236 
section 6011 to be included with such return or statement 
shall pay a penalty in the amount determined under sub-
section (b). 
‘‘(b) AMOUNT OF PENALTY.— 
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the amount of the penalty under subsection 
(a) shall be— 
‘‘(A) $10,000 in the case of a natural per-
son, and 
‘‘(B) $50,000 in any other case. 
‘‘(2) LISTED TRANSACTION.—The amount of the 
penalty under subsection (a) with respect to a listed 
transaction shall be— 
‘‘(A) $100,000 in the case of a natural per-
son, and 
‘‘(B) $200,000 in any other case. 
‘‘(c) DEFINITIONS.—For purposes of this section— 
‘‘(1) REPORTABLE TRANSACTION.—The term ‘re-
portable transaction’ means any transaction with re-
spect to which information is required to be included 
with a return or statement because, as determined 
under regulations prescribed under section 6011, such 
transaction is of a type which the Secretary deter-
mines as having a potential for tax avoidance or eva-
sion.
237 
‘‘(2) LISTED
TRANSACTION.—The term ‘listed 
transaction’ means a reportable transaction which is 
the same as, or substantially similar to, a transaction 
specifically identified by the Secretary as a tax avoid-
ance transaction for purposes of section 6011. 
‘‘(d) AUTHORITY TO RESCIND PENALTY.— 
‘‘(1) IN GENERAL.—The Commissioner of Inter-
nal Revenue may rescind all or any portion of any 
penalty imposed by this section with respect to any 
violation if— 
‘‘(A) the violation is with respect to a re-
portable transaction other than a listed trans-
action, and 
‘‘(B) rescinding the penalty would promote 
compliance with the requirements of this title 
and effective tax administration. 
‘‘(2) NO
JUDICIAL
APPEAL.—Notwithstanding 
any other provision of law, any determination under 
this subsection may not be reviewed in any judicial 
proceeding. 
‘‘(3) RECORDS.—If a penalty is rescinded under 
paragraph (1), the Commissioner shall place in the 
file in the Office of the Commissioner the opinion of 
the Commissioner or the head of the Office of Tax
238 
Shelter Analysis with respect to the determination, 
including— 
‘‘(A) a statement of the facts and cir-
cumstances relating to the violation, 
‘‘(B) the reasons for the rescission, and 
‘‘(C) the amount of the penalty rescinded. 
‘‘(e) COORDINATION WITH OTHER PENALTIES.—The 
penalty imposed by this section shall be in addition to any 
other penalty imposed by this title.’’ 
(b) CONFORMING AMENDMENT.—The table of sections 
for part I of subchapter B of chapter 68 is amended by 
inserting after the item relating to section 6707 the fol-
lowing: 
‘‘Sec. 6707A. Penalty for failure to include reportable transaction 
information with return.’’ 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to returns and statements the due date 
for which is after the date of the enactment of this Act. 
(d) REPORT.—The Commissioner of Internal Revenue 
shall annually report to the Committee on Ways and Means 
of the House of Representatives and the Committee on Fi-
nance of the Senate— 
(1) a summary of the total number and aggre-
gate amount of penalties imposed, and rescinded, 
under section 6707A of the Internal Revenue Code of 
1986, and
239 
(2) a description of each penalty rescinded under 
section 6707(c) of such Code and the reasons therefor. 
SEC. 
612. 
ACCURACY-RELATED 
PENALTY 
FOR 
LISTED 
TRANSACTIONS, OTHER REPORTABLE TRANS-
ACTIONS HAVING A SIGNIFICANT TAX AVOID-
ANCE PURPOSE, ETC. 
(a) IN GENERAL.—Subchapter A of chapter 68 is 
amended by inserting after section 6662 the following new 
section: 
‘‘SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PENALTY 
ON UNDERSTATEMENTS WITH RESPECT TO 
REPORTABLE TRANSACTIONS. 
‘‘(a) IMPOSITION OF PENALTY.—If a taxpayer has a 
reportable transaction understatement for any taxable year, 
there shall be added to the tax an amount equal to 20 per-
cent of the amount of such understatement. 
‘‘(b) 
REPORTABLE
TRANSACTION
UNDERSTATE-
MENT.—For purposes of this section— 
‘‘(1) IN GENERAL.—The term ‘reportable trans-
action understatement’ means the sum of— 
‘‘(A) the product of— 
‘‘(i) the amount of the increase (if any) 
in taxable income which results from a dif-
ference between the proper tax treatment of 
an item to which this section applies and
240 
the taxpayer’s treatment of such item (as 
shown on the taxpayer’s return of tax), and 
‘‘(ii) the highest rate of tax imposed by 
section 1 (section 11 in the case of a tax-
payer which is a corporation), and 
‘‘(B) the amount of the decrease (if any) in 
the aggregate amount of credits determined 
under subtitle A which results from a difference 
between the taxpayer’s treatment of an item to 
which this section applies (as shown on the tax-
payer’s return of tax) and the proper tax treat-
ment of such item. 
For purposes of subparagraph (A), any reduction of 
the excess of deductions allowed for the taxable year 
over gross income for such year, and any reduction 
in the amount of capital losses which would (without 
regard to section 1211) be allowed for such year, shall 
be treated as an increase in taxable income. 
