I 

108TH CONGRESS 

1ST SESSION H. R. 3655

To amend the Internal Revenue Code of 1986 to replace the earned income 

credit, the child tax credit, and the deduction for dependents with a 

simplified family tax credit. 

IN THE HOUSE OF REPRESENTATIVES 

DECEMBER 8, 2003

Mr. KUCINICH (for himself, Ms. LEE, and Mr. SANDERS) 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 replace 

the earned income credit, the child tax credit, and the 

deduction for dependents with a simplified family tax 

credit.

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

3 SECTION 1. SHORT TITLE, ETC. 

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

5 ‘‘Progressive Tax Act of 2003’’. 

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment 
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1 to, or repeal of, a section or other provision, the reference 

2 shall be considered to be made to a section or other provi3 sion of the Internal Revenue Code of 1986. 

4 (c) TABLE OF CONTENTS.—

Sec. 1. Short title, etc. 

TITLE I—TAX RELIEF 

Sec. 101. Simplified family credit. 

Sec. 102. Child support included in gross income of recipient and allowed as 

deduction to payor. 

Sec. 103. Refundable credit for payroll taxes. 

TITLE II—PROVISIONS RELATING TO CORPORATE TAX 

Subtitle A—Provisions Designed To Curtail Tax Shelters 

Sec. 201. Clarification of economic substance doctrine. 

Sec. 202. Penalty for failing to disclose reportable transaction. 

Sec. 203. Accuracy-related penalty for listed transactions and other reportable 

transactions having a significant tax avoidance purpose. 

Sec. 204. Penalty for understatements attributable to transactions lacking economic substance, etc. 

Sec. 205. Modifications of substantial understatement penalty for nonreportable 

transactions. 

Sec. 206. Tax shelter exception to confidentiality privileges relating to taxpayer 

communications. 

Sec. 207. Disclosure of reportable transactions. 

Sec. 208. Modifications to penalty for failure to register tax shelters. 

Sec. 209. Modification of penalty for failure to maintain lists of investors. 

Sec. 210. Modification of actions to enjoin certain conduct related to tax shelters and reportable transactions. 

Sec. 211. Understatement of taxpayer’s liability by income tax return preparer. 

Sec. 212. Penalty on failure to report interests in foreign financial accounts. 

Sec. 213. Frivolous tax submissions. 

Sec. 214. Regulation of individuals practicing before the Department of Treasury. 

Sec. 215. Penalty on promoters of tax shelters. 

Sec. 216. Statute of limitations for taxable years for which listed transactions 

not reported. 

Sec. 217. Denial of deduction for interest on underpayments attributable to 

nondisclosed reportable and noneconomic substance transactions. 

Subtitle B—Other Provisions 

Sec. 221. Limitation on transfer or importation of built-in losses. 

Sec. 222. Disallowance of certain partnership loss transfers. 

Sec. 223. No reduction of basis under section 734 in stock held by partnership 

in corporate partner. 

Sec. 224. Repeal of special rules for FASITS. 

Sec. 225. Expanded disallowance of deduction for interest on convertible debt. 
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Sec. 226. Expanded authority to disallow tax benefits under section 269. 

Sec. 227. Modifications of certain rules relating to controlled foreign corporations. 

Sec. 228. Basis for determining loss always reduced by nontaxed portion of 

dividends. 

Sec. 229. Affirmation of consolidated return regulation authority. 

TITLE III—OTHER REVENUE OFFSETS 

Sec. 301. Modification of individual income tax brackets and rates. 

Sec. 302. Repeal of removal of limitations on itemized deductions and exemption amount. 

Sec. 303. Individual capital gains and dividends treated as ordinary income. 

Sec. 304. Restoration and modifications of estate tax; repeal of carryover basis. 

Sec. 305. Extension of superfund, oil spill liability, and leaking underground 

storage tank taxes. 

Sec. 306. Limitation on certain business provisions enacted in 2002 and 2003. 

Sec. 307. Repeal of exclusion for parking transportation fringe benefit. 

Sec. 308. Repeal of certain deductions relating to second homes.

1 TITLE I—TAX RELIEF 

2 SEC. 101. SIMPLIFIED FAMILY CREDIT. 

3 (a) IN GENERAL.—Section 32 of the Internal Rev4 enue Code of 1986 (relating to earned income credit) is 

5 amended to read as follows: 

6 ‘‘SEC. 32. SIMPLIFIED FAMILY CREDIT. 

7 ‘‘(a) ALLOWANCE OF CREDIT.—In the case of an eli8 gible individual, there shall be allowed as a credit against 

9 the tax imposed by this subtitle for the taxable year an 

10 amount equal to 50 percent of the taxpayer’s modified ad11 justed gross income for the taxable year. 

12 ‘‘(b) LIMITATIONS.—For purposes of subsection 

13 (a)—

14 ‘‘(1) LIMITATION BASED ON QUALIFYING CHIL15 DREN.—The amount of the credit allowable to a tax16 payer under paragraph (1) for any taxable year shall 

17 not exceed the lesser of—
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1 ‘‘(A) $2,000 multiplied by the number of 

2 qualifying children of the taxpayer, and 

3 ‘‘(B) 50 percent of earned income. 

4 ‘‘(2) LIMITATION BASED ON ADJUSTED GROSS

5 INCOME.—

6 ‘‘(A) IN GENERAL.—The amount of the 

7 credit allowable under subsection (a) shall be 

8 reduced (but not below zero) by $50 for each 

9 $1,000 (or fraction thereof) by which the tax10 payer’s modified adjusted gross income exceeds 

11 the threshold amount. 

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

13 of subparagraph (A), the term ‘threshold 

14 amount’ means—

15 ‘‘(i) $150,000 in the case of a joint 

16 return, 

17 ‘‘(ii) $100,000 in the case of an indi18 vidual who is not married, and 

19 ‘‘(iii) $75,000 in the case of a married 

20 individual filing a separate return.

21 For purposes of this paragraph, marital status 

22 shall be determined under section 7703. 

23 ‘‘(3) LIMITATION ON AMOUNT OF REFUNDABLE

24 CREDIT.—
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1 ‘‘(A) IN GENERAL.—The amount of the 

2 credit allowed under subsection (a) for a tax3 able year which is allowed under this subpart 

4 shall not exceed the earned income of the tax5 payer for such year. 

6 ‘‘(B) ALLOWANCE OF REMAINING AMOUNT

7 OF CREDIT.—The excess of—

8 ‘‘(i) the amount of the credit allowed 

9 under subsection (a), over 

10 ‘‘(ii) the amount of the credit allowed 

11 under this subpart by reason of subpara12 graph (A), 

13 shall be treated as a credit allowed under sub14 part B for such taxable year and not under this 

15 subpart. 

16 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur17 poses of this section—

18 ‘‘(1) ELIGIBLE INDIVIDUAL.—

19 ‘‘(A) IN GENERAL.—The term ‘eligible in20 dividual’ means any individual who has a quali21 fying child for the taxable year. 

22 ‘‘(B) INDIVIDUAL WHO IS QUALIFYING

23 CHILD INELIGIBLE.—If an individual is the 

24 qualifying child of a taxpayer for any taxable 

25 year of such taxpayer beginning in a calendar 
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1 year, such individual shall not be treated as an 

2 eligible individual for any taxable year of such 

3 individual beginning in such calendar year. 

4 ‘‘(C) EXCEPTION FOR INDIVIDUAL CLAIM5 ING BENEFITS UNDER SECTION 911.—The term 

6 ‘eligible individual’ does not include any indi7 vidual who claims the benefits of section 911 

8 (relating to citizens or residents living abroad) 

9 for the taxable year. 

