99–010

Calendar No. 466

107TH CONGRESS REPORT " SENATE ! 2d Session 107–189

TAX SHELTER TRANSPARENCY ACT

JUNE 28, 2002.—Ordered to be printed 

Mr. BAUCUS, from the Committee on Finance, 

submitted the following 

R E P O R T 

[To accompany S. 2498] 

The Committee on Finance, to which was referred the bill (S. 

2498) to amend the Internal Revenue Code of 1986 to require adequate disclosure of transactions which have a potential for tax 

avoidance or evasion and for other purposes, having considered the 

same, report favorably thereon with an amendment and recommend that the bill as amended do pass.

CONTENTS 

Page 

I. Legislative Background ................................................................................. 2 

II. Provisions Relating to the Tax Shelter Transparency Act ......................... 2

A. Penalty for Failure to Disclose Reportable Transactions (sec. 101 

of the bill and new sec. 6707A of the Code) ..................................... 2

B. Modifications to the Accuracy-Related Penalties for Listed Transactions and Reportable Transactions Having a Significant Tax 

Avoidance Purpose (sec. 102 of the bill and new sec. 6662A 

and secs. 6662 and 6664 of the Code) ............................................... 7

C. Modifications to the Substantial Understatement Penalty (sec. 

103 of the bill and sec. 6662 of the Code) ........................................ 11

D. Tax Shelter Exception to Confidentiality Privileges Relating to 

Taxpayer Communications (sec. 104 of the bill and sec. 7525 

of the Code) ......................................................................................... 12

E. Disclosure of Reportable Transactions by Material Advisors (secs. 

201 and 202 of the bill and secs. 6111 and 6707 of the Code) ....... 13

F. Investor Lists and Applicable Penalties (secs. 201 and 203 of 

the bill and secs. 6112 and 6708 of the Code) ................................. 16

G. Actions to Enjoin Conduct with Respect to Tax Shelters (sec. 

204 of the bill and sec. 7408 of the Code) ........................................ 18

H. Understatement of Taxpayer’s Liability by Income Tax Return 

Preparer (sec. 211 of the bill and sec. 6694 of the Code) ................ 18

I. Penalty on Failure to Report Interests in Foreign Financial Accounts (sec. 212 of the bill and sec. 5321 of Title 31, United 

States Code) ........................................................................................ 19

2

1Temp. Treas. Reg. sec. 1.6011–4T; Prop. Treas. Reg. sec. 1.6011–4. Effective June 14, 2002, 

the regulations were modified to require non-corporate taxpayers (i.e., individuals, trusts, partnerships, and S corporations) to disclose their participation in reportable transactions that have 

been specified by the Treasury Department as ‘‘listed’’ transactions. See T.D. 9000, 67 Fed. Reg. 

41,324 (June 18, 2002). Disclosure of other reportable transactions under the regulations continues to be limited to corporate taxpayers. 2The recently-modified regulations clarify that the term ‘‘substantially similar’’ includes any 

transaction that is expected to obtain the same or similar types of tax benefits and that is either 

factually similar or based on the same or similar tax strategy. Also, the term must be broadly 

construed in favor of disclosure. See T.D. 9000, 67 Fed. Reg. 41,324 (June 18, 2002). 3Temp. Treas. Reg. sec. 1.6011–4T(b)(2) and (b)(4)(i). 

J. Frivolous Tax Returns and Submissions (sec. 213 of the bill and 

sec. 6702 of the Code) ........................................................................ 21

K. Regulation of Individuals Practicing Before the Department of 

the Treasury (sec. 214 of the bill and sec. 330 of Title 31, United 

States Code) ........................................................................................ 22

L. Penalties on Promoters of Tax Shelters (sec. 215 of the bill and 

sec. 6700 of the Code) ........................................................................ 23

III. Other Provisions ............................................................................................ 24

A. Modification With Respect to Rite Aid case ...................................... 24

IV. Budget Effects of the Bill .............................................................................. 28

A. Committee Estimates .......................................................................... 28

B. Budget Authority and Tax Expenditures .......................................... 30

C. Consultation with Congressional Budget Office ................................ 30

V. Votes of the Committee ................................................................................. 30

VI. Regulatory Impact and Other Matters ........................................................ 30

A. Regulatory Impact ............................................................................... 30

B. Unfunded Mandates Statement .......................................................... 31

C. Tax Complexity Analysis ..................................................................... 31

VII. Changes in Existing Law Made by the Bill as Reported ............................ 31

I. LEGISLATIVE BACKGROUND 

The Senate Committee on Finance began a mark up of an original bill, S. 2498 (the ‘‘Tax Shelter Transparency Act’’) on June 13, 

2002. On June 18, 2002, the Senate Committee on Finance resumed the mark up and approved the Committee amendment by 

a voice vote on that date. 

The Committee held a hearing on March 21, 2002, regarding the 

proliferation of tax shelters. 

II. PROVISIONS RELATING TO THE TAX SHELTER 

TRANSPARENCY ACT 

A. PENALTY FOR FAILURE TO DISCLOSE REPORTABLE TRANSACTIONS

(Sec. 101 of the bill and new sec. 6707A of the Code) 

PRESENT LAW

Regulations under section 6011 require a taxpayer to disclose 

with its tax return certain information with respect to each ‘‘reportable transaction’’ in which the taxpayer participates.1

There are two categories of reportable transactions. The first category includes any transaction that is the same as (or substantially 

similar to) 2 a transaction that is specified by the Treasury Department as a tax avoidance transaction whose tax benefits are subject 

to disallowance under present law (referred to as a ‘‘listed transaction’’). A taxpayer must disclose any listed transaction that is expected to reduce the taxpayer’s Federal income tax liability by 

more than $1 million in any single taxable year or more than $2 

million in any combination of years.3

3

4Temp. Treas. Reg. sec. 1.6011–4T(b)(3)(i)(A)–(E). In certain circumstances, a taxpayer can 

avoid disclosure with respect to the second category of reportable transactions. See Temp. Treas. 

Reg. sec. 1.6011–4T(b)(3)(ii)(A)–(E). 5Section 6664(c) provides that a taxpayer can avoid the imposition of a section 6662 accuracyrelated penalty in cases where the taxpayer can demonstrate that there was reasonable cause 

for the underpayment and that the taxpayer acted in good faith. 6 In this regard, the Committee has concerns with the outcomes and rationales used by courts 

in some recent decisions involving tax-motivated transactions. For a more detailed discussion 

of recent court decisions and other developments regarding tax shelters, see Joint Committee 

on Taxation, Background and Present Law Relating to Tax Shelters (JCX 19–02), March 19, 

2002. 

The second category of reportable transactions includes transactions that are expected to reduce a taxpayer’s Federal income tax 

liability by more than $5 million in any single year or $10 million 

in any combination of years and that have at least two of the following characteristics: (1) the taxpayer has participated in the 

transaction under conditions of confidentiality; (2) the taxpayer has 

obtained or been provided with contractual protection against the 

possibility that part or all of the intended tax benefits from the 

transaction will not be sustained; (3) the promoters of the transaction have received or are expected to receive fees or other consideration with an aggregate value in excess of $100,000, and such 

fees are contingent on the taxpayer’s participation; (4) the trans- action results in a reported book/tax difference in excess of $5 million in any taxable year; or (5) the transaction involves a person 

that the taxpayer knows or has reason to know is in a Federal income tax position that differs from that of the taxpayer (such as 

a tax-exempt entity or foreign person), and the taxpayer knows or 

has reason to know that such difference has permitted the transaction to be structured to provide the taxpayer with a more favorable Federal income tax treatment.4

Under present law, there is no specific penalty for failing to disclose a reportable transaction; however, such a failure may jeopardize the taxpayer’s ability to claim that any income tax understatement attributable to such undisclosed transaction is due to 

reasonable cause, and that the taxpayer acted in good faith.5

REASONS FOR CHANGE

The Committee is aware that individuals and corporations are 

increasingly using sophisticated transactions to avoid or evade Federal income tax.6 Such a phenomenon could pose a serious threat 

to the efficacy of the tax system because of both the potential loss 

of revenue and the potential threat to the integrity of the self-assessment system. 

The Committee over two years ago began working on legislation 

to address this significant compliance problem. In addition, the 

Treasury Department, using the tools available, issued regulations 

requiring disclosure of certain transactions and requiring organizers and promoters of tax-engineered transactions to maintain 

customer lists and make these lists available to the IRS. Nevertheless, the Committee believed that additional legislation was needed 

to provide the Treasury Department with additional tools to assist 

its efforts to curtail abusive transactions. In that regard, the Committee issued for public comment three separate staff discussion 

drafts designed to address the tax shelter problem. The most recent 

draft (released in August 2001) focused on a regime that emphasized disclosure of tax shelter transactions. 

4

7See generally, ‘‘The Treasury Department’s Enforcement Proposals for Abusive Tax Avoidance Transactions,’’ released on March 20, 2002, reprinted electronically at 2002 TNT 55–28 

(March 21, 2002). 8The provision states that, except as provided in regulations, a listed transaction means a reportable transaction, which is the same as, or similar to, a transaction specifically identified by 

the Secretary as a tax avoidance transaction for purposes of section 6011. The Committee anticipates that regulations under section 6011 will provide that a transaction is similar to a listed 

On March 21, 2002, the Committee heard testimony from Treasury Department and IRS officials that only 272 transactions by 99 

different taxpayers were disclosed under the present law for the 

2001 tax-filing season. In connection with the hearing, the Treasury Department announced a new initiative (the ‘‘Treasury shelter 

initiative’’) that is designed to provide the Treasury Department 

and the Internal Revenue Service (‘‘IRS’’) with the tools necessary 

to respond to abusive tax avoidance transactions.7 The Treasury 

shelter initiative emphasizes combating abusive transactions by requiring increased disclosure of such transactions by all parties involved. To facilitate such disclosure, the Treasury shelter initiative 

proposes clearer definitions to identify transactions that must be 

disclosed, and stiffer penalties for failure to disclose such transactions. The Treasury shelter initiative provides for 

[A] series of clear, mutually reinforcing rules for disclosure, registration, and list maintenance. These rules will 

be easier for taxpayers and their advisors to apply, and 

harder for those who seek to avoid disclosure to manipulate. * * * The Treasury Department’s proposals, for example, will broaden and align the rules and regulations for 

disclosure, registration, and list keeping under Sections 

6011, 6111, and 6112 of the Code. * * * The Treasury Department’s enforcement initiative will create a single, clear 

definition of a transaction that must be disclosed and registered, and for which lists must be maintained. 

