[Congressional Bills 119th Congress]
[From the U.S. Government Publishing Office]
[S. 2095 Introduced in Senate (IS)]
<DOC>
119th CONGRESS
1st Session
S. 2095
To amend the Internal Revenue Code of 1986 to improve the rules related
to partners and partnerships, and for other purposes.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
June 17, 2025
Mr. Wyden 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 improve the rules related
to partners and partnerships, 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. REFERENCE, ETC.
(a) Short Title.--This Act may be cited as the ``Preventing Abusive
Routine Tax Nonsense Enabled by Rip-offs Shelters and Havens and
Instead Promoting Simplicity Act'' or the ``PARTNERSHIPS Act''.
(b) Reference.--Except as otherwise expressly provided, whenever in
this Act, an amendment or repeal is expressed in terms of an amendment
to, or repeal of, a section or other provision, the reference shall be
considered to be made to a section or other provision of the Internal
Revenue Code of 1986.
(c) Table of Contents.--The table of contents of this Act is as
follows:
Sec. 1. Reference, etc.
Sec. 2. Determination of partner's distributive share.
Sec. 3. Allocation of built-in-gains with respect to contributed
property.
Sec. 4. Treatment of revalued property.
Sec. 5. Repeal of time limitation on taxing precontribution gain.
Sec. 6. Repeal of rules relating to certain liquidating distributions.
Sec. 7. Clarification of rules relating to payments to partners for
property or services.
Sec. 8. Elimination of preformation expenditure exception to
partnership transaction rules.
Sec. 9. Partnership terminations.
Sec. 10. Repeal of requirement that inventory be substantially
appreciated in certain partnership
distributions treated as sale or exchange.
Sec. 11. Treatment of partnership debt.
Sec. 12. Adjustments to basis of partnership property.
Sec. 13. Application of net investment income tax to trade or business
income of certain high income individuals.
Sec. 14. Recognition of gain on transfers to swap funds.
Sec. 15. Modifications to treatment of certain losses.
Sec. 16. Codification of anti-abuse rule.
SEC. 2. DETERMINATION OF PARTNER'S DISTRIBUTIVE SHARE.
(a) In General.--Section 704(b) is amended to read as follows:
``(b) Determination of Distributive Share.--
``(1) In general.--Except as provided in paragraph (2), a
partner's distributive share of income, gain, loss, deduction,
or credit (or item thereof) shall be determined in accordance
with the partner's interest in the partnership (determined by
taking into account all facts and circumstances), if--
``(A) the partnership agreement does not provide as
to the partner's distributive share of income, gain,
loss, deduction, or credit (or item thereof), or
``(B) the allocation to a partner under the
agreement of income, gain, loss, deduction, or credit
(or item thereof) does not have substantial economic
effect.
``(2) Required use of consistent percentage method for
certain partners.--
``(A) In general.--Except as otherwise provided in
this subchapter or by the Secretary, in the case of any
covered partner which is a partner in a partnership
which is a covered partnership for the taxable year of
such partnership, such covered partner's distributive
share of the covered partnership's applicable items for
such taxable year shall be determined using the
consistent percentage method.
``(B) Covered partner; covered partnership.--For
purposes of this paragraph--
``(i) Covered partnership.--The term
`covered partnership' means any partnership if,
during any day during the taxable year of the
partnership--
``(I) two or more members of a
controlled group (within the meaning of
section 267(f)) own (within the meaning
of section 267(e)(3)) 50 percent or
more of the capital or profits
interests in such partnership, or
``(II) it is a partnership which is
specified by the Secretary in
regulations or other guidance as being
of a type to which this subparagraph
applies in order to prevent the
avoidance of the purposes of this
paragraph.
``(ii) Covered partner.--The term `covered
partner' means--
``(I) in the case of a covered
partnership described in clause (i)(I),
any partner which is a member of a
controlled group described in such
clause or any other partner any
ownership interest (other than a de
minimis interest) in which is held
directly or indirectly by a member of
such a controlled group, and
``(II) in the case of a covered
partnership described in clause
(i)(II), any partner which meets such
specifications as prescribed by the
Secretary under the regulations or
guidance referred to in such clause.
``(iii) Reporting rule.--Each covered
partnership shall submit to the Secretary, at
such time and in such manner as prescribed by
the Secretary--
``(I) a statement that such
partnership is a covered partnership,
and
``(II) such other information as
the Secretary shall require.
``(C) Consistent percentage method.--For purposes
of this paragraph, the term `consistent percentage
method' means a method under which--
``(i) a covered partner's distributive
share of any applicable item of a covered
partnership bears the same ratio to the
aggregate distributive shares of such item for
all covered partners in such partnership
(determined without regard to this paragraph)
as--
``(I) the covered partner's net
equity in the covered partnership,
bears to
``(II) the net equity of all
covered partners in the covered
partnership, and
``(ii) the covered partner is allocated the
same share of each applicable item of the
covered partnership.