10 ‘‘(D) LIMITATION ON ELIGIBILITY OF NON11 RESIDENT ALIENS.—The term ‘eligible indi12 vidual’ shall not include any individual who is 

13 a nonresident alien individual for any portion of 

14 the taxable year unless such individual is treat15 ed for such taxable year as a resident of the 

16 United States for purposes of this chapter by 

17 reason of an election under subsection (g) or 

18 (h) of section 6013. 

19 ‘‘(E) IDENTIFICATION NUMBER REQUIRE20 MENT.—No credit shall be allowed under this 

21 section to an eligible individual who does not in22 clude on the return of tax for the taxable 

23 year—

24 ‘‘(i) such individual’s taxpayer identi25 fication number, and 
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1 ‘‘(ii) if the individual is married (with2 in the meaning of section 7703), the tax3 payer identification number of such indi4 vidual’s spouse. 

5 ‘‘(F) INDIVIDUALS WHO DO NOT INCLUDE

6 TIN, ETC., OF ANY QUALIFYING CHILD.—No 

7 credit shall be allowed under this section to any 

8 eligible individual who has one or more quali9 fying children if no qualifying child of such in10 dividual is taken into account under subsection 

11 (b) by reason of paragraph (2)(F). 

12 ‘‘(2) QUALIFYING CHILD.—

13 ‘‘(A) IN GENERAL.—The term ‘qualifying 

14 child’ means, with respect to any taxpayer for 

15 any taxable year, an individual—

16 ‘‘(i) who bears a relationship to the 

17 taxpayer described in subparagraph (B), 

18 ‘‘(ii) who has the same principal place 

19 of abode as the taxpayer for more than 

20 one-half of such taxable year (or, in the 

21 case of a student, meets the requirements 

22 of subparagraph (F)), and 

23 ‘‘(iii) who meets the age requirements 

24 of subparagraph (C). 

25 ‘‘(B) RELATIONSHIP TEST.—
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1 ‘‘(i) IN GENERAL.—An individual 

2 bears a relationship to the taxpayer de3 scribed in this subparagraph if such indi4 vidual is—

5 ‘‘(I) a son, daughter, stepson, or 

6 stepdaughter, or a descendant of any 

7 such individual, 

8 ‘‘(II) a brother, sister, step9 brother, or stepsister, or a descendant 

10 of any such individual, who the tax11 payer cares for as the taxpayer’s own 

12 child, or 

13 ‘‘(III) an eligible foster child of 

14 the taxpayer. 

15 ‘‘(ii) MARRIED CHILDREN.—Clause (i) 

16 shall not apply to any individual who has 

17 made a joint return with his spouse under 

18 section 6013 for the taxable year beginning 

19 in the calendar year in which the taxable 

20 year of the taxpayer begins. 

21 ‘‘(iii) ELIGIBLE FOSTER CHILD.—For 

22 purposes of clause (i), the term ‘eligible 

23 foster child’ means an individual not de24 scribed in subclause (I) or (II) of clause (i) 

25 who—
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1 ‘‘(I) is placed with the taxpayer 

2 by an authorized placement agency, 

3 and 

4 ‘‘(II) the taxpayer cares for as 

5 the taxpayer’s own child. 

6 ‘‘(iv) ADOPTION.—For purposes of 

7 this subparagraph, a child who is legally 

8 adopted, or who is placed with the tax9 payer by an authorized placement agency 

10 for adoption by the taxpayer, shall be 

11 treated as a child by blood. 

12 ‘‘(C) AGE REQUIREMENTS.—An individual 

13 meets the requirements of this subparagraph if 

14 such individual—

15 ‘‘(i) has not attained the age of 19 as 

16 of the close of the calendar year in which 

17 the taxable year of the taxpayer begins, 

18 ‘‘(ii) is a student who has not attained 

19 the age of 24 as of the close of such cal20 endar year, or

21 ‘‘(iii) is permanently and totally dis22 abled (as defined in section 22(e)(3)) at 

23 any time during the taxable year. 

24 ‘‘(D) IDENTIFICATION REQUIREMENTS.—
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1 ‘‘(i) IN GENERAL.—A qualifying child 

2 shall not be taken into account under sub3 section (b) unless the taxpayer includes the 

4 name, age, and TIN of the qualifying child 

5 on the return of tax for the taxable year. 

6 ‘‘(ii) OTHER METHODS.—The Sec7 retary may prescribe other methods for 

8 providing the information described in 

9 clause (i). 

10 ‘‘(E) ABODE MUST BE IN THE UNITED

11 STATES.—The requirements of subparagraph 

12 (A)(ii) shall be met only if the principal place 

13 of abode is in the United States. 

14 ‘‘(F ) SPECIAL RULES RELATING TO STU15 DENTS.—For purposes of this paragraph—

16 ‘‘(i) STUDENT DEFINED.—The term 

17 ‘student’ means an individual who during 

18 each of 5 calendar months during the cal19 endar year in which the taxable year of the 

20 taxpayer begins—

21 ‘‘(I) is a full-time student at an 

22 educational organization described in 

23 section 170(b)(1)(A)(ii); or 

24 ‘‘(II) is pursuing a full-time 

25 course of institutional on-farm train-
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1 ing under the supervision of an ac2 credited agent of an educational orga3 nization described in section 

4 170(b)(1)(A)(ii) or of a State or polit5 ical subdivision of a State. 

6 ‘‘(ii) SUPPORT TEST.—In the case of 

7 an individual who is a student, the indi8 vidual meets the requirements of this sub9 paragraph if such individual is a dependent 

10 (within the meaning of section 152). 

11 ‘‘(G) 2 OR MORE CLAIMING QUALIFYING

12 CHILD.—

13 ‘‘(i) IN GENERAL.—Except as pro14 vided in clause (ii), if (but for this sub15 paragraph) an individual may be claimed, 

16 and is claimed, as a qualifying child by 2 

17 or more taxpayers for a taxable year begin18 ning in the same calendar year, such indi19 vidual shall be treated as the qualifying 

20 child of the taxpayer who is—

21 ‘‘(I) a parent of the individual, or 

22 ‘‘(II) if subclause (I) does not 

23 apply, the taxpayer with the highest 

24 adjusted gross income for such tax25 able year. 
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1 ‘‘(ii) MORE THAN 1 CLAIMING CRED2 IT.—If the parents claiming the credit with 

3 respect to any qualifying child do not file 

4 a joint return together, such child shall be 

5 treated as the qualifying child of—

6 ‘‘(I) the parent with whom the 

7 child resided for the longest period of 

8 time during the taxable year, or 

9 ‘‘(II) if the child resides with 

10 both parents for the same amount of 

11 time during such taxable year, the 

12 parent with the highest adjusted gross 

13 income. 

14 ‘‘(3) EARNED INCOME.—

15 ‘‘(A) IN GENERAL.—The term ‘earned in16 come’ means the sum of—

17 ‘‘(i) wages, salaries, tips, and other 

18 employee compensation, but only if such 

19 amounts are includible in gross income for 

20 the taxable year, 

21 ‘‘(ii) the amount of the taxpayer’s net 

22 earnings from self-employment for the tax23 able year (within the meaning of section 

24 1402(a)), but such net earnings shall be 
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1 determined with regard to the deduction 

2 allowed to the taxpayer by section 164(f), 

3 ‘‘(iii) alimony or separate maintenance 

4 payments and child support received, plus 

5 ‘‘(iv) amounts received under a Fed6 eral or State unemployment compensation 

7 law which are in the nature of unemploy8 ment compensation. 

