which it is so held in con-14
nection with such a trade or business, 15
‘‘(B) shall not cease to be an investment 16
services partnership interest merely because 17
such person holds such interest other than in 18
connection with such a trade or business, and 19
‘‘(C) shall be treated as an investment 20
services partnership interest if acquired from a 21
related person in whose hands such interest was 22
an investment services partnership interest. 23
‘‘(2) B
USINESSES TO WHICH THIS SECTION AP -24
PLIES.—A trade or business is described in this 25
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paragraph if such trade or business primarily in-1
volves the performance of any of the following serv-2
ices with respect to assets held (directly or indi-3
rectly) by one or more investment partnerships re-4
ferred to in paragraph (1): 5
‘‘(A) Advising as to the advisability of in-6
vesting in, purchasing, or selling any specified 7
asset. 8
‘‘(B) Managing, acquiring, or disposing of 9
any specified asset. 10
‘‘(C) Arranging financing with respect to 11
acquiring specified assets. 12
‘‘(D) Any activity in support of any service 13
described in subparagraphs (A) through (C). 14
‘‘(3) I
NVESTMENT PARTNERSHIP .— 15
‘‘(A) I
N GENERAL.—The term ‘investment 16
partnership’ means any partnership if, at the 17
end of any two consecutive calendar quarters 18
ending after the date of enactment of this sec-19
tion— 20
‘‘(i) substantially all of the assets of 21
the partnership are specified assets (deter-22
mined without regard to any section 197 23
intangible within the meaning of section 24
197(d)), and 25
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‘‘(ii) less than 75 percent of the cap-1
ital of the partnership is attributable to 2
qualified capital interests which constitute 3
property held in connection with a trade or 4
business of the owner of such interest. 5
‘‘(B) L
OOK-THROUGH OF CERTAIN WHOL -6
LY OWNED ENTITIES FOR PURPOSES OF DETER -7
MINING ASSETS OF THE PARTNERSHIP .— 8
‘‘(i) I
N GENERAL.—For purposes of 9
determining the assets of a partnership 10
under subparagraph (A)(i)— 11
‘‘(I) any interest in a specified 12
entity shall not be treated as an asset 13
of such partnership, and 14
‘‘(II) such partnership shall be 15
treated as holding its proportionate 16
share of each of the assets of such 17
specified entity. 18
‘‘(ii) S
PECIFIED ENTITY.—For pur-19
poses of clause (i), the term ‘specified enti-20
ty’ means, with respect to any partnership 21
(hereafter referred to as the upper-tier 22
partnership), any person which engages in 23
the same trade or business as the upper- 24
tier partnership and is— 25
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‘‘(I) a partnership all of the cap-1
ital and profits interests of which are 2
held directly or indirectly by the 3
upper-tier partnership, or 4
‘‘(II) a foreign corporation which 5
does not engage in a trade or business 6
in the United States and all of the 7
stock of which is held directly or indi-8
rectly by the upper-tier partnership. 9
‘‘(C) S
PECIAL RULES FOR DETERMINING 10
IF PROPERTY HELD IN CONNECTION WITH 11
TRADE OR BUSINESS.— 12
‘‘(i) I
N GENERAL.—Except as other-13
wise provided by the Secretary, solely for 14
purposes of determining whether any inter-15
est in a partnership constitutes property 16
held in connection with a trade or business 17
under subparagraph (A)(ii)— 18
‘‘(I) a trade or business of any 19
person closely related to the owner of 20
such interest shall be treated as a 21
trade or business of such owner, 22
‘‘(II) such interest shall be treat-23
ed as held by a person in connection 24
with a trade or business during any 25
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taxable year if such interest was so 1
held by such person during any 3 tax-2
able years preceding such taxable 3
year, and 4
‘‘(III) paragraph (5)(B) shall not 5
apply. 6
‘‘(ii) C
LOSELY RELATED PERSONS .— 7
For purposes of clause (i)(I), a person 8
shall be treated as closely related to an-9
other person if, taking into account the 10
rules of section 267(c), the relationship be-11
tween such persons is described in— 12
‘‘(I) paragraph (1) or (9) of sec-13
tion 267(b), or 14
‘‘(II) section 267(b)(4), but solely 15
in the case of a trust with respect to 16
which each current beneficiary is the 17
grantor or a person whose relationship 18
to the grantor is described in para-19
graph (1) or (9) of section 267(b). 20
‘‘(D) A
NTIABUSE RULES.—The Secretary 21
may issue regulations or other guidance which 22
prevent the avoidance of the purposes of sub-23
paragraph (A), including regulations or other 24
guidance which treat convertible and contingent 25
