DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS TRANSFERS.

SEC. 833. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS TRANSFERS.(a) Treatment of Contributed Property With Built-In Loss.—Paragraph (1) of section 704(c) is amended by striking “and” at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting “, and”, and by adding at the end the following:“(C) if any property so contributed has a built-in loss—“(i) such built-in loss shall be taken into account only in determining the amount of items allocated to the contributing partner, and“(ii) except as provided in regulations, in determining the amount of items allocated to other partners, the basis of the contributed property in the hands of the partnership shall be treated as being equal to its fair market value at the time of contribution.For purposes of subparagraph (C), the term ‘built-in loss’ means the excess of the adjusted basis of the property (determined without regard to subparagraph (C)(ii)) over its fair market value at the time of contribution.”.(b) Special Rules for Transfers of Partnership Interest if There Is Substantial Built-In Loss.—(1) Adjustment of partnership basis required.—Subsection (a) of section 743 (relating to optional adjustment to basis of partnership property) is amended by inserting before the period “or unless the partnership has a substantial built-in loss immediately after such transfer”.(2) Adjustment.—Subsection (b) of section 743 is amended by inserting “or which has a substantial built-in loss immediately after such transfer” after “section 754 is in effect”.(3) Substantial built-in loss.—Section 743 is amended by adding at the end the following new subsection:“(d) Substantial Built-In Loss.—“(1) In general.—For purposes of this section, a partnership has a substantial built-in loss with respect to a transfer of an interest in a partnership if the partnership’s adjusted basis in the partnership property exceeds by more than $250,000 the fair market value of such property.“(2) Regulations.—The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of paragraph (1) and section 734(d), including regulations aggregating related partnerships and disregarding property acquired by the partnership in an attempt to avoid such purposes.”.(4) Alternative rules for electing investment partnerships.—(A) In general.—Section 743 is amended by adding after subsection (d) the following new subsection:“(e) Alternative Rules for Electing Investment Partnerships.—“(1) No adjustment of partnership basis.—For purposes of this section, an electing investment partnership shall not be treated as having a substantial built-in loss with respect to any transfer occurring while the election under paragraph (6)(A) is in effect. 118 STAT. 1590“(2) Loss deferral for transferee partner.—In the case of a transfer of an interest in an electing investment partnership, the transferee partner’s distributive share of losses (without regard to gains) from the sale or exchange of partnership property shall not be allowed except to the extent that it is established that such losses exceed the loss (if any) recognized by the transferor (or any prior transferor to the extent not fully offset by a prior disallowance under this paragraph) on the transfer of the partnership interest.“(3) No reduction in partnership basis.—Losses disallowed under paragraph (2) shall not decrease the transferee partner’s basis in the partnership interest.“(4) Effect of termination of partnership.—This subsection shall be applied without regard to any termination of a partnership under section 708(b)(1)(B).“(5) Certain basis reductions treated as losses.—In the case of a transferee partner whose basis in property distributed by the partnership is reduced under section 732(a)(2), the amount of the loss recognized by the transferor on the transfer of the partnership interest which is taken into account under paragraph (2) shall be reduced by the amount of such basis reduction.“(6) Electing investment partnership.—For purposes of this subsection, the term ‘electing investment partnership’ means any partnership if—“(A) the partnership makes an election to have this subsection apply,“(B) the partnership would be an investment company under section 3(a)(1)(A) of the Investment Company Act of 1940 but for an exemption under paragraph (1) or (7) of section 3(c) of such Act, “(C) such partnership has never been engaged in a trade or business,“(D) substantially all of the assets of such partnership are held for investment,“(E) at least 95 percent of the assets contributed to such partnership consist of money,“(F) no assets contributed to such partnership had an adjusted basis in excess of fair market value at the time of contribution,“(G) all partnership interests of such partnership are issued by such partnership pursuant to a private offering before the date which is 24 months after the date of the first capital contribution to such partnership,“(H) the partnership agreement of such partnership has substantive restrictions on each partner’s ability to cause a redemption of the partner’s interest, and“(I) the partnership agreement of such partnership provides for a term that is not in excess of 15 years.The election described in subparagraph (A), once made, shall be irrevocable except with the consent of the Secretary.