II 

108TH CONGRESS 

1ST SESSION S. 1937

To amend the Internal Revenue Code of 1986 to curtail the use of tax 

shelters, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

NOVEMBER 24, 2003

Mr. BAUCUS (for himself, Mr. GRASSLEY, Mr. DASCHLE, Mr. CONRAD, and 

Mr. GRAHAM of Florida) 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 curtail 

the use of tax shelters, and for other purposes.

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

3 SECTION 1. SHORT TITLE; ETC. 

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

5 ‘‘Tax Shelter Transparency and Enforcement Act’’. 

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment 

9 to, or repeal of, a section or other provision, the reference 
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1 shall be considered to be made to a section or other provi2 sion of the Internal Revenue Code of 1986. 

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

4 this Act is as follows:

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

TITLE I—PROVISIONS DESIGNED TO CURTAIL TAX SHELTERS 

Sec. 101. Clarification of economic substance doctrine. 

Sec. 102. Penalty for failing to disclose reportable transaction. 

Sec. 103. Accuracy-related penalty for listed transactions and other reportable 

transactions having a significant tax avoidance purpose. 

Sec. 104. Penalty for understatements attributable to transactions lacking economic substance, etc. 

Sec. 105. Modifications of substantial understatement penalty for nonreportable 

transactions. 

Sec. 106. Tax shelter exception to confidentiality privileges relating to taxpayer 

communications. 

Sec. 107. Disclosure of reportable transactions. 

Sec. 108. Modifications to penalty for failure to register tax shelters. 

Sec. 109. Modification of penalty for failure to maintain lists of investors. 

Sec. 110. Modification of actions to enjoin certain conduct related to tax shelters and reportable transactions. 

Sec. 111. Understatement of taxpayer’s liability by income tax return preparer. 

Sec. 112. Penalty on failure to report interests in foreign financial accounts. 

Sec. 113. Frivolous tax submissions. 

Sec. 114. Regulation of individuals practicing before the Department of Treasury. 

Sec. 115. Penalty on promoters of tax shelters. 

Sec. 116. Statute of limitations for taxable years for which required listed 

transactions not reported. 

Sec. 117. Denial of deduction for interest on underpayments attributable to 

nondisclosed reportable and noneconomic substance transactions. 

Sec. 118. Authorization of appropriations for tax law enforcement. 

TITLE II—OTHER CORPORATE GOVERNANCE PROVISIONS 

Sec. 201. Affirmation of consolidated return regulation authority. 

Sec. 202. Signing of corporate tax returns by chief executive officer. 

Sec. 203. Denial of deduction for certain fines, penalties, and other amounts. 

Sec. 204. Disallowance of deduction for punitive damages. 

Sec. 205. Increase in criminal monetary penalty limitation for the underpayment or overpayment of tax due to fraud. 

TITLE III—ENRON-RELATED TAX SHELTER PROVISIONS 

Sec. 301. Limitation on transfer or importation of built-in losses. 

Sec. 302. No reduction of basis under section 734 in stock held by partnership 

in corporate partner. 

Sec. 303. Repeal of special rules for FASITs. 

Sec. 304. Expanded disallowance of deduction for interest on convertible debt. 
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Sec. 305. Expanded authority to disallow tax benefits under section 269. 

Sec. 306. Modification of interaction between subpart F and passive foreign investment company rules.

1 TITLE I—PROVISIONS DESIGNED 

2 TO CURTAIL TAX SHELTERS 

3 SEC. 101. CLARIFICATION OF ECONOMIC SUBSTANCE DOC4 TRINE. 

5 (a) IN GENERAL.—Section 7701 is amended by re6 designating subsection (n) as subsection (o) and by insert7 ing after subsection (m) the following new subsection: 

8 ‘‘(n) CLARIFICATION OF ECONOMIC SUBSTANCE

9 DOCTRINE; ETC.—

10 ‘‘(1) GENERAL RULES.—

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

12 a court determines that the economic substance 

13 doctrine is relevant for purposes of this title to 

14 a transaction (or series of transactions), such 

15 transaction (or series of transactions) shall have 

16 economic substance only if the requirements of 

17 this paragraph are met. 

18 ‘‘(B) DEFINITION OF ECONOMIC SUB19 STANCE.—For purposes of subparagraph (A)—

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

21 economic substance only if—

22 ‘‘(I) the transaction changes in a 

23 meaningful way (apart from Federal 
4

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1 tax effects) the taxpayer’s economic 

2 position, and 

3 ‘‘(II) the taxpayer has a substan4 tial nontax purpose for entering into 

5 such transaction and the transaction 

6 is a reasonable means of accom7 plishing such purpose. 

8 In applying subclause (II), a purpose of 

9 achieving a financial accounting benefit 

10 shall not be taken into account in deter11 mining whether a transaction has a sub12 stantial nontax purpose if the origin of 

13 such financial accounting benefit is a re14 duction of income tax. 

15 ‘‘(ii) SPECIAL RULE WHERE TAX16 PAYER RELIES ON PROFIT POTENTIAL.—A 

17 transaction shall not be treated as having 

18 economic substance by reason of having a 

19 potential for profit unless—

20 ‘‘(I) the present value of the rea21 sonably expected pre-tax profit from 

22 the transaction is substantial in rela23 tion to the present value of the ex24 pected net tax benefits that would be 
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1 allowed if the transaction were re2 spected, and 

3 ‘‘(II) the reasonably expected 

4 pre-tax profit from the transaction ex5 ceeds a risk-free rate of return.

6 ‘‘(C) TREATMENT OF FEES AND FOREIGN

7 TAXES.—Fees and other transaction expenses 

8 and foreign taxes shall be taken into account as 

9 expenses in determining pre-tax profit under 

10 subparagraph (B)(ii). 

11 ‘‘(2) SPECIAL RULES FOR TRANSACTIONS WITH

12 TAX-INDIFFERENT PARTIES.—

13 ‘‘(A) SPECIAL RULES FOR FINANCING

14 TRANSACTIONS.—The form of a transaction 

15 which is in substance the borrowing of money 

16 or the acquisition of financial capital directly or 

17 indirectly from a tax-indifferent party shall not 

18 be respected if the present value of the deduc19 tions to be claimed with respect to the trans20 action is substantially in excess of the present 

21 value of the anticipated economic returns of the 

22 person lending the money or providing the fi23 nancial capital. A public offering shall be treat24 ed as a borrowing, or an acquisition of financial 

25 capital, from a tax-indifferent party if it is rea-
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•S 1937 IS 

1 sonably expected that at least 50 percent of the

2 offering will be placed with tax-indifferent par3 ties. 

4 ‘‘(B) ARTIFICIAL INCOME SHIFTING AND

5 BASIS ADJUSTMENTS.—The form of a trans6 action with a tax-indifferent party shall not be 

7 respected if—

8 ‘‘(i) it results in an allocation of in9 come or gain to the tax-indifferent party in 

10 excess of such party’s economic income or 

11 gain, or 

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

13 or shifting of basis on account of over14 stating the income or gain of the tax-indif15 ferent party. 

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

17 purposes of this subsection—

18 ‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.—

19 The term ‘economic substance doctrine’ means 

20 the common law doctrine under which tax bene21 fits under subtitle A with respect to a trans22 action are not allowable if the transaction does 

23 not have economic substance or lacks a business 

24 purpose. 
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1 ‘‘(B) TAX-INDIFFERENT PARTY.—The 

2 term ‘tax-indifferent party’ means any person 

3 or entity not subject to tax imposed by subtitle 

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

5 party with respect to a transaction if the items 

6 taken into account with respect to the trans7 action have no substantial impact on such per8 son’s liability under subtitle A. 

9 ‘‘(C) EXCEPTION FOR PERSONAL TRANS10 ACTIONS OF INDIVIDUALS.—In the case of an 

11 individual, this subsection shall apply only to 

12 transactions entered into in connection with a 

13 trade or business or an activity engaged in for 

14 the production of income. 

15 ‘‘(D) TREATMENT OF LESSORS.—In apply16 ing paragraph (1)(B)(ii) to the lessor of tan17 gible property subject to a lease—

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

19 respect to the leased property shall not in20 clude the benefits of—

21 ‘‘(I) depreciation, 

22 ‘‘(II) any tax credit, or 

23 ‘‘(III) any other deduction as 

24 provided in guidance by the Secretary, 

25 and 
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•S 1937 IS 

1 ‘‘(ii) subclause (II) of paragraph 

2 (1)(B)(ii) shall be disregarded in deter3 mining whether any of such benefits are al4 lowable.

5 ‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF6 FECTED.—Except as specifically provided in this 

7 subsection, the provisions of this subsection shall not 

8 be construed as altering or supplanting any other 

9 rule of law, and the requirements of this subsection 

10 shall be construed as being in addition to any such 

11 other rule of law. 

12 ‘‘(5) REGULATIONS.—The Secretary shall pre13 scribe such regulations as may be necessary or ap14 propriate to carry out the purposes of this sub15 section. Such regulations may include exemptions 

16 from the application of this subsection.’’. 

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

18 this section shall apply to transactions entered into after 

19 the date of the enactment of this Act. 

20 SEC. 102. PENALTY FOR FAILING TO DISCLOSE REPORT21 ABLE TRANSACTION. 

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

23 68 (relating to assessable penalties) is amended by insert24 ing after section 6707 the following new section: 
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1 ‘‘SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORT2 ABLE TRANSACTION INFORMATION WITH RE3 TURN OR STATEMENT. 

4 ‘‘(a) IMPOSITION OF PENALTY.—Any person who 

5 fails to include on any return or statement any informa6 tion with respect to a reportable transaction which is re7 quired under section 6011 to be included with such return 

8 or statement shall pay a penalty in the amount determined 

9 under subsection (b). 

10 ‘‘(b) AMOUNT OF PENALTY.—

11 ‘‘(1) IN GENERAL.—Except as provided in para12 graphs (2) and (3), the amount of the penalty under 

13 subsection (a) shall be $50,000. 

14 ‘‘(2) LISTED TRANSACTION.—The amount of 

15 the penalty under subsection (a) with respect to a 

16 listed transaction shall be $100,000. 

17 ‘‘(3) INCREASE IN PENALTY FOR LARGE ENTI18 TIES AND HIGH NET WORTH INDIVIDUALS.—

19 ‘‘(A) IN GENERAL.—In the case of a fail20 ure under subsection (a) by—

21 ‘‘(i) a large entity, or 

22 ‘‘(ii) a high net worth individual, 

23 the penalty under paragraph (1) or (2) shall be 

24 twice the amount determined without regard to 

25 this paragraph.
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1 ‘‘(B) LARGE ENTITY.—For purposes of 

2 subparagraph (A), the term ‘large entity’ 

3 means, with respect to any taxable year, a per4 son (other than a natural person) with gross re5 ceipts in excess of $10,000,000 for the taxable 

6 year in which the reportable transaction occurs 

7 or the preceding taxable year. Rules similar to 

8 the rules of paragraph (2) and subparagraphs 

9 (B), (C), and (D) of paragraph (3) of section 

10 448(c) shall apply for purposes of this subpara11 graph. 

