,i #aagth ,,congress #ast ,session ,h4 ,r4 #cijc ,,in ,,the ,,house ,,of ,,representatives ,june #ae1 #bjba,mr4 ,grothman introduced the following bill2 which was referred to the ,committee on ,ways and ,means ,a ,,bill ,to amend the ,internal ,revenue ,code of #aihf to treat certain income with respect to partnership interests held in connection with the performance of services as ordinary income4 #a4 ,short title ,this ,act may be cited as the ,tax ,fairness ,act of #bjba4 #b4 ,ordinary income treatment in the case of partnership interests held in connection with performance of services 7a7 ,in general ,section #ajfa of the ,internal ,revenue ,code of #aihf is amended to read as follows3 #ajfa4 ,partnership interests held in connection with performance of services 7a7 ,in general ,if one or more applicable partnership interests are held by a taxpayer at any time during the taxable year1 so much of-- 7#a7 the taxpayer's net capital gain with respect to such interests for such taxable year1 as does not exceed 7#b7 the taxpayer's recharacterization account balance for such taxable year1 shall be treated as ordinary income4 7b7 ,net capital gain 7#a7 ,in general ,for purposes of subsection 7a77#a71 net capital gain shall be determined under section #abbb1 except that such section shall be applied-- 7,a7 without regard to the recharacterization of any item as ordinary income under this section1 7,b7 by only taking into account items of gain and loss-- 7i7 taken into account by the taxpayer under section #gjb with respect to any applicable partnership interest1 7ii7 recognized by the taxpayer on the disposition of any such interest1 or 7iii7 recognized by the taxpayer under paragraph 7#d7 on a distribution of property with respect to such interest1 and 7,c7 in the case of a taxable year for which section #abca gains 7as defined in section #abca7;a77#c77;,a77 exceed section #abca losses 7as defined in section #abca7;a77#c77;,b771 by treating property which is taken into account in determining such gains and losses as capital assets held for more than #a year4 7#b7 ,allocation to items of gain ,the amount treated as ordinary income under subsection 7a7 shall be allocated ratably among the items of long-term capital gain taken into account in determining net capital gain under paragraph 7#a74 7#c7 ,recognition of gain on disposition of applicable partnership interests ,any gain on the disposition of any applicable partnership interest shall be recognized notwithstanding any other provision of this title4 7#d7 ,recognition of gain on distributions of partnership property 7,a7 ,in general ,in the case of any distribution of property by a partnership with respect to any applicable partnership interest1 the partner receiving such property shall recognize gain equal to the excess 7if any7 of-- 7i7 the fair market value of such property at the time of such distribution1 over 7ii7 the adjusted basis of such property in the hands of such partner 7determined without regard to subparagraph 7,b774 7,b7 ,adjustment of basis ,in the case of a distribution to which subparagraph 7,a7 applies1 the basis of the distributed property in the hands of the distributee partner shall be the amount determined under subparagraph 7,a77i74 7c7 ,recharacterization account balance 7#a7 ,in general ,for purposes of this section1 the term recharacterization account balance means1 with respect to any taxpayer for any taxable year1 the excess 7if any7 of-- 7,a7 the sum of-- 7i7 the taxpayer's aggregate annual recharacterization amounts with respect to applicable partnership interests for such taxable year1 plus 7ii7 the taxpayer's recharacterization account balance for the taxable year preceding such taxable year1 over 7,b7 the sum of-- 7i7 the taxpayer's net ordinary income with respect to applicable partnership interests for such taxable year 7determined without regard to this section71 plus 7ii7 the amount treated as ordinary income of the taxpayer under this section for the taxable year preceding such taxable year4 7#b7 ,annual recharacterization amount ,for purposes of this subsection-- 7,a7 ,in general ,the term annual recharacterization amount means1 with respect to any applicable partnership interest for any partnership taxable year1 an amount equal to the product of-- 7i7 the specified rate determined under subparagraph 7,b7 for the calendar year in which such taxable year begins1 multiplied by 7ii7 the excess 7if any7 of-- 7,i7 an amount equal to the applicable percentage of the partnership's aggregate invested capital for such taxable year1 over 7,,ii7 the specified capital contribution of the partner with respect to the applicable partnership interest for such taxable year4 ,if a taxpayer holds an applicable partnership interest for less than the entire taxable year1 the amount determined under the preceding sentence shall be ratably reduced4 7,b7 ,specified rate ,for purposes of subparagraph 7,a71 the term specified rate means1 with respect to any calendar year1 a percentage equal to-- 7i7 the ,federal long-term rate determined under section #abgd7;d77#a7 for the last month of the calendar year1 plus 7ii7 #aj percentage points4 7,c7 ,applicable percentage 7i7 ,in general ,the term applicable percentage means1 with respect to any applicable partnership interest1 the highest percentage of profits of the partnership that could be allocated with respect to such interest for the taxable year 7consistent with the partnership agreement and assuming such facts and circumstances with respect to such taxable year as would result in such highest percentage74 7ii7 ,secretarial authority ,the ,secretary shall prescribe rules for the determination of the applicable percentage in cases in which the percentage of profits of a partnership that are to be allocated with respect to an applicable partnership interest varies on the basis of the aggregate amount of such profits4 ,such rules may provide a percentage which may be used in lieu of the highest percentage determined under clause 7i7 in cases where such other percentage is consistent with the purposes of this section4 7,d7 ,aggregate invested capital 7i7 ,in general ,the term aggregate invested capital means1 with respect to any taxable year1 the average daily amount of invested capital of the partnership for such taxable year4 7ii7 ,invested capital ,the term invested capital means1 with respect to any partnership as of any day1 the total cumulative value1 determined at the time of contribution1 of all money or other property contributed to the partnership on or before such day4 7iii7 ,reduction for liquidation of partnership interests ,the invested capital of a partnership shall be reduced by the aggregate amount distributed in