II 

110TH CONGRESS 

1ST SESSION S. 1111 

To amend the Internal Revenue Code of 1986 to make the Federal income 

tax system simpler, fairer, and more fiscally responsible, and for other 

purposes. 

IN THE SENATE OF THE UNITED STATES 

APRIL 16, 2007 

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

to the Committee on Finance 

A BILL 

To amend the Internal Revenue Code of 1986 to make 

the Federal income tax system simpler, fairer, and more 

fiscally responsible, 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; AMENDMENT OF 1986 CODE; 

4 TABLE OF CONTENTS. 

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

6 ‘‘Fair Flat Tax Act of 2007’’. 

7 (b) AMENDMENT OF 1986 CODE.—Except as other8 wise expressly provided, whenever in this Act an amend9 ment or repeal is expressed in terms of an amendment 


jcorcoran on PROD1PC62 with BILLS
2 

•S 1111 IS

1 to, or repeal of, a section or other provision, the reference 

2 shall be considered to be made to a section or other provi3 sion of the Internal Revenue Code of 1986. 

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

5 this Act is as follows: 

Sec. 1. Short title; amendment of 1986 Code; table of contents. 

Sec. 2. Purpose. 

TITLE I—INDIVIDUAL INCOME TAX REFORMS 

Sec. 101. 3 progressive individual income tax rates for all forms of income. 

Sec. 102. Health care standard deduction. 

Sec. 103. Increase in basic standard deduction. 

Sec. 104. Refundable credit for State and local income, sales, and real and personal property taxes. 

Sec. 105. Earned income child credit and earned income credit for childless taxpayers. 

Sec. 106. Repeal of individual alternative minimum tax. 

Sec. 107. Termination of various exclusions, exemptions, deductions, and credits. 

TITLE II—CORPORATE AND BUSINESS INCOME TAX REFORMS 

Sec. 201. Corporate flat tax. 

Sec. 202. Treatment of travel on corporate aircraft. 

Sec. 203. Termination of various preferential treatments. 

Sec. 204. Elimination of tax expenditures that subsidize inefficiencies in the 

health care system. 

Sec. 205. Pass-through business entity transparency. 

Sec. 206. Modification of effective date of leasing provisions of the American 

Jobs Creation Act of 2004. 

Sec. 207. Revaluation of LIFO inventories of large integrated oil companies. 

Sec. 208. Modifications of foreign tax credit rules applicable to large integrated 

oil companies which are dual capacity taxpayers. 

Sec. 209. Repeal of lower of cost or market value of inventory rule. 

Sec. 210. Reinstitution of per country foreign tax credit. 

Sec. 211. Application of rules treating inverted corporations as domestic corporations to certain transactions occurring after March 20, 

2002. 

TITLE III—OTHER PROVISIONS 

Subtitle A—Improvements in Tax Compliance 

Sec. 301. Information reporting on payments to corporations. 

Sec. 302. Broker reporting of customer’s basis in securities transactions. 

Sec. 303. Additional reporting requirements by regulation. 

Sec. 304. Increase in information return penalties. 

Sec. 305. E-filing requirement for certain large organizations. 


jcorcoran on PROD1PC62 with BILLS
3 

•S 1111 IS

Sec. 306. Implementation of standards clarifying when employee leasing companies can be held liable for their clients’ Federal employment 

taxes. 

Sec. 307. Modification of collection due process procedures for employment tax 

liabilities. 

Sec. 308. Expansion of IRS access to information in National Directory of New 

Hires for tax administration purposes. 

Sec. 309. Disclosure of prisoner return information to Federal Bureau of Prisons. 

Sec. 310. Modification of criminal penalties for willful failures involving tax 

payments and filing requirements. 

Sec. 311. Understatement of taxpayer liability by return preparers. 

Sec. 312. Penalties for failure to file certain returns electronically. 

Sec. 313. Penalty for filing erroneous refund claims. 

Subtitle B—Requiring Economic Substance 

Sec. 321. Clarification of economic substance doctrine. 

Sec. 322. Penalty for understatements attributable to transactions lacking economic substance, etc. 

Sec. 323. Denial of deduction for interest on underpayments attributable to 

noneconomic substance transactions. 

Subtitle C—Miscellaneous 

Sec. 331. Denial of deduction for punitive damages. 

TITLE IV—TECHNICAL AND CONFORMING AMENDMENTS; SUNSET 

Sec. 401. Technical and conforming amendments. 

Sec. 402. Sunset. 

1 SEC. 2. PURPOSE. 

2 The purpose of this Act is to amend the Internal Rev3 enue Code of 1986— 

4 (1) to make the Federal individual income tax 

5 system simpler, fairer, and more transparent by— 

6 (A) recognizing the overall Federal, State, 

7 and local tax burden on individual Americans, 

8 especially the regressive nature of State and 

9 local taxes, and providing a Federal income tax 

10 credit for State and local income, sales, and 

11 property taxes, 


jcorcoran on PROD1PC62 with BILLS
4 

•S 1111 IS

1 (B) providing for an earned income tax 

2 credit for childless taxpayers and a new earned 

3 income child credit, 

4 (C) repealing the individual alternative 

5 minimum tax, 

6 (D) increasing the basic standard deduc7 tion and maintaining itemized deductions for 

8 principal residence mortgage interest and chari9 table contributions, 

10 (E) reducing the number of exclusions, ex11 emptions, deductions, and credits, and 

12 (F) treating all income equally, 

13 (2) to make the Federal corporate income tax 

14 rate a flat 35 percent and eliminate special tax pref15 erences that favor particular types of businesses or 

16 activities, and 

17 (3) to partially offset the Federal budget deficit 

18 through the increased fiscal responsibility resulting 

19 from these reforms. 


jcorcoran on PROD1PC62 with BILLS
5 

•S 1111 IS

1 TITLE I—INDIVIDUAL INCOME 

2 TAX REFORMS 

3 SEC. 101. 3 PROGRESSIVE INDIVIDUAL INCOME TAX RATES 

4 FOR ALL FORMS OF INCOME. 

5 (a) MARRIED INDIVIDUALS FILING JOINT RETURNS

6 AND SURVIVING SPOUSES.—The table contained in sec7 tion 1(a) is amended to read as follows: 

‘‘If taxable income is: The tax is: 

Not over $30,000 .......................... 15% of taxable income.

Over $30,000 but not over 

$120,000.

$4,500, plus 25% of the excess over 

$30,000

Over $120,000 ............................... $27,000, plus 35% of the excess over 

$120,000’’. 

8 (b) HEADS OF HOUSEHOLDS.—The table contained 

9 in section 1(b) is amended to read as follows: 

‘‘If taxable income is: The tax is: 

Not over $16,000 .......................... 15% of taxable income.

Over $16,000 but not over 

$105,000.

$2,400, plus 25% of the excess over 

$16,000

Over $105,000 ............................... $24,650, plus 35% of the excess over 

$105,000’’. 

10 (c) UNMARRIED INDIVIDUALS (OTHER THAN SUR11 VIVING SPOUSES AND HEADS OF HOUSEHOLDS).—The 

12 table contained in section 1(c) is amended to read as fol13 lows: 

‘‘If taxable income is: The tax is: 

Not over $15,000 .......................... 15% of taxable income.

Over $15,000 but not over 

$60,000.

$2,250, plus 25% of the excess over 

$15,000

Over $60,000 ................................. $13,500, plus 35% of the excess over 

$60,000’’. 

14 (d) MARRIED INDIVIDUALS FILING SEPARATE RE15 TURNS.—The table contained in section 1(d) is amended 

16 to read as follows: 

‘‘If taxable income is: The tax is: 

Not over $15,000 .......................... 15% of taxable income.


jcorcoran on PROD1PC62 with BILLS
6 

•S 1111 IS

‘‘If taxable income is: The tax is: 

Over $15,000 but not over 

$60,000.

$2,250, plus 25% of the excess over 

$15,000

Over $60,000 ................................. $13,500, plus 35% of the excess over 

$60,000’’. 

1 (e) CONFORMING AMENDMENTS TO INFLATION AD2 JUSTMENT.—Section 1(f) is amended— 

3 (1) by striking ‘‘1993’’ in paragraph (1) and in4 serting ‘‘2008’’, 

5 (2) by striking ‘‘except as provided in para6 graph (8)’’ in paragraph (2)(A), 

7 (3) by striking ‘‘1992’’ in paragraph (3)(B) and 

8 inserting ‘‘2007’’, 

9 (4) by striking paragraphs (7) and (8), and 

10 (5) by striking ‘‘PHASEOUT OF MARRIAGE PEN11 ALTY IN 15-PERCENT BRACKET;’’ in the heading 

12 thereof. 

13 (f) REPEAL OF RATE DIFFERENTIAL FOR CAPITAL

14 GAINS AND DIVIDENDS.— 

15 (1) REPEAL OF 2003 RATE REDUCTION.—Sec16 tion 303 of the Jobs and Growth Tax Relief Rec17 onciliation Act of 2003 is amended by striking ‘‘De18 cember 3, 2008’’ and inserting ‘‘December 31, 

19 2007’’. 

20 (2) TERMINATION OF PRE-2003 CAPITAL GAIN

21 RATE DIFFERENTIAL.—Section 1(h) is amended 

22 (after the application of paragraph (1)) by adding at 

23 the end the following new paragraph: 


jcorcoran on PROD1PC62 with BILLS
7 

•S 1111 IS

1 ‘‘(13) TERMINATION.—This section shall not 

2 apply to taxable years beginning after December 31, 

3 2007.’’. 

4 (g) ADDITIONAL CONFORMING AMENDMENTS.— 

5 (1) Section 1 is amended by striking subsection 

6 (i). 

7 (2) The Internal Revenue Code of 1986 is 

8 amended by striking ‘‘calendar year 1992’’ each 

9 place it appears and inserting ‘‘calendar year 2007’’. 

10 (3) Section 1445(e)(1) (after the application of 

11 subsection (g)(1)) is amended by striking ‘‘(or, to 

12 the extent provided in regulations, 20 percent)’’. 

13 (h) EFFECTIVE DATE.—The amendments made by 

14 this section shall apply to taxable years beginning after 

15 December 31, 2007. 

16 SEC. 102. HEALTH CARE STANDARD DEDUCTION. 

17 (a) IN GENERAL.—Section 62(a) (defining adjusted 

18 gross income) is amended by inserting after paragraph 

19 (21) the following new paragraph: 

20 ‘‘(22) INDIVIDUAL SHARED RESPONSIBILITY

21 PAYMENTS.— 

22 ‘‘(A) IN GENERAL.—In the case of a tax23 payer with gross income for the taxable year ex24 ceeding 100 percent of the poverty line (ad25 justed for the size of the family involved) for 


jcorcoran on PROD1PC62 with BILLS
8 

•S 1111 IS

1 the calendar year in which such taxable year 

2 begins and who is enrolled in a HAPI plan 

3 under the Healthy Americans Act, the deduc4 tion allowable under section 213 by reason of 

5 subsection (d)(1)(D) thereof (determined with6 out regard to any income limitation under sub7 section (a) thereof) in an amount equal to the 

8 applicable fraction times, in the case of— 

9 ‘‘(i) coverage of an individual, $6,025, 

10 ‘‘(ii) coverage of a married couple or 

11 domestic partnership (as determined by a 

12 State) without dependent children, 

13 $12,050, 

14 ‘‘(iii) coverage of an unmarried indi15 vidual with 1 or more dependent children, 

16 $8,610, plus $2,000 for each dependent 

17 child, and 

18 ‘‘(iv) coverage of a married couple or 

19 domestic partnership (as determined by a 

20 State) with 1 or more dependent children, 

21 $15,210, plus $2,000 for each dependent 

22 child. 

23 ‘‘(B) APPLICABLE FRACTION.—For pur24 poses of subparagraph (A), the applicable frac25 tion is the fraction (not to exceed 1)— 


jcorcoran on PROD1PC62 with BILLS
9 

•S 1111 IS

1 ‘‘(i) the numerator of which is the 

2 gross income of the taxpayer for the tax3 able year expressed as a percentage of the 

4 poverty line (adjusted for the size of the 

5 family involved) minus such poverty line 

6 for the calendar year in which such taxable 

7 year begins, and 

8 ‘‘(ii) the denominator of which is 400 

9 percent of the poverty line (adjusted for 

10 the size of the family involved) minus such 

11 poverty line. 

12 ‘‘(C) PHASEOUT OF DEDUCTION

13 AMOUNT.— 

14 ‘‘(i) IN GENERAL.—The amount oth15 erwise determined under subparagraph (A) 

16 for any taxable year shall be reduced by 

17 the amount determined under clause (ii). 

18 ‘‘(ii) AMOUNT OF REDUCTION.—The 

19 amount determined under this clause shall 

20 be the amount which bears the same ratio 

21 to the amount determined under subpara22 graph (A) as— 

23 ‘‘(I) the excess of the taxpayer’s 

24 modified adjusted gross income for 

25 such taxable year, over $62,500 


jcorcoran on PROD1PC62 with BILLS
10 

•S 1111 IS

1 ($125,000 in the case of a joint re2 turn), bears to 

3 ‘‘(II) $62,500 ($125,000 in the 

4 case of a joint return). 

5 Any amount determined under this clause 

6 which is not a multiple of $1,000 shall be 

7 rounded to the next lowest $1,000. 

8 ‘‘(D) INFLATION ADJUSTMENT.—In the 

9 case of any taxable year beginning in a calendar 

10 year after 2009, each dollar amount contained 

11 in subparagraph (A) and subparagraph 

12 (C)(ii)(I) shall be increased by an amount equal 

13 to such dollar amount, multiplied by the cost14 of-living adjustment determined under section 

15 1(f)(3) for the calendar year in which the tax16 able year begins, determined by substituting 

17 ‘calendar year 2008’ for ‘calendar year 1992’ in 

18 subparagraph (B) thereof. Any increase deter19 mined under the preceding sentence shall be 

20 rounded to the nearest multiple of $50 ($1,000 

21 in the case of the dollar amount contained in 

22 subparagraph (C)(ii)(I)). 

