II 

109TH CONGRESS 

1ST SESSION S. 2045 

To provide incentives to the auto industry to accelerate efforts to develop 

more energy-efficient vehicles to lessen dependence on oil. 

IN THE SENATE OF THE UNITED STATES 

NOVEMBER 17, 2005 

Mr. OBAMA introduced the following bill; which was read twice and referred 

to the Committee on Finance 

A BILL 

To provide incentives to the auto industry to accelerate efforts to develop more energy-efficient vehicles to lessen 

dependence on oil. 

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. 

4 This Act may be cited as the ‘‘Health Care for Hy5 brids Act’’. 

6 SEC. 2. FINDINGS. 

7 Congress makes the following findings: 

8 (1) The United States imports over half the oil 

9 it consumes. 
2 

•S 2045 IS

1 (2) According to present trends, the United 

2 States reliance on foreign oil will increase to 68 per3 cent of its total consumption by 2025. 

4 (3) With only 3 percent of the world’s known 

5 oil reserves, the health of the United States economy 

6 is dependent on world oil prices. 

7 (4) World oil prices are overwhelmingly dictated 

8 by countries other than the United States, thus en9 dangering our economic and national security. 

10 (5) Legacy health care costs associated with re11 tiree workers are an increasing burden on the global 

12 competitiveness of American industries. 

13 (6) American automakers have lagged behind 

14 their foreign competitors in producing hybrid and 

15 other energy efficient automobiles. 

16 (7) Innovative uses of new technology in auto17 mobiles in the United States will help retain Amer18 ican jobs, support health care obligations for retiring 

19 workers in the automotive sector, decrease America’s 

20 dependence on foreign oil, and address pressing envi21 ronmental concerns. 

22 TITLE I—PROGRAM 

23 SEC. 101. COORDINATING TASK FORCE. 

24 Not later than 6 months after the date of enactment 

25 of this Act, the Secretary of Energy, the Secretary of 
3 

•S 2045 IS

1 Health and Human Services, the Secretary of Transpor2 tation, and the Secretary of the Treasury shall establish, 

3 and appoint an equal number of representatives to, a task 

4 force (referred to in this Act as the ‘‘task force’’) to ad5 minister the program established under this Act. 

6 SEC. 102. ESTABLISHMENT OF PROGRAM. 

7 (a) IN GENERAL.—Not later than 1 year after the 

8 date of enactment of this Act, the task force established 

9 under section 101 shall establish a program to provide fi10 nancial assistance to eligible domestic automobile manu11 facturers for the costs incurred in providing health bene12 fits to their retired employees. 

13 (b) CONSULTATION.—In establishing the program 

14 under subsection (a), the task force shall consult with rep15 resentatives from the domestic automobile manufacturers, 

16 unions representing employees of such manufacturers, and 

17 consumer and environmental groups. 

18 (c) ELIGIBLE DOMESTIC AUTOMOBILE MANUFAC19 TURER.—To be eligible to receive financial assistance 

20 under the program established under subsection (a), a do21 mestic automobile manufacturer shall— 

22 (1) submit an application to the task force at 

23 such time, in such manner, and containing such in24 formation as the task force shall require; 
4 

•S 2045 IS

1 (2) certify that such manufacturer is providing 

2 full health care coverage to all of its domestic em3 ployees; 

4 (3) provide an assurance that the manufacturer 

5 will invest an amount equal to not less than 50 per6 cent of the amount of health savings derived by the 

7 manufacturer as a result of its retiree health care 

8 costs being covered under the program under this 

9 section, in— 

10 (A) the domestic manufacture and com11 mercialization of petroleum fuel reduction tech12 nologies, including alternative or flexible fuel 

13 vehicles, hybrids, and other state-of-the-art fuel 

14 saving technologies; 

15 (B) the retraining of workers and retooling 

16 of assembly lines for such domestic manufac17 ture and commercialization; 

18 (C) research and development, design, 

19 commercialization, and other costs related to 

20 the diversifying of domestic production of auto21 mobiles through the offering of high perform22 ance fuel efficient vehicles; and 

23 (D) assisting domestic automobile compo24 nent suppliers to retool their domestic manufac25 turing plants to produce components for petro-
5 

•S 2045 IS

1 leum fuel reduction technologies, including al2 ternative or flexible fuel vehicles, hybrid, ad3 vanced diesel, or other state-of-the-art fuel sav4 ing technologies; and 

5 (4) provide additional assurances and informa6 tion as the task force may require, including infor7 mation needed by the task force to audit the manu8 facturer’s compliance with the requirements of the 

9 program. 

