II 

108TH CONGRESS 

2D SESSION S. 2210

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

inappropriately avoid Federal taxation, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

MARCH 12, 2004

Mr. LEVIN (for himself and Mr. COLEMAN) introduced the following bill; 

which was read twice and referred to the Committee on Finance 

A BILL

To restrict the use of abusive tax shelters and offshore 

tax havens to inappropriately avoid Federal taxation, 

and for other purposes.

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

3 SECTION 1. SHORT TITLE; ETC. 

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

5 ‘‘Tax Shelter and Tax Haven Reform 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; etc. 

TITLE I—STRENGTHENING TAX SHELTER PENALTIES 

Sec. 101. Penalty for promoting abusive tax shelters. 

Sec. 102. Penalty for aiding and abetting the understatement of tax liability. 

Sec. 103. Penalty for failing to register tax shelter. 

Sec. 104. Penalty for failing to maintain client list. 

Sec. 105. Penalty for failing to disclose potentially abusive tax shelter. 

Sec. 106. Improved disclosure of potentially abusive tax shelters. 

Sec. 107. Extension of statute of limitations for undisclosed tax shelter. 

Sec. 108. Expansion of injunctive relief to stop certain conduct related to tax 

shelter or understatement of tax liability. 

Sec. 109. Penalty for failing to report interests in foreign financial accounts. 

TITLE II—PREVENTING ABUSIVE TAX SHELTERS 

Sec. 201. Censure, civil fines, and tax opinion standards for tax practitioners. 

Sec. 202. Expansion of tax shelter exception to tax practitioner privilege. 

Sec. 203. Information sharing for enforcement purposes. 

Sec. 204. Disclosure of information to Congress. 

Sec. 205. Contingent fee prohibition. 

Sec. 206. Sense of the Senate on tax enforcement priorities. 

TITLE III—REQUIRING ECONOMIC SUBSTANCE 

Sec. 301. Clarification of economic substance doctrine. 

Sec. 302. Accuracy-related penalty for listed transactions and other potentially 

abusive tax shelters having a significant tax avoidance purpose. 

Sec. 303. Penalty for understatements attributable to transactions lacking economic substance, etc. 

Sec. 304. Denial of deduction for interest on underpayments attributable to 

noneconomic substance transactions. 

TITLE IV—DETERRING UNCOOPERATIVE TAX HAVENS 

Sec. 401. Disclosing payments to persons in uncooperative tax havens. 

Sec. 402. Deterring uncooperative tax havens by restricting allowable tax benefits.
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1 TITLE I—STRENGTHENING TAX 

2 SHELTER PENALTIES 

3 SEC. 101. PENALTY FOR PROMOTING ABUSIVE TAX SHEL4 TERS. 

5 (a) PENALTY FOR PROMOTING ABUSIVE TAX SHEL6 TERS.—Section 6700 (relating to promoting abusive tax 

7 shelters, etc.) is amended—

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

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

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

11 through the period in the first sentence of subsection 

12 (a) and inserting ‘‘a penalty determined under sub13 section (b)’’, and 

14 (3) by inserting after subsection (a) the fol15 lowing new subsections: 

16 ‘‘(b) AMOUNT OF PENALTY; CALCULATION OF PEN17 ALTY; LIABILITY FOR PENALTY.—

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

19 the penalty imposed by subsection (a) shall not ex20 ceed the greater of—

21 ‘‘(A) 150 percent of the gross income de22 rived (or to be derived) from such activity by 

23 the person or persons subject to such penalty, 

24 and 
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1 ‘‘(B) if readily subject to calculation, the 

2 total amount of underpayment by the taxpayer 

3 (including penalties, interest, and taxes) in con4 nection with such activity. 

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

6 amount determined under paragraph (1) shall be 

7 calculated with respect to each instance of an activ8 ity described in subsection (a), each instance in 

9 which income was derived by the person or persons 

10 subject to such penalty, and each person who par11 ticipated in such an activity. 

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

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

14 such activity, all such persons shall be jointly and 

15 severally liable for the penalty under such sub16 section. 

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

18 any penalty imposed under this section or the payment 

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

20 penalty shall not be considered an ordinary and necessary 

21 expense in carrying on a trade or business for purposes 

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

23 is subject to such penalty or who makes such payment.’’. 
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1 (b) EFFECTIVE DATE.—The amendments made by 

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

3 enactment of this Act. 

4 SEC. 102. PENALTY FOR AIDING AND ABETTING THE UN5 DERSTATEMENT OF TAX LIABILITY. 

6 (a) IN GENERAL.—Section 6701(a) (relating to impo7 sition of penalty) is amended—

8 (1) by inserting ‘‘the tax liability or’’ after ‘‘re9 spect to,’’ in paragraph (1), 

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

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

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

13 and 

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

15 procurement, or advice or each such’’ before ‘‘docu16 ment’’ in the matter following paragraph (3). 

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

18 6701 (relating to penalties for aiding and abetting under19 statement of tax liability) is amended to read as follows: 

20 ‘‘(b) AMOUNT OF PENALTY; CALCULATION OF PEN21 ALTY; LIABILITY FOR PENALTY.—

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

23 the penalty imposed by subsection (a) shall not ex24 ceed the greater of—
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1 ‘‘(i) 150 percent of the gross income 

2 derived (or to be derived) from such aid, 

3 assistance, procurement, or advice provided 

4 by the person or persons subject to such 

5 penalty, and 

6 ‘‘(ii) if readily subject to calculation, 

7 the total amount of underpayment by the 

8 taxpayer (including penalties, interest, and 

9 taxes) in connection with the understate10 ment of the liability for tax. 

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

12 amount determined under paragraph (1) shall be 

13 calculated with respect to each instance of aid, as14 sistance, procurement, or advice described in sub15 section (a), each instance in which income was de16 rived by the person or persons subject to such pen17 alty, and each person who made such an understate18 ment of the liability for tax. 

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

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

21 providing such aid, assistance, procurement, or ad22 vice, all such persons shall be jointly and severally 

23 liable for the penalty under such subsection.’’. 
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1 (c) PENALTY NOT DEDUCTIBLE.—Section 6701 is 

2 amended by adding at the end the following new sub3 section: 

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

5 any penalty imposed under this section or the payment 

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

7 penalty shall not be considered an ordinary and necessary 

8 expense in carrying on a trade or business for purposes 

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

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

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

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

13 enactment of this Act. 

14 SEC. 103. PENALTY FOR FAILURE TO REGISTER TAX SHEL15 TER. 

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

17 to furnish information regarding tax shelters) is amended 

18 to read as follows: 

19 ‘‘SEC. 6707. FAILURE TO FURNISH INFORMATION ON PO20 TENTIALLY ABUSIVE TAX SHELTER OR LIST21 ED TRANSACTION. 

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

23 file a return under section 6111 with respect to any poten24 tially abusive tax shelter—
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1 ‘‘(1) fails to file such return on or before the 

2 date prescribed therefor, or 

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

4 the Secretary with respect to such shelter, 

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

6 in the amount determined under subsection (b). 

7 ‘‘(b) AMOUNT OF PENALTY.—

8 ‘‘(1) IN GENERAL.—Except as provided in para9 graph (2), the penalty imposed under subsection (a) 

10 with respect to any failure shall be not less than 

11 $50,000 and not more than $100,000. 

12 ‘‘(2) LISTED TRANSACTIONS.—The penalty im13 posed under subsection (a) with respect to any listed 

14 transaction shall be an amount equal to the greater 

15 of—

16 ‘‘(A) $200,000, or 

17 ‘‘(B) 100 percent of the gross income de18 rived by such person for providing aid, assist19 ance, procurement, advice, or other services 

20 with respect to the listed transaction before the 

21 date the return including the transaction is 

22 filed under section 6111. 

