I 

108TH CONGRESS 

1ST SESSION H. R. 2286

To amend the Internal Revenue Code of 1986 to increase partial refundability 

of the child tax credit, to provide that pay received by members of 

the Armed Forces while serving in Iraq or other combat zones will 

be taken into account in determining eligibility for partial refundability 

of the child tax credit, to accelerate marriage penalty relief in the 

earned income tax credit, and for other purposes. 

IN THE HOUSE OF REPRESENTATIVES 

JUNE 2, 2003

Mr. RANGEL (for himself, Ms. DELAURO, Mr. MICHAUD, Mr. HOYER, Mr. 

DAVIS of Alabama, Mr. MORAN of Virginia, and Mr. STRICKLAND) introduced the following bill; which was referred to the Committee on Ways 

and Means 

A BILL

To amend the Internal Revenue Code of 1986 to increase 

partial refundability of the child tax credit, to provide 

that pay received by members of the Armed Forces while 

serving in Iraq or other combat zones will be taken 

into account in determining eligibility for partial 

refundability of the child tax credit, to accelerate marriage penalty relief in the earned income tax credit, and 

for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,
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1 SECTION 1. SHORT TITLE; REFERENCE. 

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

3 ‘‘Working Families Tax Credit Act of 2003’’. 

4 (b) AMENDMENT OF 1986 CODE.—Except as other5 wise expressly provided, whenever in this Act an amend6 ment or repeal is expressed in terms of an amendment 

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

8 shall be considered to be made to a section or other provi9 sion of the Internal Revenue Code of 1986. 

10 TITLE I—FAMILY TAX CREDITS.

11 SEC. 101. PARTIAL REFUNDABILITY OF FAMILY CREDIT. 

12 (a) IN GENERAL.—Clause (i) of section 24(d)(1)(B) 

13 to read as follows: 

14 ‘‘(i) 15 percent of such much of the 

15 taxpayer’s earned income (within the 

16 meaning of section 32) which is taken into 

17 account in computing taxable income for 

18 the taxable year as exceeds $7,500, or’’. 

19 (b) COMBAT PAY TAKEN INTO ACCOUNT.—Para20 graph (1) of section 24(d) is amended by adding at the 

21 end the following flush sentence: ‘‘For purposes of clause 

22 (i) of subparagraph (B), amounts excluded from gross in23 come under section 112 (relating to combat pay) shall be 

24 treated as earned income that is taken into account in 

25 computing taxable income.’’. 
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1 (c) CONFORMING AMENDMENT.—Section 24(d)(3) is 

2 amended—

3 (1) by striking ‘‘after 2001’’ and inserting 

4 ‘‘after 2003’’, 

5 (2) by striking ‘‘$10,000’’ and inserting 

6 ‘‘$7,500’’, and 

7 (3) by striking ‘‘2000’’ and inserting ‘‘2002’’. 

8 (d) EFFECTIVE DATE.—The amendments made by 

9 this section shall apply to taxable years beginning after 

10 December 31, 2002. 

11 SEC. 102. MARRIAGE PENALTY IN THE EARNED INCOME 

12 CREDIT. 

13 (a) IN GENERAL.—Subparagraph (B) of section 

14 32(b)(2) is amended to read as follows: 

15 ‘‘(B) JOINT RETURNS.—In the case of a 

16 joint return filed by an eligible individual and 

17 such individual’s spouse, the phaseout amount 

18 determined under subparagraph (A) shall be in19 creased by $3,000.’’. 

20 (b) CONFORMING AMENDMENT.—Section 

21 32(j)(1)(B)(ii) is amended—

22 (1) by striking ‘‘subsection (b)(2)(B)(iii)’’ and 

23 inserting ‘‘subsection (b)(2)(B)’’, and 

24 (2) by striking ‘‘2007’’ and inserting ‘‘2002’’. 
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to taxable years beginning after 

3 December 31, 2002. 

4 TITLE II—ELIMINATION OF 

5 ABUSIVE TAX STRATEGIES

6 SEC. 201. FINDINGS AND PURPOSE. 

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

8 (1) Many corporate tax shelter transactions are 

9 complicated ways of accomplishing nothing aside 

10 from claimed tax benefits, and the legal opinions 

11 justifying those transactions take an inappropriately 

12 narrow and restrictive view of well-developed court 

13 doctrines under which—

14 (A) the taxation of a transaction is deter15 mined in accordance with its substance and not 

16 merely its form, 

17 (B) transactions which have no significant 

18 effect on the taxpayer’s economic or beneficial 

19 interests except for tax benefits are treated as 

20 sham transactions and disregarded, 

21 (C) transactions involving multiple steps 

22 are collapsed when those steps have no substan23 tial economic meaning and are merely designed 

24 to create tax benefits, 
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1 (D) transactions with no business purpose 

2 are not given effect, and 

3 (E) in the absence of a specific congres4 sional authorization, it is presumed that Con5 gress did not intend a transaction to result in 

6 a negative tax where the taxpayer’s economic 

7 position or rate of return is better after tax 

8 than before tax. 

9 (2) Permitting aggressive and abusive tax shel10 ters not only results in large revenue losses but also 

11 undermines voluntary compliance with the Internal 

12 Revenue Code of 1986. 

13 (b) PURPOSE.—The purpose of this title is to elimi14 nate abusive tax shelters by denying tax attributes claimed 

15 to arise from transactions that do not meet a heightened 

16 economic substance requirement and by repealing the pro17 vision that permits legal opinions to be used to avoid pen18 alties on tax underpayments resulting from transactions 

19 without significant economic substance or business pur20 pose.
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1 Subtitle A—Tax Shelters

2 Part I—Provisions Designed To 

3 Curtail Tax Shelters 

4 SEC. 211. CLARIFICATION OF ECONOMIC SUBSTANCE DOC5 TRINE. 

6 (a) IN GENERAL.—Section 7701 is amended by re7 designating subsection (m) as subsection (n) and by in8 serting after subsection (l) the following new subsection: 

9 ‘‘(m) CLARIFICATION OF ECONOMIC SUBSTANCE

10 DOCTRINE; ETC.—

11 ‘‘(1) GENERAL RULES.—

12 ‘‘(A) IN GENERAL.—In applying the eco13 nomic substance doctrine, the determination of 

14 whether a transaction has economic substance 

15 shall be made as provided in this paragraph. 

16 ‘‘(B) DEFINITION OF ECONOMIC SUB17 STANCE.—For purposes of subparagraph (A)—

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

19 economic substance only if—

20 ‘‘(I) the transaction changes in a 

21 meaningful way (apart from Federal 

22 tax effects and, if there is any Federal 

23 tax effects, also apart from any for24 eign, State, or local tax effects) the 

25 taxpayer’s economic position, and 
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1 ‘‘(II) the taxpayer has a substan2 tial nontax purpose for entering into 

3 such transaction and the transaction 

4 is a reasonable means of accom5 plishing such purpose. 

6 ‘‘(ii) SPECIAL RULE WHERE TAX7 PAYER RELIES ON PROFIT POTENTIAL.—A 

8 transaction shall not be treated as having 

9 economic substance by reason of having a 

10 potential for profit unless—

11 ‘‘(I) the present value of the rea12 sonably expected pre-tax profit from 

13 the transaction is substantial in rela14 tion to the present value of the ex15 pected net tax benefits that would be 

16 allowed if the transaction were re17 spected, and 

18 ‘‘(II) the reasonably expected 

19 pre-tax profit from the transaction ex20 ceeds a risk-free rate of return.

21 ‘‘(C) TREATMENT OF FEES AND FOREIGN

22 TAXES.—Fees and other transaction expenses 

23 and foreign taxes shall be taken into account as 

24 expenses in determining pre-tax profit under 

25 subparagraph (B)(ii). 
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1 ‘‘(2) SPECIAL RULES FOR TRANSACTIONS WITH

2 TAX-INDIFFERENT PARTIES.—

3 ‘‘(A) SPECIAL RULES FOR FINANCING

4 TRANSACTIONS.—The form of a transaction 

5 which is in substance the borrowing of money 

6 or the acquisition of financial capital directly or 

7 indirectly from a tax-indifferent party shall not 

8 be respected if the present value of the deduc9 tions to be claimed with respect to the trans10 action is substantially in excess of the present 

11 value of the anticipated economic returns of the 

12 person lending the money or providing the fi13 nancial capital. A public offering shall be treat14 ed as a borrowing, or an acquisition of financial 

15 capital, from a tax-indifferent party if it is rea16 sonably expected that at least 50 percent of the 

17 offering will be placed with tax-indifferent par18 ties. 

19 ‘‘(B) ARTIFICIAL INCOME SHIFTING AND

20 BASIS ADJUSTMENTS.—The form of a trans21 action with a tax-indifferent party shall not be 

22 respected if—

23 ‘‘(i) it results in an allocation of in24 come or gain to the tax-indifferent party in 
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1 excess of such party’s economic income or 

2 gain, or 

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

4 or shifting of basis on account of over5 stating the income or gain of the tax-indif6 ferent party. 

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

8 purposes of this subsection—

9 ‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.—

10 The term ‘economic substance doctrine’ means 

11 the common law doctrine under which tax bene12 fits under subtitle A with respect to a trans13 action are not allowable if the transaction does 

14 not have economic substance or lacks a business 

15 purpose. 