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debt (and other debt having the attributes of 1
equity) as a capital interest in the partnership. 2
‘‘(E) C
ONTROLLED GROUPS OF ENTI -3
TIES.— 4
‘‘(i) I
N GENERAL.—In the case of a 5
controlled group of entities, if an interest 6
in the partnership received in exchange for 7
a contribution to the capital of the part-8
nership by any member of such controlled 9
group would (in the hands of such mem-10
ber) constitute property held in connection 11
with a trade or business, then any interest 12
in such partnership held by any member of 13
such group shall be treated for purposes of 14
subparagraph (A) as constituting (in the 15
hands of such member) property held in 16
connection with a trade or business. 17
‘‘(ii) C
ONTROLLED GROUP OF ENTI -18
TIES.—For purposes of clause (i), the term 19
‘controlled group of entities’ means a con-20
trolled group of corporations as defined in 21
section 1563(a)(1), applied without regard 22
to subsections (a)(4) and (b)(2) of section 23
1563. A partnership or any other entity 24
(other than a corporation) shall be treated 25
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as a member of a controlled group of enti-1
ties if such entity is controlled (within the 2
meaning of section 954(d)(3)) by members 3
of such group (including any entity treated 4
as a member of such group by reason of 5
this sentence). 6
‘‘(F) S
PECIAL RULE FOR CORPORA -7
TIONS.—For purposes of this paragraph, in the 8
case of a corporation, the determination of 9
whether property is held in connection with a 10
trade or business shall be determined as if the 11
taxpayer were an individual. 12
‘‘(4) S
PECIFIED ASSET.—The term ‘specified 13
asset’ means securities (as defined in section 14
475(c)(2) without regard to the last sentence there-15
of), real estate held for rental or investment, inter-16
ests in partnerships, commodities (as defined in sec-17
tion 475(e)(2)), cash or cash equivalents, or options 18
or derivative contracts with respect to any of the 19
foregoing. 20
‘‘(5) R
ELATED PERSONS.— 21
‘‘(A) I
N GENERAL.—A person shall be 22
treated as related to another person if the rela-23
tionship between such persons is described in 24
section 267(b) or 707(b). 25
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‘‘(B) ATTRIBUTION OF PARTNER SERV -1
ICES.—Any service described in paragraph (2) 2
which is provided by a partner of a partnership 3
shall be treated as also provided by such part-4
nership. 5
‘‘(d) E
XCEPTION FOR CERTAINCAPITALINTER-6
ESTS.— 7
‘‘(1) I
N GENERAL.—In the case of any portion 8
of an investment services partnership interest which 9
is a qualified capital interest, all items of gain and 10
loss (and any dividends) which are allocated to such 11
qualified capital interest shall not be taken into ac-12
count under subsection (a) if— 13
‘‘(A) allocations of items are made by the 14
partnership to such qualified capital interest in 15
the same manner as such allocations are made 16
to other qualified capital interests held by part-17
ners who do not provide any services described 18
in subsection (c)(2) and who are not related to 19
the partner holding the qualified capital inter-20
est, and 21
‘‘(B) the allocations made to such other in-22
terests are significant compared to the alloca-23
tions made to such qualified capital interest. 24
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‘‘(2) AUTHORITY TO PROVIDE EXCEPTIONS TO 1
ALLOCATION REQUIREMENTS .—To the extent pro-2
vided by the Secretary in regulations or other guid-3
ance— 4
‘‘(A) A
LLOCATIONS TO PORTION OF QUALI -5
FIED CAPITAL INTEREST .—Paragraph (1) may 6
be applied separately with respect to a portion 7
of a qualified capital interest. 8
‘‘(B) N
O OR INSIGNIFICANT ALLOCATIONS 9
TO NONSERVICE PROVIDERS .—In any case in 10
which the requirements of paragraph (1)(B) are 11
not satisfied, items of gain and loss (and any 12
dividends) shall not be taken into account under 13
subsection (a) to the extent that such items are 14
properly allocable under such regulations or 15
other guidance to qualified capital interests. 16
‘‘(C) A
LLOCATIONS TO SERVICE PRO -17
VIDERS’ QUALIFIED CAPITAL INTERESTS WHICH 18
ARE LESS THAN OTHER ALLOCATIONS .—Alloca-19
tions shall not be treated as failing to meet the 20
requirement of paragraph (1)(A) merely be-21
cause the allocations to the qualified capital in-22
terest represent a lower return than the alloca-23
tions made to the other qualified capital inter-24
ests referred to in such paragraph. 25
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‘‘(3) SPECIAL RULE FOR CHANGES IN SERVICES 1
