II 

110TH CONGRESS 

1ST SESSION S. 681 

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

inappropriately avoid Federal taxation, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

FEBRUARY 17, 2007 

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 offshore tax havens and abusive tax 

shelters 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 ‘‘Stop Tax Haven Abuse Act’’. 

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 of 

4 this Act is as follows: 

Sec. 1. Short title; etc. 

TITLE I—DETERRING THE USE OF TAX HAVENS FOR TAX 

EVASION 

Sec. 101. Establishing presumptions for entities and transactions involving offshore secrecy jurisdictions. 

Sec. 102. Authorizing special measures against foreign jurisdictions, financial 

institutions, and others that impede United States tax enforcement. 

Sec. 103. Allowing more time for investigations involving offshore secrecy jurisdictions. 

Sec. 104. Reporting United States beneficial owners of foreign owned financial 

accounts. 

Sec. 105. Preventing misuse of foreign trusts for tax evasion. 

Sec. 106. Limitation on legal opinion protection from penalties with respect to 

transactions involving offshore secrecy jurisdictions. 

TITLE II—OTHER MEASURES TO COMBAT TAX HAVEN AND TAX 

SHELTER ABUSES 

Sec. 201. Penalty for failing to disclose offshore holdings. 

Sec. 202. Deadline for anti-money laundering rule for hedge funds and private 

equity funds. 

Sec. 203. Anti-money laundering requirements for formation agents. 

Sec. 204. Strengthening summons in cases involving offshore secrecy jurisdictions. 

Sec. 205. Improving enforcement of foreign financial account reporting. 

TITLE III—COMBATING TAX SHELTER PROMOTERS 

Sec. 301. Penalty for promoting abusive tax shelters. 

Sec. 302. Penalty for aiding and abetting the understatement of tax liability. 

Sec. 303. Prohibition on tax shelter patents. 

Sec. 304. Prohibited fee arrangement. 

Sec. 305. Preventing tax shelter activities by financial institutions. 

Sec. 306. Information sharing for enforcement purposes. 

Sec. 307. Disclosure of information to Congress. 

Sec. 308. Tax opinion standards for tax practitioners. 

Sec. 309. Denial of deduction for certain fines, penalties, and other amounts. 

TITLE IV—REQUIRING ECONOMIC SUBSTANCE 

Sec. 401. Clarification of economic substance doctrine. 

Sec. 402. Penalty for understatements attributable to transactions lacking economic substance, etc. 

Sec. 403. Denial of deduction for interest on underpayments attributable to 

noneconomic substance transactions. 


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1 TITLE I—DETERRING THE USE 

2 OF TAX HAVENS FOR TAX 

3 EVASION 

4 SEC. 101. ESTABLISHING PRESUMPTIONS FOR ENTITIES 

5 AND TRANSACTIONS INVOLVING OFFSHORE 

6 SECRECY JURISDICTIONS. 

7 (a) PRESUMPTIONS FOR INTERNAL REVENUE CODE

8 OF 1986.— 

9 (1) IN GENERAL.—Chapter 76 is amended by 

10 inserting after section 7491 the following new sub11 chapter: 

12 ‘‘Subchapter F—Presumptions for Certain 

13 Legal Proceedings 

‘‘Sec. 7492. Presumptions pertaining to entities and transactions involving offshore secrecy jurisdictions. 

14 ‘‘SEC. 7492. PRESUMPTIONS PERTAINING TO ENTITIES AND 

15 TRANSACTIONS INVOLVING OFFSHORE SE16 CRECY JURISDICTIONS. 

17 ‘‘(a) CONTROL.—For purposes of any United States 

18 civil judicial or administrative proceeding to determine or 

19 collect tax, there shall be a rebuttable presumption that 

20 a United States person (other than an entity with shares 

21 regularly traded on an established securities market) who 

22 directly or indirectly formed, transferred assets to, was a 

23 beneficiary of, or received money or property or the use 

24 thereof from an entity, including a trust, corporation, limVerDate Aug 31 2005 21:03 Feb 23, 2007 Jkt 059200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\S681.IS S681

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1 ited liability company, partnership, or foundation (other 

2 than an entity with shares regularly traded on an estab3 lished securities market), formed, domiciled, or operating 

4 in an offshore secrecy jurisdiction, exercised control over 

5 such entity. The presumption of control created by this 

6 subsection shall not be applied to prevent the Secretary 

7 from determining or arguing the absence of control. 

8 ‘‘(b) TRANSFERS OF INCOME.—For purposes of any 

9 United States civil judicial or administrative proceeding 

10 to determine or collect tax, there shall be a rebuttable pre11 sumption that any amount or thing of value received by 

12 a United States person (other than an entity with shares 

13 regularly traded on an established securities market) di14 rectly or indirectly from an account or entity in an off15 shore secrecy jurisdiction, constitutes income of such per16 son taxable in the year of receipt, and any amount or thing 

17 of value paid or transferred by or on behalf of a United 

18 States person (other than an entity with shares regularly 

19 traded on an established securities market) directly or in20 directly to an account or entity in any such jurisdiction 

21 represents previously unreported income of such person 

22 taxable in the year of the transfer. 

23 ‘‘(c) REBUTTING THE PRESUMPTIONS.—The pre24 sumptions established in this section may be rebutted only 

25 by clear and convincing evidence, including detailed docuVerDate Aug 31 2005 21:03 Feb 23, 2007 Jkt 059200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\S681.IS S681

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1 mentary, testimonial, and transactional evidence, estab2 lishing that— 

3 ‘‘(1) in subsection (a), such taxpayer exercised 

4 no control, directly or indirectly, over such entity at 

5 the time in question, and 

6 ‘‘(2) in subsection (b), such amounts or things 

7 of value did not represent income related to such 

8 United States person. 

9 Any court having jurisdiction of a civil proceeding in which 

10 control of such an offshore entity or the income character 

11 of such receipts or amounts transferred is an issue shall 

12 prohibit the introduction by the taxpayer of any foreign 

13 based document that is not authenticated in open court 

14 by a person with knowledge of such document, or any 

15 other evidence supplied by a person outside the jurisdic16 tion of a United States court, unless such person appears 

17 before the court.’’. 

18 (2) The table of subchapters for chapter 76 is 

19 amended by inserting after the item relating to sub20 chapter E the following new item: 

‘‘SUBCHAPTER F—PRESUMPTIONS FOR CERTAIN LEGAL PROCEEDINGS’’. 

21 (b) DEFINITION OF OFFSHORE SECRECY JURISDIC22 TION.—Section 7701(a) is amended by adding at the end 

23 the following new paragraph: 

24 ‘‘(50) OFFSHORE SECRECY JURISDICTION.— 


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1 ‘‘(A) IN GENERAL.—The term ‘offshore se2 crecy jurisdiction’ means any foreign jurisdic3 tion which is listed by the Secretary as an off4 shore secrecy jurisdiction for purposes of this 

5 title. 

6 ‘‘(B) DETERMINATION OF JURISDICTIONS

7 ON LIST.—A jurisdiction shall be listed under 

8 paragraph (A) if the Secretary determines that 

9 such jurisdiction has corporate, business, bank, 

10 or tax secrecy rules and practices which, in the 

11 judgment of the Secretary, unreasonably re12 strict the ability of the United States to obtain 

13 information relevant to the enforcement of this 

14 title, unless the Secretary also determines that 

15 such country has effective information exchange 

16 practices. 

17 ‘‘(C) SECRECY OR CONFIDENTIALITY

18 RULES AND PRACTICES.—For purposes of sub19 paragraph (B), corporate, business, bank, or 

20 tax secrecy or confidentiality rules and practices 

21 include both formal laws and regulations and 

22 informal government or business practices hav23 ing the effect of inhibiting access of law en24 forcement and tax administration authorities to 


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1 beneficial ownership and other financial infor2 mation. 

3 ‘‘(D) INEFFECTIVE INFORMATION EX4 CHANGE PRACTICES.—For purposes of subpara5 graph (B), a jurisdiction shall be deemed to 

6 have ineffective information exchange practices 

7 unless the Secretary determines, on an annual 

8 basis, that— 

9 ‘‘(i) such jurisdiction has in effect a 

10 treaty or other information exchange 

11 agreement with the United States that 

12 provides for the prompt, obligatory, and 

13 automatic exchange of such information as 

14 is forseeably relevant for carrying out the 

15 provisions of the treaty or agreement or 

16 the administration or enforcement of this 

17 title, 

18 ‘‘(ii) during the 12-month period pre19 ceding the annual determination, the ex20 change of information between the United 

21 States and such jurisdiction was in prac22 tice adequate to prevent evasion or avoid23 ance of United States income tax by 

24 United States persons and to enable the 


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1 United States effectively to enforce this 

2 title, and 

3 ‘‘(iii) during the 12-month period pre4 ceding the annual determination, such ju5 risdiction was not identified by an inter6 governmental group or organization of 

7 which the United States is a member as 

8 uncooperative with international tax en9 forcement or information exchange and the 

10 United States concurs in such identifica11 tion. 

12 ‘‘(E) INITIAL LIST OF OFFSHORE SECRECY

13 JURISDICTIONS.—For purposes of this para14 graph, each of the following foreign jurisdic15 tions, which have been previously and publicly 

16 identified by the Internal Revenue Service as 

17 secrecy jurisdictions in Federal court pro18 ceedings, shall be deemed listed by the Sec19 retary as an offshore secrecy jurisdiction unless 

20 delisted by the Secretary under subparagraph 

21 (F)(ii): 

22 ‘‘(i) Anguilla. 

23 ‘‘(ii) Antigua and Barbuda. 

