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[House Report 108-273]
[From the U.S. Government Publishing Office]

108th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    108-273

======================================================================

 
  PROVIDING FOR CONSIDERATION OF H.R. 7, CHARITABLE GIVING ACT OF 2003

                                _______
                                

 September 16, 2003.--Referred to the House Calendar and ordered to be 
                                printed

                                _______
                                

    Mr. Linder, from the Committee on Rules, submitted the following

                              R E P O R T

                       [To accompany H. Res. 370]

    The Committee on Rules, having had under consideration 
House Resolution 370, by a nonrecord vote, report the same to 
the House with the recommendation that the resolution be 
adopted.

                SUMMARY OF PROVISIONS OF THE RESOLUTION

    The resolution provides for the consideration of H.R. 7, 
the Charitable Giving Act of 2003, under a modified closed 
rule. The rule provides one hour of debate in the House equally 
divided and controlled by the chairman and ranking minority 
member of the Committee on Ways and Means.
    The rule waives all points of order against consideration 
of the bill. The rule provides that the amendment in the nature 
of a substitute recommended by the Committee on Ways and Means, 
as modified by the amendment printed in Part A of this report, 
shall be considered as adopted.
    The rule provides for consideration of the amendment in the 
nature of a substitute printed in Part B of this report if 
offered by Representative Cardin or his designee, which shall 
be considered as read and shall be debatable for one hour 
equally divided and controlled by the proponent and an 
opponent. The rule waives all points of order against the 
amendment printed in Part B of this report. Finally, the rule 
provides one motion to recommit with or without instructions.
    The waiver of all points of order against consideration of 
this bill in the rule includes a waiver of clause 4(a) of rule 
XIII (requiring a three-day layover of the committee report), 
which is necessary because the committee report (H. Rept. 108-
270, Part 1) was not filed until Tuesday, September 16, 2003, 
and the bill may be considered by the House as early as 
Wednesday, September 17, 2003.

                            COMMITTEE VOTES

    Pursuant to clause 3(b) of House rule XIII the results of 
each record vote on an amendment or motion to report, together 
with the names of those voting for and against, are printed 
below:

Rules Committee record vote No. 197

    Date: September 16, 2003.
    Measure: H.R. 7--Charitable Giving Act of 2003.
    Motion by: Mrs. Slaughter.
    Summary of motion: To make in order and provide the 
appropriate waivers for the amendment offered by Representative 
Maloney which holds the IRS accountable for the tax treatment 
of 9/11 CDBG relief grants for individuals and businesses in 
lower Manhattan. Clarifies that the grants should be exempt 
from federal tax and should not be considered as gross income. 
Refunds taxes already paid on grants and makes future grants 
tax exempt.
    Results: Defeated 4 to 9.
    Vote by Members: Goss--Nay; Linder--Nay; Pryce--Nay; Diaz-
Balart--Nay; Hastings (WA)--Nay; Myrick--Nay; Sessions--Nay; 
Reynolds--Nay; Frost--Yea; Slaughter--Yea; McGovern--Yea; 
Hastings (FL)--Yea; Dreier--Nay.

        PART A--SUMMARY OF AMENDMENT TO BE CONSIDERED AS ADOPTED

    Boehner: Strikes provisions contained in the section of the 
bill pertaining to maternity group homes which provide for 
contract evaluation and a separate authorization for 
appropriations. The amendment seeks to conform the language of 
H.R. 7 with the language of H.R. 1925 (Runaway, Homeless, and 
Missing Children Protection Act) as passed by the House (404-
14).

               PART B--SUMMARY OF AMENDMENT MADE IN ORDER

    Cardin: Amendment in the Nature of a Substitute. Includes 
all the provisions of the underlying bill, as reported by the 
Committee on Ways and Means. Adds a provision increasing the 
funding for the Social Security Block Grant (SSBG) by $1.1 
billion next year. Adds revenue offset provisions to prevent 
abusive tax shelter transactions and also tightens penalties 
for egregious tax shelter behavior.

         PART A--TEXT OF AMENDMENT TO BE CONSIDERED AS ADOPTED

    In section 304 of the bill, strike subsections (b) and (c) 
and ``(a) Permissible Use of Funds.--'' (subsection heading of 
subsection (a)).

                PART B--TEXT OF AMENDMENT MADE IN ORDER

  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE; ETC.

  (a) Short Title.--This Act may be cited as the ``Charitable 
Giving Act of 2003''.
  (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is 
expressed in terms of an amendment to, or repeal of, a section 
or other provision, the reference shall be considered to be 
made to a section or other provision of the Internal Revenue 
Code of 1986.
  (c) Table of Contents.--

Sec. 1. Short title; etc.

                  TITLE I--CHARITABLE GIVING INCENTIVES

Sec. 101. Deduction for portion of charitable contributions to be 
          allowed to individuals who do not itemize deductions.
Sec. 102. Tax-free distributions from individual retirement plans for 
          charitable purposes.
Sec. 103. Increase in cap on corporate charitable contributions.
Sec. 104. Charitable deduction for contributions of food inventory.
Sec. 105. Reform of certain excise taxes related to private foundations.
Sec. 106. Excise tax on unrelated business taxable income of charitable 
          remainder trusts.
Sec. 107. Expansion of charitable contribution allowed for scientific 
          property used for research and for computer technology and 
          equipment used for educational purposes.
Sec. 108. Adjustment to basis of s corporation stock for certain 
          charitable contributions.
Sec. 109. Charitable organizations permitted to make collegiate housing 
          and infrastructure grants.
Sec. 110. Conduct of certain games of chance not treated as unrelated 
          trade or business.
Sec. 111. Excise taxes exemption for blood collector organizations.
Sec. 112. Nonrecognition of gain on the sale of property used in 
          performance of an exempt function.
Sec. 113. Exemption of qualified 501(c)(3) bonds for nursing homes from 
          Federal guarantee prohibitions.

      TITLE II--TAX REFORM AND IMPROVEMENTS RELATING TO CHARITABLE 
                       ORGANIZATIONS AND PROGRAMS

Sec. 201. Suspension of tax-exempt status of terrorist organizations.
Sec. 202. Clarification of definition of church tax inquiry.
Sec. 203. Extension of declaratory judgment remedy to tax-exempt 
          organizations.
Sec. 204. Landowner incentives programs.
Sec. 205. Modifications to section 512(b)(13).
Sec. 206. Simplification of lobbying expenditure limitation.
Sec. 207. Pilot project for forest conservation activities.

                       TITLE III--OTHER PROVISIONS

Sec. 301. Compassion capital fund.
Sec. 302. Reauthorization of assets for independence demonstration.
Sec. 303. Sense of the Congress regarding corporate contributions to 
          faith-based organizations, etc.

                  TITLE IV--SOCIAL SERVICES BLOCK GRANT

Sec. 401. Restoration of funds for the social services block grant.
Sec. 402. Restoration of authority to transfer up to 10 percent of TANF 
          funds to the social services block grant.
Sec. 403. Requirement to submit annual report on State activities.

                      TITLE V--ABUSIVE TAX SHELTERS

Sec. 501. Short title.
Sec. 502. Findings and purpose.

         Subtitle A--Provisions Designed to Curtail Tax Shelters

Sec. 511. Clarification of economic substance doctrine.
Sec. 512. Penalty for failing to disclose reportable transaction.
Sec. 513. Accuracy-related penalty for listed transactions and other 
          reportable transactions having a significant tax avoidance 
          purpose.
Sec. 514. Penalty for understatements attributable to transactions 
          lacking economic substance, etc.
Sec. 515. Modifications of substantial understatement penalty for 
          nonreportable transactions.
Sec. 516. Tax shelter exception to confidentiality privileges relating 
          to taxpayer communications.
Sec. 517. Disclosure of reportable transactions.
Sec. 518. Modifications to penalty for failure to register tax shelters.
Sec. 519. Modification of penalty for failure to maintain lists of 
          investors.
Sec. 520. Modification of actions to enjoin certain conduct related to 
          tax shelters and reportable transactions.
Sec. 521. Understatement of taxpayer's liability by income tax return 
          preparer.
Sec. 522. Penalty on failure to report interests in foreign financial 
          accounts.
Sec. 523. Frivolous tax submissions.
Sec. 524. Regulation of individuals practicing before the Department of 
          Treasury.
Sec. 525. Penalty on promoters of tax shelters.
Sec. 526. Statute of limitations for taxable years for which listed 
          transactions not reported.
Sec. 527. Denial of deduction for interest on underpayments attributable 
          to nondisclosed reportable and noneconomic substance 
          transactions.

   Subtitle B--Affirmation of Consolidated Return Regulation Authority

Sec. 531. Affirmation of consolidated return regulation authority.

                 TITLE I--CHARITABLE GIVING INCENTIVES

SEC. 101. DEDUCTION FOR PORTION OF CHARITABLE CONTRIBUTIONS TO BE 
                    ALLOWED TO INDIVIDUALS WHO DO NOT ITEMIZE 
                    DEDUCTIONS.

  (a) In General.--Section 170 (relating to charitable, etc., 
contributions and gifts) is amended by redesignating subsection 
(m) as subsection (n) and by inserting after subsection (l) the 
following new subsection:
  ``(m) Deduction for Individuals Not Itemizing Deductions.--
          ``(1) In general.--In the case of an individual who 
        does not itemize deductions for a taxable year, there 
        shall be taken into account as a direct charitable 
        deduction under section 63 an amount equal to the 
        amount allowable under subsection (a) for the taxable 
        year for cash contributions (determined without regard 
        to any carryover), to the extent that such 
        contributions exceed $250 ($500 in the case of a joint 
        return) but do not exceed $500 ($1,000 in the case of a 
        joint return).
          ``(2) Termination.--Paragraph (1) shall not apply to 
        any taxable year beginning after December 31, 2005.''.
  (b) Direct Charitable Deduction.--
          (1) In general.--Subsection (b) of section 63 
        (defining taxable income) is amended by striking 
        ``and'' at the end of paragraph (1), by striking the 
        period at the end of paragraph (2) and inserting ``, 
        and'', and by adding at the end the following new 
        paragraph:
          ``(3) the direct charitable deduction.''.
          (2) Definition.--Section 63 is amended by 
        redesignating subsection (g) as subsection (h) and by 
        inserting after subsection (f) the following new 
        subsection:
  ``(g) Direct Charitable Deduction.--For purposes of this 
section, the term `direct charitable deduction' means that 
portion of the amount allowable under section 170(a) which is 
taken as a direct charitable deduction for the taxable year 
under section 170(m).''.
          (3) Conforming amendment.--Subsection (d) of section 
        63 is amended by striking ``and'' at the end of 
        paragraph (1), by striking the period at the end of 
        paragraph (2) and inserting ``, and'', and by adding at 
        the end the following new paragraph:
          ``(3) the direct charitable deduction.''.
  (c) Study.--
          (1) In general.--The Secretary of the Treasury shall 
        study the effect of the amendments made by this section 
        on increased charitable giving and taxpayer compliance, 
        including a comparison of taxpayer compliance between 
        taxpayers who itemize their charitable contributions 
        and taxpayers who claim a direct charitable deduction.
          (2) Report.--Not later than December 31, 2006, the 
        Secretary of the Treasury shall report on the study 
        required under paragraph (1) to the Committee on 
        Finance of the Senate and the Committee on Ways and 
        Means of the House of Representatives.
  (d) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2003.

SEC. 102. TAX-FREE DISTRIBUTIONS FROM INDIVIDUAL RETIREMENT PLANS FOR 
                    CHARITABLE PURPOSES.

  (a) In General.--Subsection (d) of section 408 (relating to 
individual retirement accounts) is amended by adding at the end 
the following new paragraph:
          ``(8) Distributions for charitable purposes.--
                  ``(A) In general.--No amount shall be 
                includible in gross income by reason of a 
                qualified charitable distribution.
                  ``(B) Qualified charitable distribution.--For 
                purposes of this paragraph, the term `qualified 
                charitable distribution' means any distribution 
                from an individual retirement plan other than a 
                plan described in subsection (k) or (p) of 
                section 408--
                          ``(i) which is made on or after the 
                        date that the individual for whose 
                        benefit the plan is maintained has 
                        attained age 70 \1/2\, and
                          ``(ii) which is made directly by the 
                        trustee--
                                  ``(I) to an organization 
                                described in section 170(c), or
                                  ``(II) to a split-interest 
                                entity.
                A distribution shall be treated as a qualified 
                charitable distribution only to the extent that 
                the distribution would be includible in gross 
                income without regard to subparagraph (A) and, 
                in the case of a distribution to a split-
                interest entity, only if no person holds an 
                income interest in the amounts in the split-
                interest entity attributable to such 
                distribution other than one or more of the 
                following: the individual for whose benefit 
                such plan is maintained, the spouse of such 
                individual, or any organization described in 
                section 170(c).
                  ``(C) Contributions must be otherwise 
                deductible.--For purposes of this paragraph--
                          ``(i) Direct contributions.--A 
                        distribution to an organization 
                        described in section 170(c) shall be 
                        treated as a qualified charitable 
                        distribution only if a deduction for 
                        the entire distribution would be 
                        allowable under section 170 (determined 
                        without regard to subsection (b) 
                        thereof and this paragraph).
                          ``(ii) Split-interest gifts.--A 
                        distribution to a split-interest entity 
                        shall be treated as a qualified 
                        charitable distribution only if a 
                        deduction for the entire value of the 
                        interest in the distribution for the 
                        use of an organization described in 
                        section 170(c) would be allowable under 
                        section 170 (determined without regard 
                        to subsection (b) thereof and this 
                        paragraph).
                  ``(D) Application of section 72.--
                Notwithstanding section 72, in determining the 
                extent to which a distribution is a qualified 
                charitable distribution, the entire amount of 
                the distribution shall be treated as includible 
                in gross income without regard to subparagraph 
                (A) to the extent that such amount does not 
                exceed the aggregate amount which would have 
                been so includible if all amounts distributed 
                from all individual retirement plans were 
                treated as 1 contract under paragraph (2)(A) 
                for purposes of determining the inclusion of 
                such distribution under section 72. Proper 
                adjustments shall be made in applying section 
                72 to other distributions in such taxable year 
                and subsequent taxable years.
                  ``(E) Special rules for split-interest 
                entities.--
                          ``(i) Charitable remainder trusts.--
                        Notwithstanding section 664(b), 
                        distributions made from a trust 
                        described in subparagraph (G)(i) shall 
                        be treated as ordinary income in the 
                        hands of the beneficiary to whom is 
                        paid the annuity described in section 
                        664(d)(1)(A) or the payment described 
                        in section 664(d)(2)(A).
                          ``(ii) Pooled income funds.--No 
                        amount shall be includible in the gross 
                        income of a pooled income fund (as 
                        defined in subparagraph (G)(ii)) by 
                        reason of a qualified charitable 
                        distribution to such fund, and all 
                        distributions from the fund which are 
                        attributable to qualified charitable 
                        distributions shall be treated as 
                        ordinary income to the beneficiary.
                          ``(iii) Charitable gift annuities.--
                        Qualified charitable distributions made 
                        for a charitable gift annuity shall not 
                        be treated as an investment in the 
                        contract.
                  ``(F) Denial of deduction.--Qualified 
                charitable distributions shall not be taken 
                into account in determining the deduction under 
                section 170.
                  ``(G) Split-interest entity defined.--For 
                purposes of this paragraph, the term `split-
                interest entity' means--
                          ``(i) a charitable remainder annuity 
                        trust or a charitable remainder 
                        unitrust (as such terms are defined in 
                        section 664(d)) which must be funded 
                        exclusively by qualified charitable 
                        distributions,
                          ``(ii) a pooled income fund (as 
                        defined in section 642(c)(5)), but only 
                        if the fund accounts separately for 
                        amounts attributable to qualified 
                        charitable distributions, and
                          ``(iii) a charitable gift annuity (as 
                        defined in section 501(m)(5)).''.
  (b) Modifications Relating to Information Returns by Certain 
Trusts.--
          (1) Returns.--Section 6034 (relating to returns by 
        trusts described in section 4947(a)(2) or claiming 
        charitable deductions under section 642(c)) is amended 
        to read as follows:

``SEC. 6034. RETURNS BY TRUSTS DESCRIBED IN SECTION 4947(A)(2) OR 
                    CLAIMING CHARITABLE DEDUCTIONS UNDER SECTION 
                    642(C).