12 ‘‘(C) HIGH NET WORTH INDIVIDUAL.—For 

13 purposes of subparagraph (A), the term ‘high 

14 net worth individual’ means, with respect to a 

15 reportable transaction, a natural person whose 

16 net worth exceeds $2,000,000 immediately be17 fore the transaction. 

18 ‘‘(c) DEFINITIONS.—For purposes of this section—

19 ‘‘(1) REPORTABLE TRANSACTION.—The term 

20 ‘reportable transaction’ means any transaction with 

21 respect to which information is required to be in22 cluded with a return or statement because, as deter23 mined under regulations prescribed under section 

24 6011, such transaction is of a type which the Sec-
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1 retary determines as having a potential for tax 

2 avoidance or evasion. 

3 ‘‘(2) LISTED TRANSACTION.—Except as pro4 vided in regulations, the term ‘listed transaction’ 

5 means a reportable transaction which is the same as, 

6 or substantially similar to, a transaction specifically 

7 identified by the Secretary as a tax avoidance trans8 action for purposes of section 6011. 

9 ‘‘(d) AUTHORITY TO RESCIND PENALTY.—

10 ‘‘(1) IN GENERAL.—The Commissioner of In11 ternal Revenue may rescind all or any portion of any 

12 penalty imposed by this section with respect to any 

13 violation if—

14 ‘‘(A) the violation is with respect to a re15 portable transaction other than a listed trans16 action, 

17 ‘‘(B) the person on whom the penalty is 

18 imposed has a history of complying with the re19 quirements of this title, 

20 ‘‘(C) it is shown that the violation is due 

21 to an unintentional mistake of fact; 

22 ‘‘(D) imposing the penalty would be 

23 against equity and good conscience, and 
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1 ‘‘(E) rescinding the penalty would promote 

2 compliance with the requirements of this title 

3 and effective tax administration. 

4 ‘‘(2) DISCRETION.—The exercise of authority 

5 under paragraph (1) shall be at the sole discretion 

6 of the Commissioner and may be delegated only to 

7 the head of the Office of Tax Shelter Analysis. The 

8 Commissioner, in the Commissioner’s sole discretion, 

9 may establish a procedure to determine if a penalty 

10 should be referred to the Commissioner or the head 

11 of such Office for a determination under paragraph 

12 (1). 

13 ‘‘(3) NO APPEAL.—Notwithstanding any other 

14 provision of law, any determination under this sub15 section may not be reviewed in any administrative or 

16 judicial proceeding. 

17 ‘‘(4) RECORDS.—If a penalty is rescinded under 

18 paragraph (1), the Commissioner shall place in the 

19 file in the Office of the Commissioner the opinion of 

20 the Commissioner or the head of the Office of Tax 

21 Shelter Analysis with respect to the determination, 

22 including—

23 ‘‘(A) the facts and circumstances of the 

24 transaction, 

25 ‘‘(B) the reasons for the rescission, and 
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•S 1937 IS 

1 ‘‘(C) the amount of the penalty rescinded. 

2 ‘‘(5) REPORT.—The Commissioner shall each 

3 year report to the Committee on Ways and Means 

4 of the House of Representatives and the Committee 

5 on Finance of the Senate—

6 ‘‘(A) a summary of the total number and 

7 aggregate amount of penalties imposed, and re8 scinded, under this section, and 

9 ‘‘(B) a description of each penalty re10 scinded under this subsection and the reasons 

11 therefor. 

12 ‘‘(e) PENALTY REPORTED TO SEC.—In the case of 

13 a person—

14 ‘‘(1) which is required to file periodic reports 

15 under section 13 or 15(d) of the Securities Ex16 change Act of 1934 or is required to be consolidated 

17 with another person for purposes of such reports, 

18 and 

19 ‘‘(2) which— 

20 ‘‘(A) is required to pay a penalty under 

21 this section with respect to a listed transaction, 

22 ‘‘(B) is required to pay a penalty under 

23 section 6662A with respect to any reportable 

24 transaction at a rate prescribed under section 

25 6662A(c), or 
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1 ‘‘(C) is required to pay a penalty under 

2 section 6662B with respect to any noneconomic 

3 substance transaction, 

4 the requirement to pay such penalty shall be disclosed in 

5 such reports filed by such person for such periods as the 

6 Secretary shall specify. Failure to make a disclosure in 

7 accordance with the preceding sentence shall be treated 

8 as a failure to which the penalty under subsection (b)(2) 

9 applies. 

10 ‘‘(f) COORDINATION WITH OTHER PENALTIES.—The 

11 penalty imposed by this section is in addition to any pen12 alty imposed under this title.’’. 

13 (b) CONFORMING AMENDMENT.—The table of sec14 tions for part I of subchapter B of chapter 68 is amended 

15 by inserting after the item relating to section 6707 the 

16 following:

‘‘Sec. 6707A. Penalty for failure to include reportable transaction 

information with return or statement.’’.

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

18 this section shall apply to returns and statements the due 

19 date for which is after the date of the enactment of this 

20 Act.
15

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1 SEC. 103. ACCURACY-RELATED PENALTY FOR LISTED 

2 TRANSACTIONS AND OTHER REPORTABLE 

3 TRANSACTIONS HAVING A SIGNIFICANT TAX 

4 AVOIDANCE PURPOSE. 

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

6 amended by inserting after section 6662 the following new 

7 section: 

8 ‘‘SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PEN9 ALTY ON UNDERSTATEMENTS WITH RESPECT 

10 TO REPORTABLE TRANSACTIONS. 

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

12 reportable transaction understatement for any taxable 

13 year, there shall be added to the tax an amount equal to 

14 20 percent of the amount of such understatement. 

15 ‘‘(b) REPORTABLE TRANSACTION UNDERSTATE16 MENT.—For purposes of this section—

17 ‘‘(1) IN GENERAL.—The term ‘reportable trans18 action understatement’ means the sum of—

19 ‘‘(A) the product of—

20 ‘‘(i) the amount of the increase (if 

21 any) in taxable income which results from 

22 a difference between the proper tax treat23 ment of an item to which this section ap24 plies and the taxpayer’s treatment of such 

25 item (as shown on the taxpayer’s return of 

26 tax), and 
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•S 1937 IS 

1 ‘‘(ii) the highest rate of tax imposed 

2 by section 1 (section 11 in the case of a 

3 taxpayer which is a corporation), and 

4 ‘‘(B) the amount of the decrease (if any) 

5 in the aggregate amount of credits determined 

6 under subtitle A which results from a difference 

7 between the taxpayer’s treatment of an item to 

8 which this section applies (as shown on the tax9 payer’s return of tax) and the proper tax treat10 ment of such item. 

11 For purposes of subparagraph (A), any reduction of 

12 the excess of deductions allowed for the taxable year 

13 over gross income for such year, and any reduction 

14 in the amount of capital losses which would (without 

15 regard to section 1211) be allowed for such year, 

16 shall be treated as an increase in taxable income. 

17 ‘‘(2) ITEMS TO WHICH SECTION APPLIES.—This 

18 section shall apply to any item which is attributable 

19 to—

20 ‘‘(A) any listed transaction, and 

21 ‘‘(B) any reportable transaction (other 

22 than a listed transaction) if a significant pur23 pose of such transaction is the avoidance or 

24 evasion of Federal income tax. 
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•S 1937 IS 

1 ‘‘(c) HIGHER PENALTY FOR NONDISCLOSED LISTED

2 AND OTHER AVOIDANCE TRANSACTIONS.—

3 ‘‘(1) IN GENERAL.—Subsection (a) shall be ap4 plied by substituting ‘30 percent’ for ‘20 percent’ 

5 with respect to the portion of any reportable trans6 action understatement with respect to which the re7 quirement of section 6664(d)(2)(A) is not met. 

8 ‘‘(2) RULES APPLICABLE TO ASSERTION AND

9 COMPROMISE OF PENALTY.—

10 ‘‘(A) IN GENERAL.—Only upon the ap11 proval by the Chief Counsel for the Internal 

12 Revenue Service or the Chief Counsel’s delegate 

13 at the national office of the Internal Revenue 

14 Service may a penalty to which paragraph (1) 

15 applies be included in a 1st letter of proposed 

16 deficiency which allows the taxpayer an oppor17 tunity for administrative review in the Internal 

18 Revenue Service Office of Appeals. If such a 

19 letter is provided to the taxpayer, only the Com20 missioner of Internal Revenue may compromise 

21 all or any portion of such penalty. 

22 ‘‘(B) APPLICABLE RULES.—The rules of 

23 paragraphs (2), (3), (4), and (5) of section 

24 6707A(d) shall apply for purposes of subpara25 graph (A). 
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•S 1937 IS 

1 ‘‘(d) DEFINITIONS OF REPORTABLE AND LISTED

2 TRANSACTIONS.—For purposes of this section, the terms 

3 ‘reportable transaction’ and ‘listed transaction’ have the 

4 respective meanings given to such terms by section 

5 6707A(c). 

6 ‘‘(e) SPECIAL RULES.—

7 ‘‘(1) COORDINATION WITH PENALTIES, ETC., 

8 ON OTHER UNDERSTATEMENTS.—In the case of an 

9 understatement (as defined in section 6662(d)(2))—

10 ‘‘(A) the amount of such understatement 

11 (determined without regard to this paragraph) 

12 shall be increased by the aggregate amount of 

13 reportable transaction understatements and 

14 noneconomic substance transaction understate15 ments for purposes of determining whether 

16 such understatement is a substantial under17 statement under section 6662(d)(1), and 

18 ‘‘(B) the addition to tax under section 

19 6662(a) shall apply only to the excess of the 

20 amount of the substantial understatement (if 

21 any) after the application of subparagraph (A) 

22 over the aggregate amount of reportable trans23 action understatements and noneconomic sub24 stance transaction understatements. 
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•S 1937 IS 

1 ‘‘(2) COORDINATION WITH OTHER PEN2 ALTIES.—

3 ‘‘(A) APPLICATION OF FRAUD PENALTY.—

4 References to an underpayment in section 6663 

5 shall be treated as including references to a re6 portable transaction understatement and a non7 economic substance transaction understatement. 

8 ‘‘(B) NO DOUBLE PENALTY.—This section 

9 shall not apply to any portion of an understate10 ment on which a penalty is imposed under sec11 tion 6662B or 6663. 

12 ‘‘(3) SPECIAL RULE FOR AMENDED RE13 TURNS.—Except as provided in regulations, in no 

14 event shall any tax treatment included with an 

15 amendment or supplement to a return of tax be 

16 taken into account in determining the amount of any 

17 reportable transaction understatement or non18 economic substance transaction understatement if 

19 the amendment or supplement is filed after the ear20 lier of the date the taxpayer is first contacted by the 

21 Secretary regarding the examination of the return or 

22 such other date as is specified by the Secretary. 

23 ‘‘(4) NONECONOMIC SUBSTANCE TRANS24 ACTION UNDERSTATEMENT.—For purposes of 

25 this subsection, the term ‘noneconomic sub-
20

•S 1937 IS 

1 stance transaction understatement’ has the 

2 meaning given such term by section 6662B(c). 