9 ‘‘(B) MODIFICATIONS OF EARNED IN10 COME.—For purposes of subparagraph (A)—

11 ‘‘(i) the earned income of an indi12 vidual shall be computed without regard to 

13 any community property laws, 

14 ‘‘(ii) no amount received as a pension 

15 or annuity shall be taken into account, 

16 ‘‘(iii) no amount to which section 

17 871(a) applies (relating to income of non18 resident alien individuals not connected 

19 with United States business) shall be taken 

20 into account, and 

21 ‘‘(iv) no amount received for services 

22 provided by an individual while the indi23 vidual is an inmate at a penal institution 

24 shall be taken into account. 
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1 ‘‘(4) MODIFIED ADJUSTED GROSS INCOME.—

2 The term ‘modified adjusted gross income’ means 

3 adjusted gross income increased by any amount ex4 cluded from gross income under section 911, 931, or 

5 933. 

6 ‘‘(5) TREATMENT OF MILITARY PERSONNEL

7 STATIONED OUTSIDE THE UNITED STATES.—For 

8 purposes of subparagraphs (A)(ii) and (E) of para9 graph (3), the principal place of abode of a member 

10 of the Armed Forces of the United States shall be 

11 treated as in the United States during any period 

12 during which such member is stationed outside the 

13 United States while serving on extended active duty 

14 with the Armed Forces of the United States. For 

15 purposes of the preceding sentence, the term ‘ex16 tended active duty’ means any period of active duty 

17 pursuant to a call or order to such duty for a period 

18 in excess of 90 days or for an indefinite period. 

19 ‘‘(d) MARRIED INDIVIDUALS.—In the case of an indi20 vidual who is married (within the meaning of section

21 7703), this section shall apply only if a joint return is filed 

22 for the taxable year under section 6013. 

23 ‘‘(e) TAXABLE YEAR MUST BE FULL TAXABLE

24 YEAR.—Except in the case of a taxable year closed by rea25 son of the death of the taxpayer, no credit shall be allow-
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1 able under this section in the case of a taxable year cov2 ering a period of less than 12 months. 

3 ‘‘(f) INFLATION ADJUSTMENTS.—

4 ‘‘(1) IN GENERAL.—In the case of any taxable 

5 year beginning after 2004, each of the dollar 

6 amounts in subsections (b)(1)(A) and (b)(2)(B) shall 

7 be increased by an amount equal to—

8 ‘‘(A) such dollar amount, multiplied by 

9 ‘‘(B) the cost-of-living adjustment deter10 mined under section 1(f)(3) for the calendar 

11 year in which the taxable year begins, deter12 mined by substituting ‘calendar year 2003’ for 

13 ‘calendar year 1992’ in subparagraph (B) 

14 thereof. 

15 ‘‘(2) ROUNDING.—If any dollar amount in sub16 section (b)(1)(A) after being increased under para17 graph (1) is not a multiple of $10, such dollar 

18 amount shall be rounded to the nearest multiple of 

19 $10, and if any dollar amount in subsection 

20 (b)(2)(B) after being increased under paragraph (1) 

21 is not a multiple of $1,000, such dollar amount shall 

22 be rounded to the nearest multiple of $1,000. 

23 ‘‘(i) COORDINATION WITH CERTAIN MEANS-TESTED

24 PROGRAMS.—For purposes of—

25 ‘‘(1) the United States Housing Act of 1937, 
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1 ‘‘(2) title V of the Housing Act of 1949, 

2 ‘‘(3) section 101 of the Housing and Urban De3 velopment Act of 1965, 

4 ‘‘(4) sections 221(d)(3), 235, and 236 of the 

5 National Housing Act, and 

6 ‘‘(5) the Food Stamp Act of 1977—

7 any refund made to an individual (or the spouse of an 

8 individual) by reason of this section, and any payment 

9 made to such individual (or such spouse) by an employer 

10 under section 3507, shall not be treated as income (and 

11 shall not be taken into account in determining resources 

12 for the month of its receipt and the following month). 

13 ‘‘(j) IDENTIFICATION NUMBERS.—Solely for pur14 poses of subsections (c)(1)(F) and (c)(3)(D), a taxpayer 

15 identification number means a social security number 

16 issued to an individual by the Social Security Administra17 tion (other than a social security number issued pursuant 

18 to clause (II) (or that portion of clause (III) that relates 

19 to clause (II)) of section 205(c)(2)(B)(i) of the Social Se20 curity Act).’’. 

21 (b) REPEALS OF OTHER PROVISIONS.—

22 (1) CHILD CREDIT.—Section 24 is hereby re23 pealed. 

24 (2) DEDUCTION FOR EXEMPTION FOR DEPEND25 ENTS DISALLOWED TO CREDIT RECIPIENTS.—Sub-
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1 section (c) of section 151 is amended by adding at 

2 the end the following new paragraph: 

3 ‘‘(7) DEDUCTION FOR EXEMPTION FOR DE4 PENDENTS DISALLOWED TO CREDIT RECIPIENTS.—

5 No exemption shall be allowed under this section for 

6 a dependent for a taxable year if a credit is allowed 

7 under section 32 with respect to such dependent for 

8 such taxable year.’’. 

9 (c) CONFORMING AMENDMENTS.—

10 (1) AMENDMENTS RELATING TO REPEAL OF

11 CHILD CREDIT.—

12 (A) Sections 25(e)(1)(C) and 1400C(d) (as 

13 in effect for taxable years after December 31, 

14 2003) are both amended by striking ‘‘24,’’. 

15 (B) Section 501(c)(26) is amended by in16 serting ‘‘(as in effect before the enactment of 

17 the Progressive Tax Act of 2003)’’ after ‘‘sec18 tion 24(c)’’. 

19 (C) Section 6213(g)(2) is amended—

20 (i) by striking subparagraph (I), and 

21 (ii) in subparagraph (L), by striking 

22 ‘‘21, 24, or 32’’ and inserting ‘‘21 or 32’’. 

23 (2) AMENDMENTS RELATING TO REPEAL OF

24 DEDUCTION FOR EXEMPTION FOR DEPENDENTS.—
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1 (A) Section 2(a) is amended by striking ‘‘a 

2 deduction for the taxable year under section 

3 151’’ and inserting ‘‘a credit for the taxable 

4 year under section 32’’. 

5 (B) Section 2(b) is amended by striking ‘‘a 

6 deduction for the taxable year for such person 

7 under section 151’’ and inserting ‘‘a credit for 

8 the taxable year for such person under section 

9 32’’. 

10 (C) Section 21(b)(1)(A) is amended by 

11 striking ‘‘a deduction under section 151(c)’’ 

12 and inserting ‘‘a credit under section 32’’. 

13 (D) Section 21(e)(6)(A) is amended by 

14 striking ‘‘deduction under section 151(c)’’ and 

15 inserting ‘‘credit under section 32’’. 

16 (E) Sections 25A(f)(1)(A)(iii) and 

17 25A(g)(3) are amended by striking ‘‘deduction 

18 under section 151’’ both places it appears and 

19 inserting ‘‘credit under section 32’’. 

20 (F) Section 25B(c)(2)(A) is amended by 

21 striking ‘‘deduction under section 151’’ and in22 serting ‘‘credit under section 32’’. 

23 (G) Section 35(d)(1)(B) is amended by 

24 striking ‘‘deduction under section 151(c)’’ and 

25 inserting ‘‘credit under section 32’’. 
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1 (H) Section 35(g)(4) is amended by strik2 ing ‘‘deduction under section 151’’ and insert3 ing ‘‘credit under section 32’’. 

4 (I) Section 63(c)(5) is amended by striking 

5 ‘‘deduction under section 151’’ and inserting 

6 ‘‘credit under section 32’’. 