Clause (i) shall only apply to an applicable item if it
is included in the distributive share of at least 1
covered partner (determined without regard to this
paragraph).
``(D) Net equity.--For purposes of this paragraph--
``(i) In general.--The term `net equity'
means, with respect to any covered partner in a
covered partnership, the contributed equity of
such covered partner, properly adjusted to take
into account any revaluation event described in
subparagraphs (A), (B), (C), (D), or (F) of
subsection (f)(3).
``(ii) Contributed equity.--The term
`contributed equity' means, with respect to any
covered partner in a covered partnership, the
excess of--
``(I) the sum of the value of all
property and money contributed by the
covered partner (or any predecessor of
such partner) to the covered
partnership plus the amount of
liabilities (within the meaning of
section 752) of the covered partnership
that are assumed by the covered partner
(or any predecessor of such partner),
over
``(II) the sum of the value of all
property and money distributed to the
covered partner (or any predecessor of
such partner) by the covered
partnership plus the amount of
liabilities (within the meaning of
section 752) of the covered partner (or
any predecessor of such partner) that
are assumed by the covered partnership.
For purposes of this clause, a predecessor of a
partner includes any person treated as
transferring an interest to such partner in a
transaction described in section 707(d)(1)(A).
``(E) Applicable items.--For purposes of this
paragraph, the term `applicable item' means, with
respect to any partnership, any item of income, gain,
deduction, loss, or credit.
``(F) Cross-reference.--For the treatment of
covered partners in the event of certain rights or
distributions not in accordance with the consistent
percentage method, see section 707(d).''.
(b) Treatment of Certain Rights and Distributions Not in Accordance
With Consistent Percentage Method.--Section 707 is amended by adding at
the end the following new subsection:
``(d) Deemed Transfers in Certain Cases Where Certain Rights Do Not
Reflect Partnership Distributive Share.--
``(1) In general.--If a covered partner has an excess share
with respect to any covered partnership on any applicable
date--
``(A) such partner shall be treated as having
received an interest in the partnership in a
transaction between 2 or more partners acting other
than in their capacity as members of the partnership,
and
``(B) notwithstanding any other provision of this
chapter--
``(i) the value of such interest shall be
included in the gross income of the covered
partner receiving such interest in such
transaction, and
``(ii) no deduction or loss shall be
allowed with respect to such transfer to any
covered partner treated as transferring all or
a portion of such interest in such transaction.
``(2) Excess share.--For purposes of this subsection--
``(A) In general.--The term `excess share' means,
with respect to any covered partner, the amount by
which--
``(i) the covered partner's interest in
partnership assets distributable to such
covered partner upon liquidation of the covered
partnership as of any applicable date, exceeds
``(ii) the covered partner's interest in
partnership assets, determined as if the amount
distributable upon liquidation to all covered
partners as of such applicable date were
distributable to each covered partner based on
the ratio of--
``(I) such covered partner's net
equity (as defined in section
704(b)(2)(D)) in the covered
partnership on such applicable date, to
``(II) the net equity (as so
defined) of all covered partners in the
covered partnership on such applicable
date.
``(B) Applicable date.--For purposes of this
paragraph, the term `applicable date' means any of the
following:
``(i) The last day of any taxable year of
the covered partnership.
``(ii) The date of any revaluation event
(as defined in section 704(f)).
``(3) Covered partner; covered partnership.--For purposes
of this subsection, the terms `covered partnership' and
`covered partner' have the meanings give such terms under
section 704(b)(2).
``(4) Regulations and guidance.--The Secretary shall
prescribe such regulations and other guidance as necessary to
carry out the purposes of this subsection, including
regulations or other guidance providing exceptions to the
application of paragraph (1) to the extent such exceptions are
consistent with the purposes of this subsection.''.
(c) Regulations and Guidance.--Section 704 is amended by
redesignating subsection (f) as subsection (g) and by inserting after
subsection (e) the following new subsection:
``(f) Regulations and Guidance.--The Secretary shall prescribe such
regulations and other guidance as necessary to carry out the purposes
of this section, including regulations or other guidance for the
application of this section to one or more tiers of entities.''.
(d) Reporting Penalties.--Section 6724(d)(1)(B) is amended by
striking ``or'' at the end of clause (xxvii), by striking ``and'' at
the end of clause (xxviii) and inserting ``or'', and by adding at the
end the following new clause:
``(xxix) section 704(b)(2)(B)(iii)
(relating to reporting rule for required use of
consistent percentage method), and''.
(e) Conforming Amendments.--
(1) Section 168(h)(6)(B)(ii) is amended by striking
``section 704(b)(2)'' and inserting ``section 704(b)(1)(B)''.
(2) Section 514(c)(9)(E)(i)(II) is amended by striking
``section 704(b)(2)'' and inserting ``section 704(b)(1)(B)''.
(f) Effective Date.--The amendments made by this section shall
apply to taxable years of partnerships beginning after the date of the
enactment of this Act.
