II 

110TH CONGRESS 

1ST SESSION S. 1151 

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

more energy-efficient vehicles to lessen dependence on oil. 

IN THE SENATE OF THE UNITED STATES 

APRIL 18, 2007 

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

to the Committee on Finance 

A BILL 

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

dependence on oil. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE; TABLE OF CONTENTS. 

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

5 ‘‘Health Care for Hybrids Act’’. 

6 (b) TABLE OF CONTENTS.—The table of contents for 

7 this Act is as follows: 

Sec. 1. Short title; table of contents. 

Sec. 2. Findings. 

TITLE I—RETIRED EMPLOYEE HEALTH BENEFITS 

REIMBURSEMENT PROGRAM 

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Sec. 101. Coordinating task force. 

Sec. 102. Establishment of program. 

Sec. 103. Reporting. 

Sec. 104. Authorization of appropriations. 

TITLE II—TAX PROVISIONS 

Sec. 201. Clarification of economic substance doctrine. 

Sec. 202. Penalty for understatements attributable to transactions lacking economic substance. 

Sec. 203. Denial of deduction for interest on underpayments attributable to 

noneconomic substance transactions. 

1 SEC. 2. FINDINGS. 

2 Congress makes the following findings: 

3 (1) More than 50 percent of the oil consumed 

4 in the United States is imported. 

5 (2) If present trends continue, foreign oil will 

6 represent 68 percent of the oil consumed in the 

7 United States by 2025. 

8 (3) The United States has only 3 percent of the 

9 world’s known oil reserves and the Nation’s eco10 nomic health is dependent on world oil prices. 

11 (4) World oil prices are overwhelmingly dictated 

12 by other countries, which endangers the economic 

13 and national security of the United States. 

14 (5) A major portion of the world’s oil supply is 

15 controlled by unstable governments and countries 

16 that are known to finance, harbor, or otherwise sup17 port terrorists and terrorist activities. 

18 (6) American automakers have lagged behind 

19 their foreign competitors in producing hybrid and 

20 other energy-efficient automobiles. 

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1 (7) Legacy health care costs associated with re2 tiree workers are an increasing burden on the global 

3 competitiveness of American industries. 

4 (8) Innovative uses of new technology in auto5 mobiles manufactured in the United States will— 

6 (A) help retain American jobs; 

7 (B) support health care obligations for re8 tiring workers in the automotive sector; 

9 (C) decrease our Nation’s dependence on 

10 foreign oil; and 

11 (D) address pressing environmental con12 cerns. 

13 TITLE I—RETIRED EMPLOYEE 

14 HEALTH BENEFITS REIM15 BURSEMENT PROGRAM 

16 SEC. 101. COORDINATING TASK FORCE. 

17 (a) ESTABLISHMENT.—Not later than 6 months after 

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

19 Energy, the Secretary of Health and Human Services, the 

20 Secretary of Transportation, and the Secretary of the 

21 Treasury shall establish a task force (referred to in this 

22 Act as the ‘‘task force’’) to administer the program estab23 lished under section 102 (referred to in this Act as the 

24 ‘‘program’’). 

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1 (b) MEMBERSHIP.—The task force shall be composed 

2 representatives of the departments headed by the officials 

3 referred to in subsection (a), who shall be appointed by 

4 such officials in equal numbers. 

5 SEC. 102. ESTABLISHMENT OF PROGRAM. 

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

7 date of the enactment of this Act, the task force shall es8 tablish a program to reimburse eligible domestic auto9 mobile manufacturers for the costs incurred in providing 

10 health benefits to their retired employees. The task force 

11 shall determine compliance with the assurances under sub12 section (c)(4) through accepted measurements of fuel sav13 ings. 

14 (b) CONSULTATION.—In establishing the program, 

15 the task force shall consult with representatives from— 

16 (1) eligible domestic automobile manufacturers; 

17 (2) unions representing employees of such man18 ufacturers; and 

19 (3) consumer and environmental groups. 

