I

106TH CONGRESS

1ST SESSION H. R. 2255

To amend the Internal Revenue Code of 1986 to curb tax abuses by disallowing tax benefits claimed to arise from transactions without substantial economic substance.

IN THE HOUSE OF REPRESENTATIVES

JUNE 17, 1999

Mr. DOGGETT (for himself, Mr. STARK, Mr. HINCHEY, Mr. TIERNEY, Mr.

ALLEN, Mr. LUTHER, Mr. BONIOR, and Mr. FARR of California) introduced the following bill; which was referred to the Committee on Ways

and Means

A BILL

To amend the Internal Revenue Code of 1986 to curb tax

abuses by disallowing tax benefits claimed to arise from

transactions without substantial economic substance.

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 ‘‘Abusive Tax Shelter

5 Shutdown Act of 1999’’.

6 SEC. 2. FINDINGS AND PURPOSE.

7 (a) FINDINGS.—The Congress hereby finds that:
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1 (1) Many corporate tax shelter transactions are

2 complicated ways of accomplishing nothing aside

3 from claimed tax benefits, and the legal opinions

4 justifying those transactions take an inappropriately

5 narrow and restrictive view of well-developed court

6 doctrines under which—

7 (A) the taxation of a transaction is deter8 mined in accordance with its substance and not

9 merely its form,

10 (B) transactions which have no significant

11 effect on the taxpayer’s economic or beneficial

12 interests except for tax benefits are treated as

13 sham transactions and disregarded,

14 (C) transactions involving multiple steps

15 are collapsed when those steps have no substan16 tial economic meaning and are merely designed

17 to create tax benefits,

18 (D) transactions with no business purpose

19 are not given effect, and

20 (E) in the absence of a specific congres21 sional authorization, it is presumed that Con22 gress did not intend a transaction to result in

23 a negative tax where the taxpayer’s economic

24 position or rate of return is better after tax

25 than before tax.
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1 (2) Permitting aggressive and abusive tax shel2 ters not only results in large revenue losses but also

3 undermines the sense of voluntary compliance with

4 the Internal Revenue Code of 1986.

5 (b) PURPOSE.—The purpose of this Act is to elimi6 nate abusive tax shelters by denying tax attributes claimed

7 to arise from transactions that do not meet a heightened

8 economic substance requirement and by repealing the pro9 vision that permits legal opinions to be used to avoid pen10 alties on tax underpayments resulting from transactions

11 without significant economic substance or business pur12 pose.

13 SEC. 3. DISALLOWANCE OF NONECONOMIC TAX AT14 TRIBUTES.

15 Section 7701 of the Internal Revenue Code of 1986

16 is amended by redesignating subsection (m) as subsection

17 (n) and by inserting after subsection (l) the following new

18 subsection:

19 ‘‘(m) DISALLOWANCE OF NONECONOMIC TAX AT20 TRIBUTES.—

21 ‘‘(1) IN GENERAL.—In determining liability for

22 any tax under subtitle A, noneconomic tax attributes

23 shall not be allowed.

24 ‘‘(2) NONECONOMIC TAX ATTRIBUTE.—For

25 purposes of this subsection, a noneconomic tax at-
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1 tribute is any deduction, loss, or credit claimed to

2 result from any transaction unless—

3 ‘‘(A) the transaction changes in a mean4 ingful way (apart from Federal income tax con5 sequences) the taxpayer’s economic position,

6 and

7 ‘‘(B)(i) the present value of the reasonably

8 expected potential income from the transaction

9 (and the taxpayer’s risk of loss from the trans10 action) are substantial in relationship to the

11 present value of the tax benefits claimed, or

12 ‘‘(ii) in the case of a transaction which is

13 in substance the borrowing of money or the ac14 quisition of financial capital, the deductions

15 claimed with respect to the transaction for any

16 period are not significantly in excess of the eco17 nomic return for such period realized by the

18 person lending the money or providing the fi19 nancial capital.

