I 

108TH CONGRESS 

1ST SESSION H. R. 1661

To provide balanced taxpayer protections in tax administrations, including 

elimination of abusive tax strategies, simplification of the earned income 

tax credit, and taxpayer protections. 

IN THE HOUSE OF REPRESENTATIVES 

APRIL 8, 2003

Mr. RANGEL (for himself, Mr. STARK, Mr. MATSUI, Mr. LEVIN, Mr. CARDIN, 

Mr. MCDERMOTT, Mr. KLECZKA, Mr. LEWIS of Georgia, Mr. NEAL of 

Massachusetts, Mr. MCNULTY, Mr. JEFFERSON, Mr. BECERRA, Mr. 

DOGGETT, Mr. SANDLIN, and Mrs. JONES of Ohio) introduced the following bill; which was referred to the Committee on Ways and Means 

A BILL

To provide balanced taxpayer protections in tax administrations, including elimination of abusive tax strategies, simplification of the earned income tax credit, and taxpayer 

protections.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE; REFERENCE; TABLE OF CON4 TENTS. 

5 (a) SHORT TITLE.—This Act may be cited as the 

6 ‘‘Taxpayer and Fairness Protection Act of 2003’’. 
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1 (b) AMENDMENT OF 1986 CODE.—Except as other2 wise expressly provided, whenever in this Act an amend3 ment or repeal is expressed in terms of an amendment 

4 to, or repeal of, a section or other provision, the reference 

5 shall be considered to be made to a section or other provi6 sion of the Internal Revenue Code of 1986. 

7 (c) TABLE OF CONTENTS.—The table of contents for 

8 this Act is as follows:

Sec. 1. Short title; reference; table of contents. 

TITLE I—ELIMINATION OF ABUSIVE TAX STRATEGIES 

Sec. 101. Findings and purpose. 

Subtitle A—Tax Shelters 

PART I—PROVISIONS DESIGNED TO CURTAIL TAX SHELTERS

Sec. 111. Clarification of economic substance doctrine. 

Sec. 112. Penalty for failing to disclose reportable transaction. 

Sec. 113. Accuracy-related penalty for listed transactions and other reportable 

transactions having a significant tax avoidance purpose. 

Sec. 114. Penalty for understatements attributable to transactions lacking economic substance, etc. 

Sec. 115. Modifications of substantial understatement penalty for nonreportable 

transactions. 

Sec. 116. Tax shelter exception to confidentiality privileges relating to taxpayer 

communications. 

Sec. 117. Disclosure of reportable transactions. 

Sec. 118. Modifications to penalty for failure to register tax shelters. 

Sec. 119. Modification of penalty for failure to maintain lists of investors. 

Sec. 120. Modification of actions to enjoin certain conduct related to tax shelters and reportable transactions. 

Sec. 121. Understatement of taxpayer’s liability by income tax return preparer. 

Sec. 122. Penalty on failure to report interests in foreign financial accounts. 

Sec. 123. Frivolous tax submissions. 

Sec. 124. Regulation of individuals practicing before the Department of Treasury. 

Sec. 125. Penalty on promoters of tax shelters. 

Sec. 126. Statute of limitations for taxable years for which listed transactions 

not reported. 

Sec. 127. Denial of deduction for interest on underpayments attributable to 

nondisclosed reportable and noneconomic substance transactions. 

PART II—OTHER PROVISIONS
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Sec. 131. Limitation on transfer or importation of built-in losses. 

Sec. 132. Disallowance of certain partnership loss transfers. 

Sec. 133. No reduction of basis under section 734 in stock held by partnership 

in corporate partner. 

Sec. 134. Repeal of special rules for FASITS. 

Sec. 135. Expanded disallowance of deduction for interest on convertible debt. 

Sec. 136. Expanded authority to disallow tax benefits under section 269. 

Sec. 137. Modifications of certain rules relating to controlled foreign corporations. 

Sec. 138. Basis for determining loss always reduced by nontaxed portion of 

dividends. 

Sec. 139. Affirmation of consolidated return regulation authority. 

Subtitle B—Prevention of corporate expatriation to avoid United States 

income tax 

Sec. 151. Prevention of corporate expatriation to avoid United States income 

tax. 

TITLE II—SIMPLIFICATION OF EARNED INCOME TAX CREDIT 

Sec. 201. Simplification of earned income tax credit. 

TITLE III—TAXPAYER PROTECTIONS AND IRS ACCOUNTABILITY 

Subtitle A—Penalty and Interest Reforms 

Sec. 301. Failure to pay estimated tax penalty converted to interest charge on 

accumulated unpaid balance. 

Sec. 302. Abatement of interest. 

Sec. 303. Deposits made to suspend running of interest on potential underpayments. 

Sec. 304. Expansion of interest netting for individuals. 

Sec. 305. Waiver of certain penalties for first-time unintentional minor errors. 

Sec. 306. Frivolous tax submissions. 

Sec. 307. Clarification of application of Federal tax deposit penalty. 

Subtitle B—Fairness of Collection Procedures 

Sec. 311. Partial payment of tax liability in installment agreements. 

Sec. 312. Extension of time for return of property. 

Sec. 313. Individuals held harmless on wrongful levy, etc., on individual retirement plan. 

Sec. 314. Seven-day threshold on tolling of statute of limitations during tax review. 

Sec. 315. Study of liens and levies. 

Subtitle C—Tax Administration Reforms 

Sec. 331. Revisions relating to termination of employment of Internal Revenue 

Service employees for misconduct. 

Sec. 332. Confirmation of authority of tax court to apply doctrine of equitable 

recoupment. 

Sec. 333. Jurisdiction of Tax Court over collection due process cases. 

Sec. 334. Office of Chief Counsel review of offers in compromise. 

Sec. 335. Access of National Taxpayer Advocate to independent legal counsel. 

Sec. 336. Payment of motor fuel excise tax refunds by direct deposit. 

Sec. 337. Family business tax simplification. 
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Sec. 338. Suspension of tax-exempt status of terrorist organizations. 

Sec. 339. Tax refund anticipation loans. 

Sec. 340. Fairness in tax audit coverage. 

Subtitle D—Confidentiality and Disclosure 

Sec. 341. Collection activities with respect to joint return disclosable to either 

spouse based on oral request. 

Sec. 342. Taxpayer representatives not subject to examination on sole basis of 

representation of taxpayers. 

Sec. 343. Disclosure in judicial or administrative tax proceedings of return and 

return information of persons who are not party to such proceedings. 

Sec. 344. Prohibition of disclosure of taxpayer identification information with 

respect to disclosure of accepted offers-in-compromise. 

Sec. 345. Compliance by contractors with confidentiality safeguards. 

Sec. 346. Higher standards for requests for and consents to disclosure. 

Sec. 347. Notice to taxpayer concerning administrative determination of browsing; annual report. 

Sec. 348. Expanded disclosure in emergency circumstances. 

Sec. 349. Disclosure of taxpayer identity for tax refund purposes. 

Sec. 350. Disclosure to State officials of proposed actions related to section 

501(c)(3) organizations. 

Sec. 351. Confidentiality of taxpayer communications with the Office of the 

Taxpayer Advocate. 

Subtitle E—Miscellaneous 

Sec. 361. Clarification of definition of church tax inquiry. 

Sec. 362. Expansion of declaratory judgment remedy to tax-exempt organizations. 

Sec. 363. Employee misconduct report to include summary of complaints by 

category. 

Sec. 364. Annual report on awards of costs and certain fees in administrative 

and court proceedings. 

Sec. 365. Annual report on abatement of penalties. 

Sec. 366. Better means of communicating with taxpayers. 

Sec. 367. Explanation of statute of limitations and consequences of failure to 

file. 

Sec. 368. Amendment to Treasury auction reforms. 

Sec. 369. Enrolled agents. 

Sec. 370. Financial management service fees. 

Sec. 371. Extension of Internal Revenue Service user fees. 

Subtitle F—Low-Income Taxpayer Clinics 

Sec. 381. Low-income taxpayer clinics.

Sec. 382. Matching grants to low income return preparation clinics. 

Subtitle G—Federal-State Unemployment Assistance Agreements 

Sec. 391. Applicability of certain Federal-State Agreements relating to unemployment assistance.
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1 TITLE I—ELIMINATION OF 

2 ABUSIVE TAX STRATEGIES

3 SEC. 101. FINDINGS AND PURPOSE. 

4 (a) FINDINGS.—The Congress hereby finds that: 

5 (1) Many corporate tax shelter transactions are 

6 complicated ways of accomplishing nothing aside 

7 from claimed tax benefits, and the legal opinions 

8 justifying those transactions take an inappropriately 

9 narrow and restrictive view of well-developed court 

10 doctrines under which—

11 (A) the taxation of a transaction is deter12 mined in accordance with its substance and not 

13 merely its form, 

14 (B) transactions which have no significant 

15 effect on the taxpayer’s economic or beneficial 

16 interests except for tax benefits are treated as 

17 sham transactions and disregarded, 

18 (C) transactions involving multiple steps 

19 are collapsed when those steps have no substan20 tial economic meaning and are merely designed 

21 to create tax benefits, 

22 (D) transactions with no business purpose 

23 are not given effect, and 

24 (E) in the absence of a specific congres25 sional authorization, it is presumed that Con-
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1 gress did not intend a transaction to result in 

2 a negative tax where the taxpayer’s economic 

3 position or rate of return is better after tax 

4 than before tax. 

5 (2) Permitting aggressive and abusive tax shel6 ters not only results in large revenue losses but also 

7 undermines voluntary compliance with the Internal 

8 Revenue Code of 1986. 

9 (b) PURPOSE.—The purpose of this title is to elimi10 nate abusive tax shelters by denying tax attributes claimed 

11 to arise from transactions that do not meet a heightened 

12 economic substance requirement and by repealing the pro13 vision that permits legal opinions to be used to avoid pen14 alties on tax underpayments resulting from transactions 

15 without significant economic substance or business pur16 pose. 

17 Subtitle A—Tax Shelters

18 Part I—Provisions Designed to 

19 Curtail Tax Shelters 

20 SEC. 111. CLARIFICATION OF ECONOMIC SUBSTANCE DOC21 TRINE. 

22 (a) IN GENERAL.—Section 7701 is amended by re23 designating subsection (m) as subsection (n) and by in24 serting after subsection (l) the following new subsection: 
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1 ‘‘(m) CLARIFICATION OF ECONOMIC SUBSTANCE

2 DOCTRINE; ETC.—

3 ‘‘(1) GENERAL RULES.—

4 ‘‘(A) IN GENERAL.—In applying the eco5 nomic substance doctrine, the determination of 

6 whether a transaction has economic substance 

7 shall be made as provided in this paragraph. 

8 ‘‘(B) DEFINITION OF ECONOMIC SUB9 STANCE.—For purposes of subparagraph (A)—

10 ‘‘(i) IN GENERAL.—A transaction has 

11 economic substance only if—

12 ‘‘(I) the transaction changes in a 

13 meaningful way (apart from Federal 

14 tax effects and, if there is any Federal 

15 tax effects, also apart from any for16 eign, State, or local tax effects) the 

17 taxpayer’s economic position, and 

18 ‘‘(II) the taxpayer has a substan19 tial nontax purpose for entering into 

20 such transaction and the transaction 

21 is a reasonable means of accom22 plishing such purpose. 

23 ‘‘(ii) SPECIAL RULE WHERE TAX24 PAYER RELIES ON PROFIT POTENTIAL.—A 

25 transaction shall not be treated as having 
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1 economic substance by reason of having a 

2 potential for profit unless—

3 ‘‘(I) the present value of the rea4 sonably expected pre-tax profit from 

5 the transaction is substantial in rela6 tion to the present value of the ex7 pected net tax benefits that would be 

8 allowed if the transaction were re9 spected, and 

10 ‘‘(II) the reasonably expected 

11 pre-tax profit from the transaction ex12 ceeds a risk-free rate of return.

13 ‘‘(C) TREATMENT OF FEES AND FOREIGN

14 TAXES.—Fees and other transaction expenses 

15 and foreign taxes shall be taken into account as 

16 expenses in determining pre-tax profit under 

17 subparagraph (B)(ii). 

18 ‘‘(2) SPECIAL RULES FOR TRANSACTIONS WITH

19 TAX-INDIFFERENT PARTIES.—

20 ‘‘(A) SPECIAL RULES FOR FINANCING

21 TRANSACTIONS.—The form of a transaction 

22 which is in substance the borrowing of money 

23 or the acquisition of financial capital directly or 

24 indirectly from a tax-indifferent party shall not 

25 be respected if the present value of the deduc-
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1 tions to be claimed with respect to the trans2 action is substantially in excess of the present 

3 value of the anticipated economic returns of the 

4 person lending the money or providing the fi5 nancial capital. A public offering shall be treat6 ed as a borrowing, or an acquisition of financial 

7 capital, from a tax-indifferent party if it is rea8 sonably expected that at least 50 percent of the 

9 offering will be placed with tax-indifferent par10 ties. 

11 ‘‘(B) ARTIFICIAL INCOME SHIFTING AND

12 BASIS ADJUSTMENTS.—The form of a trans13 action with a tax-indifferent party shall not be 

14 respected if—

15 ‘‘(i) it results in an allocation of in16 come or gain to the tax-indifferent party in 

17 excess of such party’s economic income or 

18 gain, or 

19 ‘‘(ii) it results in a basis adjustment 

20 or shifting of basis on account of over21 stating the income or gain of the tax-indif22 ferent party. 

23 ‘‘(3) DEFINITIONS AND SPECIAL RULES.—For 

24 purposes of this subsection—
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1 ‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.—

2 The term ‘economic substance doctrine’ means 

3 the common law doctrine under which tax bene4 fits under subtitle A with respect to a trans5 action are not allowable if the transaction does 

6 not have economic substance or lacks a business 

7 purpose. 

8 ‘‘(B) TAX-INDIFFERENT PARTY.—The 

9 term ‘tax-indifferent party’ means any person 

10 or entity not subject to tax imposed by subtitle 

11 A. A person shall be treated as a tax-indifferent 

12 party with respect to a transaction if the items 

13 taken into account with respect to the trans14 action have no substantial impact on such per15 son’s liability under subtitle A. 

16 ‘‘(C) SUBSTANTIAL NONTAX PURPOSE.—In 

17 applying subclause (II) of paragraph (1)(B)(i),

18 a purpose of achieving a financial accounting 

19 benefit shall not be taken into account in deter20 mining whether a transaction has a substantial 

21 nontax purpose if the origin of such financial 

22 accounting benefit is a reduction of income tax. 

23 ‘‘(D) EXCEPTION FOR PERSONAL TRANS24 ACTIONS OF INDIVIDUALS.—In the case of an 

25 individual, this subsection shall apply only to 
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1 transactions entered into in connection with a 

2 trade or business or an activity engaged in for 

3 the production of income. 

4 ‘‘(E) TREATMENT OF LESSORS.—In apply5 ing subclause (I) of paragraph (1)(B)(ii) to the 

6 lessor of tangible property subject to a lease, 

7 the expected net tax benefits shall not include 

8 the benefits of depreciation, or any tax credit, 

9 with respect to the leased property and sub10 clause (II) of paragraph (1)(B)(ii) shall be dis11 regarded in determining whether any of such 

12 benefits are allowable.

13 ‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF14 FECTED.—Except as specifically provided in this 

15 subsection, the provisions of this subsection shall not 

16 be construed as altering or supplanting any other 

17 rule of law, and the requirements of this subsection 

18 shall be construed as being in addition to any such 

19 other rule of law. 

20 ‘‘(5) REGULATIONS.—The Secretary shall pre21 scribe such regulations as may be necessary or ap22 propriate to carry out the purposes of this sub23 section. Such regulations may include exemptions 

24 from the application of this subsection.’’
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1 (b) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to transactions entered into after 

3 February 13, 2003. 

4 SEC. 112. PENALTY FOR FAILING TO DISCLOSE REPORT5 ABLE TRANSACTION. 

6 (a) IN GENERAL.—Part I of subchapter B of chapter 

7 68 (relating to assessable penalties) is amended by insert8 ing after section 6707 the following new section: 

9 ‘‘SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORT10 ABLE TRANSACTION INFORMATION WITH RE11 TURN OR STATEMENT. 

12 ‘‘(a) IMPOSITION OF PENALTY.—Any person who 

13 fails to include on any return or statement any informa14 tion with respect to a reportable transaction which is re15 quired under section 6011 to be included with such return 

16 or statement shall pay a penalty in the amount determined 

17 under subsection (b). 

18 ‘‘(b) AMOUNT OF PENALTY.—

19 ‘‘(1) IN GENERAL.—Except as provided in para20 graphs (2) and (3), the amount of the penalty under 

21 subsection (a) shall be $50,000. 

22 ‘‘(2) LISTED TRANSACTION.—The amount of 

23 the penalty under subsection (a) with respect to a 

24 listed transaction shall be $100,000. 
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1 ‘‘(3) INCREASE IN PENALTY FOR LARGE ENTI2 TIES AND HIGH NET WORTH INDIVIDUALS.—

3 ‘‘(A) IN GENERAL.—In the case of a fail4 ure under subsection (a) by—

5 ‘‘(i) a large entity, or 

6 ‘‘(ii) a high net worth individual, 

7 the penalty under paragraph (1) or (2) shall be 

8 twice the amount determined without regard to 

9 this paragraph. 

10 ‘‘(B) LARGE ENTITY.—For purposes of 

11 subparagraph (A), the term ‘large entity’ 

12 means, with respect to any taxable year, a per13 son (other than a natural person) with gross re14 ceipts in excess of $10,000,000 for the taxable 

15 year in which the reportable transaction occurs 

16 or the preceding taxable year. Rules similar to 

17 the rules of paragraph (2) and subparagraphs 

18 (B), (C), and (D) of paragraph (3) of section 

19 448(c) shall apply for purposes of this subpara20 graph. 

21 ‘‘(C) HIGH NET WORTH INDIVIDUAL.—For 

22 purposes of subparagraph (A), the term ‘high 

23 net worth individual’ means, with respect to a 

24 reportable transaction, a natural person whose 
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1 net worth exceeds $2,000,000 immediately be2 fore the transaction. 

3 ‘‘(c) DEFINITIONS.—For purposes of this section—

4 ‘‘(1) REPORTABLE TRANSACTION.—The term 

5 ‘reportable transaction’ means any transaction with 

6 respect to which information is required to be in7 cluded with a return or statement because, as deter8 mined under regulations prescribed under section 

9 6011, such transaction is of a type which the Sec10 retary determines as having a potential for tax 

11 avoidance or evasion. 

12 ‘‘(2) LISTED TRANSACTION.—Except as pro13 vided in regulations, the term ‘listed transaction’ 

14 means a reportable transaction which is the same as, 

15 or substantially similar to, a transaction specifically 

16 identified by the Secretary as a tax avoidance trans17 action for purposes of section 6011. 

18 ‘‘(d) AUTHORITY TO RESCIND PENALTY.—

19 ‘‘(1) IN GENERAL.—The Commissioner of In20 ternal Revenue may rescind all or any portion of any 

21 penalty imposed by this section with respect to any 

22 violation if—

23 ‘‘(A) the violation is with respect to a re24 portable transaction other than a listed trans25 action, 
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1 ‘‘(B) the person on whom the penalty is 

2 imposed has a history of complying with the re3 quirements of this title, 

4 ‘‘(C) it is shown that the violation is due 

5 to an unintentional mistake of fact; 

6 ‘‘(D) imposing the penalty would be 

7 against equity and good conscience, and 

8 ‘‘(E) rescinding the penalty would promote 

9 compliance with the requirements of this title 

10 and effective tax administration. 

11 ‘‘(2) DISCRETION.—The exercise of authority 

12 under paragraph (1) shall be at the sole discretion 

13 of the Commissioner and may be delegated only to 

14 the head of the Office of Tax Shelter Analysis. The 

15 Commissioner, in the Commissioner’s sole discretion, 

16 may establish a procedure to determine if a penalty 

17 should be referred to the Commissioner or the head 

18 of such Office for a determination under paragraph 

19 (1). 

20 ‘‘(3) NO APPEAL.—Notwithstanding any other 

21 provision of law, any determination under this sub22 section may not be reviewed in any administrative or 

23 judicial proceeding. 

24 ‘‘(4) RECORDS.—If a penalty is rescinded under 

25 paragraph (1), the Commissioner shall place in the 
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1 file in the Office of the Commissioner the opinion of 

2 the Commissioner or the head of the Office of Tax 

3 Shelter Analysis with respect to the determination, 

4 including—

5 ‘‘(A) the facts and circumstances of the 

6 transaction, 

7 ‘‘(B) the reasons for the rescission, and 

8 ‘‘(C) the amount of the penalty rescinded. 

9 ‘‘(5) REPORT.—The Commissioner shall each 

10 year report to the Committee on Ways and Means 

11 of the House of Representatives and the Committee 

12 on Finance of the Senate—

13 ‘‘(A) a summary of the total number and 

14 aggregate amount of penalties imposed, and re15 scinded, under this section, and

16 ‘‘(B) a description of each penalty re17 scinded under this subsection and the reasons 

18 therefor. 

19 ‘‘(e) PENALTY REPORTED TO SEC.—In the case of 

20 a person—

21 ‘‘(1) which is required to file periodic reports 

22 under section 13 or 15(d) of the Securities Ex23 change Act of 1934 or is required to be consolidated 

24 with another person for purposes of such reports, 

25 and 
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1 ‘‘(2) which— 

2 ‘‘(A) is required to pay a penalty under 

3 this section with respect to a listed transaction, 

4 ‘‘(B) is required to pay a penalty under 

5 section 6662A with respect to any reportable 

6 transaction at a rate prescribed under section 

7 6662A(c), or 

8 ‘‘(C) is required to pay a penalty under 

9 section 6662B with respect to any noneconomic 

10 substance transaction, 

11 the requirement to pay such penalty shall be disclosed in 

12 such reports filed by such person for such periods as the 

13 Secretary shall specify. Failure to make a disclosure in 

14 accordance with the preceding sentence shall be treated 

15 as a failure to which the penalty under subsection (b)(2) 

16 applies. 

17 ‘‘(f) COORDINATION WITH OTHER PENALTIES.—The 

18 penalty imposed by this section is in addition to any pen19 alty imposed under this title.’’

20 (b) CONFORMING AMENDMENT.—The table of sec21 tions for part I of subchapter B of chapter 68 is amended 

22 by inserting after the item relating to section 6707 the 

23 following:

‘‘Sec. 6707A. Penalty for failure to include reportable transaction 

information with return or statement.’’
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to returns and statements the due 

3 date for which is after the date of the enactment of this 

4 Act.

5 SEC. 113. ACCURACY-RELATED PENALTY FOR LISTED 

6 TRANSACTIONS AND OTHER REPORTABLE 

7 TRANSACTIONS HAVING A SIGNIFICANT TAX 

8 AVOIDANCE PURPOSE. 

9 (a) IN GENERAL.—Subchapter A of chapter 68 is 

10 amended by inserting after section 6662 the following new 

11 section: 

12 ‘‘SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PEN13 ALTY ON UNDERSTATEMENTS WITH RESPECT 

14 TO REPORTABLE TRANSACTIONS. 

15 ‘‘(a) IMPOSITION OF PENALTY.—If a taxpayer has a 

16 reportable transaction understatement for any taxable 

17 year, there shall be added to the tax an amount equal to 

18 20 percent of the amount of such understatement. 