‘‘(2) ITEMS TO WHICH SECTION APPLIES.—This 
section shall apply to any item which is attributable 
to— 
‘‘(A) any listed transaction, and 
‘‘(B) any reportable transaction (other than 
a listed transaction) if a significant purpose of
243 
‘‘The excess under the preceding sentence shall be 
determined without regard to items to which sec-
tion 6662A applies.’’ 
(c) REASONABLE CAUSE EXCEPTION.— 
(1) IN GENERAL.—Section 6664 is amended by 
adding at the end the following new subsection: 
‘‘(d) REASONABLE CAUSE EXCEPTION FOR REPORT-
ABLE TRANSACTION UNDERSTATEMENTS.— 
‘‘(1) IN GENERAL.—No penalty shall be imposed 
under section 6662A with respect to any portion of a 
reportable transaction understatement if it is shown 
that there was a reasonable cause for such portion 
and that the taxpayer acted in good faith with respect 
to such portion. 
‘‘(2) SPECIAL RULES.—Paragraph (1) shall not 
apply to any reportable transaction understatement 
unless— 
‘‘(A) the relevant facts affecting the tax 
treatment of the item are adequately disclosed in 
accordance with the regulations prescribed under 
section 6011, 
‘‘(B) there is or was substantial authority 
for such treatment, and
244 
‘‘(C) the taxpayer reasonably believed that 
such treatment was more likely than not the 
proper treatment. 
A taxpayer failing to adequately disclose in accord-
ance with section 6011 shall be treated as meeting the 
requirements of subparagraph (A) if the penalty for 
such failure was rescinded under section 6707A(d). 
‘‘(3) RULES
RELATING
TO
REASONABLE
BE-
LIEF.—For purposes of paragraph (2)(C)— 
‘‘(A) IN
GENERAL.—A taxpayer shall be 
treated as having a reasonable belief with respect 
to the tax treatment of an item only if such be-
lief— 
‘‘(i) is based on the facts and law that 
exist at the time the return of tax which in-
cludes such tax treatment is filed, and 
‘‘(ii) relates solely to the taxpayer’s 
chances of success on the merits of such 
treatment and does not take into account 
the possibility that a return will not be au-
dited, such treatment will not be raised on 
audit, or such treatment will be resolved 
through settlement if it is raised. 
‘‘(B) CERTAIN OPINIONS MAY NOT BE RE-
LIED UPON.—
245 
‘‘(i) IN
GENERAL.—An opinion of a 
tax advisor may not be relied upon to estab-
lish the reasonable belief of a taxpayer if— 
‘‘(I) the tax advisor is described 
in clause (ii), or 
‘‘(II) the opinion is described in 
clause (iii). 
‘‘(ii) DISQUALIFIED TAX ADVISORS.—A 
tax advisor is described in this clause if the 
tax advisor— 
‘‘(I) is a material advisor (within 
the meaning of section 6111(b)(1)) and 
participates in the organization, man-
agement, promotion, or sale of the 
transaction or is related (within the 
meaning 
of 
section 
267(b) 
or 
707(b)(1)) to any person who so par-
ticipates, 
‘‘(II) is compensated directly or 
indirectly by a material advisor with 
respect to the transaction, 
‘‘(III) has a fee arrangement with 
respect to the transaction which is con-
tingent on all or part of the intended
246 
tax benefits from the transaction being 
sustained, or 
‘‘(IV) as determined under regula-
tions prescribed by the Secretary, has a 
disqualifying financial interest with 
respect to the transaction. 
‘‘(iii) DISQUALIFIED
OPINIONS.—For 
purposes of clause (i), an opinion is dis-
qualified if the opinion— 
‘‘(I) is based on unreasonable fac-
tual or legal assumptions (including 
assumptions as to future events), 
‘‘(II) unreasonably relies on rep-
resentations, statements, findings, or 
agreements of the taxpayer or any 
other person, 
‘‘(III) does not identify and con-
sider all relevant facts, or 
‘‘(IV) fails to meet any other re-
quirement as the Secretary may pre-
scribe.’’ 
(2) CONFORMING AMENDMENTS.— 
(A) Paragraph (1) of section 6664(c) is 
amended by striking ‘‘this part’’ and inserting 
‘‘section 6662 or 6663’’.
247 
(B) The heading for subsection (c) of section 
6664 is amended by inserting ‘‘FOR UNDERPAY-
MENTS’’ after ‘‘EXCEPTION’’. 
(d) REDUCTION IN PENALTY FOR SUBSTANTIAL UN-
DERSTATEMENT OF INCOME TAX NOT TO APPLY TO TAX 
SHELTERS.—Subparagraph (C) of section 6662(d)(2) (re-
lating to substantial understatement of income tax) is 
amended to read as follows: 
‘‘(C) REDUCTION
NOT
TO
APPLY
TO
TAX 
SHELTERS.— 
‘‘(i) IN GENERAL.—Subparagraph (B) 
shall not apply to any item attributable to 
a tax shelter. 
‘‘(ii) TAX SHELTER.—For purposes of 
clause (i), the term ‘tax shelter’ means— 
‘‘(I) a partnership or other entity, 
‘‘(II) any investment plan or ar-
rangement, or 
‘‘(III) any other plan or arrange-
ment, 
if a significant purpose of such partnership, 
entity, plan, or arrangement is the avoid-
ance or evasion of Federal income tax.’’ 
