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[Congressional Bills 110th Congress]
[From the U.S. Government Publishing Office]
[S. 1111 Introduced in Senate (IS)]

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.

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

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Fair Flat Tax Act 
of 2007''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.
    (c) Table of Contents.--The table of contents for 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.
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.

SEC. 2. PURPOSE.

    The purpose of this Act is to amend the Internal Revenue Code of 
1986--
            (1) to make the Federal individual income tax system 
        simpler, fairer, and more transparent by--
                    (A) recognizing the overall Federal, State, and 
                local tax burden on individual Americans, especially 
                the regressive nature of State and local taxes, and 
                providing a Federal income tax credit for State and 
                local income, sales, and property taxes,
                    (B) providing for an earned income tax credit for 
                childless taxpayers and a new earned income child 
                credit,
                    (C) repealing the individual alternative minimum 
                tax,
                    (D) increasing the basic standard deduction and 
                maintaining itemized deductions for principal residence 
                mortgage interest and charitable contributions,
                    (E) reducing the number of exclusions, exemptions, 
                deductions, and credits, and
                    (F) treating all income equally,
            (2) to make the Federal corporate income tax rate a flat 35 
        percent and eliminate special tax preferences that favor 
        particular types of businesses or activities, and
            (3) to partially offset the Federal budget deficit through 
        the increased fiscal responsibility resulting from these 
        reforms.

                 TITLE I--INDIVIDUAL INCOME TAX REFORMS

SEC. 101. 3 PROGRESSIVE INDIVIDUAL INCOME TAX RATES FOR ALL FORMS OF 
              INCOME.

    (a) Married Individuals Filing Joint Returns and Surviving 
Spouses.--The table contained in section 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''.
    (b) Heads of Households.--The table contained 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''.
    (c) Unmarried Individuals (Other Than Surviving Spouses and Heads 
of Households).--The table contained in section 1(c) is amended to read 
as follows:
``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''.
    (d) Married Individuals Filing Separate Returns.--The table 
contained in section 1(d) is amended to read as follows:
``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''.
    (e) Conforming Amendments to Inflation Adjustment.--Section 1(f) is 
amended--
            (1) by striking ``1993'' in paragraph (1) and inserting 
        ``2008'',
            (2) by striking ``except as provided in paragraph (8)'' in 
        paragraph (2)(A),
            (3) by striking ``1992'' in paragraph (3)(B) and inserting 
        ``2007'',
            (4) by striking paragraphs (7) and (8), and
            (5) by striking ``Phaseout of Marriage Penalty in 15-
        Percent Bracket;'' in the heading thereof.
    (f) Repeal of Rate Differential for Capital Gains and Dividends.--
            (1) Repeal of 2003 rate reduction.--Section 303 of the Jobs 
        and Growth Tax Relief Reconciliation Act of 2003 is amended by 
        striking ``December 3, 2008'' and inserting ``December 31, 
        2007''.
            (2) Termination of pre-2003 capital gain rate 
        differential.--Section 1(h) is amended (after the application 
        of paragraph (1)) by adding at the end the following new 
        paragraph:
            ``(13) Termination.--This section shall not apply to 
        taxable years beginning after December 31, 2007.''.
    (g) Additional Conforming Amendments.--
            (1) Section 1 is amended by striking subsection (i).
            (2) The Internal Revenue Code of 1986 is amended by 
        striking ``calendar year 1992'' each place it appears and 
        inserting ``calendar year 2007''.
            (3) Section 1445(e)(1) (after the application of subsection 
        (g)(1)) is amended by striking ``(or, to the extent provided in 
        regulations, 20 percent)''.
    (h) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 102. HEALTH CARE STANDARD DEDUCTION.

    (a) In General.--Section 62(a) (defining adjusted gross income) is 
amended by inserting after paragraph (21) the following new paragraph:
            ``(22) Individual shared responsibility payments.--
                    ``(A) In general.--In the case of a taxpayer with 
                gross income for the taxable year exceeding 100 percent 
                of the poverty line (adjusted for the size of the 
                family involved) for the calendar year in which such 
                taxable year begins and who is enrolled in a HAPI plan 
                under the Healthy Americans Act, the deduction 
                allowable under section 213 by reason of subsection 
                (d)(1)(D) thereof (determined without regard to any 
                income limitation under subsection (a) thereof) in an 
                amount equal to the applicable fraction times, in the 
                case of--
                            ``(i) coverage of an individual, $6,025,
                            ``(ii) coverage of a married couple or 
                        domestic partnership (as determined by a State) 
                        without dependent children, $12,050,
                            ``(iii) coverage of an unmarried individual 
                        with 1 or more dependent children, $8,610, plus 
                        $2,000 for each dependent child, and
                            ``(iv) coverage of a married couple or 
                        domestic partnership (as determined by a State) 
                        with 1 or more dependent children, $15,210, 
                        plus $2,000 for each dependent child.
                    ``(B) Applicable fraction.--For purposes of 
                subparagraph (A), the applicable fraction is the 
                fraction (not to exceed 1)--
                            ``(i) the numerator of which is the gross 
                        income of the taxpayer for the taxable year 
                        expressed as a percentage of the poverty line 
                        (adjusted for the size of the family involved) 
                        minus such poverty line for the calendar year 
                        in which such taxable year begins, and
                            ``(ii) the denominator of which is 400 
                        percent of the poverty line (adjusted for the 
                        size of the family involved) minus such poverty 
                        line.
                    ``(C) Phaseout of deduction amount.--
                            ``(i) In general.--The amount otherwise 
                        determined under subparagraph (A) for any 
                        taxable year shall be reduced by the amount 
                        determined under clause (ii).
                            ``(ii) Amount of reduction.--The amount 
                        determined under this clause shall be the 
                        amount which bears the same ratio to the amount 
                        determined under subparagraph (A) as--
                                    ``(I) the excess of the taxpayer's 
                                modified adjusted gross income for such 
                                taxable year, over $62,500 ($125,000 in 
                                the case of a joint return), bears to
                                    ``(II) $62,500 ($125,000 in the 
                                case of a joint return).
                        Any amount determined under this clause which 
                        is not a multiple of $1,000 shall be rounded to 
                        the next lowest $1,000.
                    ``(D) Inflation adjustment.--In the case of any 
                taxable year beginning in a calendar year after 2009, 
                each dollar amount contained in subparagraph (A) and 
                subparagraph (C)(ii)(I) shall be increased by an amount 
                equal to such dollar amount, multiplied by the cost-of-
                living adjustment determined under section 1(f)(3) for 
                the calendar year in which the taxable year begins, 
                determined by substituting `calendar year 2008' for 
                `calendar year 1992' in subparagraph (B) thereof. Any 
                increase determined under the preceding sentence shall 
                be rounded to the nearest multiple of $50 ($1,000 in 
                the case of the dollar amount contained in subparagraph 
                (C)(ii)(I)).
                    ``(E) Determination of modified adjusted gross 
                income.--
                            ``(i) In general.--For purposes of this 
                        paragraph, the term `modified adjusted gross 
                        income' means adjusted gross income--
                            ``(ii) determined without regard to this 
                        section and sections 86, 135, 137, 199, 221, 
                        222, 911, 931, and 933, and
                            ``(iii) increased by--
                                    ``(I) the amount of interest 
                                received or accrued during the taxable 
                                year which is exempt from tax under 
                                this title, and
                                    ``(II) the amount of any social 
                                security benefits (as defined in 
                                section 86(d)) received or accrued 
                                during the taxable year.
                    ``(F) Poverty line.--For purposes of this 
                paragraph, the term `poverty line' has the meaning 
                given such term in section 673(2) of the Community 
                Health Services Block Grant Act (42 U.S.C. 9902(2)), 
                including any revision required by such section.''.
    (b) Conforming Amendment.--Section 213(d)(1)(D) is amended by 
inserting ``amounts paid under section 3421 and'' after ``including''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 103. INCREASE IN BASIC STANDARD DEDUCTION.

    (a) In General.--Paragraph (2) of section 63(c) (defining standard 
deduction) is amended to read as follows:
            ``(2) Basic standard deduction.--For purposes of paragraph 
        (1), the basic standard deduction is--
                    ``(A) 200 percent of the dollar amount in effect 
                under subparagraph (C) for the taxable year in the case 
                of--
                            ``(i) a joint return, or
                            ``(ii) a surviving spouse (as defined in 
                        section 2(a)),
                    ``(B) $26,250 in the case of a head of household 
                (as defined in section 2(b)), reduced by any deduction 
                allowed under section 62(a)(22) for such taxable year, 
                or
                    ``(C) $15,000 in any other case, reduced by any 
                deduction allowed under section 62(a)(22) for such 
                taxable year.''.
    (b) Conforming Amendment to Inflation Adjustment.--Section 
63(c)(4)(B)(i) is amended by striking ``(2)(B), (2)(C), or''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 104. REFUNDABLE CREDIT FOR STATE AND LOCAL INCOME, SALES, AND REAL 
              AND PERSONAL PROPERTY TAXES.

    (a) General Rule.--Subpart C of part IV of subchapter A of chapter 
1 (relating to refundable credits) is amended by redesignating section 
36 as section 37 and by inserting after section 35 the following new 
section:

``SEC. 36. CREDIT FOR STATE AND LOCAL INCOME, SALES, AND REAL AND 
              PERSONAL PROPERTY TAXES.