3 ‘‘(5) CROSS REFERENCE.—

‘‘For reporting of section 6662A(c) penalty to the 

Securities and Exchange Commission, see section 

6707A(e).’’.

4 (b) DETERMINATION OF OTHER UNDERSTATE5 MENTS.—Subparagraph (A) of section 6662(d)(2) is 

6 amended by adding at the end the following flush sen7 tence: 

8 ‘‘The excess under the preceding sentence shall 

9 be determined without regard to items to which 

10 section 6662A applies and without regard to 

11 items with respect to which a penalty is im12 posed by section 6662B.’’. 

13 (c) REASONABLE CAUSE EXCEPTION.—

14 (1) IN GENERAL.—Section 6664 is amended by 

15 adding at the end the following new subsection: 

16 ‘‘(d) REASONABLE CAUSE EXCEPTION FOR REPORT17 ABLE TRANSACTION UNDERSTATEMENTS.— 

18 ‘‘(1) IN GENERAL.—No penalty shall be im19 posed under section 6662A with respect to any por20 tion of a reportable transaction understatement if it 

21 is shown that there was a reasonable cause for such 

22 portion and that the taxpayer acted in good faith 

23 with respect to such portion.
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•S 1937 IS 

1 ‘‘(2) SPECIAL RULES.—Paragraph (1) shall not 

2 apply to any reportable transaction understatement 

3 unless—

4 ‘‘(A) the relevant facts affecting the tax 

5 treatment of the item are adequately disclosed 

6 in accordance with the regulations prescribed 

7 under section 6011, 

8 ‘‘(B) there is or was substantial authority 

9 for such treatment, and 

10 ‘‘(C) the taxpayer reasonably believed that 

11 such treatment was more likely than not the 

12 proper treatment. 

13 A taxpayer failing to adequately disclose in accord14 ance with section 6011 shall be treated as meeting 

15 the requirements of subparagraph (A) if the penalty 

16 for such failure was rescinded under section 

17 6707A(d). 

18 ‘‘(3) RULES RELATING TO REASONABLE BE19 LIEF.—For purposes of paragraph (2)(C)—

20 ‘‘(A) IN GENERAL.—A taxpayer shall be 

21 treated as having a reasonable belief with re22 spect to the tax treatment of an item only if 

23 such belief—
22

•S 1937 IS 

1 ‘‘(i) is based on the facts and law that 

2 exist at the time the return of tax which 

3 includes such tax treatment is filed, and 

4 ‘‘(ii) relates solely to the taxpayer’s 

5 chances of success on the merits of such 

6 treatment and does not take into account 

7 the possibility that a return will not be au8 dited, such treatment will not be raised on 

9 audit, or such treatment will be resolved 

10 through settlement if it is raised. 

11 ‘‘(B) CERTAIN OPINIONS MAY NOT BE RE12 LIED UPON.—

13 ‘‘(i) IN GENERAL.—An opinion of a 

14 tax advisor may not be relied upon to es15 tablish the reasonable belief of a taxpayer 

16 if—

17 ‘‘(I) the tax advisor is described 

18 in clause (ii), or 

19 ‘‘(II) the opinion is described in 

20 clause (iii). 

21 ‘‘(ii) DISQUALIFIED TAX ADVISORS.—

22 A tax advisor is described in this clause if 

23 the tax advisor—

24 ‘‘(I) is a material advisor (within 

25 the meaning of section 6111(b)(1)) 
23

•S 1937 IS 

1 who participates in the organization, 

2 management, promotion, or sale of 

3 the transaction or who is related 

4 (within the meaning of section 267(b) 

5 or 707(b)(1)) to any person who so 

6 participates, 

7 ‘‘(II) is compensated directly or 

8 indirectly by a material advisor with 

9 respect to the transaction, 

10 ‘‘(III) has a fee arrangement 

11 with respect to the transaction which 

12 is contingent on all or part of the in13 tended tax benefits from the trans14 action being sustained, or 

15 ‘‘(IV) as determined under regu16 lations prescribed by the Secretary, 

17 has a disqualifying financial interest 

18 with respect to the transaction. 

19 ‘‘(iii) DISQUALIFIED OPINIONS.—For 

20 purposes of clause (i), an opinion is dis21 qualified if the opinion—

22 ‘‘(I) is based on unreasonable 

23 factual or legal assumptions (includ24 ing assumptions as to future events), 
24

•S 1937 IS 

1 ‘‘(II) unreasonably relies on rep2 resentations, statements, findings, or 

3 agreements of the taxpayer or any 

4 other person, 

5 ‘‘(III) does not identify and con6 sider all relevant facts, or 

7 ‘‘(IV) fails to meet any other re8 quirement as the Secretary may pre9 scribe.’’. 

10 (2) CONFORMING AMENDMENT.—The heading 

11 for subsection (c) of section 6664 is amended by in12 serting ‘‘FOR UNDERPAYMENTS’’ after ‘‘EXCEP13 TION’’. 

14 (d) CONFORMING AMENDMENTS.—

15 (1) Subparagraph (C) of section 461(i)(3) is 

16 amended by striking ‘‘section 6662(d)(2)(C)(iii)’’ 

17 and inserting ‘‘section 1274(b)(3)(C)’’. 

18 (2) Paragraph (3) of section 1274(b) is amend19 ed—

20 (A) by striking ‘‘(as defined in section 

21 6662(d)(2)(C)(iii))’’ in subparagraph (B)(i), 

22 and 

23 (B) by adding at the end the following new 

24 subparagraph:
25

•S 1937 IS 

1 ‘‘(C) TAX SHELTER.—For purposes of sub2 paragraph (B), the term ‘tax shelter’ means—

3 ‘‘(i) a partnership or other entity, 

4 ‘‘(ii) any investment plan or arrange5 ment, or 

6 ‘‘(iii) any other plan or arrangement, 

7 if a significant purpose of such partnership, en8 tity, plan, or arrangement is the avoidance or 

9 evasion of Federal income tax.’’. 

10 (3) Section 6662(d)(2) is amended by striking 

11 subparagraphs (C) and (D). 

12 (4) Section 6664(c)(1) is amended by striking 

13 ‘‘this part’’ and inserting ‘‘section 6662 or 6663’’. 

14 (5) Subsection (b) of section 7525 is amended 

15 by striking ‘‘section 6662(d)(2)(C)(iii)’’ and insert16 ing ‘‘section 1274(b)(3)(C)’’. 

17 (6)(A) The heading for section 6662 is amend18 ed to read as follows: 

19 ‘‘SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY 

20 ON UNDERPAYMENTS.’’. 

21 (B) The table of sections for part II of sub22 chapter A of chapter 68 is amended by striking the 

23 item relating to section 6662 and inserting the fol24 lowing new items:

‘‘Sec. 6662. Imposition of accuracy-related penalty on underpayments. 
26

•S 1937 IS 

‘‘Sec. 6662A. Imposition of accuracy-related penalty on understatements with respect to reportable transactions.’’.

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

2 this section shall apply to taxable years ending after the 

3 date of the enactment of this Act. 

4 SEC. 104. PENALTY FOR UNDERSTATEMENTS ATTRIB5 UTABLE TO TRANSACTIONS LACKING ECO6 NOMIC SUBSTANCE, ETC. 

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

8 amended by inserting after section 6662A the following 

9 new section: 

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

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

14 noneconomic substance transaction understatement for 

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

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

18 ‘‘(b) REDUCTION OF PENALTY FOR DISCLOSED

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

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

24 in the return or a statement attached to the return. 
27

•S 1937 IS 

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

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

4 substance transaction understatement’ means any 

5 amount which would be an understatement under 

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

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

9 to which section 6662A would apply without regard 

10 to this paragraph. 

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

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

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

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

18 section 7701(n)(2), or 

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

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

23 ‘‘(1) IN GENERAL.—If the 1st letter of pro24 posed deficiency which allows the taxpayer an oppor25 tunity for administrative review in the Internal Rev-
28

•S 1937 IS 

1 enue Service Office of Appeals has been sent with 

2 respect to a penalty to which this section applies, 

3 only the Commissioner of Internal Revenue may 

4 compromise all or any portion of such penalty. 

5 ‘‘(2) APPLICABLE RULES.—The rules of para6 graphs (2), (3), (4), and (5) of section 6707A(d) 

7 shall apply for purposes of paragraph (1). 

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

12 ‘‘(f) CROSS REFERENCES.—

‘‘(1) For coordination of penalty with understatements under section 6662 and other special rules, 

see section 6662A(e). 

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

section to the Securities and Exchange Commission, 

see section 6707A(e).’’.

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

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

15 inserting after the item relating to section 6662A the fol16 lowing new item:

‘‘Sec. 6662B. Penalty for understatements attributable to transactions lacking economic substance, etc.’’.

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

18 this section shall apply to transactions entered into after 

19 the date of the enactment of this Act.
29

•S 1937 IS 

1 SEC. 105. MODIFICATIONS OF SUBSTANTIAL UNDERSTATE2 MENT PENALTY FOR NONREPORTABLE 

3 TRANSACTIONS. 

4 (a) SUBSTANTIAL UNDERSTATEMENT OF CORPORA5 TIONS.—Section 6662(d)(1)(B) (relating to special rule 

6 for corporations) is amended to read as follows: 

7 ‘‘(B) SPECIAL RULE FOR CORPORA8 TIONS.—In the case of a corporation other than 

9 an S corporation or a personal holding company 

10 (as defined in section 542), there is a substan11 tial understatement of income tax for any tax12 able year if the amount of the understatement 

13 for the taxable year exceeds the lesser of—

14 ‘‘(i) 10 percent of the tax required to 

15 be shown on the return for the taxable 

16 year (or, if greater, $10,000), or 

17 ‘‘(ii) $10,000,000.’’.

18 (b) REDUCTION FOR UNDERSTATEMENT OF TAX19 PAYER DUE TO POSITION OF TAXPAYER OR DISCLOSED

20 ITEM.—

21 (1) IN GENERAL.—Section 6662(d)(2)(B)(i) 

22 (relating to substantial authority) is amended to 

23 read as follows: 

24 ‘‘(i) the tax treatment of any item by 

25 the taxpayer if the taxpayer had reason-
30

•S 1937 IS 

1 able belief that the tax treatment was more 

2 likely than not the proper treatment, or’’. 

3 (2) CONFORMING AMENDMENT.—Section 

4 6662(d) is amended by adding at the end the fol5 lowing new paragraph: 

6 ‘‘(3) SECRETARIAL LIST.—For purposes of this 

7 subsection, section 6664(d)(2), and section 

8 6694(a)(1), the Secretary may prescribe a list of po9 sitions for which the Secretary believes there is not 

10 substantial authority or there is no reasonable belief 

11 that the tax treatment is more likely than not the 

12 proper tax treatment. Such list (and any revisions 

13 thereof) shall be published in the Federal Register 

14 or the Internal Revenue Bulletin.’’. 

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

16 this section shall apply to taxable years beginning after 

17 the date of the enactment of this Act. 