20 (c) ELIGIBILITY REQUIREMENTS.—A domestic auto21 mobile manufacturer seeking reimbursement under the 

22 program shall— 

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

24 such time, in such manner, and containing such in25 formation as the task force shall require; 

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1 (2) certify that such manufacturer is providing 

2 full health care coverage to all of its employees; 

3 (3) provide assurances to the task force that 

4 the manufacturer will invest, in an amount equal to 

5 not less than 50 percent of the amount saved by the 

6 manufacturer through the reimbursement of its re7 tiree health care costs under the program, in— 

8 (A) the domestic manufacture and com9 mercialization of petroleum fuel reduction tech10 nologies, including alternative or flexible fuel 

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

12 saving technologies; 

13 (B) retraining workers and retooling as14 sembly lines for the activities described in sub15 paragraph (A); 

16 (C) researching, developing, designing, and 

17 commercializing high-performance, fuel-efficient 

18 vehicles, and other activities related to diversi19 fying the domestic production of automobiles; 

20 and 

21 (D) assisting domestic automobile compo22 nent suppliers to retool their domestic manufac23 turing plants to produce components for petro24 leum fuel reduction technologies, including al25 ternative or flexible fuel vehicles and hybrid, admstockstill on PROD1PC66 with BILLS

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1 vanced diesel, and other state-of-the-art fuel 

2 saving technologies; and 

3 (4) provide assurances to the task force that av4 erage adjusted fuel economy savings achieved under 

5 paragraph (3) will not result in fuel economy de6 creases in other automobiles manufactured in the 

7 United States; and 

8 (5) provide additional assurances and informa9 tion as the task force may require, including infor10 mation needed by the task force to audit the manu11 facturer’s compliance with the requirements of the 

12 program. 

13 (d) LIMITATION.—Not more than 10 percent of the 

14 annual retiree health care costs of any domestic auto15 mobile manufacturer may be reimbursed under the pro16 gram in any year. 

17 (e) TERMINATION OF PROGRAM.—The program shall 

18 terminate on December 31, 2017. 

19 SEC. 103. REPORTING. 

20 (a) REIMBURSEMENT REPORTS.—Not later than 6 

21 months after the date of the enactment of this Act, and 

22 every 6 months thereafter, the task force shall submit a 

23 report to Congress that— 

24 (1) identifies the reimbursements paid under 

25 the program; and 

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1 (2) describes the changes in the manufacture 

2 and commercialization of fuel saving technologies 

3 implemented by automobile manufacturers as a re4 sult of such reimbursements. 

5 (b) CONSUMER INCENTIVES.—Not later than 1 year 

6 after the date of the enactment of this Act, the task force 

7 shall submit a report to Congress that— 

8 (1) indicates the effectiveness of financial incen9 tives available to consumers for the purchase of hy10 brid vehicles in encouraging such purchases; and 

11 (2) recommends whether such incentives should 

12 be expanded. 

13 SEC. 104. AUTHORIZATION OF APPROPRIATIONS. 

14 There are authorized to be appropriated such sums 

15 as may be necessary in each of fiscal years 2008 through 

16 2018 to carry out this title. 

17 TITLE II—TAX PROVISIONS 

18 SEC. 201. CLARIFICATION OF ECONOMIC SUBSTANCE DOC19 TRINE. 

20 (a) IN GENERAL.—Section 7701 of the Internal Rev21 enue Code of 1986 is amended— 

22 (1) by redesignating subsection (p) as sub23 section (q); and 

24 (2) by inserting after subsection (o) the fol25 lowing: 

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1 ‘‘(p) CLARIFICATION OF ECONOMIC SUBSTANCE

2 DOCTRINE.— 

3 ‘‘(1) GENERAL RULES.— 

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

5 a court determines that the economic substance 

6 doctrine is relevant for purposes of this title to 

7 a transaction (or series of transactions), such 

8 transaction (or series of transactions) shall have 

9 economic substance only if the requirements of 

10 this paragraph are met. 