23 Subparagraph (B) shall be applied by substituting 

24 ‘150 percent’ for ‘100 percent’ in the case of an in25 tentional failure or act described in subsection (a). 
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1 ‘‘(c) CERTAIN RULES TO APPLY.—The provisions of 

2 section 6707A(d) allowing the Commissioner of Internal 

3 Revenue to rescind a penalty under certain circumstances 

4 shall apply to any penalty imposed under this section. 

5 ‘‘(d) POTENTIALLY ABUSIVE TAX SHELTERS AND

6 LISTED TRANSACTIONS.—The terms ‘potentially abusive 

7 tax shelter’ and ‘listed transaction’ have the respective 

8 meanings given to such terms by section 6707A(c). 

9 ‘‘(e) PENALTY NOT DEDUCTIBLE.—The payment of 

10 any penalty imposed under this section or the payment 

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

12 penalty shall not be considered an ordinary and necessary 

13 expense in carrying on a trade or business for purposes 

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

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

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

17 section 6707 in the table of sections for part I of sub18 chapter B of chapter 68 is amended by striking ‘‘regard19 ing tax shelters’’ and inserting ‘‘on potentially abusive tax 

20 shelter or listed transaction’’. 

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

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

23 is after the date of the enactment of this Act.
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1 SEC. 104. PENALTY FOR FAILING TO MAINTAIN CLIENT 

2 LIST. 

3 (a) IN GENERAL.—Subsection (a) of section 6708 

4 (relating to failure to maintain lists of investors in poten5 tially abusive tax shelters) is amended to read as follows: 

6 ‘‘(a) IMPOSITION OF PENALTY.—

7 ‘‘(1) IN GENERAL.—If any person who is re8 quired to maintain a list under section 6112(a) fails 

9 to make such list available upon written request to 

10 the Secretary in accordance with section 

11 6112(b)(1)(A) within 20 business days after the 

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

13 pay a penalty of $10,000 for each day of such fail14 ure after such 20th day. If such person makes avail15 able an incomplete list upon such request, such per16 son shall pay a penalty of $100 per each omitted 

17 name for each day of such omission after such 20th 

18 day. 

19 ‘‘(2) GOOD CAUSE EXCEPTION.—No penalty 

20 shall be imposed by paragraph (1) with respect to 

21 the failure on any day if, in the judgment of the 

22 Secretary, such failure is due to good cause.’’. 

23 (b) PENALTY NOT DEDUCTIBLE.—Section 6708 is 

24 amended by adding at the end the following new sub25 section: 
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1 ‘‘(c) PENALTY NOT DEDUCTIBLE.—The payment of 

2 any penalty imposed under this section or the payment 

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

4 penalty shall not be considered an ordinary and necessary 

5 expense in carrying on a trade or business for purposes 

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

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

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

9 this section shall apply to requests made by the Secretary 

10 of the Treasury after the date of the enactment of this 

11 Act. 

12 SEC. 105. PENALTY FOR FAILING TO DISCLOSE POTEN13 TIALLY ABUSIVE TAX SHELTER. 

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

15 68 (relating to assessable penalties) is amended by insert16 ing after section 6707 the following new section: 

17 ‘‘SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE POTEN18 TIALLY ABUSIVE TAX SHELTER INFORMA19 TION WITH RETURN OR STATEMENT. 

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

21 fails to include on any return or statement any informa22 tion with respect to a potentially abusive tax shelter which 

23 is required under section 6011 to be included with such 

24 return or statement shall pay a penalty in the amount de25 termined under subsection (b). 
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1 ‘‘(b) AMOUNT OF PENALTY.—

2 ‘‘(1) IN GENERAL.—Except as provided in para3 graphs (2) and (3), the amount of the penalty under 

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

5 ‘‘(2) LISTED TRANSACTION.—Except as pro6 vided in paragraph 3, the amount of the penalty 

7 under subsection (a) with respect to a listed trans8 action shall be $100,000. 

9 ‘‘(3) INCREASE IN PENALTY FOR INTENTIONAL

10 NONDISCLOSURE.—In the case of an intentional fail11 ure by any person under subsection (a), the penalty 

12 under paragraph (1) shall be $100,000 and the pen13 alty under paragraph (2) shall be $200,000. 

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

15 ‘‘(1) POTENTIALLY ABUSIVE TAX SHELTER.—

16 The term ‘potentially abusive tax shelter’ means any 

17 transaction with respect to which information is re18 quired to be included with a return or statement, be19 cause the Secretary has determined by regulation or 

20 otherwise that such transaction has a potential for 

21 tax avoidance or evasion. 

22 ‘‘(2) LISTED TRANSACTION.—Except as pro23 vided in regulations, the term ‘listed transaction’ 

24 means a potentially abusive tax shelter which is the 

25 same as, or substantially similar to, a transaction 
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1 specifically identified by the Secretary as a tax 

2 avoidance transaction for purposes of section 6011. 

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

4 ‘‘(1) IN GENERAL.—The Commissioner of In5 ternal Revenue may rescind all or any portion of a 

6 penalty imposed by this section with respect to any 

7 violation if—

8 ‘‘(A) the violation is with respect to a po9 tentially abusive tax shelter other than a listed 

10 transaction, 

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

12 imposed has a history of complying with the re13 quirements of this title, 

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

15 to an unintentional mistake of fact, 

16 ‘‘(D) imposing the penalty would be 

17 against equity and good conscience, and 

18 ‘‘(E) rescinding the penalty would promote 

19 compliance with the requirements of this title 

20 and effective tax administration. 

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

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

23 of the Commissioner and may be delegated only to 

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

25 Commissioner, in the Commissioner’s sole discretion, 
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1 may establish a procedure to determine if a penalty 

2 should be referred to the Commissioner or the head 

3 of such Office for a determination under paragraph 

4 (1). 

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

6 provision of law, any determination under this sub7 section may not be reviewed in any administrative or 

8 judicial proceeding. 

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

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

11 file in the Office of the Commissioner the opinion of 

12 the Commissioner or the head of the Office of Tax 

13 Shelter Analysis with respect to the determination, 

14 including—

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

16 transaction, 

17 ‘‘(B) the reasons for the rescission, and 

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

19 A copy of such opinion shall be provided upon writ20 ten request to the Committee on Ways and Means 

21 of the House of Representatives, the Committee on 

22 Finance of the Senate, the Joint Committee on Tax23 ation, or the General Accounting Office. 

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

25 year report to the Committee on Ways and Means
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1 of the House of Representatives and the Committee 

2 on Finance of the Senate—

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

4 aggregate amount of penalties imposed, and re5 scinded, under this section, and 

6 ‘‘(B) a description of each penalty re7 scinded under this subsection and the reasons 

8 therefor. 

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

10 a person—

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

12 under section 13 or 15(d) of the Securities Ex13 change Act of 1934 or is required to be consolidated 

14 with another person for purposes of such reports, 

15 and 

16 ‘‘(2) which— 

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

18 this section with respect to a listed transaction, 

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

20 section 6662A with respect to any potentially 

21 abusive tax shelter at a rate prescribed under 

22 section 6662A(c), or 

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

24 section 6662B with respect to any noneconomic 

25 substance transaction, 
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1 the requirement to pay such penalty shall be disclosed in 

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

3 Secretary shall specify. Failure to make a disclosure in 

4 accordance with the preceding sentence shall be treated 

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

6 applies. 

7 ‘‘(f) PENALTY IN ADDITION TO OTHER PEN8 ALTIES.—The penalty imposed by this section shall be in 

9 addition to any other penalty provided by law. 

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

11 any penalty imposed under this section or the payment 

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

13 penalty shall not be considered an ordinary and necessary 

14 expense in carrying on a trade or business for purposes 

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

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

17 (b) CONFORMING AMENDMENT.—The table of sec18 tions for part I of subchapter B of chapter 68 is amended 

19 by inserting after the item relating to section 6707 the 

20 following:

‘‘Sec. 6707A. Penalty for failure to include potentially abusive tax 

shelter information with return or statement.’’.