18 SEC. 106. TAX SHELTER EXCEPTION TO CONFIDENTIALITY 

19 PRIVILEGES RELATING TO TAXPAYER COM20 MUNICATIONS. 

21 (a) IN GENERAL.—Section 7525(b) (relating to sec22 tion not to apply to communications regarding corporate 

23 tax shelters) is amended to read as follows: 

24 ‘‘(b) SECTION NOT TO APPLY TO COMMUNICATIONS

25 REGARDING TAX SHELTERS.—The privilege under sub-
31

•S 1937 IS 

1 section (a) shall not apply to any written communication 

2 which is—

3 ‘‘(1) between a federally authorized tax practi4 tioner and—

5 ‘‘(A) any person, 

6 ‘‘(B) any director, officer, employee, agent, 

7 or representative of the person, or 

8 ‘‘(C) any other person holding a capital or 

9 profits interest in the person, and 

10 ‘‘(2) in connection with the promotion of the di11 rect or indirect participation of the person in any 

12 tax shelter (as defined in section 1274(b)(3)(C)).’’. 

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

14 this section shall apply to communications made on or 

15 after the date of the enactment of this Act. 

16 SEC. 107. DISCLOSURE OF REPORTABLE TRANSACTIONS. 

17 (a) IN GENERAL.—Section 6111 (relating to registra18 tion of tax shelters) is amended to read as follows: 

19 ‘‘SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS. 

20 ‘‘(a) IN GENERAL.—Each material advisor with re21 spect to any reportable transaction shall make a return 

22 (in such form as the Secretary may prescribe) setting 

23 forth—

24 ‘‘(1) information identifying and describing the 

25 transaction, 
32

•S 1937 IS 

1 ‘‘(2) information describing any potential tax 

2 benefits expected to result from the transaction, and 

3 ‘‘(3) such other information as the Secretary 

4 may prescribe. 

5 Such return shall be filed not later than the date specified 

6 by the Secretary. 

7 ‘‘(b) DEFINITIONS.—For purposes of this section—

8 ‘‘(1) MATERIAL ADVISOR.—

9 ‘‘(A) IN GENERAL.—The term ‘material 

10 advisor’ means any person—

11 ‘‘(i) who provides any material aid, 

12 assistance, or advice with respect to orga13 nizing, managing, promoting, selling, im14 plementing, or carrying out any reportable 

15 transaction, and 

16 ‘‘(ii) who directly or indirectly derives 

17 gross income in excess of the threshold 

18 amount for such aid, assistance, or advice. 

19 ‘‘(B) THRESHOLD AMOUNT.—For purposes 

20 of subparagraph (A), the threshold amount is—

21 ‘‘(i) $50,000 in the case of a report22 able transaction substantially all of the tax 

23 benefits from which are provided to nat24 ural persons, and 

25 ‘‘(ii) $250,000 in any other case. 
33

•S 1937 IS 

1 ‘‘(2) REPORTABLE TRANSACTION.—The term 

2 ‘reportable transaction’ has the meaning given to 

3 such term by section 6707A(c). 

4 ‘‘(c) REGULATIONS.—The Secretary may prescribe 

5 regulations which provide—

6 ‘‘(1) that only 1 person shall be required to 

7 meet the requirements of subsection (a) in cases in 

8 which 2 or more persons would otherwise be re9 quired to meet such requirements, 

10 ‘‘(2) exemptions from the requirements of this 

11 section, and 

12 ‘‘(3) such rules as may be necessary or appro13 priate to carry out the purposes of this section.’’. 

14 (b) CONFORMING AMENDMENTS.—

15 (1) The item relating to section 6111 in the 

16 table of sections for subchapter B of chapter 61 is 

17 amended to read as follows:

‘‘Sec. 6111. Disclosure of reportable transactions.’’.

18 (2)(A) So much of section 6112 as precedes 

19 subsection (c) thereof is amended to read as follows: 

20 ‘‘SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANS21 ACTIONS MUST KEEP LISTS OF ADVISEES. 

22 ‘‘(a) IN GENERAL.—Each material advisor (as de23 fined in section 6111) with respect to any reportable 

24 transaction (as defined in section 6707A(c)) shall main-
34

•S 1937 IS 

1 tain, in such manner as the Secretary may by regulations 

2 prescribe, a list—

3 ‘‘(1) identifying each person with respect to 

4 whom such advisor acted as such a material advisor 

5 with respect to such transaction, and 

6 ‘‘(2) containing such other information as the 

7 Secretary may by regulations require. 

8 This section shall apply without regard to whether a mate9 rial advisor is required to file a return under section 6111 

10 with respect to such transaction.’’. 

11 (B) Section 6112 is amended by redesignating 

12 subsection (c) as subsection (b).

13 (C) Section 6112(b), as redesignated by sub14 paragraph (B), is amended—

15 (i) by inserting ‘‘written’’ before ‘‘request’’ 

16 in paragraph (1)(A), and 

17 (ii) by striking ‘‘shall prescribe’’ in para18 graph (2) and inserting ‘‘may prescribe’’. 

19 (D) The item relating to section 6112 in the 

20 table of sections for subchapter B of chapter 61 is 

21 amended to read as follows:

‘‘Sec. 6112. Material advisors of reportable transactions must 

keep lists of advisees.’’.

22 (3)(A) The heading for section 6708 is amend23 ed to read as follows:
35

•S 1937 IS 

1 ‘‘SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES 

2 WITH RESPECT TO REPORTABLE TRANS3 ACTIONS.’’. 

4 (B) The item relating to section 6708 in the 

5 table of sections for part I of subchapter B of chap6 ter 68 is amended to read as follows:

‘‘Sec. 6708. Failure to maintain lists of advisees with respect to 

reportable transactions.’’.

7 (c) REQUIRED DISCLOSURE NOT SUBJECT TO CLAIM

8 OF CONFIDENTIALITY.—Subparagraph (A) of section 

9 6112(b)(1), as redesignated by subsection (b)(2)(B), is 

10 amended by adding at the end the following new flush sen11 tence: 

12 ‘‘For purposes of this section, the identity of any 

13 person on such list shall not be privileged.’’. 

14 (d) EFFECTIVE DATE.—

15 (1) IN GENERAL.—Except as provided in para16 graph (2), the amendments made by this section 

17 shall apply to transactions with respect to which ma18 terial aid, assistance, or advice referred to in section 

19 6111(b)(1)(A)(i) of the Internal Revenue Code of 

20 1986 (as added by this section) is provided after the 

21 date of the enactment of this Act. 

22 (2) NO CLAIM OF CONFIDENTIALITY AGAINST

23 DISCLOSURE.—The amendment made by subsection 

24 (c) shall take effect as if included in the amend-
36

•S 1937 IS 

1 ments made by section 142 of the Deficit Reduction 

2 Act of 1984. 

3 SEC. 108. MODIFICATIONS TO PENALTY FOR FAILURE TO 

4 REGISTER TAX SHELTERS. 

5 (a) IN GENERAL.—Section 6707 (relating to failure 

6 to furnish information regarding tax shelters) is amended 

7 to read as follows: 

8 ‘‘SEC. 6707. FAILURE TO FURNISH INFORMATION REGARD9 ING REPORTABLE TRANSACTIONS. 

10 ‘‘(a) IN GENERAL.—If a person who is required to 

11 file a return under section 6111(a) with respect to any 

12 reportable transaction—

13 ‘‘(1) fails to file such return on or before the 

14 date prescribed therefor, or 

15 ‘‘(2) files false or incomplete information with 

16 the Secretary with respect to such transaction, 

17 such person shall pay a penalty with respect to such return 

18 in the amount determined under subsection (b). 

19 ‘‘(b) AMOUNT OF PENALTY.—

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

22 with respect to any failure shall be $50,000. 

23 ‘‘(2) LISTED TRANSACTIONS.—The penalty im24 posed under subsection (a) with respect to any listed 
37

•S 1937 IS 

1 transaction shall be an amount equal to the greater 

2 of—

3 ‘‘(A) $200,000, or 

4 ‘‘(B) 50 percent of the gross income de5 rived by such person with respect to aid, assist6 ance, or advice which is provided with respect 

7 to the listed transaction before the date the re8 turn including the transaction is filed under 

9 section 6111. 

10 Subparagraph (B) shall be applied by substituting 

11 ‘75 percent’ for ‘50 percent’ in the case of an inten12 tional failure or act described in subsection (a). 

13 ‘‘(c) CERTAIN RULES TO APPLY.—The provisions of 

14 section 6707A(d) shall apply to any penalty imposed under 

15 this section. 

16 ‘‘(d) REPORTABLE AND LISTED TRANSACTIONS.—

17 The terms ‘reportable transaction’ and ‘listed transaction’ 

18 have the respective meanings given to such terms by sec19 tion 6707A(c).’’. 

20 (b) CLERICAL AMENDMENT.—The item relating to 

21 section 6707 in the table of sections for part I of sub22 chapter B of chapter 68 is amended by striking ‘‘tax shel23 ters’’ and inserting ‘‘reportable transactions’’. 
38

•S 1937 IS 

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

2 this section shall apply to returns the due date for which 

3 is after the date of the enactment of this Act. 

4 SEC. 109. MODIFICATION OF PENALTY FOR FAILURE TO 

5 MAINTAIN LISTS OF INVESTORS. 

6 (a) IN GENERAL.—Subsection (a) of section 6708 is 

7 amended to read as follows: 

8 ‘‘(a) IMPOSITION OF PENALTY.—

9 ‘‘(1) IN GENERAL.—If any person who is re10 quired to maintain a list under section 6112(a) fails 

11 to make such list available upon written request to 

12 the Secretary in accordance with section 

13 6112(b)(1)(A) within 20 business days after the 

14 date of the Secretary’s request, such person shall 

15 pay a penalty of $10,000 for each day of such fail16 ure after such 20th day. 

17 ‘‘(2) REASONABLE CAUSE EXCEPTION.—No 

18 penalty shall be imposed by paragraph (1) with re19 spect to the failure on any day if such failure is due 

20 to reasonable cause.’’. 

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

22 this section shall apply to requests made after the date 

23 of the enactment of this Act. 
39

•S 1937 IS 

1 SEC. 110. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN 

2 CONDUCT RELATED TO TAX SHELTERS AND 

3 REPORTABLE TRANSACTIONS. 

4 (a) IN GENERAL.—Section 7408 (relating to action 

5 to enjoin promoters of abusive tax shelters, etc.) is amend6 ed by redesignating subsection (c) as subsection (d) and 

7 by striking subsections (a) and (b) and inserting the fol8 lowing new subsections: 

9 ‘‘(a) AUTHORITY TO SEEK INJUNCTION.—A civil ac10 tion in the name of the United States to enjoin any person 

11 from further engaging in specified conduct may be com12 menced at the request of the Secretary. Any action under 

13 this section shall be brought in the district court of the 

14 United States for the district in which such person resides, 

15 has his principal place of business, or has engaged in spec16 ified conduct. The court may exercise its jurisdiction over 

17 such action (as provided in section 7402(a)) separate and 

18 apart from any other action brought by the United States 

19 against such person. 