23 ‘‘(E) DETERMINATION OF MODIFIED AD24 JUSTED GROSS INCOME.— 


jcorcoran on PROD1PC62 with BILLS
11 

•S 1111 IS

1 ‘‘(i) IN GENERAL.—For purposes of 

2 this paragraph, the term ‘modified ad3 justed gross income’ means adjusted gross 

4 income— 

5 ‘‘(ii) determined without regard to 

6 this section and sections 86, 135, 137, 

7 199, 221, 222, 911, 931, and 933, and 

8 ‘‘(iii) increased by— 

9 ‘‘(I) the amount of interest re10 ceived or accrued during the taxable 

11 year which is exempt from tax under 

12 this title, and 

13 ‘‘(II) the amount of any social se14 curity benefits (as defined in section 

15 86(d)) received or accrued during the 

16 taxable year. 

17 ‘‘(F) POVERTY LINE.—For purposes of 

18 this paragraph, the term ‘poverty line’ has the 

19 meaning given such term in section 673(2) of 

20 the Community Health Services Block Grant 

21 Act (42 U.S.C. 9902(2)), including any revision 

22 required by such section.’’. 

23 (b) CONFORMING AMENDMENT.—Section 

24 213(d)(1)(D) is amended by inserting ‘‘amounts paid 

25 under section 3421 and’’ after ‘‘including’’. 


jcorcoran on PROD1PC62 with BILLS
12 

•S 1111 IS

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

2 this section shall apply to taxable years beginning after 

3 December 31, 2007. 

4 SEC. 103. INCREASE IN BASIC STANDARD DEDUCTION. 

5 (a) IN GENERAL.—Paragraph (2) of section 63(c) 

6 (defining standard deduction) is amended to read as fol7 lows: 

8 ‘‘(2) BASIC STANDARD DEDUCTION.—For pur9 poses of paragraph (1), the basic standard deduction 

10 is— 

11 ‘‘(A) 200 percent of the dollar amount in 

12 effect under subparagraph (C) for the taxable 

13 year in the case of— 

14 ‘‘(i) a joint return, or 

15 ‘‘(ii) a surviving spouse (as defined in 

16 section 2(a)), 

17 ‘‘(B) $26,250 in the case of a head of 

18 household (as defined in section 2(b)), reduced 

19 by any deduction allowed under section 

20 62(a)(22) for such taxable year, or 

21 ‘‘(C) $15,000 in any other case, reduced 

22 by any deduction allowed under section 

23 62(a)(22) for such taxable year.’’. 


jcorcoran on PROD1PC62 with BILLS
13 

•S 1111 IS

1 (b) CONFORMING AMENDMENT TO INFLATION AD2 JUSTMENT.—Section 63(c)(4)(B)(i) is amended by strik3 ing ‘‘(2)(B), (2)(C), or’’. 

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

5 this section shall apply to taxable years beginning after 

6 December 31, 2007. 

7 SEC. 104. REFUNDABLE CREDIT FOR STATE AND LOCAL IN8 COME, SALES, AND REAL AND PERSONAL 

9 PROPERTY TAXES. 

10 (a) GENERAL RULE.—Subpart C of part IV of sub11 chapter A of chapter 1 (relating to refundable credits) is 

12 amended by redesignating section 36 as section 37 and 

13 by inserting after section 35 the following new section: 

14 ‘‘SEC. 36. CREDIT FOR STATE AND LOCAL INCOME, SALES, 

15 AND REAL AND PERSONAL PROPERTY TAXES. 

16 ‘‘(a) ALLOWANCE OF CREDIT.—In the case of an in17 dividual, there shall be allowed as a credit against the tax 

18 imposed by this subtitle for the taxable year an amount 

19 equal to 10 percent of the qualified State and local taxes 

20 paid by the taxpayer for such year. 

21 ‘‘(b) QUALIFIED STATE AND LOCAL TAXES.—For 

22 purposes of this section, the term ‘qualified State and local 

23 taxes’ means— 

24 ‘‘(1) State and local income taxes, 

25 ‘‘(2) State and local general sales taxes, 


jcorcoran on PROD1PC62 with BILLS
14 

•S 1111 IS

1 ‘‘(3) State and local real property taxes, and 

2 ‘‘(4) State and local personal property taxes. 

3 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur4 poses of this section— 

5 ‘‘(1) STATE OR LOCAL TAXES.—A State or local 

6 tax includes only a tax imposed by a State, a posses7 sion of the United States, or a political subdivision 

8 of any of the foregoing, or by the District of Colum9 bia. 

10 ‘‘(2) GENERAL SALES TAXES.— 

11 ‘‘(A) IN GENERAL.—The term ‘general 

12 sales tax’ means a tax imposed at one rate with 

13 respect to the sale at retail of a broad range of 

14 classes of items. 

15 ‘‘(B) APPLICATION OF RULES.—Rules 

16 similar to the rules under subparagraphs (C), 

17 (D), (E), (F), (G), and (H) of section 164(b)(5) 

18 shall apply. 

19 ‘‘(3) PERSONAL PROPERTY TAXES.—The term 

20 ‘personal property tax’ means an ad valorem tax 

21 which is imposed on an annual basis in respect of 

22 personal property. 

23 ‘‘(4) APPLICATION OF RULES TO PROPERTY

24 TAXES.—Rules similar to the rules of subsections (c) 

25 and (d) of section 164 shall apply. 


jcorcoran on PROD1PC62 with BILLS
15 

•S 1111 IS

1 ‘‘(5) NO CREDIT FOR MARRIED INDIVIDUALS

2 FILING SEPARATE RETURNS.—If the taxpayer is a 

3 married individual (within the meaning of section 

4 7703), this section shall apply only if the taxpayer 

5 and the taxpayer’s spouse file a joint return for the 

6 taxable year. 

7 ‘‘(6) DENIAL OF CREDIT TO DEPENDENTS.—No 

8 credit shall be allowed under this section to any indi9 vidual with respect to whom a deduction under sec10 tion 151 is allowable to another taxpayer for a tax11 able year beginning in the calendar year in which 

12 such individual’s taxable year begins. 

13 ‘‘(7) DENIAL OF DOUBLE BENEFIT.—Any 

14 amount taken into account in determining the credit 

15 allowable under this section may not be taken into 

16 account in determining any credit or deduction 

17 under any other provision of this chapter.’’. 

18 (b) TECHNICAL AMENDMENTS.— 

19 (1) Paragraph (2) of section 1324(b) of title 

20 31, United States Code, is amended by inserting ‘‘or 

21 from section 36 of such Code’’ before the period at 

22 the end. 

23 (2) The table of sections for subpart C of part 

24 IV of subchapter A of chapter 1 is amended by 


jcorcoran on PROD1PC62 with BILLS
16 

•S 1111 IS

1 striking the item relating to section 36 and inserting 

2 the following: 

‘‘Sec. 36. Credit for state and local income, sales, and real and personal property taxes. 

‘‘Sec. 37. Overpayments of tax.’’. 

3 (c) REPORT REGARDING USE OF CREDIT BY RENT4 ERS.—Not later than 180 days after the date of the enact5 ment of this Act, the Secretary of the Treasury shall re6 port to the Committee on Finance of the Senate and the 

7 Committee on Ways and Means of the House of Rep8 resentatives recommendations regarding the treatment of 

9 a portion of rental payments in a manner similar to real 

10 property taxes under section 36 of the Internal Revenue 

11 Code of 1986 (as added by this section). 

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

13 this section shall apply to taxable years beginning after 

14 December 31, 2007. 

15 SEC. 105. EARNED INCOME CHILD CREDIT AND EARNED IN16 COME CREDIT FOR CHILDLESS TAXPAYERS. 

17 (a) IN GENERAL.—Subsection (a) of section 32 (re18 lating to earned income) is amended to read as follows: 

19 ‘‘(a) ALLOWANCE OF EARNED INCOME CHILD CRED20 IT AND EARNED INCOME CREDIT.— 

21 ‘‘(1) IN GENERAL.—There shall be allowed as a 

22 credit against the tax imposed by this subtitle for 

23 the taxable year— 


jcorcoran on PROD1PC62 with BILLS
17 

•S 1111 IS

1 ‘‘(A) in the case of any eligible individual 

2 with 1 or more qualifying children, an amount 

3 equal to the earned income child credit amount, 

4 and 

5 ‘‘(B) in the case of any eligible individual 

6 with no qualifying children, an amount equal to 

7 the earned income credit amount. 

8 ‘‘(2) EARNED INCOME CHILD CREDIT

9 AMOUNT.—For purposes of this section, the earned 

10 income child credit amount is equal to the sum of— 

11 ‘‘(A) the credit percentage of so much of 

12 the taxpayer’s earned income for the taxable 

13 year as does not exceed the earned income limit 

14 amount, plus 

15 ‘‘(B) the supplemental child credit amount 

16 determined under subsection (n) for such tax17 able year. 

18 ‘‘(3) EARNED INCOME CREDIT AMOUNT.—For 

19 purposes of this section, the earned income credit 

20 amount is equal to the credit percentage of so much 

21 of the taxpayer’s earned income for the taxable year 

22 as does not exceed the earned income limit amount. 

23 ‘‘(4) LIMITATION.—The amount of the credit 

24 allowable to a taxpayer under paragraph (2)(A) or 


jcorcoran on PROD1PC62 with BILLS
18 

•S 1111 IS

1 (3) for any taxable year shall not exceed the excess 

2 (if any) of— 

3 ‘‘(A) the credit percentage of the earned 

4 income amount, over 

5 ‘‘(B) the phaseout percentage of so much 

6 of the adjusted gross income (or, if greater, the 

7 earned income) of the taxpayer for the taxable 

8 year as exceeds the phaseout amount.’’. 

9 (b) SUPPLEMENTAL CHILD CREDIT AMOUNT.—Sec10 tion 32 is amended by adding at the end the following 

11 new subsection: 

12 ‘‘(n) SUPPLEMENTAL CHILD CREDIT AMOUNT.— 

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

14 (a)(2)(B), the supplemental child credit amount for 

15 any taxable year is equal to the lesser of— 

16 ‘‘(A) the credit which would be allowed 

17 under section 24 for such taxable year without 

18 regard to the limitation under section 24(b)(3) 

19 with respect to any qualifying child as defined 

20 under subsection (c)(3), or 

21 ‘‘(B) the amount by which the aggregate 

22 amount of credits allowed by subpart A for 

23 such taxable year would increase if the limita24 tion imposed by section 24(b)(3) were increased 

25 by the excess (if any) of— 


jcorcoran on PROD1PC62 with BILLS
19 

•S 1111 IS

1 ‘‘(i) 15 percent of so much of the tax2 payer’s earned income which is taken into 

3 account in computing taxable income for 

4 the taxable year as exceeds $10,000, or 

5 ‘‘(ii) in the case of a taxpayer with 3 

6 or more qualifying children (as so defined), 

7 the excess (if any) of— 

8 ‘‘(I) the taxpayer’s social security 

9 taxes for the taxable year, over 

10 ‘‘(II) the credit allowed under 

11 this section for the taxable year. 

12 The amount of the credit allowed under this sub13 section shall not be treated as a credit allowed under 

14 subpart A and shall reduce the amount of credit oth15 erwise allowable under section 24(a) without regard 

16 to section 24(b)(3). 

17 ‘‘(2) SOCIAL SECURITY TAXES.—For purposes 

18 of paragraph (1)— 

19 ‘‘(A) IN GENERAL.—The term ‘social secu20 rity taxes’ means, with respect to any taxpayer 

21 for any taxable year— 

22 ‘‘(i) the amount of the taxes imposed 

23 by section 3101 and 3201(a) on amounts 

24 received by the taxpayer during the calVerDate Aug 31 2005 02:37 Apr 18, 2007 Jkt 059200 PO 00000 Frm 00019 Fmt 6652 Sfmt 6201 E:\BILLS\S1111.IS S1111

jcorcoran on PROD1PC62 with BILLS
20 

•S 1111 IS

1 endar year in which the taxable year be2 gins, 

3 ‘‘(ii) 50 percent of the taxes imposed 

4 by section 1401 on the self-employment in5 come of the taxpayer for the taxable year, 

6 and 

7 ‘‘(iii) 50 percent of the taxes imposed 

8 by section 3211(a)(1) on amounts received 

9 by the taxpayer during the calendar year 

10 in which the taxable year begins. 

11 ‘‘(B) COORDINATION WITH SPECIAL RE12 FUND OF SOCIAL SECURITY TAXES.—The term 

13 ‘social security taxes’ shall not include any 

14 taxes to the extent the taxpayer is entitled to 

15 a special refund of such taxes under section 

16 6413(c). 

17 ‘‘(C) SPECIAL RULE.—Any amounts paid 

18 pursuant to an agreement under section 3121(l) 

19 (relating to agreements entered into by Amer20 ican employers with respect to foreign affiliates) 

21 which are equivalent to the taxes referred to in 

22 subparagraph (A)(i) shall be treated as taxes 

23 referred to in such paragraph. 

24 ‘‘(3) INFLATION ADJUSTMENT.—In the case of 

25 any taxable year beginning in a calendar year after 


jcorcoran on PROD1PC62 with BILLS
21 

•S 1111 IS

1 2007, the $10,000 amount contained in paragraph 

2 (1)(B) shall be increased by an amount equal to— 

3 ‘‘(A) such dollar amount, multiplied by 

4 ‘‘(B) the cost-of-living adjustment deter5 mined under section 1(f)(3) for the calendar 

6 year in which the taxable year begins, deter7 mined by substituting ‘calendar year 2000’ for 

8 ‘calendar year 1992’ in subparagraph (B) 

9 thereof. 

10 ‘‘Any increase determined under the preceding 

11 sentence shall be rounded to the nearest multiple of 

12 $50.’’. 

13 (c) CONFORMING AMENDMENT.—Section 24(d) is 

14 amended by adding at the end the following new para15 graph: 

16 ‘‘(4) TERMINATION.—This subsection shall not 

17 apply with respect to any taxable year beginning 

18 after December 31, 2007.’’. 