19 ‘‘(b) REPORTABLE TRANSACTION UNDERSTATE20 MENT.—For purposes of this section—

21 ‘‘(1) IN GENERAL.—The term ‘reportable trans22 action understatement’ means the sum of—

23 ‘‘(A) the product of—

24 ‘‘(i) the amount of the increase (if 

25 any) in taxable income which results from 
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1 a difference between the proper tax treat2 ment of an item to which this section ap3 plies and the taxpayer’s treatment of such 

4 item (as shown on the taxpayer’s return of 

5 tax), and 

6 ‘‘(ii) the highest rate of tax imposed 

7 by section 1 (section 11 in the case of a 

8 taxpayer which is a corporation), and 

9 ‘‘(B) the amount of the decrease (if any) 

10 in the aggregate amount of credits determined 

11 under subtitle A which results from a difference 

12 between the taxpayer’s treatment of an item to 

13 which this section applies (as shown on the tax14 payer’s return of tax) and the proper tax treat15 ment of such item. 

16 For purposes of subparagraph (A), any reduction of 

17 the excess of deductions allowed for the taxable year 

18 over gross income for such year, and any reduction 

19 in the amount of capital losses which would (without 

20 regard to section 1211) be allowed for such year, 

21 shall be treated as an increase in taxable income. 

22 ‘‘(2) ITEMS TO WHICH SECTION APPLIES.—This 

23 section shall apply to any item which is attributable 

24 to—

25 ‘‘(A) any listed transaction, and 
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1 ‘‘(B) any reportable transaction (other 

2 than a listed transaction) if a significant pur3 pose of such transaction is the avoidance or 

4 evasion of Federal income tax. 

5 ‘‘(c) HIGHER PENALTY FOR NONDISCLOSED LISTED

6 AND OTHER AVOIDANCE TRANSACTIONS.—

7 ‘‘(1) IN GENERAL.—Subsection (a) shall be ap8 plied by substituting ‘30 percent’ for ‘20 percent’ 

9 with respect to the portion of any reportable trans10 action understatement with respect to which the re11 quirement of section 6664(d)(2)(A) is not met. 

12 ‘‘(2) RULES APPLICABLE TO COMPROMISE OF

13 PENALTY.—

14 ‘‘(A) IN GENERAL.—If the 1st letter of 

15 proposed deficiency which allows the taxpayer 

16 an opportunity for administrative review in the 

17 Internal Revenue Service Office of Appeals has 

18 been sent with respect to a penalty to which 

19 paragraph (1) applies, only the Commissioner 

20 of Internal Revenue may compromise all or any 

21 portion of such penalty. 

22 ‘‘(B) APPLICABLE RULES.—The rules of 

23 paragraphs (3), (4), and (5) of section 

24 6707A(d) shall apply for purposes of subpara25 graph (A). 
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1 ‘‘(d) DEFINITIONS OF REPORTABLE AND LISTED

2 TRANSACTIONS.—For purposes of this section, the terms 

3 ‘reportable transaction’ and ‘listed transaction’ have the 

4 respective meanings given to such terms by section 

5 6707A(c). 

6 ‘‘(e) SPECIAL RULES.—

7 ‘‘(1) COORDINATION WITH PENALTIES, ETC., 

8 ON OTHER UNDERSTATEMENTS.—In the case of an 

9 understatement (as defined in section 6662(d)(2))—

10 ‘‘(A) the amount of such understatement 

11 (determined without regard to this paragraph)

12 shall be increased by the aggregate amount of 

13 reportable transaction understatements and 

14 noneconomic substance transaction understate15 ments for purposes of determining whether 

16 such understatement is a substantial under17 statement under section 6662(d)(1), and 

18 ‘‘(B) the addition to tax under section 

19 6662(a) shall apply only to the excess of the 

20 amount of the substantial understatement (if 

21 any) after the application of subparagraph (A) 

22 over the aggregate amount of reportable trans23 action understatements and noneconomic sub24 stance transaction understatements. 
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1 ‘‘(2) COORDINATION WITH OTHER PEN2 ALTIES.—

3 ‘‘(A) APPLICATION OF FRAUD PENALTY.—

4 References to an underpayment in section 6663 

5 shall be treated as including references to a re6 portable transaction understatement and a non7 economic substance transaction understatement. 

8 ‘‘(B) NO DOUBLE PENALTY.—This section 

9 shall not apply to any portion of an understate10 ment on which a penalty is imposed under sec11 tion 6662B or 6663. 

12 ‘‘(3) SPECIAL RULE FOR AMENDED RE13 TURNS.—Except as provided in regulations, in no 

14 event shall any tax treatment included with an 

15 amendment or supplement to a return of tax be 

16 taken into account in determining the amount of any 

17 reportable transaction understatement or non18 economic substance transaction understatement if 

19 the amendment or supplement is filed after the ear20 lier of the date the taxpayer is first contacted by the 

21 Secretary regarding the examination of the return or 

22 such other date as is specified by the Secretary. 

23 ‘‘(4) NONECONOMIC SUBSTANCE TRANSACTION

24 UNDERSTATEMENT.—For purposes of this sub25 section, the term ‘noneconomic substance trans-
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1 action understatement’ has the meaning given such 

2 term by section 6662B(c). 

3 ‘‘(5) CROSS REFERENCE.—

‘‘For reporting of section 6662A(c) penalty to the 

Securities and Exchange Commission, see section 

6707A(e).’’

4 (b) DETERMINATION OF OTHER UNDERSTATE5 MENTS.—Subparagraph (A) of section 6662(d)(2) is 

6 amended by adding at the end the following flush sen7 tence: 

8 ‘‘The excess under the preceding sentence shall 

9 be determined without regard to items to which 

10 section 6662A applies and without regard to 

11 items with respect to which a penalty is im12 posed by section 6662B.’’

13 (c) REASONABLE CAUSE EXCEPTION.—

14 (1) IN GENERAL.—Section 6664 is amended by 

15 adding at the end the following new subsection: 

16 ‘‘(d) REASONABLE CAUSE EXCEPTION FOR REPORT17 ABLE TRANSACTION UNDERSTATEMENTS.— 

18 ‘‘(1) IN GENERAL.—No penalty shall be im19 posed under section 6662A with respect to any por20 tion of a reportable transaction understatement if it 

21 is shown that there was a reasonable cause for such 

22 portion and that the taxpayer acted in good faith 

23 with respect to such portion. 
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1 ‘‘(2) SPECIAL RULES.—Paragraph (1) shall not 

2 apply to any reportable transaction understatement 

3 unless—

4 ‘‘(A) the relevant facts affecting the tax 

5 treatment of the item are adequately disclosed 

6 in accordance with the regulations prescribed 

7 under section 6011, 

8 ‘‘(B) there is or was substantial authority 

9 for such treatment, and 

10 ‘‘(C) the taxpayer reasonably believed that 

11 such treatment was more likely than not the 

12 proper treatment. 

13 A taxpayer failing to adequately disclose in accord14 ance with section 6011 shall be treated as meeting 

15 the requirements of subparagraph (A) if the penalty 

16 for such failure was rescinded under section 

17 6707A(d). 

18 ‘‘(3) RULES RELATING TO REASONABLE BE19 LIEF.—For purposes of paragraph (2)(C)—

20 ‘‘(A) IN GENERAL.—A taxpayer shall be 

21 treated as having a reasonable belief with re22 spect to the tax treatment of an item only if 

23 such belief—
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1 ‘‘(i) is based on the facts and law that 

2 exist at the time the return of tax which 

3 includes such tax treatment is filed, and 

4 ‘‘(ii) relates solely to the taxpayer’s 

5 chances of success on the merits of such 

6 treatment and does not take into account 

7 the possibility that a return will not be au8 dited, such treatment will not be raised on 

9 audit, or such treatment will be resolved 

10 through settlement if it is raised. 

11 ‘‘(B) CERTAIN OPINIONS MAY NOT BE RE12 LIED UPON.—

13 ‘‘(i) IN GENERAL.—An opinion of a 

14 tax advisor may not be relied upon to es15 tablish the reasonable belief of a taxpayer 

16 if—

17 ‘‘(I) the tax advisor is described 

18 in clause (ii), or 

19 ‘‘(II) the opinion is described in 

20 clause (iii). 

21 ‘‘(ii) DISQUALIFIED TAX ADVISORS.—

22 A tax advisor is described in this clause if 

23 the tax advisor—

24 ‘‘(I) is a material advisor (within 

25 the meaning of section 6111(b)(1)) 
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1 who participates in the organization, 

2 management, promotion, or sale of 

3 the transaction or who is related 

4 (within the meaning of section 267(b) 

5 or 707(b)(1)) to any person who so 

6 participates, 

7 ‘‘(II) is compensated directly or 

8 indirectly by a material advisor with 

9 respect to the transaction, 

10 ‘‘(III) has a fee arrangement 

11 with respect to the transaction which 

12 is contingent on all or part of the in13 tended tax benefits from the trans14 action being sustained, or 

15 ‘‘(IV) as determined under regu16 lations prescribed by the Secretary, 

17 has a continuing financial interest 

18 with respect to the transaction. 

19 ‘‘(iii) DISQUALIFIED OPINIONS.—For 

20 purposes of clause (i), an opinion is dis21 qualified if the opinion—

22 ‘‘(I) is based on unreasonable 

23 factual or legal assumptions (includ24 ing assumptions as to future events), 
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1 ‘‘(II) unreasonably relies on rep2 resentations, statements, findings, or 

3 agreements of the taxpayer or any 

4 other person, 

5 ‘‘(III) does not identify and con6 sider all relevant facts, or 

7 ‘‘(IV) fails to meet any other re8 quirement as the Secretary may pre9 scribe.’’

10 (2) CONFORMING AMENDMENT.—The heading 

11 for subsection (c) of section 6664 is amended by in12 serting ‘‘FOR UNDERPAYMENTS’’ after ‘‘EXCEP13 TION’’. 

14 (d) CONFORMING AMENDMENTS.—

15 (1) Subparagraph (C) of section 461(i)(3) is 

16 amended by striking ‘‘section 6662(d)(2)(C)(iii)’’ 

17 and inserting ‘‘section 1274(b)(3)(C)’’. 

18 (2) Paragraph (3) of section 1274(b) is amend19 ed—

20 (A) by striking ‘‘(as defined in section 

21 6662(d)(2)(C)(iii))’’ in subparagraph (B)(i), 

22 and 

23 (B) by adding at the end the following new 

24 subparagraph: 
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1 ‘‘(C) TAX SHELTER.—For purposes of sub2 paragraph (B), the term ‘tax shelter’ means—

3 ‘‘(i) a partnership or other entity, 

4 ‘‘(ii) any investment plan or arrange5 ment, or 

6 ‘‘(iii) any other plan or arrangement, 

7 if a significant purpose of such partnership, en8 tity, plan, or arrangement is the avoidance or 

9 evasion of Federal income tax.’’

10 (3) Section 6662(d)(2) is amended by striking 

11 subparagraphs (C) and (D). 

12 (4) Section 6664(c)(1) is amended by striking 

13 ‘‘this part’’ and inserting ‘‘section 6662 or 6663’’. 

14 (5) Subsection (b) of section 7525 is amended 

15 by striking ‘‘section 6662(d)(2)(C)(iii)’’ and insert16 ing ‘‘section 1274(b)(3)(C)’’. 

17 (6)(A) The heading for section 6662 is amend18 ed to read as follows: 

19 ‘‘SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY 

20 ON UNDERPAYMENTS.’’

21 (B) The table of sections for part II of sub22 chapter A of chapter 68 is amended by striking the 

23 item relating to section 6662 and inserting the fol24 lowing new items:

‘‘Sec. 6662. Imposition of accuracy-related penalty on underpayments. 
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‘‘Sec. 6662A. Imposition of accuracy-related penalty on understatements with respect to reportable transactions.’’

1 (e) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to taxable years ending after the 

3 date of the enactment of this Act. 

4 SEC. 114. PENALTY FOR UNDERSTATEMENTS ATTRIB5 UTABLE TO TRANSACTIONS LACKING ECO6 NOMIC SUBSTANCE, ETC. 

7 (a) IN GENERAL.—Subchapter A of chapter 68 is 

8 amended by inserting after section 6662A the following 

9 new section: 

10 ‘‘SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIB11 UTABLE TO TRANSACTIONS LACKING ECO12 NOMIC SUBSTANCE, ETC. 

13 ‘‘(a) IMPOSITION OF PENALTY.—If a taxpayer has an 

14 noneconomic substance transaction understatement for 

15 any taxable year, there shall be added to the tax an 

16 amount equal to 40 percent of the amount of such under17 statement. 

18 ‘‘(b) REDUCTION OF PENALTY FOR DISCLOSED

19 TRANSACTIONS.—Subsection (a) shall be applied by sub20 stituting ‘20 percent’ for ‘40 percent’ with respect to the 

21 portion of any noneconomic substance transaction under22 statement with respect to which the relevant facts affect23 ing the tax treatment of the item are adequately disclosed 

24 in the return or a statement attached to the return. 
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1 ‘‘(c) NONECONOMIC SUBSTANCE TRANSACTION UN2 DERSTATEMENT.—For purposes of this section—

3 ‘‘(1) IN GENERAL.—The term ‘noneconomic 

4 substance transaction understatement’ means any 

5 amount which would be an understatement under 

6 section 6662A(b)(1) if section 6662A were applied 

7 by taking into account items attributable to non8 economic substance transactions rather than items 

9 to which section 6662A would apply without regard 

10 to this paragraph. 

11 ‘‘(2) NONECONOMIC SUBSTANCE TRANS12 ACTION.—The term ‘noneconomic substance trans13 action’ means any transaction if—

14 ‘‘(A) there is a lack of economic substance 

15 (within the meaning of section 7701(m)(1)) for 

16 the transaction giving rise to the claimed tax 

17 benefit or the transaction was not respected 

18 under section 7701(m)(2), or 

19 ‘‘(B) the transaction fails to meet the re20 quirements of any similar rule of law. 

21 ‘‘(d) RULES APPLICABLE TO COMPROMISE OF PEN22 ALTY.—

23 ‘‘(1) IN GENERAL.—If the 1st letter of pro24 posed deficiency which allows the taxpayer an oppor25 tunity for administrative review in the Internal Rev-
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1 enue Service Office of Appeals has been sent with 

2 respect to a penalty to which this section applies, 

3 only the Commissioner of Internal Revenue may 

4 compromise all or any portion of such penalty. 

5 ‘‘(2) APPLICABLE RULES.—The rules of para6 graphs (3), (4), and (5) of section 6707A(d) shall 

7 apply for purposes of paragraph (1). 

8 ‘‘(e) COORDINATION WITH OTHER PENALTIES.—Ex9 cept as otherwise provided in this part, the penalty im10 posed by this section shall be in addition to any other pen11 alty imposed by this title. 

12 ‘‘(f) CROSS REFERENCES.—

‘‘(1) For coordination of penalty with understatements under section 6662 and other special rules, 

see section 6662A(e). 

‘‘(2) For reporting of penalty imposed under this 

section to the Securities and Exchange Commission, 

see section 6707A(e).’’

13 (b) CLERICAL AMENDMENT.—The table of sections 

14 for part II of subchapter A of chapter 68 is amended by 

15 inserting after the item relating to section 6662A the fol16 lowing new item:

‘‘Sec. 6662B. Penalty for understatements attributable to transactions lacking economic substance, etc.’’

17 (c) EFFECTIVE DATE.—The amendments made by 

18 this section shall apply to transactions entered into after 

19 February 13, 2003. 
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1 SEC. 115. MODIFICATIONS OF SUBSTANTIAL UNDERSTATE2 MENT PENALTY FOR NONREPORTABLE 

3 TRANSACTIONS. 

4 (a) SUBSTANTIAL UNDERSTATEMENT OF CORPORA5 TIONS.—Section 6662(d)(1)(B) (relating to special rule 

6 for corporations) is amended to read as follows: 

7 ‘‘(B) SPECIAL RULE FOR CORPORA8 TIONS.—In the case of a corporation other than 

9 an S corporation or a personal holding company 

10 (as defined in section 542), there is a substan11 tial understatement of income tax for any tax12 able year if the amount of the understatement 

13 for the taxable year exceeds the lesser of—

14 ‘‘(i) 10 percent of the tax required to 

15 be shown on the return for the taxable 

16 year (or, if greater, $10,000), or 

17 ‘‘(ii) $10,000,000.’’

18 (b) REDUCTION FOR UNDERSTATEMENT OF TAX19 PAYER DUE TO POSITION OF TAXPAYER OR DISCLOSED

20 ITEM.—

21 (1) IN GENERAL.—Section 6662(d)(2)(B)(i) 

22 (relating to substantial authority) is amended to 

23 read as follows: 

24 ‘‘(i) the tax treatment of any item by 

25 the taxpayer if the taxpayer had reason-
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1 able belief that the tax treatment was more 

2 likely than not the proper treatment, or’’. 

3 (2) CONFORMING AMENDMENT.—Section 

4 6662(d) is amended by adding at the end the fol5 lowing new paragraph: 

6 ‘‘(3) SECRETARIAL LIST.—For purposes of this 

7 subsection, section 6664(d)(2), and section 

8 6694(a)(1), the Secretary may prescribe a list of po9 sitions for which the Secretary believes there is not 

10 substantial authority or there is no reasonable belief 

11 that the tax treatment is more likely than not the

12 proper tax treatment. Such list (and any revisions 

13 thereof) shall be published in the Federal Register 

14 or the Internal Revenue Bulletin.’’

15 (c) EFFECTIVE DATE.—The amendments made by 

16 this section shall apply to taxable years beginning after 

17 the date of the enactment of this Act. 

18 SEC. 116. TAX SHELTER EXCEPTION TO CONFIDENTIALITY 

19 PRIVILEGES RELATING TO TAXPAYER COM20 MUNICATIONS. 

21 (a) IN GENERAL.—Section 7525(b) (relating to sec22 tion not to apply to communications regarding corporate 

23 tax shelters) is amended to read as follows: 

24 ‘‘(b) SECTION NOT TO APPLY TO COMMUNICATIONS

25 REGARDING TAX SHELTERS.—The privilege under sub-
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•HR 1661 IH 

1 section (a) shall not apply to any written communication 

2 which is—

3 ‘‘(1) between a federally authorized tax practi4 tioner and—

5 ‘‘(A) any person, 

6 ‘‘(B) any director, officer, employee, agent, 

7 or representative of the person, or 

8 ‘‘(C) any other person holding a capital or 

9 profits interest in the person, and 

10 ‘‘(2) in connection with the promotion of the di11 rect or indirect participation of the person in any 

12 tax shelter (as defined in section 1274(b)(3)(C)).’’

13 (b) EFFECTIVE DATE.—The amendment made by 

14 this section shall apply to communications made on or 

15 after the date of the enactment of this Act. 

16 SEC. 117. DISCLOSURE OF REPORTABLE TRANSACTIONS. 

17 (a) IN GENERAL.—Section 6111 (relating to registra18 tion of tax shelters) is amended to read as follows: 

19 ‘‘SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS. 

20 ‘‘(a) IN GENERAL.—Each material advisor with re21 spect to any reportable transaction shall make a return 

22 (in such form as the Secretary may prescribe) setting 

23 forth—

24 ‘‘(1) information identifying and describing the 

25 transaction, 
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1 ‘‘(2) information describing any potential tax 

2 benefits expected to result from the transaction, and 

3 ‘‘(3) such other information as the Secretary 

4 may prescribe. 

5 Such return shall be filed not later than the date specified 

6 by the Secretary. 

7 ‘‘(b) DEFINITIONS.—For purposes of this section—

8 ‘‘(1) MATERIAL ADVISOR.—

9 ‘‘(A) IN GENERAL.—The term ‘material 

10 advisor’ means any person—

11 ‘‘(i) who provides any material aid, 

12 assistance, or advice with respect to orga13 nizing, promoting, selling, implementing, 

14 or carrying out any reportable transaction, 

15 and 

16 ‘‘(ii) who directly or indirectly derives 

17 gross income in excess of the threshold 

18 amount for such aid, assistance, or advice. 

19 ‘‘(B) THRESHOLD AMOUNT.—For purposes 

20 of subparagraph (A), the threshold amount is—

21 ‘‘(i) $50,000 in the case of a report22 able transaction substantially all of the tax 

23 benefits from which are provided to nat24 ural persons, and 

25 ‘‘(ii) $250,000 in any other case. 
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1 ‘‘(2) REPORTABLE TRANSACTION.—The term 

2 ‘reportable transaction’ has the meaning given to 

3 such term by section 6707A(c). 

4 ‘‘(c) REGULATIONS.—The Secretary may prescribe 

5 regulations which provide—

6 ‘‘(1) that only 1 person shall be required to 

7 meet the requirements of subsection (a) in cases in 

8 which 2 or more persons would otherwise be re9 quired to meet such requirements, 

10 ‘‘(2) exemptions from the requirements of this 

11 section, and 

12 ‘‘(3) such rules as may be necessary or appro13 priate to carry out the purposes of this section.’’

14 (b) CONFORMING AMENDMENTS.—

15 (1) The item relating to section 6111 in the 

16 table of sections for subchapter B of chapter 61 is 

17 amended to read as follows:

‘‘Sec. 6111. Disclosure of reportable transactions.’’

18 (2)(A) So much of section 6112 as precedes 

19 subsection (c) thereof is amended to read as follows: 

20 ‘‘SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANS21 ACTIONS MUST KEEP LISTS OF ADVISEES. 

22 ‘‘(a) IN GENERAL.—Each material advisor (as de23 fined in section 6111) with respect to any reportable 

24 transaction (as defined in section 6707A(c)) shall main-
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1 tain, in such manner as the Secretary may by regulations 

2 prescribe, a list—

3 ‘‘(1) identifying each person with respect to 

4 whom such advisor acted as such a material advisor 

5 with respect to such transaction, and 

6 ‘‘(2) containing such other information as the 

7 Secretary may by regulations require. 

8 This section shall apply without regard to whether a mate9 rial advisor is required to file a return under section 6111 

10 with respect to such transaction.’’

11 (B) Section 6112 is amended by redesignating 

12 subsection (c) as subsection (b).

13 (C) Section 6112(b), as redesignated by sub14 paragraph (B), is amended—

15 (i) by inserting ‘‘written’’ before ‘‘request’’ 

16 in paragraph (1)(A), and 

17 (ii) by striking ‘‘shall prescribe’’ in para18 graph (2) and inserting ‘‘may prescribe’’. 

19 (D) The item relating to section 6112 in the 

20 table of sections for subchapter B of chapter 61 is 

21 amended to read as follows:

‘‘Sec. 6112. Material advisors of reportable transactions must 

keep lists of advisees.’’

