Ending the Carried Interest Loophole Act

II 116TH CONGRESS 1ST SESSION S. 1639 To amend the Internal Revenue Code of 1986 to revise the treatment of partnership interests received in connection with the performance of services, and for other purposes. IN THE SENATE OF THE UNITED STATES MAY 23 (legislative day, MAY 22), 2019 Mr. WYDEN (for himself and Mr. WHITEHOUSE) introduced the following bill; which was read twice and referred to the Committee on Finance A BILL To amend the Internal Revenue Code of 1986 to revise the treatment of partnership interests received in connec- tion with the performance of services, and for other purposes. Be it enacted by the Senate and House of Representa- 1 tives of the United States of America in Congress assembled, 2 SECTION 1. SHORT TITLE. 3 This Act may be cited as the ‘‘Ending the Carried 4 Interest Loophole Act’’. 5 VerDate Sep 11 2014 17:45 Jun 03, 2019 Jkt 089200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\S1639.IS S1639 pamtmann on DSKBFK8HB2PROD with BILLS 2 •S 1639 IS SEC. 2. PARTNERSHIP INTERESTS TRANSFERRED IN CON- 1 NECTION WITH PERFORMANCE OF SERVICES. 2 (a) MODIFICATION OF ELECTION TO INCLUDE PART- 3 NERSHIP INTEREST IN GROSS INCOME IN YEAR OF 4 TRANSFER.—Subsection (c) of section 83 is amended by 5 redesignating paragraph (4) as paragraph (5) and by in- 6 serting after paragraph (3) the following new paragraph: 7 ‘‘(4) PARTNERSHIP INTERESTS.—Except as 8 provided by the Secretary— 9 ‘‘(A) IN GENERAL.—In the case of any 10 transfer of an interest in a partnership in con- 11 nection with the performance of services for (or 12 for the benefit of) such partnership— 13 ‘‘(i) the fair market value of such in- 14 terest shall be treated for purposes of this 15 section as being equal to the amount of the 16 distribution which the partner would re- 17 ceive if the partnership sold (at the time of 18 the transfer) all of its assets at fair market 19 value and distributed the proceeds of such 20 sale (reduced by the liabilities of the part- 21 nership) to its partners in liquidation of 22 the partnership, and 23 ‘‘(ii) the person receiving such interest 24 shall be treated as having made the elec- 25 tion under subsection (b)(1) unless such 26 VerDate Sep 11 2014 17:45 Jun 03, 2019 Jkt 089200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\S1639.IS S1639 pamtmann on DSKBFK8HB2PROD with BILLS 3 •S 1639 IS person makes an election under this para- 1 graph to have such subsection not apply. 2 ‘‘(B) COORDINATION WITH OTHER PART- 3 NERSHIP RULES.—Except as otherwise provided 4 by the Secretary, if, by reason of subparagraph 5 (A), subsection (b)(1) applies to a partnership 6 interest transferred to a person, then the 7 amount included in the gross income of such 8 person by reason of such subsection shall (at 9 the time of the transfer)— 10 ‘‘(i) be treated as an addition to the 11 capital account of such person with respect 12 to such partnership for purposes of sub- 13 chapter K, and 14 ‘‘(ii) if such interest is an applicable 15 partnership interest under section 1299 at 16 any time, be treated as invested capital of 17 such person with respect to such interest 18 for purposes of such section. 19 ‘‘(C) ELECTION.—The election under sub- 20 paragraph (A)(ii) shall be made under rules 21 similar to the rules of subsection (b)(2). 22 ‘‘(D) PARTNERSHIP INTEREST.— 23 ‘‘(i) IN GENERAL.—For purposes of 24 this paragraph, any applicable financial in- 25 VerDate Sep 11 2014 17:45 Jun 03, 2019 Jkt 089200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\S1639.IS S1639 pamtmann on DSKBFK8HB2PROD with BILLS 4 •S 1639 IS strument or contract (as defined in section 1 1299(b)(2)(B)) or interest in an entity 2 other than a partnership which is treated 3 as an applicable partnership interest under 4 section 1299(b)(2) shall be treated as an 5 interest in a partnership. 