19 (d) CERTAIN TREATMENT OF EARNED INCOME

20 MADE PERMANENT.—Clause (vi) of section 32(c)(2)(B) 

21 is amended to read as follows: 

22 ‘‘(vi) a taxpayer may elect to treat 

23 amounts excluded from gross income by 

24 reason of section 112 as earned income.’’. 


jcorcoran on PROD1PC62 with BILLS
22 

•S 1111 IS

1 (e) REPEAL OF DISQUALIFIED INVESTMENT INCOME

2 TEST.—Subsection (i) of section 32 is repealed. 

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

4 this section shall apply to taxable years beginning after 

5 December 31, 2007. 

6 SEC. 106. REPEAL OF INDIVIDUAL ALTERNATIVE MINIMUM 

7 TAX. 

8 (a) IN GENERAL.—Section 55(a) (relating to alter9 native minimum tax imposed) is amended by adding at 

10 the end the following new flush sentence: 

11 ‘‘For purposes of this title, the tentative minimum 

12 tax on any taxpayer other than a corporation for any tax13 able year beginning after December 31, 2007, shall be 

14 zero.’’. 

15 (b) MODIFICATION OF LIMITATION ON USE OF

16 CREDIT FOR PRIOR YEAR MINIMUM TAX LIABILITY.— 

17 Subsection (c) of section 53 (relating to credit for prior 

18 year minimum tax liability) is amended to read as follows: 

19 ‘‘(c) LIMITATION.— 

20 ‘‘(1) IN GENERAL.—Except as provided in para21 graph (2), the credit allowable under subsection (a) 

22 for any taxable year shall not exceed the excess (if 

23 any) of— 

24 ‘‘(A) the regular tax liability of the tax25 payer for such taxable year reduced by the sum 


jcorcoran on PROD1PC62 with BILLS
23 

•S 1111 IS

1 of the credits allowable under subparts A, B, D, 

2 E, and F of this part, over 

3 ‘‘(B) the tentative minimum tax for the 

4 taxable year. 

5 ‘‘(2) TAXABLE YEARS BEGINNING AFTER

6 2007.—In the case of any taxable year beginning 

7 after 2007, the credit allowable under subsection (a) 

8 to a taxpayer other than a corporation for any tax9 able year shall not exceed 90 percent of the regular 

10 tax liability of the taxpayer for such taxable year re11 duced by the sum of the credits allowable under sub12 parts A, B, D, E, and F of this part.’’. 

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

14 this section shall apply to taxable years beginning after 

15 December 31, 2007. 

16 SEC. 107. TERMINATION OF VARIOUS EXCLUSIONS, EXEMP17 TIONS, DEDUCTIONS, AND CREDITS. 

18 (a) IN GENERAL.—Subchapter C of chapter 90 (re19 lating to provisions affecting more than one subtitle) is 

20 amended by adding at the end the following new section: 

21 ‘‘SEC. 7875. TERMINATION OF CERTAIN PROVISIONS. 

22 ‘‘The following provisions shall not apply to taxable 

23 years beginning after December 31, 2007: 

24 ‘‘(1) Section 67 (relating to 2-percent floor on 

25 miscellaneous itemized deductions). 


jcorcoran on PROD1PC62 with BILLS
24 

•S 1111 IS

1 ‘‘(2) Section 74(c) (relating to exclusion of cer2 tain employee achievement awards). 

3 ‘‘(3) Section 79 (relating to exclusion of group4 term life insurance purchased for employees). 

5 ‘‘(4) Section 119 (relating to exclusion of meals 

6 or lodging furnished for the convenience of the em7 ployer). 

8 ‘‘(5) Section 125 (relating to exclusion of cafe9 teria plan benefits). 

10 ‘‘(6) Section 132 (relating to certain fringe ben11 efits), except with respect to subsection (a)(5) there12 of (relating to exclusion of qualified transportation 

13 fringe). 

14 ‘‘(7) Section 163(h)(4)(A)(i)(II) (relating to 

15 definition of qualified residence). 

16 ‘‘(8) Section 165(d) (relating to deduction for 

17 wagering losses). 

18 ‘‘(9) Section 217 (relating to deduction for 

19 moving expenses). 

20 ‘‘(10) Section 454 (relating to deferral of tax 

21 on obligations issued at discount). 

22 ‘‘(11) Section 501(c)(9) (relating to tax-exempt 

23 status of voluntary employees’ beneficiary associa24 tions). 


jcorcoran on PROD1PC62 with BILLS
25 

•S 1111 IS

1 ‘‘(12) Section 911 (relating to exclusion of 

2 earned income of citizens or residents of the United 

3 States living abroad). 

4 ‘‘(13) Section 912 (relating to exemption for 

5 certain allowances).’’. 

6 (b) CONFORMING AMENDMENT.—The table of sec7 tions for subchapter C of chapter 90 is amended by adding 

8 at the end the following new item: 

‘‘Sec. 7875. Termination of certain provisions.’’. 

9 TITLE II—CORPORATE AND 

10 BUSINESS INCOME TAX RE11 FORMS 

12 SEC. 201. CORPORATE FLAT TAX. 

13 (a) IN GENERAL.—Subsection (b) of section 11 (re14 lating to tax imposed) is amended to read as follows: 

15 ‘‘(b) AMOUNT OF TAX.—The amount of tax imposed 

16 by subsection (a) shall be equal to 35 percent of the tax17 able income.’’. 

18 (b) CONFORMING AMENDMENTS.— 

19 (1) Section 280C(c)(3)(B)(ii)(II) is amended by 

20 striking ‘‘maximum rate of tax under section 

21 11(b)(1)’’ and inserting ‘‘rate of tax under section 

22 11(b)’’. 

23 (2) Sections 860E(e)(2)(B), 860E(e)(6)(A)(ii), 

24 860K(d)(2)(A)(ii), 860K(e)(1)(B)(ii), 

25 1446(b)(2)(B), and 7874(e)(1)(B) are each amended 


jcorcoran on PROD1PC62 with BILLS
26 

•S 1111 IS

1 by striking ‘‘highest rate of tax specified in section 

2 11(b)(1)’’ and inserting ‘‘rate of tax specified in sec3 tion 11(b)’’. 

4 (3) Section 904(b)(3)(D)(ii) is amended by 

5 striking ‘‘(determined without regard to the last sen6 tence of section 11(b)(1))’’. 

7 (4) Section 962 is amended by striking sub8 section (c) and by redesignating subsection (d) as 

9 subsection (c). 

10 (5) Section 1201(a) is amended by striking 

11 ‘‘(determined without regard to the last 2 sentences 

12 of section 11(b)(1))’’. 

13 (6) Section 1561(a) is amended— 

14 (A) by striking paragraph (1) and by re15 designating paragraphs (2), (3), and (4) as 

16 paragraphs (1), (2), and (3), respectively, 

17 (B) by striking ‘‘The amounts specified in 

18 paragraph (1), the’’ and inserting ‘‘The’’, 

19 (C) by striking ‘‘paragraph (2)’’ and in20 serting ‘‘paragraph (1)’’, 

21 (D) by striking ‘‘paragraph (3)’’ both 

22 places it appears and inserting ‘‘paragraph 

23 (2)’’, 

24 (E) by striking ‘‘paragraph (4)’’ and in25 serting ‘‘paragraph (3)’’, and 


jcorcoran on PROD1PC62 with BILLS
27 

•S 1111 IS

1 (F) by striking the fourth sentence. 

2 (7) Subsection (b) of section 1561 is amended 

3 to read as follows: 

4 ‘‘(b) CERTAIN SHORT TAXABLE YEARS.—If a cor5 poration has a short taxable year which does not include 

6 a December 31 and is a component member of a controlled 

7 group of corporations with respect to such taxable year, 

8 then for purposes of this subtitle, the amount to be used 

9 in computing the accumulated earnings credit under sec10 tion 535(c)(2) and (3) of such corporation for such taxable 

11 year shall be the amount specified in subsection (a)(1) di12 vided by the number of corporations which are component 

13 members of such group on the last day of such taxable 

14 year. For purposes of the preceding sentence, section 

15 1563(b) shall be applied as if such last day were sub16 stituted for December 31.’’. 

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

18 this section shall apply to taxable years beginning after 

19 December 31, 2007. 

20 SEC. 202. TREATMENT OF TRAVEL ON CORPORATE AIR21 CRAFT. 

22 (a) IN GENERAL.—Section 162 (relating to trade or 

23 business expenses) is amended by redesignating subsection 

24 (q) as subsection (r) and by inserting after subsection (p) 

25 the following new subsection: 


jcorcoran on PROD1PC62 with BILLS
28 

•S 1111 IS

1 ‘‘(q) TREATMENT OF TRAVEL ON CORPORATE AIR2 CRAFT.—The rate at which an amount allowable as a de3 duction under this chapter for the use of an aircraft owned 

4 by the taxpayer is determined shall not exceed the rate 

5 at which an amount paid or included in income by an em6 ployee of such taxpayer for the personal use of such air7 craft is determined.’’. 

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

9 this section shall apply to taxable years beginning after 

10 December 31, 2007. 

11 SEC. 203. TERMINATION OF VARIOUS PREFERENTIAL 

12 TREATMENTS. 

13 (a) IN GENERAL.—Section 7875, as added by section 

14 107, is amended— 

15 (1) by inserting ‘‘(or transactions in the case of 

16 sections referred to in paragraphs (21), (22), (23), 

17 (24), and (27))’’ after ‘‘taxable years beginning’’, 

18 and 

19 (2) by adding at the end the following new 

20 paragraphs: 

21 ‘‘(14) Section 43 (relating to enhanced oil re22 covery credit). 

23 ‘‘(15) Section 263(c) (relating to intangible 

24 drilling and development costs in the case of oil and 

25 gas wells and geothermal wells). 


jcorcoran on PROD1PC62 with BILLS
29 

•S 1111 IS

1 ‘‘(16) Section 382(l)(5) (relating to exception 

2 from net operating loss limitations for corporations 

3 in bankruptcy proceeding). 

4 ‘‘(17) Section 451(i) (relating to special rules 

5 for sales or dispositions to implement Federal En6 ergy Regulatory Commission or State electric re7 structuring policy). 

8 ‘‘(18) Section 453A (relating to special rules for 

9 nondealers), but only with respect to the dollar limi10 tation under subsection (b)(1) thereof and sub11 section (b)(3) thereof (relating to exception for per12 sonal use and farm property). 

13 ‘‘(19) Section 460(e)(1) (relating to special 

14 rules for long-term home construction contracts or 

15 other short-term construction contracts). 

16 ‘‘(20) Section 613A (relating to percentage de17 pletion in case of oil and gas wells). 

18 ‘‘(21) Section 616 (relating to development 

19 costs). 

20 ‘‘(22) Sections 861(a)(6), 862(a)(6), 863(b)(2), 

21 863(b)(3), and 865(b) (relating to inventory prop22 erty sales source rule exception).’’. 

23 (b) FULL TAX RATE ON NUCLEAR DECOMMIS24 SIONING RESERVE FUND.—Subparagraph (B) of section 

25 468A(e)(2) is amended to read as follows: 


jcorcoran on PROD1PC62 with BILLS
30 

•S 1111 IS

1 ‘‘(B) RATE OF TAX.—For purposes of sub2 paragraph (A), the rate set forth in this sub3 paragraph is 35 percent.’’. 

4 (c) DEFERRAL OF ACTIVE INCOME OF CONTROLLED

5 FOREIGN CORPORATIONS.—Section 952 (relating to sub6 part F income defined) is amended by adding at the end 

7 the following new subsection: 

8 ‘‘(e) SPECIAL APPLICATION OF SUBPART.— 

9 ‘‘(1) IN GENERAL.—For taxable years begin10 ning after December 31, 2007, notwithstanding any 

11 other provision of this subpart, the term ‘subpart F 

12 income’ means, in the case of any controlled foreign 

13 corporation, the income of such corporation derived 

14 from any foreign country. 

15 ‘‘(2) APPLICABLE RULES.—Rules similar to the 

16 rules under the last sentence of subsection (a) and 

17 subsection (d) shall apply to this subsection.’’. 

18 (d) DEFERRAL OF ACTIVE FINANCING INCOME.— 

19 Section 953(e)(10) is amended— 

20 (1) by striking ‘‘January 1, 2009’’ and insert21 ing ‘‘January 1, 2008’’, and 

22 (2) by striking ‘‘December 31, 2008’’ and in23 serting ‘‘December 31, 2007’’. 

24 (e) DEPRECIATION ON EQUIPMENT IN EXCESS OF

25 ALTERNATIVE DEPRECIATION SYSTEM.—Section 


jcorcoran on PROD1PC62 with BILLS
31 

•S 1111 IS

1 168(g)(1) (relating to alternative depreciation system) is 

2 amended by striking ‘‘and’’ at the end of subparagraph 

3 (D), by adding ‘‘and’’ at the end of subparagraph (E), 

4 and by inserting after subparagraph (E) the following new 

5 subparagraph: 

6 ‘‘(F) notwithstanding subsection (a), any 

7 tangible property placed in service after Decem8 ber 31, 2007,’’. 

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

10 subsections (b), (c), and (d) shall apply to taxable years 

11 beginning after December 31, 2007. 

12 SEC. 204. ELIMINATION OF TAX EXPENDITURES THAT SUB13 SIDIZE INEFFICIENCIES IN THE HEALTH 

14 CARE SYSTEM. 

15 Not later than 180 days after the date of the enact16 ment of this Act, the Secretary of the Treasury shall re17 port to the Committee on Finance of the Senate and the 

18 Committee on Ways and Means of the House of Rep19 resentatives recommendations regarding the elimination of 

20 Federal tax incentives which subsidize inefficiencies in the 

21 health care system and if eliminated would result in Fed22 eral budget savings of not less than $10,000,000,000 an23 nually. 


jcorcoran on PROD1PC62 with BILLS
32 

•S 1111 IS

1 SEC. 205. PASS-THROUGH BUSINESS ENTITY TRANS2 PARENCY. 

3 Not later than 90 days after the date of the enact4 ment of this Act, the Secretary of the Treasury shall re5 port to the Committee on Finance of the Senate and the 

6 Committee on Ways and Means of the House of Rep7 resentatives regarding the implementation of additional 

8 reporting requirements with respect to any pass-through 

9 entity with the goal of the reduction of tax avoidance 

10 through the use of such entities. In addition, the Secretary 

11 shall develop procedures to share such report data with 

12 State revenue agencies under the disclosure requirements 

13 of section 6103(d) of the Internal Revenue Code of 1986. 

