119 S2095 IS: Preventing Abusive Routine Tax Nonsense Enabled by Rip-offs Shelters and Havens and Instead Promoting Simplicity Act
U.S. Senate
2025-06-17
text/xml
EN
Pursuant to Title 17 Section 105 of the United States Code, this file is not subject to copyright protection and is in the public domain.
II
119th CONGRESS
1st Session
S. 2095
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.