II 

109TH CONGRESS 

2D SESSION S. 3738 

To amend the Internal Revenue Code of 1986 to provide an additional 

standard deduction for real property taxes for nonitemizers. 

IN THE SENATE OF THE UNITED STATES 

JULY 26, 2006 

Mr. BAUCUS (for himself and Mr. MENENDEZ) 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 provide 

an additional standard deduction for real property taxes 

for nonitemizers. 

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. 

4 This Act may be cited as the ‘‘Nonitemizer Real 

5 Property Tax Deduction Act of 2006’’. 

6 SEC. 2. ADDITIONAL STANDARD DEDUCTION FOR REAL 

7 PROPERTY TAXES FOR NONITEMIZERS. 

8 (a) IN GENERAL.—Section 63(c)(1) (defining stand9 ard deduction) is amended by striking ‘‘and’’ at the end 

10 of subparagraph (A), by striking the period at the end 


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1 of subparagraph (B) and inserting ‘‘, and’’, and by adding 

2 at the end the following new subparagraph: 

3 ‘‘(C) the real property tax deduction.’’. 

4 (b) DEFINITION.—Section 63(c) is amended by add5 ing at the end the following new paragraph: 

6 ‘‘(8) REAL PROPERTY TAX DEDUCTION.—For 

7 purposes of paragraph (1), the real property tax de8 duction is so much of the amount of State and local 

9 real property taxes (within the meaning of section 

10 164) paid or accrued by the taxpayer during the tax11 able year which do not exceed $500 ($1,000 in the 

12 case of a joint return).’’. 

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

14 this section shall apply to taxable years beginning after 

15 December 31, 2006. 

16 SEC. 3. CLARIFICATION OF ECONOMIC SUBSTANCE DOC17 TRINE. 

18 (a) IN GENERAL.—Section 7701 is amended by re19 designating subsection (o) as subsection (p) and by insert20 ing after subsection (n) the following new subsection: 

21 ‘‘(o) CLARIFICATION OF ECONOMIC SUBSTANCE

22 DOCTRINE; ETC.— 

23 ‘‘(1) GENERAL RULES.— 

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

25 a court determines that the economic substance 


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1 doctrine is relevant for purposes of this title to 

2 a transaction (or series of transactions), such 

3 transaction (or series of transactions) shall have 

4 economic substance only if the requirements of 

5 this paragraph are met. 

6 ‘‘(B) DEFINITION OF ECONOMIC SUB7 STANCE.—For purposes of subparagraph (A)— 

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

9 economic substance only if— 

10 ‘‘(I) the transaction changes in a 

11 meaningful way (apart from Federal 

12 tax effects) the taxpayer’s economic 

13 position, and 

14 ‘‘(II) the taxpayer has a substan15 tial nontax purpose for entering into 

16 such transaction and the transaction 

17 is a reasonable means of accom18 plishing such purpose. 

19 In applying subclause (II), a purpose of 

20 achieving a financial accounting benefit 

21 shall not be taken into account in deter22 mining whether a transaction has a sub23 stantial nontax purpose if the origin of 

24 such financial accounting benefit is a re25 duction of income tax. 


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1 ‘‘(ii) SPECIAL RULE WHERE TAX2 PAYER RELIES ON PROFIT POTENTIAL.—A 

3 transaction shall not be treated as having 

4 economic substance by reason of having a 

5 potential for profit unless— 

6 ‘‘(I) the present value of the rea7 sonably expected pre-tax profit from 

8 the transaction is substantial in rela9 tion to the present value of the ex10 pected net tax benefits that would be 

11 allowed if the transaction were re12 spected, and 

13 ‘‘(II) the reasonably expected 

14 pre-tax profit from the transaction ex15 ceeds a risk-free rate of return. 

16 ‘‘(C) TREATMENT OF FEES AND FOREIGN

17 TAXES.—Fees and other transaction expenses 

18 and foreign taxes shall be taken into account as 

19 expenses in determining pre-tax profit under 

20 subparagraph (B)(ii). 