22 (3)(A) The heading for section 6708 is amend23 ed to read as follows: 
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1 ‘‘SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES 

2 WITH RESPECT TO REPORTABLE TRANS3 ACTIONS.’’

4 (B) The item relating to section 6708 in the 

5 table of sections for part I of subchapter B of chap6 ter 68 is amended to read as follows:

‘‘Sec. 6708. Failure to maintain lists of advisees with respect to 

reportable transactions.’’

7 (c) EFFECTIVE DATE.—The amendments made by 

8 this section shall apply to transactions with respect to 

9 which material aid, assistance, or advice referred to in sec10 tion 6111(b)(1)(A)(i) of the Internal Revenue Code of 

11 1986 (as added by this section) is provided after the date 

12 of the enactment of this Act. 

13 SEC. 118. MODIFICATIONS TO PENALTY FOR FAILURE TO 

14 REGISTER TAX SHELTERS. 

15 (a) IN GENERAL.—Section 6707 (relating to failure 

16 to furnish information regarding tax shelters) is amended 

17 to read as follows: 

18 ‘‘SEC. 6707. FAILURE TO FURNISH INFORMATION REGARD19 ING REPORTABLE TRANSACTIONS. 

20 ‘‘(a) IN GENERAL.—If a person who is required to 

21 file a return under section 6111(a) with respect to any 

22 reportable transaction—

23 ‘‘(1) fails to file such return on or before the 

24 date prescribed therefor, or 
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•HR 1661 IH 

1 ‘‘(2) files false or incomplete information with 

2 the Secretary with respect to such transaction, 

3 such person shall pay a penalty with respect to such return 

4 in the amount determined under subsection (b). 

5 ‘‘(b) AMOUNT OF PENALTY.—

6 ‘‘(1) IN GENERAL.—Except as provided in para7 graph (2), the penalty imposed under subsection (a) 

8 with respect to any failure shall be $50,000. 

9 ‘‘(2) LISTED TRANSACTIONS.—The penalty im10 posed under subsection (a) with respect to any listed 

11 transaction shall be an amount equal to the greater 

12 of—

13 ‘‘(A) $200,000, or 

14 ‘‘(B) 50 percent of the gross income de15 rived by such person with respect to aid, assist16 ance, or advice which is provided with respect 

17 to the reportable transaction before the date the 

18 return including the transaction is filed under 

19 section 6111. 

20 Subparagraph (B) shall be applied by substituting 

21 ‘75 percent’ for ‘50 percent’ in the case of an inten22 tional failure or act described in subsection (a). 

23 ‘‘(c) RESCISSION AUTHORITY.—The provisions of 

24 section 6707A(d) (relating to authority of Commissioner 
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1 to rescind penalty) shall apply to any penalty imposed 

2 under this section. 

3 ‘‘(d) REPORTABLE AND LISTED TRANSACTIONS.—

4 The terms ‘reportable transaction’ and ‘listed transaction’ 

5 have the respective meanings given to such terms by sec6 tion 6707A(c).’’. 

7 (b) CLERICAL AMENDMENT.—The item relating to 

8 section 6707 in the table of sections for part I of sub9 chapter B of chapter 68 is amended by striking ‘‘tax shel10 ters’’ and inserting ‘‘reportable transactions’’. 

11 (c) EFFECTIVE DATE.—The amendments made by 

12 this section shall apply to returns the due date for which 

13 is after the date of the enactment of this Act. 

14 SEC. 119. MODIFICATION OF PENALTY FOR FAILURE TO 

15 MAINTAIN LISTS OF INVESTORS. 

16 (a) IN GENERAL.—Subsection (a) of section 6708 is 

17 amended to read as follows: 

18 ‘‘(a) IMPOSITION OF PENALTY.—

19 ‘‘(1) IN GENERAL.—If any person who is re20 quired to maintain a list under section 6112(a) fails 

21 to make such list available upon written request to 

22 the Secretary in accordance with section 

23 6112(b)(1)(A) within 20 business days after the 

24 date of the Secretary’s request, such person shall 
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•HR 1661 IH 

1 pay a penalty of $10,000 for each day of such fail2 ure after such 20th day. 

3 ‘‘(2) REASONABLE CAUSE EXCEPTION.—No 

4 penalty shall be imposed by paragraph (1) with re5 spect to the failure on any day if such failure is due 

6 to reasonable cause.’’

7 (b) EFFECTIVE DATE.—The amendment made by 

8 this section shall apply to requests made after the date 

9 of the enactment of this Act. 

10 SEC. 120. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN 

11 CONDUCT RELATED TO TAX SHELTERS AND 

12 REPORTABLE TRANSACTIONS. 

13 (a) IN GENERAL.—Section 7408 (relating to action 

14 to enjoin promoters of abusive tax shelters, etc.) is amend15 ed by redesignating subsection (c) as subsection (d) and 

16 by striking subsections (a) and (b) and inserting the fol17 lowing new subsections: 

18 ‘‘(a) AUTHORITY TO SEEK INJUNCTION.—A civil ac19 tion in the name of the United States to enjoin any person 

20 from further engaging in specified conduct may be com21 menced at the request of the Secretary. Any action under 

22 this section shall be brought in the district court of the 

23 United States for the district in which such person resides, 

24 has his principal place of business, or has engaged in spec25 ified conduct. The court may exercise its jurisdiction over 
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•HR 1661 IH 

1 such action (as provided in section 7402(a)) separate and 

2 apart from any other action brought by the United States 

3 against such person. 

4 ‘‘(b) ADJUDICATION AND DECREE.—In any action 

5 under subsection (a), if the court finds—

6 ‘‘(1) that the person has engaged in any speci7 fied conduct, and 

8 ‘‘(2) that injunctive relief is appropriate to pre9 vent recurrence of such conduct, 

10 the court may enjoin such person from engaging in such 

11 conduct or in any other activity subject to penalty under 

12 this title. 

13 ‘‘(c) SPECIFIED CONDUCT.—For purposes of this 

14 section, the term ‘specified conduct’ means any action, or 

15 failure to take action, subject to penalty under section 

16 6700, 6701, 6707, or 6708.’’

17 (b) CONFORMING AMENDMENTS.—

18 (1) The heading for section 7408 is amended to 

19 read as follows: 

20 ‘‘SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RE21 LATED TO TAX SHELTERS AND REPORTABLE 

22 TRANSACTIONS.’’

23 (2) The table of sections for subchapter A of 

24 chapter 67 is amended by striking the item relating 
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1 to section 7408 and inserting the following new 

2 item:

‘‘Sec. 7408. Actions to enjoin specified conduct related to tax shelters and 

reportable transactions.’’

3 (c) EFFECTIVE DATE.—The amendment made by 

4 this section shall take effect on the day after the date of 

5 the enactment of this Act.

6 SEC. 121. UNDERSTATEMENT OF TAXPAYER’S LIABILITY BY 

7 INCOME TAX RETURN PREPARER. 

8 (a) STANDARDS CONFORMED TO TAXPAYER STAND9 ARDS.—Section 6694(a) (relating to understatements due 

10 to unrealistic positions) is amended—

11 (1) by striking ‘‘realistic possibility of being 

12 sustained on its merits’’ in paragraph (1) and in13 serting ‘‘reasonable belief that the tax treatment in 

14 such position was more likely than not the proper 

15 treatment’’, 

16 (2) by striking ‘‘or was frivolous’’ in paragraph 

17 (3) and inserting ‘‘or there was no reasonable basis 

18 for the tax treatment of such position’’, and 

19 (3) by striking ‘‘UNREALISTIC’’ in the heading 

20 and inserting ‘‘IMPROPER’’. 

21 (b) AMOUNT OF PENALTY.—Section 6694 is amend22 ed—

23 (1) by striking ‘‘$250’’ in subsection (a) and in24 serting ‘‘$1,000’’, and 
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1 (2) by striking ‘‘$1,000’’ in subsection (b) and 

2 inserting ‘‘$5,000’’. 

3 (c) EFFECTIVE DATE.—The amendments made by 

4 this section shall apply to documents prepared after the 

5 date of the enactment of this Act. 

6 SEC. 122. PENALTY ON FAILURE TO REPORT INTERESTS IN 

7 FOREIGN FINANCIAL ACCOUNTS. 

8 (a) IN GENERAL.—Section 5321(a)(5) of title 31, 

9 United States Code, is amended to read as follows: 

10 ‘‘(5) FOREIGN FINANCIAL AGENCY TRANS11 ACTION VIOLATION.—

12 ‘‘(A) PENALTY AUTHORIZED.—The Sec13 retary of the Treasury may impose a civil 

14 money penalty on any person who violates, or 

15 causes any violation of, any provision of section 

16 5314. 

17 ‘‘(B) AMOUNT OF PENALTY.—

18 ‘‘(i) IN GENERAL.—Except as pro19 vided in subparagraph (C), the amount of 

20 any civil penalty imposed under subpara21 graph (A) shall not exceed $5,000. 

22 ‘‘(ii) REASONABLE CAUSE EXCEP23 TION.—No penalty shall be imposed under 

24 subparagraph (A) with respect to any vio25 lation if—
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1 ‘‘(I) such violation was due to 

2 reasonable cause, and 

3 ‘‘(II) the amount of the trans4 action or the balance in the account 

5 at the time of the transaction was 

6 properly reported. 

7 ‘‘(C) WILLFUL VIOLATIONS.—In the case 

8 of any person willfully violating, or willfully 

9 causing any violation of, any provision of sec10 tion 5314—

11 ‘‘(i) the maximum penalty under sub12 paragraph (B)(i) shall be increased to the 

13 greater of—

14 ‘‘(I) $25,000, or 

15 ‘‘(II) the amount (not exceeding 

16 $100,000) determined under subpara17 graph (D), and 

18 ‘‘(ii) subparagraph (B)(ii) shall not 

19 apply. 

20 ‘‘(D) AMOUNT.—The amount determined 

21 under this subparagraph is—

22 ‘‘(i) in the case of a violation involving 

23 a transaction, the amount of the trans24 action, or 
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1 ‘‘(ii) in the case of a violation involv2 ing a failure to report the existence of an 

3 account or any identifying information re4 quired to be provided with respect to an 

5 account, the balance in the account at the 

6 time of the violation.’’

7 (b) EFFECTIVE DATE.—The amendment made by 

8 this section shall apply to violations occurring after the 

9 date of the enactment of this Act. 

10 SEC. 123. FRIVOLOUS TAX SUBMISSIONS. 

11 (a) CIVIL PENALTIES.—Section 6702 is amended to 

12 read as follows: 

13 ‘‘SEC. 6702. FRIVOLOUS TAX SUBMISSIONS. 

14 ‘‘(a) CIVIL PENALTY FOR FRIVOLOUS TAX RE15 TURNS.—A person shall pay a penalty of $5,000 if—

16 ‘‘(1) such person files what purports to be a re17 turn of a tax imposed by this title but which—

18 ‘‘(A) does not contain information on 

19 which the substantial correctness of the self-as20 sessment may be judged, or 

21 ‘‘(B) contains information that on its face 

22 indicates that the self-assessment is substan23 tially incorrect; and 

24 ‘‘(2) the conduct referred to in paragraph (1)— 
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1 ‘‘(A) is based on a position which the Sec2 retary has identified as frivolous under sub3 section (c), or 

4 ‘‘(B) reflects a desire to delay or impede 

5 the administration of Federal tax laws. 

6 ‘‘(b) CIVIL PENALTY FOR SPECIFIED FRIVOLOUS

7 SUBMISSIONS.—

8 ‘‘(1) IMPOSITION OF PENALTY.—Except as pro9 vided in paragraph (3), any person who submits a 

10 specified frivolous submission shall pay a penalty of 

11 $5,000. 

12 ‘‘(2) SPECIFIED FRIVOLOUS SUBMISSION.—For 

13 purposes of this section—

14 ‘‘(A) SPECIFIED FRIVOLOUS SUBMIS15 SION.—The term ‘specified frivolous submis16 sion’ means a specified submission if any por17 tion of such submission—

18 ‘‘(i) is based on a position which the 

19 Secretary has identified as frivolous under 

20 subsection (c), or 

21 ‘‘(ii) reflects a desire to delay or im22 pede the administration of Federal tax 

23 laws. 

24 ‘‘(B) SPECIFIED SUBMISSION.—The term 

25 ‘specified submission’ means—
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1 ‘‘(i) a request for a hearing under—

2 ‘‘(I) section 6320 (relating to no3 tice and opportunity for hearing upon 

4 filing of notice of lien), or 

5 ‘‘(II) section 6330 (relating to 

6 notice and opportunity for hearing be7 fore levy), and 

8 ‘‘(ii) an application under— 

9 ‘‘(I) section 6159 (relating to 

10 agreements for payment of tax liabil11 ity in installments), 

12 ‘‘(II) section 7122 (relating to 

13 compromises), or 

14 ‘‘(III) section 7811 (relating to 

15 taxpayer assistance orders). 

16 ‘‘(3) OPPORTUNITY TO WITHDRAW SUBMIS17 SION.—If the Secretary provides a person with no18 tice that a submission is a specified frivolous sub19 mission and such person withdraws such submission 

20 within 30 days after such notice, the penalty im21 posed under paragraph (1) shall not apply with re22 spect to such submission. 

23 ‘‘(c) LISTING OF FRIVOLOUS POSITIONS.—The Sec24 retary shall prescribe (and periodically revise) a list of po25 sitions which the Secretary has identified as being frivo-
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1 lous for purposes of this subsection. The Secretary shall 

2 not include in such list any position that the Secretary 

3 determines meets the requirement of section 

4 6662(d)(2)(B)(ii)(II). 

5 ‘‘(d) REDUCTION OF PENALTY.—The Secretary may 

6 reduce the amount of any penalty imposed under this sec7 tion if the Secretary determines that such reduction would

8 promote compliance with and administration of the Fed9 eral tax laws. 

10 ‘‘(e) PENALTIES IN ADDITION TO OTHER PEN11 ALTIES.—The penalties imposed by this section shall be 

12 in addition to any other penalty provided by law.’’

13 (b) TREATMENT OF FRIVOLOUS REQUESTS FOR

14 HEARINGS BEFORE LEVY.—

15 (1) FRIVOLOUS REQUESTS DISREGARDED.—

16 Section 6330 (relating to notice and opportunity for 

17 hearing before levy) is amended by adding at the 

18 end the following new subsection: 

19 ‘‘(g) FRIVOLOUS REQUESTS FOR HEARING, ETC.—

20 Notwithstanding any other provision of this section, if the 

21 Secretary determines that any portion of a request for a 

22 hearing under this section or section 6320 meets the re23 quirement of clause (i) or (ii) of section 6702(b)(2)(A), 

24 then the Secretary may treat such portion as if it were 
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1 never submitted and such portion shall not be subject to 

2 any further administrative or judicial review.’’

3 (2) PRECLUSION FROM RAISING FRIVOLOUS

4 ISSUES AT HEARING.—Section 6330(c)(4) is amend5 ed—

6 (A) by striking ‘‘(A)’’ and inserting 

7 ‘‘(A)(i)’’; 

8 (B) by striking ‘‘(B)’’ and inserting ‘‘(ii)’’; 

9 (C) by striking the period at the end of the 

10 first sentence and inserting ‘‘; or’’; and 

11 (D) by inserting after subparagraph (A)(ii) 

12 (as so redesignated) the following: 

13 ‘‘(B) the issue meets the requirement of 

14 clause (i) or (ii) of section 6702(b)(2)(A).’’

15 (3) STATEMENT OF GROUNDS.—Section 

16 6330(b)(1) is amended by striking ‘‘under sub17 section (a)(3)(B)’’ and inserting ‘‘in writing under 

18 subsection (a)(3)(B) and states the grounds for the 

19 requested hearing’’. 

20 (c) TREATMENT OF FRIVOLOUS REQUESTS FOR

21 HEARINGS UPON FILING OF NOTICE OF LIEN.—Section 

22 6320 is amended—

23 (1) in subsection (b)(1), by striking ‘‘under sub24 section (a)(3)(B)’’ and inserting ‘‘in writing under 
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1 subsection (a)(3)(B) and states the grounds for the 

2 requested hearing’’, and 

3 (2) in subsection (c), by striking ‘‘and (e)’’ and 

4 inserting ‘‘(e), and (g)’’. 

5 (d) TREATMENT OF FRIVOLOUS APPLICATIONS FOR

6 OFFERS-IN-COMPROMISE AND INSTALLMENT AGREE7 MENTS.—Section 7122 is amended by adding at the end 

8 the following new subsection: 

9 ‘‘(e) FRIVOLOUS SUBMISSIONS, ETC.—Notwith10 standing any other provision of this section, if the Sec11 retary determines that any portion of an application for 

12 an offer-in-compromise or installment agreement sub13 mitted under this section or section 6159 meets the re14 quirement of clause (i) or (ii) of section 6702(b)(2)(A), 

15 then the Secretary may treat such portion as if it were 

16 never submitted and such portion shall not be subject to 

17 any further administrative or judicial review.’’

18 (e) CLERICAL AMENDMENT.—The table of sections 

19 for part I of subchapter B of chapter 68 is amended by 

20 striking the item relating to section 6702 and inserting 

21 the following new item:

‘‘Sec. 6702. Frivolous tax submissions.’’

22 (f) EFFECTIVE DATE.—The amendments made by 

23 this section shall apply to submissions made and issues 

24 raised after the date on which the Secretary first pre-
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1 scribes a list under section 6702(c) of the Internal Rev2 enue Code of 1986, as amended by subsection (a). 

3 SEC. 124. REGULATION OF INDIVIDUALS PRACTICING BE4 FORE THE DEPARTMENT OF TREASURY. 

5 (a) CENSURE; IMPOSITION OF PENALTY.—

6 (1) IN GENERAL.—Section 330(b) of title 31, 

7 United States Code, is amended—

8 (A) by inserting ‘‘, or censure,’’ after ‘‘De9 partment’’, and 

10 (B) by adding at the end the following new 

11 flush sentence: 

12 ‘‘The Secretary may impose a monetary penalty on any 

13 representative described in the preceding sentence. If the 

14 representative was acting on behalf of an employer or any 

15 firm or other entity in connection with the conduct giving 

16 rise to such penalty, the Secretary may impose a monetary 

17 penalty on such employer, firm, or entity if it knew, or 

18 reasonably should have known, of such conduct. Such pen19 alty shall not exceed the gross income derived (or to be 

20 derived) from the conduct giving rise to the penalty and 

21 may be in addition to, or in lieu of, any suspension, disbar22 ment, or censure.’’

23 (2) EFFECTIVE DATE.—The amendments made 

24 by this subsection shall apply to actions taken after 

25 the date of the enactment of this Act. 
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1 (b) TAX SHELTER OPINIONS, ETC.—Section 330 of 

2 such title 31 is amended by adding at the end the fol3 lowing new subsection: 

4 ‘‘(d) Nothing in this section or in any other provision 

5 of law shall be construed to limit the authority of the Sec6 retary of the Treasury to impose standards applicable to 

7 the rendering of written advice with respect to any entity, 

8 transaction plan or arrangement, or other plan or arrange9 ment, which is of a type which the Secretary determines 

10 as having a potential for tax avoidance or evasion.’’

11 SEC. 125. PENALTY ON PROMOTERS OF TAX SHELTERS. 

12 (a) PENALTY ON PROMOTING ABUSIVE TAX SHEL13 TERS.—Section 6700(a) is amended by adding at the end 

14 the following new sentence: ‘‘Notwithstanding the first 

15 sentence, if an activity with respect to which a penalty 

16 imposed under this subsection involves a statement de17 scribed in paragraph (2)(A), the amount of the penalty 

18 shall be equal to 50 percent of the gross income derived 

19 (or to be derived) from such activity by the person on 

20 which the penalty is imposed.’’

21 (b) EFFECTIVE DATE.—The amendment made by 

22 this section shall apply to activities after the date of the 

23 enactment of this Act. 
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1 SEC. 126. STATUTE OF LIMITATIONS FOR TAXABLE YEARS 

2 FOR WHICH LISTED TRANSACTIONS NOT RE3 PORTED. 

4 (a) IN GENERAL.—Section 6501(e)(1) (relating to 

5 substantial omission of items for income taxes) is amended 

6 by adding at the end the following new subparagraph: 

7 ‘‘(C) LISTED TRANSACTIONS.—If a tax8 payer fails to include on any return or state9 ment for any taxable year any information with 

10 respect to a listed transaction (as defined in

11 section 6707A(c)(2)) which is required under 

12 section 6011 to be included with such return 

13 or statement, the tax for such taxable year may 

14 be assessed, or a proceeding in court for collec15 tion of such tax may be begun without assess16 ment, at any time within 6 years after the time 

17 the return is filed. This subparagraph shall not 

18 apply to any taxable year if the time for assess19 ment or beginning the proceeding in court has 

20 expired before the time a transaction is treated 

21 as a listed transaction under section 6011.’’ 

22 (b) EFFECTIVE DATE.—The amendment made by 

23 this section shall apply to transactions after the date of 

24 the enactment of this Act in taxable years ending after 

25 such date. 
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1 SEC. 127. DENIAL OF DEDUCTION FOR INTEREST ON UN2 DERPAYMENTS ATTRIBUTABLE TO NONDIS3 CLOSED REPORTABLE AND NONECONOMIC 

4 SUBSTANCE TRANSACTIONS. 

5 (a) IN GENERAL.—Section 163 (relating to deduction 

6 for interest) is amended by redesignating subsection (m) 

7 as subsection (n) and by inserting after subsection (l) the 

8 following new subsection: 

9 ‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE

10 TO NONDISCLOSED REPORTABLE TRANSACTIONS AND

11 NONECONOMIC SUBSTANCE TRANSACTIONS.—No deduc12 tion shall be allowed under this chapter for any interest 

13 paid or accrued under section 6601 on any underpayment 

14 of tax which is attributable to—

15 ‘‘(1) the portion of any reportable transaction 

16 understatement (as defined in section 6662A(b)) 

17 with respect to which the requirement of section 

18 6664(d)(2)(A) is not met, or 

19 ‘‘(2) any noneconomic substance transaction 

20 understatement (as defined in section 6662B(c)).’’

21 (b) EFFECTIVE DATE.—The amendments made by 

22 this section shall apply to transactions after the date of 

23 the enactment of this Act in taxable years ending after 

24 such date. 
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1 Part II—Other Provisions 

2 SEC. 131. LIMITATION ON TRANSFER OR IMPORTATION OF 

3 BUILT-IN LOSSES. 

4 (a) IN GENERAL.—Section 362 (relating to basis to 

5 corporations) is amended by adding at the end the fol6 lowing new subsection: 

7 ‘‘(e) LIMITATIONS ON BUILT-IN LOSSES.—

8 ‘‘(1) LIMITATION ON IMPORTATION OF BUILT9 IN LOSSES.—

10 ‘‘(A) IN GENERAL.—If in any transaction 

11 described in subsection (a) or (b) there would 

12 (but for this subsection) be an importation of a 

13 net built-in loss, the basis of each property de14 scribed in subparagraph (B) which is acquired 

15 in such transaction shall (notwithstanding sub16 sections (a) and (b)) be its fair market value 

17 immediately after such transaction. 