16 ‘‘(B) TAX-INDIFFERENT PARTY.—The 

17 term ‘tax-indifferent party’ means any person 

18 or entity not subject to tax imposed by subtitle 

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

20 party with respect to a transaction if the items 

21 taken into account with respect to the trans22 action have no substantial impact on such per23 son’s liability under subtitle A. 

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

25 applying subclause (II) of paragraph (1)(B)(i), 
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1 a purpose of achieving a financial accounting 

2 benefit shall not be taken into account in deter3 mining whether a transaction has a substantial 

4 nontax purpose if the origin of such financial 

5 accounting benefit is a reduction of income tax. 

6 ‘‘(D) EXCEPTION FOR PERSONAL TRANS7 ACTIONS OF INDIVIDUALS.—In the case of an 

8 individual, this subsection shall apply only to 

9 transactions entered into in connection with a 

10 trade or business or an activity engaged in for 

11 the production of income. 

12 ‘‘(E) TREATMENT OF LESSORS.—In apply13 ing subclause (I) of paragraph (1)(B)(ii) to the 

14 lessor of tangible property subject to a lease, 

15 the expected net tax benefits shall not include 

16 the benefits of depreciation, or any tax credit, 

17 with respect to the leased property and sub18 clause (II) of paragraph (1)(B)(ii) shall be dis19 regarded in determining whether any of such 

20 benefits are allowable.

21 ‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF22 FECTED.—Except as specifically provided in this 

23 subsection, the provisions of this subsection shall not 

24 be construed as altering or supplanting any other 

25 rule of law, and the requirements of this subsection
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1 shall be construed as being in addition to any such 

2 other rule of law. 

3 ‘‘(5) REGULATIONS.—The Secretary shall pre4 scribe such regulations as may be necessary or ap5 propriate to carry out the purposes of this sub6 section. Such regulations may include exemptions 

7 from the application of this subsection.’’. 

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

9 this section shall apply to transactions entered into after 

10 February 13, 2003. 

11 SEC. 212. PENALTY FOR FAILING TO DISCLOSE REPORT12 ABLE TRANSACTION. 

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

14 68 (relating to assessable penalties) is amended by insert15 ing after section 6707 the following new section: 

16 ‘‘SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORT17 ABLE TRANSACTION INFORMATION WITH RE18 TURN OR STATEMENT. 

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

20 fails to include on any return or statement any informa21 tion with respect to a reportable transaction which is re22 quired under section 6011 to be included with such return 

23 or statement shall pay a penalty in the amount determined 

24 under subsection (b). 

25 ‘‘(b) AMOUNT OF PENALTY.—
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1 ‘‘(1) IN GENERAL.—Except as provided in para2 graphs (2) and (3), the amount of the penalty under 

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

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

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

6 listed transaction shall be $100,000. 

7 ‘‘(3) INCREASE IN PENALTY FOR LARGE ENTI8 TIES AND HIGH NET WORTH INDIVIDUALS.—

9 ‘‘(A) IN GENERAL.—In the case of a fail10 ure under subsection (a) by—

11 ‘‘(i) a large entity, or 

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

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

14 twice the amount determined without regard to 

15 this paragraph. 

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

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

18 means, with respect to any taxable year, a per19 son (other than a natural person) with gross re20 ceipts in excess of $10,000,000 for the taxable 

21 year in which the reportable transaction occurs 

22 or the preceding taxable year. Rules similar to 

23 the rules of paragraph (2) and subparagraphs 

24 (B), (C), and (D) of paragraph (3) of section 
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1 448(c) shall apply for purposes of this subpara2 graph. 

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

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

5 net worth individual’ means, with respect to a 

6 reportable transaction, a natural person whose 

7 net worth exceeds $2,000,000 immediately be8 fore the transaction. 

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

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

11 ‘reportable transaction’ means any transaction with 

12 respect to which information is required to be in13 cluded with a return or statement because, as deter14 mined under regulations prescribed under section 

15 6011, such transaction is of a type which the Sec16 retary determines as having a potential for tax 

17 avoidance or evasion. 

18 ‘‘(2) LISTED TRANSACTION.—Except as pro19 vided in regulations, the term ‘listed transaction’ 

20 means a reportable transaction which is the same as, 

21 or substantially similar to, a transaction specifically 

22 identified by the Secretary as a tax avoidance trans23 action for purposes of section 6011. 

24 ‘‘(d) AUTHORITY TO RESCIND PENALTY.—
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1 ‘‘(1) IN GENERAL.—The Commissioner of In2 ternal Revenue may rescind all or any portion of any 

3 penalty imposed by this section with respect to any 

4 violation if—

5 ‘‘(A) the violation is with respect to a re6 portable transaction other than a listed trans7 action, 

8 ‘‘(B) the person on whom the penalty is 

9 imposed has a history of complying with the re10 quirements of this title, 

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

12 to an unintentional mistake of fact, 

13 ‘‘(D) imposing the penalty would be 

14 against equity and good conscience, and 

15 ‘‘(E) rescinding the penalty would promote 

16 compliance with the requirements of this title 

17 and effective tax administration. 

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

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

20 of the Commissioner and may be delegated only to 

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

22 Commissioner, in the Commissioner’s sole discretion, 

23 may establish a procedure to determine if a penalty 

24 should be referred to the Commissioner or the head 
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1 of such Office for a determination under paragraph 

2 (1). 

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

4 provision of law, any determination under this sub5 section may not be reviewed in any administrative or 

6 judicial proceeding. 

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

8 paragraph (1), the Commissioner shall place in the 

9 file in the Office of the Commissioner the opinion of 

10 the Commissioner or the head of the Office of Tax 

11 Shelter Analysis with respect to the determination, 

12 including—

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

14 transaction, 

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

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

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

18 year report to the Committee on Ways and Means 

19 of the House of Representatives and the Committee 

20 on Finance of the Senate—

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

22 aggregate amount of penalties imposed, and re23 scinded, under this section, and
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1 ‘‘(B) a description of each penalty re2 scinded under this subsection and the reasons 

3 therefor. 

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

5 a person—

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

7 under section 13 or 15(d) of the Securities Ex8 change Act of 1934 or is required to be consolidated 

9 with another person for purposes of such reports, 

10 and 

11 ‘‘(2) which— 

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

13 this section with respect to a listed transaction, 

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

15 section 6662A with respect to any reportable 

16 transaction at a rate prescribed under section 

17 6662A(c), or 

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

19 section 6662B with respect to any noneconomic 

20 substance transaction, 

21 the requirement to pay such penalty shall be disclosed in 

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

23 Secretary shall specify. Failure to make a disclosure in 

24 accordance with the preceding sentence shall be treated 
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1 as a failure to which the penalty under subsection (b)(2) 

2 applies. 

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

4 penalty imposed by this section is in addition to any pen5 alty imposed under this title.’’. 

6 (b) CONFORMING AMENDMENT.—The table of sec7 tions for part I of subchapter B of chapter 68 is amended 

8 by inserting after the item relating to section 6707 the 

9 following:

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

information with return or statement.’’.

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

11 this section shall apply to returns and statements the due 

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

13 Act.

14 SEC. 213. ACCURACY-RELATED PENALTY FOR LISTED 

15 TRANSACTIONS AND OTHER REPORTABLE 

16 TRANSACTIONS HAVING A SIGNIFICANT TAX 

17 AVOIDANCE PURPOSE. 

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

19 amended by inserting after section 6662 the following new 

20 section: 
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1 ‘‘SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PEN2 ALTY ON UNDERSTATEMENTS WITH RESPECT 

3 TO REPORTABLE TRANSACTIONS. 

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

5 reportable transaction understatement for any taxable 

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

7 20 percent of the amount of such understatement. 

8 ‘‘(b) REPORTABLE TRANSACTION UNDERSTATE9 MENT.—For purposes of this section—

10 ‘‘(1) IN GENERAL.—The term ‘reportable trans11 action understatement’ means the sum of—

12 ‘‘(A) the product of—

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

14 any) in taxable income which results from 

15 a difference between the proper tax treat16 ment of an item to which this section ap17 plies and the taxpayer’s treatment of such 

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

19 tax), and 

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

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

22 taxpayer which is a corporation), and 

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

24 in the aggregate amount of credits determined 

25 under subtitle A which results from a difference 

26 between the taxpayer’s treatment of an item to 
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1 which this section applies (as shown on the tax2 payer’s return of tax) and the proper tax treat3 ment of such item. 

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

5 the excess of deductions allowed for the taxable year 

6 over gross income for such year, and any reduction 

7 in the amount of capital losses which would (without 

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

9 shall be treated as an increase in taxable income. 

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

11 section shall apply to any item which is attributable 

12 to—

13 ‘‘(A) any listed transaction, and 

14 ‘‘(B) any reportable transaction (other 

15 than a listed transaction) if a significant pur16 pose of such transaction is the avoidance or 

17 evasion of Federal income tax. 