  ``(a) Trusts Described in Section 4947(a)(2).--Every trust 
described in section 4947(a)(2) shall furnish such information 
with respect to the taxable year as the Secretary may by forms 
or regulations require.
  ``(b) Trusts Claiming a Charitable Deduction Under Section 
642(c).--
          ``(1) In general.--Every trust not required to file a 
        return under subsection (a) but claiming a deduction 
        under section 642(c) for the taxable year shall furnish 
        such information with respect to such taxable year as 
        the Secretary may by forms or regulations prescribe, 
        including--
                  ``(A) the amount of the deduction taken under 
                section 642(c) within such year,
                  ``(B) the amount paid out within such year 
                which represents amounts for which deductions 
                under section 642(c) have been taken in prior 
                years,
                  ``(C) the amount for which such deductions 
                have been taken in prior years but which has 
                not been paid out at the beginning of such 
                year,
                  ``(D) the amount paid out of principal in the 
                current and prior years for the purposes 
                described in section 642(c),
                  ``(E) the total income of the trust within 
                such year and the expenses attributable 
                thereto, and
                  ``(F) a balance sheet showing the assets, 
                liabilities, and net worth of the trust as of 
                the beginning of such year.
          ``(2) Exceptions.--Paragraph (1) shall not apply to a 
        trust for any taxable year if--
                  ``(A) all the net income for such year, 
                determined under the applicable principles of 
                the law of trusts, is required to be 
                distributed currently to the beneficiaries, or
                  ``(B) the trust is described in section 
                4947(a)(1).''.
          (2) Increase in penalty relating to filing of 
        information return by split-interest trusts.--Paragraph 
        (2) of section 6652(c) (relating to returns by exempt 
        organizations and by certain trusts) is amended by 
        adding at the end the following new subparagraph:
                  ``(C) Split-interest trusts.--In the case of 
                a trust which is required to file a return 
                under section 6034(a), subparagraphs (A) and 
                (B) of this paragraph shall not apply and 
                paragraph (1) shall apply in the same manner as 
                if such return were required under section 
                6033, except that--
                          ``(i) the 5 percent limitation in the 
                        second sentence of paragraph (1)(A) 
                        shall not apply,
                          ``(ii) in the case of any trust with 
                        gross income in excess of $250,000, the 
                        first sentence of paragraph (1)(A) 
                        shall be applied by substituting `$100' 
                        for `$20', and the second sentence 
                        thereof shall be applied by 
                        substituting `$50,000' for `$10,000', 
                        and
                          ``(iii) the third sentence of 
                        paragraph (1)(A) shall be disregarded.
                In addition to any penalty imposed on the trust 
                pursuant to this subparagraph, if the person 
                required to file such return knowingly fails to 
                file the return, such penalty shall also be 
                imposed on such person who shall be personally 
                liable for such penalty.''.
          (3) Confidentiality of noncharitable beneficiaries.--
        Subsection (b) of section 6104 (relating to inspection 
        of annual information returns) is amended by adding at 
        the end the following new sentence: ``In the case of a 
        trust which is required to file a return under section 
        6034(a), this subsection shall not apply to information 
        regarding beneficiaries which are not organizations 
        described in section 170(c).''.
  (c) Effective Dates.--
          (1) Subsection (a).--The amendment made by subsection 
        (a) shall apply to distributions made after December 
        31, 2003.
          (2) Subsection (b).--The amendments made by 
        subsection (b) shall apply to returns for taxable years 
        beginning after December 31, 2003.

SEC. 103. INCREASE IN CAP ON CORPORATE CHARITABLE CONTRIBUTIONS.

  (a) In General.--Paragraph (2) of section 170(b) (relating to 
corporations) is amended by striking ``10 percent'' and 
inserting ``the applicable percentage''.
  (b) Applicable Percentage.--Subsection (b) of section 170 is 
amended by adding at the end the following new paragraph:
          ``(3) Applicable percentage defined.--For purposes of 
        paragraph (2), the applicable percentage shall be 
        determined in accordance with the following table:

        ``For taxable years beginning                     The applicable
          in calendar year--                             percentage is--
          2004................................................       11 
          2005................................................       12 
          2006................................................       13 
          2007................................................       14 
          2008 through 2011...................................       15 
          2012 and thereafter.................................    20.''.

  (c) Conforming Amendments.--
          (1) Sections 512(b)(10) and 805(b)(2)(A) are each 
        amended by striking ``10 percent'' each place it occurs 
        and inserting ``the applicable percentage (determined 
        under section 170(b)(3))''.
          (2) Sections 545(b)(2) and 556(b)(2) are each amended 
        by striking ``10-percent limitation'' and inserting 
        ``applicable percentage limitation''.
  (d) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2003.

SEC. 104. CHARITABLE DEDUCTION FOR CONTRIBUTIONS OF FOOD INVENTORY.

  (a) In General.--Paragraph (3) of section 170(e) (relating to 
special rule for certain contributions of inventory and other 
property) is amended by redesignating subparagraph (C) as 
subparagraph (D) and by inserting after subparagraph (B) the 
following new subparagraph:
                  ``(C) Special rule for contributions of food 
                inventory.--
                          ``(i) General rule.--In the case of a 
                        charitable contribution of food from 
                        any trade or business (or interest 
                        therein) of the taxpayer, this 
                        paragraph shall be applied--
                                  ``(I) without regard to 
                                whether the contribution is 
                                made by a C corporation, and
                                  ``(II) only to food that is 
                                apparently wholesome food.
                          ``(ii) Limitation.--In the case of a 
                        taxpayer other than a C corporation, 
                        the aggregate amount of such 
                        contributions for any taxable year 
                        which may be taken into account under 
                        this section shall not exceed the 
                        applicable percentage (within the 
                        meaning of subsection (b)(3)) of the 
                        taxpayer's aggregate net income for 
                        such taxable year from all trades or 
                        businesses from which such 
                        contributions were made for such year, 
                        computed without regard to this 
                        section.
                          ``(iii) Determination of fair market 
                        value.--In the case of a qualified 
                        contribution of apparently wholesome 
                        food to which this paragraph applies 
                        and which, solely by reason of internal 
                        standards of the taxpayer or lack of 
                        market, cannot or will not be sold, the 
                        fair market value of such food shall be 
                        determined by taking into account the 
                        price at which the same or 
                        substantially the same food items (as 
                        to both type and quality) are sold by 
                        the taxpayer at the time of the 
                        contribution (or, if not so sold at 
                        such time, in the recent past).
                          ``(iv) Apparently wholesome food.--
                        For purposes of this subparagraph, the 
                        term `apparently wholesome food' has 
                        the meaning given to such term by 
                        section 22(b)(2) of the Bill Emerson 
                        Good Samaritan Food Donation Act (42 
                        U.S.C. 1791(b)(2)), as in effect on the 
                        date of the enactment of this 
                        subparagraph.''.
  (b) Effective Date.--The amendment made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 105. REFORM OF CERTAIN EXCISE TAXES RELATED TO PRIVATE 
                    FOUNDATIONS.

  (a) Reduction of Tax on Net Investment Income.--Section 
4940(a) (relating to tax-exempt foundations) is amended by 
striking ``2 percent'' and inserting ``1 percent''.
  (b) Repeal of Reduction in Tax Where Private Foundation Meets 
Certain Distribution Requirements.--Section 4940 (relating to 
excise tax based on investment income) is amended by striking 
subsection (e).
  (c) Modification of Excise Tax on Self-Dealing.--The second 
sentence of section 4941(a)(1) (relating to initial excise tax 
imposed on self-dealer) is amended by striking ``5 percent'' 
and inserting ``25 percent''.
  (d) Modification of Excise Tax on Failure To Distribute 
Income.--
          (1) Certain administrative expenses not treated as 
        distributions.--Section 4942(g) is amended by striking 
        paragraph (4) and inserting the following new 
        paragraphs:
          ``(4) Limitation on administrative expenses treated 
        as distributions.--
                  ``(A) In general.--For purposes of paragraph 
                (1)(A), the following administrative expenses 
                shall not be treated as qualifying 
                distributions:
                          ``(i) Any administrative expense 
                        which is not directly attributable to 
                        direct charitable activities, grant 
                        selection activities, grant monitoring 
                        and administration activities, 
                        compliance with applicable Federal, 
                        State, or local law, or furthering 
                        public accountability of the private 
                        foundation.
                          ``(ii) Any compensation paid to a 
                        disqualified person to the extent that 
                        such compensation exceeds an annual 
                        rate of $100,000.
                          ``(iii) Any expense incurred for 
                        transportation by air unless such 
                        transportation is regularly-scheduled 
                        commercial air transportation.
                          ``(iv) Any expense incurred for 
                        regularly-scheduled commercial air 
                        transportation to the extent that such 
                        expense exceeds the cost of such 
                        transportation in coach-class 
                        accommodations.
                  ``(B) Adjustment for inflation.--In the case 
                of a taxable year beginning after December 31, 
                2004, the $100,000 amount in subparagraph 
                (A)(ii) shall be increased by an amount equal 
                to--
                          ``(i) such dollar amount, multiplied 
                        by
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        the calendar year in which the taxable 
                        year begins, determined by substituting 
                        `calendar year 2003' for `calendar year 
                        1992' in subparagraph (B) thereof.
                If any amount as increased under the preceding 
                sentence is not a multiple of $50, such amount 
                shall be rounded to the next lowest multiple of 
                $50.
          ``(5) Regulations.--The Secretary shall prescribe 
        such regulations as may be necessary to carry out the 
        purposes of paragraph (4). Such regulations shall 
        provide that administrative expenses which are excluded 
        from qualifying distributions solely by reason of the 
        limitations in paragraph (4) shall not for such reason 
        subject a private foundation to any other excise taxes 
        imposed by this subchapter.''.
          (2) Disallowance not to apply to certain private 
        foundations.--
                  (A) In general.--Section 4942(j)(3) (defining 
                operating foundation) is amended--
                          (i) by striking ``(within the meaning 
                        of paragraph (1) or (2) of subsection 
                        (g))'' each place it appears, and
                          (ii) by adding at the end the 
                        following new sentence: ``For purposes 
                        of this paragraph, the term `qualifying 
                        distributions' means qualifying 
                        distributions within the meaning of 
                        paragraph (1) or (2) of subsection (g) 
                        (determined without regard to 
                        subsection (g)(4)).''.
                  (B) Conforming amendment.--Section 
                4942(f)(2)(C)(i) is amended by inserting 
                ``(determined without regard to subsection 
                (g)(4))'' after ``within the meaning of 
                subsection (g)(1)(A)''.
  (e) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2003.

SEC. 106. EXCISE TAX ON UNRELATED BUSINESS TAXABLE INCOME OF CHARITABLE 
                    REMAINDER TRUSTS.

  (a) In General.--Subsection (c) of section 664 (relating to 
exemption from income taxes) is amended to read as follows:
  ``(c) Taxation of Trusts.--
          ``(1) Income tax.--A charitable remainder annuity 
        trust and a charitable remainder unitrust shall, for 
        any taxable year, not be subject to any tax imposed by 
        this subtitle.
          ``(2) Excise tax.--
                  ``(A) In general.--In the case of a 
                charitable remainder annuity trust or a 
                charitable remainder unitrust that has 
                unrelated business taxable income (within the 
                meaning of section 512, determined as if part 
                III of subchapter F applied to such trust) for 
                a taxable year, there is hereby imposed on such 
                trust or unitrust an excise tax equal to the 
                amount of such unrelated business taxable 
                income.
                  ``(B) Certain rules to apply.--The tax 
                imposed by subparagraph (A) shall be treated as 
                imposed by chapter 42 for purposes of this 
                title other than subchapter E of chapter 42.
                  ``(C) Character of distributions and 
                coordination with distribution requirements.--
                The amounts taken into account in determining 
                unrelated business taxable income (as defined 
                in subparagraph (A)) shall not be taken into 
                account for purposes of--
                          ``(i) subsection (b),
                          ``(ii) determining the value of trust 
                        assets under subsection (d)(2), and
                          ``(iii) determining income under 
                        subsection (d)(3).
                  ``(D) Tax court proceedings.--For purposes of 
                this paragraph, the references in section 
                6212(c)(1) to section 4940 shall be deemed to 
                include references to this paragraph.''.
  (b) Effective Date.--The amendment made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 107. EXPANSION OF CHARITABLE CONTRIBUTION ALLOWED FOR SCIENTIFIC 
                    PROPERTY USED FOR RESEARCH AND FOR COMPUTER 
                    TECHNOLOGY AND EQUIPMENT USED FOR EDUCATIONAL 
                    PURPOSES.

  (a) Scientific Property Used for Research.--
          (1) In general.--Clause (ii) of section 170(e)(4)(B) 
        (defining qualified research contributions) is amended 
        by inserting ``or assembled'' after ``constructed''.
          (2) Conforming amendment.--Clause (iii) of section 
        170(e)(4)(B) is amended by inserting ``or assembling'' 
        after ``construction''.
  (b) Computer Technology and Equipment for Educational 
Purposes.--
          (1) In general.--Clause (ii) of section 170(e)(6)(B) 
        is amended by inserting ``or assembled'' after 
        ``constructed'' and ``or assembling'' after 
        ``construction''.
          (2) Special rule made permanent.--Section 170(e)(6) 
        is amended by striking subparagraph (G).
          (3) Conforming amendments.--Subparagraph (D) of 
        section 170(e)(6) is amended by inserting ``or 
        assembled'' after ``constructed'' and ``or assembling'' 
        after ``construction''.
  (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2003.

SEC. 108. ADJUSTMENT TO BASIS OF S CORPORATION STOCK FOR CERTAIN 
                    CHARITABLE CONTRIBUTIONS.

  (a) In General.--Paragraph (2) of section 1367(a) (relating 
to adjustments to basis of stock of shareholders, etc.) is 
amended by adding at the end the following new flush sentence:
        ``The decrease under subparagraph (B) by reason of a 
        charitable contribution (as defined in section 170(c)) 
        of property shall be the amount equal to the 
        shareholder's pro rata share of the adjusted basis of 
        such property.''.
  (b) Effective Date.--The amendment made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 109. CHARITABLE ORGANIZATIONS PERMITTED TO MAKE COLLEGIATE HOUSING 
                    AND INFRASTRUCTURE GRANTS.

  (a) In General.--Section 501 (relating to exemption from tax 
on corporations, certain trusts, etc.), as amended by section 
201, is further amended by redesignating subsection (q) as 
subsection (r) and by inserting after subsection (p) the 
following new subsection:
  ``(q) Treatment of Organizations Making Collegiate Housing 
and Infrastructure Improvement Grants.--
          ``(1) In general.--For purposes of subsection (c)(3) 
        and sections 170(c)(2)(B), 2055(a), and 2522(a)(2), an 
        organization shall not fail to be treated as organized 
        and operated exclusively for charitable or educational 
        purposes solely because such organization makes 
        collegiate housing and infrastructure grants to an 
        organization described in subsection (c)(7), so long 
        as, at the time of the grant, substantially all of the 
        active members of the recipient organization are full-
        time students at the college or university with which 
        such recipient organization is associated.
          ``(2) Housing and infrastructure grants.--For 
        purposes of paragraph (1), collegiate housing and 
        infrastructure grants are grants to provide, improve, 
        operate, or maintain collegiate housing that may 
        involve more than incidental social, recreational, or 
        private purposes, so long as such grants are for 
        purposes that would be permissible for a dormitory of 
        the college or university referred to in paragraph (1). 
        A grant shall not be treated as a collegiate housing 
        and infrastructure grant for purposes of paragraph (1) 
        to the extent that such grant is used to provide 
        physical fitness equipment.
          ``(3) Grants to certain organizations holding title 
        to property, etc.--For purposes of this subsection, a 
        collegiate housing and infrastructure grant to an 
        organization described in subsection (c)(2) or (c)(7) 
        holding title to property exclusively for the benefit 
        of an organization described in subsection (c)(7) shall 
        be considered a grant to the organization described in 
        subsection (c)(7) for whose benefit such property is 
        held.''.
  (b) Effective Date.--The amendment made by this section shall 
apply to grants made after December 31, 2003.