SEC. 3. ALLOCATION OF BUILT-IN-GAINS WITH RESPECT TO CONTRIBUTED
PROPERTY.
(a) In General.--Subparagraph (A) of section 704(c)(1) is amended
to read as follows:
``(A) income, gain, loss, and deduction (including
notional items thereof) with respect to property
contributed to the partnership by a partner shall be
shared among the partners under the remedial method
prescribed by the Secretary so as to take into account
all of the variation between the basis of the property
to the partnership and its fair market value at the
time of contribution,''.
(b) Effective Date.--The amendment made by this section shall apply
to property contributed to a partnership after the date of the
enactment of this Act.
SEC. 4. TREATMENT OF REVALUED PROPERTY.
(a) In General.--Section 704, as amended by section 2, is amended
by redesignating subsections (f) and (g) as subsections (g) and (h),
respectively, and by inserting after subsection (e) the following new
subsection:
``(f) Revalued Property.--
``(1) In general.--Under regulations prescribed by the
Secretary, rules similar to the rules of paragraphs (1)(A) and
(1)(C) of subsection (c) shall apply to any property held by a
partnership at the time of a revaluation event.
``(2) Exception.--Paragraph (1) shall not apply to any
revaluation event which occurs during a taxable year in which
the partnership meets the gross receipts test of section 448(c)
unless the partnership elects, at such time and in such manner
as prescribed by the Secretary, to not have this paragraph
apply.
``(3) Revaluation event.--For purposes of this subsection,
the term `revaluation event' means--
``(A) any disproportionate contribution of money or
other property (other than a de minimis amount) to the
partnership,
``(B) any disproportionate distribution of money or
other property (other than a de minimis amount) by the
partnership,
``(C) any grant of an interest in the partnership
(other than a de minimis interest) as consideration for
the provision of services,
``(D) any issuance by the partnership of a non-
compensatory option (other than an option for a de
minimis partnership interest),
``(E) except as provided by the Secretary, any
agreement to change (other than a de minimis change)
the manner in which the partners share any item or
class of items of income, gain, loss, deduction, or
credit of the partnership, or
``(F) any other event prescribed by the Secretary.
``(4) Application to tiered entities.--If--
``(A) a partnership (hereinafter in this paragraph
referred to as the `upper-tier partnership') is a
partner in another partnership (hereinafter in this
paragraph referred to as the `lower-tier partnership'),
and
``(B) the upper-tier partnership holds more than 50
percent of the capital or profits interests in the
lower-tier partnership,
then a revaluation event with respect to the upper-tier
partnership shall be treated as a revaluation event with
respect to the lower-tier partnership.''.
(b) Conforming Amendments.--
(1) Section 168(h)(6) is amended by striking ``section
704(c)'' each place it appears in subparagraphs (B) and (C) and
inserting ``subsections (c) and (f) of section 704''.
(2) Section 514(c)(9)(E)(i) is amended by striking
``section 704(c)'' and inserting ``subsections (c) and (f) of
section 704''.
(3) Section 613A(c)(7)(D) is amended by inserting after the
fourth sentence the following new sentence: ``In the case of
any revaluation event (as defined in section 704(f)), section
704(f) shall apply in determining such share.''.
(4) Section 743(b) is amended by inserting after the third
sentence the following new sentence: ``In the case of any
revaluation event (as defined in section 704(f)) which occurs
before such transfer, section 704(f) shall apply in determining
such share.''.
(5) Section 897(k)(4)(C) is amended by striking ``section
704(c)'' each place it appears and inserting ``subsections (c)
and (f) of section 704''.
(c) Effective Date.--The amendment made by this section shall apply
to revaluation events (as defined in section 704(f)(2) of the Internal
Revenue Code of 1986, as added by this section) occurring after the
date of the enactment of this Act.
SEC. 5. REPEAL OF TIME LIMITATION ON TAXING PRECONTRIBUTION GAIN.
(a) In General.--Subparagraph (B) of section 704(c)(1) is amended
by striking ``within 7 years of being contributed''.
(b) Conforming Amendment.--Paragraph (1) of section 737(b) is
amended by striking ``within 7 years of the distribution''.
(c) Effective Date.--The amendments made by this section shall
apply to property contributed to a partnership after the date of the
enactment of this Act.
SEC. 6. REPEAL OF RULES RELATING TO CERTAIN LIQUIDATING DISTRIBUTIONS.
(a) In General.--Subpart B of part II of subchapter K of chapter 1
is amended by striking section 736 (and by striking the item relating
to such section in the table of sections for such subpart).
(b) Retired Partners and Successors in Interest of Deceased
Partners Treated as Partners Until Liquidation.--Section 761(d) is
amended by adding at the end the following: ``For purposes of this
subchapter, any retired partner or any deceased partner's successor in
interest shall be treated as a partner until the complete liquidation
of such retired partner's or successor's interest in the
partnership.''.
(c) Conforming Amendments.--
(1) Section 357(c)(3)(A) is amended by striking ``payment
of which either--'' and all that follows through ``then, for
purposes of'' and inserting ``payment of which would give rise
to a deduction, then, for purposes of''.
