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.