[Congressional Bills 117th Congress]
[From the U.S. Government Publishing Office]
[S. 2617 Introduced in Senate (IS)]
<DOC>
117th CONGRESS
1st Session
S. 2617
To amend the Internal Revenue Code of 1986 to revise the treatment of
partnership interests received in connection with the performance of
services, and for other purposes.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
August 5, 2021
Mr. Wyden (for himself and Mr. Whitehouse) 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 revise the treatment of
partnership interests received in connection with the performance of
services, and for other purposes.
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 ``Ending the Carried Interest Loophole
Act''.
SEC. 2. PARTNERSHIP INTERESTS TRANSFERRED IN CONNECTION WITH
PERFORMANCE OF SERVICES.
(a) Modification of Election To Include Partnership Interest in
Gross Income in Year of Transfer.--Subsection (c) of section 83 is
amended by redesignating paragraph (4) as paragraph (5) and by
inserting after paragraph (3) the following new paragraph:
``(4) Partnership interests.--Except as provided by the
Secretary--
``(A) In general.--In the case of any transfer of
an interest in a partnership in connection with the
performance of services--
``(i) the fair market value of such
interest shall be treated for purposes of this
section as being equal to the amount which the
partner would receive if the partnership sold
(at the time of the transfer) all of its assets
for cash at their fair market value in a fully
taxable transaction and distributed the
proceeds of such sale (reduced by the
liabilities of the partnership) to its partners
in complete liquidation, and
``(ii) the person receiving such interest
shall be treated as having made the election
under subsection (b)(1) unless such person
makes an election under this paragraph to have
such subsection not apply.
``(B) Coordination with other partnership rules.--
Except as otherwise provided by the Secretary, if, by
reason of subparagraph (A), subsection (b)(1) applies
to a partnership interest transferred to a person, then
the amount included in the gross income of such person
by reason of such subsection shall (at the time of the
transfer)--
``(i) be treated as an addition to the
capital account of such person with respect to
such partnership for purposes of subchapter K,
and
``(ii) if such interest is an applicable
partnership interest under section 1299 at any
time, be treated as invested capital of such
person with respect to such interest for
purposes of such section.
``(C) Election.--The election under subparagraph
(A)(ii) shall be made under rules similar to the rules
of subsection (b)(2).
``(D) Partnership interest.--
``(i) In general.--For purposes of this
paragraph, any applicable financial instrument
or contract (as defined in section
1299(b)(2)(B)) or interest in an entity other
than a partnership which is treated as an
applicable partnership interest under section
1299(b)(2) shall be treated as an interest in a
partnership.
``(ii) Regulations.--The Secretary shall
prescribe such regulations or other guidance as
the Secretary determines necessary or
appropriate to carry out this paragraph,
including regulations for the application of
this paragraph to applicable financial
instruments or contracts (as so defined) or
interests in entities other than partnerships
which are treated as partnership interests
under clause (i).''.
(b) Effective Date.--The amendments made by this section shall
apply to interests in partnerships transferred after the date of the
enactment of this Act.
SEC. 3. TREATMENT OF CERTAIN PARTNERSHIP INTERESTS RECEIVED IN
CONNECTION WITH PERFORMANCE OF SERVICES.
(a) In General.--Subchapter P of chapter 1 of the Internal Revenue
Code of 1986 is amended by adding at the end the following new part:
``PART VII--TREATMENT OF CERTAIN PARTNERSHIP INTERESTS RECEIVED IN
CONNECTION WITH PERFORMANCE OF SERVICES
``Sec. 1299. Treatment of certain partnership interests received in
connection with performance of services.
``SEC. 1299. TREATMENT OF CERTAIN PARTNERSHIP INTERESTS RECEIVED IN
CONNECTION WITH PERFORMANCE OF SERVICES.
``(a) In General.--In the case of a taxpayer who holds 1 or more
applicable partnership interests in any partnership at any time during
any taxable year of the partnership ending with or within the taxable
year of the taxpayer--
``(1) there shall be included in the gross income of the
taxpayer as ordinary income an amount equal to the aggregate of
the deemed compensation amounts determined under subsection (c)
with respect to such interests in all partnerships, and
``(2) the taxpayer shall be treated as having for such
taxable year of the taxpayer a long-term capital loss equal to
the aggregate of such deemed compensation amounts.
