TITLE 
I—DEDUCTION 
FOR 
STATE 
AND 
LOCAL 
REAL 
PROPERTY TAXES ALLOWED 
WHETHER OR NOT TAXPAYER 
ITEMIZES 
OTHER 
DEDUC-
TIONS 
SEC. 101. DEDUCTION FOR STATE AND LOCAL REAL PROP-
ERTY TAXES ALLOWED WHETHER OR NOT 
TAXPAYER ITEMIZES OTHER DEDUCTIONS. 
(a) IN GENERAL.—Subsection (a) of section 62 of the 
Internal Revenue Code of 1986 (defining adjusted gross 
income) is amended by inserting before the last sentence 
the following new paragraph: 
‘‘(22) STATE
AND
LOCAL
REAL
PROPERTY 
TAXES.—At the election of the taxpayer, so much of 
the deduction allowed by section 164 for State and 
local real property taxes (within the meaning of sec-
tion 164) as does not exceed $1,000 ($2,000 in the 
case of a joint return).’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to taxable years beginning after 
December 31, 2008. 
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TITLE II—REVENUE PROVISIONS 
Subtitle A—Nonqualified Deferred 
Compensation 
From 
Certain 
Tax Indifferent Parties 
SEC. 
201. 
NONQUALIFIED 
DEFERRED 
COMPENSATION 
FROM CERTAIN TAX INDIFFERENT PARTIES. 
(a) IN GENERAL.—Subpart B of part II of sub-
chapter E of chapter 1 of the Internal Revenue Code of 
1986 (relating to taxable year for which items of gross 
income included) is amended by inserting after section 457 
the following new section: 
‘‘SEC. 457A. NONQUALIFIED DEFERRED COMPENSATION 
FROM CERTAIN TAX INDIFFERENT PARTIES. 
‘‘(a) IN GENERAL.—Any compensation which is de-
ferred under a nonqualified deferred compensation plan of 
a nonqualified entity shall be taken into account for pur-
poses of this chapter when there is no substantial risk of 
forfeiture of the rights to such compensation. 
‘‘(b) NONQUALIFIED ENTITY.—For purposes of this 
section, the term ‘nonqualified entity’ means— 
‘‘(1) any foreign corporation unless substan-
tially all of its income is— 
‘‘(A) effectively connected with the conduct 
of a trade or business in the United States, or 
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‘‘(B) subject to a comprehensive foreign in-
come tax, and 
‘‘(2) any partnership unless substantially all of 
its income is allocated to persons other than— 
‘‘(A) foreign persons with respect to whom 
such income is not subject to a comprehensive 
foreign income tax, and 
‘‘(B) organizations which are exempt from 
tax under this title. 
‘‘(c) ASCERTAINABILITY
OF AMOUNTS
OF COM-
PENSATION.— 
‘‘(1) IN GENERAL.—If the amount of any com-
pensation is not ascertainable at the time that such 
compensation is otherwise to be taken into account 
under subsection (a)— 
‘‘(A) such amount shall be so taken into 
account when ascertainable, and 
‘‘(B) the tax imposed under this chapter 
for the taxable year in which such compensation 
is taken into account under subparagraph (A) 
shall be increased by the sum of— 
‘‘(i) the amount of interest determined 
under paragraph (2), and 
‘‘(ii) an amount equal to 20 percent of 
the amount of such compensation. 
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‘‘(2) INTEREST.—For purposes of paragraph 
(1)(B)(i), the interest determined under this para-
graph for any taxable year is the amount of interest 
at the underpayment rate under section 6621 plus 
1 percentage point on the underpayments that would 
have occurred had the deferred compensation been 
includible in gross income for the taxable year in 
which first deferred or, if later, the first taxable year 
in which such deferred compensation is not subject 
to a substantial risk of forfeiture. 
‘‘(d) OTHER DEFINITIONS AND SPECIAL RULES.— 
For purposes of this section— 
‘‘(1) SUBSTANTIAL RISK OF FORFEITURE.— 
‘‘(A) IN GENERAL.—The rights of a person 
to compensation shall be treated as subject to 
a substantial risk of forfeiture only if such per-
son’s rights to such compensation are condi-
tioned upon the future performance of substan-
tial services by any individual. 
‘‘(B) 
EXCEPTION
FOR
COMPENSATION 
BASED ON GAIN RECOGNIZED ON AN INVEST-
MENT ASSET.— 
‘‘(i) IN GENERAL.—To the extent pro-
vided in regulations prescribed by the Sec-
retary, if compensation is determined solely 
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by reference to the amount of gain recog-
nized on the disposition of an investment 
asset, such compensation shall be treated 
as subject to a substantial risk of for-
feiture until the date of such disposition. 