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

22 this section shall apply to returns and statements the due 

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

24 Act. 
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1 SEC. 106. IMPROVED DISCLOSURE OF POTENTIALLY ABU2 SIVE TAX SHELTERS. 

3 (a) IN GENERAL.—Section 6111 (relating to registra4 tion of tax shelters) is amended to read as follows: 

5 ‘‘SEC. 6111. DISCLOSURE OF POTENTIALLY ABUSIVE TAX 

6 SHELTERS. 

7 ‘‘(a) IN GENERAL.—Each material advisor with re8 spect to any potentially abusive tax shelter shall make a 

9 return (in such form as the Secretary may prescribe) set10 ting forth—

11 ‘‘(1) information identifying and describing 

12 such shelter, 

13 ‘‘(2) information describing any potential tax 

14 benefits expected to result from the shelter, and 

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

16 may prescribe. 

17 Such return shall be filed not later than the date which 

18 is 30 days before the date on which the first sale of such 

19 shelter occurs or on any other date specified by the Sec20 retary. 

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

22 ‘‘(1) MATERIAL ADVISOR.—

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

24 advisor’ means any person—

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

26 assistance, or advice with respect to de-
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1 signing, organizing, managing, promoting, 

2 selling, implementing, or carrying out any 

3 potentially abusive tax shelter, and 

4 ‘‘(ii) who directly or indirectly derives 

5 gross income in excess of the threshold 

6 amount for such aid, assistance, or advice. 

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

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

9 ‘‘(i) $50,000 in the case of a poten10 tially abusive tax shelter substantially all 

11 of the tax benefits from which are provided 

12 to natural persons, and 

13 ‘‘(ii) $100,000 in any other case. 

14 ‘‘(2) POTENTIALLY ABUSIVE TAX SHELTER.—

15 The term ‘potentially abusive tax shelter’ has the 

16 meaning given to such term by section 6707A(c). 

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

18 regulations which provide—

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

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

21 which 2 or more persons would otherwise be re22 quired to meet such requirements, 

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

24 section, and 
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1 ‘‘(3) such rules as may be necessary or appro2 priate to carry out the purposes of this section.’’. 

3 (b) CONFORMING AMENDMENTS.—

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

5 table of sections for subchapter B of chapter 61 is 

6 amended to read as follows:

‘‘Sec. 6111. Disclosure of potentially abusive tax shelters.’’.

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

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

9 ‘‘SEC. 6112. MATERIAL ADVISORS OF POTENTIALLY ABU10 SIVE TAX SHELTERS MUST KEEP CLIENT 

11 LISTS. 

12 ‘‘(a) IN GENERAL.—Each material advisor (as de13 fined in section 6111) with respect to any potentially abu14 sive tax shelter (as defined in section 6707A(c)) shall 

15 maintain, in such manner as the Secretary may by regula16 tions prescribe, a list—

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

18 whom such advisor acted as such a material advisor 

19 with respect to such shelter, and 

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

21 Secretary may by regulations require. 

22 This section shall apply without regard to whether a mate23 rial advisor is required to file a return under section 6111 

24 with respect to such transaction.’’.
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1 (B) Section 6112 is amended by redesignating 

2 subsection (c) as subsection (b).

3 (C) Section 6112(b), as redesignated by sub4 paragraph (B), is amended—

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

6 in paragraph (1)(A), and 

7 (ii) by striking ‘‘shall prescribe’’ in para8 graph (2) and inserting ‘‘may prescribe’’. 

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

10 table of sections for subchapter B of chapter 61 is 

11 amended to read as follows:

‘‘Sec. 6112. Material advisors of potentially abusive tax shelters 

must keep client lists.’’.

12 (3)(A) The heading for section 6708 is amend13 ed to read as follows:

14 ‘‘SEC. 6708. FAILURE TO MAINTAIN CLIENT LISTS WITH RE15 SPECT TO POTENTIALLY ABUSIVE TAX SHEL16 TERS.’’. 

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

18 table of sections for part I of subchapter B of chap19 ter 68 is amended to read as follows:

‘‘Sec. 6708. Failure to maintain client lists with respect to potentially abusive tax shelters.’’.

20 (c) REQUIRED DISCLOSURE NOT SUBJECT TO CLAIM

21 OF CONFIDENTIALITY.—Section 6112(b)(1), as redesig22 nated by subsection (b)(2)(B), is amended by adding at 

23 the end the following new flush sentence: 
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1 ‘‘For purposes of this section, the identity of any 

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

3 (d) EFFECTIVE DATE.—

4 (1) IN GENERAL.—Except as provided in para5 graph (2), the amendments made by this section 

6 shall apply to transactions with respect to which ma7 terial aid, assistance, or advice referred to in section 

8 6111(b)(1)(A)(i) of the Internal Revenue Code of 

9 1986 (as added by this section) is provided after the 

10 date of the enactment of this Act. 

11 (2) NO CLAIM OF CONFIDENTIALITY AGAINST

12 DISCLOSURE.—The amendment made by subsection 

13 (c) shall take effect as if included in the amend14 ments made by section 142 of the Deficit Reduction 

15 Act of 1984. 

16 SEC. 107. EXTENSION OF STATUTE OF LIMITATIONS FOR 

17 UNDISCLOSED TAX SHELTER. 

18 (a) IN GENERAL.—Section 6501(c) (relating to ex19 ceptions) is amended by adding at the end the following 

20 new paragraph: 

21 ‘‘(10) POTENTIALLY ABUSIVE TAX SHEL22 TERS.—If a taxpayer fails to include on any return 

23 or statement for any taxable year any information 

24 with respect to a potentially abusive tax shelter (as 

25 defined in section 6707A(c)) which is required under 
22

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1 section 6011 to be included with such return or 

2 statement, the time for assessment of any tax im3 posed by this title with respect to such transaction 

4 shall not expire before the date which is 2 years 

5 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. 108. EXPANSION OF INJUNCTIVE RELIEF TO STOP 

19 CERTAIN CONDUCT RELATED TO TAX SHEL20 TER OR UNDERSTATEMENT OF TAX LIABIL21 ITY. 

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

23 to enjoin promoters of abusive tax shelters, etc.) is amend24 ed by redesignating subsection (c) as subsection (d) and 
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1 by striking subsections (a) and (b) and inserting the fol2 lowing new subsections: 

3 ‘‘(a) AUTHORITY TO SEEK INJUNCTION.—A civil ac4 tion in the name of the United States to enjoin any person 

5 from further engaging in specified conduct may be com6 menced at the request of the Secretary. Any action under 

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

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

9 has his principal place of business, or has engaged in spec10 ified conduct. The court may exercise its jurisdiction over 

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

12 apart from any other action brought by the United States 

13 against such person. 

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

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

16 ‘‘(1) that the person has engaged in any speci17 fied conduct, and 

18 ‘‘(2) that injunctive relief is appropriate to pre19 vent recurrence of such conduct, 

20 the court may enjoin such person from engaging in such 

21 conduct or in any other activity subject to penalty under 

22 this title. 

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

24 section, the term ‘specified conduct’ means any action, or 
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1 failure to take action, subject to penalty under section 

2 6700, 6701, 6707, 6707A, 6708, or 7206.’’. 

3 (b) CONFORMING AMENDMENTS.—

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

5 read as follows:

6 ‘‘SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RE7 LATED TO TAX SHELTER OR UNDERSTATE8 MENT OF TAX LIABILITY.’’. 

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

10 chapter 67 is amended by striking the item relating 

11 to section 7408 and inserting the following new 

12 item:

‘‘Sec. 7408. Actions to enjoin specified conduct related to tax shelter or understatement of liability.’’.

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

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

15 the enactment of this Act. 

