[Congressional Record Volume 172, Number 49 (Wednesday, March 18, 2026)]
[Senate]
[Pages S1224-S1228]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
SA 4479. Mr. WYDEN submitted an amendment intended to be proposed by
him to the bill S. 1383, to establish the Veterans Advisory Committee
on Equal Access, and for other purposes; which was ordered to lie on
the table; as follows:
At the appropriate place, insert the following:
TITLE __--PARTNERSHIP REFORMS
SEC. _01. REFERENCE, ETC.
(a) Reference.--Except as otherwise expressly provided,
whenever in this title, 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.
SEC. _02. 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
[[Page S1225]]
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 (xxviii), by striking
``and'' at the end of clause (xxix) and inserting ``or'', and
by adding at the end the following new clause:
``(xxx) 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. _03. 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. _04. TREATMENT OF REVALUED PROPERTY.
(a) In General.--Section 704, as amended by section _02, 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.--
[[Page S1226]]
(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. _05. 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. _06. 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. _08. 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. _09. 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,
2026.
(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, 2026, 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,
2026.
(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, 2026 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--
[[Page S1227]]
(i) such taxpayer's net income tax for the taxable year
beginning after December 31, 2026, 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.--
``(i) In general.--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).
``(ii) Special rules for syndicates.--Clause (i) shall not
apply to any syndicate (within the meaning of section
1256(e)(3)(B)).
``(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.
[[Page S1228]]
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 so that--
``(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.
______