6 ‘‘(ii) REGULATIONS.—The Secretary 7 shall by regulations provide rules for the 8 application of this paragraph to applicable 9 financial instruments or contracts (as so 10 defined) or interests in entities other than 11 partnerships which are treated as partner- 12 ship interests under clause (i).’’. 13 (b) EFFECTIVE DATE.—The amendments made by 14 this section shall apply to interests in partnerships trans- 15 ferred after the date of the enactment of this Act. 16 SEC. 3. TREATMENT OF CERTAIN PARTNERSHIP INTER- 17 ESTS RECEIVED IN CONNECTION WITH PER- 18 FORMANCE OF SERVICES. 19 (a) IN GENERAL.—Subchapter P of chapter 1 of the 20 Internal Revenue Code of 1986 is amended by adding at 21 the end the following new part: 22 VerDate Sep 11 2014 17:45 Jun 03, 2019 Jkt 089200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\S1639.IS S1639 pamtmann on DSKBFK8HB2PROD with BILLS 5 •S 1639 IS ‘‘PART VII—TREATMENT OF CERTAIN PARTNER- 1 SHIP INTERESTS RECEIVED IN CONNECTION 2 WITH PERFORMANCE OF SERVICES 3 ‘‘Sec. 1299. Treatment of certain partnership interests received in connection with performance of services. ‘‘SEC. 1299. TREATMENT OF CERTAIN PARTNERSHIP INTER- 4 ESTS RECEIVED IN CONNECTION WITH PER- 5 FORMANCE OF SERVICES. 6 ‘‘(a) IN GENERAL.—In the case of a taxpayer who 7 holds 1 or more applicable partnership interests in any 8 partnership at any time during any taxable year of the 9 partnership ending with or within the taxable year of the 10 taxpayer— 11 ‘‘(1) there shall be included in the gross income 12 of the taxpayer as ordinary income an amount equal 13 to the aggregate of the deemed compensation 14 amounts determined under subsection (c) with re- 15 spect to such interests in all partnerships, and 16 ‘‘(2) the taxpayer shall be treated as having for 17 such taxable year of the taxpayer a long-term capital 18 loss equal to the aggregate of such deemed com- 19 pensation amounts. 20 ‘‘(b) APPLICABLE PARTNERSHIP INTEREST.—For 21 purposes of this section— 22 VerDate Sep 11 2014 17:45 Jun 03, 2019 Jkt 089200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\S1639.IS S1639 pamtmann on DSKBFK8HB2PROD with BILLS 6 •S 1639 IS ‘‘(1) IN GENERAL.—Except as provided in this 1 subsection, the term ‘applicable partnership interest’ 2 means any interest in a partnership which— 3 ‘‘(A) is directly or indirectly transferred to 4 (or held by) the taxpayer in connection with the 5 performance of services by the taxpayer, or any 6 other person, in any applicable trade or busi- 7 ness, or 8 ‘‘(B) is held by a taxpayer who received an 9 applicable loan. 10 Such term shall not include any interest which is ac- 11 quired pursuant to a sale or disposition to which 12 subsection (c)(5) applies. 13 ‘‘(2) DETERMINATION OF INTEREST IN A PART- 14 NERSHIP.— 15 ‘‘(A) IN GENERAL.—For purposes of para- 16 graph (1), the term ‘interest in a partnership’ 17 includes— 18 ‘‘(i) any applicable financial instru- 19 ment or contract, or 20 ‘‘(ii) to the extent provided by the 21 Secretary, any interest in an entity other 22 than a partnership if such interest would 23 be treated as an applicable partnership in- 24 terest if such entity were a partnership. 25 VerDate Sep 11 2014 17:45 Jun 03, 2019 Jkt 089200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6201 E:\BILLS\S1639.IS S1639 pamtmann on DSKBFK8HB2PROD with BILLS 7 •S 1639 IS ‘‘(B) APPLICABLE FINANCIAL INSTRUMENT 1 OR CONTRACT.—For purposes of this para- 2 graph— 3 ‘‘(i) IN GENERAL.