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[Congressional Bills 106th Congress]
[From the U.S. Government Publishing Office]
[H.R. 2255 Introduced in House (IH)]

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.

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

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Abusive Tax Shelter Shutdown Act of 
1999''.

SEC. 2. 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 the sense 
        of voluntary compliance with the Internal Revenue Code of 1986.
    (b) Purpose.--The purpose of this Act 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.

SEC. 3. DISALLOWANCE OF NONECONOMIC TAX ATTRIBUTES.

    Section 7701 of the Internal Revenue Code of 1986 is amended by 
redesignating subsection (m) as subsection (n) and by inserting after 
subsection (l) the following new subsection:
    ``(m) Disallowance of Noneconomic Tax Attributes.--
            ``(1) In general.--In determining liability for any tax 
        under subtitle A, noneconomic tax attributes shall not be 
        allowed.
            ``(2) Noneconomic tax attribute.--For purposes of this 
        subsection, a noneconomic tax attribute is any deduction, loss, 
        or credit claimed to result from any transaction unless--
                    ``(A) the transaction changes in a meaningful way 
                (apart from Federal income tax consequences) the 
                taxpayer's economic position, and
                    ``(B)(i) the present value of the reasonably 
                expected potential income from the transaction (and the 
                taxpayer's risk of loss from the transaction) are 
                substantial in relationship to the present value of the 
                tax benefits claimed, or
                    ``(ii) in the case of a transaction which is in 
                substance the borrowing of money or the acquisition of 
                financial capital, the deductions claimed with respect 
                to the transaction for any period are not significantly 
                in excess of the economic return for such period 
                realized by the person lending the money or providing 
                the financial capital.
            ``(3) Presumption of noneconomic tax attributes.--For 
        purposes of paragraph (2), the following factors shall give 
        rise to a presumption that a transaction fails to meet the 
requirements of paragraph (2):
                    ``(A) The fact that the payments, liabilities, or 
                assets that purport to create a loss (or other benefit) 
                for tax purposes are not reflected to any meaningful 
                extent on the taxpayer's books and records for 
                financial reporting purposes.
                    ``(B) The fact that the transaction results in an 
                allocation of income or gain to a tax-indifferent party 
                which is substantially in excess of such party's 
                economic income or gain from the transaction.
            ``(4) Treatment of built-in loss.--The determination of 
        whether a transaction results in the realization of a built-in 
        loss shall be made under subtitle A as if this subsection had 
        not been enacted. For purposes of the preceding sentence, the 
        term `built-in loss' means any loss or deduction to the extent 
        that such loss or deduction had economically been incurred 
        before such transaction is entered into and to the extent that 
        the loss or deduction was economically borne by the taxpayer.
            ``(5) Definition and special rules.--For purposes of this 
        subsection--
                    ``(A) Tax-indifferent party.--The term `tax-
                indifferent party' means any person or entity exempt 
                from tax under subtitle A. A person shall be treated as 
                a tax-indifferent party with respect to a transaction 
                if, by reason of such person's method of accounting, 
                the items taken into account with respect to the 
                transaction have no substantial impact on such person's 
                liability under subtitle A.
                    ``(B) Series of related transaction.--A transaction 
                which is part of a series of related transactions shall 
                be treated as meeting the requirements of paragraph (2) 
                only if--
                            ``(i) such transaction meets such 
                        requirements without regard to the other 
                        transactions, and
                            ``(ii) such transactions, if treated as 1 
                        transaction, would meet such requirements.
                A similar rule shall apply to a multiple step 
                transaction with each step being treated as a separate 
                related transaction.
                    ``(C) Normal business transactions.--In the case of 
                a transaction which is an integral part of a taxpayer's 
                trade or business and which is entered into in the 
                normal course of such trade or business, the 
                determination of the potential income from such 
                transaction shall be made by taking into account its 
                relationship to the overall trade or business of the 
                taxpayer.
                    ``(D) Treatment of fees.--In determining whether 
                there is risk of loss from a transaction (and the 
                amount thereof), potential loss of fees and other 
                transaction expenses shall be disregarded.
                    ``(E) Treatment of economic return enhancements.--
                The following shall be treated as economic returns and 
                not tax benefits:
                            ``(i) The credit under section 29 (relating 
                        to credit for producing fuel from a 
                        nonconventional source).
                            ``(ii) The credit under section 42 
                        (relating to low-income housing credit).
                            ``(iii) The credit under section 45 
                        (relating to electricity produced from certain 
                        renewable resources).
                            ``(iv) The credit under section 1397E 
                        (relating to credit to holders of qualified 
                        zone academy bonds) or any similar program 
                        hereafter enacted.
                            ``(v) Any other tax benefit specified in 
                        regulations.
                    ``(F) Exceptions for nonbusiness transactions.--
                            ``(i) Individuals.--In the case of an 
                        individual, this subsection shall only apply to 
                        transactions entered into in connection with a 
                        trade or business or activity engaged in for 
                        profit.
                            ``(ii) Charitable transfers.--This 
                        subsection shall not apply in determining the 
                        amount allowable as a deduction under section 
                        170, 545(b)(2), 556(b)(2), or 642(c).
            ``(6) Economic substance doctrine, etc., not affected.--The 
        provisions of this subsection shall not be construed as 
        altering or supplanting any rule of law referred to in section 
        6662(i)(2)(B) and the requirements of this subsection shall be 
        construed as being in addition to any such rule of law.''