24 ‘‘(iii) Aruba. 

25 ‘‘(iv) Bahamas. 


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1 ‘‘(v) Barbados. 

2 ‘‘(vi) Belize. 

3 ‘‘(vii) Bermuda. 

4 ‘‘(viii) British Virgin Islands. 

5 ‘‘(ix) Cayman Islands. 

6 ‘‘(x) Cook Islands. 

7 ‘‘(xi) Costa Rica. 

8 ‘‘(xii) Cyprus. 

9 ‘‘(xiii) Dominica. 

10 ‘‘(xiv) Gibraltar. 

11 ‘‘(xv) Grenada. 

12 ‘‘(xvi) Guernsey/Sark/Alderney. 

13 ‘‘(xvii) Hong Kong. 

14 ‘‘(xviii) Isle of Man. 

15 ‘‘(xix) Jersey. 

16 ‘‘(xx) Latvia. 

17 ‘‘(xxi) Liechtenstein. 

18 ‘‘(xxii) Luxembourg. 

19 ‘‘(xxiii) Malta. 

20 ‘‘(xxiv) Nauru. 

21 ‘‘(xxv) Netherlands Antilles. 

22 ‘‘(xxvi) Panama. 

23 ‘‘(xxvii) Samoa. 

24 ‘‘(xxviii) St. Kitts and Nevis. 

25 ‘‘(xxix) St. Lucia. 


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1 ‘‘(xxx) St. Vincent and the Grena2 dines. 

3 ‘‘(xxxi) Singapore. 

4 ‘‘(xxxii) Switzerland. 

5 ‘‘(xxxiii) Turks and Caicos. 

6 ‘‘(xxxiv) Vanuatu. 

7 ‘‘(F) MODIFICATIONS TO LIST.—The Sec8 retary— 

9 ‘‘(i) shall add to the list under para10 graph (A) jurisdictions which meet the re11 quirements of paragraph (B), and 

12 ‘‘(ii) may remove from such list only 

13 those jurisdictions which meet none of the 

14 requirements of paragraph (B).’’. 

15 (c) PRESUMPTIONS FOR SECURITIES LAW PUR16 POSES.—Section 21 of the Securities Exchange Act of 

17 1934 (15 U.S.C. 78u) is amended by adding at the end 

18 the following the following new subsection: 

19 ‘‘(j) PRESUMPTIONS PERTAINING TO CONTROL AND

20 BENEFICIAL OWNERSHIP.— 

21 ‘‘(1) CONTROL.—For purposes of any civil judi22 cial or administrative proceeding under this title, 

23 there shall be a rebuttable presumption that a 

24 United States person (other than an entity with 

25 shares regularly traded on an established securities 


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1 market) who directly or indirectly formed, trans2 ferred assets to, was a beneficiary of, or received 

3 money or property or the use thereof from an entity, 

4 including a trust, corporation, limited liability com5 pany, partnership, or foundation (other than an en6 tity with shares regularly traded on an established 

7 securities market), formed, domiciled, or operating 

8 in an offshore secrecy jurisdiction (as defined in sec9 tion 7701(a)(50) of the Internal Revenue Code of 

10 1986), exercised control over such entity. The pre11 sumption of control created by this paragraph shall 

12 not be applied to prevent the Commission from de13 termining or arguing the absence of control. 

14 ‘‘(2) BENEFICIAL OWNERSHIP.—For purposes 

15 of any civil judicial or administrative proceeding 

16 under this title, there shall be a rebuttable presump17 tion that securities that are nominally owned by an 

18 entity, including a trust, corporation, limited liability 

19 company, partnership, or foundation (other than an 

20 entity with shares regularly traded on an established 

21 securities market), formed, domiciled, or operating 

22 in an offshore secrecy jurisdiction (as so defined), 

23 are beneficially owned by any United States person 

24 (other than an entity with shares regularly traded on 

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1 directly exercised control over such entity. The pre2 sumption of beneficial ownership created by this 

3 paragraph shall not be applied to prevent the Com4 mission from determining or arguing the absence of 

5 beneficial ownership.’’. 

6 (d) PRESUMPTION FOR REPORTING PURPOSES RE7 LATING TO FOREIGN FINANCIAL ACCOUNTS.—Section 

8 5314 of title 31, United States Code, is amended by add9 ing at the end the following: 

10 ‘‘(d) REBUTTABLE PRESUMPTION.—For purposes of 

11 this section, there shall be a rebuttable presumption that 

12 any account with a financial institution formed, domiciled, 

13 or operating in an offshore secrecy jurisdiction (as defined 

14 in section 7701(a)(50) of the Internal Revenue Code of 

15 1986) contains funds in an amount that is at least suffi16 cient to require a report prescribed by regulations under 

17 this section.’’. 

18 (e) REGULATORY AUTHORITY AND EFFECTIVE

19 DATE.— 

20 (1) REGULATORY AUTHORITY.—Not later than 

21 180 days after the date of the enactment of this Act, 

22 the Secretary of the Treasury and the Chairman of 

23 the Securities and Exchange Commission shall each 

24 adopt regulations or other guidance necessary to im25 plement the amendments made by this section. The 


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1 Secretary and the Chairman may by regulation or 

2 guidance provide that the presumption of control 

3 shall not extend to particular classes of transactions, 

4 such as corporate reorganizations, if either deter5 mines that applying such amendments to such trans6 actions is not necessary to carry out the purposes of 

7 such amendments. 

8 (2) EFFECTIVE DATE.—The amendments made 

9 by this section shall take effect on the date of the 

10 enactment of this Act. 

11 SEC. 102. AUTHORIZING SPECIAL MEASURES AGAINST FOR12 EIGN JURISDICTIONS, FINANCIAL INSTITU13 TIONS, AND OTHERS THAT IMPEDE UNITED 

14 STATES TAX ENFORCEMENT. 

15 Section 5318A of title 31, United States Code, is 

16 amended— 

17 (1) by striking the section heading and insert18 ing the following: 

19 ‘‘§ 5318A. Special measures for jurisdictions, financial 

20 institutions, or international transactions 

21 that are of primary money laundering 

22 concern or impede United States tax en23 forcement’’; 

24 (2) in subsection (a), by striking the subsection 

25 heading and inserting the following: 


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1 ‘‘(a) SPECIAL MEASURES TO COUNTER MONEY

2 LAUNDERING AND EFFORTS TO IMPEDE UNITED STATES

3 TAX ENFORCEMENT.—’’; 

4 (3) in subsection (c), by striking the subsection 

5 heading and inserting the following: 

6 ‘‘(c) CONSULTATIONS AND INFORMATION TO BE

7 CONSIDERED IN FINDING JURISDICTIONS, INSTITUTIONS, 

8 TYPES OF ACCOUNTS, OR TRANSACTIONS TO BE OF PRI9 MARY MONEY LAUNDERING CONCERN OR TO BE IMPED10 ING UNITED STATES TAX ENFORCEMENT.—’’; 

11 (4) in subsection (a)(1), by inserting ‘‘or is im12 peding United States tax enforcement’’ after ‘‘pri13 mary money laundering concern’’; 

14 (5) in subsection (a)(4)— 

15 (A) in subparagraph (A)— 

16 (i) by inserting ‘‘in matters involving 

17 money laundering,’’ before ‘‘shall consult’’; 

18 and 

19 (ii) by striking ‘‘and’’ at the end; 

20 (B) by redesignating subparagraph (B) as 

21 subparagraph (C); and 

22 (C) by inserting after subparagraph (A) 

23 the following: 

24 ‘‘(B) in matters involving United States 

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1 sioner of the Internal Revenue Service, the Sec2 retary of State, the Attorney General of the 

3 United States, and in the sole discretion of the 

4 Secretary, such other agencies and interested 

5 parties as the Secretary may find to be appro6 priate; and’’; 

7 (6) in each of paragraphs (1)(A), (2), (3), and 

8 (4) of subsection (b), by inserting ‘‘or to be imped9 ing United States tax enforcement’’ after ‘‘primary 

10 money laundering concern’’ each place that term ap11 pears; 

12 (7) in subsection (b), by striking paragraph (5) 

13 and inserting the following: 

14 ‘‘(5) PROHIBITIONS OR CONDITIONS ON OPEN15 ING OR MAINTAINING CERTAIN CORRESPONDENT OR

16 PAYABLE-THROUGH ACCOUNTS OR AUTHORIZING

17 CERTAIN CREDIT CARDS.—If the Secretary finds a 

18 jurisdiction outside of the United States, 1 or more 

19 financial institutions operating outside of the United 

20 States, or 1 or more classes of transactions within 

21 or involving a jurisdiction outside of the United 

22 States to be of primary money laundering concern or 

23 to be impeding United States tax enforcement, the 

24 Secretary, in consultation with the Secretary of 

25 State, the Attorney General of the United States, 


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1 and the Chairman of the Board of Governors of the 

2 Federal Reserve System, may prohibit, or impose 

3 conditions upon— 

4 ‘‘(A) the opening or maintaining in the 

5 United States of a correspondent account or 

6 payable-through account; or 

7 ‘‘(B) the authorization, approval, or use in 

8 the United States of a credit card, charge card, 

9 debit card, or similar credit or debit financial 

10 instrument by any domestic financial institu11 tion, financial agency, or credit card company 

12 or association, for or on behalf of a foreign 

13 banking institution, if such correspondent ac14 count, payable-through account, credit card, 

15 charge card, debit card, or similar credit or 

16 debit financial instrument, involves any such ju17 risdiction or institution, or if any such trans18 action may be conducted through such cor19 respondent account, payable-through account, 