7 (J) Section 129(c)(1) is amended by strik8 ing ‘‘deduction is allowable under section 151(c) 

9 (relating to personal exemptions for depend10 ents) ’’ and inserting ‘‘credit is allowable under 

11 section 32 (relating to simplified family cred12 it)’’. 

13 (K) Section 135(c)(2)(A)(iii) is amended 

14 by striking ‘‘deduction under section 151’’ and 

15 inserting ‘‘credit under section 32’’. 

16 (L) Section 220(b)(6) is amended by strik17 ing ‘‘deduction under section 151’’ and insert18 ing ‘‘credit under section 32’’.

19 (M) Section 221(c) is amended by striking 

20 ‘‘deduction under section 151’’ and inserting 

21 ‘‘credit under section 32’’. 

22 (N) Section 222(c)(3) is amended by strik23 ing ‘‘deduction under section 151’’ and insert24 ing ‘‘credit under section 32’’. 
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1 (O) Section 2032A(c)(7)(D) is amended by 

2 striking ‘‘section 151(c)(4)’’ and inserting ‘‘sec3 tion 32(c)(3)(F)’’. 

4 (P) Section 6012(a)(1)(A) is amended by 

5 striking ‘‘an exemption for such spouse under 

6 section 151(c)’’ and inserting ‘‘a credit for such 

7 spouse under section 32’’. 

8 (Q) Section 7703(b)(1) is amended by 

9 striking ‘‘deduction for the taxable year under 

10 section 151’’ and inserting ‘‘credit for the tax11 able year under section 32’’. 

12 (d) CLERICAL AMENDMENT.—The table of sections 

13 for subpart C of part IV of subchapter A of chapter 1 

14 is amended by striking the item relating to section 32 and 

15 inserting the following:

‘‘Sec. 32. Simplified family credit.’’.

16 (e) EFFECTIVE DATE.—

17 (1) IN GENERAL.—The amendments made by 

18 this section shall apply to taxable years beginning 

19 after December 31, 2003. 

20 (2) TRANSITIONAL RULE FOR NONCUSTODIAL

21 PARENTS.—

22 (A) IN GENERAL.—If, on the last day of 

23 the taxable year, an eligible individual is the 

24 noncustodial parent of a qualifying child, the 

25 Internal Revenue Code of 1986 shall be applied 
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1 to such individual without regard to the amend2 ments made by this section. 

3 (B) DEFINITIONS.—For purposes of sub4 paragraph (A), the terms ‘eligible individual’ 

5 and ‘qualifying child’ shall have the meanings 

6 given such terms by section 32(c) of the Inter7 nal Revenue Code of 1986 (as amended by this 

8 section). 

9 SEC. 102. CHILD SUPPORT INCLUDED IN GROSS INCOME OF 

10 RECIPIENT AND ALLOWED AS DEDUCTION TO 

11 PAYOR. 

12 (a) CHILD SUPPORT INCLUDED IN GROSS INCOME.—

13 Subsection (c) of section 71 of the Internal Revenue Code 

14 of 1986 (relating to alimony and separate maintenance 

15 payments) is amended to read as follows: 

16 ‘‘(c) PAYMENTS TO SUPPORT CHILDREN.—Notwith17 standing any other provision of this section, the term ‘ali18 mony or separate maintenance payment’ includes any pay19 ment or part of a payment which the terms of the divorce 

20 or separation instrument fix (in terms of an amount of 

21 money or a part of the payment) as a sum which is pay22 able for the support of children of the payor spouse.’’. 

23 (b) CLARIFICATION THAT CHILD SUPPORT AL24 LOWED AS DEDUCTION.—Subsection (b) of section 215 
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1 (relating to alimony, etc., payments) is amended by strik2 ing ‘‘section 71(b)’’ and inserting ‘‘section 71’’. 

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

4 this section shall apply to taxable years beginning after 

5 December 31, 2003. 

6 SEC. 103. REFUNDABLE CREDIT FOR PAYROLL TAXES. 

7 (a) IN GENERAL.—Subpart C of part IV of sub8 chapter A of chapter 1 of the Internal Revenue Code of 

9 1986 (relating to refundable credits) is amended by redes10 ignating section 36 as section 37 and by inserting after 

11 section 35 the following new section: 

12 ‘‘SEC. 36. CREDIT FOR PAYROLL TAXES. 

13 ‘‘(a) IN GENERAL.—In the case of an individual, 

14 there shall be allowed as a credit against the tax imposed 

15 by this subtitle for the taxable year an amount equal to 

16 the social security taxes paid with respect to the individual 

17 for the taxable year. 

18 ‘‘(b) LIMITATION BASED ON ADJUSTED GROSS IN19 COME.—The amount which (but for this subsection) would 

20 be allowable as a credit under this section shall be reduced 

21 (but not below zero) by the amount which bears the same 

22 ratio to the amount which would be so taken into account 

23 as—

24 ‘‘(1) the excess of—
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1 ‘‘(A) the taxpayer’s modified adjusted 

2 gross income for such taxable year, over 

3 ‘‘(B) $15,000 ($30,000 in the case of a 

4 joint return), bears to 

5 ‘‘(2) $15,000. 

6 For purposes of the preceding sentence, the term ‘modi7 fied adjusted gross income’ means adjusted gross income 

8 increased by any amount excluded from gross income 

9 under section 911, 931, or 933. 

10 ‘‘(c) SOCIAL SECURITY TAXES.—For purposes of this 

11 section—

12 ‘‘(1) IN GENERAL.—The term ‘social security 

13 taxes’ means, with respect to an individual for the 

14 taxable year, the sum of—

15 ‘‘(A) the amount of the taxes imposed by 

16 section 3101, 3111, 3201, 3211, and 3221 on 

17 amounts received by the taxpayer during the 

18 calendar year in which the taxable year begins, 

19 and 

20 ‘‘(B) the taxes imposed by section 1401 on 

21 the self-employment income of the taxpayer for 

22 the taxable year. 

23 ‘‘(2) COORDINATION WITH SPECIAL REFUND OF

24 SOCIAL SECURITY TAXES.—The term ‘social security 

25 taxes’ shall not include any taxes to the extent the 
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1 taxpayer is entitled to a special refund of such taxes 

2 under section 6413(c). 

3 ‘‘(3) SPECIAL RULE.—Any amounts paid pursu4 ant to an agreement under section 3121(l) (relating 

5 to agreements entered into by American employers 

6 with respect to foreign affiliates) which are equiva7 lent to the taxes referred to in paragraph (1)(A) 

8 shall be treated as taxes referred to in such para9 graph.’’.

10 (b) CONFORMING AMENDMENTS.—

11 (1) Paragraph (2) of section 1324(b) of title 

12 31, United States Code, is amended by inserting ‘‘or 

13 36’’ after ‘‘section 35’’. 

14 (2) The table of sections for subpart C of part 

15 IV of subchapter A of chapter 1 of the Internal Rev16 enue Code of 1986 is amended by striking the last 

17 item and inserting the following new items:

‘‘Sec. 36. Credit for payroll taxes. 

‘‘Sec. 37. Overpayments of tax.’’.

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

19 this section shall apply to taxable years beginning after 

20 December 31, 2003.
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•HR 3655 IH 

1 TITLE II—PROVISIONS 

2 RELATING TO CORPORATE TAX 

3 Subtitle A—Provisions Designed To 

4 Curtail Tax Shelters 

5 SEC. 201. CLARIFICATION OF ECONOMIC SUBSTANCE DOC6 TRINE. 

7 (a) IN GENERAL.—Section 7701 is amended by re8 designating subsection (m) as subsection (n) and by in9 serting after subsection (l) the following new subsection: 

10 ‘‘(m) CLARIFICATION OF ECONOMIC SUBSTANCE

11 DOCTRINE; ETC.—

12 ‘‘(1) GENERAL RULES.—

13 ‘‘(A) IN GENERAL.—In applying the eco14 nomic substance doctrine, the determination of 

15 whether a transaction has economic substance 

16 shall be made as provided in this paragraph. 