18 ‘‘(B) PROPERTY DESCRIBED.—For pur19 poses of subparagraph (A), property is de20 scribed in this paragraph if—

21 ‘‘(i) gain or loss with respect to such 

22 property is not subject to tax under this 

23 subtitle in the hands of the transferor im24 mediately before the transfer, and 
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•HR 1661 IH 

1 ‘‘(ii) gain or loss with respect to such 

2 property is subject to such tax in the 

3 hands of the transferee immediately after 

4 such transfer. 

5 In any case in which the transferor is a part6 nership, the preceding sentence shall be applied 

7 by treating each partner in such partnership as 

8 holding such partner’s proportionate share of 

9 the property of such partnership. 

10 ‘‘(C) IMPORTATION OF NET BUILT-IN

11 LOSS.—For purposes of subparagraph (A), 

12 there is an importation of a net built-in loss in 

13 a transaction if the transferee’s aggregate ad14 justed bases of property described in subpara15 graph (B) which is transferred in such trans16 action would (but for this paragraph) exceed 

17 the fair market value of such property imme18 diately after such transaction.’’

19 ‘‘(2) LIMITATION ON TRANSFER OF BUILT-IN

20 LOSSES IN SECTION 351 TRANSACTIONS.—

21 ‘‘(A) IN GENERAL.—If—

22 ‘‘(i) property is transferred in any 

23 transaction which is described in sub24 section (a) and which is not described in 

25 paragraph (1) of this subsection, and 
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1 ‘‘(ii) the transferee’s aggregate ad2 justed bases of the property so transferred 

3 would (but for this paragraph) exceed the 

4 fair market value of such property imme5 diately after such transaction, 

6 then, notwithstanding subsection (a), the trans7 feree’s aggregate adjusted bases of the property 

8 so transferred shall not exceed the fair market 

9 value of such property immediately after such 

10 transaction. 

11 ‘‘(B) ALLOCATION OF BASIS REDUC12 TION.—The aggregate reduction in basis by 

13 reason of subparagraph (A) shall be allocated 

14 among the property so transferred in proportion 

15 to their respective built-in losses immediately 

16 before the transaction. 

17 ‘‘(C) EXCEPTION FOR TRANSFERS WITHIN

18 AFFILIATED GROUP.—Subparagraph (A) shall 

19 not apply to any transaction if the transferor 

20 owns stock in the transferee meeting the re21 quirements of section 1504(a)(2). In the case of 

22 property to which subparagraph (A) does not 

23 apply by reason of the preceding sentence, the 

24 transferor’s basis in the stock received for such 
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1 property shall not exceed its fair market value 

2 immediately after the transfer.’’ 

3 (b) COMPARABLE TREATMENT WHERE LIQUIDA4 TION.—Paragraph (1) of section 334(b) (relating to liq5 uidation of subsidiary) is amended to read as follows: 

6 ‘‘(1) IN GENERAL.—If property is received by a 

7 corporate distributee in a distribution in a complete 

8 liquidation to which section 332 applies (or in a 

9 transfer described in section 337(b)(1)), the basis of 

10 such property in the hands of such distributee shall 

11 be the same as it would be in the hands of the trans12 feror; except that the basis of such property in the 

13 hands of such distributee shall be the fair market

14 value of the property at the time of the distribu15 tion—

16 ‘‘(A) in any case in which gain or loss is 

17 recognized by the liquidating corporation with 

18 respect to such property, or 

19 ‘‘(B) in any case in which the liquidating 

20 corporation is a foreign corporation, the cor21 porate distributee is a domestic corporation, 

22 and the corporate distributee’s aggregate ad23 justed bases of property described in section 

24 362(e)(1)(B) which is distributed in such liq25 uidation would (but for this subparagraph) ex-
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1 ceed the fair market value of such property im2 mediately after such liquidation.’’

3 (c) EFFECTIVE DATE.—The amendments made by 

4 this section shall apply to transactions after the date of 

5 the enactment of this Act. 

6 SEC. 132. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS 

7 TRANSFERS. 

8 (a) TREATMENT OF CONTRIBUTED PROPERTY WITH

9 BUILT-IN LOSS.—Paragraph (1) of section 704(c) is 

10 amended by striking ‘‘and’’ at the end of subparagraph 

11 (A), by striking the period at the end of subparagraph 

12 (B) and inserting ‘‘, and’’, and by adding at the end the 

13 following: 

14 ‘‘(C) if any property so contributed has a 

15 built-in loss—

16 ‘‘(i) such built-in loss shall be taken 

17 into account only in determining the 

18 amount of items allocated to the contrib19 uting partner, and 

20 ‘‘(ii) except as provided in regulations, 

21 in determining the amount of items allo22 cated to other partners, the basis of the 

23 contributed property in the hands of the 

24 partnership shall be treated as being equal 
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1 to its fair market value immediately after 

2 the contribution. 

3 For purposes of subparagraph (C), the term ‘built4 in loss’ means the excess of the adjusted basis of the 

5 property (determined without regard to subpara6 graph (C)(ii)) over its fair market value immediately 

7 after the contribution.’’

8 (b) ADJUSTMENT TO BASIS OF PARTNERSHIP PROP9 ERTY ON TRANSFER OF PARTNERSHIP INTEREST IF

10 THERE IS SUBSTANTIAL BUILT-IN LOSS.—

11 (1) ADJUSTMENT REQUIRED.—Subsection (a) 

12 of section 743 (relating to optional adjustment to 

13 basis of partnership property) is amended by insert14 ing before the period ‘‘or unless the partnership has 

15 a substantial built-in loss immediately after such 

16 transfer’’. 

17 (2) ADJUSTMENT.—Subsection (b) of section 

18 743 is amended by inserting ‘‘or with respect to 

19 which there is a substantial built-in loss immediately 

20 after such transfer’’ after ‘‘section 754 is in effect’’. 

21 (3) SUBSTANTIAL BUILT-IN LOSS.—Section 743 

22 is amended by adding at the end the following new 

23 subsection: 

24 ‘‘(d) SUBSTANTIAL BUILT-IN LOSS.—
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1 ‘‘(1) IN GENERAL.—For purposes of this sec2 tion, a partnership has a substantial built-in loss 

3 with respect to a transfer of an interest in a part4 nership if the transferee partner’s proportionate 

5 share of the adjusted basis of the partnership prop6 erty exceeds by more than $250,000 the basis of 

7 such partner’s interest in the partnership. 

8 ‘‘(2) REGULATIONS.—The Secretary shall pre9 scribe such regulations as may be appropriate to 

10 carry out the purposes of paragraph (1) and section 

11 734(d), including regulations aggregating related 

12 partnerships and disregarding property acquired by 

13 the partnership in an attempt to avoid such pur14 poses.’’

15 (4) CLERICAL AMENDMENTS.—

16 (A) The section heading for section 743 is 

17 amended to read as follows: 

18 ‘‘SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROP19 ERTY WHERE SECTION 754 ELECTION OR 

20 SUBSTANTIAL BUILT-IN LOSS.’’

21 (B) The table of sections for subpart C of 

22 part II of subchapter K of chapter 1 is amend23 ed by striking the item relating to section 743 

24 and inserting the following new item:

‘‘Sec. 743. Adjustment to basis of partnership property where section 754 election or substantial built-in loss.’’
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1 (c) ADJUSTMENT TO BASIS OF UNDISTRIBUTED

2 PARTNERSHIP PROPERTY IF THERE IS SUBSTANTIAL

3 BASIS REDUCTION.—

4 (1) ADJUSTMENT REQUIRED.—Subsection (a) 

5 of section 734 (relating to optional adjustment to 

6 basis of undistributed partnership property) is 

7 amended by inserting before the period ‘‘or unless 

8 there is a substantial basis reduction’’. 

9 (2) ADJUSTMENT.—Subsection (b) of section 

10 734 is amended by inserting ‘‘or unless there is a 

11 substantial basis reduction’’ after ‘‘section 754 is in 

12 effect’’. 

13 (3) SUBSTANTIAL BASIS REDUCTION.—Section 

14 734 is amended by adding at the end the following 

15 new subsection: 

16 ‘‘(d) SUBSTANTIAL BASIS REDUCTION.—

17 ‘‘(1) IN GENERAL.—For purposes of this sec18 tion, there is a substantial basis reduction with re19 spect to a distribution if the sum of the amounts de20 scribed in subparagraphs (A) and (B) of subsection 

21 (b)(2) exceeds $250,000. 

22 ‘‘(2) REGULATIONS.—

‘‘For regulations to carry out this subsection, see 

section 743(d)(2).’’

23 (4) CLERICAL AMENDMENTS.—
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1 (A) The section heading for section 734 is 

2 amended to read as follows: 

3 ‘‘SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED 

4 PARTNERSHIP PROPERTY WHERE SECTION 

5 754 ELECTION OR SUBSTANTIAL BASIS RE6 DUCTION.’’

7 (B) The table of sections for subpart B of 

8 part II of subchapter K of chapter 1 is amend9 ed by striking the item relating to section 734 

10 and inserting the following new item:

‘‘Sec. 734. Adjustment to basis of undistributed partnership property where section 754 election or substantial basis 

reduction.’’

11 (d) EFFECTIVE DATES.—

12 (1) SUBSECTION (a).—The amendment made 

13 by subsection (a) shall apply to contributions made 

14 after the date of the enactment of this Act.

15 (2) SUBSECTION (b).—The amendments made 

16 by subsection (b) shall apply to transfers after the 

17 date of the enactment of this Act. 

18 (3) SUBSECTION (c).—The amendments made 

19 by subsection (c) shall apply to distributions after 

20 the date of the enactment of this Act. 
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1 SEC. 133. NO REDUCTION OF BASIS UNDER SECTION 734 IN 

2 STOCK HELD BY PARTNERSHIP IN COR3 PORATE PARTNER. 

4 (a) IN GENERAL.—Section 755 is amended by adding 

5 at the end the following new subsection: 

6 ‘‘(c) NO ALLOCATION OF BASIS DECREASE TO

7 STOCK OF CORPORATE PARTNER.—In making an alloca8 tion under subsection (a) of any decrease in the adjusted 

9 basis of partnership property under section 734(b)—

10 ‘‘(1) no allocation may be made to stock in a 

11 corporation which is a partner in the partnership, 

12 and 

13 ‘‘(2) any amount not allocable to stock by rea14 son of paragraph (1) shall be allocated under sub15 section (a) to other partnership property. 

16 Gain shall be recognized to the partnership to the extent 

17 that the amount required to be allocated under paragraph 

18 (2) to other partnership property exceeds the aggregate 

19 adjusted basis of such other property immediately before 

20 the allocation required by paragraph (2).’’

21 (b) EFFECTIVE DATE.—The amendment made by 

22 this section shall apply to distributions after the date of 

23 the enactment of this Act. 
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1 SEC. 134. REPEAL OF SPECIAL RULES FOR FASITS. 

2 (a) IN GENERAL.—Part V of subchapter M of chap3 ter 1 (relating to financial asset securitization investment 

4 trusts) is hereby repealed. 

5 (b) CONFORMING AMENDMENTS.—

6 (1) Paragraph (6) of section 56(g) is amended 

7 by striking ‘‘REMIC, or FASIT’’ and inserting ‘‘or 

8 REMIC’’. 

9 (2) Clause (ii) of section 382(l)(4)(B) is amend10 ed by striking ‘‘a REMIC to which part IV of sub11 chapter M applies, or a FASIT to which part V of 

12 subchapter M applies,’’ and inserting ‘‘or a REMIC 

13 to which part IV of subchapter M applies,’’. 

14 (3) Paragraph (1) of section 582(c) is amended 

15 by striking ‘‘, and any regular interest in a 

16 FASIT,’’. 

17 (4) Subparagraph (E) of section 856(c)(5) is 

18 amended by striking the last sentence. 

19 (5) Paragraph (5) of section 860G(a) is amend20 ed by adding ‘‘and’’ at the end of subparagraph (B), 

21 by striking ‘‘, and’’ at the end of subparagraph (C) 

22 and inserting a period, and by striking subparagraph 

23 (D). 

24 (6) Subparagraph (C) of section 1202(e)(4) is 

25 amended by striking ‘‘REMIC, or FASIT’’ and in26 serting ‘‘or REMIC’’. 
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1 (7) Subparagraph (C) of section 7701(a)(19) is 

2 amended by adding ‘‘and’’ at the end of clause (ix), 

3 by striking ‘‘, and’’ at the end of clause (x) and in4 serting a period, and by striking clause (xi). 

5 (8) The table of parts for subchapter M of 

6 chapter 1 is amended by striking the item relating 

7 to part V. 

8 (c) EFFECTIVE DATE.—

9 (1) IN GENERAL.—Except as provided in para10 graph (2), the amendments made by this section 

11 shall apply to taxable years beginning after Decem12 ber 31, 2003. 

13 (2) EXCEPTION FOR EXISTING FASITS.—

14 (A) IN GENERAL.—Paragraph (1) shall not 

15 apply to any FASIT in existence on the date of 

16 the enactment of this Act. 

17 (B) TRANSFER OF ADDITIONAL ASSETS

18 NOT PERMITTED.—Except as provided in regu19 lations prescribed by the Secretary of the 

20 Treasury or the Secretary’s delegate, subpara21 graph (A) shall cease to apply as of the earliest 

22 date after the date of the enactment of this Act 

23 that any property is transferred to the FASIT. 
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1 SEC. 135. EXPANDED DISALLOWANCE OF DEDUCTION FOR 

2 INTEREST ON CONVERTIBLE DEBT. 

3 (a) IN GENERAL.—Paragraph (2) of section 163(l) 

4 is amended by striking ‘‘or a related party’’ and inserting 

5 ‘‘or equity held by the issuer (or any related party) in any 

6 other person’’. 

7 (b) CONFORMING AMENDMENT.—Paragraph (3) of 

8 section 163(l) is amended by striking ‘‘or a related party’’ 

9 in the material preceding subparagraph (A) and inserting 

10 ‘‘or any other person’’. 

11 (c) EFFECTIVE DATE.—The amendments made by 

12 this section shall apply to debt instruments issued after 

13 the date of the enactment of this Act. 

14 SEC. 136. EXPANDED AUTHORITY TO DISALLOW TAX BENE15 FITS UNDER SECTION 269. 

16 (a) IN GENERAL.—Subsection (a) of section 269 (re17 lating to acquisitions made to evade or avoid income tax) 

18 is amended to read as follows: 

19 ‘‘(a) IN GENERAL.—If—

20 ‘‘(1)(A) any person acquires stock in a corpora21 tion, or 

22 ‘‘(B) any corporation acquires, directly or indi23 rectly, property of another corporation and the basis 

24 of such property, in the hands of the acquiring cor25 poration, is determined by reference to the basis in 

26 the hands of the transferor corporation, and 
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1 ‘‘(2) the principal purpose for which such acqui2 sition was made is evasion or avoidance of Federal 

3 income tax by securing the benefit of a deduction, 

4 credit, or other allowance, 

5 then the Secretary may disallow such deduction, credit, 

6 or other allowance.’’

7 (b) EFFECTIVE DATE.—The amendment made by 

8 this section shall apply to stock and property acquired 

9 after February 13, 2003. 

10 SEC. 137. MODIFICATIONS OF CERTAIN RULES RELATING 

11 TO CONTROLLED FOREIGN CORPORATIONS. 

12 (a) LIMITATION ON EXCEPTION FROM PFIC RULES

13 FOR UNITED STATES SHAREHOLDERS OF CONTROLLED

14 FOREIGN CORPORATIONS.—Paragraph (2) of section 

15 1297(e) (relating to passive investment company) is 

16 amended by adding at the end the following flush sen17 tence: 

18 ‘‘Such term shall not include any period if there is 

19 only a remote likelihood of an inclusion in gross in20 come under section 951(a)(1)(A)(i) of subpart F in21 come of such corporation for such period.’’

22 (b) DETERMINATION OF PRO RATA SHARE OF SUB23 PART F INCOME.—Subsection (a) of section 951 (relating 

24 to amounts included in gross income of United States 
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1 shareholders) is amended by adding at the end the fol2 lowing new paragraph: 

3 ‘‘(4) SPECIAL RULES FOR DETERMINING PRO

4 RATA SHARE OF SUBPART F INCOME.—The pro rata 

5 share under paragraph (2) shall be determined by 

6 disregarding—

7 ‘‘(A) any rights lacking substantial eco8 nomic effect, and 

9 ‘‘(B) stock owned by a shareholder who is 

10 a tax-indifferent party (as defined in section 

11 7701(m)(3)) if the amount which would (but 

12 for this paragraph) be allocated to such share13 holder does not reflect such shareholder’s eco14 nomic share of the earnings and profits of the 

15 corporation.’’

16 (c) EFFECTIVE DATE.—The amendments made by 

17 this section shall apply to taxable years on controlled for18 eign corporation beginning after February 13, 2003, and 

19 to taxable years of United States shareholder in which or

20 with which such taxable years of controlled foreign cor21 porations end. 
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1 SEC. 138. BASIS FOR DETERMINING LOSS ALWAYS RE2 DUCED BY NONTAXED PORTION OF DIVI3 DENDS. 

4 (a) IN GENERAL.—Section 1059 (relating to cor5 porate shareholder’s basis in stock reduced by nontaxed 

6 portion of extraordinary dividends) is amended by redesig7 nating subsection (g) as subsection (h) and by inserting 

8 after subsection (f) the following new subsection: 

9 ‘‘(g) BASIS FOR DETERMINING LOSS ALWAYS RE10 DUCED BY NONTAXED PORTION OF DIVIDENDS.—The 

11 basis of stock in a corporation (for purposes of deter12 mining loss) shall be reduced by the nontaxed portion of 

13 any dividend received with respect to such stock if this 

14 section does not otherwise apply to such dividend.’’

15 (b) EFFECTIVE DATE.—The amendment made by 

16 this section shall apply to dividends received after the date 

17 of the enactment of this Act. 

18 SEC. 139. AFFIRMATION OF CONSOLIDATED RETURN REGU19 LATION AUTHORITY. 

20 (a) IN GENERAL.—Section 1502 (relating to consoli21 dated return regulations) is amended by adding at the end 

22 the following new sentence: ‘‘In prescribing such regula23 tions, the Secretary may prescribe rules applicable to cor24 porations filing consolidated returns under section 1501 

25 that are different from other provisions of this title that 

26 would apply if such corporations filed separate returns.’’
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1 (b) RESULT NOT OVERTURNED.—Notwithstanding 

2 subsection (a), the Internal Revenue Code of 1986 shall 

3 be construed by treating Treasury regulation § 1.1502–

4 20(c)(1)(iii) (as in effect on January 1, 2001) as being 

5 inapplicable to the type of factual situation in 255 F.3d 

6 1357 (Fed. Cir. 2001). 

7 (c) EFFECTIVE DATE.—The provisions of this section 

8 shall apply to taxable years beginning before, on, or after 

9 the date of the enactment of this Act. 

10 Subtitle B—Prevention of Cor11 porate Expatriation to Avoid 

12 United States Income Tax

13 SEC. 151. PREVENTION OF CORPORATE EXPATRIATION TO 

14 AVOID UNITED STATES INCOME TAX. 

15 (a) IN GENERAL.—Paragraph (4) of section 7701(a) 

16 (defining domestic) is amended to read as follows: 

17 ‘‘(4) DOMESTIC.—

18 ‘‘(A) IN GENERAL.—Except as provided in 

19 subparagraph (B), the term ‘domestic’ when ap20 plied to a corporation or partnership means cre21 ated or organized in the United States or under 

22 the law of the United States or of any State 

23 unless, in the case of a partnership, the Sec24 retary provides otherwise by regulations. 
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1 ‘‘(B) CERTAIN CORPORATIONS TREATED

2 AS DOMESTIC.—

3 ‘‘(i) IN GENERAL.—The acquiring cor4 poration in a corporate expatriation trans5 action shall be treated as a domestic cor6 poration. 

7 ‘‘(ii) CORPORATE EXPATRIATION

8 TRANSACTION.—For purposes of this sub9 paragraph, the term ‘corporate expatria10 tion transaction’ means any transaction 

11 if—

12 ‘‘(I) a nominally foreign corpora13 tion (referred to in this subparagraph 

14 as the ‘acquiring corporation’) ac15 quires, as a result of such transaction, 

16 directly or indirectly substantially all 

17 of the properties held directly or indi18 rectly by a domestic corporation, and 

19 ‘‘(II) immediately after the trans20 action, more than 80 percent of the 

21 stock (by vote or value) of the acquir22 ing corporation is held by former 

23 shareholders of the domestic corpora24 tion by reason of holding stock in the 

25 domestic corporation. 
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1 ‘‘(iii) LOWER STOCK OWNERSHIP RE2 QUIREMENT IN CERTAIN CASES.—Sub3 clause (II) of clause (ii) shall be applied by 

4 substituting ‘50 percent’ for ‘80 percent’ 

5 with respect to any nominally foreign cor6 poration if—

7 ‘‘(I) such corporation does not 

8 have substantial business activities 

9 (when compared to the total business 

10 activities of the expanded affiliated 

11 group) in the foreign country in which 

12 or under the law of which the corpora13 tion is created or organized, and 

14 ‘‘(II) the stock of the corporation 

15 is publicly traded and the principal 

16 market for the public trading of such 

17 stock is in the United States. 

18 ‘‘(iv) PARTNERSHIP TRANSACTIONS.—

19 The term ‘corporate expatriation trans20 action’ includes any transaction if—

21 ‘‘(I) a nominally foreign corpora22 tion (referred to in this subparagraph 

23 as the ‘acquiring corporation’) ac24 quires, as a result of such transaction, 

25 directly or indirectly properties consti-
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1 tuting a trade or business of a domes2 tic partnership, 

3 ‘‘(II) immediately after the trans4 action, more than 80 percent of the 

5 stock (by vote or value) of the acquir6 ing corporation is held by former 

7 partners of the domestic partnership 

8 or related foreign partnerships (deter9 mined without regard to stock of the 

10 acquiring corporation which is sold in 

11 a public offering related to the trans12 action), and 

13 ‘‘(III) the acquiring corporation 

14 meets the requirements of subclauses 

15 (I) and (II) of clause (iii). 

16 ‘‘(v) SPECIAL RULES.—For purposes 

17 of this subparagraph—

18 ‘‘(I) a series of related trans19 actions shall be treated as 1 trans20 action, and 

21 ‘‘(II) stock held by members of 

22 the expanded affiliated group which 

23 includes the acquiring corporation 

24 shall not be taken into account in de25 termining ownership. 
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1 ‘‘(vi) OTHER DEFINITIONS.—For pur2 poses of this subparagraph—

3 ‘‘(I) NOMINALLY FOREIGN COR4 PORATION.—The term ‘nominally for5 eign corporation’ means any corpora6 tion which would (but for this sub7 paragraph) be treated as a foreign 

8 corporation. 