11 ‘‘(B) DEFINITION OF ECONOMIC SUB12 STANCE.—For purposes of subparagraph (A): 

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

14 economic substance only if— 

15 ‘‘(I) the transaction changes in a 

16 meaningful way (apart from Federal 

17 tax effects) the taxpayer’s economic 

18 position, and 

19 ‘‘(II) the taxpayer has a substan20 tial nontax purpose for entering into 

21 such transaction and the transaction 

22 is a reasonable means of accom23 plishing such purpose. 

24 In applying subclause (II), a purpose of 

25 achieving a financial accounting benefit 

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1 shall not be taken into account in deter2 mining whether a transaction has a sub3 stantial nontax purpose if the origin of 

4 such financial accounting benefit is a re5 duction of income tax. 

6 ‘‘(ii) SPECIAL RULE WHERE TAX7 PAYER RELIES ON PROFIT POTENTIAL.—A 

8 transaction shall not be treated as having 

9 economic substance by reason of having a 

10 potential for profit unless— 

11 ‘‘(I) the present value of the rea12 sonably expected pre-tax profit from 

13 the transaction is substantial in rela14 tion to the present value of the ex15 pected net tax benefits that would be 

16 allowed if the transaction were re17 spected, and 

18 ‘‘(II) the reasonably expected 

19 pre-tax profit from the transaction ex20 ceeds a risk-free rate of return. 

21 ‘‘(C) TREATMENT OF FEES AND FOREIGN

22 TAXES.—Fees and other transaction expenses 

23 and foreign taxes shall be taken into account as 

24 expenses in determining pre-tax profit under 

25 subparagraph (B)(ii). 

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1 ‘‘(2) SPECIAL RULES FOR TRANSACTION WITH

2 TAX-INDIFFERENT PARTIES.— 

3 ‘‘(A) SPECIAL RULES FOR FINANCING

4 TRANSACTIONS.—The form of a transaction 

5 which is in substance the borrowing of money 

6 or the acquisition of financial capital directly or 

7 indirectly from a tax-indifferent party shall not 

8 be respected if the present value of the deduc9 tions to be claimed with respect to the trans10 action is substantially in excess of the present 

11 value of the anticipated economic returns of the 

12 person lending the money or providing the fi13 nancial capital. A public offering shall be treat14 ed as a borrowing, or an acquisition of financial 

15 capital, from a tax-indifferent party if it is rea16 sonably expected that at least 50 percent of the 

17 offering will be placed with tax-indifferent par18 ties. 

19 ‘‘(B) ARTIFICIAL INCOME SHIFTING AND

20 BASIS ADJUSTMENTS.—The form of a trans21 action with a tax-indifferent party shall not be 

22 respected if— 

23 ‘‘(i) it results in an allocation of in24 come or gain to the tax-indifferent party in 

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1 excess of such party’s economic income or 

2 gain, or 

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

4 or shifting of basis on account of over5 stating the income or gain of the tax-indif6 ferent party. 

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

8 purposes of this subsection: 

9 ‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.— 

10 The term ‘economic substance doctrine’ means 

11 the common law doctrine under which tax bene12 fits under subtitle A with respect to a trans13 action are not allowable if the transaction does 

14 not have economic substance or lacks a business 

15 purpose. 

16 ‘‘(B) TAX-INDIFFERENT PARTY.—The 

17 term ‘tax-indifferent party’ means any person 

18 or entity not subject to tax imposed by subtitle 

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

20 party with respect to a transaction if the items 

21 taken into account with respect to the trans22 action have no substantial impact on such per23 son’s liability under subtitle A. 

24 ‘‘(C) EXCEPTION FOR PERSONAL TRANS25 ACTIONS OF INDIVIDUALS.—In the case of an 

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1 individual, this subsection shall apply only to 

2 transactions entered into in connection with a 

3 trade or business or an activity engaged in for 

4 the production of income. 

