I 

108TH CONGRESS 

2D SESSION H. R. 4997 

To amend the Internal Revenue Code of 1986 to provide tax relief for 

middle income taxpayers, and for other purposes. 

IN THE HOUSE OF REPRESENTATIVES 

JULY 22, 2004 

Mr. STENHOLM (for himself, Mr. ALEXANDER, Mr. BACA, Mr. BERRY, Mr. 

BISHOP of Georgia, Mr. BOSWELL, Mr. BOYD, Mr. CARDOZA, Mr. CASE, 

Mr. CHANDLER, Mr. COOPER, Mr. CRAMER, Mr. DAVIS of Tennessee, 

Ms. HARMAN, Ms. HERSETH, Mr. HILL, Mr. HOLDEN, Mr. LUCAS of 

Kentucky, Mr. MICHAUD, Mr. MOORE, Mr. PETERSON of Minnesota, Mr. 

POMEROY, Mr. ROSS, Mr. SANDLIN, Mr. SCHIFF, Mr. SCOTT of Georgia, 

Mr. TANNER, Mrs. TAUSCHER, Mr. TAYLOR of Mississippi, Mr. THOMPSON of California, Mr. TURNER of Texas, Ms. LORETTA SANCHEZ of 

California, Mr. ISRAEL, Mr. FORD, and Mr. MCINTYRE) introduced the 

following bill; which was referred to the Committee on Ways and Means 

A BILL 

To amend the Internal Revenue Code of 1986 to provide 

tax relief for middle income taxpayers, 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 ‘‘Fiscally Responsible Family Tax Relief Act of 2004’’. 
2 

•HR 4997 IH 

1 (b) AMENDMENT OF 1986 CODE.—Except as other2 wise expressly provided, whenever in this Act an amend3 ment or repeal is expressed in terms of an amendment 

4 to, or repeal of, a section or other provision, the reference 

5 shall be considered to be made to a section or other provi6 sion of the Internal Revenue Code of 1986. 

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

8 this Act is as follows: 

Sec. 1. Short title; etc. 

TITLE I—EXTENSION OF CERTAIN EXPIRING PROVISIONS 

Sec. 101. Extension of family tax provisions through 2005. 

Sec. 102. Acceleration of increase in refundability of the child tax credit. 

Sec. 103. Application of EGTRRA sunset to this title. 

TITLE II—UNIFORM DEFINITION OF CHILD 

Sec. 201. Uniform definition of child, etc. 

Sec. 202. Modifications of definition of head of household. 

Sec. 203. Modifications of dependent care credit. 

Sec. 204. Modifications of child tax credit. 

Sec. 205. Modifications of earned income credit. 

Sec. 206. Modifications of deduction for personal exemption for dependents. 

Sec. 207. Technical and conforming amendments. 

Sec. 208. Effective date. 

TITLE III—REVENUE PROVISIONS 

Subtitle A—Provisions Designed To Curtail Tax Shelters 

Sec. 301. Clarification of economic substance doctrine. 

Sec. 302. Penalty for failing to disclose reportable transaction. 

Sec. 303. Accuracy-related penalty for listed transactions and other reportable 

transactions having a significant tax avoidance purpose. 

Sec. 304. Penalty for understatements attributable to transactions lacking economic substance, etc. 

Sec. 305. Modifications of substantial understatement penalty for nonreportable 

transactions. 

Sec. 306. Tax shelter exception to confidentiality privileges relating to taxpayer 

communications. 

Sec. 307. Disclosure of reportable transactions. 

Sec. 308. Modifications to penalty for failure to register tax shelters. 

Sec. 309. Modification of penalty for failure to maintain lists of investors. 

Sec. 310. Modification of actions to enjoin certain conduct related to tax shelters and reportable transactions. 

Sec. 311. Understatement of taxpayer’s liability by income tax return preparer. 
3 

•HR 4997 IH 

Sec. 312. Penalty on failure to report interests in foreign financial accounts. 

Sec. 313. Frivolous tax submissions. 

Sec. 314. Regulation of individuals practicing before the Department of Treasury. 

Sec. 315. Penalty for promoting abusive tax shelters. 

Sec. 316. Statute of limitations for taxable years for which required listed 

transactions not reported. 

Sec. 317. Denial of deduction for interest on underpayments attributable to 

nondisclosed reportable and noneconomic substance transactions. 

Sec. 318. Authorization of appropriations for tax law enforcement. 

Sec. 319. Penalty for aiding and abetting the understatement of tax liability. 

Subtitle B—Enron-Related Tax Shelter Provisions 

Sec. 321. Limitation on transfer or importation of built-in losses. 

Sec. 322. No reduction of basis under section 734 in stock held by partnership 

in corporate partner. 

Sec. 323. Repeal of special rules for FASITs. 

Sec. 324. Expanded disallowance of deduction for interest on convertible debt. 

Sec. 325. Expanded authority to disallow tax benefits under section 269. 

Sec. 326. Modification of interaction between subpart F and passive foreign investment company rules. 

Subtitle C—Extension of Customs User Fees 

Sec. 331. Extension of customs user fees. 

1 TITLE I—EXTENSION OF 

2 CERTAIN EXPIRING PROVISIONS 

3 SEC. 101. EXTENSION OF FAMILY TAX PROVISIONS 

4 THROUGH 2005. 

5 (a) CHILD CREDIT.—The table contained in section 

6 24(a)(2) (relating to per child amount) is amended— 

7 (1) by striking ‘‘2005,’’ in the second item, and 

8 (2) by striking ‘‘or 2004’’ in the first item and 

9 inserting ‘‘, 2004, or 2005’’. 

10 (b) MARRIAGE PENALTY RELIEF IN STANDARD DE11 DUCTION.—Paragraph (7) of section 63(c) (relating to ap12 plicable percentage) is amended by striking ‘‘174’’ and in13 serting ‘‘200’’. 
4 

•HR 4997 IH 

1 (c) MARRIAGE PENALTY RELIEF IN 15-PERCENT IN2 COME TAX BRACKET.—Subparagraph (B) of section 

3 1(f)(8) (relating to applicable percentage) is amended by 

4 striking ‘‘180’’ and inserting ‘‘200’’. 

5 (d) 10-PERCENT RATE BRACKET.—Paragraph (1) of 

6 section 1(i) (relating to rate reductions after 2000) is 

7 amended— 

8 (1) by striking ‘‘2004’’ in subparagraph (B)(i) 

9 and inserting ‘‘2005’’, and 

10 (2) by inserting ‘‘and 2005’’ after ‘‘2004’’ in 

11 subparagraph (C)(ii). 

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

13 this section shall apply to taxable years beginning after 

14 December 31, 2004. 

15 SEC. 102. ACCELERATION OF INCREASE IN REFUNDABILITY 

16 OF THE CHILD TAX CREDIT. 

17 (a) ACCELERATION OF REFUNDABILITY.—Section 

18 24(d)(1)(B)(i) (relating to portion of credit refundable) is 

19 amended by striking ‘‘(10 percent in the case of taxable 

20 years beginning before January 1, 2005)’’. 

21 (b) EARNED INCOME INCLUDES COMBAT PAY.—Sec22 tion 24(d)(1) is amended by adding at the end the fol23 lowing new sentence: ‘‘For purposes of subparagraph (B), 

24 any amount excluded from gross income by reason of sec25 tion 112 shall be treated as earned income which is taken 
5 

•HR 4997 IH 

1 into account in computing taxable income for the taxable 

2 year.’’. 

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

4 this section shall apply to taxable years beginning after 

5 December 31, 2003. 

6 SEC. 103. APPLICATION OF EGTRRA SUNSET TO THIS TITLE. 

7 Each amendment made by this title shall be subject 

8 to title IX of the Economic Growth and Tax Relief Rec9 onciliation Act of 2001 to the same extent and in the same 

10 manner as the provision of such Act to which such amend11 ment relates. 

12 TITLE II—UNIFORM DEFINITION 

13 OF CHILD 

14 SEC. 201. UNIFORM DEFINITION OF CHILD, ETC. 

15 Section 152 is amended to read as follows: 

16 ‘‘SEC. 152. DEPENDENT DEFINED. 

17 ‘‘(a) IN GENERAL.—For purposes of this subtitle, the 

18 term ‘dependent’ means— 

19 ‘‘(1) a qualifying child, or 

20 ‘‘(2) a qualifying relative. 

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

22 ‘‘(1) DEPENDENTS INELIGIBLE.—If an indi23 vidual is a dependent of a taxpayer for any taxable 

24 year of such taxpayer beginning in a calendar year, 

25 such individual shall be treated as having no depend-
6 

•HR 4997 IH 

1 ents for any taxable year of such individual beginning 

2 in such calendar year. 

3 ‘‘(2) MARRIED DEPENDENTS.—An individual 

4 shall not be treated as a dependent of a taxpayer 

5 under subsection (a) if such individual has made a 

6 joint return with the individual’s spouse under sec7 tion 6013 for the taxable year beginning in the cal8 endar year in which the taxable year of the taxpayer 

9 begins. 

10 ‘‘(3) CITIZENS OR NATIONALS OF OTHER COUN11 TRIES.— 

12 ‘‘(A) IN GENERAL.—The term ‘dependent’ 

13 does not include an individual who is not a cit14 izen or national of the United States unless 

15 such individual is a resident of the United 

16 States or a country contiguous to the United 

17 States. 

18 ‘‘(B) EXCEPTION FOR ADOPTED CHILD.— 

19 Subparagraph (A) shall not exclude any child of 

20 a taxpayer (within the meaning of subsection 

21 (f)(1)(B)) from the definition of ‘dependent’ 

22 if— 

23 ‘‘(i) for the taxable year of the tax24 payer, the child has the same principal 
7 

•HR 4997 IH 

1 place of abode as the taxpayer and is a 

2 member of the taxpayer’s household, and 

3 ‘‘(ii) the taxpayer is a citizen or na4 tional of the United States. 

5 ‘‘(c) QUALIFYING CHILD.—For purposes of this sec6 tion— 

7 ‘‘(1) IN GENERAL.—The term ‘qualifying child’ 

8 means, with respect to any taxpayer for any taxable 

9 year, an individual— 

10 ‘‘(A) who bears a relationship to the tax11 payer described in paragraph (2), 

12 ‘‘(B) who has the same principal place of 

13 abode as the taxpayer for more than one-half of 

14 such taxable year, 

15 ‘‘(C) who meets the age requirements of 

16 paragraph (3), and 

17 ‘‘(D) who has not provided over one-half of 

18 such individual’s own support for the calendar 

19 year in which the taxable year of the taxpayer 

20 begins. 

21 ‘‘(2) RELATIONSHIP.—For purposes of para22 graph (1)(A), an individual bears a relationship to 

23 the taxpayer described in this paragraph if such in24 dividual is— 
8 

•HR 4997 IH 

1 ‘‘(A) a child of the taxpayer or a descend2 ant of such a child, or 

3 ‘‘(B) a brother, sister, stepbrother, or step4 sister of the taxpayer or a descendant of any 

5 such relative. 

6 ‘‘(3) AGE REQUIREMENTS.— 

7 ‘‘(A) IN GENERAL.—For purposes of para8 graph (1)(C), an individual meets the require9 ments of this paragraph if such individual— 

10 ‘‘(i) has not attained the age of 19 as 

11 of the close of the calendar year in which 

12 the taxable year of the taxpayer begins, or 

13 ‘‘(ii) is a student who has not attained 

14 the age of 24 as of the close of such cal15 endar year. 

16 ‘‘(B) SPECIAL RULE FOR DISABLED.—In 

17 the case of an individual who is permanently 

18 and totally disabled (as defined in section 

19 22(e)(3)) at any time during such calendar 

20 year, the requirements of subparagraph (A) 

21 shall be treated as met with respect to such in22 dividual. 

