Sec. 3621. Ordinary income treatment in the case of partnership interests held in connection with performance of services
1,834 words·~8 min read·
/bill/113/hr/1/ih/section-3621A research copy — for the controlling text, always check the official state or federal source. Not legal advice.
Part IV of subchapter O of chapter 1 is amended— by redesignating section 1061 as section 1062, and by inserting after section 1060 the following new section: If one or more applicable partnership interests are held by a taxpayer at any time during the taxable year, so much of— the taxpayer’s net capital gain with respect to such interests for such taxable year, as does not exceed the taxpayer’s recharacterization account balance for such taxable year, shall be treated as ordinary income.
For purposes of subsection (a)(1), net capital gain shall be determined under section 1222, except that such section shall be applied— without regard to the recharacterization of any item as ordinary income under this section, by only taking into account items of gain and loss— taken into account by the taxpayer under section 702 with respect to any applicable partnership interest, recognized by the taxpayer on the disposition of any such interest, or recognized by the taxpayer under paragraph
(4)on a distribution of property with respect to such interest, and in the case of a taxable year for which section 1231 gains (as defined in section 1231(a)(3)(A)) exceed section 1231 losses (as defined in section 1231(a)(3)(B)), by treating property which is taken into account in determining such gains and losses as capital assets held for more than 1 year. The amount treated as ordinary income under subsection
(a)shall be allocated ratably among the items of long-term capital gain taken into account in determining net capital gain under paragraph (1). Any gain on the disposition of any applicable partnership interest shall be recognized notwithstanding any other provision of this title. In the case of any distribution of property by a partnership with respect to any applicable partnership interest, the partner receiving such property shall recognize gain equal to the excess (if any) of— the fair market value of such property at the time of such distribution, over the adjusted basis of such property in the hands of such partner (determined without regard to subparagraph (B)). In the case of a distribution to which subparagraph
(A)applies, the basis of the distributed property in the hands of the distributee partner shall be the amount determined under subparagraph (A)(i). For purposes of this section, the term recharacterization account balance means, with respect to any taxpayer for any taxable year, the excess (if any) of— the sum of— the taxpayer’s aggregate annual recharacterization amounts with respect to applicable partnership interests for such taxable year, plus the taxpayer’s recharacterization account balance for the taxable year preceding such taxable year, over the sum of— the taxpayer’s net ordinary income with respect to applicable partnership interests for such taxable year (determined without regard to this section), plus the amount treated as ordinary income of the taxpayer under this section for the taxable year preceding such taxable year. For purposes of this subsection— The term annual recharacterization amount means, with respect to any applicable partnership interest for any partnership taxable year, an amount equal to the product of— the specified rate determined under subparagraph
(B)for the calendar year in which such taxable year begins, multiplied by the excess (if any) of— an amount equal to the applicable percentage of the partnership’s aggregate invested capital for such taxable year, over the specified capital contribution of the partner with respect to the applicable partnership interest for such taxable year. If a taxpayer holds an applicable partnership interest for less than the entire taxable year, the amount determined under the preceding sentence shall be ratably reduced. For purposes of subparagraph (A), the term specified rate means, with respect to any calendar year, a percentage equal to— the Federal long-term rate determined under section 1274(d)(1) for the last month of the calendar year, plus 10 percentage points. The term applicable percentage means, with respect to any applicable partnership interest, the highest percentage of profits of the partnership that could be allocated with respect to such interest for the taxable year (consistent with the partnership agreement and assuming such facts and circumstances with respect to such taxable year as would result in such highest percentage). The Secretary shall prescribe rules for the determination of the applicable percentage in cases in which the percentage of profits of a partnership that are to be allocated with respect to an applicable partnership interest varies on the basis of the aggregate amount of such profits. Such rules may provide a percentage which may be used in lieu of the highest percentage determined under clause