AND CAPITAL CONTRIBUTIONS .—In the case of an 2
interest in a partnership which was not an invest-3
ment services partnership interest and which, by 4
reason of a change in the services with respect to as-5
sets held (directly or indirectly) by the partnership 6
or by reason of a change in the capital contributions 7
to such partnership, becomes an investment services 8
partnership interest, the qualified capital interest of 9
the holder of such partnership interest immediately 10
after such change shall not, for purposes of this sub-11
section, be less than the fair market value of such 12
interest (determined immediately before such 13
change). 14
‘‘(4) S
PECIAL RULE FOR TIERED PARTNER -15
SHIPS.—Except as otherwise provided by the Sec-16
retary, in the case of tiered partnerships, all items 17
which are allocated in a manner which meets the re-18
quirements of paragraph (1) to qualified capital in-19
terests in a lower-tier partnership shall retain such 20
character to the extent allocated on the basis of 21
qualified capital interests in any upper-tier partner-22
ship. 23
‘‘(5) E
XCEPTION FOR NO -SELF-CHARGED 24
CARRY AND MANAGEMENT FEE PROVISIONS .—Ex-25
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cept as otherwise provided by the Secretary, an in-1
terest shall not fail to be treated as satisfying the 2
requirement of paragraph (1)(A) merely because the 3
allocations made by the partnership to such interest 4
do not reflect the cost of services described in sub-5
section (c)(2) which are provided (directly or indi-6
rectly) to the partnership by the holder of such in-7
terest (or a related person). 8
‘‘(6) S
PECIAL RULE FOR DISPOSITIONS .—In the 9
case of any investment services partnership interest 10
any portion of which is a qualified capital interest, 11
subsection (b) shall not apply to so much of any 12
gain or loss as bears the same proportion to the en-13
tire amount of such gain or loss as— 14
‘‘(A) the distributive share of gain or loss 15
that would have been allocated to the qualified 16
capital interest (consistent with the require-17
ments of paragraph (1)) if the partnership had 18
sold all of its assets at fair market value imme-19
diately before the disposition, bears to 20
‘‘(B) the distributive share of gain or loss 21
that would have been so allocated to the invest-22
ment services partnership interest of which such 23
qualified capital interest is a part. 24
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•S 445 IS
‘‘(7) QUALIFIED CAPITAL INTEREST .—For pur-1
poses of this section— 2
‘‘(A) I
N GENERAL.—The term ‘qualified 3
capital interest’ means so much of a partner’s 4
interest in the capital of the partnership as is 5
attributable to— 6
‘‘(i) the fair market value of any 7
money or other property contributed to the 8
partnership in exchange for such interest 9
(determined without regard to section 10
752(a)), 11
‘‘(ii) any amounts which have been in-12
cluded in gross income under section 83 13
with respect to the transfer of such inter-14
est, and 15
‘‘(iii) the excess (if any) of— 16
‘‘(I) any items of income and 17
gain taken into account under section 18
702 with respect to such interest, over 19
‘‘(II) any items of deduction and 20
loss so taken into account. 21
‘‘(B) A
DJUSTMENT TO QUALIFIED CAPITAL 22
INTEREST.— 23
‘‘(i) D
ISTRIBUTIONS AND LOSSES .— 24
The qualified capital interest shall be re-25
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•S 445 IS
duced by distributions from the partner-1
ship with respect to such interest and by 2
the excess (if any) of the amount described 3
in subparagraph (A)(iii)(II) over the 4
amount described in subparagraph 5
(A)(iii)(I). 6
‘‘(ii) S
PECIAL RULE FOR CONTRIBU -7
TIONS OF PROPERTY.—In the case of any 8
contribution of property described in sub-9
paragraph (A)(i) with respect to which the 10
fair market value of such property is not 11
equal to the adjusted basis of such prop-12
erty immediately before such contribution, 13
proper adjustments shall be made to the 14
qualified capital interest to take into ac-15
count such difference consistent with such 16
regulations or other guidance as the Sec-17
retary may provide. 18
‘‘(C) M
ERGERS, CONSOLIDATIONS, ETC., 19
DISREGARDED.—No increase or decrease in the 20
qualified capital interest of any partner shall re-21
sult from a merger, consolidation, or division 22
described in section 708, or any similar trans-23
action. 24
‘‘(8) T
REATMENT OF CERTAIN LOANS .— 25
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•S 445 IS
‘‘(A) PROCEEDS OF PARTNERSHIP LOANS 1
NOT TREATED AS QUALIFIED CAPITAL INTER -2
EST OF SERVICE PROVIDING PARTNERS .—For 3