SEC. 110. CONDUCT OF CERTAIN GAMES OF CHANCE NOT TREATED AS UNRELATED 
                    TRADE OR BUSINESS.

  (a) In General.--Paragraph (1) of section 513(f) (relating to 
certain bingo games) is amended to read as follows:
          ``(1) In general.--The term `unrelated trade or 
        business' does not include--
                  ``(A) any trade or business which consists of 
                conducting bingo games, and
                  ``(B) any trade or business which consists of 
                conducting qualified games of chance if the net 
                proceeds from such trade or business are paid 
                or set aside for payment for purposes described 
                in section 170(c)(2)(B), for the promotion of 
                social welfare (within the meaning of section 
                501(c)(4)), or for a purpose for which State 
                law specifically authorizes the expenditure of 
                such proceeds.''.
  (b) Qualified Games of Chance.--Subsection (f) of section 513 
is amended by adding at the end the following new paragraph:
          ``(3) Qualified games of chance.--For purposes of 
        paragraph (1), the term `qualified game of chance' 
        means any game of chance (other than bingo) conducted 
        by an organization if--
                  ``(A) such organization is licensed pursuant 
                to State law to conduct such game,
                  ``(B) only organizations which are organized 
                as nonprofit corporations or are exempt from 
                tax under section 501(a) may be so licensed to 
                conduct such game within the State, and
                  ``(C) the conduct of such game does not 
                violate State or local law.''
  (c) Clerical Amendment.--The subsection heading of section 
513(f) is amended by striking ``Bingo Games'' and inserting 
``Games of Chance''.
  (d) Effective Date.-- The amendments made by this section 
shall apply to games conducted after December 31, 2003.

SEC. 111. EXCISE TAXES EXEMPTION FOR BLOOD COLLECTOR ORGANIZATIONS.

  (a) Exemption From Imposition of Special Fuels Tax.--Section 
4041(g) (relating to other exemptions) is amended by striking 
``and'' at the end of paragraph (3), by striking the period in 
paragraph (4) and inserting ``; and'', and by inserting after 
paragraph (4) the following new paragraph:
          ``(5) with respect to the sale of any liquid to a 
        qualified blood collector organization (as defined in 
        section 7701(a)(48)) for such organization's exclusive 
        use, or with respect to the use by a qualified blood 
        collector organization of any liquid as a fuel.''.
  (b) Exemption From Manufacturers Excise Tax.--
          (1) In general.--Section 4221(a) (relating to certain 
        tax-free sales) is amended by striking ``or'' at the 
        end of paragraph (4), by adding ``or'' at the end of 
        paragraph (5), and by inserting after paragraph (5) the 
        following new paragraph:
          ``(6) to a qualified blood collector organization (as 
        defined in section 7701(a)(48)) for such organization's 
        exclusive use,''.
          (2) Conforming amendments.--
                  (A) The second sentence of section 4221(a) is 
                amended by striking ``Paragraphs (4) and (5)'' 
                and inserting ``Paragraphs (4), (5), and (6)''.
                  (B) Section 6421(c) is amended by striking 
                ``or (5)'' and inserting ``(5), or (6)''.
  (c) Exemption From Communication Excise Tax.--
          (1) In general.--Section 4253 (relating to 
        exemptions) is amended by redesignating subsection (k) 
        as subsection (l) and inserting after subsection (j) 
        the following new subsection:
  ``(k) Exemption for Qualified Blood Collector 
Organizations.--Under regulations provided by the Secretary, no 
tax shall be imposed under section 4251 on any amount paid by a 
qualified blood collector organization (as defined in section 
7701(a)(48)) for services or facilities furnished to such 
organization.''.
          (2) Conforming amendment.--Section 4253(l), as 
        redesignated by paragraph (1), is amended by striking 
        ``or (j)'' and inserting ``(j), or (k)''.
  (d) Credit for Refund for Certain Taxes on Sales and 
Services.--
          (1) Deemed overpayment.--
                  (A) In general.--Section 6416(b)(2) is 
                amended by redesignating subparagraphs (E) and 
                (F) as subparagraphs (F) and (G), respectively, 
                and by inserting after subparagraph (D) the 
                following new subparagraph:
                  ``(E) sold to a qualified blood collector 
                organization (as defined in section 
                7701(a)(48)) for such organization's exclusive 
                use;''.
                  (B) Conforming amendments.--Section 
                6416(b)(2) is amended--
                          (i) by striking ``Subparagraphs (C) 
                        and (D)'' and inserting ``Subparagraphs 
                        (C), (D), and (E)'', and
                          (ii) by striking ``(C), and (D)'' and 
                        inserting ``(C), (D), and (E)''.
          (2) Sales of tires.--Clause (ii) of section 
        6416(b)(4)(B) is amended by inserting ``sold to a 
        qualified blood collector organization (as defined in 
        section 7701(a)(48)) for its exclusive use,'' after 
        ``for its exclusive use,''.
  (e) Definition of Qualified Blood Collector Organization.--
Section 7701(a) is amended by inserting at the end the 
following new paragraph:
          ``(48) Qualified blood collector organization.--The 
        term `qualified blood collector organization' means an 
        organization which is--
                  ``(A) described in section 501(c)(3) and 
                exempt from tax under section 501(a),
                  ``(B) registered by the Food and Drug 
                Administration to collect blood, and
                  ``(C) primarily engaged in the activity of 
                the collection of blood.''.
  (f) Effective Date.--The amendments made by this section 
shall take effect on January 1, 2004.

SEC. 112. NONRECOGNITION OF GAIN ON THE SALE OF PROPERTY USED IN 
                    PERFORMANCE OF AN EXEMPT FUNCTION.

  (a) In General.--Subparagraph (D) of section 512(a)(3) is 
amended to read as follows:
                  ``(D) Nonrecognition of gain.--
                          ``(i) In general.--If property used 
                        directly in the performance of the 
                        exempt function of an organization 
                        described in paragraph (7), (9), (17), 
                        or (20) of section 501(c) is sold by 
                        such organization, and within a period 
                        beginning 1 year before the date of 
                        such sale, and ending 3 years (10 
                        years, in the case of an organization 
                        described in section 501(c)(7)) after 
                        such date, other property is purchased 
                        and used by such organization directly 
                        in the performance of its exempt 
                        function, gain (if any) from such sale 
                        shall be recognized only to the extent 
                        that such organization's sales price of 
                        the old property exceeds the 
                        organization's cost of purchasing the 
                        other property.
                          ``(ii) Statute of limitations.--If an 
                        organization described in section 
                        501(c)(7) sells property on which gain 
                        is not recognized, in whole or in part, 
                        by reason of clause (i), then the 
                        statutory period for the assessment of 
                        any deficiency attributable to such 
                        gain shall not expire until the end of 
                        the 3-year period beginning on the date 
                        that the Secretary is notified by such 
                        organization (in such manner as the 
                        Secretary may prescribe) that--
                                  ``(I) the organization has 
                                met the requirements of clause 
                                (i) with respect to gain which 
                                was not recognized,
                                  ``(II) the organization does 
                                not intend to meet such 
                                requirements, or
                                  ``(III) the organization 
                                failed to meet such 
                                requirements within the 
                                prescribed period.
                        For the purposes of this clause, any 
                        deficiency may be assessed before the 
                        expiration of such 3-year period 
                        notwithstanding the provisions of any 
                        other law or rule of law which would 
                        otherwise prevent such assessment.
                          ``(iii) Destruction and loss.--For 
                        purposes of this subparagraph, the 
                        destruction in whole or in part, theft, 
                        seizure, requisition, or condemnation 
                        of property, shall be treated as the 
                        sale of such property, and rules 
                        similar to the rules provided by 
                        subsections (b), (c), (e), and (j) of 
                        section 1034 (as in effect on the day 
                        before the date of the enactment of the 
                        Taxpayer Relief Act of 1997) shall 
                        apply.''.
  (b) Effective Date.--The amendment made by this section shall 
apply with respect to the sale of any property for which the 3-
year period for offsetting gain by purchasing other property 
under subparagraph (D) of section 512(a)(3) of the Internal 
Revenue Code (as in effect on the day before the date of the 
enactment of this Act) had not expired as of January 1, 2001.

SEC. 113. EXEMPTION OF QUALIFIED 501(C)(3) BONDS FOR NURSING HOMES FROM 
                    FEDERAL GUARANTEE PROHIBITIONS.

  (a) In General.--For purposes of section 149(b)(1) of the 
Internal Revenue Code of 1986, any qualified 501(c)(3) bond (as 
defined in section 145 of such Code) shall not be treated as 
federally guaranteed solely because such bond is part of an 
issue supported by a letter of credit, if such bond--
          (1) is issued after December 31, 2003, and before the 
        date which is 1 year after the date of the enactment of 
        this Act, and
          (2) is part of an issue 95 percent or more of the net 
        proceeds of which are to be used to finance 1 or more 
        of the following facilities primarily for the benefit 
        of the elderly:
                  (A) Licensed nursing home facility.
                  (B) Licensed or certified assisted living 
                facility.
                  (C) Licensed personal care facility.
                  (D) Continuing care retirement community.
  (b) Limitation on Issuer.--Subsection (a) shall not apply to 
any bond described in such subsection if the aggregate 
authorized face amount of the issue of which such bond is a 
part, when increased by the outstanding amount of such bonds 
issued by the issuer during the period described in subsection 
(a)(1) exceeds $15,000,000.
  (c) Limitation on Beneficiary.--Rules similar to the rules of 
section 144(a)(10) of the Internal Revenue Code of 1986 shall 
apply for purposes of this section, except that--
          (1) ``$15,000,000'' shall be substituted for 
        ``$40,000,000'' in subparagraph (A) thereof, and
          (2) such rules shall be applied--
                  (A) only with respect to bonds described in 
                this section, and
                  (B) with respect to the aggregate authorized 
                face amount of all issues of such bonds which 
                are allocable to the beneficiary.
  (d) Continuing Care Retirement Community.--For purposes of 
this section, the term ``continuing care retirement community'' 
means a community which provides, on the same campus, a 
consortium of residential living options and support services 
to persons at least 60 years of age under a written agreement. 
For purposes of the preceding sentence, the residential living 
options shall include independent living units, nursing home 
beds, and either assisted living units or personal care beds.

     TITLE II--TAX REFORM AND IMPROVEMENTS RELATING TO CHARITABLE 
                       ORGANIZATIONS AND PROGRAMS

SEC. 201. SUSPENSION OF TAX-EXEMPT STATUS OF TERRORIST ORGANIZATIONS.

  (a) In General.--Section 501 (relating to exemption from tax 
on corporations, certain trusts, etc.) is amended by 
redesignating subsection (p) as subsection (q) and by inserting 
after subsection (o) the following new subsection:
  ``(p) Suspension of Tax-Exempt Status of Terrorist 
Organizations.--
          ``(1) In general.--The exemption from tax under 
        subsection (a) with respect to any organization 
        described in paragraph (2), and the eligibility of any 
        organization described in paragraph (2) to apply for 
        recognition of exemption under subsection (a), shall be 
        suspended during the period described in paragraph (3).
          ``(2) Terrorist organizations.--An organization is 
        described in this paragraph if such organization is 
        designated or otherwise individually identified--
                  ``(A) under section 212(a)(3)(B)(vi)(II) or 
                219 of the Immigration and Nationality Act as a 
                terrorist organization or foreign terrorist 
                organization,
                  ``(B) in or pursuant to an Executive order 
                which is related to terrorism and issued under 
                the authority of the International Emergency 
                Economic Powers Act or section 5 of the United 
                Nations Participation Act of 1945 for the 
                purpose of imposing on such organization an 
                economic or other sanction, or
                  ``(C) in or pursuant to an Executive order 
                issued under the authority of any Federal law 
                if--
                          ``(i) the organization is designated 
                        or otherwise individually identified in 
                        or pursuant to such Executive order as 
                        supporting or engaging in terrorist 
                        activity (as defined in section 
                        212(a)(3)(B) of the Immigration and 
                        Nationality Act) or supporting 
                        terrorism (as defined in section 
                        140(d)(2) of the Foreign Relations 
                        Authorization Act, Fiscal Years 1988 
                        and 1989); and
                          ``(ii) such Executive order refers to 
                        this subsection.
          ``(3) Period of suspension.--With respect to any 
        organization described in paragraph (2), the period of 
        suspension--
                  ``(A) begins on the later of--
                          ``(i) the date of the first 
                        publication of a designation or 
                        identification described in paragraph 
                        (2) with respect to such organization, 
                        or
                          ``(ii) the date of the enactment of 
                        this subsection, and
                  ``(B) ends on the first date that all 
                designations and identifications described in 
                paragraph (2) with respect to such organization 
                are rescinded pursuant to the law or Executive 
                order under which such designation or 
                identification was made.
          ``(4) Denial of deduction.--No deduction shall be 
        allowed under section 170, 545(b)(2), 556(b)(2), 
        642(c), 2055, 2106(a)(2), or 2522 for any contribution 
        to an organization described in paragraph (2) during 
        the period described in paragraph (3).
          ``(5) Denial of administrative or judicial challenge 
        of suspension or denial of deduction.--Notwithstanding 
        section 7428 or any other provision of law, no 
        organization or other person may challenge a suspension 
        under paragraph (1), a designation or identification 
        described in paragraph (2), the period of suspension 
        described in paragraph (3), or a denial of a deduction 
        under paragraph (4) in any administrative or judicial 
        proceeding relating to the Federal tax liability of 
        such organization or other person.
          ``(6) Erroneous designation.--
                  ``(A) In general.--If--
                          ``(i) the tax exemption of any 
                        organization described in paragraph (2) 
                        is suspended under paragraph (1),
                          ``(ii) each designation and 
                        identification described in paragraph 
                        (2) which has been made with respect to 
                        such organization is determined to be 
                        erroneous pursuant to the law or 
                        Executive order under which such 
                        designation or identification was made, 
                        and
                          ``(iii) the erroneous designations 
                        and identifications result in an 
                        overpayment of income tax for any 
                        taxable year by such organization,
                credit or refund (with interest) with respect 
                to such overpayment shall be made.
                  ``(B) Waiver of limitations.--If the credit 
                or refund of any overpayment of tax described 
                in subparagraph (A)(iii) is prevented at any 
                time by the operation of any law or rule of law 
                (including res judicata), such credit or refund 
                may nevertheless be allowed or made if the 
                claim therefor is filed before the close of the 
                1-year period beginning on the date of the last 
                determination described in subparagraph 
                (A)(ii).
          ``(7) Notice of suspensions.--If the tax exemption of 
        any organization is suspended under this subsection, 
        the Internal Revenue Service shall update the listings 
        of tax-exempt organizations and shall publish 
        appropriate notice to taxpayers of such suspension and 
        of the fact that contributions to such organization are 
        not deductible during the period of such suspension.''.
  (b) Effective Date.--The amendments made by this section 
shall apply to designations made before, on, or after the date 
of the enactment of this Act.

