II 

109TH CONGRESS 

1ST SESSION S. 1565 

To restrict the use of abusive tax shelters and offshore tax havens to 

inappropriately avoid Federal taxation, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

JULY 29, 2005 

Mr. LEVIN (for himself, Mr. COLEMAN, and Mr. OBAMA) introduced the 

following bill; which was read twice and referred to the Committee on Finance 

A BILL 

To restrict the use of abusive tax shelters and offshore 

tax havens to inappropriately avoid Federal taxation, 

and for other purposes. 

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

3 SECTION 1. SHORT TITLE; ETC. 

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

5 ‘‘Tax Shelter and Tax Haven Reform Act of 2005’’. 

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment 

9 to, or repeal of, a section or other provision, the reference 
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1 shall be considered to be made to a section or other provi2 sion of the Internal Revenue Code of 1986. 

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

4 this Act is as follows: 

Sec. 1. Short title; etc. 

TITLE I—STRENGTHENING TAX SHELTER PENALTIES 

Sec. 101. Penalty for promoting abusive tax shelters. 

Sec. 102. Penalty for aiding and abetting the understatement of tax liability. 

TITLE II—PREVENTING ABUSIVE TAX SHELTERS 

Sec. 201. Prohibited fee arrangement. 

Sec. 202. Preventing tax shelter activities by financial institutions. 

Sec. 203. Information sharing for enforcement purposes. 

Sec. 204. Disclosure of information to Congress. 

Sec. 205. Tax opinion standards for tax practitioners. 

Sec. 206. Whistleblower reforms. 

Sec. 207. Denial of deduction for certain fines, penalties, and other amounts. 

Sec. 208. Sense of the Senate on tax enforcement priorities. 

TITLE III—REQUIRING ECONOMIC SUBSTANCE 

Sec. 301. Clarification of economic substance doctrine. 

Sec. 302. Penalty for understatements attributable to transactions lacking economic substance, etc. 

Sec. 303. Denial of deduction for interest on underpayments attributable to 

noneconomic substance transactions. 

TITLE IV—DETERRING UNCOOPERATIVE TAX HAVENS 

Sec. 401. Disclosing payments to persons in uncooperative tax havens. 

Sec. 402. Deterring uncooperative tax havens by restricting allowable tax benefits. 

Sec. 403. Doubling of certain penalties, fines, and interest on underpayments 

related to certain offshore financial arrangements. 

Sec. 404. Treasury regulations on foreign tax credit. 
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1 TITLE I—STRENGTHENING TAX 

2 SHELTER PENALTIES 

3 SEC. 101. PENALTY FOR PROMOTING ABUSIVE TAX SHEL4 TERS. 

5 (a) PENALTY FOR PROMOTING ABUSIVE TAX SHEL6 TERS.—Section 6700 (relating to promoting abusive tax 

7 shelters, etc.) is amended— 

8 (1) by redesignating subsections (b) and (c) as 

9 subsections (d) and (e), respectively, 

10 (2) by striking ‘‘a penalty’’ and all that follows 

11 through the period in the first sentence of subsection 

12 (a) and inserting ‘‘a penalty determined under sub13 section (b)’’, and 

14 (3) by inserting after subsection (a) the fol15 lowing new subsections: 

16 ‘‘(b) AMOUNT OF PENALTY; CALCULATION OF PEN17 ALTY; LIABILITY FOR PENALTY.— 

18 ‘‘(1) AMOUNT OF PENALTY.—The amount of 

19 the penalty imposed by subsection (a) shall not ex20 ceed the greater of— 

21 ‘‘(A) 150 percent of the gross income de22 rived (or to be derived) from such activity by 

23 the person or persons subject to such penalty, 

24 and 
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1 ‘‘(B) if readily subject to calculation, the 

2 total amount of underpayment by the taxpayer 

3 (including penalties, interest, and taxes) in con4 nection with such activity. 

5 ‘‘(2) CALCULATION OF PENALTY.—The penalty 

6 amount determined under paragraph (1) shall be 

7 calculated with respect to each instance of an activ8 ity described in subsection (a), each instance in 

9 which income was derived by the person or persons 

10 subject to such penalty, and each person who par11 ticipated in such an activity. 

12 ‘‘(3) LIABILITY FOR PENALTY.—If more than 1 

13 person is liable under subsection (a) with respect to 

14 such activity, all such persons shall be jointly and 

15 severally liable for the penalty under such sub16 section. 

17 ‘‘(c) PENALTY NOT DEDUCTIBLE.—The payment of 

18 any penalty imposed under this section or the payment 

19 of any amount to settle or avoid the imposition of such 

20 penalty shall not be considered an ordinary and necessary 

21 expense in carrying on a trade or business for purposes 

22 of this title and shall not be deductible by the person who 

23 is subject to such penalty or who makes such payment.’’. 

24 (b) CONFORMING AMENDMENT.—Section 6700(a) is 

25 amended by striking the last sentence. 
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1 (c) EFFECTIVE DATE.—The amendments made by 

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

3 enactment of this Act. 

4 SEC. 102. PENALTY FOR AIDING AND ABETTING THE UN5 DERSTATEMENT OF TAX LIABILITY. 

6 (a) IN GENERAL.—Section 6701(a) (relating to impo7 sition of penalty) is amended— 

8 (1) by inserting ‘‘the tax liability or’’ after ‘‘re9 spect to,’’ in paragraph (1), 

10 (2) by inserting ‘‘aid, assistance, procurement, 

11 or advice with respect to such’’ before ‘‘portion’’ 

12 both places it appears in paragraphs (2) and (3), 

13 and 

14 (3) by inserting ‘‘instance of aid, assistance, 

15 procurement, or advice or each such’’ before ‘‘docu16 ment’’ in the matter following paragraph (3). 

17 (b) AMOUNT OF PENALTY.—Subsection (b) of section 

18 6701 (relating to penalties for aiding and abetting under19 statement of tax liability) is amended to read as follows: 

20 ‘‘(b) AMOUNT OF PENALTY; CALCULATION OF PEN21 ALTY; LIABILITY FOR PENALTY.— 

22 ‘‘(1) AMOUNT OF PENALTY.—The amount of 

23 the penalty imposed by subsection (a) shall not ex24 ceed the greater of— 
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1 ‘‘(A) 150 percent of the gross income de2 rived (or to be derived) from such aid, assist3 ance, procurement, or advice provided by the 

4 person or persons subject to such penalty, and 

5 ‘‘(B) if readily subject to calculation, the 

6 total amount of underpayment by the taxpayer 

7 (including penalties, interest, and taxes) in con8 nection with the understatement of the liability 

9 for tax. 

10 ‘‘(2) CALCULATION OF PENALTY.—The penalty 

11 amount determined under paragraph (1) shall be 

12 calculated with respect to each instance of aid, as13 sistance, procurement, or advice described in sub14 section (a), each instance in which income was de15 rived by the person or persons subject to such pen16 alty, and each person who made such an understate17 ment of the liability for tax. 