23 ‘‘(4) SPECIAL RULE RELATING TO 2 OR MORE

24 CLAIMING QUALIFYING CHILD.— 
9 

•HR 4997 IH 

1 ‘‘(A) IN GENERAL.—Except as provided in 

2 subparagraph (B) and subsection (e), if (but for 

3 this paragraph) an individual may be and is 

4 claimed as a qualifying child by 2 or more tax5 payers for a taxable year beginning in the same 

6 calendar year, such individual shall be treated 

7 as the qualifying child of the taxpayer who is— 

8 ‘‘(i) a parent of the individual, or 

9 ‘‘(ii) if clause (i) does not apply, the 

10 taxpayer with the highest adjusted gross 

11 income for such taxable year. 

12 ‘‘(B) MORE THAN 1 PARENT CLAIMING

13 QUALIFYING CHILD.—If the parents claiming 

14 any qualifying child do not file a joint return 

15 together, such child shall be treated as the 

16 qualifying child of— 

17 ‘‘(i) the parent with whom the child 

18 resided for the longest period of time dur19 ing the taxable year, or 

20 ‘‘(ii) if the child resides with both par21 ents for the same amount of time during 

22 such taxable year, the parent with the 

23 highest adjusted gross income. 

24 ‘‘(d) QUALIFYING RELATIVE.—For purposes of this 

25 section— 
10 

•HR 4997 IH 

1 ‘‘(1) IN GENERAL.—The term ‘qualifying rel2 ative’ means, with respect to any taxpayer for any 

3 taxable year, an individual— 

4 ‘‘(A) who bears a relationship to the tax5 payer described in paragraph (2), 

6 ‘‘(B) whose gross income for the calendar 

7 year in which such taxable year begins is less 

8 than the exemption amount (as defined in sec9 tion 151(d)), 

10 ‘‘(C) with respect to whom the taxpayer 

11 provides over one-half of the individual’s sup12 port for the calendar year in which such taxable 

13 year begins, and 

14 ‘‘(D) who is not a qualifying child of such 

15 taxpayer or of any other taxpayer for any tax16 able year beginning in the calendar year in 

17 which such taxable year begins. 

18 ‘‘(2) RELATIONSHIP.—For purposes of para19 graph (1)(A), an individual bears a relationship to 

20 the taxpayer described in this paragraph if the indi21 vidual is any of the following with respect to the tax22 payer: 

23 ‘‘(A) A child or a descendant of a child. 

24 ‘‘(B) A brother, sister, stepbrother, or 

25 stepsister. 
11 

•HR 4997 IH 

1 ‘‘(C) The father or mother, or an ancestor 

2 of either. 

3 ‘‘(D) A stepfather or stepmother. 

4 ‘‘(E) A son or daughter of a brother or sis5 ter of the taxpayer. 

6 ‘‘(F) A brother or sister of the father or 

7 mother of the taxpayer. 

8 ‘‘(G) A son-in-law, daughter-in-law, father9 in-law, mother-in-law, brother-in-law, or sister10 in-law. 

11 ‘‘(H) An individual (other than an indi12 vidual who at any time during the taxable year 

13 was the spouse, determined without regard to 

14 section 7703, of the taxpayer) who, for the tax15 able year of the taxpayer, has the same prin16 cipal place of abode as the taxpayer and is a 

17 member of the taxpayer’s household. 

18 ‘‘(3) SPECIAL RULE RELATING TO MULTIPLE

19 SUPPORT AGREEMENTS.—For purposes of paragraph 

20 (1)(C), over one-half of the support of an individual 

21 for a calendar year shall be treated as received from 

22 the taxpayer if— 

23 ‘‘(A) no one person contributed over one24 half of such support, 
12 

•HR 4997 IH 

1 ‘‘(B) over one-half of such support was re2 ceived from 2 or more persons each of whom, 

3 but for the fact that any such person alone did 

4 not contribute over one-half of such support, 

5 would have been entitled to claim such indi6 vidual as a dependent for a taxable year begin7 ning in such calendar year, 

8 ‘‘(C) the taxpayer contributed over 10 per9 cent of such support, and 

10 ‘‘(D) each person described in subpara11 graph (B) (other than the taxpayer) who con12 tributed over 10 percent of such support files a 

13 written declaration (in such manner and form 

14 as the Secretary may by regulations prescribe) 

15 that such person will not claim such individual 

16 as a dependent for any taxable year beginning 

17 in such calendar year. 

18 ‘‘(4) SPECIAL RULE RELATING TO INCOME OF

19 HANDICAPPED DEPENDENTS.— 

20 ‘‘(A) IN GENERAL.—For purposes of para21 graph (1)(B), the gross income of an individual 

22 who is permanently and totally disabled (as de23 fined in section 22(e)(3)) at any time during 

24 the taxable year shall not include income attrib-
13 

•HR 4997 IH 

1 utable to services performed by the individual 

2 at a sheltered workshop if— 

3 ‘‘(i) the availability of medical care at 

4 such workshop is the principal reason for 

5 the individual’s presence there, and 

6 ‘‘(ii) the income arises solely from ac7 tivities at such workshop which are inci8 dent to such medical care. 

9 ‘‘(B) SHELTERED WORKSHOP DEFINED.— 

10 For purposes of subparagraph (A), the term 

11 ‘sheltered workshop’ means a school— 

12 ‘‘(i) which provides special instruction 

13 or training designed to alleviate the dis14 ability of the individual, and 

15 ‘‘(ii) which is operated by an organi16 zation described in section 501(c)(3) and 

17 exempt from tax under section 501(a), or 

18 by a State, a possession of the United 

19 States, any political subdivision of any of 

20 the foregoing, the United States, or the 

21 District of Columbia. 

22 ‘‘(5) SPECIAL RULES FOR SUPPORT.—For pur23 poses of this subsection— 

24 ‘‘(A) payments to a spouse which are in25 cludible in the gross income of such spouse 
14 

•HR 4997 IH 

1 under section 71 or 682 shall not be treated as 

2 a payment by the payor spouse for the support 

3 of any dependent, and 

4 ‘‘(B) in the case of the remarriage of a 

5 parent, support of a child received from the 

6 parent’s spouse shall be treated as received 

7 from the parent. 

8 ‘‘(e) SPECIAL RULE FOR DIVORCED PARENTS.— 

9 ‘‘(1) IN GENERAL.—Notwithstanding subsection 

10 (c)(4) or (d)(1)(C), if— 

11 ‘‘(A) a child receives over one-half of the 

12 child’s support during the calendar year from 

13 the child’s parents— 

14 ‘‘(i) who are divorced or legally sepa15 rated under a decree of divorce or separate 

16 maintenance, 

17 ‘‘(ii) who are separated under a writ18 ten separation agreement, or 

19 ‘‘(iii) who live apart at all times dur20 ing the last 6 months of the calendar year, 

21 and 

22 ‘‘(B) such child is in the custody of 1 or 

23 both of the child’s parents for more than one24 half of the calendar year, 
15 

•HR 4997 IH 

1 such child shall be treated as being the qualifying 

2 child or qualifying relative of the noncustodial par3 ent for a calendar year if the requirements described 

4 in paragraph (2) are met. 

5 ‘‘(2) REQUIREMENTS.—For purposes of para6 graph (1), the requirements described in this para7 graph are met if— 

8 ‘‘(A) a decree of divorce or separate main9 tenance or written separation agreement be10 tween the parents applicable to the taxable year 

11 beginning in such calendar year provides that— 

12 ‘‘(i) the noncustodial parent shall be 

13 entitled to any deduction allowable under 

14 section 151 for such child, or 

15 ‘‘(ii) the custodial parent will sign a 

16 written declaration (in such manner and 

17 form as the Secretary may prescribe) that 

18 such parent will not claim such child as a 

19 dependent for such taxable year, or 

20 ‘‘(B) in the case of such an agreement exe21 cuted before January 1, 1985, the noncustodial 

22 parent provides at least $600 for the support of 

23 such child during such calendar year. 

24 For purposes of subparagraph (B), amounts ex25 pended for the support of a child or children shall 
16 

•HR 4997 IH 

1 be treated as received from the noncustodial parent 

2 to the extent that such parent provided amounts for 

3 such support. 

4 ‘‘(3) CUSTODIAL PARENT AND NONCUSTODIAL

5 PARENT.—For purposes of this subsection— 

6 ‘‘(A) CUSTODIAL PARENT.—The term ‘cus7 todial parent’ means the parent with whom a 

8 child shared the same principal place of abode 

9 for the greater portion of the calendar year. 

10 ‘‘(B) NONCUSTODIAL PARENT.—The term 

11 ‘noncustodial parent’ means the parent who is 

12 not the custodial parent. 

13 ‘‘(4) EXCEPTION FOR MULTIPLE-SUPPORT

14 AGREEMENTS.—This subsection shall not apply in 

15 any case where over one-half of the support of the 

16 child is treated as having been received from a tax17 payer under the provision of subsection (d)(3). 

18 ‘‘(f) OTHER DEFINITIONS AND RULES.—For pur19 poses of this section— 

20 ‘‘(1) CHILD DEFINED.— 

21 ‘‘(A) IN GENERAL.—The term ‘child’ 

22 means an individual who is— 

23 ‘‘(i) a son, daughter, stepson, or step24 daughter of the taxpayer, or 
17 

•HR 4997 IH 

1 ‘‘(ii) an eligible foster child of the tax2 payer. 

3 ‘‘(B) ADOPTED CHILD.—In determining 

4 whether any of the relationships specified in 

5 subparagraph (A)(i) or paragraph (4) exists, a 

6 legally adopted individual of the taxpayer, or an 

7 individual who is lawfully placed with the tax8 payer for legal adoption by the taxpayer, shall 

9 be treated as a child of such individual by 

10 blood. 

11 ‘‘(C) ELIGIBLE FOSTER CHILD.—For pur12 poses of subparagraph (A)(ii), the term ‘eligible 

13 foster child’ means an individual who is placed 

14 with the taxpayer by an authorized placement 

15 agency or by judgment, decree, or other order 

16 of any court of competent jurisdiction. 

17 ‘‘(2) STUDENT DEFINED.—The term ‘student’ 

18 means an individual who during each of 5 calendar 

19 months during the calendar year in which the tax20 able year of the taxpayer begins— 

21 ‘‘(A) is a full-time student at an edu22 cational organization described in section 

23 170(b)(1)(A)(ii), or 

24 ‘‘(B) is pursuing a full-time course of insti25 tutional on-farm training under the supervision 
18 

•HR 4997 IH 

1 of an accredited agent of an educational organi2 zation described in section 170(b)(1)(A)(ii) or 

3 of a State or political subdivision of a State. 

4 ‘‘(3) DETERMINATION OF HOUSEHOLD STA5 TUS.—An individual shall not be treated as a mem6 ber of the taxpayer’s household if at any time during 

7 the taxable year of the taxpayer the relationship be8 tween such individual and the taxpayer is in viola9 tion of local law. 

10 ‘‘(4) BROTHER AND SISTER.—The terms 

11 ‘brother’ and ‘sister’ include a brother or sister by 

12 the half blood. 

13 ‘‘(5) SPECIAL SUPPORT TEST IN CASE OF STU14 DENTS.—For purposes of subsections (c)(1)(D) and 

15 (d)(1)(C), in the case of an individual who is— 

16 ‘‘(A) a child of the taxpayer, and 

17 ‘‘(B) a student, 

18 amounts received as scholarships for study at an 

19 educational organization described in section 

20 170(b)(1)(A)(ii) shall not be taken into account. 