16 SEC. 109. PENALTY FOR FAILING TO REPORT INTERESTS IN 

17 FOREIGN FINANCIAL ACCOUNTS. 

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

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

20 ‘‘(5) FOREIGN FINANCIAL AGENCY TRANS21 ACTION VIOLATION.—

22 ‘‘(A) PENALTY AUTHORIZED.—The Sec23 retary of the Treasury may impose a civil 

24 money penalty on any person who violates, or
25

•S 2210 IS 

1 causes any violation of, any provision of section 

2 5314. 

3 ‘‘(B) AMOUNT OF PENALTY.—

4 ‘‘(i) IN GENERAL.—Except as pro5 vided in subparagraph (C), the amount of 

6 any civil penalty imposed under subpara7 graph (A) shall not exceed $10,000. 

8 ‘‘(ii) REASONABLE CAUSE EXCEP9 TION.—No penalty shall be imposed under 

10 subparagraph (A) with respect to any vio11 lation if—

12 ‘‘(I) such violation was due to 

13 reasonable cause, and 

14 ‘‘(II) the amount of the trans15 action or the balance in the account 

16 at the time of the transaction was 

17 properly reported. 

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

19 of any person willfully violating, or willfully 

20 causing any violation of, any provision of sec21 tion 5314, the amount of the civil penalty im22 posed under subparagraph (A) shall be—

23 ‘‘(i) not less than $5,000, 
26

•S 2210 IS 

1 ‘‘(ii) not more than 50 percent of the 

2 amount determined under subparagraph 

3 (D), and 

4 ‘‘(iii) subparagraph (B)(ii) shall not 

5 apply. 

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

7 under this subparagraph is—

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

9 a transaction, the amount of the trans10 action, or 

11 ‘‘(ii) in the case of a violation involv12 ing a failure to report the existence of an 

13 account or any identifying information re14 quired to be provided with respect to an 

15 account, the balance in the account at the 

16 time of the violation.’’. 

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

18 this section shall apply to violations occurring after the 

19 date of the enactment of this Act.

20 TITLE II—PREVENTING ABUSIVE 

21 TAX SHELTERS 

22 SEC. 201. CENSURE, CIVIL FINES, AND TAX OPINION STAND23 ARDS FOR TAX PRACTITIONERS. 

24 (a) CENSURE; IMPOSITION OF MONETARY PEN25 ALTY.—
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•S 2210 IS 

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

2 United States Code, is amended—

3 (A) by inserting ‘‘, or censure,’’ after ‘‘De4 partment’’, and

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

6 flush sentence: 

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

8 representative described in the preceding sentence. If the 

9 representative was acting on behalf of an employer or any 

10 firm or other entity in connection with the conduct giving 

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

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

13 reasonably should have known, of such conduct. Such pen14 alty may be in addition to, or in lieu of, any suspension, 

15 disbarment, or censure of the representative.’’. 

16 (2) EFFECTIVE DATE.—The amendments made 

17 by this subsection shall apply to actions taken after 

18 the date of the enactment of this Act. 

19 (b) TAX OPINION STANDARDS.—Section 330 of such 

20 title 31 is amended by adding at the end the following 

21 new subsection: 

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

23 standards applicable to the rendering of written advice 

24 with respect to any potentially abusive tax shelter or any 

25 entity, plan, arrangement, or transaction which has a po-
28

•S 2210 IS 

1 tential for tax avoidance or evasion. Such standards shall 

2 address, but not be limited to, the following issues: 

3 ‘‘(1) Independence of the practitioner issuing 

4 such written advice from persons promoting, mar5 keting, or recommending the subject of the advice. 

6 ‘‘(2) Collaboration among practitioners, or be7 tween a practitioner and other party, which could re8 sult in such collaborating parties having a joint fi9 nancial interest in the subject of the advice. 

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

11 would impair auditor independence. 

12 ‘‘(4) For written advice issued by a firm, stand13 ards for reviewing the advice and ensuring the con14 sensus support of the firm for positions taken. 

15 ‘‘(5) Reliance on reasonable factual representa16 tions by the taxpayer and other parties. 

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

18 practitioner for the written advice.’’. 

19 SEC. 202. EXPANSION OF TAX SHELTER EXCEPTION TO TAX 

20 PRACTITIONER PRIVILEGE. 

21 (a) IN GENERAL.—Subsection (b) of section 7525 

22 (relating to confidentiality privileges relating to taxpayer 

23 communications) is amended to read as follows: 
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1 ‘‘(b) NO PRIVILEGE FOR COMMUNICATIONS REGARD2 ING TAX SHELTERS.—The privilege under subsection (a) 

3 shall not apply to any communication which is—

4 ‘‘(1) between a federally authorized tax practi5 tioner and—

6 ‘‘(A) any person, 

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

8 or representative of the person, or 

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

10 profits interest in the person, and 

11 ‘‘(2) in connection with the promotion of the di12 rect or indirect participation of the person in any 

13 tax shelter (as defined in section 1274(b)(3)(C), 

14 6662, or 6707A).’’. 

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

16 this section shall apply to communications made on or 

17 after the date of the enactment of this Act. 

18 SEC. 203. INFORMATION SHARING FOR ENFORCEMENT 

19 PURPOSES. 

20 (a) PROMOTION OF PROHIBITED TAX SHELTERS OR

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

22 disclosure to certain Federal officers and employees for 

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

24 at the end the following new paragraph:
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•S 2210 IS 

1 ‘‘(7) DISCLOSURE OF RETURNS AND RETURN

2 INFORMATION RELATED TO PROMOTION OF PROHIB3 ITED TAX SHELTERS OR TAX AVOIDANCE

4 SCHEMES.—

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

6 by the Secretary of a written request which 

7 meets the requirements of subparagraph (B) 

8 from the head of the United States Securities 

9 and Exchange Commission, an appropriate 

10 Federal banking agency as defined under sec11 tion 1813(q) of title 12, United States Code, or 

12 the Public Company Accounting Oversight 

13 Board, a return or return information shall be 

14 disclosed to such requestor’s officers and em15 ployees who are personally and directly engaged 

16 in an investigation, examination, or proceeding 

17 by such requestor to evaluate, determine, penal18 ize, or deter conduct by a financial institution, 

19 issuer, or public accounting firm, or associated 

20 person, in connection with a potential or actual 

21 violation of section 6700 (promotion of abusive 

22 tax shelters), 6701 (aiding and abetting under23 statement of tax liability), or activities related 

24 to promoting or facilitating inappropriate tax 

25 avoidance or tax evasion. Such disclosure shall 
31

•S 2210 IS 

1 be solely for use by such officers and employees 

2 in such investigation, examination, or pro3 ceeding. 

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

5 the requirements of this subparagraph if it sets 

6 forth—

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

8 examination, or proceeding, 

9 ‘‘(ii) the statutory authority under 

10 which such investigation, examination, or 

11 proceeding is being conducted, 

12 ‘‘(iii) the name or names of the finan13 cial institution, issuer, or public accounting 

14 firm to which such return information re15 lates, 

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

17 which such return information relates, and 

18 ‘‘(v) the specific reason or reasons 

19 why such disclosure is, or may be, relevant 

20 to such investigation, examination or pro21 ceeding. 

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

23 purposes of this paragraph, the term ‘financial 

24 institution’ means a depository institution, for25 eign bank, insured institution, industrial loan 
32

•S 2210 IS 

1 company, broker, dealer, investment company, 

2 investment advisor, or other entity subject to 

3 regulation or oversight by the United States Se4 curities and Exchange Commission or an appro5 priate Federal banking agency.’’. 