(e) CONFORMING AMENDMENTS.—
248 
(1) 
Sections 
461(i)(3)(C), 
1274(b)(3), 
and 
7525(b) are each amended by striking ‘‘section 
6662(d)(2)(C)(iii)’’ 
and 
inserting 
‘‘section 
6662(d)(2)(C)(ii)’’. 
(2) The heading for section 6662 is amended to 
read as follows: 
‘‘SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY 
ON UNDERPAYMENTS.’’ 
(3) The table of sections for part II of subchapter 
A of chapter 68 is amended by striking the item relat-
ing to section 6662 and inserting the following new 
items: 
‘‘Sec. 6662. Imposition of accuracy-related penalty on underpay-
ments. 
‘‘Sec. 6662A. Imposition of accuracy-related penalty on understate-
ments with respect to reportable transactions.’’ 
(f) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years ending after the date 
of the enactment of this Act. 
SEC. 613. TAX SHELTER EXCEPTION TO CONFIDENTIALITY 
PRIVILEGES RELATING TO TAXPAYER COM-
MUNICATIONS. 
(a) IN GENERAL.—Section 7525(b) (relating to section 
not to apply to communications regarding corporate tax 
shelters) is amended to read as follows: 
‘‘(b) SECTION NOT TO APPLY TO COMMUNICATIONS 
REGARDING TAX SHELTERS.—The privilege under sub-
249 
section (a) shall not apply to any written communication 
which is— 
‘‘(1) between a federally authorized tax practi-
tioner and— 
‘‘(A) any person, 
‘‘(B) any director, officer, employee, agent, 
or representative of the person, or 
‘‘(C) any other person holding a capital or 
profits interest in the person, and 
‘‘(2) in connection with the promotion of the di-
rect or indirect participation of the person in any tax 
shelter (as defined in section 6662(d)(2)(C)(ii)).’’ 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to communications made on or after the 
date of the enactment of this Act. 
SEC. 614. STATUTE OF LIMITATIONS FOR TAXABLE YEARS 
FOR 
WHICH 
REQUIRED 
LISTED 
TRANS-
ACTIONS NOT REPORTED. 
(a) IN GENERAL.—Section 6501(c) (relating to excep-
tions) is amended by adding at the end the following new 
paragraph: 
‘‘(10) LISTED
TRANSACTIONS.—If a taxpayer 
fails to include on any return or statement for any 
taxable year any information with respect to a listed 
transaction (as defined in section 6707A(c)(2)) which
250 
is required under section 6011 to be included with 
such return or statement, the time for assessment of 
any tax imposed by this title with respect to such 
transaction shall not expire before the date which is 
1 year after the earlier of— 
‘‘(A) the date on which the Secretary is fur-
nished the information so required, or 
‘‘(B) the date that a material advisor (as 
defined in section 6111) meets the requirements 
of section 6112 with respect to a request by the 
Secretary under section 6112(b) relating to such 
transaction with respect to such taxpayer.’’ 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to taxable years with respect to which 
the period for assessing a deficiency did not expire before 
the date of the enactment of this Act. 
SEC. 615. DISCLOSURE OF REPORTABLE TRANSACTIONS. 
(a) IN GENERAL.—Section 6111 (relating to registra-
tion of tax shelters) is amended to read as follows: 
‘‘SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS. 
‘‘(a) IN GENERAL.—Each material advisor with re-
spect to any reportable transaction shall make a return (in 
such form as the Secretary may prescribe) setting forth— 
‘‘(1) information identifying and describing the 
transaction,
251 
‘‘(2) information describing any potential tax 
benefits expected to result from the transaction, and 
‘‘(3) such other information as the Secretary 
may prescribe. 
Such return shall be filed not later than the date specified 
by the Secretary. 
‘‘(b) DEFINITIONS.—For purposes of this section— 
‘‘(1) MATERIAL ADVISOR.— 
‘‘(A) IN GENERAL.—The term ‘material ad-
visor’ means any person— 
‘‘(i) who provides any material aid, 
assistance, or advice with respect to orga-
nizing, managing, promoting, selling, im-
plementing, or carrying out any reportable 
transaction, and 
‘‘(ii) who directly or indirectly derives 
gross income in excess of the threshold 
amount (or such other amount as may be 
prescribed by the Secretary) for such advice 
or assistance. 
‘‘(B) THRESHOLD AMOUNT.—For purposes 
of subparagraph (A), the threshold amount is— 
‘‘(i) $50,000 in the case of a reportable 
transaction substantially all of the tax bene-
252 
fits from which are provided to natural per-
sons, and 
‘‘(ii) $250,000 in any other case. 
‘‘(2) REPORTABLE TRANSACTION.—The term ‘re-
portable transaction’ has the meaning given to such 
term by section 6707A(c). 
‘‘(c) REGULATIONS.—The Secretary may prescribe reg-
ulations which provide— 
‘‘(1) that only 1 person shall be required to meet 
the requirements of subsection (a) in cases in which 
2 or more persons would otherwise be required to meet 
such requirements, 
‘‘(2) exemptions from the requirements of this 
section, and 
‘‘(3) such rules as may be necessary or appro-
priate to carry out the purposes of this section.’’ 