18 ‘‘(c) HIGHER PENALTY FOR NONDISCLOSED LISTED

19 AND OTHER AVOIDANCE TRANSACTIONS.—

20 ‘‘(1) IN GENERAL.—Subsection (a) shall be ap21 plied by substituting ‘30 percent’ for ‘20 percent’ 

22 with respect to the portion of any reportable trans23 action understatement with respect to which the re24 quirement of section 6664(d)(2)(A) is not met. 
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1 ‘‘(2) RULES APPLICABLE TO COMPROMISE OF

2 PENALTY.—

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

4 proposed deficiency which allows the taxpayer 

5 an opportunity for administrative review in the 

6 Internal Revenue Service Office of Appeals has 

7 been sent with respect to a penalty to which 

8 paragraph (1) applies, only the Commissioner 

9 of Internal Revenue may compromise all or any 

10 portion of such penalty. 

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

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

13 6707A(d) shall apply for purposes of subpara14 graph (A). 

15 ‘‘(d) DEFINITIONS OF REPORTABLE AND LISTED

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

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

18 respective meanings given to such terms by section 

19 6707A(c). 

20 ‘‘(e) SPECIAL RULES.—

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

22 ON OTHER UNDERSTATEMENTS.—In the case of an 

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

24 ‘‘(A) the amount of such understatement 

25 (determined without regard to this paragraph)
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1 shall be increased by the aggregate amount of 

2 reportable transaction understatements and 

3 noneconomic substance transaction understate4 ments for purposes of determining whether 

5 such understatement is a substantial under6 statement under section 6662(d)(1), and 

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

8 6662(a) shall apply only to the excess of the 

9 amount of the substantial understatement (if 

10 any) after the application of subparagraph (A) 

11 over the aggregate amount of reportable trans12 action understatements and noneconomic sub13 stance transaction understatements. 

14 ‘‘(2) COORDINATION WITH OTHER PEN15 ALTIES.—

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

17 References to an underpayment in section 6663 

18 shall be treated as including references to a re19 portable transaction understatement and a non20 economic substance transaction understatement. 

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

22 shall not apply to any portion of an understate23 ment on which a penalty is imposed under sec24 tion 6662B or 6663. 
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1 ‘‘(3) SPECIAL RULE FOR AMENDED RE2 TURNS.—Except as provided in regulations, in no 

3 event shall any tax treatment included with an 

4 amendment or supplement to a return of tax be 

5 taken into account in determining the amount of any 

6 reportable transaction understatement or non7 economic substance transaction understatement if 

8 the amendment or supplement is filed after the ear9 lier of the date the taxpayer is first contacted by the 

10 Secretary regarding the examination of the return or 

11 such other date as is specified by the Secretary. 

12 ‘‘(4) NONECONOMIC SUBSTANCE TRANSACTION

13 UNDERSTATEMENT.—For purposes of this sub14 section, the term ‘noneconomic substance trans15 action understatement’ has the meaning given such 

16 term by section 6662B(c). 

17 ‘‘(5) CROSS REFERENCE.—

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

Securities and Exchange Commission, see section 

6707A(e).’’.

18 (b) DETERMINATION OF OTHER UNDERSTATE19 MENTS.—Subparagraph (A) of section 6662(d)(2) is 

20 amended by adding at the end the following flush sen21 tence: 

22 ‘‘The excess under the preceding sentence shall 

23 be determined without regard to items to which 

24 section 6662A applies and without regard to 
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1 items with respect to which a penalty is im2 posed by section 6662B.’’. 

3 (c) REASONABLE CAUSE EXCEPTION.—

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

5 adding at the end the following new subsection: 

6 ‘‘(d) REASONABLE CAUSE EXCEPTION FOR REPORT7 ABLE TRANSACTION UNDERSTATEMENTS.— 

8 ‘‘(1) IN GENERAL.—No penalty shall be im9 posed under section 6662A with respect to any por10 tion of a reportable transaction understatement if it 

11 is shown that there was a reasonable cause for such 

12 portion and that the taxpayer acted in good faith 

13 with respect to such portion. 

14 ‘‘(2) SPECIAL RULES.—Paragraph (1) shall not 

15 apply to any reportable transaction understatement 

16 unless—

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

18 treatment of the item are adequately disclosed 

19 in accordance with the regulations prescribed 

20 under section 6011, 

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

22 for such treatment, and 

23 ‘‘(C) the taxpayer reasonably believed that 

24 such treatment was more likely than not the 

25 proper treatment. 
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1 A taxpayer failing to adequately disclose in accord2 ance with section 6011 shall be treated as meeting 

3 the requirements of subparagraph (A) if the penalty 

4 for such failure was rescinded under section 

5 6707A(d). 

6 ‘‘(3) RULES RELATING TO REASONABLE BE7 LIEF.—For purposes of paragraph (2)(C)—

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

9 treated as having a reasonable belief with re10 spect to the tax treatment of an item only if 

11 such belief—

12 ‘‘(i) is based on the facts and law that 

13 exist at the time the return of tax which 

14 includes such tax treatment is filed, and 

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

16 chances of success on the merits of such 

17 treatment and does not take into account 

18 the possibility that a return will not be au19 dited, such treatment will not be raised on 

20 audit, or such treatment will be resolved 

21 through settlement if it is raised. 

22 ‘‘(B) CERTAIN OPINIONS MAY NOT BE RE23 LIED UPON.—

24 ‘‘(i) IN GENERAL.—An opinion of a 

25 tax advisor may not be relied upon to es-
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1 tablish the reasonable belief of a taxpayer 

2 if—

3 ‘‘(I) the tax advisor is described 

4 in clause (ii), or 

5 ‘‘(II) the opinion is described in 

6 clause (iii). 

7 ‘‘(ii) DISQUALIFIED TAX ADVISORS.—

8 A tax advisor is described in this clause if 

9 the tax advisor—

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

11 the meaning of section 6111(b)(1)) 

12 who participates in the organization, 

13 management, promotion, or sale of 

14 the transaction or who is related 

15 (within the meaning of section 267(b) 

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

17 participates, 

18 ‘‘(II) is compensated directly or 

19 indirectly by a material advisor with 

20 respect to the transaction, 

21 ‘‘(III) has a fee arrangement 

22 with respect to the transaction which 

23 is contingent on all or part of the in24 tended tax benefits from the trans25 action being sustained, or
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1 ‘‘(IV) as determined under regu2 lations prescribed by the Secretary, 

3 has a continuing financial interest 

4 with respect to the transaction. 

5 ‘‘(iii) DISQUALIFIED OPINIONS.—For 

6 purposes of clause (i), an opinion is dis7 qualified if the opinion—

8 ‘‘(I) is based on unreasonable 

9 factual or legal assumptions (includ10 ing assumptions as to future events), 

11 ‘‘(II) unreasonably relies on rep12 resentations, statements, findings, or 

13 agreements of the taxpayer or any 

14 other person, 

15 ‘‘(III) does not identify and con16 sider all relevant facts, or 

17 ‘‘(IV) fails to meet any other re18 quirement as the Secretary may pre19 scribe.’’. 

20 (2) CONFORMING AMENDMENT.—The heading 

21 for subsection (c) of section 6664 is amended by in22 serting ‘‘FOR UNDERPAYMENTS’’ after ‘‘EXCEP23 TION’’. 

24 (d) CONFORMING AMENDMENTS.—
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1 (1) Subparagraph (C) of section 461(i)(3) is 

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

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

4 (2) Paragraph (3) of section 1274(b) is amend5 ed—

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

7 6662(d)(2)(C)(iii))’’ in subparagraph (B)(i), 

8 and 

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

10 subparagraph: 

11 ‘‘(C) TAX SHELTER.—For purposes of sub12 paragraph (B), the term ‘tax shelter’ means—

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

14 ‘‘(ii) any investment plan or arrange15 ment, or 

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

17 if a significant purpose of such partnership, en18 tity, plan, or arrangement is the avoidance or 

19 evasion of Federal income tax.’’. 

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

21 subparagraphs (C) and (D). 

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

23 ‘‘this part’’ and inserting ‘‘section 6662 or 6663’’. 
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1 (5) Subsection (b) of section 7525 is amended 

2 by striking ‘‘section 6662(d)(2)(C)(iii)’’ and insert3 ing ‘‘section 1274(b)(3)(C)’’. 

4 (6)(A) The heading for section 6662 is amend5 ed to read as follows: 

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

7 ON UNDERPAYMENTS.’’. 

8 (B) The table of sections for part II of sub9 chapter A of chapter 68 is amended by striking the 

10 item relating to section 6662 and inserting the fol11 lowing new items:

‘‘Sec. 6662. Imposition of accuracy-related penalty on underpayments. 

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

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

13 this section shall apply to taxable years ending after the 

14 date of the enactment of this Act. 

15 SEC. 214. PENALTY FOR UNDERSTATEMENTS ATTRIB16 UTABLE TO TRANSACTIONS LACKING ECO17 NOMIC SUBSTANCE, ETC. 

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

19 amended by inserting after section 6662A the following 

20 new section: 
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1 ‘‘SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIB2 UTABLE TO TRANSACTIONS LACKING ECO3 NOMIC SUBSTANCE, ETC. 

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

5 noneconomic substance transaction understatement for 

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

7 amount equal to 40 percent of the amount of such under8 statement. 

9 ‘‘(b) REDUCTION OF PENALTY FOR DISCLOSED

10 TRANSACTIONS.—Subsection (a) shall be applied by sub11 stituting ‘20 percent’ for ‘40 percent’ with respect to the 

12 portion of any noneconomic substance transaction under13 statement with respect to which the relevant facts affect14 ing the tax treatment of the item are adequately disclosed 

15 in the return or a statement attached to the return. 