21 ‘‘(6) TREATMENT OF MISSING CHILDREN.— 

22 ‘‘(A) IN GENERAL.—Solely for the pur23 poses referred to in subparagraph (B), a child 

24 of the taxpayer— 
19 

•HR 4997 IH 

1 ‘‘(i) who is presumed by law enforce2 ment authorities to have been kidnapped 

3 by someone who is not a member of the 

4 family of such child or the taxpayer, and 

5 ‘‘(ii) who had, for the taxable year in 

6 which the kidnapping occurred, the same 

7 principal place of abode as the taxpayer for 

8 more than one-half of the portion of such 

9 year before the date of the kidnapping, 

10 shall be treated as meeting the requirement of 

11 subsection (c)(1)(B) with respect to a taxpayer 

12 for all taxable years ending during the period 

13 that the child is kidnapped. 

14 ‘‘(B) PURPOSES.—Subparagraph (A) shall 

15 apply solely for purposes of determining— 

16 ‘‘(i) the deduction under section 

17 151(c), 

18 ‘‘(ii) the credit under section 24 (re19 lating to child tax credit), 

20 ‘‘(iii) whether an individual is a sur21 viving spouse or a head of a household (as 

22 such terms are defined in section 2), and 

23 ‘‘(iv) the earned income credit under 

24 section 32. 
20 

•HR 4997 IH 

1 ‘‘(C) COMPARABLE TREATMENT OF CER2 TAIN QUALIFYING RELATIVES.—For purposes 

3 of this section, a child of the taxpayer— 

4 ‘‘(i) who is presumed by law enforce5 ment authorities to have been kidnapped 

6 by someone who is not a member of the 

7 family of such child or the taxpayer, and 

8 ‘‘(ii) who was (without regard to this 

9 paragraph) a qualifying relative of the tax10 payer for the portion of the taxable year 

11 before the date of the kidnapping, 

12 shall be treated as a qualifying relative of the 

13 taxpayer for all taxable years ending during the 

14 period that the child is kidnapped. 

15 ‘‘(D) TERMINATION OF TREATMENT.— 

16 Subparagraphs (A) and (C) shall cease to apply 

17 as of the first taxable year of the taxpayer be18 ginning after the calendar year in which there 

19 is a determination that the child is dead (or, if 

20 earlier, in which the child would have attained 

21 age 18). 
21 

•HR 4997 IH 

1 ‘‘(7) CROSS REFERENCES.— 

‘‘For provision treating child as dependent of both 

parents for purposes of certain provisions, see sections 105(b), 132(h)(2)(B), and 213(d)(5).’’. 

2 SEC. 202. MODIFICATIONS OF DEFINITION OF HEAD OF 

3 HOUSEHOLD. 

4 (a) HEAD OF HOUSEHOLD.—Clause (i) of section 

5 2(b)(1)(A) is amended to read as follows: 

6 ‘‘(i) a qualifying child of the indi7 vidual (as defined in section 152(c), deter8 mined without regard to section 152(e)), 

9 but not if such child— 

10 ‘‘(I) is married at the close of the 

11 taxpayer’s taxable year, and 

12 ‘‘(II) is not a dependent of such 

13 individual by reason of section 

14 152(b)(2) or 152(b)(3), or both, or’’. 

15 (b) CONFORMING AMENDMENTS.— 

16 (1) Section 2(b)(2) is amended by striking sub17 paragraph (A) and by redesignating subparagraphs 

18 (B), (C), and (D) as subparagraphs (A), (B), and 

19 (C), respectively. 

20 (2) Clauses (i) and (ii) of section 2(b)(3)(B) are 

21 amended to read as follows: 

22 ‘‘(i) subparagraph (H) of section 

23 152(d)(2), or 
22 

•HR 4997 IH 

1 ‘‘(ii) paragraph (3) of section 

2 152(d).’’. 

3 SEC. 203. MODIFICATIONS OF DEPENDENT CARE CREDIT. 

4 (a) IN GENERAL.—Section 21(a)(1) is amended by 

5 striking ‘‘In the case of an individual who maintains a 

6 household which includes as a member one or more quali7 fying individuals (as defined in subsection (b)(1))’’ and in8 serting ‘‘In the case of an individual for which there are 

9 1 or more qualifying individuals (as defined in subsection 

10 (b)(1)) with respect to such individual’’. 

11 (b) QUALIFYING INDIVIDUAL.—Paragraph (1) of sec12 tion 21(b) is amended to read as follows: 

13 ‘‘(1) QUALIFYING INDIVIDUAL.—The term 

14 ‘qualifying individual’ means— 

15 ‘‘(A) a dependent of the taxpayer (as de16 fined in section 152(a)(1)) who has not attained 

17 age 13, 

18 ‘‘(B) a dependent of the taxpayer who is 

19 physically or mentally incapable of caring for 

20 himself or herself and who has the same prin21 cipal place of abode as the taxpayer for more 

22 than one-half of such taxable year, or 

23 ‘‘(C) the spouse of the taxpayer, if the 

24 spouse is physically or mentally incapable of 

25 caring for himself or herself and who has the 
23 

•HR 4997 IH 

1 same principal place of abode as the taxpayer 

2 for more than one-half of such taxable year.’’. 

3 (c) CONFORMING AMENDMENT.—Paragraph (1) of 

4 section 21(e) is amended to read as follows: 

5 ‘‘(1) PLACE OF ABODE.—An individual shall 

6 not be treated as having the same principal place of 

7 abode of the taxpayer if at any time during the tax8 able year of the taxpayer the relationship between 

9 the individual and the taxpayer is in violation of 

10 local law.’’. 

11 SEC. 204. MODIFICATIONS OF CHILD TAX CREDIT. 

12 (a) IN GENERAL.—Paragraph (1) of section 24(c) is 

13 amended to read as follows: 

14 ‘‘(1) IN GENERAL.—The term ‘qualifying child’ 

15 means a qualifying child of the taxpayer (as defined 

16 in section 152(c)) who has not attained age 17.’’. 

17 (b) CONFORMING AMENDMENT.—Section 24(c)(2) is 

18 amended by striking ‘‘the first sentence of section 

19 152(b)(3)’’ and inserting ‘‘subparagraph (A) of section 

20 152(b)(3)’’. 

21 SEC. 205. MODIFICATIONS OF EARNED INCOME CREDIT. 

22 (a) QUALIFYING CHILD.—Paragraph (3) of section 

23 32(c) is amended to read as follows: 

24 ‘‘(3) QUALIFYING CHILD.— 
24 

•HR 4997 IH 

1 ‘‘(A) IN GENERAL.—The term ‘qualifying 

2 child’ means a qualifying child of the taxpayer 

3 (as defined in section 152(c), determined with4 out regard to paragraph (1)(D) thereof and sec5 tion 152(e)). 

6 ‘‘(B) MARRIED INDIVIDUAL.—The term 

7 ‘qualifying child’ shall not include an individual 

8 who is married as of the close of the taxpayer’s 

9 taxable year unless the taxpayer is entitled to 

10 a deduction under section 151 for such taxable 

11 year with respect to such individual (or would 

12 be so entitled but for section 152(e)). 

13 ‘‘(C) PLACE OF ABODE.—For purposes of 

14 subparagraph (A), the requirements of section 

15 152(c)(1)(B) shall be met only if the principal 

16 place of abode is in the United States. 

17 ‘‘(D) IDENTIFICATION REQUIREMENTS.— 

18 ‘‘(i) IN GENERAL.—A qualifying child 

19 shall not be taken into account under sub20 section (b) unless the taxpayer includes the 

21 name, age, and TIN of the qualifying child 

22 on the return of tax for the taxable year. 

23 ‘‘(ii) OTHER METHODS.—The Sec24 retary may prescribe other methods for 
25 

•HR 4997 IH 

1 providing the information described in 

2 clause (i).’’. 

3 (b) CONFORMING AMENDMENTS.— 

4 (1) Section 32(c)(1) is amended by striking 

5 subparagraph (C) and by redesignating subpara6 graphs (D), (E), (F), and (G) as subparagraphs (C), 

7 (D), (E), and (F), respectively. 

8 (2) Section 32(c)(4) is amended by striking 

9 ‘‘(3)(E)’’ and inserting ‘‘(3)(C)’’. 

10 (3) Section 32(m) is amended by striking ‘‘sub11 sections (c)(1)(F)’’ and inserting ‘‘subsections 

12 (c)(1)(E)’’. 

13 SEC. 206. MODIFICATIONS OF DEDUCTION FOR PERSONAL 

14 EXEMPTION FOR DEPENDENTS. 

15 Subsection (c) of section 151 is amended to read as 

16 follows: 

17 ‘‘(c) ADDITIONAL EXEMPTION FOR DEPENDENTS.— 

18 An exemption of the exemption amount for each individual 

19 who is a dependent (as defined in section 152) of the tax20 payer for the taxable year.’’. 

21 SEC. 207. TECHNICAL AND CONFORMING AMENDMENTS. 

22 (1) Section 2(a)(1)(B)(i) is amended by insert23 ing ‘‘, determined without regard to subsections 

24 (b)(1), (b)(2), and (d)(1)(B) thereof’’ after ‘‘section 

25 152’’. 
26 

•HR 4997 IH 

1 (2) Section 21(e)(5) is amended— 

2 (A) by striking ‘‘paragraph (2) or (4) of’’ 

3 in subparagraph (A), and 

4 (B) by striking ‘‘within the meaning of sec5 tion 152(e)(1)’’ and inserting ‘‘as defined in 

6 section 152(e)(3)(A)’’. 

7 (3) Section 21(e)(6)(B) is amended by striking 

8 ‘‘section 151(c)(3)’’ and inserting ‘‘section 

9 152(f)(1)’’. 

10 (4) Section 25B(c)(2)(B) is amended by strik11 ing ‘‘151(c)(4)’’ and inserting ‘‘152(f)(2)’’. 

12 (5)(A) Subparagraphs (A) and (B) of section 

13 51(i)(1) are each amended by striking ‘‘paragraphs 

14 (1) through (8) of section 152(a)’’ both places it ap15 pears and inserting ‘‘subparagraphs (A) through (G) 

16 of section 152(d)(2)’’. 

17 (B) Section 51(i)(1)(C) is amended by striking 

18 ‘‘152(a)(9)’’ and inserting ‘‘152(d)(2)(H)’’. 

19 (6) Section 72(t)(2)(D)(i)(III) is amended by 

20 inserting ‘‘, determined without regard to sub21 sections (b)(1), (b)(2), and (d)(1)(B) thereof’’ after 

22 ‘‘section 152’’. 

23 (7) Section 72(t)(7)(A)(iii) is amended by strik24 ing ‘‘151(c)(3)’’ and inserting ‘‘152(f)(1)’’. 
27 

•HR 4997 IH 

1 (8) Section 42(i)(3)(D)(ii)(I) is amended by in2 serting ‘‘, determined without regard to subsections 

3 (b)(1), (b)(2), and (d)(1)(B) thereof’’ after ‘‘section 

4 152’’. 

5 (9) Subsections (b) and (c)(1) of section 105 

6 are amended by inserting ‘‘, determined without re7 gard to subsections (b)(1), (b)(2), and (d)(1)(B) 

8 thereof’’ after ‘‘section 152’’. 

9 (10) Section 120(d)(4) is amended by inserting 

10 ‘‘(determined without regard to subsections (b)(1), 

11 (b)(2), and (d)(1)(B) thereof)’’ after ‘‘section 152’’. 

12 (11) Section 125(e)(1)(D) is amended by in13 serting ‘‘, determined without regard to subsections 

14 (b)(1), (b)(2), and (d)(1)(B) thereof’’ after ‘‘section 

15 152’’. 

16 (12) Section 129(c)(2) is amended by striking 

17 ‘‘151(c)(3)’’ and inserting ‘‘152(f)(1)’’. 

18 (13) The first sentence of section 132(h)(2)(B) 

19 is amended by striking ‘‘151(c)(3)’’ and inserting 

20 ‘‘152(f)(1)’’. 

