I 

109TH CONGRESS 

1ST SESSION H. R. 2625 

To amend the Internal Revenue Code of 1986 to curb tax abuses by disallowing tax benefits claimed to arise from transactions without substantial economic substance, and for other purposes. 

IN THE HOUSE OF REPRESENTATIVES 

MAY 25, 2005 

Mr. DOGGETT (for himself, Mr. LEVIN, Mr. STARK, Mr. MCDERMOTT, Mr. 

NEAL of Massachusetts, Mr. MCNULTY, Mr. LEWIS of Georgia, Mr. JEFFERSON, Mr. BECERRA, Mr. EMANUEL, Mr. ALLEN, Ms. BALDWIN, Mr. 

BERMAN, Mr. BROWN of Ohio, Mrs. CAPPS, Mr. CASE, Mr. CONYERS, 

Mr. COSTELLO, Mr. CROWLEY, Mr. DAVIS of Illinois, Mr. DEFAZIO, Ms. 

DEGETTE, Ms. DELAURO, Mr. FARR, Mr. FATTAH, Mr. FILNER, Mr. 

GENE GREEN of Texas, Mr. GRIJALVA, Ms. JACKSON-LEE of Texas, Mr. 

KUCINICH, Ms. LEE, Mr. MARKEY, Mr. MCGOVERN, Mrs. MALONEY, Mr. 

GEORGE MILLER of California, Mr. NADLER, Mrs. NAPOLITANO, Mr. 

OBERSTAR, Mr. RYAN of Ohio, Mr. SABO, Ms. LORETTA SANCHEZ of 

California, Mr. SANDERS, Ms. SCHAKOWSKY, Mr. SHERMAN, Ms. 

SLAUGHTER, Mr. STRICKLAND, Ms. SOLIS, Mr. TAYLOR of Mississippi, 

Mr. TIERNEY, Mrs. JONES of Ohio, Ms. WATERS, and Mr. WAXMAN) 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 curb tax 

abuses by disallowing tax benefits claimed to arise from 

transactions without substantial economic substance, 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; ETC. 

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

3 ‘‘Abusive Tax Shelter Shutdown and Taxpayer Account4 ability Act of 2005’’. 

5 (b) AMENDMENT OF 1986 CODE.—Except as other6 wise expressly provided, whenever in this Act an amend7 ment or repeal is expressed in terms of an amendment 

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

9 shall be considered to be made to a section or other provi10 sion of the Internal Revenue Code of 1986. 

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

12 this Act is as follows: 

Sec. 1. Short title; etc. 

Sec. 2. Findings and purpose. 

TITLE I—PROVISIONS DESIGNED TO CURTAIL TAX SHELTERS 

Sec. 101. Clarification of economic substance doctrine. 

Sec. 102. Modification of penalty for failing to disclose reportable transaction. 

Sec. 103. Penalty for understatements attributable to transactions lacking economic substance, etc. 

Sec. 104. Required disclosure by material advisors not subject to claim of confidentiality. 

Sec. 105. Understatement of taxpayer’s liability by income tax return preparer. 

Sec. 106. Frivolous tax submissions. 

Sec. 107. Denial of deduction for interest on Underpayments attributable to 

nondisclosed reportable and noneconomic substance transactions. 

TITLE II—OTHER PROVISIONS 

Sec. 201. Expanded authority to disallow tax benefits under Section 269. 

Sec. 202. Modifications of certain rules relating to controlled foreign corporations. 

Sec. 203. Basis for determining loss always reduced by nontaxed portion of 

dividends. 