purposes of this subsection, an investment serv-4
ices partnership interest shall not be treated as 5
a qualified capital interest to the extent that 6
such interest is acquired in connection with the 7
proceeds of any loan or other advance made or 8
guaranteed, directly or indirectly, by any other 9
partner or the partnership (or any person re-10
lated to any such other partner or the partner-11
ship). The preceding sentence shall not apply to 12
the extent the loan or other advance is repaid 13
before the date of the enactment of this section 14
unless such repayment is made with the pro-15
ceeds of a loan or other advance described in 16
the preceding sentence. 17
‘‘(B) R
EDUCTION IN ALLOCATIONS TO 18
QUALIFIED CAPITAL INTERESTS FOR LOANS 19
FROM NONSERVICE -PROVIDING PARTNERS TO 20
THE PARTNERSHIP.—For purposes of this sub-21
section, any loan or other advance to the part-22
nership made or guaranteed, directly or indi-23
rectly, by a partner not providing services de-24
scribed in subsection (c)(2) to the partnership 25
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•S 445 IS
(or any person related to such partner) shall be 1
taken into account in determining the qualified 2
capital interests of the partners in the partner-3
ship. 4
‘‘(9) S
PECIAL RULE FOR QUALIFIED FAMILY 5
PARTNERSHIPS.— 6
‘‘(A) I
N GENERAL.—In the case of any 7
specified family partnership interest, paragraph 8
(1)(A) shall be applied without regard to the 9
phrase ‘and who are not related to the partner 10
holding the qualified capital interest’. 11
‘‘(B) S
PECIFIED FAMILY PARTNERSHIP IN -12
TEREST.—For purposes of this paragraph, the 13
term ‘specified family partnership interest’ 14
means any investment services partnership in-15
terest if— 16
‘‘(i) such interest is an interest in a 17
qualified family partnership, 18
‘‘(ii) such interest is held by a natural 19
person or by a trust with respect to which 20
each beneficiary is a grantor or a person 21
whose relationship to the grantor is de-22
scribed in section 267(b)(1), and 23
‘‘(iii) all other interests in such quali-24
fied family partnership with respect to 25
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•S 445 IS
which significant allocations are made 1
(within the meaning of paragraph (1)(B) 2
and in comparison to the allocations made 3
to the interest described in clause (ii)) are 4
held by persons who— 5
‘‘(I) are related to the natural 6
person or trust referred to in clause 7
(ii), or 8
‘‘(II) provide services described 9
in subsection (c)(2). 10
‘‘(C) Q
UALIFIED FAMILY PARTNERSHIP .— 11
For purposes of this paragraph, the term 12
‘qualified family partnership’ means any part-13
nership if— 14
‘‘(i) all of the capital and profits in-15
terests of such partnership are held by— 16
‘‘(I) specified family members, 17
‘‘(II) any person closely related 18
(within the meaning of subsection 19
(c)(3)(C)(ii)) to a specified family 20
member, or 21
‘‘(III) any other person (not de-22
scribed in subclause (I) or (II)) if 23
such interest is an investment services 24
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•S 445 IS
partnership interest with respect to 1
such person, and 2
‘‘(ii) such partnership does not hold 3
itself out to the public as an investment 4
advisor. 5
‘‘(D) S
PECIFIED FAMILY MEMBERS .—For 6
purposes of subparagraph (C), individuals shall 7
be treated as specified family members if such 8
individuals would be treated as one person 9
under the rules of section 1361(c)(1) if the ap-10
plicable date (within the meaning of subpara-11
graph (B)(iii) thereof) were the latest of— 12
‘‘(i) the date of the establishment of 13
the partnership, 14
‘‘(ii) the earliest date that the com-15
mon ancestor holds a capital or profits in-16
terest in the partnership, or 17
‘‘(iii) the date of the enactment of this 18
section. 19
‘‘(e) O
THERINCOME AND GAIN INCONNECTION 20
W
ITHINVESTMENTMANAGEMENTSERVICES.— 21
‘‘(1) I
N GENERAL.—If— 22
‘‘(A) a person performs (directly or indi-23
rectly) investment management services for any 24
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•S 445 IS
investment entity or special purpose acquisition 1
company, 2
‘‘(B) such person holds (directly or indi-3
rectly) a disqualified interest with respect to 4
such entity or such company (as the case may 5
be), and 6
‘‘(C) the value of such interest (or pay-7
ments thereunder) is substantially related to 8
the amount of income or gain (whether or not 9
realized) from the assets with respect to which 10
the investment management services are per-11
formed, 12
any income or gain with respect to such interest 13
shall be treated as ordinary income. Rules similar to 14
