,,ii #aaith ,,congress #ast ,session ,s4 #dde ,,in ,,the ,,senate ,,of ,,the ,,united ,,states ,february #f 7legislative day1 ,february #e71 #bjbe,ms4 ,baldwin 7for herself1 ,mr4 ,van ,hollen1 ,mrs4 ,murray1 ,mr4 ,schatz1 ,mr4 ,markey1 ,ms4 ,klobuchar1 ,mr4 ,kaine1 ,mr4 ,merkley1 ,mr4 ,reed1 ,ms4 ,hirono1 ,ms4 ,warren1 ,mr4 ,sanders1 ,mr4 ,booker1 and ,mr4 ,welch7 introduced the following bill2 which was read twice and referred to the ,committee on ,finance ,a ,,bill ,to amend the ,internal ,revenue ,code of #aihf to provide for the proper tax treatment of personal service income earned in pass-thru entities4 #a4 ,short title2 etc 7a7 ,short title ,this ,act may be cited as the ,carried ,interest ,fairness ,act of #bjbe4 7b7 ,amendment of #aihf ,code ,except as otherwise expressly provided1 whenever in this ,act an amendment or repeal is expressed in terms of an amendment to1 or repeal of1 a section or other provision1 the reference shall be considered to be made to a section or other provision of the ,internal ,revenue ,code of #aihf4 7c7 ,table of contents ,the table of contents for this ,act is as follows3 ,sec4 #a4 ,short title2 etc4,sec4 #b4 ,partnership interests transferred in connection with performance of services4,sec4 #c4 ,special rules for partners providing investment management services to partnerships4 #b4 ,partnership interests transferred in connection with performance of services 7a7 ,modification to election ,to include partnership interest in gross income in year of transfer ,subsection 7c7 of section #hc is amended by redesignating paragraph 7#d7 as paragraph 7#e7 and by inserting after paragraph 7#c7 the following new paragraph3 7#d7 ,partnership interests ,except as provided by the ,secretary-- 7,a7 ,in general ,in the case of any transfer of an interest in a partnership in connection with the provision of services to 7or for the benefit of7 such partnership-- 7i7 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 7at the time of the transfer7 all of its assets at fair market value and distributed the proceeds of such sale 7reduced by the liabilities of the partnership7 to its partners in liquidation of the partnership1 and 7ii7 the person receiving such interest shall be treated as having made the election under subsection 7b77#a7 unless such person makes an election under this paragraph to have such subsection not apply4 7,b7 ,election ,the election under subparagraph 7,a77ii7 shall be made under rules similar to the rules of subsection 7b77#b74 4 7b7 ,effective date ,the amendments made by this section shall apply to interests in partnerships transferred after the date of the enactment of this ,act4 #c4 ,special rules for partners providing investment management services to partnerships 7a7 ,in general ,part ,i of subchapter ,k of chapter #a is amended by adding at the end the following new section3 #gaj4 ,special rules for partners providing investment management services to partnerships 7a7 ,treatment of distributive share of partnership items ,for purposes of this title1 in the case of an investment services partnership interest-- 7#a7 ,in general ,notwithstanding section #gjb7;b7-- 7,a7 an amount equal to the net capital gain with respect to such interest for any partnership taxable year shall be treated as ordinary income1 and 7,b7 subject to the limitation of paragraph 7#b71 an amount equal to the net capital loss with respect to such interest for any partnership taxable year shall be treated as an ordinary loss4 7#b7 ,recharacterization of losses limited to recharacterized gains ,the amount treated as ordinary loss under paragraph 7#a77;,b7 for any taxable year shall not exceed the excess 7if any7 of-- 7,a7 the aggregate amount treated as ordinary income under paragraph 7#a77;,a7 with respect to the investment services partnership interest for all preceding partnership taxable years to which this section applies1 over 7,b7 the aggregate amount treated as ordinary loss under paragraph 7#a77;,b7 with respect to such interest for all preceding partnership taxable years to which this section applies4 7#c7 ,allocation to items of gain and loss 7,a7 ,net capital gain ,the amount treated as ordinary income under paragraph 7#a77;,a7 shall be allocated ratably among the items of long-term capital gain taken into account in determining such net capital gain4 7,b7 ,net capital loss ,the amount treated as ordinary loss under paragraph 7#a77;,b7 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 loss4 7#d7 ,terms relating to capital gains and losses ,for purposes of this section-- 7,a7 ,in general ,net capital gain1 long-term capital gain1 and long-term capital loss1 with respect to any investment services partnership interest for any taxable year1 shall be determined under section #abbb1 except that such section shall