SEC. 4. INCREASE IN SUBSTANTIAL UNDERPAYMENT PENALTY WITH RESPECT TO 
              DISALLOWED NONECONOMIC TAX ATTRIBUTES.

    Section 6662 of the Internal Revenue Code of 1986 (relating to 
imposition of accuracy-related penalty) is amended by adding at the end 
the following new subsection:
    ``(i) Increase in Penalty in Case of Disallowed Noneconomic Tax 
Attributes.--
            ``(1) In general.--In the case of the portion of the 
        underpayment to which this subsection applies--
                    ``(A) subsection (a) shall be applied with respect 
                to such portion by substituting `40 percent' for `20 
                percent', and
                    ``(B) subsection (d)(2)(B) and section 6664(c) 
                shall not apply.
            ``(2) Underpayments to which subsection applies.--This 
        subsection shall apply to an underpayment to which this section 
        applies by reason of paragraph (1) or (2) of subsection (b) to 
        the extent that such underpayment is attributable to--
                    ``(A) the disallowance of any noneconomic tax 
                attribute (determined under section 7701(m)), or
                    ``(B) the disallowance of any other benefit--
                            ``(i) because of a lack of economic 
                        substance or business purpose for the 
                        transaction giving rise to the claimed benefit,
                            ``(ii) because the form of the transaction 
                        did not reflect its substance, or
                            ``(iii) because of any other similar rule 
                        of law.
            ``(3) Increase in penalty not to apply if compliance with 
        disclosure requirements.--Paragraph (1)(A) shall not apply if 
        the taxpayer--
                    ``(A) discloses to the Secretary within 30 days 
                after the closing of the transaction appropriate 
                documents describing the transaction, and
                    ``(B) files with the taxpayer's return of tax 
                imposed by subtitle A--
                            ``(i) a statement verifying that such 
                        disclosure has been made,
                            ``(ii) a detailed description of the facts, 
                        assumptions of facts, and factual conclusions 
                        with respect to the business or economic 
                        purposes or objectives of the transaction that 
                        are relied upon to support the manner in which 
                        it is reported on the return,
                            ``(iii) a description of the due diligence 
                        performed to ascertain the accuracy of such 
                        facts, assumptions, and factual conclusions,
                            ``(iv)(I) a statement (signed by the senior 
                        financial officer of the corporation under 
                        penalty of perjury) that the facts, 
                        assumptions, or factual conclusions relied upon 
                        in reporting the transaction are true and 
                        correct as of the date the return is filed, to 
                        the best of such officer's knowledge and 
                        belief, and
                            ``(II) if the actual facts varied 
                        materially from the facts, assumptions, or 
                        factual conclusions relied upon, a statement 
                        describing such variances,
                            ``(v) copies of any written material 
                        provided in connection with the offer of the 
                        transaction to the taxpayer by a third party,
                            ``(vi) a full description of any express or 
                        implied agreement or arrangement with any 
                        advisor, or with any offeror, that the fee 
                        payable to such person would be contingent or 
                        subject to possible reimbursement, and
                            ``(vii) a full description of any express 
                        or implied warranty from any person with 
                        respect to the anticipated tax results from the 
                        transaction.''

SEC. 5. EFFECTIVE DATE.

    The amendments made by this Act shall apply to transactions after 
the date of the enactment of this Act.
                                 <all>
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