The Committee believes that the course of action outlined in the 

Treasury shelter initiative will bolster ongoing efforts to combat 

abusive tax avoidance transactions, and that encouraging greater 

disclosure of transactions with a potential for tax avoidance is beneficial to the tax system. Moreover, the Committee believes that a 

penalty for failing to make the required disclosures, when the imposition of such penalty is not dependent on the tax treatment of 

the underlying transaction ultimately being sustained, will provide 

an additional incentive for taxpayers to satisfy their reporting obligations under the new disclosure provisions. 

EXPLANATION OF PROVISION

In general 

The provision creates a new penalty for any person who fails to 

include with any return or statement any required information 

with respect to a reportable transaction. The new penalty applies 

without regard to whether the transaction ultimately results in an 

understatement of tax, and applies in addition to any accuracy-related penalty that may be imposed. 

Transactions to be disclosed 

The provision does not define the terms ‘‘listed transaction’’ 8 or ‘‘reportable transaction,’’ nor does the provision explain the type of 

5

transaction if such transaction is expected to obtain the same or similar types of tax benefits 

and that is either factually similar or based on the same or similar tax strategy. The Secretary 

will have discretion to modify this definition as appropriate (as well as the definitions of reportable and listed transactions). 9The Treasury shelter initiative stated that a reportable transaction would be defined as any 

transaction with any of the following characteristics: (1) any transaction specifically identified 

by the IRS in published guidance as a tax avoidance transaction without regard to the size of 

the tax savings (i.e., a ‘‘listed transaction’’), (2) certain loss transactions under section 165 in 

excess of $10 million for corporations, partnerships, and S corporations ($2 million for trusts 

and individuals), (3) any transaction resulting in a tax credit in excess of $250,000 if the taxpayer held the underlying asset for less than 45 days, (4) any book-tax difference of at least 

$10 million, subject to certain exceptions, and (5) any transaction marketed under conditions 

of confidentiality, if the transaction is expected to result in a reduction in taxable income of at 

least $250,000 ($500,000 in the case of a corporation). 

information that must be disclosed in order to avoid the imposition 

of a penalty. Rather, the provision authorizes the Treasury Department to define a ‘‘listed transaction’’ and a ‘‘reportable transaction’’

under section 6011. As part of the Treasury shelter initiative, the 

Committee expects the Treasury Department to issue new regulations under section 6011 that will provide taxpayers with a set of 

objective standards to be applied in determining whether a taxpayer must disclose information regarding a particular transaction. 

The Committee anticipates that the new regulations will define a 

reportable transaction to include (but not be limited to) transactions with any of the following characteristics: (1) a significant 

loss, (2) a brief holding period, (3) a transaction that is marketed 

under conditions of confidentiality, (4) a transaction that is subject 

to indemnification agreements, or (5) a certain amount of book-tax 

difference.9

Disclosure requirements 

The Committee further expects that the new regulations will 

specify the manner in which a taxpayer must disclose reportable 

transactions. The Committee anticipates that the information required to be disclosed with respect to reportable transactions will 

be sufficiently detailed so as to provide the Treasury Department 

and IRS the ability to analyze all aspects of the transaction and determine an appropriate course of action (if any). To accomplish this 

objective, a taxpayer may be required to disclose the following information with respect to a reportable transaction: (1) a detailed 

description of all facts relevant to the expected tax treatment of the 

reportable transaction (such as the structure of the transaction and 

the principal elements of the transaction), (2) a description and 

schedule of the expected tax benefits for all tax years resulting 

from the reportable transaction (including any anticipated transactions as part of the overall strategy), (3) if applicable, the names 

and addresses of any party who promoted, solicited, or recommended the taxpayer’s participation in the transaction and who 

had a financial interest (including the receipt of fees) in the taxpayer’s decision to participate, and (4) other information that the 

Secretary may prescribe (e.g., the involvement of any accommodation party or any tax-indifferent party, the receipt of a tax opinion 

with respect to the transaction, the amount of any fees paid to any 

promoter or advisor in connection with the transaction, any anticipated subsequent transactions or exit strategies).

6

10The Committee recognizes that the Secretary’s present-law authority to postpone certain 

tax-related deadlines because of Presidentially-declared disasters (sec. 7508A) will also encompass the authority to postpone the reporting deadlines established by the provision. 11This category of transactions is described in greater detail below in connection with the provision modifying the accuracy-related penalty to tax shelters. 

The Committee intends that, in accordance with section 6065 (relating to verification of returns), the form the Secretary prescribes 

for taxpayer disclosure of reportable transactions will include a 

written declaration that the information is being provided under 

penalties of perjury. Moreover, the Committee intends that the 

verification under penalties of perjury also will apply to any large 

entity that discloses that it did not enter into any reportable transactions during the tax year covered by such declaration. 

Penalty rate 

The penalty for failing to disclose a reportable transaction is 

$50,000. The amount is increased to $100,000 if the failure is with 

respect to a listed transaction. For large entities and high net 

worth individuals, the penalty amount is doubled (i.e., $100,000 for 

a reportable transaction and $200,000 for a listed transaction). The 

penalty cannot be waived with respect to a listed transaction. As 

to reportable transactions, the penalty can be rescinded or abated 

only in exceptional circumstances.10 All or part of the penalty may 

be rescinded only if: (1) the taxpayer on whom the penalty is imposed has a history of complying with the Federal tax laws, (2) it 

is shown that the violation is due to an unintentional mistake of 

fact, (3) imposing the penalty would be against equity and good 

conscience, and (4) rescinding the penalty would promote compliance with the tax laws and effective tax administration. The authority to rescind the penalty can only be exercised by the Commissioner personally or the head of the Office of Tax Shelter Analysis; 

this authority to rescind cannot otherwise be delegated by the 

Commissioner. Thus, the penalty cannot be rescinded by a revenue 

agent, an appeals officer, or other IRS personnel. The decision to 

rescind a penalty must be accompanied by a record describing the 

facts and reasons for the action and the amount rescinded. There 

will be no taxpayer right to appeal a refusal to rescind a penalty. 

The IRS also is required to submit an annual report to Congress 

summarizing the application of the disclosure penalties and providing a description of each penalty rescinded under this provision 

and the reasons for the rescission. 

A ‘‘large entity’’ is defined as any entity with gross receipts in excess of $10 million in the year of the transaction or in the preceding year. A ‘‘high net worth individual’’ is defined as any individual whose net worth exceeds $2 million, based on the fair market value of the individual’s assets and liabilities immediately before entering into the transaction. 

A public entity that is required to pay a penalty for failing to disclose a listed transaction (or is subject to an accuracy-related penalty for a nondisclosed listed transaction or a nondisclosed reportable transaction with a significant tax avoidance purpose 11) must 

disclose the imposition of the penalty in reports to the Securities 

and Exchange Commission (‘‘SEC’’) for such period as the Secretary 

shall specify. The provision applies without regard to whether the 

7

12Sec. 6662. 13Sec. 6662(d)(2)(B). 14Sec. 6662(d)(2)(C). 

taxpayer determines the amount of the penalty to be material to 

the reports in which the penalty must appear, and treats any failure to disclose a transaction in such reports as a failure to disclose 

a listed transaction. A taxpayer must disclose a penalty in reports 

to the SEC once the taxpayer has exhausted its administrative and 

judicial remedies with respect to the penalty (or if earlier, when 

paid). 

As described above in connection with present law, current regulations under section 6011 require the disclosure of certain reportable transactions. Until such regulations are modified to reflect the 

new categories of reportable transactions, the penalty will apply to 

taxpayers who fail to timely disclose any reportable transaction 

under the definitions contained in the current regulations. 

EFFECTIVE DATE

The provision is effective for returns and statements the due date 

for which is after the date of enactment. 

B. MODIFICATIONS TO THE ACCURACY-RELATED PENALTIES FOR LISTED TRANSACTIONS AND REPORTABLE TRANSACTIONS HAVING A

SIGNIFICANT TAX AVOIDANCE PURPOSE

(Sec. 102 of the bill and new sec. 6662A and secs. 6662 and 6664 

of the Code) 

PRESENT LAW

The accuracy-related penalty applies to the portion of any underpayment that is attributable to (1) negligence, (2) any substantial 

understatement of income tax, (3) any substantial valuation 

misstatement, (4) any substantial overstatement of pension liabilities, or (5) any substantial estate or gift tax valuation understatement. If the correct income tax liability exceeds that reported by 

the taxpayer by the greater of 10 percent of the correct tax or 

$5,000 ($10,000 in the case of corporations), then a substantial understatement exists and a penalty may be imposed equal to 20 percent of the underpayment of tax attributable to the understatement.12 The amount of any understatement generally is reduced by 

any portion attributable to an item if (1) the treatment of the item 

is supported by substantial authority, or (2) facts relevant to the 

tax treatment of the item were adequately disclosed and there was 

a reasonable basis for its tax treatment.13

Special rules apply with respect to tax shelters.14 For understatements by non-corporate taxpayers attributable to tax shelters, the 

penalty may be avoided only if the taxpayer establishes that, in addition to having substantial authority for the position, the taxpayer 

reasonably believed that the treatment claimed was more likely 

than not the proper treatment of the item. This reduction in the 

penalty is unavailable to corporate tax shelters. 