SEC. 202. CLARIFICATION OF DEFINITION OF CHURCH TAX INQUIRY.

  Subsection (i) of section 7611 (relating to section not to 
apply to criminal investigations, etc.) is amended by striking 
``or'' at the end of paragraph (4), by striking the period at 
the end of paragraph (5) and inserting ``, or'', and by 
inserting after paragraph (5) the following:
          ``(6) information provided by the Secretary related 
        to the standards for exemption from tax under this 
        title and the requirements under this title relating to 
        unrelated business taxable income.''.

SEC. 203. EXTENSION OF DECLARATORY JUDGMENT REMEDY TO TAX-EXEMPT 
                    ORGANIZATIONS.

  (a) In General.--Paragraph (1) of section 7428(a) (relating 
to creation of remedy) is amended--
          (1) in subparagraph (B) by inserting after 
        ``509(a))'' the following: ``or as a private operating 
        foundation (as defined in section 4942(j)(3))''; and
          (2) by amending subparagraph (C) to read as follows:
                  ``(C) with respect to the initial 
                qualification or continuing qualification of an 
                organization as an organization described in 
                subsection (c) (other than paragraph (3)) or 
                (d) of section 501 which is exempt from tax 
                under section 501(a), or''.
  (b) Court Jurisdiction.--Subsection (a) of section 7428 is 
amended in the material following paragraph (2) by striking 
``United States Tax Court, the United States Claims Court, or 
the district court of the United States for the District of 
Columbia'' and inserting the following: ``United States Tax 
Court (in the case of any such determination or failure) or the 
United States Claims Court or the district court of the United 
States for the District of Columbia (in the case of a 
determination or failure with respect to an issue referred to 
in subparagraph (A) or (B) of paragraph (1)),''.
  (c) Effective Date.--The amendments made by this section 
shall apply to pleadings filed with respect to determinations 
(or requests for determinations) made after the date of the 
enactment of this Act.

SEC. 204. LANDOWNER INCENTIVES PROGRAMS.

  (a) In General.--Subsection (a) of section 126 is amended by 
redesignating paragraph (10) as paragraph (11) and by inserting 
after paragraph (9) the following new paragraph:
          ``(10) Landowner initiatives programs to conserve 
        threatened, endangered, or imperiled species, or 
        protect or restore habitat carried out under--
                  ``(A) the Fish and Wildlife Coordination Act 
                (16 U.S.C. 661 et seq.),
                  ``(B) the Fish and Wildlife Act of 1956 (16 
                U.S.C. 742f), or
                  ``(C) section 6 of the Endangered Species Act 
                (16 U.S.C. 11531 et seq.).''.
  (b) Excludable Portion.--Subparagraph (A) of section 
126(b)(1) is amended by inserting after ``Secretary of 
Agriculture'' the following: ``(the Secretary of the Interior, 
in the case of the landowner incentives programs described in 
subsection (a)(10) and the programs described in subsection 
(a)(11) that are implemented by the Department of the 
Interior)''.
  (c) Effective Date.--The amendments made by this section 
shall apply to amounts received after December 31, 2003, in 
taxable years ending after such date.

SEC. 205. MODIFICATIONS TO SECTION 512(B)(13).

  (a) In General.--Paragraph (13) of section 512(b) (relating 
to special rules for certain amounts received from controlled 
entities) is amended by redesignating subparagraph (E) as 
subparagraph (F) and by inserting after subparagraph (D) the 
following new subparagraph:
                  ``(E) Paragraph to apply only to excess 
                payments.--
                          ``(i) In general.--Subparagraph (A) 
                        shall apply only to the portion of a 
                        specified payment received or accrued 
                        by the controlling organization that 
                        exceeds the amount which would have 
                        been paid or accrued if such payment 
                        met the requirements prescribed under 
                        section 482.
                          ``(ii) Addition to tax for valuation 
                        misstatements.--The tax imposed by this 
                        chapter on the controlling organization 
                        shall be increased by an amount equal 
                        to 20 percent of the larger of--
                                  ``(I) such excess determined 
                                without regard to any amendment 
                                or supplement to a return of 
                                tax, or
                                  ``(II) such excess determined 
                                with regard to all such 
                                amendments and supplements.''.
  (b) Effective Date.--
          (1) In general.--The amendment made by this section 
        shall apply to payments received or accrued after 
        December 31, 2003.
          (2) Payments subject to binding contract transition 
        rule.--If the amendments made by section 1041 of the 
        Taxpayer Relief Act of 1997 did not apply to any amount 
        received or accrued in the first 2 taxable years 
        beginning on or after the date of the enactment of the 
        Taxpayer Relief Act of 1997 under any contract 
        described in subsection (b)(2) of such section, such 
        amendments also shall not apply to amounts received or 
        accrued under such contract before January 1, 2001.

SEC. 206. SIMPLIFICATION OF LOBBYING EXPENDITURE LIMITATION.

  (a) Repeal of Grassroots Expenditure Limit.--Paragraph (1) of 
section 501(h) (relating to expenditures by public charities to 
influence legislation) is amended to read as follows:
          ``(1) General rule.--In the case of an organization 
        to which this subsection applies, exemption from 
        taxation under subsection (a) shall be denied because a 
        substantial part of the activities of such organization 
        consists of carrying on propaganda, or otherwise 
        attempting, to influence legislation, but only if such 
        organization normally makes lobbying expenditures in 
        excess of the lobbying ceiling amount for such 
        organization for each taxable year.''.
  (b) Excess Lobbying Expenditures.--Section 4911(b) is amended 
to read as follows:
  ``(b) Excess Lobbying Expenditures.--For purposes of this 
section, the term `excess lobbying expenditures' means, for a 
taxable year, the amount by which the lobbying expenditures 
made by the organization during the taxable year exceed the 
lobbying nontaxable amount for such organization for such 
taxable year.''.
  (c) Conforming Amendments.--
          (1) Section 501(h)(2) is amended by striking 
        subparagraphs (C) and (D).
          (2) Section 4911(c) is amended by striking paragraphs 
        (3) and (4).
          (3) Paragraph (1)(A) of section 4911(f) is amended by 
        striking ``limits of section 501(h)(1) have'' and 
        inserting ``limit of section 501(h)(1) has''.
          (4) Paragraph (1)(C) of section 4911(f) is amended by 
        striking ``limits of section 501(h)(1) are'' and 
        inserting ``limit of section 501(h)(1) is''.
          (5) Paragraphs (4)(A) and (4)(B) of section 4911(f) 
        are each amended by striking ``limits of section 
        501(h)(1)'' and inserting ``limit of section 
        501(h)(1)''.
          (6) Paragraph (8) of section 6033(b) (relating to 
        certain organizations described in section 501(c)(3)) 
        is amended by inserting ``and'' at the end of 
        subparagraph (A) and by striking subparagraphs (C) and 
        (D).
  (d) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2003.

SEC. 207. PILOT PROJECT FOR FOREST CONSERVATION ACTIVITIES.

  (a) Tax-Exempt Bond Financing.--
          (1) In general.--For purposes of the Internal Revenue 
        Code of 1986, any qualified forest conservation bond 
        shall be treated as an exempt facility bond under 
        section 142 of such Code.
          (2) Qualified forest conservation bond.--For purposes 
        of this section, the term ``qualified forest 
        conservation bond'' means any bond issued as part of an 
        issue if--
                  (A) 95 percent or more of the net proceeds 
                (as defined in section 150(a)(3) of such Code) 
                of such issue are to be used for qualified 
                project costs,
                  (B) such bond is an obligation of the State 
                of Washington or any political subdivision 
                thereof, and
                  (C) such bond is issued for a qualified 
                organization before December 31, 2006.
          (3) Limitation on aggregate amount issued.--The 
        maximum aggregate face amount of bonds which may be 
        issued under this subsection shall not exceed 
        $250,000,000.
          (4) Qualified project costs.--For purposes of this 
        subsection, the term ``qualified project costs'' means 
        the sum of--
                  (A) the cost of acquisition by the qualified 
                organization from an unrelated person of 
                forests and forest land located in the State of 
                Washington which at the time of acquisition or 
                immediately thereafter are subject to a 
                conservation restriction described in 
                subsection (c)(2),
                  (B) interest on the qualified forest 
                conservation bonds for the 3-year period 
                beginning on the date of issuance of such 
                bonds, and
                  (C) credit enhancement fees which constitute 
                qualified guarantee fees (within the meaning of 
                section 148 of such Code).
          (5) Special rules.--In applying the Internal Revenue 
        Code of 1986 to any qualified forest conservation bond, 
        the following modifications shall apply:
                  (A) Section 146 of such Code (relating to 
                volume cap) shall not apply.
                  (B) For purposes of section 147(b) of such 
                Code (relating to maturity may not exceed 120 
                percent of economic life), the land and 
                standing timber acquired with proceeds of 
                qualified forest conservation bonds shall have 
                an economic life of 35 years.
                  (C) Subsections (c) and (d) of section 147 of 
                such Code (relating to limitations on 
                acquisition of land and existing property) 
                shall not apply.
                  (D) Section 57(a)(5) of such Code (relating 
                to tax-exempt interest) shall not apply to 
                interest on qualified forest conservation 
                bonds.
          (6) Treatment of current refunding bonds.--Paragraphs 
        (2)(C) and (3) shall not apply to any bond (or series 
        of bonds) issued to refund a qualified forest 
        conservation bond issued before December 31, 2006, if--
                  (A) the average maturity date of the issue of 
                which the refunding bond is a part is not later 
                than the average maturity date of the bonds to 
                be refunded by such issue,
                  (B) the amount of the refunding bond does not 
                exceed the outstanding amount of the refunded 
                bond, and
                  (C) the net proceeds of the refunding bond 
                are used to redeem the refunded bond not later 
                than 90 days after the date of the issuance of 
                the refunding bond.
        For purposes of subparagraph (A), average maturity 
        shall be determined in accordance with section 
        147(b)(2)(A) of such Code.
          (7) Effective date.--This subsection shall apply to 
        obligations issued on or after the date of enactment of 
        this Act.
  (b) Items From Qualified Harvesting Activities Not Subject to 
Tax or Taken Into Account.--
          (1) In general.--Income, gains, deductions, losses, 
        or credits from a qualified harvesting activity 
        conducted by a qualified organization shall not be 
        subject to tax or taken into account under subtitle A 
        of the Internal Revenue Code of 1986.
          (2) Limitation.--The amount of income excluded from 
        gross income under paragraph (1) for any taxable year 
        shall not exceed the amount used by the qualified 
        organization to make debt service payments during such 
        taxable year for qualified forest conservation bonds.
          (3) Qualified harvesting activity.--For purposes of 
        paragraph (1)--
                  (A) In general.--The term ``qualified 
                harvesting activity'' means the sale, lease, or 
                harvesting, of standing timber--
                          (i) on land owned by a qualified 
                        organization which was acquired with 
                        proceeds of qualified forest 
                        conservation bonds, and
                          (ii) pursuant to a qualified 
                        conservation plan adopted by the 
                        qualified organization.
                  (B) Exceptions.--
                          (i) Cessation as qualified 
                        organization.--The term ``qualified 
                        harvesting activity'' shall not include 
                        any sale, lease, or harvesting for any 
                        period during which the organization 
                        ceases to qualify as a qualified 
                        organization.
                          (ii) Exceeding limits on 
                        harvesting.--The term ``qualified 
                        harvesting activity'' shall not include 
                        any sale, lease, or harvesting of 
                        standing timber on land acquired with 
                        proceeds of qualified forest 
                        conservation bonds to the extent that--
                                  (I) the average annual area 
                                of timber harvested from such 
                                land exceeds 2.5 percent of the 
                                total area of such land, or
                                  (II) the quantity of timber 
                                removed from such land exceeds 
                                the quantity which can be 
                                removed from such land annually 
                                in perpetuity on a sustained-
                                yield basis with respect to 
                                such land.
                        The limitations under subclauses (I) 
                        and (II) shall not apply to post-fire 
                        restoration and rehabilitation or 
                        sanitation harvesting of timber stands 
                        which are substantially damaged by 
                        fire, windthrow, or other catastrophes, 
                        or which are in imminent danger from 
                        insect or disease attack.
          (4) Termination.--This subsection shall not apply to 
        any qualified harvesting activity occurring after the 
        date on which there is no outstanding qualified forest 
        conservation bond or any such bond ceases to be a tax-
        exempt bond.
          (5) Partial recapture of benefits if harvesting limit 
        exceeded.--If, as of the date that this subsection 
        ceases to apply under paragraph (4), the average annual 
        area of timber harvested from the land exceeds the 
        requirement of paragraph (3)(B)(ii)(I), the tax imposed 
        by chapter 1 of such Code shall be increased, under 
        rules prescribed by the Secretary of the Treasury, by 
        the sum of the tax benefits attributable to such excess 
        and interest at the underpayment rate under section 
        6621 of such Code for the period of the underpayment.
  (c) Definitions.--For purposes of this section--
          (1) Qualified conservation plan.--The term 
        ``qualified conservation plan'' means a multiple land 
        use program or plan which--
                  (A) is designed and administered primarily 
                for the purposes of protecting and enhancing 
                wildlife and fish, timber, scenic attributes, 
                recreation, and soil and water quality of the 
                forest and forest land,
                  (B) mandates that conservation of forest and 
                forest land is the single-most significant use 
                of the forest and forest land, and
                  (C) requires that timber harvesting be 
                consistent with--
                          (i) restoring and maintaining 
                        reference conditions for the region's 
                        ecotype,
                          (ii) restoring and maintaining a 
                        representative sample of young, mid, 
                        and late successional forest age 
                        classes,
                          (iii) maintaining or restoring the 
                        resources' ecological health for 
                        purposes of preventing damage from 
                        fire, insect, or disease,
                          (iv) maintaining or enhancing 
                        wildlife or fish habitat, or
                          (v) enhancing research opportunities 
                        in sustainable renewable resource uses.
          (2) Conservation restriction.--The conservation 
        restriction described in this paragraph is a 
        restriction which--
                  (A) is granted in perpetuity to an unrelated 
                person which is described in section 170(h)(3) 
                of such Code and which, in the case of a 
                nongovernmental unit, is organized and operated 
                for conservation purposes,
                  (B) meets the requirements of clause (ii) or 
                (iii)(II) of section 170(h)(4)(A) of such Code,
                  (C) obligates the qualified organization to 
                pay the costs incurred by the holder of the 
                conservation restriction in monitoring 
                compliance with such restriction, and
                  (D) requires an increasing level of 
                conservation benefits to be provided whenever 
                circumstances allow it.
          (3) Qualified organization.--The term ``qualified 
        organization'' means an organization--
                  (A) which is a nonprofit organization 
                substantially all the activities of which are 
                charitable, scientific, or educational, 
                including acquiring, protecting, restoring, 
                managing, and developing forest lands and other 
                renewable resources for the long-term 
                charitable, educational, scientific and public 
                benefit,
                  (B) more than half of the value of the 
                property of which consists of forests and 
                forest land acquired with the proceeds from 
                qualified forest conservation bonds,
                  (C) which periodically conducts educational 
                programs designed to inform the public of 
                environmentally sensitive forestry management 
                and conservation techniques,
                  (D) which has at all times a board of 
                directors--
                          (i) at least 20 percent of the 
                        members of which represent the holders 
                        of the conservation restriction 
                        described in paragraph (2),
                          (ii) at least 20 percent of the 
                        members of which are public officials, 
                        and
                          (iii) not more than one-third of the 
                        members of which are individuals who 
                        are or were at any time within 5 years 
                        before the beginning of a term of 
                        membership on the board, an employee 
                        of, independent contractor with respect 
                        to, officer of, director of, or held a 
                        material financial interest in, a 
                        commercial forest products enterprise 
                        with which the qualified organization 
                        has a contractual or other financial 
                        arrangement,
                  (E) the bylaws of which require at least two-
                thirds of the members of the board of directors 
                to vote affirmatively to approve the qualified 
                conservation plan and any change thereto, and
                  (F) upon dissolution, is required to dedicate 
                its assets to--
                          (i) an organization described in 
                        section 501(c)(3) of such Code which is 
                        organized and operated for conservation 
                        purposes, or
                          (ii) a governmental unit described in 
                        section 170(c)(1) of such Code.
          (4) Unrelated person.--The term ``unrelated person'' 
        means a person who is not a related person.
          (5) Related person.--A person shall be treated as 
        related to another person if--
                  (A) such person bears a relationship to such 
                other person described in section 267(b) 
                (determined without regard to paragraph (9) 
                thereof), or 707(b)(1), of such Code, 
                determined by substituting ``25 percent'' for 
                ``50 percent'' each place it appears therein, 
                and
                  (B) in the case such other person is a 
                nonprofit organization, if such person controls 
                directly or indirectly more than 25 percent of 
                the governing body of such organization.
  (d) Report.--
          (1) In general.--The Comptroller General of the 
        United States shall conduct a study on the pilot 
        project for forest conservation activities under this 
        section. Such study shall examine the extent to which 
        forests and forest lands were managed during the 5-year 
        period beginning on the date of the enactment of this 
        Act to achieve the goals of such project.
          (2) Submission of report to congress.--Not later than 
        six years after the date of the enactment of this Act, 
        the Comptroller General shall submit a report of such 
        study to the Committee on Ways and Means and the 
        Committee on Resources of the House of Representatives 
        and the Committee on Finance and the Committee on 
        Energy and Natural Resources of the Senate.