the rules of subsections (a)(5) and (d) shall apply 15
for purposes of this subsection. 16
‘‘(2) D
EFINITIONS.—For purposes of this sub-17
section— 18
‘‘(A) D
ISQUALIFIED INTEREST.— 19
‘‘(i) I
N GENERAL.—The term ‘dis-20
qualified interest’ means, with respect to 21
any investment entity— 22
‘‘(I) any interest in such entity 23
other than indebtedness, 24
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•S 445 IS
‘‘(II) convertible or contingent 1
debt of such entity, 2
‘‘(III) any option or other right 3
to acquire property described in sub-4
clause (I) or (II), and 5
‘‘(IV) any derivative instrument 6
entered into (directly or indirectly) 7
with such entity or any investor in 8
such entity. 9
‘‘(ii) E
XCEPTIONS.—Such term shall 10
not include— 11
‘‘(I) a partnership interest, 12
‘‘(II) except as provided by the 13
Secretary, any interest in a taxable 14
corporation (other than a special pur-15
pose acquisition company), and 16
‘‘(III) except as provided by the 17
Secretary, stock in an S corporation. 18
‘‘(B) T
AXABLE CORPORATION .—The term 19
‘taxable corporation’ means— 20
‘‘(i) a domestic C corporation, or 21
‘‘(ii) a foreign corporation substan-22
tially all of the income of which is— 23
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•S 445 IS
‘‘(I) effectively connected with 1
the conduct of a trade or business in 2
the United States, or 3
‘‘(II) subject to a comprehensive 4
foreign income tax (as defined in sec-5
tion 457A(d)(2)). 6
‘‘(C) I
NVESTMENT MANAGEMENT SERV -7
ICES.—The term ‘investment management serv-8
ices’ means a substantial quantity of any of the 9
services described in subsection (c)(2). 10
‘‘(D) I
NVESTMENT ENTITY .—The term ‘in-11
vestment entity’ means any entity which, if it 12
were a partnership, would be an investment 13
partnership. 14
‘‘(E) S
PECIAL PURPOSE ACQUISITION COM -15
PANY.—The term ‘special purpose acquisition 16
company’ means any corporation that— 17
‘‘(i) is formed for the purpose of ac-18
quiring a privately held company, 19
‘‘(ii) is publicly traded on an estab-20
lished securities market or its interests are 21
readily tradable on a secondary market (or 22
the substantial equivalent thereof), and 23
‘‘(iii) is required to report an acquisi-24
tion under Item 2.01 or make a disclosure 25
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•S 445 IS
under Item 5.06 of Form 8-K (or any suc-1
cessor form) with the Securities and Ex-2
change Commission. 3
‘‘(f) E
XCEPTION FORDOMESTICC CORPORATIONS.— 4
Except as otherwise provided by the Secretary, in the case 5
of a domestic C corporation (other than a special purpose 6
acquisition company, as defined in subsection (e)(2)(E))— 7
‘‘(1) subsections (a) and (b) shall not apply to 8
any item allocated to such corporation with respect 9
to any investment services partnership interest (or 10
to any gain or loss with respect to the disposition of 11
such an interest), and 12
‘‘(2) subsection (e) shall not apply. 13
‘‘(g) R
EGULATIONS.—The Secretary shall prescribe 14
such regulations or other guidance as is necessary or ap-15
propriate to carry out the purposes of this section, includ-16
ing regulations or other guidance to— 17
‘‘(1) require such reporting and recordkeeping 18
by any person in such manner and at such time as 19
the Secretary may prescribe for purposes of enabling 20
the partnership to meet the requirements of section 21
6031 with respect to any item described in section 22
702(a)(9), 23
‘‘(2) provide modifications to the application of 24
this section (including treating related persons as 25
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•S 445 IS
not related to one another) to the extent such modi-1
fication is consistent with the purposes of this sec-2
tion, 3
‘‘(3) prevent the avoidance of the purposes of 4
this section (including through the use of qualified 5
family partnerships), and 6
‘‘(4) coordinate this section with the other pro-7
visions of this title. 8
‘‘(h) C
ROSSREFERENCE.—For 40 percent penalty on 9
certain underpayments due to the avoidance of this sec-10
tion, see section 6662.’’. 11
(b) A
PPLICATION OFSECTION751 TOINDIRECTDIS-12
POSITIONS OFINVESTMENTSERVICESPARTNERSHIPIN-13
TERESTS.— 14
(1) I
N GENERAL.—Subsection (a) of section 15
751 is amended by striking ‘‘or’’ at the end of para-16
graph (1), by inserting ‘‘or’’ at the end of paragraph 17
(2), and by inserting after paragraph (2) the fol-18
lowing new paragraph: 19
‘‘(3) investment services partnership interests 20
held by the partnership,’’. 21
(2) C
ERTAIN DISTRIBUTIONS TREATED AS 22
SALES OR EXCHANGES .—Subparagraph (A) of sec-23
tion 751(b)(1) is amended by striking ‘‘or’’ at the 24