14 SEC. 206. MODIFICATION OF EFFECTIVE DATE OF LEASING 

15 PROVISIONS OF THE AMERICAN JOBS CRE16 ATION ACT OF 2004. 

17 (a) LEASES TO FOREIGN ENTITIES.—Section 849(b) 

18 of the American Jobs Creation Act of 2004 is amended 

19 by adding at the end the following new paragraph: 

20 ‘‘(5) LEASES TO FOREIGN ENTITIES.—In the 

21 case of tax-exempt use property leased to a tax-ex22 empt entity which is a foreign person or entity, the 

23 amendments made by this part shall apply to taxable 

24 years beginning after December 31, 2006, with re25 spect to leases entered into on or before March 12, 

26 2004.’’. 


jcorcoran on PROD1PC62 with BILLS
33 

•S 1111 IS

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

2 this section shall take effect as if included in the enact3 ment of the American Jobs Creation Act of 2004. 

4 SEC. 207. REVALUATION OF LIFO INVENTORIES OF LARGE 

5 INTEGRATED OIL COMPANIES. 

6 (a) GENERAL RULE.—Notwithstanding any other 

7 provision of law, if a taxpayer is an applicable integrated 

8 oil company for its last taxable year ending in calendar 

9 year 2006, the taxpayer shall— 

10 (1) increase, effective as of the close of such 

11 taxable year, the value of each historic LIFO layer 

12 of inventories of crude oil, natural gas, or any other 

13 petroleum product (within the meaning of section 

14 4611) by the layer adjustment amount, and 

15 (2) decrease its cost of goods sold for such tax16 able year by the aggregate amount of the increases 

17 under paragraph (1). 

18 If the aggregate amount of the increases under paragraph 

19 (1) exceed the taxpayer’s cost of goods sold for such tax20 able year, the taxpayer’s gross income for such taxable 

21 year shall be increased by the amount of such excess. 

22 (b) LAYER ADJUSTMENT AMOUNT.—For purposes of 

23 this section— 


jcorcoran on PROD1PC62 with BILLS
34 

•S 1111 IS

1 (1) IN GENERAL.—The term ‘‘layer adjustment 

2 amount’’ means, with respect to any historic LIFO 

3 layer, the product of— 

4 (A) $18.75, and 

5 (B) the number of barrels of crude oil (or 

6 in the case of natural gas or other petroleum 

7 products, the number of barrel-of-oil equiva8 lents) represented by the layer. 

9 (2) BARREL-OF-OIL EQUIVALENT.—The term 

10 ‘‘barrel-of-oil equivalent’’ has the meaning given 

11 such term by section 29(d)(5) (as in effect before its 

12 redesignation by the Energy Tax Incentives Act of 

13 2005). 

14 (c) APPLICATION OF REQUIREMENT.— 

15 (1) NO CHANGE IN METHOD OF ACCOUNTING.— 

16 Any adjustment required by this section shall not be 

17 treated as a change in method of accounting. 

18 (2) UNDERPAYMENTS OF ESTIMATED TAX.—No 

19 addition to the tax shall be made under section 6655 

20 of the Internal Revenue Code of 1986 (relating to 

21 failure by corporation to pay estimated tax) with re22 spect to any underpayment of an installment re23 quired to be paid with respect to the taxable year 

24 described in subsection (a) to the extent such under25 payment was created or increased by this section. 


jcorcoran on PROD1PC62 with BILLS
35 

•S 1111 IS

1 (d) APPLICABLE INTEGRATED OIL COMPANY.—For 

2 purposes of this section, the term ‘‘applicable integrated 

3 oil company’’ means an integrated oil company (as defined 

4 in section 291(b)(4) of the Internal Revenue Code of 

5 1986) which has an average daily worldwide production 

6 of crude oil of at least 500,000 barrels for the taxable 

7 year and which had gross receipts in excess of 

8 $1,000,000,000 for its last taxable year ending during cal9 endar year 2006. For purposes of this subsection all per10 sons treated as a single employer under subsections (a) 

11 and (b) of section 52 of the Internal Revenue Code of 

12 1986 shall be treated as 1 person and, in the case of a 

13 short taxable year, the rule under section 448(c)(3)(B) 

14 shall apply. 

15 SEC. 208. MODIFICATIONS OF FOREIGN TAX CREDIT RULES 

16 APPLICABLE TO LARGE INTEGRATED OIL 

17 COMPANIES WHICH ARE DUAL CAPACITY 

18 TAXPAYERS. 

19 (a) IN GENERAL.—Section 901 (relating to credit for 

20 taxes of foreign countries and of possessions of the United 

21 States) is amended by redesignating subsection (n) as sub22 section (o) and by inserting after subsection (l) the fol23 lowing new subsection: 


jcorcoran on PROD1PC62 with BILLS
36 

•S 1111 IS

1 ‘‘(m) SPECIAL RULES RELATING TO LARGE INTE2 GRATED OIL COMPANIES WHICH ARE DUAL CAPACITY

3 TAXPAYERS.— 

4 ‘‘(1) GENERAL RULE.—Notwithstanding any 

5 other provision of this chapter, any amount paid or 

6 accrued by a dual capacity taxpayer which is a large 

7 integrated oil company to a foreign country or pos8 session of the United States for any period shall not 

9 be considered a tax— 

10 ‘‘(A) if, for such period, the foreign coun11 try or possession does not impose a generally 

12 applicable income tax, or 

13 ‘‘(B) to the extent such amount exceeds 

14 the amount (determined in accordance with reg15 ulations) which— 

16 ‘‘(i) is paid by such dual capacity tax17 payer pursuant to the generally applicable 

18 income tax imposed by the country or pos19 session, or 

20 ‘‘(ii) would be paid if the generally ap21 plicable income tax imposed by the country 

22 or possession were applicable to such dual 

23 capacity taxpayer. 

24 Nothing in this paragraph shall be construed to 

25 imply the proper treatment of any such amount 


jcorcoran on PROD1PC62 with BILLS
37 

•S 1111 IS

1 not in excess of the amount determined under 

2 subparagraph (B). 

3 ‘‘(2) DUAL CAPACITY TAXPAYER.—For pur4 poses of this subsection, the term ‘dual capacity tax5 payer’ means, with respect to any foreign country or 

6 possession of the United States, a person who— 

7 ‘‘(A) is subject to a levy of such country or 

8 possession, and 

9 ‘‘(B) receives (or will receive) directly or 

10 indirectly a specific economic benefit (as deter11 mined in accordance with regulations) from 

12 such country or possession. 

13 ‘‘(3) GENERALLY APPLICABLE INCOME TAX.— 

14 For purposes of this subsection— 

15 ‘‘(A) IN GENERAL.—The term ‘generally 

16 applicable income tax’ means an income tax (or 

17 a series of income taxes) which is generally im18 posed under the laws of a foreign country or 

19 possession on income derived from the conduct 

20 of a trade or business within such country or 

21 possession. 

22 ‘‘(B) EXCEPTIONS.—Such term shall not 

23 include a tax unless it has substantial applica24 tion, by its terms and in practice, to— 


jcorcoran on PROD1PC62 with BILLS
38 

•S 1111 IS

1 ‘‘(i) persons who are not dual capacity 

2 taxpayers, and 

3 ‘‘(ii) persons who are citizens or resi4 dents of the foreign country or possession. 

5 ‘‘(4) LARGE INTEGRATED OIL COMPANY.—For 

6 purposes of this subsection, the term ‘large inte7 grated oil company’ means, with respect to any tax8 able year, an integrated oil company (as defined in 

9 section 291(b)(4)) which— 

10 ‘‘(A) had gross receipts in excess of 

11 $1,000,000,000 for such taxable year, and 

12 ‘‘(B) has an average daily worldwide pro13 duction of crude oil of at least 500,000 barrels 

14 for such taxable year.’’ 

15 (b) EFFECTIVE DATE.— 

16 (1) IN GENERAL.—The amendments made by 

17 this section shall apply to taxes paid or accrued in 

18 taxable years beginning after the date of the enact19 ment of this Act. 

20 (2) CONTRARY TREATY OBLIGATIONS

21 UPHELD.—The amendments made by this section 

22 shall not apply to the extent contrary to any treaty 

23 obligation of the United States. 


jcorcoran on PROD1PC62 with BILLS
39 

•S 1111 IS

1 SEC. 209. REPEAL OF LOWER OF COST OR MARKET VALUE 

2 OF INVENTORY RULE. 

3 (a) IN GENERAL.—Subsection (a) of section 471 (re4 lating to general rules for inventories) is amended to read 

5 as follows: 

6 ‘‘(a) GENERAL RULE.—Whenever in the opinion of 

7 the Secretary the use of inventories is necessary in order 

8 clearly to determine the income of the taxpayer, inven9 tories shall be valued at cost.’’. 

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

11 this section shall apply to taxable years beginning after 

12 the date of the enactment of this Act. 

13 SEC. 210. REINSTITUTION OF PER COUNTRY FOREIGN TAX 

14 CREDIT. 

15 (a) IN GENERAL.—Subsection (a) of section 904 (re16 lating to limitation on credit) is amended to read as fol17 lows: 

18 ‘‘(a) LIMITATION.—The amount of the credit in re19 spect of the tax paid or accrued to any foreign country 

20 or possession of the United States shall not exceed the 

21 same proportion of the tax against which such credit is 

22 taken which the taxpayer’s taxable income from sources 

23 within such country or possession (but not in excess of 

24 the taxpayer’s entire taxable income) bears to such tax25 payer’s entire taxable income for the same taxable year.’’. 


jcorcoran on PROD1PC62 with BILLS
40 

•S 1111 IS

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

2 this section shall apply to taxable years beginning after 

3 December 31, 2007. 

4 SEC. 211. APPLICATION OF RULES TREATING INVERTED 

5 CORPORATIONS AS DOMESTIC CORPORA6 TIONS TO CERTAIN TRANSACTIONS OCCUR7 RING AFTER MARCH 20, 2002. 

8 (a) IN GENERAL.—Section 7874(b) (relating to in9 verted corporations treated as domestic corporations) is 

10 amended to read as follows: 

11 ‘‘(b) INVERTED CORPORATIONS TREATED AS DO12 MESTIC CORPORATIONS.— 

13 ‘‘(1) IN GENERAL.—Notwithstanding section 

14 7701(a)(4), a foreign corporation shall be treated for 

15 purposes of this title as a domestic corporation if 

16 such corporation would be a surrogate foreign cor17 poration if subsection (a)(2) were applied by sub18 stituting ‘80 percent’ for ‘60 percent’. 

19 ‘‘(2) SPECIAL RULE FOR CERTAIN TRANS20 ACTIONS OCCURRING AFTER MARCH 20, 2002.— 

21 ‘‘(A) IN GENERAL.—If— 

22 ‘‘(i) paragraph (1) does not apply to 

23 a foreign corporation, but 

24 ‘‘(ii) paragraph (1) would apply to 

25 such corporation if, in addition to the subVerDate Aug 31 2005 02:37 Apr 18, 2007 Jkt 059200 PO 00000 Frm 00040 Fmt 6652 Sfmt 6201 E:\BILLS\S1111.IS S1111

jcorcoran on PROD1PC62 with BILLS
41 

•S 1111 IS

1 stitution under paragraph (1), subsection 

2 (a)(2) were applied by substituting ‘March 

3 20, 2002’ for ‘March 4, 2003’ each place 

4 it appears, 

5 then paragraph (1) shall apply to such corpora6 tion but only with respect to taxable years of 

7 such corporation beginning after December 31, 

8 2006. 

9 ‘‘(B) SPECIAL RULES.—Subject to such 

10 rules as the Secretary may prescribe, in the 

11 case of a corporation to which paragraph (1) 

12 applies by reason of this paragraph— 

13 ‘‘(i) the corporation shall be treated, 

14 as of the close of its last taxable year be15 ginning before January 1, 2007, as having 

16 transferred all of its assets, liabilities, and 

17 earnings and profits to a domestic corpora18 tion in a transaction with respect to which 

19 no tax is imposed under this title, 

20 ‘‘(ii) the bases of the assets trans21 ferred in the transaction to the domestic 

22 corporation shall be the same as the bases 

23 of the assets in the hands of the foreign 

24 corporation, subject to any adjustments 

25 under this title for built-in losses, 


jcorcoran on PROD1PC62 with BILLS
42 

•S 1111 IS

1 ‘‘(iii) the basis of the stock of any 

2 shareholder in the domestic corporation 

3 shall be the same as the basis of the stock 

4 of the shareholder in the foreign corpora5 tion for which it is treated as exchanged, 

6 and 

7 ‘‘(iv) the transfer of any earnings and 

8 profits by reason of clause (i) shall be dis9 regarded in determining any deemed divi10 dend or foreign tax creditable to the do11 mestic corporation with respect to such 

12 transfer. 

13 ‘‘(C) REGULATIONS.—The Secretary may 

14 prescribe such regulations as may be necessary 

15 or appropriate to carry out this paragraph, in16 cluding regulations to prevent the avoidance of 

17 the purposes of this paragraph.’’. 

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

19 this section shall apply to taxable years beginning after 

20 December 31, 2006. 


jcorcoran on PROD1PC62 with BILLS
43 

•S 1111 IS

1 TITLE III—OTHER PROVISIONS 

2 Subtitle A—Improvements in Tax 

3 Compliance 

4 SEC. 301. INFORMATION REPORTING ON PAYMENTS TO 

5 CORPORATIONS. 

6 (a) IN GENERAL.—Section 6041(a) (relating to pay7 ments of $600 or more) is amended by inserting ‘‘(includ8 ing any corporation other than a corporation exempt from 

9 taxation)’’ after ‘‘another person’’. 

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

11 this section shall apply to payments made after December 

12 31, 2007. 