(b) CONFORMING AMENDMENTS.— 
(1) The item relating to section 6111 in the table 
of sections for subchapter B of chapter 61 is amended 
to read as follows: 
‘‘Sec. 6111. Disclosure of reportable transactions.’’ 
(2) So much of section 6112 as precedes sub-
section (c) thereof is amended to read as follows:
253 
‘‘SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANS-
ACTIONS MUST KEEP LISTS OF ADVISEES, 
ETC. 
‘‘(a) IN GENERAL.—Each material advisor (as defined 
in section 6111) with respect to any reportable transaction 
(as defined in section 6707A(c)) shall (whether or not re-
quired to file a return under section 6111 with respect to 
such transaction) maintain (in such manner as the Sec-
retary may by regulations prescribe) a list— 
‘‘(1) identifying each person with respect to 
whom such advisor acted as a material advisor with 
respect to such transaction, and 
‘‘(2) containing such other information as the 
Secretary may by regulations require.’’ 
(3) Section 6112 is amended— 
(A) by redesignating subsection (c) as sub-
section (b), 
(B) by inserting ‘‘written’’ before ‘‘request’’ 
in subsection (b)(1) (as so redesignated), and 
(C) by striking ‘‘shall prescribe’’ in sub-
section (b)(2) (as so redesignated) and inserting 
‘‘may prescribe’’. 
(4) The item relating to section 6112 in the table 
of sections for subchapter B of chapter 61 is amended 
to read as follows:
254 
‘‘Sec. 6112. Material advisors of reportable transactions must keep 
lists of advisees, etc.’’ 
(5)(A) The heading for section 6708 is amended 
to read as follows: 
‘‘SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES 
WITH 
RESPECT 
TO 
REPORTABLE 
TRANS-
ACTIONS.’’ 
(B) The item relating to section 6708 in the 
table of sections for part I of subchapter B of chapter 
68 is amended to read as follows: 
‘‘Sec. 6708. Failure to maintain lists of advisees with respect to re-
portable transactions.’’ 
(c) REQUIRED DISCLOSURE NOT SUBJECT TO CLAIM 
OF CONFIDENTIALITY.—Paragraph (1) of section 6112(b), 
as redesignated by subsection (b), is amended by adding 
at the end the following new flush sentence: 
‘‘For purposes of this section, the identity of any per-
son on such list shall not be privileged.’’. 
(d) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall 
apply to transactions with respect to which material 
aid, assistance, or advice referred to in section 
6111(b)(1)(A)(i) of the Internal Revenue Code of 1986 
(as added by this section) is provided after the date 
of the enactment of this Act.
255 
(2) NO CLAIM OF CONFIDENTIALITY AGAINST DIS-
CLOSURE.—The amendment made by subsection (c) 
shall take effect as if included in the amendments 
made by section 142 of the Deficit Reduction Act of 
1984. 
SEC. 616. FAILURE TO FURNISH INFORMATION REGARDING 
REPORTABLE TRANSACTIONS. 
(a) IN GENERAL.—Section 6707 (relating to failure to 
furnish information regarding tax shelters) is amended to 
read as follows: 
‘‘SEC. 6707. FAILURE TO FURNISH INFORMATION REGARD-
ING REPORTABLE TRANSACTIONS. 
‘‘(a) IN GENERAL.—If a person who is required to file 
a return under section 6111(a) with respect to any report-
able transaction— 
‘‘(1) fails to file such return on or before the date 
prescribed therefor, or 
‘‘(2) files false or incomplete information with 
the Secretary with respect to such transaction, 
such person shall pay a penalty with respect to such return 
in the amount determined under subsection (b). 
‘‘(b) AMOUNT OF PENALTY.— 
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the penalty imposed under subsection (a) 
with respect to any failure shall be $50,000.
256 
‘‘(2) LISTED TRANSACTIONS.—The penalty im-
posed under subsection (a) with respect to any listed 
transaction shall be an amount equal to the greater 
of— 
‘‘(A) $200,000, or 
‘‘(B) 50 percent of the gross income derived 
by such person with respect to aid, assistance, or 
advice which is provided with respect to the list-
ed transaction before the date the return is filed 
under section 6111. 
Subparagraph (B) shall be applied by substituting 
‘75 percent’ for ‘50 percent’ in the case of an inten-
tional failure or act described in subsection (a). 
‘‘(c) RESCISSION AUTHORITY.—The provisions of sec-
tion 6707A(d) (relating to authority of Commissioner to re-
scind penalty) shall apply to any penalty imposed under 
this section. 
‘‘(d) REPORTABLE AND LISTED TRANSACTIONS.—For 
purposes of this section, the terms ‘reportable transaction’ 
and ‘listed transaction’ have the respective meanings given 
to such terms by section 6707A(c).’’ 
(b) CLERICAL AMENDMENT.—The item relating to sec-
tion 6707 in the table of sections for part I of subchapter 
B of chapter 68 is amended by striking ‘‘tax shelters’’ and 
inserting ‘‘reportable transactions’’.
257 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to returns the due date for which is after 
the date of the enactment of this Act. 
SEC. 617. MODIFICATION OF PENALTY FOR FAILURE TO 
MAINTAIN LISTS OF INVESTORS. 