    ``(a) Allowance of Credit.--In the case of an individual, there 
shall be allowed as a credit against the tax imposed by this subtitle 
for the taxable year an amount equal to 10 percent of the qualified 
State and local taxes paid by the taxpayer for such year.
    ``(b) Qualified State and Local Taxes.--For purposes of this 
section, the term `qualified State and local taxes' means--
            ``(1) State and local income taxes,
            ``(2) State and local general sales taxes,
            ``(3) State and local real property taxes, and
            ``(4) State and local personal property taxes.
    ``(c) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) State or local taxes.--A State or local tax includes 
        only a tax imposed by a State, a possession of the United 
        States, or a political subdivision of any of the foregoing, or 
        by the District of Columbia.
            ``(2) General sales taxes.--
                    ``(A) In general.--The term `general sales tax' 
                means a tax imposed at one rate with respect to the 
                sale at retail of a broad range of classes of items.
                    ``(B) Application of rules.--Rules similar to the 
                rules under subparagraphs (C), (D), (E), (F), (G), and 
                (H) of section 164(b)(5) shall apply.
            ``(3) Personal property taxes.--The term `personal property 
        tax' means an ad valorem tax which is imposed on an annual 
        basis in respect of personal property.
            ``(4) Application of rules to property taxes.--Rules 
        similar to the rules of subsections (c) and (d) of section 164 
        shall apply.
            ``(5) No credit for married individuals filing separate 
        returns.--If the taxpayer is a married individual (within the 
        meaning of section 7703), this section shall apply only if the 
        taxpayer and the taxpayer's spouse file a joint return for the 
        taxable year.
            ``(6) Denial of credit to dependents.--No credit shall be 
        allowed under this section to any individual with respect to 
        whom a deduction under section 151 is allowable to another 
        taxpayer for a taxable year beginning in the calendar year in 
        which such individual's taxable year begins.
            ``(7) Denial of double benefit.--Any amount taken into 
        account in determining the credit allowable under this section 
        may not be taken into account in determining any credit or 
        deduction under any other provision of this chapter.''.
    (b) Technical Amendments.--
            (1) Paragraph (2) of section 1324(b) of title 31, United 
        States Code, is amended by inserting ``or from section 36 of 
        such Code'' before the period at the end.
            (2) The table of sections for subpart C of part IV of 
        subchapter A of chapter 1 is amended by striking the item 
        relating to section 36 and inserting the following:

``Sec. 36. Credit for state and local income, sales, and real and 
                            personal property taxes.
``Sec. 37. Overpayments of tax.''.
    (c) Report Regarding Use of Credit by Renters.--Not later than 180 
days after the date of the enactment of this Act, the Secretary of the 
Treasury shall report to the Committee on Finance of the Senate and the 
Committee on Ways and Means of the House of Representatives 
recommendations regarding the treatment of a portion of rental payments 
in a manner similar to real property taxes under section 36 of the 
Internal Revenue Code of 1986 (as added by this section).
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 105. EARNED INCOME CHILD CREDIT AND EARNED INCOME CREDIT FOR 
              CHILDLESS TAXPAYERS.

    (a) In General.--Subsection (a) of section 32 (relating to earned 
income) is amended to read as follows:
    ``(a) Allowance of Earned Income Child Credit and Earned Income 
Credit.--
            ``(1) In general.--There shall be allowed as a credit 
        against the tax imposed by this subtitle for the taxable year--
                    ``(A) in the case of any eligible individual with 1 
                or more qualifying children, an amount equal to the 
                earned income child credit amount, and
                    ``(B) in the case of any eligible individual with 
                no qualifying children, an amount equal to the earned 
                income credit amount.
            ``(2) Earned income child credit amount.--For purposes of 
        this section, the earned income child credit amount is equal to 
        the sum of--
                    ``(A) the credit percentage of so much of the 
                taxpayer's earned income for the taxable year as does 
                not exceed the earned income limit amount, plus
                    ``(B) the supplemental child credit amount 
                determined under subsection (n) for such taxable year.
            ``(3) Earned income credit amount.--For purposes of this 
        section, the earned income credit amount is equal to the credit 
        percentage of so much of the taxpayer's earned income for the 
        taxable year as does not exceed the earned income limit amount.
            ``(4) Limitation.--The amount of the credit allowable to a 
        taxpayer under paragraph (2)(A) or (3) for any taxable year 
        shall not exceed the excess (if any) of--
                    ``(A) the credit percentage of the earned income 
                amount, over
                    ``(B) the phaseout percentage of so much of the 
                adjusted gross income (or, if greater, the earned 
                income) of the taxpayer for the taxable year as exceeds 
                the phaseout amount.''.
    (b) Supplemental Child Credit Amount.--Section 32 is amended by 
adding at the end the following new subsection:
    ``(n) Supplemental Child Credit Amount.--
            ``(1) In general.--For purposes of subsection (a)(2)(B), 
        the supplemental child credit amount for any taxable year is 
        equal to the lesser of--
                    ``(A) the credit which would be allowed under 
                section 24 for such taxable year without regard to the 
                limitation under section 24(b)(3) with respect to any 
                qualifying child as defined under subsection (c)(3), or
                    ``(B) the amount by which the aggregate amount of 
                credits allowed by subpart A for such taxable year 
                would increase if the limitation imposed by section 
                24(b)(3) were increased by the excess (if any) of--
                            ``(i) 15 percent of so much of the 
                        taxpayer's earned income which is taken into 
                        account in computing taxable income for the 
                        taxable year as exceeds $10,000, or
                            ``(ii) in the case of a taxpayer with 3 or 
                        more qualifying children (as so defined), the 
                        excess (if any) of--
                                    ``(I) the taxpayer's social 
                                security taxes for the taxable year, 
                                over
                                    ``(II) the credit allowed under 
                                this section for the taxable year.
        The amount of the credit allowed under this subsection shall 
        not be treated as a credit allowed under subpart A and shall 
        reduce the amount of credit otherwise allowable under section 
        24(a) without regard to section 24(b)(3).
            ``(2) Social security taxes.--For purposes of paragraph 
        (1)--
                    ``(A) In general.--The term `social security taxes' 
                means, with respect to any taxpayer for any taxable 
                year--
                            ``(i) the amount of the taxes imposed by 
                        section 3101 and 3201(a) on amounts received by 
                        the taxpayer during the calendar year in which 
                        the taxable year begins,
                            ``(ii) 50 percent of the taxes imposed by 
                        section 1401 on the self-employment income of 
                        the taxpayer for the taxable year, and
                            ``(iii) 50 percent of the taxes imposed by 
                        section 3211(a)(1) on amounts received by the 
                        taxpayer during the calendar year in which the 
                        taxable year begins.
                    ``(B) Coordination with special refund of social 
                security taxes.--The term `social security taxes' shall 
                not include any taxes to the extent the taxpayer is 
                entitled to a special refund of such taxes under 
                section 6413(c).
                    ``(C) Special rule.--Any amounts paid pursuant to 
                an agreement under section 3121(l) (relating to 
                agreements entered into by American employers with 
                respect to foreign affiliates) which are equivalent to 
                the taxes referred to in subparagraph (A)(i) shall be 
                treated as taxes referred to in such paragraph.
            ``(3) Inflation adjustment.--In the case of any taxable 
        year beginning in a calendar year after 2007, the $10,000 
        amount contained in paragraph (1)(B) shall be increased by an 
        amount equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in which 
                the taxable year begins, determined by substituting 
                `calendar year 2000' for `calendar year 1992' in 
                subparagraph (B) thereof.
            ``Any increase determined under the preceding sentence 
        shall be rounded to the nearest multiple of $50.''.
    (c) Conforming Amendment.--Section 24(d) is amended by adding at 
the end the following new paragraph:
            ``(4) Termination.--This subsection shall not apply with 
        respect to any taxable year beginning after December 31, 
        2007.''.
    (d) Certain Treatment of Earned Income Made Permanent.--Clause (vi) 
of section 32(c)(2)(B) is amended to read as follows:
                            ``(vi) a taxpayer may elect to treat 
                        amounts excluded from gross income by reason of 
                        section 112 as earned income.''.
    (e) Repeal of Disqualified Investment Income Test.--Subsection (i) 
of section 32 is repealed.
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 106. REPEAL OF INDIVIDUAL ALTERNATIVE MINIMUM TAX.

    (a) In General.--Section 55(a) (relating to alternative minimum tax 
imposed) is amended by adding at the end the following new flush 
sentence:
    ``For purposes of this title, the tentative minimum tax on any 
taxpayer other than a corporation for any taxable year beginning after 
December 31, 2007, shall be zero.''.
    (b) Modification of Limitation on Use of Credit for Prior Year 
Minimum Tax Liability.--Subsection (c) of section 53 (relating to 
credit for prior year minimum tax liability) is amended to read as 
follows:
    ``(c) Limitation.--
            ``(1) In general.--Except as provided in paragraph (2), the 
        credit allowable under subsection (a) for any taxable year 
        shall not exceed the excess (if any) of--
                    ``(A) the regular tax liability of the taxpayer for 
                such taxable year reduced by the sum of the credits 
                allowable under subparts A, B, D, E, and F of this 
                part, over
                    ``(B) the tentative minimum tax for the taxable 
                year.
            ``(2) Taxable years beginning after 2007.--In the case of 
        any taxable year beginning after 2007, the credit allowable 
        under subsection (a) to a taxpayer other than a corporation for 
        any taxable year shall not exceed 90 percent of the regular tax 
        liability of the taxpayer for such taxable year reduced by the 
        sum of the credits allowable under subparts A, B, D, E, and F 
        of this part.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 107. TERMINATION OF VARIOUS EXCLUSIONS, EXEMPTIONS, DEDUCTIONS, 
              AND CREDITS.

    (a) In General.--Subchapter C of chapter 90 (relating to provisions 
affecting more than one subtitle) is amended by adding at the end the 
following new section:

``SEC. 7875. TERMINATION OF CERTAIN PROVISIONS.

    ``The following provisions shall not apply to taxable years 
beginning after December 31, 2007:
            ``(1) Section 67 (relating to 2-percent floor on 
        miscellaneous itemized deductions).
            ``(2) Section 74(c) (relating to exclusion of certain 
        employee achievement awards).
            ``(3) Section 79 (relating to exclusion of group-term life 
        insurance purchased for employees).
            ``(4) Section 119 (relating to exclusion of meals or 
        lodging furnished for the convenience of the employer).
            ``(5) Section 125 (relating to exclusion of cafeteria plan 
        benefits).
            ``(6) Section 132 (relating to certain fringe benefits), 
        except with respect to subsection (a)(5) thereof (relating to 
        exclusion of qualified transportation fringe).
            ``(7) Section 163(h)(4)(A)(i)(II) (relating to definition 
        of qualified residence).
            ``(8) Section 165(d) (relating to deduction for wagering 
        losses).
            ``(9) Section 217 (relating to deduction for moving 
        expenses).
            ``(10) Section 454 (relating to deferral of tax on 
        obligations issued at discount).
            ``(11) Section 501(c)(9) (relating to tax-exempt status of 
        voluntary employees' beneficiary associations).
            ``(12) Section 911 (relating to exclusion of earned income 
        of citizens or residents of the United States living abroad).
            ``(13) Section 912 (relating to exemption for certain 
        allowances).''.
    (b) Conforming Amendment.--The table of sections for subchapter C 
of chapter 90 is amended by adding at the end the following new item:

``Sec. 7875. Termination of certain provisions.''.