20 ‘‘(3) PRESUMPTION OF NONECONOMIC TAX AT21 TRIBUTES.—For purposes of paragraph (2), the fol22 lowing factors shall give rise to a presumption that

23 a transaction fails to meet the requirements of para24 graph (2):
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1 ‘‘(A) The fact that the payments, liabil2 ities, or assets that purport to create a loss (or

3 other benefit) for tax purposes are not reflected

4 to any meaningful extent on the taxpayer’s

5 books and records for financial reporting pur6 poses.

7 ‘‘(B) The fact that the transaction results

8 in an allocation of income or gain to a tax-indif9 ferent party which is substantially in excess of

10 such party’s economic income or gain from the

11 transaction.

12 ‘‘(4) TREATMENT OF BUILT-IN LOSS.—The de13 termination of whether a transaction results in the

14 realization of a built-in loss shall be made under

15 subtitle A as if this subsection had not been enacted.

16 For purposes of the preceding sentence, the term

17 ‘built-in loss’ means any loss or deduction to the ex18 tent that such loss or deduction had economically

19 been incurred before such transaction is entered into

20 and to the extent that the loss or deduction was eco21 nomically borne by the taxpayer.

22 ‘‘(5) DEFINITION AND SPECIAL RULES.—For

23 purposes of this subsection—

24 ‘‘(A) TAX-INDIFFERENT PARTY.—The

25 term ‘tax-indifferent party’ means any person
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1 or entity exempt from tax under subtitle A. A

2 person shall be treated as a tax-indifferent

3 party with respect to a transaction if, by reason

4 of such person’s method of accounting, the

5 items taken into account with respect to the

6 transaction have no substantial impact on such

7 person’s liability under subtitle A.

8 ‘‘(B) SERIES OF RELATED TRANS9 ACTION.—A transaction which is part of a se10 ries of related transactions shall be treated as

11 meeting the requirements of paragraph (2) only

12 if—

13 ‘‘(i) such transaction meets such re14 quirements without regard to the other

15 transactions, and

16 ‘‘(ii) such transactions, if treated as 1

17 transaction, would meet such requirements.

18 A similar rule shall apply to a multiple step

19 transaction with each step being treated as a

20 separate related transaction.

21 ‘‘(C) NORMAL BUSINESS TRANSACTIONS.—

22 In the case of a transaction which is an integral

23 part of a taxpayer’s trade or business and

24 which is entered into in the normal course of

25 such trade or business, the determination of the
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1 potential income from such transaction shall be

2 made by taking into account its relationship to

3 the overall trade or business of the taxpayer.

4 ‘‘(D) TREATMENT OF FEES.—In deter5 mining whether there is risk of loss from a

6 transaction (and the amount thereof), potential

7 loss of fees and other transaction expenses shall

8 be disregarded.

9 ‘‘(E) TREATMENT OF ECONOMIC RETURN

10 ENHANCEMENTS.—The following shall be treat11 ed as economic returns and not tax benefits:

12 ‘‘(i) The credit under section 29 (re13 lating to credit for producing fuel from a

14 nonconventional source).

15 ‘‘(ii) The credit under section 42 (re16 lating to low-income housing credit).

17 ‘‘(iii) The credit under section 45 (re18 lating to electricity produced from certain

19 renewable resources).

20 ‘‘(iv) The credit under section 1397E

21 (relating to credit to holders of qualified

22 zone academy bonds) or any similar pro23 gram hereafter enacted.

24 ‘‘(v) Any other tax benefit specified in

25 regulations.
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1 ‘‘(F) EXCEPTIONS FOR NONBUSINESS

2 TRANSACTIONS.—

3 ‘‘(i) INDIVIDUALS.—In the case of an

4 individual, this subsection shall only apply

5 to transactions entered into in connection

6 with a trade or business or activity en7 gaged in for profit.

8 ‘‘(ii) CHARITABLE TRANSFERS.—This

9 subsection shall not apply in determining

10 the amount allowable as a deduction under

11 section 170, 545(b)(2), 556(b)(2), or

12 642(c).