18 ‘‘(3) LIABILITY FOR PENALTY.—If more than 1 

19 person is liable under subsection (a) with respect to 

20 providing such aid, assistance, procurement, or ad21 vice, all such persons shall be jointly and severally 

22 liable for the penalty under such subsection.’’. 

23 (c) PENALTY NOT DEDUCTIBLE.—Section 6701 is 

24 amended by adding at the end the following new sub25 section: 
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1 ‘‘(g) PENALTY NOT DEDUCTIBLE.—The payment of 

2 any penalty imposed under this section or the payment 

3 of any amount to settle or avoid the imposition of such 

4 penalty shall not be considered an ordinary and necessary 

5 expense in carrying on a trade or business for purposes 

6 of this title and shall not be deductible by the person who 

7 is subject to such penalty or who makes such payment.’’. 

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

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

10 enactment of this Act. 

11 TITLE II—PREVENTING ABUSIVE 

12 TAX SHELTERS 

13 SEC. 201. PROHIBITED FEE ARRANGEMENT. 

14 (a) IN GENERAL.—Section 6701, as amended by this 

15 Act, is amended— 

16 (1) by redesignating subsections (f) and (g) as 

17 subsections (g) and (h), respectively, 

18 (2) by striking ‘‘subsection (a).’’ in paragraphs 

19 (2) and (3) of subsection (g) (as redesignated by 

20 paragraph (1)) and inserting ‘‘subsection (a) or 

21 (f).’’, and 

22 (3) by inserting after subsection (e) the fol23 lowing new subsection: 

24 ‘‘(f) PROHIBITED FEE ARRANGEMENT.— 
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1 ‘‘(1) IN GENERAL.—Any person who makes an 

2 agreement for, charges, or collects a fee which is for 

3 services provided in connection with the internal rev4 enue laws, and the amount of which is calculated ac5 cording to, or is dependent upon, a projected or ac6 tual amount of— 

7 ‘‘(A) tax savings or benefits, or 

8 ‘‘(B) losses which can be used to offset 

9 other taxable income, 

10 shall pay a penalty with respect to each such fee ac11 tivity in the amount determined under subsection 

12 (b). 

13 ‘‘(2) RULES.—The Secretary may issue rules to 

14 carry out the purposes of this subsection and may 

15 provide exceptions for fee arrangements that are in 

16 the public interest.’’. 

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

18 this section shall apply to fee agreements, charges, and 

19 collections made after the date of the enactment of this 

20 Act. 

21 SEC. 202. PREVENTING TAX SHELTER ACTIVITIES BY FI22 NANCIAL INSTITUTIONS. 

23 (a) EXAMINATIONS.— 

24 (1) DEVELOPMENT OF EXAMINATION TECH25 NIQUES.—Each of the Federal banking agencies and 
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1 the Commission shall, in consultation with the Inter2 nal Revenue Service, develop examination techniques 

3 to detect potential violations of section 6700 or 6701 

4 of the Internal Revenue Code of 1986, by depository 

5 institutions, brokers, dealers, and investment advis6 ers, as appropriate. 

7 (2) FREQUENCY.—Not less frequently than 

8 once in each 2-year period, each of the Federal 

9 banking agencies and the Commission shall imple10 ment the examination techniques developed under 

11 paragraph (1) with respect to each of the depository 

12 institutions, brokers, dealers, or investment advisers 

13 subject to their enforcement authority. Such exam14 ination shall, to the extent possible, be combined 

15 with any examination by such agency otherwise re16 quired or authorized by Federal law. 

17 (b) REPORT TO INTERNAL REVENUE SERVICE.—In 

18 any case in which an examination conducted under this 

19 section with respect to a financial institution or other enti20 ty reveals a potential violation, such agency shall promptly 

21 notify the Internal Revenue Service of such potential viola22 tion for investigation and enforcement by the Internal 

23 Revenue Service in accordance with applicable provisions 

24 of law. 
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1 (c) REPORT TO CONGRESS.—The Federal banking 

2 agencies and the Commission shall submit a joint written 

3 report to Congress in 2007 and 2010 on their progress 

4 in preventing violations of sections 6700 and 6701 of the 

5 Internal Revenue Code of 1986, by depository institutions, 

6 brokers, dealers, and investment advisers, as appropriate. 

7 (d) DEFINITIONS.—For purposes of this section— 

8 (1) the terms ‘‘broker’’, ‘‘dealer’’, and ‘‘invest9 ment adviser’’ have the same meanings as in section 

10 3 of the Securities Exchange Act of 1934 (15 U.S.C. 

11 78c); 

12 (2) the term ‘‘Commission’’ means the Securi13 ties and Exchange Commission; 

14 (3) the term ‘‘depository institution’’ has the 

15 same meaning as in section 3(c) of the Federal De16 posit Insurance Act (12 U.S.C. 1813(c)); 

17 (4) the term ‘‘Federal banking agencies’’ has 

18 the same meaning as in section 3(q) of the Federal 

19 Deposit Insurance Act (12 U.S.C. 1813(q)); and 

20 (5) the term ‘‘Secretary’’ means the Secretary 

21 of the Treasury. 

22 SEC. 203. INFORMATION SHARING FOR ENFORCEMENT 

23 PURPOSES. 

24 (a) PROMOTION OF PROHIBITED TAX SHELTERS OR

25 TAX AVOIDANCE SCHEMES.—Section 6103(h) (relating to 
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1 disclosure to certain Federal officers and employees for 

2 purposes of tax administration, etc.) is amended by adding 

3 at the end the following new paragraph: 

4 ‘‘(7) DISCLOSURE OF RETURNS AND RETURN

5 INFORMATION RELATED TO PROMOTION OF PROHIB6 ITED TAX SHELTERS OR TAX AVOIDANCE

7 SCHEMES.— 

8 ‘‘(A) WRITTEN REQUEST.—Upon receipt 

9 by the Secretary of a written request which 

10 meets the requirements of subparagraph (B) 

11 from the head of the United States Securities 

12 and Exchange Commission, an appropriate 

13 Federal banking agency as defined under sec14 tion 1813(q) of title 12, United States Code, or 

15 the Public Company Accounting Oversight 

16 Board, a return or return information shall be 

17 disclosed to such requestor’s officers and em18 ployees who are personally and directly engaged 

19 in an investigation, examination, or proceeding 

20 by such requestor to evaluate, determine, penal21 ize, or deter conduct by a financial institution, 

22 issuer, or public accounting firm, or associated 

23 person, in connection with a potential or actual 

24 violation of section 6700 (promotion of abusive 

25 tax shelters), 6701 (aiding and abetting under-
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1 statement of tax liability), or activities related 

2 to promoting or facilitating inappropriate tax 

3 avoidance or tax evasion. Such disclosure shall 

4 be solely for use by such officers and employees 

5 in such investigation, examination, or pro6 ceeding. 