6 (b) FINANCIAL AND ACCOUNTING FRAUD INVESTIGA7 TIONS.—Section 6103(i) (relating to disclosure to Federal 

8 officers or employees for administration of Federal laws 

9 not relating to tax administration) is amended by adding 

10 at the end the following new paragraph: 

11 ‘‘(9) DISCLOSURE OF RETURNS AND RETURN

12 INFORMATION FOR USE IN FINANCIAL AND AC13 COUNTING FRAUD INVESTIGATIONS.—

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

15 by the Secretary of a written request which 

16 meets the requirements of subparagraph (B) 

17 from the head of the United States Securities 

18 and Exchange Commission or the Public Com19 pany Accounting Oversight Board, a return or 

20 return information shall be disclosed to such re21 questor’s officers and employees who are per22 sonally and directly engaged in an investigation, 

23 examination, or proceeding by such requester to 

24 evaluate the accuracy of a financial statement 

25 or report or to determine, require a restate-
33

•S 2210 IS 

1 ment, penalize, or deter conduct by an issuer, 

2 investment company, or public accounting firm, 

3 or associated person, in connection with a po4 tential or actual violation of auditing standards 

5 or prohibitions against false or misleading 

6 statements or omissions in financial statements 

7 or reports. Such disclosure shall be solely for 

8 use by such officers and employees in such in9 vestigation, examination or proceeding. 

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

11 the requirements of this subparagraph if it sets 

12 forth—

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

14 examination, or proceeding, 

15 ‘‘(ii) the statutory authority under 

16 which such investigation, examination, or 

17 proceeding is being conducted, 

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

19 investment company, or public accounting 

20 firm to which such return information re21 lates, 

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

23 which such return information relates, and 

24 ‘‘(v) the specific reason or reasons 

25 why such disclosure is, or may be, relevant 
34

•S 2210 IS 

1 to such investigation, examination or pro2 ceeding.’’. 

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

4 this section shall apply to disclosures and to information 

5 and document requests made after the date of the enact6 ment of this Act. 

7 SEC. 204. DISCLOSURE OF INFORMATION TO CONGRESS. 

8 (a) DISCLOSURE BY TAX RETURN PREPARER.—

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

10 7216(b)(1) (relating to disclosures) is amended to 

11 read as follows: 

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

13 documents, if clearly identified: 

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

15 or local court of record. 

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

17 or State grand jury. 

18 ‘‘(iii) An administrative order, sum19 mons, or subpoena which is issued in the 

20 performance of its duties by—

21 ‘‘(I) any Federal agency, includ22 ing Congress or any committee or 

23 subcommittee thereof, or 

24 ‘‘(II) any State agency, body, or 

25 commission charged under the laws of
35

•S 2210 IS 

1 the State or a political subdivision of 

2 the State with the licensing, registra3 tion, or regulation of tax return pre4 parers.’’. 

5 (2) EFFECTIVE DATE.—The amendment made 

6 by this subsection shall apply to disclosures made 

7 after the date of the enactment of this Act pursuant 

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

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

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

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

12 follows: 

13 ‘‘(2) INSPECTION BY CONGRESS.—

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

15 written request from a committee or sub16 committee of Congress, copies of documents re17 lated to a determination by the Secretary to 

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

19 exemption from taxation under section 501 or 

20 527 shall be provided to such committee or sub21 committee, including any application, notice of 

22 status, or supporting information provided by 

23 such organization to the Internal Revenue Serv24 ice; any letter, analysis or other document pro25 duced by or for the Internal Revenue Service 
36

•S 2210 IS 

1 evaluating, determining, explaining, or relating 

2 to the tax exempt status of such organization 

3 (other than returns, unless such returns are 

4 available to the public under this section or sec5 tion 6103 or 6110); and any communication be6 tween the Internal Revenue Service and any 

7 other party relating to the tax exempt status of 

8 such organization. 

9 ‘‘(B) ADDITIONAL INFORMATION.—Section 

10 6103(f) shall apply with respect to—

11 ‘‘(i) the application for exemption of 

12 any organization described in subsection 

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

14 from taxation under section 501(a) for any 

15 taxable year or notice of status of any po16 litical organization which is exempt from 

17 taxation under section 527 for any taxable 

18 year, and any application referred to in 

19 subparagraph (B) of subsection (a)(1) of 

20 this section, and 

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

22 the possession of the Secretary and which 

23 relate to such application, 

24 as if such papers constituted returns.’’. 
37

•S 2210 IS 

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

2 this section shall apply to disclosures and to information 

3 and document requests made after the date of the enact4 ment of this Act. 

5 SEC. 205. CONTINGENT FEE PROHIBITION. 

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

7 Act, is amended—

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

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

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

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

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

13 (f).’’, and 

14 (3) by inserting after subsection (e) the fol15 lowing new subsection: 

16 ‘‘(f) CONTINGENT FEE PROHIBITION.—

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

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

19 services provided in connection with the internal rev20 enue laws, and which is contingent upon the actual 

21 or projected achievement of—

22 ‘‘(A) Federal tax savings or benefits, or 

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

24 other taxable income, 
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•S 2210 IS 

1 shall pay a penalty with respect to each such fee ac2 tivity in the amount determined under subsection 

3 (b). 

4 ‘‘(2) REGULATIONS.—The Secretary may issue 

5 rules to carry out the purposes of this subsection 

6 and may provide for exceptions for fee arrangements 

7 that are in the public interest.’’. 

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

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

10 collections made after the date of the enactment of this 

11 Act. 

12 SEC. 206. SENSE OF THE SENATE ON TAX ENFORCEMENT 

13 PRIORITIES. 

14 It is the sense of the Senate that additional funds 

15 should be appropriated for Internal Revenue Service en16 forcement efforts and that the Internal Revenue Service 

17 should devote proportionately more of its enforcement 

18 funds—

19 (1) to combat the promotion of abusive tax 

20 shelters for corporations and high net worth individ21 uals and the aiding and abetting of tax evasion, 

22 (2) to stop accounting, law, and financial firms 

23 involved in such promotion and aiding and abetting, 

24 and 
39

•S 2210 IS 

1 (3) to combat the use of offshore financial ac2 counts to conceal taxable income. 

3 TITLE III—REQUIRING 

4 ECONOMIC SUBSTANCE 

5 SEC. 301. CLARIFICATION OF ECONOMIC SUBSTANCE DOC6 TRINE. 

7 (a) IN GENERAL.—Section 7701 (relating to defini8 tions) is amended by redesignating subsection (n) as sub9 section (o) and by inserting after subsection (m) the fol10 lowing new subsection: 

11 ‘‘(n) CLARIFICATION OF ECONOMIC SUBSTANCE

12 DOCTRINE; ETC.—

13 ‘‘(1) GENERAL RULES.—

14 ‘‘(A) IN GENERAL.—In applying the eco15 nomic substance doctrine, the determination of 

16 whether a transaction satisfies such doctrine 

17 shall be made as provided in this subsection. 

18 ‘‘(B) APPLICATION OF ECONOMIC SUB19 STANCE DOCTRINE.—For purposes of subpara20 graph (A)—

21 ‘‘(i) IN GENERAL.—A transaction sat22 isfies the economic substance doctrine only 

23 if—

24 ‘‘(I) the transaction changes in a 

25 meaningful way, apart from Federal
40

•S 2210 IS 

1 tax effects (and, if there are any Fed2 eral tax effects, also apart from any 

3 foreign, State, or local tax effects), 

4 the taxpayer’s economic position, and 

5 ‘‘(II) the taxpayer has a substan6 tial nontax purpose for entering into 

7 such transaction and the transaction 

8 is a reasonable means of accom9 plishing such purpose. 

10 In applying subclause (II), a purpose of 

11 achieving a financial accounting benefit 

12 shall not be taken into account in deter13 mining whether a transaction has a sub14 stantial nontax purpose if the origin of 

15 such financial accounting benefit is a re16 duction of income tax or achievement of a 

17 tax benefit. 

18 ‘‘(ii) SPECIAL RULE WHERE TAX19 PAYER RELIES ON PROFIT POTENTIAL.—A 

20 transaction shall not be treated as satis21 fying the economic substance doctrine by 

22 reason of having a potential for profit un23 less—

24 ‘‘(I) the present value of the rea25 sonably expected pre-tax profit from 
41

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1 the transaction is substantial in rela2 tion to the present value of the ex3 pected net tax benefits that would be 

4 allowed if the transaction were re5 spected, and 

6 ‘‘(II) the reasonably expected 

7 pre-tax profit from the transaction ex8 ceeds a risk-free rate of return.