13 SEC. 2. FINDINGS AND PURPOSE. 

14 (a) FINDINGS.—The Congress hereby finds that: 
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1 (1) Many corporate tax shelter transactions are 

2 complicated ways of accomplishing nothing aside 

3 from claimed tax benefits, and the legal opinions 

4 justifying those transactions take an inappropriately 

5 narrow and restrictive view of well-developed court 

6 doctrines under which— 

7 (A) the taxation of a transaction is deter8 mined in accordance with its substance and not 

9 merely its form, 

10 (B) transactions which have no significant 

11 effect on the taxpayer’s economic or beneficial 

12 interests except for tax benefits are treated as 

13 sham transactions and disregarded, 

14 (C) transactions involving multiple steps 

15 are collapsed when those steps have no substan16 tial economic meaning and are merely designed 

17 to create tax benefits, 

18 (D) transactions with no business purpose 

19 are not given effect, and 

20 (E) in the absence of a specific congres21 sional authorization, it is presumed that Con22 gress did not intend a transaction to result in 

23 a negative tax where the taxpayer’s economic 

24 position or rate of return is better after tax 

25 than before tax. 
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1 (2) Permitting aggressive and abusive tax shel2 ters not only results in large revenue losses but also 

3 undermines voluntary compliance with the Internal 

4 Revenue Code of 1986. 

5 (b) PURPOSE.—The purpose of this Act is to elimi6 nate abusive tax shelters by denying tax attributes claimed 

7 to arise from transactions that do not meet a heightened 

8 economic substance requirement and by repealing the pro9 vision that permits legal opinions to be used to avoid pen10 alties on tax underpayments resulting from transactions 

11 without significant economic substance or business pur12 pose. 

13 TITLE I—PROVISIONS DESIGNED 

14 TO CURTAIL TAX SHELTERS 

15 SEC. 101. CLARIFICATION OF ECONOMIC SUBSTANCE DOC16 TRINE. 

17 (a) IN GENERAL.—Section 7701 is amended by re18 designating subsection (o) as subsection (p) and by insert19 ing after subsection (n) the following new subsection: 

20 ‘‘(o) CLARIFICATION OF ECONOMIC SUBSTANCE

21 DOCTRINE; ETC.— 

22 ‘‘(1) GENERAL RULES.— 

23 ‘‘(A) IN GENERAL.—In applying the eco24 nomic substance doctrine, the determination of 
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1 whether a transaction has economic substance 

2 shall be made as provided in this paragraph. 

3 ‘‘(B) DEFINITION OF ECONOMIC SUB4 STANCE.—For purposes of subparagraph (A)— 

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

6 economic substance only if— 

7 ‘‘(I) the transaction changes in a 

8 meaningful way (apart from Federal 

9 tax effects and, if there are any Fed10 eral tax effects, also apart from any 

11 foreign, State, or local tax effects) the 

12 taxpayer’s economic position, and 

13 ‘‘(II) the taxpayer has a substan14 tial nontax purpose for entering into 

15 such transaction and the transaction 

16 is a reasonable means of accom17 plishing such purpose. 

18 ‘‘(ii) SPECIAL RULE WHERE TAX19 PAYER RELIES ON PROFIT POTENTIAL.—A 

20 transaction shall not be treated as having 

21 economic substance by reason of having a 

22 potential for profit unless— 

23 ‘‘(I) the present value of the rea24 sonably expected pre-tax profit from 

25 the transaction is substantial in rela-
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1 tion to the present value of the ex2 pected net tax benefits that would be 

3 allowed if the transaction were re4 spected, and 

5 ‘‘(II) the reasonably expected 

6 pre-tax profit from the transaction ex7 ceeds a risk-free rate of return. 

8 ‘‘(C) TREATMENT OF FEES AND FOREIGN

9 TAXES.—Fees and other transaction expenses 

10 and foreign taxes shall be taken into account as 

11 expenses in determining pre-tax profit under 

12 subparagraph (B)(ii). 

13 ‘‘(2) SPECIAL RULES FOR TRANSACTIONS WITH

14 TAX-INDIFFERENT PARTIES.— 

15 ‘‘(A) SPECIAL RULES FOR FINANCING

16 TRANSACTIONS.—The form of a transaction 

17 which is in substance the borrowing of money 

18 or the acquisition of financial capital directly or 

19 indirectly from a tax-indifferent party shall not 

20 be respected if the present value of the deduc21 tions to be claimed with respect to the trans22 action is substantially in excess of the present 

23 value of the anticipated economic returns of the 

24 person lending the money or providing the fi25 nancial capital. A public offering shall be treat-
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1 ed as a borrowing, or an acquisition of financial 

2 capital, from a tax-indifferent party if it is rea3 sonably expected that at least 50 percent of the 

4 offering will be placed with tax-indifferent par5 ties. 