                      TITLE III--OTHER PROVISIONS

SEC. 301. COMPASSION CAPITAL FUND.

  Title IV of the Social Security Act (42 U.S.C. 601-679b) is 
amended by adding at the end the following:

                   ``PART F--COMPASSION CAPITAL FUND

``SEC. 481. SECRETARY'S FUND TO SUPPORT AND REPLICATE PROMISING SOCIAL 
                    SERVICE PROGRAMS.

  ``(a) Grant Authority.--
          ``(1) In general.--The Secretary may make grants to 
        support any private entity that operates a promising 
        social services program.
          ``(2) Applications.--An entity desiring to receive a 
        grant under paragraph (1) shall submit to the Secretary 
        an application for the grant, which shall contain such 
        information as the Secretary may require.
  ``(b) Contract Authority, Etc.--The Secretary may enter into 
a grant, contract, or cooperative agreement with any entity 
under which the entity would provide technical assistance to 
another entity to operate a social service program that assists 
persons and families in need, including by--
          ``(1) providing the other entity with--
                  ``(A) technical assistance and information, 
                including legal assistance and other business 
                assistance;
                  ``(B) information on capacity-building;
                  ``(C) information and assistance in 
                identifying and using best practices for 
                serving persons and families in need; or
                  ``(D) assistance in replicating programs with 
                demonstrated effectiveness in assisting persons 
                and families in need; or
          ``(2) supporting research on the best practices of 
        social service organizations.
  ``(c) Guidance and Technical Assistance.--The Secretary may 
use not more than 25 percent of the amount appropriated under 
this section for a fiscal year to provide guidance and 
technical assistance to States and political subdivisions of 
States with respect to the implementation of any social service 
program.
  ``(d) Social Services Program Defined.--In this section, the 
term `social services program' means a program that provides 
benefits or services of any kind to persons and families in 
need.
  ``(e) Limitations on Authorization of Appropriations.--To 
carry out this section, there are authorized to be appropriated 
to the Secretary $150,000,000 for fiscal year 2004, and such 
sums as may be necessary for fiscal years 2005 through 2008.''.

SEC. 302. REAUTHORIZATION OF ASSETS FOR INDEPENDENCE DEMONSTRATION.

  (a) In General.--Section 416 of the Assets for Independence 
Act (title IV of Public Law 105-285; 42 U.S.C. 604 note) is 
amended by striking ``and 2003'' and inserting ``2003, 2004, 
2005, 2006, 2007, and 2008''.
  (b) Removal of Economic Literacy Activities From Limitation 
on Use of Amounts in the Reserve Fund.--Section 407(c)(3) of 
such Act (title IV of Public Law 105-285; 42 U.S.C. 604 note) 
is amended by adding at the end the following: ``The preceding 
sentences of this paragraph shall not apply to amounts used by 
an entity for any activity described in paragraph (1)(A).''.
  (c) Eligibility Expanded to Include Individuals In Households 
With Income Not Exceeding 50 Percent of Area Median Income.--
Section 408(a)(1) of such Act (title IV of Public Law 105-285; 
42 U.S.C. 604 note) is amended to read as follows:
          ``(1) Income test.--The adjusted gross income of the 
        household--
                  ``(A) does not exceed 200 percent of the 
                poverty line (as determined by the Office of 
                Management and Budget) or the earned income 
                amount described in section 32 of the Internal 
                Revenue Code of 1986 (taking into account the 
                size of the household); or
                  ``(B) does not exceed 50 percent of the area 
                median income (as determined by the Secretary 
                of Housing and Urban Development) for the area 
                in which the household is located.''.
  (d) Extension of Time for Account Holders to Access Federal 
Funds.--Section 407(d) of such Act (title IV of Public Law 105-
285; 42 U.S.C. 604 note) is amended--
          (1) in the subsection heading, by striking ``When 
        Project Terminates''; and
          (2) by striking ``upon'' and inserting ``on the date 
        that is 6 months after''.
  (e) Verification of Postsecondary Education Expenses.--
Section 404(8)(A) of such Act (title IV of Public Law 105-285; 
42 U.S.C. 604 note) is amended in the 1st sentence by inserting 
``or a vendor, but only to the extent that the expenses are 
described in a document which explains the educational items to 
be purchased, and the document and the expenses are approved by 
the qualified entity'' before the period.
  (f) Authority to Use Excess Interest to Fund Other Individual 
Development Accounts.--Section 410 of such Act (title IV of 
Public Law 105-285; 42 U.S.C. 604 note) is amended--
          (1) in subsection (a)(3)--
                  (A) by striking ``any interest that has 
                accrued'' and inserting ``interest that has 
                accrued during that period''; and
                  (B) by striking the period and inserting ``, 
                but only to the extent that the amount of the 
                interest does not exceed the amount of interest 
                that has accrued during that period on amounts 
                deposited in the account by that individual.''; 
                and
          (2) by adding at the end the following:
  ``(f) Use of Excess Interest to Fund Other Individual 
Development Accounts.--To the extent that a qualified entity 
has an amount that, but for the limitation in subsection 
(a)(3), would be required by that subsection to be deposited 
into the individual development account of an individual or 
into a parallel account maintained by the qualified entity, the 
qualified entity may deposit the amount into the individual 
development account of any individual or into any such parallel 
account maintained by the qualified entity.''.

SEC. 303. SENSE OF THE CONGRESS REGARDING CORPORATE CONTRIBUTIONS TO 
                    FAITH-BASED ORGANIZATIONS, ETC.

  (a) Findings.--The Congress finds as follows:
          (1) America's community of faith has long played a 
        leading role in dealing with difficult societal 
        problems that might otherwise have gone unaddressed.
          (2) President Bush has called upon Americans ``to 
        revive the spirit of citizenship . . . to marshal the 
        compassion of our people to meet the continuing needs 
        of our Nation''.
          (3) Although the work of faith-based organizations 
        should not be used by government as an excuse for 
        backing away from its historic and rightful commitment 
        to help those who are disadvantaged and in need, such 
        organizations can and should be seen as a valuable 
        partner with government in meeting societal challenges.
          (4) Every day faith-based organizations in the United 
        States help people recover from drug and alcohol 
        addiction, provide food and shelter for the homeless, 
        rehabilitate prison inmates so that they can break free 
        from the cycle of recidivism, and teach people job 
        skills that will allow them to move from poverty to 
        productivity.
          (5) Faith-based organizations are often more 
        successful in dealing with difficult societal problems 
        than government and non-sectarian organizations.
          (6) As President Bush has stated, ``It is not 
        sufficient to praise charities and community groups; we 
        must support them. And this is both a public obligation 
        and a personal responsibility.''.
          (7) Corporate foundations contribute billions of 
        dollars each year to a variety of philanthropic causes.
          (8) According to a study produced by the Capital 
        Research Center, the 10 largest corporate foundations 
        in the United States contributed $1,900,000,000 to such 
        causes.
          (9) According to the same study, faith-based 
        organizations only receive a small fraction of the 
        contributions made by corporations in the United 
        States, and 6 of the 10 corporations that give the most 
        to philanthropic causes explicitly ban or restrict 
        contributions to faith-based organizations.
  (b) Corporations Encouraged To Contribute to Faith-Based 
Organizations.--The Congress calls on corporations in the 
United States, in the words of the President, ``to give more 
and to give better'' by making greater contributions to faith-
based organizations that are on the front lines battling some 
of the great societal challenges of our day.
  (c) Sense of the Congress.--It is the sense of Congress 
that--
          (1) corporations in the United States are important 
        partners with government in efforts to overcome 
        difficult societal problems; and
          (2) no corporation in the United States should adopt 
        policies that prohibit the corporation from 
        contributing to an organization that is successfully 
        advancing a philanthropic cause merely because such 
        organization is faith based.

                 TITLE IV--SOCIAL SERVICES BLOCK GRANT

SEC. 401. RESTORATION OF FUNDS FOR THE SOCIAL SERVICES BLOCK GRANT.

  (a) Findings.--Congress makes the following findings:
          (1) On August 22, 1996, the Personal Responsibility 
        and Work Opportunity Reconciliation Act of 1996 (Public 
        Law 104-193; 110 Stat. 2105) was signed into law.
          (2) In enacting that law, Congress authorized 
        $2,800,000,000 for fiscal year 2003 and each fiscal 
        year thereafter to carry out the Social Services Block 
        Grant program established under title XX of the Social 
        Security Act (42 U.S.C. 1397 et seq.).
  (b) Restoration of Funds.--Section 2003(c)(11) of the Social 
Security Act (42 U.S.C. 1397b(c)(11)) is amended by inserting 
``, except that, with respect to fiscal year 2004, the amount 
shall be $2,800,000,000'' after ``thereafter''.

SEC. 402. RESTORATION OF AUTHORITY TO TRANSFER UP TO 10 PERCENT OF TANF 
                    FUNDS TO THE SOCIAL SERVICES BLOCK GRANT.

  (a) In General.--Section 404(d)(2) of the Social Security Act 
(42 U.S.C. 604(d)(2)) is amended to read as follows:
          ``(2) Limitation on amount transferable to title xx 
        programs.--A State may use not more than 10 percent of 
        the amount of any grant made to the State under section 
        403(a) for a fiscal year to carry out State programs 
        pursuant to title XX.''.
  (b) Effective Date.--The amendment made by subsection (a) 
applies to amounts made available for fiscal year 2004 and each 
fiscal year thereafter.

SEC. 403. REQUIREMENT TO SUBMIT ANNUAL REPORT ON STATE ACTIVITIES.

  (a) In General.--Section 2006(c) of the Social Security Act 
(42 U.S.C. 1397e(c)) is amended by adding at the end the 
following:
``The Secretary shall compile the information submitted by the 
States and submit that information to Congress on an annual 
basis.''.
  (b) Effective Date.--The amendment made by subsection (a) 
applies to information submitted by States under section 2006 
of the Social Security Act (42 U.S.C. 1397e) with respect to 
fiscal year 2004 and each fiscal year thereafter.

                     TITLE V--ABUSIVE TAX SHELTERS

SEC. 501. SHORT TITLE.

  This title may be cited as the ``Abusive Tax Shelter Shutdown 
and Taxpayer Accountability Act of 2003''.

SEC. 502. FINDINGS AND PURPOSE.

  (a) Findings.--The Congress hereby finds that:
          (1) Many corporate tax shelter transactions are 
        complicated ways of accomplishing nothing aside from 
        claimed tax benefits, and the legal opinions justifying 
        those transactions take an inappropriately narrow and 
        restrictive view of well-developed court doctrines 
        under which--
                  (A) the taxation of a transaction is 
                determined in accordance with its substance and 
                not merely its form,
                  (B) transactions which have no significant 
                effect on the taxpayer's economic or beneficial 
                interests except for tax benefits are treated 
                as sham transactions and disregarded,
                  (C) transactions involving multiple steps are 
                collapsed when those steps have no substantial 
                economic meaning and are merely designed to 
                create tax benefits,
                  (D) transactions with no business purpose are 
                not given effect, and
                  (E) in the absence of a specific 
                congressional authorization, it is presumed 
                that Congress did not intend a transaction to 
                result in a negative tax where the taxpayer's 
                economic position or rate of return is better 
                after tax than before tax.
          (2) Permitting aggressive and abusive tax shelters 
        not only results in large revenue losses but also 
        undermines voluntary compliance with the Internal 
        Revenue Code of 1986.
  (b) Purpose.--The purpose of this title is to eliminate 
abusive tax shelters by denying tax attributes claimed to arise 
from transactions that do not meet a heightened economic 
substance requirement and by repealing the provision that 
permits legal opinions to be used to avoid penalties on tax 
underpayments resulting from transactions without significant 
economic substance or business purpose.