7 ‘‘(B) REQUIREMENTS.—A request meets 

8 the requirements of this subparagraph if it sets 

9 forth— 

10 ‘‘(i) the nature of the investigation, 

11 examination, or proceeding, 

12 ‘‘(ii) the statutory authority under 

13 which such investigation, examination, or 

14 proceeding is being conducted, 

15 ‘‘(iii) the name or names of the finan16 cial institution, issuer, or public accounting 

17 firm to which such return information re18 lates, 

19 ‘‘(iv) the taxable period or periods to 

20 which such return information relates, and 

21 ‘‘(v) the specific reason or reasons 

22 why such disclosure is, or may be, relevant 

23 to such investigation, examination or pro24 ceeding. 
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1 ‘‘(C) FINANCIAL INSTITUTION.—For the 

2 purposes of this paragraph, the term ‘financial 

3 institution’ means a depository institution, for4 eign bank, insured institution, industrial loan 

5 company, broker, dealer, investment company, 

6 investment advisor, or other entity subject to 

7 regulation or oversight by the United States Se8 curities and Exchange Commission or an appro9 priate Federal banking agency.’’. 

10 (b) FINANCIAL AND ACCOUNTING FRAUD INVESTIGA11 TIONS.—Section 6103(i) (relating to disclosure to Federal 

12 officers or employees for administration of Federal laws 

13 not relating to tax administration) is amended by adding 

14 at the end the following new paragraph: 

15 ‘‘(9) DISCLOSURE OF RETURNS AND RETURN

16 INFORMATION FOR USE IN FINANCIAL AND AC17 COUNTING FRAUD INVESTIGATIONS.— 

18 ‘‘(A) WRITTEN REQUEST.—Upon receipt 

19 by the Secretary of a written request which 

20 meets the requirements of subparagraph (B) 

21 from the head of the United States Securities 

22 and Exchange Commission or the Public Com23 pany Accounting Oversight Board, a return or 

24 return information shall be disclosed to such re25 questor’s officers and employees who are per-
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1 sonally and directly engaged in an investigation, 

2 examination, or proceeding by such requester to 

3 evaluate the accuracy of a financial statement 

4 or report or to determine whether to require a 

5 restatement, penalize, or deter conduct by an 

6 issuer, investment company, or public account7 ing firm, or associated person, in connection 

8 with a potential or actual violation of auditing 

9 standards or prohibitions against false or mis10 leading statements or omissions in financial 

11 statements or reports. Such disclosure shall be 

12 solely for use by such officers and employees in 

13 such investigation, examination, or proceeding. 

14 ‘‘(B) REQUIREMENTS.—A request meets 

15 the requirements of this subparagraph if it sets 

16 forth— 

17 ‘‘(i) the nature of the investigation, 

18 examination, or proceeding, 

19 ‘‘(ii) the statutory authority under 

20 which such investigation, examination, or 

21 proceeding is being conducted, 

22 ‘‘(iii) the name or names of the issuer, 

23 investment company, or public accounting 

24 firm to which such return information re25 lates, 
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1 ‘‘(iv) the taxable period or periods to 

2 which such return information relates, and 

3 ‘‘(v) the specific reason or reasons 

4 why such disclosure is, or may be, relevant 

5 to such investigation, examination or pro6 ceeding.’’. 

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

8 this section shall apply to disclosures and to information 

9 and document requests made after the date of the enact10 ment of this Act. 

11 SEC. 204. DISCLOSURE OF INFORMATION TO CONGRESS. 

12 (a) DISCLOSURE BY TAX RETURN PREPARER.— 

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

14 7216(b)(1) (relating to disclosures) is amended to 

15 read as follows: 

16 ‘‘(B) pursuant to any 1 of the following 

17 documents, if clearly identified: 

18 ‘‘(i) The order of any Federal, State, 

19 or local court of record. 

20 ‘‘(ii) A subpoena issued by a Federal 

21 or State grand jury. 

22 ‘‘(iii) An administrative order, sum23 mons, or subpoena which is issued in the 

24 performance of its duties by— 
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1 ‘‘(I) any Federal agency, includ2 ing Congress or any committee or 

3 subcommittee thereof, or 

4 ‘‘(II) any State agency, body, or 

5 commission charged under the laws of 

6 the State or a political subdivision of 

7 the State with the licensing, registra8 tion, or regulation of tax return pre9 parers.’’. 

10 (2) EFFECTIVE DATE.—The amendment made 

11 by this subsection shall apply to disclosures made 

12 after the date of the enactment of this Act pursuant 

13 to any document in effect on or after such date. 

14 (b) DISCLOSURE BY SECRETARY.—Paragraph (2) of 

15 section 6104(a) (relating to inspection of applications for 

16 tax exemption or notice of status) is amended to read as 

17 follows: 

18 ‘‘(2) INSPECTION BY CONGRESS.— 

19 ‘‘(A) IN GENERAL.—Upon receipt of a 

20 written request from a committee or sub21 committee of Congress, copies of documents re22 lated to a determination by the Secretary to 

23 grant, deny, revoke, or restore an organization’s 

24 exemption from taxation under section 501 

25 shall be provided to such committee or sub-
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1 committee, including any application, notice of 

2 status, or supporting information provided by 

3 such organization to the Internal Revenue Serv4 ice; any letter, analysis, or other document pro5 duced by or for the Internal Revenue Service 

6 evaluating, determining, explaining, or relating 

7 to the tax exempt status of such organization 

8 (other than returns, unless such returns are 

9 available to the public under this section or sec10 tion 6103 or 6110); and any communication be11 tween the Internal Revenue Service and any 

12 other party relating to the tax exempt status of 

13 such organization. 

14 ‘‘(B) ADDITIONAL INFORMATION.—Section 

15 6103(f) shall apply with respect to— 

16 ‘‘(i) the application for exemption of 

17 any organization described in subsection 

18 (c) or (d) of section 501 which is exempt 

19 from taxation under section 501(a) for any 

20 taxable year and any application referred 

21 to in subparagraph (B) of subsection 

22 (a)(1) of this section, and 

23 ‘‘(ii) any other papers which are in 

24 the possession of the Secretary and which 

25 relate to such application, 
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1 as if such papers constituted returns.’’. 

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

3 this section shall apply to disclosures and to information 

4 and document requests made after the date of the enact5 ment of this Act. 

6 SEC. 205. TAX OPINION STANDARDS FOR TAX PRACTI7 TIONERS. 

8 Section 330(d) of title 31, United States Code, is 

9 amended to read as follows: 

10 ‘‘(d) The Secretary of the Treasury shall impose 

11 standards applicable to the rendering of written advice 

12 with respect to any listed transaction or any entity, plan, 

13 arrangement, or other transaction which has a potential 

14 for tax avoidance or evasion. Such standards shall ad15 dress, but not be limited to, the following issues: 

16 ‘‘(1) Independence of the practitioner issuing 

17 such written advice from persons promoting, mar18 keting, or recommending the subject of the advice. 

19 ‘‘(2) Collaboration among practitioners, or be20 tween a practitioner and other party, which could re21 sult in such collaborating parties having a joint fi22 nancial interest in the subject of the advice. 