end of clause (i), by inserting ‘‘or’’ at the end of 25
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•S 445 IS
clause (ii), and by inserting after clause (ii) the fol-1
lowing new clause: 2
‘‘(iii) investment services partnership 3
interests held by the partnership,’’. 4
(3) A
PPLICATION OF SPECIAL RULES IN THE 5
CASE OF TIERED PARTNERSHIPS .—Subsection (f) of 6
section 751 is amended— 7
(A) by striking ‘‘or’’ at the end of para-8
graph (1), by inserting ‘‘or’’ at the end of para-9
graph (2), and by inserting after paragraph (2) 10
the following new paragraph: 11
‘‘(3) an investment services partnership interest 12
held by the partnership,’’, and 13
(B) by striking ‘‘partner.’’ and inserting 14
‘‘partner (other than a partnership in which it 15
holds an investment services partnership inter-16
est).’’. 17
(4) I
NVESTMENT SERVICES PARTNERSHIP IN -18
TERESTS; QUALIFIED CAPITAL INTERESTS .—Section 19
751 is amended by adding at the end the following 20
new subsection: 21
‘‘(g) I
NVESTMENTSERVICESPARTNERSHIPINTER-22
ESTS.—For purposes of this section— 23
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•S 445 IS
‘‘(1) IN GENERAL.—The term ‘investment serv-1
ices partnership interest’ has the meaning given 2
such term by section 710(c). 3
‘‘(2) A
DJUSTMENTS FOR QUALIFIED CAPITAL 4
INTERESTS.—The amount to which subsection (a) 5
applies by reason of paragraph (3) thereof shall not 6
include so much of such amount as is attributable 7
to any portion of the investment services partnership 8
interest which is a qualified capital interest (deter-9
mined under rules similar to the rules of section 10
710(d)). 11
‘‘(3) E
XCEPTION FOR PUBLICLY TRADED PART -12
NERSHIPS.—Except as otherwise provided by the 13
Secretary, in the case of an exchange of an interest 14
in a publicly traded partnership (as defined in sec-15
tion 7704) to which subsection (a) applies— 16
‘‘(A) this section shall be applied without 17
regard to subsections (a)(3), (b)(1)(A)(iii), and 18
(f)(3), and 19
‘‘(B) such partnership shall be treated as 20
owning its proportionate share of the property 21
of any other partnership in which it is a part-22
ner. 23
‘‘(4) R
ECOGNITION OF GAINS .—Any gain with 24
respect to which subsection (a) applies by reason of 25
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•S 445 IS
paragraph (3) thereof shall be recognized notwith-1
standing any other provision of this title. 2
‘‘(5) C
OORDINATION WITH INVENTORY 3
ITEMS.—An investment services partnership interest 4
held by the partnership shall not be treated as an 5
inventory item of the partnership. 6
‘‘(6) P
REVENTION OF DOUBLE COUNTING .— 7
Under regulations or other guidance prescribed by 8
the Secretary, subsection (a)(3) shall not apply with 9
respect to any amount to which section 710 applies. 10
‘‘(7) V
ALUATION METHODS .—The Secretary 11
shall prescribe regulations or other guidance which 12
provide the acceptable methods for valuing invest-13
ment services partnership interests for purposes of 14
this section.’’. 15
(c) T
REATMENT FOR PURPOSES OF SECTION 16
7704.—Subsection (d) of section 7704 is amended by add-17
ing at the end the following new paragraph: 18
‘‘(6) I
NCOME FROM CERTAIN CARRIED INTER -19
ESTS NOT QUALIFIED.— 20
‘‘(A) I
N GENERAL.—Specified carried in-21
terest income shall not be treated as qualifying 22
income. 23
‘‘(B) S
PECIFIED CARRIED INTEREST IN -24
COME.—For purposes of this paragraph— 25
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•S 445 IS
‘‘(i) IN GENERAL.—The term ‘speci-1
fied carried interest income’ means— 2
‘‘(I) any item of income or gain 3
allocated to an investment services 4
partnership interest (as defined in 5
section 710(c)) held by the partner-6
ship, 7
‘‘(II) any gain on the disposition 8
of an investment services partnership 9
interest (as so defined) or a partner-10
ship interest to which (in the hands of 11
the partnership) section 751 applies, 12
and 13
‘‘(III) any income or gain taken 14
into account by the partnership under 15
subsection (b)(4) or (e) of section 16
710. 17
‘‘(ii) E
XCEPTION FOR QUALIFIED CAP -18
ITAL INTERESTS.—A rule similar to the 19
rule of section 710(d) shall apply for pur-20
poses of clause (i). 21
‘‘(C) C
OORDINATION WITH OTHER PROVI -22
SIONS.—Subparagraph (A) shall not apply to 23
any item described in paragraph (1)(E) (or so 24
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•S 445 IS
much of paragraph (1)(F) as relates to para-1
graph (1)(E)). 2
‘‘(D) S
PECIAL RULES FOR CERTAIN PART -3
NERSHIPS.— 4
‘‘(i) C
ERTAIN PARTNERSHIPS OWNED 5
BY REAL ESTATE INVESTMENT TRUSTS .— 6
Subparagraph (A) shall not apply in the 7
case of a partnership which meets each of 8