(a) IN GENERAL.—Subsection (a) of section 6708 is 
amended to read as follows: 
‘‘(a) IMPOSITION OF PENALTY.— 
‘‘(1) IN GENERAL.—If any person who is re-
quired to maintain a list under section 6112(a) fails 
to make such list available upon written request to 
the Secretary in accordance with section 6112(b) 
within 20 business days after the date of such request, 
such person shall pay a penalty of $10,000 for each 
day of such failure after such 20th day. 
‘‘(2) REASONABLE CAUSE EXCEPTION.—No pen-
alty shall be imposed by paragraph (1) with respect 
to the failure on any day if such failure is due to rea-
sonable cause.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to requests made after the date of the 
enactment of this Act. 
SEC. 618. PENALTY ON PROMOTERS OF TAX SHELTERS. 
(a) PENALTY ON PROMOTING ABUSIVE TAX SHEL-
TERS.—Section 6700(a) is amended by adding at the end
258 
the following new sentence: ‘‘Notwithstanding the first sen-
tence, if an activity with respect to which a penalty im-
posed under this subsection involves a statement described 
in paragraph (2)(A), the amount of the penalty shall be 
equal to 50 percent of the gross income derived (or to be 
derived) from such activity by the person on which the pen-
alty is imposed.’’ 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to activities after the date of the enact-
ment of this Act. 
SEC. 619. MODIFICATIONS OF SUBSTANTIAL UNDERSTATE-
MENT 
PENALTY 
FOR 
NONREPORTABLE 
TRANSACTIONS. 
(a) SUBSTANTIAL UNDERSTATEMENT
OF CORPORA-
TIONS.—Section 6662(d)(1)(B) (relating to special rule for 
corporations) is amended to read as follows: 
‘‘(B) SPECIAL RULE FOR CORPORATIONS.— 
In the case of a corporation other than an S cor-
poration or a personal holding company (as de-
fined in section 542), there is a substantial un-
derstatement of income tax for any taxable year 
if the amount of the understatement for the tax-
able year exceeds the lesser of—
259 
‘‘(i) 10 percent of the tax required to 
be shown on the return for the taxable year 
(or, if greater, $10,000), or 
‘‘(ii) $10,000,000.’’ 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to taxable years beginning after the date 
of the enactment of this Act. 
SEC. 620. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN 
CONDUCT RELATED TO TAX SHELTERS AND 
REPORTABLE TRANSACTIONS. 
(a) IN GENERAL.—Section 7408 (relating to action to 
enjoin promoters of abusive tax shelters, etc.) is amended 
by redesignating subsection (c) as subsection (d) and by 
striking subsections (a) and (b) and inserting the following 
new subsections: 
‘‘(a) AUTHORITY TO SEEK INJUNCTION.—A civil ac-
tion in the name of the United States to enjoin any person 
from further engaging in specified conduct may be com-
menced at the request of the Secretary. Any action under 
this section shall be brought in the district court of the 
United States for the district in which such person resides, 
has his principal place of business, or has engaged in speci-
fied conduct. The court may exercise its jurisdiction over 
such action (as provided in section 7402(a)) separate and
260 
apart from any other action brought by the United States 
against such person. 
‘‘(b) ADJUDICATION
AND DECREE.—In any action 
under subsection (a), if the court finds— 
‘‘(1) that the person has engaged in any specified 
conduct, and 
‘‘(2) that injunctive relief is appropriate to pre-
vent recurrence of such conduct, 
the court may enjoin such person from engaging in such 
conduct or in any other activity subject to penalty under 
this title. 
‘‘(c) SPECIFIED CONDUCT.—For purposes of this sec-
tion, the term ‘specified conduct’ means any action, or fail-
ure to take action, subject to penalty under section 6700, 
6701, 6707, or 6708.’’ 
(b) CONFORMING AMENDMENTS.— 
(1) The heading for section 7408 is amended to 
read as follows: 
‘‘SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RE-
LATED TO TAX SHELTERS AND REPORTABLE 
TRANSACTIONS.’’ 
(2) The table of sections for subchapter A of 
chapter 76 is amended by striking the item relating 
to section 7408 and inserting the following new item: 
‘‘Sec. 7408. Actions to enjoin specified conduct related to tax shelters and re-
portable transactions.’’
261 
(c) EFFECTIVE DATE.—The amendment made by this 
section shall take effect on the day after the date of the en-
actment of this Act. 
SEC. 621. PENALTY ON FAILURE TO REPORT INTERESTS IN 
FOREIGN FINANCIAL ACCOUNTS. 
(a) IN GENERAL.—Section 5321(a)(5) of title 31, 
United States Code, is amended to read as follows: 
‘‘(5) FOREIGN FINANCIAL AGENCY TRANSACTION 
VIOLATION.— 
‘‘(A) PENALTY
AUTHORIZED.—The Sec-
retary of the Treasury may impose a civil money 
penalty on any person who violates, or causes 
any violation of, any provision of section 5314. 
‘‘(B) AMOUNT OF PENALTY.— 
‘‘(i) IN GENERAL.—Except as provided 
in subparagraph (C), the amount of any 
civil penalty imposed under subparagraph 
(A) shall not exceed $5,000. 
‘‘(ii) 
REASONABLE
CAUSE
EXCEP-
TION.—No penalty shall be imposed under 
subparagraph (A) with respect to any viola-
tion if— 
‘‘(I) such violation was due to 
reasonable cause, and
262 
‘‘(II) the amount of the trans-
action or the balance in the account at 
the time of the transaction was prop-
erly reported. 