be applied-- 7i7 without regard to the recharacterization of any item as ordinary income or ordinary loss under this section1 7ii7 by only taking into account items of gain and loss taken into account by the holder of such interest under section #gjb 7other than subsection 7a77#i7 thereof7 with respect to such interest for such taxable year1 and 7iii7 by treating property which is taken into account in determining gains and losses to which section #abca applies as capital assets held for more than #a year4 7,b7 ,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 exchanges4 ,rules similar to the rules of clauses 7i7 through 7iii7 of subparagraph 7,a7 shall apply for purposes of the preceding sentence4 7#e7 ,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 #a7;h74 7#f7 ,special rule for qualified small business stock ,section #abjb shall not apply to any gain from the sale or exchange of qualified small business stock 7as defined in section #abjb7;c77 allocated with respect to any investment services partnership interest4 7b7 ,dispositions of partnership interests 7#a7 ,gain 7,a7 ,in general ,any gain on the disposition of an investment services partnership interest shall be-- 7i7 treated as ordinary income1 and 7ii7 recognized notwithstanding any other provision of this subtitle4 7,b7 ,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-- 7i7 subparagraph 7,a7 shall not apply1 7ii7 such interest shall be treated as an investment services partnership interest in the hands of the person acquiring such interest1 and 7iii7 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 #fia4 7#b7 ,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 7if any7 of-- 7,a7 the aggregate amount treated as ordinary income under subsection 7a7 with respect to such interest for all partnership taxable years to which this section applies1 over 7,b7 the aggregate amount treated as ordinary loss under subsection 7a7 with respect to such interest for all partnership taxable years to which this section applies4 7#c7 ,election with respect to certain exchanges ,paragraph 7#a77;,a77ii7 shall not apply to the contribution of an investment services partnership interest to a partnership in exchange for an interest in such partnership if-- 7,a7 the taxpayer makes an irrevocable election to treat the partnership interest received in the exchange as an investment services partnership interest1 and 7,b7 the taxpayer agrees to comply with such reporting and recordkeeping requirements as the ,secretary may prescribe4 7#d7 ,distributions of partnership property 7,a7 ,in general ,in the case of any distribution of property by a partnership with respect to any investment services partnership interest held by a partner1 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,c774 7,b7 ,treatment of gain as ordinary income ,any gain recognized by such partner under subparagraph 7,a7 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 7a7 if1 immediately prior to the distribution1 the partnership had sold the distributed property at fair market value and all of the gain from such disposition were allocated to such partner4 ,for purposes of applying subsection 7a77#b71 any gain treated as ordinary income under this subparagraph shall be treated as an amount treated as ordinary income under subsection 7a77#a77;,a74 7,c7 ,adjustment of basis ,in the case a distribution to which subparagraph 7,a7 applies1 the basis of the distributed property in the hands of the distributee partner shall be the fair market value of such property4 7,d7 ,special rules with respect to mergers and divisions ,in the case of a taxpayer which satisfies requirements similar to the requirements of subparagraphs 7,a7 and 7,b7 of paragraph 7#c71 this paragraph and paragraph 7#a77;,a77ii7 shall not apply to the distribution of a partnership interest if such distribution is in connection with a contribution 7or deemed contribution7 of any property of the partnership to which section #gba applies pursuant to a transaction described in section #gjh7;b77#b74 7c7 ,investment services partnership interest ,for purposes of this section-- 7#a7 ,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 7#b7 by such person 7or any person related to such person74 ,an interest in an investment partnership held by any person-- 7,a7 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 business1 7,b7 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 business1 and 7,c7 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 interest4 7#b7 ,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 7directly or indirectly7 by one or more investment partnerships referred to in paragraph 7#a73 7,a7 ,advising as to the advisability of investing in1 purchasing1 or selling any specified asset4 7,b7 ,managing1 acquiring1 or disposing