17 ‘‘(B) DEFINITION OF ECONOMIC SUB18 STANCE.—For purposes of subparagraph (A)—

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

20 economic substance only if—

21 ‘‘(I) the transaction changes in a 

22 meaningful way (apart from Federal 

23 tax effects and, if there are any Fed24 eral tax effects, also apart from any 
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1 foreign, State, or local tax effects) the 

2 taxpayer’s economic position, and

3 ‘‘(II) the taxpayer has a substan4 tial nontax purpose for entering into 

5 such transaction and the transaction 

6 is a reasonable means of accom7 plishing such purpose. 

8 ‘‘(ii) SPECIAL RULE WHERE TAX9 PAYER RELIES ON PROFIT POTENTIAL.—A 

10 transaction shall not be treated as having 

11 economic substance by reason of having a 

12 potential for profit unless—

13 ‘‘(I) the present value of the rea14 sonably expected pre-tax profit from 

15 the transaction is substantial in rela16 tion to the present value of the ex17 pected net tax benefits that would be 

18 allowed if the transaction were re19 spected, and 

20 ‘‘(II) the reasonably expected 

21 pre-tax profit from the transaction ex22 ceeds a risk-free rate of return.

23 ‘‘(C) TREATMENT OF FEES AND FOREIGN

24 TAXES.—Fees and other transaction expenses 

25 and foreign taxes shall be taken into account as 
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•HR 3655 IH 

1 expenses in determining pre-tax profit under 

2 subparagraph (B)(ii). 

3 ‘‘(2) SPECIAL RULES FOR TRANSACTIONS WITH

4 TAX-INDIFFERENT PARTIES.—

5 ‘‘(A) SPECIAL RULES FOR FINANCING

6 TRANSACTIONS.—The form of a transaction 

7 which is in substance the borrowing of money 

8 or the acquisition of financial capital directly or 

9 indirectly from a tax-indifferent party shall not 

10 be respected if the present value of the deduc11 tions to be claimed with respect to the trans12 action is substantially in excess of the present 

13 value of the anticipated economic returns of the 

14 person lending the money or providing the fi15 nancial capital. A public offering shall be treat16 ed as a borrowing, or an acquisition of financial 

17 capital, from a tax-indifferent party if it is rea18 sonably expected that at least 50 percent of the 

19 offering will be placed with tax-indifferent par20 ties. 

21 ‘‘(B) ARTIFICIAL INCOME SHIFTING AND

22 BASIS ADJUSTMENTS.—The form of a trans23 action with a tax-indifferent party shall not be 

24 respected if—
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•HR 3655 IH 

1 ‘‘(i) it results in an allocation of in2 come or gain to the tax-indifferent party in 

3 excess of such party’s economic income or 

4 gain, or 

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

6 or shifting of basis on account of over7 stating the income or gain of the tax-indif8 ferent party. 

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

10 purposes of this subsection—

11 ‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.—

12 The term ‘economic substance doctrine’ means 

13 the common law doctrine under which tax bene14 fits under subtitle A with respect to a trans15 action are not allowable if the transaction does 

16 not have economic substance or lacks a business 

17 purpose. 

18 ‘‘(B) TAX-INDIFFERENT PARTY.—The 

19 term ‘tax-indifferent party’ means any person 

20 or entity not subject to tax imposed by subtitle 

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

22 party with respect to a transaction if the items 

23 taken into account with respect to the trans24 action have no substantial impact on such per25 son’s liability under subtitle A. 
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•HR 3655 IH 

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

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

3 a purpose of achieving a financial accounting 

4 benefit shall not be taken into account in deter5 mining whether a transaction has a substantial 

6 nontax purpose if the origin of such financial 

7 accounting benefit is a reduction of income tax. 

8 ‘‘(D) EXCEPTION FOR PERSONAL TRANS9 ACTIONS OF INDIVIDUALS.—In the case of an 

10 individual, this subsection shall apply only to 

11 transactions entered into in connection with a 

12 trade or business or an activity engaged in for 

13 the production of income. 

14 ‘‘(E) TREATMENT OF LESSORS.—In apply15 ing subclause (I) of paragraph (1)(B)(ii) to the 

16 lessor of tangible property subject to a lease, 

17 the expected net tax benefits shall not include 

18 the benefits of depreciation, or any tax credit, 

19 with respect to the leased property and sub20 clause (II) of paragraph (1)(B)(ii) shall be dis21 regarded in determining whether any of such 

22 benefits are allowable.

23 ‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF24 FECTED.—Except as specifically provided in this 

25 subsection, the provisions of this subsection shall not 
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•HR 3655 IH 

1 be construed as altering or supplanting any other 

2 rule of law, and the requirements of this subsection 

3 shall be construed as being in addition to any such 

4 other rule of law. 

5 ‘‘(5) REGULATIONS.—The Secretary shall pre6 scribe such regulations as may be necessary or ap7 propriate to carry out the purposes of this sub8 section. Such regulations may include exemptions 

9 from the application of this subsection.’’

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

11 this section shall apply to transactions entered into after 

12 December 31, 2003. 

13 SEC. 202. PENALTY FOR FAILING TO DISCLOSE REPORT14 ABLE TRANSACTION. 

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

16 68 (relating to assessable penalties) is amended by insert17 ing after section 6707 the following new section: 

18 ‘‘SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORT19 ABLE TRANSACTION INFORMATION WITH RE20 TURN OR STATEMENT. 

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

22 fails to include on any return or statement any informa23 tion with respect to a reportable transaction which is re24 quired under section 6011 to be included with such return 
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•HR 3655 IH 

1 or statement shall pay a penalty in the amount determined 

2 under subsection (b). 

3 ‘‘(b) AMOUNT OF PENALTY.—

4 ‘‘(1) IN GENERAL.—Except as provided in para5 graphs (2) and (3), the amount of the penalty under 

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

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

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

9 listed transaction shall be $100,000. 

10 ‘‘(3) INCREASE IN PENALTY FOR LARGE ENTI11 TIES AND HIGH NET WORTH INDIVIDUALS.—

12 ‘‘(A) IN GENERAL.—In the case of a fail13 ure under subsection (a) by—

14 ‘‘(i) a large entity, or 

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

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

17 twice the amount determined without regard to 

18 this paragraph. 

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

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

21 means, with respect to any taxable year, a per22 son (other than a natural person) with gross re23 ceipts in excess of $10,000,000 for the taxable 

24 year in which the reportable transaction occurs 

25 or the preceding taxable year. Rules similar to 
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•HR 3655 IH 

1 the rules of paragraph (2) and subparagraphs 

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

3 448(c) shall apply for purposes of this subpara4 graph. 

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

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

7 net worth individual’ means, with respect to a 

8 reportable transaction, a natural person whose 

9 net worth exceeds $2,000,000 immediately be10 fore the transaction. 

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

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

13 ‘reportable transaction’ means any transaction with 

14 respect to which information is required to be in15 cluded with a return or statement because, as deter16 mined under regulations prescribed under section 

17 6011, such transaction is of a type which the Sec18 retary determines as having a potential for tax 

19 avoidance or evasion. 