The understatement penalty generally is abated (even with respect to tax shelters) in cases in which the taxpayer can demonstrate that there was ‘‘reasonable cause’’ for the underpayment 

8

15Sec. 6664(c). 16Treas. Reg. sec. 1.6662–4(g)(4)(i)(B); Treas. Reg. sec. 1.6664–4(c). 17See ‘‘The Treasury Department’s Enforcement Proposals for Abusive Tax Avoidance Transactions,’’ at 12 (released on March 20, 2002), reprinted electronically at 2002 TNT 55–28 (March 

21, 2002). 18The terms ‘‘reportable transaction’’ and ‘‘listed transaction’’ have the same meanings as previously described in connection with the penalty for failing to disclose a reportable transaction. 

and that the taxpayer acted in good faith.15 The relevant regulations provide that reasonable cause exists where the taxpayer ‘‘reasonably relies in good faith on an opinion based on a professional 

tax advisor’s analysis of the pertinent facts and authorities [that] 

* * * unambiguously concludes that there is a greater than 50–

percent likelihood that the tax treatment of the item will be upheld 

if challenged’’ by the IRS.16

REASONS FOR CHANGE

The Committee understands that taxpayers are being advised 

not to disclose tax avoidance transactions on the grounds that any 

accuracy-related penalty that could result from an underpayment 

of tax on such a transaction can be avoided.17 Because the Treasury shelter initiative emphasizes combating abusive tax avoidance 

transactions by requiring increased disclosure of such transactions 

by all parties involved, the Committee believes that taxpayers 

should be subject to a strict liability penalty on an understatement 

of tax that is attributable to non-disclosed listed transactions or 

non-disclosed reportable transactions that have a significant purpose of tax avoidance. Furthermore, in order to deter taxpayers 

from entering into tax avoidance transactions, the Committee believes that a more meaningful (but less stringent) accuracy-related 

penalty should apply to such transactions even when disclosed. 

EXPLANATION OF PROVISION

In general 

The provision modifies the present-law accuracy related penalty 

by replacing the rules applicable to tax shelters with a new accuracy-related penalty that applies to listed transactions and reportable transactions with a significant tax avoidance purpose (hereinafter referred to as a ‘‘reportable avoidance transaction’’).18 The 

penalty rate and the taxpayer defenses available to avoid the penalty vary depending on the category of the transaction (i.e., listed 

or reportable avoidance transaction) and whether the transaction 

was adequately disclosed. 

In general, a 20–percent accuracy-related penalty is imposed on 

any understatement attributable to a listed transaction or a reportable avoidance transaction. The only exception to the penalty is if 

the taxpayer satisfies a more stringent reasonable cause and good 

faith exception (hereinafter referred to as the ‘‘strengthened reasonable cause exception’’), which is described below. The strengthened reasonable cause exception is available only if the relevant 

facts affecting the tax treatment are adequately disclosed, there is 

or was substantial authority for the claimed tax treatment, and the 

taxpayer reasonably believed that the claimed tax treatment was 

more likely than not the proper treatment. 

9

19For this purpose, any reduction in the excess of deductions allowed for the taxable year over 

gross income for such year, and any reduction in the amount of capital losses which would (without regard to section 1211) be allowed for such year, shall be treated as an increase in taxable 

income. 20See the previous discussion regarding the penalty for failing to disclose a reportable transaction. 

If the taxpayer does not adequately disclose the transaction, the 

strengthened reasonable cause exception is not available (i.e., a nofault penalty applies), and the taxpayer is subject to an increased 

penalty rate. If the understatement is attributable to an undisclosed listed transaction, the penalty rate is increased to 30 percent 

of the understatement. For understatements attributable to an undisclosed reportable avoidance transaction, the penalty rate is 25 

percent of the understatement. 

Determination of the understatement amount 

The penalty is applied to the amount of any understatement attributable to the listed or reportable avoidance transaction without 

regard to other items on the tax return. For purposes of this provision, the amount of the understatement is determined as the sum 

of (1) the product of the highest corporate or individual tax rate (as 

appropriate) and the increase in taxable income resulting from the 

difference between the taxpayer’s treatment of the item and the 

proper treatment of the item (without regard to other items on the 

tax return),19 and (2) the amount of any decrease in the aggregate 

amount of credits which results from a difference between the taxpayer’s treatment of an item and the proper tax treatment of such 

item. 

Except as provided in regulations, the taxpayer’s treatment of an 

item shall not take into account any amendment or supplement to 

a return if the amendment or supplement is filed after the earlier 

of when the taxpayer is first contacted regarding an examination 

of the return or such other date as specified by the Secretary. 

Strengthened reasonable cause exception 

A penalty is not imposed under the provision with respect to any 

portion of an understatement if it is shown that there was reasonable cause for such portion and the taxpayer acted in good faith. 

Such a showing requires (1) adequate disclosure of the facts affecting the transaction in accordance with the regulations under section 6011,20 (2) there is or was substantial authority for such treatment, and (3) the taxpayer reasonably believed that such treatment 

was more likely than not the proper treatment. For this purpose, 

a taxpayer will be treated as having a reasonable belief with respect to the tax treatment of an item only if such belief (1) is based 

on the facts and law that exist at the time the tax return (that includes the item) is filed, and (2) relates solely to the taxpayer’s 

chances of success on the merits and does not take into account the 

possibility that (a) a return will not be audited, (b) the treatment 

will not be raised on audit, or (c) the treatment will be resolved 

through settlement if raised. 

A taxpayer may (but is not required to) rely on an opinion of a 

tax advisor in establishing its reasonable belief with respect to the 

tax treatment of the item. However, a taxpayer may not rely on an 

opinion of a tax advisor for this purpose if the opinion (1) is proVerDate Jun 13 2002 04:13 Jul 02, 2002 Jkt 099010 PO 00000 Frm 00009 Fmt 6602 Sfmt 6602 E:\HR\OC\SR189.XXX pfrm20 PsN: SR189
10

21The term ‘‘material advisor’’ (defined below in connection with the new information filing 

requirements for material advisors) means any person who provides any material aid, assistance, or advice with respect to organizing, promoting, selling, implementing, or carrying out any 

reportable transaction, and who derives gross income in excess of $50,000 in the case of a reportable transaction substantially all of the tax benefits from which are provided to natural persons ($250,000 in any other case). 22This situation could arise, for example, when an advisor has an arrangement or understanding (oral or written) with an organizer, manager, or promoter of a reportable transaction 

that such party will recommend or refer potential participants to the advisor for an opinion regarding the tax treatment of the transaction. 23 An advisor should not be treated as participating in the organization of a transaction if the 

advisor’s only involvement with respect to the organization of the transaction is the rendering 

of an opinion regarding the tax consequences of such transaction. However, such an advisor may 

be a ‘‘disqualified tax advisor’’ with respect to the transaction if the advisor participates in the 

management, promotion or sale of the transaction (or if the material advisor is compensated by 

another material advisor, has a fee arrangement that is contingent on the tax benefits of the 

transaction, or as determined by the Secretary, has a continuing financial interest with respect 

to the transaction). 

vided by a ‘‘disqualified tax advisor,’’ or (2) is a ‘‘disqualified opinion.’’

Disqualified tax advisor 

A disqualified tax advisor is any material advisor 21 who (1) participates in the organization, management, promotion or sale of the 

transaction or is related (within the meaning of section 267 or 707) 

to any person who so participates, (2) is compensated by another 

material advisor with respect to the transaction, (3) has a fee arrangement with respect to the transaction that is contingent on all 

or part of the intended tax benefits from the transaction being sustained, or (4) as determined under regulations prescribed by the 

Secretary, has a continuing financial interest with respect to the 

transaction.22

Organization, management, promotion or sale of a transaction 

The Committee intends that a material advisor be considered as 

participating in the ‘‘organization’’ of a transaction if the advisor 

performs acts relating to the development of the transaction. This 

may include, for example, preparing documents (1) establishing a 

structure used in connection with the transaction (such as a partnership agreement), (2) describing the transaction (such as an offering memorandum or other statement describing the transaction), 

or (3) relating to the registration of the transaction with any federal, state or local government body.23 Participation in the ‘‘management’’ of a transaction means involvement in the decision-making process regarding any business activity with respect to the 

transaction. Participation in the ‘‘promotion or sale’’ of a transaction means involvement in the marketing or solicitation of the 

transaction to others. Thus, an advisor who provides information 

about the transaction to a potential participant is involved in the 

promotion or sale of a transaction, as is any advisor who recommends the transaction to a potential participant. 

Disqualified opinion 

An opinion may not be relied upon if the opinion (1) is based on 

unreasonable factual or legal assumptions (including assumptions 

as to future events), (2) unreasonably relies upon representations, 

statements, finding or agreements of the taxpayer or any other perVerDate Jun 13 2002 04:13 Jul 02, 2002 Jkt 099010 PO 00000 Frm 00010 Fmt 6602 Sfmt 6602 E:\HR\OC\SR189.XXX pfrm20 PsN: SR189
11

24Sec. 6662(a) and (d)(1)(A). 25Sec. 6662(d)(2)(B). 26Sec. 6662(d)(2)(D). 

son, (3) does not identify and consider all relevant facts, or (4) fails 

to meet any other requirement prescribed by the Secretary. 

Coordination with other penalties 

Any understatement to which a penalty is imposed under this 

provision is not subject to the accuracy-related penalty under section 6662. However, such understatement is included for purposes 

of determining whether any understatement (as defined in sec. 

6662(d)(2)) is a substantial understatement as defined under section 6662(d)(1). 

The penalty imposed under this provision shall not apply to any 

portion of an understatement to which a fraud penalty is applied 

under section 6663. 

EFFECTIVE DATE

The provision is effective for taxable years ending after the date 

of enactment. 

C. MODIFICATIONS TO THE SUBSTANTIAL UNDERSTATEMENT PENALTY

(Sec. 103 of the bill and sec. 6662 of the Code) 

PRESENT LAW

Definition of substantial understatement 

An accuracy-related penalty equal to 20 percent applies to any 

substantial understatement of tax. A ‘‘substantial understatement’’

exists if the correct income tax liability for a taxable year exceeds 

that reported by the taxpayer by the greater of 10 percent of the 

correct tax or $5,000 ($10,000 in the case of most corporations).24

Reduction of understatement for certain positions 

For purposes of determining whether a substantial understatement penalty applies, the amount of any understatement generally 

is reduced by any portion attributable to an item if (1) the treatment of the item is supported by substantial authority, or (2) facts 

relevant to the tax treatment of the item were adequately disclosed 

and there was a reasonable basis for its tax treatment.25

The Secretary is required to publish annually in the Federal Register a list of positions for which the Secretary believes there is not 

substantial authority and which affect a significant number of taxpayers.26

REASONS FOR CHANGE

The Committee believes that the present-law definition of substantial understatement allows large corporate taxpayers to avoid 

the accuracy-related penalty on questionable transactions of a significant size. The Committee believes that an understatement of 

more than $10 million is substantial in and of itself, regardless of 

the proportion it represents of the taxpayer’s total tax liability. 