10 (d) LIMITATION.—The total amount of financial as11 sistance that may be provided each year under the pro12 gram under this section with respect to any single domes13 tic automobile manufacturer shall not exceed an amount 

14 equal to 10 percent of the retiree health care costs of that 

15 manufacturer for that year. 

16 SEC. 103. REPORTING. 

17 Not later than 6 months after the date of enactment 

18 of this Act, and every 6 months thereafter, the task force 

19 shall submit to Congress a report on any financial assist20 ance provided under this program under this Act and the 

21 resulting changes in the manufacture and commercializa22 tion of fuel saving technologies implemented by auto man23 ufacturers as a result of such financial assistance. Not 

24 later than 1 year after the date of enactment of this Act, 

25 the task force shall submit a report to Congress on the 
6 

•S 2045 IS

1 effectiveness of current consumer incentives available for 

2 the purchase of hybrid vehicles in encouraging the pur3 chase of such vehicles and whether these incentives should 

4 be expanded. 

5 SEC. 104. AUTHORIZATION OF APPROPRIATIONS. 

6 There are authorized to be appropriated, such sums 

7 as may be necessary in each fiscal year to carry out this 

8 Act. 

9 SEC. 105. LIMITATION ON BACKSLIDING. 

10 To be eligible to receive financial assistance under 

11 this title, a manufacturer shall provide assurances to the 

12 task force that fuel savings achieved with respect its aver13 age adjusted fuel economy will not result in decreases with 

14 respect to fuel economy elsewhere in the domestic fleet. 

15 The task force shall determine compliance with such as16 surances using accepted measurements of fuel savings. 

17 SEC. 106. TERMINATION OF PROGRAM. 

18 The program established under this title shall termi19 nate on December 31, 2015. 

20 TITLE II—OFFSETS 

21 SEC. 201. CLARIFICATION OF ECONOMIC SUBSTANCE DOC22 TRINE. 

23 (a) IN GENERAL.—Section 7701 of the Internal Rev24 enue Code of 1986 is amended by redesignating subsection 
7 

•S 2045 IS

1 (o) as subsection (p) and by inserting after subsection (n) 

2 the following new subsection: 

3 ‘‘(o) CLARIFICATION OF ECONOMIC SUBSTANCE

4 DOCTRINE; ETC.— 

5 ‘‘(1) GENERAL RULES.— 

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

7 a court determines that the economic substance 

8 doctrine is relevant for purposes of this title to 

9 a transaction (or series of transactions), such 

10 transaction (or series of transactions) shall have 

11 economic substance only if the requirements of 

12 this paragraph are met. 

13 ‘‘(B) DEFINITION OF ECONOMIC SUB14 STANCE.—For purposes of subparagraph (A)— 

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

16 economic substance only if— 

17 ‘‘(I) the transaction changes in a 

18 meaningful way (apart from Federal 

19 tax effects) the taxpayer’s economic 

20 position, and 

21 ‘‘(II) the taxpayer has a substan22 tial nontax purpose for entering into 

23 such transaction and the transaction 

24 is a reasonable means of accom25 plishing such purpose. 
8 

•S 2045 IS

1 In applying subclause (II), a purpose of 

2 achieving a financial accounting benefit 

3 shall not be taken into account in deter4 mining whether a transaction has a sub5 stantial nontax purpose if the origin of 

6 such financial accounting benefit is a re7 duction of income tax 

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

10 transaction shall not be treated as having 

11 economic substance by reason of having a 

12 potential for profit unless— 

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

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

18 allowed if the transaction were re19 spected, and 

20 ‘‘(II) the reasonably expected 

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

23 ‘‘(C) TREATMENT OF FEES AND FOREIGN

24 TAXES.—Fees and other transaction expenses 

25 and foreign taxes shall be taken into account as 
9 

•S 2045 IS

1 expenses in determining pre-tax profit under 

2 subparagraph (B)(ii). 