20 ‘‘(2) LISTED TRANSACTION.—Except as pro21 vided in regulations, the term ‘listed transaction’ 

22 means a reportable transaction which is the same as, 

23 or substantially similar to, a transaction specifically 

24 identified by the Secretary as a tax avoidance trans25 action for purposes of section 6011. 
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•HR 3655 IH 

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

2 ‘‘(1) IN GENERAL.—The Commissioner of In3 ternal Revenue may rescind all or any portion of any 

4 penalty imposed by this section with respect to any 

5 violation if—

6 ‘‘(A) the violation is with respect to a re7 portable transaction other than a listed trans8 action, 

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

10 imposed has a history of complying with the re11 quirements of this title, 

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

13 to an unintentional mistake of fact; 

14 ‘‘(D) imposing the penalty would be 

15 against equity and good conscience, and 

16 ‘‘(E) rescinding the penalty would promote 

17 compliance with the requirements of this title 

18 and effective tax administration. 

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

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

21 of the Commissioner and may be delegated only to 

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

23 Commissioner, in the Commissioner’s sole discretion, 

24 may establish a procedure to determine if a penalty 

25 should be referred to the Commissioner or the head 
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•HR 3655 IH 

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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•HR 3655 IH 

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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•HR 3655 IH 

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. 203. 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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•HR 3655 IH 

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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•HR 3655 IH 

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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•HR 3655 IH 

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 TRANS13 ACTION UNDERSTATEMENT.—For purposes of 

14 this subsection, the term ‘noneconomic sub15 stance transaction understatement’ has the 

16 meaning given such 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-
44

•HR 3655 IH 

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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•HR 3655 IH 

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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•HR 3655 IH 

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 arrange17 ment— 

18 if a significant purpose of such partnership, en19 tity, plan, or arrangement is the avoidance or 

20 evasion of Federal income tax.’’

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

22 subparagraphs (C) and (D). 

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

24 ‘‘this part’’ and inserting ‘‘section 6662 or 6663’’. 
47

•HR 3655 IH 

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. 204. 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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•HR 3655 IH 

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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•HR 3655 IH 

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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•HR 3655 IH 

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 December 31, 2003. 

11 SEC. 205. 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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•HR 3655 IH 

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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•HR 3655 IH 

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. 206. 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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•HR 3655 IH 

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. 207. 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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•HR 3655 IH 

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 3655 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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•HR 3655 IH 

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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•HR 3655 IH 

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. 208. 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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•HR 3655 IH 

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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•HR 3655 IH 

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. 209. 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. 210. 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. 211. 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. 212. 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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•HR 3655 IH 

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. 213. 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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•HR 3655 IH 

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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•HR 3655 IH 

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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•HR 3655 IH 

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. 214. 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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•HR 3655 IH 

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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•HR 3655 IH 

1 ment, which is of a type which the Secretary determines 

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

3 SEC. 215. 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. 216. 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. 217. 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 Subtitle B—Other Provisions 

16 SEC. 221. 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. 222. 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. 223. 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. 224. 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. 225. 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. 226. 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 December 31, 2003. 

15 SEC. 227. 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 December 31, 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. 228. 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. 229. 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 TITLE III—OTHER REVENUE 

14 OFFSETS 

15 SEC. 301. MODIFICATION OF INDIVIDUAL INCOME TAX 

16 BRACKETS AND RATES. 

17 (a) IN GENERAL.—So much of section 1 as precedes 

18 subsection (f) is amended to read as follows: 

19 ‘‘SECTION 1. TAX IMPOSED. 

20 ‘‘(a) MARRIED INDIVIDUALS FILING JOINT RETURNS

21 AND SURVIVING SPOUSES.—There is hereby imposed on 

22 the taxable income of—

23 ‘‘(1) every married individual (as defined in sec24 tion 7703) who makes a single return jointly with 

25 his spouse under section 6013, and
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1 ‘‘(2) every surviving spouse (as defined in sec2 tion 2(a)), a tax determined in accordance with the 

3 following table:

If taxable income is: The tax is: 

Not over $12,000 .......................... 10% of taxable income 

Over $12,000 but not over 

$47,450.

$1,200, plus 15% of the excess over 

$12,000

Over $47,450 but not over 

$114,650.

$6,517.50, plus 25% of the excess 

over $47,450

Over $114,650 but not over 

$122,080.

$23,317.50, plus 28% of the excess 

over $114,650

Over $122,080 but not over 

$311,950.

$25,397.90, plus 36% of the excess 

over $122,080

Over $311,950 ............................... $93,751.10, plus 39.6% of the excess 

over $311,950

4 ‘‘(b) HEADS OF HOUSEHOLDS.—There is hereby im5 posed on the taxable income of every head of a household 

6 (as defined in section 2(b)) a tax determined in accordance 

7 with the following table:

If taxable income is: The tax is: 

Not over $10,00 ............................ 10% of taxable income 

Over $10,000 but not over 

$38,050.

$1,000, plus 15% of the excess over 

$10,000

Over $38,050 but not over 

$98,250.

$5,207.50, plus 25% of the excess 

over $38,050

Over $98,250 but not over 

$111,370.

$20,257.50, plus 28% of the excess 

over $98,250

Over $111,370 but not over 

$311,950.

$23,931.10, plus 36% of the excess 

over $111,370

Over $311,950 ............................... $96,139.90, plus 39.6% of the excess 

over $311,950 

8 ‘‘(c) UNMARRIED INDIVIDUALS FILING (OTHER

9 THAN SURVIVING SPOUSES AND HEADS OF HOUSE10 HOLDS).—There is hereby imposed on the taxable income 

11 of every individual (other than a surviving spouse as de12 fined in section 2(a) or the head of a household as defined 

13 in section 2(b)) who is not a married individual (as defined 
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1 in section 7703) a tax determined in accordance with the 

2 following table:

If taxable income is: The tax is: 

Not over $6,000 ............................ 10% of taxable income 

Over $6,000 but not over $28,400 $600, plus 15% of the excess over 

$6,000

Over $28,400 but not over 

$68,800.

$3,960, plus 25% of the excess over 

$28,400

Over $68,800 but not over 

$100,450.

$14,060, plus 28% of the excess over 

$68,800

Over $100,450 but not over 

$311,950.

$22,922, plus 36% of the excess over 

$100,450

Over $311,950 ............................... $99,062, plus 39.6% of the excess 

over $311,950

3 ‘‘(d) MARRIED INDIVIDUALS FILING SEPARATE RE4 TURNS.—There is hereby imposed on the taxable income 

5 of every married individual (as defined in section 7703) 

6 who does not make a single return jointly with his spouse 

7 under section 6013, a tax determined in accordance with 

8 the following table:

If taxable income is: The tax is: 

Not over $6,000 ............................ 10% of taxable income 

Over $6,000 but not over $23,725 $600, plus 15% of the excess over 

$6,000

Over $23,725 but not over 

$57,325.

$3,258.75, plus 25% of the excess 

over $23,725

Over $57,325 but not over 

$61,040.

$11,658.75, plus 28% of the excess 

over $57,325

Over $61,040 but not over 

$155,975.

$12,698.95, plus 36% of the excess 

over $61,040

Over $155,975 ............................... $46,875.55, plus 39.6% of the excess 

over $155,975

9 ‘‘(e) ESTATES AND TRUSTS.—There is hereby im10 posed on the taxable income of—

11 ‘‘(1) every estate, and 

12 ‘‘(2) every trust, 

13 taxable under this subsection a tax determined in accord14 ance with the following table:
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If taxable income is: The tax is: 

Not over $1,900 ............................ 15% of taxable income 

Over $1,900 but not over $4,500 .. $285, plus 25% of the excess over 

$4,500

Over $4,500 but not over $6,850 .. $935, plus 28% of the excess over 

$6,850

Over $6,850 but not over $9,350 .. $1,593, plus 36% of the excess over 

$6,850

Over $9,350 ................................... $2,493, plus 39.6% of the excess over 

$9,350.’’