(2) Section 731(d) is amended--
(A) by striking ``section 736 (relating to payments
to a retiring partner or a deceased partner's successor
in interest),'', and
(B) by striking ``items), and'' and inserting
``items) and''.
(3) Section 751(b)(2) is amended to read as follows:
``(2) Exception.--Paragraph (1) shall not apply to a
distribution of property which the distributee contributed to
the partnership.''.
(4)(A) Section 753 is amended by striking ``The amount
includible'' and all that follows and inserting ``For treatment
of income in respect of a decedent, see section 691.''
(B) Section 691 is amended by striking subsection
(e).
(d) Effective Date.--The amendments made by this section shall
apply to partners retiring or dying after the date of the enactment of
this Act.
SEC. 7. CLARIFICATION OF RULES RELATING TO PAYMENTS TO PARTNERS FOR
PROPERTY OR SERVICES.
(a) In General.--Section 707(a)(2) is amended by striking ``Under
regulations prescribed by the Secretary--'' and inserting ``Except as
provided by the Secretary--''.
(b) Effective Date.--The amendment made by this section shall apply
to services performed or property transferred after the date of the
enactment of this Act.
(c) No Inference.--Nothing in this section or the amendments made
by this section shall be construed to create any inference with respect
to the proper treatment under section 707(a) of the Internal Revenue
Code of 1986 with respect to payments from a partnership to a partner
for property transferred or services performed on or before the date of
the enactment of this Act.
SEC. 8. ELIMINATION OF PREFORMATION EXPENDITURE EXCEPTION TO
PARTNERSHIP TRANSACTION RULES.
(a) In General.--Section 707(a)(2)(B) is amended by adding at the
end the following new sentence: ``For purposes of the preceding
sentence, a transfer of money or other property by a partnership to a
partner or by a partner to a partnership will not fail to be
characterized as part of a sale or exchange of property because such
transfer is made to reimburse the partner or partnership for an
expenditure chargeable to capital account (determined without regard to
any election under this chapter).''.
(b) Effective Date.--
(1) In general.--The amendment made by this section shall
apply to property transferred after the date of the enactment
of this Act.
(2) Binding contract exception.--The amendment made by
subsection (a) shall not apply to a transfer of property
described in section 707(a)(2)(B)(i) of the Internal Revenue
Code of 1986 if such transfer is pursuant to a written binding
contract in effect on the date of the enactment of this Act,
and at all times thereafter before the transfer.
SEC. 9. PARTNERSHIP TERMINATIONS.
(a) In General.--Section 708(b)(1) is amended--
(1) by striking ``by any of its partners'' and inserting
``by any of its historic partners (or any related person to any
of its partners)'', and
(2) by adding at the end the following sentence: ``For
purposes of the preceding sentence, a person is a related
person to another person if the relationship between such
persons would result in a disallowance of losses under section
267 or 707(b).''.
(b) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after the date of the enactment of
this Act.
(c) No Inference.--Nothing in this section or the amendments made
by this section shall be construed to create any inference with respect
to the proper treatment under section 708(b) of the Internal Revenue
Code of 1986 with respect to the activities of persons related (as
determined under the last sentence of section 708(b)(1) of such Code,
as added by subsection (a)) to partners for taxable years beginning on
or before the date of the enactment of this Act.
SEC. 10. REPEAL OF REQUIREMENT THAT INVENTORY BE SUBSTANTIALLY
APPRECIATED IN CERTAIN PARTNERSHIP DISTRIBUTIONS TREATED
AS SALE OR EXCHANGE.
(a) In General.--Clause (ii) of section 751(b)(1)(A) is amended by
striking ``which have appreciated substantially in value''.
(b) Conforming Amendment.--Section 751(b) is amended by striking
paragraph (3).
(c) Effective Date.--The amendments made by this section shall
apply to distributions after the date of the enactment of this Act.
SEC. 11. TREATMENT OF PARTNERSHIP DEBT.
(a) In General.--Section 752 is amended by adding at the end the
following new subsection:
``(e) Treatment and Allocation of Partnership Liabilities.--
``(1) In general.--Except as provided in paragraph (2) or
by the Secretary, all liabilities of a partnership shall be
allocated among partners in accordance with each partner's
share of partnership profits.
``(2) Exception.--
``(A) In general.--Paragraph (1) shall not apply to
bona fide indebtedness of the partnership to a partner
or to any related person to a partner. For purposes of
the preceding sentence, a person is a related person to
another person if the relationship between such persons
would result in a disallowance of losses under section
267 or 707(b).
``(B) Nonapplication to guarantees.--Subparagraph
(A) shall not apply to any guarantee or similar
arrangement.
``(3) Regulations and other guidance.--The Secretary shall
prescribe such regulations and other guidance as necessary to
carry out the purposes of this subsection, including
regulations or other guidance with respect to arrangements that
are similar to guarantees for purposes of paragraph (2)(B).''.
