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.