23 ‘‘(3) Avoidance of conflicts of interest which 

24 would impair auditor independence. 
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1 ‘‘(4) For written advice issued by a firm, stand2 ards for reviewing the advice and ensuring the con3 sensus support of the firm for positions taken. 

4 ‘‘(5) Reliance on reasonable factual representa5 tions by the taxpayer and other parties. 

6 ‘‘(6) Appropriateness of the fees charged by the 

7 practitioner for the written advice. 

8 ‘‘(7) Preventing practitioners and firms from 

9 aiding or abetting the understatement of tax liability 

10 by clients. 

11 ‘‘(8) Banning the promotion of potentially abu12 sive or illegal tax shelters.’’. 

13 SEC. 206. WHISTLEBLOWER REFORMS. 

14 (a) IN GENERAL.—Section 7623 (relating to ex15 penses of detection of underpayments and fraud, etc.) is 

16 amended— 

17 (1) by striking ‘‘The Secretary’’ and inserting 

18 ‘‘(a) IN GENERAL.—The Secretary’’, 

19 (2) by striking ‘‘and’’ at the end of paragraph 

20 (1) and inserting ‘‘or’’, 

21 (3) by striking ‘‘(other than interest)’’, and 

22 (4) by adding at the end the following new sub23 sections: 

24 ‘‘(b) AWARDS TO WHISTLEBLOWERS.— 
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1 ‘‘(1) IN GENERAL.—If the Secretary proceeds 

2 with any administrative or judicial action described 

3 in subsection (a) based on information brought to 

4 the Secretary’s attention by an individual, such indi5 vidual shall, subject to paragraph (2), receive as an 

6 award at least 15 percent but not more than 30 per7 cent of the collected proceeds (including penalties, 

8 interest, additions to tax, and additional amounts) 

9 resulting from the action (including any related ac10 tions) or from any settlement in response to such ac11 tion. The determination of the amount of such 

12 award by the Whistleblower Office shall depend upon 

13 the extent to which the individual substantially con14 tributed to such action, and shall be determined at 

15 the sole discretion of the Whistleblower Office. 

16 ‘‘(2) AWARD IN CASE OF LESS SUBSTANTIAL

17 CONTRIBUTION.— 

18 ‘‘(A) IN GENERAL.—In the event the ac19 tion described in paragraph (1) is one which the 

20 Whistleblower Office determines to be based 

21 principally on disclosures of specific allegations 

22 (other than information provided by the indi23 vidual described in paragraph (1)) resulting 

24 from a judicial or administrative hearing, from 

25 a governmental report, hearing, audit, or inves-
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1 tigation, or from the news media, the Whistle2 blower Office may award such sums as it con3 siders appropriate, but in no case more than 10 

4 percent of the collected proceeds (including pen5 alties, interest, additions to tax, and additional 

6 amounts) resulting from the action (including 

7 any related actions) or from any settlement in 

8 response to such action, taking into account the 

9 significance of the individual’s information and 

10 the role of such individual and any legal rep11 resentative of such individual in contributing to 

12 such action. 

13 ‘‘(B) NONAPPLICATION OF PARAGRAPH

14 WHERE INDIVIDUAL IS ORIGINAL SOURCE OF

15 INFORMATION.—Subparagraph (A) shall not 

16 apply if the information resulting in the initi17 ation of the action described in paragraph (1) 

18 was originally provided by the individual de19 scribed in paragraph (1). 

20 ‘‘(3) APPLICATION OF THIS SUBSECTION.—This 

21 subsection shall apply with respect to any action— 

22 ‘‘(A) against any taxpayer, but in the case 

23 of any individual, only if such individual’s gross 

24 income exceeds $200,000 for any taxable year 

25 subject to such action, and 
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1 ‘‘(B) if the tax, penalties, interest, addi2 tions to tax, and additional amounts in dispute 

3 exceed $20,000. 

4 ‘‘(4) ADDITIONAL RULES.— 

5 ‘‘(A) NO CONTRACT NECESSARY.—No con6 tract with the Internal Revenue Service is nec7 essary for any individual to receive an award 

8 under this subsection. 

9 ‘‘(B) REPRESENTATION.—Any individual 

10 described in paragraph (1) or (2) may be rep11 resented by counsel. 

12 ‘‘(C) AWARD NOT SUBJECT TO INDIVIDUAL

13 ALTERNATIVE MINIMUM TAX.—No award re14 ceived under this subsection shall be included in 

15 gross income for purposes of determining alter16 native minimum taxable income. 

17 ‘‘(c) WHISTLEBLOWER OFFICE.— 

18 ‘‘(1) IN GENERAL.—There is established in the 

19 Internal Revenue Service an office to be known as 

20 the ‘Whistleblower Office’ which— 

21 ‘‘(A) shall analyze information received 

22 from any individual described in subsection (b) 

23 and either investigate the matter itself or assign 

24 it to the appropriate Internal Revenue Service 

25 office, 
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1 ‘‘(B) shall monitor any action taken with 

2 respect to such matter, 

3 ‘‘(C) shall inform such individual that it 

4 has accepted the individual’s information for 

5 further review, 

6 ‘‘(D) may require such individual and any 

7 legal representative of such individual to not 

8 disclose any information so provided, 

9 ‘‘(E) may ask for additional assistance 

10 from such individual or any legal representative 

11 of such individual, and 

12 ‘‘(F) shall determine the amount to be 

13 awarded to such individual under subsection 

14 (b). 

15 ‘‘(2) FUNDING FOR OFFICE.—From the 

16 amounts available for expenditure under subsection 

17 (a), the Whistleblower Office shall be credited with 

18 an amount equal to the awards made under sub19 section (b). These funds shall be used to maintain 

20 the Whistleblower Office and also to reimburse other 

21 Internal Revenue Service offices for related costs, 

22 such as costs of investigation and collection. 

23 ‘‘(3) REQUEST FOR ASSISTANCE.— 

24 ‘‘(A) IN GENERAL.—Any assistance re25 quested under paragraph (1)(E) shall be under 
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1 the direction and control of the Whistleblower 

2 Office or the office assigned to investigate the 

3 matter under subparagraph (A). To the extent 

4 the disclosure of any returns or return informa5 tion to the individual or legal representative is 

6 required for the performance of such assistance, 

7 such disclosure shall be pursuant to a contract 

8 entered into between the Secretary and the re9 cipients of such disclosure subject to section 

10 6103(n). 

11 ‘‘(B) FUNDING OF ASSISTANCE.—From 

12 the funds made available to the Whistleblower 

13 Office under paragraph (2), the Whistleblower 

14 Office may reimburse the costs incurred by any 

15 legal representative in providing assistance de16 scribed in subparagraph (A).’’. 

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

18 this section shall apply to information provided on or after 

19 the date of the enactment of this Act. 