6 ‘‘(B) ARTIFICIAL INCOME SHIFTING AND

7 BASIS ADJUSTMENTS.—The form of a trans8 action with a tax-indifferent party shall not be 

9 respected if— 

10 ‘‘(i) it results in an allocation of in11 come or gain to the tax-indifferent party in 

12 excess of such party’s economic income or 

13 gain, or 

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

15 or shifting of basis on account of over16 stating the income or gain of the tax-indif17 ferent party. 

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

19 purposes of this subsection— 

20 ‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.— 

21 The term ‘economic substance doctrine’ means 

22 the common law doctrine under which tax bene23 fits under subtitle A with respect to a trans24 action are not allowable if the transaction does 
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1 not have economic substance or lacks a business 

2 purpose. 

3 ‘‘(B) TAX-INDIFFERENT PARTY.—The 

4 term ‘tax-indifferent party’ means any person 

5 or entity not subject to tax imposed by subtitle 

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

7 party with respect to a transaction if the items 

8 taken into account with respect to the trans9 action have no substantial impact on such per10 son’s liability under subtitle A. 

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

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

13 a purpose of achieving a financial accounting 

14 benefit shall not be taken into account in deter15 mining whether a transaction has a substantial 

16 nontax purpose if the origin of such financial 

17 accounting benefit is a reduction of income tax. 

18 ‘‘(D) EXCEPTION FOR PERSONAL TRANS19 ACTIONS OF INDIVIDUALS.—In the case of an 

20 individual, this subsection shall apply only to 

21 transactions entered into in connection with a 

22 trade or business or an activity engaged in for 

23 the production of income. 

24 ‘‘(E) TREATMENT OF LESSORS.—In apply25 ing subclause (I) of paragraph (1)(B)(ii) to the 
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1 lessor of tangible property subject to a lease, 

2 the expected net tax benefits shall not include 

3 the benefits of depreciation, or any tax credit, 

4 with respect to the leased property and sub5 clause (II) of paragraph (1)(B)(ii) shall be dis6 regarded in determining whether any of such 

7 benefits are allowable. 

8 ‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF9 FECTED.—Except as specifically provided in this 

10 subsection, the provisions of this subsection shall not 

11 be construed as altering or supplanting any other 

12 rule of law, and the requirements of this subsection 

13 shall be construed as being in addition to any such 

14 other rule of law. 

15 ‘‘(5) REGULATIONS.—The Secretary shall pre16 scribe such regulations as may be necessary or ap17 propriate to carry out the purposes of this sub18 section. Such regulations may include exemptions 

19 from the application of this subsection.’’. 

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

21 this section shall apply to transactions entered into after 

22 February 13, 2003. 
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1 SEC. 102. MODIFICATION OF PENALTY FOR FAILING TO DIS2 CLOSE REPORTABLE TRANSACTION. 

3 (a) INCREASE IN PENALTY FOR LARGE ENTITIES

4 AND HIGH NET WORTH INDIVIDUALS.— 

5 (1) IN GENERAL.—Subsection (b) of section 

6 6707A is amended to read as follows: 

7 ‘‘(b) AMOUNT OF PENALTY.— 

8 ‘‘(1) IN GENERAL.—Except as provided in para9 graph (2), the amount of the penalty under sub10 section (a) shall be— 

11 ‘‘(A) $10,000 in the case of a natural per12 son who is not a high net worth individual, 

13 ‘‘(B) $100,000 in the case of a large entity 

14 or a high net worth individual, and 

15 ‘‘(C) $50,000 in any other case. 

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

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

18 listed transaction shall be— 

19 ‘‘(A) $100,000 in the case of a natural 

20 person who is not a high net worth individual, 

21 and 

22 ‘‘(B) $200,000 in any other case.’’. 