‘‘(ii) INVESTMENT ASSET.—For pur-
poses of clause (i), the term ‘investment 
asset’ means any single asset (other than 
an investment fund or similar entity)— 
‘‘(I) acquired directly by an in-
vestment fund or similar entity, 
‘‘(II) with respect to which such 
entity does not (nor does any person 
related to such entity) participate in 
the active management of such asset 
(or if such asset is an interest in an 
entity, in the active management of 
the activities of such entity), and 
‘‘(III) substantially all of any 
gain on the disposition of which (other 
than such deferred compensation) is 
allocated to investors in such entity. 
‘‘(iii) COORDINATION
WITH
SPECIAL 
RULE
FOR
SHORT-TERM
DEFERRALS
OF 
COMPENSATION.—Paragraph (3)(B) shall 
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not apply to any compensation to which 
clause (i) applies. 
‘‘(2) COMPREHENSIVE FOREIGN INCOME TAX.— 
The term ‘comprehensive foreign income tax’ means, 
with respect to any foreign person, the income tax 
of a foreign country if— 
‘‘(A) such person is eligible for the benefits 
of a comprehensive income tax treaty between 
such foreign country and the United States, or 
‘‘(B) such person demonstrates to the sat-
isfaction of the Secretary that such foreign 
country has a comprehensive income tax. 
Such term shall not include any tax unless such tax 
includes rules for the deductibility of deferred com-
pensation which are similar to the rules of this title. 
‘‘(3) NONQUALIFIED
DEFERRED
COMPENSA-
TION PLAN.— 
‘‘(A) 
IN
GENERAL.—The 
term 
‘non-
qualified deferred compensation plan’ has the 
meaning 
given 
such 
term 
under 
section 
409A(d), except that such term shall include 
any plan that provides a right to compensation 
based on the appreciation in value of a specified 
number of equity units of the service recipient. 
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‘‘(B) EXCEPTION
FOR
SHORT-TERM
DE-
FERRALS.—Compensation shall not be treated 
as deferred for purposes of this section if the 
service provider receives payment of such com-
pensation not later than 12 months after the 
end of the taxable year of the service recipient 
during which the right to the payment of such 
compensation is no longer subject to a substan-
tial risk of forfeiture. 
‘‘(4) EXCEPTION FOR CERTAIN COMPENSATION 
WITH
RESPECT
TO
EFFECTIVELY
CONNECTED
IN-
COME.—In the case a foreign corporation with in-
come which is taxable under section 882, this section 
shall not apply to compensation which, had such 
compensation had been paid in cash on the date that 
such compensation ceased to be subject to a sub-
stantial risk of forfeiture, would have been deduct-
ible by such foreign corporation against such income. 
‘‘(5) APPLICATION OF RULES.—Rules similar to 
the rules of paragraphs (5) and (6) of section 
409A(d) shall apply. 
‘‘(e) REGULATIONS.—The Secretary shall prescribe 
such regulations as may be necessary or appropriate to 
carry out the purposes of this section, including regula-
tions disregarding a substantial risk of forfeiture in cases 
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where necessary to carry out the purposes of this sec-
tion.’’. 
(b) CONFORMING AMENDMENT.—Section 26(b)(2) of 
such Code is amended by striking ‘‘and’’ at the end of 
subparagraph (S), by striking the period at the end of sub-
paragraph (T) and inserting ‘‘, and’’, and by adding at 
the end the following new subparagraph: 
‘‘(U) section 457A(c)(1)(B) (relating to as-
certainability of amounts of compensation).’’. 
(c) CLERICAL AMENDMENT.—The table of sections 
of subpart B of part II of subchapter E of chapter 1 of 
such Code is amended by inserting after the item relating 
to section 457 the following new item: 
‘‘Sec. 457A. Nonqualified deferred compensation from certain tax indifferent 
parties.’’. 
(d) EFFECTIVE DATE.— 
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by 
this section shall apply to amounts deferred which 
are attributable to services performed after Decem-
ber 31, 2007. 