        Subtitle A--Provisions Designed to Curtail Tax Shelters

SEC. 511. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

  (a) In General.--Section 7701 is amended by redesignating 
subsection (m) as subsection (n) and by inserting after 
subsection (l) the following new subsection:
  ``(m) Clarification of Economic Substance Doctrine; Etc.--
          ``(1) General rules.--
                  ``(A) In general.--In applying the economic 
                substance doctrine, the determination of 
                whether a transaction has economic substance 
                shall be made as provided in this paragraph.
                  ``(B) Definition of economic substance.--For 
                purposes of subparagraph (A)--
                          ``(i) In general.--A transaction has 
                        economic substance only if--
                                  ``(I) the transaction changes 
                                in a meaningful way (apart from 
                                Federal tax effects and, if 
                                there are any Federal tax 
                                effects, also apart from any 
                                foreign, State, or local tax 
                                effects) the taxpayer's 
                                economic position, and
                                  ``(II) the taxpayer has a 
                                substantial nontax purpose for 
                                entering into such transaction 
                                and the transaction is a 
                                reasonable means of 
                                accomplishing such purpose.
                          ``(ii) Special rule where taxpayer 
                        relies on profit potential.--A 
                        transaction shall not be treated as 
                        having economic substance by reason of 
                        having a potential for profit unless--
                                  ``(I) the present value of 
                                the reasonably expected pre-tax 
                                profit from the transaction is 
                                substantial in relation to the 
                                present value of the expected 
                                net tax benefits that would be 
                                allowed if the transaction were 
                                respected, and
                                  ``(II) the reasonably 
                                expected pre-tax profit from 
                                the transaction exceeds a risk-
                                free rate of return.
                  ``(C) Treatment of fees and foreign taxes.--
                Fees and other transaction expenses and foreign 
                taxes shall be taken into account as expenses 
                in determining pre-tax profit under 
                subparagraph (B)(ii).
          ``(2) Special rules for transactions with tax-
        indifferent parties.--
                  ``(A) Special rules for financing 
                transactions.--The form of a transaction which 
                is in substance the borrowing of money or the 
                acquisition of financial capital directly or 
                indirectly from a tax-indifferent party shall 
                not be respected if the present value of the 
                deductions to be claimed with respect to the 
                transaction is substantially in excess of the 
                present value of the anticipated economic 
                returns of the person lending the money or 
                providing the financial capital. A public 
                offering shall be treated as a borrowing, or an 
                acquisition of financial capital, from a tax-
                indifferent party if it is reasonably expected 
                that at least 50 percent of the offering will 
                be placed with tax-indifferent parties.
                  ``(B) Artificial income shifting and basis 
                adjustments.--The form of a transaction with a 
                tax-indifferent party shall not be respected 
                if--
                          ``(i) it results in an allocation of 
                        income or gain to the tax-indifferent 
                        party in excess of such party's 
                        economic income or gain, or
                          ``(ii) it results in a basis 
                        adjustment or shifting of basis on 
                        account of overstating the income or 
                        gain of the tax-indifferent party.
          ``(3) Definitions and special rules.--For purposes of 
        this subsection--
                  ``(A) Economic substance doctrine.--The term 
                `economic substance doctrine' means the common 
                law doctrine under which tax benefits under 
                subtitle A with respect to a transaction are 
                not allowable if the transaction does not have 
                economic substance or lacks a business purpose.
                  ``(B) Tax-indifferent party.--The term `tax-
                indifferent party' means any person or entity 
                not subject to tax imposed by subtitle A. A 
                person shall be treated as a tax-indifferent 
                party with respect to a transaction if the 
                items taken into account with respect to the 
                transaction have no substantial impact on such 
                person's liability under subtitle A.
                  ``(C) Substantial nontax purpose.--In 
                applying subclause (II) of paragraph (1)(B)(i), 
                a purpose of achieving a financial accounting 
                benefit shall not be taken into account in 
                determining whether a transaction has a 
                substantial nontax purpose if the origin of 
                such financial accounting benefit is a 
                reduction of income tax.
                  ``(D) Exception for personal transactions of 
                individuals.--In the case of an individual, 
                this subsection shall apply only to 
                transactions entered into in connection with a 
                trade or business or an activity engaged in for 
                the production of income.
                  ``(E) Treatment of lessors.--In applying 
                subclause (I) of paragraph (1)(B)(ii) to the 
                lessor of tangible property subject to a lease, 
                the expected net tax benefits shall not include 
                the benefits of depreciation, or any tax 
                credit, with respect to the leased property and 
                subclause (II) of paragraph (1)(B)(ii) shall be 
                disregarded in determining whether any of such 
                benefits are allowable.
          ``(4) Other common law doctrines not affected.--
        Except as specifically provided in this subsection, the 
        provisions of this subsection shall not be construed as 
        altering or supplanting any other rule of law, and the 
        requirements of this subsection shall be construed as 
        being in addition to any such other rule of law.
          ``(5) Regulations.--The Secretary shall prescribe 
        such regulations as may be necessary or appropriate to 
        carry out the purposes of this subsection. Such 
        regulations may include exemptions from the application 
        of this subsection.''
  (b) Effective Date.--The amendments made by this section 
shall apply to transactions entered into after February 13, 
2003.

SEC. 512. PENALTY FOR FAILING TO DISCLOSE REPORTABLE TRANSACTION.

  (a) In General.--Part I of subchapter B of chapter 68 
(relating to assessable penalties) is amended by inserting 
after section 6707 the following new section:

``SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORTABLE TRANSACTION 
                    INFORMATION WITH RETURN OR STATEMENT.

  ``(a) Imposition of Penalty.--Any person who fails to include 
on any return or statement any information with respect to a 
reportable transaction which is required under section 6011 to 
be included with such return or statement shall pay a penalty 
in the amount determined under subsection (b).
  ``(b) Amount of Penalty.--
          ``(1) In general.--Except as provided in paragraphs 
        (2) and (3), the amount of the penalty under subsection 
        (a) shall be $50,000.
          ``(2) Listed transaction.--The amount of the penalty 
        under subsection (a) with respect to a listed 
        transaction shall be $100,000.
          ``(3) Increase in penalty for large entities and high 
        net worth individuals.--
                  ``(A) In general.--In the case of a failure 
                under subsection (a) by--
                          ``(i) a large entity, or
                          ``(ii) a high net worth individual,
                the penalty under paragraph (1) or (2) shall be 
                twice the amount determined without regard to 
                this paragraph.
                  ``(B) Large entity.--For purposes of 
                subparagraph (A), the term `large entity' 
                means, with respect to any taxable year, a 
                person (other than a natural person) with gross 
                receipts in excess of $10,000,000 for the 
                taxable year in which the reportable 
                transaction occurs or the preceding taxable 
                year. Rules similar to the rules of paragraph 
                (2) and subparagraphs (B), (C), and (D) of 
                paragraph (3) of section 448(c) shall apply for 
                purposes of this subparagraph.
                  ``(C) High net worth individual.--For 
                purposes of subparagraph (A), the term `high 
                net worth individual' means, with respect to a 
                reportable transaction, a natural person whose 
                net worth exceeds $2,000,000 immediately before 
                the transaction.
  ``(c) Definitions.--For purposes of this section--
          ``(1) Reportable transaction.--The term `reportable 
        transaction' means any transaction with respect to 
        which information is required to be included with a 
        return or statement because, as determined under 
        regulations prescribed under section 6011, such 
        transaction is of a type which the Secretary determines 
        as having a potential for tax avoidance or evasion.
          ``(2) Listed transaction.--Except as provided in 
        regulations, the term `listed transaction' means a 
        reportable transaction which is the same as, or 
        substantially similar to, a transaction specifically 
        identified by the Secretary as a tax avoidance 
        transaction for purposes of section 6011.
  ``(d) Authority To Rescind Penalty.--
          ``(1) In general.--The Commissioner of Internal 
        Revenue may rescind all or any portion of any penalty 
        imposed by this section with respect to any violation 
        if--
                  ``(A) the violation is with respect to a 
                reportable transaction other than a listed 
                transaction,
                  ``(B) the person on whom the penalty is 
                imposed has a history of complying with the 
                requirements of this title,
                  ``(C) it is shown that the violation is due 
                to an unintentional mistake of fact;
                  ``(D) imposing the penalty would be against 
                equity and good conscience, and
                  ``(E) rescinding the penalty would promote 
                compliance with the requirements of this title 
                and effective tax administration.
          ``(2) Discretion.--The exercise of authority under 
        paragraph (1) shall be at the sole discretion of the 
        Commissioner and may be delegated only to the head of 
        the Office of Tax Shelter Analysis. The Commissioner, 
        in the Commissioner's sole discretion, may establish a 
        procedure to determine if a penalty should be referred 
        to the Commissioner or the head of such Office for a 
        determination under paragraph (1).
          ``(3) No appeal.--Notwithstanding any other provision 
        of law, any determination under this subsection may not 
        be reviewed in any administrative or judicial 
        proceeding.
          ``(4) Records.--If a penalty is rescinded under 
        paragraph (1), the Commissioner shall place in the file 
        in the Office of the Commissioner the opinion of the 
        Commissioner or the head of the Office of Tax Shelter 
        Analysis with respect to the determination, including--
                  ``(A) the facts and circumstances of the 
                transaction,
                  ``(B) the reasons for the rescission, and
                  ``(C) the amount of the penalty rescinded.
          ``(5) Report.--The Commissioner shall each year 
        report to the Committee on Ways and Means of the House 
        of Representatives and the Committee on Finance of the 
        Senate--
                  ``(A) a summary of the total number and 
                aggregate amount of penalties imposed, and 
                rescinded, under this section, and
                  ``(B) a description of each penalty rescinded 
                under this subsection and the reasons therefor.
  ``(e) Penalty Reported to SEC.--In the case of a person--
          ``(1) which is required to file periodic reports 
        under section 13 or 15(d) of the Securities Exchange 
        Act of 1934 or is required to be consolidated with 
        another person for purposes of such reports, and
          ``(2) which--
                  ``(A) is required to pay a penalty under this 
                section with respect to a listed transaction,
                  ``(B) is required to pay a penalty under 
                section 6662A with respect to any reportable 
                transaction at a rate prescribed under section 
                6662A(c), or
                  ``(C) is required to pay a penalty under 
                section 6662B with respect to any noneconomic 
                substance transaction,
the requirement to pay such penalty shall be disclosed in such 
reports filed by such person for such periods as the Secretary 
shall specify. Failure to make a disclosure in accordance with 
the preceding sentence shall be treated as a failure to which 
the penalty under subsection (b)(2) applies.
  ``(f) Coordination With Other Penalties.--The penalty imposed 
by this section is in addition to any penalty imposed under 
this title.''.
  (b) Conforming Amendment.--The table of sections for part I 
of subchapter B of chapter 68 is amended by inserting after the 
item relating to section 6707 the following:

        ``Sec. 6707A. Penalty for failure to include reportable 
                  transaction information with return or statement.''.

  (c) Effective Date.--The amendments made by this section 
shall apply to returns and statements the due date for which is 
after the date of the enactment of this Act.

SEC. 513. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS AND OTHER 
                    REPORTABLE TRANSACTIONS HAVING A SIGNIFICANT TAX 
                    AVOIDANCE PURPOSE.

  (a) In General.--Subchapter A of chapter 68 is amended by 
inserting after section 6662 the following new section:

``SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERSTATEMENTS 
                    WITH RESPECT TO REPORTABLE TRANSACTIONS.

  ``(a) Imposition of Penalty.--If a taxpayer has a reportable 
transaction understatement for any taxable year, there shall be 
added to the tax an amount equal to 20 percent of the amount of 
such understatement.
  ``(b) Reportable Transaction Understatement.--For purposes of 
this section--
          ``(1) In general.--The term `reportable transaction 
        understatement' means the sum of--
                  ``(A) the product of--
                          ``(i) the amount of the increase (if 
                        any) in taxable income which results 
                        from a difference between the proper 
                        tax treatment of an item to which this 
                        section applies and the taxpayer's 
                        treatment of such item (as shown on the 
                        taxpayer's return of tax), and
                          ``(ii) the highest rate of tax 
                        imposed by section 1 (section 11 in the 
                        case of a taxpayer which is a 
                        corporation), and
                  ``(B) the amount of the decrease (if any) in 
                the aggregate amount of credits determined 
                under subtitle A which results from a 
                difference between the taxpayer's treatment of 
                an item to which this section applies (as shown 
                on the taxpayer's return of tax) and the proper 
                tax treatment of such item.
        For purposes of subparagraph (A), any reduction of 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.
          ``(2) Items to which section applies.--This section 
        shall apply to any item which is attributable to--
                  ``(A) any listed transaction, and
                  ``(B) any reportable transaction (other than 
                a listed transaction) if a significant purpose 
                of such transaction is the avoidance or evasion 
                of Federal income tax.
  ``(c) Higher Penalty for Nondisclosed Listed and Other 
Avoidance Transactions.--
          ``(1) In general.--Subsection (a) shall be applied by 
        substituting `30 percent' for `20 percent' with respect 
        to the portion of any reportable transaction 
        understatement with respect to which the requirement of 
        section 6664(d)(2)(A) is not met.
          ``(2) Rules applicable to compromise of penalty.--
                  ``(A) In general.--If the 1st letter of 
                proposed deficiency which allows the taxpayer 
                an opportunity for administrative review in the 
                Internal Revenue Service Office of Appeals has 
                been sent with respect to a penalty to which 
                paragraph (1) applies, only the Commissioner of 
                Internal Revenue may compromise all or any 
                portion of such penalty.
                  ``(B) Applicable rules.--The rules of 
                paragraphs (3), (4), and (5) of section 
                6707A(d) shall apply for purposes of 
                subparagraph (A).
  ``(d) Definitions of Reportable and Listed Transactions.--For 
purposes of this section, the terms `reportable transaction' 
and `listed transaction' have the respective meanings given to 
such terms by section 6707A(c).
  ``(e) Special Rules.--
          ``(1) Coordination with penalties, etc., on other 
        understatements.--In the case of an understatement (as 
        defined in section 6662(d)(2))--
                  ``(A) the amount of such understatement 
                (determined without regard to this paragraph) 
                shall be increased by the aggregate amount of 
                reportable transaction understatements and 
                noneconomic substance transaction 
                understatements for purposes of determining 
                whether such understatement is a substantial 
                understatement under section 6662(d)(1), and
                  ``(B) the addition to tax under section 
                6662(a) shall apply only to the excess of the 
                amount of the substantial understatement (if 
                any) after the application of subparagraph (A) 
                over the aggregate amount of reportable 
                transaction understatements and noneconomic 
                substance transaction understatements.
          ``(2) Coordination with other penalties.--
                  ``(A) Application of fraud penalty.--
                References to an underpayment in section 6663 
                shall be treated as including references to a 
                reportable transaction understatement and a 
                noneconomic substance transaction 
                understatement.
                  ``(B) No double penalty.--This section shall 
                not apply to any portion of an understatement 
                on which a penalty is imposed under section 
                6662B or 6663.
          ``(3) Special rule for amended returns.--Except as 
        provided in regulations, in no event shall any tax 
        treatment included with an amendment or supplement to a 
        return of tax be taken into account in determining the 
        amount of any reportable transaction understatement or 
        noneconomic substance transaction understatement if the 
        amendment or supplement is filed after the earlier of 
        the date the taxpayer is first contacted by the 
        Secretary regarding the examination of the return or 
        such other date as is specified by the Secretary.
                  ``(4) Noneconomic substance transaction 
                understatement.--For purposes of this 
                subsection, the term `noneconomic substance 
                transaction understatement' has the meaning 
                given such term by section 6662B(c).
                  ``(5) Cross reference.--

          ``For reporting of section 6662A(c) penalty to the Securities 
        and Exchange Commission, see section 6707A(e).''