20 ‘‘(b) ADJUDICATION AND DECREE.—In any action 

21 under subsection (a), if the court finds—

22 ‘‘(1) that the person has engaged in any speci23 fied conduct, and 

24 ‘‘(2) that injunctive relief is appropriate to pre25 vent recurrence of such conduct, 
40

•S 1937 IS 

1 the court may enjoin such person from engaging in such 

2 conduct or in any other activity subject to penalty under 

3 this title. 

4 ‘‘(c) SPECIFIED CONDUCT.—For purposes of this 

5 section, the term ‘specified conduct’ means any action, or 

6 failure to take action, subject to penalty under section 

7 6700, 6701, 6707, or 6708.’’. 

8 (b) CONFORMING AMENDMENTS.—

9 (1) The heading for section 7408 is amended to 

10 read as follows: 

11 ‘‘SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RE12 LATED TO TAX SHELTERS AND REPORTABLE 

13 TRANSACTIONS.’’. 

14 (2) The table of sections for subchapter A of 

15 chapter 67 is amended by striking the item relating 

16 to section 7408 and inserting the following new 

17 item:

‘‘Sec. 7408. Actions to enjoin specified conduct related to tax shelters and 

reportable transactions.’’.

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

19 this section shall take effect on the day after the date of 

20 the enactment of this Act.
41

•S 1937 IS 

1 SEC. 111. UNDERSTATEMENT OF TAXPAYER’S LIABILITY BY 

2 INCOME TAX RETURN PREPARER. 

3 (a) STANDARDS CONFORMED TO TAXPAYER STAND4 ARDS.—Section 6694(a) (relating to understatements due 

5 to unrealistic positions) is amended—

6 (1) by striking ‘‘realistic possibility of being 

7 sustained on its merits’’ in paragraph (1) and in8 serting ‘‘reasonable belief that the tax treatment in 

9 such position was more likely than not the proper 

10 treatment’’, 

11 (2) by striking ‘‘or was frivolous’’ in paragraph 

12 (3) and inserting ‘‘or there was no reasonable basis 

13 for the tax treatment of such position’’, and 

14 (3) by striking ‘‘UNREALISTIC’’ in the heading 

15 and inserting ‘‘IMPROPER’’. 

16 (b) AMOUNT OF PENALTY.—Section 6694 is amend17 ed—

18 (1) by striking ‘‘$250’’ in subsection (a) and in19 serting ‘‘$1,000’’, and 

20 (2) by striking ‘‘$1,000’’ in subsection (b) and 

21 inserting ‘‘$5,000’’. 

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

23 this section shall apply to documents prepared after the 

24 date of the enactment of this Act. 
42

•S 1937 IS 

1 SEC. 112. PENALTY ON FAILURE TO REPORT INTERESTS IN 

2 FOREIGN FINANCIAL ACCOUNTS. 

3 (a) IN GENERAL.—Section 5321(a)(5) of title 31, 

4 United States Code, is amended to read as follows: 

5 ‘‘(5) FOREIGN FINANCIAL AGENCY TRANS6 ACTION VIOLATION.—

7 ‘‘(A) PENALTY AUTHORIZED.—The Sec8 retary of the Treasury may impose a civil 

9 money penalty on any person who violates, or 

10 causes any violation of, any provision of section 

11 5314. 

12 ‘‘(B) AMOUNT OF PENALTY.—

13 ‘‘(i) IN GENERAL.—Except as pro14 vided in subparagraph (C), the amount of 

15 any civil penalty imposed under subpara16 graph (A) shall not exceed $5,000. 

17 ‘‘(ii) REASONABLE CAUSE EXCEP18 TION.—No penalty shall be imposed under 

19 subparagraph (A) with respect to any vio20 lation if—

21 ‘‘(I) such violation was due to 

22 reasonable cause, and 

23 ‘‘(II) the amount of the trans24 action or the balance in the account 

25 at the time of the transaction was 

26 properly reported. 
43

•S 1937 IS 

1 ‘‘(C) WILLFUL VIOLATIONS.—In the case 

2 of any person willfully violating, or willfully 

3 causing any violation of, any provision of sec4 tion 5314—

5 ‘‘(i) the maximum penalty under sub6 paragraph (B)(i) shall be increased to the 

7 greater of—

8 ‘‘(I) $25,000, or 

9 ‘‘(II) the amount (not exceeding 

10 $100,000) determined under subpara11 graph (D), and 

12 ‘‘(ii) subparagraph (B)(ii) shall not 

13 apply. 

14 ‘‘(D) AMOUNT.—The amount determined 

15 under this subparagraph is—

16 ‘‘(i) in the case of a violation involving 

17 a transaction, the amount of the trans18 action, or 

19 ‘‘(ii) in the case of a violation involv20 ing a failure to report the existence of an 

21 account or any identifying information re22 quired to be provided with respect to an 

23 account, the balance in the account at the 

24 time of the violation.’’. 
44

•S 1937 IS 

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

2 this section shall apply to violations occurring after the 

3 date of the enactment of this Act. 

4 SEC. 113. FRIVOLOUS TAX SUBMISSIONS. 

5 (a) CIVIL PENALTIES.—Section 6702 is amended to 

6 read as follows: 

7 ‘‘SEC. 6702. FRIVOLOUS TAX SUBMISSIONS. 

8 ‘‘(a) CIVIL PENALTY FOR FRIVOLOUS TAX RE9 TURNS.—A person shall pay a penalty of $5,000 if—

10 ‘‘(1) such person files what purports to be a re11 turn of a tax imposed by this title but which—

12 ‘‘(A) does not contain information on 

13 which the substantial correctness of the self-as14 sessment may be judged, or 

15 ‘‘(B) contains information that on its face 

16 indicates that the self-assessment is substan17 tially incorrect; and 

18 ‘‘(2) the conduct referred to in paragraph (1)— 

19 ‘‘(A) is based on a position which the Sec20 retary has identified as frivolous under sub21 section (c), or 

22 ‘‘(B) reflects a desire to delay or impede 

23 the administration of Federal tax laws. 

24 ‘‘(b) CIVIL PENALTY FOR SPECIFIED FRIVOLOUS

25 SUBMISSIONS.—
45

•S 1937 IS 

1 ‘‘(1) IMPOSITION OF PENALTY.—Except as pro2 vided in paragraph (3), any person who submits a 

3 specified frivolous submission shall pay a penalty of 

4 $5,000. 

5 ‘‘(2) SPECIFIED FRIVOLOUS SUBMISSION.—For 

6 purposes of this section—

7 ‘‘(A) SPECIFIED FRIVOLOUS SUBMIS8 SION.—The term ‘specified frivolous submis9 sion’ means a specified submission if any por10 tion of such submission—

11 ‘‘(i) is based on a position which the 

12 Secretary has identified as frivolous under 

13 subsection (c), or 

14 ‘‘(ii) reflects a desire to delay or im15 pede the administration of Federal tax 

16 laws. 

17 ‘‘(B) SPECIFIED SUBMISSION.—The term 

18 ‘specified submission’ means—

19 ‘‘(i) a request for a hearing under—

20 ‘‘(I) section 6320 (relating to no21 tice and opportunity for hearing upon 

22 filing of notice of lien), or 

23 ‘‘(II) section 6330 (relating to 

24 notice and opportunity for hearing be25 fore levy), and
46

•S 1937 IS 

1 ‘‘(ii) an application under— 

2 ‘‘(I) section 6159 (relating to 

3 agreements for payment of tax liabil4 ity in installments), 

5 ‘‘(II) section 7122 (relating to 

6 compromises), or 

7 ‘‘(III) section 7811 (relating to 

8 taxpayer assistance orders). 

9 ‘‘(3) OPPORTUNITY TO WITHDRAW SUBMIS10 SION.—If the Secretary provides a person with no11 tice that a submission is a specified frivolous sub12 mission and such person withdraws such submission 

13 within 30 days after such notice, the penalty im14 posed under paragraph (1) shall not apply with re15 spect to such submission. 

16 ‘‘(c) LISTING OF FRIVOLOUS POSITIONS.—The Sec17 retary shall prescribe (and periodically revise) a list of po18 sitions which the Secretary has identified as being frivo19 lous for purposes of this subsection. The Secretary shall 

20 not include in such list any position that the Secretary 

21 determines meets the requirement of section 

22 6662(d)(2)(B)(ii)(II). 

23 ‘‘(d) REDUCTION OF PENALTY.—The Secretary may 

24 reduce the amount of any penalty imposed under this sec25 tion if the Secretary determines that such reduction would 
47

•S 1937 IS 

1 promote compliance with and administration of the Fed2 eral tax laws. 

3 ‘‘(e) PENALTIES IN ADDITION TO OTHER PEN4 ALTIES.—The penalties imposed by this section shall be 

5 in addition to any other penalty provided by law.’’. 

6 (b) TREATMENT OF FRIVOLOUS REQUESTS FOR

7 HEARINGS BEFORE LEVY.—

8 (1) FRIVOLOUS REQUESTS DISREGARDED.—

9 Section 6330 (relating to notice and opportunity for 

10 hearing before levy) is amended by adding at the 

11 end the following new subsection: 

12 ‘‘(g) FRIVOLOUS REQUESTS FOR HEARING, ETC.—

13 Notwithstanding any other provision of this section, if the 

14 Secretary determines that any portion of a request for a 

15 hearing under this section or section 6320 meets the re16 quirement of clause (i) or (ii) of section 6702(b)(2)(A), 

17 then the Secretary may treat such portion as if it were 

18 never submitted and such portion shall not be subject to 

19 any further administrative or judicial review.’’. 

20 (2) PRECLUSION FROM RAISING FRIVOLOUS

21 ISSUES AT HEARING.—Section 6330(c)(4) is amend22 ed—

23 (A) by striking ‘‘(A)’’ and inserting 

24 ‘‘(A)(i)’’; 

25 (B) by striking ‘‘(B)’’ and inserting ‘‘(ii)’’; 
48

•S 1937 IS 

1 (C) by striking the period at the end of the 

2 first sentence and inserting ‘‘; or’’; and 

3 (D) by inserting after subparagraph (A)(ii) 

4 (as so redesignated) the following: 

5 ‘‘(B) the issue meets the requirement of 

6 clause (i) or (ii) of section 6702(b)(2)(A).’’. 

7 (3) STATEMENT OF GROUNDS.—Section 

8 6330(b)(1) is amended by striking ‘‘under sub9 section (a)(3)(B)’’ and inserting ‘‘in writing under 

10 subsection (a)(3)(B) and states the grounds for the 

11 requested hearing’’. 

12 (c) TREATMENT OF FRIVOLOUS REQUESTS FOR

13 HEARINGS UPON FILING OF NOTICE OF LIEN.—Section 

14 6320 is amended—

15 (1) in subsection (b)(1), by striking ‘‘under sub16 section (a)(3)(B)’’ and inserting ‘‘in writing under 

17 subsection (a)(3)(B) and states the grounds for the 

18 requested hearing’’, and 

19 (2) in subsection (c), by striking ‘‘and (e)’’ and 

20 inserting ‘‘(e), and (g)’’. 