23 (2) LARGE ENTITIES AND HIGH NET WORTH IN24 DIVIDUALS DEFINED.—Subsection (c) of section 

25 6707A is amended by adding at the end the fol26 lowing new paragraphs: 
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1 ‘‘(1) LARGE ENTITY.—The term ‘large entity’ 

2 means, with respect to any taxable year, a person 

3 (other than a natural person) with gross receipts in 

4 excess of $10,000,000 for the taxable year in which 

5 the reportable transaction occurs or the preceding 

6 taxable year. Rules similar to the rules of paragraph 

7 (2) and subparagraphs (B), (C), and (D) of para8 graph (3) of section 448(c) shall apply for purposes 

9 of this subparagraph. 

10 ‘‘(2) HIGH NET WORTH INDIVIDUAL.—The 

11 term ‘high net worth individual’ means, with respect 

12 to a reportable transaction, a natural person whose 

13 net worth exceeds $2,000,000 immediately before 

14 the transaction.’’. 

15 (b) RESTRICTION OF AUTHORITY TO RESCIND PEN16 ALTY.—Paragraph (1) of section 6707A(d) is amended by 

17 striking ‘‘and’’ at the end of subparagraph (A), by redesig18 nating subparagraph (B) as subparagraph (E), and by in19 serting after subparagraph (A) the following new subpara20 graphs: 

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

22 imposed has a history of complying with the re23 quirements of this title, 

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

25 to an unintentional mistake of fact, 
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1 ‘‘(D) imposing the penalty would be 

2 against equity and good conscience, and’’. 

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

4 this section shall apply to returns and statements the due 

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

6 Act. 

7 SEC. 103. PENALTY FOR UNDERSTATEMENTS ATTRIB8 UTABLE TO TRANSACTIONS LACKING ECO9 NOMIC SUBSTANCE, ETC. 

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

11 amended by inserting after section 6662A the following 

12 new section: 

13 ‘‘SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIB14 UTABLE TO TRANSACTIONS LACKING ECO15 NOMIC SUBSTANCE, ETC. 

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

17 noneconomic substance transaction understatement for 

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

19 amount equal to 40 percent of the amount of such under20 statement. 

21 ‘‘(b) REDUCTION OF PENALTY FOR DISCLOSED

22 TRANSACTIONS.—Subsection (a) shall be applied by sub23 stituting ‘20 percent’ for ‘40 percent’ with respect to the 

24 portion of any noneconomic substance transaction under25 statement with respect to which the relevant facts affect-
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1 ing the tax treatment of the item are adequately disclosed 

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

3 ‘‘(c) NONECONOMIC SUBSTANCE TRANSACTION UN4 DERSTATEMENT.—For purposes of this section— 

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

6 substance transaction understatement’ means any 

7 amount which would be an understatement under 

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

9 by taking into account items attributable to non10 economic substance transactions rather than items 

11 to which section 6662A would apply without regard 

12 to this paragraph. 

13 ‘‘(2) NONECONOMIC SUBSTANCE TRANS14 ACTION.—The term ‘noneconomic substance trans15 action’ means any transaction if— 

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

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

18 the transaction giving rise to the claimed tax 

19 benefit or the transaction was not respected 

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

21 ‘‘(B) the transaction fails to meet the re22 quirements of any similar rule of law. 

23 ‘‘(d) RULES APPLICABLE TO COMPROMISE OF PEN24 ALTY.— 
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1 ‘‘(1) IN GENERAL.—If the 1st letter of pro2 posed deficiency which allows the taxpayer an oppor3 tunity for administrative review in the Internal Rev4 enue Service Office of Appeals has been sent with 

5 respect to a penalty to which this section applies, 

6 only the Commissioner of Internal Revenue may 

7 compromise all or any portion of such penalty. 

8 ‘‘(2) APPLICABLE RULES.—The rules of para9 graphs (3), (4), and (5) of section 6707A(d) shall 

10 apply for purposes of paragraph (1). 