1 (b) CONFORMING AMENDMENTS.—

2 (1) Section 1(f)(3)(B) is amended—

3 (A) by striking ‘‘For purposes’’ and insert4 ing ‘‘In the case of calendar years beginning 

5 after 2003, for purposes’’, 

6 (B) in subparagraph (B) by striking 

7 ‘‘1992’’ and inserting ‘‘2002’’, and 

8 (C) by adding at the end the following 

9 flush sentence: ‘‘In the case of a reference to 

10 the preceding provisions of this paragraph by 

11 any other provision of law, subparagraph (B) 

12 shall be applied by substituting ‘1992’ for 

13 ‘2002’.’’. 

14 (2) Section 1(f) is amended by striking para15 graph (7). 

16 (3) Section 1(i)(1)(C)(iii) is amended by strik17 ing ‘‘1992’’ and inserting ‘‘2002’’. 

18 (4) Section 1(i) is amended by striking para19 graph (2). 
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to years beginning after December 

3 31, 2003. 

4 SEC. 302. REPEAL OF REMOVAL OF LIMITATIONS ON 

5 ITEMIZED DEDUCTIONS AND EXEMPTION 

6 AMOUNT. 

7 (a) ITEMIZED DEDUCTIONS.—Section 68 of the In8 ternal Revenue Code of 1986 (relating to overall limitation 

9 on itemized deductions) is amended by striking sub10 sections (f) and (g). 

11 (b) EXEMPTION AMOUNT.—Paragraph (3) of section 

12 151(d) (relating to phaseout) is amended by striking sub13 paragraphs (E) and (F). 

14 SEC. 303. INDIVIDUAL CAPITAL GAINS AND DIVIDENDS 

15 TREATED AS ORDINARY INCOME. 

16 (a) IN GENERAL.—Section 1 of the Internal Revenue 

17 Code of 1986 (relating to tax imposed) is amended by 

18 striking subsection (h). 

19 (b) ALTERNATIVE MINIMUM TAX.—Section 55(b) 

20 (relating to tentative minimum tax) is amended by strik21 ing paragraph (3). 

22 (c) CONFORMING AMENDMENTS.—

23 (1) Section 57(a)(7) is amended by striking 

24 ‘‘(determined with the application of the last sen25 tence of section 1(h)(2)(B))’’. 
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1 (2) Section 453A(c)(3) is amended by striking 

2 ‘‘section 1(h) or 1201 (whichever is appropriate)’’ 

3 and inserting ‘‘section 1201’’. 

4 (3) Section 641(c)(2)(A) is amended by striking 

5 ‘‘Except as provided in section 1(h), the’’ and insert6 ing ‘‘The’’. 

7 (4) Section 904(b)(2)(C) is amended by striking 

8 ‘‘1(h) or’’. 

9 (5) Section 904(b)(3)(D) is amended by strik10 ing ‘‘if—’’ and all that follows and inserting ‘‘if, in 

11 the case of a corporation, any rate of tax imposed 

12 by section 11, 511, or 831(a) or (b) (whichever ap13 plies) exceeds the alternative rate of tax under sec14 tion 1201(a) (determined without regard to the last 

15 sentence of section 11(b)(1)).’’. 

16 (6) Section 904(b)(3)(E)(iii) is amended by 

17 striking ‘‘means—’’ and all that follows and insert18 ing ‘‘means, in the case of a corporation, the alter19 native rate of tax under section 1201(a).’’. 

20 (7) Section 1260(a) is amended by striking 

21 ‘‘gain—’’ and all that follows and inserting ‘‘gain, 

22 such gain shall be treated as ordinary income to the

23 extent that such gain exceeds the net underlying 

24 long-term capital gain.’’. 
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1 (8) Section 7518 is amended by striking ‘‘1(h) 

2 or’’. 

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

4 this section shall apply to taxable years beginning after 

5 December 31, 2003.

6 SEC. 304. RESTORATION AND MODIFICATIONS OF ESTATE 

7 TAX; REPEAL OF CARRYOVER BASIS. 

8 (a) RESTORATION.—

9 (1) IN GENERAL.—Subtitles A and E of title V 

10 of the Economic Growth and Tax Relief Reconcili11 ation Act of 2001, and the amendments made by 

12 such subtitles, are hereby repealed; and the Internal 

13 Revenue Code of 1986 shall be applied as if such 

14 subtitles, and amendments, had never been enacted. 

15 (2) SUNSET NOT TO APPLY.—

16 (A) Subsection (a) of section 901 of the 

17 Economic Growth and Tax Relief Reconciliation 

18 Act of 2001 is amended by striking ‘‘this Act’’ 

19 and all that follows and inserting ‘‘this Act 

20 (other than title V) shall not apply to taxable, 

21 plan, or limitation years beginning after Decem22 ber 31, 2010.’’. 

23 (B) Subsection (b) of such section 901 is 

24 amended by striking ‘‘, estates, gifts, and trans25 fers’’. 
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1 (3) CONFORMING AMENDMENTS.—Subsections 

2 (d) and (e) of section 511 of the Economic Growth 

3 and Tax Relief Reconciliation Act of 2001, and the 

4 amendments made by such subsections, are hereby 

5 repealed; and the Internal Revenue Code of 1986 

6 shall be applied as if such subsections, and amend7 ments, had never been enacted. 

8 (b) MODIFICATIONS TO ESTATE TAX.—

9 (1) INCREASE IN EXCLUSION EQUIVALENT OF

10 UNIFIED CREDIT TO $2,000,000.—Subsection (c) of 

11 section 2010 of the Internal Revenue Code of 1986 

12 (relating to applicable credit amount) is amended by 

13 striking all that follows ‘‘the applicable exclusion 

14 amount’’ and inserting ‘‘. For purposes of the pre15 ceding sentence, the applicable exclusion amount is 

16 $2,000,000.’’. 

17 (2) RESTORATION OF RATE SCHEDULE.—The 

18 table in section 2001(c) is amended by striking the 

19 last item and inserting the following:

‘‘Over $2,500,000 but not over 

$3,000,000.

$1,025,800, plus 53% of the excess 

over $2,500,000

Over $3,000,000 ............................ $1,290,800, plus 55% of the excess 

over $3,000,000’’.

20 (3) RESTORATION OF PHASEOUT OF GRAD21 UATED RATES AND UNIFIED CREDIT.—Paragraph 

22 (2) of section 2001(c) is amended to read as follows: 
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1 ‘‘(2) PHASEOUT OF GRADUATED RATES AND

2 UNIFIED CREDIT.—The tentative tax determined 

3 under paragraph (1) shall be increased by an 

4 amount equal to 5 percent of so much of the amount 

5 (with respect to which the tentative tax is to be com6 puted) as exceeds $10,000,000 but does not exceed 

7 the amount at which the average tax rate under this 

8 section is 55 percent.’’. 

9 (c) INCREASE IN DEDUCTION FOR FAMILY-OWNED

10 BUSINESS INTERESTS.—

11 (1) IN GENERAL.—Paragraph (2) of section 

12 2057(a) is amended by striking ‘‘$675,000’’ and in13 serting ‘‘$2,000,000’’. 

14 (2) REPEAL OF COORDINATION WITH UNIFIED

15 CREDIT.—Section 2057(a) is amended by striking 

16 paragraph (3). 

17 (3) REPEAL OF TERMINATION.—Section 2057 

18 is amended by striking subsection (j). 