13 SEC. 302. BROKER REPORTING OF CUSTOMER’S BASIS IN 

14 SECURITIES TRANSACTIONS. 

15 (a) IN GENERAL.—Section 6045 (relating to returns 

16 of brokers) is amended by adding at the end the following 

17 new subsection: 

18 ‘‘(g) ADDITIONAL INFORMATION REQUIRED IN THE

19 CASE OF SECURITIES TRANSACTIONS.— 

20 ‘‘(1) IN GENERAL.—If a broker is otherwise re21 quired to make a return under subsection (a) with 

22 respect to any applicable security, the broker shall 

23 include in such return the information described in 

24 paragraph (2). 

25 ‘‘(2) ADDITIONAL INFORMATION REQUIRED.— 


jcorcoran on PROD1PC62 with BILLS
44 

•S 1111 IS

1 ‘‘(A) IN GENERAL.—The information re2 quired under paragraph (1) to be shown on a 

3 return with respect to an applicable security of 

4 a customer shall include for each reported ap5 plicable security the customer’s adjusted basis 

6 in such security. 

7 ‘‘(B) EXEMPTION FROM REQUIREMENT.— 

8 The Secretary shall issue such regulations or 

9 guidance as necessary concerning the applica10 tion of the requirement under subparagraph (A) 

11 in cases in which a broker in making a return 

12 does not have sufficient information to meet 

13 such requirement with respect to the reported 

14 applicable security. Such regulations or guid15 ance may— 

16 ‘‘(i) require such other information re17 lated to such adjusted basis as the Sec18 retary may prescribe, and 

19 ‘‘(ii) exempt classes of cases in which 

20 the broker does not have sufficient infor21 mation to meet either the requirement 

22 under subparagraph (A) or the require23 ment under clause (i). 

24 ‘‘(3) INFORMATION TRANSFERS.—To the extent 

25 provided in regulations, there shall be such exVerDate Aug 31 2005 02:37 Apr 18, 2007 Jkt 059200 PO 00000 Frm 00044 Fmt 6652 Sfmt 6201 E:\BILLS\S1111.IS S1111

jcorcoran on PROD1PC62 with BILLS
45 

•S 1111 IS

1 changes of information between brokers as such reg2 ulations may require for purposes of enabling such 

3 brokers to meet the requirements of this subsection. 

4 ‘‘(4) DEFINITIONS.—For purposes of this sub5 section, the term ‘applicable security’ means any— 

6 ‘‘(A) security described in subparagraph 

7 (A) or (C) of section 475(c)(2), 

8 ‘‘(B) interest in a regulated investment 

9 company (as defined in section 851), or 

10 ‘‘(C) other financial instrument designated 

11 in regulations prescribed by the Secretary.’’. 

12 (b) DETERMINATION OF BASIS OF CERTAIN SECURI13 TIES BY FIFO METHOD.—Section 1012 (relating to basis 

14 of property—cost) is amended by adding at the end the 

15 following new sentence: ‘‘Except to the extent provided in 

16 regulations, the basis of any applicable security reportable 

17 under section 6045 (by reason of subsection (g) thereof) 

18 shall be determined on a first-in, first-out method.’’. 

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

20 this section shall apply to sales and transfers occurring 

21 after December 31, 2007, with respect to securities ac22 quired before, on, or after such date. 


jcorcoran on PROD1PC62 with BILLS
46 

•S 1111 IS

1 SEC. 303. ADDITIONAL REPORTING REQUIREMENTS BY 

2 REGULATION. 

3 The Secretary of the Treasury is authorized to issue 

4 regulations under which with respect to payments made 

5 after December 31, 2007— 

6 (1) any merchant acquiring bank is required to 

7 annually report to the Secretary the gross reim8 bursement payments made to merchants in a cal9 endar year, unless the benefit of such reporting does 

10 not justify the cost of compliance, as determined by 

11 the Secretary, 

12 (2) any contractor receiving payments of $600 

13 or more in a calendar year from a particular busi14 ness is required to furnish such business the con15 tractor’s certified taxpayer identification number or 

16 be subject to withholding on such payments at a flat 

17 rate percentage selected by the contractor, and 

18 (3) any Federal, State, or local government is 

19 required to report to the Secretary any non-wage 

20 payment to procure property and services, other 

21 than payments of interest, payments for real prop22 erty, payments to tax-exempt entities or foreign gov23 ernments, intergovernmental payments, and pay24 ments made pursuant to a classified or confidential 

25 contract. 


jcorcoran on PROD1PC62 with BILLS
47 

•S 1111 IS

1 SEC. 304. INCREASE IN INFORMATION RETURN PENALTIES. 

2 (a) FAILURE TO FILE CORRECT INFORMATION RE3 TURNS.— 

4 (1) IN GENERAL.—Section 6721(a)(1) is 

5 amended— 

6 (A) by striking ‘‘$50’’ and inserting 

7 ‘‘$250’’, and 

8 (B) by striking ‘‘$250,000’’ and inserting 

9 ‘‘$3,000,000’’. 

10 (2) REDUCTION WHERE CORRECTION IN SPECI11 FIED PERIOD.— 

12 (A) CORRECTION WITHIN 30 DAYS.—Sec13 tion 6721(b)(1) is amended— 

14 (i) by striking ‘‘$15’’ and inserting 

15 ‘‘$50’’, 

16 (ii) by striking ‘‘$50’’ and inserting 

17 ‘‘$250’’, and 

18 (iii) by striking ‘‘$75,000’’ and insert19 ing ‘‘$500,000’’. 

20 (B) FAILURES CORRECTED ON OR BEFORE

21 AUGUST 1.—Section 6721(b)(2) is amended— 

22 (i) by striking ‘‘$30’’ and inserting 

23 ‘‘$100’’, 

24 (ii) by striking ‘‘$50’’ and inserting 

25 ‘‘$250’’, and 


jcorcoran on PROD1PC62 with BILLS
48 

•S 1111 IS

1 (iii) by striking ‘‘$150,000’’ and in2 serting ‘‘$1,500,000’’. 

3 (3) LOWER LIMITATION FOR PERSONS WITH

4 GROSS RECEIPTS OF NOT MORE THAN $5,000,000.— 

5 Section 6721(d)(1) is amended— 

6 (A) in subparagraph (A)— 

7 (i) by striking ‘‘$100,000’’ and insert8 ing ‘‘$1,000,000’’, and 

9 (ii) by striking ‘‘$250,000’’ and in10 serting ‘‘$3,000,000’’, 

11 (B) in subparagraph (B)— 

12 (i) by striking ‘‘$25,000’’ and insert13 ing ‘‘$175,000’’, and 

14 (ii) by striking ‘‘$75,000’’ and insert15 ing ‘‘$500,000’’, and 

16 (C) in subparagraph (C)— 

17 (i) by striking ‘‘$50,000’’ and insert18 ing ‘‘$500,000’’, and 

19 (ii) by striking ‘‘$150,000’’ and in20 serting ‘‘$1,500,000’’. 

21 (4) PENALTY IN CASE OF INTENTIONAL DIS22 REGARD.—Section 6721(e) is amended— 

23 (A) by striking ‘‘$100’’ in paragraph (2) 

24 and inserting ‘‘$500’’, 


jcorcoran on PROD1PC62 with BILLS
49 

•S 1111 IS

1 (B) by striking ‘‘$250,000’’ in paragraph 

2 (3)(A) and inserting ‘‘$3,000,000’’. 

3 (b) FAILURE TO FURNISH CORRECT PAYEE STATE4 MENTS.— 

5 (1) IN GENERAL.—Section 6722(a) is amend6 ed— 

7 (A) by striking ‘‘$50’’ and inserting 

8 ‘‘$250’’, and 

9 (B) by striking ‘‘$100,000’’ and inserting 

10 ‘‘$1,000,000’’. 

11 (2) PENALTY IN CASE OF INTENTIONAL DIS12 REGARD.—Section 6722(c) is amended— 

13 (A) by striking ‘‘$100’’ in paragraph (1) 

14 and inserting ‘‘$500’’, and 

15 (B) by striking ‘‘$100,000’’ in paragraph 

16 (2)(A) and inserting ‘‘$1,000,000’’. 

17 (c) FAILURE TO COMPLY WITH OTHER INFORMA18 TION REPORTING REQUIREMENTS.—Section 6723 is 

19 amended— 

20 (1) by striking ‘‘$50’’ and inserting ‘‘$250’’, 

21 and 

22 (2) by striking ‘‘$100,000’’ and inserting 

23 ‘‘$1,000,000’’. 


jcorcoran on PROD1PC62 with BILLS
50 

•S 1111 IS

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

2 this section shall apply with respect to information returns 

3 required to be filed on or after January 1, 2008. 

4 SEC. 305. E-FILING REQUIREMENT FOR CERTAIN LARGE 

5 ORGANIZATIONS. 

6 (a) IN GENERAL.—The first sentence of section 

7 6011(e)(2) is amended to read as follows: ‘‘In prescribing 

8 regulations under paragraph (1), the Secretary shall take 

9 into account (among other relevant factors) the ability of 

10 the taxpayer to comply at reasonable cost with the require11 ments of such regulations.’’. 

12 (b) CONFORMING AMENDMENT.—Section 6724 is 

13 amended by striking subsection (c). 

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

15 this section shall apply to taxable years ending on or after 

16 December 31, 2008. 

17 SEC. 306. IMPLEMENTATION OF STANDARDS CLARIFYING 

18 WHEN EMPLOYEE LEASING COMPANIES CAN 

19 BE HELD LIABLE FOR THEIR CLIENTS’ FED20 ERAL EMPLOYMENT TAXES. 

21 With respect to employment tax returns required to 

22 be filed with respect to wages paid on or after January 

23 1, 2008, the Secretary of the Treasury shall issue regula24 tions establishing— 


jcorcoran on PROD1PC62 with BILLS
51 

•S 1111 IS

1 (1) standards for holding employee leasing com2 panies jointly and severally liable with their clients 

3 for Federal employment taxes under chapters 21, 

4 22, 23, and 24 of the Internal Revenue Code of 

5 1986, and 

6 (2) standards for holding such companies solely 

7 liable for such taxes. 

8 SEC. 307. MODIFICATION OF COLLECTION DUE PROCESS 

9 PROCEDURES FOR EMPLOYMENT TAX LI10 ABILITIES. 

11 (a) IN GENERAL.—Section 6330(f) (relating to jeop12 ardy and State refund collection) is amended— 

13 (1) by striking ‘‘; or’’ at the end of paragraph 

14 (1) and inserting a comma, 

15 (2) by adding ‘‘or’’ at the end of paragraph (2), 

16 and 

17 (3) by inserting after paragraph (2) the fol18 lowing new paragraph: 

19 ‘‘(3) the Secretary has served a disqualified em20 ployment tax levy,’’. 

21 (b) DISQUALIFIED EMPLOYMENT TAX LEVY.—Sec22 tion 6330 (relating to notice and opportunity for hearing 

23 before levy) is amended by adding at the end the following 

24 new subsection: 


jcorcoran on PROD1PC62 with BILLS
52 

•S 1111 IS

1 ‘‘(h) DISQUALIFIED EMPLOYMENT TAX LEVY.—For 

2 purposes of subsection (f), a disqualified employment tax 

3 levy is any levy in connection with the collection of employ4 ment taxes for any taxable period if the person subject 

5 to the levy (or any predecessor thereof) requested a hear6 ing under this section with respect to unpaid employment 

7 taxes arising in the most recent 2-year period before the 

8 beginning of the taxable period with respect to which the 

9 levy is served. For purposes of the preceding sentence, the 

10 term ‘employment taxes’ means any taxes under chapter 

11 21, 22, 23, or 24.’’. 

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

13 this section shall apply to levies served on or after January 

14 1, 2008. 

15 SEC. 308. EXPANSION OF IRS ACCESS TO INFORMATION IN 

16 NATIONAL DIRECTORY OF NEW HIRES FOR 

17 TAX ADMINISTRATION PURPOSES. 

18 (a) IN GENERAL.—Paragraph (3) of section 453(j) 

19 of the Social Security Act (42 U.S.C. 653(j)) is amended 

20 to read as follows: 

21 ‘‘(3) ADMINISTRATION OF FEDERAL TAX

22 LAWS.—The Secretary of the Treasury shall have 

23 access to the information in the National Directory 

24 of New Hires for purposes of administering the In25 ternal Revenue Code of 1986.’’. 


jcorcoran on PROD1PC62 with BILLS
53 

•S 1111 IS

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

2 this section shall take effect on the date of the enactment 

3 of this Act. 

4 SEC. 309. DISCLOSURE OF PRISONER RETURN INFORMA5 TION TO FEDERAL BUREAU OF PRISONS. 

6 (a) DISCLOSURE.— 

7 (1) IN GENERAL.—Subsection (l) of section 

8 6103 (relating to disclosure of returns and return 

9 information for purposes other than tax administra10 tion) is amended by adding at the end the following 

11 new paragraph: 

12 ‘‘(22) DISCLOSURE OF RETURN INFORMATION

13 OF PRISONERS TO FEDERAL BUREAU OF PRISONS.— 

14 ‘‘(A) IN GENERAL.—Under such proce15 dures as the Secretary may prescribe, the Sec16 retary may disclose return information with re17 spect to persons incarcerated in Federal prisons 

18 whom the Secretary believes filed or facilitated 

19 the filing of false or fraudulent returns to the 

20 head of the Federal Bureau of Prisons if the 

21 Secretary determines that such disclosure is 

22 necessary to permit effective tax administration. 

23 ‘‘(B) DISCLOSURE BY AGENCY TO EMPLOY24 EES.—The head of the Federal Bureau of PrisVerDate Aug 31 2005 02:37 Apr 18, 2007 Jkt 059200 PO 00000 Frm 00053 Fmt 6652 Sfmt 6201 E:\BILLS\S1111.IS S1111

jcorcoran on PROD1PC62 with BILLS
54 

•S 1111 IS

1 ons may redisclose information received under 

2 subparagraph (A)— 

3 ‘‘(i) only to those officers and employ4 ees of the Bureau who are personally and 

5 directly engaged in taking administrative 

6 actions to address violations of administra7 tive rules and regulations of the prison fa8 cility, and 

9 ‘‘(ii) solely for the purposes described 

10 in subparagraph (C). 