11 ‘‘(e) COORDINATION WITH OTHER PENALTIES.—Ex12 cept as otherwise provided in this part, the penalty im13 posed by this section shall be in addition to any other pen14 alty imposed by this title. 

15 ‘‘(f) CROSS REFERENCES.— 

16 ‘‘(1) For coordination of penalty with under17 statements under section 6662 and other special 

18 rules, see section 6662A(e). 

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

20 this section to the Securities and Exchange Commis21 sion, see section 6707A(e).’’. 

22 (b) COORDINATION WITH OTHER UNDERSTATE23 MENTS AND PENALTIES.— 

24 (1) Subparagraph (A) of section 6662(d)(2) is 

25 amended by inserting ‘‘and without regard to items 
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1 with respect to which a penalty is imposed by section 

2 6662B’’ before the period at the end. 

3 (2) Subsection (e) of section 6662A is amend4 ed— 

5 (A) in paragraph (1), by inserting ‘‘and 

6 noneconomic substance transaction understate7 ments’’ after ‘‘reportable transaction under8 statements’’ each place it appears, 

9 (B) in paragraph (2)(A) and (3), by insert10 ing ‘‘and noneconomic substance transaction 

11 understatement’’ after ‘‘reportable transaction 

12 understatement’’, 

13 (C) in paragraph (2)(B), by inserting 

14 ‘‘6662B or’’ before ‘‘6663’’, 

15 (D) in paragraph (2)(C)(i), by inserting 

16 ‘‘or section 6662B’’ before the period at the 

17 end, and 

18 (E) in paragraph (2)(C)(ii), by inserting 

19 ‘‘and section 6662B’’ after ‘‘This section’’, and 

20 (F) by adding at the end the following new 

21 paragraph: 

22 ‘‘(4) NONECONOMIC SUBSTANCE TRANSACTION

23 UNDERSTATEMENT.—For purposes of this sub24 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 (c) CLERICAL AMENDMENT.—The table of sections 

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

5 inserting after the item relating to section 6662A the fol6 lowing new item: 

‘‘Sec. 6662B. Penalty for understatements attributable to transactions lacking 

economic substance, etc.’’. 

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

8 this section shall apply to transactions entered into after 

9 February 13, 2003. Sections 6662(d)(2)(A) and 6662A(e) 

10 of the Internal Revenue Code of 1986 shall apply to such 

11 transactions to the extent such sections relate to such 

12 amendments. 

13 SEC. 104. REQUIRED DISCLOSURE BY MATERIAL ADVISORS 

14 NOT SUBJECT TO CLAIM OF CONFIDEN15 TIALITY. 

16 (a) IN GENERAL.—Paragraph (1) of section 6112(b) 

17 is amended by adding at the end the following new flush 

18 sentence: 

19 ‘‘For purposes of this section, the identity of any 

20 person on such list shall not be privileged.’’. 

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

22 this section shall take effect as if included in the amend23 ments made by section 142 of the Deficit Reduction Act 

24 of 1984. 
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1 SEC. 105. 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 and 

15 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. 106. FRIVOLOUS TAX SUBMISSIONS. 

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

3 read as follows: 

4 ‘‘SEC. 6702. FRIVOLOUS TAX SUBMISSIONS. 

5 ‘‘(a) CIVIL PENALTY FOR FRIVOLOUS TAX RE6 TURNS.—A person shall pay a penalty of $5,000 if— 

7 ‘‘(1) such person files what purports to be a re8 turn of a tax imposed by this title but which— 

9 ‘‘(A) does not contain information on 

10 which the substantial correctness of the self-as11 sessment may be judged, or 

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

13 indicates that the self-assessment is substan14 tially incorrect; and 

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

16 ‘‘(A) is based on a position which the Sec17 retary has identified as frivolous under sub18 section (c), or 

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

20 the administration of Federal tax laws. 