9 ‘‘(II) EXPANDED AFFILIATED

10 GROUP.—The term ‘expanded affili11 ated group’ means an affiliated group 

12 (as defined in section 1504(a) without 

13 regard to section 1504(b)). 

14 ‘‘(III) RELATED FOREIGN PART15 NERSHIP.—A foreign partnership is 

16 related to a domestic partnership if 

17 they are under common control (with18 in the meaning of section 482), or 

19 they shared the same trademark or 

20 tradename.’’

21 (b) EFFECTIVE DATES.—

22 (1) IN GENERAL.—The amendment made by 

23 this section shall apply to corporate expatriation 

24 transactions completed after September 11, 2001. 
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1 (2) SPECIAL RULE.—The amendment made by 

2 this section shall also apply to corporate expatriation 

3 transactions completed on or before September 11, 

4 2001, but only with respect to taxable years of the 

5 acquiring corporation beginning after December 31, 

6 2003. 

7 TITLE II—SIMPLIFICATION OF 

8 EARNED INCOME TAX CREDIT 

9 SEC. 201. SIMPLIFICATION OF EARNED INCOME TAX CRED10 IT. 

11 (a) REPEAL OF DENIAL OF CREDIT WHERE INVEST12 MENT INCOME.—Section 32 is amended by striking sub13 section (i). 

14 (b) EARNED INCOME TO INCLUDE ONLY AMOUNTS

15 INCLUDIBLE IN GROSS INCOME.—Section 32(c)(2)(B) is 

16 amended by striking ‘‘and’’ at the end of clause (iv), by 

17 striking the period at the end of clause (v) and inserting 

18 ‘‘, and’’, and by adding at the end the following new 

19 clause: 

20 ‘‘(vi) the requirement under subparagraph 

21 (A)(i) that an amount be includible in 

22 gross income shall not apply if such 

23 amount is exempt from tax under section 

24 7873 or is derived directly from restricted 

25 and allotted land under the Act of Feb-
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1 ruary 8, 1887 (commonly known as the In2 dian General Allotment Act) (25 U.S.C. 

3 331 et seq.) or from land held under Acts 

4 or treaties containing an exception provi5 sion similar to the Indian General Allot6 ment Act.’’

7 (c) MODIFICATION OF JOINT RETURN REQUIRE8 MENT.—Subsection (d) of section 32 is amended to read 

9 as follows: 

10 ‘‘(d) MARRIED INDIVIDUALS.—

11 ‘‘(1) IN GENERAL.—If the taxpayer is married 

12 at the close of the taxable year, the credit shall be 

13 allowed under subsection (a) only if the taxpayer 

14 and his spouse file a joint return for the taxable 

15 year. 

16 ‘‘(2) MARITAL STATUS.—For purposes of para17 graph (1), an individual legally separated from his 

18 spouse under a decree of divorce or of separate 

19 maintenance shall not be considered as married. 

20 ‘‘(3) CERTAIN MARRIED INDIVIDUALS LIVING

21 APART.—For purposes of paragraph (1), if—

22 ‘‘(A) an individual —

23 ‘‘(i) is married and files a separate re24 turn, and 
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1 ‘‘(ii) has a qualifying child who is a 

2 son, daughter, stepson, or stepdaughter of 

3 such individual, and 

4 ‘‘(B) during the last 6 months of such tax5 able year, such individual and such individual’s 

6 spouse do not have the same principal place of 

7 abode, 

8 such individual shall not be considered as married.’’

9 (d) EXPANSION OF MATHEMATICAL ERROR AUTHOR10 ITY.—Paragraph (2) of section 6213(g) is amended by 

11 striking ‘‘and’’ at the end of subparagraph (K), by striking 

12 the period at the end of subparagraph (L) and inserting 

13 ‘‘, and’’, and by inserting after subparagraph (L) the fol14 lowing new subparagraph: 

15 ‘‘(M) the entry on the return claiming the 

16 credit under section 32 with respect to a child 

17 if, according to the Federal Case Registry of 

18 Child Support Orders established under section 

19 453(h) of the Social Security Act, the taxpayer 

20 is a noncustodial parent of such child.’’

21 (e) EFFECTIVE DATE.—The amendments made by 

22 this section shall apply to taxable years beginning after 

23 December 31, 2003. 

24 (f) PRECERTIFICATION OF EARNED INCOME CRED25 IT.—Nothing in any provision of law shall be construed 
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1 as authorizing precertification of the earned income credit 

2 under section 32 of the Internal Revenue Code of 1986. 

3 TITLE III—TAXPAYER PROTEC4 TIONS AND IRS ACCOUNT5 ABILITY 

6 Subtitle A—Penalty and Interest 

7 Reforms 

8 SEC. 301. FAILURE TO PAY ESTIMATED TAX PENALTY CON9 VERTED TO INTEREST CHARGE ON ACCUMU10 LATED UNPAID BALANCE. 

11 (a) PENALTY MOVED TO INTEREST CHAPTER OF

12 CODE.—The Internal Revenue Code of 1986 is amended 

13 by redesignating section 6654 as section 6641 and by 

14 moving section 6641 (as so redesignated) from part I of 

15 subchapter A of chapter 68 to the end of subchapter E 

16 of chapter 67 (as added by subsection (e)(1) of this sec17 tion). 

18 (b) PENALTY CONVERTED TO INTEREST CHARGE.—

19 The heading and subsections (a) and (b) of section 6641 

20 (as so redesignated) are amended to read as follows: 

21 ‘‘SEC. 6641. INTEREST ON FAILURE BY INDIVIDUAL TO PAY 

22 ESTIMATED INCOME TAX. 

23 ‘‘(a) IN GENERAL.—Interest shall be paid on any un24 derpayment of estimated tax by an individual for a taxable 

25 year for each day of such underpayment. The amount of 
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1 such interest for any day shall be the product of the un2 derpayment rate established under subsection (b)(2) mul3 tiplied by the amount of the underpayment. 

4 ‘‘(b) AMOUNT OF UNDERPAYMENT; INTEREST

5 RATE.—For purposes of subsection (a)—

6 ‘‘(1) AMOUNT.—The amount of the under7 payment on any day shall be the excess of—

8 ‘‘(A) the sum of the required installments 

9 for the taxable year the due dates for which are 

10 on or before such day, over 

11 ‘‘(B) the sum of the amounts (if any) of 

12 estimated tax payments made on or before such 

13 day on such required installments. 

14 ‘‘(2) DETERMINATION OF INTEREST RATE.—

15 ‘‘(A) IN GENERAL.—The underpayment 

16 rate with respect to any day in an installment 

17 underpayment period shall be the under18 payment rate established under section 6621 

19 for the first day of the calendar quarter in 

20 which such installment underpayment period 

21 begins. 

22 ‘‘(B) INSTALLMENT UNDERPAYMENT PE23 RIOD.—For purposes of subparagraph (A), the 

24 term ‘installment underpayment period’ means 

25 the period beginning on the day after the due 
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1 date for a required installment and ending on 

2 the due date for the subsequent required in3 stallment (or in the case of the 4th required in4 stallment, the 15th day of the 4th month fol5 lowing the close of a taxable year). 

6 ‘‘(C) DAILY RATE.—The rate determined 

7 under subparagraph (A) shall be applied on a 

8 daily basis and shall be based on the assump9 tion of 365 days in a calendar year. 

10 ‘‘(3) TERMINATION OF ESTIMATED TAX INTER11 EST.—No day after the end of the installment un12 derpayment period for the 4th required installment 

13 specified in paragraph (2)(B) for a taxable year 

14 shall be treated as a day of underpayment with re15 spect to such taxable year.’’. 

16 (c) INCREASE IN SAFE HARBOR WHERE TAX IS

17 SMALL.—

18 (1) IN GENERAL.—Clause (i) of section 

19 6641(d)(1)(B) (as so redesignated) is amended to 

20 read as follows: 

21 ‘‘(i) the lesser of—

22 ‘‘(I) 90 percent of the tax shown 

23 on the return for the taxable year (or, 

24 if no return is filed, 90 percent of the 

25 tax for such year), or 
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1 ‘‘(II) the tax shown on the return 

2 for the taxable year (or, if no return 

3 is filed, the tax for such year) reduced 

4 (but not below zero) by $1,600, or’’. 

5 (2) CONFORMING AMENDMENT.—Subsection (e) 

6 of section 6641 (as so redesignated) is amended by 

7 striking paragraph (1) and redesignating paragraphs 

8 (2) and (3) as paragraphs (1) and (2), respectively. 

9 (d) CONFORMING AMENDMENTS.—

10 (1) Paragraphs (1) and (2) of subsection (e) 

11 (as redesignated by subsection (c)(2)) and sub12 section (h) of section 6641 (as so designated) are 

13 each amended by striking ‘‘addition to tax’’ each 

14 place it occurs and inserting ‘‘interest’’. 

15 (2) Section 167(g)(5)(D) is amended by strik16 ing ‘‘6654’’ and inserting ‘‘6641’’. 

17 (3) Section 460(b)(1) is amended by striking 

18 ‘‘6654’’ and inserting ‘‘6641’’. 

19 (4) Section 3510(b) is amended—

20 (A) by striking ‘‘section 6654’’ in para21 graph (1) and inserting ‘‘section 6641’’; 

22 (B) by amending paragraph (2)(B) to read 

23 as follows: 

24 ‘‘(B) no interest would be required to be 

25 paid (but for this section) under 6641 for such 
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1 taxable year by reason of the $1,600 amount 

2 specified in section 6641(d)(1)(B)(i)(II).’’; 

3 (C) by striking ‘‘section 6654(d)(2)’’ in 

4 paragraph (3) and inserting ‘‘section 

5 6641(d)(2)’’; and 

6 (D) by striking paragraph (4). 

7 (5) Section 6201(b)(1) is amended by striking 

8 ‘‘6654’’ and inserting ‘‘6641’’. 

9 (6) Section 6601(h) is amended by striking 

10 ‘‘6654’’ and inserting ‘‘6641’’. 

11 (7) Section 6621(b)(2)(B) is amended by strik12 ing ‘‘addition to tax under section 6654’’ and insert13 ing ‘‘interest required to be paid under section 

14 6641’’. 

15 (8) Section 6622(b) is amended—

16 (A) by striking ‘‘PENALTY FOR’’ in the 

17 heading; and 

18 (B) by striking ‘‘addition to tax under sec19 tion 6654 or 6655’’ and inserting ‘‘interest re20 quired to be paid under section 6641 or addi21 tion to tax under section 6655’’. 

22 (9) Section 6658(a) is amended—

23 (A) by striking ‘‘6654, or 6655’’ and in24 serting ‘‘or 6655, and no interest shall be re25 quired to be paid under section 6641,’’; and 
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1 (B) by inserting ‘‘or paying interest’’ after 

2 ‘‘the tax’’ in paragraph (2)(B)(ii). 

3 (10) Section 6665(b) is amended—

4 (A) in the matter preceding paragraph (1) 

5 by striking ‘‘, 6654,’’; and 

6 (B) in paragraph (2) by striking ‘‘6654 

7 or’’. 

8 (11) Section 7203 is amended by striking ‘‘sec9 tion 6654 or 6655’’ and inserting ‘‘section 6655 or 

10 interest required to be paid under section 6641’’. 

11 (e) CLERICAL AMENDMENTS.—

12 (1) Chapter 67 is amended by inserting after 

13 subchapter D the following: 

14 ‘‘Subchapter E—Interest on Failure by 

15 Individual to Pay Estimated Income Tax

‘‘Sec. 6641. Interest on failure by individual to pay estimated income tax.’’.

16 (2) The table of subchapters for chapter 67 is 

17 amended by adding at the end the following new 

18 items:

‘‘Subchapter D. Notice requirements. 

‘‘Subchapter E. Interest on failure by individual to pay estimated 

income tax.’’.

19 (3) The table of sections for part I of sub20 chapter A of chapter 68 is amended by striking the 

21 item relating to section 6654. 
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1 (f) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to installment payments for taxable 

3 years beginning after December 31, 2003. 

4 SEC. 302. ABATEMENT OF INTEREST. 

5 (a) ABATEMENT OF INTEREST WITH RESPECT TO

6 ERRONEOUS REFUND CHECK WITHOUT REGARD TO SIZE

7 OF REFUND.—Paragraph (2) of section 6404(e) is amend8 ed by striking ‘‘unless—’’ and all that follows and insert9 ing ‘‘unless the taxpayer (or a related party) has in any 

10 way caused such erroneous refund.’’. 

11 (b) ABATEMENT OF INTEREST TO EXTENT INTER12 EST IS ATTRIBUTABLE TO TAXPAYER RELIANCE ON

13 WRITTEN STATEMENTS OF THE IRS.—Subsection (f) of 

14 section 6404 is amended—

15 (1) in the subsection heading, by striking 

16 ‘‘PENALTY OR ADDITION’’ and inserting ‘‘INTEREST, 

17 PENALTY, OR ADDITION’’; and 

18 (2) in paragraph (1) and in subparagraph (B) 

19 of paragraph (2), by striking ‘‘penalty or addition’’ 

20 and inserting ‘‘interest, penalty, or addition’’. 

21 (c) EFFECTIVE DATE.—The amendments made by 

22 this section shall apply with respect to interest accruing 

23 on or after the date of the enactment of this Act.
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1 SEC. 303. DEPOSITS MADE TO SUSPEND RUNNING OF IN2 TEREST ON POTENTIAL UNDERPAYMENTS. 

3 (a) IN GENERAL.—Subchapter A of chapter 67 (re4 lating to interest on underpayments) is amended by add5 ing at the end the following new section: 

6 ‘‘SEC. 6603. DEPOSITS MADE TO SUSPEND RUNNING OF IN7 TEREST ON POTENTIAL UNDERPAYMENTS, 

8 ETC. 

9 ‘‘(a) AUTHORITY TO MAKE DEPOSITS OTHER THAN

10 AS PAYMENT OF TAX.—A taxpayer may make a cash de11 posit with the Secretary which may be used by the Sec12 retary to pay any tax imposed under subtitle A or B or 

13 chapter 41, 42, 43, or 44 which has not been assessed 

14 at the time of the deposit. Such a deposit shall be made 

15 in such manner as the Secretary shall prescribe. 

16 ‘‘(b) NO INTEREST IMPOSED.—To the extent that 

17 such deposit is used by the Secretary to pay tax, for pur18 poses of section 6601 (relating to interest on underpay19 ments), the tax shall be treated as paid when the deposit 

20 is made. 

21 ‘‘(c) RETURN OF DEPOSIT.—Except in a case where 

22 the Secretary determines that collection of tax is in jeop23 ardy, the Secretary shall return to the taxpayer any 

24 amount of the deposit (to the extent not used for a pay25 ment of tax) which the taxpayer requests in writing. 

26 ‘‘(d) PAYMENT OF INTEREST.—
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1 ‘‘(1) IN GENERAL.—For purposes of section 

2 6611 (relating to interest on overpayments), a de3 posit which is returned to a taxpayer shall be treated 

4 as a payment of tax for any period to the extent 

5 (and only to the extent) attributable to a disputable 

6 tax for such period. Under regulations prescribed by 

7 the Secretary, rules similar to the rules of section 

8 6611(b)(2) shall apply. 

9 ‘‘(2) DISPUTABLE TAX.—

10 ‘‘(A) IN GENERAL.—For purposes of this 

11 section, the term ‘disputable tax’ means the 

12 amount of tax specified at the time of the de13 posit as the taxpayer’s reasonable estimate of 

14 the maximum amount of any tax attributable to 

15 disputable items. 

16 ‘‘(B) SAFE HARBOR BASED ON 30-DAY

17 LETTER.—In the case of a taxpayer who has 

18 been issued a 30-day letter, the maximum 

19 amount of tax under subparagraph (A) shall 

20 not be less than the amount of the proposed de21 ficiency specified in such letter.

22 ‘‘(3) OTHER DEFINITIONS.—For purposes of 

23 paragraph (2)—
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1 ‘‘(A) DISPUTABLE ITEM.—The term ‘dis2 putable item’ means any item of income, gain, 

3 loss, deduction, or credit if the taxpayer—

4 ‘‘(i) has a reasonable basis for its 

5 treatment of such item, and 

6 ‘‘(ii) reasonably believes that the Sec7 retary also has a reasonable basis for dis8 allowing the taxpayer’s treatment of such 

9 item. 

10 ‘‘(B) 30-DAY LETTER.—The term ‘30-day 

11 letter’ means the first letter of proposed defi12 ciency which allows the taxpayer an opportunity 

13 for administrative review in the Internal Rev14 enue Service Office of Appeals. 

15 ‘‘(4) RATE OF INTEREST.—The rate of interest 

16 allowable under this subsection shall be the Federal 

17 short-term rate determined under section 6621(b), 

18 compounded daily. 

19 ‘‘(e) USE OF DEPOSITS.—

20 ‘‘(1) PAYMENT OF TAX.—Except as otherwise 

21 provided by the taxpayer, deposits shall be treated 

22 as used for the payment of tax in the order depos23 ited. 
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1 ‘‘(B) RETURNS OF DEPOSITS.—Deposits shall 

2 be treated as returned to the taxpayer on a last-in, 

3 first-out basis.’’. 

4 (b) CLERICAL AMENDMENT.—The table of sections 

5 for subchapter A of chapter 67 is amended by adding at 

6 the end the following new item:

‘‘Sec. 6603. Deposits made to suspend running of interest on potential underpayments, etc.’’.

7 (c) EFFECTIVE DATE.—

8 (1) IN GENERAL.—The amendments made by 

9 this section shall apply to deposits made after the 

10 date of the enactment of this Act. 

11 (2) COORDINATION WITH DEPOSITS MADE

12 UNDER REVENUE PROCEDURE 84–58.—In the case of 

13 an amount held by the Secretary of the Treasury or 

14 his delegate on the date of the enactment of this Act 

15 as a deposit in the nature of a cash bond deposit 

16 pursuant to Revenue Procedure 84–58, the date that 

17 the taxpayer identifies such amount as a deposit 

18 made pursuant to section 6603 of the Internal Rev19 enue Code (as added by this Act) shall be treated as 

20 the date such amount is deposited for purposes of 

21 such section 6603. 
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1 SEC. 304. EXPANSION OF INTEREST NETTING FOR INDIVID2 UALS. 

3 (a) IN GENERAL.—Subsection (d) of section 6621 

4 (relating to elimination of interest on overlapping periods 

5 of tax overpayments and underpayments) is amended by 

6 adding at the end the following: ‘‘Solely for purposes of 

7 the preceding sentence, section 6611(e) shall not apply in 

8 the case of an individual.’’. 

9 (b) EFFECTIVE DATE.—The amendment made by 

10 subsection (a) shall apply to interest accrued after Decem11 ber 31, 2003. 

12 SEC. 305. WAIVER OF CERTAIN PENALTIES FOR FIRST-TIME 

13 UNINTENTIONAL MINOR ERRORS. 

14 (a) IN GENERAL.—Section 6651 (relating to failure 

15 to file tax return or to pay tax) is amended by adding 

16 at the end the following new subsection: 

17 ‘‘(i) TREATMENT OF FIRST-TIME UNINTENTIONAL

18 MINOR ERRORS.—

19 ‘‘(1) IN GENERAL.—In the case of a return of 

20 tax imposed by subtitle A filed by an individual, the 

21 Secretary may waive an addition to tax under sub22 section (a) if—

23 ‘‘(A) the individual has a history of compli24 ance with the requirements of this title, 

25 ‘‘(B) it is shown that the failure is due to 

26 an unintentional minor error, 
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1 ‘‘(C) the penalty would be grossly dis2 proportionate to the action or expense that 

3 would have been needed to avoid the error, and 

4 imposing the penalty would be against equity 

5 and good conscience, 

6 ‘‘(D) waiving the penalty would promote 

7 compliance with the requirements of this title 

8 and effective tax administration, and 

9 ‘‘(E) the taxpayer took all reasonable steps 

10 to remedy the error promptly after discovering 

11 it. 

12 ‘‘(2) EXCEPTIONS.—Paragraph (1) shall not 

13 apply if—

14 ‘‘(A) the Secretary has waived any addition 

15 to tax under this subsection with respect to any 

16 prior failure by such individual, 

17 ‘‘(B) the failure is a mathematical or cler18 ical error (as defined in section 6213(g)(2)), or 

19 ‘‘(C) the failure is the lack of a required 

20 signature.’’. 

21 (b) EFFECTIVE DATE.—The amendment made by 

22 this section shall take effect on January 1, 2004.

23 SEC. 306. FRIVOLOUS TAX SUBMISSIONS. 

24 (a) CIVIL PENALTIES.—Section 6702 is amended to 

25 read as follows: 
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1 ‘‘SEC. 6702. FRIVOLOUS TAX SUBMISSIONS. 

2 ‘‘(a) CIVIL PENALTY FOR FRIVOLOUS TAX RE3 TURNS.—A person shall pay a penalty of $5,000 if—

4 ‘‘(1) such person files what purports to be a re5 turn of a tax imposed by this title but which—

6 ‘‘(A) does not contain information on 

7 which the substantial correctness of the self-as8 sessment may be judged, or 

9 ‘‘(B) contains information that on its face 

10 indicates that the self-assessment is substan11 tially incorrect; and 

12 ‘‘(2) the conduct referred to in paragraph (1)— 

13 ‘‘(A) is based on a position which the Sec14 retary has identified as frivolous under sub15 section (c), or 

16 ‘‘(B) reflects a desire to delay or impede 

17 the administration of Federal tax laws. 

18 ‘‘(b) CIVIL PENALTY FOR SPECIFIED FRIVOLOUS

19 SUBMISSIONS.—

20 ‘‘(1) IMPOSITION OF PENALTY.—Except as pro21 vided in paragraph (3), any person who submits a 

22 specified frivolous submission shall pay a penalty of 

23 $5,000. 

24 ‘‘(2) SPECIFIED FRIVOLOUS SUBMISSION.—For 

25 purposes of this section—
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1 ‘‘(A) SPECIFIED FRIVOLOUS SUBMIS2 SION.—The term ‘specified frivolous submis3 sion’ means a specified submission if any por4 tion of such submission is based on a position 

5 which the Secretary has identified as frivolous 

6 under subsection (c). 

7 ‘‘(B) SPECIFIED SUBMISSION.—The term 

8 ‘specified submission’ means—

9 ‘‘(i) a request for a hearing under—

10 ‘‘(I) section 6320 (relating to no11 tice and opportunity for hearing upon 

12 filing of notice of lien), or 

13 ‘‘(II) section 6330 (relating to 

14 notice and opportunity for hearing be15 fore levy), and 

16 ‘‘(ii) an application under—

17 ‘‘(I) section 7811 (relating to 

18 taxpayer assistance orders), 

19 ‘‘(II) section 6159 (relating to 

20 agreements for payment of tax liabil21 ity in installments), or 

22 ‘‘(III) section 7122 (relating to 

23 compromises). 

