I 118TH CONGRESS 1ST SESSION H. R. 2686 To amend the Internal Revenue Code of 1986 to provide for the proper tax treatment of personal service income earned in pass-thru entities. IN THE HOUSE OF REPRESENTATIVES APRIL 18, 2023 Mr. PASCRELL (for himself, Mr. BEYER, and Ms. PORTER) introduced the following bill; which was referred to the Committee on Ways and Means A BILL To amend the Internal Revenue Code of 1986 to provide for the proper tax treatment of personal service income earned in pass-thru entities. 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; ETC. 3 (a) SHORT TITLE.—This Act may be cited as the 4 ‘‘Ending Wall Street Tax Giveaway Act’’. 5 (b) AMENDMENT OF 1986 CODE.—Except as other- 6 wise expressly provided, whenever in this Act an amend- 7 ment or repeal is expressed in terms of an amendment 8 to, or repeal of, a section or other provision, the reference 9 VerDate Sep 11 2014 03:44 Apr 25, 2023 Jkt 039200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\H2686.IH H2686 kjohnson on DSK79L0C42PROD with BILLS 2 •HR 2686 IH shall be considered to be made to a section or other provi- 1 sion of the Internal Revenue Code of 1986. 2 (c) TABLE OF CONTENTS.—The table of contents for 3 this Act is as follows: 4 Sec. 1. Short title; etc. Sec. 2. Partnership interests transferred in connection with performance of services. Sec. 3. Special rules for partners providing investment management services to partnerships. SEC. 2. PARTNERSHIP INTERESTS TRANSFERRED IN CON- 5 NECTION WITH PERFORMANCE OF SERVICES. 6 (a) MODIFICATION TO ELECTION TO INCLUDE PART- 7 NERSHIP INTEREST IN GROSS INCOME IN YEAR OF 8 TRANSFER.—Subsection (c) of section 83 is amended by 9 redesignating paragraph (4) as paragraph (5) and by in- 10 serting after paragraph (3) the following new paragraph: 11 ‘‘(4) PARTNERSHIP INTERESTS.—Except as 12 provided by the Secretary— 13 ‘‘(A) IN GENERAL.—In the case of any 14 transfer of an interest in a partnership in con- 15 nection with the provision of services to (or for 16 the benefit of) such partnership— 17 ‘‘(i) the fair market value of such in- 18 terest shall be treated for purposes of this 19 section as being equal to the amount of the 20 distribution which the partner would re- 21 ceive if the partnership sold (at the time of 22 the transfer) all of its assets at fair market 23 VerDate Sep 11 2014 03:44 Apr 25, 2023 Jkt 039200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\H2686.IH H2686 kjohnson on DSK79L0C42PROD with BILLS 3 •HR 2686 IH value and distributed the proceeds of such 1 sale (reduced by the liabilities of the part- 2 nership) to its partners in liquidation of 3 the partnership, and 4 ‘‘(ii) the person receiving such interest 5 shall be treated as having made the elec- 6 tion under subsection (b)(1) unless such 7 person makes an election under this para- 8 graph to have such subsection not apply. 9 ‘‘(B) ELECTION.—The election under sub- 10 paragraph (A)(ii) shall be made under rules 11 similar to the rules of subsection (b)(2).’’. 12 (b) EFFECTIVE DATE.—The amendments made by 13 this section shall apply to interests in partnerships trans- 14 ferred after the date of the enactment of this Act. 15 SEC. 3. SPECIAL RULES FOR PARTNERS PROVIDING IN- 16 VESTMENT MANAGEMENT SERVICES TO 17 PARTNERSHIPS. 18 (a) IN GENERAL.—Part I of subchapter K of chapter 19 1 is amended by adding at the end the following new sec- 20 tion: 21 VerDate Sep 11 2014 03:44 Apr 25, 2023 Jkt 039200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\H2686.IH H2686 kjohnson on DSK79L0C42PROD with BILLS 4 •HR 2686 IH ‘‘SEC. 710. SPECIAL RULES FOR PARTNERS PROVIDING IN- 1 VESTMENT MANAGEMENT SERVICES TO 2 PARTNERSHIPS. 