          TITLE II--CORPORATE AND BUSINESS INCOME TAX REFORMS

SEC. 201. CORPORATE FLAT TAX.

    (a) In General.--Subsection (b) of section 11 (relating to tax 
imposed) is amended to read as follows:
    ``(b) Amount of Tax.--The amount of tax imposed by subsection (a) 
shall be equal to 35 percent of the taxable income.''.
    (b) Conforming Amendments.--
            (1) Section 280C(c)(3)(B)(ii)(II) is amended by striking 
        ``maximum rate of tax under section 11(b)(1)'' and inserting 
        ``rate of tax under section 11(b)''.
            (2) Sections 860E(e)(2)(B), 860E(e)(6)(A)(ii), 
        860K(d)(2)(A)(ii), 860K(e)(1)(B)(ii), 1446(b)(2)(B), and 
        7874(e)(1)(B) are each amended by striking ``highest rate of 
        tax specified in section 11(b)(1)'' and inserting ``rate of tax 
        specified in section 11(b)''.
            (3) Section 904(b)(3)(D)(ii) is amended by striking 
        ``(determined without regard to the last sentence of section 
        11(b)(1))''.
            (4) Section 962 is amended by striking subsection (c) and 
        by redesignating subsection (d) as subsection (c).
            (5) Section 1201(a) is amended by striking ``(determined 
        without regard to the last 2 sentences of section 11(b)(1))''.
            (6) Section 1561(a) is amended--
                    (A) by striking paragraph (1) and by redesignating 
                paragraphs (2), (3), and (4) as paragraphs (1), (2), 
                and (3), respectively,
                    (B) by striking ``The amounts specified in 
                paragraph (1), the'' and inserting ``The'',
                    (C) by striking ``paragraph (2)'' and inserting 
                ``paragraph (1)'',
                    (D) by striking ``paragraph (3)'' both places it 
                appears and inserting ``paragraph (2)'',
                    (E) by striking ``paragraph (4)'' and inserting 
                ``paragraph (3)'', and
                    (F) by striking the fourth sentence.
            (7) Subsection (b) of section 1561 is amended to read as 
        follows:
    ``(b) Certain Short Taxable Years.--If a corporation has a short 
taxable year which does not include a December 31 and is a component 
member of a controlled group of corporations with respect to such 
taxable year, then for purposes of this subtitle, the amount to be used 
in computing the accumulated earnings credit under section 535(c)(2) 
and (3) of such corporation for such taxable year shall be the amount 
specified in subsection (a)(1) divided by the number of corporations 
which are component members of such group on the last day of such 
taxable year. For purposes of the preceding sentence, section 1563(b) 
shall be applied as if such last day were substituted for December 
31.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 202. TREATMENT OF TRAVEL ON CORPORATE AIRCRAFT.

    (a) In General.--Section 162 (relating to trade or business 
expenses) is amended by redesignating subsection (q) as subsection (r) 
and by inserting after subsection (p) the following new subsection:
    ``(q) Treatment of Travel on Corporate Aircraft.--The rate at which 
an amount allowable as a deduction under this chapter for the use of an 
aircraft owned by the taxpayer is determined shall not exceed the rate 
at which an amount paid or included in income by an employee of such 
taxpayer for the personal use of such aircraft is determined.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 203. TERMINATION OF VARIOUS PREFERENTIAL TREATMENTS.

    (a) In General.--Section 7875, as added by section 107, is 
amended--
            (1) by inserting ``(or transactions in the case of sections 
        referred to in paragraphs (21), (22), (23), (24), and (27))'' 
        after ``taxable years beginning'', and
            (2) by adding at the end the following new paragraphs:
            ``(14) Section 43 (relating to enhanced oil recovery 
        credit).
            ``(15) Section 263(c) (relating to intangible drilling and 
        development costs in the case of oil and gas wells and 
        geothermal wells).
            ``(16) Section 382(l)(5) (relating to exception from net 
        operating loss limitations for corporations in bankruptcy 
        proceeding).
            ``(17) Section 451(i) (relating to special rules for sales 
        or dispositions to implement Federal Energy Regulatory 
        Commission or State electric restructuring policy).
            ``(18) Section 453A (relating to special rules for 
        nondealers), but only with respect to the dollar limitation 
        under subsection (b)(1) thereof and subsection (b)(3) thereof 
        (relating to exception for personal use and farm property).
            ``(19) Section 460(e)(1) (relating to special rules for 
        long-term home construction contracts or other short-term 
        construction contracts).
            ``(20) Section 613A (relating to percentage depletion in 
        case of oil and gas wells).
            ``(21) Section 616 (relating to development costs).
            ``(22) Sections 861(a)(6), 862(a)(6), 863(b)(2), 863(b)(3), 
        and 865(b) (relating to inventory property sales source rule 
        exception).''.
    (b) Full Tax Rate on Nuclear Decommissioning Reserve Fund.--
Subparagraph (B) of section 468A(e)(2) is amended to read as follows:
                    ``(B) Rate of tax.--For purposes of subparagraph 
                (A), the rate set forth in this subparagraph is 35 
                percent.''.
    (c) Deferral of Active Income of Controlled Foreign Corporations.--
Section 952 (relating to subpart F income defined) is amended by adding 
at the end the following new subsection:
    ``(e) Special Application of Subpart.--
            ``(1) In general.--For taxable years beginning after 
        December 31, 2007, notwithstanding any other provision of this 
        subpart, the term `subpart F income' means, in the case of any 
        controlled foreign corporation, the income of such corporation 
        derived from any foreign country.
            ``(2) Applicable rules.--Rules similar to the rules under 
        the last sentence of subsection (a) and subsection (d) shall 
        apply to this subsection.''.
    (d) Deferral of Active Financing Income.--Section 953(e)(10) is 
amended--
            (1) by striking ``January 1, 2009'' and inserting ``January 
        1, 2008'', and
            (2) by striking ``December 31, 2008'' and inserting 
        ``December 31, 2007''.
    (e) Depreciation on Equipment in Excess of Alternative Depreciation 
System.--Section 168(g)(1) (relating to alternative depreciation 
system) is amended by striking ``and'' at the end of subparagraph (D), 
by adding ``and'' at the end of subparagraph (E), and by inserting 
after subparagraph (E) the following new subparagraph:
                    ``(F) notwithstanding subsection (a), any tangible 
                property placed in service after December 31, 2007,''.
    (f) Effective Date.--The amendments made by subsections (b), (c), 
and (d) shall apply to taxable years beginning after December 31, 2007.

SEC. 204. ELIMINATION OF TAX EXPENDITURES THAT SUBSIDIZE INEFFICIENCIES 
              IN THE HEALTH CARE SYSTEM.

    Not later than 180 days after the date of the enactment of this 
Act, the Secretary of the Treasury shall report to the Committee on 
Finance of the Senate and the Committee on Ways and Means of the House 
of Representatives recommendations regarding the elimination of Federal 
tax incentives which subsidize inefficiencies in the health care system 
and if eliminated would result in Federal budget savings of not less 
than $10,000,000,000 annually.

SEC. 205. PASS-THROUGH BUSINESS ENTITY TRANSPARENCY.

    Not later than 90 days after the date of the enactment of this Act, 
the Secretary of the Treasury shall report to the Committee on Finance 
of the Senate and the Committee on Ways and Means of the House of 
Representatives regarding the implementation of additional reporting 
requirements with respect to any pass-through entity with the goal of 
the reduction of tax avoidance through the use of such entities. In 
addition, the Secretary shall develop procedures to share such report 
data with State revenue agencies under the disclosure requirements of 
section 6103(d) of the Internal Revenue Code of 1986.

SEC. 206. MODIFICATION OF EFFECTIVE DATE OF LEASING PROVISIONS OF THE 
              AMERICAN JOBS CREATION ACT OF 2004.

    (a) Leases to Foreign Entities.--Section 849(b) of the American 
Jobs Creation Act of 2004 is amended by adding at the end the following 
new paragraph:
            ``(5) Leases to foreign entities.--In the case of tax-
        exempt use property leased to a tax-exempt entity which is a 
        foreign person or entity, the amendments made by this part 
        shall apply to taxable years beginning after December 31, 2006, 
        with respect to leases entered into on or before March 12, 
        2004.''.
    (b) Effective Date.--The amendment made by this section shall take 
effect as if included in the enactment of the American Jobs Creation 
Act of 2004.

SEC. 207. REVALUATION OF LIFO INVENTORIES OF LARGE INTEGRATED OIL 
              COMPANIES.

    (a) General Rule.--Notwithstanding any other provision of law, if a 
taxpayer is an applicable integrated oil company for its last taxable 
year ending in calendar year 2006, the taxpayer shall--
            (1) increase, effective as of the close of such taxable 
        year, the value of each historic LIFO layer of inventories of 
        crude oil, natural gas, or any other petroleum product (within 
        the meaning of section 4611) by the layer adjustment amount, 
        and
            (2) decrease its cost of goods sold for such taxable year 
        by the aggregate amount of the increases under paragraph (1).
If the aggregate amount of the increases under paragraph (1) exceed the 
taxpayer's cost of goods sold for such taxable year, the taxpayer's 
gross income for such taxable year shall be increased by the amount of 
such excess.
    (b) Layer Adjustment Amount.--For purposes of this section--
            (1) In general.--The term ``layer adjustment amount'' 
        means, with respect to any historic LIFO layer, the product 
        of--
                    (A) $18.75, and
                    (B) the number of barrels of crude oil (or in the 
                case of natural gas or other petroleum products, the 
                number of barrel-of-oil equivalents) represented by the 
                layer.
            (2) Barrel-of-oil equivalent.--The term ``barrel-of-oil 
        equivalent'' has the meaning given such term by section 
        29(d)(5) (as in effect before its redesignation by the Energy 
        Tax Incentives Act of 2005).
    (c) Application of Requirement.--
            (1) No change in method of accounting.--Any adjustment 
        required by this section shall not be treated as a change in 
        method of accounting.
            (2) Underpayments of estimated tax.--No addition to the tax 
        shall be made under section 6655 of the Internal Revenue Code 
        of 1986 (relating to failure by corporation to pay estimated 
        tax) with respect to any underpayment of an installment 
        required to be paid with respect to the taxable year described 
        in subsection (a) to the extent such underpayment was created 
        or increased by this section.
    (d) Applicable Integrated Oil Company.--For purposes of this 
section, the term ``applicable integrated oil company'' means an 
integrated oil company (as defined in section 291(b)(4) of the Internal 
Revenue Code of 1986) which has an average daily worldwide production 
of crude oil of at least 500,000 barrels for the taxable year and which 
had gross receipts in excess of $1,000,000,000 for its last taxable 
year ending during calendar year 2006. For purposes of this subsection 
all persons treated as a single employer under subsections (a) and (b) 
of section 52 of the Internal Revenue Code of 1986 shall be treated as 
1 person and, in the case of a short taxable year, the rule under 
section 448(c)(3)(B) shall apply.