‘‘(C) WILLFUL VIOLATIONS.—In the case of 
any person willfully violating, or willfully caus-
ing any violation of, any provision of section 
5314— 
‘‘(i) the maximum penalty under sub-
paragraph (B)(i) shall be increased to the 
greater of— 
‘‘(I) $25,000, or 
‘‘(II) the amount (not exceeding 
$100,000) determined under subpara-
graph (D), and 
‘‘(ii) subparagraph (B)(ii) shall not 
apply. 
‘‘(D) AMOUNT.—The amount determined 
under this subparagraph is— 
‘‘(i) in the case of a violation involving 
a transaction, the amount of the trans-
action, or 
‘‘(ii) in the case of a violation involv-
ing a failure to report the existence of an 
account or any identifying information re-
263 
quired to be provided with respect to an ac-
count, the balance in the account at the 
time of the violation.’’ 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to violations occurring after the date of 
the enactment of this Act. 
SEC. 622. REGULATION OF INDIVIDUALS PRACTICING BE-
FORE THE DEPARTMENT OF THE TREASURY. 
(a) CENSURE; IMPOSITION OF PENALTY.— 
(1) IN
GENERAL.—Section 330(b) of title 31, 
United States Code, is amended— 
(A) by inserting ‘‘, or censure,’’ after ‘‘De-
partment’’, and 
(B) by adding at the end the following new 
flush sentence: 
‘‘The Secretary may impose a monetary penalty on any 
representative described in the preceding sentence. If the 
representative was acting on behalf of an employer or any 
firm or other entity in connection with the conduct giving 
rise to such penalty, the Secretary may impose a monetary 
penalty on such employer, firm, or entity if it knew, or 
reasonably should have known, of such conduct. Such pen-
alty shall not exceed the gross income derived (or to be de-
rived) from the conduct giving rise to the penalty. Any such 
penalty imposed on an individual may be in addition to,
264 
or in lieu of, any suspension, disbarment, or censure of such 
individual.’’ 
(2) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to actions taken after 
the date of the enactment of this Act. 
(b) TAX SHELTER OPINIONS, ETC.—Section 330 of 
such title 31 is amended by adding at the end the following 
new subsection: 
‘‘(d) Nothing in this section or in any other provision 
of law shall be construed to limit the authority of the Sec-
retary of the Treasury to impose standards applicable to 
the rendering of written advice with respect to any entity, 
transaction plan or arrangement, or other plan or arrange-
ment, which is of a type which the Secretary determines 
as having a potential for tax avoidance or evasion.’’ 
PART II—OTHER PROVISIONS 
SEC. 631. TREATMENT OF STRIPPED INTERESTS IN BOND 
AND PREFERRED STOCK FUNDS, ETC. 
(a) IN GENERAL.—Section 1286 (relating to tax treat-
ment of stripped bonds) is amended by redesignating sub-
section (f) as subsection (g) and by inserting after sub-
section (e) the following new subsection: 
‘‘(f) TREATMENT OF STRIPPED INTERESTS IN BOND 
AND PREFERRED STOCK FUNDS, ETC.—In the case of an 
account or entity substantially all of the assets of which
265 
consist of bonds, preferred stock, or a combination thereof, 
the Secretary may by regulations provide that rules similar 
to the rules of this section and 305(e), as appropriate, shall 
apply to interests in such account or entity to which (but 
for this subsection) this section or section 305(e), as the case 
may be, would not apply.’’ 
(b) CROSS REFERENCE.—Subsection (e) of section 305 
is amended by adding at the end the following new para-
graph: 
‘‘(7) CROSS REFERENCE.— 
‘‘For treatment of stripped interests in certain ac-
counts or entities holding preferred stock, see section 
1286(f).’’ 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to purchases and dispositions after the 
date of the enactment of this Act. 
SEC. 632. MINIMUM HOLDING PERIOD FOR FOREIGN TAX 
CREDIT ON WITHHOLDING TAXES ON INCOME 
OTHER THAN DIVIDENDS. 
(a) IN GENERAL.—Section 901 is amended by redesig-
nating subsection (l) as subsection (m) and by inserting 
after subsection (k) the following new subsection: 
‘‘(l) MINIMUM HOLDING PERIOD FOR WITHHOLDING 
TAXES ON GAIN AND INCOME OTHER THAN DIVIDENDS 
ETC.— 
‘‘(1) IN GENERAL.—In no event shall a credit be 
allowed under subsection (a) for any withholding tax
266 
(as defined in subsection (k)) on any item of income 
or gain with respect to any property if— 
‘‘(A) such property is held by the recipient 
of the item for 15 days or less during the 30-day 
period beginning on the date which is 15 days 
before the date on which the right to receive pay-
ment of such item arises, or 
‘‘(B) to the extent that the recipient of the 
item is under an obligation (whether pursuant to 
a short sale or otherwise) to make related pay-
ments with respect to positions in substantially 
similar or related property. 
This paragraph shall not apply to any dividend to 
which subsection (k) applies. 
‘‘(2) EXCEPTION
FOR
TAXES
PAID
BY
DEAL-
ERS.— 
‘‘(A) IN
GENERAL.—Paragraph (1) shall 
not apply to any qualified tax with respect to 
any property held in the active conduct in a for-
eign country of a business as a dealer in such 
property. 