20 SEC. 207. DENIAL OF DEDUCTION FOR CERTAIN FINES, 

21 PENALTIES, AND OTHER AMOUNTS. 

22 (a) IN GENERAL.—Subsection (f) of section 162 (re23 lating to trade or business expenses) is amended to read 

24 as follows: 

25 ‘‘(f) FINES, PENALTIES, AND OTHER AMOUNTS.— 
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1 ‘‘(1) IN GENERAL.—Except as provided in para2 graph (2), no deduction otherwise allowable shall be 

3 allowed under this chapter for any amount paid or 

4 incurred (whether by suit, agreement, or otherwise) 

5 to, or at the direction of, a government or entity de6 scribed in paragraph (4) in relation to the violation 

7 of any law or the investigation or inquiry by such 

8 government or entity into the potential violation of 

9 any law. 

10 ‘‘(2) EXCEPTION FOR AMOUNTS CONSTITUTING

11 RESTITUTION.—Paragraph (1) shall not apply to 

12 any amount which— 

13 ‘‘(A) the taxpayer establishes constitutes 

14 restitution (including remediation of property) 

15 for damage or harm caused by or which may be 

16 caused by the violation of any law or the poten17 tial violation of any law, and 

18 ‘‘(B) is identified as restitution in the 

19 court order or settlement agreement. 

20 Identification pursuant to subparagraph (B) alone 

21 shall not satisfy the requirement under subpara22 graph (A). This paragraph shall not apply to any 

23 amount paid or incurred as reimbursement to the 

24 government or entity for the costs of any investiga25 tion or litigation. 
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1 ‘‘(3) EXCEPTION FOR AMOUNTS PAID OR IN2 CURRED AS THE RESULT OF CERTAIN COURT OR3 DERS.—Paragraph (1) shall not apply to any 

4 amount paid or incurred by order of a court in a 

5 suit in which no government or entity described in 

6 paragraph (4) is a party. 

7 ‘‘(4) CERTAIN NONGOVERNMENTAL REGU8 LATORY ENTITIES.—An entity is described in this 

9 paragraph if it is— 

10 ‘‘(A) a nongovernmental entity which exer11 cises self-regulatory powers (including imposing 

12 sanctions) in connection with a qualified board 

13 or exchange (as defined in section 1256(g)(7)), 

14 or 

15 ‘‘(B) to the extent provided in regulations, 

16 a nongovernmental entity which exercises self17 regulatory powers (including imposing sanc18 tions) as part of performing an essential gov19 ernmental function. 

20 ‘‘(5) EXCEPTION FOR TAXES DUE.—Paragraph 

21 (1) shall not apply to any amount paid or incurred 

22 as taxes due.’’. 

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

24 this section shall apply to amounts paid or incurred on 

25 or after the date of the enactment of this Act, except that 
27 

•S 1565 IS

1 such amendment shall not apply to amounts paid or in2 curred under any binding order or agreement entered into 

3 before such date. Such exception shall not apply to an 

4 order or agreement requiring court approval unless the ap5 proval was obtained before such date. 

6 SEC. 208. SENSE OF THE SENATE ON TAX ENFORCEMENT 

7 PRIORITIES. 

8 It is the sense of the Senate that additional funds 

9 should be appropriated for Internal Revenue Service en10 forcement efforts and that the Internal Revenue Service 

11 should devote proportionately more of its enforcement 

12 funds— 

13 (1) to combat the promotion of abusive tax 

14 shelters for corporations and high net worth individ15 uals and the aiding and abetting of tax evasion, 

16 (2) to stop accounting, law, and financial firms 

17 involved in such promotion and aiding and abetting, 

18 and 

19 (3) to combat the use of offshore financial ac20 counts to conceal taxable income. 
28 

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1 TITLE III—REQUIRING 

2 ECONOMIC SUBSTANCE 

3 SEC. 301. CLARIFICATION OF ECONOMIC SUBSTANCE DOC4 TRINE. 

5 (a) IN GENERAL.—Section 7701 is amended by re6 designating subsection (o) as subsection (p) and by insert7 ing after subsection (n) the following new subsection: 

8 ‘‘(o) CLARIFICATION OF ECONOMIC SUBSTANCE

9 DOCTRINE; ETC.— 

10 ‘‘(1) GENERAL RULES.— 

11 ‘‘(A) IN GENERAL.—In any case in which 

12 a court determines that the economic substance 

13 doctrine is relevant for purposes of this title to 

14 a transaction (or series of transactions), such 

15 transaction (or series of transactions) shall have 

16 economic substance only if the requirements of 

17 this paragraph are met. 

18 ‘‘(B) DEFINITION OF ECONOMIC SUB19 STANCE.—For purposes of subparagraph (A)— 

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

21 economic substance only if— 

22 ‘‘(I) the transaction changes in a 

23 meaningful way (apart from Federal 

24 tax effects) the taxpayer’s economic 

25 position, and 
29 

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1 ‘‘(II) the taxpayer has a substan2 tial nontax purpose for entering into 

3 such transaction and the transaction 

4 is a reasonable means of accom5 plishing such purpose. 

6 In applying subclause (II), a purpose of 

7 achieving a financial accounting benefit 

8 shall not be taken into account in deter9 mining whether a transaction has a sub10 stantial nontax purpose if the origin of 

11 such financial accounting benefit is a re12 duction of income tax. 

13 ‘‘(ii) SPECIAL RULE WHERE TAX14 PAYER RELIES ON PROFIT POTENTIAL.—A 

15 transaction shall not be treated as having 

16 economic substance by reason of having a 

17 potential for profit unless— 

18 ‘‘(I) the present value of the rea19 sonably expected pre-tax profit from 

20 the transaction is substantial in rela21 tion to the present value of the ex22 pected net tax benefits that would be 

23 allowed if the transaction were re24 spected, and 
30 

•S 1565 IS

1 ‘‘(II) the reasonably expected 

2 pre-tax profit from the transaction ex3 ceeds a risk-free rate of return. 

4 ‘‘(C) TREATMENT OF FEES AND FOREIGN

5 TAXES.—Fees and other transaction expenses 

6 and foreign taxes shall be taken into account as 

7 expenses in determining pre-tax profit under 

8 subparagraph (B)(ii). 

9 ‘‘(2) SPECIAL RULES FOR TRANSACTIONS WITH

10 TAX-INDIFFERENT PARTIES.— 

11 ‘‘(A) SPECIAL RULES FOR FINANCING

12 TRANSACTIONS.—The form of a transaction 

13 which is in substance the borrowing of money 

14 or the acquisition of financial capital directly or 

15 indirectly from a tax-indifferent party shall not 

16 be respected if the present value of the deduc17 tions to be claimed with respect to the trans18 action is substantially in excess of the present 

19 value of the anticipated economic returns of the 

20 person lending the money or providing the fi21 nancial capital. A public offering shall be treat22 ed as a borrowing, or an acquisition of financial 

23 capital, from a tax-indifferent party if it is rea24 sonably expected that at least 50 percent of the 
31 

•S 1565 IS

1 offering will be placed with tax-indifferent par2 ties. 

3 ‘‘(B) ARTIFICIAL INCOME SHIFTING AND

4 BASIS ADJUSTMENTS.—The form of a trans5 action with a tax-indifferent party shall not be 

6 respected if— 

7 ‘‘(i) it results in an allocation of in8 come or gain to the tax-indifferent party in 

9 excess of such party’s economic income or 

10 gain, or 

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

12 or shifting of basis on account of over13 stating the income or gain of the tax-indif14 ferent party. 