21 (14) Section 153 is amended by striking para22 graph (1) and by redesignating paragraphs (2), (3), 

23 and (4) as paragraphs (1), (2), and (3), respectively. 
28 

•HR 4997 IH 

1 (15) Section 170(g)(1) is amended by inserting 

2 ‘‘(determined without regard to subsections (b)(1), 

3 (b)(2), and (d)(1)(B) thereof)’’ after ‘‘section 152’’. 

4 (16) Section 170(g)(3) is amended by striking 

5 ‘‘paragraphs (1) through (8) of section 152(a)’’ and 

6 inserting ‘‘subparagraphs (A) through (G) of section 

7 152(d)(2)’’. 

8 (17) Section 213(a) is amended by inserting ‘‘, 

9 determined without regard to subsections (b)(1), 

10 (b)(2), and (d)(1)(B) thereof’’ after ‘‘section 152’’. 

11 (18) The second sentence of section 213(d)(11) 

12 is amended by striking ‘‘paragraphs (1) through (8) 

13 of section 152(a)’’ and inserting ‘‘subparagraphs (A) 

14 through (G) of section 152(d)(2)’’. 

15 (19) Section 220(d)(2)(A) is amended by in16 serting ‘‘, determined without regard to subsections 

17 (b)(1), (b)(2), and (d)(1)(B) thereof’’ after ‘‘section 

18 152’’. 

19 (20) Section 221(d)(4) is amended by inserting 

20 ‘‘(determined without regard to subsections (b)(1), 

21 (b)(2), and (d)(1)(B) thereof)’’ after ‘‘section 152’’. 

22 (21) Section 529(e)(2)(B) is amended by strik23 ing ‘‘paragraphs (1) through (8) of section 152(a)’’ 

24 and inserting ‘‘subparagraphs (A) through (G) of 

25 section 152(d)(2)’’. 
29 

•HR 4997 IH 

1 (22) Section 2032A(c)(7)(D) is amended by 

2 striking ‘‘section 151(c)(4)’’ and inserting ‘‘section 

3 152(f)(2)’’. 

4 (23) Section 2057(d)(2)(B) is amended by in5 serting ‘‘, determined without regard to subsections 

6 (b)(1), (b)(2), and (d)(1)(B) thereof’’ after ‘‘section 

7 152’’. 

8 (24) Section 7701(a)(17) is amended by strik9 ing ‘‘152(b)(4), 682,’’ and inserting ‘‘682’’. 

10 (25) Section 7702B(f)(2)(C)(iii) is amended by 

11 striking ‘‘paragraphs (1) through (8) of section 

12 152(a)’’ and inserting ‘‘subparagraphs (A) through 

13 (G) of section 152(d)(2)’’. 

14 (26) Section 7703(b)(1) is amended— 

15 (A) by striking ‘‘151(c)(3)’’ and inserting 

16 ‘‘152(f)(1)’’, and 

17 (B) by striking ‘‘paragraph (2) or (4) of’’. 

18 SEC. 208. EFFECTIVE DATE. 

19 The amendments made by this title shall apply to tax20 able years beginning after December 31, 2004. 
30 

•HR 4997 IH 

1 TITLE III—REVENUE 

2 PROVISIONS 

3 Subtitle A—Provisions Designed To 

4 Curtail Tax Shelters 

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

7 (a) IN GENERAL.—Section 7701 is amended by re8 designating subsection (n) as subsection (o) and by insert9 ing after subsection (m) the following new subsection: 

10 ‘‘(n) CLARIFICATION OF ECONOMIC SUBSTANCE

11 DOCTRINE; ETC.— 

12 ‘‘(1) GENERAL RULES.— 

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

14 a court determines that the economic substance 

15 doctrine is relevant for purposes of this title to 

16 a transaction (or series of transactions), such 

17 transaction (or series of transactions) shall have 

18 economic substance only if the requirements of 

19 this paragraph are met. 

20 ‘‘(B) DEFINITION OF ECONOMIC SUB21 STANCE.—For purposes of subparagraph (A)— 

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

23 economic substance only if— 

24 ‘‘(I) the transaction changes in a 

25 meaningful way (apart from Federal 
31 

•HR 4997 IH 

1 tax effects) the taxpayer’s economic 

2 position, and 

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

5 such transaction and the transaction 

6 is a reasonable means of accom7 plishing such purpose. 

8 In applying subclause (II), a purpose of 

9 achieving a financial accounting benefit 

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

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

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

17 transaction shall not be treated as having 

18 economic substance by reason of having a 

19 potential for profit unless— 

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

22 the transaction is substantial in rela23 tion to the present value of the ex24 pected net tax benefits that would be 
32 

•HR 4997 IH 

1 allowed if the transaction were re2 spected, and 

3 ‘‘(II) the reasonably expected 

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

6 ‘‘(C) TREATMENT OF FEES AND FOREIGN

7 TAXES.—Fees and other transaction expenses 

8 and foreign taxes shall be taken into account as 

9 expenses in determining pre-tax profit under 

10 subparagraph (B)(ii). 

11 ‘‘(2) SPECIAL RULES FOR TRANSACTIONS WITH

12 TAX-INDIFFERENT PARTIES.— 

13 ‘‘(A) SPECIAL RULES FOR FINANCING

14 TRANSACTIONS.—The form of a transaction 

15 which is in substance the borrowing of money 

16 or the acquisition of financial capital directly or 

17 indirectly from a tax-indifferent party shall not 

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

21 value of the anticipated economic returns of the 

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

25 capital, from a tax-indifferent party if it is rea-
33 

•HR 4997 IH 

1 sonably expected that at least 50 percent of the 

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

4 ‘‘(B) ARTIFICIAL INCOME SHIFTING AND

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

7 respected if— 

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

10 excess of such party’s economic income or 

11 gain, or 

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

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

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

17 purposes of this subsection— 

18 ‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.— 

19 The term ‘economic substance doctrine’ means 

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

23 not have economic substance or lacks a business 

24 purpose. 
34 

•HR 4997 IH 

1 ‘‘(B) TAX-INDIFFERENT PARTY.—The 

2 term ‘tax-indifferent party’ means any person 

3 or entity not subject to tax imposed by subtitle 

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

5 party with respect to a transaction if the items 

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

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

11 individual, this subsection shall apply only to 

12 transactions entered into in connection with a 

13 trade or business or an activity engaged in for 

14 the production of income. 

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

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

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

21 ‘‘(I) depreciation, 

22 ‘‘(II) any tax credit, or 

23 ‘‘(III) any other deduction as 

24 provided in guidance by the Secretary, 

25 and 
35 

•HR 4997 IH 

1 ‘‘(ii) subclause (II) of paragraph 

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

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

7 subsection, the provisions of this subsection shall not 

8 be construed as altering or supplanting any other 

9 rule of law, and the requirements of this subsection 

10 shall be construed as being in addition to any such 

11 other rule of law. 

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

16 from the application of this subsection.’’. 

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

18 this section shall apply to transactions entered into after 

19 the date of the enactment of this Act. 

20 SEC. 302. PENALTY FOR FAILING TO DISCLOSE REPORT21 ABLE TRANSACTION. 

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

23 68 (relating to assessable penalties) is amended by insert24 ing after section 6707 the following new section: 
36 

•HR 4997 IH 

1 ‘‘SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORT2 ABLE TRANSACTION INFORMATION WITH RE3 TURN OR STATEMENT. 

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

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

8 or statement shall pay a penalty in the amount determined 

9 under subsection (b). 

10 ‘‘(b) AMOUNT OF PENALTY.— 

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

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

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

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

16 listed transaction shall be $100,000. 

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

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

21 ‘‘(i) a large entity, or 

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

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

24 twice the amount determined without regard to 

25 this paragraph. 
37 

•HR 4997 IH 

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

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

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

6 year in which the reportable transaction occurs 

7 or the preceding taxable year. Rules similar to 

8 the rules of paragraph (2) and subparagraphs 

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

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

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

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

14 net worth individual’ means, with respect to a 

15 reportable transaction, a natural person whose 

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

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

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

20 ‘reportable transaction’ means any transaction with 

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

24 6011, such transaction is of a type which the Sec-
38 

•HR 4997 IH 

1 retary determines as having a potential for tax 

2 avoidance or evasion. 

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

5 means a reportable transaction which is the same as, 

6 or substantially similar to, a transaction specifically 

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

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

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

12 penalty imposed by this section with respect to any 

13 violation if— 

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

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

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

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

21 to an unintentional mistake of fact; 

22 ‘‘(D) imposing the penalty would be 

23 against equity and good conscience, and 
39 

•HR 4997 IH 

1 ‘‘(E) rescinding the penalty would promote 

2 compliance with the requirements of this title 

3 and effective tax administration. 

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

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

6 of the Commissioner and may be delegated only to 

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

8 Commissioner, in the Commissioner’s sole discretion, 

9 may establish a procedure to determine if a penalty 

10 should be referred to the Commissioner or the head 

11 of such Office for a determination under paragraph 

12 (1). 

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

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

16 judicial proceeding. 

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

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

19 file in the Office of the Commissioner the opinion of 

20 the Commissioner or the head of the Office of Tax 

21 Shelter Analysis with respect to the determination, 

22 including— 

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

24 transaction, 

25 ‘‘(B) the reasons for the rescission, and 
40 

•HR 4997 IH 

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

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

3 year report to the Committee on Ways and Means 

4 of the House of Representatives and the Committee 

5 on Finance of the Senate— 

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

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

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

11 therefor. 

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

13 a person— 

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

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

17 with another person for purposes of such reports, 

18 and 

19 ‘‘(2) which— 

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

21 this section with respect to a listed transaction, 

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

23 section 6662A with respect to any reportable 

24 transaction at a rate prescribed under section 

25 6662A(c), or 
41 

•HR 4997 IH 

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

2 section 6662B with respect to any noneconomic 

3 substance transaction, 

4 the requirement to pay such penalty shall be disclosed in 

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

6 Secretary shall specify. Failure to make a disclosure in 

7 accordance with the preceding sentence shall be treated 

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

9 applies. 

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

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

13 (b) DISCLOSURE BY SECRETARY.— 

14 (1) IN GENERAL.—Section 6103 is amended by 

15 redesignating subsection (q) as subsection (r) and by 

16 inserting after subsection (p) the following new sub17 section: 

18 ‘‘(q) DISCLOSURE RELATING TO PAYMENTS OF CER19 TAIN PENALTIES.—Notwithstanding any other provision 

20 of this section, the Secretary shall make public the name 

21 of any person required to pay a penalty described in sec22 tion 6707A(e)(2) and the amount of the penalty.’’. 

23 (2) RECORDS.—Section 6103(p)(3)(A) is 

24 amended by striking ‘‘or (n)’’ and inserting ‘‘(n), or 

25 (q)’’. 
42 

•HR 4997 IH 

1 (c) CONFORMING AMENDMENT.—The table of sec2 tions for part I of subchapter B of chapter 68 is amended 

3 by inserting after the item relating to section 6707 the 

4 following: 

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

information with return or statement.’’. 

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

6 this section shall apply to returns and statements the due 

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

8 Act. 

9 SEC. 303. ACCURACY-RELATED PENALTY FOR LISTED 

10 TRANSACTIONS AND OTHER REPORTABLE 

11 TRANSACTIONS HAVING A SIGNIFICANT TAX 

12 AVOIDANCE PURPOSE. 

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

14 amended by inserting after section 6662 the following new 

15 section: 

16 ‘‘SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PEN17 ALTY ON UNDERSTATEMENTS WITH RESPECT 

18 TO REPORTABLE TRANSACTIONS. 

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

20 reportable transaction understatement for any taxable 

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

22 20 percent of the amount of such understatement. 