of any specified asset4 7,c7 ,arranging financing with respect to acquiring specified assets4 7,d7 ,any activity in support of any service described in subparagraphs 7,a7 through 7,c74 7#c7 ,investment partnership 7,a7 ,in general ,the term investment partnership means any partnership if1 at the end of any two consecutive calendar quarters ending after the date of enactment of this section-- 7i7 substantially all of the assets of the partnership are specified assets 7determined without regard to any section #aig intangible within the meaning of section #aig7;d771 and 7ii7 less than #ge 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 interest4 7,b7 ,look-through of certain wholly owned entities for purposes of determining assets of the partnership 7i7 ,in general ,for purposes of determining the assets of a partnership under subparagraph 7,a77i7-- 7,i7 any interest in a specified entity shall not be treated as an asset of such partnership1 and 7,,ii7 such partnership shall be treated as holding its proportionate share of each of the assets of such specified entity4 7ii7 ,specified entity ,for purposes of clause 7i71 the term specified entity means1 with respect to any partnership 7hereafter referred to as the upper-tier partnership71 any person which engages in the same trade or business as the upper-tier partnership and is-- 7,i7 a partnership all of the capital and profits interests of which are held directly or indirectly by the upper-tier partnership1 or 7,,ii7 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 partnership4 7,c7 ,special rules for determining if property held in connection with trade or business 7i7 ,in general ,except as otherwise provided by the ,secretary1 solely for purposes of determining whether any interest in a partnership constitutes property held in connection with a trade or business under subparagraph 7,a77ii7-- 7,i7 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 owner1 7,,ii7 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 #c taxable years preceding such taxable year1 and 7,,iii7 paragraph 7#e77;,b7 shall not apply4 7ii7 ,closely related persons ,for purposes of clause 7i77,i71 a person shall be treated as closely related to another person if1 taking into account the rules of section #bfg7;c71 the relationship between such persons is described in-- 7,i7 paragraph 7#a7 or 7#i7 of section #bfg7;b71 or 7,,ii7 section #bfg7;b77#d71 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 7#a7 or 7#i7 of section #bfg7;b74 7,d7 ,antiabuse rules ,the ,secretary may issue regulations or other guidance which prevent the avoidance of the purposes of subparagraph 7,a71 including regulations or other guidance which treat convertible and contingent debt 7and other debt having the attributes of equity7 as a capital interest in the partnership4 7,e7 ,controlled groups of entities 7i7 ,in general ,in the case of a controlled group of entities1 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 7in the hands of such member7 constitute property held in connection with a trade or business1 then any interest in such partnership held by any member of such group shall be treated for purposes of subparagraph 7,a7 as constituting 7in the hands of such member7 property held in connection with a trade or business4 7ii7 ,controlled group of entities ,for purposes of clause 7i71 the term controlled group of entities means a controlled group of corporations as defined in section #aefc7;a77#a71 applied without regard to subsections 7a77#d7 and 7b77#b7 of section #aefc4 ,a partnership or any other entity 7other than a corporation7 shall be treated as a member of a controlled group of entities if such entity is controlled 7within the meaning of section #ied7;d77#c77 by members of such group 7including any entity treated as a member of such group by reason of this sentence74 7,f7 ,special rule for corporations ,for purposes of this paragraph1 in the case of a corporation1 the determination of whether property is held in connection with a trade or business shall be determined as if the taxpayer were an individual4 7#d7 ,specified asset ,the term specified asset means securities 7as defined in section #dge7;c77#b7 without regard to the last sentence thereof71 real estate held for rental or investment1 interests in partnerships1 commodities 7as defined in section #dge7;e77#b771 cash or cash equivalents1 or options or derivative contracts with respect to any of the foregoing4 7#e7 ,related persons 7,a7 ,in general ,a person shall be treated as related to another person if the relationship between such persons is described in section #bfg7;b7 or #gjg7;b74 7,b7 ,attribution of partner services ,any service described in paragraph 7#b7 which is provided by a partner of a partnership shall be treated as also provided by such