12

The Committee believes that a higher compliance standard 

should be imposed on any taxpayer in order to reduce the amount 

of an understatement resulting from a transaction that the taxpayer did not adequately disclose. The Committee further believes 

that a taxpayer should not take a position on a tax return that 

could give rise to a substantial understatement penalty that the 

taxpayer does not believe is more likely than not the correct tax 

treatment unless this information is disclosed to the IRS.

EXPLANATION OF PROVISION

Definition of substantial understatement 

The provision modifies the definition of ‘‘substantial’’ for corporate taxpayers. Under the provision, a corporate taxpayer has a 

substantial understatement if the amount of the understatement 

for the taxable year exceeds the lesser of (1) 10 percent of the tax 

required to be shown on the return for the taxable year (or, if 

greater, $10,000), or (2) $10 million. 

Reduction of understatement for certain positions 

The provision elevates the standard that a taxpayer must satisfy 

in order to reduce the amount of an understatement for undisclosed 

items. With respect to the treatment of an item whose facts are not 

adequately disclosed, a resulting understatement is reduced only if 

the taxpayer had a reasonable belief that the tax treatment was 

more likely than not the proper treatment. The provision also authorizes (but does not require) the Secretary to publish a list of positions for which it believes there is not substantial authority or 

there is no reasonable belief that the tax treatment is more likely 

than not the proper treatment (without regard to whether such positions affect a significant number of taxpayers). The list shall be 

published in the Federal Register or the Internal Revenue Bulletin. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after date 

of enactment. 

D. TAX SHELTER EXCEPTION TO CONFIDENTIALITY PRIVILEGES

RELATING TO TAXPAYER COMMUNICATIONS

(Sec. 104 of the bill and sec. 7525 of the Code) 

PRESENT LAW

In general, a common law privilege of confidentiality exists for 

communications between an attorney and client with respect to the 

legal advice the attorney gives the client. The Code provides that, 

with respect to tax advice, the same common law protections of 

confidentiality that apply to a communication between a taxpayer 

and an attorney also apply to a communication between a taxpayer 

and a federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it 

were between a taxpayer and an attorney. This rule is inapplicable 

to communications regarding corporate tax shelters. 

13

27Sec. 6111(a). 28The tax shelter ratio is, with respect to any year, the ratio that the aggregate amount of 

the deductions and 350 percent of the credits, which are represented to be potentially allowable 

to any investor, bears to the investment base (money plus basis of assets contributed) as of the 

close of the tax year. 29Sec. 6111(c). 30Sec. 6111(d). 31Temp. Treas. Reg. sec. 301.6111–2T(b)(2). 

REASONS FOR CHANGE

The Committee believes that the rule currently applicable to corporate tax shelters should be applied to all tax shelters, regardless 

of whether or not the participant is a corporation. 

EXPLANATION OF PROVISION

The bill modifies the rule relating to corporate tax shelters by 

making it applicable to all tax shelters, whether entered into by 

corporations, individuals, partnerships, tax-exempt entities, or any 

other entity. Accordingly, communications with respect to tax shelters are not subject to the confidentiality provision of the Code that 

otherwise applies to a communication between a taxpayer and a 

federally authorized tax practitioner. 

EFFECTIVE DATE

The provision is effective with respect to communications made 

on or after the date of enactment. 

E. DISCLOSURE OF REPORTABLE TRANSACTIONS BY MATERIAL

ADVISORS

(Secs. 201 and 202 of the bill and secs. 6111 and 6707 of the Code) 

PRESENT LAW

Registration of tax shelter arrangements 

An organizer of a tax shelter is required to register the shelter 

with the Secretary not later than the day on which the shelter is 

first offered for sale.27 A ‘‘tax shelter’’ means any investment with 

respect to which the tax shelter ratio 28 for any investor as of the 

close of any of the first five years ending after the investment is 

offered for sale may be greater than two to one and which is: (1) 

required to be registered under Federal or State securities laws, (2) 

sold pursuant to an exemption from registration requiring the filing of a notice with a Federal or State securities agency, or (3) a 

substantial investment (greater than $250,000 and at least five investors).29

Other promoted arrangements are treated as tax shelters for 

purposes of the registration requirement if: (1) a significant purpose of the arrangement is the avoidance or evasion of Federal income tax by a corporate participant; (2) the arrangement is offered 

under conditions of confidentiality; and (3) the promoter may receive fees in excess of $100,000 in the aggregate.30

A transaction has a ‘‘significant purpose of avoiding or evading 

Federal income tax’’ if the transaction: (1) is the same as or substantially similar to a ‘‘listed transaction,’’ 31 or (2) is structured to 

produce tax benefits that constitute an important part of the inVerDate Jun 13 2002 04:13 Jul 02, 2002 Jkt 099010 PO 00000 Frm 00013 Fmt 6602 Sfmt 6602 E:\HR\OC\SR189.XXX pfrm20 PsN: SR189
14

32Temp. Treas. Reg. sec. 301.6111–2T(b)(3). 33Temp. Treas. Reg. sec. 301.6111–2T(b)(4). 34The regulations provide that the determination of whether an arrangement is offered under 

conditions of confidentiality is based on all the facts and circumstances surrounding the offer. 

If an offeree’s disclosure of the structure or tax aspects of the transaction are limited in any 

way by an express or implied understanding or agreement with or for the benefit of a tax shelter 

promoter, an offer is considered made under conditions of confidentiality, whether or not such 

understanding or agreement is legally binding. Treas. Reg. sec. 301.6111–2T(c)(1). 35Sec. 6707. 36The Treasury Department’s enforcement proposals for abusive tax avoidance transactions 

are described in greater detail above in connection with the penalty for failing to disclose reportable transactions (new sec. 6707A). 

tended results of the arrangement and the promoter reasonably expects to present the arrangement to more than one taxpayer.32

Certain exceptions are provided with respect to the second category 

of transactions.33

An arrangement is offered under conditions of confidentiality if: 

(1) an offeree has an understanding or agreement to limit the disclosure of the transaction or any significant tax features of the 

transaction; or (2) the promoter claims, knows, or has reason to 

know that a party other than the potential participant claims that 

the transaction (or any aspect of it) is proprietary to the promoter 

or any party other than the offeree, or is otherwise protected from 

disclosure or use.34

Failure to register tax shelter 

The penalty for failing to timely register a tax shelter (or for filing false or incomplete information with respect to the tax shelter 

registration) generally is the greater of one percent of the aggregate amount invested in the shelter or $500.35 However, if the tax 

shelter involves an arrangement offered to a corporation under conditions of confidentiality, the penalty is the greater of $10,000 or 

50 percent of the fees payable to any promoter with respect to offerings prior to the date of late registration. Intentional disregard 

of the requirement to register increases the penalty to 75 percent 

of the applicable fees. 

Section 6707 also imposes (1) a $100 penalty on the promoter for 

each failure to furnish the investor with the required tax shelter 

identification number, and (2) a $250 penalty on the investor for 

each failure to include the tax shelter identification number on a 

return. 

REASONS FOR CHANGE

The Committee has been advised that the current promoter registration rules have not proven particularly helpful, because the 

rules are not appropriate for the kinds of abusive transactions now 

prevalent, and because the limitations regarding confidential corporate arrangements have proven easy to circumvent. 

The Committee believes that providing a single, clear definition 

regarding the types of transactions that must be disclosed by taxpayers and material advisors (as outlined in the Treasury shelter 

initiative), coupled with more meaningful penalties for failing to 

disclose such transactions, are necessary tools if the effort to curb 

the use of abusive tax avoidance transactions is to be effective.36

15

37The terms ‘‘reportable transaction’’ and ‘‘listed transaction’’ have the same meaning as previously described in connection with the taxpayer-related provisions. 38See the previous discussion regarding the disclosure requirements under new section 6707A. 39The terms ‘‘reportable transaction’’ and ‘‘listed transaction’’ have the same meaning as previously described in connection with the taxpayer-related provisions. 

EXPLANATION OF PROVISION

Disclosure of reportable transactions by material advisors 

The provision repeals the present law rules with respect to registration of tax shelters. Instead, the provision requires each material advisor with respect to any reportable transaction 37 to timely 

file an information return with the Secretary (in such form and 

manner as the Secretary may prescribe). The return must be filed 

on such date as specified by the Secretary. 

The information return will include (1) information identifying 

and describing the transaction, (2) information describing any potential tax benefits expected to result from the transaction, and (3) 

such other information as the Secretary may prescribe. It is expected that the Secretary may seek from the material advisor the 

same type of information that the Secretary may request from a 

taxpayer in connection with a reportable transaction.38

A ‘‘material advisor’’ means any person (1) who provides material 

aid, assistance, or advice with respect to organizing, promoting, 

selling, implementing, or carrying out any reportable transaction, 

and (2) who directly or indirectly derives gross income in excess of 

$250,000 ($50,000 in the case of a reportable transaction substantially all of the tax benefits from which are provided to natural persons) for such advice or assistance. 

The Secretary may prescribe regulations which provide (1) that 

only one material advisor has to file an information return in cases 

in which two or more material advisors would otherwise be required to file information returns with respect to a particular reportable transaction, (2) exemptions from the requirements of this 

section, and (3) other rules as may be necessary or appropriate to 

carry out the purposes of this section. 

Penalty for failing to furnish information regarding reportable 

transactions 

The provision repeals the present law penalty for failure to register tax shelters. Instead, the provision imposes a penalty on any 

material advisor who fails to file an information return with respect to any reportable transaction, or who files a false or incomplete information return with the Secretary with respect to a reportable transaction.39 The amount of the penalty is $50,000. If the 

penalty is with respect to a listed transaction, the amount of the 

penalty is increased to the greater of (1) $200,000, or (2) 50 percent 

of the gross income of such person with respect to aid, assistance, 

or advice which is provided with respect to the reportable transaction before the date the information return that includes the 

transaction is filed. Intentional disregard by a material advisor of 

the requirement to disclose a reportable transaction increases the 

penalty to 75 percent of such gross income. 