3 ‘‘(2) SPECIAL RULES FOR TRANSACTION WITH

4 TAX-INDIFFERENT PARTIES.— 

5 ‘‘(A) SPECIAL RULES FOR FINANCING

6 TRANSACTIONS.—The form of a transaction 

7 which is in substance the borrowing of money 

8 or the acquisition of financial capital directly or 

9 indirectly from a tax-indifferent party shall not 

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

13 value of the anticipated economic returns of the 

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

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

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

21 ‘‘(B) ARTIFICIAL INCOME SHIFTING AND

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

24 respected if— 
10 

•S 2045 IS

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

3 excess of such party’s economic income or 

4 gain, or 

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

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

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

10 purposes of this subsection— 

11 ‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.— 

12 The term ‘economic substance doctrine’ means 

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

16 not have economic substance or lacks a business 

17 purpose. 

18 ‘‘(B) TAX-INDIFFERENT PARTY.—The 

19 term ‘tax-indifferent party’ means any person 

20 or entity not subject to tax imposed by subtitle 

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

22 party with respect to a transaction if the items 

23 taken into account with respect to the trans24 action have no substantial impact on such per25 son’s liability under subtitle A. 
11 

•S 2045 IS

1 ‘‘(C) EXCEPTION FOR PERSONAL TRANS2 ACTIONS OF INDIVIDUALS.—In the case of an 

3 individual, this subsection shall apply only to 

4 transactions entered into in connection with a 

5 trade or business or an activity engaged in for 

6 the production of income. 

7 ‘‘(D) TREATMENT OF LESSORS.—In apply8 ing paragraph (1)(B)(ii) to the lessor of tan9 gible property subject to a lease— 

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

11 respect to the leased property shall not in12 clude the benefits of— 

13 ‘‘(I) depreciation, 

14 ‘‘(II) any tax credit, or 

15 ‘‘(III) any other deduction as 

16 provided in guidance by the Secretary, 

17 and 

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

19 (1)(B)(ii) shall be disregarded in deter20 mining whether any of such benefits are al21 lowable. 

22 ‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF23 FECTED.—Except as specifically provided in this 

24 subsection, the provisions of this subsection shall not 

25 be construed as altering or supplanting any other 
12 

•S 2045 IS

1 rule of law, and the requirements of this subsection 

2 shall be construed as being in addition to any such 

3 other rule of law. 

4 ‘‘(5) REGULATIONS.—The Secretary shall pre5 scribe such regulations as may be necessary or ap6 propriate to carry out the purposes of this sub7 section. Such regulations may include exemptions 

8 from the application of this subsection.’’. 

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

10 this section shall apply to transactions entered into after 

11 the date of the enactment of this Act. 

12 SEC. 202. PENALTY FOR UNDERSTATEMENTS ATTRIB13 UTABLE TO TRANSACTIONS LACKING ECO14 NOMIC SUBSTANCE, ETC. 

15 (a) IN GENERAL.—Subchapter A of chapter 68 of the 

16 Internal Revenue Code of 1986 is amended by inserting 

17 after section 6662A the following new section: 

18 ‘‘SEC. 6662A. PENALTY FOR UNDERSTATEMENTS ATTRIB19 UTABLE TO TRANSACTIONS LACKING ECO20 NOMIC SUBSTANCE, ETC. 

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

22 noneconomic substance transaction understatement for 

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

24 amount equal to 40 percent of the amount of such under25 statement. 
13 

•S 2045 IS

1 ‘‘(b) REDUCTION OF PENALTY FOR DISCLOSED

2 TRANSACTIONS.—Subsection (a) shall be applied by sub3 stituting ‘20 percent’ for ‘40 percent’ with respect to the 

4 portion of any noneconomic substance transaction under5 statement with respect to which the relevant facts affect6 ing the tax treatment of the item are adequately disclosed 

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

8 ‘‘(c) NONECONOMIC SUBSTANCE TRANSACTION UN9 DERSTATEMENT.—For purposes of this section— 

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

11 substance transaction understatement’ means any 

12 amount which would be an understatement under 

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

14 by taking into account items attributable to non15 economic substance transactions rather than items 

16 to which section 6662A would apply without regard 

17 to this paragraph. 

18 ‘‘(2) NONECONOMIC SUBSTANCE TRANS19 ACTION.—The term ‘noneconomic substance trans20 action’ means any transaction if— 

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

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

23 the transaction giving rise to the claimed ben24 efit or the transaction was not respected under 

25 section 7701(o)(2), or 
14 

•S 2045 IS

1 ‘‘(B) the transaction fails to meet the re2 quirements of any similar rule of law. 