20 credit card, charge card, debit card, or similar 

21 credit or debit financial instrument.’’; and 

22 (8) in subsection (c)(1), by inserting ‘‘or is im23 peding United States tax enforcement’’ after ‘‘pri24 mary money laundering concern’’; 

25 (9) in subsection (c)(2)(A)— 


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1 (A) in clause (ii), by striking ‘‘bank secrecy 

2 or special regulatory advantages’’ and inserting 

3 ‘‘bank, tax, corporate, trust, or financial secrecy 

4 or regulatory advantages’’; 

5 (B) in clause (iii), by striking ‘‘supervisory 

6 and counter-money’’ and inserting ‘‘supervisory, 

7 international tax enforcement, and counter8 money’’; 

9 (C) in clause (v), by striking ‘‘banking or 

10 secrecy’’ and inserting ‘‘banking, tax, or se11 crecy’’; and 

12 (D) in clause (vi), by inserting ‘‘, tax trea13 ty, or tax information exchange agreement’’ 

14 after ‘‘treaty’’; 

15 (10) in subsection (c)(2)(B)— 

16 (A) in clause (i), by inserting ‘‘or tax eva17 sion’’ after ‘‘money laundering’’; and 

18 (B) in clause (iii), by inserting ‘‘, tax eva19 sion,’’ after ‘‘money laundering’’; and 

20 (11) in subsection (d), by inserting ‘‘involving 

21 money laundering, and shall notify, in writing, the 

22 Committee on Finance of the Senate and the Com23 mittee on Ways and Means of the House of Rep24 resentatives of any such action involving United 

25 States tax enforcement’’ after ‘‘such action’’. 


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1 SEC. 103. ALLOWING MORE TIME FOR INVESTIGATIONS IN2 VOLVING OFFSHORE SECRECY JURISDIC3 TIONS. 

4 (a) IN GENERAL.—Section 6501(c) is amended by 

5 adding at the end the following new paragraph: 

6 ‘‘(11) RETURNS INVOLVING OFFSHORE SE7 CRECY JURISDICTIONS.—In the case of a return for 

8 a year in which the taxpayer directly or indirectly 

9 formed, owned, transferred assets to, was a bene10 ficiary of, or received money or property or the use 

11 thereof from a financial account or an entity, includ12 ing a trust, corporation, limited liability company, 

13 partnership, or foundation (other than an entity 

14 with shares regularly traded on an established secu15 rities market) formed, located, domiciled or oper16 ating in an offshore secrecy jurisdiction, the tax may 

17 be assessed, or a proceeding in court for the collec18 tion of such tax may be begun without assessment, 

19 at any time within 6 years after the return was 

20 filed.’’. 

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

22 this section shall apply to— 

23 (1) returns filed after the date of the enactment 

24 of this Act, and 

25 (2) returns filed on or before such date if the 

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1 enue Code of 1986 (determined without regard to 

2 the amendments made by subsection (a)) for assess3 ment of such taxes has not expired as of such date. 

4 SEC. 104. REPORTING UNITED STATES BENEFICIAL OWN5 ERS OF FOREIGN OWNED FINANCIAL AC6 COUNTS. 

7 (a) IN GENERAL.—Subpart B of part III of sub8 chapter A of chapter 61 is amended by inserting after sec9 tion 6045 the following new sections: 

10 ‘‘SEC. 6045A. RETURNS REGARDING UNITED STATES BENE11 FICIAL OWNERS OF FOREIGN OWNED FINAN12 CIAL ACCOUNTS. 

13 ‘‘(a) REQUIREMENT OF RETURN.—If— 

14 ‘‘(1) any withholding agent under sections 1441 

15 and 1442 has the control, receipt, custody, disposal, 

16 or payment of any amount constituting gross income 

17 from sources within the United States of any foreign 

18 entity, including a trust, corporation, limited liability 

19 company, partnership, or foundation (other than an 

20 entity with shares regularly traded on an established 

21 securities market), and 

22 ‘‘(2) such withholding agent determines for pur23 poses of titles 14, 18, or 31 of the United States 

24 Code that a United States person has any beneficial 

25 interest in the foreign entity or in the account in 


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1 such entity’s name (hereafter in this section referred 

2 to as ‘United States beneficial owner’), 

3 then the withholding agent shall make a return according 

4 to the forms or regulations prescribed by the Secretary. 

5 ‘‘(b) REQUIRED INFORMATION.—For purposes of 

6 subsection (a) the information required to be included on 

7 the return shall include— 

8 ‘‘(1) the name, address, and, if known, the tax9 payer identification number of the United States 

10 beneficial owner, 

11 ‘‘(2) the known facts pertaining to the relation12 ship of such United States beneficial owner to the 

13 foreign entity and the account, 

14 ‘‘(3) the gross amount of income from sources 

15 within the United States (including gross proceeds 

16 from brokerage transactions), and 

17 ‘‘(4) such other information as the Secretary 

18 may by forms or regulations provide. 

19 ‘‘(c) STATEMENTS TO BE FURNISHED TO BENE20 FICIAL OWNERS WITH RESPECT TO WHOM INFORMATION

21 IS REQUIRED TO BE REPORTED.—A withholding agent 

22 required to make a return under subsection (a) shall fur23 nish to each United States beneficial owner whose name 

24 is required to be set forth in such return a statement 

25 showing— 


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1 ‘‘(1) the name, address, and telephone number 

2 of the information contact of the person required to 

3 make such return, and 

4 ‘‘(2) the information required to be shown on 

5 such return with respect to such United States bene6 ficial owner. 

7 The written statement required under the preceding sen8 tence shall be furnished to the United States beneficial 

9 owner on or before January 31 of the year following the 

10 calendar year for which the return under subsection (a) 

11 was required to be made. In the event the person filing 

12 such return does not have a current address for the United 

13 States beneficial owner, such written statement may be 

14 mailed to the address of the foreign entity. 

15 ‘‘(d) CROSS REFERENCE.— 

‘‘For provisions relating to penalties for failure to file returns and reports, see sections 6721, 7203, and 7206(1). 

16 ‘‘SEC. 6045B. RETURNS BY FINANCIAL INSTITUTIONS RE17 GARDING ESTABLISHMENT OF ACCOUNTS 

18 AND CREATION OF ENTITIES IN OFFSHORE 

19 SECRECY JURISDICTIONS. 

20 ‘‘(a) REQUIREMENT OF RETURN.—Any financial in21 stitution directly or indirectly— 

22 ‘‘(1) opening a bank, brokerage, or other finan23 cial account, or 


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1 ‘‘(2) forming or acquiring an entity, including a 

2 trust, corporation, limited liability company, partner3 ship, or foundation (other than an entity with shares 

4 regularly traded on an established securities mar5 ket), 

6 in an offshore secrecy jurisdiction at the direction of, on 

7 behalf of, or for the benefit of a United States person shall 

8 make a return according to the forms or regulations pre9 scribed by the Secretary. 

10 ‘‘(b) REQUIRED INFORMATION.—For purposes of 

11 subsection (a) the information required to be included on 

12 the return shall include— 

13 ‘‘(1) the name, address, and taxpayer identifica14 tion number of such United States person, 

15 ‘‘(2) the name and address of the financial in16 stitution at which a financial account is opened, the 

17 type of account, the account number, the name 

18 under which the account was opened, and the 

19 amount of the initial deposit, 

20 ‘‘(3) the name and address of an entity formed 

21 or acquired, the type of entity, and the name and 

22 address of any company formation agent or other 

23 professional employed to form or acquire the entity, 

24 and 


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1 ‘‘(4) such other information as the Secretary 

2 may by forms or regulations provide. 

3 ‘‘(c) STATEMENTS TO BE FURNISHED TO UNITED

4 STATES PERSONS WITH RESPECT TO WHOM INFORMA5 TION IS REQUIRED TO BE REPORTED.—A financial insti6 tution required to make a return under subsection (a) 

7 shall furnish to each United States person whose name 

8 is required to be set forth in such return a statement 

9 showing— 

10 ‘‘(1) the name, address, and telephone number 

11 of the information contact of the person required to 

12 make such return, and 

13 ‘‘(2) the information required to be shown on 

14 such return with respect to such United States per15 son. 

16 The written statement required under the preceding sen17 tence shall be furnished to such United States person on 

18 or before January 31 of the year following the calendar 

19 year for which the return under subsection (a) was re20 quired to be made. 

21 ‘‘(d) EXEMPTION.—The Secretary may by regula22 tions exempt any class of United States persons or any 

23 class of accounts or entities from the requirements of this 

24 section if the Secretary determines that applying this secVerDate Aug 31 2005 21:03 Feb 23, 2007 Jkt 059200 PO 00000 Frm 00023 Fmt 6652 Sfmt 6201 E:\BILLS\S681.IS S681

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1 tion to such persons, accounts, or entities is not necessary 

2 to carry out the purposes of this section. 

3 ‘‘(e) CROSS REFERENCE.— 

‘‘For provisions relating to penalties for failure to file returns and reports required under this section, see sections 6721, 7203, and 

7206(1).’’. 

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

5 for such subpart is amended by inserting after the item 

6 relating to section 6045 the following new items: 

‘‘Sec. 6045A. Returns regarding United States beneficial owners of foreign 

owned financial accounts. 

‘‘Sec. 6045B. Returns by financial institutions regarding establishment of accounts and creation of entities in offshore secrecy jurisdictions.’’. 

7 (c) ADDITIONAL PENALTIES.— 

8 (1) ADDITIONAL PENALTIES ON BANKS.—Sec9 tion 5239(b)(1) of the Revised Statutes (12 U.S.C. 