``(b) Applicable Partnership Interest.--For purposes of this
section--
``(1) In general.--Except as provided in this subsection,
the term `applicable partnership interest' means any interest
in a partnership which--
``(A) is directly or indirectly transferred to (or
held by) the taxpayer in connection with the
performance of services by the taxpayer, or any other
person, in any applicable trade or business, or
``(B) is held by a taxpayer who received an
applicable loan.
Such term shall not include any interest which is acquired
pursuant to a sale or disposition to which subsection (c)(5)
applies.
``(2) Determination of interest in a partnership.--
``(A) In general.--For purposes of paragraph (1),
the term `interest in a partnership' includes--
``(i) any applicable financial instrument
or contract, or
``(ii) to the extent provided by the
Secretary, any interest in an entity other than
a partnership if such interest would be treated
as an applicable partnership interest if such
entity were a partnership.
``(B) Applicable financial instrument or
contract.--For purposes of this paragraph--
``(i) In general.--The term `applicable
financial instrument or contract' means any
financial instrument or contract the value of
which is determined in whole or in part by
reference to any partnership or partnership-
related item (including the amount of
partnership distributions, the value of
partnership assets, or the results of
partnership operations).
``(ii) Exception for non-convertible
debt.--Such term shall not include a financial
instrument or contract if such instrument or
contract--
``(I) is treated as debt for
Federal tax purposes, and
``(II) is not convertible into or
exchangeable for any partnership
interest and does not provide for a
payment of similar or equivalent value.
``(3) Applicable trade or business.--
``(A) In general.--For purposes of paragraph
(1)(A), the term `applicable trade or business' means
any activity conducted on a regular, continuous, and
substantial basis which, regardless of whether the
activity is conducted in one or more entities,
consists, in whole or in part, of--
``(i) raising or returning capital, and
``(ii) either--
``(I) investing in (including
acquiring or disposing of) specified
assets (or identifying specified assets
for such investing, acquisition, or
disposition), or
``(II) developing specified assets.
``(B) Specified assets.--
``(i) In general.--The term `specified
assets' means securities, commodities, real
estate held for rental or investment, cash or
cash equivalents, options or derivative
contracts with respect to any of the foregoing,
and an interest in a partnership if such
partnership has a direct or indirect interest
in any of the foregoing.
``(ii) Securities.--For purposes of clause
(i), the term `securities' has the meaning
given such term under section 475(c)(2),
determined--
``(I) by applying subparagraph (B)
thereof without regard to whether the
partnership or trust is widely held or
publicly traded, and
``(II) without regard to the last
sentence thereof.
``(iii) Commodities.--For purposes of
clause (i), the term `commodities' has the
meaning given such term under section
475(e)(2), except that such term shall not
include commodities held in connection with the
active conduct of a commodities business as a
producer, processor, merchant, or handler of
commodities.
``(4) Applicable loan.--
``(A) In general.--The term `applicable loan'
means, with respect to any partnership interest, any
loan issued directly or indirectly from the
partnership, any other partner of the partnership, or
any person related to such other partner or such
partnership.
``(B) Safe harbor.--The term `applicable loan' does
not include any loan which--
``(i) is fully recourse to the borrower or
fully secured by the borrower's assets, and
``(ii) requires payments of interest with a
stated rate not less than the specified rate
determined under subsection (c)(2).
``(c) Deemed Compensation Amount.--For purposes of this section--
``(1) Deemed compensation amount.--
``(A) In general.--The term `deemed compensation
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
paragraph (2) 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 weighted
average of the aggregate of invested
capital of all partners of the
partnership on each measurement date
occurring within such taxable year,
over
``(II) the weighted average of
invested capital with respect to the
applicable partnership interest on each
measurement date occurring within such
taxable year.
``(B) Measurement date.--For purposes of
subparagraph (A), the term `measurement date' means--
``(i) the last day of the partnership
taxable year,
``(ii) any date specified in the
regulations under subchapter K as a date on
which to revalue property of the partnership
for purposes of adjusting capital accounts of
the partner (without regard to whether the
partnership capital accounts are adjusted on
that date), and
``(iii) any other date specified by the
Secretary.
``(2) Specified rate.--The term `specified rate' means,
with respect to any calendar year, a percentage equal to the
sum of--
``(A) the first segment rate (as defined in section
430(h)(2)(C)(i)) for the first month of such calendar
year, plus
``(B) 9 percentage points.