16 ‘‘(c) NONECONOMIC SUBSTANCE TRANSACTION UN17 DERSTATEMENT.—For purposes of this section—

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

19 substance transaction understatement’ means any 

20 amount which would be an understatement under 

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

22 by taking into account items attributable to non23 economic substance transactions rather than items 

24 to which section 6662A would apply without regard 

25 to this paragraph.
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1 ‘‘(2) NONECONOMIC SUBSTANCE TRANS2 ACTION.—The term ‘noneconomic substance trans3 action’ means any transaction if—

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

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

6 the transaction giving rise to the claimed tax 

7 benefit or the transaction was not respected 

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

9 ‘‘(B) the transaction fails to meet the re10 quirements of any similar rule of law. 

11 ‘‘(d) RULES APPLICABLE TO COMPROMISE OF PEN12 ALTY.—

13 ‘‘(1) IN GENERAL.—If the 1st letter of pro14 posed deficiency which allows the taxpayer an oppor15 tunity for administrative review in the Internal Rev16 enue Service Office of Appeals has been sent with 

17 respect to a penalty to which this section applies, 

18 only the Commissioner of Internal Revenue may 

19 compromise all or any portion of such penalty. 

20 ‘‘(2) APPLICABLE RULES.—The rules of para21 graphs (3), (4), and (5) of section 6707A(d) shall 

22 apply for purposes of paragraph (1). 

23 ‘‘(e) COORDINATION WITH OTHER PENALTIES.—Ex24 cept as otherwise provided in this part, the penalty im-
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1 posed by this section shall be in addition to any other pen2 alty imposed by this title. 

3 ‘‘(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).’’.

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

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

6 inserting after the item relating to section 6662A the fol7 lowing new item:

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

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

9 this section shall apply to transactions entered into after 

10 February 13, 2003. 

11 SEC. 215. MODIFICATIONS OF SUBSTANTIAL UNDERSTATE12 MENT PENALTY FOR NONREPORTABLE 

13 TRANSACTIONS. 

14 (a) SUBSTANTIAL UNDERSTATEMENT OF CORPORA15 TIONS.—Section 6662(d)(1)(B) (relating to special rule 

16 for corporations) is amended to read as follows: 

17 ‘‘(B) SPECIAL RULE FOR CORPORA18 TIONS.—In the case of a corporation other than 

19 an S corporation or a personal holding company 

20 (as defined in section 542), there is a substan21 tial understatement of income tax for any tax-
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1 able year if the amount of the understatement 

2 for the taxable year exceeds the lesser of—

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

4 be shown on the return for the taxable 

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

6 ‘‘(ii) $10,000,000.’’.

7 (b) REDUCTION FOR UNDERSTATEMENT OF TAX8 PAYER DUE TO POSITION OF TAXPAYER OR DISCLOSED

9 ITEM.—

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

11 (relating to substantial authority) is amended to 

12 read as follows: 

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

14 the taxpayer if the taxpayer had reason15 able belief that the tax treatment was more 

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

17 (2) CONFORMING AMENDMENT.—Section 

18 6662(d) is amended by adding at the end the fol19 lowing new paragraph: 

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

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

22 6694(a)(1), the Secretary may prescribe a list of po23 sitions for which the Secretary believes there is not 

24 substantial authority or there is no reasonable belief 

25 that the tax treatment is more likely than not the 
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1 proper tax treatment. Such list (and any revisions 

2 thereof) shall be published in the Federal Register 

3 or the Internal Revenue Bulletin.’’

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

5 this section shall apply to taxable years beginning after 

6 the date of the enactment of this Act. 

7 SEC. 216. TAX SHELTER EXCEPTION TO CONFIDENTIALITY 

8 PRIVILEGES RELATING TO TAXPAYER COM9 MUNICATIONS. 

10 (a) IN GENERAL.—Section 7525(b) (relating to sec11 tion not to apply to communications regarding corporate 

12 tax shelters) is amended to read as follows: 

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

14 REGARDING TAX SHELTERS.—The privilege under sub15 section (a) shall not apply to any written communication 

16 which is—

17 ‘‘(1) between a federally authorized tax practi18 tioner and—

19 ‘‘(A) any person, 

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

21 or representative of the person, or 

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

23 profits interest in the person, and 
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1 ‘‘(2) in connection with the promotion of the di2 rect or indirect participation of the person in any 

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

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

5 this section shall apply to communications made on or 

6 after the date of the enactment of this Act. 

7 SEC. 217. DISCLOSURE OF REPORTABLE TRANSACTIONS. 

8 (a) IN GENERAL.—Section 6111 (relating to registra9 tion of tax shelters) is amended to read as follows: 

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

11 ‘‘(a) IN GENERAL.—Each material advisor with re12 spect to any reportable transaction shall make a return 

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

14 forth—

15 ‘‘(1) information identifying and describing the 

16 transaction, 

17 ‘‘(2) information describing any potential tax 

18 benefits expected to result from the transaction, and 

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

20 may prescribe. 

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

22 by the Secretary. 

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

24 ‘‘(1) MATERIAL ADVISOR.—
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1 ‘‘(A) IN GENERAL.—The term ‘material 

2 advisor’ means any person—

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

4 assistance, or advice with respect to orga5 nizing, promoting, selling, implementing, 

6 or carrying out any reportable transaction, 

7 and 

8 ‘‘(ii) who directly or indirectly derives 

9 gross income in excess of the threshold 

10 amount for such aid, assistance, or advice. 

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

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

13 ‘‘(i) $50,000 in the case of a report14 able transaction substantially all of the tax 

15 benefits from which are provided to nat16 ural persons, and 

17 ‘‘(ii) $250,000 in any other case. 

18 ‘‘(2) REPORTABLE TRANSACTION.—The term 

19 ‘reportable transaction’ has the meaning given to 

20 such term by section 6707A(c). 

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

22 regulations which provide—

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

24 meet the requirements of subsection (a) in cases in 
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•HR 2286 IH 

1 which 2 or more persons would otherwise be re2 quired to meet such requirements, 

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

4 section, and 

5 ‘‘(3) such rules as may be necessary or appro6 priate to carry out the purposes of this section.’’. 

7 (b) CONFORMING AMENDMENTS.—

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

9 table of sections for subchapter B of chapter 61 is 

10 amended to read as follows:

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

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

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

13 ‘‘SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANS14 ACTIONS MUST KEEP LISTS OF ADVISEES. 

15 ‘‘(a) IN GENERAL.—Each material advisor (as de16 fined in section 6111) with respect to any reportable 

17 transaction (as defined in section 6707A(c)) shall main18 tain, in such manner as the Secretary may by regulations 

19 prescribe, a list—

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

21 whom such advisor acted as such a material advisor 

22 with respect to such transaction, and 

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

24 Secretary may by regulations require. 
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1 This section shall apply without regard to whether a mate2 rial advisor is required to file a return under section 6111 

3 with respect to such transaction.’’. 

4 (B) Section 6112 is amended by redesignating 

5 subsection (c) as subsection (b).

6 (C) Section 6112(b), as redesignated by sub7 paragraph (B), is amended—

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

9 in paragraph (1)(A), and 

10 (ii) by striking ‘‘shall prescribe’’ in para11 graph (2) and inserting ‘‘may prescribe’’. 

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

13 table of sections for subchapter B of chapter 61 is 

14 amended to read as follows:

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

keep lists of advisees.’’.

15 (3)(A) The heading for section 6708 is amend16 ed to read as follows: 

17 ‘‘SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES 

18 WITH RESPECT TO REPORTABLE TRANS19 ACTIONS.’’. 

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

21 table of sections for part I of subchapter B of chap22 ter 68 is amended to read as follows:

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

reportable transactions.’’.
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to transactions with respect to 

3 which material aid, assistance, or advice referred to in sec4 tion 6111(b)(1)(A)(i) of the Internal Revenue Code of 

5 1986 (as added by this section) is provided after the date 

6 of the enactment of this Act. 

7 SEC. 218. MODIFICATIONS TO PENALTY FOR FAILURE TO 

8 REGISTER TAX SHELTERS. 

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

10 to furnish information regarding tax shelters) is amended 

11 to read as follows: 

12 ‘‘SEC. 6707. FAILURE TO FURNISH INFORMATION REGARD13 ING REPORTABLE TRANSACTIONS. 

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

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

16 reportable transaction—

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

18 date prescribed therefor, or 

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

20 the Secretary with respect to such transaction, 

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

22 in the amount determined under subsection (b). 

23 ‘‘(b) AMOUNT OF PENALTY.—
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1 ‘‘(1) IN GENERAL.—Except as provided in para2 graph (2), the penalty imposed under subsection (a) 

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

4 ‘‘(2) LISTED TRANSACTIONS.—The penalty im5 posed under subsection (a) with respect to any listed 

6 transaction shall be an amount equal to the greater 

7 of—

8 ‘‘(A) $200,000, or 

9 ‘‘(B) 50 percent of the gross income de10 rived by such person with respect to aid, assist11 ance, or advice which is provided with respect 

12 to the reportable transaction before the date the 

13 return including the transaction is filed under 

14 section 6111. 