10 93(b)(1)) is amended by inserting ‘‘or any of the 

11 provisions of section 6045B of the Internal Revenue 

12 Code of 1986,’’ after ‘‘any regulation issued pursu13 ant to,’’. 

14 (2) ADDITIONAL PENALTIES ON SECURITIES

15 FIRMS.—Section 21(d)(3)(A) of the Securities Ex16 change Act of 1934 (15 U.S.C. 78u(d)(3)(A)) is 

17 amended by inserting ‘‘any of the provisions of sec18 tion 6045B of the Internal Revenue Code of 1986,’’ 

19 after ‘‘the rules or regulations thereunder,’’. 

20 (d) REGULATORY AUTHORITY AND EFFECTIVE

21 DATE.— 


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1 (1) REGULATORY AUTHORITY.—Not later than 

2 180 days after the date of the enactment of this Act, 

3 the Secretary of the Treasury shall adopt regula4 tions, forms, or other guidance necessary to imple5 ment this section. 

6 (2) EFFECTIVE DATE.—Section 6045A of the 

7 Internal Revenue Code of 1986 (as added by this 

8 section) and the amendment made by subsection 

9 (c)(1) shall take effect with respect to amounts paid 

10 into foreign owned accounts after December 31 of 

11 the year of the date of the enactment of this Act. 

12 Section 6045B of such Code (as so added) and the 

13 amendment made by subsection (c)(2) shall take ef14 fect with respect to accounts opened or entities 

15 formed or acquired after December 31 of the year 

16 of the date of the enactment of this Act. 

17 SEC. 105. PREVENTING MISUSE OF FOREIGN TRUSTS FOR 

18 TAX EVASION. 

19 (a) ATTRIBUTION OF TRUST PROTECTOR POWERS

20 TO GRANTORS.—Section 672 is amended by redesignating 

21 subsection (f) as subsection (g) and by inserting after sub22 section (e) the following new subsection: 

23 ‘‘(f) GRANTOR TREATED AS HOLDING ANY POWER

24 OR INTEREST OF TRUST PROTECTOR OR ENFORCER.— 

25 For purposes of this subpart, a grantor shall be treated 


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1 as holding any power or interest held by any trust pro2 tector or trust enforcer or similar person appointed to ad3 vise, influence, oversee, or veto the actions of the trustee.’’. 

4 (b) TREATMENT OF UNITED STATES RECIPIENTS OF

5 FOREIGN TRUST ASSETS AS TRUST BENEFICIARIES.— 

6 Section 679 is amended by redesignating subsections (c) 

7 and (d) as subsections (d) and (e), respectively, and by 

8 inserting after subsection (b) the following new subsection: 

9 ‘‘(c) CERTAIN UNITED STATES PERSONS TREATED

10 AS BENEFICIARIES.—Any United States person receiving 

11 from a foreign trust cash or other property, or receiving 

12 the use thereof, shall be treated as a beneficiary of such 

13 trust regardless of whether such person is a named bene14 ficiary, except to the extent that such person paid fair 

15 market value for the benefit received.’’. 

16 (c) TREATMENT OF FOREIGN TRUST TRANSFERS OF

17 REAL ESTATE, ARTWORK, OR JEWELRY CONSISTENTLY

18 WITH TRANSFERS OF SECURITIES.—Section 643(i)(1) is 

19 amended by striking ‘‘or marketable securities’’ and in20 serting ‘‘or other property, including real estate, market21 able securities, artwork, jewelry, and other personal prop22 erty,’’. 

23 (d) TREATMENT OF TRUSTS WITH FUTURE OR CON24 TINGENT UNITED STATES BENEFICIARIES.—Section 

25 679(a)(1) is amended— 


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1 (1) by inserting ‘‘or for any subsequent year’’ 

2 after ‘‘such year’’, and 

3 (2) by inserting ‘‘(including a contingent bene4 ficiary)’’ after ‘‘beneficiary’’. 

5 SEC. 106. LIMITATION ON LEGAL OPINION PROTECTION 

6 FROM PENALTIES WITH RESPECT TO TRANS7 ACTIONS INVOLVING OFFSHORE SECRECY 

8 JURISDICTIONS. 

9 (a) IN GENERAL.—Section 6664 is amended by add10 ing at the end the following new subsection: 

11 ‘‘(e) CERTAIN OPINIONS MAY NOT BE RELIED

12 UPON.—For purposes of this part, an opinion of a tax 

13 advisor may not be relied upon to establish that there was 

14 reasonable cause for any portion of an underpayment, or 

15 that the taxpayer acted in good faith with respect to such 

16 portion, if such portion is attributable to a transaction any 

17 part of which involves an entity or financial account in 

18 an offshore secrecy jurisdiction.’’. 

19 (b) REGULATORY AUTHORITY.—The Secretary of the 

20 Treasury may by regulation or guidance provide that sub21 section (e) of section 6664 of the Internal Revenue Code 

22 of 1986, as added by subsection (a), does not apply to 

23 legal opinions that express a confidence level that substan24 tially exceeds the ‘‘more likely than not’’ confidence level; 

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1 actions, such as corporate reorganizations, where the Sec2 retary determines that applying such subsection to such 

3 transactions is not necessary to carry out the purposes of 

4 such subsection. 

5 TITLE II—OTHER MEASURES TO 

6 COMBAT TAX HAVEN AND TAX 

7 SHELTER ABUSES 

8 SEC. 201. PENALTY FOR FAILING TO DISCLOSE OFFSHORE 

9 HOLDINGS. 

10 (a) SECURITIES EXCHANGE ACT OF 1934.—Section 

11 21(d)(3)(B) of the Securities Exchange Act of 1934 (15 

12 U.S.C. 78u(d)(3)(B)) is amended by adding at the end 

13 the following: 

14 ‘‘(iv) FOURTH TIER.—Notwithstanding 

15 clauses (i), (ii), and (iii), the amount of the 

16 penalty for each such violation shall not exceed 

17 $1,000,000 for any person if the violation de18 scribed in subparagraph (A) involved a knowing 

19 failure to disclose any holding or transaction in20 volving equity or debt instruments of an issuer 

21 and known by such person to involve a foreign 

22 entity, including any trust, corporation, limited 

23 liability company, partnership, or foundation 

24 that is directly or indirectly controlled by such 

25 person, and which would have been otherwise 


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1 subject to disclosure by such person under this 

2 title.’’. 

3 (b) SECURITIES ACT OF 1933.—Section 20(d)(2) of 

4 the Securities Act of 1933 (15 U.S.C. 77t(d)(2)) is 

5 amended by adding at the end the following: 

6 ‘‘(D) FOURTH TIER.—Notwithstanding 

7 subparagraphs (A), (B), and (C), the amount of 

8 penalty for each such violation shall not exceed 

9 $1,000,000 for any person, if the violation de10 scribed in paragraph (1) involved a knowing 

11 failure to disclose any holding or transaction in12 volving equity or debt instruments of an issuer 

13 and known by such person to involve a foreign 

14 entity, including any trust, corporation, limited 

15 liability company, partnership, or foundation, 

16 directly or indirectly controlled by such person, 

17 and which would have been otherwise subject to 

18 disclosure by such person under this title.’’. 

19 (c) INVESTMENT COMPANY ACT OF 1940.—Section 

20 9(d)(2) of the Investment Company Act of 1940 (15 

21 U.S.C. 80a–9(d)(2)) is amended by adding at the end the 

22 following: 

23 ‘‘(D) FOURTH TIER.—Notwithstanding 

24 subparagraphs (A), (B), and (C), the amount of 

25 penalty for each such violation shall not exceed 


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1 $1,000,000 for any person, if the violation de2 scribed in paragraph (1) involved a knowing 

3 failure to disclose any holding or transaction in4 volving equity or debt instruments of an issuer 

5 and known by such person to involve a foreign 

6 entity, including any trust, corporation, limited 

7 liability company, partnership, or foundation, 

8 directly or indirectly controlled by such person, 

9 and which would have been otherwise subject to 

10 disclosure by such person under this title.’’. 

11 (d) INVESTMENT ADVISERS ACT OF 1940.—Section 

12 203(i)(2) of the Investment Advisers Act of 1940 (15 

13 U.S.C. 80b–3(i)(2)) is amended by adding at the end the 

14 following: 

15 ‘‘(D) FOURTH TIER.—Notwithstanding 

16 subparagraphs (A), (B), and (C), the amount of 

17 penalty for each such violation shall not exceed 

18 $1,000,000 for any person, if the violation de19 scribed in paragraph (1) involved a knowing 

20 failure to disclose any holding or transaction in21 volving equity or debt instruments of an issuer 

22 and known by such person to involve a foreign 

23 entity, including any trust, corporation, limited 

24 liability company, partnership, or foundation, 

25 directly or indirectly controlled by such person, 


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1 and which would have been otherwise subject to 

2 disclosure by such person under this title.’’. 

3 SEC. 202. DEADLINE FOR ANTI-MONEY LAUNDERING RULE 

4 FOR HEDGE FUNDS AND PRIVATE EQUITY 

5 FUNDS. 

6 (a) IN GENERAL.—Not later than 180 days after the 

7 date of the enactment of this Act, the Secretary of the 

8 Treasury, in consultation with the Chairman of the Secu9 rities and Exchange Commission and the Chairman of the 

10 Commodity Futures Trading Commission, shall publish a 

11 final rule in the Federal Register requiring unregistered 

12 investment companies, including hedge funds or private 

13 equity funds, to establish anti-money laundering programs 

14 and submit suspicious activity reports under subsections 

15 (g) and (h) of section 5318 of title 31, United States Code. 