(b) Effective Date.--The amendment made by subsection (a) shall
apply to taxable years beginning after December 31, 2025.
(c) Treatment of Gain.--
(1) In general.--In the case of a taxpayer which recognizes
gain by reason of the application of the amendments made by
subsection (a) with respect to its first taxable year beginning
after December 31, 2025, such taxpayer may elect to pay the net
tax liability under this subsection in 6 equal annual
installments over the 6-taxable year period beginning with the
first taxable year beginning after December 31, 2025.
(2) Date for payment of installments.--If an election is
made under paragraph (1), the first installment shall be paid
on the due date (determined without regard to any extension of
time for filing the return for the return of tax for the
taxable year described in paragraph (1)) and each succeeding
installment shall be paid on the due date (as so determined)
for the return of tax for the taxable year following the
taxable year with respect to which the preceding installment
was made.
(3) Acceleration of payment.--If there is an addition to
tax for failure to timely pay any installment required under
this subsection, a liquidation or sale of substantially all the
assets of the taxpayer (including in a title 11 or similar
case), a cessation of business by the taxpayer, or any similar
circumstance, then the unpaid portion of all remaining
installments shall be due on the date of such event (or in the
case of a title 11 or similar case, the day before the petition
is filed). The preceding sentence shall not apply to the sale
of substantially all the assets of a taxpayer to a buyer if
such buyer enters into an agreement with the Secretary under
which such buyer is liable for the remaining installments due
under this subsection in the same manner as if such buyer were
the taxpayer.
(4) Proration of deficiency to installments.--If an
election is made under paragraph (1) to pay the net tax
liability under this subsection in installments and a
deficiency has been assessed with respect to such net tax
liability, the deficiency shall be prorated to the installments
payable under paragraph (1). The part of the deficiency so
prorated to any installment the date for payment of which has
not arrived shall be collected at the same time as, and as a
part of, such installment. The part of the deficiency so
prorated to any installment the date for payment of which has
arrived shall be paid upon notice and demand from the
Secretary. This subsection shall not apply if the deficiency is
due to negligence, to intentional disregard of rules and
regulations, or to fraud with intent to evade tax.
(5) Election.--Any election under paragraph (1) shall be
made not later than the due date for the return of tax for the
first taxable year beginning after December 31, 2025 and shall
be made in such manner as the Secretary shall provide.
(6) Net tax liability under this subsection.--For purposes
of this subsection--
(A) In general.--The net tax liability under this
subsection with respect to any taxpayer is the excess
(if any) of--
(i) such taxpayer's net income tax for the
taxable year beginning after December 31, 2025,
over
(ii) such taxpayer's net income tax for
such taxable year determined without regard to
any amount included in gross income by reason
of the amendments made by subsection (a).
(B) Net income tax.--The term ``net income tax''
means the regular tax liability (as defined in section
26 of the Internal Revenue Code of 1986) reduced by the
credits allowed under subparts A, B, and D of part IV
of subchapter A of chapter 1 of such Code.
(7) Installments not to prevent credit or refund of
overpayments or increase estimated taxes.--If an election is
made under paragraph (1) to pay the net tax liability under
this subsection in installments--
(A) no installment of such net tax liability
shall--
(i) in the case of a request for credit or
refund, be taken into account as a liability
for purposes of determining whether an
overpayment exists for purposes of section 6402
of the Internal Revenue Code of 1986 before the
date on which such installment is due, or
(ii) for purposes of sections 6425, 6654,
and 6655 of such Code, be treated as a tax
imposed by section 1 of such Code, section 11
of such Code, or subchapter L of chapter 1 of
such Code, and
(B) the first sentence of section 6403 of such Code
shall not apply with respect to any such installment.
SEC. 12. ADJUSTMENTS TO BASIS OF PARTNERSHIP PROPERTY.
(a) Section 754 Elections Limited to Qualified Small Business
Partnerships.--Section 754 is amended--
(1) by striking ``If a partnership files an election'' and
inserting the following:
``(a) In General.--If a partnership which is a qualified small
business partnership files an election'',
(2) by inserting ``with respect to which such partnership
is a qualified small business partnership'' after ``all
subsequent taxable years'', and
(3) by adding at the end the following new subsection:
``(b) Qualified Small Business Partnership.--For purposes of this
section--
``(1) In general.--The term `qualified small business
partnership' means, with respect to any taxable year, any
partnership which meets the gross receipts test under section
448(c) (determined with the modification described in paragraph
(3)) for such taxable year.
``(2) Exception not to apply to partnerships previously
failing test or tax shelters.--
``(A) Partnerships failing test disqualified
prospectively.--If a partnership fails to meet the
gross receipts test described in paragraph (1) for any
taxable year which begins after the date of the
enactment of this subsection, paragraph (1) shall not
apply to such partnership (or any successor) for such
taxable year or any succeeding taxable year.