the following requirements: 9
‘‘(I) Such partnership is treated 10
as publicly traded under this section 11
solely by reason of interests in such 12
partnership being convertible into in-13
terests in a real estate investment 14
trust which is publicly traded. 15
‘‘(II) Fifty percent or more of 16
the capital and profits interests of 17
such partnership are owned, directly 18
or indirectly, at all times during the 19
taxable year by such real estate in-20
vestment trust (determined with the 21
application of section 267(c)). 22
‘‘(III) Such partnership meets 23
the requirements of paragraphs (2), 24
(3), and (4) of section 856(c). 25
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•S 445 IS
‘‘(ii) CERTAIN PARTNERSHIPS OWN -1
ING OTHER PUBLICLY TRADED PARTNER -2
SHIPS.—Subparagraph (A) shall not apply 3
in the case of a partnership which meets 4
each of the following requirements: 5
‘‘(I) Substantially all of the as-6
sets of such partnership consist of in-7
terests in one or more publicly traded 8
partnerships (determined without re-9
gard to subsection (b)(2)). 10
‘‘(II) Substantially all of the in-11
come of such partnership is ordinary 12
income or section 1231 gain (as de-13
fined in section 1231(a)(3)). 14
‘‘(E) T
RANSITIONAL RULE .—Subpara-15
graph (A) shall not apply to any taxable year 16
of the partnership beginning before the date 17
which is 10 years after the date of the enact-18
ment of this paragraph.’’. 19
(d) I
MPOSITION OF PENALTY ON UNDERPAY-20
MENTS.— 21
(1) I
N GENERAL.—Subsection (b) of section 22
6662 is amended by inserting after paragraph (10) 23
the following new paragraph: 24
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•S 445 IS
‘‘(11) The application of section 710(e) or the 1
regulations or other guidance prescribed under sec-2
tion 710(g) to prevent the avoidance of the purposes 3
of section 710.’’. 4
(2) A
MOUNT OF PENALTY .— 5
(A) I
N GENERAL.—Section 6662 is amend-6
ed by adding at the end the following new sub-7
section: 8
‘‘(m) I
NCREASE INPENALTY INCASE OFPROPERTY 9
T
RANSFERRED FOR INVESTMENT MANAGEMENT SERV-10
ICES.—In the case of any portion of an underpayment to 11
which this section applies by reason of subsection (b)(10), 12
subsection (a) shall be applied with respect to such portion 13
by substituting ‘40 percent’ for ‘20 percent’.’’. 14
(B) C
ONFORMING AMENDMENT .—Subpara-15
graph (B) of section 6662A(e)(2) is amended 16
by striking ‘‘or (i)’’ and inserting ‘‘, (i), or 17
(m)’’. 18
(3) S
PECIAL RULES FOR APPLICATION OF REA -19
SONABLE CAUSE EXCEPTION .—Subsection (c) of sec-20
tion 6664 is amended— 21
(A) by redesignating paragraphs (3) and 22
(4) as paragraphs (4) and (5), respectively; 23
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•S 445 IS
(B) by striking ‘‘paragraph (3)’’ in para-1
graph (5)(A), as so redesignated, and inserting 2
‘‘paragraph (4)’’; and 3
(C) by inserting after paragraph (2) the 4
following new paragraph: 5
‘‘(3) S
PECIAL RULE FOR UNDERPAYMENTS AT -6
TRIBUTABLE TO INVESTMENT MANAGEMENT SERV -7
ICES.— 8
‘‘(A) I
N GENERAL.—Paragraph (1) shall 9
not apply to any portion of an underpayment to 10
which section 6662 applies by reason of sub-11
section (b)(11) unless— 12
‘‘(i) the relevant facts affecting the 13
tax treatment of the item are adequately 14
disclosed, 15
‘‘(ii) there is or was substantial au-16
thority for such treatment, and 17
‘‘(iii) the taxpayer reasonably believed 18
that such treatment was more likely than 19
not the proper treatment. 20
‘‘(B) R
ULES RELATING TO REASONABLE 21
BELIEF.—Rules similar to the rules of sub-22
section (d)(4) shall apply for purposes of sub-23
paragraph (A)(iii).’’. 24
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•S 445 IS
(e) INCOME ANDLOSSFROMINVESTMENTSERVICES 1
P
ARTNERSHIPINTERESTSTAKENINTOACCOUNT INDE-2
TERMININGNETEARNINGSFROMSELF-EMPLOYMENT.— 3
(1) I
NTERNAL REVENUE CODE .— 4
(A) I
N GENERAL.—Section 1402(a) is 5
amended by striking ‘‘and’’ at the end of para-6
graph (16), by striking the period at the end of 7
paragraph (17) and inserting ‘‘; and’’, and by 8
inserting after paragraph (17) the following 9
new paragraph: 10
‘‘(18) notwithstanding the preceding provisions 11
of this subsection, in the case of any individual en-12
gaged in the trade or business of providing services 13
described in section 710(c)(2) with respect to any 14
entity, investment services partnership income or 15
loss (as defined in subsection (m)) of such individual 16
with respect to such entity shall be taken into ac-17
count in determining the net earnings from self-em-18
ployment of such individual.’’. 19
(B) I
NVESTMENT SERVICES PARTNERSHIP 20
