[Congressional Bills 117th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3903 Introduced in House (IH)]
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117th CONGRESS
1st Session
H. R. 3903
To amend the Internal Revenue Code of 1986 to treat certain income with
respect to partnership interests held in connection with the
performance of services as ordinary income.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
June 15, 2021
Mr. Grothman introduced the following bill; which was referred to the
Committee on Ways and Means
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to treat certain income with
respect to partnership interests held in connection with the
performance of services as ordinary income.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Tax Fairness Act of 2021''.
SEC. 2. ORDINARY INCOME TREATMENT IN THE CASE OF PARTNERSHIP INTERESTS
HELD IN CONNECTION WITH PERFORMANCE OF SERVICES.
(a) In General.--Section 1061 of the Internal Revenue Code of 1986
is amended to read as follows:
``SEC. 1061. PARTNERSHIP INTERESTS HELD IN CONNECTION WITH PERFORMANCE
OF SERVICES.
``(a) In General.--If one or more applicable partnership interests
are held by a taxpayer at any time during the taxable year, so much
of--
``(1) the taxpayer's net capital gain with respect to such
interests for such taxable year, as does not exceed
``(2) the taxpayer's recharacterization account balance for
such taxable year,
shall be treated as ordinary income.
``(b) Net Capital Gain.--
``(1) In general.--For purposes of subsection (a)(1), net
capital gain shall be determined under section 1222, except
that such section shall be applied--
``(A) without regard to the recharacterization of
any item as ordinary income under this section,
``(B) by only taking into account items of gain and
loss--
``(i) taken into account by the taxpayer
under section 702 with respect to any
applicable partnership interest,
``(ii) recognized by the taxpayer on the
disposition of any such interest, or
``(iii) recognized by the taxpayer under
paragraph (4) on a distribution of property
with respect to such interest, and
``(C) in the case of a taxable year for which
section 1231 gains (as defined in section
1231(a)(3)(A)) exceed section 1231 losses (as defined
in section 1231(a)(3)(B)), by treating property which
is taken into account in determining such gains and
losses as capital assets held for more than 1 year.
``(2) Allocation to items of gain.--The amount treated as
ordinary income under subsection (a) shall be allocated ratably
among the items of long-term capital gain taken into account in
determining net capital gain under paragraph (1).
``(3) 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 title.
``(4) Recognition of gain on distributions of partnership
property.--
``(A) In general.--In the case of any distribution
of property by a partnership with respect to any
applicable partnership interest, the partner receiving
such property shall recognize gain equal to the excess
(if any) of--
``(i) the fair market value of such
property at the time of such distribution, over
``(ii) the adjusted basis of such property
in the hands of such partner (determined
without regard to subparagraph (B)).
``(B) Adjustment of basis.--In the case of a
distribution to which subparagraph (A) applies, the
basis of the distributed property in the hands of the
distributee partner shall be the amount determined
under subparagraph (A)(i).
``(c) Recharacterization Account Balance.--
``(1) In general.--For purposes of this section, the term
`recharacterization account balance' means, with respect to any
taxpayer for any taxable year, the excess (if any) of--
``(A) the sum of--
``(i) the taxpayer's aggregate annual
recharacterization amounts with respect to
applicable partnership interests for such
taxable year, plus
``(ii) the taxpayer's recharacterization
account balance for the taxable year preceding
such taxable year, over
``(B) the sum of--
``(i) the taxpayer's net ordinary income
with respect to applicable partnership
interests for such taxable year (determined
without regard to this section), plus
``(ii) the amount treated as ordinary
income of the taxpayer under this section for
the taxable year preceding such taxable year.
``(2) Annual recharacterization amount.--For purposes of
this subsection--
``(A) In general.--The term `annual
recharacterization amount' means, with respect to any
applicable partnership interest for any partnership
taxable year, an amount equal to the product of--
``(i) the specified rate determined under
subparagraph (B) for the calendar year in which
such taxable year begins, multiplied by
``(ii) the excess (if any) of--
``(I) an amount equal to the
applicable percentage of the
partnership's aggregate invested
capital for such taxable year, over
``(II) the specified capital
contribution of the partner with
respect to the applicable partnership
interest for such taxable year.
If a taxpayer holds an applicable partnership interest
for less than the entire taxable year, the amount
determined under the preceding sentence shall be
ratably reduced.
``(B) Specified rate.--For purposes of subparagraph
(A), the term `specified rate' means, with respect to
any calendar year, a percentage equal to--
``(i) the Federal long-term rate determined
under section 1274(d)(1) for the last month of
the calendar year, plus
``(ii) 10 percentage points.
``(C) Applicable percentage.--
``(i) In general.--The term `applicable
percentage' means, with respect to any
applicable partnership interest, the highest
percentage of profits of the partnership that
could be allocated with respect to such
interest for the taxable year (consistent with
the partnership agreement and assuming such
facts and circumstances with respect to such
taxable year as would result in such highest
percentage).
``(ii) 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 profits. Such rules may provide a
percentage which may be used in lieu of the
highest percentage determined under clause (i)
in cases where such other percentage is
consistent with the purposes of this section.