5 ‘‘(D) TREATMENT OF LESSORS.—In apply6 ing paragraph (1)(B)(ii) to the lessor of tan7 gible property subject to a lease— 

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

9 respect to the leased property shall not in10 clude the benefits of— 

11 ‘‘(I) depreciation, 

12 ‘‘(II) any tax credit, or 

13 ‘‘(III) any other deduction as 

14 provided in guidance by the Secretary, 

15 and 

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

17 (1)(B)(ii) shall be disregarded in deter18 mining whether any of such benefits are al19 lowable. 

20 ‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF21 FECTED.—Except as specifically provided in this 

22 subsection, the provisions of this subsection shall not 

23 be construed as altering or supplanting any other 

24 rule of law, and the requirements of this subsection 

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1 shall be construed as being in addition to any such 

2 other rule of law. 

3 ‘‘(5) REGULATIONS.—The Secretary shall pre4 scribe such regulations as may be necessary or ap5 propriate to carry out the purposes of this sub6 section. Such regulations may include exemptions 

7 from the application of this subsection.’’. 

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

9 this section shall apply to transactions entered into after 

10 the date of the enactment of this Act. 

11 SEC. 202. PENALTY FOR UNDERSTATEMENTS ATTRIB12 UTABLE TO TRANSACTIONS LACKING ECO13 NOMIC SUBSTANCE. 

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

15 Internal Revenue Code of 1986 is amended by inserting 

16 after section 6662A the following: 

17 ‘‘SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIB18 UTABLE TO TRANSACTIONS LACKING ECO19 NOMIC SUBSTANCE. 

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

21 noneconomic substance transaction understatement for 

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

23 amount equal to 40 percent of the amount of such under24 statement. 

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1 ‘‘(b) REDUCTION OF PENALTY FOR DISCLOSED

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

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

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

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

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

11 substance transaction understatement’ means any 

12 amount which would be an understatement under 

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

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

16 to which section 6662A would apply without regard 

17 to this paragraph. 

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

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

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

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

25 section 7701(p)(2), or 

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

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

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

9 respect to a penalty to which this section applies, 

10 only the Commissioner of Internal Revenue may 

11 compromise all or any portion of such penalty. 

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

14 for purposes of paragraph (1). 

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

19 ‘‘(f) CROSS REFERENCES.— 

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

22 rules, see section 6662A(e). 

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

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

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

3 (1) The second sentence of section 

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

5 is amended by inserting ‘‘and without regard to 

6 items with respect to which a penalty is imposed by 

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

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

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

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

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

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

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

19 ‘‘6662B or’’ before ‘‘6663’’, 

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

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

22 end, 

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

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

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

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

6 paragraph: 

7 ‘‘(3) NONECONOMIC SUBSTANCE TRANSACTION

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

11 term by section 6662B(c).’’. 

12 (3) Paragraph (2) of section 6707A(e) of the 

13 Internal Revenue Code of 1986 is amended— 

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

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

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

19 section 6662B with respect to any noneconomic 

20 substance transaction, or 

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

22 section 6662(h) with respect to any transaction 

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

24 have been subject to penalty under section 

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1 6662A at a rate prescribed under section 

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

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

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

5 Revenue Code of 1986 is amended by inserting after the 

6 item relating to section 6662A the following: 

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

economic substance, etc.’’. 

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

8 this section shall apply to transactions entered into after 

9 the date of the enactment of this Act. 

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

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

14 Revenue Code of 1986 (relating to interest on unpaid 

15 taxes attributable to nondisclosed reportable transactions) 

16 is amended— 

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

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

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

21 with respect to which the requirement of section 

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

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1 ‘‘(2) any noneconomic substance transaction 

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

3 and 

4 (2) by inserting ‘‘and noneconomic substance 

5 transactions’’ after ‘‘transactions’’. 

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

7 this section shall apply to transactions after the date of 

8 the enactment of this Act in taxable years ending after 

9 such date. 

Æ 

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