‘‘(B) QUALIFIED TAX.—For purposes of sub-
paragraph (A), the term ‘qualified tax’ means a 
tax paid to a foreign country (other than the for-
267 
eign country referred to in subparagraph (A)) 
if— 
‘‘(i) the item to which such tax is at-
tributable is subject to taxation on a net 
basis by the country referred to in subpara-
graph (A), and 
‘‘(ii) such country allows a credit 
against its net basis tax for the full amount 
of the tax paid to such other foreign coun-
try. 
‘‘(C) DEALER.—For purposes of subpara-
graph (A), the term ‘dealer’ means— 
‘‘(i) with respect to a security, any 
person to whom paragraphs (1) and (2) of 
subsection (k) would not apply by reason of 
paragraph (4) thereof if such security were 
stock, and 
‘‘(ii) with respect to any other prop-
erty, any person with respect to whom such 
property is described in section 1221(a)(1). 
‘‘(D) REGULATIONS.—The Secretary may 
prescribe such regulations as may be appropriate 
to carry out this paragraph, including regula-
tions to prevent the abuse of the exception pro-
268 
vided by this paragraph and to treat other taxes 
as qualified taxes. 
‘‘(3) EXCEPTIONS.—The Secretary may by regu-
lation provide that paragraph (1) shall not apply to 
property where the Secretary determines that the ap-
plication of paragraph (1) to such property is not 
necessary to carry out the purposes of this subsection. 
‘‘(4) CERTAIN RULES TO APPLY.—Rules similar 
to the rules of paragraphs (5), (6), and (7) of sub-
section (k) shall apply for purposes of this subsection. 
‘‘(5) DETERMINATION
OF
HOLDING
PERIOD.— 
Holding periods shall be determined for purposes of 
this subsection without regard to section 1235 or any 
similar rule.’’ 
(b) CONFORMING AMENDMENT.—The heading of sub-
section (k) of section 901 is amended by inserting ‘‘ON DIVI-
DENDS’’ after ‘‘TAXES’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to amounts paid or accrued more than 
30 days after the date of the enactment of this Act. 
SEC. 633. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS 
TRANSFERS. 
(a) TREATMENT OF CONTRIBUTED PROPERTY WITH 
BUILT-IN LOSS.—Paragraph (1) of section 704(c) is 
amended by striking ‘‘and’’ at the end of subparagraph (A),
269 
by striking the period at the end of subparagraph (B) and 
inserting ‘‘, and’’, and by adding at the end the following: 
‘‘(C) if any property so contributed has a 
built-in loss— 
‘‘(i) such built-in loss shall be taken 
into account only in determining the 
amount of items allocated to the contrib-
uting partner, and 
‘‘(ii) except as provided in regulations, 
in determining the amount of items allo-
cated to other partners, the basis of the con-
tributed property in the hands of the part-
nership shall be treated as being equal to its 
fair market value at the time of contribu-
tion. 
For purposes of subparagraph (C), the term ‘built-in 
loss’ means the excess of the adjusted basis of the 
property (determined without regard to subparagraph 
(C)(ii)) over its fair market value at the time of con-
tribution.’’ 
(b) SPECIAL RULES FOR TRANSFERS OF PARTNER-
SHIP INTEREST
IF THERE IS SUBSTANTIAL BUILT-IN 
LOSS.— 
(1) ADJUSTMENT OF PARTNERSHIP BASIS RE-
QUIRED.—Subsection (a) of section 743 (relating to
270 
optional adjustment to basis of partnership property) 
is amended by inserting before the period ‘‘or unless 
the partnership has a substantial built-in loss imme-
diately after such transfer’’. 
(2) ADJUSTMENT.—Subsection (b) of section 743 
is amended by inserting ‘‘or which has a substantial 
built-in loss immediately after such transfer’’ after 
‘‘section 754 is in effect’’. 
(3) SUBSTANTIAL BUILT-IN LOSS.—Section 743 
is amended by adding at the end the following new 
subsection: 
‘‘(d) SUBSTANTIAL BUILT-IN LOSS.— 
‘‘(1) IN GENERAL.—For purposes of this section, 
a partnership has a substantial built-in loss with re-
spect to a transfer of an interest in a partnership if 
the partnership’s adjusted basis in the partnership 
property exceeds by more than $250,000 the fair mar-
ket value of such property. 
‘‘(2) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be appropriate to 
carry out the purposes of paragraph (1) and section 
734(d), including regulations aggregating related 
partnerships and disregarding property acquired by 
the partnership in an attempt to avoid such pur-
poses.’’
271 
(4) ALTERNATIVE RULES FOR ELECTING INVEST-
MENT PARTNERSHIPS.— 
(A) IN GENERAL.—Section 743 is amended 
by adding at the end the following new sub-
section: 
‘‘(e) ALTERNATIVE RULES
FOR ELECTING INVEST-
MENT PARTNERSHIPS.— 
‘‘(1) NO ADJUSTMENT OF PARTNERSHIP BASIS.— 
For purposes of this section, an electing investment 
partnership shall not be treated as having a substan-
tial built-in loss with respect to any transfer occur-
ring while the election under paragraph (6)(A) is in 
effect. 