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

16 purposes of this subsection— 

17 ‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.— 

18 The term ‘economic substance doctrine’ means 

19 the common law doctrine under which tax bene20 fits under subtitle A with respect to a trans21 action are not allowable if the transaction does 

22 not have economic substance or lacks a business 

23 purpose. 

24 ‘‘(B) TAX-INDIFFERENT PARTY.—The 

25 term ‘tax-indifferent party’ means any person 
32 

•S 1565 IS

1 or entity not subject to tax imposed by subtitle 

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

3 party with respect to a transaction if the items 

4 taken into account with respect to the trans5 action have no substantial impact on such per6 son’s liability under subtitle A. 

7 ‘‘(C) EXCEPTION FOR PERSONAL TRANS8 ACTIONS OF INDIVIDUALS.—In the case of an 

9 individual, this subsection shall apply only to 

10 transactions entered into in connection with a 

11 trade or business or an activity engaged in for 

12 the production of income. 

13 ‘‘(D) TREATMENT OF LESSORS.—In apply14 ing paragraph (1)(B)(ii) to the lessor of tan15 gible property subject to a lease— 

16 ‘‘(i) the expected net tax benefits with 

17 respect to the leased property shall not in18 clude the benefits of— 

19 ‘‘(I) depreciation, 

20 ‘‘(II) any tax credit, or 

21 ‘‘(III) any other deduction as 

22 provided in guidance by the Secretary, 

23 and 

24 ‘‘(ii) subclause (II) of paragraph 

25 (1)(B)(ii) shall be disregarded in deter-
33 

•S 1565 IS

1 mining whether any of such benefits are al2 lowable. 

3 ‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF4 FECTED.—Except as specifically provided in this 

5 subsection, the provisions of this subsection shall not 

6 be construed as altering or supplanting any other 

7 rule of law, and the requirements of this subsection 

8 shall be construed as being in addition to any such 

9 other rule of law. 

10 ‘‘(5) REGULATIONS.—The Secretary shall pre11 scribe such regulations as may be necessary or ap12 propriate to carry out the purposes of this sub13 section. Such regulations may include exemptions 

14 from the application of this subsection.’’. 

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

16 this section shall apply to transactions entered into after 

17 the date of the enactment of this Act. 

18 SEC. 302. PENALTY FOR UNDERSTATEMENTS ATTRIB19 UTABLE TO TRANSACTIONS LACKING ECO20 NOMIC SUBSTANCE, ETC. 

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

22 amended by inserting after section 6662A the following 

23 new section: 
34 

•S 1565 IS

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

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

5 noneconomic substance transaction understatement for 

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

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

9 ‘‘(b) REDUCTION OF PENALTY FOR DISCLOSED

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

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

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

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

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

19 substance transaction understatement’ means any 

20 amount which would be an understatement under 

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

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

24 to which section 6662A would apply without regard 

25 to this paragraph. 
35 

•S 1565 IS

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

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

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

6 the transaction giving rise to the claimed ben7 efit or the transaction was not respected under 

8 section 7701(o)(2), or 

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

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

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

17 respect to a penalty to which this section applies, 

18 only the Commissioner of Internal Revenue may 

19 compromise all or any portion of such penalty. 

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

22 for purposes of paragraph (1). 

23 ‘‘(e) COORDINATION WITH OTHER PENALTIES.—Ex24 cept as otherwise provided in this part, the penalty im-
36 

•S 1565 IS

1 posed by this section shall be in addition to any other pen2 alty imposed by this title. 

3 ‘‘(f) CROSS REFERENCES.— 

‘‘(1) For coordination of penalty with understatements 

under section 6662 and other special rules, see section 

6662A(e). 

‘‘(2) For reporting of penalty imposed under this section 

to the Securities and Exchange Commission, see section 

6707A(e).’’. 

4 (b) COORDINATION WITH OTHER UNDERSTATE5 MENTS AND PENALTIES.— 

6 (1) The second sentence of section 

7 6662(d)(2)(A) is amended by inserting ‘‘and without 

8 regard to items with respect to which a penalty is 

9 imposed by section 6662B’’ before the period at the 

10 end. 

11 (2) Subsection (e) of section 6662A is amend12 ed— 

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

14 noneconomic substance transaction understate15 ments’’ after ‘‘reportable transaction under16 statements’’ both places it appears, 

17 (B) in paragraph (2)(A), by inserting ‘‘and 

18 a noneconomic substance transaction under19 statement’’ after ‘‘reportable transaction under20 statement’’, 

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

22 ‘‘6662B or’’ before ‘‘6663’’, 
37 

•S 1565 IS

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

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

3 end, 

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

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

6 (F) in paragraph (3), by inserting ‘‘or non7 economic substance transaction understate8 ment’’ after ‘‘reportable transaction understate9 ment’’, and 

10 (G) by adding at the end the following new 

11 paragraph: 

12 ‘‘(4) NONECONOMIC SUBSTANCE TRANSACTION

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

16 term by section 6662B(c).’’. 

17 (3) Subsection (e) of section 6707A is amend18 ed— 

19 (A) by striking ‘‘or’’ at the end of subpara20 graph (B), and 

21 (B) by striking subparagraph (C) and in22 serting the following new subparagraphs: 

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

24 section 6662B with respect to any noneconomic 

25 substance transaction, or 
38 

•S 1565 IS

1 ‘‘(D) is required to pay a penalty under 

2 section 6662(h) with respect to any transaction 

3 and would (but for section 6662A(e)(2)(C)) 

4 have been subject to penalty under section 

5 6662A at a rate prescribed under section 

6 6662A(c) or under section 6662B,’’. 

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

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

9 inserting after the item relating to section 6662A the fol10 lowing new item: 

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

economic substance, etc.’’. 

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

12 this section shall apply to transactions entered into after 

13 the date of the enactment of this Act. 

14 SEC. 303. DENIAL OF DEDUCTION FOR INTEREST ON UN15 DERPAYMENTS ATTRIBUTABLE TO NON16 ECONOMIC SUBSTANCE TRANSACTIONS. 

17 (a) IN GENERAL.—Section 163(m) (relating to inter18 est on unpaid taxes attributable to nondisclosed reportable 

19 transactions) is amended— 

20 (1) by striking ‘‘attributable’’ and all that fol21 lows and inserting the following: ‘‘attributable to— 

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

23 understatement (as defined in section 6662A(b)) 
39 

•S 1565 IS

1 with respect to which the requirement of section 

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

3 ‘‘(2) any noneconomic substance transaction 

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

5 and 

6 (2) by inserting ‘‘AND NONECONOMIC SUB7 STANCE TRANSACTIONS’’ after ‘‘TRANS8 ACTIONS’’. 

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

10 this section shall apply to transactions after the date of 

11 the enactment of this Act in taxable years ending after 

12 such date. 