11 ‘‘(C) RESTRICTION ON USE OF DISCLOSED

12 INFORMATION.—Return information disclosed 

13 under this paragraph may be used only for the 

14 purposes of— 

15 ‘‘(i) preventing the filing of false or 

16 fraudulent returns; and 

17 ‘‘(ii) taking administrative actions 

18 against individuals who have filed or at19 tempted to file false or fraudulent re20 turns.’’. 

21 (2) PROCEDURES AND RECORD KEEPING RE22 LATED TO DISCLOSURE.—Subsection (p)(4) of sec23 tion 6103 is amended— 


jcorcoran on PROD1PC62 with BILLS
55 

•S 1111 IS

1 (A) by striking ‘‘(14), or (17)’’ in the mat2 ter before subparagraph (A) and inserting 

3 ‘‘(14), (17), or (22)’’, and 

4 (B) by striking ‘‘(9), or (16)’’ in subpara5 graph (F)(i) and inserting ‘‘(9), (16), or (22)’’. 

6 (3) EVALUATION BY TREASURY INSPECTOR

7 GENERAL FOR TAX ADMINISTRATION.—Paragraph 

8 (3) of section 7803(d) is amended by striking ‘‘and’’ 

9 at the end of subparagraph (A), by striking the pe10 riod at the end of subparagraph (B) and inserting 

11 ‘‘; and’’, and by adding at the end the following new 

12 subparagraph: 

13 ‘‘(C) not later than 3 years after the date 

14 of the enactment of section 6103(l)(22), submit 

15 a written report to Congress on the implemen16 tation of such section.’’. 

17 (b) ANNUAL REPORTS.— 

18 (1) IN GENERAL.—The Secretary of the Treas19 ury shall submit to Congress and make publicly 

20 available an annual report on the filing of false and 

21 fraudulent returns by individuals incarcerated in 

22 Federal and State prisons. 

23 (2) CONTENTS OF REPORT.—The report sub24 mitted under paragraph (1) shall contain statistics 

25 on the number of false or fraudulent returns associVerDate Aug 31 2005 02:37 Apr 18, 2007 Jkt 059200 PO 00000 Frm 00055 Fmt 6652 Sfmt 6201 E:\BILLS\S1111.IS S1111

jcorcoran on PROD1PC62 with BILLS
56 

•S 1111 IS

1 ated with each Federal and State prison and such 

2 other information that the Secretary determines is 

3 appropriate. 

4 (3) EXCHANGE OF INFORMATION.—For the 

5 purpose of gathering information necessary for the 

6 reports required under paragraph (1), the Secretary 

7 of the Treasury shall enter into agreements with the 

8 head of the Federal Bureau of Prisons and the 

9 heads of State agencies charged with responsibility 

10 for administration of State prisons under which the 

11 head of the Bureau or Agency provides to the Sec12 retary not less frequently than annually the names 

13 and other identifying information of prisoners incar14 cerated at each facility administered by the Bureau 

15 or Agency. 

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

17 this section shall apply to disclosures on or after January 

18 1, 2008. 

19 SEC. 310. MODIFICATION OF CRIMINAL PENALTIES FOR 

20 WILLFUL FAILURES INVOLVING TAX PAY21 MENTS AND FILING REQUIREMENTS. 

22 (a) INCREASE IN PENALTY FOR ATTEMPT TO EVADE

23 OR DEFEAT TAX.—Section 7201 (relating to attempt to 

24 evade or defeat tax) is amended— 


jcorcoran on PROD1PC62 with BILLS
57 

•S 1111 IS

1 (1) by striking ‘‘$100,000’’ and inserting 

2 ‘‘$500,000’’, 

3 (2) by striking ‘‘$500,000’’ and inserting 

4 ‘‘$1,000,000’’, and 

5 (3) by striking ‘‘5 years’’ and inserting ‘‘10 

6 years’’. 

7 (b) MODIFICATION OF PENALTIES FOR WILLFUL

8 FAILURE TO FILE RETURN, SUPPLY INFORMATION, OR

9 PAY TAX.— 

10 (1) IN GENERAL.—Section 7203 (relating to 

11 willful failure to file return, supply information, or 

12 pay tax) is amended— 

13 (A) in the first sentence— 

14 (i) by striking ‘‘Any person’’ and in15 serting the following: 

16 ‘‘(a) IN GENERAL.—Any person’’, and 

17 (ii) by striking ‘‘$25,000’’ and insert18 ing ‘‘$50,000’’, 

19 (B) in the third sentence, by striking ‘‘sec20 tion’’ and inserting ‘‘subsection’’, and 

21 (C) by adding at the end the following new 

22 subsection: 

23 ‘‘(b) AGGRAVATED FAILURE TO FILE.— 


jcorcoran on PROD1PC62 with BILLS
58 

•S 1111 IS

1 ‘‘(1) IN GENERAL.—In the case of any failure 

2 described in paragraph (2), the first sentence of sub3 section (a) shall be applied by substituting— 

4 ‘‘(A) ‘felony’ for ‘misdemeanor’, 

5 ‘‘(B) ‘$250,000 ($500,000’ for ‘$50,000 

6 ($100,000’, and 

7 ‘‘(C) ‘5 years’ for ‘1 year’. 

8 ‘‘(2) FAILURE DESCRIBED.—A failure described 

9 in this paragraph is— 

10 ‘‘(A) a failure to make a return described 

11 in subsection (a) for any 3 taxable years occur12 ring during any period of 5 consecutive taxable 

13 years if the aggregate tax liability for such pe14 riod is not less than $50,000, or 

15 ‘‘(B) a failure to make a return if the tax 

16 liability giving rise to the requirement to make 

17 such return is attributable to an activity which 

18 is a felony under any State or Federal law.’’. 

19 (2) PENALTY MAY BE APPLIED IN ADDITION TO

20 OTHER PENALTIES.—Section 7204 (relating to 

21 fraudulent statement or failure to make statement to 

22 employees) is amended by striking ‘‘the penalty pro23 vided in section 6674’’ and inserting ‘‘the penalties 

24 provided in sections 6674 and 7203(b)’’. 


jcorcoran on PROD1PC62 with BILLS
59 

•S 1111 IS

1 (c) FRAUD AND FALSE STATEMENTS.—Section 7206 

2 (relating to fraud and false statements) is amended— 

3 (1) by striking ‘‘$100,000’’ and inserting 

4 ‘‘$500,000’’, 

5 (2) by striking ‘‘$500,000’’ and inserting 

6 ‘‘$1,000,000’’, and 

7 (3) by striking ‘‘3 years’’ and inserting ‘‘5 

8 years’’. 

9 (d) INCREASE IN MONETARY LIMITATION FOR UN10 DERPAYMENT OR OVERPAYMENT OF TAX DUE TO

11 FRAUD.—Section 7206 (relating to fraud and false state12 ments), as amended by subsection (a)(3), is amended— 

13 (1) by striking ‘‘Any person who—’’ and insert14 ing ‘‘(a) IN GENERAL.—Any person who—’’, and 

15 (2) by adding at the end the following new sub16 section: 

17 ‘‘(b) INCREASE IN MONETARY LIMITATION FOR UN18 DERPAYMENT OR OVERPAYMENT OF TAX DUE TO

19 FRAUD.—If any portion of any underpayment (as defined 

20 in section 6664(a)) or overpayment (as defined in section 

21 6401(a)) of tax required to be shown on a return is attrib22 utable to fraudulent action described in subsection (a), the 

23 applicable dollar amount under subsection (a) shall in no 

24 event be less than an amount equal to such portion. A 


jcorcoran on PROD1PC62 with BILLS
60 

•S 1111 IS

1 rule similar to the rule under section 6663(b) shall apply 

2 for purposes of determining the portion so attributable.’’. 

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

4 this section shall apply to actions, and failures to act, oc5 curring after the date of the enactment of this Act. 

6 SEC. 311. UNDERSTATEMENT OF TAXPAYER LIABILITY BY 

7 RETURN PREPARERS. 

8 (a) APPLICATION OF RETURN PREPARER PENALTIES

9 TO ALL TAX RETURNS.— 

10 (1) DEFINITION OF TAX RETURN PREPARER.— 

11 Paragraph (36) of section 7701(a) (relating to in12 come tax preparer) is amended— 

13 (A) by striking ‘‘income’’ each place it ap14 pears in the heading and the text, and 

15 (B) in subparagraph (A), by striking ‘‘sub16 title A’’ each place it appears and inserting 

17 ‘‘this title’’. 

18 (2) CONFORMING AMENDMENTS.— 

19 (A)(i) Section 6060 is amended by striking 

20 ‘‘INCOME TAX RETURN PREPARERS’’ in the 

21 heading and inserting ‘‘TAX RETURN PRE22 PARERS’’. 

23 (ii) Section 6060(a) is amended— 


jcorcoran on PROD1PC62 with BILLS
61 

•S 1111 IS

1 (I) by striking ‘‘an income tax return 

2 preparer’’ each place it appears and insert3 ing ‘‘a tax return preparer’’, 

4 (II) by striking ‘‘each income tax re5 turn preparer’’ and inserting ‘‘each tax re6 turn preparer’’, and 

7 (III) by striking ‘‘another income tax 

8 return preparer’’ and inserting ‘‘another 

9 tax return preparer’’. 

10 (iii) The item relating to section 6060 in 

11 the table of sections for subpart F of part III 

12 of subchapter A of chapter 61 is amended by 

13 striking ‘‘income tax return preparers’’ and in14 serting ‘‘tax return preparers’’. 

15 (iv) Subpart F of part III of subchapter A 

16 of chapter 61 is amended by striking ‘‘Income 

17 Tax Return Preparers’’ in the heading 

18 and inserting ‘‘Tax Return Preparers’’. 

19 (v) The item relating to subpart F in the 

20 table of subparts for part III of subchapter A 

21 of chapter 61 is amended by striking ‘‘income 

22 tax return preparers’’ and inserting ‘‘tax return 

23 preparers’’. 

24 (B) Section 6103(k)(5) is amended— 


jcorcoran on PROD1PC62 with BILLS
62 

•S 1111 IS

1 (i) by striking ‘‘income tax return pre2 parer’’ each place it appears and inserting 

3 ‘‘tax return preparer’’, and 

4 (ii) by striking ‘‘income tax return 

5 preparers’’ each place it appears and in6 serting ‘‘tax return preparers’’. 

7 (C)(i) Section 6107 is amended— 

8 (I) by striking ‘‘INCOME TAX RE9 TURN PREPARER’’ in the heading and in10 serting ‘‘TAX RETURN PREPARER’’, 

11 (II) by striking ‘‘an income tax return 

12 preparer’’ each place it appears in sub13 sections (a) and (b) and inserting ‘‘a tax 

14 return preparer’’, 

15 (III) by striking ‘‘INCOME TAX RE16 TURN PREPARER’’ in the heading for sub17 section (b) and inserting ‘‘TAX RETURN

18 PREPARER’’, and 

19 (IV) in subsection (c), by striking ‘‘in20 come tax return preparers’’ and inserting 

21 ‘‘tax return preparers’’. 

22 (ii) The item relating to section 6107 in 

23 the table of sections for subchapter B of chap24 ter 61 is amended by striking ‘‘Income tax reVerDate Aug 31 2005 02:37 Apr 18, 2007 Jkt 059200 PO 00000 Frm 00062 Fmt 6652 Sfmt 6201 E:\BILLS\S1111.IS S1111

jcorcoran on PROD1PC62 with BILLS
63 

•S 1111 IS

1 turn preparer’’ and inserting ‘‘Tax return pre2 parer’’. 

3 (D) Section 6109(a)(4) is amended— 

4 (i) by striking ‘‘an income tax return 

5 preparer’’ and inserting ‘‘a tax return pre6 parer’’, and 

7 (ii) by striking ‘‘INCOME RETURN

8 PREPARER’’ in the heading and inserting 

9 ‘‘TAX RETURN PREPARER’’. 

10 (E) Section 6503(k)(4) is amended by 

11 striking ‘‘Income tax return preparers’’ and in12 serting ‘‘Tax return preparers’’. 

13 (F)(i) Section 6694 is amended— 

14 (I) by striking ‘‘INCOME TAX RE15 TURN PREPARER’’ in the heading and in16 serting ‘‘TAX RETURN PREPARER’’, 

17 (II) by striking ‘‘an income tax return 

18 preparer’’ each place it appears and insert19 ing ‘‘a tax return preparer’’, 

20 (III) in subsection (c)(2), by striking 

21 ‘‘the income tax return preparer’’ and in22 serting ‘‘the tax return preparer’’, 

23 (IV) in subsection (e), by striking 

24 ‘‘subtitle A’’ and inserting ‘‘this title’’, and 


jcorcoran on PROD1PC62 with BILLS
64 

•S 1111 IS

1 (V) in subsection (f), by striking ‘‘in2 come tax return preparer’’ and inserting 

3 ‘‘tax return preparer’’. 

4 (ii) The item relating to section 6694 in 

5 the table of sections for part I of subchapter B 

6 of chapter 68 is amended by striking ‘‘income 

7 tax return preparer’’ and inserting ‘‘tax return 

8 preparer’’. 

9 (G)(i) Section 6695 is amended— 

10 (I) by striking ‘‘INCOME’’ in the 

11 heading, and 

12 (II) by striking ‘‘an income tax return 

13 preparer’’ each place it appears and insert14 ing ‘‘a tax return preparer’’. 

15 (ii) Section 6695(f) is amended— 

16 (I) by striking ‘‘subtitle A’’ and in17 serting ‘‘this title’’, and 

18 (II) by striking ‘‘the income tax re19 turn preparer’’ and inserting ‘‘the tax re20 turn preparer’’. 

21 (iii) The item relating to section 6695 in 

22 the table of sections for part I of subchapter B 

23 of chapter 68 is amended by striking ‘‘income’’. 


jcorcoran on PROD1PC62 with BILLS
65 

•S 1111 IS

1 (H) Section 6696(e) is amended by strik2 ing ‘‘subtitle A’’ each place it appears and in3 serting ‘‘this title’’. 