9 ‘‘(C) TREATMENT OF FEES AND FOREIGN

10 TAXES.—Fees and other transaction expenses 

11 and foreign taxes shall be taken into account as 

12 expenses in determining pre-tax profit under 

13 subparagraph (B)(ii). 

14 ‘‘(2) SPECIAL RULES FOR TRANSACTIONS WITH

15 TAX-INDIFFERENT PARTIES.—

16 ‘‘(A) SPECIAL RULES FOR FINANCING

17 TRANSACTIONS.—The form of a transaction 

18 which is in substance the borrowing of money 

19 or the acquisition of financial capital directly or 

20 indirectly from a tax-indifferent party shall not 

21 be respected if the present value of the deduc22 tions to be claimed with respect to the trans23 action is substantially in excess of the present 

24 value of the anticipated economic returns of the 

25 person lending the money or providing the fi-
42

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1 nancial capital. A public offering shall be treat2 ed as a borrowing, or an acquisition of financial 

3 capital, from a tax-indifferent party if it is rea4 sonably expected that at least 50 percent of the 

5 offering will be placed with tax-indifferent par6 ties. 

7 ‘‘(B) ARTIFICIAL INCOME SHIFTING AND

8 BASIS ADJUSTMENTS.—The form of a trans9 action with a tax-indifferent party shall not be 

10 respected if—

11 ‘‘(i) it results in an allocation of in12 come or gain to the tax-indifferent party in 

13 excess of such party’s economic income or 

14 gain, or 

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

16 or shifting of basis on account of over17 stating the income or gain of the tax-indif18 ferent party. 

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

20 purposes of this subsection—

21 ‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.—

22 The term ‘economic substance doctrine’ means 

23 the common law doctrine under which tax bene24 fits under subtitle A with respect to a trans25 action are not allowable if the transaction does 
43

•S 2210 IS 

1 not have economic substance or lacks a business 

2 purpose. 

3 ‘‘(B) TAX-INDIFFERENT PARTY.—The 

4 term ‘tax-indifferent party’ means any person 

5 or entity not subject to tax imposed by subtitle 

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

7 party with respect to a transaction if the items 

8 taken into account with respect to the trans9 action have no substantial impact on such per10 son’s liability under subtitle A. 

11 ‘‘(C) EXCEPTION FOR PERSONAL TRANS12 ACTIONS OF INDIVIDUALS.—In the case of an 

13 individual, this subsection shall apply only to 

14 transactions entered into in connection with a 

15 trade or business or an activity engaged in for 

16 the production of income. 

17 ‘‘(D) TREATMENT OF LESSORS.—In apply18 ing subclause (I) of paragraph (1)(B)(ii) to the 

19 lessor of tangible property subject to a lease—

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

21 respect to the leased property shall not in22 clude the benefits of—

23 ‘‘(I) depreciation, 

24 ‘‘(II) any tax credit, or 
44

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1 ‘‘(III) any other deduction as 

2 provided in guidance by the Secretary, 

3 and 

4 ‘‘(ii) subclause (II) of paragraph 

5 (1)(B)(ii) shall be disregarded in deter6 mining whether any of such benefits are al7 lowable.

8 ‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF9 FECTED.—Except as specifically provided in this 

10 subsection, the provisions of this subsection shall not 

11 be construed as altering or supplanting any other 

12 rule of law, and the requirements of this subsection 

13 shall be construed as being in addition to any such 

14 other rule of law. 

15 ‘‘(5) REGULATIONS.—The Secretary shall pre16 scribe such regulations as may be necessary or ap17 propriate to carry out the purposes of this sub18 section. Such regulations may include exemptions 

19 from the application of this subsection.’’. 

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

21 this section shall apply to transactions entered into after 

22 the date of the enactment of this Act.
45

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1 SEC. 302. ACCURACY-RELATED PENALTY FOR LISTED 

2 TRANSACTIONS AND OTHER POTENTIALLY 

3 ABUSIVE TAX SHELTERS HAVING A SIGNIFI4 CANT TAX 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 POTENTIALLY ABUSIVE TAX SHELTER. 

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

12 potentially abusive tax shelter understatement for any tax13 able year, there shall be added to the tax an amount equal 

14 to 20 percent of the amount of such understatement. 

15 ‘‘(b) POTENTIALLY ABUSIVE TAX SHELTER UNDER16 STATEMENT.—For purposes of this section—

17 ‘‘(1) IN GENERAL.—The term ‘potentially abu18 sive tax shelter 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 
46

•S 2210 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 potentially abusive tax shelter 

22 (other than a listed transaction) if a significant 

23 purpose of such transaction is the avoidance or 

24 evasion of Federal income tax. 
47

•S 2210 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 potentially abusive 

6 tax shelter understatement with respect to which the 

7 requirement 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 2210 IS 

1 ‘‘(d) DEFINITIONS OF POTENTIALLY ABUSIVE TAX

2 SHELTER AND LISTED TRANSACTION.—For purposes of 

3 this section, the terms ‘potentially abusive tax shelter’ and 

4 ‘listed transaction’ have the respective meanings given to 

5 such terms by section 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 potentially abusive tax shelter understatements 

14 and noneconomic substance transaction under15 statements 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 potentially abu23 sive tax shelter understatements and non24 economic substance transaction understate25 ments. 
49

•S 2210 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 po6 tentially abusive tax shelter understatement and 

7 a noneconomic substance transaction under8 statement. 

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

10 shall not apply to any portion of an understate11 ment on which a penalty is imposed under sec12 tion 6662B or 6663. 

13 ‘‘(3) SPECIAL RULE FOR AMENDED RE14 TURNS.—Except as provided in regulations, in no 

15 event shall any tax treatment included with an 

16 amendment or supplement to a return of tax be 

17 taken into account in determining the amount of any 

18 potentially abusive tax shelter understatement or 

19 noneconomic substance transaction understatement 

20 if the amendment or supplement is filed after the 

21 earlier of the date the taxpayer is first contacted by 

22 the Secretary regarding the examination of the re23 turn or such other date as is specified by the Sec24 retary.
50

•S 2210 IS 

1 ‘‘(4) NONECONOMIC SUBSTANCE TRANS2 ACTION UNDERSTATEMENT.—For purposes of 

3 this subsection, the term ‘noneconomic sub4 stance transaction understatement’ has the 

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

6 ‘‘(5) CROSS REFERENCE.—

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

Securities and Exchange Commission, see section 

6707A(e).’’.

7 (b) DETERMINATION OF OTHER UNDERSTATE8 MENTS.—Subparagraph (A) of section 6662(d)(2) is 

9 amended by adding at the end the following flush sen10 tence: 

11 ‘‘The excess under the preceding sentence shall 

12 be determined without regard to items to which 

13 section 6662A applies and without regard to 

14 items with respect to which a penalty is im15 posed by section 6662B.’’. 

16 (c) REASONABLE CAUSE EXCEPTION.—

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

18 adding at the end the following new subsection: 

19 ‘‘(d) REASONABLE CAUSE EXCEPTION FOR POTEN20 TIALLY ABUSIVE TAX SHELTER UNDERSTATEMENTS.— 

21 ‘‘(1) IN GENERAL.—No penalty shall be im22 posed under section 6662A with respect to any por23 tion of a potentially abusive tax shelter understate24 ment if it is shown that there was a reasonable 
51

•S 2210 IS 

1 cause for such portion and that the taxpayer acted 

2 in good faith with respect to such portion. 

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

4 apply to any potentially abusive tax shelter under5 statement unless—

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

7 treatment of the item are adequately disclosed 

8 in accordance with the regulations prescribed 

9 under section 6011, 

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

11 for such treatment, and 

12 ‘‘(C) the taxpayer reasonably believed that 

13 such treatment was more likely than not the 

14 proper treatment. 

