[Congressional Bills 118th Congress]
[From the U.S. Government Publishing Office]
[S. 3317 Introduced in Senate (IS)]

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118th CONGRESS
  1st Session
                                S. 3317

 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

                           November 15, 2023

   Mr. Wyden (for himself, Mr. Whitehouse, Mr. King, Ms. Warren, Mr. 
    Sanders, Mr. Schatz, Mr. Reed, Ms. Hirono, Mr. Markey, and Mr. 
  Fetterman) 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.
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