partnership4 7d7 ,exception for certain capital interests 7#a7 ,in general ,in the case of any portion of an investment services partnership interest which is a qualified capital interest1 all items of gain and loss 7and any dividends7 which are allocated to such qualified capital interest shall not be taken into account under subsection 7a7 if-- 7,a7 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 7c77#b7 and who are not related to the partner holding the qualified capital interest1 and 7,b7 the allocations made to such other interests are significant compared to the allocations made to such qualified capital interest4 7#b7 ,authority to provide exceptions to allocation requirements ,to the extent provided by the ,secretary in regulations or other guidance-- 7,a7 ,allocations to portion of qualified capital interest ,paragraph 7#a7 may be applied separately with respect to a portion of a qualified capital interest4 7,b7 ,no or insignificant allocations to nonservice providers ,in any case in which the requirements of paragraph 7#a77;,b7 are not satisfied1 items of gain and loss 7and any dividends7 shall not be taken into account under subsection 7a7 to the extent that such items are properly allocable under such regulations or other guidance to qualified capital interests4 7,c7 ,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 7#a77;,a7 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 paragraph4 7#c7 ,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 which1 by reason of a change in the services with respect to assets held 7directly or indirectly7 by the partnership or by reason of a change in the capital contributions to such partnership1 becomes an investment services partnership interest1 the qualified capital interest of the holder of such partnership interest immediately after such change shall not1 for purposes of this subsection1 be less than the fair market value of such interest 7determined immediately before such change74 7#d7 ,special rule for tiered partnerships ,except as otherwise provided by the ,secretary1 in the case of tiered partnerships1 all items which are allocated in a manner which meets the requirements of paragraph 7#a7 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 partnership4 7#e7 ,exception for no-self-charged carry and management fee provisions ,except as otherwise provided by the ,secretary1 an interest shall not fail to be treated as satisfying the requirement of paragraph 7#a77;,a7 merely because the allocations made by the partnership to such interest do not reflect the cost of services described in subsection 7c77#b7 which are provided 7directly or indirectly7 to the partnership by the holder of such interest 7or a related person74 7#f7 ,special rule for dispositions ,in the case of any investment services partnership interest any portion of which is a qualified capital interest1 subsection 7b7 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-- 7,a7 the distributive share of gain or loss that would have been allocated to the qualified capital interest 7consistent with the requirements of paragraph 7#a77 if the partnership had sold all of its assets at fair market value immediately before the disposition1 bears to 7,b7 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 part4 7#g7 ,qualified capital interest ,for purposes of this section-- 7,a7 ,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-- 7i7 the fair market value of any money or other property contributed to the partnership in exchange for such interest 7determined without regard to section #geb7;a771 7ii7 any amounts which have been included in gross income under section #hc with respect to the transfer of such interest1 and 7iii7 the excess 7if any7 of-- 7,i7 any items of income and gain taken into account under section #gjb with respect to such interest1 over 7,,ii7 any items of deduction and loss so taken into account4 7,b7 ,adjustment to qualified capital interest 7i7 ,distributions and losses ,the qualified capital interest shall be reduced by distributions from the partnership with respect to such interest and by the excess 7if any7 of the amount described in subparagraph 7,a77iii77,,ii7 over the amount described in subparagraph 7,a77iii77,i74 7ii7 ,special rule for contributions of property ,in the case of any contribution of property described in subparagraph 7,a77i7 with respect to which the fair market value of such property is not equal to the adjusted basis of such property immediately before such contribution1 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 provide4 7,c7 ,mergers1 consolidations1 etc41 disregarded ,no increase or decrease in the qualified capital interest of any partner shall result from a merger1 consolidation1 or division described in section #gjh1 or any similar transaction4 7#h7 ,treatment of certain loans 7,a7 ,proceeds of partnership loans not treated as qualified capital interest of service providing partners ,for purposes of this subsection1 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 guaranteed1 directly or indirectly1 by any other partner or the partnership 7or any person related to any such other partner or the partnership74 ,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 sentence4 7,b7 ,reduction in allocations to qualified capital interests for loans from nonservice-providing partners to the partnership ,for purposes of this subsection1 any loan or other advance to the partnership made or guaranteed1 directly or indirectly1 by a partner not providing services described in subsection 7c77#b7 to the partnership 7or any person related to such partner7 shall be taken into account in determining the qualified capital interests of the partners in the partnership4 7#i7 ,special rule for qualified family partnerships 7,a7 ,in general ,in the case of any specified family partnership interest1 paragraph 7#a77;,a7 shall be applied without regard to the phrase and who are not related to the partner holding the qualified capital interest4 7,b7 ,specified family partnership interest ,for purposes of this paragraph1 the term specified family partnership interest means any investment services partnership interest if-- 7i7 such interest is an interest in a qualified family partnership1 7ii7 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 #bfg7;b77#a71 and 7iii7 all other interests in such qualified family partnership with respect to which significant allocations are made 7within the meaning of paragraph 7#a77;,b7 and in comparison to the allocations made to the interest described in clause 7ii77 are held by persons who-- 7,i7 are related to the natural person or trust referred to in clause 7ii71 or 7,,ii7 provide services described in subsection 7c77#b74 7,c7 ,qualified family partnership ,for purposes of this paragraph1 the term qualified family partnership means any partnership if-- 7i7 all of the capital and profits interests of such partnership are held by-- 7,i7 specified family members1 7,,ii7 any person closely related 7within the meaning of subsection 7c77#c77;,c77ii77 to a specified family member1 or 7,,iii7 any other person 7not described in subclause 7,i7 or 7,,ii77 if such interest is an investment services partnership interest with respect to such person1 and 7ii7 such partnership does not hold itself out to the public as an investment advisor4 7,d7 ,specified family members ,for purposes of subparagraph 7,c71 individuals shall be treated as specified family members if such individuals would be treated as one person under the rules of section #acfa7;c77#a7 if the applicable date 7within the meaning of subparagraph 7,b77iii7 thereof7 were the latest of-- 7i7 the date of the establishment of the partnership1 7ii7 the earliest date that the common ancestor holds a capital or profits interest in the partnership1 or 7iii7 the date of the enactment of this section4 7e7 ,other income and gain in connection with investment management services 7#a7 ,in general ,if-- 7,a7 a person performs 7directly or indirectly7 investment management services for any investment entity or special purpose acquisition company1 7,b7 such person holds 7directly or indirectly7 a disqualified interest with respect to such entity or such company 7as the case may be71 and 7,c7 the value of such interest 7or payments thereunder7 is substantially related to the amount of income or gain 7whether or not realized7 from the assets with respect to which the investment management services are performed1 any income or gain with respect to such interest shall be treated as ordinary income4 ,rules similar to the rules of subsections 7a77#e7 and 7d7 shall apply for purposes of this subsection4 7#b7 ,definitions ,for purposes of this subsection-- 7,a7 ,disqualified interest 7i7 ,in general ,the term disqualified interest means1 with respect to any investment entity-- 7,i7 any interest in such entity other than indebtedness1 7,,ii7 convertible or contingent debt of such entity1 7,,iii7 any option or other right to acquire property described in subclause 7,i7 or 7,,ii71 and 7,,iv7 any derivative instrument entered into 7directly or indirectly7 with such entity or any investor in such entity4 7ii7 ,exceptions ,such term shall not include-- 7,i7 a partnership interest1 7,,ii7 except as provided by the ,secretary1 any interest in a taxable corporation 7other than a special purpose acquisition company71 and 7,,iii7 except as provided by the ,secretary1 stock in an ,s corporation4 7,b7 ,taxable corporation ,the term taxable corporation means-- 7i7 a domestic ,c corporation1 or 7ii7 a foreign corporation substantially all of the income of