SEC. 208. MODIFICATIONS OF FOREIGN TAX CREDIT RULES APPLICABLE TO LARGE 
              INTEGRATED OIL COMPANIES WHICH ARE DUAL CAPACITY 
              TAXPAYERS.

    (a) In General.--Section 901 (relating to credit for taxes of 
foreign countries and of possessions of the United States) is amended 
by redesignating subsection (n) as subsection (o) and by inserting 
after subsection (l) the following new subsection:
    ``(m) Special Rules Relating to Large Integrated Oil Companies 
Which Are Dual Capacity Taxpayers.--
            ``(1) General rule.--Notwithstanding any other provision of 
        this chapter, any amount paid or accrued by a dual capacity 
        taxpayer which is a large integrated oil company to a foreign 
        country or possession of the United States for any period shall 
        not be considered a tax--
                    ``(A) if, for such period, the foreign country or 
                possession does not impose a generally applicable 
                income tax, or
                    ``(B) to the extent such amount exceeds the amount 
                (determined in accordance with regulations) which--
                            ``(i) is paid by such dual capacity 
                        taxpayer pursuant to the generally applicable 
                        income tax imposed by the country or 
                        possession, or
                            ``(ii) would be paid if the generally 
                        applicable income tax imposed by the country or 
                        possession were applicable to such dual 
                        capacity taxpayer.
                Nothing in this paragraph shall be construed to imply 
                the proper treatment of any such amount not in excess 
                of the amount determined under subparagraph (B).
            ``(2) Dual capacity taxpayer.--For purposes of this 
        subsection, the term `dual capacity taxpayer' means, with 
        respect to any foreign country or possession of the United 
        States, a person who--
                    ``(A) is subject to a levy of such country or 
                possession, and
                    ``(B) receives (or will receive) directly or 
                indirectly a specific economic benefit (as determined 
                in accordance with regulations) from such country or 
                possession.
            ``(3) Generally applicable income tax.--For purposes of 
        this subsection--
                    ``(A) In general.--The term `generally applicable 
                income tax' means an income tax (or a series of income 
                taxes) which is generally imposed under the laws of a 
                foreign country or possession on income derived from 
                the conduct of a trade or business within such country 
                or possession.
                    ``(B) Exceptions.--Such term shall not include a 
                tax unless it has substantial application, by its terms 
                and in practice, to--
                            ``(i) persons who are not dual capacity 
                        taxpayers, and
                            ``(ii) persons who are citizens or 
                        residents of the foreign country or possession.
            ``(4) Large integrated oil company.--For purposes of this 
        subsection, the term `large integrated oil company' means, with 
        respect to any taxable year, an integrated oil company (as 
        defined in section 291(b)(4)) which--
                    ``(A) had gross receipts in excess of 
                $1,000,000,000 for such taxable year, and
                    ``(B) has an average daily worldwide production of 
                crude oil of at least 500,000 barrels for such taxable 
                year.''
    (b) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to taxes paid or accrued in taxable years beginning after 
        the date of the enactment of this Act.
            (2) Contrary treaty obligations upheld.--The amendments 
        made by this section shall not apply to the extent contrary to 
        any treaty obligation of the United States.

SEC. 209. REPEAL OF LOWER OF COST OR MARKET VALUE OF INVENTORY RULE.

    (a) In General.--Subsection (a) of section 471 (relating to general 
rules for inventories) is amended to read as follows:
    ``(a) General Rule.--Whenever in the opinion of the Secretary the 
use of inventories is necessary in order clearly to determine the 
income of the taxpayer, inventories shall be valued at cost.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after the date of the enactment of this Act.

SEC. 210. REINSTITUTION OF PER COUNTRY FOREIGN TAX CREDIT.

    (a) In General.--Subsection (a) of section 904 (relating to 
limitation on credit) is amended to read as follows:
    ``(a) Limitation.--The amount of the credit in respect of the tax 
paid or accrued to any foreign country or possession of the United 
States shall not exceed the same proportion of the tax against which 
such credit is taken which the taxpayer's taxable income from sources 
within such country or possession (but not in excess of the taxpayer's 
entire taxable income) bears to such taxpayer's entire taxable income 
for the same taxable year.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2007.

SEC. 211. APPLICATION OF RULES TREATING INVERTED CORPORATIONS AS 
              DOMESTIC CORPORATIONS TO CERTAIN TRANSACTIONS OCCURRING 
              AFTER MARCH 20, 2002.

    (a) In General.--Section 7874(b) (relating to inverted corporations 
treated as domestic corporations) is amended to read as follows:
    ``(b) Inverted Corporations Treated as Domestic Corporations.--
            ``(1) In general.--Notwithstanding section 7701(a)(4), a 
        foreign corporation shall be treated for purposes of this title 
        as a domestic corporation if such corporation would be a 
        surrogate foreign corporation if subsection (a)(2) were applied 
        by substituting `80 percent' for `60 percent'.
            ``(2) Special rule for certain transactions occurring after 
        march 20, 2002.--
                    ``(A) In general.--If--
                            ``(i) paragraph (1) does not apply to a 
                        foreign corporation, but
                            ``(ii) paragraph (1) would apply to such 
                        corporation if, in addition to the substitution 
                        under paragraph (1), subsection (a)(2) were 
                        applied by substituting `March 20, 2002' for 
                        `March 4, 2003' each place it appears,
                then paragraph (1) shall apply to such corporation but 
                only with respect to taxable years of such corporation 
                beginning after December 31, 2006.
                    ``(B) Special rules.--Subject to such rules as the 
                Secretary may prescribe, in the case of a corporation 
                to which paragraph (1) applies by reason of this 
                paragraph--
                            ``(i) the corporation shall be treated, as 
                        of the close of its last taxable year beginning 
                        before January 1, 2007, as having transferred 
                        all of its assets, liabilities, and earnings 
                        and profits to a domestic corporation in a 
                        transaction with respect to which no tax is 
                        imposed under this title,
                            ``(ii) the bases of the assets transferred 
                        in the transaction to the domestic corporation 
                        shall be the same as the bases of the assets in 
                        the hands of the foreign corporation, subject 
                        to any adjustments under this title for built-
                        in losses,
                            ``(iii) the basis of the stock of any 
                        shareholder in the domestic corporation shall 
                        be the same as the basis of the stock of the 
                        shareholder in the foreign corporation for 
                        which it is treated as exchanged, and
                            ``(iv) the transfer of any earnings and 
                        profits by reason of clause (i) shall be 
                        disregarded in determining any deemed dividend 
                        or foreign tax creditable to the domestic 
                        corporation with respect to such transfer.
                    ``(C) Regulations.--The Secretary may prescribe 
                such regulations as may be necessary or appropriate to 
                carry out this paragraph, including regulations to 
                prevent the avoidance of the purposes of this 
                paragraph.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2006.

                      TITLE III--OTHER PROVISIONS

               Subtitle A--Improvements in Tax Compliance

SEC. 301. INFORMATION REPORTING ON PAYMENTS TO CORPORATIONS.

    (a) In General.--Section 6041(a) (relating to payments of $600 or 
more) is amended by inserting ``(including any corporation other than a 
corporation exempt from taxation)'' after ``another person''.
    (b) Effective Date.--The amendment made by this section shall apply 
to payments made after December 31, 2007.

SEC. 302. BROKER REPORTING OF CUSTOMER'S BASIS IN SECURITIES 
              TRANSACTIONS.

    (a) In General.--Section 6045 (relating to returns of brokers) is 
amended by adding at the end the following new subsection:
    ``(g) Additional Information Required in the Case of Securities 
Transactions.--
            ``(1) In general.--If a broker is otherwise required to 
        make a return under subsection (a) with respect to any 
        applicable security, the broker shall include in such return 
        the information described in paragraph (2).
            ``(2) Additional information required.--
                    ``(A) In general.--The information required under 
                paragraph (1) to be shown on a return with respect to 
                an applicable security of a customer shall include for 
                each reported applicable security the customer's 
                adjusted basis in such security.
                    ``(B) Exemption from requirement.--The Secretary 
                shall issue such regulations or guidance as necessary 
                concerning the application of the requirement under 
                subparagraph (A) in cases in which a broker in making a 
                return does not have sufficient information to meet 
                such requirement with respect to the reported 
                applicable security. Such regulations or guidance may--
                            ``(i) require such other information 
                        related to such adjusted basis as the Secretary 
                        may prescribe, and
                            ``(ii) exempt classes of cases in which the 
                        broker does not have sufficient information to 
                        meet either the requirement under subparagraph 
                        (A) or the requirement under clause (i).
            ``(3) Information transfers.--To the extent provided in 
        regulations, there shall be such exchanges of information 
        between brokers as such regulations may require for purposes of 
        enabling such brokers to meet the requirements of this 
        subsection.
            ``(4) Definitions.--For purposes of this subsection, the 
        term `applicable security' means any--
                    ``(A) security described in subparagraph (A) or (C) 
                of section 475(c)(2),
                    ``(B) interest in a regulated investment company 
                (as defined in section 851), or
                    ``(C) other financial instrument designated in 
                regulations prescribed by the Secretary.''.
    (b) Determination of Basis of Certain Securities by FIFO Method.--
Section 1012 (relating to basis of property--cost) is amended by adding 
at the end the following new sentence: ``Except to the extent provided 
in regulations, the basis of any applicable security reportable under 
section 6045 (by reason of subsection (g) thereof) shall be determined 
on a first-in, first-out method.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to sales and transfers occurring after December 31, 2007, with 
respect to securities acquired before, on, or after such date.