21 (d) TREATMENT OF FRIVOLOUS APPLICATIONS FOR

22 OFFERS-IN-COMPROMISE AND INSTALLMENT AGREE23 MENTS.—Section 7122 is amended by adding at the end 

24 the following new subsection: 
49

•S 1937 IS 

1 ‘‘(e) FRIVOLOUS SUBMISSIONS, ETC.—Notwith2 standing any other provision of this section, if the Sec3 retary determines that any portion of an application for 

4 an offer-in-compromise or installment agreement sub5 mitted under this section or section 6159 meets the re6 quirement of clause (i) or (ii) of section 6702(b)(2)(A), 

7 then the Secretary may treat such portion as if it were 

8 never submitted and such portion shall not be subject to 

9 any further administrative or judicial review.’’. 

10 (e) CLERICAL AMENDMENT.—The table of sections 

11 for part I of subchapter B of chapter 68 is amended by 

12 striking the item relating to section 6702 and inserting 

13 the following new item:

‘‘Sec. 6702. Frivolous tax submissions.’’.

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

15 this section shall apply to submissions made and issues 

16 raised after the date on which the Secretary first pre17 scribes a list under section 6702(c) of the Internal Rev18 enue Code of 1986, as amended by subsection (a). 

19 SEC. 114. REGULATION OF INDIVIDUALS PRACTICING BE20 FORE THE DEPARTMENT OF TREASURY. 

21 (a) CENSURE; IMPOSITION OF PENALTY.—

22 (1) IN GENERAL.—Section 330(b) of title 31, 

23 United States Code, is amended—

24 (A) by inserting ‘‘, or censure,’’ after ‘‘De25 partment’’, and
50

•S 1937 IS 

1 (B) by adding at the end the following new 

2 flush sentence: 

3 ‘‘The Secretary may impose a monetary penalty on any 

4 representative described in the preceding sentence. If the 

5 representative was acting on behalf of an employer or any 

6 firm or other entity in connection with the conduct giving 

7 rise to such penalty, the Secretary may impose a monetary 

8 penalty on such employer, firm, or entity if it knew, or 

9 reasonably should have known, of such conduct. Such pen10 alty shall not exceed the gross income derived (or to be 

11 derived) from the conduct giving rise to the penalty and 

12 may be in addition to, or in lieu of, any suspension, disbar13 ment, or censure of the representative.’’. 

14 (2) EFFECTIVE DATE.—The amendments made 

15 by this subsection shall apply to actions taken after 

16 the date of the enactment of this Act. 

17 (b) TAX SHELTER OPINIONS, ETC.—Section 330 of 

18 such title 31 is amended by adding at the end the fol19 lowing new subsection: 

20 ‘‘(d) Nothing in this section or in any other provision 

21 of law shall be construed to limit the authority of the Sec22 retary of the Treasury to impose standards applicable to 

23 the rendering of written advice with respect to any entity, 

24 transaction plan or arrangement, or other plan or arrange-
51

•S 1937 IS 

1 ment, which is of a type which the Secretary determines 

2 as having a potential for tax avoidance or evasion.’’. 

3 SEC. 115. PENALTY ON PROMOTERS OF TAX SHELTERS. 

4 (a) PENALTY ON PROMOTING ABUSIVE TAX SHEL5 TERS.—Section 6700(a) is amended by adding at the end 

6 the following new sentence: ‘‘Notwithstanding the first 

7 sentence, if an activity with respect to which a penalty 

8 imposed under this subsection involves a statement de9 scribed in paragraph (2)(A), the amount of the penalty 

10 shall be equal to 50 percent of the gross income derived 

11 (or to be derived) from such activity by the person on 

12 which the penalty is imposed.’’. 

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

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

15 enactment of this Act. 

16 SEC. 116. STATUTE OF LIMITATIONS FOR TAXABLE YEARS 

17 FOR WHICH REQUIRED LISTED TRANS18 ACTIONS NOT REPORTED. 

19 (a) IN GENERAL.—Section 6501(c) (relating to ex20 ceptions) is amended by adding at the end the following 

21 new paragraph: 

22 ‘‘(10) LISTED TRANSACTIONS.—If a taxpayer 

23 fails to include on any return or statement for any 

24 taxable year any information with respect to a listed 

25 transaction (as defined in section 6707A(c)(2)) 
52

•S 1937 IS 

1 which is required under section 6011 to be included 

2 with such return or statement, the time for assess3 ment of any tax imposed by this title with respect 

4 to such transaction shall not expire before the date 

5 which is 1 year after the earlier of—

6 ‘‘(A) the date on which the Secretary is 

7 furnished the information so required; or 

8 ‘‘(B) the date that a material advisor (as 

9 defined in section 6111) meets the requirements 

10 of section 6112 with respect to a request by the 

11 Secretary under section 6112(b) relating to 

12 such transaction with respect to such tax13 payer.’’. 

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

15 this section shall apply to taxable years with respect to 

16 which the period for assessing a deficiency did not expire 

17 before the date of the enactment of this Act. 

18 SEC. 117. DENIAL OF DEDUCTION FOR INTEREST ON UN19 DERPAYMENTS ATTRIBUTABLE TO NONDIS20 CLOSED REPORTABLE AND NONECONOMIC 

21 SUBSTANCE TRANSACTIONS. 

22 (a) IN GENERAL.—Section 163 (relating to deduction 

23 for interest) is amended by redesignating subsection (m) 

24 as subsection (n) and by inserting after subsection (l) the 

25 following new subsection: 
53

•S 1937 IS 

1 ‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE

2 TO NONDISCLOSED REPORTABLE TRANSACTIONS AND

3 NONECONOMIC SUBSTANCE TRANSACTIONS.—No deduc4 tion shall be allowed under this chapter for any interest 

5 paid or accrued under section 6601 on any underpayment 

6 of tax which is attributable to—

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

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

9 with respect to which the requirement of section 

10 6664(d)(2)(A) is not met, or 

11 ‘‘(2) any noneconomic substance transaction 

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

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

14 this section shall apply to transactions in taxable years 

15 beginning after the date of the enactment of this Act. 

16 SEC. 118. AUTHORIZATION OF APPROPRIATIONS FOR TAX 

17 LAW ENFORCEMENT. 

18 There is authorized to be appropriated $300,000,000 

19 for each fiscal year beginning after September 30, 2003, 

20 for the purpose of carrying out tax law enforcement to 

21 combat tax avoidance transactions and other tax shelters, 

22 including the use of offshore financial accounts to conceal 

23 taxable income. 
54

•S 1937 IS 

1 TITLE II—OTHER CORPORATE 

2 GOVERNANCE PROVISIONS 

3 SEC. 201. AFFIRMATION OF CONSOLIDATED RETURN REGU4 LATION AUTHORITY. 

5 (a) IN GENERAL.—Section 1502 (relating to consoli6 dated return regulations) is amended by adding at the end 

7 the following new sentence: ‘‘In prescribing such regula8 tions, the Secretary may prescribe rules applicable to cor9 porations filing consolidated returns under section 1501 

10 that are different from other provisions of this title that 

11 would apply if such corporations filed separate returns.’’. 

12 (b) RESULT NOT OVERTURNED.—Notwithstanding 

13 subsection (a), the Internal Revenue Code of 1986 shall 

14 be construed by treating Treasury regulation § 1.1502–

15 20(c)(1)(iii) (as in effect on January 1, 2001) as being 

16 inapplicable to the type of factual situation in 255 F.3d 

17 1357 (Fed. Cir. 2001). 

18 (c) EFFECTIVE DATE.—The provisions of this section 

19 shall apply to taxable years beginning before, on, or after 

20 the date of the enactment of this Act. 

21 SEC. 202. SIGNING OF CORPORATE TAX RETURNS BY CHIEF 

22 EXECUTIVE OFFICER. 

23 (a) IN GENERAL.—Section 6062 (relating to signing 

24 of corporation returns) is amended by inserting after the 

25 first sentence the following new sentences: ‘‘The return
55

•S 1937 IS 

1 of a corporation with respect to income shall also include 

2 a declaration signed by the chief executive officer of such 

3 corporation (or other such officer of the corporation as 

4 the Secretary may designate if the corporation does not 

5 have a chief executive officer), under penalties of perjury, 

6 that the chief executive officer ensures that such return 

7 complies with this title and that the chief executive officer 

8 was provided reasonable assurance of the accuracy of all 

9 material aspects of such return. The preceding sentence 

10 shall not apply to any return of a regulated investment 

11 company (within the meaning of section 851).’’. 

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

13 this section shall apply to returns filed after the date of 

14 the enactment of this Act. 

15 SEC. 203. DENIAL OF DEDUCTION FOR CERTAIN FINES, 

16 PENALTIES, AND OTHER AMOUNTS. 

17 (a) IN GENERAL.—Subsection (f) of section 162 (re18 lating to trade or business expenses) is amended to read 

19 as follows: 

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

21 ‘‘(1) IN GENERAL.—Except as provided in para22 graph (2), no deduction otherwise allowable shall be 

23 allowed under this chapter for any amount paid or 

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

25 to, or at the direction of, a government or entity de-
56

•S 1937 IS 

1 scribed in paragraph (4) in relation to the violation 

2 of any law or the investigation or inquiry by such 

3 government or entity into the potential violation of 

4 any law. 

5 ‘‘(2) EXCEPTION FOR AMOUNTS CONSTITUTING

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

7 any amount which the taxpayer establishes con8 stitutes restitution for damage or harm caused by 

9 the violation of any law or the potential violation of 

10 any law. This paragraph shall not apply to any 

11 amount paid or incurred as reimbursement to the 

12 government or entity for the costs of any investiga13 tion or litigation. 

14 ‘‘(3) EXCEPTION FOR AMOUNTS PAID OR IN15 CURRED AS THE RESULT OF CERTAIN COURT OR16 DERS.—Paragraph (1) shall not apply to any 

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

18 suit in which no government or entity described in 

19 paragraph (4) is a party. 

20 ‘‘(4) CERTAIN NONGOVERNMENTAL REGU21 LATORY ENTITIES.—An entity is described in this 

22 paragraph if it is—

23 ‘‘(A) a nongovernmental entity which exer24 cises self-regulatory powers (including imposing 

25 sanctions) in connection with a qualified board 
57

•S 1937 IS 

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

2 or 

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

4 a nongovernmental entity which exercises self5 regulatory powers (including imposing sanc6 tions) as part of performing an essential gov7 ernmental function.’’. 

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

9 this section shall apply to amounts paid or incurred after 

10 April 27, 2003, except that such amendment shall not 

11 apply to amounts paid or incurred under any binding 

12 order or agreement entered into on or before April 27, 

13 2003. Such exception shall not apply to an order or agree14 ment requiring court approval unless the approval was ob15 tained on or before April 27, 2003. 