  (b) Determination of Other Understatements.--Subparagraph (A) 
of section 6662(d)(2) is amended by adding at the end the 
following flush sentence:
                ``The excess under the preceding sentence shall 
                be determined without regard to items to which 
                section 6662A applies and without regard to 
                items with respect to which a penalty is 
                imposed by section 6662B.''
(c) Reasonable Cause Exception.--
          (1) In general.--Section 6664 is amended by adding at 
        the end the following new subsection:
  ``(d) Reasonable Cause Exception for Reportable Transaction 
Understatements.--
          ``(1) In general.--No penalty shall be imposed under 
        section 6662A with respect to any portion of a 
        reportable transaction understatement if it is shown 
        that there was a reasonable cause for such portion and 
        that the taxpayer acted in good faith with respect to 
        such portion.
          ``(2) Special rules.--Paragraph (1) shall not apply 
        to any reportable transaction understatement unless--
                  ``(A) the relevant facts affecting the tax 
                treatment of the item are adequately disclosed 
                in accordance with the regulations prescribed 
                under section 6011,
                  ``(B) there is or was substantial authority 
                for such treatment, and
                  ``(C) the taxpayer reasonably believed that 
                such treatment was more likely than not the 
                proper treatment.
        A taxpayer failing to adequately disclose in accordance 
        with section 6011 shall be treated as meeting the 
        requirements of subparagraph (A) if the penalty for 
        such failure was rescinded under section 6707A(d).
          ``(3) Rules relating to reasonable belief.--For 
        purposes of paragraph (2)(C)--
                  ``(A) In general.--A taxpayer shall be 
                treated as having a reasonable belief with 
                respect to the tax treatment of an item only if 
                such belief--
                          ``(i) is based on the facts and law 
                        that exist at the time the return of 
                        tax which includes such tax treatment 
                        is filed, and
                          ``(ii) relates solely to the 
                        taxpayer's chances of success on the 
                        merits of such treatment and does not 
                        take into account the possibility that 
                        a return will not be audited, such 
                        treatment will not be raised on audit, 
                        or such treatment will be resolved 
                        through settlement if it is raised.
                  ``(B) Certain opinions may not be relied 
                upon.--
                          ``(i) In general.--An opinion of a 
                        tax advisor may not be relied upon to 
                        establish the reasonable belief of a 
                        taxpayer if--
                                  ``(I) the tax advisor is 
                                described in clause (ii), or
                                  ``(II) the opinion is 
                                described in clause (iii).
                          ``(ii) Disqualified tax advisors.--A 
                        tax advisor is described in this clause 
                        if the tax advisor--
                                  ``(I) is a material advisor 
                                (within the meaning of section 
                                6111(b)(1)) who participates in 
                                the organization, management, 
                                promotion, or sale of the 
                                transaction or who is related 
                                (within the meaning of section 
                                267(b) or 707(b)(1)) to any 
                                person who so participates,
                                  ``(II) is compensated 
                                directly or indirectly by a 
                                material advisor with respect 
                                to the transaction,
                                  ``(III) has a fee arrangement 
                                with respect to the transaction 
                                which is contingent on all or 
                                part of the intended tax 
                                benefits from the transaction 
                                being sustained, or
                                  ``(IV) as determined under 
                                regulations prescribed by the 
                                Secretary, has a continuing 
                                financial interest with respect 
                                to the transaction.
                          ``(iii) Disqualified opinions.--For 
                        purposes of clause (i), an opinion is 
                        disqualified if the opinion--
                                  ``(I) is based on 
                                unreasonable factual or legal 
                                assumptions (including 
                                assumptions as to future 
                                events),
                                  ``(II) unreasonably relies on 
                                representations, statements, 
                                findings, or agreements of the 
                                taxpayer or any other person,
                                  ``(III) does not identify and 
                                consider all relevant facts, or
                                  ``(IV) fails to meet any 
                                other requirement as the 
                                Secretary may prescribe.''
          (2) Conforming amendment.--The heading for subsection 
        (c) of section 6664 is amended by inserting ``for 
        Underpayments'' after ``Exception''.
  (d) Conforming Amendments.--
          (1) Subparagraph (C) of section 461(i)(3) is amended 
        by striking ``section 6662(d)(2)(C)(iii)'' and 
        inserting ``section 1274(b)(3)(C)''.
          (2) Paragraph (3) of section 1274(b) is amended--
                  (A) by striking ``(as defined in section 
                6662(d)(2)(C)(iii))'' in subparagraph (B)(i), 
                and
                  (B) by adding at the end the following new 
                subparagraph:
                  ``(C) Tax shelter.--For purposes of 
                subparagraph (B), the term `tax shelter' 
                means--
                          ``(i) a partnership or other entity,
                          ``(ii) any investment plan or 
                        arrangement, or
                          ``(iii) any other plan or 
                        arrangement,
                if a significant purpose of such partnership, 
                entity, plan, or arrangement is the avoidance 
                or evasion of Federal income tax.''
          (3) Section 6662(d)(2) is amended by striking 
        subparagraphs (C) and (D).
          (4) Section 6664(c)(1) is amended by striking ``this 
        part'' and inserting ``section 6662 or 6663''.
          (5) Subsection (b) of section 7525 is amended by 
        striking ``section 6662(d)(2)(C)(iii)'' and inserting 
        ``section 1274(b)(3)(C)''.
          (6)(A) The heading for section 6662 is amended to 
        read as follows:

``SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERPAYMENTS.''

          (B) The table of sections for part II of subchapter A 
        of chapter 68 is amended by striking the item relating 
        to section 6662 and inserting the following new items:

        ``Sec. 6662. Imposition of accuracy-related penalty on 
                  underpayments.
        ``Sec. 6662A. Imposition of accuracy-related penalty on 
                  understatements with respect to reportable 
                  transactions.''
  (e) Effective Date.--The amendments made by this section 
shall apply to taxable years ending after the date of the 
enactment of this Act.

SEC. 514. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS 
                    LACKING ECONOMIC SUBSTANCE, ETC.

  (a) In General.--Subchapter A of chapter 68 is amended by 
inserting after section 6662A the following new section:

``SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS 
                    LACKING ECONOMIC SUBSTANCE, ETC.

  ``(a) Imposition of Penalty.--If a taxpayer has an 
noneconomic substance transaction understatement for any 
taxable year, there shall be added to the tax an amount equal 
to 40 percent of the amount of such understatement.
  ``(b) Reduction of Penalty for Disclosed Transactions.--
Subsection (a) shall be applied by substituting `20 percent' 
for `40 percent' with respect to the portion of any noneconomic 
substance transaction understatement with respect to which the 
relevant facts affecting the tax treatment of the item are 
adequately disclosed in the return or a statement attached to 
the return.
  ``(c) Noneconomic Substance Transaction Understatement.--For 
purposes of this section--
          ``(1) In general.--The term `noneconomic substance 
        transaction understatement' means any amount which 
        would be an understatement under section 6662A(b)(1) if 
        section 6662A were applied by taking into account items 
        attributable to noneconomic substance transactions 
        rather than items to which section 6662A would apply 
        without regard to this paragraph.
          ``(2) Noneconomic substance transaction.--The term 
        `noneconomic substance transaction' means any 
        transaction if--
                  ``(A) there is a lack of economic substance 
                (within the meaning of section 7701(m)(1)) for 
                the transaction giving rise to the claimed tax 
                benefit or the transaction was not respected 
                under section 7701(m)(2), or
                  ``(B) the transaction fails to meet the 
                requirements of any similar rule of law.
  ``(d) Rules Applicable To Compromise of Penalty.--
          ``(1) In general.--If the 1st letter of proposed 
        deficiency which allows the taxpayer an opportunity for 
        administrative review in the Internal Revenue Service 
        Office of Appeals has been sent with respect to a 
        penalty to which this section applies, only the 
        Commissioner of Internal Revenue may compromise all or 
        any portion of such penalty.
          ``(2) Applicable rules.--The rules of paragraphs (3), 
        (4), and (5) of section 6707A(d) shall apply for 
        purposes of paragraph (1).
  ``(e) Coordination With Other Penalties.--Except as otherwise 
provided in this part, the penalty imposed by this section 
shall be in addition to any other penalty imposed by this 
title.
  ``(f) Cross References.--

          ``(1) For coordination of penalty with understatements under 
        section 6662 and other special rules, see section 6662A(e).
          ``(2) For reporting of penalty imposed under this section to 
        the Securities and Exchange Commission, see section 6707A(e).''
  (b) Clerical Amendment.--The table of sections for part II of 
subchapter A of chapter 68 is amended by inserting after the 
item relating to section 6662A the following new item:

        ``Sec. 6662B. Penalty for understatements attributable to 
                  transactions lacking economic substance, etc.''
  (c) Effective Date.--The amendments made by this section 
shall apply to transactions entered into after February 13, 
2003.

SEC. 515. MODIFICATIONS OF SUBSTANTIAL UNDERSTATEMENT PENALTY FOR 
                    NONREPORTABLE TRANSACTIONS.

  (a) Substantial Understatement of Corporations.--Section 
6662(d)(1)(B) (relating to special rule for corporations) is 
amended to read as follows:
                  ``(B) Special rule for corporations.--In the 
                case of a corporation other than an S 
                corporation or a personal holding company (as 
                defined in section 542), there is a substantial 
                understatement of income tax for any taxable 
                year if the amount of the understatement for 
                the taxable year exceeds the lesser of--
                          ``(i) 10 percent of the tax required 
                        to be shown on the return for the 
                        taxable year (or, if greater, $10,000), 
                        or
                          ``(ii) $10,000,000.''
  (b) Reduction for Understatement of Taxpayer Due to Position 
of Taxpayer or Disclosed Item.--
          (1) In general.--Section 6662(d)(2)(B)(i) (relating 
        to substantial authority) is amended to read as 
        follows:
                          ``(i) the tax treatment of any item 
                        by the taxpayer if the taxpayer had 
                        reasonable belief that the tax 
                        treatment was more likely than not the 
                        proper treatment, or''.
          (2) Conforming amendment.--Section 6662(d) is amended 
        by adding at the end the following new paragraph:
          ``(3) Secretarial list.--For purposes of this 
        subsection, section 6664(d)(2), and section 6694(a)(1), 
        the Secretary may prescribe a list of positions for 
        which the Secretary believes there is not substantial 
        authority or there is no reasonable belief that the tax 
        treatment is more likely than not the proper tax 
        treatment. Such list (and any revisions thereof) shall 
        be published in the Federal Register or the Internal 
        Revenue Bulletin.''
  (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 516. TAX SHELTER EXCEPTION TO CONFIDENTIALITY PRIVILEGES RELATING 
                    TO TAXPAYER COMMUNICATIONS.

  (a) In General.--Section 7525(b) (relating to section not to 
apply to communications regarding corporate tax shelters) is 
amended to read as follows:
  ``(b) Section Not To Apply to Communications Regarding Tax 
Shelters.--The privilege under subsection (a) shall not apply 
to any written communication which is--
          ``(1) between a federally authorized tax practitioner 
        and--
                  ``(A) any person,
                  ``(B) any director, officer, employee, agent, 
                or representative of the person, or
                  ``(C) any other person holding a capital or 
                profits interest in the person, and
          ``(2) in connection with the promotion of the direct 
        or indirect participation of the person in any tax 
        shelter (as defined in section 1274(b)(3)(C)).''
  (b) Effective Date.--The amendment made by this section shall 
apply to communications made on or after the date of the 
enactment of this Act.

SEC. 517. DISCLOSURE OF REPORTABLE TRANSACTIONS.

  (a) In General.--Section 6111 (relating to registration of 
tax shelters) is amended to read as follows:

``SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS.

  ``(a) In General.--Each material advisor with respect to any 
reportable transaction shall make a return (in such form as the 
Secretary may prescribe) setting forth--
          ``(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.
Such return shall be filed not later than the date specified by 
the Secretary.
  ``(b) Definitions.--For purposes of this section--
          ``(1) Material advisor.--
                  ``(A) In general.--The term `material 
                advisor' means any person--
                          ``(i) who provides any material aid, 
                        assistance, or advice with respect to 
                        organizing, promoting, selling, 
                        implementing, or carrying out any 
                        reportable transaction, and
                          ``(ii) who directly or indirectly 
                        derives gross income in excess of the 
                        threshold amount for such aid, 
                        assistance, or advice.
                  ``(B) Threshold amount.--For purposes of 
                subparagraph (A), the threshold amount is--
                          ``(i) $50,000 in the case of a 
                        reportable transaction substantially 
                        all of the tax benefits from which are 
                        provided to natural persons, and
                          ``(ii) $250,000 in any other case.
          ``(2) Reportable transaction.--The term `reportable 
        transaction' has the meaning given to such term by 
        section 6707A(c).
  ``(c) Regulations.--The Secretary may prescribe regulations 
which provide--
          ``(1) that only 1 person shall be required to meet 
        the requirements of subsection (a) in cases in which 2 
        or more persons would otherwise be required to meet 
        such requirements,
          ``(2) exemptions from the requirements of this 
        section, and
          ``(3) such rules as may be necessary or appropriate 
        to carry out the purposes of this section.''
  (b) Conforming Amendments.--
          (1) The item relating to section 6111 in the table of 
        sections for subchapter B of chapter 61 is amended to 
        read as follows:

        ``Sec. 6111. Disclosure of reportable transactions.''
          (2)(A) So much of section 6112 as precedes subsection 
        (c) thereof is amended to read as follows:

``SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANSACTIONS MUST KEEP 
                    LISTS OF ADVISEES.

  ``(a) In General.--Each material advisor (as defined in 
section 6111) with respect to any reportable transaction (as 
defined in section 6707A(c)) shall maintain, in such manner as 
the Secretary may by regulations prescribe, a list--
          ``(1) identifying each person with respect to whom 
        such advisor acted as such a material advisor with 
        respect to such transaction, and
          ``(2) containing such other information as the 
        Secretary may by regulations require.
This section shall apply without regard to whether a material 
advisor is required to file a return under section 6111 with 
respect to such transaction.''
          (B) Section 6112 is amended by redesignating 
        subsection (c) as subsection (b).
          (C) Section 6112(b), as redesignated by subparagraph 
        (B), is amended--
                  (i) by inserting ``written'' before 
                ``request'' in paragraph (1)(A), and
                  (ii) by striking ``shall prescribe'' in 
                paragraph (2) and inserting ``may prescribe''.
          (D) The item relating to section 6112 in the table of 
        sections for subchapter B of chapter 61 is amended to 
        read as follows:

        ``Sec. 6112. Material advisors of reportable transactions must 
                  keep lists of advisees.''
          (3)(A) The heading for section 6708 is amended to 
        read as follows:

``SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES WITH RESPECT TO 
                    REPORTABLE TRANSACTIONS.''

          (B) The item relating to section 6708 in the table of 
        sections for part I of subchapter B of chapter 68 is 
        amended to read as follows:

        ``Sec. 6708. Failure to maintain lists of advisees with respect 
                  to reportable transactions.''
  (c) Effective Date.--The amendments made by this section 
shall apply to transactions with respect to which material aid, 
assistance, or advice referred to in section 6111(b)(1)(A)(i) 
of the Internal Revenue Code of 1986 (as added by this section) 
is provided after the date of the enactment of this Act.

SEC. 518. MODIFICATIONS TO PENALTY FOR FAILURE TO REGISTER TAX 
                    SHELTERS.

  (a) In General.--Section 6707 (relating to failure to furnish 
information regarding tax shelters) is amended to read as 
follows:

``SEC. 6707. FAILURE TO FURNISH INFORMATION REGARDING REPORTABLE 
                    TRANSACTIONS.

  ``(a) In General.--If a person who is required to file a 
return under section 6111(a) with respect to any reportable 
transaction--
          ``(1) fails to file such return on or before the date 
        prescribed therefor, or
          ``(2) files false or incomplete information with the 
        Secretary with respect to such transaction,
such person shall pay a penalty with respect to such return in 
the amount determined under subsection (b).
  ``(b) Amount of Penalty.--
          ``(1) In general.--Except as provided in paragraph 
        (2), the penalty imposed under subsection (a) with 
        respect to any failure shall be $50,000.
          ``(2) Listed transactions.--The penalty imposed under 
        subsection (a) with respect to any listed transaction 
        shall be an amount equal to the greater of--
                  ``(A) $200,000, or
                  ``(B) 50 percent of the gross income derived 
                by such person with respect to aid, assistance, 
                or advice which is provided with respect to the 
                reportable transaction before the date the 
                return including the transaction is filed under 
                section 6111.
        Subparagraph (B) shall be applied by substituting `75 
        percent' for `50 percent' in the case of an intentional 
        failure or act described in subsection (a).
  ``(c) Rescission Authority.--The provisions of section 
6707A(d) (relating to authority of Commissioner to rescind 
penalty) shall apply to any penalty imposed under this section.
  ``(d) Reportable and Listed Transactions.--The terms 
`reportable transaction' and `listed transaction' have the 
respective meanings given to such terms by section 6707A(c).''.
  (b) Clerical Amendment.--The item relating to section 6707 in 
the table of sections for part I of subchapter B of chapter 68 
is amended by striking ``tax shelters'' and inserting 
``reportable transactions''.
  (c) Effective Date.--The amendments made by this section 
shall apply to returns the due date for which is after the date 
of the enactment of this Act.

SEC. 519. MODIFICATION OF PENALTY FOR FAILURE TO MAINTAIN LISTS OF 
                    INVESTORS.

  (a) In General.--Subsection (a) of section 6708 is amended to 
read as follows:
  ``(a) Imposition of Penalty.--
          ``(1) In general.--If any person who is required to 
        maintain a list under section 6112(a) fails to make 
        such list available upon written request to the 
        Secretary in accordance with section 6112(b)(1)(A) 
        within 20 business days after the date of the 
        Secretary's request, such person shall pay a penalty of 
        $10,000 for each day of such failure after such 20th 
        day.
          ``(2) Reasonable cause exception.--No penalty shall 
        be imposed by paragraph (1) with respect to the failure 
        on any day if such failure is due to reasonable 
        cause.''
  (b) Effective Date.--The amendment made by this section shall 
apply to requests made after the date of the enactment of this 
Act.

SEC. 520. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN CONDUCT RELATED TO 
                    TAX SHELTERS AND REPORTABLE TRANSACTIONS.