23 ‘‘(b) REPORTABLE TRANSACTION UNDERSTATE24 MENT.—For purposes of this section— 
43 

•HR 4997 IH 

1 ‘‘(1) IN GENERAL.—The term ‘reportable trans2 action understatement’ means the sum of— 

3 ‘‘(A) the product of— 

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

5 any) in taxable income which results from 

6 a difference between the proper tax treat7 ment of an item to which this section ap8 plies and the taxpayer’s treatment of such 

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

10 tax), and 

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

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

13 taxpayer which is a corporation), and 

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

15 in the aggregate amount of credits determined 

16 under subtitle A which results from a difference 

17 between the taxpayer’s treatment of an item to 

18 which this section applies (as shown on the tax19 payer’s return of tax) and the proper tax treat20 ment of such item. 

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

22 the excess of deductions allowed for the taxable year 

23 over gross income for such year, and any reduction 

24 in the amount of capital losses which would (without 
44 

•HR 4997 IH 

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

2 shall be treated as an increase in taxable income. 

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

4 section shall apply to any item which is attributable 

5 to— 

6 ‘‘(A) any listed transaction, and 

7 ‘‘(B) any reportable transaction (other 

8 than a listed transaction) if a significant pur9 pose of such transaction is the avoidance or 

10 evasion of Federal income tax. 

11 ‘‘(c) HIGHER PENALTY FOR NONDISCLOSED LISTED

12 AND OTHER AVOIDANCE TRANSACTIONS.— 

13 ‘‘(1) IN GENERAL.—Subsection (a) shall be ap14 plied by substituting ‘30 percent’ for ‘20 percent’ 

15 with respect to the portion of any reportable trans16 action understatement with respect to which the re17 quirement of section 6664(d)(2)(A) is not met. 

18 ‘‘(2) RULES APPLICABLE TO ASSERTION AND

19 COMPROMISE OF PENALTY.— 

20 ‘‘(A) IN GENERAL.—Only upon the ap21 proval by the Chief Counsel for the Internal 

22 Revenue Service or the Chief Counsel’s delegate 

23 at the national office of the Internal Revenue 

24 Service may a penalty to which paragraph (1) 

25 applies be included in a 1st letter of proposed 
45 

•HR 4997 IH 

1 deficiency which allows the taxpayer an oppor2 tunity for administrative review in the Internal 

3 Revenue Service Office of Appeals. If such a 

4 letter is provided to the taxpayer, only the Com5 missioner of Internal Revenue may compromise 

6 all or any portion of such penalty. 

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

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

9 6707A(d) shall apply for purposes of subpara10 graph (A). 

11 ‘‘(d) DEFINITIONS OF REPORTABLE AND LISTED

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

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

14 respective meanings given to such terms by section 

15 6707A(c). 

16 ‘‘(e) SPECIAL RULES.— 

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

18 ON OTHER UNDERSTATEMENTS.—In the case of an 

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

20 ‘‘(A) the amount of such understatement 

21 (determined without regard to this paragraph) 

22 shall be increased by the aggregate amount of 

23 reportable transaction understatements and 

24 noneconomic substance transaction understate25 ments for purposes of determining whether such 
46 

•HR 4997 IH 

1 understatement is a substantial understatement 

2 under section 6662(d)(1), and 

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

4 6662(a) shall apply only to the excess of the 

5 amount of the substantial understatement (if 

6 any) after the application of subparagraph (A) 

7 over the aggregate amount of reportable trans8 action understatements and noneconomic sub9 stance transaction understatements. 

10 ‘‘(2) COORDINATION WITH OTHER PEN11 ALTIES.— 

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

13 References to an underpayment in section 6663 

14 shall be treated as including references to a re15 portable transaction understatement and a non16 economic substance transaction understatement. 

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

18 shall not apply to any portion of an understate19 ment on which a penalty is imposed under sec20 tion 6662B or 6663. 

21 ‘‘(3) SPECIAL RULE FOR AMENDED RE22 TURNS.—Except as provided in regulations, in no 

23 event shall any tax treatment included with an 

24 amendment or supplement to a return of tax be 

25 taken into account in determining the amount of any 
47 

•HR 4997 IH 

1 reportable transaction understatement or non2 economic substance transaction understatement if 

3 the amendment or supplement is filed after the ear4 lier of the date the taxpayer is first contacted by the 

5 Secretary regarding the examination of the return or 

6 such other date as is specified by the Secretary. 

7 ‘‘(4) NONECONOMIC SUBSTANCE TRANSACTION

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

11 term by section 6662B(c). 

12 ‘‘(5) CROSS REFERENCE.— 

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

Securities and Exchange Commission, see section 

6707A(e).’’. 

13 (b) DETERMINATION OF OTHER UNDERSTATE14 MENTS.—Subparagraph (A) of section 6662(d)(2) is 

15 amended by adding at the end the following flush sen16 tence: 

17 ‘‘The excess under the preceding sentence shall 

18 be determined without regard to items to which 

19 section 6662A applies and without regard to 

20 items with respect to which a penalty is im21 posed by section 6662B.’’. 

22 (c) REASONABLE CAUSE EXCEPTION.— 

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

24 adding at the end the following new subsection: 
48 

•HR 4997 IH 

1 ‘‘(d) REASONABLE CAUSE EXCEPTION FOR REPORT2 ABLE TRANSACTION UNDERSTATEMENTS.— 

3 ‘‘(1) IN GENERAL.—No penalty shall be im4 posed under section 6662A with respect to any por5 tion of a reportable transaction understatement if it 

6 is shown that there was a reasonable cause for such 

7 portion and that the taxpayer acted in good faith 

8 with respect to such portion. 

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

10 apply to any reportable transaction understatement 

11 unless— 

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

13 treatment of the item are adequately disclosed 

14 in accordance with the regulations prescribed 

15 under section 6011, 

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

17 for such treatment, and 

18 ‘‘(C) the taxpayer reasonably believed that 

19 such treatment was more likely than not the 

20 proper treatment. 

21 A taxpayer failing to adequately disclose in accord22 ance with section 6011 shall be treated as meeting 

23 the requirements of subparagraph (A) if the penalty 

24 for such failure was rescinded under section 

25 6707A(d). 
49 

•HR 4997 IH 

1 ‘‘(3) RULES RELATING TO REASONABLE BE2 LIEF.—For purposes of paragraph (2)(C)— 

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

4 treated as having a reasonable belief with re5 spect to the tax treatment of an item only if 

6 such belief— 

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

8 exist at the time the return of tax which 

9 includes such tax treatment is filed, and 

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

11 chances of success on the merits of such 

12 treatment and does not take into account 

13 the possibility that a return will not be au14 dited, such treatment will not be raised on 

15 audit, or such treatment will be resolved 

16 through settlement if it is raised. 

17 ‘‘(B) CERTAIN OPINIONS MAY NOT BE RE18 LIED UPON.— 

19 ‘‘(i) IN GENERAL.—An opinion of a 

20 tax advisor may not be relied upon to es21 tablish the reasonable belief of a taxpayer 

22 if— 

23 ‘‘(I) the tax advisor is described 

24 in clause (ii), or 
50 

•HR 4997 IH 

1 ‘‘(II) the opinion is described in 

2 clause (iii). 

3 ‘‘(ii) DISQUALIFIED TAX ADVISORS.— 

4 A tax advisor is described in this clause if 

5 the tax advisor— 

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

7 the meaning of section 6111(b)(1)) 

8 who participates in the organization, 

9 management, promotion, or sale of 

10 the transaction or who is related 

11 (within the meaning of section 267(b) 

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

13 participates, 

14 ‘‘(II) is compensated directly or 

15 indirectly by a material advisor with 

16 respect to the transaction, 

17 ‘‘(III) has a fee arrangement 

18 with respect to the transaction which 

19 is contingent on all or part of the in20 tended tax benefits from the trans21 action being sustained, 

22 ‘‘(IV) has an arrangement with 

23 respect to the transaction which pro24 vides that contractual disputes be25 tween the taxpayer and the advisor 
51 

•HR 4997 IH 

1 are to be settled by arbitration or 

2 which limits damages by reference to 

3 fees paid to the advisor for such trans4 action, or 

5 ‘‘(V) as determined under regula6 tions prescribed by the Secretary, has 

7 a disqualifying financial interest with 

8 respect to the transaction. 

9 ‘‘(iii) DISQUALIFIED OPINIONS.—For 

10 purposes of clause (i), an opinion is dis11 qualified if the opinion— 

12 ‘‘(I) is based on unreasonable 

13 factual or legal assumptions (includ14 ing assumptions as to future events), 

15 ‘‘(II) unreasonably relies on rep16 resentations, statements, findings, or 

17 agreements of the taxpayer or any 

18 other person, 

19 ‘‘(III) does not identify and con20 sider all relevant facts, 

21 ‘‘(IV) is not signed by all individ22 uals who are principal authors of the 

23 opinion, or 
52 

•HR 4997 IH 

1 ‘‘(V) fails to meet any other re2 quirement as the Secretary may pre3 scribe.’’. 

4 (2) CONFORMING AMENDMENT.—The heading 

5 for subsection (c) of section 6664 is amended by in6 serting ‘‘FOR UNDERPAYMENTS’’ after ‘‘EXCEP7 TION’’. 

8 (d) CONFORMING AMENDMENTS.— 

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

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

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

12 (2) Paragraph (3) of section 1274(b) is amend13 ed— 

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

15 6662(d)(2)(C)(iii))’’ in subparagraph (B)(i), 

16 and 

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

18 subparagraph: 

19 ‘‘(C) TAX SHELTER.—For purposes of sub20 paragraph (B), the term ‘tax shelter’ means— 

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

22 ‘‘(ii) any investment plan or arrange23 ment, or 

24 ‘‘(iii) any other plan or arrangement, 
53 

•HR 4997 IH 

1 if a significant purpose of such partnership, en2 tity, plan, or arrangement is the avoidance or 

3 evasion of Federal income tax.’’. 

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

5 subparagraphs (C) and (D). 

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

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

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

9 by striking ‘‘section 6662(d)(2)(C)(iii)’’ and insert10 ing ‘‘section 1274(b)(3)(C)’’. 

11 (6)(A) The heading for section 6662 is amend12 ed to read as follows: 

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

14 ON UNDERPAYMENTS.’’. 

15 (B) The table of sections for part II of sub16 chapter A of chapter 68 is amended by striking the 

17 item relating to section 6662 and inserting the fol18 lowing new items: 

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

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

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

20 this section shall apply to taxable years ending after the 

21 date of the enactment of this Act. 
54 

•HR 4997 IH 

1 SEC. 304. PENALTY FOR UNDERSTATEMENTS ATTRIB2 UTABLE TO TRANSACTIONS LACKING ECO3 NOMIC SUBSTANCE, ETC. 

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

5 amended by inserting after section 6662A the following 

6 new section: 

7 ‘‘SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIB8 UTABLE TO TRANSACTIONS LACKING ECO9 NOMIC SUBSTANCE, ETC. 

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

11 noneconomic substance transaction understatement for 

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

13 amount equal to 40 percent of the amount of such under14 statement. 

15 ‘‘(b) REDUCTION OF PENALTY FOR DISCLOSED

16 TRANSACTIONS.—Subsection (a) shall be applied by sub17 stituting ‘20 percent’ for ‘40 percent’ with respect to the 

18 portion of any noneconomic substance transaction under19 statement with respect to which the relevant facts affect20 ing the tax treatment of the item are adequately disclosed 

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

22 ‘‘(c) NONECONOMIC SUBSTANCE TRANSACTION UN23 DERSTATEMENT.—For purposes of this section— 

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

25 substance transaction understatement’ means any 

26 amount which would be an understatement under 
55 

•HR 4997 IH 

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

2 by taking into account items attributable to non3 economic substance transactions rather than items 

4 to which section 6662A would apply without regard 

5 to this paragraph. 

6 ‘‘(2) NONECONOMIC SUBSTANCE TRANS7 ACTION.—The term ‘noneconomic substance trans8 action’ means any transaction if— 

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

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

11 the transaction giving rise to the claimed ben12 efit or the transaction was not respected under 

13 section 7701(n)(2), or 

14 ‘‘(B) the transaction fails to meet the re15 quirements of any similar rule of law. 