The penalty cannot be waived with respect to a listed transaction. As to reportable transactions, the penalty can be rescinded 

16

40The Committee recognizes that the Secretary’s present-law authority to postpone certain 

tax-related deadlines because of Presidentially-declared disasters (sec. 7508A) will also encompass the authority to postpone the reporting deadlines established by the provision. 41Sec. 6112. 42See Temp. Treas. Reg. sec. 301.6112–1T Q&A 17. 

or abated only in exceptional circumstances.40 All or part of the 

penalty may be rescinded only if: (1) the material advisor on whom 

the penalty is imposed has a history of complying with the Federal 

tax laws, (2) it is shown that the violation is due to an unintentional mistake of fact, (3) imposing the penalty would be against 

equity and good conscience, and (4) rescinding the penalty would 

promote compliance with the tax laws and effective tax administration. The authority to rescind the penalty can only be exercised by 

the Commissioner personally or the head of the Office of Tax Shelter Analysis; this authority to rescind cannot otherwise be delegated by the Commissioner. Thus, the penalty cannot be rescinded 

by a revenue agent, an appeals officer, or other IRS personnel. The 

decision to rescind a penalty must be accompanied by a record describing the facts and reasons for the action and the amount rescinded. There will be no right to appeal a refusal to rescind a penalty. The IRS also is required to submit an annual report to Congress summarizing the application of the disclosure penalties and 

providing a description of each penalty rescinded under this provision and the reasons for the rescission. 

EFFECTIVE DATE

The provision requiring disclosure of reportable transactions by 

material advisors applies to transactions with respect to which material aid, assistance or advice is provided after the date of enactment. 

The provision imposing a penalty for failing to disclose reportable 

transactions applies to returns the due date for which is after the 

date of enactment.

F. INVESTOR LISTS AND APPLICABLE PENALTIES

(Secs. 201 and 203 of the bill and secs. 6112 and 6708 of the Code) 

PRESENT LAW

Investor lists 

A promoter must maintain (for a period of seven years) a list 

identifying each person who was sold an interest in any tax shelter 

with respect to which registration was required under section 6111 

(even though the particular party may not have been subject to 

confidentiality restrictions).41 Regulations under section 6112 provide that, in addition to the name, tax shelter identification number and other identifying information the promoter must include 

detailed information about the tax shelter (including details of the 

shelter and the expected tax benefits, as well as copies of any additional written material given to any participant or advisor).42 A 

limited exception is provided for certain shelters if the total fees 

are less than $25,000 or if the expected reduction in tax liabilities 

for any single year is less than $1 million for corporations or 

17

43See Temp. Treas. Reg. sec. 301–6112–1T Q&A 8. 44Sec. 6112(c)(2). 45The Treasury Department’s enforcement proposals for abusive tax avoidance transactions 

are described in greater detail above in connection with the penalty for failing to disclose reportable transactions (new sec. 6707A). 46The term ‘‘material advisor’’ has the same meaning as when used in connection with the 

requirement to file an information return under section 6111. 47The term ‘‘reportable transaction’’ has the same meaning as previously described in connection with the taxpayer-related provisions. 

$250,000 for non-corporate taxpayers.43 The Secretary is required 

to prescribe regulations which provide that, in cases in which 2 or 

more persons are required to maintain the same list, only one person would be required to maintain the list.44

Penalties for failing to maintain investor lists 

Under section 6708, the penalty for failing to maintain the list 

required under section 6112 is $50 for each name omitted from the 

list (with a maximum penalty of $100,000 per year). 

REASONS FOR CHANGE

The Committee has been advised that the present-law penalties 

for failure to maintain customer lists are not meaningful and that 

promoters often have refused to provide requested information to 

the IRS. The Committee believes that requiring material advisors 

to maintain a list of advisees with respect to each reportable transaction, coupled with more meaningful penalties for failing to maintain an investor list, are important tools in the ongoing efforts to 

curb the use of abusive tax avoidance transactions. Furthermore, 

these provisions are consistent with the course of action outlined 

in the Treasury shelter initiative.45

EXPLANATION OF PROVISION

Investor lists 

Each material advisor 46 that is required to file an information 

return with respect to a reportable transaction 47 is required to 

maintain a list that (1) identifies each person with respect to whom 

the advisor acted as a material advisor with respect to the reportable transaction, and (2) contains other information as may be required by the Secretary. In addition, the provision authorizes (but 

does not require) the Secretary to prescribe regulations which provide that, in cases in which 2 or more persons are required to 

maintain the same list, only one person would be required to maintain the list. 

Penalty for failing to maintain investor lists 

The provision modifies the penalty for failing to maintain the required list by making it a time-sensitive penalty. Thus, a material 

advisor who is required to maintain an investor list and who fails 

to make the list available upon request by the Secretary within 20 

business days after the request will be subject to a $10,000 per day 

penalty. The penalty applies to a person who fails to maintain a 

list, maintains an incomplete list, or has in fact maintained a list 

but does not make the list available to the Secretary. The penalty 

18

48 In no event will failure to maintain a list be considered reasonable cause for failing to make 

a list available to the Secretary. 49Sec. 7408. 50Sec. 6707, as amended by other provisions of this bill. 51Sec. 6708, as amended by other provisions of this bill. 

can be waived if the failure to make the list available is due to reasonable cause.48

EFFECTIVE DATE

The provision requiring a material advisor to maintain an investor list applies to transactions with respect to which material aid, 

assistance or advice is provided after the date of enactment. 

The provision imposing a penalty for failing to maintain investor 

lists applies to requests made after the date of enactment. 

G. ACTIONS TO ENJOIN CONDUCT WITH RESPECT TO TAX SHELTERS

(Sec. 204 of the bill and sec. 7408 of the Code) 

PRESENT LAW

The Code authorizes civil action to enjoin any person from promoting abusive tax shelters or aiding or abetting the understatement of tax liability.49

REASONS FOR CHANGE

The Committee understands that some promoters are blatantly 

ignoring the rules regarding registration and list maintenance regardless of the penalties. An injunction would place these promoters in a public proceeding under court order. Thus, the Committee believes that the types of tax shelter activities with respect 

to which an injunction may be sought should be expanded. 

EXPLANATION OF PROVISION

The bill expands this rule so that injunctions may also be sought 

with respect to the requirements relating to the reporting of tax 

shelters 50 and the keeping of lists of investors by material advisors.51 Thus, under the provision, an injunction may be sought 

against a material advisor to enjoin the advisor from (1) failing to 

file an information return with respect to a reportable transaction, 

or (2) failing to maintain, or to timely furnish upon written request 

by the Secretary, a list of investors with respect to each reportable 

transaction. 

EFFECTIVE EATE

The provision is effective on the day after the date of enactment.

H. UNDERSTATEMENT OF TAXPAYER’S LIABILITY BY INCOME TAX

RETURN PREPARER

(Sec. 211 of the bill and sec. 6694 of the Code) 

PRESENT LAW

An income tax return preparer who prepares a return with respect to which there is an understatement of tax that is due to a 

19

position for which there was not a realistic possibility of being sustained on its merits and the position was not disclosed (or was frivolous) is liable for a penalty of $250, provided that the preparer 

knew or reasonably should have known of the position. An income 

tax return preparer who prepares a return and engages in specified 

willful or reckless conduct with respect to preparing such a return 

is liable for a penalty of $1,000. 

REASONS FOR CHANGE

The Committee believes that the standards of conduct applicable 

to income tax return preparers should be the same as the standards applicable to taxpayers. Accordingly, the minimum standard 

for each undisclosed position on a tax return would be that the preparer must reasonably believe that the tax treatment is more likely 

than not the proper tax treatment. The Committee believes that 

this standard is appropriate because the tax return is signed under 

penalties of perjury, which implies a high standard of diligence in 

determining the facts and substantial accuracy in determining and 

applying the rules that govern those facts. The Committee believes 

that it is both appropriate and vital to the tax system that both 

taxpayers and their return preparers file tax returns that they reasonably believe are more likely than not correct. In addition, conforming the standards of conduct applicable to income tax return 

preparers to the standards applicable to taxpayers will simplify the 

law by reducing confusion inherent in different standards applying 

to the same behavior. 

EXPLANATION OF PROVISION

The bill alters the standards of conduct that must be met to 

avoid imposition of the first penalty. The bill replaces the realistic 

possibility standard with a requirement that there be a reasonable 

belief that the tax treatment of the position was more likely than 

not the proper treatment. The bill also replaces the not frivolous 

standard with the requirement that there be a reasonable basis for 

the tax treatment of the position. 

In addition, the bill increases the amount of these penalties. The 

penalty relating to not having a reasonable belief that the tax 

treatment was more likely than not the proper tax treatment is increased from $250 to $1,000. The penalty relating to willful or reckless conduct is increased from $1,000 to $5,000. 

EFFECTIVE DATE

The provision is effective for documents prepared after the date 

of enactment. 

I. PENALTY ON FAILURE TO REPORT INTERESTS IN FOREIGN

FINANCIAL ACCOUNTS

(Sec. 212 of the bill and sec. 5321 of Title 31, United States Code) 

PRESENT LAW

The Secretary of the Treasury must require citizens, residents, or 

persons doing business in the United States to keep records and 

file reports when that person makes a transaction or maintains an 

20

52 31 U.S.C. 5314. 53 31 U.S.C. 5321(a)(5). 54 31 U.S.C. 5322. 55 A Report to Congress in Accordance with Sec. 361(b) of the Uniting and Strengthening 

America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 

2001, April 26,2002. 56Sec. 361(b) of the USA PATRIOT Act of 2001 (Pub. L. 107–56). 

account with a foreign financial entity.52 In general, individuals 

must fulfill this requirement by answering questions regarding foreign accounts or foreign trusts that are contained in Part III of 

Schedule B of the IRS Form 1040. Taxpayers who answer ‘‘yes’’ in 

response to the question regarding foreign accounts must then file 

Treasury Department Form TD F 90–22.1. This form must be filed 

with the Department of the Treasury, and not as part of the tax 

return that is filed with the IRS. 

The Secretary of the Treasury may impose a civil penalty on any 

person who willfully violates this reporting requirement. The civil 

penalty is the amount of the transaction or the value of the account, up to a maximum of $100,000; the minimum amount of the 

penalty is $25,000.53 In addition, any person who willfully violates 

this reporting requirement is subject to a criminal penalty. The 

criminal penalty is a fine of not more than $250,000 or imprisonment for not more than five years (or both); if the violation is part 

of a pattern of illegal activity, the maximum amount of the fine is 

increased to $500,000 and the maximum length of imprisonment is 

increased to 10 years.54

On April 26, 2002, the Secretary of the Treasury submitted to 

the Congress a report on these reporting requirements.55 This report, which was statutorily required,56 studies methods for improving compliance with these reporting requirements. It makes several 

administrative recommendations, but no legislative recommendations. A further report is required to be submitted by the Secretary 

of the Treasury to the Congress by October 26, 2002. 