which is-- 7,i7 effectively connected with the conduct of a trade or business in the ,united ,states1 or 7,,ii7 subject to a comprehensive foreign income tax 7as defined in section #deg;,a7d77#b774 7,c7 ,investment management services ,the term investment management services means a substantial quantity of any of the services described in subsection 7c77#b74 7,d7 ,investment entity ,the term investment entity means any entity which1 if it were a partnership1 would be an investment partnership4 7,e7 ,special purpose acquisition company ,the term special purpose acquisition company means any corporation that-- 7i7 is formed for the purpose of acquiring a privately held company1 7ii7 is publicly traded on an established securities market or its interests are readily tradable on a secondary market 7or the substantial equivalent thereof71 and 7iii7 is required to report an acquisition under ,item #b4ja or make a disclosure under ,item #e4jf of ,form #h-,k 7or any successor form7 with the ,securities and ,exchange ,commission4 7f7 ,exception for domestic ,c corporations ,except as otherwise provided by the ,secretary1 in the case of a domestic ,c corporation 7other than a special purpose acquisition company1 as defined in subsection 7e77#b77;,e77-- 7#a7 subsections 7a7 and 7b7 shall not apply to any item allocated to such corporation with respect to any investment services partnership interest 7or to any gain or loss with respect to the disposition of such an interest71 and 7#b7 subsection 7e7 shall not apply4 7g7 ,regulations ,the ,secretary shall prescribe such regulations or other guidance as is necessary or appropriate to carry out the purposes of this section1 including regulations or other guidance to-- 7#a7 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 #fjca with respect to any item described in section #gjb7;a77#i71 7#b7 provide modifications to the application of this section 7including treating related persons as not related to one another7 to the extent such modification is consistent with the purposes of this section1 7#c7 prevent the avoidance of the purposes of this section 7including through the use of qualified family partnerships71 and 7#d7 coordinate this section with the other provisions of this title4 7h7 ,cross reference ,for #dj percent penalty on certain underpayments due to the avoidance of this section1 see section #fffb4 4 7b7 ,application of section #gea to indirect dispositions of investment services partnership interests 7#a7 ,in general ,subsection 7a7 of section #gea is amended by striking or at the end of paragraph 7#a71 by inserting or at the end of paragraph 7#b71 and by inserting after paragraph 7#b7 the following new paragraph3 7#c7 investment services partnership interests held by the partnership1 4 7#b7 ,certain distributions treated as sales or exchanges ,subparagraph 7,a7 of section #gea7;b77#a7 is amended by striking or at the end of clause 7i71 by inserting or at the end of clause 7ii71 and by inserting after clause 7ii7 the following new clause3 7iii7 investment services partnership interests held by the partnership1 4 7#c7 ,application of special rules in the case of tiered partnerships ,subsection 7f7 of section #gea is amended-- 7,a7 by striking or at the end of paragraph 7#a71 by inserting or at the end of paragraph 7#b71 and by inserting after paragraph 7#b7 the following new paragraph3 7#c7 an investment services partnership interest held by the partnership1 1 and 7,b7 by striking partner4 and inserting partner 7other than a partnership in which it holds an investment services partnership interest744 7#d7 ,investment services partnership interests2 qualified capital interests ,section #gea is amended by adding at the end the following new subsection3 7g7 ,investment services partnership interests ,for purposes of this section-- 7#a7 ,in general ,the term investment services partnership interest has the meaning given such term by section #gaj7;c74 7#b7 ,adjustments for qualified capital interests ,the amount to which subsection 7a7 applies by reason of paragraph 7#c7 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 7determined under rules similar to the rules of section #gaj7;d774 7#c7 ,exception for publicly traded partnerships ,except as otherwise provided by the ,secretary1 in the case of an exchange of an interest in a publicly traded partnership 7as defined in section #ggjd7 to which subsection 7a7 applies-- 7,a7 this section shall be applied without regard to subsections 7a77#c71 7b77#a77;,a77iii71 and 7f77#c71 and 7,b7 such partnership shall be treated as owning its proportionate share of the property of any other partnership in which it is a partner4 7#d7 ,recognition of gains ,any gain with respect to which subsection 7a7 applies by reason of paragraph 7#c7 thereof shall be recognized