119-s2095

[Congressional Bills 119th Congress]
[From the U.S. Government Publishing Office]
[S. 2095 Introduced in Senate

    (IS) ]

<DOC>

119th CONGRESS
 1st Session
 S. 2095

To amend the Internal Revenue Code of 1986 to improve the rules related 
 to partners and partnerships, and for other purposes.

_______________________________________________________________________

 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.

 Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 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.

SEC. 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.

SEC. 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.

SEC. 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.

SEC. 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.

SEC. 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.

SEC. 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.

SEC. 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.

SEC. 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.

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, 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.

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.--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.

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 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.
 <all>