REASONS FOR CHANGE

The Committee understands that the number of individuals involved in using offshore bank accounts to engage in abusive tax 

scams has grown significantly in recent years. For one scheme 

alone, the IRS estimates that there may be one to two million taxpayers with offshore bank accounts attempting to conceal income 

from the IRS. The Committee is concerned about this activity and 

believes that improving compliance with this reporting requirement 

is vitally important to sound tax administration, to combating terrorism, and to preventing the use of abusive tax schemes and 

scams. Adding a new civil penalty that applies without regard to 

willfulness will improve compliance with this reporting requirement. 

EXPLANATION OF PROVISION

The bill adds an additional civil penalty that may be imposed on 

any person who violates this reporting requirement (without regard 

to willfulness). This new civil penalty is up to $5,000. The penalty 

may be waived if any income from the account was properly reported on the income tax return and there was reasonable cause 

for the failure to report. 

21

57 Because in general the Tax Court is the only pre-payment forum available to taxpayers, it 

deals with most of the frivolous, groundless, or dilatory arguments raised in tax cases. 

EFFECTIVE DATE

The provision is effective with respect to failures to report occurring on or after the date of enactment.

J. FRIVOLOUS TAX RETURNS AND SUBMISSIONS

(Sec. 213 of the bill and sec. 6702 of the Code) 

PRESENT LAW

The Code provides that an individual who files a frivolous income 

tax return is subject to a penalty of $500 imposed by the IRS (sec. 

6702). The Code also permits the Tax Court 57 to impose a penalty 

of up to $25,000 if a taxpayer has instituted or maintained proceedings primarily for delay or if the taxpayer’s position in the proceeding is frivolous or groundless (sec. 6673(a)). 

REASONS FOR CHANGE

The IRS has been faced with a significant number of tax filers 

who are filing returns based on frivolous arguments or who are 

seeking to hinder tax administration by filing returns that are patently incorrect. In addition, taxpayers are using existing procedures for collection due process hearings, offers-in-compromise, installment agreements, and taxpayer assistance orders to impede or 

delay tax administration by raising frivolous arguments. These procedures were intended to provide assistance to taxpayers genuinely 

seeking to resolve legitimate disputes with the IRS, and the use of 

these procedures for impeding or delaying tax administration diverts scarce IRS resources away from resolving genuine disputes. 

Allowing the IRS to assert more substantial penalties for frivolous 

submissions and to dismiss frivolous requests without the need to 

follow otherwise mandated procedures will deter frivolous taxpayer 

behavior and enable the IRS to use its resources to better assist 

taxpayers in resolving genuine disputes. 

EXPLANATION OF PROVISION

The bill modifies the IRS-imposed penalty by increasing the 

amount of the penalty to up to $5,000 and by applying it to all taxpayers and to all types of Federal taxes. 

The provision also modifies present law with respect to certain 

submissions that raise frivolous arguments or that are intended to 

delay or impede tax administration. The submissions to which this 

provision applies are requests for a collection due process hearing, 

installment agreements, offers-in-compromise, and taxpayer assistance orders. First, the provision permits the IRS to dismiss such 

requests. Second, the provision permits the IRS to impose a penalty 

of up to $5,000 for such requests, unless the taxpayer withdraws 

the request after being given an opportunity to do so. 

The provision requires the IRS to publish a list of positions, arguments, requests, and proposals determined to be frivolous for 

purposes of these provisions. 

22

58 31 U.S.C. 330. 

EFFECTIVE DATE

The provision is effective for submissions made and issues raised 

after the date on which the Secretary first prescribes the required 

list. 

K. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE

DEPARTMENT OF THE TREASURY

(Sec. 214 of the bill and sec. 330 of Title 31, United States Code) 

PRESENT LAW

The Secretary of the Treasury is authorized to regulate the practice of representatives of persons before the Department of the 

Treasury.58 The Secretary is also authorized to suspend or disbar 

from practice before the Department a representative who is incompetent, who is disreputable, who violates the rules regulating practice before the Department, or who (with intent to defraud) willfully and knowingly misleads or threatens the person being represented (or a person who may be represented). The rules promulgated by the Secretary pursuant to this provision are contained in 

Circular 230. 

REASONS FOR CHANGE

The Committee believes that it is critical that the Secretary have 

the authority to censure tax advisors as well as to impose monetary 

sanctions against tax advisors because of the important role of tax 

advisors in our tax system. Use of these sanctions is expected to 

curb the participation of tax advisors in both tax shelter activity 

and any other activity that is contrary to Circular 230 standards. 

EXPLANATION OF PROVISION

The bill makes two modifications to expand the sanctions that 

the Secretary may impose pursuant to these statutory provisions. 

First, the bill expressly permits censure as a sanction. Second, the 

bill permits the imposition of a monetary penalty as a sanction. If 

the representative is acting on behalf of an employer or other entity, the Secretary may impose a monetary penalty on the employer 

or other entity if it knew, or reasonably should have known, of the 

conduct. This monetary penalty on the employer or other entity 

may be imposed in addition to any monetary penalty imposed directly on the representative. These monetary penalties are not to 

exceed the gross income derived (or to be derived) from the conduct 

giving rise to the penalty. These monetary penalties may be in addition to, or in lieu of, any suspension, disbarment, or censure. 

The bill also confirms the present-law authority of the Secretary 

to impose standards applicable to written advice with respect to an 

entity, plan, or arrangement that is of a type that the Secretary determines as having a potential for tax avoidance or evasion. 

23

59Sec. 6700. 

EFFECTIVE DATE

The modifications to expand the sanctions that the Secretary 

may impose are effective for actions taken after the date of enactment.

L. PENALTIES ON PROMOTERS OF TAX SHELTERS

(Sec. 215 of the bill and sec. 6700 of the Code) 

PRESENT LAW

A penalty is imposed on any person who organizes, assists in the 

organization of, or participates in the sale of any interest in, a 

partnership or other entity, any investment plan or arrangement, 

or any other plan or arrangement, if in connection with such activity the person makes or furnishes a qualifying false or fraudulent 

statement or a gross valuation overstatement.59 A qualified false or 

fraudulent statement is any statement with respect to the allowability of any deduction or credit, the excludability of any income, 

or the securing of any other tax benefit by reason of holding an interest in the entity or participating in the plan or arrangement 

which the person knows or has reason to know is false or fraudulent as to any material matter. A ‘‘gross valuation overstatement’’

means any statement as to the value of any property or services 

if the stated value exceeds 200 percent of the correct valuation, and 

the value is directly related to the amount of any allowable income 

tax deduction or credit. 

The amount of the penalty is $1,000 (or, if the person establishes 

that it is less, 100 percent of the gross income derived or to be derived by the person from such activity). A penalty attributable to 

a gross valuation misstatement can be waived on a showing that 

there was a reasonable basis for the valuation and it was made in 

good faith. 

REASONS FOR CHANGE

The Committee believes that the present-law penalty rate is insufficient to deter the type of conduct that gives rise to the penalty. 

EXPLANATION OF PROVISION

The provision modifies the penalty amount to equal 50 percent 

of the gross income derived by the person from the activity for 

which the penalty is imposed. The new penalty rate applies to any 

activity that involves a statement regarding the tax benefits of participating in a plan or arrangement if the person knows or has reason to know that such statement is false or fraudulent as to any 

material matter. The enhanced penalty does not apply to a gross 

valuation overstatement. 

EFFECTIVE DATE

The provision is effective for activities after the date of enactment. 

24

60Sec. 1501. 61Sec. 1502. 62 Regulations issued under the authority of section 1502 are considered to be ‘‘legislative’’ regulations rather than ‘‘interpretative’’ regulations, and as such are usually given greater deference by courts in case of a taxpayer challenge to such a regulation. See, S. Rep. No. 960, 70th 

Cong., 1st Sess. at 15, describing the consolidated return regulations as ‘‘legislative in character’’. The Supreme Court has stated that ‘‘* * * legislative regulations are given controlling 

weight unless they are arbitrary, capricious, or manifestly contrary to the statute.’’ Chevron, 

U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 844 (1984) (involving an 

environmental protection regulation). For examples involving consolidated return regulations, 

see, e.g., Wolter Construction Company v. Commissioner, 634 F.2d 1029 (6th Cir. 1980); Garvey, 

Inc. v. United States, 1 Ct. Cl. 108 (1983), aff’d 726 F.2d 1569 (Fed. Cir. 1984), cert. denied 469 

U.S. 823 (1984). Compare, e.g., Audrey J. Walton v. Commissioner, 115 T.C. 589 (2000), describing different standards of review. The case did not involve a consolidated return regulation. 63 255 F.3d 1357 (Fed. Cir. 2001), reh’g denied, 2001 U.S. App. LEXIS 23207 (Fed. Cir. Oct. 

