PARTNERSHIP DISTRIBUTIONS OF MARKETABLE SECURITIES.

SEC. 741. PARTNERSHIP DISTRIBUTIONS OF MARKETABLE SECURITIES. (a) In General.—Section 731 (relating to extent of recognition of gain or loss on distribution) is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection: “(c) Treatment of Marketable Securities.— “(1) In general.— For purposes of subsection (a)(1) and section 737— “(A) the term ‘money’ includes marketable securities, and “(B) such securities shall be taken into account at their fair market value as of the date of the distribution. “(2) Marketable securities.— For purposes of this subsection: “(A) In general.—The term ‘marketable securities’ means financial instruments and foreign currencies which are, as of the date of the distribution, actively traded (within the meaning of section 1092(d)(1)). “(B) Other property.— Such term includes— “(i) any interest in— “(I) a common trust fund, or “(II) a regulated investment company which is offering for sale or has outstanding any redeemable security (as defined in section 2(a)(32) of the Investment Company Act of 1940) of which it is the issuer, “(ii) any financial instrument which, pursuant to its terms or any other arrangement, is readily convertible into, or exchangeable tor, money or marketable securities, “(iii) any financial instrument the value of which is determined substantially by reference to marketable securities, “(iv) except to the extent provided in regulations prescribed by the Secretary, any interest in a precious metal which, as of the date of the distribution, is actively traded (within the meaning of section 1092(d)(1)) unless such metal was produced, used, or held in the active conduct of a trade or business by the partnership, “(v) except as otherwise provided in regulations prescribed by the Secretary, interests in any entity if substantially all of the assets of such entity consist 108 STAT. 5007(directly or indirectly) of marketable securities, money, or both, and “(vi) to the extent provided in regulations prescribed by the Secretary, any interest in an entity not described in clause (v) but only to the extent of the value of such interest which is attributable to marketable securities, money, or both. “(C) Financial instrument.—The term ‘financial instrument’ includes stocks and other equity interests, evidences of indebtedness, options, forward or futures contracts, notional principal contracts, and derivatives. “(3) Exceptions.— “(A) In general.— Paragraph (1) shall not apply to the distribution from a partnership of a marketable security to a partner if— “(i) the security was contributed to the partnership by such partner, except to the extent that the value of the distributed security is attributable to marketable securities or money contributed (directly or indirectly) to the entity to which the distributed security relates, “(ii) to the extent provided in regulations prescribed by the Secretary, the property was not a marketable security when acquired by such partnership, or “(iii) such partnership is an investment partnership and such partner is an eligible partner thereof. “(B) Limitation on gain recognized.— In the case of a distribution of marketable securities to a partner, the amount taken into account under paragraph (1) shall be reduced (but not below zero) by the excess (if any) of— “(i) such partner’s distributive share of the net gain which would be recognized if all of the marketable securities of the same class and issuer as the distributed securities held by the partnership were sold (immediately before the transaction to which the distribution relates) by the partnership for fair market value, over “(ii) such partner’s distributive share of the net gain which is attributable to the marketable securities of the same class and issuer as the distributed securities held by the partnership immediately after the transaction, determined by using the same fair market value as used under clause (i). Under regulations prescribed by the Secretary, all marketable securities held by the partnership may be treated as marketable securities of the same class and issuer as the distributed securities. “(C) Definitions relating to investment partnerships.— For purposes of subparagraph (A)(iii): “(i) Investment partnership.— The term ‘investment partnership’ means any partnership which has never been engaged in a trade or business and substantially all of the assets (by value) of which have always consisted of— “(I) money, “(II) stock in a corporation, 108 STAT. 5008 “(III) notes, bonds, debentures, or other evidences of indebtedness, “(IV) interest rate, currency, or equity notional principal contracts, “(V) foreign currencies, “(VI) interests in or derivative financial instruments (including options, forward or futures contracts, short positions, and similar financial instruments) in any asset described in any other subclause of this clause or in any commodity traded on or subject to the rules of a board of trade or commodity exchange, “(VII) other assets specified in regulations prescribed by the Secretary, or “(VIII) any combination of the foregoing. “(ii) Exception for certain activities.— A partnership shall not be treated as engaged in a trade or business by reason of— “(I) any activity undertaken as an investor, trader, or dealer in any asset described in clause (i), or “(II) any other activity specified in regulations prescribed by the Secretary. “(iii) Eligible partner.— “(I) In general.