3 ‘‘(a) TREATMENT OF DISTRIBUTIVE SHARE OF 4 PARTNERSHIP ITEMS.—For purposes of this title, in the 5 case of an investment services partnership interest— 6 ‘‘(1) IN GENERAL.—Notwithstanding section 7 702(b)— 8 ‘‘(A) an amount equal to the net capital 9 gain with respect to such interest for any part- 10 nership taxable year shall be treated as ordi- 11 nary income, and 12 ‘‘(B) subject to the limitation of paragraph 13 (2), an amount equal to the net capital loss 14 with respect to such interest for any partner- 15 ship taxable year shall be treated as an ordi- 16 nary loss. 17 ‘‘(2) RECHARACTERIZATION OF LOSSES LIM- 18 ITED TO RECHARACTERIZED GAINS.—The amount 19 treated as ordinary loss under paragraph (1)(B) for 20 any taxable year shall not exceed the excess (if any) 21 of— 22 ‘‘(A) the aggregate amount treated as ordi- 23 nary income under paragraph (1)(A) with re- 24 spect to the investment services partnership in- 25 VerDate Sep 11 2014 03:44 Apr 25, 2023 Jkt 039200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\H2686.IH H2686 kjohnson on DSK79L0C42PROD with BILLS 5 •HR 2686 IH terest for all preceding partnership taxable 1 years to which this section applies, over 2 ‘‘(B) the aggregate amount treated as or- 3 dinary loss under paragraph (1)(B) with re- 4 spect to such interest for all preceding partner- 5 ship taxable years to which this section applies. 6 ‘‘(3) ALLOCATION TO ITEMS OF GAIN AND 7 LOSS.— 8 ‘‘(A) NET CAPITAL GAIN.—The amount 9 treated as ordinary income under paragraph 10 (1)(A) shall be allocated ratably among the 11 items of long-term capital gain taken into ac- 12 count in determining such net capital gain. 13 ‘‘(B) NET CAPITAL LOSS.—The amount 14 treated as ordinary loss under paragraph (1)(B) 15 shall be allocated ratably among the items of 16 long-term capital loss and short-term capital 17 loss taken into account in determining such net 18 capital loss. 19 ‘‘(4) TERMS RELATING TO CAPITAL GAINS AND 20 LOSSES.—For purposes of this section— 21 ‘‘(A) IN GENERAL.—Net capital gain, long- 22 term capital gain, and long-term capital loss, 23 with respect to any investment services partner- 24 ship interest for any taxable year, shall be de- 25 VerDate Sep 11 2014 03:44 Apr 25, 2023 Jkt 039200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\H2686.IH H2686 kjohnson on DSK79L0C42PROD with BILLS 6 •HR 2686 IH termined under section 1222, except that such 1 section shall be applied— 2 ‘‘(i) without regard to the recharacter- 3 ization of any item as ordinary income or 4 ordinary loss under this section, 5 ‘‘(ii) by only taking into account items 6 of gain and loss taken into account by the 7 holder of such interest under section 702 8 (other than subsection (a)(9) thereof) with 9 respect to such interest for such taxable 10 year, and 11 ‘‘(iii) by treating property which is 12 taken into account in determining gains 13 and losses to which section 1231 applies as 14 capital assets held for more than 1 year. 15 ‘‘(B) NET CAPITAL LOSS.—The term ‘net 16 capital loss’ means the excess of the losses from 17 sales or exchanges of capital assets over the 18 gains from such sales or exchanges. Rules simi- 19 lar to the rules of clauses (i) through (iii) of 20 subparagraph (A) shall apply for purposes of 21 the preceding sentence. 22 ‘‘(5) SPECIAL RULE FOR DIVIDENDS.—Any div- 23 idend allocated with respect to any investment serv- 24 ices partnership interest shall not be treated as 25 VerDate Sep 11 2014 03:44 Apr 25, 2023 Jkt 039200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6201 E:\BILLS\H2686.IH H2686 kjohnson on DSK79L0C42PROD with BILLS 7 •HR 2686 IH qualified dividend income for purposes of section 1 1(h). 