16 ‘‘(d) RULES APPLICABLE TO COMPROMISE OF PEN17 ALTY.— 

18 ‘‘(1) IN GENERAL.—If the 1st letter of pro19 posed deficiency which allows the taxpayer an oppor20 tunity for administrative review in the Internal Rev21 enue Service Office of Appeals has been sent with 

22 respect to a penalty to which this section applies, 

23 only the Commissioner of Internal Revenue may 

24 compromise all or any portion of such penalty. 
56 

•HR 4997 IH 

1 ‘‘(2) APPLICABLE RULES.—The rules of para2 graphs (2), (3), (4), and (5) of section 6707A(d) 

3 shall apply for purposes of paragraph (1). 

4 ‘‘(e) COORDINATION WITH OTHER PENALTIES.—Ex5 cept as otherwise provided in this part, the penalty im6 posed by this section shall be in addition to any other pen7 alty imposed by this title. 

8 ‘‘(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).’’. 

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

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

11 inserting after the item relating to section 6662A the fol12 lowing new item: 

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

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

14 this section shall apply to transactions entered into after 

15 the date of the enactment of this Act. 

16 SEC. 305. MODIFICATIONS OF SUBSTANTIAL UNDERSTATE17 MENT PENALTY FOR NONREPORTABLE 

18 TRANSACTIONS. 

19 (a) SUBSTANTIAL UNDERSTATEMENT OF CORPORA20 TIONS.—Section 6662(d)(1)(B) (relating to special rule 

21 for corporations) is amended to read as follows: 
57 

•HR 4997 IH 

1 ‘‘(B) SPECIAL RULE FOR CORPORA2 TIONS.—In the case of a corporation other than 

3 an S corporation or a personal holding company 

4 (as defined in section 542), there is a substan5 tial understatement of income tax for any tax6 able year if the amount of the understatement 

7 for the taxable year exceeds the lesser of— 

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

9 be shown on the return for the taxable 

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

11 ‘‘(ii) $10,000,000.’’. 

12 (b) REDUCTION FOR UNDERSTATEMENT OF TAX13 PAYER DUE TO POSITION OF TAXPAYER OR DISCLOSED

14 ITEM.— 

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

16 (relating to substantial authority) is amended to 

17 read as follows: 

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

19 the taxpayer if the taxpayer had reason20 able belief that the tax treatment was more 

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

22 (2) CONFORMING AMENDMENT.—Section 

23 6662(d) is amended by adding at the end the fol24 lowing new paragraph: 
58 

•HR 4997 IH 

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

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

3 6694(a)(1), the Secretary may prescribe a list of po4 sitions for which the Secretary believes there is not 

5 substantial authority or there is no reasonable belief 

6 that the tax treatment is more likely than not the 

7 proper tax treatment. Such list (and any revisions 

8 thereof) shall be published in the Federal Register 

9 or the Internal Revenue Bulletin.’’. 

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

11 this section shall apply to taxable years beginning after 

12 the date of the enactment of this Act. 

13 SEC. 306. TAX SHELTER EXCEPTION TO CONFIDENTIALITY 

14 PRIVILEGES RELATING TO TAXPAYER COM15 MUNICATIONS. 

16 (a) IN GENERAL.—Section 7525(b) (relating to sec17 tion not to apply to communications regarding corporate 

18 tax shelters) is amended to read as follows: 

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

20 REGARDING TAX SHELTERS.—The privilege under sub21 section (a) shall not apply to any written communication 

22 which is— 

23 ‘‘(1) between a federally authorized tax practi24 tioner and— 

25 ‘‘(A) any person, 
59 

•HR 4997 IH 

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

2 or representative of the person, or 

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

4 profits interest in the person, and 

5 ‘‘(2) in connection with the promotion of the di6 rect or indirect participation of the person in any 

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

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

9 this section shall apply to communications made on or 

10 after the date of the enactment of this Act. 

11 SEC. 307. DISCLOSURE OF REPORTABLE TRANSACTIONS. 

12 (a) IN GENERAL.—Section 6111 (relating to registra13 tion of tax shelters) is amended to read as follows: 

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

15 ‘‘(a) IN GENERAL.—Each material advisor with re16 spect to any reportable transaction shall make a return 

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

18 forth— 

19 ‘‘(1) information identifying and describing the 

20 transaction, 

21 ‘‘(2) information describing any potential tax 

22 benefits expected to result from the transaction, and 

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

24 may prescribe. 
60 

•HR 4997 IH 

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

2 by the Secretary. 

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

4 ‘‘(1) MATERIAL ADVISOR.— 

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

6 advisor’ means any person— 

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

8 assistance, or advice with respect to orga9 nizing, managing, promoting, selling, im10 plementing, insuring, or carrying out any 

11 reportable transaction, and 

12 ‘‘(ii) who directly or indirectly derives 

13 gross income in excess of the threshold 

14 amount for such aid, assistance, or advice. 

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

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

17 ‘‘(i) $50,000 in the case of a report18 able transaction substantially all of the tax 

19 benefits from which are provided to nat20 ural persons, and 

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

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

23 ‘reportable transaction’ has the meaning given to 

24 such term by section 6707A(c). 
61 

•HR 4997 IH 

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

2 regulations which provide— 

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

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

5 which 2 or more persons would otherwise be re6 quired to meet such requirements, 

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

8 section, and 

9 ‘‘(3) such rules as may be necessary or appro10 priate to carry out the purposes of this section.’’. 

11 (b) CONFORMING AMENDMENTS.— 

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

13 table of sections for subchapter B of chapter 61 is 

14 amended to read as follows: 

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

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

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

17 ‘‘SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANS18 ACTIONS MUST KEEP LISTS OF ADVISEES. 

19 ‘‘(a) IN GENERAL.—Each material advisor (as de20 fined in section 6111) with respect to any reportable 

21 transaction (as defined in section 6707A(c)) shall main22 tain, in such manner as the Secretary may by regulations 

23 prescribe, a list— 
62 

•HR 4997 IH 

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

2 whom such advisor acted as such a material advisor 

3 with respect to such transaction, and 

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

5 Secretary may by regulations require. 

6 This section shall apply without regard to whether a mate7 rial advisor is required to file a return under section 6111 

8 with respect to such transaction.’’. 

9 (B) Section 6112 is amended by redesignating 

10 subsection (c) as subsection (b). 

11 (C) Section 6112(b), as redesignated by sub12 paragraph (B), is amended— 

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

14 in paragraph (1)(A), and 

15 (ii) by striking ‘‘shall prescribe’’ in para16 graph (2) and inserting ‘‘may prescribe’’. 

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

18 table of sections for subchapter B of chapter 61 is 

19 amended to read as follows: 

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

keep lists of advisees.’’. 

20 (3)(A) The heading for section 6708 is amend21 ed to read as follows: 
63 

•HR 4997 IH 

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

2 WITH RESPECT TO REPORTABLE TRANS3 ACTIONS.’’. 

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

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

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

reportable transactions.’’. 

7 (c) REQUIRED DISCLOSURE NOT SUBJECT TO CLAIM

8 OF CONFIDENTIALITY.—Subparagraph (A) of section 

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

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

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

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

14 (d) EFFECTIVE DATE.— 

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

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

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

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

21 date of the enactment of this Act. 

22 (2) NO CLAIM OF CONFIDENTIALITY AGAINST

23 DISCLOSURE.—The amendment made by subsection 

24 (c) shall take effect as if included in the amend-
64 

•HR 4997 IH 

1 ments made by section 142 of the Deficit Reduction 

2 Act of 1984. 

3 SEC. 308. MODIFICATIONS TO PENALTY FOR FAILURE TO 

4 REGISTER TAX SHELTERS. 

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

6 to furnish information regarding tax shelters) is amended 

7 to read as follows: 

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

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

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

12 reportable transaction— 

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

14 date prescribed therefor, or 

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

16 the Secretary with respect to such transaction, 

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

18 in the amount determined under subsection (b). 

19 ‘‘(b) AMOUNT OF PENALTY.— 

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

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

23 ‘‘(2) LISTED TRANSACTIONS.—The penalty im24 posed under subsection (a) with respect to any listed 
65 

•HR 4997 IH 

1 transaction shall be an amount equal to the greater 

2 of— 

3 ‘‘(A) $200,000, or 

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

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

9 section 6111. 

10 Subparagraph (B) shall be applied by substituting 

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

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

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

15 this section. 

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

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

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

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

21 section 6707 in the table of sections for part I of sub22 chapter B of chapter 68 is amended by striking ‘‘tax shel23 ters’’ and inserting ‘‘reportable transactions’’. 
66 

•HR 4997 IH 

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

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

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

4 SEC. 309. MODIFICATION OF PENALTY FOR FAILURE TO 

5 MAINTAIN LISTS OF INVESTORS. 

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

7 amended to read as follows: 

8 ‘‘(a) IMPOSITION OF PENALTY.— 

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

11 to make such list available upon written request to 

12 the Secretary in accordance with section 

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

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

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

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

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

20 to reasonable cause.’’. 

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

22 this section shall apply to requests made after the date 

23 of the enactment of this Act. 
67 

•HR 4997 IH 

1 SEC. 310. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN 

2 CONDUCT RELATED TO TAX SHELTERS AND 

3 REPORTABLE TRANSACTIONS. 

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

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

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

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

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

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

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

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

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

18 apart from any other action brought by the United States 

19 against such person. 

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

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

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

24 ‘‘(2) that injunctive relief is appropriate to pre25 vent recurrence of such conduct, 
68 

•HR 4997 IH 

1 the court may enjoin such person from engaging in such 

2 conduct or in any other activity subject to penalty under 

3 this title. 

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

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

6 failure to take action, which is— 

7 ‘‘(1) subject to penalty under section 6700, 

8 6701, 6707, or 6708, or 

9 ‘‘(2) in violation of any requirement under reg10 ulations issued under section 320 of title 31, United 

11 States Code.’’. 

12 (b) CONFORMING AMENDMENTS.— 

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

14 read as follows: 

15 ‘‘SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RE16 LATED TO TAX SHELTERS AND REPORTABLE 

17 TRANSACTIONS.’’. 

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

19 chapter 67 is amended by striking the item relating 

20 to section 7408 and inserting the following new 

21 item: 

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

reportable transactions.’’. 

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

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

24 the enactment of this Act. 
69 

•HR 4997 IH 

1 SEC. 311. UNDERSTATEMENT OF TAXPAYER’S LIABILITY BY 

2 INCOME TAX RETURN PREPARER. 

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

5 to unrealistic positions) is amended— 

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

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

9 such position was more likely than not the proper 

10 treatment’’, 

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

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

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

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

15 and inserting ‘‘IMPROPER’’. 

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

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

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

21 inserting ‘‘$5,000’’. 

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

23 this section shall apply to documents prepared after the 

24 date of the enactment of this Act. 
70 

•HR 4997 IH 

1 SEC. 312. PENALTY ON FAILURE TO REPORT INTERESTS IN 

2 FOREIGN FINANCIAL ACCOUNTS. 

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

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

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

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

9 money penalty on any person who violates, or 

10 causes any violation of, any provision of section 

11 5314. 

12 ‘‘(B) AMOUNT OF PENALTY.— 

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

15 any civil penalty imposed under subpara16 graph (A) shall not exceed $10,000. 

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

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

21 ‘‘(I) such violation was due to 

22 reasonable cause, and 

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

25 at the time of the transaction was 

26 properly reported. 
71 

•HR 4997 IH 

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

2 of any person willfully violating, or willfully 

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

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

7 greater of— 

8 ‘‘(I) $100,000, or 

9 ‘‘(II) 50 percent of the amount 

10 determined under subparagraph (D), 

11 and 

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

13 apply. 