24 ‘‘(3) OPPORTUNITY TO WITHDRAW SUBMIS25 SION.—If the Secretary provides a person with no-
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1 tice that a submission is a specified frivolous sub2 mission and such person withdraws such submission 

3 within 30 days after such notice, the penalty im4 posed under paragraph (1) shall not apply with re5 spect to such submission. 

6 ‘‘(c) LISTING OF FRIVOLOUS POSITIONS.—The Sec7 retary shall prescribe (and periodically revise) a list of po8 sitions which the Secretary has identified as being frivo9 lous for purposes of this subsection. The Secretary shall 

10 not include in such list any position that the Secretary 

11 determines meets the requirement of section 

12 6662(d)(2)(B)(ii)(II). 

13 ‘‘(d) REDUCTION OF PENALTY.—The Secretary may 

14 reduce the amount of any penalty imposed under this sec15 tion if the Secretary determines that such reduction would 

16 promote compliance with and administration of the Fed17 eral tax laws. 

18 ‘‘(e) PENALTIES IN ADDITION TO OTHER PEN19 ALTIES.—The penalties imposed by this section shall be 

20 in addition to any other penalty provided by law.’’. 

21 (b) CLERICAL AMENDMENT.—The table of sections 

22 for part I of subchapter B of chapter 68 is amended by 

23 striking the item relating to section 6702 and inserting 

24 the following new item:

‘‘Sec. 6702. Frivolous tax submissions.’’.
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to submissions made and issues 

3 raised after the date on which the Secretary first pre4 scribes a list under section 6702(c) of the Internal Rev5 enue Code of 1986, as amended by subsection (a). 

6 SEC. 307. CLARIFICATION OF APPLICATION OF FEDERAL 

7 TAX DEPOSIT PENALTY. 

8 Nothing in section 6656 of the Internal Revenue 

9 Code of 1986 shall be construed to permit the percentage 

10 specified in subsection (b)(1)(A)(iii) thereof to apply other 

11 than in a case where the failure is for more than 15 days. 

12 Subtitle B—Fairness of Collection 

13 Procedures 

14 SEC. 311. PARTIAL PAYMENT OF TAX LIABILITY IN IN15 STALLMENT AGREEMENTS. 

16 (a) IN GENERAL.—

17 (1) Section 6159(a) (relating to authorization 

18 of agreements) is amended—

19 (A) by striking ‘‘satisfy liability for pay20 ment of’’ and inserting ‘‘make payment on’’, 

21 and 

22 (B) by inserting ‘‘full or partial’’ after ‘‘fa23 cilitate’’. 

24 (2) Section 6159(c) (relating to Secretary re25 quired to enter into installment agreements in cer-
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1 tain cases) is amended in the matter preceding para2 graph (1) by inserting ‘‘full’’ before ‘‘payment’’. 

3 (b) REQUIREMENT TO REVIEW PARTIAL PAYMENT

4 AGREEMENTS EVERY TWO YEARS.—Section 6159 is 

5 amended by redesignating subsections (d) and (e) as sub6 sections (e) and (f), respectively, and inserting after sub7 section (c) the following new subsection: 

8 ‘‘(d) SECRETARY REQUIRED TO REVIEW INSTALL9 MENT AGREEMENTS FOR PARTIAL COLLECTION EVERY

10 TWO YEARS.—In the case of an agreement entered into 

11 by the Secretary under subsection (a) for partial collection 

12 of a tax liability, the Secretary shall review the agreement 

13 at least once every 2 years.’’. 

14 (c) EFFECTIVE DATE.—The amendments made by 

15 this section shall apply to agreements entered into on or 

16 after the date of the enactment of this Act. 

17 SEC. 312. EXTENSION OF TIME FOR RETURN OF PROPERTY. 

18 (a) EXTENSION OF TIME FOR RETURN OF PROPERTY

19 SUBJECT TO LEVY.—Subsection (b) of section 6343 (re20 lating to return of property) is amended by striking ‘‘9 

21 months’’ and inserting ‘‘2 years’’. 

22 (b) PERIOD OF LIMITATION ON SUITS.—Subsection 

23 (c) of section 6532 (relating to suits by persons other than 

24 taxpayers) is amended—
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1 (1) in paragraph (1) by striking ‘‘9 months’’ 

2 and inserting ‘‘2 years’’, and 

3 (2) in paragraph (2) by striking ‘‘9-month’’ and 

4 inserting ‘‘2-year’’. 

5 (c) EFFECTIVE DATE.—The amendments made by 

6 this section shall apply to—

7 (1) levies made after the date of the enactment 

8 of this Act, and 

9 (2) levies made on or before such date if the 9-

10 month period has not expired under section 6343(b) 

11 of the Internal Revenue Code of 1986 (without re12 gard to this section) as of such date.

13 SEC. 313. INDIVIDUALS HELD HARMLESS ON WRONGFUL 

14 LEVY, ETC., ON INDIVIDUAL RETIREMENT 

15 PLAN. 

16 (a) IN GENERAL.—Section 6343 (relating to author17 ity to release levy and return property) is amended by add18 ing at the end the following new subsection: 

19 ‘‘(f) INDIVIDUALS HELD HARMLESS ON WRONGFUL

20 LEVY, ETC. ON INDIVIDUAL RETIREMENT PLAN.—

21 ‘‘(1) IN GENERAL.—If the Secretary determines 

22 that an individual retirement plan has been levied 

23 upon in a case to which subsection (b) or (d)(2)(A) 

24 applies, an amount equal to the sum of—
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1 ‘‘(A) the amount of money returned by the 

2 Secretary on account of such levy, and 

3 ‘‘(B) interest paid under subsection (c) on 

4 such amount of money, 

5 may be deposited into an individual retirement plan 

6 (other than an endowment contract) to which a roll7 over from the plan levied upon is permitted. 

8 ‘‘(2) TREATMENT AS ROLLOVER.—The distribu9 tion on account of the levy and any deposit under 

10 paragraph (1) with respect to such distribution shall 

11 be treated for purposes of this title as if such dis12 tribution and deposit were part of a rollover de13 scribed in section 408(d)(3)(A)(i); except that—

14 ‘‘(A) interest paid under subsection (c) 

15 shall be treated as part of such distribution and 

16 as not includible in gross income, 

17 ‘‘(B) the 60-day requirement in such sec18 tion shall be treated as met if the deposit is 

19 made not later than the 60th day after the day 

20 on which the individual receives an amount 

21 under paragraph (1) from the Secretary, and 

22 ‘‘(C) such deposit shall not be taken into 

23 account under section 408(d)(3)(B). 

24 ‘‘(3) REFUND, ETC., OF INCOME TAX ON

25 LEVY.—If any amount is includible in gross income 
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1 for a taxable year by reason of a levy referred to in 

2 paragraph (1) and any portion of such amount is 

3 treated as a rollover under paragraph (2), any tax 

4 imposed by chapter 1 on such portion shall not be 

5 assessed, and if assessed shall be abated, and if col6 lected shall be credited or refunded as an overpay7 ment made on the due date for filing the return of 

8 tax for such taxable year. 

9 ‘‘(4) INTEREST.—Notwithstanding subsection 

10 (d), interest shall be allowed under subsection (c) in 

11 a case in which the Secretary makes a determination 

12 described in subsection (d)(2)(A) with respect to a 

13 levy upon an individual retirement plan.’’. 

14 (b) EFFECTIVE DATE.—The amendment made by 

15 this section shall apply to amounts paid under subsections 

16 (b), (c), and (d)(2)(A) of section 6343 of the Internal Rev17 enue Code of 1986 after December 31, 2003. 

18 SEC. 314. SEVEN-DAY THRESHOLD ON TOLLING OF STAT19 UTE OF LIMITATIONS DURING TAX REVIEW. 

20 (a) IN GENERAL.—Section 7811(d)(1) (relating to 

21 suspension of running of period of limitation) is amended 

22 by inserting after ‘‘application,’’ the following: ‘‘but only 

23 if the date of such decision is at least 7 days after the 

24 date of the taxpayer’s application’’. 
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1 (b) EFFECTIVE DATE.—The amendment made by 

2 this section shall apply to applications filed after the date 

3 of the enactment of this Act. 

4 SEC. 315. STUDY OF LIENS AND LEVIES. 

5 The Secretary of the Treasury, or the Secretary’s del6 egate, shall conduct a study of the practices of the Inter7 nal Revenue Service concerning liens and levies. The study 

8 shall examine—

9 (1) the declining use of liens and levies by the 

10 Internal Revenue Service, and 

11 (2) the practicality of recording liens and

12 levying against property in cases in which the cost 

13 of such actions exceeds the amount to be realized 

14 from such property. 

15 Not later than 1 year after the date of the enactment of 

16 this Act, the Secretary shall submit such study to the 

17 Committee on Ways and Means of the House of Rep18 resentatives and the Committee on Finance of the Senate. 
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1 Subtitle C—Tax Administration 

2 Reforms 

3 SEC. 331. REVISIONS RELATING TO TERMINATION OF EM4 PLOYMENT OF INTERNAL REVENUE SERVICE 

5 EMPLOYEES FOR MISCONDUCT. 

6 (a) IN GENERAL.—Subchapter A of chapter 80 (re7 lating to application of internal revenue laws) is amended 

8 by inserting after section 7804 the following new section: 

9 ‘‘SEC. 7804A. DISCIPLINARY ACTIONS FOR MISCONDUCT. 

10 ‘‘(a) DISCIPLINARY ACTIONS.—

11 ‘‘(1) IN GENERAL.—Subject to subsection (c), 

12 the Commissioner shall take an action in accordance 

13 with the guidelines established under paragraph (2) 

14 against any employee of the Internal Revenue Serv15 ice if there is a final administrative or judicial deter16 mination that such employee committed any act or 

17 omission described under subsection (b) in the per18 formance of the employee’s official duties or where 

19 a nexus to the employee’s position exists. 

20 ‘‘(2) GUIDELINES.—The Commissioner shall 

21 issue guidelines for determining the appropriate level 

22 of discipline, up to and including termination of em23 ployment, for committing any act or omission de24 scribed under subsection (b). 
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1 ‘‘(b) ACTS OR OMISSIONS.—The acts or omissions de2 scribed under this subsection are—

3 ‘‘(1) willful failure to obtain the required ap4 proval signatures on documents authorizing the sei5 zure of a taxpayer’s home, personal belongings, or 

6 business assets; 

7 ‘‘(2) willfully providing a false statement under 

8 oath with respect to a material matter involving a 

9 taxpayer or taxpayer representative; 

10 ‘‘(3) with respect to a taxpayer or taxpayer rep11 resentative, the willful violation of—

12 ‘‘(A) any right under the Constitution of 

13 the United States; 

14 ‘‘(B) any civil right established under—

15 ‘‘(i) title VI or VII of the Civil Rights 

16 Act of 1964; 

17 ‘‘(ii) title IX of the Education Amend18 ments of 1972; 

19 ‘‘(iii) the Age Discrimination in Em20 ployment Act of 1967; 

21 ‘‘(iv) the Age Discrimination Act of 

22 1975; 

23 ‘‘(v) section 501 or 504 of the Reha24 bilitation Act of 1973; or
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1 ‘‘(vi) title I of the Americans with 

2 Disabilities Act of 1990; or 

3 ‘‘(C) the Internal Revenue Service policy 

4 on unauthorized inspection of returns or return 

5 information; 

6 ‘‘(4) willfully falsifying or destroying documents 

7 to conceal mistakes made by any employee with re8 spect to a matter involving a taxpayer or taxpayer 

9 representative; 

10 ‘‘(5) assault or battery on a taxpayer or tax11 payer representative, but only if there is a criminal 

12 conviction, or a final adverse judgment by a court in 

13 a civil case, with respect to the assault or battery; 

14 ‘‘(6) willful violations of this title, Department 

15 of the Treasury regulations, or policies of the Inter16 nal Revenue Service (including the Internal Revenue 

17 Manual) for the purpose of retaliating against, or 

18 harassing, a taxpayer or taxpayer representative; 

19 ‘‘(7) willful misuse of the provisions of section 

20 6103 for the purpose of concealing information from 

21 a congressional inquiry; 

22 ‘‘(8) willful failure to file any return of tax re23 quired under this title on or before the date pre24 scribed therefor (including any extensions) when a 
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1 tax is due and owing, unless such failure is due to 

2 reasonable cause and not due to willful neglect; 

3 ‘‘(9) willful understatement of Federal tax li4 ability, unless such understatement is due to reason5 able cause and not due to willful neglect; and 

6 ‘‘(10) threatening to audit a taxpayer, or to 

7 take other action under this title, for the purpose of 

8 extracting personal gain or benefit. 

9 ‘‘(c) DETERMINATIONS OF COMMISSIONER.—

10 ‘‘(1) IN GENERAL.—The Commissioner may 

11 take a personnel action other than a disciplinary ac12 tion provided for in the guidelines under subsection 

13 (a)(2) for an act or omission described under sub14 section (b). 

15 ‘‘(2) DISCRETION.—The exercise of authority 

16 under paragraph (1) shall be at the sole discretion 

17 of the Commissioner and may not be delegated to 

18 any other officer. The Commissioner, in his sole dis19 cretion, may establish a procedure to determine if an 

20 individual should be referred to the Commissioner 

21 for a determination by the Commissioner under 

22 paragraph (1). 

23 ‘‘(3) NO APPEAL.—Notwithstanding any other 

24 provision of law, any determination of the Commis25 sioner under this subsection may not be reviewed in 
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1 any administrative or judicial proceeding. A finding 

2 that an act or omission described under subsection 

3 (b) occurred may be reviewed. 

4 ‘‘(d) DEFINITION.—For the purposes of the provi5 sions described in clauses (i), (ii), and (iv) of subsection 

6 (b)(3)(B), references to a program or activity regarding 

7 Federal financial assistance or an education program or 

8 activity receiving Federal financial assistance shall include 

9 any program or activity conducted by the Internal Rev10 enue Service for a taxpayer. 

11 ‘‘(e) ANNUAL REPORT.—The Commissioner shall 

12 submit to Congress annually a report on disciplinary ac13 tions under this section.’’. 

14 (b) CLERICAL AMENDMENT.—The table of sections 

15 for chapter 80 is amended by inserting after the item re16 lating to section 7804 the following new item:

‘‘Sec. 7804A. Disciplinary actions for misconduct.’’.

17 (c) REPEAL OF SUPERSEDED SECTION.—Section 

18 1203 of the Internal Revenue Service Restructuring and 

19 Reform Act of 1998 (Public Law 105–206; 112 Stat. 720) 

20 is repealed. 

21 (d) EFFECTIVE DATE.—The amendments made by 

22 this section shall take effect on the date of the enactment 

23 of this Act. 
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1 SEC. 332. CONFIRMATION OF AUTHORITY OF TAX COURT 

2 TO APPLY DOCTRINE OF EQUITABLE 

3 RECOUPMENT. 

4 (a) CONFIRMATION OF AUTHORITY OF TAX COURT

5 TO APPLY DOCTRINE OF EQUITABLE RECOUPMENT.—

6 Subsection (b) of section 6214 (relating to jurisdiction 

7 over other years and quarters) is amended by adding at 

8 the end the following new sentence: ‘‘Notwithstanding the 

9 preceding sentence, the Tax Court may apply the doctrine 

10 of equitable recoupment to the same extent that it is avail11 able in civil tax cases before the district courts of the 

12 United States and the United States Court of Federal 

13 Claims.’’. 

14 (b) EFFECTIVE DATE.—The amendments made by 

15 this section shall apply to any action or proceeding in the 

16 Tax Court with respect to which a decision has not become 

17 final (as determined under section 7481 of the Internal 

18 Revenue Code of 1986) as of the date of the enactment 

19 of this Act. 

20 SEC. 333. JURISDICTION OF TAX COURT OVER COLLECTION 

21 DUE PROCESS CASES. 

22 (a) IN GENERAL.—Section 6330(d)(1) (relating to 

23 judicial review of determination) is amended to read as 

24 follows: 

25 ‘‘(1) JUDICIAL REVIEW OF DETERMINATION.—

26 The person may, within 30 days of a determination 
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1 under this section, appeal such determination to the 

2 Tax Court (and the Tax Court shall have jurisdic3 tion with respect to such matter).’’. 

4 (b) EFFECTIVE DATE.—The amendment made by 

5 subsection (a) shall apply to judicial appeals filed after 

6 the date of the enactment of this Act. 

7 SEC. 334. OFFICE OF CHIEF COUNSEL REVIEW OF OFFERS 

8 IN COMPROMISE. 

9 (a) IN GENERAL.—Section 7122(b) (relating to 

10 record) is amended by striking ‘‘Whenever a compromise’’ 

11 and all that follows through ‘‘his delegate’’ and inserting 

12 ‘‘If the Secretary determines that an opinion of the Gen13 eral Counsel for the Department of the Treasury, or the 

14 Counsel’s delegate, is required with respect to a com15 promise, there shall be placed on file in the office of the 

16 Secretary such opinion’’. 

17 (b) CONFORMING AMENDMENTS.—Section 7122(b) is 

18 amended by striking the second and third sentences. 

19 (c) EFFECTIVE DATE.—The amendments made by 

20 this section shall apply to offers-in-compromise submitted 

21 or pending on or after the date of the enactment of this 

22 Act.
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1 SEC. 335. ACCESS OF NATIONAL TAXPAYER ADVOCATE TO 

2 INDEPENDENT LEGAL COUNSEL. 

3 Clause (i) of section 7803(c)(2)(D) (relating to per4 sonnel actions) is amended by striking ‘‘and’’ at the end 

5 of subclause (I), by striking the period at the end of sub6 clause (II) and inserting ‘‘, and’’, and by adding at the 

7 end the following new subclause: 

8 ‘‘(III) appoint a counsel in the 

9 Office of the Taxpayer Advocate to re10 port solely to the National Taxpayer 

11 Advocate.’’. 

12 SEC. 336. PAYMENT OF MOTOR FUEL EXCISE TAX REFUNDS 

13 BY DIRECT DEPOSIT. 

14 (a) IN GENERAL.—Subchapter II of chapter 33 of 

15 title 31, United States Code, is amended by adding at the 

16 end the following new section: 

17 ‘‘§ 3337. Payment of motor fuel excise tax refunds by 

18 direct deposit 

19 ‘‘The Secretary of the Treasury shall make payments 

20 under sections 6420, 6421, and 6427 of the Internal Rev21 enue Code of 1986 by electronic funds transfer (as defined 

22 in section 3332(j)(1)) if the person who is entitled to the 

23 payment—

24 ‘‘(1) elects to receive the payment by electronic 

25 funds transfer; and 
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1 ‘‘(2) satisfies the requirements of section 

2 3332(g) with respect to such payment at such time 

3 and in such manner as the Secretary may require.’’. 

4 (b) CLERICAL AMENDMENT.—The table of sections 

5 for subchapter II of chapter 33 of title 31, United States 

6 Code, is amended by adding at the end the following new 

7 item:

‘‘3337. Payment of motor fuel excise tax refunds by direct deposit.’’.

8 SEC. 337. FAMILY BUSINESS TAX SIMPLIFICATION. 

9 (a) IN GENERAL.—Section 761 (defining terms for 

10 purposes of partnerships) is amended by redesignating 

11 subsection (f) as subsection (g) and by inserting after sub12 section (e) the following new subsection: 

13 ‘‘(f) QUALIFIED JOINT VENTURE.—

14 ‘‘(1) IN GENERAL.—In the case of a qualified 

15 joint venture conducted by a husband and wife who 

16 file a joint return for the taxable year, for purposes 

17 of this title—

18 ‘‘(A) such joint venture shall not be treat19 ed as a partnership, 

20 ‘‘(B) all items of income, gain, loss, deduc21 tion, and credit shall be divided between the 

22 spouses in accordance with their respective in23 terests in the venture, and 

24 ‘‘(C) each spouse shall take into account 

25 such spouse’s respective share of such items as 
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1 if they were attributable to a trade or business 

2 conducted by such spouse as a sole proprietor. 

3 ‘‘(2) QUALIFIED JOINT VENTURE.—For pur4 poses of paragraph (1), the term ‘qualified joint ven5 ture’ means any joint venture involving the conduct 

6 of a trade or business if—

7 ‘‘(A) the only members of such joint ven8 ture are a husband and wife, 

9 ‘‘(B) both spouses materially participate 

10 (within the meaning of section 469(h) without 

11 regard to paragraph (5) thereof) in such trade 

12 or business, and 

13 ‘‘(C) both spouses elect the application of 

14 this subsection.’’. 

15 (b) NET EARNINGS FROM SELF-EMPLOYMENT.—

16 (1) Subsection (a) of section 1402 (defining net 

17 earnings from self-employment) is amended by strik18 ing ‘‘and’’ at the end of paragraph (14), by striking 

19 the period at the end of paragraph (15) and insert20 ing ‘‘; and’’, and by inserting after paragraph (15) 

21 the following new paragraph: 

22 ‘‘(16) notwithstanding the preceding provisions 

23 of this subsection, each spouse’s share of income or 

24 loss from a qualified joint venture shall be taken 

25 into account as provided in section 761(f) in deter-
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1 mining net earnings from self-employment of such 

2 spouse.’’. 

3 (2) Subsection (a) of section 211 of the Social 

4 Security Act (defining net earnings from self-em5 ployment) is amended by striking ‘‘and’’ at the end 

6 of paragraph (14), by striking the period at the end 

7 of paragraph (15) and inserting ‘‘; and’’, and by in8 serting after paragraph (15) the following new para9 graph: 

10 ‘‘(16) Notwithstanding the preceding provisions 

11 of this subsection, each spouse’s share of income or 

12 loss from a qualified joint venture shall be taken 

13 into account as provided in section 761(f) of the In14 ternal Revenue Code of 1986 in determining net 

15 earnings from self-employment of such spouse.’’. 

16 (c) EFFECTIVE DATE.—The amendments made by 

17 this section shall apply to taxable years beginning after 

18 December 31, 2002. 

19 SEC. 338. SUSPENSION OF TAX-EXEMPT STATUS OF TER20 RORIST ORGANIZATIONS. 

21 (a) IN GENERAL.—Section 501 (relating to exemp22 tion from tax on corporations, certain trusts, etc.) is 

23 amended by redesignating subsection (p) as subsection (q) 

24 and by inserting after subsection (o) the following new 

25 subsection: 
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1 ‘‘(p) SUSPENSION OF TAX-EXEMPT STATUS OF TER2 RORIST ORGANIZATIONS.—

3 ‘‘(1) IN GENERAL.—The exemption from tax 

4 under subsection (a) with respect to any organiza5 tion described in paragraph (2), and the eligibility of 

6 any organization described in paragraph (2) to apply 

7 for recognition of exemption under subsection (a), 

8 shall be suspended during the period described in 

9 paragraph (3). 