16 SEC. 204. DISALLOWANCE OF DEDUCTION FOR PUNITIVE 

17 DAMAGES. 

18 (a) DISALLOWANCE OF DEDUCTION.—

19 (1) IN GENERAL.—Section 162(g) (relating to 

20 treble damage payments under the antitrust laws) is 

21 amended by adding at the end the following new 

22 paragraph: 

23 ‘‘(2) PUNITIVE DAMAGES.—No deduction shall 

24 be allowed under this chapter for any amount paid 

25 or incurred for punitive damages in connection with 
58

•S 1937 IS 

1 any judgment in, or settlement of, any action. This 

2 paragraph shall not apply to punitive damages de3 scribed in section 104(c).’’. 

4 (2) CONFORMING AMENDMENTS.—

5 (A) Section 162(g) is amended—

6 (i) by striking ‘‘If’’ and inserting: 

7 ‘‘(1) TREBLE DAMAGES.—If’’, and 

8 (ii) by redesignating paragraphs (1) 

9 and (2) as subparagraphs (A) and (B), re10 spectively. 

11 (B) The heading for section 162(g) is 

12 amended by inserting ‘‘OR PUNITIVE DAM13 AGES’’ after ‘‘LAWS’’. 

14 (b) INCLUSION IN INCOME OF PUNITIVE DAMAGES

15 PAID BY INSURER OR OTHERWISE.—

16 (1) IN GENERAL.—Part II of subchapter B of 

17 chapter 1 (relating to items specifically included in 

18 gross income) is amended by adding at the end the 

19 following new section: 

20 ‘‘SEC. 91. PUNITIVE DAMAGES COMPENSATED BY INSUR21 ANCE OR OTHERWISE. 

22 ‘‘Gross income shall include any amount paid to or 

23 on behalf of a taxpayer as insurance or otherwise by rea24 son of the taxpayer’s liability (or agreement) to pay puni25 tive damages.’’. 
59

•S 1937 IS 

1 (2) REPORTING REQUIREMENTS.—Section 6041 

2 (relating to information at source) is amended by 

3 adding at the end the following new subsection: 

4 ‘‘(f) SECTION TO APPLY TO PUNITIVE DAMAGES

5 COMPENSATION.—This section shall apply to payments by 

6 a person to or on behalf of another person as insurance 

7 or otherwise by reason of the other person’s liability (or 

8 agreement) to pay punitive damages.’’. 

9 (3) CONFORMING AMENDMENT.—The table of 

10 sections for part II of subchapter B of chapter 1 is 

11 amended by adding at the end the following new 

12 item:

‘‘Sec. 91. Punitive damages compensated by insurance or otherwise.’’.

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

14 this section shall apply to damages paid or incurred on 

15 or after the date of the enactment of this Act. 

16 SEC. 205. INCREASE IN CRIMINAL MONETARY PENALTY 

17 LIMITATION FOR THE UNDERPAYMENT OR 

18 OVERPAYMENT OF TAX DUE TO FRAUD. 

19 (a) IN GENERAL.—Section 7206 (relating to fraud 

20 and false statements) is amended—

21 (1) by striking ‘‘Any person who—’’ and insert22 ing ‘‘(a) IN GENERAL.—Any person who—’’, and 

23 (2) by adding at the end the following new sub24 section:
60

•S 1937 IS 

1 ‘‘(b) INCREASE IN MONETARY LIMITATION FOR UN2 DERPAYMENT OR OVERPAYMENT OF TAX DUE TO

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

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

5 6401(a)) of tax required to be shown on a return is attrib6 utable to fraudulent action described in subsection (a), the 

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

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

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

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

11 (b) INCREASE IN PENALTIES.—

12 (1) ATTEMPT TO EVADE OR DEFEAT TAX.—

13 Section 7201 is amended—

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

15 ‘‘$250,000’’, 

16 (B) by striking ‘‘$500,000’’ and inserting 

17 ‘‘$1,000,000’’, and 

18 (C) by striking ‘‘5 years’’ and inserting 

19 ‘‘10 years’’. 

20 (2) WILLFUL FAILURE TO FILE RETURN, SUP21 PLY INFORMATION, OR PAY TAX.—Section 7203 is 

22 amended—

23 (A) in the first sentence—

24 (i) by striking ‘‘misdemeanor’’ and in25 serting ‘‘felony’’, and 
61

•S 1937 IS 

1 (ii) by striking ‘‘1 year’’ and inserting 

2 ‘‘10 years’’, and 

3 (B) by striking the third sentence. 

4 (3) FRAUD AND FALSE STATEMENTS.—Section 

5 7206(a) (as redesignated by subsection (a)) is 

6 amended—

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

8 ‘‘$250,000’’, 

9 (B) by striking ‘‘$500,000’’ and inserting 

10 ‘‘$1,000,000’’, and 

11 (C) by striking ‘‘3 years’’ and inserting ‘‘5 

12 years’’. 

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

14 this section shall apply to underpayments and overpay15 ments attributable to actions occurring after the date of 

16 the enactment of this Act.

17 TITLE III—ENRON-RELATED TAX 

18 SHELTER PROVISIONS 

19 SEC. 301. LIMITATION ON TRANSFER OR IMPORTATION OF 

20 BUILT-IN LOSSES. 

21 (a) IN GENERAL.—Section 362 (relating to basis to 

22 corporations) is amended by adding at the end the fol23 lowing new subsection: 

24 ‘‘(e) LIMITATIONS ON BUILT-IN LOSSES.—
62

•S 1937 IS 

1 ‘‘(1) LIMITATION ON IMPORTATION OF BUILT2 IN LOSSES.—

3 ‘‘(A) IN GENERAL.—If in any transaction 

4 described in subsection (a) or (b) there would 

5 (but for this subsection) be an importation of a 

6 net built-in loss, the basis of each property de7 scribed in subparagraph (B) which is acquired 

8 in such transaction shall (notwithstanding sub9 sections (a) and (b)) be its fair market value 

10 immediately after such transaction. 

11 ‘‘(B) PROPERTY DESCRIBED.—For pur12 poses of subparagraph (A), property is de13 scribed in this subparagraph if—

14 ‘‘(i) gain or loss with respect to such 

15 property is not subject to tax under this 

16 subtitle in the hands of the transferor im17 mediately before the transfer, and 

18 ‘‘(ii) gain or loss with respect to such 

19 property is subject to such tax in the 

20 hands of the transferee immediately after 

21 such transfer. 

22 In any case in which the transferor is a part23 nership, the preceding sentence shall be applied 

24 by treating each partner in such partnership as 
63

•S 1937 IS 

1 holding such partner’s proportionate share of 

2 the property of such partnership. 

3 ‘‘(C) IMPORTATION OF NET BUILT-IN

4 LOSS.—For purposes of subparagraph (A), 

5 there is an importation of a net built-in loss in 

6 a transaction if the transferee’s aggregate ad7 justed bases of property described in subpara8 graph (B) which is transferred in such trans9 action would (but for this paragraph) exceed 

10 the fair market value of such property imme11 diately after such transaction.’’. 

12 ‘‘(2) LIMITATION ON TRANSFER OF BUILT-IN

13 LOSSES IN SECTION 351 TRANSACTIONS.—

14 ‘‘(A) IN GENERAL.—If—

15 ‘‘(i) property is transferred by a 

16 transferor in any transaction which is de17 scribed in subsection (a) and which is not 

18 described in paragraph (1) of this sub19 section, and 

20 ‘‘(ii) the transferee’s aggregate ad21 justed bases of such property so trans22 ferred would (but for this paragraph) ex23 ceed the fair market value of such property 

24 immediately after such transaction, 
64

•S 1937 IS 

1 then, notwithstanding subsection (a), the trans2 feree’s aggregate adjusted bases of the property 

3 so transferred shall not exceed the fair market 

4 value of such property immediately after such 

5 transaction. 

6 ‘‘(B) ALLOCATION OF BASIS REDUC7 TION.—The aggregate reduction in basis by 

8 reason of subparagraph (A) shall be allocated 

9 among the property so transferred in proportion 

10 to their respective built-in losses immediately 

11 before the transaction. 

12 ‘‘(C) EXCEPTION FOR TRANSFERS WITHIN

13 AFFILIATED GROUP.—Subparagraph (A) shall 

14 not apply to any transaction if the transferor 

15 owns stock in the transferee meeting the re16 quirements of section 1504(a)(2). In the case of 

17 property to which subparagraph (A) does not 

18 apply by reason of the preceding sentence, the 

19 transferor’s basis in the stock received for such 

20 property shall not exceed its fair market value 

21 immediately after the transfer.’’. 

22 (b) COMPARABLE TREATMENT WHERE LIQUIDA23 TION.—Paragraph (1) of section 334(b) (relating to liq24 uidation of subsidiary) is amended to read as follows:
65

•S 1937 IS 

1 ‘‘(1) IN GENERAL.—If property is received by a 

2 corporate distributee in a distribution in a complete 

3 liquidation to which section 332 applies (or in a 

4 transfer described in section 337(b)(1)), the basis of 

5 such property in the hands of such distributee shall 

6 be the same as it would be in the hands of the trans7 feror; except that the basis of such property in the 

8 hands of such distributee shall be the fair market 

9 value of the property at the time of the distribu10 tion—

11 ‘‘(A) in any case in which gain or loss is 

12 recognized by the liquidating corporation with 

13 respect to such property, or 

14 ‘‘(B) in any case in which the liquidating 

15 corporation is a foreign corporation, the cor16 porate distributee is a domestic corporation, 

17 and the corporate distributee’s aggregate ad18 justed bases of property described in section 

19 362(e)(1)(B) which is distributed in such liq20 uidation would (but for this subparagraph) ex21 ceed the fair market value of such property im22 mediately after such liquidation.’’.

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

24 this section shall apply to transactions after February 13, 

25 2003. 
66

•S 1937 IS 

1 SEC. 302. NO REDUCTION OF BASIS UNDER SECTION 734 IN 

2 STOCK HELD BY PARTNERSHIP IN COR3 PORATE PARTNER. 

4 (a) IN GENERAL.—Section 755 is amended by adding 

5 at the end the following new subsection: 

6 ‘‘(c) NO ALLOCATION OF BASIS DECREASE TO

7 STOCK OF CORPORATE PARTNER.—In making an alloca8 tion under subsection (a) of any decrease in the adjusted 

9 basis of partnership property under section 734(b)—

10 ‘‘(1) no allocation may be made to stock in a 

11 corporation (or any person which is related (within 

12 the meaning of section 267(b) or 707(b)(1)) to such 

13 corporation) which is a partner in the partnership, 

14 and 

15 ‘‘(2) any amount not allocable to stock by rea16 son of paragraph (1) shall be allocated under sub17 section (a) to other partnership property in such 

18 manner as the Secretary may prescribe. 

19 Gain shall be recognized to the partnership to the extent 

20 that the amount required to be allocated under paragraph 

21 (2) to other partnership property exceeds the aggregate 

22 adjusted basis of such other property immediately before 

23 the allocation required by paragraph (2).’’. 

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

25 this section shall apply to distributions after February 13, 

26 2003. 
67

•S 1937 IS 

1 SEC. 303. REPEAL OF SPECIAL RULES FOR FASITS. 

2 (a) IN GENERAL.—Part V of subchapter M of chap3 ter 1 (relating to financial asset securitization investment 

4 trusts) is hereby repealed. 