  (a) In General.--Section 7408 (relating to action to enjoin 
promoters of abusive tax shelters, etc.) is amended by 
redesignating subsection (c) as subsection (d) and by striking 
subsections (a) and (b) and inserting the following new 
subsections:
  ``(a) Authority To Seek Injunction.--A civil action in the 
name of the United States to enjoin any person from further 
engaging in specified conduct may be commenced at the request 
of the Secretary. Any action under this section shall be 
brought in the district court of the United States for the 
district in which such person resides, has his principal place 
of business, or has engaged in specified conduct. The court may 
exercise its jurisdiction over such action (as provided in 
section 7402(a)) separate and apart from any other action 
brought by the United States against such person.
  ``(b) Adjudication and Decree.--In any action under 
subsection (a), if the court finds--
          ``(1) that the person has engaged in any specified 
        conduct, and
          ``(2) that injunctive relief is appropriate to 
        prevent recurrence of such conduct,
the court may enjoin such person from engaging in such conduct 
or in any other activity subject to penalty under this title.
  ``(c) Specified Conduct.--For purposes of this section, the 
term `specified conduct' means any action, or failure to take 
action, subject to penalty under section 6700, 6701, 6707, or 
6708.''
  (b) Conforming Amendments.--
          (1) The heading for section 7408 is amended to read 
        as follows:

``SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RELATED TO TAX 
                    SHELTERS AND REPORTABLE TRANSACTIONS.''

          (2) The table of sections for subchapter A of chapter 
        67 is amended by striking the item relating to section 
        7408 and inserting the following new item:

    ``Sec. 7408. Actions to enjoin specified conduct related to tax 
              shelters and reportable transactions.''
  (c) Effective Date.--The amendment made by this section shall 
take effect on the day after the date of the enactment of this 
Act.

SEC. 521. UNDERSTATEMENT OF TAXPAYER'S LIABILITY BY INCOME TAX RETURN 
                    PREPARER.

  (a) Standards Conformed to Taxpayer Standards.--Section 
6694(a) (relating to understatements due to unrealistic 
positions) is amended--
          (1) by striking ``realistic possibility of being 
        sustained on its merits'' in paragraph (1) and 
        inserting ``reasonable belief that the tax treatment in 
        such position was more likely than not the proper 
        treatment'',
          (2) by striking ``or was frivolous'' in paragraph (3) 
        and inserting ``or there was no reasonable basis for 
        the tax treatment of such position'', and
          (3) by striking ``Unrealistic'' in the heading and 
        inserting ``Improper''.
  (b) Amount of Penalty.--Section 6694 is amended--
          (1) by striking ``$250'' in subsection (a) and 
        inserting ``$1,000'', and
          (2) by striking ``$1,000'' in subsection (b) and 
        inserting ``$5,000''.
  (c) Effective Date.--The amendments made by this section 
shall apply to documents prepared after the date of the 
enactment of this Act.

SEC. 522. PENALTY ON FAILURE TO REPORT INTERESTS IN FOREIGN FINANCIAL 
                    ACCOUNTS.

  (a) In General.--Section 5321(a)(5) of title 31, United 
States Code, is amended to read as follows:
          ``(5) Foreign financial agency transaction 
        violation.--
                  ``(A) Penalty authorized.--The Secretary of 
                the Treasury may impose a civil money penalty 
                on any person who violates, or causes any 
                violation of, any provision of section 5314.
                  ``(B) Amount of penalty.--
                          ``(i) In general.--Except as provided 
                        in subparagraph (C), the amount of any 
                        civil penalty imposed under 
                        subparagraph (A) shall not exceed 
                        $5,000.
                          ``(ii) Reasonable cause exception.--
                        No penalty shall be imposed under 
                        subparagraph (A) with respect to any 
                        violation if--
                                  ``(I) such violation was due 
                                to reasonable cause, and
                                  ``(II) the amount of the 
                                transaction or the balance in 
                                the account at the time of the 
                                transaction was properly 
                                reported.
                  ``(C) Willful violations.--In the case of any 
                person willfully violating, or willfully 
                causing any violation of, any provision of 
                section 5314--
                          ``(i) the maximum penalty under 
                        subparagraph (B)(i) shall be increased 
                        to the greater of--
                                  ``(I) $25,000, or
                                  ``(II) the amount (not 
                                exceeding $100,000) determined 
                                under subparagraph (D), and
                          ``(ii) subparagraph (B)(ii) shall not 
                        apply.
                  ``(D) Amount.--The amount determined under 
                this subparagraph is--
                          ``(i) in the case of a violation 
                        involving a transaction, the amount of 
                        the transaction, or
                          ``(ii) in the case of a violation 
                        involving a failure to report the 
                        existence of an account or any 
                        identifying information required to be 
                        provided with respect to an account, 
                        the balance in the account at the time 
                        of the violation.''
  (b) Effective Date.--The amendment made by this section shall 
apply to violations occurring after the date of the enactment 
of this Act.

SEC. 523. FRIVOLOUS TAX SUBMISSIONS.

  (a) Civil Penalties.--Section 6702 is amended to read as 
follows:

``SEC. 6702. FRIVOLOUS TAX SUBMISSIONS.

  ``(a) Civil Penalty for Frivolous Tax Returns.--A person 
shall pay a penalty of $5,000 if--
          ``(1) such person files what purports to be a return 
        of a tax imposed by this title but which--
                  ``(A) does not contain information on which 
                the substantial correctness of the self-
                assessment may be judged, or
                  ``(B) contains information that on its face 
                indicates that the self-assessment is 
                substantially incorrect; and
          ``(2) the conduct referred to in paragraph (1)--
                  ``(A) is based on a position which the 
                Secretary has identified as frivolous under 
                subsection (c), or
                  ``(B) reflects a desire to delay or impede 
                the administration of Federal tax laws.
  ``(b) Civil Penalty for Specified Frivolous Submissions.--
          ``(1) Imposition of penalty.--Except as provided in 
        paragraph (3), any person who submits a specified 
        frivolous submission shall pay a penalty of $5,000.
          ``(2) Specified frivolous submission.--For purposes 
        of this section--
                  ``(A) Specified frivolous submission.--The 
                term `specified frivolous submission' means a 
                specified submission if any portion of such 
                submission--
                          ``(i) is based on a position which 
                        the Secretary has identified as 
                        frivolous under subsection (c), or
                          ``(ii) reflects a desire to delay or 
                        impede the administration of Federal 
                        tax laws.
                  ``(B) Specified submission.--The term 
                `specified submission' means--
                          ``(i) a request for a hearing under--
                                  ``(I) section 6320 (relating 
                                to notice and opportunity for 
                                hearing upon filing of notice 
                                of lien), or
                                  ``(II) section 6330 (relating 
                                to notice and opportunity for 
                                hearing before levy), and
                          ``(ii) an application under--
                                  ``(I) section 6159 (relating 
                                to agreements for payment of 
                                tax liability in installments),
                                  ``(II) section 7122 (relating 
                                to compromises), or
                                  ``(III) section 7811 
                                (relating to taxpayer 
                                assistance orders).
          ``(3) Opportunity to withdraw submission.--If the 
        Secretary provides a person with notice that a 
        submission is a specified frivolous submission and such 
        person withdraws such submission within 30 days after 
        such notice, the penalty imposed under paragraph (1) 
        shall not apply with respect to such submission.
  ``(c) Listing of Frivolous Positions.--The Secretary shall 
prescribe (and periodically revise) a list of positions which 
the Secretary has identified as being frivolous for purposes of 
this subsection. The Secretary shall not include in such list 
any position that the Secretary determines meets the 
requirement of section 6662(d)(2)(B)(ii)(II).
  ``(d) Reduction of Penalty.--The Secretary may reduce the 
amount of any penalty imposed under this section if the 
Secretary determines that such reduction would promote 
compliance with and administration of the Federal tax laws.
  ``(e) Penalties in Addition to Other Penalties.--The 
penalties imposed by this section shall be in addition to any 
other penalty provided by law.''
  (b) Treatment of Frivolous Requests for Hearings Before 
Levy.--
          (1) Frivolous requests disregarded.--Section 6330 
        (relating to notice and opportunity for hearing before 
        levy) is amended by adding at the end the following new 
        subsection:
  ``(g) Frivolous Requests for Hearing, etc.--Notwithstanding 
any other provision of this section, if the Secretary 
determines that any portion of a request for a hearing under 
this section or section 6320 meets the requirement of clause 
(i) or (ii) of section 6702(b)(2)(A), then the Secretary may 
treat such portion as if it were never submitted and such 
portion shall not be subject to any further administrative or 
judicial review.''
          (2) Preclusion from raising frivolous issues at 
        hearing.--Section 6330(c)(4) is amended--
                  (A) by striking ``(A)'' and inserting 
                ``(A)(i)'';
                  (B) by striking ``(B)'' and inserting 
                ``(ii)'';
                  (C) by striking the period at the end of the 
                first sentence and inserting ``; or''; and
                  (D) by inserting after subparagraph (A)(ii) 
                (as so redesignated) the following:
                  ``(B) the issue meets the requirement of 
                clause (i) or (ii) of section 6702(b)(2)(A).''
          (3) Statement of grounds.--Section 6330(b)(1) is 
        amended by striking ``under subsection (a)(3)(B)'' and 
        inserting ``in writing under subsection (a)(3)(B) and 
        states the grounds for the requested hearing''.
  (c) Treatment of Frivolous Requests for Hearings Upon Filing 
of Notice of Lien.--Section 6320 is amended--
          (1) in subsection (b)(1), by striking ``under 
        subsection (a)(3)(B)'' and inserting ``in writing under 
        subsection (a)(3)(B) and states the grounds for the 
        requested hearing'', and
          (2) in subsection (c), by striking ``and (e)'' and 
        inserting ``(e), and (g)''.
  (d) Treatment of Frivolous Applications for Offers-in-
Compromise and Installment Agreements.--Section 7122 is amended 
by adding at the end the following new subsection:
  ``(e) Frivolous Submissions, etc.--Notwithstanding any other 
provision of this section, if the Secretary determines that any 
portion of an application for an offer-in-compromise or 
installment agreement submitted under this section or section 
6159 meets the requirement of clause (i) or (ii) of section 
6702(b)(2)(A), then the Secretary may treat such portion as if 
it were never submitted and such portion shall not be subject 
to any further administrative or judicial review.''
  (e) Clerical Amendment.--The table of sections for part I of 
subchapter B of chapter 68 is amended by striking the item 
relating to section 6702 and inserting the following new item:

        ``Sec. 6702. Frivolous tax submissions.''
  (f) Effective Date.--The amendments made by this section 
shall apply to submissions made and issues raised after the 
date on which the Secretary first prescribes a list under 
section 6702(c) of the Internal Revenue Code of 1986, as 
amended by subsection (a).

SEC. 524. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE DEPARTMENT OF 
                    TREASURY.

  (a) Censure; Imposition of Penalty.--
          (1) In general.--Section 330(b) of title 31, United 
        States Code, is amended--
                  (A) by inserting ``, or censure,'' after 
                ``Department'', and
                  (B) by adding at the end the following new 
                flush sentence:
``The Secretary may impose a monetary penalty on any 
representative described in the preceding sentence. If the 
representative was acting on behalf of an employer or any firm 
or other entity in connection with the conduct giving rise to 
such penalty, the Secretary may impose a monetary penalty on 
such employer, firm, or entity if it knew, or reasonably should 
have known, of such conduct. Such penalty shall not exceed the 
gross income derived (or to be derived) from the conduct giving 
rise to the penalty and may be in addition to, or in lieu of, 
any suspension, disbarment, or censure.''
          (2) Effective date.--The amendments made by this 
        subsection shall apply to actions taken after the date 
        of the enactment of this Act.
  (b) Tax Shelter Opinions, etc.--Section 330 of such title 31 
is amended by adding at the end the following new subsection:
  ``(d) Nothing in this section or in any other provision of 
law shall be construed to limit the authority of the Secretary 
of the Treasury to impose standards applicable to the rendering 
of written advice with respect to any entity, transaction plan 
or arrangement, or other plan or arrangement, which is of a 
type which the Secretary determines as having a potential for 
tax avoidance or evasion.''

SEC. 525. PENALTY ON PROMOTERS OF TAX SHELTERS.

  (a) Penalty on Promoting Abusive Tax Shelters.--Section 
6700(a) is amended by adding at the end the following new 
sentence: ``Notwithstanding the first sentence, if an activity 
with respect to which a penalty imposed under this subsection 
involves a statement described in paragraph (2)(A), the amount 
of the penalty shall be equal to 50 percent of the gross income 
derived (or to be derived) from such activity by the person on 
which the penalty is imposed.''
  (b) Effective Date.--The amendment made by this section shall 
apply to activities after the date of the enactment of this 
Act.

SEC. 526. STATUTE OF LIMITATIONS FOR TAXABLE YEARS FOR WHICH LISTED 
                    TRANSACTIONS NOT REPORTED.

  (a) In General.--Section 6501(e)(1) (relating to substantial 
omission of items for income taxes) is amended by adding at the 
end the following new subparagraph:
                  ``(C) Listed transactions.--If a taxpayer 
                fails to include on any return or statement for 
                any taxable year any information with respect 
                to a listed transaction (as defined in section 
                6707A(c)(2)) which is required under section 
                6011 to be included with such return or 
                statement, the tax for such taxable year may be 
                assessed, or a proceeding in court for 
                collection of such tax may be begun without 
                assessment, at any time within 6 years after 
                the time the return is filed. This subparagraph 
                shall not apply to any taxable year if the time 
                for assessment or beginning the proceeding in 
                court has expired before the time a transaction 
                is treated as a listed transaction under 
                section 6011.''
  (b) Effective Date.--The amendment made by this section shall 
apply to transactions after the date of the enactment of this 
Act in taxable years ending after such date.

SEC. 527. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS 
                    ATTRIBUTABLE TO NONDISCLOSED REPORTABLE AND 
                    NONECONOMIC SUBSTANCE TRANSACTIONS.

  (a) In General.--Section 163 (relating to deduction for 
interest) is amended by redesignating subsection (m) as 
subsection (n) and by inserting after subsection (l) the 
following new subsection:
  ``(m) Interest on Unpaid Taxes Attributable to Nondisclosed 
Reportable Transactions and Noneconomic Substance 
Transactions.--No deduction shall be allowed under this chapter 
for any interest paid or accrued under section 6601 on any 
underpayment of tax which is attributable to--
          ``(1) the portion of any reportable transaction 
        understatement (as defined in section 6662A(b)) with 
        respect to which the requirement of section 
        6664(d)(2)(A) is not met, or
          ``(2) any noneconomic substance transaction 
        understatement (as defined in section 6662B(c)).''
  (b) Effective Date.--The amendments made by this section 
shall apply to transactions after the date of the enactment of 
this Act in taxable years ending after such date.

  Subtitle B--Affirmation of Consolidated Return Regulation Authority

SEC. 531. AFFIRMATION OF CONSOLIDATED RETURN REGULATION AUTHORITY.

  (a) In General.--Section 1502 (relating to consolidated 
return regulations) is amended by adding at the end the 
following new sentence: ``In prescribing such regulations, the 
Secretary may prescribe rules applicable to corporations filing 
consolidated returns under section 1501 that are different from 
other provisions of this title that would apply if such 
corporations filed separate returns.''
  (b) Result Not Overturned.--Notwithstanding subsection (a), 
the Internal Revenue Code of 1986 shall be construed by 
treating Treasury regulation Sec. 1.1502-20(c)(1)(iii) (as in 
effect on January 1, 2001) as being inapplicable to the type of 
factual situation in 255 F.3d 1357 (Fed. Cir. 2001).
  (c) Effective Date.--The provisions of this section shall 
apply to taxable years beginning before, on, or after the date 
of the enactment of this Act.

                                
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