16 (b) CONTENTS.—The final rule published under this 

17 section— 

18 (1) shall require, at a minimum, that to safe19 guard against terrorist financing and money laun20 dering, all unregistered investment companies 

21 shall— 

22 (A) use due diligence to identify and evalu23 ate any foreign person (including the nominal 

24 and beneficial owner or beneficiary of a foreign 

25 corporation, partnership, trust, or other foreign 


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1 entity) planning to supply or supplying funds to 

2 be invested with the advice or assistance of that 

3 unregistered investment company; and 

4 (B) be subject to section 5318(k)(2) of 

5 title 31, United States Code; and 

6 (2) may incorporate aspects of the proposed 

7 rule for unregistered investment companies pub8 lished in the Federal Register on September 26, 

9 2002 (67 Fed. Reg. 60617) (relating to anti-money 

10 laundering programs). 

11 (c) DEFINITIONS.—In this section— 

12 (1) the terms ‘‘investment company’’ and 

13 ‘‘issuer’’ have the same meanings as in section 2 of 

14 the Investment Company Act of 1940 (15 U.S.C. 

15 80a–2); and 

16 (2) the term ‘‘unregistered investment com17 pany’’ means an issuer that would be an investment 

18 company, but for the exclusion under paragraph (1) 

19 or (7) of section 3(c) of the Investment Company 

20 Act of 1940 (15 U.S.C. 80a–3(c)). 

21 SEC. 203. ANTI-MONEY LAUNDERING REQUIREMENTS FOR 

22 FORMATION AGENTS. 

23 (a) ANTI-MONEY LAUNDERING OBLIGATIONS FOR

24 FORMATION AGENTS.—Section 5312(a)(2) of title 31, 

25 United States Code, is amended, by— 


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1 (1) in subparagraph (Y), by striking ‘‘or’’ at 

2 the end; 

3 (2) by redesignating subparagraph (Z) as sub4 paragraph (AA); and 

5 (3) by inserting after subparagraph (Y) the fol6 lowing: 

7 ‘‘(Z) persons involved in forming new cor8 porations, limited liability companies, partner9 ships, trusts, or other legal entities; or’’. 

10 (b) DEADLINE FOR ANTI-MONEY LAUNDERING

11 RULE FOR FORMATION AGENTS.—Not later than 90 days 

12 after the date of the enactment of this Act, after con13 sulting with the Attorney General of the United States, 

14 the Commissioner of the Internal Revenue Service, and 

15 Chairman of the Securities and Exchange Commission, 

16 the Secretary of the Treasury shall publish a proposed rule 

17 in the Federal Register requiring persons described in sec18 tion 5312(a)(2)(Z) of title 31, United States Code, as 

19 added by this section, to establish anti-money laundering 

20 programs under subsection (h) of section 5318 of that 

21 title. The Secretary shall publish such rule in final form 

22 in the Federal Register not later than 180 days after the 

23 date of the enactment of this Act. 


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1 SEC. 204. STRENGTHENING SUMMONS IN CASES INVOLVING 

2 OFFSHORE SECRECY JURISDICTIONS. 

3 (a) IN GENERAL.—Subsection (f) of section 7609 is 

4 amended to read as follows: 

5 ‘‘(f) ADDITIONAL REQUIREMENT IN THE CASE OF A

6 JOHN DOE SUMMONS.— 

7 ‘‘(1) GENERAL RULE.—Any summons described 

8 in subsection (c)(1) which does not identify the per9 son with respect to whose liability the summons is 

10 issued may be served only after a court proceeding 

11 in which the Secretary establishes that— 

12 ‘‘(A) the summons relates to the investiga13 tion of a particular person or ascertainable 

14 group or class of persons, 

15 ‘‘(B) there is a reasonable basis for believ16 ing that such person or group or class of per17 sons may fail or may have failed to comply with 

18 any provision of any internal revenue law, and 

19 ‘‘(C) the information sought to be obtained 

20 from the examination of the records or testi21 mony (and the identity of the person or persons 

22 with respect to whose liability the summons is 

23 issued) is not readily available from other 

24 sources. 

25 ‘‘(2) EXCEPTION.—Paragraph (1) shall not 

26 apply to any summons which specifies that it is limVerDate Aug 31 2005 21:03 Feb 23, 2007 Jkt 059200 PO 00000 Frm 00034 Fmt 6652 Sfmt 6201 E:\BILLS\S681.IS S681

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1 ited to information regarding a United States cor2 respondent account (as defined in section 

3 5318A(e)(1)(B) of title 31, United States Code) or 

4 a United States payable-through account (as defined 

5 in section 5318A(e)(1)(C) of such title) of a finan6 cial institution in an offshore secrecy jurisdiction. 

7 ‘‘(3) PRESUMPTION IN CASES INVOLVING OFF8 SHORE SECRECY JURISDICTIONS.—For purposes of 

9 this section, in any case in which the particular per10 son or ascertainable group or class of persons have 

11 financial accounts in or transactions related to off12 shore secrecy jurisdictions, there shall be a presump13 tion that there is a reasonable basis for believing 

14 that such person or group or class of persons may 

15 fail or may have failed to comply with provisions of 

16 internal revenue law. 

17 ‘‘(4) PROJECT JOHN DOE SUMMONSES.— 

18 ‘‘(A) IN GENERAL.—Notwithstanding the 

19 requirements of paragraph (1), the Secretary 

20 may issue a summons described in paragraph 

21 (1) if the summons— 

22 ‘‘(i) relates to a project which is ap23 proved under subparagraph (B), 


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1 ‘‘(ii) is issued to a person who is a 

2 member of the group or class established 

3 under subparagraph (B)(i), and 

4 ‘‘(iii) is issued within 3 years of the 

5 date on which such project was approved 

6 under subparagraph (B). 

7 ‘‘(B) APPROVAL OF PROJECTS.—A project 

8 may only be approved under this subparagraph 

9 after a court proceeding in which the Secretary 

10 establishes that— 

11 ‘‘(i) any summons issues with respect 

12 to the project will be issued to a member 

13 of an ascertainable group or class of per14 sons, and 

15 ‘‘(ii) any summons issued with respect 

16 to such project will meet the requirements 

17 of subparagraphs (A), (B), and (C) of 

18 paragraph (1). 

19 ‘‘(C) EXTENSION.—Upon application of 

20 the Secretary, the court may extend the time 

21 for issuing such summonses under subpara22 graph (A)(i) for additional 3-year periods, but 

23 only if the court continues to exercise oversight 

24 of such project under subparagraph (D). 


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1 ‘‘(D) ONGOING COURT OVERSIGHT.—Dur2 ing any period in which the Secretary is author3 ized to issue summonses in relation to a project 

4 approved under subparagraph (B) (including 

5 during any extension under subparagraph (C)), 

6 the Secretary shall report annually to the court 

7 on the use of such authority, provide copies of 

8 all summonses with such report, and comply 

9 with the court’s direction with respect to the 

10 issuance of any John Doe summons under such 

11 project.’’. 

12 (b) JURISDICTION OF COURT.— 

13 (1) IN GENERAL.—Paragraph (1) of section 

14 7609(h) is amended by inserting after the first sen15 tence the following new sentence: ‘‘Any United 

16 States district court in which a member of the group 

17 or class to which a summons may be issued resides 

18 or is found shall have jurisdiction to hear and deter19 mine the approval of a project under subsection 

20 (f)(4)(B).’’. 

21 (2) CONFORMING AMENDMENT.—The first sen22 tence of section 7609(h)(1) is amended by striking 

23 ‘‘(f)’’ and inserting ‘‘(f)(1)’’. 


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

2 this section shall apply to summonses issued after the date 

3 of the enactment of this Act. 

4 (d) GAO REPORT.—Not later than the date which 

5 is 5 years after the date of the enactment of this Act, 

6 the Comptroller General of the United States shall issue 

7 a report on the implementation of section 7609(f)(4) of 

8 the Internal Revenue Code of 1986, as added by this sec9 tion. 

10 SEC. 205. IMPROVING ENFORCEMENT OF FOREIGN FINAN11 CIAL ACCOUNT REPORTING. 

12 (a) CLARIFYING THE CONNECTION OF FOREIGN FI13 NANCIAL ACCOUNT REPORTING TO TAX ADMINISTRA14 TION.—Paragraph (4) of section 6103(b) (relating to tax 

15 administration) is amended by adding at the end the fol16 lowing new sentence: 

17 ‘‘For purposes of clause (i), section 5314 of title 31, 

18 United States Code, and sections 5321 and 5322 of 

19 such title (as such sections pertain to such section 

20 5314), shall be considered to be an internal revenue 

21 law.’’. 

22 (b) SIMPLIFYING THE CALCULATION OF FOREIGN

23 FINANCIAL ACCOUNT REPORTING PENALTIES.—Section 

24 5321(a)(5)(D)(ii) of title 31, United States Code, is 

25 amended by striking ‘‘the balance in the account at the 


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1 time of the violation’’ and inserting ‘‘the highest balance 

2 in the account during the reporting period to which the 

3 violation relates’’. 