(i)in cases where such other percentage is consistent with the purposes of this section. The term aggregate invested capital means, with respect to any taxable year, the average daily amount of invested capital of the partnership for such taxable year. The term invested capital means, with respect to any partnership as of any day, the total cumulative value, determined at the time of contribution, of all money or other property contributed to the partnership on or before such day. The invested capital of a partnership shall be reduced by the aggregate amount distributed in liquidation of interests in the partnership. The following amounts shall be treated as invested capital: The aggregate value (determined as of the time of the loan) of money or other property which a partner loans to the partnership. The face amount of any convertible debt of the partnership or any debt obligation providing equity participation in the partnership. The term specified capital contribution means, with respect to any applicable partnership interest for any taxable year, the average daily amount of contributed capital with respect to such interest for such year. The term contributed capital means, with respect to applicable partnership interest as of any day, the excess (if any) of— the total cumulative value, determined at the time of contribution, of all money or other property contributed by the partner to the partnership with respect to such interest as of such day, over the total cumulative value, determined at the time of distribution, of all money or other property distributed by the partnership to the partner with respect to such interest as of such day. Any amount borrowed directly or indirectly from the partnership or any other partner of the partnership or any person related to such other partner or such partnership shall not be taken into account under this subparagraph. For purposes of the preceding sentence, 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) if such sections and section 267(f) were applied by substituting 10 percent for 50 percent each place it appears. 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 paragraph. For purposes of this subsection, the net ordinary income with respect to applicable partnership interests for any taxable year is the excess (if any) of— the taxpayer’s distributive share of items of income and gain under section 702 with respect to applicable partnership interests for such taxable year (determined without regard to any items of gain taken into account in determining net capital gain under subsection (b)(1)), over the taxpayer’s distributive share of items of deduction and loss under section 702 with respect to such interests for such taxable year (determined without regard to any items of loss taken into account in determining net capital gain under subsection (b)(1)). For purposes of this section— The term applicable partnership interest means any interest in a partnership which, directly or indirectly, is transferred to (or is held by) the taxpayer in connection with the performance of services by the taxpayer, or any other person, in any applicable trade or business. The term applicable trade or business means any trade or business conducted on a regular, continuous, and substantial basis which, regardless of whether the activities are conducted in one or more entities, consists, in whole or in part, of— raising or returning capital, investing in (or disposing of) trades or businesses (or identifying trades or businesses for such investing or disposition), and developing such trades or businesses. Any activity involving research or experimentation (within the meaning of section 469(c)(4)) shall be treated as a trade or business for purposes of clauses
(ii)and
(iii)of subparagraph (A). If a taxpayer transfers any applicable partnership interest, directly or indirectly, to a person related to the taxpayer, the taxpayer shall include in gross income (as ordinary income) so much of the taxpayer’s recharacterization account balance for such taxable year as is allocable to such interest (determined in such manner as the Secretary may provide and reduced by any amount treated as ordinary income under subsection
(a)with respect to the transfer of such interest). For purposes of this paragraph, a person is related to the taxpayer if— the person is a member of the taxpayer’s family within the meaning of section 318(a)(1), or the person performed a service within the current calendar year or the preceding three calendar years in any applicable trade or business in which or for which the taxpayer performed a service. 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 annual recharacterization amount for the taxable year, if any. A similar rule applies to any entity that receives a report of an annual recharacterization amount for the taxable year. The Secretary shall issue such regulations or other guidance as necessary to carry out this section, including regulations— to prevent the abuse of the purposes of this section, including through— the allocation of income to tax indifferent parties, or a reduction in the invested capital of the partnership (including attempts to undervalue contributed or loaned property), which provide that partnership interests shall not fail to be treated as transferred or held in connection with the performance of services merely because the taxpayer also made contributions to the partnership, which provide for the application of this section in cases where the taxpayer has more than 1 applicable interest in a partnership, and which provide for the application of this section in cases of tiered structures of entities. . Subsection
(e)of section 83 is amended by striking or at the end of paragraph (4), by striking the period at the end of paragraph
(5)and inserting , or , and by adding at the end the following new paragraph: a transfer of a partnership interest to which section 1061 applies. . The table of sections for part IV of subchapter O of chapter 1 is amended by striking the item relating to 1061 and inserting the following new items: Sec. 1061. Partnership interests held in connection with performance of services. Sec. 1062. Cross references. . The amendments made by this section shall apply to taxable years beginning after December 31, 2014.