4 (I)(i) Section 7407 is amended— 

5 (I) by striking ‘‘INCOME TAX RE6 TURN PREPARERS’’ in the heading and 

7 inserting ‘‘TAX RETURN PREPARERS’’, 

8 (II) by striking ‘‘an income tax return 

9 preparer’’ each place it appears and insert10 ing ‘‘a tax return preparer’’, 

11 (III) by striking ‘‘income tax pre12 parer’’ both places it appears in subsection 

13 (a) and inserting ‘‘tax return preparer’’, 

14 and 

15 (IV) by striking ‘‘income tax return’’ 

16 in subsection (a) and inserting ‘‘tax re17 turn’’. 

18 (ii) The item relating to section 7407 in 

19 the table of sections for subchapter A of chap20 ter 76 is amended by striking ‘‘income tax re21 turn preparers’’ and inserting ‘‘tax return pre22 parers’’. 

23 (J)(i) Section 7427 is amended— 

24 (I) by striking ‘‘INCOME TAX RE25 TURN PREPARERS’’ in the heading and 


jcorcoran on PROD1PC62 with BILLS
66 

•S 1111 IS

1 inserting ‘‘TAX RETURN PREPARERS’’, 

2 and 

3 (II) by striking ‘‘an income tax return 

4 preparer’’ and inserting ‘‘a tax return pre5 parer’’. 

6 (ii) The item relating to section 7427 in 

7 the table of sections for subchapter B of chap8 ter 76 is amended to read as follows: 

‘‘Sec. 7427. Tax return preparers.’’. 

9 (b) MODIFICATION OF PENALTY FOR UNDERSTATE10 MENT OF TAXPAYER’S LIABILITY BY TAX RETURN PRE11 PARER.—Subsections (a) and (b) of section 6694 are 

12 amended to read as follows: 

13 ‘‘(a) UNDERSTATEMENT DUE TO UNREASONABLE

14 POSITIONS.— 

15 ‘‘(1) IN GENERAL.—Any tax return preparer 

16 who prepares any return or claim for refund with re17 spect to which any part of an understatement of li18 ability is due to a position described in paragraph 

19 (2) shall pay a penalty with respect to each such re20 turn or claim in an amount equal to the greater of— 

21 ‘‘(A) $1,000, or 

22 ‘‘(B) 50 percent of the income derived (or 

23 to be derived) by the tax return preparer with 

24 respect to the return or claim. 


jcorcoran on PROD1PC62 with BILLS
67 

•S 1111 IS

1 ‘‘(2) UNREASONABLE POSITION.—A position is 

2 described in this paragraph if— 

3 ‘‘(A) the tax return preparer knew (or rea4 sonably should have known) of the position, 

5 ‘‘(B) there was not a reasonable belief that 

6 the position would more likely than not be sus7 tained on its merits, and 

8 ‘‘(C)(i) the position was not disclosed as 

9 provided in section 6662(d)(2)(B)(ii), or 

10 ‘‘(ii) there was no reasonable basis for the 

11 position. 

12 ‘‘(3) REASONABLE CAUSE EXCEPTION.—No 

13 penalty shall be imposed under this subsection if it 

14 is shown that there is reasonable cause for the un15 derstatement and the tax return preparer acted in 

16 good faith. 

17 ‘‘(b) UNDERSTATEMENT DUE TO WILLFUL OR

18 RECKLESS CONDUCT.— 

19 ‘‘(1) IN GENERAL.—Any tax return preparer 

20 who prepares any return or claim for refund with re21 spect to which any part of an understatement of li22 ability is due to a conduct described in paragraph 

23 (2) shall pay a penalty with respect to each such re24 turn or claim in an amount equal to the greater of— 

25 ‘‘(A) $5,000, or 


jcorcoran on PROD1PC62 with BILLS
68 

•S 1111 IS

1 ‘‘(B) 50 percent of the income derived (or 

2 to be derived) by the tax return preparer with 

3 respect to the return or claim. 

4 ‘‘(2) WILLFUL OR RECKLESS CONDUCT.—Con5 duct described in this paragraph is conduct by the 

6 tax return preparer which is— 

7 ‘‘(A) a willful attempt in any manner to 

8 understate the liability for tax on the return or 

9 claim, or 

10 ‘‘(B) a reckless or intentional disregard of 

11 rules or regulations. 

12 ‘‘(3) REDUCTION IN PENALTY.—The amount of 

13 any penalty payable by any person by reason of this 

14 subsection for any return or claim for refund shall 

15 be reduced by the amount of the penalty paid by 

16 such person by reason of subsection (a).’’. 

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

18 this section shall apply to returns prepared after the date 

19 of the enactment of this Act. 

20 SEC. 312. PENALTIES FOR FAILURE TO FILE CERTAIN RE21 TURNS ELECTRONICALLY. 

22 (a) IN GENERAL.—Part I of subchapter A of chapter 

23 68 (relating to additions to the tax, additional amounts, 

24 and assessable penalties) is amended by inserting after 

25 section 6652 the following new section: 


jcorcoran on PROD1PC62 with BILLS
69 

•S 1111 IS

1 ‘‘SEC. 6652A. FAILURE TO FILE CERTAIN RETURNS ELEC2 TRONICALLY. 

3 ‘‘(a) IN GENERAL.—If a person fails to file a return 

4 described in section 6651 or 6652(c)(1) in electronic form 

5 as required under section 6011(e)— 

6 ‘‘(1) such failure shall be treated as a failure to 

7 file such return (even if filed in a form other than 

8 electronic form), and 

9 ‘‘(2) the penalty imposed under section 6651 or 

10 6652(c), whichever is appropriate, shall be equal to 

11 the greater of— 

12 ‘‘(A) the amount of the penalty under such 

13 section, determined without regard to this sec14 tion, or 

15 ‘‘(B) the amount determined under sub16 section (b). 

17 ‘‘(b) AMOUNT OF PENALTY.— 

18 ‘‘(1) IN GENERAL.—Except as provided in para19 graphs (2) and (3), the penalty determined under 

20 this subsection is equal to $40 for each day during 

21 which a failure described under subsection (a) con22 tinues. The maximum penalty under this paragraph 

23 on failures with respect to any 1 return shall not ex24 ceed the lesser of $20,000 or 10 percent of the gross 

25 receipts of the taxpayer for the year. 


jcorcoran on PROD1PC62 with BILLS
70 

•S 1111 IS

1 ‘‘(2) INCREASED PENALTIES FOR TAXPAYERS

2 WITH GROSS RECEIPTS BETWEEN $1,000,000 AND

3 $100,000,000.— 

4 ‘‘(A) TAXPAYERS WITH GROSS RECEIPTS

5 BETWEEN $1,000,000 AND $25,000,000.—In the 

6 case of a taxpayer having gross receipts exceed7 ing $1,000,000 but not exceeding $25,000,000 

8 for any year— 

9 ‘‘(i) the first sentence of paragraph 

10 (1) shall be applied by substituting ‘$200’ 

11 for ‘$40’, and 

12 ‘‘(ii) in lieu of applying the second 

13 sentence of paragraph (1), the maximum 

14 penalty under paragraph (1) shall not ex15 ceed $100,000. 

16 ‘‘(B) TAXPAYERS WITH GROSS RECEIPTS

17 OVER $25,000,000.—Except as provided in para18 graph (3), in the case of a taxpayer having 

19 gross receipts exceeding $25,000,000 for any 

20 year— 

21 ‘‘(i) the first sentence of paragraph 

22 (1) shall be applied by substituting ‘$500’ 

23 for ‘$40’, and 

24 ‘‘(ii) in lieu of applying the second 

25 sentence of paragraph (1), the maximum 


jcorcoran on PROD1PC62 with BILLS
71 

•S 1111 IS

1 penalty under paragraph (1) shall not ex2 ceed $250,000. 

3 ‘‘(3) INCREASED PENALTIES FOR CERTAIN TAX4 PAYERS WITH GROSS RECEIPTS EXCEEDING

5 $100,000,000.—In the case of a return described in 

6 section 6651— 

7 ‘‘(A) TAXPAYERS WITH GROSS RECEIPTS

8 BETWEEN $100,000,000 AND $250,000,000.—In the 

9 case of a taxpayer having gross receipts exceed10 ing $100,000,000 but not exceeding 

11 $250,000,000 for any year— 

12 ‘‘(i) the amount of the penalty deter13 mined under this subsection shall equal the 

14 sum of— 

15 ‘‘(I) $50,000, plus 

16 ‘‘(II) $1,000 for each day during 

17 which such failure continues (twice 

18 such amount for each day such failure 

19 continues after the first such 60 

20 days), and 

21 ‘‘(ii) the maximum amount under 

22 clause (i)(II) on failures with respect to 

23 any 1 return shall not exceed $200,000. 

24 ‘‘(B) TAXPAYERS WITH GROSS RECEIPTS

25 OVER $250,000,000.—In the case of a taxpayer 


jcorcoran on PROD1PC62 with BILLS
72 

•S 1111 IS

1 having gross receipts exceeding $250,000,000 

2 for any year— 

3 ‘‘(i) the amount of the penalty deter4 mined under this subsection shall equal the 

5 sum of— 

6 ‘‘(I) $250,000, plus 

7 ‘‘(II) $2,500 for each day during 

8 which such failure continues (twice 

9 such amount for each day such failure 

10 continues after the first such 60 

11 days), and 

12 ‘‘(ii) the maximum amount under 

13 clause (i)(II) on failures with respect to 

14 any 1 return shall not exceed $250,000. 

15 ‘‘(C) EXCEPTION FOR CERTAIN RE16 TURNS.—Subparagraphs (A) and (B) shall not 

17 apply to any return of tax imposed under sec18 tion 511.’’. 

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

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

21 inserting after the item relating to section 6652 the fol22 lowing new item: 

‘‘Sec. 6652A. Failure to file certain returns electronically.’’. 

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

24 this section shall apply to returns required to be filed on 

25 or after January 1, 2008. 


jcorcoran on PROD1PC62 with BILLS
73 

•S 1111 IS

1 SEC. 313. PENALTY FOR FILING ERRONEOUS REFUND 

2 CLAIMS. 

3 (a) IN GENERAL.—Part I of subchapter B of chapter 

4 68 (relating to assessable penalties) is amended by insert5 ing after section 6675 the following new section: 

6 ‘‘SEC. 6676. ERRONEOUS CLAIM FOR REFUND OR CREDIT. 

7 ‘‘(a) CIVIL PENALTY.—If a claim for refund or credit 

8 with respect to income tax (other than a claim for a refund 

9 or credit relating to the earned income credit under section 

10 32) is made for an excessive amount, unless it is shown 

11 that the claim for such excessive amount has a reasonable 

12 basis, the person making such claim shall be liable for a 

13 penalty in an amount equal to 20 percent of the excessive 

14 amount. 

15 ‘‘(b) EXCESSIVE AMOUNT.—For purposes of this sec16 tion, the term ‘excessive amount’ means in the case of any 

17 person the amount by which the amount of the claim for 

18 refund or credit for any taxable year exceeds the amount 

19 of such claim allowable under this title for such taxable 

20 year. 

21 ‘‘(c) COORDINATION WITH OTHER PENALTIES.— 

22 This section shall not apply to any portion of the excessive 

23 amount of a claim for refund or credit on which a penalty 

24 is imposed under part II of subchapter A of chapter 68.’’. 

25 (b) CONFORMING AMENDMENT.—The table of sec26 tions for part I of subchapter B of chapter 68 is amended 


jcorcoran on PROD1PC62 with BILLS
74 

•S 1111 IS

1 by inserting after the item relating to section 6675 the 

2 following new item: 

‘‘Sec. 6676. Erroneous claim for refund or credit.’’. 

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

4 this section shall apply to any claim— 

5 (1) filed or submitted after the date of the en6 actment of this Act, or 

7 (2) filed or submitted prior to such date but not 

8 withdrawn before the date which is 30 days after 

9 such date of enactment. 

10 Subtitle B—Requiring Economic 

11 Substance 

12 SEC. 321. CLARIFICATION OF ECONOMIC SUBSTANCE DOC13 TRINE. 

14 (a) IN GENERAL.—Section 7701 is amended by re15 designating subsection (p) as subsection (q) and by insert16 ing after subsection (o) the following new subsection: 

17 ‘‘(p) CLARIFICATION OF ECONOMIC SUBSTANCE

18 DOCTRINE; ETC.— 

19 ‘‘(1) GENERAL RULES.— 

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

21 a court determines that the economic substance 

22 doctrine is relevant for purposes of this title to 

23 a transaction (or series of transactions), such 

24 transaction (or series of transactions) shall have 


jcorcoran on PROD1PC62 with BILLS
75 

•S 1111 IS

1 economic substance only if the requirements of 

2 this paragraph are met. 

3 ‘‘(B) DEFINITION OF ECONOMIC SUB4 STANCE.—For purposes of subparagraph (A)— 

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

6 economic substance only if— 

7 ‘‘(I) the transaction changes in a 

8 meaningful way (apart from Federal 

9 tax effects) the taxpayer’s economic 

10 position, and 

11 ‘‘(II) the taxpayer has a substan12 tial nontax purpose for entering into 

13 such transaction and the transaction 

14 is a reasonable means of accom15 plishing such purpose. 

16 In applying subclause (II), a purpose of 

17 achieving a financial accounting benefit 

18 shall not be taken into account in deter19 mining whether a transaction has a sub20 stantial nontax purpose if the origin of 

21 such financial accounting benefit is a re22 duction of income tax. 

23 ‘‘(ii) SPECIAL RULE WHERE TAX24 PAYER RELIES ON PROFIT POTENTIAL.—A 

25 transaction shall not be treated as having 


jcorcoran on PROD1PC62 with BILLS
76 

•S 1111 IS

1 economic substance by reason of having a 

2 potential for profit unless— 

3 ‘‘(I) the present value of the rea4 sonably expected pre-tax profit from 

5 the transaction is substantial in rela6 tion to the present value of the ex7 pected net tax benefits that would be 

8 allowed if the transaction were re9 spected, and 

10 ‘‘(II) the reasonably expected 

11 pre-tax profit from the transaction ex12 ceeds a risk-free rate of return. 