13 ‘‘(6) ECONOMIC SUBSTANCE DOCTRINE, ETC.,

14 NOT AFFECTED.—The provisions of this subsection

15 shall not be construed as altering or supplanting any

16 rule of law referred to in section 6662(i)(2)(B) and

17 the requirements of this subsection shall be con18 strued as being in addition to any such rule of law.’’

19 SEC. 4. INCREASE IN SUBSTANTIAL UNDERPAYMENT PEN20 ALTY WITH RESPECT TO DISALLOWED NON21 ECONOMIC TAX ATTRIBUTES.

22 Section 6662 of the Internal Revenue Code of 1986

23 (relating to imposition of accuracy-related penalty) is

24 amended by adding at the end the following new sub25 section:
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1 ‘‘(i) INCREASE IN PENALTY IN CASE OF DIS2 ALLOWED NONECONOMIC TAX ATTRIBUTES.—

3 ‘‘(1) IN GENERAL.—In the case of the portion

4 of the underpayment to which this subsection

5 applies—

6 ‘‘(A) subsection (a) shall be applied with

7 respect to such portion by substituting ‘40 per8 cent’ for ‘20 percent’, and

9 ‘‘(B) subsection (d)(2)(B) and section

10 6664(c) shall not apply.

11 ‘‘(2) UNDERPAYMENTS TO WHICH SUBSECTION

12 APPLIES.—This subsection shall apply to an under13 payment to which this section applies by reason of

14 paragraph (1) or (2) of subsection (b) to the extent

15 that such underpayment is attributable to—

16 ‘‘(A) the disallowance of any noneconomic

17 tax attribute (determined under section

18 7701(m)), or

19 ‘‘(B) the disallowance of any other

20 benefit—

21 ‘‘(i) because of a lack of economic

22 substance or business purpose for the

23 transaction giving rise to the claimed ben24 efit,
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1 ‘‘(ii) because the form of the trans2 action did not reflect its substance, or

3 ‘‘(iii) because of any other similar rule

4 of law.

5 ‘‘(3) INCREASE IN PENALTY NOT TO APPLY IF

6 COMPLIANCE WITH DISCLOSURE REQUIREMENTS.—

7 Paragraph (1)(A) shall not apply if the taxpayer—

8 ‘‘(A) discloses to the Secretary within 30

9 days after the closing of the transaction appro10 priate documents describing the transaction,

11 and

12 ‘‘(B) files with the taxpayer’s return of tax

13 imposed by subtitle A—

14 ‘‘(i) a statement verifying that such

15 disclosure has been made,

16 ‘‘(ii) a detailed description of the

17 facts, assumptions of facts, and factual

18 conclusions with respect to the business or

19 economic purposes or objectives of the

20 transaction that are relied upon to support

21 the manner in which it is reported on the

22 return,

23 ‘‘(iii) a description of the due dili24 gence performed to ascertain the accuracy
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1 of such facts, assumptions, and factual

2 conclusions,

3 ‘‘(iv)(I) a statement (signed by the

4 senior financial officer of the corporation

5 under penalty of perjury) that the facts,

6 assumptions, or factual conclusions relied

7 upon in reporting the transaction are true

8 and correct as of the date the return is

9 filed, to the best of such officer’s knowl10 edge and belief, and

11 ‘‘(II) if the actual facts varied materi12 ally from the facts, assumptions, or factual

13 conclusions relied upon, a statement de14 scribing such variances,

15 ‘‘(v) copies of any written material

16 provided in connection with the offer of the

17 transaction to the taxpayer by a third

18 party,

19 ‘‘(vi) a full description of any express

20 or implied agreement or arrangement with

21 any advisor, or with any offeror, that the

22 fee payable to such person would be con23 tingent or subject to possible reimburse24 ment, and
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1 ‘‘(vii) a full description of any express

2 or implied warranty from any person with

3 respect to the anticipated tax results from

4 the transaction.’’

5 SEC. 5. EFFECTIVE DATE.

6 The amendments made by this Act shall apply to

7 transactions after the date of the enactment of this Act.

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