15 Subparagraph (B) shall be applied by substituting 

16 ‘75 percent’ for ‘50 percent’ in the case of an inten17 tional failure or act described in subsection (a). 

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

19 section 6707A(d) (relating to authority of Commissioner 

20 to rescind penalty) shall apply to any penalty imposed 

21 under this section. 

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

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

24 have the respective meanings given to such terms by sec25 tion 6707A(c).’’.
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1 (b) CLERICAL AMENDMENT.—The item relating to 

2 section 6707 in the table of sections for part I of sub3 chapter B of chapter 68 is amended by striking ‘‘tax shel4 ters’’ and inserting ‘‘reportable transactions’’. 

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

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

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

8 SEC. 219. MODIFICATION OF PENALTY FOR FAILURE TO 

9 MAINTAIN LISTS OF INVESTORS. 

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

11 amended to read as follows: 

12 ‘‘(a) IMPOSITION OF PENALTY.—

13 ‘‘(1) IN GENERAL.—If any person who is re14 quired to maintain a list under section 6112(a) fails 

15 to make such list available upon written request to 

16 the Secretary in accordance with section 

17 6112(b)(1)(A) within 20 business days after the 

18 date of the Secretary’s request, such person shall 

19 pay a penalty of $10,000 for each day of such fail20 ure after such 20th day. 

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

22 penalty shall be imposed by paragraph (1) with re23 spect to the failure on any day if such failure is due 

24 to reasonable cause.’’. 
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1 (b) EFFECTIVE DATE.—The amendment made by 

2 this section shall apply to requests made after the date 

3 of the enactment of this Act. 

4 SEC. 220. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN 

5 CONDUCT RELATED TO TAX SHELTERS AND 

6 REPORTABLE TRANSACTIONS. 

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

8 to enjoin promoters of abusive tax shelters, etc.) is amend9 ed by redesignating subsection (c) as subsection (d) and 

10 by striking subsections (a) and (b) and inserting the fol11 lowing new subsections: 

12 ‘‘(a) AUTHORITY TO SEEK INJUNCTION.—A civil ac13 tion in the name of the United States to enjoin any person 

14 from further engaging in specified conduct may be com15 menced at the request of the Secretary. Any action under 

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

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

18 has his principal place of business, or has engaged in spec19 ified conduct. The court may exercise its jurisdiction over 

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

21 apart from any other action brought by the United States 

22 against such person. 

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

24 under subsection (a), if the court finds—
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1 ‘‘(1) that the person has engaged in any speci2 fied conduct, and 

3 ‘‘(2) that injunctive relief is appropriate to pre4 vent recurrence of such conduct, 

5 the court may enjoin such person from engaging in such 

6 conduct or in any other activity subject to penalty under 

7 this title. 

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

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

10 failure to take action, subject to penalty under section 

11 6700, 6701, 6707, or 6708.’’. 

12 (b) CONFORMING AMENDMENTS.—

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

14 read as follows: 

15 ‘‘SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RE16 LATED TO TAX SHELTERS AND REPORTABLE 

17 TRANSACTIONS.’’. 

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

19 chapter 67 is amended by striking the item relating 

20 to section 7408 and inserting the following new 

21 item:

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

reportable transactions.’’.

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

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

24 the enactment of this Act. 
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1 SEC. 221. UNDERSTATEMENT OF TAXPAYER’S LIABILITY BY 

2 INCOME TAX RETURN PREPARER. 

3 (a) STANDARDS CONFORMED TO TAXPAYER STAND4 ARDS.—Section 6694(a) (relating to understatements due 

5 to unrealistic positions) is amended—

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

7 sustained on its merits’’ in paragraph (1) and in8 serting ‘‘reasonable belief that the tax treatment in 

9 such position was more likely than not the proper 

10 treatment’’, 

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

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

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

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

15 and inserting ‘‘IMPROPER’’. 

16 (b) AMOUNT OF PENALTY.—Section 6694 is amend17 ed—

18 (1) by striking ‘‘$250’’ in subsection (a) and in19 serting ‘‘$1,000’’, and 

20 (2) by striking ‘‘$1,000’’ in subsection (b) and 

21 inserting ‘‘$5,000’’. 

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

23 this section shall apply to documents prepared after the 

24 date of the enactment of this Act. 
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1 SEC. 222. PENALTY ON FAILURE TO REPORT INTERESTS IN 

2 FOREIGN FINANCIAL ACCOUNTS. 

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

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

5 ‘‘(5) FOREIGN FINANCIAL AGENCY TRANS6 ACTION VIOLATION.—

7 ‘‘(A) PENALTY AUTHORIZED.—The Sec8 retary of the Treasury may impose a civil 

9 money penalty on any person who violates, or 

10 causes any violation of, any provision of section 

11 5314. 

12 ‘‘(B) AMOUNT OF PENALTY.—

13 ‘‘(i) IN GENERAL.—Except as pro14 vided in subparagraph (C), the amount of 

15 any civil penalty imposed under subpara16 graph (A) shall not exceed $5,000. 

17 ‘‘(ii) REASONABLE CAUSE EXCEP18 TION.—No penalty shall be imposed under 

19 subparagraph (A) with respect to any vio20 lation if—

21 ‘‘(I) such violation was due to 

22 reasonable cause, and 

23 ‘‘(II) the amount of the trans24 action or the balance in the account 

25 at the time of the transaction was 

26 properly reported.
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1 ‘‘(C) WILLFUL VIOLATIONS.—In the case 

2 of any person willfully violating, or willfully 

3 causing any violation of, any provision of sec4 tion 5314—

5 ‘‘(i) the maximum penalty under sub6 paragraph (B)(i) shall be increased to the 

7 greater of—

8 ‘‘(I) $25,000, or 

9 ‘‘(II) the amount (not exceeding 

10 $100,000) determined under subpara11 graph (D), and 

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

13 apply. 

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

15 under this subparagraph is—

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

17 a transaction, the amount of the trans18 action, or 

19 ‘‘(ii) in the case of a violation involv20 ing a failure to report the existence of an 

21 account or any identifying information re22 quired to be provided with respect to an 

23 account, the balance in the account at the 

24 time of the violation.’’. 
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1 (b) EFFECTIVE DATE.—The amendment made by 

2 this section shall apply to violations occurring after the 

3 date of the enactment of this Act. 

4 SEC. 223. FRIVOLOUS TAX SUBMISSIONS. 

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

6 read as follows: 

7 ‘‘SEC. 6702. FRIVOLOUS TAX SUBMISSIONS. 

8 ‘‘(a) CIVIL PENALTY FOR FRIVOLOUS TAX RE9 TURNS.—A person shall pay a penalty of $5,000 if—

10 ‘‘(1) such person files what purports to be a re11 turn of a tax imposed by this title but which—

12 ‘‘(A) does not contain information on 

13 which the substantial correctness of the self-as14 sessment may be judged, or 

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

16 indicates that the self-assessment is substan17 tially incorrect, and 

18 ‘‘(2) the conduct referred to in paragraph (1)— 

19 ‘‘(A) is based on a position which the Sec20 retary has identified as frivolous under sub21 section (c), or 

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

23 the administration of Federal tax laws. 

24 ‘‘(b) CIVIL PENALTY FOR SPECIFIED FRIVOLOUS

25 SUBMISSIONS.—
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1 ‘‘(1) IMPOSITION OF PENALTY.—Except as pro2 vided in paragraph (3), any person who submits a 

3 specified frivolous submission shall pay a penalty of 

4 $5,000. 

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

6 purposes of this section—

7 ‘‘(A) SPECIFIED FRIVOLOUS SUBMIS8 SION.—The term ‘specified frivolous submis9 sion’ means a specified submission if any por10 tion of such submission—

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

12 Secretary has identified as frivolous under 

13 subsection (c), or 

14 ‘‘(ii) reflects a desire to delay or im15 pede the administration of Federal tax 

16 laws. 

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

18 ‘specified submission’ means—

19 ‘‘(i) a request for a hearing under—

20 ‘‘(I) section 6320 (relating to no21 tice and opportunity for hearing upon 

22 filing of notice of lien), or 

23 ‘‘(II) section 6330 (relating to 

24 notice and opportunity for hearing be25 fore levy), and 
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1 ‘‘(ii) an application under— 

2 ‘‘(I) section 6159 (relating to 

3 agreements for payment of tax liabil4 ity in installments), 

5 ‘‘(II) section 7122 (relating to 

6 compromises), or 

7 ‘‘(III) section 7811 (relating to 

8 taxpayer assistance orders). 

9 ‘‘(3) OPPORTUNITY TO WITHDRAW SUBMIS10 SION.—If the Secretary provides a person with no11 tice that a submission is a specified frivolous sub12 mission and such person withdraws such submission 

13 within 30 days after such notice, the penalty im14 posed under paragraph (1) shall not apply with re15 spect to such submission. 

16 ‘‘(c) LISTING OF FRIVOLOUS POSITIONS.—The Sec17 retary shall prescribe (and periodically revise) a list of po18 sitions which the Secretary has identified as being frivo19 lous for purposes of this subsection. The Secretary shall 

20 not include in such list any position that the Secretary 

21 determines meets the requirement of section 

22 6662(d)(2)(B)(ii)(II). 