13 TITLE IV—DETERRING 

14 UNCOOPERATIVE TAX HAVENS 

15 SEC. 401. DISCLOSING PAYMENTS TO PERSONS IN UNCO16 OPERATIVE TAX HAVENS. 

17 (a) IN GENERAL.—Subpart A of part III of sub18 chapter A of chapter 61 is amended by inserting after sec19 tion 6038C the following new section: 

20 ‘‘SEC. 6038D. DETERRING UNCOOPERATIVE TAX HAVENS 

21 THROUGH LISTING AND REPORTING RE22 QUIREMENTS. 

23 ‘‘(a) IN GENERAL.—Each United States person who 

24 transfers money or other property directly or indirectly to 

25 any uncooperative tax haven, to any financial institution 
40 

•S 1565 IS

1 licensed by or operating in any uncooperative tax haven, 

2 or to any person who is a resident of any uncooperative 

3 tax haven shall furnish to the Secretary, at such time and 

4 in such manner as the Secretary shall by regulation pre5 scribe, such information with respect to such transfer as 

6 the Secretary may require. 

7 ‘‘(b) EXCEPTIONS.—Subsection (a) shall not apply to 

8 a transfer by a United States person if the amount of 

9 money (and the fair market value of property) transferred 

10 is less than $10,000. Related transfers shall be treated 

11 as 1 transfer for purposes of this subsection. 

12 ‘‘(c) UNCOOPERATIVE TAX HAVEN.—For purposes of 

13 this section— 

14 ‘‘(1) IN GENERAL.—The term ‘uncooperative 

15 tax haven’ means any foreign jurisdiction which is 

16 identified on a list maintained by the Secretary 

17 under paragraph (2) as being a jurisdiction— 

18 ‘‘(A) which imposes no or nominal taxation 

19 either generally or on specified classes of in20 come, and 

21 ‘‘(B) has corporate, business, bank, or tax 

22 secrecy or confidentiality rules and practices, or 

23 has ineffective information exchange practices 

24 which, in the judgment of the Secretary, effec25 tively limit or restrict the ability of the United 
41 

•S 1565 IS

1 States to obtain information relevant to the en2 forcement of this title. 

3 ‘‘(2) MAINTENANCE OF LIST.—Not later than 

4 November 1 of each calendar year, the Secretary 

5 shall issue a list of foreign jurisdictions which the 

6 Secretary determines qualify as uncooperative tax 

7 havens under paragraph (1). 

8 ‘‘(3) INEFFECTIVE INFORMATION EXCHANGE

9 PRACTICES.—For purposes of paragraph (1), a juris10 diction shall be deemed to have ineffective informa11 tion exchange practices if the Secretary determines 

12 that during any taxable year ending in the 12-month 

13 period preceding the issuance of the list under para14 graph (2)— 

15 ‘‘(A) the exchange of information between 

16 the United States and such jurisdiction was in17 adequate to prevent evasion or avoidance of 

18 United States income tax by United States per19 sons or to enable the United States effectively 

20 to enforce this title, or 

21 ‘‘(B) such jurisdiction was identified by an 

22 intergovernmental group or organization of 

23 which the United States is a member as unco24 operative with international tax enforcement or 
42 

•S 1565 IS

1 information exchange and the United States 

2 concurs in the determination. 

3 ‘‘(d) PENALTY FOR FAILURE TO FILE INFORMA4 TION.—If a United States person fails to furnish the infor5 mation required by subsection (a) with respect to any 

6 transfer within the time prescribed therefor (including ex7 tensions), such United States person shall pay (upon no8 tice and demand by the Secretary and in the same manner 

9 as tax) an amount equal to 20 percent of the amount of 

10 such transfer. 

11 ‘‘(e) SIMPLIFIED REPORTING.—The Secretary may 

12 by regulations provide for simplified reporting under this 

13 section for United States persons making large volumes 

14 of similar payments. 

15 ‘‘(f) REGULATIONS.—The Secretary shall prescribe 

16 such regulations as may be necessary or appropriate to 

17 carry out the purposes of this section.’’. 

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

19 for such subpart A is amended by inserting after the item 

20 relating to section 6038C the following new item: 

‘‘Sec. 6038D. Deterring uncooperative tax havens through listing and reporting 

requirements.’’. 

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

22 this section shall apply to transfers after the date which 

23 is 180 days after the date of the enactment of this Act. 
43 

•S 1565 IS

1 SEC. 402. DETERRING UNCOOPERATIVE TAX HAVENS BY 

2 RESTRICTING ALLOWABLE TAX BENEFITS. 

3 (a) LIMITATION ON DEFERRAL.— 

4 (1) IN GENERAL.—Subsection (a) of section 

5 952 (defining subpart F income) is amended by 

6 striking ‘‘and’’ at the end of paragraph (4), by strik7 ing the period at the end of paragraph (5) and in8 serting ‘‘, and’’, and by inserting after paragraph 

9 (5) the following new paragraph: 

10 ‘‘(6) an amount equal to the applicable fraction 

11 (as defined in subsection (e)) of the income of such 

12 corporation other than income which— 

13 ‘‘(A) is attributable to earnings and profits 

14 of the foreign corporation included in the gross 

15 income of a United States person under section 

16 951 (other than by reason of this paragraph or 

17 paragraph (3)(A)(i)), or 

18 ‘‘(B) is described in subsection (b).’’. 

19 (2) APPLICABLE FRACTION.—Section 952 is 

20 amended by adding at the end the following new 

21 subsection: 

22 ‘‘(e) IDENTIFIED TAX HAVEN INCOME WHICH IS

23 SUBPART F INCOME.— 

24 ‘‘(1) IN GENERAL.—For purposes of subsection 

25 (a)(6), the term ‘applicable fraction’ means the frac26 tion— 
44 

•S 1565 IS

1 ‘‘(A) the numerator of which is the aggre2 gate identified tax haven income for the taxable 

3 year, and 

4 ‘‘(B) the denominator of which is the ag5 gregate income for the taxable year which is 

6 from sources outside the United States. 

7 ‘‘(2) IDENTIFIED TAX HAVEN INCOME.—For 

8 purposes of paragraph (1), the term ‘identified tax 

9 haven income’ means income for the taxable year 

10 which is attributable to a foreign jurisdiction for any 

11 period during which such jurisdiction has been iden12 tified as an uncooperative tax haven under section 

13 6038D(c). 

14 ‘‘(3) REGULATIONS.—The Secretary shall pre15 scribe regulations similar to the regulations issued 

16 under section 999(c) to carry out the purposes of 

17 this subsection.’’. 