4 (c) CLARIFYING THE USE OF SUSPICIOUS ACTIVITY

5 REPORTS UNDER THE BANK SECRECY ACT FOR CIVIL

6 TAX LAW ENFORCEMENT.—Section 5319 of title 31, 

7 United States Code, is amended by inserting ‘‘the civil and 

8 criminal enforcement divisions of the Internal Revenue 

9 Service,’’ after ‘‘including’’. 

10 TITLE III—COMBATING TAX 

11 SHELTER PROMOTERS 

12 SEC. 301. PENALTY FOR PROMOTING ABUSIVE TAX SHEL13 TERS. 

14 (a) PENALTY FOR PROMOTING ABUSIVE TAX SHEL15 TERS.—Section 6700 (relating to promoting abusive tax 

16 shelters, etc.) is amended— 

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

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

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

20 through the period in the first sentence of subsection 

21 (a) and inserting ‘‘a penalty determined under sub22 section (b)’’, and 

23 (3) by inserting after subsection (a) the fol24 lowing new subsections: 


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1 ‘‘(b) AMOUNT OF PENALTY; CALCULATION OF PEN2 ALTY; LIABILITY FOR PENALTY.— 

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

4 the penalty imposed by subsection (a) shall not ex5 ceed 150 percent of the gross income derived (or to 

6 be derived) from such activity by the person or per7 sons subject to such penalty. 

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

9 amount determined under paragraph (1) shall be 

10 calculated with respect to each instance of an activ11 ity described in subsection (a), each instance in 

12 which income was derived by the person or persons 

13 subject to such penalty, and each person who par14 ticipated in such an activity. 

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

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

17 such activity, all such persons shall be jointly and 

18 severally liable for the penalty under such sub19 section. 

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

21 any penalty imposed under this section or the payment 

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

23 penalty shall not be considered an ordinary and necessary 

24 expense in carrying on a trade or business for purposes 


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

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

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

4 amended by striking the last sentence. 

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

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

7 enactment of this Act. 

8 SEC. 302. PENALTY FOR AIDING AND ABETTING THE UN9 DERSTATEMENT OF TAX LIABILITY. 

10 (a) IN GENERAL.—Section 6701(a) (relating to impo11 sition of penalty) is amended— 

12 (1) by inserting ‘‘the tax liability or’’ after ‘‘re13 spect to,’’ in paragraph (1), 

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

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

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

17 and 

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

19 procurement, or advice or each such’’ before ‘‘docu20 ment’’ in the matter following paragraph (3). 

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

22 6701 (relating to penalties for aiding and abetting under23 statement of tax liability) is amended to read as follows: 

24 ‘‘(b) AMOUNT OF PENALTY; CALCULATION OF PEN25 ALTY; LIABILITY FOR PENALTY.— 


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

2 the penalty imposed by subsection (a) shall not ex3 ceed 150 percent of the gross income derived (or to 

4 be derived) from such aid, assistance, procurement, 

5 or advice provided by the person or persons subject 

6 to such penalty. 

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

8 amount determined under paragraph (1) shall be 

9 calculated with respect to each instance of aid, as10 sistance, procurement, or advice described in sub11 section (a), each instance in which income was de12 rived by the person or persons subject to such pen13 alty, and each person who made such an understate14 ment of the liability for tax. 

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

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

17 providing such aid, assistance, procurement, or ad18 vice, all such persons shall be jointly and severally 

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

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

21 amended by adding at the end the following new sub22 section: 

23 ‘‘(g) PENALTY NOT DEDUCTIBLE.—The payment of 

24 any penalty imposed under this section or the payment 

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


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1 penalty shall not be considered an ordinary and necessary 

2 expense in carrying on a trade or business for purposes 

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

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

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

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

7 enactment of this Act. 

8 SEC. 303. PROHIBITION ON TAX SHELTER PATENTS. 

9 (a) IN GENERAL.—Section 102 of title 35, United 

10 States Code, is amended— 

11 (1) by redesignating subsection (g) as sub12 section (h); and 

13 (2) by inserting after subsection (f) the fol14 lowing: 

15 ‘‘(g) the invention is designed to minimize, avoid, 

16 defer, or otherwise affect the liability for Federal, State, 

17 local, or foreign tax, or’’. 

18 (b) EFFECTIVE DATE AND APPLICATION.—The 

19 amendment made by this section shall take effect on the 

20 date of the enactment of this Act and apply to any applica21 tion for a patent that has not been granted by that date. 

22 SEC. 304. PROHIBITED FEE ARRANGEMENT. 

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

24 Act, is amended— 


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

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

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

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

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

6 (f).’’, and 

7 (3) by inserting after subsection (e) the fol8 lowing new subsection: 

9 ‘‘(f) PROHIBITED FEE ARRANGEMENT.— 

10 ‘‘(1) IN GENERAL.—Any person who makes an 

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

12 services provided in connection with the internal rev13 enue laws, and the amount of which is calculated ac14 cording to, or is dependent upon, a projected or ac15 tual amount of— 

16 ‘‘(A) tax savings or benefits, or 

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

18 other taxable income, 

19 shall pay a penalty with respect to each such fee ac20 tivity in the amount determined under subsection 

21 (b). 

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

23 carry out the purposes of this subsection and may 

24 provide exceptions for fee arrangements that are in 

25 the public interest.’’. 


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

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

3 collections made after the date of the enactment of this 

4 Act. 

5 SEC. 305. PREVENTING TAX SHELTER ACTIVITIES BY FI6 NANCIAL INSTITUTIONS. 

7 (a) EXAMINATIONS.— 

8 (1) DEVELOPMENT OF EXAMINATION TECH9 NIQUES.—Each of the Federal banking agencies and 

10 the Commission shall, in consultation with the Inter11 nal Revenue Service, develop examination techniques 

12 to detect potential violations of section 6700 or 6701 

13 of the Internal Revenue Code of 1986, by depository 

14 institutions, brokers, dealers, and investment advis15 ers, as appropriate. 

16 (2) IMPLEMENTATION.—Each of the Federal 

17 banking agencies and the Commission shall imple18 ment the examination techniques developed under 

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

20 institutions, brokers, dealers, or investment advisers 

21 subject to their enforcement authority. Such exam22 ination shall, to the extent possible, be combined 

23 with any examination by such agency otherwise re24 quired or authorized by Federal law. 


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

2 any case in which an examination conducted under this 

3 section with respect to a financial institution or other enti4 ty reveals a potential violation, such agency shall promptly 

5 notify the Internal Revenue Service of such potential viola6 tion for investigation and enforcement by the Internal 

7 Revenue Service, in accordance with applicable provisions 

8 of law. 

9 (c) REPORT TO CONGRESS.—The Federal banking 

10 agencies and the Commission shall submit a joint written 

11 report to Congress in 2009 and 2012 on their progress 

12 in preventing violations of sections 6700 and 6701 of the 

13 Internal Revenue Code of 1986, by depository institutions, 

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

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

16 (1) the terms ‘‘broker’’, ‘‘dealer’’, and ‘‘invest17 ment adviser’’ have the same meanings as in section 

18 3 of the Securities Exchange Act of 1934 (15 U.S.C. 

19 78c); 

20 (2) the term ‘‘Commission’’ means the Securi21 ties and Exchange Commission; 

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

23 same meaning as in section 3(c) of the Federal De24 posit Insurance Act (12 U.S.C. 1813(c)); 


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

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

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

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

5 of the Treasury. 

6 SEC. 306. INFORMATION SHARING FOR ENFORCEMENT 

7 PURPOSES. 

8 (a) PROMOTION OF PROHIBITED TAX SHELTERS OR

9 TAX AVOIDANCE SCHEMES.—Section 6103(h) (relating to 

10 disclosure to certain Federal officers and employees for 

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

12 at the end the following new paragraph: 

13 ‘‘(7) DISCLOSURE OF RETURNS AND RETURN

14 INFORMATION RELATED TO PROMOTION OF PROHIB15 ITED TAX SHELTERS OR TAX AVOIDANCE

16 SCHEMES.— 

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

18 by the Secretary of a written request which 

19 meets the requirements of subparagraph (B) 

20 from the head of the United States Securities 

21 and Exchange Commission, an appropriate 

22 Federal banking agency as defined under sec23 tion 1813(q) of title 12, United States Code, or 

24 the Public Company Accounting Oversight 

25 Board, a return or return information shall be 


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1 disclosed to such requestor’s officers and em2 ployees who are personally and directly engaged 

3 in an investigation, examination, or proceeding 

4 by such requestor to evaluate, determine, penal5 ize, or deter conduct by a financial institution, 

6 issuer, or public accounting firm, or associated 

7 person, in connection with a potential or actual 

8 violation of section 6700 (promotion of abusive 

9 tax shelters), 6701 (aiding and abetting under10 statement of tax liability), or activities related 

11 to promoting or facilitating inappropriate tax 

12 avoidance or tax evasion. Such disclosure shall 

13 be solely for use by such officers and employees 

14 in such investigation, examination, or pro15 ceeding. In the discretion of the Secretary, such 

16 disclosure may take the form of the participa17 tion of Internal Revenue Service employees in a 

18 joint investigation, examination, or proceeding 

19 with the Securities Exchange Commission, Fed20 eral banking agency, or Public Company Ac21 counting Oversight Board. 

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

23 the requirements of this subparagraph if it sets 

24 forth— 


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

2 examination, or proceeding, 

3 ‘‘(ii) the statutory authority under 

4 which such investigation, examination, or 

5 proceeding is being conducted, 

6 ‘‘(iii) the name or names of the finan7 cial institution, issuer, or public accounting 

8 firm to which such return information re9 lates, 

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

11 which such return information relates, and 

12 ‘‘(v) the specific reason or reasons 

13 why such disclosure is, or may be, relevant 

14 to such investigation, examination or pro15 ceeding. 

16 ‘‘(C) FINANCIAL INSTITUTION.—For the 

17 purposes of this paragraph, the term ‘financial 

18 institution’ means a depository institution, for19 eign bank, insured institution, industrial loan 

20 company, broker, dealer, investment company, 

21 investment advisor, or other entity subject to 

22 regulation or oversight by the United States Se23 curities and Exchange Commission or an appro24 priate Federal banking agency.’’. 