SEC. 303. ADDITIONAL REPORTING REQUIREMENTS BY REGULATION.

    The Secretary of the Treasury is authorized to issue regulations 
under which with respect to payments made after December 31, 2007--
            (1) any merchant acquiring bank is required to annually 
        report to the Secretary the gross reimbursement payments made 
        to merchants in a calendar year, unless the benefit of such 
        reporting does not justify the cost of compliance, as 
        determined by the Secretary,
            (2) any contractor receiving payments of $600 or more in a 
        calendar year from a particular business is required to furnish 
        such business the contractor's certified taxpayer 
        identification number or be subject to withholding on such 
        payments at a flat rate percentage selected by the contractor, 
        and
            (3) any Federal, State, or local government is required to 
        report to the Secretary any non-wage payment to procure 
        property and services, other than payments of interest, 
        payments for real property, payments to tax-exempt entities or 
        foreign governments, intergovernmental payments, and payments 
        made pursuant to a classified or confidential contract.

SEC. 304. INCREASE IN INFORMATION RETURN PENALTIES.

    (a) Failure To File Correct Information Returns.--
            (1) In general.--Section 6721(a)(1) is amended--
                    (A) by striking ``$50'' and inserting ``$250'', and
                    (B) by striking ``$250,000'' and inserting 
                ``$3,000,000''.
            (2) Reduction where correction in specified period.--
                    (A) Correction within 30 days.--Section 6721(b)(1) 
                is amended--
                            (i) by striking ``$15'' and inserting 
                        ``$50'',
                            (ii) by striking ``$50'' and inserting 
                        ``$250'', and
                            (iii) by striking ``$75,000'' and inserting 
                        ``$500,000''.
                    (B) Failures corrected on or before august 1.--
                Section 6721(b)(2) is amended--
                            (i) by striking ``$30'' and inserting 
                        ``$100'',
                            (ii) by striking ``$50'' and inserting 
                        ``$250'', and
                            (iii) by striking ``$150,000'' and 
                        inserting ``$1,500,000''.
            (3) Lower limitation for persons with gross receipts of not 
        more than $5,000,000.--Section 6721(d)(1) is amended--
                    (A) in subparagraph (A)--
                            (i) by striking ``$100,000'' and inserting 
                        ``$1,000,000'', and
                            (ii) by striking ``$250,000'' and inserting 
                        ``$3,000,000'',
                    (B) in subparagraph (B)--
                            (i) by striking ``$25,000'' and inserting 
                        ``$175,000'', and
                            (ii) by striking ``$75,000'' and inserting 
                        ``$500,000'', and
                    (C) in subparagraph (C)--
                            (i) by striking ``$50,000'' and inserting 
                        ``$500,000'', and
                            (ii) by striking ``$150,000'' and inserting 
                        ``$1,500,000''.
            (4) Penalty in case of intentional disregard.--Section 
        6721(e) is amended--
                    (A) by striking ``$100'' in paragraph (2) and 
                inserting ``$500'',
                    (B) by striking ``$250,000'' in paragraph (3)(A) 
                and inserting ``$3,000,000''.
    (b) Failure To Furnish Correct Payee Statements.--
            (1) In general.--Section 6722(a) is amended--
                    (A) by striking ``$50'' and inserting ``$250'', and
                    (B) by striking ``$100,000'' and inserting 
                ``$1,000,000''.
            (2) Penalty in case of intentional disregard.--Section 
        6722(c) is amended--
                    (A) by striking ``$100'' in paragraph (1) and 
                inserting ``$500'', and
                    (B) by striking ``$100,000'' in paragraph (2)(A) 
                and inserting ``$1,000,000''.
    (c) Failure To Comply With Other Information Reporting 
Requirements.--Section 6723 is amended--
            (1) by striking ``$50'' and inserting ``$250'', and
            (2) by striking ``$100,000'' and inserting ``$1,000,000''.
    (d) Effective Date.--The amendments made by this section shall 
apply with respect to information returns required to be filed on or 
after January 1, 2008.

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

    (a) In General.--The first sentence of section 6011(e)(2) is 
amended to read as follows: ``In prescribing regulations under 
paragraph (1), the Secretary shall take into account (among other 
relevant factors) the ability of the taxpayer to comply at reasonable 
cost with the requirements of such regulations.''.
    (b) Conforming Amendment.--Section 6724 is amended by striking 
subsection (c).
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years ending on or after December 31, 2008.

SEC. 306. IMPLEMENTATION OF STANDARDS CLARIFYING WHEN EMPLOYEE LEASING 
              COMPANIES CAN BE HELD LIABLE FOR THEIR CLIENTS' FEDERAL 
              EMPLOYMENT TAXES.

    With respect to employment tax returns required to be filed with 
respect to wages paid on or after January 1, 2008, the Secretary of the 
Treasury shall issue regulations establishing--
            (1) standards for holding employee leasing companies 
        jointly and severally liable with their clients for Federal 
        employment taxes under chapters 21, 22, 23, and 24 of the 
        Internal Revenue Code of 1986, and
            (2) standards for holding such companies solely liable for 
        such taxes.

SEC. 307. MODIFICATION OF COLLECTION DUE PROCESS PROCEDURES FOR 
              EMPLOYMENT TAX LIABILITIES.

    (a) In General.--Section 6330(f) (relating to jeopardy and State 
refund collection) is amended--
            (1) by striking ``; or'' at the end of paragraph (1) and 
        inserting a comma,
            (2) by adding ``or'' at the end of paragraph (2), and
            (3) by inserting after paragraph (2) the following new 
        paragraph:
            ``(3) the Secretary has served a disqualified employment 
        tax levy,''.
    (b) Disqualified Employment Tax Levy.--Section 6330 (relating to 
notice and opportunity for hearing before levy) is amended by adding at 
the end the following new subsection:
    ``(h) Disqualified Employment Tax Levy.--For purposes of subsection 
(f), a disqualified employment tax levy is any levy in connection with 
the collection of employment taxes for any taxable period if the person 
subject to the levy (or any predecessor thereof) requested a hearing 
under this section with respect to unpaid employment taxes arising in 
the most recent 2-year period before the beginning of the taxable 
period with respect to which the levy is served. For purposes of the 
preceding sentence, the term `employment taxes' means any taxes under 
chapter 21, 22, 23, or 24.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to levies served on or after January 1, 2008.

SEC. 308. EXPANSION OF IRS ACCESS TO INFORMATION IN NATIONAL DIRECTORY 
              OF NEW HIRES FOR TAX ADMINISTRATION PURPOSES.

    (a) In General.--Paragraph (3) of section 453(j) of the Social 
Security Act (42 U.S.C. 653(j)) is amended to read as follows:
            ``(3) Administration of federal tax laws.--The Secretary of 
        the Treasury shall have access to the information in the 
        National Directory of New Hires for purposes of administering 
        the Internal Revenue Code of 1986.''.
    (b) Effective Date.--The amendment made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 309. DISCLOSURE OF PRISONER RETURN INFORMATION TO FEDERAL BUREAU 
              OF PRISONS.

    (a) Disclosure.--
            (1) In general.--Subsection (l) of section 6103 (relating 
        to disclosure of returns and return information for purposes 
        other than tax administration) is amended by adding at the end 
        the following new paragraph:
            ``(22) Disclosure of return information of prisoners to 
        federal bureau of prisons.--
                    ``(A) In general.--Under such procedures as the 
                Secretary may prescribe, the Secretary may disclose 
                return information with respect to persons incarcerated 
                in Federal prisons whom the Secretary believes filed or 
                facilitated the filing of false or fraudulent returns 
                to the head of the Federal Bureau of Prisons if the 
                Secretary determines that such disclosure is necessary 
                to permit effective tax administration.
                    ``(B) Disclosure by agency to employees.--The head 
                of the Federal Bureau of Prisons may redisclose 
                information received under subparagraph (A)--
                            ``(i) only to those officers and employees 
                        of the Bureau who are personally and directly 
                        engaged in taking administrative actions to 
                        address violations of administrative rules and 
                        regulations of the prison facility, and
                            ``(ii) solely for the purposes described in 
                        subparagraph (C).
                    ``(C) Restriction on use of disclosed 
                information.--Return information disclosed under this 
                paragraph may be used only for the purposes of--
                            ``(i) preventing the filing of false or 
                        fraudulent returns; and
                            ``(ii) taking administrative actions 
                        against individuals who have filed or attempted 
                        to file false or fraudulent returns.''.
            (2) Procedures and record keeping related to disclosure.--
        Subsection (p)(4) of section 6103 is amended--
                    (A) by striking ``(14), or (17)'' in the matter 
                before subparagraph (A) and inserting ``(14), (17), or 
                (22)'', and
                    (B) by striking ``(9), or (16)'' in subparagraph 
                (F)(i) and inserting ``(9), (16), or (22)''.
            (3) Evaluation by treasury inspector general for tax 
        administration.--Paragraph (3) of section 7803(d) is amended by 
        striking ``and'' at the end of subparagraph (A), by striking 
        the period at the end of subparagraph (B) and inserting ``; 
        and'', and by adding at the end the following new subparagraph:
                    ``(C) not later than 3 years after the date of the 
                enactment of section 6103(l)(22), submit a written 
                report to Congress on the implementation of such 
                section.''.
    (b) Annual Reports.--
            (1) In general.--The Secretary of the Treasury shall submit 
        to Congress and make publicly available an annual report on the 
        filing of false and fraudulent returns by individuals 
        incarcerated in Federal and State prisons.
            (2) Contents of report.--The report submitted under 
        paragraph (1) shall contain statistics on the number of false 
        or fraudulent returns associated with each Federal and State 
        prison and such other information that the Secretary determines 
        is appropriate.
            (3) Exchange of information.--For the purpose of gathering 
        information necessary for the reports required under paragraph 
        (1), the Secretary of the Treasury shall enter into agreements 
        with the head of the Federal Bureau of Prisons and the heads of 
        State agencies charged with responsibility for administration 
        of State prisons under which the head of the Bureau or Agency 
        provides to the Secretary not less frequently than annually the 
        names and other identifying information of prisoners 
        incarcerated at each facility administered by the Bureau or 
        Agency.
    (c) Effective Date.--The amendments made by this section shall 
apply to disclosures on or after January 1, 2008.