3 ‘‘(d) RULES APPLICABLE TO COMPROMISE OF PEN4 ALTY.— 

5 ‘‘(1) IN GENERAL.—If the 1st letter of pro6 posed deficiency which allows the taxpayer an oppor7 tunity for administrative review in the Internal Rev8 enue Service Office of Appeals has been sent with 

9 respect to a penalty to which this section applies, 

10 only the Commissioner of Internal Revenue may 

11 compromise all or any portion of such penalty. 

12 ‘‘(2) APPLICABLE RULES.—The rules of para13 graphs (2) and (3) of section 6707A(d) shall apply 

14 for purposes of paragraph (1). 

15 ‘‘(e) COORDINATION WITH OTHER PENALTIES.—Ex16 cept as otherwise provided in this part, the penalty im17 posed by this section shall be in addition to any other pen18 alty imposed by this title. 

19 ‘‘(f) CROSS REFERENCES.— 

20 ‘‘(1) For coordination of penalty with under21 statements under section 6662 and other special 

22 rules, see section 6662A(e). 

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

24 this section to the Securities and Exchange Commis25 sion, see section 6707A(e).’’. 
15 

•S 2045 IS

1 (b) COORDINATION WITH OTHER UNDERSTATE2 MENTS AND PENALTIES.— 

3 (1) The second sentence of section 

4 6662(d)(2)(A) of the Internal Revenue Code of 1986 

5 is amended by inserting ‘‘and without regard to 

6 items with respect to which a penalty is imposed by 

7 section 6662B’’ before the period at the end. 

8 (2) Subsection (e) of section 6662A of the In9 ternal Revenue Code of 1986 is amended— 

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

11 noneconomic substance transaction understate12 ments’’ after ‘‘reportable transaction under13 statements’’ both places it appears, 

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

15 a noneconomic substance transaction under16 statement’’ after ‘‘reportable transaction under17 statement’’, 

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

19 ‘‘6662B or’’ before ‘‘6663’’, 

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

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

22 end, 

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

24 ‘‘and section 6662B’’ after ‘‘This section’’, 
16 

•S 2045 IS

1 (F) in paragraph (3), by inserting ‘‘or non2 economic substance transaction understate3 ment’’ after ‘‘reportable transaction understate4 ment’’, and 

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

6 paragraph: 

7 ‘‘(3) NONECONOMIC SUBSTANCE TRANSACTION

8 UNDERSTATEMENT.—For purposes of this sub9 section, the term ‘noneconomic substance trans10 action understatement’ has the meaning given such 

11 term by section 6662B(c).’’. 

12 (3) Subsection (e) of section 6707A of the In13 ternal Revenue Code of 1986 is amended— 

14 (A) by striking ‘‘or’’ at the end of subpara15 graph (B), and 

16 (B) by striking subparagraph (C) and in17 serting the following new subparagraphs: 

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

19 section 6662B with respect to any noneconomic 

20 substance transaction, or 

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

22 section 6662(h) with respect to any transaction 

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

24 have been subject to penalty under section 
17 

•S 2045 IS

1 6662A at a rate prescribed under section 

2 6662A(c) or under section 6662B,’’. 

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

4 for part II of subchapter A of chapter 68 of the Internal 

5 Revenue Code of 1986 is amended by inserting after the 

6 item relating to section 6662A the following new item: 

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

lacking economic substance, etc.’’. 

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

8 this section shall apply to transactions entered into after 

9 the date of the enactment of this Act. 

10 SEC. 203. DENIAL OF DEDUCTION FOR INTEREST ON UN11 DERPAYMENTS ATTRIBUTABLE TO NON12 ECONOMIC SUBSTANCE TRANSACTIONS. 

13 (a) IN GENERAL.—Section 163(m) of the Internal 

14 Revenue Code of 1986 (relating to interest on unpaid 

15 taxes attributable to nondisclosed reportable transactions) 

16 is amended— 

17 (1) by striking ‘‘attributable’’ and all that fol18 lows and inserting the following: ‘‘attributable to— 

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

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

21 with respect to which the requirement of section 

22 6664(d)(2)(A) is not met, or 
18 

•S 2045 IS

1 ‘‘(2) any noneconomic substance transaction 

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

3 and 

4 (2) by inserting ‘‘and noneconomic substance 

5 transactions’’ after ‘‘transactions’’. 

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

7 this section shall apply to transactions after the date of 

8 the enactment of this Act in taxable years ending after 

9 such date. 

Æ