15 A taxpayer failing to adequately disclose in accord16 ance with section 6011 shall be treated as meeting 

17 the requirements of subparagraph (A) if the penalty 

18 for such failure was rescinded under section 

19 6707A(d). 

20 ‘‘(3) RULES RELATING TO REASONABLE BE21 LIEF.—For purposes of paragraph (2)(C)—

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

23 treated as having a reasonable belief with re24 spect to the tax treatment of an item only if 

25 such belief—
52

•S 2210 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)) 
53

•S 2210 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), 
54

•S 2210 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:
55

•S 2210 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. 
56

•S 2210 IS 

‘‘Sec. 6662A. Imposition of accuracy-related penalty on understatements with respect to potentially abusive tax 

shelter.’’.

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. 303. PENALTY FOR UNDERSTATEMENTS ATTRIB5 UTABLE TO TRANSACTIONS LACKING ECO6 NOMIC SUBSTANCE, ETC. 

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

8 amended by section 302, is amended by inserting after 

9 section 6662A the following new section: 

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

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

14 noneconomic substance transaction understatement for 

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

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

18 ‘‘(b) REDUCTION OF PENALTY FOR DISCLOSED

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

21 portion of any noneconomic substance transaction under22 statement with respect to which the relevant information 

23 affecting the tax treatment of the item is adequately dis24 closed in the return or a statement attached to the return. 
57

•S 2210 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 the 

5 sum of—

6 ‘‘(A) the product of—

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

8 any) in taxable income which results from 

9 a difference between the proper tax treat10 ment of an item attributable to a non11 economic substance transaction and the 

12 taxpayer’s treatment of such item (as 

13 shown on the taxpayer’s return of tax), 

14 and 

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

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

17 taxpayer which is a corporation), and 

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

19 in the aggregate amount of credits determined 

20 under subtitle A which results from a difference 

21 between the taxpayer’s treatment of an item at22 tributable to a noneconomic substance trans23 action (as shown on the taxpayer’s return of 

24 tax) and the proper tax treatment of such item. 
58

•S 2210 IS 

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

2 the excess of deductions allowed for the taxable year 

3 over gross income for such year, and any reduction 

4 in the amount of capital losses which would (without 

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

6 shall be treated as an increase in taxable income. 

7 ‘‘(2) NONECONOMIC SUBSTANCE TRANS8 ACTION.—The term ‘noneconomic substance trans9 action’ means any transaction if—

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

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

12 the transaction giving rise to the claimed ben13 efit or the transaction was not respected under 

14 section 7701(n)(2), or 

15 ‘‘(B) the transaction fails to meet the re16 quirements of any similar rule of law. 

17 ‘‘(d) RULES APPLICABLE TO COMPROMISE OF PEN18 ALTY.—

19 ‘‘(1) IN GENERAL.—If the 1st letter of pro20 posed deficiency which allows the taxpayer an oppor21 tunity for administrative review in the Internal Rev22 enue Service Office of Appeals has been sent with 

23 respect to a penalty to which this section applies, 

24 only the Commissioner of Internal Revenue may 

25 compromise all or any portion of such penalty. 
59

•S 2210 IS 

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

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

3 of the Commissioner and may be delegated only to 

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

5 Commissioner, in the Commissioner’s sole discretion, 

6 may establish a procedure to determine if a penalty 

7 should be referred to the Commissioner or the head 

8 of such Office for a determination under paragraph 

9 (1). 

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

11 provision of law, any determination under this sub12 section may not be reviewed in any administrative or 

13 judicial proceeding. 

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

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

16 file in the Office of the Commissioner the opinion of 

17 the Commissioner or the head of the Office of Tax 

18 Shelter Analysis with respect to the determination, 

19 including—

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

21 transaction, 

22 ‘‘(B) the reasons for the rescission, and 

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

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

25 year report to the Committee on Ways and Means
60

•S 2210 IS 

1 of the House of Representatives and the Committee 

2 on Finance of the Senate—

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

4 aggregate amount of penalties imposed, and re5 scinded, under this section, and 

6 ‘‘(B) a description of each penalty re7 scinded under this subsection and the reasons 

8 therefor. 

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

10 a person—

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

12 under section 13 or 15(d) of the Securities Ex13 change Act of 1934 or is required to be consolidated 

14 with another person for purposes of such reports, 

15 and 

16 ‘‘(2) which is required to pay a penalty under 

17 this section with respect to any noneconomic sub18 stance transaction, 

19 the requirement to pay such penalty shall be disclosed in 

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

21 Secretary shall specify. Failure to make a disclosure in 

22 accordance with the preceding sentence shall be treated 

23 as a failure to which the penalty under subsection (b) ap24 plies. 

25 ‘‘(f) SPECIAL RULES.—
61

•S 2210 IS 

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

2 ON OTHER UNDERSTATEMENTS.—In the case of an 

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

4 ‘‘(A) the amount of such understatement 

5 (determined without regard to this paragraph) 

6 shall be increased by the aggregate amount of 

7 noneconomic substance transaction understate8 ments for purposes of determining whether 

9 such understatement is a substantial under10 statement under section 6662(d)(1), and 

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

12 6662(a) shall apply only to the excess of the 

13 amount of the substantial understatement (if 

14 any) after the application of subparagraph (A) 

15 over the aggregate amount of noneconomic sub16 stance transaction understatements. 

17 ‘‘(2) COORDINATION WITH OTHER PEN18 ALTIES.—

19 ‘‘(A) IN GENERAL.—Except as otherwise 

20 provided in subparagraph (C), the penalty im21 posed by this section shall be in addition to any 

22 other penalty imposed by this title. 

23 ‘‘(B) APPLICATION OF FRAUD PENALTY.—

24 References to an underpayment in section 6663 

25 shall be treated as including references to a 
62

•S 2210 IS 

1 noneconomic substance transaction understate2 ment. 

3 ‘‘(C) NO DOUBLE PENALTY.—This section 

4 shall not apply to any portion of an understate5 ment on which a penalty is imposed under sec6 tion 6663. 

7 ‘‘(3) SPECIAL RULE FOR AMENDED RE8 TURNS.—Except as provided in regulations, in no 

9 event shall any tax treatment included with an 

10 amendment or supplement to a return of tax be 

11 taken into account in determining the amount of any 

12 noneconomic substance transaction understatement 

13 if the amendment or supplement is filed after the 

14 earlier of the date the taxpayer is first contacted by 

15 the Secretary regarding the examination of the re16 turn or such other date as is specified by the Sec17 retary.’’.

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

19 for part II of subchapter A of chapter 68, as amended 

20 by section 302, is amended by inserting after the item re21 lating to section 6662 the following new item:

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

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

23 this section shall apply to transactions entered after the 

24 date of the enactment of this Act. 
63

•S 2210 IS 

1 SEC. 304. DENIAL OF DEDUCTION FOR INTEREST ON UN2 DERPAYMENTS ATTRIBUTABLE TO NON3 ECONOMIC SUBSTANCE TRANSACTIONS. 

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

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

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

7 following new subsection: 

8 ‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE

9 TO NONECONOMIC SUBSTANCE TRANSACTIONS.—No de10 duction shall be allowed under this chapter for any inter11 est paid or accrued under section 6601 on any under12 payment of tax which is attributable to any noneconomic 

13 substance transaction understatement (as defined in sec14 tion 6662A(c)(1)).’’. 