SEC. 310. MODIFICATION OF CRIMINAL PENALTIES FOR WILLFUL FAILURES 
              INVOLVING TAX PAYMENTS AND FILING REQUIREMENTS.

    (a) Increase in Penalty for Attempt To Evade or Defeat Tax.--
Section 7201 (relating to attempt to evade or defeat tax) is amended--
            (1) by striking ``$100,000'' and inserting ``$500,000'',
            (2) by striking ``$500,000'' and inserting ``$1,000,000'', 
        and
            (3) by striking ``5 years'' and inserting ``10 years''.
    (b) Modification of Penalties for Willful Failure To File Return, 
Supply Information, or Pay Tax.--
            (1) In general.--Section 7203 (relating to willful failure 
        to file return, supply information, or pay tax) is amended--
                    (A) in the first sentence--
                            (i) by striking ``Any person'' and 
                        inserting the following:
    ``(a) In General.--Any person'', and
                            (ii) by striking ``$25,000'' and inserting 
                        ``$50,000'',
                    (B) in the third sentence, by striking ``section'' 
                and inserting ``subsection'', and
                    (C) by adding at the end the following new 
                subsection:
    ``(b) Aggravated Failure To File.--
            ``(1) In general.--In the case of any failure described in 
        paragraph (2), the first sentence of subsection (a) shall be 
        applied by substituting--
                    ``(A) `felony' for `misdemeanor',
                    ``(B) `$250,000 ($500,000' for `$50,000 ($100,000', 
                and
                    ``(C) `5 years' for `1 year'.
            ``(2) Failure described.--A failure described in this 
        paragraph is--
                    ``(A) a failure to make a return described in 
                subsection (a) for any 3 taxable years occurring during 
                any period of 5 consecutive taxable years if the 
                aggregate tax liability for such period is not less 
                than $50,000, or
                    ``(B) a failure to make a return if the tax 
                liability giving rise to the requirement to make such 
                return is attributable to an activity which is a felony 
                under any State or Federal law.''.
            (2) Penalty may be applied in addition to other 
        penalties.--Section 7204 (relating to fraudulent statement or 
        failure to make statement to employees) is amended by striking 
        ``the penalty provided in section 6674'' and inserting ``the 
        penalties provided in sections 6674 and 7203(b)''.
    (c) Fraud and False Statements.--Section 7206 (relating to fraud 
and false statements) is amended--
            (1) by striking ``$100,000'' and inserting ``$500,000'',
            (2) by striking ``$500,000'' and inserting ``$1,000,000'', 
        and
            (3) by striking ``3 years'' and inserting ``5 years''.
    (d) Increase in Monetary Limitation for Underpayment or Overpayment 
of Tax Due to Fraud.--Section 7206 (relating to fraud and false 
statements), as amended by subsection (a)(3), is amended--
            (1) by striking ``Any person who--'' and inserting ``(a) In 
        General.--Any person who--'', and
            (2) by adding at the end the following new subsection:
    ``(b) Increase in Monetary Limitation for Underpayment or 
Overpayment of Tax Due to Fraud.--If any portion of any underpayment 
(as defined in section 6664(a)) or overpayment (as defined in section 
6401(a)) of tax required to be shown on a return is attributable to 
fraudulent action described in subsection (a), the applicable dollar 
amount under subsection (a) shall in no event be less than an amount 
equal to such portion. A rule similar to the rule under section 6663(b) 
shall apply for purposes of determining the portion so attributable.''.
    (e) Effective Date.--The amendments made by this section shall 
apply to actions, and failures to act, occurring after the date of the 
enactment of this Act.

SEC. 311. UNDERSTATEMENT OF TAXPAYER LIABILITY BY RETURN PREPARERS.

    (a) Application of Return Preparer Penalties to All Tax Returns.--
            (1) Definition of tax return preparer.--Paragraph (36) of 
        section 7701(a) (relating to income tax preparer) is amended--
                    (A) by striking ``income'' each place it appears in 
                the heading and the text, and
                    (B) in subparagraph (A), by striking ``subtitle A'' 
                each place it appears and inserting ``this title''.
            (2) Conforming amendments.--
                    (A)(i) Section 6060 is amended by striking ``income 
                tax return preparers'' in the heading and inserting 
                ``tax return preparers''.
                    (ii) Section 6060(a) is amended--
                            (I) by striking ``an income tax return 
                        preparer'' each place it appears and inserting 
                        ``a tax return preparer'',
                            (II) by striking ``each income tax return 
                        preparer'' and inserting ``each tax return 
                        preparer'', and
                            (III) by striking ``another income tax 
                        return preparer'' and inserting ``another tax 
                        return preparer''.
                    (iii) The item relating to section 6060 in the 
                table of sections for subpart F of part III of 
                subchapter A of chapter 61 is amended by striking 
                ``income tax return preparers'' and inserting ``tax 
                return preparers''.
                    (iv) Subpart F of part III of subchapter A of 
                chapter 61 is amended by striking ``Income Tax Return 
                Preparers'' in the heading and inserting ``Tax Return 
                Preparers''.
                    (v) The item relating to subpart F in the table of 
                subparts for part III of subchapter A of chapter 61 is 
                amended by striking ``income tax return preparers'' and 
                inserting ``tax return preparers''.
                    (B) Section 6103(k)(5) is amended--
                            (i) by striking ``income tax return 
                        preparer'' each place it appears and inserting 
                        ``tax return preparer'', and
                            (ii) by striking ``income tax return 
                        preparers'' each place it appears and inserting 
                        ``tax return preparers''.
                    (C)(i) Section 6107 is amended--
                            (I) by striking ``income tax return 
                        preparer'' in the heading and inserting ``tax 
                        return preparer'',
                            (II) by striking ``an income tax return 
                        preparer'' each place it appears in subsections 
                        (a) and (b) and inserting ``a tax return 
                        preparer'',
                            (III) by striking ``Income Tax Return 
                        Preparer'' in the heading for subsection (b) 
                        and inserting ``Tax Return Preparer'', and
                            (IV) in subsection (c), by striking 
                        ``income tax return preparers'' and inserting 
                        ``tax return preparers''.
                    (ii) The item relating to section 6107 in the table 
                of sections for subchapter B of chapter 61 is amended 
                by striking ``Income tax return preparer'' and 
                inserting ``Tax return preparer''.
                    (D) Section 6109(a)(4) is amended--
                            (i) by striking ``an income tax return 
                        preparer'' and inserting ``a tax return 
                        preparer'', and
                            (ii) by striking ``income return preparer'' 
                        in the heading and inserting ``tax return 
                        preparer''.
                    (E) Section 6503(k)(4) is amended by striking 
                ``Income tax return preparers'' and inserting ``Tax 
                return preparers''.
                    (F)(i) Section 6694 is amended--
                            (I) by striking ``income tax return 
                        preparer'' in the heading and inserting ``tax 
                        return preparer'',
                            (II) by striking ``an income tax return 
                        preparer'' each place it appears and inserting 
                        ``a tax return preparer'',
                            (III) in subsection (c)(2), by striking 
                        ``the income tax return preparer'' and 
                        inserting ``the tax return preparer'',
                            (IV) in subsection (e), by striking 
                        ``subtitle A'' and inserting ``this title'', 
                        and
                            (V) in subsection (f), by striking ``income 
                        tax return preparer'' and inserting ``tax 
                        return preparer''.
                    (ii) The item relating to section 6694 in the table 
                of sections for part I of subchapter B of chapter 68 is 
                amended by striking ``income tax return preparer'' and 
                inserting ``tax return preparer''.
                    (G)(i) Section 6695 is amended--
                            (I) by striking ``income'' in the heading, 
                        and
                            (II) by striking ``an income tax return 
                        preparer'' each place it appears and inserting 
                        ``a tax return preparer''.
                    (ii) Section 6695(f) is amended--
                            (I) by striking ``subtitle A'' and 
                        inserting ``this title'', and
                            (II) by striking ``the income tax return 
                        preparer'' and inserting ``the tax return 
                        preparer''.
                    (iii) The item relating to section 6695 in the 
                table of sections for part I of subchapter B of chapter 
                68 is amended by striking ``income''.
                    (H) Section 6696(e) is amended by striking 
                ``subtitle A'' each place it appears and inserting 
                ``this title''.
                    (I)(i) Section 7407 is amended--
                            (I) by striking ``income tax return 
                        preparers'' in the heading and inserting ``tax 
                        return preparers'',
                            (II) by striking ``an income tax return 
                        preparer'' each place it appears and inserting 
                        ``a tax return preparer'',
                            (III) by striking ``income tax preparer'' 
                        both places it appears in subsection (a) and 
                        inserting ``tax return preparer'', and
                            (IV) by striking ``income tax return'' in 
                        subsection (a) and inserting ``tax return''.
                    (ii) The item relating to section 7407 in the table 
                of sections for subchapter A of chapter 76 is amended 
                by striking ``income tax return preparers'' and 
                inserting ``tax return preparers''.
                    (J)(i) Section 7427 is amended--
                            (I) by striking ``income tax return 
                        preparers'' in the heading and inserting ``tax 
                        return preparers'', and
                            (II) by striking ``an income tax return 
                        preparer'' and inserting ``a tax return 
                        preparer''.
                    (ii) The item relating to section 7427 in the table 
                of sections for subchapter B of chapter 76 is amended 
                to read as follows:

``Sec. 7427. Tax return preparers.''.
    (b) Modification of Penalty for Understatement of Taxpayer's 
Liability by Tax Return Preparer.--Subsections (a) and (b) of section 
6694 are amended to read as follows:
    ``(a) Understatement Due to Unreasonable Positions.--
            ``(1) In general.--Any tax return preparer who prepares any 
        return or claim for refund with respect to which any part of an 
        understatement of liability is due to a position described in 
        paragraph (2) shall pay a penalty with respect to each such 
        return or claim in an amount equal to the greater of--
                    ``(A) $1,000, or
                    ``(B) 50 percent of the income derived (or to be 
                derived) by the tax return preparer with respect to the 
                return or claim.
            ``(2) Unreasonable position.--A position is described in 
        this paragraph if--
                    ``(A) the tax return preparer knew (or reasonably 
                should have known) of the position,
                    ``(B) there was not a reasonable belief that the 
                position would more likely than not be sustained on its 
                merits, and
                    ``(C)(i) the position was not disclosed as provided 
                in section 6662(d)(2)(B)(ii), or
                    ``(ii) there was no reasonable basis for the 
                position.
            ``(3) Reasonable cause exception.--No penalty shall be 
        imposed under this subsection if it is shown that there is 
        reasonable cause for the understatement and the tax return 
        preparer acted in good faith.
    ``(b) Understatement Due to Willful or Reckless Conduct.--
            ``(1) In general.--Any tax return preparer who prepares any 
        return or claim for refund with respect to which any part of an 
        understatement of liability is due to a conduct described in 
        paragraph (2) shall pay a penalty with respect to each such 
        return or claim in an amount equal to the greater of--
                    ``(A) $5,000, or
                    ``(B) 50 percent of the income derived (or to be 
                derived) by the tax return preparer with respect to the 
                return or claim.
            ``(2) Willful or reckless conduct.--Conduct described in 
        this paragraph is conduct by the tax return preparer which is--
                    ``(A) a willful attempt in any manner to understate 
                the liability for tax on the return or claim, or
                    ``(B) a reckless or intentional disregard of rules 
                or regulations.
            ``(3) Reduction in penalty.--The amount of any penalty 
        payable by any person by reason of this subsection for any 
        return or claim for refund shall be reduced by the amount of 
        the penalty paid by such person by reason of subsection (a).''.
    (c) Effective Date.--The amendments made by this section shall 
apply to returns prepared after the date of the enactment of this Act.

SEC. 312. PENALTIES FOR FAILURE TO FILE CERTAIN RETURNS ELECTRONICALLY.

    (a) In General.--Part I of subchapter A of chapter 68 (relating to 
additions to the tax, additional amounts, and assessable penalties) is 
amended by inserting after section 6652 the following new section:

``SEC. 6652A. FAILURE TO FILE CERTAIN RETURNS ELECTRONICALLY.

    ``(a) In General.--If a person fails to file a return described in 
section 6651 or 6652(c)(1) in electronic form as required under section 
6011(e)--
            ``(1) such failure shall be treated as a failure to file 
        such return (even if filed in a form other than electronic 
        form), and
            ``(2) the penalty imposed under section 6651 or 6652(c), 
        whichever is appropriate, shall be equal to the greater of--
                    ``(A) the amount of the penalty under such section, 
                determined without regard to this section, or
                    ``(B) the amount determined under subsection (b).
    ``(b) Amount of Penalty.--
            ``(1) In general.--Except as provided in paragraphs (2) and 
        (3), the penalty determined under this subsection is equal to 
        $40 for each day during which a failure described under 
        subsection (a) continues. The maximum penalty under this 
        paragraph on failures with respect to any 1 return shall not 
        exceed the lesser of $20,000 or 10 percent of the gross 
        receipts of the taxpayer for the year.
            ``(2) Increased penalties for taxpayers with gross receipts 
        between $1,000,000 and $100,000,000.--
                    ``(A) Taxpayers with gross receipts between 
                $1,000,000 and $25,000,000.--In the case of a taxpayer 
                having gross receipts exceeding $1,000,000 but not 
                exceeding $25,000,000 for any year--
                            ``(i) the first sentence of paragraph (1) 
                        shall be applied by substituting `$200' for 
                        `$40', and
                            ``(ii) in lieu of applying the second 
                        sentence of paragraph (1), the maximum penalty 
                        under paragraph (1) shall not exceed $100,000.
                    ``(B) Taxpayers with gross receipts over 
                $25,000,000.--Except as provided in paragraph (3), in 
                the case of a taxpayer having gross receipts exceeding 
                $25,000,000 for any year--
                            ``(i) the first sentence of paragraph (1) 
                        shall be applied by substituting `$500' for 
                        `$40', and
                            ``(ii) in lieu of applying the second 
                        sentence of paragraph (1), the maximum penalty 
                        under paragraph (1) shall not exceed $250,000.
            ``(3) Increased penalties for certain taxpayers with gross 
        receipts exceeding $100,000,000.--In the case of a return 
        described in section 6651--
                    ``(A) Taxpayers with gross receipts between 
                $100,000,000 and $250,000,000.--In the case of a 
                taxpayer having gross receipts exceeding $100,000,000 
                but not exceeding $250,000,000 for any year--
                            ``(i) the amount of the penalty determined 
                        under this subsection shall equal the sum of--
                                    ``(I) $50,000, plus
                                    ``(II) $1,000 for each day during 
                                which such failure continues (twice 
                                such amount for each day such failure 
                                continues after the first such 60 
                                days), and
                            ``(ii) the maximum amount under clause 
                        (i)(II) on failures with respect to any 1 
                        return shall not exceed $200,000.
                    ``(B) Taxpayers with gross receipts over 
                $250,000,000.--In the case of a taxpayer having gross 
                receipts exceeding $250,000,000 for any year--
                            ``(i) the amount of the penalty determined 
                        under this subsection shall equal the sum of--
                                    ``(I) $250,000, plus
                                    ``(II) $2,500 for each day during 
                                which such failure continues (twice 
                                such amount for each day such failure 
                                continues after the first such 60 
                                days), and
                            ``(ii) the maximum amount under clause 
                        (i)(II) on failures with respect to any 1 
                        return shall not exceed $250,000.
                    ``(C) Exception for certain returns.--Subparagraphs 
                (A) and (B) shall not apply to any return of tax 
                imposed under section 511.''.
    (b) Clerical Amendment.--The table of sections for part I of 
subchapter A of chapter 68 is amended by inserting after the item 
relating to section 6652 the following new item:

``Sec. 6652A. Failure to file certain returns electronically.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to returns required to be filed on or after January 1, 2008.

SEC. 313. PENALTY FOR FILING ERRONEOUS REFUND CLAIMS.

    (a) In General.--Part I of subchapter B of chapter 68 (relating to 
assessable penalties) is amended by inserting after section 6675 the 
following new section:

``SEC. 6676. ERRONEOUS CLAIM FOR REFUND OR CREDIT.

    ``(a) Civil Penalty.--If a claim for refund or credit with respect 
to income tax (other than a claim for a refund or credit relating to 
the earned income credit under section 32) is made for an excessive 
amount, unless it is shown that the claim for such excessive amount has 
a reasonable basis, the person making such claim shall be liable for a 
penalty in an amount equal to 20 percent of the excessive amount.
    ``(b) Excessive Amount.--For purposes of this section, the term 
`excessive amount' means in the case of any person the amount by which 
the amount of the claim for refund or credit for any taxable year 
exceeds the amount of such claim allowable under this title for such 
taxable year.
    ``(c) Coordination With Other Penalties.--This section shall not 
apply to any portion of the excessive amount of a claim for refund or 
credit on which a penalty is imposed under part II of subchapter A of 
chapter 68.''.
    (b) Conforming Amendment.--The table of sections for part I of 
subchapter B of chapter 68 is amended by inserting after the item 
relating to section 6675 the following new item:

``Sec. 6676. Erroneous claim for refund or credit.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to any claim--
            (1) filed or submitted after the date of the enactment of 
        this Act, or
            (2) filed or submitted prior to such date but not withdrawn 
        before the date which is 30 days after such date of enactment.

                Subtitle B--Requiring Economic Substance

SEC. 321. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

    (a) In General.--Section 7701 is amended by redesignating 
subsection (p) as subsection (q) and by inserting after subsection (o) 
the following new subsection:
    ``(p) Clarification of Economic Substance Doctrine; etc.--
            ``(1) General rules.--
                    ``(A) In general.--In any case in which a court 
                determines that the economic substance doctrine is 
                relevant for purposes of this title to a transaction 
                (or series of transactions), such transaction (or 
                series of transactions) shall have economic substance 
                only if the requirements of this paragraph are met.
                    ``(B) Definition of economic substance.--For 
                purposes of subparagraph (A)--
                            ``(i) In general.--A transaction has 
                        economic substance only if--
                                    ``(I) the transaction changes in a 
                                meaningful way (apart from Federal tax 
                                effects) the taxpayer's economic 
                                position, and
                                    ``(II) the taxpayer has a 
                                substantial nontax purpose for entering 
                                into such transaction and the 
                                transaction is a reasonable means of 
                                accomplishing such purpose.
                        In applying subclause (II), a purpose of 
                        achieving a financial accounting benefit shall 
                        not be taken into account in determining 
                        whether a transaction has a substantial nontax 
                        purpose if the origin of such financial 
                        accounting benefit is a reduction of income 
                        tax.
                            ``(ii) Special rule where taxpayer relies 
                        on profit potential.--A transaction shall not 
                        be treated as having economic substance by 
                        reason of having a potential for profit 
                        unless--
                                    ``(I) the present value of the 
                                reasonably expected pre-tax profit from 
                                the transaction is substantial in 
                                relation to the present value of the 
                                expected net tax benefits that would be 
                                allowed if the transaction were 
                                respected, and
                                    ``(II) the reasonably expected pre-
                                tax profit from the transaction exceeds 
                                a risk-free rate of return.
                    ``(C) Treatment of fees and foreign taxes.--Fees 
                and other transaction expenses and foreign taxes shall 
                be taken into account as expenses in determining pre-
                tax profit under subparagraph (B)(ii).
            ``(2) Special rules for transactions with tax-indifferent 
        parties.--
                    ``(A) Special rules for financing transactions.--
                The form of a transaction which is in substance the 
                borrowing of money or the acquisition of financial 
                capital directly or indirectly from a tax-indifferent 
                party shall not be respected if the present value of 
                the deductions to be claimed with respect to the 
                transaction is substantially in excess of the present 
                value of the anticipated economic returns of the person 
                lending the money or providing the financial capital. A 
                public offering shall be treated as a borrowing, or an 
                acquisition of financial capital, from a tax-
                indifferent party if it is reasonably expected that at 
                least 50 percent of the offering will be placed with 
                tax-indifferent parties.
                    ``(B) Artificial income shifting and basis 
                adjustments.--The form of a transaction with a tax-
                indifferent party shall not be respected if--
                            ``(i) it results in an allocation of income 
                        or gain to the tax-indifferent party in excess 
                        of such party's economic income or gain, or
                            ``(ii) it results in a basis adjustment or 
                        shifting of basis on account of overstating the 
                        income or gain of the tax-indifferent party.
            ``(3) Definitions and special rules.--For purposes of this 
        subsection--
                    ``(A) Economic substance doctrine.--The term 
                `economic substance doctrine' means the common law 
                doctrine under which tax benefits under subtitle A with 
                respect to a transaction are not allowable if the 
                transaction does not have economic substance or lacks a 
                business purpose.
                    ``(B) Tax-indifferent party.--The term `tax-
                indifferent party' means any person or entity not 
                subject to tax imposed by subtitle A. A person shall be 
                treated as a tax-indifferent party with respect to a 
                transaction if the items taken into account with 
                respect to the transaction have no substantial impact 
                on such person's liability under subtitle A.
                    ``(C) Exception for personal transactions of 
                individuals.--In the case of an individual, this 
                subsection shall apply only to transactions entered 
                into in connection with a trade or business or an 
                activity engaged in for the production of income.
                    ``(D) Treatment of lessors.--In applying paragraph 
                (1)(B)(ii) to the lessor of tangible property subject 
                to a lease--
                            ``(i) the expected net tax benefits with 
                        respect to the leased property shall not 
                        include the benefits of--
                                    ``(I) depreciation,
                                    ``(II) any tax credit, or
                                    ``(III) any other deduction as 
                                provided in guidance by the Secretary, 
                                and
                            ``(ii) subclause (II) of paragraph 
                        (1)(B)(ii) shall be disregarded in determining 
                        whether any of such benefits are allowable.
            ``(4) Other common law doctrines not affected.--Except as 
        specifically provided in this subsection, the provisions of 
        this subsection shall not be construed as altering or 
        supplanting any other rule of law, and the requirements of this 
        subsection shall be construed as being in addition to any such 
        other rule of law.
            ``(5) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry out the 
        purposes of this subsection. Such regulations may include 
        exemptions from the application of this subsection.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to transactions entered into after the date of the enactment of 
this Act.

