‘‘(D) TREATMENT OF LESSORS.—In apply-
ing paragraph (1)(B)(ii) to the lessor of tan-
gible property subject to a lease— 
‘‘(i) the expected net tax benefits with 
respect to the leased property shall not in-
clude the benefits of— 
‘‘(I) depreciation, 
‘‘(II) any tax credit, or 
‘‘(III) any other deduction as 
provided in guidance by the Secretary, 
and 
‘‘(ii) subclause (II) of paragraph 
(1)(B)(ii) shall be disregarded in deter-
mining whether any of such benefits are al-
lowable. 
‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF-
FECTED.—Except as specifically provided in this 
subsection, the provisions of this subsection shall not 
be construed as altering or supplanting any other 
rule of law, and the requirements of this subsection 
shall be construed as being in addition to any such 
other rule of law. 
‘‘(5) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
VerDate Aug 31 2005 
00:54 Sep 22, 2006
Jkt 049200
PO 00000
Frm 00007
Fmt 6652
Sfmt 6201
E:\BILLS\H6122.IH
H6122
CColeman on PROD1PC71 with BILLS
section. Such regulations may include exemptions 
from the application of this subsection.’’. 
(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. 4. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE 
TO TRANSACTIONS LACKING ECONOMIC SUB-
STANCE, ETC. 
(a) IN GENERAL.—Subchapter A of chapter 68 is 
amended by inserting after section 6662A the following 
new section: 
‘‘SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIB-
UTABLE TO TRANSACTIONS LACKING ECO-
NOMIC SUBSTANCE, ETC. 
‘‘(a) IMPOSITION OF PENALTY.—If a taxpayer has an 
noneconomic substance transaction understatement for 
any taxable year, there shall be added to the tax an 
amount equal to 40 percent of the amount of such under-
statement. 
‘‘(b) REDUCTION
OF PENALTY
FOR DISCLOSED 
TRANSACTIONS.—Subsection (a) shall be applied by sub-
stituting ‘20 percent’ for ‘40 percent’ with respect to the 
portion of any noneconomic substance transaction under-
statement with respect to which the relevant facts affect-
VerDate Aug 31 2005 
00:54 Sep 22, 2006
Jkt 049200
PO 00000
Frm 00008
Fmt 6652
Sfmt 6201
E:\BILLS\H6122.IH
H6122
CColeman on PROD1PC71 with BILLS
ing the tax treatment of the item are adequately disclosed 
in the return or a statement attached to the return. 
‘‘(c) NONECONOMIC SUBSTANCE TRANSACTION UN-
DERSTATEMENT.—For purposes of this section— 
‘‘(1) IN
GENERAL.—The term ‘noneconomic 
substance transaction understatement’ means any 
amount which would be an understatement under 
section 6662A(b)(1) if section 6662A were applied 
by taking into account items attributable to non-
economic substance transactions rather than items 
to which section 6662A would apply without regard 
to this paragraph. 
‘‘(2) 
NONECONOMIC
SUBSTANCE
TRANS-
ACTION.—The term ‘noneconomic substance trans-
action’ means any transaction if— 
‘‘(A) there is a lack of economic substance 
(within the meaning of section 7701(o)(1)) for 
the transaction giving rise to the claimed ben-
efit or the transaction was not respected under 
section 7701(o)(2), or 
‘‘(B) the transaction fails to meet the re-
quirements of any similar rule of law. 
‘‘(d) RULES APPLICABLE TO COMPROMISE OF PEN-
ALTY.— 
VerDate Aug 31 2005 
00:54 Sep 22, 2006
Jkt 049200
PO 00000
Frm 00009
Fmt 6652
Sfmt 6201
E:\BILLS\H6122.IH
H6122
CColeman on PROD1PC71 with BILLS
‘‘(1) IN GENERAL.—If the 1st letter of pro-
posed deficiency which allows the taxpayer an oppor-
tunity for administrative review in the Internal Rev-
enue Service Office of Appeals has been sent with 
respect to a penalty to which this section applies, 
only the Commissioner of Internal Revenue may 
compromise all or any portion of such penalty. 
‘‘(2) APPLICABLE RULES.—The rules of para-
graphs (2) and (3) of section 6707A(d) shall apply 
for purposes of paragraph (1). 
‘‘(e) COORDINATION WITH OTHER PENALTIES.—Ex-
cept as otherwise provided in this part, the penalty im-
posed by this section shall be in addition to any other pen-
alty imposed by this title. 
‘‘(f) CROSS REFERENCES.— 
‘‘(1) For coordination of penalty with under-
statements 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 Commis-
sion, see section 6707A(e).’’. 
(b) COORDINATION WITH OTHER UNDERSTATE-
MENTS AND PENALTIES.— 
(1) 
The 
second 
sentence 
of 
section 
6662(d)(2)(A) is amended by inserting ‘‘and without 
VerDate Aug 31 2005 
00:54 Sep 22, 2006
Jkt 049200
PO 00000
Frm 00010
Fmt 6652
Sfmt 6201
E:\BILLS\H6122.IH
H6122
CColeman on PROD1PC71 with BILLS
regard to items with respect to which a penalty is 
imposed by section 6662B’’ before the period at the 
end. 
(2) Subsection (e) of section 6662A is amend-
ed— 
(A) in paragraph (1), by inserting ‘‘and 
noneconomic substance transaction understate-
ments’’ after ‘‘reportable transaction under-
statements’’ both places it appears, 
(B) in paragraph (2)(A), by inserting 
‘‘6662B or’’ before ‘‘6663’’, 
(C) in paragraph (2)(B), by inserting ‘‘or 
6662B’’ after ‘‘section 6662’’, 
(D) in paragraph (3), by inserting ‘‘or 
noneconomic substance transaction understate-
ment’’ after ‘‘reportable transaction understate-
ment’’, and 
(E) by adding at the end the following new 
paragraph: 
‘‘(4) NONECONOMIC SUBSTANCE TRANSACTION 
UNDERSTATEMENT.—For purposes of this sub-
section, the term ‘noneconomic substance trans-
action understatement’ has the meaning given such 
term by section 6662B(c).’’. 
VerDate Aug 31 2005 
00:54 Sep 22, 2006
Jkt 049200
PO 00000
Frm 00011
Fmt 6652
Sfmt 6201
E:\BILLS\H6122.IH
H6122
CColeman on PROD1PC71 with BILLS
(3) Subsection (e) of section 6707A is amend-
ed— 
(A) by striking ‘‘or’’ at the end of subpara-
graph (B), and 
(B) by striking subparagraph (C) and in-
serting the following new subparagraphs: 
‘‘(C) is required to pay a penalty under 
section 6662B with respect to any noneconomic 
substance transaction, or 
‘‘(D) is required to pay a penalty under 
section 6662(h) with respect to any transaction 
and would (but for section 6662A(e)(2)(C)) 
have been subject to penalty under section 
6662A at a rate prescribed under section 
6662A(c) or under section 6662B,’’. 
(c) CLERICAL AMENDMENT.—The table of sections 
for part II of subchapter A of chapter 68 is amended by 
inserting after the item relating to section 6662A the fol-
lowing new item: 
‘‘Sec. 6662B. Penalty for understatements attributable to transactions lacking 
economic substance, etc.’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions entered into after 
the date of the enactment of this Act. 
Æ 
VerDate Aug 31 2005 
00:54 Sep 22, 2006
Jkt 049200
PO 00000
Frm 00012
Fmt 6652
Sfmt 6301
E:\BILLS\H6122.IH
H6122
CColeman on PROD1PC71 with BILLS