``(D) Aggregate invested capital.--
``(i) In general.--The term `aggregate
invested capital' means, with respect to any
taxable year, the average daily amount of
invested capital of the partnership for such
taxable year.
``(ii) Invested capital.--The term
`invested capital' means, with respect to any
partnership as of any day, the total cumulative
value, determined at the time of contribution,
of all money or other property contributed to
the partnership on or before such day.
``(iii) 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 partnership.
``(iv) Treatment of certain indebtedness as
invested capital.--The following amounts shall
be treated as invested capital:
``(I) Partner loans.--The aggregate
value (determined as of the time of the
loan) of money or other property which
a partner loans to the partnership.
``(II) 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 partnership.
``(E) Specified capital contribution.--
``(i) In general.--The term `specified
capital contribution' means, with respect to
any applicable partnership interest for any
taxable year, the average daily amount of
contributed capital with respect to such
interest for such year.
``(ii) Contributed capital.--The term
`contributed capital' means, with respect to
any applicable partnership interest as of any
day, the excess (if any) of--
``(I) the total cumulative value,
determined at the time of contribution,
of all money or other property
contributed by the partner to the
partnership with respect to such
interest as of such day, over
``(II) the total cumulative value,
determined at the time of distribution,
of all money or other property
distributed by the partnership to the
partner with respect to such interest
as of such day.
``(iii) 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 subparagraph. For purposes of the
preceding sentence, a person shall be treated
as related to another person if the
relationship between such persons would be
described in section 267(b) or 707(b) if such
sections and section 267(f) were applied by
substituting `10 percent' for `50 percent' each
place it appears.
``(F) Multiple interests.--If at any time during a
taxable year a taxpayer holds directly or indirectly
more than 1 applicable partnership interest in a single
partnership, such interests shall be treated as 1
applicable partnership interest for purposes of
applying this paragraph.
``(3) Net ordinary income.--For purposes of this
subsection, the net ordinary income with respect to applicable
partnership interests for any taxable year is the excess (if
any) of--
``(A) the taxpayer's distributive share of items of
income and gain under section 702 with respect to
applicable partnership interests for such taxable year
(determined without regard to any items of gain taken
into account in determining net capital gain under
subsection (b)(1)), over
``(B) the taxpayer's distributive share of items of
deduction and loss under section 702 with respect to
such interests for such taxable year (determined
without regard to any items of loss taken into account
in determining net capital gain under subsection
(b)(1)).
``(d) Applicable Partnership Interest.--For purposes of this
section--
``(1) In general.--The term `applicable partnership
interest' means any interest in a partnership which, directly
or indirectly, is transferred to (or is held by) the taxpayer
in connection with the performance of services by the taxpayer,
or any other person, in any applicable trade or business.
``(2) Applicable trade or business.--
``(A) In general.--The term `applicable trade or
business' means any trade or business conducted on a
regular, continuous, and substantial basis which,
regardless of whether the activities are conducted in
one or more entities, consists, in whole or in part,
of--
``(i) raising or returning capital,
``(ii) investing in (or disposing of)
trades or businesses (or identifying trades or
businesses for such investing or disposition),
and
``(iii) developing such trades or
businesses.
``(B) Treatment of research and experimentation
activities.--Any activity involving research or
experimentation (within the meaning of section
469(c)(4)) shall be treated as a trade or business for
purposes of clauses (ii) and (iii) of subparagraph (A).
``(e) Transfer of Applicable Partnership Interest to Related
Person.--
``(1) In general.--If a taxpayer transfers any applicable
partnership interest, directly or indirectly, to a person
related to the taxpayer, the taxpayer shall include in gross
income (as ordinary income) so much of the taxpayer's
recharacterization account balance for such taxable year as is
allocable to such interest (determined in such manner as the
Secretary may provide and reduced by any amount treated as
ordinary income under subsection (a) with respect to the
transfer of such interest).
``(2) Related person.--For purposes of this paragraph, a
person is related to the taxpayer if--
``(A) the person is a member of the taxpayer's
family within the meaning of section 318(a)(1), or
``(B) 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 service.
``(f) Reporting by Entity of Taxpayer's Annual Recharacterization
Amount.--A partnership shall report to the Secretary, and include with
the information required to be furnished under section 6031(b) to each
partner, the amount of the partner's annual recharacterization amount
for the taxable year, if any. A similar rule applies to any entity that
receives a report of an annual recharacterization amount for the
taxable year.
``(g) Regulations.--The Secretary shall issue such regulations or
other guidance as necessary to carry out this section, including
regulations--
``(1) to prevent the abuse of the purposes of this section,
including through--
``(A) the allocation of income to tax indifferent
parties, or
``(B) a reduction in the invested capital of the
partnership (including attempts to undervalue
contributed or loaned property),
``(2) 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 partnership,
``(3) which provide for the application of this section in
cases where the taxpayer has more than 1 applicable interest in
a partnership, and
``(4) which provide for the application of this section in
cases of tiered structures of entities.''.
(b) Coordination With Section 83.--Subsection (e) of section 83 is
amended by striking ``or'' at the end of paragraph (4), by striking the
period at the end of paragraph (5) and inserting ``, or'', and by
adding at the end the following new paragraph:
``(6) a transfer of a partnership interest to which section
1061 applies.''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2021.
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