—The term ‘applica- 4 ble financial instrument or contract’ means 5 any financial instrument or contract the 6 value of which is determined in whole or in 7 part by reference to the partnership (in- 8 cluding the amount of partnership dis- 9 tributions, the value of partnership assets, 10 or the results of partnership operations). 11 ‘‘(ii) EXCEPTION FOR NON-CONVERT- 12 IBLE DEBT.—Such term shall not include 13 a financial instrument or contract if such 14 instrument or contract— 15 ‘‘(I) is treated as debt for Fed- 16 eral tax purposes, and 17 ‘‘(II) is not convertible into or 18 exchangeable for an interest in the 19 capital or profits of the partnership 20 and does not provide for a payment of 21 equivalent value. 22 ‘‘(3) APPLICABLE TRADE OR BUSINESS.— 23 ‘‘(A) IN GENERAL.—For purposes of para- 24 graph (1)(A), the term ‘applicable trade or 25 VerDate Sep 11 2014 17:45 Jun 03, 2019 Jkt 089200 PO 00000 Frm 00007 Fmt 6652 Sfmt 6201 E:\BILLS\S1639.IS S1639 pamtmann on DSKBFK8HB2PROD with BILLS 8 •S 1639 IS business’ means any activity conducted on a 1 regular, continuous, and substantial basis 2 which, regardless of whether the activity is con- 3 ducted in one or more entities, consists, in 4 whole or in part, of— 5 ‘‘(i) raising or returning capital, and 6 ‘‘(ii) either— 7 ‘‘(I) investing in (including ac- 8 quiring or disposing of) specified as- 9 sets (or identifying specified assets for 10 such investing, acquisition, or disposi- 11 tion), or 12 ‘‘(II) developing specified assets. 13 ‘‘(B) SPECIFIED ASSETS.— 14 ‘‘(i) IN GENERAL.—The term ‘speci- 15 fied assets’ means securities, commodities, 16 real estate held for rental or investment, 17 cash or cash equivalents, options or deriva- 18 tive contracts with respect to any of the 19 foregoing, and an interest in a partnership 20 if such partnership has a direct or indirect 21 interest in any of the foregoing. 22 ‘‘(ii) SECURITIES.—For purposes of 23 clause (i), the term ‘securities’ has the 24 VerDate Sep 11 2014 17:45 Jun 03, 2019 Jkt 089200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\S1639.IS S1639 pamtmann on DSKBFK8HB2PROD with BILLS 9 •S 1639 IS meaning given such term under section 1 475(c)(2), determined— 2 ‘‘(I) by applying subparagraph 3 (B) thereof without regard to whether 4 the interest is widely held or publicly 5 traded, and 6 ‘‘(II) without regard to the last 7 sentence thereof. 8 ‘‘(iii) COMMODITIES.—For purposes 9 of clause (i), the term ‘commodities’ has 10 the meaning given such term under section 11 475(e)(2), except that such term shall not 12 include commodities held in connection 13 with the active conduct of a commodities 14 business as a producer, processor, mer- 15 chant, or handler of commodities. 16 ‘‘(4) APPLICABLE LOAN.— 17 ‘‘(A) IN GENERAL.—The term ‘applicable 18 loan’ means, with respect to any partnership in- 19 terest, any loan issued directly or indirectly 20 from the partnership, any other partner of the 21 partnership, or any person related to such other 22 partner or such partnership. 23 ‘‘(B) SAFE HARBOR.—The term ‘applicable 24 loan’ does not include any loan which— 25 VerDate Sep 11 2014 17:45 Jun 03, 2019 Jkt 089200 PO 00000 Frm 00009 Fmt 6652 Sfmt 6201 E:\BILLS\S1639.IS S1639 pamtmann on DSKBFK8HB2PROD with BILLS 10 •S 1639 IS ‘‘(i) is fully recourse to the borrower 1 or fully secured by the borrower’s assets, 2 and 3 ‘‘(ii) requires payments of interest 4 with a stated rate not less than the speci- 5 fied rate determined under subsection 6 (c)(2). 7 ‘‘(c) DEEMED COMPENSATION AMOUNT.—For pur- 8 poses of this section— 9 ‘‘(1) DEEMED COMPENSATION AMOUNT.— 10 ‘‘(A) IN GENERAL.