INCOME OR LOSS.—Section 1402 is amended by 21
adding at the end the following new subsection: 22
‘‘(m) I
NVESTMENTSERVICESPARTNERSHIPINCOME 23
ORLOSS.—For purposes of subsection (a)— 24
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‘‘(1) IN GENERAL.—The term ‘investment serv-1
ices partnership income or loss’ means, with respect 2
to any investment services partnership interest (as 3
defined in section 710(c)) or disqualified interest (as 4
defined in section 710(e)), the net of— 5
‘‘(A) the amounts treated as ordinary in-6
come or ordinary loss under subsections (b) and 7
(e) of section 710 with respect to such interest, 8
‘‘(B) all items of income, gain, loss, and 9
deduction allocated to such interest, and 10
‘‘(C) the amounts treated as realized from 11
the sale or exchange of property other than a 12
capital asset under section 751 with respect to 13
such interest. 14
‘‘(2) E
XCEPTION FOR QUALIFIED CAPITAL IN -15
TERESTS.—A rule similar to the rule of section 16
710(d) shall apply for purposes of applying para-17
graph (1)(B).’’. 18
(2) S
OCIAL SECURITY ACT.—Section 211(a) of 19
the Social Security Act is amended by striking 20
‘‘and’’ at the end of paragraph (15), by striking the 21
period at the end of paragraph (16) and inserting ‘‘; 22
and’’, and by inserting after paragraph (16) the fol-23
lowing new paragraph: 24
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‘‘(17) Notwithstanding the preceding provisions 1
of this subsection, in the case of any individual en-2
gaged in the trade or business of providing services 3
described in section 710(c)(2) of the Internal Rev-4
enue Code of 1986 with respect to any entity, invest-5
ment services partnership income or loss (as defined 6
in section 1402(m) of such Code) shall be taken into 7
account in determining the net earnings from self- 8
employment of such individual.’’. 9
(f) S
EPARATEACCOUNTING BYPARTNER.—Section 10
702(a) is amended by striking ‘‘and’’ at the end of para-11
graph (7), by striking the period at the end of paragraph 12
(8) and inserting ‘‘, and’’, and by inserting after para-13
graph (8) the following: 14
‘‘(9) any amount treated as ordinary income or 15
loss under subsection (a), (b), or (e) of section 16
710.’’. 17
(g) C
ONFORMINGAMENDMENTS.— 18
(1) Subsection (d) of section 731 is amended by 19
inserting ‘‘section 710(b)(4) (relating to distribu-20
tions of partnership property),’’ after ‘‘to the extent 21
otherwise provided by’’. 22
(2) Section 741 is amended by inserting ‘‘or 23
section 710 (relating to special rules for partners 24
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providing investment management services to part-1
nerships)’’ before the period at the end. 2
(3) The table of sections for part I of sub-3
chapter K of chapter 1 is amended by adding at the 4
end the following new item: 5
‘‘Sec. 710. Special rules for partners providing investment management services
to partnerships.’’.
(4)(A) Part IV of subchapter O of chapter 1 is 6
amended by striking section 1061. 7
(B) The table of sections for part IV of sub-8
chapter O of chapter 1 is amended by striking the 9
item relating to section 1061. 10
(h) E
FFECTIVEDATE.— 11
(1) I
N GENERAL.—Except as otherwise pro-12
vided in this subsection, the amendments made by 13
this section shall apply to taxable years ending after 14
the date of the enactment of this Act. 15
(2) P
ARTNERSHIP TAXABLE YEARS WHICH IN -16
CLUDE EFFECTIVE DATE .—In applying section 17
710(a) of the Internal Revenue Code of 1986 (as 18
added by this section) in the case of any partnership 19
taxable year which includes the date of the enact-20
ment of this Act, the amount of the net capital gain 21
referred to in such section shall be treated as being 22
the lesser of the net capital gain for the entire part-23
nership taxable year or the net capital gain deter-24
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mined by only taking into account items attributable 1
to the portion of the partnership taxable year which 2
is after such date. 3
(3) D
ISPOSITIONS OF PARTNERSHIP INTER -4
ESTS.— 5
(A) I
N GENERAL.—Section 710(b) of such 6
Code (as added by this section) shall apply to 7
dispositions and distributions after the date of 8
the enactment of this Act. 9
(B) I
NDIRECT DISPOSITIONS.—The amend-10
ments made by subsection (b) shall apply to 11
transactions after the date of the enactment of 12
this Act. 13
(4) O
THER INCOME AND GAIN IN CONNECTION 14
WITH INVESTMENT MANAGEMENT SERVICES .—Sec-15
tion 710(e) of such Code (as added by this section) 16
shall take effect on the date of the enactment of this 17
Act. 18
Æ
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