``(B) Tax shelters.--Paragraph (1) shall not apply
to a tax shelter prohibited from using the cash
receipts and disbursements method of accounting under
section 448(a)(3), except that, for purposes of
applying this subparagraph, a syndicate (as defined in
section 1256(e)(3)(B)) shall not be treated as a tax
shelter.
``(3) Modification.--In applying section 52(b) to section
448(c)(2) for purposes of this subsection, the term `trade or
business' shall include any activity treated as a trade or
business under paragraph (5) or (6) of section 469(c)
(determined without regard to the phrase `To the extent
provided in regulations' in such paragraph (6)).''.
(b) Adjustments in the Case of Transfer of Partnership Interests.--
(1) In general.--Section 743 is amended--
(A) by striking subsection (a) and inserting the
following:
``(a) General Rule.--
``(1) Adjustments required.--Except as provided in
paragraph (2), in the case of a transfer of an interest in a
partnership by sale or exchange or upon the death of a partner,
the basis of partnership property shall be adjusted as provided
in subsection (b).
``(2) Exception for qualified small business
partnerships.--Paragraph (1) shall not apply to a qualified
small business partnership (as defined in section 754(b)) if--
``(A) the election provided by section 754
(relating to optional adjustment to basis of
partnership property) is not in effect with respect to
such partnership, and
``(B) in the case of a transfer, the partnership
does not have a substantial built-in loss immediately
after such transfer.'', and
(B) in subsection (b), by striking ``with respect
to which the election provided in section 754 is in
effect or which has a substantial built-in loss
immediately after such transfer'' and inserting ``a
partnership which is required to adjust the basis of
partnership property under subsection (a)''.
(2) Reporting.--
(A) In general.--Section 6050K is amended--
(i) in subsection (a), by striking
``described in section 751(a)'',
(ii) in subsection (c)(1), by striking the
period at the end and inserting ``, the amount
received, and such other information as the
Secretary may require. Such notification shall
be furnished at such time and in such manner as
the Secretary may require.'', and
(iii) in the heading, by striking
``certain''.
(B) Conforming amendment.--The item relating to
section 6050K in the table of sections for subpart B of
part III of subchapter A of chapter 61 is amended by
striking ``certain''.
(3) Conforming amendments.--
(A) Section 732(d) is amended by striking ``his
interest'' and inserting ``an interest in a qualified
small business partnership (as defined in section
743(f))''.
(B)(i) The heading for section 743 is amended to
read as follows: ``adjustment to basis of partnership
property''.
(ii) Section 761(e)(2) is amended by striking
``optional''.
(iii) The item relating to section 743 in the table
of sections for subpart C of part II of subchapter K of
chapter 1 is amended to read as follows:
``Sec. 743. Adjustment to basis of partnership property.''.
(c) Adjustments to Basis of Undistributed Partnership Property.--
(1) In general.--Section 734 is amended--
(A) by redesignating subsections (b) through (e) as
subsections (c) through (f), respectively, and
(B) by striking subsection (a) and inserting the
following:
``(a) General Rule.--
``(1) Mandatory adjustment.--Except as provided in
paragraph (2), in the case of a distribution to a partner, the
partnership shall adjust the basis of partnership property in
accordance with subsection (b).
``(2) Special rule for qualified small business
partnerships.--In the case of a distribution to a partner by a
qualified small business partnership (as defined in section
754(b))--
``(A) if there is an election provided in section
754 in effect with respect to such partnership or if
there is a substantial basis reduction with respect to
such distribution, the partnership shall adjust the
basis of partnership property in accordance with
subsection (c), and
``(B) if subparagraph (A) does not apply, no
adjustment shall be made to the basis of partnership
property as the result of such distribution.
``(b) General Method of Adjustment.--
``(1) In general.--In the case of any distribution to a
partner to which subsection (a)(1) applies, the partnership
shall adjust the basis of partnership property such that each
remaining partner's net liquidation amount immediately after
such distribution is equal to such partner's net liquidation
amount immediately before such distribution. For purposes of
the preceding sentence, a partner's net liquidation amount
immediately before a distribution shall be calculated after
taking into account any adjustment to the basis of property
required by section 704(c)(1)(B) or 737 with respect to such
distribution.
``(2) Distributions other than in liquidation of a
partner's interest.--
``(A) In general.--In the case of any distribution
to a partner other than in liquidation of such
partner's interest, proper adjustment shall be made
under paragraph (1) with respect to such partner to
take into account--
``(i) the amount of any gain recognized by
such partner with respect to such distribution
under section 731(a), and
``(ii) the amount of any gain or loss which
would be recognized by such partner if such
partner sold the property distributed at fair
market value immediately after such
distribution.
``(B) Reporting.--The Secretary may require such
reporting as necessary to carry out this subsection.
``(3) Net liquidation amount.--For purposes of this
subsection, the term `net liquidation amount' means, with
respect to any partner, the net amount of gain or loss (if any)
which would be taken into account (including gain or loss that
would be taken into account by reason of subsections (c)(1)(A),
(c)(1)(C), or (f)(1) of section 704) by the partner if the
partnership sold all of its assets at fair market value (and no
other amounts were taken into account under such section).''.