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1 (b) FINANCIAL AND ACCOUNTING FRAUD INVESTIGA2 TIONS.—Section 6103(i) (relating to disclosure to Federal 

3 officers or employees for administration of Federal laws 

4 not relating to tax administration) is amended by adding 

5 at the end the following new paragraph: 

6 ‘‘(9) DISCLOSURE OF RETURNS AND RETURN

7 INFORMATION FOR USE IN FINANCIAL AND AC8 COUNTING FRAUD INVESTIGATIONS.— 

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

10 by the Secretary of a written request which 

11 meets the requirements of subparagraph (B) 

12 from the head of the United States Securities 

13 and Exchange Commission or the Public Com14 pany Accounting Oversight Board, a return or 

15 return information shall be disclosed to such re16 questor’s officers and employees who are per17 sonally and directly engaged in an investigation, 

18 examination, or proceeding by such requester to 

19 evaluate the accuracy of a financial statement 

20 or report, or to determine whether to require a 

21 restatement, penalize, or deter conduct by an 

22 issuer, investment company, or public account23 ing firm, or associated person, in connection 

24 with a potential or actual violation of auditing 

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1 leading statements or omissions in financial 

2 statements or reports. Such disclosure shall be 

3 solely for use by such officers and employees in 

4 such investigation, examination, or proceeding. 

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

6 the requirements of this subparagraph if it sets 

7 forth— 

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

9 examination, or proceeding, 

10 ‘‘(ii) the statutory authority under 

11 which such investigation, examination, or 

12 proceeding is being conducted, 

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

14 investment company, or public accounting 

15 firm to which such return information re16 lates, 

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

18 which such return information relates, and 

19 ‘‘(v) the specific reason or reasons 

20 why such disclosure is, or may be, relevant 

21 to such investigation, examination or pro22 ceeding.’’. 

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

24 this section shall apply to disclosures and to information 


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1 and document requests made after the date of the enact2 ment of this Act. 

3 SEC. 307. DISCLOSURE OF INFORMATION TO CONGRESS. 

4 (a) DISCLOSURE BY TAX RETURN PREPARER.— 

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

6 7216(b)(1) (relating to disclosures) is amended to 

7 read as follows: 

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

9 documents, if clearly identified: 

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

11 or local court of record. 

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

13 or State grand jury. 

14 ‘‘(iii) An administrative order, sum15 mons, or subpoena which is issued in the 

16 performance of its duties by— 

17 ‘‘(I) any Federal agency, includ18 ing Congress or any committee or 

19 subcommittee thereof, or 

20 ‘‘(II) any State agency, body, or 

21 commission charged under the laws of 

22 the State or a political subdivision of 

23 the State with the licensing, registra24 tion, or regulation of tax return pre25 parers.’’. 


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1 (2) EFFECTIVE DATE.—The amendment made 

2 by this subsection shall apply to disclosures made 

3 after the date of the enactment of this Act pursuant 

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

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

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

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

8 follows: 

9 ‘‘(2) INSPECTION BY CONGRESS.— 

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

11 written request from a committee or sub12 committee of Congress, copies of documents re13 lated to a determination by the Secretary to 

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

15 exemption from taxation under section 501 

16 shall be provided to such committee or sub17 committee, including any application, notice of 

18 status, or supporting information provided by 

19 such organization to the Internal Revenue Serv20 ice; any letter, analysis, or other document pro21 duced by or for the Internal Revenue Service 

22 evaluating, determining, explaining, or relating 

23 to the tax exempt status of such organization 

24 (other than returns, unless such returns are 

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1 tion 6103 or 6110); and any communication be2 tween the Internal Revenue Service and any 

3 other party relating to the tax exempt status of 

4 such organization. 

5 ‘‘(B) ADDITIONAL INFORMATION.—Section 

6 6103(f) shall apply with respect to— 

7 ‘‘(i) the application for exemption of 

8 any organization described in subsection 

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

10 from taxation under section 501(a) for any 

11 taxable year and any application referred 

12 to in subparagraph (B) of subsection 

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

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

15 the possession of the Secretary and which 

16 relate to such application, 

17 as if such papers constituted returns.’’. 

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

19 this section shall apply to disclosures and to information 

20 and document requests made after the date of the enact21 ment of this Act. 

22 SEC. 308. TAX OPINION STANDARDS FOR TAX PRACTI23 TIONERS. 

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

25 amended to read as follows: 


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

2 standards applicable to the rendering of written advice 

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

4 arrangement, or other transaction which has a potential 

5 for tax avoidance or evasion. Such standards shall ad6 dress, but not be limited to, the following issues: 

7 ‘‘(1) Independence of the practitioner issuing 

8 such written advice from persons promoting, mar9 keting, or recommending the subject of the advice. 

10 ‘‘(2) Collaboration among practitioners, or be11 tween a practitioner and other party, which could re12 sult in such collaborating parties having a joint fi13 nancial interest in the subject of the advice. 

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

15 would impair auditor independence. 

16 ‘‘(4) For written advice issued by a firm, stand17 ards for reviewing the advice and ensuring the con18 sensus support of the firm for positions taken. 

19 ‘‘(5) Reliance on reasonable factual representa20 tions by the taxpayer and other parties. 

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

22 practitioner for the written advice. 

23 ‘‘(7) Preventing practitioners and firms from 

24 aiding or abetting the understatement of tax liability 

25 by clients. 


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1 ‘‘(8) Banning the promotion of potentially abu2 sive or illegal tax shelters.’’. 

3 SEC. 309. DENIAL OF DEDUCTION FOR CERTAIN FINES, 

4 PENALTIES, AND OTHER AMOUNTS. 

5 (a) IN GENERAL.—Subsection (f) of section 162 (re6 lating to trade or business expenses) is amended to read 

7 as follows: 

8 ‘‘(f) FINES, PENALTIES, AND OTHER AMOUNTS.— 

9 ‘‘(1) IN GENERAL.—Except as provided in para10 graph (2), no deduction otherwise allowable shall be 

11 allowed under this chapter for any amount paid or 

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

13 to, or at the direction of, a government or entity de14 scribed in paragraph (4) in relation to the violation 

15 of any law or the investigation or inquiry by such 

16 government or entity into the potential violation of 

17 any law. 

18 ‘‘(2) EXCEPTION FOR AMOUNTS CONSTITUTING

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

20 any amount which— 

21 ‘‘(A) the taxpayer establishes constitutes 

22 restitution (including remediation of property) 

23 for damage or harm caused by or which may be 

24 caused by the violation of any law or the poten25 tial violation of any law, and 


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

2 court order or settlement agreement. 

3 Identification pursuant to subparagraph (B) alone 

4 shall not satisfy the requirement under subpara5 graph (A). This paragraph shall not apply to any 

6 amount paid or incurred as reimbursement to the 

7 government or entity for the costs of any investiga8 tion or litigation. 

9 ‘‘(3) EXCEPTION FOR AMOUNTS PAID OR IN10 CURRED AS THE RESULT OF CERTAIN COURT OR11 DERS.—Paragraph (1) shall not apply to any 

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

13 suit in which no government or entity described in 

14 paragraph (4) is a party. 

15 ‘‘(4) CERTAIN NONGOVERNMENTAL REGU16 LATORY ENTITIES.—An entity is described in this 

17 paragraph if it is— 

18 ‘‘(A) a nongovernmental entity which exer19 cises self-regulatory powers (including imposing 

20 sanctions) in connection with a qualified board 

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

22 or 

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

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1 tions) as part of performing an essential gov2 ernmental function. 

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

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

5 as taxes due.’’. 

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

7 this section shall apply to amounts paid or incurred on 

8 or after the date of the enactment of this Act, except that 

9 such amendment shall not apply to amounts paid or in10 curred under any binding order or agreement entered into 

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

12 order or agreement requiring court approval unless the ap13 proval was obtained before such date. 

14 TITLE IV—REQUIRING 

15 ECONOMIC SUBSTANCE 

16 SEC. 401. CLARIFICATION OF ECONOMIC SUBSTANCE DOC17 TRINE. 

18 (a) IN GENERAL.—Section 7701 is amended by re19 designating subsection (p) as subsection (q) and by insert20 ing after subsection (o) the following new subsection: 

21 ‘‘(p) CLARIFICATION OF ECONOMIC SUBSTANCE

22 DOCTRINE; ETC.— 

23 ‘‘(1) GENERAL RULES.— 

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

25 a court determines that the economic substance 


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1 doctrine is relevant for purposes of this title to 

2 a transaction (or series of transactions), such 

3 transaction (or series of transactions) shall have 

4 economic substance only if the requirements of 

5 this paragraph are met. 

6 ‘‘(B) DEFINITION OF ECONOMIC SUB7 STANCE.—For purposes of subparagraph (A)— 

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

9 economic substance only if— 

10 ‘‘(I) the transaction changes in a 

11 meaningful way (apart from Federal 

12 tax effects) the taxpayer’s economic 

13 position, and 

14 ‘‘(II) the taxpayer has a substan15 tial nontax purpose for entering into 

16 such transaction and the transaction 

17 is a reasonable means of accom18 plishing such purpose. 

19 In applying subclause (II), a purpose of 

20 achieving a financial accounting benefit 

21 shall not be taken into account in deter22 mining whether a transaction has a sub23 stantial nontax purpose if the origin of 

24 such financial accounting benefit is a re25 duction of income tax. 