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

15 under this subparagraph is— 

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

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

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

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

23 account, the balance in the account at the 

24 time of the violation.’’. 
72 

•HR 4997 IH 

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

2 this section shall apply to violations occurring after the 

3 date of the enactment of this Act. 

4 SEC. 313. FRIVOLOUS TAX SUBMISSIONS. 

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

6 read as follows: 

7 ‘‘SEC. 6702. FRIVOLOUS TAX SUBMISSIONS. 

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

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

12 ‘‘(A) does not contain information on 

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

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

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

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

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

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

23 the administration of Federal tax laws. 

24 ‘‘(b) CIVIL PENALTY FOR SPECIFIED FRIVOLOUS

25 SUBMISSIONS.— 
73 

•HR 4997 IH 

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

3 specified frivolous submission shall pay a penalty of 

4 $5,000. 

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

6 purposes of this section— 

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

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

12 Secretary has identified as frivolous under 

13 subsection (c), or 

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

16 laws. 

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

18 ‘specified submission’ means— 

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

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

22 filing of notice of lien), or 

23 ‘‘(II) section 6330 (relating to 

24 notice and opportunity for hearing be25 fore levy), and 
74 

•HR 4997 IH 

1 ‘‘(ii) an application under— 

2 ‘‘(I) section 6159 (relating to 

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

5 ‘‘(II) section 7122 (relating to 

6 compromises), or 

7 ‘‘(III) section 7811 (relating to 

8 taxpayer assistance orders). 

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

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

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

20 not include in such list any position that the Secretary 

21 determines meets the requirement of section 

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

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

24 reduce the amount of any penalty imposed under this sec25 tion if the Secretary determines that such reduction would 
75 

•HR 4997 IH 

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

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

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

6 (b) TREATMENT OF FRIVOLOUS REQUESTS FOR

7 HEARINGS BEFORE LEVY.— 

8 (1) FRIVOLOUS REQUESTS DISREGARDED.— 

9 Section 6330 (relating to notice and opportunity for 

10 hearing before levy) is amended by adding at the 

11 end the following new subsection: 

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

13 Notwithstanding any other provision of this section, if the 

14 Secretary determines that any portion of a request for a 

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

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

18 never submitted and such portion shall not be subject to 

19 any further administrative or judicial review.’’. 

20 (2) PRECLUSION FROM RAISING FRIVOLOUS

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

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

24 ‘‘(A)(i)’’; 

25 (B) by striking ‘‘(B)’’ and inserting ‘‘(ii)’’; 
76 

•HR 4997 IH 

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

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

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

4 (as so redesignated) the following: 

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

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

7 (3) STATEMENT OF GROUNDS.—Section 

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

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

11 requested hearing’’. 

12 (c) TREATMENT OF FRIVOLOUS REQUESTS FOR

13 HEARINGS UPON FILING OF NOTICE OF LIEN.—Section 

14 6320 is amended— 

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

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

18 requested hearing’’, and 

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

20 inserting ‘‘(e), and (g)’’. 

21 (d) TREATMENT OF FRIVOLOUS APPLICATIONS FOR

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

24 the following new subsection: 
77 

•HR 4997 IH 

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

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

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

8 never submitted and such portion shall not be subject to 

9 any further administrative or judicial review.’’. 

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

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

12 striking the item relating to section 6702 and inserting 

13 the following new item: 

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

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

15 this section shall apply to submissions made and issues 

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

19 SEC. 314. REGULATION OF INDIVIDUALS PRACTICING BE20 FORE THE DEPARTMENT OF TREASURY. 

21 (a) CENSURE; IMPOSITION OF PENALTY.— 

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

23 United States Code, is amended— 

24 (A) by inserting ‘‘, or censure,’’ after ‘‘De25 partment’’, and 
78 

•HR 4997 IH 

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

2 flush sentence: 

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

4 representative described in the preceding sentence. If the 

5 representative was acting on behalf of an employer or any 

6 firm or other entity in connection with the conduct giving 

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

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

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

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

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

14 (2) EFFECTIVE DATE.—The amendments made 

15 by this subsection shall apply to actions taken after 

16 the date of the enactment of this Act. 

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

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

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

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

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

24 transaction plan or arrangement, or other plan or arrange-
79 

•HR 4997 IH 

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

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

3 SEC. 315. 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 100 percent of the gross income derived (or to 

21 be derived) from such activity by the person or per22 sons subject to such penalty. 

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

24 amount determined under paragraph (1) shall be 

25 calculated with respect to each instance of an activ-
80 

•HR 4997 IH 

1 ity described in subsection (a), each instance in 

2 which income was derived by the person or persons 

3 subject to such penalty, and each person who par4 ticipated in such an activity. 

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

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

7 such activity, all such persons shall be jointly and 

8 severally liable for the penalty under such sub9 section. 

10 ‘‘(c) 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 deductible by the person who is sub14 ject to such penalty or who makes such payment.’’. 

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

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

17 enactment of this Act. 

18 SEC. 316. STATUTE OF LIMITATIONS FOR TAXABLE YEARS 

19 FOR WHICH REQUIRED LISTED TRANS20 ACTIONS NOT REPORTED. 

21 (a) IN GENERAL.—Section 6501(c) (relating to ex22 ceptions) is amended by adding at the end the following 

23 new paragraph: 

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

25 fails to include on any return or statement for any 
81 

•HR 4997 IH 

1 taxable year any information with respect to a listed 

2 transaction (as defined in section 6707A(c)(2)) which 

3 is required under section 6011 to be included with 

4 such return or statement, the time for assessment of 

5 any tax imposed by this title with respect to such 

6 transaction shall not expire before the date which is 

7 1 year after the earlier of— 

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

9 furnished the information so required; or 

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

11 defined in section 6111) meets the requirements 

12 of section 6112 with respect to a request by the 

13 Secretary under section 6112(b) relating to 

14 such transaction with respect to such tax15 payer.’’. 

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

17 this section shall apply to taxable years with respect to 

18 which the period for assessing a deficiency did not expire 

19 before the date of the enactment of this Act. 

20 SEC. 317. DENIAL OF DEDUCTION FOR INTEREST ON UN21 DERPAYMENTS ATTRIBUTABLE TO NONDIS22 CLOSED REPORTABLE AND NONECONOMIC 

23 SUBSTANCE TRANSACTIONS. 

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

25 for interest) is amended by redesignating subsection (m) 
82 

•HR 4997 IH 

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

2 following new subsection: 

3 ‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE

4 TO NONDISCLOSED REPORTABLE TRANSACTIONS AND

5 NONECONOMIC SUBSTANCE TRANSACTIONS.—No deduc6 tion shall be allowed under this chapter for any interest 

7 paid or accrued under section 6601 on any underpayment 

8 of tax which is attributable to— 

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

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

11 with respect to which the requirement of section 

12 6664(d)(2)(A) is not met, or 

13 ‘‘(2) any noneconomic substance transaction 

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

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 SEC. 318. AUTHORIZATION OF APPROPRIATIONS FOR TAX 

19 LAW ENFORCEMENT. 

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

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

22 for the purpose of carrying out tax law enforcement to 

23 combat tax avoidance transactions and other tax shelters, 

24 including the use of offshore financial accounts to conceal 

25 taxable income. 
83 

•HR 4997 IH 

1 SEC. 319. PENALTY FOR AIDING AND ABETTING THE UN2 DERSTATEMENT OF TAX LIABILITY. 

3 (a) IN GENERAL.—Section 6701(a) (relating to impo4 sition of penalty) is amended— 

5 (1) by inserting ‘‘the tax liability or’’ after ‘‘re6 spect to,’’ in paragraph (1), 

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

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

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

10 and 

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

12 procurement, or advice or each such’’ before ‘‘docu13 ment’’ in the matter following paragraph (3). 

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

15 6701 (relating to penalties for aiding and abetting under16 statement of tax liability) is amended to read as follows: 

17 ‘‘(b) AMOUNT OF PENALTY; CALCULATION OF PEN18 ALTY; LIABILITY FOR PENALTY.— 

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

20 the penalty imposed by subsection (a) shall not ex21 ceed 100 percent of the gross income derived (or to 

22 be derived) from such aid, assistance, procurement, 

23 or advice provided by the person or persons subject 

24 to such penalty. 

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

26 amount determined under paragraph (1) shall be 
84 

•HR 4997 IH 

1 calculated with respect to each instance of aid, as2 sistance, procurement, or advice described in sub3 section (a), each instance in which income was de4 rived by the person or persons subject to such pen5 alty, and each person who made such an understate6 ment of the liability for tax. 

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

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

9 providing such aid, assistance, procurement, or ad10 vice, all such persons shall be jointly and severally 

11 liable for the penalty under such subsection.’’. 

12 (c) PENALTY NOT DEDUCTIBLE.—Section 6701 is 

13 amended by adding at the end the following new sub14 section: 

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

16 any penalty imposed under this section or the payment 

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

18 penalty shall not be deductible by the person who is sub19 ject to such penalty or who makes such payment.’’. 

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

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

22 enactment of this Act. 
85 

•HR 4997 IH 

1 Subtitle B—Enron-Related Tax 

2 Shelter Provisions 

3 SEC. 321. LIMITATION ON TRANSFER OR IMPORTATION OF 

4 BUILT-IN LOSSES. 

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

6 corporations) is amended by adding at the end the fol7 lowing new subsection: 

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

9 ‘‘(1) LIMITATION ON IMPORTATION OF BUILT10 IN LOSSES.— 

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

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

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

14 net built-in loss, the basis of each property de15 scribed in subparagraph (B) which is acquired 

16 in such transaction shall (notwithstanding sub17 sections (a) and (b)) be its fair market value 

18 immediately after such transaction. 

19 ‘‘(B) PROPERTY DESCRIBED.—For pur20 poses of subparagraph (A), property is de21 scribed in this subparagraph if— 

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

23 property is not subject to tax under this 

24 subtitle in the hands of the transferor im25 mediately before the transfer, and 
86 

•HR 4997 IH 

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

2 property is subject to such tax in the 

3 hands of the transferee immediately after 

4 such transfer. 

5 In any case in which the transferor is a part6 nership, the preceding sentence shall be applied 

7 by treating each partner in such partnership as 

8 holding such partner’s proportionate share of 

9 the property of such partnership. 

10 ‘‘(C) IMPORTATION OF NET BUILT-IN

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

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

13 a transaction if the transferee’s aggregate ad14 justed bases of property described in subpara15 graph (B) which is transferred in such trans16 action would (but for this paragraph) exceed 

17 the fair market value of such property imme18 diately after such transaction. 

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

20 LOSSES IN SECTION 351 TRANSACTIONS.— 

21 ‘‘(A) IN GENERAL.—If— 

22 ‘‘(i) property is transferred by a 

23 transferor in any transaction which is de24 scribed in subsection (a) and which is not 
87 

•HR 4997 IH 

1 described in paragraph (1) of this sub2 section, and 

3 ‘‘(ii) the transferee’s aggregate ad4 justed bases of such property so trans5 ferred would (but for this paragraph) ex6 ceed the fair market value of such property 

7 immediately after such transaction, 

8 then, notwithstanding subsection (a), the trans9 feree’s aggregate adjusted bases of the property 

10 so transferred shall not exceed the fair market 

11 value of such property immediately after such 

12 transaction. 

13 ‘‘(B) ALLOCATION OF BASIS REDUC14 TION.—The aggregate reduction in basis by 

15 reason of subparagraph (A) shall be allocated 

16 among the property so transferred in proportion 

17 to their respective built-in losses immediately 

18 before the transaction. 