3, 2001). 64Prior to this decision, there had been a few instances involving prior laws in which certain 

consolidated return regulations were held to be invalid. See, e.g., American Standard, Inc. v. United States, 602 F.2d 256 (Ct. Cl. 1979), discussed in the text infra. see also Union Carbide 

Corp. v. United States, 612 F.2d 558 (Ct. Cl. 1979), and Allied Corporation v. United States,

685 F.2d 396 (Ct. Cl. 1982), all three cases involving the allocation of income and loss within 

a consolidated group for purposes of computation of a deduction allowed under prior law by the 

Code for Western Hemisphere Trading Corporations. See also Joseph Weidenhoff v. Commissioner, 32 T.C. 1222, 1242–1244 (1959), involving the application of certain regulations to the 

excess profits tax credit allowed under prior law, and concluding that the Commissioner had 

applied a particular regulation in an arbitrary manner inconsistent with the wording of the regulation and inconsistent with even a consolidated group computation. Cf. Kanawha Gas & Utilities Co. v. Commissioner, 214 F.2d 685 (1954), concluding that the substance of a transaction 

was an acquisition of assets rather than stock. Thus, a regulation governing basis of the assets 

of consolidated subsidiaries did not apply to the case. See also General Machinery Corporation

III. OTHER PROVISIONS 

A. AFFIRMATION OF CONSOLIDATED RETURN REGULATION

AUTHORITY

(Sec. 301 of the bill and sec. 1502 of the Code) 

PRESENT LAW

An affiliated group of corporations may elect to file a consolidated return in lieu of separate returns. A condition of electing to 

file a consolidated return is that all corporations that are members 

of the consolidated group must consent to all the consolidated return regulations prescribed under section 1502 prior to the last day 

prescribed by law for filing such return.60

Section 1502 states: 

The Secretary shall prescribe such regulations as he 

may deem necessary in order that the tax liability of any 

affiliated group of corporations making a consolidated return and of each corporation in the group, both during and 

after the period of affiliation, may be returned, determined, computed, assessed, collected, and adjusted, in such 

manner as clearly to reflect the income-tax liability and 

the various factors necessary for the determination of such 

liability, and in order to prevent the avoidance of such tax 

liability.61

Under this authority, the Treasury Department has issued extensive consolidated return regulations.62

In the recent case of Rite Aid Corp. v. United States, 63 the Federal Circuit Court of Appeals addressed the application of a particular provision of certain consolidated return loss disallowance 

regulations, and concluded that the provision was invalid.64 The 

25

v. Commissioner, 33 B.T.A. 1215 (1936); Lefcourt Realty Corporation, 31 B.T.A. 978 (1935); 

Helvering v. Morgans, Inc., 293 U.S. 121 (1934), interpreting the term ‘‘taxable year.’’ 65Treas. Reg. Sec. 1.1502–20(c)(1)(iii). 66Treasury Regulation section 1.1502–20, generally imposing certain ‘‘loss disallowance’’ rules 

on the disposition of subsidiary stock, contained other limitations besides the ‘‘duplicated loss’’

rule that could limit the loss available to the group on a disposition of a subsidiary’s stock. 

Treasury Regulation section 1.1502–20 as a whole was promulgated in connection with regulations issued under section 337(d), principally in connection with the so-called General Utilities

repeal of 1986 (referring to the case of General Utilities & Operating Company v. Helvering, 296 

U.S. 200 (1935)). Such repeal generally required a liquidating corporation, or a corporation acquired in a stock acquisition treated as a sale of assets, to pay corporate level tax on the excess 

of the value of its assets over the basis. Treasury regulation section 1.1502–20 principally reflected an attempt to prevent corporations filing consolidated returns from offsetting income 

with a loss on the sale of subsidiary stock. Such a loss could result from the unique upward 

adjustment of a subsidiary’s stock basis required under the consolidated return regulations for 

subsidiary income earned in consolidation, an adjustment intended to prevent taxation of both 

the subsidiary and the parent on the same income or gain. As one example, absent a denial 

of certain losses on a sale of subsidiary stock, a consolidated group could obtain a loss deduction 

with respect to subsidiary stock, the basis of which originally reflected the subsidiary’s value 

at the time of the purchase of the stock, and that had then been adjusted upward on recognition 

of any built-in income or gain of the subsidiary reflected in that value. The regulations also contained the duplicated loss factor addressed by the court in Rite Aid. The preamble to the regulations stated: ‘‘it is not administratively feasible to differentiate between loss attributable to 

built-in gain and duplicated loss.’’ T.D. 8364, 1991–2 C.B. 43, 46 (Sept. 13, 1991). The government also argued in the Rite Aid case that duplicated loss was a separate concern of the regulations. 255 F.3d at 1360. 67For example, the court stated: ‘‘The duplicated loss factor * * * addresses a situation that 

arises from the sale of stock regardless of whether corporations file separate or consolidated returns. With I.R.C. secs. 382 and 383, Congress has addressed this situation by limiting the subsidiary’s potential future deduction, not the parent’s loss on the sale of stock under I.R.C. sec. 

165.’’ 255 F.3d 1357, 1360 (Fed. Cir. 2001). 68S. Rep. No. 960, 70th Cong., 1st Sess. 15 (1928). Though not quoted by the court in Rite 

Aid, the same Senate report also indicated that one purpose of the consolidated return authority 

was to permit treatment of the separate corporations as if they were a single unit, stating ‘‘The 

mere fact that by legal fiction several corporations owned by the same shareholders are separate 

entities should not obscure the fact that they are in reality one and the same business owned 

by the same individuals and operated as a unit.’’ S. Rep. No. 960, 70th Cong., 1st Sess. 29 

(1928). 

particular provision, known as the ‘‘duplicated loss’’ provision,65

would have denied a loss on the sale of stock of a subsidiary by a 

parent corporation that had filed a consolidated return with the 

subsidiary, to the extent the subsidiary corporation had assets that 

had a built-in loss, or had a net operating loss, that could be recognized or used later.66

The Federal Circuit Court opinion contained language discussing 

the fact that the regulation produced a result different than the result that would have obtained if the corporations had filed separate 

returns rather than consolidated returns.67

The Federal Circuit Court opinion cited a 1928 Senate Finance 

Committee Report to legislation that authorized consolidated return regulations, which stated that ‘‘many difficult and complicated 

problems, * * * have arisen in the administration of the provisions 

permitting the filing of consolidated returns’’ and that the committee ‘‘found it necessary to delegate power to the commissioner 

to prescribe regulations legislative in character covering them.’’ 68

The Court’s opinion also cited a previous decision of the Court of 

Claims for the proposition, interpreting this legislative history, that 

section 1502 grants the Secretary ‘‘the power to conform the applicable income tax law of the Code to the special, myriad problems 

resulting from the filing of consolidated income tax returns;’’ but 

that section 1502 ‘‘does not authorize the Secretary to choose a 

26

69 American Standard, Inc. v. United States, 602 F.2d 256, 261 (Ct. Cl. 1979). That case did 

not involve the question of separate returns as compared to a single return approach. It involved 

the computation of a Western Hemisphere Trade Corporation (‘‘WHTC’’) deduction under prior 

law (which deduction would have been computed as a percentage of each WHTC’s taxable income if the corporations had filed separate returns), in a case where a consolidated group included several WHTCs as well as other corporations. The question was how to apportion income 

and losses of the admittedly consolidated WHTCs and how to combine that computation with 

the rest of the group’s consolidated income or losses. The court noted that the new, changed 

regulations approach varied from the approach taken to a similar problem involving public utilities within a group and previously allowed for WHTCs. The court objected that the allocation 

method adopted by the regulation allowed non-WHTC losses to reduce WHTC income. However, 

the court did not disallow a method that would net WHTC income of one WHTC with losses 

of another WHTC, a result that would not have occurred under separate returns. Nor did the 

court expressly disallow a different fractional method that would net both income and losses of 

the WHTCs with those of other corporations in the consolidated group. The court also found that 

the regulation had been adopted without proper notice. 70Rite Aid, 255 F.3d at 1360. 71See Temp. Reg. 1.1502–20T(i)(2). The Treasury Department has also indicated its intention 

to continue to study all the issues that the original loss disallowance regulations addressed (including issues of furthering single entity principles) and possibly issue different regulations (not 

including the particular approach of Treas. Reg. Sec. 1.1502–20(c)(1)(iii)) on the issues in the 

future. See Notice 2002–11, 2002–7 I.R.B. 526 (Feb. 19, 2002); T.D. 8984, 67 F.R. 11034 (March 

12, 2002); REG–102740–02, 67 F.R. 11070 (March 12, 2002); see also Notice 2002–18, 2002–12 

I.R.B. 644 (March 25, 2002). 

to choose a method that imposes a tax on income that would not 

otherwise be taxed.’’ 69

The Federal Circuit Court construed these authorities and applied them to invalidate Treas. Reg. Sec. 1.1502–20(c)(1)(iii), stating that: 

The loss realized on the sale of a former subsidiary’s assets after the consolidated group sells the subsidiary’s 

stock is not a problem resulting from the filing of consolidated income tax returns. The scenario also arises where 

a corporate shareholder sells the stock of a non-consolidated subsidiary. The corporate shareholder could realize 

a loss under I.R.C. sec. 1001, and deduct the loss under 

I.R.C. sec. 165. The subsidiary could then deduct any 

losses from a later sale of assets. The duplicated loss factor, therefore, addresses a situation that arises from the 

sale of stock regardless of whether corporations file separate or consolidated returns. With I.R.C. secs. 382 and 383, 

Congress has addressed this situation by limiting the subsidiary’s potential future deduction, not the parent’s loss 

on the sale of stock under I.R.C. sec. 165.70

The Treasury Department has announced that it will not continue to litigate the validity of the duplicated loss provision of the 

regulations, and has issued interim regulations that permit taxpayers for all years to elect a different treatment, though they may 

apply the provision for the past if they wish.71

REASONS FOR CHANGE

The Committee is concerned that the language and analysis in 

the Rite Aid decision might lead taxpayers to attempt to challenge 

other Treasury consolidated return regulations that prescribe a tax 

result different from the result that would occur if separate returns 

were filed. 

The Committee is concerned that any such challenges may lead 

to protracted litigation and commitment of Internal Revenue Service resources to defending the consolidated return provisions.

27

72Treas. Reg. Sec. 1.1502–20(c)(1)(iii). 73The Committee does not intend to overrule the current Treasury Department regulations, 

which allow taxpayers for the past to follow Treasury Regulations Section 1.1502–20(c)(1)(iii), 

if they choose to do so. Temp. Reg. Sec. 1.1502–20T(i)(2). 

The Committee wishes to clarify that the fact that a result under 

the consolidated return regulations differs from the result under 

separate returns does not provide a basis to challenge a Treasury 

consolidated return regulation. 

The Committee believes that the result of the case with respect 

to the type of factual situation in Rite Aid, involving the ‘‘duplicated loss factor’’ portion of Treasury Regulation section 1.1502–20, 

which Treasury has announced that taxpayers need not follow, 

should not be overturned. Therefore, the committee legislatively allows the specific result of the case to stand for the taxpayer in Rite 

Aid or any similarly situated taxpayers. 

Apart from that specific result, the Committee disagrees with the 

reasoning of the case and believes it should not be applied to support any challenge to other consolidated return regulations. The 

Committee also wishes to reaffirm the broad authority of the 

Treasury Department to issue consolidated return regulations. 