21 ‘‘(b) CIVIL PENALTY FOR SPECIFIED FRIVOLOUS

22 SUBMISSIONS.— 

23 ‘‘(1) IMPOSITION OF PENALTY.—Except as pro24 vided in paragraph (3), any person who submits a 

25 specified frivolous submission shall pay a penalty of 

26 $5,000. 
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1 ‘‘(2) SPECIFIED FRIVOLOUS SUBMISSION.—For 

2 purposes of this section— 

3 ‘‘(A) SPECIFIED FRIVOLOUS SUBMIS4 SION.—The term ‘specified frivolous submis5 sion’ means a specified submission if any por6 tion of such submission— 

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

8 Secretary has identified as frivolous under 

9 subsection (c), or 

10 ‘‘(ii) reflects a desire to delay or im11 pede the administration of Federal tax 

12 laws. 

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

14 ‘specified submission’ means— 

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

16 ‘‘(I) section 6320 (relating to no17 tice and opportunity for hearing upon 

18 filing of notice of lien), or 

19 ‘‘(II) section 6330 (relating to 

20 notice and opportunity for hearing be21 fore levy), and 

22 ‘‘(ii) an application under— 

23 ‘‘(I) section 6159 (relating to 

24 agreements for payment of tax liabil25 ity in installments), 
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1 ‘‘(II) section 7122 (relating to 

2 compromises), or 

3 ‘‘(III) section 7811 (relating to 

4 taxpayer assistance orders). 

5 ‘‘(3) OPPORTUNITY TO WITHDRAW SUBMIS6 SION.—If the Secretary provides a person with no7 tice that a submission is a specified frivolous sub8 mission and such person withdraws such submission 

9 within 30 days after such notice, the penalty im10 posed under paragraph (1) shall not apply with re11 spect to such submission. 

12 ‘‘(c) LISTING OF FRIVOLOUS POSITIONS.—The Sec13 retary shall prescribe (and periodically revise) a list of po14 sitions which the Secretary has identified as being frivo15 lous for purposes of this subsection. The Secretary shall 

16 not include in such list any position that the Secretary 

17 determines meets the requirement of section 

18 6662(d)(2)(B)(ii)(II). 

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

20 reduce the amount of any penalty imposed under this sec21 tion if the Secretary determines that such reduction would 

22 promote compliance with and administration of the Fed23 eral tax laws. 
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1 ‘‘(e) PENALTIES IN ADDITION TO OTHER PEN2 ALTIES.—The penalties imposed by this section shall be 

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

4 (b) TREATMENT OF FRIVOLOUS REQUESTS FOR

5 HEARINGS BEFORE LEVY.— 

6 (1) FRIVOLOUS REQUESTS DISREGARDED.— 

7 Section 6330 (relating to notice and opportunity for 

8 hearing before levy) is amended by adding at the 

9 end the following new subsection: 

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

11 Notwithstanding any other provision of this section, if the 

12 Secretary determines that any portion of a request for a 

13 hearing under this section or section 6320 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 (2) PRECLUSION FROM RAISING FRIVOLOUS

19 ISSUES AT HEARING.—Section 6330(c)(4) is amend20 ed— 

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

22 ‘‘(A)(i)’’; 

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

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

25 first sentence and inserting ‘‘; or’’; and 
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1 (D) by inserting after subparagraph (A)(ii) 

2 (as so redesignated) the following: 

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

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

5 (3) STATEMENT OF GROUNDS.—Section 

6 6330(b)(1) is amended by striking ‘‘under sub7 section (a)(3)(B)’’ and inserting ‘‘in writing under 

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

9 requested hearing’’. 

10 (c) TREATMENT OF FRIVOLOUS REQUESTS FOR

11 HEARINGS UPON FILING OF NOTICE OF LIEN.—Section 

12 6320 is amended— 

13 (1) in subsection (b)(1), by striking ‘‘under sub14 section (a)(3)(B)’’ and inserting ‘‘in writing under 

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

16 requested hearing’’, and 

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

18 inserting ‘‘(e), and (g)’’. 