“(7) Regulations.—The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this subsection, including regulations for applying this subsection to tiered partnerships.”.(B) Information reporting.—Section 6031 is amended by adding at the end the following new subsection:118 STAT. 1591 “(f) Electing Investment Partnerships.—In the case of any electing investment partnership (as defined in section 743(e)(6)), the information required under subsection (b) to be furnished to any partner to whom section 743(e)(2) applies shall include such information as is necessary to enable the partner to compute the amount of losses disallowed under section 743(e).”.(5) Special rule for securitization partnerships.—Section 743 is amended by adding after subsection (e) the following new subsection:“(f) Exception for Securitization Partnerships.—“(1) No adjustment of partnership basis.—For purposes of this section, a securitization partnership shall not be treated as having a substantial built-in loss with respect to any transfer.“(2) Securitization partnership.—For purposes of paragraph (1), the term ‘securitization partnership’ means any partnership the sole business activity of which is to issue securities which provide for a fixed principal (or similar) amount and which are primarily serviced by the cash flows of a discrete pool (either fixed or revolving) of receivables or other financial assets that by their terms convert into cash in a finite period, but only if the sponsor of the pool reasonably believes that the receivables and other financial assets comprising the pool are not acquired so as to be disposed of.”.(6) Clerical amendments.—(A) The section heading for section 743 is amended to read as follows:“SEC. 743. SPECIAL RULES WHERE SECTION 754 ELECTION OR SUBSTANTIAL BUILT-IN LOSS.” .(B) The table of sections for subpart C of part II of subchapter K of chapter 1 is amended by striking the item relating to section 743 and inserting the following new item: “Sec. 743. Special rules where section 754 election or substantial built-in loss.”. (c) Adjustment to Basis of Undistributed Partnership Property if There Is Substantial Basis Reduction.—(1) Adjustment required.—Subsection (a) of section 734 (relating to optional adjustment to basis of undistributed partnership property) is amended by inserting before the period the following: “or unless there is a substantial basis reduction”.(2) Adjustment.—Subsection (b) of section 734 is amended by inserting “or unless there is a substantial basis reduction” after “section 754 is in effect”.(3) Substantial basis reduction.—Section 734 is amended by adding at the end the following new subsection:“(d) Substantial Basis Reduction.—“(1) In general.—For purposes of this section, there is a substantial basis reduction with respect to a distribution if the sum of the amounts described in subparagraphs (A) and (B) of subsection (b)(2) exceeds $250,000.“(2) Regulations.— “For regulations to carry out this subsection, see section 743(d)(2).”.(4) Exception for securitization partnerships.—Section 734 is amended by inserting after subsection (d) the following new subsection:118 STAT. 1592 “(e) Exception for Securitization Partnerships.—For purposes of this section, a securitization partnership (as defined in section 743(f)) shall not be treated as having a substantial basis reduction with respect to any distribution of property to a partner.”.(5) Clerical amendments.—(A) The section heading for section 734 is amended to read as follows:“SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED PARTNERSHIP PROPERTY WHERE SECTION 754 ELECTION OR SUBSTANTIAL BASIS REDUCTION.” .(B) The table of sections for subpart B of part II of subchapter K of chapter 1 is amended by striking the item relating to section 734 and inserting the following new item: “Sec. 734. Adjustment to basis of undistributed partnership property where section 754 election or substantial basis reduction.”. (d) Effective Dates.—(1) Subsection (a).—The amendment made by subsection (a) shall apply to contributions made after the date of the enactment of this Act.(2) Subsection (b).—(A) In general.—Except as provided in subparagraph (B), the amendments made by subsection (b) shall apply to transfers after the date of the enactment of this Act.(B) Transition rule.—In the case of an electing investment partnership which is in existence on June 4, 2004, section 743(e)(6)(H) of the Internal Revenue Code of 1986, as added by this section, shall not apply to such partnership and section 743(e)(6)(I) of such Code, as so added, shall be applied by substituting “20 years” for “15 years”.(3) Subsection (c).—The amendments made by subsection (c) shall apply to distributions after the date of the enactment of this Act.