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

24 reduce the amount of any penalty imposed under this sec25 tion if the Secretary determines that such reduction would 
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1 promote compliance with and administration of the Fed2 eral tax laws. 

3 ‘‘(e) PENALTIES IN ADDITION TO OTHER PEN4 ALTIES.—The penalties imposed by this section shall be 

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

6 (b) TREATMENT OF FRIVOLOUS REQUESTS FOR

7 HEARINGS BEFORE LEVY.—

8 (1) FRIVOLOUS REQUESTS DISREGARDED.—

9 Section 6330 (relating to notice and opportunity for 

10 hearing before levy) is amended by adding at the 

11 end the following new subsection: 

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

13 Notwithstanding any other provision of this section, if the 

14 Secretary determines that any portion of a request for a 

15 hearing under this section or section 6320 meets the re16 quirement of clause (i) or (ii) of section 6702(b)(2)(A), 

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

18 never submitted and such portion shall not be subject to 

19 any further administrative or judicial review.’’. 

20 (2) PRECLUSION FROM RAISING FRIVOLOUS

21 ISSUES AT HEARING.—Section 6330(c)(4) is amend22 ed—

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

24 ‘‘(A)(i)’’, 

25 (B) by striking ‘‘(B)’’ and inserting ‘‘(ii)’’, 
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1 (C) by striking the period at the end of the 

2 first sentence and inserting ‘‘; or’’, and 

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

4 (as so redesignated) the following: 

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

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

7 (3) STATEMENT OF GROUNDS.—Section 

8 6330(b)(1) is amended by striking ‘‘under sub9 section (a)(3)(B)’’ and inserting ‘‘in writing under 

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

11 requested hearing’’. 

12 (c) TREATMENT OF FRIVOLOUS REQUESTS FOR

13 HEARINGS UPON FILING OF NOTICE OF LIEN.—Section 

14 6320 is amended—

15 (1) in subsection (b)(1), by striking ‘‘under sub16 section (a)(3)(B)’’ and inserting ‘‘in writing under 

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

18 requested hearing’’, and 

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

20 inserting ‘‘(e), and (g)’’. 

21 (d) TREATMENT OF FRIVOLOUS APPLICATIONS FOR

22 OFFERS-IN-COMPROMISE AND INSTALLMENT AGREE23 MENTS.—Section 7122 is amended by adding at the end 

24 the following new subsection: 
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1 ‘‘(e) FRIVOLOUS SUBMISSIONS, ETC.—Notwith2 standing any other provision of this section, if the Sec3 retary determines that any portion of an application for 

4 an offer-in-compromise or installment agreement sub5 mitted under this section or section 6159 meets the re6 quirement of clause (i) or (ii) of section 6702(b)(2)(A), 

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

8 never submitted and such portion shall not be subject to 

9 any further administrative or judicial review.’’. 

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

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

12 striking the item relating to section 6702 and inserting 

13 the following new item:

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

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

15 this section shall apply to submissions made and issues 

16 raised after the date on which the Secretary first pre17 scribes a list under section 6702(c) of the Internal Rev18 enue Code of 1986, as amended by subsection (a). 

19 SEC. 224. REGULATION OF INDIVIDUALS PRACTICING BE20 FORE THE DEPARTMENT OF TREASURY. 

21 (a) CENSURE; IMPOSITION OF PENALTY.—

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

23 United States Code, is amended—

24 (A) by inserting ‘‘, or censure,’’ after ‘‘De25 partment’’, and 
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1 (B) by adding at the end the following new 

2 flush sentence: 

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

4 representative described in the preceding sentence. If the 

5 representative was acting on behalf of an employer or any 

6 firm or other entity in connection with the conduct giving 

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

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

9 reasonably should have known, of such conduct. Such pen10 alty shall not exceed the gross income derived (or to be 

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

12 may be in addition to, or in lieu of, any suspension, disbar13 ment, or censure.’’. 

14 (2) EFFECTIVE DATE.—The amendments made 

15 by this subsection shall apply to actions taken after 

16 the date of the enactment of this Act. 

17 (b) TAX SHELTER OPINIONS, ETC.—Section 330 of 

18 such title 31 is amended by adding at the end the fol19 lowing new subsection: 

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

21 of law shall be construed to limit the authority of the Sec22 retary of the Treasury to impose standards applicable to 

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

24 transaction plan or arrangement, or other plan or arrange-
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1 ment, which is of a type which the Secretary determines 

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

3 SEC. 225. PENALTY ON PROMOTERS OF TAX SHELTERS. 

4 (a) PENALTY ON PROMOTING ABUSIVE TAX SHEL5 TERS.—Section 6700(a) is amended by adding at the end 

6 the following new sentence: ‘‘Notwithstanding the first 

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

8 imposed under this subsection involves a statement de9 scribed in paragraph (2)(A), the amount of the penalty 

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

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

12 which the penalty is imposed.’’. 

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

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

15 enactment of this Act. 

16 SEC. 226. STATUTE OF LIMITATIONS FOR TAXABLE YEARS 

17 FOR WHICH LISTED TRANSACTIONS NOT RE18 PORTED. 

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

20 substantial omission of items for income taxes) is amended 

21 by adding at the end the following new subparagraph: 

22 ‘‘(C) LISTED TRANSACTIONS.—If a tax23 payer fails to include on any return or state24 ment for any taxable year any information with 

25 respect to a listed transaction (as defined in 
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1 section 6707A(c)(2)) which is required under 

2 section 6011 to be included with such return or 

3 statement, the tax for such taxable year may be 

4 assessed, or a proceeding in court for collection 

5 of such tax may be begun without assessment, 

6 at any time within 6 years after the time the 

7 return is filed. This subparagraph shall not 

8 apply to any taxable year if the time for assess9 ment or beginning the proceeding in court has 

10 expired before the time a transaction is treated 

11 as a listed transaction under section 6011.’’. 

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

13 this section shall apply to transactions after the date of 

14 the enactment of this Act in taxable years ending after 

15 such date. 

16 SEC. 227. DENIAL OF DEDUCTION FOR INTEREST ON UN17 DERPAYMENTS ATTRIBUTABLE TO NONDIS18 CLOSED REPORTABLE AND NONECONOMIC 

19 SUBSTANCE TRANSACTIONS. 

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

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

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

23 following new subsection: 

24 ‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE

25 TO NONDISCLOSED REPORTABLE TRANSACTIONS AND
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1 NONECONOMIC SUBSTANCE TRANSACTIONS.—No deduc2 tion shall be allowed under this chapter for any interest 

3 paid or accrued under section 6601 on any underpayment 

4 of tax which is attributable to—

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

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

7 with respect to which the requirement of section 

8 6664(d)(2)(A) is not met, or 

9 ‘‘(2) any noneconomic substance transaction 

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

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

12 this section shall apply to transactions after the date of 

13 the enactment of this Act in taxable years ending after 

14 such date. 

15 Part II—Other Provisions 

16 SEC. 231. LIMITATION ON TRANSFER OR IMPORTATION OF 

17 BUILT-IN LOSSES. 

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

19 corporations) is amended by adding at the end the fol20 lowing new subsection: 

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

22 ‘‘(1) LIMITATION ON IMPORTATION OF BUILT23 IN LOSSES.—

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

25 described in subsection (a) or (b) there would 
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1 (but for this subsection) be an importation of a 

2 net built-in loss, the basis of each property de3 scribed in subparagraph (B) which is acquired 

4 in such transaction shall (notwithstanding sub5 sections (a) and (b)) be its fair market value 

6 immediately after such transaction. 

7 ‘‘(B) PROPERTY DESCRIBED.—For pur8 poses of subparagraph (A), property is de9 scribed in this paragraph if—

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

11 property is not subject to tax under this 

12 subtitle in the hands of the transferor im13 mediately before the transfer, and 

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

15 property is subject to such tax in the 

16 hands of the transferee immediately after 

17 such transfer. 

18 In any case in which the transferor is a part19 nership, the preceding sentence shall be applied 

20 by treating each partner in such partnership as 

21 holding such partner’s proportionate share of 

22 the property of such partnership. 

23 ‘‘(C) IMPORTATION OF NET BUILT-IN

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

25 there is an importation of a net built-in loss in 
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1 a transaction if the transferee’s aggregate ad2 justed bases of property described in subpara3 graph (B) which is transferred in such trans4 action would (but for this paragraph) exceed 

5 the fair market value of such property imme6 diately after such transaction.’’. 

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

8 LOSSES IN SECTION 351 TRANSACTIONS.—

9 ‘‘(A) IN GENERAL.—If—

10 ‘‘(i) property is transferred in any 

11 transaction which is described in sub12 section (a) and which is not described in 

13 paragraph (1) of this subsection, and 

14 ‘‘(ii) the transferee’s aggregate ad15 justed bases of the property so transferred 

16 would (but for this paragraph) exceed the 

17 fair market value of such property imme18 diately after such transaction, 

19 then, notwithstanding subsection (a), the trans20 feree’s aggregate adjusted bases of the property 

21 so transferred shall not exceed the fair market 

22 value of such property immediately after such 

23 transaction. 

24 ‘‘(B) ALLOCATION OF BASIS REDUC25 TION.—The aggregate reduction in basis by 
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1 reason of subparagraph (A) shall be allocated 

2 among the property so transferred in proportion 

3 to their respective built-in losses immediately 

4 before the transaction. 