10 ‘‘(2) TERRORIST ORGANIZATIONS.—An organi11 zation is described in this paragraph if such organi12 zation is designated or otherwise individually identi13 fied— 

14 ‘‘(A) under section 212(a)(3)(B)(vi)(II) or 

15 219 of the Immigration and Nationality Act as 

16 a terrorist organization or foreign terrorist or17 ganization, 

18 ‘‘(B) in or pursuant to an Executive order 

19 which is related to terrorism and issued under 

20 the authority of the International Emergency 

21 Economic Powers Act or section 5 of the 

22 United Nations Participation Act of 1945 for 

23 the purpose of imposing on such organization 

24 an economic or other sanction, or
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1 ‘‘(C) in or pursuant to an Executive order 

2 issued under the authority of any Federal law 

3 if—

4 ‘‘(i) the organization is designated or 

5 otherwise individually identified in or pur6 suant to such Executive order as sup7 porting or engaging in terrorist activity (as 

8 defined in section 212(a)(3)(B) of the Im9 migration and Nationality Act) or sup10 porting terrorism (as defined in section 

11 140(d)(2) of the Foreign Relations Author12 ization Act, Fiscal Years 1988 and 1989); 

13 and 

14 ‘‘(ii) such Executive order refers to 

15 this subsection. 

16 ‘‘(3) PERIOD OF SUSPENSION.—With respect to 

17 any organization described in paragraph (2), the pe18 riod of suspension—

19 ‘‘(A) begins on the later of—

20 ‘‘(i) the date of the first publication of 

21 a designation or identification described in 

22 paragraph (2) with respect to such organi23 zation, or 

24 ‘‘(ii) the date of the enactment of this 

25 subsection, and 
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1 ‘‘(B) ends on the first date that all des2 ignations and identifications described in para3 graph (2) with respect to such organization are 

4 rescinded pursuant to the law or Executive 

5 order under which such designation or identi6 fication was made. 

7 ‘‘(4) DENIAL OF DEDUCTION.—No deduction 

8 shall be allowed under section 170, 545(b)(2), 

9 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522 for 

10 any contribution to an organization described in 

11 paragraph (2) during the period described in para12 graph (3). 

13 ‘‘(5) DENIAL OF ADMINISTRATIVE OR JUDICIAL

14 CHALLENGE OF SUSPENSION OR DENIAL OF DEDUC15 TION.—Notwithstanding section 7428 or any other 

16 provision of law, no organization or other person 

17 may challenge a suspension under paragraph (1), a 

18 designation or identification described in paragraph 

19 (2), the period of suspension described in paragraph 

20 (3), or a denial of a deduction under paragraph (4) 

21 in any administrative or judicial proceeding relating 

22 to the Federal tax liability of such organization or 

23 other person. 

24 ‘‘(6) ERRONEOUS DESIGNATION.—

25 ‘‘(A) IN GENERAL.—If—
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1 ‘‘(i) the tax exemption of any organi2 zation described in paragraph (2) is sus3 pended under paragraph (1), 

4 ‘‘(ii) each designation and identifica5 tion described in paragraph (2) which has 

6 been made with respect to such organiza7 tion is determined to be erroneous pursu8 ant to the law or Executive order under 

9 which such designation or identification 

10 was made, and 

11 ‘‘(iii) the erroneous designations and 

12 identifications result in an overpayment of 

13 income tax for any taxable year by such 

14 organization, 

15 credit or refund (with interest) with respect to 

16 such overpayment shall be made. 

17 ‘‘(B) WAIVER OF LIMITATIONS.—If the 

18 credit or refund of any overpayment of tax de19 scribed in subparagraph (A)(iii) is prevented at 

20 any time by the operation of any law or rule of 

21 law (including res judicata), such credit or re22 fund may nevertheless be allowed or made if the 

23 claim therefor is filed before the close of the 1-

24 year period beginning on the date of the last 
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1 determination described in subparagraph 

2 (A)(ii). 

3 ‘‘(7) NOTICE OF SUSPENSIONS.—If the tax ex4 emption of any organization is suspended under this 

5 subsection, the Internal Revenue Service shall up6 date the listings of tax-exempt organizations and 

7 shall publish appropriate notice to taxpayers of such 

8 suspension and of the fact that contributions to such 

9 organization are not deductible during the period of 

10 such suspension.’’. 

11 (b) EFFECTIVE DATE.—The amendments made by 

12 this section shall apply to designations made before, on, 

13 or after the date of the enactment of this Act. 

14 SEC. 339. TAX REFUND ANTICIPATION LOANS. 

15 The Secretary of the Treasury may not provide any 

16 direct deposit indicator with respect to a taxpayer to any 

17 tax return preparer, financial institution, or other person 

18 that charges taxpayers interest rates (including fees) on 

19 refund anticipation loans in excess of the consumer loan 

20 usury rate limit of the State in which the taxpayer is domi21 ciled. 

22 SEC. 340. FAIRNESS IN TAX AUDIT COVERAGE. 

23 (a) MANDATORY AUDITS OF HIGH RISK TAX24 PAYERS.—The Secretary of the Treasury shall conduct au-
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1 dits of all taxpayers whom the Secretary determines are 

2 likely to have—

3 (1) an unpaid Federal income tax liability of 

4 more than $1,000,000, or 

5 (2) to have unreported income or structured 

6 transactions which are considered by the Secretary 

7 to be high risk. 

8 (b) RATE OF AUDITS.—The Secretary of the Treas9 ury shall conduct audits of high income taxpayers likely 

10 to owe taxes at a rate which is not less than the rate at 

11 which the Secretary conducts audits of low income tax12 payers likely to owe taxes. 

13 Subtitle D—Confidentiality and 

14 Disclosure 

15 SEC. 341. COLLECTION ACTIVITIES WITH RESPECT TO 

16 JOINT RETURN DISCLOSABLE TO EITHER 

17 SPOUSE BASED ON ORAL REQUEST. 

18 (a) IN GENERAL.—Paragraph (8) of section 6103(e) 

19 (relating to disclosure of collection activities with respect 

20 to joint return) is amended by striking ‘‘in writing’’ the 

21 first place it appears. 

22 (b) EFFECTIVE DATE.—The amendment made by 

23 this section shall apply to requests made after the date 

24 of the enactment of this Act. 
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1 SEC. 342. TAXPAYER REPRESENTATIVES NOT SUBJECT TO 

2 EXAMINATION ON SOLE BASIS OF REPRESEN3 TATION OF TAXPAYERS. 

4 (a) IN GENERAL.—Paragraph (1) of section 6103(h) 

5 (relating to disclosure to certain Federal officers and em6 ployees for purposes of tax administration, etc.) is amend7 ed—

8 (1) by striking ‘‘Returns’’ and inserting the fol9 lowing: 

10 ‘‘(A) IN GENERAL.—Returns’’, and 

11 (2) by adding at the end the following new sub12 paragraph: 

13 ‘‘(B) TAXPAYER REPRESENTATIVES.—Not14 withstanding subparagraph (A), the return of 

15 the representative of a taxpayer whose return is 

16 being examined by an officer or employee of the 

17 Department of the Treasury shall not be open 

18 to inspection by such officer or employee on the 

19 sole basis of the representative’s relationship to 

20 the taxpayer unless a supervisor of such officer 

21 or employee has approved the inspection of the 

22 return of such representative on a basis other 

23 than by reason of such relationship.’’. 

24 (b) EFFECTIVE DATE.—The amendment made by 

25 this section shall take effect on the date which is 180 days 

26 after the date of the enactment of this Act.
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1 SEC. 343. DISCLOSURE IN JUDICIAL OR ADMINISTRATIVE 

2 TAX PROCEEDINGS OF RETURN AND RETURN 

3 INFORMATION OF PERSONS WHO ARE NOT 

4 PARTY TO SUCH PROCEEDINGS. 

5 (a) IN GENERAL.—Paragraph (4) of section 6103(h) 

6 (relating to disclosure to certain Federal officers and em7 ployees for purposes of tax administration, etc.) is amend8 ed by adding at the end the following new subparagraph: 

9 ‘‘(B) DISCLOSURE IN JUDICIAL OR ADMIN10 ISTRATIVE TAX PROCEEDINGS OF RETURN AND

11 RETURN INFORMATION OF PERSONS NOT PARTY

12 TO SUCH PROCEEDINGS.—

13 ‘‘(i) NOTICE.—Return or return infor14 mation of any person who is not a party to 

15 a judicial or administrative proceeding de16 scribed in this paragraph shall not be dis17 closed under clause (ii) or (iii) of subpara18 graph (A) until after the Secretary makes 

19 a reasonable effort to give notice to such 

20 person and an opportunity for such person 

21 to request the deletion of matter from such 

22 return or return information, including any 

23 of the items referred to in paragraphs (1) 

24 through (7) of section 6110(c). Such notice 

25 shall include a statement of the issue or 

26 issues the resolution of which is the reason 
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1 such return or return information is 

2 sought. In the case of S corporations, part3 nerships, estates, and trusts, such notice 

4 shall be made at the entity level. 

5 ‘‘(ii) DISCLOSURE LIMITED TO PERTI6 NENT PORTION.—The only portion of a re7 turn or return information described in 

8 clause (i) which may be disclosed under 

9 subparagraph (A) is that portion of such 

10 return or return information that directly 

11 relates to the resolution of an issue in such 

12 proceeding. 

13 ‘‘(iii) EXCEPTIONS.—Clause (i) shall 

14 not apply—

15 ‘‘(I) to any civil action under sec16 tion 7407, 7408, or 7409, 

17 ‘‘(II) to any ex parte proceeding 

18 for obtaining a search warrant, order 

19 for entry on premises or safe deposit 

20 boxes, or similar ex parte proceeding, 

21 ‘‘(III) to disclosure of third party 

22 return information by indictment or 

23 criminal information, or 

24 ‘‘(IV) if the Attorney General or 

25 the Attorney General’s delegate deter-
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1 mines that the application of such 

2 clause would seriously impair a crimi3 nal tax investigation or proceeding.’’. 

4 (b) CONFORMING AMENDMENTS.—Paragraph (4) of 

5 section 6103(h) is amended by—

6 (1) by striking ‘‘PROCEEDINGS.—A return’’ and 

7 inserting ‘‘PROCEEDINGS.—

8 ‘‘(A) IN GENERAL.—Except as provided in 

9 subparagraph (B), a return’’; 

10 (2) by redesignating subparagraphs (A), (B), 

11 (C), and (D) as clauses (i), (ii), (iii), and (iv), re12 spectively; and 

13 (3) in the matter following clause (iv) (as so re14 designated), by striking ‘‘subparagraph (A), (B), or 

15 (C)’’ and inserting ‘‘clause (i), (ii), or (iii)’’ and by 

16 moving such matter 2 ems to the right. 

17 (c) EFFECTIVE DATE.—The amendments made by 

18 this section shall apply to proceedings commenced after 

19 the date of the enactment of this Act. 

20 SEC. 344. PROHIBITION OF DISCLOSURE OF TAXPAYER 

21 IDENTIFICATION INFORMATION WITH RE22 SPECT TO DISCLOSURE OF ACCEPTED OF23 FERS-IN-COMPROMISE. 

24 (a) GENERAL.—Paragraph (1) of section 6103(k) 

25 (relating to disclosure of certain returns and return infor-
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1 mation for tax administrative purposes) is amended by in2 serting ‘‘(other than the taxpayer’s address and TIN)’’ 

3 after ‘‘Return information’’. 

4 (b) EFFECTIVE DATE.—The amendment made by 

5 this section shall apply to disclosures made after the date 

6 of the enactment of this Act. 

7 SEC. 345. COMPLIANCE BY CONTRACTORS WITH CONFIDEN8 TIALITY SAFEGUARDS. 

9 (a) IN GENERAL.—Section 6103(p) (relating to State 

10 law requirements) is amended by adding at the end the 

11 following new paragraph: 

12 ‘‘(9) DISCLOSURE TO CONTRACTORS AND

13 OTHER AGENTS.—Notwithstanding any other provi14 sion of this section, no return or return information 

15 shall be disclosed to any contractor or other agent 

16 of a Federal, State, or local agency unless such 

17 agency, to the satisfaction of the Secretary—

18 ‘‘(A) has requirements in effect which re19 quire each such contractor or other agent which 

20 would have access to returns or return informa21 tion to provide safeguards (within the meaning 

22 of paragraph (4)) to protect the confidentiality 

23 of such returns or return information, 

24 ‘‘(B) agrees to conduct an annual, on-site 

25 review (mid-point review in the case of con-
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1 tracts of less than 1 year in duration) of each 

2 such contractor or other agent to determine 

3 compliance with such requirements, 

4 ‘‘(C) submits the findings of the most re5 cent review conducted under subparagraph (B) 

6 to the Secretary as part of the report required 

7 by paragraph (4)(E), and 

8 ‘‘(D) certifies to the Secretary for the most 

9 recent annual period that each such contractor 

10 or other agent is in compliance with all such re11 quirements. 

12 The certification required by subparagraph (D) shall 

13 include the name and address of each contractor and 

14 other agent, a description of the contract of the con15 tractor or other agent with the agency, and the du16 ration of such contract.’’. 

17 (b) CONFORMING AMENDMENT.—Subparagraph (B) 

18 of section 6103(p)(8) is amended by inserting ‘‘or para19 graph (9)’’ after ‘‘subparagraph (A)’’. 

20 (c) EFFECTIVE DATE.—

21 (1) IN GENERAL.—The amendments made by 

22 this section shall apply to disclosures made after De23 cember 31, 2003. 

24 (2) CERTIFICATIONS.—The first certification 

25 under section 6103(p)(9)(D) of the Internal Revenue 
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1 Code of 1986, as added by subsection (a), shall be 

2 made with respect to calendar year 2004. 

3 SEC. 346. HIGHER STANDARDS FOR REQUESTS FOR AND 

4 CONSENTS TO DISCLOSURE. 

5 (a) IN GENERAL.—Subsection (c) of section 6103 

6 (relating to disclosure of returns and return information 

7 to designee of taxpayer) is amended by adding at the end 

8 the following new paragraphs: 

9 ‘‘(2) REQUIREMENTS FOR VALID REQUESTS

10 AND CONSENTS.—A request for or consent to disclo11 sure under paragraph (1) shall only be valid for pur12 poses of this section, sections 7213, 7213A, and 

13 7431 if—

14 ‘‘(A) at the time of execution, such request 

15 or consent designates a recipient of such disclo16 sure and is dated, and 

17 ‘‘(B) at the time such request or consent 

18 is submitted to the Secretary, the submitter of 

19 such request or consent certifies, under penalty 

20 of perjury, that such request or consent com21 plied with subparagraph (A). 

22 ‘‘(3) RESTRICTIONS ON PERSONS OBTAINING

23 INFORMATION.—Any person shall, as a condition for 

24 receiving return or return information under para25 graph (1)—
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1 ‘‘(A) ensure that such return and return 

2 information is kept confidential, 

3 ‘‘(B) use such return and return informa4 tion only for the purpose for which it was re5 quested, and 

6 ‘‘(C) not disclose such return and return 

7 information except to accomplish the purpose 

8 for which it was requested, unless a separate 

9 consent from the taxpayer is obtained. 

10 ‘‘(4) REQUIREMENTS FOR FORM PRESCRIBED

11 BY SECRETARY.—For purposes of this subsection, 

12 the Secretary shall prescribe a form for requests and 

13 consents which shall— 

14 ‘‘(A) contain a warning, prominently dis15 played, informing the taxpayer that the form 

16 should not be signed unless it is completed, 

17 ‘‘(B) state that if the taxpayer believes 

18 there is an attempt to coerce him to sign an in19 complete or blank form, the taxpayer should re20 port the matter to the Treasury Inspector Gen21 eral for Tax Administration, and 

22 ‘‘(C) contain the address and telephone 

23 number of the Treasury Inspector General for 

24 Tax Administration.’’. 
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1 (b) REPORT.—Not later than 18 months after the 

2 date of the enactment of this Act, the Treasury Inspector 

3 General for Tax Administration shall submit a report to 

4 the Congress on compliance with the designation and cer5 tification requirements applicable to requests for or con6 sent to disclosure of returns and return information under 

7 section 6103(c) of the Internal Revenue Code of 1986, as 

8 amended by subsection (a). Such report shall—

9 (1) evaluate (on the basis of random sampling) 

10 whether—

11 (A) the amendment made by subsection (a) 

12 is achieving the purposes of this section; 

13 (B) requesters and submitters for such dis14 closure are continuing to evade the purposes of 

15 this section and, if so, how; and 

16 (C) the sanctions for violations of such re17 quirements are adequate; and 

18 (2) include such recommendations that the 

19 Treasury Inspector General for Tax Administration 

20 considers necessary or appropriate to better achieve 

21 the purposes of this section. 

22 (c) CONFORMING AMENDMENTS.—

23 (1) Section 6103(c) is amended by striking 

24 ‘‘TAXPAYER.—The Secretary’’ and inserting ‘‘TAX25 PAYER.—
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1 ‘‘(1) IN GENERAL.—The Secretary’’. 

2 (2) Section 7213(a)(1) is amended by striking 

3 ‘‘section 6103(n)’’ and inserting ‘‘subsections (c) 

4 and (n) of section 6103’’. 

5 (3) Section 7213A(a)(1)(B) is amended by 

6 striking ‘‘subsection (l)(18) or (n) of section 6103’’ 

7 and inserting ‘‘subsection (c), (l)(18), or (n) of sec8 tion 6103’’. 

9 (d) EFFECTIVE DATE.—The amendments made by 

10 this section shall apply to requests and consents made 

11 after 3 months after the date of the enactment of this 

12 Act. 

13 SEC. 347. NOTICE TO TAXPAYER CONCERNING ADMINIS14 TRATIVE DETERMINATION OF BROWSING; AN15 NUAL REPORT. 

16 (a) NOTICE TO TAXPAYER.—Subsection (e) of section 

17 7431 (relating to notification of unlawful inspection and 

18 disclosure) is amended by adding at the end the following: 

19 ‘‘The Secretary shall also notify such taxpayer if the 

20 Treasury Inspector General for Tax Administration sub21 stantiates that such taxpayer’s return or return informa22 tion was inspected or disclosed in violation of any of the 

23 provisions specified in paragraph (1), (2), or (3).’’. 
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1 (b) REPORTS.—Subsection (p) of section 6103 (relat2 ing to procedure and recordkeeping), is amended by add3 ing at the end the following new paragraph: 

4 ‘‘(10) REPORT ON UNAUTHORIZED DISCLOSURE

5 AND INSPECTION.—As part of the report required by 

6 paragraph (3)(C) for each calendar year, the Sec7 retary shall furnish information regarding the unau8 thorized disclosure and inspection of returns and re9 turn information, including the number, status, and 

10 results of—

11 ‘‘(A) administrative investigations, 

12 ‘‘(B) civil lawsuits brought under section 

13 7431 (including the amounts for which such 

14 lawsuits were settled and the amounts of dam15 ages awarded), and 

16 ‘‘(C) criminal prosecutions.’’. 

17 (c) EFFECTIVE DATE.—

18 (1) NOTICE.—The amendment made by sub19 section (a) shall apply to determinations made after 

20 the date of the enactment of this Act. 

21 (2) REPORTS.—The amendment made by sub22 section (b) shall apply to calendar years ending after 

23 the date of the enactment of this Act. 
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1 SEC. 348. EXPANDED DISCLOSURE IN EMERGENCY CIR2 CUMSTANCES. 

3 (a) IN GENERAL.—Section 6103(i)(3)(B) (relating to 

4 danger of death or physical injury) is amended by striking 

5 ‘‘or State’’ and inserting ‘‘, State, or local’’. 

6 (b) EFFECTIVE DATE.—The amendment made by 

7 this section shall take effect on the date of the enactment 

8 of this Act. 

9 SEC. 349. DISCLOSURE OF TAXPAYER IDENTITY FOR TAX 

10 REFUND PURPOSES. 

11 (a) IN GENERAL.—Paragraph (1) of section 6103(m) 

12 (relating to disclosure of taxpayer identity information) is 

13 amended by striking ‘‘and other media’’ and by inserting 

14 ‘‘, other media, and through any other means of mass 

15 communication,’’. 

16 (b) EFFECTIVE DATE.—The amendments made by 

17 this section shall take effect on the date of the enactment 

18 of this Act. 

19 SEC. 350. DISCLOSURE TO STATE OFFICIALS OF PROPOSED 

20 ACTIONS RELATED TO SECTION 501(c)(3) OR21 GANIZATIONS. 

22 (a) IN GENERAL.—Subsection (c) of section 6104 is 

23 amended by striking paragraph (2) and inserting the fol24 lowing new paragraphs: 

25 ‘‘(2) DISCLOSURE OF PROPOSED ACTIONS.—
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1 ‘‘(A) SPECIFIC NOTIFICATIONS.—In the 

2 case of an organization to which paragraph (1) 

3 applies, the Secretary may disclose to the ap4 propriate State officer—

5 ‘‘(i) a notice of proposed refusal to 

6 recognize such organization as an organi7 zation described in section 501(c)(3) or a 

8 notice of proposed revocation of such orga9 nization’s recognition as an organization 

10 exempt from taxation, 

11 ‘‘(ii) the issuance of a letter of pro12 posed deficiency of tax imposed under sec13 tion 507 or chapter 41 or 42, and 

14 ‘‘(iii) the names, addresses, and tax15 payer identification numbers of organiza16 tions that have applied for recognition as 

17 organizations described in section 

18 501(c)(3). 

19 ‘‘(B) ADDITIONAL DISCLOSURES.—Returns 

20 and return information of organizations with 

21 respect to which information is disclosed under 

22 subparagraph (A) may be made available for in23 spection by or disclosed to an appropriate State 

24 officer. 
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1 ‘‘(C) PROCEDURES FOR DISCLOSURE.—In2 formation may be inspected or disclosed under 

3 subparagraph (A) or (B) only—

4 ‘‘(i) upon written request by an ap5 propriate State officer, and 

6 ‘‘(ii) for the purpose of, and only to 

7 the extent necessary in, the administration 

8 of State laws regulating such organiza9 tions. 

10 Such information may only be inspected by or 

11 disclosed to a person other than the appropriate 

12 State officer if such person is an officer or em13 ployee of the State and is designated by the ap14 propriate State officer to receive the returns or 

15 return information under this paragraph on be16 half of the appropriate State officer. 

17 ‘‘(D) DISCLOSURES OTHER THAN BY RE18 QUEST.—The Secretary may make available for 

19 inspection or disclose returns and return infor20 mation of an organization to which paragraph 

21 (1) applies to an appropriate State officer of 

22 any State if the Secretary determines that such 

23 inspection or disclosure may facilitate the reso24 lution of State or Federal issues relating to the 

25 tax-exempt status of such organization. 
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1 ‘‘(3) USE IN ADMINISTRATIVE AND JUDICIAL

2 CIVIL PROCEEDINGS.—Returns and return informa3 tion disclosed pursuant to this subsection may be 

4 disclosed in administrative and judicial civil pro5 ceedings pertaining to the enforcement of State laws 

6 regulating such organizations in a manner pre7 scribed by the Secretary similar to that for tax ad8 ministration proceedings under section 6103(h)(4). 

9 ‘‘(4) NO DISCLOSURE IF IMPAIRMENT.—Re10 turns and return information shall not be disclosed 

11 under this subsection, or in any proceeding described 

12 in paragraph (3), to the extent that the Secretary 

13 determines that such disclosure would seriously im14 pair Federal tax administration. 