(2) APPLICATION TO EXISTING DEFERRALS.— 
In the case of any amount deferred to which the 
amendments made by this section do not apply solely 
by reason of the fact that the amount is attributable 
to services performed before January 1, 2008, to the 
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extent such amount is not includible in gross income 
in a taxable year beginning before 2017, such 
amounts shall be includible in gross income in the 
later of— 
(A) the last taxable year beginning before 
2017, or 
(B) the taxable year in which there is no 
substantial risk of forfeiture of the rights to 
such compensation (determined in the same 
manner as determined for purposes of section 
457A of the Internal Revenue Code of 1986, as 
added by this section). 
(3) ACCELERATED PAYMENTS.—No later than 
60 days after the date of the enactment of this Act, 
the Secretary shall issue guidance providing a lim-
ited period of time during which a nonqualified de-
ferred compensation arrangement attributable to 
services performed on or before December 31, 2007, 
may, without violating the requirements of section 
409A(a) of the Internal Revenue Code of 1986, be 
amended to conform the date of distribution to the 
date the amounts are required to be included in in-
come. 
(4) CERTAIN BACK-TO-BACK ARRANGEMENTS.— 
If the taxpayer is also a service recipient and main-
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tains one or more nonqualified deferred compensa-
tion arrangements for its service providers under 
which any amount is attributable to services per-
formed on or before December 31, 2007, the guid-
ance issued under paragraph (3) shall permit such 
arrangements to be amended to conform the dates of 
distribution under such arrangement to the date 
amounts are required to be included in the income 
of such taxpayer under this subsection. 
(5) ACCELERATED PAYMENT NOT TREATED AS 
MATERIAL
MODIFICATION.—Any amendment to a 
nonqualified deferred compensation arrangement 
made pursuant to paragraph (3) or (4) shall not be 
treated as a material modification of the arrange-
ment for purposes of section 409A of the Internal 
Revenue Code of 1986. 
Subtitle B—Codification of 
Economic Substance Doctrine 
SEC. 211. CODIFICATION OF ECONOMIC SUBSTANCE DOC-
TRINE. 
(a) IN GENERAL.—Section 7701 of the Internal Rev-
enue Code of 1986 is amended by redesignating subsection 
(p) as subsection (q) and by inserting after subsection (o) 
the following new subsection: 
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‘‘(p) CLARIFICATION
OF
ECONOMIC
SUBSTANCE 
DOCTRINE.— 
‘‘(1) APPLICATION OF DOCTRINE.—In the case 
of any transaction to which the economic substance 
doctrine is relevant, such transaction shall be treated 
as having economic substance only if— 
‘‘(A) the transaction changes in a mean-
ingful way (apart from Federal income tax ef-
fects) the taxpayer’s economic position, and 
‘‘(B) the taxpayer has a substantial pur-
pose (apart from Federal income tax effects) 
for entering into such transaction. 
‘‘(2) SPECIAL RULE WHERE TAXPAYER RELIES 
ON PROFIT POTENTIAL.— 
‘‘(A) IN
GENERAL.—The potential for 
profit of a transaction shall be taken into ac-
count in determining whether the requirements 
of subparagraphs (A) and (B) of paragraph (1) 
are met with respect to the transaction only if 
the present value of the reasonably expected 
pre-tax profit from the transaction is substan-
tial in relation to the present value of the ex-
pected net tax benefits that would be allowed if 
the transaction were respected. 
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‘‘(B) TREATMENT OF FEES AND FOREIGN 
TAXES.—Fees and other transaction expenses 
and foreign taxes shall be taken into account as 
expenses in determining pre-tax profit under 
subparagraph (A). 
‘‘(3) STATE AND LOCAL TAX BENEFITS.—For 
purposes of paragraph (1), any State or local income 
tax effect which is related to a Federal income tax 
effect shall be treated in the same manner as a Fed-
eral income tax effect. 
‘‘(4) FINANCIAL ACCOUNTING BENEFITS.—For 
purposes of paragraph (1)(B), achieving a financial 
accounting benefit shall not be taken into account as 
a purpose for entering into a transaction if such 
transaction results in a Federal income tax benefit. 
‘‘(5) DEFINITIONS AND SPECIAL RULES.—For 
purposes of this subsection— 
‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.— 
The term ‘economic substance doctrine’ means 
the common law doctrine under which tax bene-
fits under subtitle A with respect to a trans-
action are not allowable if the transaction does 
not have economic substance or lacks a business 
purpose. 
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‘‘(B) EXCEPTION FOR PERSONAL TRANS-
ACTIONS OF INDIVIDUALS.—In the case of an 
individual, paragraph (1) shall apply only to 
transactions entered into in connection with a 
trade or business or an activity engaged in for 
the production of income. 