19 ‘‘(C) EXCEPTION FOR TRANSFERS WITHIN

20 AFFILIATED GROUP.—Subparagraph (A) shall 

21 not apply to any transaction if the transferor 

22 owns stock in the transferee meeting the re23 quirements of section 1504(a)(2). In the case of 

24 property to which subparagraph (A) does not 

25 apply by reason of the preceding sentence, the 
88 

•HR 4997 IH 

1 transferor’s basis in the stock received for such 

2 property shall not exceed its fair market value 

3 immediately after the transfer.’’. 

4 (b) COMPARABLE TREATMENT WHERE LIQUIDA5 TION.—Paragraph (1) of section 334(b) (relating to liq6 uidation of subsidiary) is amended to read as follows: 

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

8 corporate distributee in a distribution in a complete 

9 liquidation to which section 332 applies (or in a 

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

11 such property in the hands of such distributee shall 

12 be the same as it would be in the hands of the trans13 feror; except that the basis of such property in the 

14 hands of such distributee shall be the fair market 

15 value of the property at the time of the distribu16 tion— 

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

18 recognized by the liquidating corporation with 

19 respect to such property, or 

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

21 corporation is a foreign corporation, the cor22 porate distributee is a domestic corporation, 

23 and the corporate distributee’s aggregate ad24 justed bases of property described in section 

25 362(e)(1)(B) which is distributed in such liq-
89 

•HR 4997 IH 

1 uidation would (but for this subparagraph) ex2 ceed the fair market value of such property im3 mediately after such liquidation.’’. 

4 (c) EFFECTIVE DATES.— 

5 (1) IN GENERAL.—The amendment made by 

6 subsection (a) shall apply to transactions after De7 cember 31, 2003. 

8 (2) LIQUIDATIONS.—The amendment made by 

9 subsection (b) shall apply to liquidations after De10 cember 31, 2003. 

11 SEC. 322. NO REDUCTION OF BASIS UNDER SECTION 734 IN 

12 STOCK HELD BY PARTNERSHIP IN COR13 PORATE PARTNER. 

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

15 at the end the following new subsection: 

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

17 STOCK OF CORPORATE PARTNER.—In making an alloca18 tion under subsection (a) of any decrease in the adjusted 

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

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

21 corporation (or any person which is related (within 

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

23 corporation) which is a partner in the partnership, 

24 and 
90 

•HR 4997 IH 

1 ‘‘(2) any amount not allocable to stock by rea2 son of paragraph (1) shall be allocated under sub3 section (a) to other partnership property in such 

4 manner as the Secretary may prescribe. 

5 Gain shall be recognized to the partnership to the extent 

6 that the amount required to be allocated under paragraph 

7 (2) to other partnership property exceeds the aggregate 

8 adjusted basis of such other property immediately before 

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

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

11 this section shall apply to distributions after February 13, 

12 2003. 

13 SEC. 323. REPEAL OF SPECIAL RULES FOR FASITS. 

14 (a) IN GENERAL.—Part V of subchapter M of chap15 ter 1 (relating to financial asset securitization investment 

16 trusts) is hereby repealed. 

17 (b) CONFORMING AMENDMENTS.— 

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

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

20 REMIC’’. 

21 (2) Clause (ii) of section 382(l)(4)(B) is amend22 ed by striking ‘‘a REMIC to which part IV of sub23 chapter M applies, or a FASIT to which part V of 

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

25 to which part IV of subchapter M applies,’’. 
91 

•HR 4997 IH 

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

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

3 FASIT,’’. 

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

5 amended by striking the last sentence. 

6 (5)(A) Section 860G(a)(1) is amended by add7 ing at the end the following new sentence: ‘‘An inter8 est shall not fail to qualify as a regular interest sole9 ly because the specified principal amount of the reg10 ular interest (or the amount of interest accrued on 

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

12 the nonoccurrence of 1 or more contingent payments 

13 with respect to any reverse mortgage loan held by 

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

15 the sponsor reasonably believes that all principal and 

16 interest due under the regular interest will be paid 

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

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

19 amended by inserting ‘‘, and any reverse mortgage 

20 loan (and each balance increase on such loan meet21 ing the requirements of subparagraph (A)(iii)) shall 

22 be treated as an obligation secured by an interest in 

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

24 (6) Paragraph (3) of section 860G(a) is amend25 ed by adding ‘‘and’’ at the end of subparagraph (B), 
92 

•HR 4997 IH 

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

2 and inserting a period, and by striking subparagraph 

3 (D). 

4 (7) Section 860G(a)(3), as amended by para5 graph (6), is amended by adding at the end the fol6 lowing new sentence: ‘‘For purposes of subparagraph 

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

8 transferred to, or purchased by, the REMIC are 

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

10 political subdivision, agency, or instrumentality of 

11 the United States or any State) and are principally 

12 secured by an interest in real property, then each 

13 obligation transferred to, or purchased by, the 

14 REMIC shall be treated as secured by an interest in 

15 real property.’’. 

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

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

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

19 clause (ii) the following new clause: 

20 ‘‘(iii) represents an increase in the 

21 principal amount under the original terms 

22 of an obligation described in clause (i) or 

23 (ii) if such increase— 
93 

•HR 4997 IH 

1 ‘‘(I) is attributable to an advance 

2 made to the obligor pursuant to the 

3 original terms of the obligation, 

4 ‘‘(II) occurs after the startup 

5 day, and 

6 ‘‘(III) is purchased by the 

7 REMIC pursuant to a fixed price con8 tract in effect on the startup day.’’. 

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

10 as follows: 

11 ‘‘(B) QUALIFIED RESERVE FUND.—For 

12 purposes of subparagraph (A), the term ‘quali13 fied reserve fund’ means any reasonably re14 quired reserve to— 

15 ‘‘(i) provide for full payment of ex16 penses of the REMIC or amounts due on 

17 regular interests in the event of defaults on 

18 qualified mortgages or lower than expected 

19 returns on cash flow investments, or 

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

21 purchase of obligations described in clause 

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

23 The aggregate fair market value of the assets 

24 held in any such reserve shall not exceed 50 

25 percent of the aggregate fair market value of all 
94 

•HR 4997 IH 

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

2 and the amount of any such reserve shall be 

3 promptly and appropriately reduced to the ex4 tent the amount held in such reserve is no 

5 longer reasonably required for purposes speci6 fied in clause (i) or (ii) of this subparagraph.’’. 

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

8 amended by striking ‘‘REMIC, or FASIT’’ and in9 serting ‘‘or REMIC’’. 

10 (10) Clause (xi) of section 7701(a)(19)(C) is 

11 amended— 

12 (A) by striking ‘‘and any regular interest 

13 in a FASIT,’’, and 

14 (B) by striking ‘‘or FASIT’’ each place it 

15 appears. 

16 (11) Subparagraph (A) of section 7701(i)(2) is 

17 amended by striking ‘‘or a FASIT’’. 

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

19 chapter 1 is amended by striking the item relating 

20 to part V. 

21 (c) EFFECTIVE DATE.— 

22 (1) IN GENERAL.—Except as provided in para23 graph (2), the amendments made by this section 

24 shall take effect on February 14, 2003. 
95 

•HR 4997 IH 

1 (2) EXCEPTION FOR EXISTING FASITS.—Para2 graph (1) shall not apply to any FASIT in existence 

3 on the date of the enactment of this Act to the ex4 tent that regular interests issued by the FASIT be5 fore such date continue to remain outstanding in ac6 cordance with the original terms of issuance. 

7 SEC. 324. EXPANDED DISALLOWANCE OF DEDUCTION FOR 

8 INTEREST ON CONVERTIBLE DEBT. 

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

10 is amended by inserting ‘‘or equity held by the issuer (or 

11 any related party) in any other person’’ after ‘‘or a related 

12 party’’. 

13 (b) CAPITALIZATION ALLOWED WITH RESPECT TO

14 EQUITY OF PERSONS OTHER THAN ISSUER AND RE15 LATED PARTIES.—Section 163(l) is amended by redesig16 nating paragraphs (4) and (5) as paragraphs (5) and (6) 

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

18 paragraph: 

19 ‘‘(4) CAPITALIZATION ALLOWED WITH RESPECT

20 TO EQUITY OF PERSONS OTHER THAN ISSUER AND

21 RELATED PARTIES.—If the disqualified debt instru22 ment of a corporation is payable in equity held by 

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

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

25 shall be increased by the amount not allowed as a 
96 

•HR 4997 IH 

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

2 the instrument.’’. 

3 (c) EXCEPTION FOR CERTAIN INSTRUMENTS ISSUED

4 BY DEALERS IN SECURITIES.—Section 163(l), as amend5 ed by subsection (b), is amended by redesignating para6 graphs (5) and (6) as paragraphs (6) and (7) and by in7 serting after paragraph (4) the following new paragraph: 

8 ‘‘(5) EXCEPTION FOR CERTAIN INSTRUMENTS

9 ISSUED BY DEALERS IN SECURITIES.—For purposes 

10 of this subsection, the term ‘disqualified debt instru11 ment’ does not include indebtedness issued by a 

12 dealer in securities (or a related party) which is pay13 able in, or by reference to, equity (other than equity 

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

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

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

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

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

19 section 163(l) is amended— 

20 (1) by striking ‘‘or a related party’’ in the ma21 terial preceding subparagraph (A) and inserting ‘‘or 

22 any other person’’, and 

23 (2) by striking ‘‘or interest’’ each place it ap24 pears. 
97 

•HR 4997 IH 

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

2 this section shall apply to debt instruments issued after 

3 February 13, 2003. 

4 SEC. 325. EXPANDED AUTHORITY TO DISALLOW TAX BENE5 FITS UNDER SECTION 269. 

6 (a) IN GENERAL.—Subsection (a) of section 269 (re7 lating to acquisitions made to evade or avoid income tax) 

8 is amended to read as follows: 

9 ‘‘(a) IN GENERAL.—If— 

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

11 or indirectly, control of a corporation, or 

12 ‘‘(B) any corporation acquires, directly or indi13 rectly, property of another corporation and the basis 

14 of such property, in the hands of the acquiring cor15 poration, is determined by reference to the basis in 

16 the hands of the transferor corporation, and 

17 ‘‘(2) the principal purpose for which such acqui18 sition was made is evasion or avoidance of Federal 

19 income tax, 

20 then the Secretary may disallow such deduction, credit, 

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

22 control means the ownership of stock possessing at least 

23 50 percent of the total combined voting power of all class24 es of stock entitled to vote or at least 50 percent of the 
98 

•HR 4997 IH 

1 total value of all shares of all classes of stock of the cor2 poration.’’. 

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

4 this section shall apply to stock and property acquired 

5 after February 13, 2003. 

6 SEC. 326. MODIFICATION OF INTERACTION BETWEEN SUB7 PART F AND PASSIVE FOREIGN INVESTMENT 

8 COMPANY RULES. 

9 (a) LIMITATION ON EXCEPTION FROM PFIC RULES

10 FOR UNITED STATES SHAREHOLDERS OF CONTROLLED

11 FOREIGN CORPORATIONS.—Paragraph (2) of section 

12 1297(e) (relating to passive foreign investment company) 

13 is amended by adding at the end the following flush sen14 tence: 

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

16 earning of subpart F income by such corpora17 tion during such period would result in only a 

18 remote likelihood of an inclusion in gross in19 come under section 951(a)(1)(A)(i).’’. 

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

21 this section shall apply to taxable years of controlled for22 eign corporations beginning after February 13, 2003, and 

23 to taxable years of United States shareholders with or 

24 within which such taxable years of controlled foreign cor25 porations end. 
99 

•HR 4997 IH 

1 Subtitle C—Extension of Customs 

2 User Fees 

3 SEC. 331. EXTENSION OF CUSTOMS USER FEES. 

4 Section 13031(j)(3) of the Consolidated Omnibus 

5 Budget Reconciliation Act of 1985 (19 U.S.C. 58c(j)(3)) 

6 is amended by striking ‘‘March 1, 2005’’ and inserting 

7 ‘‘September 30, 2013’’. 

Æ