19 (d) TREATMENT OF FRIVOLOUS APPLICATIONS FOR

20 OFFERS-IN-COMPROMISE AND INSTALLMENT AGREE21 MENTS.—Section 7122 is amended by adding at the end 

22 the following new subsection: 

23 ‘‘(e) FRIVOLOUS SUBMISSIONS, ETC.—Notwith24 standing any other provision of this section, if the Sec25 retary determines that any portion of an application for 
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1 an offer-in-compromise or installment agreement sub2 mitted under this section or section 6159 meets the re3 quirement of clause (i) or (ii) of section 6702(b)(2)(A), 

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

5 never submitted and such portion shall not be subject to 

6 any further administrative or judicial review.’’. 

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

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

9 striking the item relating to section 6702 and inserting 

10 the following new item: 

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

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

12 this section shall apply to submissions made and issues 

13 raised after the date on which the Secretary first pre14 scribes a list under section 6702(c) of the Internal Rev15 enue Code of 1986, as amended by subsection (a). 

16 SEC. 107. DENIAL OF DEDUCTION FOR INTEREST ON UN17 DERPAYMENTS ATTRIBUTABLE TO NONDIS18 CLOSED REPORTABLE AND NONECONOMIC 

19 SUBSTANCE TRANSACTIONS. 

20 (a) IN GENERAL.—Subsection (m) of section 163 is 

21 amended to read as follows: 

22 ‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE

23 TO NONDISCLOSED REPORTABLE TRANSACTIONS AND

24 NONECONOMIC SUBSTANCE TRANSACTIONS.—No deduc25 tion shall be allowed under this chapter for any interest 
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1 paid or accrued under section 6601 on any underpayment 

2 of tax which is attributable to— 

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

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

5 with respect to which the requirement of section 

6 6664(d)(2)(A) is not met, or 

7 ‘‘(2) any noneconomic substance transaction 

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

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

10 this section shall apply to transactions after the date of 

11 the enactment of this Act in taxable years ending after 

12 such date. 

13 TITLE II—OTHER PROVISIONS 

14 SEC. 201. 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 cor-
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1 poration, is determined by reference to the basis in 

2 the hands of the transferor corporation, and 

3 ‘‘(2) the principal purpose for which such acqui4 sition was made is evasion or avoidance of Federal 

5 income tax by securing the benefit of a deduction, 

6 credit, or other allowance, 

7 then the Secretary may disallow such deduction, credit, 

8 or other allowance.’’. 

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

10 this section shall apply to stock and property acquired 

11 after February 13, 2003. 

12 SEC. 202. MODIFICATIONS OF CERTAIN RULES RELATING 

13 TO CONTROLLED FOREIGN CORPORATIONS. 

14 (a) LIMITATION ON EXCEPTION FROM PFIC RULES

15 FOR UNITED STATES SHAREHOLDERS OF CONTROLLED

16 FOREIGN CORPORATIONS.—Paragraph (2) of section 

17 1297(e) (relating to passive investment company) is 

18 amended by adding at the end the following flush sen19 tence: 

20 ‘‘Such term shall not include any period if there is only 

21 a remote likelihood of an inclusion in gross income under 

22 section 951(a)(1)(A)(i) of subpart F income of such cor23 poration for such period.’’. 

24 (b) DETERMINATION OF PRO RATA SHARE OF SUB25 PART F INCOME.—Subsection (a) of section 951 (relating 
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1 to amounts included in gross income of United States 

2 shareholders) is amended by adding at the end the fol3 lowing new paragraph: 

4 ‘‘(4) SPECIAL RULES FOR DETERMINING PRO

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

6 share under paragraph (2) shall be determined by 

7 disregarding— 

8 ‘‘(A) any rights lacking substantial eco9 nomic effect, and 

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

11 a tax-indifferent party (as defined in section 

12 7701(m)(3)) if the amount which would (but 

13 for this paragraph) be allocated to such share14 holder does not reflect such shareholder’s eco15 nomic share of the earnings and profits of the 

16 corporation.’’. 

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

18 this section shall apply to taxable years on controlled for19 eign corporation beginning after February 13, 2003, and 

20 to taxable years of United States shareholder in which or 

21 with which such taxable years of controlled foreign cor22 porations end. 
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1 SEC. 203. 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. 

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