21 ‘‘(2) SPECIAL RULES FOR TRANSACTIONS WITH

22 TAX-INDIFFERENT PARTIES.— 

23 ‘‘(A) SPECIAL RULES FOR FINANCING

24 TRANSACTIONS.—The form of a transaction 

25 which is in substance the borrowing of money 


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1 or the acquisition of financial capital directly or 

2 indirectly from a tax-indifferent party shall not 

3 be respected if the present value of the deduc4 tions to be claimed with respect to the trans5 action is substantially in excess of the present 

6 value of the anticipated economic returns of the 

7 person lending the money or providing the fi8 nancial capital. A public offering shall be treat9 ed as a borrowing, or an acquisition of financial 

10 capital, from a tax-indifferent party if it is rea11 sonably expected that at least 50 percent of the 

12 offering will be placed with tax-indifferent par13 ties. 

14 ‘‘(B) ARTIFICIAL INCOME SHIFTING AND

15 BASIS ADJUSTMENTS.—The form of a trans16 action with a tax-indifferent party shall not be 

17 respected if— 

18 ‘‘(i) it results in an allocation of in19 come or gain to the tax-indifferent party in 

20 excess of such party’s economic income or 

21 gain, or 

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

23 or shifting of basis on account of over24 stating the income or gain of the tax-indif25 ferent party. 


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

2 purposes of this subsection— 

3 ‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.— 

4 The term ‘economic substance doctrine’ means 

5 the common law doctrine under which tax bene6 fits under subtitle A with respect to a trans7 action are not allowable if the transaction does 

8 not have economic substance or lacks a business 

9 purpose. 

10 ‘‘(B) TAX-INDIFFERENT PARTY.—The 

11 term ‘tax-indifferent party’ means any person 

12 or entity not subject to tax imposed by subtitle 

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

14 party with respect to a transaction if the items 

15 taken into account with respect to the trans16 action have no substantial impact on such per17 son’s liability under subtitle A. 

18 ‘‘(C) EXCEPTION FOR PERSONAL TRANS19 ACTIONS OF INDIVIDUALS.—In the case of an 

20 individual, this subsection shall apply only to 

21 transactions entered into in connection with a 

22 trade or business or an activity engaged in for 

23 the production of income. 


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1 ‘‘(D) TREATMENT OF LESSORS.—In apply2 ing paragraph (1)(B)(ii) to the lessor of tan3 gible property subject to a lease— 

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

5 respect to the leased property shall not in6 clude the benefits of— 

7 ‘‘(I) depreciation, 

8 ‘‘(II) any tax credit, or 

9 ‘‘(III) any other deduction as 

10 provided in guidance by the Secretary, 

11 and 

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

13 (1)(B)(ii) shall be disregarded in deter14 mining whether any of such benefits are al15 lowable. 

16 ‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF17 FECTED.—Except as specifically provided in this 

18 subsection, the provisions of this subsection shall not 

19 be construed as altering or supplanting any other 

20 rule of law, and the requirements of this subsection 

21 shall be construed as being in addition to any such 

22 other rule of law. 

23 ‘‘(5) REGULATIONS.—The Secretary shall pre24 scribe such regulations as may be necessary or ap25 propriate to carry out the purposes of this subVerDate Aug 31 2005 04:52 Jul 30, 2006 Jkt 049200 PO 00000 Frm 00007 Fmt 6652 Sfmt 6201 E:\BILLS\S3738.IS S3738

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1 section. Such regulations may include exemptions 

2 from the application of this subsection.’’. 

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

4 this section shall apply to transactions entered into after 

5 the date of the enactment of this Act. 

6 SEC. 4. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE 

7 TO TRANSACTIONS LACKING ECONOMIC SUB8 STANCE, ETC. 

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

10 amended by inserting after section 6662A the following 

11 new section: 

12 ‘‘SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIB13 UTABLE TO TRANSACTIONS LACKING ECO14 NOMIC SUBSTANCE, ETC. 

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

16 noneconomic substance transaction understatement for 

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

18 amount equal to 40 percent of the amount of such under19 statement. 