2 ‘‘(6) SPECIAL RULE FOR QUALIFIED SMALL 3 BUSINESS STOCK.—Section 1202 shall not apply to 4 any gain from the sale or exchange of qualified small 5 business stock (as defined in section 1202(c)) allo- 6 cated with respect to any investment services part- 7 nership interest. 8 ‘‘(b) DISPOSITIONS OF PARTNERSHIP INTERESTS.— 9 ‘‘(1) GAIN.— 10 ‘‘(A) IN GENERAL.—Any gain on the dis- 11 position of an investment services partnership 12 interest shall be— 13 ‘‘(i) treated as ordinary income, and 14 ‘‘(ii) recognized notwithstanding any 15 other provision of this subtitle. 16 ‘‘(B) GIFT AND TRANSFERS AT DEATH.— 17 In the case of a disposition of an investment 18 services partnership interest by gift or by rea- 19 son of death of the taxpayer— 20 ‘‘(i) subparagraph (A) shall not apply, 21 ‘‘(ii) such interest shall be treated as 22 an investment services partnership interest 23 in the hands of the person acquiring such 24 interest, and 25 VerDate Sep 11 2014 03:44 Apr 25, 2023 Jkt 039200 PO 00000 Frm 00007 Fmt 6652 Sfmt 6201 E:\BILLS\H2686.IH H2686 kjohnson on DSK79L0C42PROD with BILLS 8 •HR 2686 IH ‘‘(iii) any amount that would have 1 been treated as ordinary income under this 2 subsection had the decedent sold such in- 3 terest immediately before death shall be 4 treated as an item of income in respect of 5 a decedent under section 691. 6 ‘‘(2) LOSS.—Any loss on the disposition of an 7 investment services partnership interest shall be 8 treated as an ordinary loss to the extent of the ex- 9 cess (if any) of— 10 ‘‘(A) the aggregate amount treated as ordi- 11 nary income under subsection (a) with respect 12 to such interest for all partnership taxable 13 years to which this section applies, over 14 ‘‘(B) the aggregate amount treated as or- 15 dinary loss under subsection (a) with respect to 16 such interest for all partnership taxable years 17 to which this section applies. 18 ‘‘(3) ELECTION WITH RESPECT TO CERTAIN EX- 19 CHANGES.—Paragraph (1)(A)(ii) shall not apply to 20 the contribution of an investment services partner- 21 ship interest to a partnership in exchange for an in- 22 terest in such partnership if— 23 ‘‘(A) the taxpayer makes an irrevocable 24 election to treat the partnership interest re- 25 VerDate Sep 11 2014 03:44 Apr 25, 2023 Jkt 039200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\H2686.IH H2686 kjohnson on DSK79L0C42PROD with BILLS 9 •HR 2686 IH ceived in the exchange as an investment serv- 1 ices partnership interest, and 2 ‘‘(B) the taxpayer agrees to comply with 3 such reporting and recordkeeping requirements 4 as the Secretary may prescribe. 5 ‘‘(4) DISTRIBUTIONS OF PARTNERSHIP PROP- 6 ERTY.— 7 ‘‘(A) IN GENERAL.—In the case of any dis- 8 tribution of property by a partnership with re- 9 spect to any investment services partnership in- 10 terest held by a partner, the partner receiving 11 such property shall recognize gain equal to the 12 excess (if any) of— 13 ‘‘(i) the fair market value of such 14 property at the time of such distribution, 15 over 16 ‘‘(ii) the adjusted basis of such prop- 17 erty in the hands of such partner (deter- 18 mined without regard to subparagraph 19 (C)). 20 ‘‘(B) TREATMENT OF GAIN AS ORDINARY 21 INCOME.—Any gain recognized by such partner 22 under subparagraph (A) shall be treated as or- 23 dinary income to the same extent and in the 24 same manner as the increase in such partner’s 25 VerDate Sep 11 2014 03:44 Apr 25, 2023 Jkt 039200 PO 00000 Frm 00009 Fmt 6652 Sfmt 6201 E:\BILLS\H2686.IH H2686 kjohnson on DSK79L0C42PROD with BILLS 10 •HR 2686 IH distributive share of the taxable income of the 1 partnership would be treated under subsection 2 (a) if, immediately prior to the distribution, the 3 partnership had sold the distributed property at 4 fair market value and all of the gain from such 5 disposition were allocated to such partner. For 6 purposes of applying subsection (a)(2), any gain 7 treated as ordinary income under this subpara- 8 graph shall be treated as an amount treated as 9 ordinary income under subsection (a)(1)(A). 