5 ‘‘(C) EXCEPTION FOR TRANSFERS WITHIN

6 AFFILIATED GROUP.—Subparagraph (A) shall 

7 not apply to any transaction if the transferor 

8 owns stock in the transferee meeting the re9 quirements of section 1504(a)(2). In the case of 

10 property to which subparagraph (A) does not 

11 apply by reason of the preceding sentence, the 

12 transferor’s basis in the stock received for such 

13 property shall not exceed its fair market value 

14 immediately after the transfer.’’. 

15 (b) COMPARABLE TREATMENT WHERE LIQUIDA16 TION.—Paragraph (1) of section 334(b) (relating to liq17 uidation of subsidiary) is amended to read as follows: 

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

19 corporate distributee in a distribution in a complete 

20 liquidation to which section 332 applies (or in a 

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

22 such property in the hands of such distributee shall 

23 be the same as it would be in the hands of the trans24 feror; except that the basis of such property in the 

25 hands of such distributee shall be the fair market 
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1 value of the property at the time of the distribu2 tion—

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

4 recognized by the liquidating corporation with 

5 respect to such property, or 

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

7 corporation is a foreign corporation, the cor8 porate distributee is a domestic corporation, 

9 and the corporate distributee’s aggregate ad10 justed bases of property described in section 

11 362(e)(1)(B) which is distributed in such liq12 uidation would (but for this subparagraph) ex13 ceed the fair market value of such property im14 mediately after such liquidation.’’.

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

16 this section shall apply to transactions after the date of 

17 the enactment of this Act. 

18 SEC. 232. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS 

19 TRANSFERS. 

20 (a) TREATMENT OF CONTRIBUTED PROPERTY WITH

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

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

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

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

25 following:
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1 ‘‘(C) if any property so contributed has a 

2 built-in loss—

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

4 into account only in determining the 

5 amount of items allocated to the contrib6 uting partner, and 

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

8 in determining the amount of items allo9 cated to other partners, the basis of the 

10 contributed property in the hands of the 

11 partnership shall be treated as being equal 

12 to its fair market value immediately after 

13 the contribution. 

14 For purposes of subparagraph (C), the term ‘built15 in loss’ means the excess of the adjusted basis of the 

16 property (determined without regard to subpara17 graph (C)(ii)) over its fair market value immediately 

18 after the contribution.’’. 

19 (b) ADJUSTMENT TO BASIS OF PARTNERSHIP PROP20 ERTY ON TRANSFER OF PARTNERSHIP INTEREST IF

21 THERE IS SUBSTANTIAL BUILT-IN LOSS.—

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

23 of section 743 (relating to optional adjustment to 

24 basis of partnership property) is amended by insert25 ing before the period ‘‘or unless the partnership has 
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1 a substantial built-in loss immediately after such 

2 transfer’’. 

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

4 743 is amended by inserting ‘‘or with respect to 

5 which there is a substantial built-in loss immediately 

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

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

8 is amended by adding at the end the following new 

9 subsection: 

10 ‘‘(d) SUBSTANTIAL BUILT-IN LOSS.—

11 ‘‘(1) IN GENERAL.—For purposes of this sec12 tion, a partnership has a substantial built-in loss 

13 with respect to a transfer of an interest in a part14 nership if the transferee partner’s proportionate 

15 share of the adjusted basis of the partnership prop16 erty exceeds by more than $250,000 the basis of 

17 such partner’s interest in the partnership. 

18 ‘‘(2) REGULATIONS.—The Secretary shall pre19 scribe such regulations as may be appropriate to 

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

21 734(d), including regulations aggregating related 

22 partnerships and disregarding property acquired by 

23 the partnership in an attempt to avoid such pur24 poses.’’. 

25 (4) CLERICAL AMENDMENTS.—
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1 (A) The section heading for section 743 is 

2 amended to read as follows: 

3 ‘‘SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROP4 ERTY WHERE SECTION 754 ELECTION OR 

5 SUBSTANTIAL BUILT-IN LOSS.’’. 

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

7 part II of subchapter K of chapter 1 is amend8 ed by striking the item relating to section 743 

9 and inserting the following new item:

‘‘Sec. 743. Adjustment to basis of partnership property where section 754 election or substantial built-in loss.’’.

10 (c) ADJUSTMENT TO BASIS OF UNDISTRIBUTED

11 PARTNERSHIP PROPERTY IF THERE IS SUBSTANTIAL

12 BASIS REDUCTION.—

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

14 of section 734 (relating to optional adjustment to 

15 basis of undistributed partnership property) is 

16 amended by inserting before the period ‘‘or unless 

17 there is a substantial basis reduction’’. 

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

19 734 is amended by inserting ‘‘or unless there is a 

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

21 effect’’. 

22 (3) SUBSTANTIAL BASIS REDUCTION.—Section 

23 734 is amended by adding at the end the following 

24 new subsection: 
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1 ‘‘(d) SUBSTANTIAL BASIS REDUCTION.—

2 ‘‘(1) IN GENERAL.—For purposes of this sec3 tion, there is a substantial basis reduction with re4 spect to a distribution if the sum of the amounts de5 scribed in subparagraphs (A) and (B) of subsection 

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

7 ‘‘(2) REGULATIONS.—

‘‘For regulations to carry out this subsection, see 

section 743(d)(2).’’.

8 (4) CLERICAL AMENDMENTS.—

9 (A) The section heading for section 734 is 

10 amended to read as follows: 

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

12 PARTNERSHIP PROPERTY WHERE SECTION 

13 754 ELECTION OR SUBSTANTIAL BASIS RE14 DUCTION.’’. 

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

16 part II of subchapter K of chapter 1 is amend17 ed by striking the item relating to section 734 

18 and inserting the following new item:

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

reduction.’’.

19 (d) EFFECTIVE DATES.—

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

21 by subsection (a) shall apply to contributions made 

22 after the date of the enactment of this Act. 
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1 (2) SUBSECTION (b).—The amendments made 

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

3 date of the enactment of this Act. 

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

5 by subsection (c) shall apply to distributions after 

6 the date of the enactment of this Act. 

7 SEC. 233. NO REDUCTION OF BASIS UNDER SECTION 734 IN 

8 STOCK HELD BY PARTNERSHIP IN COR9 PORATE PARTNER. 

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

11 at the end the following new subsection: 

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

13 STOCK OF CORPORATE PARTNER.—In making an alloca14 tion under subsection (a) of any decrease in the adjusted 

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

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

17 corporation which is a partner in the partnership, 

18 and 

19 ‘‘(2) any amount not allocable to stock by rea20 son of paragraph (1) shall be allocated under sub21 section (a) to other partnership property. 

22 Gain shall be recognized to the partnership to the extent 

23 that the amount required to be allocated under paragraph 

24 (2) to other partnership property exceeds the aggregate
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1 adjusted basis of such other property immediately before 

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

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

4 this section shall apply to distributions after the date of 

5 the enactment of this Act. 

6 SEC. 234. REPEAL OF SPECIAL RULES FOR FASITS. 

7 (a) IN GENERAL.—Part V of subchapter M of chap8 ter 1 (relating to financial asset securitization investment 

9 trusts) is hereby repealed. 

10 (b) CONFORMING AMENDMENTS.—

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

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

13 REMIC’’. 

14 (2) Clause (ii) of section 382(l)(4)(B) is amend15 ed by striking ‘‘a REMIC to which part IV of sub16 chapter M applies, or a FASIT to which part V of 

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

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

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

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

21 FASIT,’’. 

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

23 amended by striking the last sentence. 

24 (5) Paragraph (5) of section 860G(a) is amend25 ed by adding ‘‘and’’ at the end of subparagraph (B), 
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1 by striking ‘‘, and’’ at the end of subparagraph (C) 

2 and inserting a period, and by striking subparagraph 

3 (D). 

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

5 amended by striking ‘‘REMIC, or FASIT’’ and in6 serting ‘‘or REMIC’’. 

7 (7) Subparagraph (C) of section 7701(a)(19) is 

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

9 by striking ‘‘, and’’ at the end of clause (x) and in10 serting a period, and by striking clause (xi). 

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

12 chapter 1 is amended by striking the item relating 

13 to part V. 

14 (c) EFFECTIVE DATE.—

15 (1) IN GENERAL.—Except as provided in para16 graph (2), the amendments made by this section 

17 shall apply to taxable years beginning after Decem18 ber 31, 2003. 

19 (2) EXCEPTION FOR EXISTING FASITS.—

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

21 apply to any FASIT in existence on the date of 

22 the enactment of this Act. 

23 (B) TRANSFER OF ADDITIONAL ASSETS

24 NOT PERMITTED.—Except as provided in regu25 lations prescribed by the Secretary of the 
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1 Treasury or the Secretary’s delegate, subpara2 graph (A) shall cease to apply as of the earliest 

3 date after the date of the enactment of this Act 

4 that any property is transferred to the FASIT. 

5 SEC. 235. EXPANDED DISALLOWANCE OF DEDUCTION FOR 

6 INTEREST ON CONVERTIBLE DEBT. 

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

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

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

10 other person’’. 

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

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

13 in the material preceding subparagraph (A) and inserting 

14 ‘‘or any other person’’. 