EXPLANATION OF PROVISION

The provision confirms that, in exercising its authority under 

section 1502 to issue consolidated return regulations, the Treasury 

Department may provide rules treating corporations filing consolidated returns differently from corporations filing separate returns. 

Thus, under the statutory authority of section 1502, the Treasury 

Department is authorized to issue consolidated return regulations 

utilizing either a single taxpayer or separate taxpayer approach or 

a combination of the two approaches, as Treasury deems necessary 

in order that the tax liability of any affiliated group of corporations 

making a consolidated return, and of each corporation in the group, 

both during and after the period of affiliation, may be determined 

and adjusted in such manner as clearly to reflect the income-tax 

liability and the various factors necessary for the determination of 

such liability, and in order to prevent avoidance of such liability. 

Rite Aid is thus overruled to the extent it suggests that there is 

not a problem that can be addressed in consolidated return regulations if application of a particular Code provision on a separate taxpayer basis would produce a result different from single taxpayer 

principles that may be used for consolidation. 

The provision nevertheless allows the result of the Rite Aid case 

to stand with respect to the type of factual situation presented in 

the case. That is, the legislation provides for the override of the 

regulatory provision that took the approach of denying a loss on a 

deconsolidating disposition of stock of a consolidated subsidiary 72

to the extent the subsidiary had net operating losses or built in 

losses that could be used later outside the group.73

Retaining the result in the Rite Aid case with respect to the particular regulation section 1.1502–20(c)(1)(iii) as applied to the factual situation of the case does not in any way prevent or invalidate 

the various approaches Treasury has announced it will apply or 

that it intends to consider in lieu of the approach of that regulation, including, for example, the denial of a loss on a stock sale if 

28

74See, e.g., Notice 2002–11, 2002–7 I.R.B. 526 (Feb. 19, 2002); T.D. 8984, 67 F.R. 11034 (Mar. 

12, 2002); REG–102740–02, 67 F.R. 11070 (Mar. 12, 2002); see also Notice 2002–18, 2002–12 

I.R.B. 644 (Mar. 25, 2002). In exercising its authority under section 1502, the Secretary is also 

authorized to prescribe rules that protect the purpose of General Utilities repeal using presumptions and other simplifying conventions. 

inside losses of a subsidiary may also be used by the consolidated 

group, and the possible requirement that inside attributes be adjusted when a subsidiary leaves a group.74

EFFECTIVE DATE

The provision is effective for all years, whether beginning before, 

on, or after the date of enactment of the provision. 

No inference is intended that the results following from this provision are not the same as the results under present law. 

IV. BUDGET EFFECTS OF THE BILL 

A. COMMITTEE ESTIMATES

In compliance with paragraph 11(a) of rule XXVI of the Standing 

Rules of the Senate, the following statement is made concerning 

the estimated budget effects of the committee amendment to the 

bill as reported.

ESTIMATED REVENUE EFFECTS OF S. 2498, THE ‘‘TAX SHELTER TRANSPARENCY ACT,’’ AS REPORTED BY THE COMMITTEE ON FINANCE 

[Fiscal years 2002–2012, in millions of dollars] 

Provision Effective 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2002–07 

1. Provisions relating to reportable transactions and tax shelters (sections 101, 102, 104, 201 

through 203, and 215) 1.

various dates 

after DOE 2

16 55 98 121 124 124 127 132 139 148 160 540 

2. Modification to the substantial understatement penalty (section 103) 1 ........................................... tyba DOE ........ ........ ........ 8 11 19 23 26 30 34 38 38 

3. Actions to enjoin conduct with respect to tax shelters (section 204) ................................................ DOE Negligible Revenue Effect 4. Understatement of taxpayer’s liability by income tax return preparer (section 211) ......................... dpa DOE Negligible Revenue Effect 

5. Impose a civil penalty (of up to $5,000) on failure to report interest in foreign financial accounts 

(section 212).

DOE (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) 

6. Frivolous tax submissions (section 213) ............................................................................................. DOE (4) ........ 3 3 3 3 3 3 3 3 3 3 1

7. Regulation of individuals practicing before the Department of Treasury (section 214) .................... ata DOE No Revenue Effect 8. Affirmation of consolidated return regulation authority (section 301) ............................................... (5) Negligible Revenue Effect 

Net Total ....................................................................................................................................... ....................... 16 58 101 132 138 146 153 161 172 185 201 594 

Legend for ‘‘Effective’’ column: ata=actions taken after; DOE=date of enactment; dpa=documents prepared after; tyba=taxable years beginning after.1 Failure or substantial delay of forthcoming regulations for section 6011 of the Internal Revenue Code and other administrative actions to be taken by the Treasury Department or the Internal Revenue Service would reduce t

revenue effects of these provisions. 2 Effective dates for provisions relating to reportable transactions and tax shelters: section 101 is effective for returns and statements the due date of which is after the date of enactment; section 102 is effective for taxable after the date of enactment; section 104 is effective for communications made on or after the date of enactment; section 201 is effective for transactions with respect to which material aid, assistance or advice is provided afteenactment; section 202 is effective for returns the due date for which is after the date of enactment; section 203 is effective for requests made after the date of enactment; and section 215 is effective for activities after the dament. 3 Gain of less than $1 million. 

4 Effective for submissions made and issues raised after the first list is prescribed under section 6702(c). 5 Effective for all taxable years, whether beginning before, with, or after the date of enactment.

Note.—Details may not add to totals due to rounding. Source: Joint Committee on Taxation. 

30

B. BUDGET AUTHORITY AND TAX EXPENDITURES

Budget authority 

In compliance with section 308(a)(1) of the Budget Act, the Committee states that the revenue provisions of the committee amendment to the bill as reported involve no new or increased budget authority. 

Tax expenditures 

In compliance with section 308(a)(2) of the Budget Act, the Committee states that there are no revenue-reducing provisions in the 

committee amendment to the bill, and the revenue-increasing provisions of the committee amendment to the bill involve reduced expenditures (see revenue table in Part IV.A., above). 

C. CONSULTATION WITH CONGRESSIONAL BUDGET OFFICE

In accordance with section 403 of the Budget Act, the Committee 

advises that the Congressional Budget Office (‘‘CBO’’) has not submitted a statement on the bill. The letter from CBO was not received in a timely manner, and therefore will be provided separately. 

V. VOTES OF THE COMMITTEE 

In compliance with paragraph 7(b) of rule XXVI of the Standing 

Rules of the Senate, the following statements are made concerning 

the votes taken on the Committee’s consideration of the amendment to the bill. 

Motion to report the committee amendment 

The amendment to the bill was ordered favorably reported by a 

voice vote, a quorum being present, on June 18, 2002. 

Votes on other amendments 

An amendment by Senator Baucus in a Chairman’s modification 

to the bill adding the provision regarding the affirmation of the 

consolidated return regulation authority was agreed to by voice 

vote.

VI. REGULATORY IMPACT AND OTHER MATTERS 

A. REGULATORY IMPACT

Pursuant to paragraph 11(b) of rule XXVI of the Standing Rules 

of the Senate, the Committee makes the following statement concerning the regulatory impact that might be incurred in carrying 

out the provisions of the bill as amended. 

Impact on individuals and businesses 

With respect to individuals and businesses, the bill modifies the 

rules relating to (1) the disclosure of reportable transactions and 

tax shelters; (2) the substantial understatement penalty; (3) actions 

to enjoin conduct with respect to tax shelters; (4) an understatement of a taxpayer’s liability by an income tax return preparer; (5) 

the imposition of a civil penalty (of up to $5,000) on a failure to 

31

report interest in foreign financial accounts; and (6) frivolous tax 

submissions. The provisions relate to taxpayers that engage in certain tax avoidance transactions. The provisions do not impose increased regulatory burdens on individuals or businesses. 

Impact on personal privacy and paperwork 

The provisions of the bill do not impact personal privacy. The 

provisions relate to taxpayers that engage in certain tax avoidance 

transactions. The bill does not impose increased paperwork burdens on individuals. Individuals who elect to engage in these types 

of transactions, and certain advisors that provide material aid, assistance or advice with respect to these transactions, may in some 

cases need to file certain disclosure statements with the IRS. 

B. UNFUNDED MANDATES STATEMENT

The information is provided in accordance with section 423 of the 

Unfunded Mandates Reform Act of 1995 (P.L. 104–4). 

The Committee has determined that the following provisions of 

the bill contain Federal mandates on the private sector: (1) provisions relating to reportable transactions and tax shelters; (2) modifications to the substantial understatement penalty; (3) actions to 

enjoin conduct with respect to tax shelters; (4) understatement of 

taxpayer’s liability by an income tax return preparer; (5) the imposition of a civil penalty (of up to $5,000) on a failure to report interest in foreign financial accounts; and (6) frivolous tax submissions. 

The costs required to comply with each Federal private sector 

mandate generally are no greater than the estimated budget effect 

of the provision. Benefits from the provisions include improved administration of the Federal income tax laws and a more accurate 

measurement of income for Federal income tax purposes. 

C. TAX COMPLEXITY ANALYSIS

Section 4022(b) of the Internal Revenue Service Reform and Restructuring Act of 1998 (the ‘‘IRS Reform Act’’) requires the Joint 

Committee on Taxation (in consultation with the Internal Revenue 

Service and the Department of the Treasury) to provide a tax complexity analysis. The complexity analysis is required for all legislation reported by the Senate Committee on Finance, the House 

Committee on Ways and Means, or any committee on conference if 

the legislation includes a provision that directly or indirectly 

amends the Code and has widespread applicability to individuals 

or small businesses. 

The staff of the Joint Committee on Taxation has determined 

that a complexity analysis is not required under section 4022(b) of 

the IRS Reform Act because the bill contains no provisions that 

amend the Code and that have ‘‘widespread applicability’’ to individuals or small businesses. 

VII. CHANGES IN EXISTING LAW MADE BY THE BILL AS 

REPORTED 

In the opinion of the Committee, it is necessary in order to expedite the business of the Senate, to dispense with the requirements 

of paragraph 12 of rule XXVI of the Standing Rules of the Senate 

32

(relating to the showing of changes in existing law made by the bill 

as reported by the Committee).

Æ