(2) Conforming amendments.--
(A) Section 734(c), as redesignated by paragraph
(1), is amended by striking ``by a partnership with
respect to which the election provided in section 754
is in effect or with respect to which there is a
substantial basis reduction'' and inserting ``by a
partnership to which subsection (a)(2)(A) applies''.
(B) Section 734(d), as redesignated by paragraph
(1), is amended by striking ``subsection (b)'' and
inserting ``subsection (b) or (c)''.
(C) Section 755 is amended--
(i) in subsection (a), by striking
``section 734(b) (relating to optional
adjustment to the basis of undistributed
partnership property)'' and inserting
``subsection (b) or (c) of section 734
(relating to adjustment to basis of
undistributed partnership property)'', and
(ii) in subsection (c), by striking
``section 734(b)'' and inserting ``subsection
(b) or (c) of section 734''.
(D)(i) The heading for section 734 is amended by
striking ``where section 754 election or substantial
basis reduction''.
(ii) The item relating to section 734 in the table
of sections for subpart B of part II of subchapter K of
chapter 1 is amended by striking ``where section 754
election or substantial basis reduction''.
(d) Effective Date.--The amendments made by this section shall
apply to distributions after the date of the enactment of this Act.
SEC. 13. APPLICATION OF NET INVESTMENT INCOME TAX TO TRADE OR BUSINESS
INCOME OF CERTAIN HIGH INCOME INDIVIDUALS.
(a) In General.--Section 1411 is amended by adding at the end the
following new subsection:
``(f) Application to Certain High Income Individuals.--
``(1) In general.--In the case of any individual whose
modified adjusted gross income for the taxable year exceeds the
high income threshold amount, subsection (a)(1) shall be
applied by substituting `the greater of specified net income or
net investment income' for `net investment income' in
subparagraph (A) thereof.
``(2) Phase-in of increase.--The increase in the tax
imposed under subsection (a)(1) by reason of the application of
paragraph (1) of this subsection shall not exceed the amount
which bears the same ratio to the amount of such increase
(determined without regard to this paragraph) as--
``(A) the excess described in paragraph (1), bears
to
``(B) $100,000 (\1/2\ such amount in the case of a
married taxpayer (as defined in section 7703) filing a
separate return).
``(3) High income threshold amount.--For purposes of this
subsection, the term `high income threshold amount' means--
``(A) except as provided in subparagraph (B) or
(C), $400,000,
``(B) in the case of a taxpayer making a joint
return under section 6013 or a surviving spouse (as
defined in section 2(a)), $500,000, and
``(C) in the case of a married taxpayer (as defined
in section 7703) filing a separate return, \1/2\ of the
dollar amount determined under subparagraph (B).
``(4) Specified net income.--For purposes of this section,
the term `specified net income' means net investment income
determined--
``(A) without regard to the phrase `other than such
income which is derived in the ordinary course of a
trade or business not described in paragraph (2),' in
subsection (c)(1)(A)(i),
``(B) without regard to the phrase `described in
paragraph (2)' in subsection (c)(1)(A)(ii),
``(C) without regard to the phrase `other than
property held in a trade or business not described in
paragraph (2)' in subsection (c)(1)(A)(iii),
``(D) without regard to paragraphs (2), (3), and
(4) of subsection (c), and
``(E) by treating paragraphs (5) and (6) of section
469(c) (determined without regard to the phrase `To the
extent provided in regulations,' in such paragraph (6))
as applying for purposes of subsection (c) of this
section.''.
(b) Application to Trusts and Estates.--Section 1411(a)(2)(A) is
amended by striking ``undistributed net investment income'' and
inserting ``the greater of undistributed specified net income or
undistributed net investment income''.
(c) Clarifications With Respect to Determination of Net Investment
Income.--
(1) Certain exceptions.--Section 1411(c)(6) is amended to
read as follows:
``(6) Special rules.--Net investment income shall not
include--
``(A) any item taken into account in determining
self-employment income for such taxable year on which a
tax is imposed by section 1401(b),
``(B) wages received with respect to employment on
which a tax is imposed under section 3101(b)
(determined without regard to section 3101(c)) or
3201(a) (including amounts taken into account under
section 3121(v)(2)), and
``(C) wages received from the performance of
services earned outside the United States for a foreign
employer.''.
(2) Net operating losses not taken into account.--Section
1411(c)(1)(B) is amended by inserting ``(other than section
172)'' after ``this subtitle''.
(3) Inclusion of certain foreign income.--
(A) In general.--Section 1411(c)(1)(A) is amended
by striking ``and'' at the end of clause (ii), by
striking ``over'' at the end of clause (iii) and
inserting ``and'', and by adding at the end the
following new clause:
``(iv) any amount includible in gross
income under section 951, 951A, 1293, or 1296,
over''.