20 ‘‘(b) REDUCTION OF PENALTY FOR DISCLOSED

21 TRANSACTIONS.—Subsection (a) shall be applied by sub22 stituting ‘20 percent’ for ‘40 percent’ with respect to the 

23 portion of any noneconomic substance transaction under24 statement with respect to which the relevant facts affectVerDate Aug 31 2005 04:52 Jul 30, 2006 Jkt 049200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\S3738.IS S3738

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1 ing the tax treatment of the item are adequately disclosed 

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

3 ‘‘(c) NONECONOMIC SUBSTANCE TRANSACTION UN4 DERSTATEMENT.—For purposes of this section— 

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

6 substance transaction understatement’ means any 

7 amount which would be an understatement under 

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

9 by taking into account items attributable to non10 economic substance transactions rather than items 

11 to which section 6662A would apply without regard 

12 to this paragraph. 

13 ‘‘(2) NONECONOMIC SUBSTANCE TRANS14 ACTION.—The term ‘noneconomic substance trans15 action’ means any transaction if— 

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

17 (within the meaning of section 7701(o)(1)) for 

18 the transaction giving rise to the claimed ben19 efit or the transaction was not respected under 

20 section 7701(o)(2), or 

21 ‘‘(B) the transaction fails to meet the re22 quirements of any similar rule of law. 

23 ‘‘(d) RULES APPLICABLE TO COMPROMISE OF PEN24 ALTY.— 


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1 ‘‘(1) IN GENERAL.—If the 1st letter of pro2 posed deficiency which allows the taxpayer an oppor3 tunity for administrative review in the Internal Rev4 enue Service Office of Appeals has been sent with 

5 respect to a penalty to which this section applies, 

6 only the Commissioner of Internal Revenue may 

7 compromise all or any portion of such penalty. 

8 ‘‘(2) APPLICABLE RULES.—The rules of para9 graphs (2) and (3) of section 6707A(d) shall apply 

10 for purposes of paragraph (1). 

11 ‘‘(e) COORDINATION WITH OTHER PENALTIES.—Ex12 cept as otherwise provided in this part, the penalty im13 posed by this section shall be in addition to any other pen14 alty imposed by this title. 

15 ‘‘(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).’’. 

16 (b) COORDINATION WITH OTHER UNDERSTATE17 MENTS AND PENALTIES.— 

18 (1) The second sentence of section 

19 6662(d)(2)(A) is amended by inserting ‘‘and without 

20 regard to items with respect to which a penalty is 

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

22 end. 


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1 (2) Subsection (e) of section 6662A is amend2 ed— 

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

4 noneconomic substance transaction understate5 ments’’ after ‘‘reportable transaction under6 statements’’ both places it appears, 

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

8 a noneconomic substance transaction under9 statement’’ after ‘‘reportable transaction under10 statement’’, 

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

12 ‘‘6662B or’’ before ‘‘6663’’, 

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

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

15 end, 

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

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

18 (F) in paragraph (3), by inserting ‘‘or non19 economic substance transaction understate20 ment’’ after ‘‘reportable transaction understate21 ment’’, and 

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

23 paragraph: 

24 ‘‘(4) NONECONOMIC SUBSTANCE TRANSACTION

25 UNDERSTATEMENT.—For purposes of this subVerDate Aug 31 2005 04:52 Jul 30, 2006 Jkt 049200 PO 00000 Frm 00011 Fmt 6652 Sfmt 6201 E:\BILLS\S3738.IS S3738

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1 section, the term ‘noneconomic substance trans2 action understatement’ has the meaning given such 

3 term by section 6662B(c).’’. 

4 (3) Subsection (e) of section 6707A is amend5 ed— 

6 (A) by striking ‘‘or’’ at the end of subpara7 graph (B), and 

8 (B) by striking subparagraph (C) and in9 serting the following new subparagraphs: 

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

11 section 6662B with respect to any noneconomic 

12 substance transaction, or 

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

14 section 6662(h) with respect to any transaction 

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

16 have been subject to penalty under section 

17 6662A at a rate prescribed under section 

18 6662A(c) or under section 6662B,’’. 

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

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

21 inserting after the item relating to section 6662A the fol22 lowing new item: 

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

economic substance, etc.’’. 


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

2 this section shall apply to transactions entered into after 

3 the date of the enactment of this Act. 

Æ 


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