18 (b) DENIAL OF FOREIGN TAX CREDIT.—Section 901 

19 (relating to taxes of foreign countries and of possessions 

20 of United States) is amended by redesignating subsection 

21 (m) as subsection (n) and by inserting after subsection 

22 (l) the following new subsection: 

23 ‘‘(m) REDUCTION OF FOREIGN TAX CREDIT, ETC., 

24 FOR IDENTIFIED TAX HAVEN INCOME.— 
45 

•S 1565 IS

1 ‘‘(1) IN GENERAL.—Notwithstanding any other 

2 provision of this part— 

3 ‘‘(A) no credit shall be allowed under sub4 section (a) for any income, war profits, or ex5 cess profits taxes paid or accrued (or deemed 

6 paid under section 902 or 960) to any foreign 

7 jurisdiction if such taxes are with respect to in8 come attributable to a period during which such 

9 jurisdiction has been identified as an unco10 operative tax haven under section 6038D(c), 

11 and 

12 ‘‘(B) subsections (a), (b), (c), and (d) of 

13 section 904 and sections 902 and 960 shall be 

14 applied separately with respect to all income of 

15 a taxpayer attributable to periods described in 

16 subparagraph (A) with respect to all such juris17 dictions. 

18 ‘‘(2) TAXES ALLOWED AS A DEDUCTION, ETC.— 

19 Sections 275 and 78 shall not apply to any tax 

20 which is not allowable as a credit under subsection 

21 (a) by reason of this subsection. 

22 ‘‘(3) REGULATIONS.—The Secretary shall pre23 scribe such regulations as may be necessary or ap24 propriate to carry out the purposes of this sub25 section, including regulations which treat income 
46 

•S 1565 IS

1 paid through 1 or more entities as derived from a 

2 foreign jurisdiction to which this subsection applies 

3 if such income was, without regard to such entities, 

4 derived from such jurisdiction.’’. 

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

6 this section shall apply to taxable years beginning after 

7 the date of the enactment of this Act. 

8 SEC. 403. DOUBLING OF CERTAIN PENALTIES, FINES, AND 

9 INTEREST ON UNDERPAYMENTS RELATED TO 

10 CERTAIN OFFSHORE FINANCIAL ARRANGE11 MENTS. 

12 (a) DETERMINATION OF PENALTY.— 

13 (1) IN GENERAL.—Notwithstanding any other 

14 provision of law, in the case of an applicable tax15 payer— 

16 (A) the determination as to whether any 

17 interest or applicable penalty is to be imposed 

18 with respect to any arrangement described in 

19 paragraph (2), or to any underpayment of Fed20 eral income tax attributable to items arising in 

21 connection with any such arrangement, shall be 

22 made without regard to the rules of subsections 

23 (b), (c), and (d) of section 6664 of the Internal 

24 Revenue Code of 1986, and 
47 

•S 1565 IS

1 (B) if any such interest or applicable pen2 alty is imposed, the amount of such interest or 

3 penalty shall be equal to twice that determined 

4 without regard to this section. 

5 (2) APPLICABLE TAXPAYER.—For purposes of 

6 this subsection— 

7 (A) IN GENERAL.—The term ‘‘applicable 

8 taxpayer’’ means a taxpayer which— 

9 (i) has underreported its United 

10 States income tax liability with respect to 

11 any item which directly or indirectly in12 volves— 

13 (I) any financial arrangement 

14 which in any manner relies on the use 

15 of an offshore payment mechanism 

16 (including credit, debit, or charge 

17 cards) issued by a bank or other enti18 ty in a foreign jurisdiction, or 

19 (II) any offshore financial ar20 rangement (including any arrange21 ment with foreign banks, financial in22 stitutions, corporations, partnerships, 

23 trusts, or other entities), and 

24 (ii) has not signed a closing agree25 ment pursuant to the Voluntary Offshore 
48 

•S 1565 IS

1 Compliance Initiative established by the 

2 Department of the Treasury under Rev3 enue Procedure 2003–11 or voluntarily 

4 disclosed its participation in such arrange5 ment by notifying the Internal Revenue 

6 Service of such arrangement prior to the 

7 issue being raised by the Internal Revenue 

8 Service during an examination. 

9 (B) AUTHORITY TO WAIVE.—The Sec10 retary of the Treasury or the Secretary’s dele11 gate may waive the application of paragraph (1) 

12 for any taxpayer if the Secretary or the Sec13 retary’s delegate determines that— 

14 (i) the use of such offshore payment 

15 mechanism or financial arrangement was 

16 incidental to the transaction, 

17 (ii) in the case of a trade or business, 

18 such use took place in the ordinary course 

19 of the trade or business of the taxpayer, 

20 and 

21 (iii) such waiver would serve the pub22 lic interest. 

23 (C) ISSUES RAISED.—For purposes of sub24 paragraph (A)(ii), an item shall be treated as 
49 

•S 1565 IS

1 an issue raised during an examination if the in2 dividual examining the return— 

3 (i) communicates to the taxpayer 

4 knowledge about the specific item, or 

5 (ii) has made a request to the tax6 payer for information and the taxpayer 

7 could not make a complete response to 

8 that request without giving the examiner 

9 knowledge of the specific item. 

10 (b) DEFINITIONS AND RULES.—For purposes of this 

11 section— 

12 (1) APPLICABLE PENALTY.—The term ‘‘appli13 cable penalty’’ means any penalty, addition to tax, 

14 or fine imposed under chapter 68 of the Internal 

15 Revenue Code of 1986. 

16 (2) FEES AND EXPENSES.—The Secretary of 

17 the Treasury may retain and use an amount not in 

18 excess of 25 percent of all additional interest, pen19 alties, additions to tax, and fines collected under this 

20 section to be used for enforcement and collection ac21 tivities of the Internal Revenue Service. The Sec22 retary shall keep adequate records regarding 

23 amounts so retained and used. The amount credited 

24 as paid by any taxpayer shall be determined without 

25 regard to this paragraph. 
50 

•S 1565 IS

1 (c) REPORT BY SECRETARY.—The Secretary shall 

2 each year conduct a study and report to Congress on the 

3 implementation of this section during the preceding year, 

4 including statistics on the number of taxpayers affected 

5 by such implementation and the amount of interest and 

6 applicable penalties asserted, waived, and assessed during 

7 such preceding year. 

8 (d) EFFECTIVE DATE.—The provisions of this sec9 tion shall apply to interest, penalties, additions to tax, and 

10 fines with respect to any taxable year if, as of the date 

11 of the enactment of this Act, the assessment of any tax, 

12 penalty, or interest with respect to such taxable year is 

13 not prevented by the operation of any law or rule of law. 

14 SEC. 404. TREASURY REGULATIONS ON FOREIGN TAX 

15 CREDIT. 

16 (a) IN GENERAL.—Section 901 (relating to taxes of 

17 foreign countries and of possessions of United States), as 

18 amended by section 402, is amended by redesignating sub19 section (n) as subsection (o) and by inserting after sub20 section (m) the following new subsection: 

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

22 regulations disallowing a credit under subsection (a) for 

23 all or a portion of any foreign tax, or allocating a foreign 

24 tax among 2 or more persons, in cases where the foreign 

25 tax is imposed on any person in respect of income of an-
51 

•S 1565 IS

1 other person or in other cases involving the inappropriate 

2 separation of the foreign tax from the related foreign in3 come.’’. 

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

5 this section shall apply to transactions entered into after 

6 the date of the enactment of this Act. 

Æ