liquidation of interests in the partnership4 7iv7 ,treatment of certain indebtedness as invested capital ,the following amounts shall be treated as invested capital3 7,i7 ,partner loans ,the aggregate value 7determined as of the time of the loan7 of money or other property which a partner loans to the partnership4 7,,ii7 ,indebtedness eligible to share in equity of the partnership ,the face amount of any convertible debt of the partnership or any debt obligation providing equity participation in the partnership4 7,e7 ,specified capital contribution 7i7 ,in general ,the term specified capital contribution means1 with respect to any applicable partnership interest for any taxable year1 the average daily amount of contributed capital with respect to such interest for such year4 7ii7 ,contributed capital ,the term contributed capital means1 with respect to any applicable partnership interest as of any day1 the excess 7if any7 of-- 7,i7 the total cumulative value1 determined at the time of contribution1 of all money or other property contributed by the partner to the partnership with respect to such interest as of such day1 over 7,,ii7 the total cumulative value1 determined at the time of distribution1 of all money or other property distributed by the partnership to the partner with respect to such interest as of such day4 7iii7 ,treatment of related party borrowings ,any amount borrowed directly or indirectly from the partnership or any other partner of the partnership or any person related to such other partner or such partnership shall not be taken into account under this subparagraph4 ,for purposes of the preceding sentence1 a person shall be treated as related to another person if the relationship between such persons would be described in section #bfg7;b7 or #gjg7;b7 if such sections and section #bfg7;f7 were applied by substituting #aj percent for #ej percent each place it appears4 7,f7 ,multiple interests ,if at any time during a taxable year a taxpayer holds directly or indirectly more than #a applicable partnership interest in a single partnership1 such interests shall be treated as #a applicable partnership interest for purposes of applying this paragraph4 7#c7 ,net ordinary income ,for purposes of this subsection1 the net ordinary income with respect to applicable partnership interests for any taxable year is the excess 7if any7 of-- 7,a7 the taxpayer's distributive share of items of income and gain under section #gjb with respect to applicable partnership interests for such taxable year 7determined without regard to any items of gain taken into account in determining net capital gain under subsection 7b77#a771 over 7,b7 the taxpayer's distributive share of items of deduction and loss under section #gjb with respect to such interests for such taxable year 7determined without regard to any items of loss taken into account in determining net capital gain under subsection 7b77#a774 7d7 ,applicable partnership interest ,for purposes of this section-- 7#a7 ,in general ,the term applicable partnership interest means any interest in a partnership which1 directly or indirectly1 is transferred to 7or is held by7 the taxpayer in connection with the performance of services by the taxpayer1 or any other person1 in any applicable trade or business4 7#b7 ,applicable trade or business 7,a7 ,in general ,the term applicable trade or business means any trade or business conducted on a regular1 continuous1 and substantial basis which1 regardless of whether the activities are conducted in one or more entities1 consists1 in whole or in part1 of-- 7i7 raising or returning capital1 7ii7 investing in 7or disposing of7 trades or businesses 7or identifying trades or businesses for such investing or disposition71 and 7iii7 developing such trades or businesses4 7,b7 ,treatment of research and experimentation activities ,any activity involving research or experimentation 7within the meaning of section #dfi7;c77#d77 shall be treated as a trade or business for purposes of clauses 7ii7 and 7iii7 of subparagraph 7,a74 7e7 ,transfer of applicable partnership interest to related person 7#a7 ,in general ,if a taxpayer transfers any applicable partnership interest1 directly or indirectly1 to a person related to the taxpayer1 the taxpayer shall include in gross income 7as ordinary income7 so much of the taxpayer's recharacterization account balance for such taxable year as is allocable to such interest 7determined in such manner as the ,secretary may provide and reduced by any amount treated as ordinary income under subsection 7a7 with respect to the transfer of such interest74 7#b7 ,related person ,for purposes of this paragraph1 a person is related to the taxpayer if-- 7,a7 the person is a member of the taxpayer's family within the meaning of section #cah7;a77#a71 or 7,b7 the person performed a service within the current calendar year or the preceding three calendar years in any applicable trade or business in which or for which the taxpayer performed a service4 7f7 ,reporting by entity of taxpayer's annual recharacterization amount ,a partnership shall report to the ,secretary1 and include with the information required to be furnished under section #fjca7;b7 to each partner1 the amount of the partner's annual recharacterization amount for the taxable year1 if any4 ,a similar rule applies to any entity that receives a report of an annual recharacterization amount for the taxable year4 7g7 ,regulations ,the ,secretary shall issue such regulations or other guidance as necessary to carry out this section1 including regulations-- 7#a7 to prevent the abuse of the purposes of this section1 including through-- 7,a7 the allocation of income to tax indifferent parties1 or 7,b7 a reduction in the invested capital of the partnership 7including attempts to undervalue contributed or loaned property71 7#b7 which provide that partnership interests shall not fail to be treated as transferred or held in connection with the performance of services merely because the taxpayer also made contributions to the partnership1 7#c7 which provide for the application of this section in cases where the taxpayer has more than #a applicable interest in a partnership1 and 7#d7 which provide for the application of this section in cases of tiered structures of entities4 4 7b7 ,coordination with section #hc ,subsection 7e7 of section #hc is amended by striking or at the end of paragraph 7#d71 by striking the period at the end of paragraph 7#e7 and inserting 1 or1 and by adding at the end the following new paragraph3 7#f7 a transfer of a partnership interest to which section #ajfa applies4 4 7c7 ,effective date ,the amendments made by this section shall apply to taxable years beginning after ,december #ca1 #bjba4