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

16 this section shall apply to transactions in taxable years 

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

18 TITLE IV—DETERRING 

19 UNCOOPERATIVE TAX HAVENS 

20 SEC. 401. DISCLOSING PAYMENTS TO PERSONS IN UNCO21 OPERATIVE TAX HAVENS. 

22 (a) IN GENERAL.—Subpart A of part III of sub23 chapter A of chapter 61 is amended by inserting after sec24 tion 6038C the following new section: 
64

•S 2210 IS 

1 ‘‘SEC. 6038D. DETERRING UNCOOPERATIVE TAX HAVENS 

2 THROUGH LISTING AND REPORTING RE3 QUIREMENTS. 

4 ‘‘(a) IN GENERAL.—Each United States person who 

5 transfers money or other property directly or indirectly to 

6 any uncooperative tax haven, to any financial institution 

7 licensed by or operating in any uncooperative tax haven, 

8 or to any person who is a resident of any uncooperative 

9 tax haven shall furnish to the Secretary, at such time and 

10 in such manner as the Secretary shall by regulation pre11 scribe, such information with respect to such transfer as 

12 the Secretary may require. 

13 ‘‘(b) EXCEPTIONS.—Subsection (a) shall not apply to 

14 a transfer by a United States person if the amount of 

15 money (and the fair market value of property) transferred 

16 is less than $10,000. Related transfers shall be treated 

17 as 1 transfer for purposes of this subsection. 

18 ‘‘(c) UNCOOPERATIVE TAX HAVEN.—For purposes of 

19 this section—

20 ‘‘(1) IN GENERAL.—The term ‘uncooperative 

21 tax haven’ means any foreign jurisdiction which is 

22 identified on a list maintained by the Secretary 

23 under paragraph (2) as being a jurisdiction—

24 ‘‘(A) which imposes no or nominal taxation 

25 either generally or on specified classes of in26 come, and
65

•S 2210 IS 

1 ‘‘(B) has corporate, business, bank, or tax 

2 secrecy or confidentiality rules and practices, or 

3 has ineffective information exchange practices 

4 which, in the judgment of the Secretary, effec5 tively limit or restrict the ability of the United 

6 States to obtain information relevant to the en7 forcement of this title. 

8 ‘‘(2) MAINTENANCE OF LIST.—Not later than 

9 November 1 of each calendar year, the Secretary 

10 shall issue a list of foreign jurisdictions which the 

11 Secretary determines qualify as uncooperative tax 

12 havens under paragraph (1). 

13 ‘‘(3) INEFFECTIVE INFORMATION EXCHANGE

14 PRACTICES.—For purposes of paragraph (1), a juris15 diction shall be deemed to have ineffective informa16 tion exchange practices if the Secretary determines 

17 that during any taxable year ending in the 12-month 

18 period preceding the issuance of the list under para19 graph (2)—

20 ‘‘(A) the exchange of information between 

21 the United States and such jurisdiction was in22 adequate to prevent evasion or avoidance of 

23 United States income tax by United States per24 sons or to enable the United States effectively 

25 to enforce this title, or 
66

•S 2210 IS 

1 ‘‘(B) such jurisdiction was identified by an 

2 intergovernmental group or organization of 

3 which the United States is a member as unco4 operative with international tax enforcement or 

5 information exchange and the United States 

6 concurs in the determination. 

7 ‘‘(d) PENALTY FOR FAILURE TO FILE INFORMA8 TION.—If a United States person fails to furnish the infor9 mation required by subsection (a) with respect to any 

10 transfer within the time prescribed therefor (including ex11 tensions), such United States person shall pay (upon no12 tice and demand by the Secretary and in the same manner 

13 as tax) an amount equal to 20 percent of the amount of 

14 such transfer. 

15 ‘‘(e) SIMPLIFIED REPORTING.—The Secretary may 

16 by regulations provide for simplified reporting under this 

17 section for United States persons making large volumes 

18 of similar payments. 

19 ‘‘(f) REGULATIONS.—The Secretary shall prescribe 

20 such regulations as may be necessary or appropriate to 

21 carry out the purposes of this section.’’. 

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

23 for such subpart A is amended by inserting after the item 

24 relating to section 6038C the following new item:

‘‘Sec. 6038D. Deterring uncooperative tax havens through listing and reporting 

requirements.’’.
67

•S 2210 IS 

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

2 this section shall apply to transfers after the date which 

3 is 180 days after the date of the enactment of this Act.

4 SEC. 402. DETERRING UNCOOPERATIVE TAX HAVENS BY 

5 RESTRICTING ALLOWABLE TAX BENEFITS. 

6 (a) LIMITATION ON DEFERRAL.—

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

8 952 (defining subpart F income) is amended by 

9 striking ‘‘and’’ at the end of paragraph (4), by strik10 ing the period at the end of paragraph (5) and in11 serting ‘‘, and’’, and by inserting after paragraph 

12 (5) the following new paragraph: 

13 ‘‘(6) an amount equal to the applicable fraction 

14 (as defined in subsection (e)) of the income of such 

15 corporation other than income which—

16 ‘‘(A) is attributable to earnings and profits 

17 of the foreign corporation included in the gross 

18 income of a United States person under section 

19 951 (other than by reason of this paragraph or 

20 paragraph (3)(A)(i)), or 

21 ‘‘(B) is described in subsection (b).’’. 

22 (2) APPLICABLE FRACTION.—Section 952 is 

23 amended by adding at the end the following new 

24 subsection: 
68

•S 2210 IS 

1 ‘‘(e) IDENTIFIED TAX HAVEN INCOME WHICH IS

2 SUBPART F INCOME.—

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

4 (a)(6), the term ‘applicable fraction’ means the frac5 tion—

6 ‘‘(A) the numerator of which is the aggre7 gate identified tax haven income for the taxable 

8 year, and 

9 ‘‘(B) the denominator of which is the ag10 gregate income for the taxable year which is 

11 from sources outside the United States. 

12 ‘‘(2) IDENTIFIED TAX HAVEN INCOME.—For 

13 purposes of paragraph (1), the term ‘identified tax 

14 haven income’ means income for the taxable year 

15 which is attributable to a foreign jurisdiction for any 

16 period during which such jurisdiction has been iden17 tified as an uncooperative tax haven under section 

18 6038D(c). 

19 ‘‘(3) REGULATIONS.—The Secretary shall pre20 scribe regulations similar to the regulations issued 

21 under section 999(c) to carry out the purposes of 

22 this subsection.’’. 

23 (b) DENIAL OF FOREIGN TAX CREDIT.—Section 901 

24 (relating to taxes of foreign countries and of possessions 

25 of United States) is amended by redesignating subsection 
69

•S 2210 IS 

1 (l) as subsection (m) and by inserting after subsection (k) 

2 the following new subsection: 

3 ‘‘(l) REDUCTION OF FOREIGN TAX CREDIT, ETC., 

4 FOR IDENTIFIED TAX HAVEN INCOME.—

5 ‘‘(1) IN GENERAL.—Notwithstanding any other 

6 provision of this part—

7 ‘‘(A) no credit shall be allowed under sub8 section (a) for any income, war profits, or ex9 cess profits taxes paid or accrued (or deemed 

10 paid under section 902 or 960) to any foreign 

11 jurisdiction if such taxes are with respect to in12 come attributable to a period during which such 

13 jurisdiction has been identified as an unco14 operative tax haven under section 6038D(c), 

15 and 

16 ‘‘(B) subsections (a), (b), (c), and (d) of 

17 section 904 and sections 902 and 960 shall be 

18 applied separately with respect to all income of 

19 a taxpayer attributable to periods described in 

20 subparagraph (A) with respect to all such juris21 dictions. 

22 ‘‘(2) TAXES ALLOWED AS A DEDUCTION, ETC.—

23 Sections 275 and 78 shall not apply to any tax 

24 which is not allowable as a credit under subsection 

25 (a) by reason of this subsection. 
70

•S 2210 IS 

1 ‘‘(3) REGULATIONS.—The Secretary shall pre2 scribe such regulations as may be necessary or ap3 propriate to carry out the purposes of this sub4 section, including regulations which treat income 

5 paid through 1 or more entities as derived from a 

6 foreign jurisdiction to which this subsection applies 

7 if such income was, without regard to such entities, 

8 derived from such jurisdiction.’’. 

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

10 this section shall apply to taxable years beginning after 

11 the date of the enactment of this Act.

Æ