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1 ‘‘(ii) SPECIAL RULE WHERE TAX2 PAYER RELIES ON PROFIT POTENTIAL.—A 

3 transaction shall not be treated as having 

4 economic substance by reason of having a 

5 potential for profit unless— 

6 ‘‘(I) the present value of the rea7 sonably expected pre-tax profit from 

8 the transaction is substantial in rela9 tion to the present value of the ex10 pected net tax benefits that would be 

11 allowed if the transaction were re12 spected, and 

13 ‘‘(II) the reasonably expected 

14 pre-tax profit from the transaction ex15 ceeds a risk-free rate of return. 

16 ‘‘(C) TREATMENT OF FEES AND FOREIGN

17 TAXES.—Fees and other transaction expenses 

18 and foreign taxes shall be taken into account as 

19 expenses in determining pre-tax profit under 

20 subparagraph (B)(ii). 

21 ‘‘(2) SPECIAL RULES FOR TRANSACTIONS WITH

22 TAX-INDIFFERENT PARTIES.— 

23 ‘‘(A) SPECIAL RULES FOR FINANCING

24 TRANSACTIONS.—The form of a transaction 

25 which is in substance the borrowing of money 


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1 or the acquisition of financial capital directly or 

2 indirectly from a tax-indifferent party shall not 

3 be respected if the present value of the deduc4 tions to be claimed with respect to the trans5 action is substantially in excess of the present 

6 value of the anticipated economic returns of the 

7 person lending the money or providing the fi8 nancial capital. A public offering shall be treat9 ed as a borrowing, or an acquisition of financial 

10 capital, from a tax-indifferent party if it is rea11 sonably expected that at least 50 percent of the 

12 offering will be placed with tax-indifferent par13 ties. 

14 ‘‘(B) ARTIFICIAL INCOME SHIFTING AND

15 BASIS ADJUSTMENTS.—The form of a trans16 action with a tax-indifferent party shall not be 

17 respected if— 

18 ‘‘(i) it results in an allocation of in19 come or gain to the tax-indifferent party in 

20 excess of such party’s economic income or 

21 gain, or 

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

23 or shifting of basis on account of over24 stating the income or gain of the tax-indif25 ferent party. 


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

2 purposes of this subsection— 

3 ‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.— 

4 The term ‘economic substance doctrine’ means 

5 the common law doctrine under which tax bene6 fits under subtitle A with respect to a trans7 action are not allowable if the transaction does 

8 not have economic substance or lacks a business 

9 purpose. 

10 ‘‘(B) TAX-INDIFFERENT PARTY.—The 

11 term ‘tax-indifferent party’ means any person 

12 or entity not subject to tax imposed by subtitle 

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

14 party with respect to a transaction if the items 

15 taken into account with respect to the trans16 action have no substantial impact on such per17 son’s liability under subtitle A. 

18 ‘‘(C) EXCEPTION FOR PERSONAL TRANS19 ACTIONS OF INDIVIDUALS.—In the case of an 

20 individual, this subsection shall apply only to 

21 transactions entered into in connection with a 

22 trade or business or an activity engaged in for 

23 the production of income. 


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1 ‘‘(D) TREATMENT OF LESSORS.—In apply2 ing paragraph (1)(B)(ii) to the lessor of tan3 gible property subject to a lease— 

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

5 respect to the leased property shall not in6 clude the benefits of— 

7 ‘‘(I) depreciation, 

8 ‘‘(II) any tax credit, or 

9 ‘‘(III) any other deduction as 

10 provided in guidance by the Secretary, 

11 and 

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

13 (1)(B)(ii) shall be disregarded in deter14 mining whether any of such benefits are al15 lowable. 

16 ‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF17 FECTED.—Except as specifically provided in this 

18 subsection, the provisions of this subsection shall not 

19 be construed as altering or supplanting any other 

20 rule of law, and the requirements of this subsection 

21 shall be construed as being in addition to any such 

22 other rule of law. 

23 ‘‘(5) REGULATIONS.—The Secretary shall pre24 scribe such regulations as may be necessary or ap25 propriate to carry out the purposes of this subVerDate Aug 31 2005 21:03 Feb 23, 2007 Jkt 059200 PO 00000 Frm 00063 Fmt 6652 Sfmt 6201 E:\BILLS\S681.IS S681

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1 section. Such regulations may include exemptions 

2 from the application of this subsection.’’. 

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

4 this section shall apply to transactions entered into after 

5 the date of the enactment of this Act. 

6 SEC. 402. PENALTY FOR UNDERSTATEMENTS ATTRIB7 UTABLE TO TRANSACTIONS LACKING ECO8 NOMIC SUBSTANCE, ETC. 

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

10 amended by inserting after section 6662A the following 

11 new section: 

12 ‘‘SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIB13 UTABLE TO TRANSACTIONS LACKING ECO14 NOMIC SUBSTANCE, ETC. 

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

16 noneconomic substance transaction understatement for 

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

18 amount equal to 40 percent of the amount of such under19 statement. 

20 ‘‘(b) REDUCTION OF PENALTY FOR DISCLOSED

21 TRANSACTIONS.—Subsection (a) shall be applied by sub22 stituting ‘20 percent’ for ‘40 percent’ with respect to the 

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1 ing the tax treatment of the item are adequately disclosed 

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

3 ‘‘(c) NONECONOMIC SUBSTANCE TRANSACTION UN4 DERSTATEMENT.—For purposes of this section— 

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

6 substance transaction understatement’ means any 

7 amount which would be an understatement under 

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

9 by taking into account items attributable to non10 economic substance transactions rather than items 

11 to which section 6662A would apply without regard 

12 to this paragraph. 

13 ‘‘(2) NONECONOMIC SUBSTANCE TRANS14 ACTION.—The term ‘noneconomic substance trans15 action’ means any transaction if— 

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

17 (within the meaning of section 7701(p)(1)) for 

18 the transaction giving rise to the claimed ben19 efit or the transaction was not respected under 

20 section 7701(p)(2), or 

21 ‘‘(B) the transaction fails to meet the re22 quirements of any similar rule of law. 

23 ‘‘(d) RULES APPLICABLE TO COMPROMISE OF PEN24 ALTY.— 


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1 ‘‘(1) IN GENERAL.—If the first letter of pro2 posed deficiency which allows the taxpayer an oppor3 tunity for administrative review in the Internal Rev4 enue Service Office of Appeals has been sent with 

5 respect to a penalty to which this section applies, 

6 only the Commissioner of Internal Revenue may 

7 compromise all or any portion of such penalty. 

8 ‘‘(2) APPLICABLE RULES.—The rules of para9 graphs (2) and (3) of section 6707A(d) shall apply 

10 for purposes of paragraph (1). 

11 ‘‘(e) COORDINATION WITH OTHER PENALTIES.—Ex12 cept as otherwise provided in this part, the penalty im13 posed by this section shall be in addition to any other pen14 alty imposed by this title. 

15 ‘‘(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).’’. 

16 (b) COORDINATION WITH OTHER UNDERSTATE17 MENTS AND PENALTIES.— 

18 (1) The second sentence of section 

19 6662(d)(2)(A) is amended by inserting ‘‘and without 

20 regard to items with respect to which a penalty is 

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

22 end. 


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1 (2) Subsection (e) of section 6662A is amend2 ed— 

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

4 noneconomic substance transaction understate5 ments’’ after ‘‘reportable transaction under6 statements’’ both places it appears, 

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

8 a noneconomic substance transaction under9 statement’’ after ‘‘reportable transaction under10 statement’’, 

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

12 ‘‘6662B or’’ before ‘‘6663’’, 

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

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

15 end, 

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

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

18 (F) in paragraph (3), by inserting ‘‘or non19 economic substance transaction understate20 ment’’ after ‘‘reportable transaction understate21 ment’’, and 

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

23 paragraph: 

24 ‘‘(4) NONECONOMIC SUBSTANCE TRANSACTION

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1 section, the term ‘noneconomic substance trans2 action understatement’ has the meaning given such 

3 term by section 6662B(c).’’. 

4 (3) Subsection (e) of section 6707A is amend5 ed— 

6 (A) by striking ‘‘or’’ at the end of subpara7 graph (B), and 

8 (B) by striking subparagraph (C) and in9 serting the following new subparagraphs: 

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

11 section 6662B with respect to any noneconomic 

12 substance transaction, or 

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

14 section 6662(h) with respect to any transaction 

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

16 have been subject to penalty under section 

17 6662A at a rate prescribed under section 

18 6662A(c) or under section 6662B,’’. 

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

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

21 inserting after the item relating to section 6662A the fol22 lowing new item: 

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

economic substance, etc.’’. 


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

2 this section shall apply to transactions entered into after 

3 the date of the enactment of this Act. 

4 SEC. 403. DENIAL OF DEDUCTION FOR INTEREST ON UN5 DERPAYMENTS ATTRIBUTABLE TO NON6 ECONOMIC SUBSTANCE TRANSACTIONS. 

7 (a) IN GENERAL.—Section 163(m) (relating to inter8 est on unpaid taxes attributable to nondisclosed reportable 

9 transactions) is amended— 

10 (1) by striking ‘‘attributable’’ and all that fol11 lows and inserting the following: ‘‘attributable to— 

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

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

14 with respect to which the requirement of section 

15 6664(d)(2)(A) is not met, or 

16 ‘‘(2) any noneconomic substance transaction 

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

18 and 

19 (2) by inserting ‘‘AND NONECONOMIC SUB20 STANCE TRANSACTIONS’’ after ‘‘TRANSACTIONS’’. 

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

22 this section shall apply to transactions after the date of 

23 the enactment of this Act in taxable years ending after 

24 such date. 

Æ 


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