SEC. 322. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS 
              LACKING ECONOMIC SUBSTANCE, ETC.

    (a) In General.--Subchapter A of chapter 68 is amended by inserting 
after section 6662A the following new section:

``SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS 
              LACKING ECONOMIC SUBSTANCE, ETC.

    ``(a) Imposition of Penalty.--If a taxpayer has a noneconomic 
substance transaction understatement for any taxable year, there shall 
be added to the tax an amount equal to 40 percent of the amount of such 
understatement.
    ``(b) Reduction of Penalty for Disclosed Transactions.--Subsection 
(a) shall be applied by substituting `20 percent' for `40 percent' with 
respect to the portion of any noneconomic substance transaction 
understatement with respect to which the relevant facts affecting the 
tax treatment of the item are adequately disclosed in the return or a 
statement attached to the return.
    ``(c) Noneconomic Substance Transaction Understatement.--For 
purposes of this section--
            ``(1) In general.--The term `noneconomic substance 
        transaction understatement' means any amount which would be an 
        understatement under section 6662A(b)(1) if section 6662A were 
        applied by taking into account items attributable to 
        noneconomic substance transactions rather than items to which 
        section 6662A would apply without regard to this paragraph.
            ``(2) Noneconomic substance transaction.--The term 
        `noneconomic substance transaction' means any transaction if--
                    ``(A) there is a lack of economic substance (within 
                the meaning of section 7701(p)(1)) for the transaction 
                giving rise to the claimed benefit or the transaction 
                was not respected under section 7701(p)(2), or
                    ``(B) the transaction fails to meet the 
                requirements of any similar rule of law.
    ``(d) Rules Applicable to Compromise of Penalty.--
            ``(1) In general.--If the first letter of proposed 
        deficiency which allows the taxpayer an opportunity for 
        administrative review in the Internal Revenue Service Office of 
        Appeals has been sent with respect to a penalty to which this 
        section applies, only the Commissioner of Internal Revenue may 
        compromise all or any portion of such penalty.
            ``(2) Applicable rules.--The rules of paragraphs (2) and 
        (3) of section 6707A(d) shall apply for purposes of paragraph 
        (1).
    ``(e) Coordination With Other Penalties.--Except as otherwise 
provided in this part, the penalty imposed by this section shall be in 
addition to any other penalty imposed by this title.
    ``(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).''.
    (b) Coordination With Other Understatements and Penalties.--
            (1) The second sentence of section 6662(d)(2)(A) is amended 
        by inserting ``and without regard to items with respect to 
        which a penalty is imposed by section 6662B'' before the period 
        at the end.
            (2) Subsection (e) of section 6662A is amended--
                    (A) in paragraph (1), by inserting ``and 
                noneconomic substance transaction understatements'' 
                after ``reportable transaction understatements'' both 
                places it appears,
                    (B) in paragraph (2)(A), by inserting ``and a 
                noneconomic substance transaction understatement'' 
                after ``reportable transaction understatement'',
                    (C) in paragraph (2)(B), by inserting ``6662B or'' 
                before ``6663'',
                    (D) in paragraph (2)(C)(i), by inserting ``or 
                section 6662B'' before the period at the end,
                    (E) in paragraph (2)(C)(ii), by inserting ``and 
                section 6662B'' after ``This section'',
                    (F) in paragraph (3), by inserting ``or noneconomic 
                substance transaction understatement'' after 
                ``reportable transaction understatement'', and
                    (G) by adding at the end the following new 
                paragraph:
            ``(4) Noneconomic substance transaction understatement.--
        For purposes of this subsection, the term `noneconomic 
        substance transaction understatement' has the meaning given 
        such term by section 6662B(c).''.
            (3) Subsection (e) of section 6707A is amended--
                    (A) by striking ``or'' at the end of subparagraph 
                (B), and
                    (B) by striking subparagraph (C) and inserting the 
                following new subparagraphs:
                    ``(C) is required to pay a penalty under section 
                6662B with respect to any noneconomic substance 
                transaction, or
                    ``(D) is required to pay a penalty under section 
                6662(h) with respect to any transaction and would (but 
                for section 6662A(e)(2)(C)) have been subject to 
                penalty under section 6662A at a rate prescribed under 
                section 6662A(c) or under section 6662B,''.
    (c) Clerical Amendment.--The table of sections for part II of 
subchapter A of chapter 68 is amended by inserting after the item 
relating to section 6662A the following new item:

``Sec. 6662B. Penalty for understatements attributable to transactions 
                            lacking economic substance, etc.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to transactions entered into after the date of the enactment of 
this Act.

SEC. 323. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS 
              ATTRIBUTABLE TO NONECONOMIC SUBSTANCE TRANSACTIONS.

    (a) In General.--Section 163(m) (relating to interest on unpaid 
taxes attributable to nondisclosed reportable transactions) is 
amended--
            (1) by striking ``attributable'' and all that follows and 
        inserting the following: ``attributable to--
            ``(1) the portion of any reportable transaction 
        understatement (as defined in section 6662A(b)) with respect to 
        which the requirement of section 6664(d)(2)(A) is not met, or
            ``(2) any noneconomic substance transaction understatement 
        (as defined in section 6662B(c)).'', and
            (2) by inserting ``and Noneconomic Substance Transactions'' 
        after ``Transactions''.
    (b) Effective Date.--The amendments made by this section shall 
apply to transactions after the date of the enactment of this Act in 
taxable years ending after such date.

                       Subtitle C--Miscellaneous

SEC. 331. DENIAL OF DEDUCTION FOR PUNITIVE DAMAGES.

    (a) Disallowance of Deduction.--
            (1) In general.--Section 162(g) (relating to treble damage 
        payments under the antitrust laws) is amended--
                    (A) by redesignating paragraphs (1) and (2) as 
                subparagraphs (A) and (B), respectively,
                    (B) by striking ``If'' and inserting:
            ``(1) Treble damages.--If'', and
                    (C) by adding at the end the following new 
                paragraph:
            ``(2) Punitive damages.--No deduction shall be allowed 
        under this chapter for any amount paid or incurred for punitive 
        damages in connection with any judgment in, or settlement of, 
        any action. This paragraph shall not apply to punitive damages 
        described in section 104(c).''.
            (2) Conforming amendment.--The heading for section 162(g) 
        is amended by inserting ``Or Punitive Damages'' after ``Laws''.
    (b) Inclusion in Income of Punitive Damages Paid by Insurer or 
Otherwise.--
            (1) In general.--Part II of subchapter B of chapter 1 
        (relating to items specifically included in gross income) is 
        amended by adding at the end the following new section:

``SEC. 91. PUNITIVE DAMAGES COMPENSATED BY INSURANCE OR OTHERWISE.

    ``Gross income shall include any amount paid to or on behalf of a 
taxpayer as insurance or otherwise by reason of the taxpayer's 
liability (or agreement) to pay punitive damages.''.
            (2) Reporting requirements.--Section 6041 (relating to 
        information at source) is amended by adding at the end the 
        following new subsection:
    ``(h) Section To Apply to Punitive Damages Compensation.--This 
section shall apply to payments by a person to or on behalf of another 
person as insurance or otherwise by reason of the other person's 
liability (or agreement) to pay punitive damages.''.
            (3) Conforming amendment.--The table of sections for part 
        II of subchapter B of chapter 1 is amended by adding at the end 
        the following new item:

``Sec. 91. Punitive damages compensated by insurance or otherwise.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to damages paid or incurred on or after the date of the enactment 
of this Act.

         TITLE IV--TECHNICAL AND CONFORMING AMENDMENTS; SUNSET

SEC. 401. TECHNICAL AND CONFORMING AMENDMENTS.

    The Secretary of the Treasury or the Secretary's delegate shall not 
later than 90 days after the date of the enactment of this Act, submit 
to the Committee on Ways and Means of the House of Representatives and 
the Committee on Finance of the Senate a draft of any technical and 
conforming changes in the Internal Revenue Code of 1986 which are 
necessary to reflect throughout such Code the purposes of the 
provisions of, and amendments made by, this Act.

SEC. 402. SUNSET.

    (a) In General.--All provisions of, and amendments made by, this 
Act shall not apply to taxable years beginning after December 31, 2012.
    (b) Application of Code.--The Internal Revenue Code of 1986 shall 
be applied and administered to taxable years described in subsection 
(a) as if the provisions of, and amendments made by, this Act had never 
been enacted.
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