notwithstanding any other provision of this title4 7#e7 ,coordination with inventory items ,an investment services partnership interest held by the partnership shall not be treated as an inventory item of the partnership4 7#f7 ,prevention of double counting ,under regulations or other guidance prescribed by the ,secretary1 subsection 7a77#c7 shall not apply with respect to any amount to which section #gaj applies4 7#g7 ,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 section4 4 7c7 ,treatment for purposes of section #ggjd ,subsection 7d7 of section #ggjd is amended by adding at the end the following new paragraph3 7#f7 ,income from certain carried interests not qualified 7,a7 ,in general ,specified carried interest income shall not be treated as qualifying income4 7,b7 ,specified carried interest income ,for purposes of this paragraph-- 7i7 ,in general ,the term specified carried interest income means-- 7,i7 any item of income or gain allocated to an investment services partnership interest 7as defined in section #gaj7;c77 held by the partnership1 7,,ii7 any gain on the disposition of an investment services partnership interest 7as so defined7 or a partnership interest to which 7in the hands of the partnership7 section #gea applies1 and 7,,iii7 any income or gain taken into account by the partnership under subsection 7b77#d7 or 7e7 of section #gaj4 7ii7 ,exception for qualified capital interests ,a rule similar to the rule of section #gaj7;d7 shall apply for purposes of clause 7i74 7,c7 ,coordination with other provisions ,subparagraph 7,a7 shall not apply to any item described in paragraph 7#a77;,e7 7or so much of paragraph 7#a77;,f7 as relates to paragraph 7#a77;,e774 7,d7 ,special rules for certain partnerships 7i7 ,certain partnerships owned by real estate investment trusts ,subparagraph 7,a7 shall not apply in the case of a partnership which meets each of the following requirements3 7,i7 ,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 traded4 7,,ii7 ,fifty percent or more of the capital and profits interests of such partnership are owned1 directly or indirectly1 at all times during the taxable year by such real estate investment trust 7determined with the application of section #bfg7;c774 7,,iii7 ,such partnership meets the requirements of paragraphs 7#b71 7#c71 and 7#d7 of section #hef7;c74 7ii7 ,certain partnerships owning other publicly traded partnerships ,subparagraph 7,a7 shall not apply in the case of a partnership which meets each of the following requirements3 7,i7 ,substantially all of the assets of such partnership consist of interests in one or more publicly traded partnerships 7determined without regard to subsection 7b77#b774 7,,ii7 ,substantially all of the income of such partnership is ordinary income or section #abca gain 7as defined in section #abca7;a77#c774 7,e7 ,transitional rule ,subparagraph 7,a7 shall not apply to any taxable year of the partnership beginning before the date which is #aj years after the date of the enactment of this paragraph4 4 7d7 ,imposition of penalty on underpayments 7#a7 ,in general ,subsection 7b7 of section #fffb is amended by inserting after paragraph 7#aj7 the following new paragraph3 7#aa7 ,the application of section #gaj7;e7 or the regulations or other guidance prescribed under section #gaj7;g7 to prevent the avoidance of the purposes of section #gaj4 4 7#b7 ,amount of penalty 7,a7 ,in general ,section #fffb is amended by adding at the end the following new subsection3 7m7 ,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 7b77#aj71 subsection 7a7 shall be applied with respect to such portion by substituting #dj percent for #bj percent4 4 7,b7 ,conforming amendment ,subparagraph 7,b7 of section #fffb;,a7e77#b7 is amended by striking or 7i7 and inserting 1 7i71 or 7m74 7#c7 ,special rules for application of reasonable cause exception ,subsection 7c7 of section #fffd is amended-- 7,a7 by redesignating paragraphs 7#c7 and 7#d7 as paragraphs 7#d7 and 7#e71 respectively2 7,b7 by striking paragraph 7#c7 in paragraph 7#e77;,a71 as so redesignated1 and inserting paragraph 7#d72 and 7,c7 by inserting after paragraph 7#b7 the following new paragraph3 7#c7 ,special rule for underpayments attributable to investment management services 7,a7 ,in general ,paragraph 7#a7 shall not apply to any portion of an underpayment to which section #fffb applies by reason of subsection 7b77#aa7 unless-- 7i7 the relevant facts affecting the tax treatment of the item are adequately disclosed1 7ii7 there is or was substantial authority for such treatment1 and 7iii7 the taxpayer reasonably believed that such treatment was more likely than not the proper treatment4 7,b7 ,rules relating to reasonable belief ,rules similar to the rules of subsection 7d77#d7 shall apply for purposes of subparagraph 