5 (b) CONFORMING AMENDMENTS.—

6 (1) Paragraph (6) of section 56(g) is amended 

7 by striking ‘‘REMIC, or FASIT’’ and inserting ‘‘or 

8 REMIC’’. 

9 (2) Clause (ii) of section 382(l)(4)(B) is amend10 ed by striking ‘‘a REMIC to which part IV of sub11 chapter M applies, or a FASIT to which part V of 

12 subchapter M applies,’’ and inserting ‘‘or a REMIC 

13 to which part IV of subchapter M applies,’’. 

14 (3) Paragraph (1) of section 582(c) is amended 

15 by striking ‘‘, and any regular interest in a 

16 FASIT,’’. 

17 (4) Subparagraph (E) of section 856(c)(5) is 

18 amended by striking the last sentence. 

19 (5)(A) Section 860G(a)(1) is amended by add20 ing at the end the following new sentence: ‘‘An inter21 est shall not fail to qualify as a regular interest sole22 ly because the specified principal amount of the reg23 ular interest (or the amount of interest accrued on 

24 the regular interest) can be reduced as a result of 

25 the nonoccurrence of 1 or more contingent payments 

26 with respect to any reverse mortgage loan held by 
68

•S 1937 IS 

1 the REMIC if, on the startup day for the REMIC, 

2 the sponsor reasonably believes that all principal and 

3 interest due under the regular interest will be paid 

4 at or prior to the liquidation of the REMIC.’’. 

5 (B) The last sentence of section 860G(a)(3) is 

6 amended by inserting ‘‘, and any reverse mortgage 

7 loan (and each balance increase on such loan meet8 ing the requirements of subparagraph (A)(iii)) shall 

9 be treated as an obligation secured by an interest in 

10 real property’’ before the period at the end. 

11 (6) Paragraph (3) of section 860G(a) is amend12 ed by adding ‘‘and’’ at the end of subparagraph (B), 

13 by striking ‘‘, and’’ at the end of subparagraph (C) 

14 and inserting a period, and by striking subparagraph 

15 (D). 

16 (7) Section 860G(a)(3), as amended by para17 graph (6), is amended by adding at the end the fol18 lowing new sentence: ‘‘For purposes of subparagraph 

19 (A), if more than 50 percent of the obligations 

20 transferred to, or purchased by, the REMIC are 

21 originated by the United States or any State (or any 

22 political subdivision, agency, or instrumentality of 

23 the United States or any State) and are principally 

24 secured by an interest in real property, then each 

25 obligation transferred to, or purchased by, the 
69

•S 1937 IS 

1 REMIC shall be treated as secured by an interest in 

2 real property.’’. 

3 (8)(A) Section 860G(a)(3)(A) is amended by 

4 striking ‘‘or’’ at the end of clause (i), by inserting 

5 ‘‘or’’ at the end of clause (ii), and by inserting after 

6 clause (ii) the following new clause: 

7 ‘‘(iii) represents an increase in the 

8 principal amount under the original terms 

9 of an obligation described in clause (i) or 

10 (ii) if such increase— 

11 ‘‘(I) is attributable to an advance 

12 made to the obligor pursuant to the 

13 original terms of the obligation, 

14 ‘‘(II) occurs after the startup 

15 day, and 

16 ‘‘(III) is purchased by the 

17 REMIC pursuant to a fixed price con18 tract in effect on the startup day.’’. 

19 (B) Section 860G(a)(7)(B) is amended to read 

20 as follows: 

21 ‘‘(B) QUALIFIED RESERVE FUND.—For 

22 purposes of subparagraph (A), the term ‘quali23 fied reserve fund’ means any reasonably re24 quired reserve to—
70

•S 1937 IS 

1 ‘‘(i) provide for full payment of ex2 penses of the REMIC or amounts due on 

3 regular interests in the event of defaults on 

4 qualified mortgages or lower than expected 

5 returns on cash flow investments, or 

6 ‘‘(ii) provide a source of funds for the 

7 purchase of obligations described in clause 

8 (ii) or (iii) of paragraph (3)(A). 

9 The aggregate fair market value of the assets 

10 held in any such reserve shall not exceed 50 

11 percent of the aggregate fair market value of all 

12 of the assets of the REMIC on the startup day, 

13 and the amount of any such reserve shall be 

14 promptly and appropriately reduced to the ex15 tent the amount held in such reserve is no 

16 longer reasonably required for purposes speci17 fied in clause (i) or (ii) of paragraph (3)(A).’’. 

18 (9) Subparagraph (C) of section 1202(e)(4) is 

19 amended by striking ‘‘REMIC, or FASIT’’ and in20 serting ‘‘or REMIC’’. 

21 (10) Section 1272(a)(6)(B) is amended by add22 ing at the end the following new flush sentence: 

23 ‘‘For purposes of clause (iii), the Secretary 

24 shall prescribe regulations permitting the use of 

25 a current prepayment assumption, determined 
71

•S 1937 IS 

1 as of the close of the accrual period (or such 

2 other time as the Secretary may prescribe dur3 ing the taxable year in which the accrual period 

4 ends).’’. 

5 (11) Subparagraph (C) of section 7701(a)(19) 

6 is amended by adding ‘‘and’’ at the end of clause 

7 (ix), by striking ‘‘, and’’ at the end of clause (x) and 

8 inserting a period, and by striking clause (xi). 

9 (12) The table of parts for subchapter M of 

10 chapter 1 is amended by striking the item relating 

11 to part V. 

12 (c) EFFECTIVE DATE.—

13 (1) IN GENERAL.—Except as provided in para14 graph (2), the amendments made by this section 

15 shall take effect on February 14, 2003. 

16 (2) EXCEPTION FOR EXISTING FASITS.—

17 (A) IN GENERAL.—Paragraph (1) shall not 

18 apply to any FASIT in existence on the date of 

19 the enactment of this Act to the extent that 

20 regular interests issued by the FASIT before 

21 such date continue to remain outstanding in ac22 cordance with the original terms of issuance. 

23 (B) TRANSFER OF ADDITIONAL ASSETS

24 NOT PERMITTED.—Except as provided in regu25 lations prescribed by the Secretary of the 
72

•S 1937 IS 

1 Treasury or the Secretary’s delegate, subpara2 graph (A) shall cease to apply as of the earliest 

3 date after the date of the enactment of this Act 

4 that any property is transferred to the FASIT. 

5 SEC. 304. EXPANDED DISALLOWANCE OF DEDUCTION FOR 

6 INTEREST ON CONVERTIBLE DEBT. 

7 (a) IN GENERAL.—Paragraph (2) of section 163(l) 

8 is amended by striking ‘‘or a related party’’ and inserting 

9 ‘‘or equity held by the issuer (or any related party) in any 

10 other person’’. 

11 (b) CAPITALIZATION ALLOWED WITH RESPECT TO

12 EQUITY OF PERSONS OTHER THAN ISSUER AND RE13 LATED PARTIES.—Section 163(l) is amended by redesig14 nating paragraphs (4) and (5) as paragraphs (5) and (6) 

15 and by inserting after paragraph (3) the following new 

16 paragraph: 

17 ‘‘(4) CAPITALIZATION ALLOWED WITH RESPECT

18 TO EQUITY OF PERSONS OTHER THAN ISSUER AND

19 RELATED PARTIES.—If the disqualified debt instru20 ment of a corporation is payable in equity held by 

21 the issuer (or any related party) in any other person 

22 (other than a related party), the basis of such equity 

23 shall be increased by the amount not allowed as a 

24 deduction by reason of paragraph (1) with respect to 

25 the instrument.’’. 
73

•S 1937 IS 

1 (c) EXCEPTION FOR CERTAIN INSTRUMENTS ISSUED

2 BY DEALERS IN SECURITIES.—Section 163(l), as amend3 ed by subsection (b), is amended by redesignating para4 graphs (5) and (6) as paragraphs (6) and (7) and by in5 serting after paragraph (4) the following new paragraph: 

6 ‘‘(5) EXCEPTION FOR CERTAIN INSTRUMENTS

7 ISSUED BY DEALERS IN SECURITIES.—For purposes 

8 of this subsection, the term ‘disqualified debt instru9 ment’ does not include indebtedness issued by a 

10 dealer in securities (or a related party) which is pay11 able in, or by reference to, equity (other than equity 

12 of the issuer or a related party) held by such dealer 

13 in its capacity as a dealer in securities. For purposes 

14 of this paragraph, the term ‘dealer in securities’ has 

15 the meaning given such term by section 475.’’. 

16 (d) CONFORMING AMENDMENTS.—Paragraph (3) of 

17 section 163(l) is amended—

18 (1) by striking ‘‘or a related party’’ in the ma19 terial preceding subparagraph (A) and inserting ‘‘or 

20 any other person’’, and 

21 (2) by striking ‘‘or interest’’ each place it ap22 pears. 

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

24 this section shall apply to debt instruments issued after 

25 February 13, 2003. 
74

•S 1937 IS 

1 SEC. 305. EXPANDED AUTHORITY TO DISALLOW TAX BENE2 FITS UNDER SECTION 269. 

3 (a) IN GENERAL.—Subsection (a) of section 269 (re4 lating to acquisitions made to evade or avoid income tax) 

5 is amended to read as follows: 

6 ‘‘(a) IN GENERAL.—If—

7 ‘‘(1)(A) any person or persons acquire, directly 

8 or indirectly, control of a corporation, or 

9 ‘‘(B) any corporation acquires, directly or indi10 rectly, property of another corporation and the basis 

11 of such property, in the hands of the acquiring cor12 poration, is determined by reference to the basis in 

13 the hands of the transferor corporation, and 

14 ‘‘(2) the principal purpose for which such acqui15 sition was made is evasion or avoidance of Federal 

16 income tax, 

17 then the Secretary may disallow such deduction, credit, 

18 or other allowance. For purposes of paragraph (1)(A), 

19 control means the ownership of stock possessing at least 

20 50 percent of the total combined voting power of all class21 es of stock entitled to vote or at least 50 percent of the 

22 total value of all shares of all classes of stock of the cor23 poration.’’. 

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

25 this section shall apply to stock and property acquired 

26 after February 13, 2003. 
75

•S 1937 IS 

1 SEC. 306. MODIFICATION OF INTERACTION BETWEEN SUB2 PART F AND PASSIVE FOREIGN INVESTMENT 

3 COMPANY RULES. 

4 (a) LIMITATION ON EXCEPTION FROM PFIC RULES

5 FOR UNITED STATES SHAREHOLDERS OF CONTROLLED

6 FOREIGN CORPORATIONS.—Paragraph (2) of section 

7 1297(e) (relating to passive foreign investment company) 

8 is amended by adding at the end the following flush sen9 tence: 

10 ‘‘Such term shall not include any period if the 

11 earning of subpart F income by such corpora12 tion during such period would result in only a 

13 remote likelihood of an inclusion in gross in14 come under section 951(a)(1)(A)(i).’’. 

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

16 this section shall apply to taxable years of controlled for17 eign corporations beginning after February 13, 2003, and 

18 to taxable years of United States shareholders with or 

19 within which such taxable years of controlled foreign cor20 porations end.

Æ