15 ‘‘(5) DEFINITIONS.—For purposes of this sub16 section—

17 ‘‘(A) RETURN AND RETURN INFORMA18 TION.—The terms ‘return’ and ‘return informa19 tion’ have the respective meanings given to such 

20 terms by section 6103(b). 

21 ‘‘(B) APPROPRIATE STATE OFFICER.—The 

22 term ‘appropriate State officer’ means—

23 ‘‘(i) the State attorney general, or 
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1 ‘‘(ii) any other State official charged 

2 with overseeing organizations of the type 

3 described in section 501(c)(3).’’. 

4 (b) CONFORMING AMENDMENTS.—

5 (1) Subparagraph (A) of section 6103(p)(3) is 

6 amended by inserting ‘‘and section 6104(c)’’ after 

7 ‘‘section’’ in the first sentence. 

8 (2) Paragraph (4) of section 6103(p) is amend9 ed—

10 (A) in the matter preceding subparagraph 

11 (A), by inserting ‘‘, or any appropriate State of12 ficer (as defined in section 6104(c)),’’ before 

13 ‘‘or any other person’’, 

14 (B) in subparagraph (F)(i), by inserting 

15 ‘‘or any appropriate State officer (as defined in 

16 section 6104(c)),’’ before ‘‘or any other per17 son’’, and 

18 (C) in the matter following subparagraph 

19 (F), by inserting ‘‘, an appropriate State officer 

20 (as defined in section 6104(c)),’’ after ‘‘includ21 ing an agency’’ each place it appears. 

22 (3) Paragraph (2) of section 7213(a) is amend23 ed by inserting ‘‘or under section 6104(c)’’ after 

24 ‘‘6103’’. 
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1 (4) Paragraph (2) of section 7213A(a) is 

2 amended by inserting ‘‘or 6104(c)’’ after ‘‘6103’’. 

3 (5) Paragraph (2) of section 7431(a) is amend4 ed by inserting ‘‘(including any disclosure in viola5 tion of section 6104(c))’’ after ‘‘6103’’. 

6 (c) EFFECTIVE DATE.—The amendments made by 

7 this section shall take effect on the date of the enactment 

8 of this Act but shall not apply to requests made before 

9 such date.

10 SEC. 351. CONFIDENTIALITY OF TAXPAYER COMMUNICA11 TIONS WITH THE OFFICE OF THE TAXPAYER 

12 ADVOCATE. 

13 (a) IN GENERAL.—Subsection (c) of section 7803 is 

14 amended by adding at the end the following new para15 graph: 

16 ‘‘(5) CONFIDENTIALITY OF TAXPAYER INFOR17 MATION.—

18 ‘‘(A) IN GENERAL.—To the extent author19 ized by the National Taxpayer Advocate or pur20 suant to guidance issued under subparagraph 

21 (B), any officer or employee of the Office of the 

22 Taxpayer Advocate may withhold from the In23 ternal Revenue Service and the Department of 

24 Justice any information provided by, or regard25 ing contact with, any taxpayer.
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1 ‘‘(B) ISSUANCE OF GUIDANCE.—In con2 sultation with the Chief Counsel for the Inter3 nal Revenue Service and subject to the approval 

4 of the Commissioner of Internal Revenue, the 

5 National Taxpayer Advocate may issue guid6 ance regarding the circumstances (including 

7 with respect to litigation) under which, and the 

8 persons to whom, employees of the Office of the 

9 Taxpayer Advocate shall not disclose informa10 tion obtained from a taxpayer. To the extent to 

11 which any provision of the Internal Revenue 

12 Manual would require greater disclosure by em13 ployees of the Office of the Taxpayer Advocate 

14 than the disclosure required under such guid15 ance, such provision shall not apply. 

16 ‘‘(C) EMPLOYEE PROTECTION.—Section 

17 7214(a)(8) shall not apply to any failure to re18 port knowledge or information if—

19 ‘‘(i) such failure to report is author20 ized under subparagraph (A), and 

21 ‘‘(ii) such knowledge or information is 

22 not of fraud committed by a person 

23 against the United States under any rev24 enue law.’’. 
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1 (b) CONFORMING AMENDMENT.—Subparagraph (A) 

2 of section 7803(c)(4) is amended by inserting ‘‘and’’ at 

3 the end of clause (ii), by striking ‘‘; and’’ at the end of 

4 clause (iii) and inserting a period, and by striking clause 

5 (iv). 

6 Subtitle E—Miscellaneous 

7 SEC. 361. CLARIFICATION OF DEFINITION OF CHURCH TAX 

8 INQUIRY. 

9 Subsection (i) of section 7611 (relating to section not 

10 to apply to criminal investigations, etc.) is amended by 

11 striking ‘‘or’’ at the end of paragraph (4), by striking the 

12 period at the end of paragraph (5) and inserting ‘‘, or’’, 

13 and by inserting after paragraph (5) the following: 

14 ‘‘(6) information provided by the Secretary re15 lated to the standards for exemption from tax under 

16 this title and the requirements under this title relat17 ing to unrelated business taxable income.’’. 

18 SEC. 362. EXPANSION OF DECLARATORY JUDGMENT REM19 EDY TO TAX-EXEMPT ORGANIZATIONS. 

20 (a) IN GENERAL.—Paragraph (1) of section 7428(a) 

21 (relating to creation of remedy) is amended—

22 (1) in subparagraph (B) by inserting after 

23 ‘‘509(a))’’ the following: ‘‘or as a private operating 

24 foundation (as defined in section 4942(j)(3))’’; and 
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1 (2) by amending subparagraph (C) to read as 

2 follows: 

3 ‘‘(C) with respect to the initial qualifica4 tion or continuing qualification of an organiza5 tion as an organization described in subsection 

6 (c) (other than paragraph (3)) or (d) of section 

7 501 which is exempt from tax under section 

8 501(a), or’’. 

9 (b) COURT JURISDICTION.—Subsection (a) of section 

10 7428 is amended in the material following paragraph (2) 

11 by striking ‘‘United States Tax Court, the United States 

12 Claims Court, or the district court of the United States 

13 for the District of Columbia’’ and inserting the following: 

14 ‘‘United States Tax Court (in the case of any such deter15 mination or failure) or the United States Claims Court 

16 or the district court of the United States for the District 

17 of Columbia (in the case of a determination or failure with 

18 respect to an issue referred to in subparagraph (A) or (B) 

19 of paragraph (1)),’’. 

20 (c) EFFECTIVE DATE.—The amendments made by 

21 this section shall apply to pleadings filed with respect to 

22 determinations (or requests for determinations) made 

23 after the date of the enactment of this Act. 
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1 SEC. 363. EMPLOYEE MISCONDUCT REPORT TO INCLUDE 

2 SUMMARY OF COMPLAINTS BY CATEGORY. 

3 (a) IN GENERAL.—Clause (ii) of section 

4 7803(d)(2)(A) is amended by inserting before the semi5 colon at the end the following: ‘‘, including a summary 

6 (by category) of the 10 most common complaints made 

7 and the number of such common complaints’’. 

8 (b) EFFECTIVE DATE.—The amendment made by 

9 subsection (a) shall apply with respect to reporting periods 

10 ending after the date of the enactment of this Act. 

11 SEC. 364. ANNUAL REPORT ON AWARDS OF COSTS AND 

12 CERTAIN FEES IN ADMINISTRATIVE AND 

13 COURT PROCEEDINGS. 

14 Not later than 3 months after the close of each Fed15 eral fiscal year after fiscal year 2003, the Treasury In16 spector General for Tax Administration shall submit a re17 port to Congress which specifies for such year—

18 (1) the number of payments made by the 

19 United States pursuant to section 7430 of the Inter20 nal Revenue Code of 1986 (relating to awarding of 

21 costs and certain fees); 

22 (2) the amount of each such payment; 

23 (3) an analysis of any administrative issue giv24 ing rise to such payments; and 

25 (4) changes (if any) which will be implemented 

26 as a result of such analysis and other changes (if 
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1 any) recommended by the Treasury Inspector Gen2 eral for Tax Administration as a result of such anal3 ysis. 

4 SEC. 365. ANNUAL REPORT ON ABATEMENT OF PENALTIES. 

5 Not later than 6 months after the close of each Fed6 eral fiscal year after fiscal year 2003, the Treasury In7 spector General for Tax Administration shall submit a re8 port to Congress on abatements of penalties under the In9 ternal Revenue Code of 1986 during such year, including 

10 information on the reasons and criteria for such abate11 ments. 

12 SEC. 366. BETTER MEANS OF COMMUNICATING WITH TAX13 PAYERS. 

14 Not later than 18 months after the date of the enact15 ment of this Act, the Treasury Inspector General for Tax 

16 Administration shall submit a report to Congress evalu17 ating whether technological advances, such as e-mail and 

18 facsimile transmission, permit the use of alternative 

19 means for the Internal Revenue Service to communicate 

20 with taxpayers. 

21 SEC. 367. EXPLANATION OF STATUTE OF LIMITATIONS AND 

22 CONSEQUENCES OF FAILURE TO FILE. 

23 The Secretary of the Treasury or the Secretary’s del24 egate shall, as soon as practicable but not later than 180 

25 days after the date of the enactment of this Act, revise
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1 the statement required by section 6227 of the Omnibus 

2 Taxpayer Bill of Rights (Internal Revenue Service Publi3 cation No. 1), and any instructions booklet accompanying 

4 a general income tax return form for taxable years begin5 ning after 2002 (including forms 1040, 1040A, 1040EZ, 

6 and any similar or successor forms relating thereto), to 

7 provide for an explanation of—

8 (1) the limitations imposed by section 6511 of 

9 the Internal Revenue Code of 1986 on credits and 

10 refunds; and 

11 (2) the consequences under such section 6511 

12 of the failure to file a return of tax. 

13 SEC. 368. AMENDMENT TO TREASURY AUCTION REFORMS. 

14 (a) IN GENERAL.—Clause (i) of section 202(c)(4)(B) 

15 of the Government Securities Act Amendments of 1993 

16 (31 U.S.C. 3121 note) is amended by inserting before the 

17 semicolon ‘‘(or, if earlier, at the time the Secretary re18 leases the minutes of the meeting in accordance with para19 graph (2))’’. 

20 (b) EFFECTIVE DATE.—The amendment made by 

21 subsection (a) shall apply to meetings held after the date 

22 of the enactment of this Act. 
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1 SEC. 369. ENROLLED AGENTS. 

2 (a) IN GENERAL.—Chapter 77 (relating to miscella3 neous provisions) is amended by adding at the end the 

4 following new section: 

5 ‘‘SEC. 7528. ENROLLED AGENTS. 

6 ‘‘(a) IN GENERAL.—The Secretary may prescribe 

7 such regulations as may be necessary to regulate the con8 duct of enrolled agents in regards to their practice before 

9 the Internal Revenue Service. 

10 ‘‘(b) USE OF CREDENTIALS.—Any enrolled agents 

11 properly licensed to practice as required under rules pro12 mulgated under section (a) herein shall be allowed to use 

13 the credentials or designation as ‘enrolled agent’, ‘EA’, or 

14 ‘E.A.’.’’. 

15 (b) CLERICAL AMENDMENT.—The table of sections 

16 for chapter 77 is amended by adding at the end the fol17 lowing new item:

‘‘Sec. 7528. Enrolled agents.’’.

18 (c) PRIOR REGULATIONS.—Nothing in the amend19 ments made by this section shall be construed to have any 

20 effect on part 10 of title 31, Code of Federal Regulations, 

21 or any other Federal rule or regulation issued before the 

22 date of the enactment of this Act. 

23 SEC. 370. FINANCIAL MANAGEMENT SERVICE FEES. 

24 Notwithstanding any other provision of law, the Fi25 nancial Management Service may charge the Internal Rev-
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1 enue Service, and the Internal Revenue Service may pay 

2 the Financial Management Service, a fee sufficient to 

3 cover the full cost of implementing a continuous levy pro4 gram under subsection (h) of section 6331 of the Internal 

5 Revenue Code of 1986. Any such fee shall be based on 

6 actual levies made and shall be collected by the Financial 

7 Management Service by the retention of a portion of 

8 amounts collected by levy pursuant to that subsection. 

9 Amounts received by the Financial Management Service 

10 as fees under that subsection shall be deposited into the 

11 account of the Department of the Treasury under section 

12 3711(g)(7) of title 31, United States Code, and shall be 

13 collected and accounted for in accordance with the provi14 sions of that section. The amount credited against the tax15 payer’s liability on account of the continuous levy shall 

16 be the amount levied, without reduction for the amount 

17 paid to the Financial Management Service as a fee.

18 SEC. 371. EXTENSION OF INTERNAL REVENUE SERVICE 

19 USER FEES. 

20 (a) IN GENERAL.—Chapter 77 (relating to miscella21 neous provisions) is amended by adding at the end the 

22 following new section: 

23 ‘‘SEC. 7529. INTERNAL REVENUE SERVICE USER FEES. 

24 ‘‘(a) GENERAL RULE.—The Secretary shall establish 

25 a program requiring the payment of user fees for—
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1 ‘‘(1) requests to the Internal Revenue Service 

2 for ruling letters, opinion letters, and determination 

3 letters, and 

4 ‘‘(2) other similar requests. 

5 ‘‘(b) PROGRAM CRITERIA.—

6 ‘‘(1) IN GENERAL.—The fees charged under the 

7 program required by subsection (a)—

8 ‘‘(A) shall vary according to categories (or 

9 subcategories) established by the Secretary, 

10 ‘‘(B) shall be determined after taking into 

11 account the average time for (and difficulty of) 

12 complying with requests in each category (and 

13 subcategory), and 

14 ‘‘(C) shall be payable in advance. 

15 ‘‘(2) EXEMPTIONS, ETC.—

16 ‘‘(A) IN GENERAL.—The Secretary shall 

17 provide for such exemptions (and reduced fees) 

18 under such program as the Secretary deter19 mines to be appropriate. 

20 ‘‘(B) EXEMPTION FOR CERTAIN REQUESTS

21 REGARDING PENSION PLANS.—The Secretary 

22 shall not require payment of user fees under 

23 such program for requests for determination 

24 letters with respect to the qualified status of a 

25 pension benefit plan maintained solely by 1 or 
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1 more eligible employers or any trust which is 

2 part of the plan. The preceding sentence shall 

3 not apply to any request—

4 ‘‘(i) made after the later of—

5 ‘‘(I) the fifth plan year the pen6 sion benefit plan is in existence, or 

7 ‘‘(II) the end of any remedial 

8 amendment period with respect to the 

9 plan beginning within the first 5 plan 

10 years, or 

11 ‘‘(ii) made by the sponsor of any pro12 totype or similar plan which the sponsor 

13 intends to market to participating employ14 ers. 

15 ‘‘(C) DEFINITIONS AND SPECIAL RULES.—

16 For purposes of subparagraph (B)—

17 ‘‘(i) PENSION BENEFIT PLAN.—The 

18 term ‘pension benefit plan’ means a pen19 sion, profit-sharing, stock bonus, annuity, 

20 or employee stock ownership plan. 

21 ‘‘(ii) ELIGIBLE EMPLOYER.—The 

22 term ‘eligible employer’ means an eligible 

23 employer (as defined in section 

24 408(p)(2)(C)(i)(I)) which has at least 1 

25 employee who is not a highly compensated 
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1 employee (as defined in section 414(q)) 

2 and is participating in the plan. The deter3 mination of whether an employer is an eli4 gible employer under subparagraph (B) 

5 shall be made as of the date of the request 

6 described in such subparagraph. 

7 ‘‘(iii) DETERMINATION OF AVERAGE

8 FEES CHARGED.—For purposes of any de9 termination of average fees charged, any 

10 request to which subparagraph (B) applies 

11 shall not be taken into account. 

12 ‘‘(3) AVERAGE FEE REQUIREMENT.—The aver13 age fee charged under the program required by sub14 section (a) shall not be less than the amount deter15 mined under the following table:

Average 

‘‘Category Fee 

Employee plan ruling and opinion ........................................... $250

Exempt organization ruling ..................................................... $350

Employee plan determination .................................................. $300

Exempt organization determination ........................................ $275

Chief counsel ruling ................................................................. $200.

16 ‘‘(c) TERMINATION.—No fee shall be imposed under 

17 this section with respect to requests made after September 

18 30, 2013.’’. 

19 (b) CONFORMING AMENDMENTS.—
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1 (1) The table of sections for chapter 77 is 

2 amended by adding at the end the following new 

3 item:

‘‘Sec. 7529. Internal Revenue Service user fees.’’.

4 (2) Section 10511 of the Revenue Act of 1987 

5 is repealed. 

6 (3) Section 620 of the Economic Growth and 

7 Tax Relief Reconciliation Act of 2001 is repealed. 

8 (c) LIMITATIONS.—Notwithstanding any other provi9 sion of law, any fees collected pursuant to section 7527 

10 of the Internal Revenue Code of 1986, as added by sub11 section (a), shall not be expended by the Internal Revenue 

12 Service unless provided by an appropriations Act. 

13 (d) EFFECTIVE DATE.—The amendments made by 

14 this section shall apply to requests made after the date 

15 of the enactment of this Act. 

16 Subtitle F—Low-Income Taxpayer 

17 Clinics 

18 SEC. 381. LOW-INCOME TAXPAYER CLINICS. 

19 (a) LIMITATION ON AMOUNT OF GRANTS.—Para20 graph (1) of section 7526(c) (relating to special rules and 

21 limitations) is amended by striking ‘‘$6,000,000 per year’’ 

22 and inserting ‘‘$9,000,000 for 2004, $12,000,000 for 

23 2005, and $15,000,000 for each year thereafter’’. 
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1 (b) PROMOTION OF CLINICS.—Section 7526(c) is 

2 amended by adding at the end the following new para3 graph: 

4 ‘‘(6) PROMOTION OF CLINICS.—The Secretary 

5 is authorized to promote the benefits of and encour6 age the use of low-income taxpayer clinics through 

7 the use of mass communications, referrals, and other 

8 means.’’. 

9 (c) USE OF GRANTS FOR OVERHEAD EXPENSES

10 PROHIBITED.—Section 7526(c), as amended by sub11 section (b), is further amended by adding at the end the 

12 following new paragraph: 

13 ‘‘(7) USE OF GRANTS FOR OVERHEAD EX14 PENSES PROHIBITED.—No grant made under this 

15 section may be used for the general overhead ex16 penses of any institution sponsoring a qualified low17 income taxpayer clinic.’’. 

18 (d) ELIGIBLE CLINICS.—

19 (1) IN GENERAL.—Paragraph (2) of section 

20 7526(b) is amended to read as follows: 

21 ‘‘(2) ELIGIBLE CLINIC.—The term ‘eligible clin22 ic’ means— 

23 ‘‘(A) any clinical program at an accredited 

24 law, business, or accounting school in which 
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1 students represent low-income taxpayers in con2 troversies arising under this title; and 

3 ‘‘(B) any organization described in section 

4 501(c) and exempt from tax under section 

5 501(a) which satisfies the requirements of para6 graph (1) through representation of taxpayers 

7 or referral of taxpayers to qualified representa8 tives.’’. 

9 (2) CONFORMING AMENDMENT.—Subparagraph 

10 (A) of section 7526(b)(1) is amended by striking 

11 ‘‘means a clinic’’ and inserting ‘‘means an eligible 

12 clinic’’.

13 SEC. 382. MATCHING GRANTS TO LOW INCOME RETURN 

14 PREPARATION CLINICS. 

15 (a) IN GENERAL.—Chapter 77 (relating to miscella16 neous provisions) is amended by inserting after section 

17 7526 the following new section: 

18 ‘‘SEC. 7526A. LOW INCOME RETURN PREPARATION CLINICS. 

19 ‘‘(a) IN GENERAL.—The Secretary may, subject to 

20 the availability of appropriated funds, make grants to pro21 vide matching funds for the development, expansion, or 

22 continuation of qualified return preparation clinics. 

23 ‘‘(b) DEFINITIONS.—For purposes of this section—

24 ‘‘(1) QUALIFIED RETURN PREPARATION CLIN25 IC.—
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1 ‘‘(A) IN GENERAL.—The term ‘qualified 

2 return preparation clinic’ means an eligible clin3 ic which—

4 ‘‘(i) does not charge more than a 

5 nominal fee for its services (except for re6 imbursement of actual costs incurred), and 

7 ‘‘(ii) operates programs which assist 

8 low-income taxpayers in preparing and fil9 ing their Federal income tax returns, in10 cluding schedules reporting sole proprietor11 ship or farm income. 

12 ‘‘(B) ASSISTANCE TO LOW-INCOME TAX13 PAYERS.—A clinic is treated as assisting low-in14 come taxpayers under subparagraph (A)(ii) if 

15 at least 90 percent of the taxpayers assisted by 

16 the clinic have incomes which do not exceed 250 

17 percent of the poverty level, as determined in 

18 accordance with criteria established by the Di19 rector of the Office of Management and Budg20 et. 

21 ‘‘(2) ELIGIBLE CLINIC.—The term ‘eligible clin22 ic’ includes—

23 ‘‘(A) a clinical program at an eligible edu24 cational institution (as defined in section 

25 529(e)(5)) which satisfies the requirements of 
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1 paragraph (1) through student assistance of 

2 taxpayers in return preparation and filing, and 

3 ‘‘(B) an organization described in section 

4 501(c) and exempt from tax under section 

5 501(a) which satisfies the requirements of para6 graph (1). 

7 ‘‘(c) SPECIAL RULES AND LIMITATIONS.—

8 ‘‘(1) AGGREGATE LIMITATION.—Unless other9 wise provided by specific appropriation, the Sec10 retary shall not allocate more than $10,000,000 per 

11 year (exclusive of costs of administering the pro12 gram) to grants under this section. 

13 ‘‘(2) OTHER APPLICABLE RULES.—Rules simi14 lar to the rules under paragraphs (2) through (7) of 

15 section 7526(c) shall apply with respect to the 

16 awarding of grants to qualified return preparation 

17 clinics.’’. 

18 (b) CLERICAL AMENDMENT.—The table of sections 

19 for chapter 77 is amended by inserting after the item re20 lating to section 7526 the following new item:

‘‘Sec. 7526A. Low income return preparation clinics.’’.

21 (c) EFFECTIVE DATE.—The amendments made by 

22 this section shall apply to grants made after the date of 

23 the enactment of this Act. 
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1 Subtitle G—Federal-state unem2 ployment assistance agreements 

3 SEC. 391. APPLICABILITY OF CERTAIN FEDERAL-STATE 

4 AGREEMENTS RELATING TO UNEMPLOY5 MENT ASSISTANCE. 

6 Effective as of May 25, 2003, section 208 of Public 

7 Law 107–147 is amended—

8 (1) in subsection (a)(2), by inserting ‘‘on or’’ 

9 after ‘‘ending’’; and 

10 (2) in subsection (b), by striking ‘‘May 31’’ 

11 each place it appears and inserting ‘‘June 1’’.

Æ