``(3) Applicable percentage.--
``(A) In general.--The term `applicable percentage'
means, with respect to any applicable partnership
interest, the highest percentage of profits of the
partnership which could be allocated to such interest
(consistent with the partnership agreement and
determined as if all performance targets with respect
to such interest had been met).
``(B) 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 which may be allocated to the
applicable partnership interest under the partnership
agreement may temporarily exceed the highest percentage
determined under subparagraph (A).
``(4) Invested capital.--
``(A) In general.--The term `invested capital'
means, with respect to any partner as of any day, the
excess of--
``(i) the sum 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 on or before such day (net
of any liabilities the partnership is
considered to assume or take subject
to), plus
``(II) the aggregate amounts of the
partner's distributive share of income
and gain as of such day, over
``(ii) the sum of--
``(I) the aggregate value,
determined at the time of distribution,
of all money or other property
distributed to the partner from the
partnership on or before such day (net
of any liabilities the partner is
considered to assume or take subject
to), plus
``(II) the aggregate amount of the
partner's distributive share of loss
and deductions of the partnership as of
such day.
``(B) Special rules.--
``(i) In general.--For purposes of
subparagraph (A), invested capital shall be
determined--
``(I) without regard to amounts
considered as a contribution of money
or as a distribution of money by reason
of subsection (a) or (B) of section
752, and
``(II) without regard to income
required to be recognized by a
contributing partner under section
704(c) with respect to property
described in subparagraph (A)(i)(I).
``(ii) Adjustments.--The Secretary may
provide for rules making such adjustments as
the Secretary determines necessary to the
determination of invested capital under
subparagraph (A) in order to carry out the
purposes of this section.
``(C) Treatment of borrowings from partnerships or
other partners.--For purposes of paragraph (1)(A), the
amount of invested capital with respect to any
applicable partnership interest shall be reduced by the
amount of any applicable loan to a partner who is
described in subsection (b)(1)(B).
``(5) Accelerated inclusion in case of disposition of
applicable partnership interest.--
``(A) In general.--If a taxpayer who holds an
applicable partnership interest sells or disposes of
any portion of such interest during a taxable year in
the applicable period, the amount determined under this
subsection for such taxable year shall be the sum of--
``(i) the amount determined under paragraph
(1) for the taxable year (determined as if no
such sale or disposition had occurred), plus
``(ii) an amount equal to the product of--
``(I) the excess of the amount
determined under clause (i) over the
amount determined under paragraph (1)
for the taxable year, and
``(II) the number of taxable years
beginning after the date of the sale or
disposition and before the last day of
the applicable period.
``(B) Applicable period.--For purposes of this
paragraph, the applicable period is the 10-year period
beginning on the later of--
``(i) the date the taxpayer acquired the
applicable partnership interest, or
``(ii) the last date described in paragraph
(1)(B)(ii) on which there was an increase in
the amount of the taxpayers applicable
percentage of the aggregate invested capital of
all partners of the partnership.
``(6) 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 subsection.
``(d) Related Person.--For purposes of this section, 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).
``(e) Reporting.--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 deemed
compensation amount for the taxable year, if any. A similar rule
applies to any entity that receives a report of a deemed compensation
amount for the taxable year.
``(f) 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 or increase in the invested
capital of any partner (including attempts to
undervalue or overvalue property),
``(2) which provide for the application of the rules of
subsection (c) to applicable financial instruments and
contracts and to entities other than partnerships,
``(3) which provide in appropriate circumstances for
purposes of this section the aggregation of assets held by
related partnerships or for the disaggregation of assets within
1 partnership,
``(4) which provide for the application of this section in
cases of tiered structures or entities,
``(5) which provide guidance with respect to forgiveness of
any loan described in subsection (b)(4)(B), and
``(6) which provide rules for transfers or liquidations of
applicable partnership interests by gift, inheritance,
substituted basis transactions, and other transactions in which
income is not recognized at the time of the transaction.''.
(b) Conforming Amendments.--
(1)(A) Part IV of subchapter O of chapter 1 of the Internal
Revenue Code of 1986 is amended by striking section 1061.
(B) The table of sections for part IV of subchapter O of
chapter 1 of such Code is amended by striking the item relating
to section 1061.
(2) The table of parts for subchapter P of such Code is
amended by adding at the end the following new item:
``Part VII--Treatment of Certain Partnership Interests Received in
Connection With Performance of Services''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years of a taxpayer beginning after date of enactment
of this Act, with or within which ends the taxable year of a
partnership which begins after such date.
<all>