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

16 this section shall apply to debt instruments issued after 

17 the date of the enactment of this Act. 

18 SEC. 236. EXPANDED AUTHORITY TO DISALLOW TAX BENE19 FITS UNDER SECTION 269. 

20 (a) IN GENERAL.—Subsection (a) of section 269 (re21 lating to acquisitions made to evade or avoid income tax) 

22 is amended to read as follows: 

23 ‘‘(a) IN GENERAL.—If—

24 ‘‘(1)(A) any person acquires stock in a corpora25 tion, or 
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1 ‘‘(B) any corporation acquires, directly or indi2 rectly, property of another corporation and the basis 

3 of such property, in the hands of the acquiring cor4 poration, is determined by reference to the basis in 

5 the hands of the transferor corporation, and 

6 ‘‘(2) the principal purpose for which such acqui7 sition was made is evasion or avoidance of Federal 

8 income tax by securing the benefit of a deduction, 

9 credit, or other allowance, 

10 then the Secretary may disallow such deduction, credit, 

11 or other allowance.’’. 

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

13 this section shall apply to stock and property acquired 

14 after February 13, 2003. 

15 SEC. 237. MODIFICATIONS OF CERTAIN RULES RELATING 

16 TO CONTROLLED FOREIGN CORPORATIONS. 

17 (a) LIMITATION ON EXCEPTION FROM PFIC RULES

18 FOR UNITED STATES SHAREHOLDERS OF CONTROLLED

19 FOREIGN CORPORATIONS.—Paragraph (2) of section 

20 1297(e) (relating to passive investment company) is 

21 amended by adding at the end the following flush sen22 tence: 

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

24 only a remote likelihood of an inclusion in gross in-
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1 come under section 951(a)(1)(A)(i) of subpart F in2 come of such corporation for such period.’’. 

3 (b) DETERMINATION OF PRO RATA SHARE OF SUB4 PART F INCOME.—Subsection (a) of section 951 (relating 

5 to amounts included in gross income of United States 

6 shareholders) is amended by adding at the end the fol7 lowing new paragraph: 

8 ‘‘(4) SPECIAL RULES FOR DETERMINING PRO

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

10 share under paragraph (2) shall be determined by 

11 disregarding—

12 ‘‘(A) any rights lacking substantial eco13 nomic effect, and 

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

15 a tax-indifferent party (as defined in section 

16 7701(m)(3)) if the amount which would (but 

17 for this paragraph) be allocated to such share18 holder does not reflect such shareholder’s eco19 nomic share of the earnings and profits of the 

20 corporation.’’. 

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

22 this section shall apply to taxable years on controlled for23 eign corporation beginning after February 13, 2003, and 

24 to taxable years of United States shareholder in which or 
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1 with which such taxable years of controlled foreign cor2 porations end. 

3 SEC. 238. BASIS FOR DETERMINING LOSS ALWAYS RE4 DUCED BY NONTAXED PORTION OF DIVI5 DENDS. 

6 (a) IN GENERAL.—Section 1059 (relating to cor7 porate shareholder’s basis in stock reduced by nontaxed 

8 portion of extraordinary dividends) is amended by redesig9 nating subsection (g) as subsection (h) and by inserting 

10 after subsection (f) the following new subsection: 

11 ‘‘(g) BASIS FOR DETERMINING LOSS ALWAYS RE12 DUCED BY NONTAXED PORTION OF DIVIDENDS.—The 

13 basis of stock in a corporation (for purposes of deter14 mining loss) shall be reduced by the nontaxed portion of 

15 any dividend received with respect to such stock if this 

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

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

18 this section shall apply to dividends received after the date 

19 of the enactment of this Act. 

20 SEC. 239. AFFIRMATION OF CONSOLIDATED RETURN REGU21 LATION AUTHORITY. 

22 (a) IN GENERAL.—Section 1502 (relating to consoli23 dated return regulations) is amended by adding at the end 

24 the following new sentence: ‘‘In prescribing such regula25 tions, the Secretary may prescribe rules applicable to cor-
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1 porations filing consolidated returns under section 1501 

2 that are different from other provisions of this title that 

3 would apply if such corporations filed separate returns.’’. 

4 (b) RESULT NOT OVERTURNED.—Notwithstanding 

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

6 be construed by treating Treasury regulation § 1.1502–

7 20(c)(1)(iii) (as in effect on January 1, 2001) as being 

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

9 1357 (Fed. Cir. 2001). 

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

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

12 the date of the enactment of this Act. 

13 Subtitle B—PREVENTION OF 

14 CORPORATE EXPATRIATION 

15 TO AVOID UNITED STATES IN16 COME TAX

17 SEC. 251. PREVENTION OF CORPORATE EXPATRIATION TO 

18 AVOID UNITED STATES INCOME TAX. 

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

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

21 ‘‘(4) DOMESTIC.—

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

23 subparagraph (B), the term ‘domestic’ when ap24 plied to a corporation or partnership means cre25 ated or organized in the United States or under 
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1 the law of the United States or of any State 

2 unless, in the case of a partnership, the Sec3 retary provides otherwise by regulations. 

4 ‘‘(B) CERTAIN CORPORATIONS TREATED

5 AS DOMESTIC.—

6 ‘‘(i) IN GENERAL.—The acquiring cor7 poration in a corporate expatriation trans8 action shall be treated as a domestic cor9 poration. 

10 ‘‘(ii) CORPORATE EXPATRIATION

11 TRANSACTION.—For purposes of this sub12 paragraph, the term ‘corporate expatria13 tion transaction’ means any transaction 

14 if—

15 ‘‘(I) a nominally foreign corpora16 tion (referred to in this subparagraph 

17 as the ‘acquiring corporation’) ac18 quires, as a result of such transaction, 

19 directly or indirectly substantially all 

20 of the properties held directly or indi21 rectly by a domestic corporation, and 

22 ‘‘(II) immediately after the trans23 action, more than 80 percent of the 

24 stock (by vote or value) of the acquir25 ing corporation is held by former
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1 shareholders of the domestic corpora2 tion by reason of holding stock in the 

3 domestic corporation. 

4 ‘‘(iii) LOWER STOCK OWNERSHIP RE5 QUIREMENT IN CERTAIN CASES.—Sub6 clause (II) of clause (ii) shall be applied by 

7 substituting ‘50 percent’ for ‘80 percent’ 

8 with respect to any nominally foreign cor9 poration if—

10 ‘‘(I) such corporation does not 

11 have substantial business activities 

12 (when compared to the total business 

13 activities of the expanded affiliated 

14 group) in the foreign country in which 

15 or under the law of which the corpora16 tion is created or organized, and 

17 ‘‘(II) the stock of the corporation 

18 is publicly traded and the principal 

19 market for the public trading of such 

20 stock is in the United States. 

21 ‘‘(iv) PARTNERSHIP TRANSACTIONS.—

22 The term ‘corporate expatriation trans23 action’ includes any transaction if—

24 ‘‘(I) a nominally foreign corpora25 tion (referred to in this subparagraph 
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1 as the ‘acquiring corporation’) ac2 quires, as a result of such transaction, 

3 directly or indirectly properties consti4 tuting a trade or business of a domes5 tic partnership, 

6 ‘‘(II) immediately after the trans7 action, more than 80 percent of the 

8 stock (by vote or value) of the acquir9 ing corporation is held by former 

10 partners of the domestic partnership 

11 or related foreign partnerships (deter12 mined without regard to stock of the 

13 acquiring corporation which is sold in 

14 a public offering related to the trans15 action), and 

16 ‘‘(III) the acquiring corporation 

17 meets the requirements of subclauses 

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

19 ‘‘(v) SPECIAL RULES.—For purposes 

20 of this subparagraph—

21 ‘‘(I) a series of related trans22 actions shall be treated as 1 trans23 action, and 

24 ‘‘(II) stock held by members of 

25 the expanded affiliated group which 
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1 includes the acquiring corporation 

2 shall not be taken into account in de3 termining ownership. 

4 ‘‘(vi) OTHER DEFINITIONS.—For pur5 poses of this subparagraph—

6 ‘‘(I) NOMINALLY FOREIGN COR7 PORATION.—The term ‘nominally for8 eign corporation’ means any corpora9 tion which would (but for this sub10 paragraph) be treated as a foreign 

11 corporation. 

12 ‘‘(II) EXPANDED AFFILIATED

13 GROUP.—The term ‘expanded affili14 ated group’ means an affiliated group 

15 (as defined in section 1504(a) without 

16 regard to section 1504(b)). 

17 ‘‘(III) RELATED FOREIGN PART18 NERSHIP.—A foreign partnership is 

19 related to a domestic partnership if 

20 they are under common control (with21 in the meaning of section 482), or 

22 they shared the same trademark or 

23 tradename.’’. 

24 (b) EFFECTIVE DATES.—
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1 (1) IN GENERAL.—The amendment made by 

2 this section shall apply to corporate expatriation 

3 transactions completed after September 11, 2001. 

4 (2) SPECIAL RULE.—The amendment made by 

5 this section shall also apply to corporate expatriation 

6 transactions completed on or before September 11, 

7 2001, but only with respect to taxable years of the 

8 acquiring corporation beginning after December 31, 

9 2003.

Æ