‘‘(C) OTHER
COMMON
LAW
DOCTRINES 
NOT
AFFECTED.—Except as specifically pro-
vided in this subsection, the provisions of this 
subsection shall not be construed as altering or 
supplanting any other rule of law, and the re-
quirements of this subsection shall be construed 
as being in addition to any such other rule of 
law. 
‘‘(D) DETERMINATION OF APPLICATION OF 
DOCTRINE NOT AFFECTED.—The determination 
of whether the economic substance doctrine is 
relevant to a transaction shall be made in the 
same manner as if this subsection had never 
been enacted. 
‘‘(6) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section. Such regulations may include exemptions 
from the application of this subsection.’’. 
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(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions entered into after 
the date of the enactment of this Act. 
SEC. 212. PENALTIES FOR UNDERPAYMENTS. 
(a) PENALTY FOR UNDERPAYMENTS ATTRIBUTABLE 
TO TRANSACTIONS LACKING ECONOMIC SUBSTANCE.— 
(1) IN
GENERAL.—Subsection (b) of section 
6662 of the Internal Revenue Code of 1986 is 
amended by inserting after paragraph (5) the fol-
lowing new paragraph: 
‘‘(6) Any disallowance of claimed tax benefits 
by reason of a transaction lacking economic sub-
stance (within the meaning of section 7701(p)) or 
failing to meet the requirements of any similar rule 
of law.’’. 
(2) INCREASED PENALTY FOR NONDISCLOSED 
TRANSACTIONS.—Section 6662 of such Code is 
amended by adding at the end the following new 
subsection: 
‘‘(i) INCREASE IN PENALTY IN CASE OF NONDIS-
CLOSED NONECONOMIC SUBSTANCE TRANSACTIONS.— 
‘‘(1) IN GENERAL.—To the extent that a por-
tion of the underpayment to which this section ap-
plies is attributable to one or more nondisclosed non-
economic substance transactions, subsection (a) shall 
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be applied with respect to such portion by sub-
stituting ‘40 percent’ for ‘20 percent’. 
‘‘(2) 
NONDISCLOSED
NONECONOMIC
SUB-
STANCE TRANSACTIONS.—For purposes of this sub-
section, the term ‘nondisclosed noneconomic sub-
stance transaction’ means any portion of a trans-
action described in subsection (b)(6) with respect to 
which the relevant facts affecting the tax treatment 
are not adequately disclosed in the return nor in a 
statement attached to the return. 
‘‘(3) 
SPECIAL
RULE
FOR
AMENDED
RE-
TURNS.—Except as provided in regulations, in no 
event shall any amendment or supplement to a re-
turn of tax be taken into account for purposes of 
this subsection if the amendment or supplement is 
filed after the earlier of the date the taxpayer is first 
contacted by the Secretary regarding the examina-
tion of the return or such other date as is specified 
by the Secretary.’’. 
(3) CONFORMING AMENDMENT.—Subparagraph 
(B) of section 6662A(e)(2) of such Code is amend-
ed— 
(A) by striking ‘‘section 6662(h)’’ and in-
serting ‘‘subsection (h) or (i) of section 6662’’, 
and 
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(B) 
by 
striking 
‘‘GROSS
VALUATION 
MISSTATEMENT PENALTY’’ in the heading and 
inserting 
‘‘CERTAIN
INCREASED
UNDER-
PAYMENT PENALTIES’’. 
(b) REASONABLE CAUSE EXCEPTION NOT APPLICA-
BLE TO NONECONOMIC SUBSTANCE TRANSACTIONS, TAX 
SHELTERS, AND CERTAIN LARGE CORPORATIONS.—Sub-
section (c) of section 6664 of such Code is amended— 
(1) by redesignating paragraphs (2) and (3) as 
paragraphs (3) and (4), respectively, 
(2) by striking ‘‘paragraph (2)’’ in paragraph 
(4), as so redesignated, and inserting ‘‘paragraph 
(3)’’, and 
(3) by inserting after paragraph (1) the fol-
lowing new paragraph: 
‘‘(2) EXCEPTION
FOR
NONECONOMIC
SUB-
STANCE TRANSACTIONS, TAX SHELTERS, AND CER-
TAIN LARGE CORPORATIONS.—Paragraph (1) shall 
not apply— 
‘‘(A) to any portion of an underpayment 
which is attributable to one or more tax shelters 
(as defined in section 6662(d)(2)(C)) or trans-
actions described in section 6662(b)(6), and 
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