7,a77iii74 4 7e7 ,income and loss from investment services partnership interests taken into account in determining net earnings from self-,employment 7#a7 ,internal ,revenue ,code 7,a7 ,in general ,section #adjb7;a7 is amended by striking and at the end of paragraph 7#af71 by striking the period at the end of paragraph 7#ag7 and inserting 2 and1 and by inserting after paragraph 7#ag7 the following new paragraph3 7#ah7 notwithstanding the preceding provisions of this subsection1 in the case of any individual engaged in the trade or business of providing services described in section #gaj7;c77#b7 with respect to any entity1 investment services partnership income or loss 7as defined in subsection 7m77 of such individual with respect to such entity shall be taken into account in determining the net earnings from self-employment of such individual4 4 7,b7 ,investment services partnership income or loss ,section #adjb is amended by adding at the end the following new subsection3 7m7 ,investment services partnership income or loss ,for purposes of subsection 7a7-- 7#a7 ,in general ,the term investment services partnership income or loss means1 with respect to any investment services partnership interest 7as defined in section #gaj7;c77 or disqualified interest 7as defined in section #gaj7;e771 the net of-- 7,a7 the amounts treated as ordinary income or ordinary loss under subsections 7b7 and 7e7 of section #gaj with respect to such interest1 7,b7 all items of income1 gain1 loss1 and deduction allocated to such interest1 and 7,c7 the amounts treated as realized from the sale or exchange of property other than a capital asset under section #gea with respect to such interest4 7#b7 ,exception for qualified capital interests ,a rule similar to the rule of section #gaj7;d7 shall apply for purposes of applying paragraph 7#a77;,b74 4 7#b7 ,social ,security ,act ,section #baa7;a7 of the ,social ,security ,act is amended by striking and at the end of paragraph 7#ae71 by striking the period at the end of paragraph 7#af7 and inserting 2 and1 and by inserting after paragraph 7#af7 the following new paragraph3 7#ag7 ,notwithstanding the preceding provisions of this subsection1 in the case of any individual engaged in the trade or business of providing services described in section #gaj7;c77#b7 of the ,internal ,revenue ,code of #aihf with respect to any entity1 investment services partnership income or loss 7as defined in section #adjb7m7 of such ,code7 shall be taken into account in determining the net earnings from self-employment of such individual4 4 7f7 ,separate accounting by partner ,section #gjb7;a7 is amended by striking and at the end of paragraph 7#g71 by striking the period at the end of paragraph 7#h7 and inserting 1 and1 and by inserting after paragraph 7#h7 the following3 7#i7 any amount treated as ordinary income or loss under subsection 7a71 7b71 or 7e7 of section #gaj4 4 7g7 ,conforming amendments 7#a7 ,subsection 7d7 of section #gca is amended by inserting section #gaj7;b77#d7 7relating to distributions of partnership property71 after to the extent otherwise provided by4 7#b7 ,section #gda is amended by inserting or section #gaj 7relating to special rules for partners providing investment management services to partnerships7 before the period at the end4 7#c7 ,the table of sections for part ,i of subchapter ,k of chapter #a is amended by adding at the end the following new item3 ,sec4 #gaj4 ,special rules for partners providing investment management services to partnerships4 4 7#d7 7,a7 ,part ,,iv of subchapter ,o of chapter #a is amended by striking section #ajfa4 7,b7 ,the table of sections for part ,,iv of subchapter ,o of chapter #a is amended by striking the item relating to section #ajfa4 7h7 ,effective date 7#a7 ,in general ,except as otherwise provided in this subsection1 the amendments made by this section shall apply to taxable years ending after the date of the enactment of this ,act4 7#b7 ,partnership taxable years which include effective date ,in applying section #gaj7;a7 of the ,internal ,revenue ,code of #aihf 7as added by this section7 in the case of any partnership taxable year which includes the date of the enactment of this ,act1 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 date4 7#c7 ,dispositions of partnership interests 7,a7 ,in general ,section #gaj7;b7 of such ,code 7as added by this section7 shall apply to dispositions and distributions after the date of the enactment of this ,act4 7,b7 ,indirect dispositions ,the amendments made by subsection 7b7 shall apply to transactions after the date of the enactment of this ,act4 7#d7 ,other income and gain in connection with investment management services ,section #gaj7;e7 of such ,code 7as added by this section7 shall take effect on the date of the enactment of this ,act4