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

20 this section shall apply to estates of decedents dying, and 

21 gifts made, after December 31, 2003. 

22 SEC. 305. EXTENSION OF SUPERFUND, OIL SPILL LIABILITY, 

23 AND LEAKING UNDERGROUND STORAGE 

24 TANK TAXES. 

25 (a) EXCISE TAXES.—
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1 (1) SUPERFUND TAXES.—Section 4611(e) of 

2 the Internal Revenue Code of 1986 is amended to 

3 read as follows: 

4 ‘‘(e) APPLICATION OF HAZARDOUS SUBSTANCE

5 SUPERFUND FINANCING RATE.—The Hazardous Sub6 stance Superfund financing rate under this section shall 

7 apply after December 31, 1986, and before January 1, 

8 1996, and after the date of the enactment of this sentence 

9 and before October 1, 2013.’’. 

10 (2) OIL SPILL LIABILITY TAX.—Section 4611(f) 

11 is amended to read as follows: 

12 ‘‘(f) APPLICATION OF OIL SPILL LIABILITY TRUST

13 FUND FINANCING RATE.—The Oil Spill Liability Trust 

14 Fund financing rate under subsection (c) shall apply after 

15 December 31, 1989, and before January 1, 1995, and 

16 after the date of the enactment of this sentence and before 

17 October 1, 2013.’’. 

18 (3) LEAKING UNDERGROUND STORAGE TANK

19 RATE.—Section 4081(d)(3) is amended by striking 

20 ‘‘April 1, 2005’’ and inserting ‘‘October 1, 2013’’. 

21 (b) CORPORATE ENVIRONMENTAL INCOME TAX.—

22 Section 59A(e) is amended to read as follows: 

23 ‘‘(e) APPLICATION OF TAX.—The tax imposed by this 

24 section shall apply to taxable years beginning after De25 cember 31, 1986, and before January 1, 1996, and to tax-
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1 able years beginning after the date of the enactment of 

2 this sentence and before January 1, 2013.’’. 

3 (c) TECHNICAL AMENDMENTS.—

4 (1) Section 4611(b) is amended—

5 (A) by striking ‘‘or exported from’’ in 

6 paragraph (1)(A), 

7 (B) by striking ‘‘or exportation’’ in para8 graph (1)(B), and 

9 (C) by striking ‘‘AND EXPORTATION’’ in 

10 the heading. 

11 (2) Section 4611(d)(3) is amended—

12 (A) by striking ‘‘or exporting the crude oil, 

13 as the case may be’’ in the text and inserting 

14 ‘‘the crude oil’’, and 

15 (B) by striking ‘‘OR EXPORTS’’ in the 

16 heading. 

17 (d) EFFECTIVE DATES.—

18 (1) EXCISE TAXES.—The amendments made by 

19 subsections (a) and (c) shall take effect on the date 

20 of the enactment of this Act.

21 (2) INCOME TAX.—The amendment made by 

22 subsection (b) shall apply to taxable years beginning 

23 after the date of the enactment of this Act. 
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1 SEC. 306. LIMITATION ON CERTAIN BUSINESS PROVISIONS 

2 ENACTED IN 2002 AND 2003. 

3 (a) SPECIAL DEPRECIATION.—Section 168(k) is 

4 amended by striking ‘‘January 1, 2005’’ each place it oc5 curs in the headings and text and inserting ‘‘January 1, 

6 2004’’. 

7 (b) CARRYBACK OF CERTAIN NET OPERATING

8 LOSSES.—Section 172(H) is amended by inserting at the 

9 end the following: ‘‘The preceding sentence shall not apply 

10 after December 31, 2003.’’. 

11 (c) EXPENSING.—Section 179 is amended by striking 

12 ‘‘2006’’ each place it occurs and inserting ‘‘2004’’. 

13 SEC. 307. REPEAL OF EXCLUSION FOR PARKING TRANS14 PORTATION FRINGE BENEFIT. 

15 (a) IN GENERAL.—Section 132(f) is amended—

16 (1) in paragraph (1) by striking subparagraph 

17 (C), and 

18 (2) in paragraph (5) by striking subparagraph 

19 (C) and redesignating subparagraphs (D) and (E) as 

20 subparagraphs (C) and (D), respectively. 

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

22 this section shall apply to taxable years beginning after 

23 December 31, 2003. 

24 SEC. 308. REPEAL OF CERTAIN DEDUCTIONS RELATING TO 

25 SECOND HOMES. 

26 (a) INTEREST.—
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1 (1) IN GENERAL.—Subparagraph (A) of section 

2 163(h)(4) is amended to read as follows: 

3 ‘‘(A) QUALIFIED RESIDENCE.—The term 

4 ‘qualified residence’ means the principal resi5 dence (within the meaning of section 121) of 

6 the taxpayer.’’. 

7 (2) EFFECTIVE DATE.—The amendment made 

8 by paragraph (1) shall apply to interest paid or ac9 crued after December 31, 2003. 

10 (b) PROPERTY TAXES.—

11 (1) IN GENERAL.—Section 164 is amended by 

12 redesignating subsection (g) as subsection (h) and 

13 by inserting after subsection (f) the following new 

14 subsection: 

15 ‘‘(g) NO DEDUCTION FOR MULTIPLE RESIDENCES.—

16 ‘‘(1) IN GENERAL.—No deduction shall be al17 lowed under this section for real property taxes paid 

18 or accrued in connection with any property of the 

19 taxpayer used as a residence of the taxpayer at any 

20 time during the taxable year other than as the prin21 cipal residence (within the meaning of section 121) 

22 of the taxpayer during such year. 

23 ‘‘(2) PROPERTY USED AS PRINCIPAL RESI24 DENCE FOR PORTION OF YEAR.—In the case that 

25 more than one property is used by the taxpayer as 
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1 a principal residence (as so defined) during the tax2 able year, the real property taxes allowed as a de3 duction under this section with respect to a property 

4 shall not exceed the amount which bears the same 

5 ratio to the total amount of real property taxes paid 

6 or accrued for the taxable year with respect to such 

7 property as the number of days in the taxable year 

8 during which the taxpayer used such property as a 

9 principal residence bears to 365. 

10 ‘‘(3) SPECIAL RULES FOR MARRIED INDIVID11 UALS.—For purposes of this subsection—

12 ‘‘(A) MARRIED COUPLES MUST FILE JOINT

13 RETURN.—If the taxpayer is married at the 

14 close of the taxable year, the deduction under 

15 this section for real property taxes with respect 

16 to the principal residence of the taxpayer shall 

17 only be allowed if the taxpayer and his spouse 

18 file a joint return for the taxable year. 

19 ‘‘(B) MARITAL STATUS.—An individual le20 gally separated from his spouse under a decree 

21 of divorce or of separate maintenance shall not 

22 be considered as married. 

23 ‘‘(C) CERTAIN MARRIED INDIVIDUALS LIV24 ING APART.—If—
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1 ‘‘(i) an individual who is married and 

2 who files a separate return—

3 ‘‘(I) maintains as his home a 

4 household which constitutes for more 

5 than one-half of the taxable year the 

6 principal place of abode of a quali7 fying individual, and 

8 ‘‘(II) furnishes over half of the 

9 cost of maintaining such household 

10 during the taxable year, and 

11 ‘‘(ii) during the last 6 months of such 

12 taxable year such individual’s spouse is not 

13 a member of such household, 

14 such individual shall not be considered as mar15 ried.’’. 

16 (2) EFFECTIVE DATE.—The amendment made 

17 by this subsection shall apply to taxes paid or ac18 crued for periods beginning after December 31, 

19 2003, in taxable years beginning after such date.

Æ