—The term ‘eligible partner’ means any partner who, before the date of the distribution, did not contribute to the partnership any property other than assets described in clause (i). “(II) Exception for certain nonrecognition transactions.—The term ‘eligible partner’ shall not include the transferor or transferee in a nonrecognition transaction involving a transfer of any portion of an interest in a partnership with respect to which the transferor was not an eligible partner. “(iv) Look-thru of partnership tiers.— Except as otherwise provided in regulations prescribed by the Secretary— “(I) a partnership shall be treated as engaged in any trade or business engaged in by, and as holding (instead of a partnership interest) a proportionate share of the assets of, any other partnership in which the partnership holds a partnership interest, and “(II) a partner who contributes to a partnership an interest in another partnership shall be treated as contributing a proportionate share of the assets of the other partnership. If the preceding sentence does not apply under such regulations with respect to any interest held by a partnership in another partnership, the interest in such other partnership shall be treated as if it were specified in a subclause of clause (i). “(4) Basis of securities distributed.— “(A) In general.— The basis of marketable securities with respect to which gain is recognized by reason of this subsection shall be— 108 STAT. 5009 “(i) their basis determined under section 732, increased by “(ii) the amount of such gain. “(B) Allocation of basis increase.—Any increase in basis attributable to the gain described in subparagraph (A)(ii) shall be allocated to marketable securities in proportion to their respective amounts of unrealized appreciation before such increase. “(5) Subsection disregarded in determining basis of partner’s interest in partnership and of basis of partnership property.—Sections 733 and 734 shall be applied as if no gain were recognized, and no adjustment were made to the basis of property, under this subsection. “(6) Character of gain recognized.—In the case of a distribution of a marketable security which is an unrealized receivable (as defined in section 751(c)) or an inventory item (as defined in section 751(d)(2)), any gain recognized under this subsection shall be treated as ordinary income to the extent of any increase in the basis of such security attributable to the gain described in paragraph (4)(A)(ii). “(7) Regulations.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including regulations to prevent the avoidance of such purposes.” (b) Conforming Amendments.— (1) The last sentence of section 737(c)(1) is amended to read as follows: “For purposes of determining the basis of the distributed property (other than money), such increase shall be treated as occurring immediately before the distribution.” (2) Section 737 is amended by adding at the end the following new subsection: “(e) Marketable Securities Treated as Money.— “For treatment of marketable securities as money for purposes of this section, see section 731(c).” (c) Effective Date.— (1) In general.—Except as otherwise provided in this subsection, the amendments made by this section shall apply to distributions after the date of the enactment of this Act (2) Certain distributions before January 1, 1995.—The amendments made by this section shall not apply to any marketable security distributed before January 1, 1995, by the partnership which held such security on July 27, 1994. (3) Distributions in liquidation of partner’s interest.— The amendments made by this section shall not apply to the distribution of a marketable security in liquidation of a partner’s interest in a partnership if— (A) such liquidation is pursuant to a written contract which was binding on July 15, 1994, and at all times thereafter before the distribution, and (B) such contract provides for the purchase of such interest not later than a date certain for— (i) a fixed value of marketable securities that are specified in the contract, or (ii) other property. The preceding sentence shall not apply if the partner has the right to elect that such distribution be made other than in marketable securities. 108 STAT. 5010 (4) Distributions in complete liquidation of publicly traded partnerships.— (A) In general.— The amendments made by this section shall not apply to the distribution of a marketable security in a qualified partnership liquidation if— (i) the marketable securities were received by the partnership in a nonrecognition transaction in exchange for substantially all of the assets of the partnership, (ii) the marketable securities are distributed by the partnership within 90 days after their receipt by the partnership, and (iii) the partnership is liquidated before the beginning of the 1st taxable year of the partnership beginning after December 31, 1997. (B) Qualified partnership liquidation.— For purposes of subparagraph (A), the term “qualified partnership liquidation” means— (i) a complete liquidation of a publicly traded partnership (as defined in section 7704(b) of the Internal Revenue Code of 1986) which is an existing partnership (as defined in section 10211(c)(2) of the Revenue Act of 1987), and (ii) a complete liquidation of a partnership which is related to a partnership described in clause (i) if such liquidation is related to a complete liquidation of the partnership described in clause (i). (5) Marketable securities.—For purposes of this subsection, the term “marketable securities” has the meaning given such term by section 731(c) of the Internal Revenue Code of 1986, as added by this section.