—The term ‘deemed 11 compensation amount’ means, with respect to 12 any applicable partnership interest for any 13 partnership taxable year, an amount equal to 14 the product of— 15 ‘‘(i) the specified rate determined 16 under paragraph (2) for the calendar year 17 in which such taxable year begins, multi- 18 plied by 19 ‘‘(ii) the excess (if any) of— 20 ‘‘(I) an amount equal to the ap- 21 plicable percentage of the weighted 22 average of the aggregate of invested 23 capital of all partners of the partner- 24 VerDate Sep 11 2014 17:45 Jun 03, 2019 Jkt 089200 PO 00000 Frm 00010 Fmt 6652 Sfmt 6201 E:\BILLS\S1639.IS S1639 pamtmann on DSKBFK8HB2PROD with BILLS 11 •S 1639 IS ship on each measurement date occur- 1 ring within such taxable year, over 2 ‘‘(II) the weighted average of in- 3 vested capital with respect to the ap- 4 plicable partnership interest on each 5 measurement date occurring within 6 such taxable year. 7 ‘‘(B) MEASUREMENT DATE.—For purposes 8 of subparagraph (A), the term ‘measurement 9 date’ means— 10 ‘‘(i) the last day of the partnership 11 taxable year, 12 ‘‘(ii) any date specified in the regula- 13 tions under subchapter K as a date on 14 which to revalue property of the partner- 15 ship for purposes of adjusting capital ac- 16 counts of the partner (without regard to 17 whether the partnership capital accounts 18 are adjusted on that date), and 19 ‘‘(iii) any other date specified by the 20 Secretary. 21 ‘‘(2) SPECIFIED RATE.—The term ‘specified 22 rate’ means, with respect to any calendar year, a 23 percentage equal to the sum of— 24 VerDate Sep 11 2014 17:45 Jun 03, 2019 Jkt 089200 PO 00000 Frm 00011 Fmt 6652 Sfmt 6201 E:\BILLS\S1639.IS S1639 pamtmann on DSKBFK8HB2PROD with BILLS 12 •S 1639 IS ‘‘(A) the first segment rate (as defined in 1 section 430(h)(2)(C)(i)) for the first month of 2 such calendar year, plus 3 ‘‘(B) 9 percentage points. 4 ‘‘(3) APPLICABLE PERCENTAGE.— 5 ‘‘(A) IN GENERAL.—The term ‘applicable 6 percentage’ means, with respect to any applica- 7 ble partnership interest, the highest percentage 8 of profits of the partnership which could be al- 9 located to such interest (consistent with the 10 partnership agreement and determined as if all 11 performance targets with respect to such inter- 12 est had been met). 13 ‘‘(B) SECRETARIAL AUTHORITY.—The Sec- 14 retary shall prescribe rules for the determina- 15 tion of the applicable percentage in cases in 16 which the percentage of profits of a partnership 17 which may be allocated to the applicable part- 18 nership interest under the partnership agree- 19 ment may temporarily exceed the highest per- 20 centage determined under subparagraph (A). 21 ‘‘(4) INVESTED CAPITAL.— 22 ‘‘(A) IN GENERAL.—The term ‘invested 23 capital’ means, with respect to any partner as 24 of any day, the excess of— 25 VerDate Sep 11 2014 17:45 Jun 03, 2019 Jkt 089200 PO 00000 Frm 00012 Fmt 6652 Sfmt 6201 E:\BILLS\S1639.IS S1639 pamtmann on DSKBFK8HB2PROD with BILLS 13 •S 1639 IS ‘‘(i) the sum of— 1 ‘‘(I) the total cumulative value, 2 determined at the time of contribu- 3 tion, of all money or other property 4 contributed by the partner to the 5 partnership on or before such day (net 6 of any liabilities the partnership is 7 considered to assume or take subject 8 to), plus 9 ‘‘(II) the aggregate amounts of 10 the partner’s distributive share of in- 11 come and gain (other than unrealized 12 gains resulting from revaluations of 13 partnership property) as of such day, 14 over 15 ‘‘(ii) the sum of— 16 ‘‘(I) the aggregate value, deter- 17 mined at the time of distribution, of 18 all money or other property distrib- 19 uted to the partner from the partner- 20 ship on or before such day (net of any 21 liabilities the partner is considered to 22 assume or take subject to), plus 23 ‘‘(II) the aggregate amount of [Text truncated for display. 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