10 ‘‘(C) ADJUSTMENT OF BASIS.—In the case 11 a distribution to which subparagraph (A) ap- 12 plies, the basis of the distributed property in 13 the hands of the distributee partner shall be the 14 fair market value of such property. 15 ‘‘(D) SPECIAL RULES WITH RESPECT TO 16 MERGERS AND DIVISIONS.—In the case of a 17 taxpayer which satisfies requirements similar to 18 the requirements of subparagraphs (A) and (B) 19 of paragraph (3), this paragraph and paragraph 20 (1)(A)(ii) shall not apply to the distribution of 21 a partnership interest if such distribution is in 22 connection with a contribution (or deemed con- 23 tribution) of any property of the partnership to 24 which section 721 applies pursuant to a trans- 25 VerDate Sep 11 2014 03:44 Apr 25, 2023 Jkt 039200 PO 00000 Frm 00010 Fmt 6652 Sfmt 6201 E:\BILLS\H2686.IH H2686 kjohnson on DSK79L0C42PROD with BILLS 11 •HR 2686 IH action described in paragraph (2) of section 1 708(b). 2 ‘‘(c) INVESTMENT SERVICES PARTNERSHIP INTER- 3 EST.—For purposes of this section— 4 ‘‘(1) IN GENERAL.—The term ‘investment serv- 5 ices partnership interest’ means any interest in an 6 investment partnership acquired or held by any per- 7 son in connection with the conduct of a trade or 8 business described in paragraph (2) by such person 9 (or any person related to such person). An interest 10 in an investment partnership held by any person— 11 ‘‘(A) shall not be treated as an investment 12 services partnership interest for any period be- 13 fore the first date on which it is so held in con- 14 nection with such a trade or business, 15 ‘‘(B) shall not cease to be an investment 16 services partnership interest merely because 17 such person holds such interest other than in 18 connection with such a trade or business, and 19 ‘‘(C) shall be treated as an investment 20 services partnership interest if acquired from a 21 related person in whose hands such interest was 22 an investment services partnership interest. 23 ‘‘(2) BUSINESSES TO WHICH THIS SECTION AP- 24 PLIES.—A trade or business is described in this 25 VerDate Sep 11 2014 03:44 Apr 25, 2023 Jkt 039200 PO 00000 Frm 00011 Fmt 6652 Sfmt 6201 E:\BILLS\H2686.IH H2686 kjohnson on DSK79L0C42PROD with BILLS 12 •HR 2686 IH paragraph if such trade or business primarily in- 1 volves the performance of any of the following serv- 2 ices with respect to assets held (directly or indi- 3 rectly) by one or more investment partnerships re- 4 ferred to in paragraph (1): 5 ‘‘(A) Advising as to the advisability of in- 6 vesting in, purchasing, or selling any specified 7 asset. 8 ‘‘(B) Managing, acquiring, or disposing of 9 any specified asset. 10 ‘‘(C) Arranging financing with respect to 11 acquiring specified assets. 12 ‘‘(D) Any activity in support of any service 13 described in subparagraphs (A) through (C). 14 ‘‘(3) INVESTMENT PARTNERSHIP.— 15 ‘‘(A) IN GENERAL.—The term ‘investment 16 partnership’ means any partnership if, at the 17 end of any two consecutive calendar quarters 18 ending after the date of enactment of this sec- 19 tion— 20 ‘‘(i) substantially all of the assets of 21 the partnership are specified assets (deter- 22 mined without regard to any section 197 23 intangible within the meaning of section 24 197(d)), and [Text truncated for display. 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