13 ‘‘(C) TREATMENT OF FEES AND FOREIGN

14 TAXES.—Fees and other transaction expenses 

15 and foreign taxes shall be taken into account as 

16 expenses in determining pre-tax profit under 

17 subparagraph (B)(ii). 

18 ‘‘(2) SPECIAL RULES FOR TRANSACTIONS WITH

19 TAX-INDIFFERENT PARTIES.— 

20 ‘‘(A) SPECIAL RULES FOR FINANCING

21 TRANSACTIONS.—The form of a transaction 

22 which is in substance the borrowing of money 

23 or the acquisition of financial capital directly or 

24 indirectly from a tax-indifferent party shall not 

25 be respected if the present value of the deducVerDate Aug 31 2005 02:37 Apr 18, 2007 Jkt 059200 PO 00000 Frm 00076 Fmt 6652 Sfmt 6201 E:\BILLS\S1111.IS S1111

jcorcoran on PROD1PC62 with BILLS
77 

•S 1111 IS

1 tions to be claimed with respect to the trans2 action is substantially in excess of the present 

3 value of the anticipated economic returns of the 

4 person lending the money or providing the fi5 nancial capital. A public offering shall be treat6 ed as a borrowing, or an acquisition of financial 

7 capital, from a tax-indifferent party if it is rea8 sonably expected that at least 50 percent of the 

9 offering will be placed with tax-indifferent par10 ties. 

11 ‘‘(B) ARTIFICIAL INCOME SHIFTING AND

12 BASIS ADJUSTMENTS.—The form of a trans13 action with a tax-indifferent party shall not be 

14 respected if— 

15 ‘‘(i) it results in an allocation of in16 come or gain to the tax-indifferent party in 

17 excess of such party’s economic income or 

18 gain, or 

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

20 or shifting of basis on account of over21 stating the income or gain of the tax-indif22 ferent party. 

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

24 purposes of this subsection— 


jcorcoran on PROD1PC62 with BILLS
78 

•S 1111 IS

1 ‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.— 

2 The term ‘economic substance doctrine’ means 

3 the common law doctrine under which tax bene4 fits under subtitle A with respect to a trans5 action are not allowable if the transaction does 

6 not have economic substance or lacks a business 

7 purpose. 

8 ‘‘(B) TAX-INDIFFERENT PARTY.—The 

9 term ‘tax-indifferent party’ means any person 

10 or entity not subject to tax imposed by subtitle 

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

12 party with respect to a transaction if the items 

13 taken into account with respect to the trans14 action have no substantial impact on such per15 son’s liability under subtitle A. 

16 ‘‘(C) EXCEPTION FOR PERSONAL TRANS17 ACTIONS OF INDIVIDUALS.—In the case of an 

18 individual, this subsection shall apply only to 

19 transactions entered into in connection with a 

20 trade or business or an activity engaged in for 

21 the production of income. 

22 ‘‘(D) TREATMENT OF LESSORS.—In apply23 ing paragraph (1)(B)(ii) to the lessor of tan24 gible property subject to a lease— 


jcorcoran on PROD1PC62 with BILLS
79 

•S 1111 IS

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

2 respect to the leased property shall not in3 clude the benefits of— 

4 ‘‘(I) depreciation, 

5 ‘‘(II) any tax credit, or 

6 ‘‘(III) any other deduction as 

7 provided in guidance by the Secretary, 

8 and 

9 ‘‘(ii) subclause (II) of paragraph 

10 (1)(B)(ii) shall be disregarded in deter11 mining whether any of such benefits are al12 lowable. 

13 ‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF14 FECTED.—Except as specifically provided in this 

15 subsection, the provisions of this subsection shall not 

16 be construed as altering or supplanting any other 

17 rule of law, and the requirements of this subsection 

18 shall be construed as being in addition to any such 

19 other rule of law. 

20 ‘‘(5) REGULATIONS.—The Secretary shall pre21 scribe such regulations as may be necessary or ap22 propriate to carry out the purposes of this sub23 section. Such regulations may include exemptions 

24 from the application of this subsection.’’. 


jcorcoran on PROD1PC62 with BILLS
80 

•S 1111 IS

1 (b) 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. 322. PENALTY FOR UNDERSTATEMENTS ATTRIB5 UTABLE TO TRANSACTIONS LACKING ECO6 NOMIC SUBSTANCE, ETC. 

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

8 amended by inserting after section 6662A the following 

9 new section: 

10 ‘‘SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIB11 UTABLE TO TRANSACTIONS LACKING ECO12 NOMIC SUBSTANCE, ETC. 

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

14 noneconomic substance transaction understatement for 

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

16 amount equal to 40 percent of the amount of such under17 statement. 

18 ‘‘(b) REDUCTION OF PENALTY FOR DISCLOSED

19 TRANSACTIONS.—Subsection (a) shall be applied by sub20 stituting ‘20 percent’ for ‘40 percent’ with respect to the 

21 portion of any noneconomic substance transaction under22 statement with respect to which the relevant facts affect23 ing the tax treatment of the item are adequately disclosed 

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


jcorcoran on PROD1PC62 with BILLS
81 

•S 1111 IS

1 ‘‘(c) NONECONOMIC SUBSTANCE TRANSACTION UN2 DERSTATEMENT.—For purposes of this section— 

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

4 substance transaction understatement’ means any 

5 amount which would be an understatement under 

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

7 by taking into account items attributable to non8 economic substance transactions rather than items 

9 to which section 6662A would apply without regard 

10 to this paragraph. 

11 ‘‘(2) NONECONOMIC SUBSTANCE TRANS12 ACTION.—The term ‘noneconomic substance trans13 action’ means any transaction if— 

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

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

16 the transaction giving rise to the claimed ben17 efit or the transaction was not respected under 

18 section 7701(p)(2), or 

19 ‘‘(B) the transaction fails to meet the re20 quirements of any similar rule of law. 

21 ‘‘(d) RULES APPLICABLE TO COMPROMISE OF PEN22 ALTY.— 

23 ‘‘(1) IN GENERAL.—If the first letter of pro24 posed deficiency which allows the taxpayer an oppor25 tunity for administrative review in the Internal RevVerDate Aug 31 2005 02:37 Apr 18, 2007 Jkt 059200 PO 00000 Frm 00081 Fmt 6652 Sfmt 6201 E:\BILLS\S1111.IS S1111

jcorcoran on PROD1PC62 with BILLS
82 

•S 1111 IS

1 enue Service Office of Appeals has been sent with 

2 respect to a penalty to which this section applies, 

3 only the Commissioner of Internal Revenue may 

4 compromise all or any portion of such penalty. 

5 ‘‘(2) APPLICABLE RULES.—The rules of para6 graphs (2) and (3) of section 6707A(d) shall apply 

7 for purposes of paragraph (1). 

8 ‘‘(e) COORDINATION WITH OTHER PENALTIES.—Ex9 cept as otherwise provided in this part, the penalty im10 posed by this section shall be in addition to any other pen11 alty imposed by this title. 

12 ‘‘(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).’’. 

13 (b) COORDINATION WITH OTHER UNDERSTATE14 MENTS AND PENALTIES.— 

15 (1) The second sentence of section 

16 6662(d)(2)(A) is amended by inserting ‘‘and without 

17 regard to items with respect to which a penalty is 

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

19 end. 

20 (2) Subsection (e) of section 6662A is amend21 ed— 


jcorcoran on PROD1PC62 with BILLS
83 

•S 1111 IS

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

2 noneconomic substance transaction understate3 ments’’ after ‘‘reportable transaction under4 statements’’ both places it appears, 

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

6 a noneconomic substance transaction under7 statement’’ after ‘‘reportable transaction under8 statement’’, 

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

10 ‘‘6662B or’’ before ‘‘6663’’, 

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

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

13 end, 

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

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

16 (F) in paragraph (3), by inserting ‘‘or non17 economic substance transaction understate18 ment’’ after ‘‘reportable transaction understate19 ment’’, and 

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

21 paragraph: 

22 ‘‘(4) NONECONOMIC SUBSTANCE TRANSACTION

23 UNDERSTATEMENT.—For purposes of this sub24 section, the term ‘noneconomic substance transVerDate Aug 31 2005 02:37 Apr 18, 2007 Jkt 059200 PO 00000 Frm 00083 Fmt 6652 Sfmt 6201 E:\BILLS\S1111.IS S1111

jcorcoran on PROD1PC62 with BILLS
84 

•S 1111 IS

1 action understatement’ has the meaning given such 

2 term by section 6662B(c).’’. 

3 (3) Subsection (e) of section 6707A is amend4 ed— 

5 (A) by striking ‘‘or’’ at the end of subpara6 graph (B), and 

7 (B) by striking subparagraph (C) and in8 serting the following new subparagraphs: 

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

10 section 6662B with respect to any noneconomic 

11 substance transaction, or 

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

13 section 6662(h) with respect to any transaction 

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

15 have been subject to penalty under section 

16 6662A at a rate prescribed under section 

17 6662A(c) or under section 6662B,’’. 

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

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

20 inserting after the item relating to section 6662A the fol21 lowing new item: 

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

economic substance, etc.’’. 

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

23 this section shall apply to transactions entered into after 

24 the date of the enactment of this Act. 


jcorcoran on PROD1PC62 with BILLS
85 

•S 1111 IS

1 SEC. 323. DENIAL OF DEDUCTION FOR INTEREST ON UN2 DERPAYMENTS ATTRIBUTABLE TO NON3 ECONOMIC SUBSTANCE TRANSACTIONS. 

4 (a) IN GENERAL.—Section 163(m) (relating to inter5 est on unpaid taxes attributable to nondisclosed reportable 

6 transactions) is amended— 

7 (1) by striking ‘‘attributable’’ and all that fol8 lows and inserting the following: ‘‘attributable to— 

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

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

11 with respect to which the requirement of section 

12 6664(d)(2)(A) is not met, or 

13 ‘‘(2) any noneconomic substance transaction 

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

15 and 

16 (2) by inserting ‘‘AND NONECONOMIC SUB17 STANCE TRANSACTIONS’’ after ‘‘TRANSACTIONS’’. 

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

19 this section shall apply to transactions after the date of 

20 the enactment of this Act in taxable years ending after 

21 such date. 

22 Subtitle C—Miscellaneous 

23 SEC. 331. DENIAL OF DEDUCTION FOR PUNITIVE DAMAGES. 

24 (a) DISALLOWANCE OF DEDUCTION.— 


jcorcoran on PROD1PC62 with BILLS
86 

•S 1111 IS

1 (1) IN GENERAL.—Section 162(g) (relating to 

2 treble damage payments under the antitrust laws) is 

3 amended— 

4 (A) by redesignating paragraphs (1) and 

5 (2) as subparagraphs (A) and (B), respectively, 

6 (B) by striking ‘‘If’’ and inserting: 

7 ‘‘(1) TREBLE DAMAGES.—If’’, and 

8 (C) by adding at the end the following new 

9 paragraph: 

10 ‘‘(2) PUNITIVE DAMAGES.—No deduction shall 

11 be allowed under this chapter for any amount paid 

12 or incurred for punitive damages in connection with 

13 any judgment in, or settlement of, any action. This 

14 paragraph shall not apply to punitive damages de15 scribed in section 104(c).’’. 

16 (2) CONFORMING AMENDMENT.—The heading 

17 for section 162(g) is amended by inserting ‘‘OR PU18 NITIVE DAMAGES’’ after ‘‘LAWS’’. 

19 (b) INCLUSION IN INCOME OF PUNITIVE DAMAGES

20 PAID BY INSURER OR OTHERWISE.— 

21 (1) IN GENERAL.—Part II of subchapter B of 

22 chapter 1 (relating to items specifically included in 

23 gross income) is amended by adding at the end the 

24 following new section: 


jcorcoran on PROD1PC62 with BILLS
87 

•S 1111 IS

1 ‘‘SEC. 91. PUNITIVE DAMAGES COMPENSATED BY INSUR2 ANCE OR OTHERWISE. 

3 ‘‘Gross income shall include any amount paid to or 

4 on behalf of a taxpayer as insurance or otherwise by rea5 son of the taxpayer’s liability (or agreement) to pay puni6 tive damages.’’. 

7 (2) REPORTING REQUIREMENTS.—Section 6041 

8 (relating to information at source) is amended by 

9 adding at the end the following new subsection: 

10 ‘‘(h) SECTION TO APPLY TO PUNITIVE DAMAGES

11 COMPENSATION.—This section shall apply to payments by 

12 a person to or on behalf of another person as insurance 

13 or otherwise by reason of the other person’s liability (or 

14 agreement) to pay punitive damages.’’. 

15 (3) CONFORMING AMENDMENT.—The table of 

16 sections for part II of subchapter B of chapter 1 is 

17 amended by adding at the end the following new 

18 item: 

‘‘Sec. 91. Punitive damages compensated by insurance or otherwise.’’. 

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

20 this section shall apply to damages paid or incurred on 

21 or after the date of the enactment of this Act. 


jcorcoran on PROD1PC62 with BILLS
88 

•S 1111 IS

1 TITLE IV—TECHNICAL AND CON2 FORMING AMENDMENTS; 

3 SUNSET 

4 SEC. 401. TECHNICAL AND CONFORMING AMENDMENTS. 

5 The Secretary of the Treasury or the Secretary’s del6 egate shall not later than 90 days after the date of the 

7 enactment of this Act, submit to the Committee on Ways 

8 and Means of the House of Representatives and the Com9 mittee on Finance of the Senate a draft of any technical 

10 and conforming changes in the Internal Revenue Code of 

11 1986 which are necessary to reflect throughout such Code 

12 the purposes of the provisions of, and amendments made 

13 by, this Act. 

14 SEC. 402. SUNSET. 

15 (a) IN GENERAL.—All provisions of, and amend16 ments made by, this Act shall not apply to taxable years 

17 beginning after December 31, 2012. 

18 (b) APPLICATION OF CODE.—The Internal Revenue 

19 Code of 1986 shall be applied and administered to taxable 

20 years described in subsection (a) as if the provisions of, 

21 and amendments made by, this Act had never been en22 acted. 

Æ 


jcorcoran on PROD1PC62 with BILLS