(B) Proper treatment of certain previously taxed
income.--Section 1411(c) is amended by adding at the
end the following new paragraph:
``(7) Certain previously taxed income.--The Secretary shall
issue regulations or other guidance providing for the treatment
of--
``(A) distributions of amounts previously included
in gross income for purposes of chapter 1 but not
previously subject to tax under this section, and
``(B) distributions described in section 962(d).''.
(d) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after the date of the enactment of
this Act.
(e) Transition Rule.--The regulations or other guidance issued by
the Secretary under section 1411(c)(7) of the Internal Revenue Code of
1986 (as added by this section) shall include provisions which provide
for the proper coordination and application of clauses (i) and (iv) of
section 1411(c)(1)(A) with respect to--
(1) taxable years beginning on or before the date of the
enactment of this Act, and
(2) taxable years beginning after such date.
SEC. 14. RECOGNITION OF GAIN ON TRANSFERS TO SWAP FUNDS.
(a) Interests Similar to Preferred Stock Treated as Stock.--Clause
(vi) of section 351(e)(1)(B) is amended to read as follows:
``(vi) except as otherwise provided in
regulations prescribed by the Secretary--
``(I) any interest in an entity if
the return on such interest is limited
and preferred, and
``(II) interests (not described in
subclause (I)) in any entity if
substantially all of the assets of such
entity consist (directly or indirectly)
of any assets described in subclause
(I), any preceding clause, or clause
(viii).''.
(b) Certain Transfers Deemed To Be to Investment Companies.--
Subsection (e) of section 351 is amended by adding at the end the
following new paragraph:
``(3) Transfers of marketable securities to certain
corporations.--A transfer of property to a corporation if--
``(A) such property is marketable securities (as
defined in section 731(c)(2)), and
``(B) such corporation--
``(i) is registered under the Investment
Company Act of 1940 as an investment company,
or is exempt from registration as a investment
company under section 3(c)(7) of such Act
because interests in such corporation are
offered to qualified purchasers within the
meaning of section 2(a)(51) of such Act, or
``(ii) allows persons who have blocks of
marketable securities with significant
unrealized appreciation to diversify those
holdings.''.
(c) Transfers to Partnerships.--Subsection (b) of section 721 is
amended to read as follows:
``(b) Special Rule.--Subsection (a) shall not apply to gain
realized on a transfer of property to a partnership if, were the
partnership incorporated--
``(1) such partnership would be treated as an investment
company (within the meaning of section 351), or
``(2) section 351 would not apply to such transfer by
reason of section 351(e)(3).''.
(d) Effective Date.--The amendments made by this section shall
apply to transfers after the date of the enactment of this Act.
SEC. 15. MODIFICATIONS TO TREATMENT OF CERTAIN LOSSES.
(a) Losses From Certain Capital Assets Which Become Worthless.--
(1) When treated as loss.--Section 165(g)(1) is amended by
striking ``on the last day of the taxable year'' and inserting
``at the time of the identifiable event establishing
worthlessness''.
(2) Treatment of partnership indebtedness.--Section
165(g)(2)(C) is amended by inserting ``, by a partnership,''
after ``by a corporation''.
(3) Treatment of abandonment.--Section 165(g) is amended by
adding at the end the following new paragraph:
``(4) Treatment of abandonment.--For purposes of this
subsection and subsection (m), abandonment shall be treated as
an identifiable event establishing worthlessness.''.
(4) Treatment of partnership interest.--Section 165 is
amended by redesignating subsection (m) as subsection (n) and
by inserting after subsection (l) the following new subsection:
``(m) Worthless Partnership Interest.--If any interest in a
partnership becomes worthless during the taxable year, the loss
resulting therefrom shall, for purposes of this subtitle, be treated as
a loss from the sale or exchange of the interest in the partnership at
the time of the identifiable event establishing worthlessness.''.
(b) Effective Date.--The amendments made by this section shall
apply to losses arising in taxable years beginning after the date of
the enactment of this Act.
SEC. 16. CODIFICATION OF ANTI-ABUSE RULE.
(a) In General.--Section 701 is amended--
(1) by striking ``A partnership'' and inserting the
following:
``(a) In General.--A partnership'', and
(2) by adding at the end the following new subsection:
``(b) Regulations.--Under regulations established by the Secretary,
in the case of a transaction involving a partnership, the Secretary may
recast, disregard, or otherwise modify such transaction for purposes of
the Internal Revenue Code of 1986 unless--
``(1) the tax consequences to each partner and the
partnership reflect the partners' economic agreement and
clearly reflect the partners' income,
``(2) the form of such transaction is consistent with it
substance, and
``(3) there is a substantial purpose (apart from Federal
income tax effects) for entering into such transaction.''.
(b) No Inference.--Nothing in this section or the amendments made
by this section shall be construed to create any inference with respect
to the authority of the Secretary of the Treasury (or the Secretary's
delegate) to regulate transactions described in section 701(b) of the
Internal Revenue Code (as added by subsection (a)) without regard to
the provisions of such section.
<all>