U.S. Senators Baucus and Grassley have introduced a bill aimed at taxing as corporations partnerships that make their interests available on an exchange or market and that earn income from investment adviser and related asset management services. Although a publicly traded partnership generally is treated as a corporation for Federal tax purposes, under the current rules, advisory partnerships that are traded on an exchange can avail themselves of an exception from corporate treatment if 90% or more of their gross income is “qualifying income” as defined in the Internal Revenue Code of 1986, as amended (the Code). The proposed legislation amends §7704(c)(2) of the Code by providing that this exception from corporate treatment does not apply to partnerships providing certain investment adviser and related asset management services.

The legislation applies only to advisory entities that would be publicly traded partnerships but for the qualifying income exception, and does not apply to hedge funds or private equity funds. The bill provides that the amendment would apply to taxable years of a partnership beginning on or after June 14, 2007. Partnerships that filed a registration statement with the Securities and Exchange Commission relating to an IPO or had interests that were traded on an established securities market or were readily tradable on a secondary market on June 14 would not be subject to the new rule until taxable years of the partnership beginning on or after June 14, 2012.

http://www.senate.gov/~finance/sitepages/legislation.htm