‘‘(2) LOSS DEFERRAL FOR TRANSFEREE PART-
NER.—In the case of a transfer of an interest in an 
electing investment partnership, the transferee part-
ner’s distributive share of losses (without regard to 
gains) from the sale or exchange of partnership prop-
erty shall not be allowed except to the extent that it 
is established that such losses exceed the loss (if any) 
recognized by the transferor (or any prior transferor 
to the extent not fully offset by a prior disallowance 
under this paragraph) on the transfer of the partner-
ship interest.
272 
‘‘(3) NO REDUCTION IN PARTNERSHIP BASIS.— 
Losses disallowed under paragraph (2) shall not de-
crease the transferee partner’s basis in the partner-
ship interest. 
‘‘(4) EFFECT
OF
TERMINATION
OF
PARTNER-
SHIP.—This subsection shall be applied without re-
gard to any termination of a partnership under sec-
tion 708(b)(1)(B). 
‘‘(5) CERTAIN BASIS REDUCTIONS TREATED AS 
LOSSES.—In the case of a transferee partner whose 
basis in property distributed by the partnership is re-
duced under section 732(a)(2), the amount of the loss 
recognized by the transferor on the transfer of the 
partnership interest which is taken into account 
under paragraph (2) shall be reduced by the amount 
of such basis reduction. 
‘‘(6) ELECTING
INVESTMENT
PARTNERSHIP.— 
For purposes of this subsection, the term ‘electing in-
vestment partnership’ means any partnership if— 
‘‘(A) the partnership makes an election to 
have this subsection apply, 
‘‘(B) the partnership would be an invest-
ment company under section 3(a)(1)(A) of the 
Investment Company Act of 1940 but for an ex-
273 
emption under paragraph (1) or (7) of section 
3(c) of such Act, 
‘‘(C) such partnership has never been en-
gaged in a trade or business, 
‘‘(D) substantially all of the assets of such 
partnership are held for investment, 
‘‘(E) at least 95 percent of the assets con-
tributed to such partnership consist of money, 
‘‘(F) no assets contributed to such partner-
ship had an adjusted basis in excess of fair mar-
ket value at the time of contribution, 
‘‘(G) all partnership interests of such part-
nership are issued by such partnership pursuant 
to a private offering and during the 24-month 
period beginning on the date of the first capital 
contribution to such partnership, 
‘‘(H) the partnership agreement of such 
partnership has substantive restrictions on each 
partner’s ability to cause a redemption of the 
partner’s interest, and 
‘‘(I) the partnership agreement of such part-
nership provides for a term that is not in excess 
of 15 years.
274 
The election described in subparagraph (A), once 
made, shall be irrevocable except with the consent of 
the Secretary. 
‘‘(7) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be appropriate to 
carry out the purposes of this subsection, including 
regulations for applying this subsection to tiered 
partnerships.’’. 
(B) 
INFORMATION
REPORTING.—Section 
6031 is amended by adding at the end the fol-
lowing new subsection: 
‘‘(f) ELECTING INVESTMENT PARTNERSHIPS.—In the 
case of any electing investment partnership (as defined in 
section 743(e)(6)), the information required under sub-
section (b) to be furnished to any partner to whom section 
743(e)(2) applies shall include such information as is nec-
essary to enable the partner to compute the amount of losses 
disallowed under section 743(e).’’. 
(5) CLERICAL AMENDMENTS.— 
(A) The section heading for section 743 is 
amended to read as follows: 
‘‘SEC. 743. SPECIAL RULES WHERE SECTION 754 ELECTION 
OR SUBSTANTIAL BUILT-IN LOSS.’’ 
(B) The table of sections for subpart C of 
part II of subchapter K of chapter 1 is amended
275 
by striking the item relating to section 743 and 
inserting the following new item: 
‘‘Sec. 743. Special rules where section 754 election or substantial 
built-in loss.’’ 
(c) ADJUSTMENT TO BASIS OF UNDISTRIBUTED PART-
NERSHIP PROPERTY IF THERE IS SUBSTANTIAL BASIS RE-
DUCTION.— 
(1) ADJUSTMENT REQUIRED.—Subsection (a) of 
section 734 (relating to optional adjustment to basis 
of undistributed partnership property) is amended by 
inserting before the period ‘‘or unless there is a sub-
stantial basis reduction’’. 
(2) ADJUSTMENT.—Subsection (b) of section 734 
is amended by inserting ‘‘or unless there is a substan-
tial basis reduction’’ after ‘‘section 754 is in effect’’. 
(3) SUBSTANTIAL
BASIS
REDUCTION.—Section 
734 is amended by adding at the end the following 
new subsection: 
‘‘(d) SUBSTANTIAL BASIS REDUCTION.— 
‘‘(1) IN GENERAL.—For purposes of this section, 
there is a substantial basis reduction with respect to 
a distribution if the sum of the amounts described in 
subparagraphs (A) and (B) of subsection (b)(2) ex-
ceeds $250,000.
276 
‘‘(2) REGULATIONS.— 
‘‘For regulations to carry out this subsection, see 
section 743(d)(2).’’ 
(4) CLERICAL AMENDMENTS.— 
(A) The section heading for section 734 is 
amended to read as follows: 
‘‘SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED 
PARTNERSHIP PROPERTY WHERE SECTION 
754 ELECTION OR SUBSTANTIAL BASIS RE-
DUCTION.’’ 
(B) The table of sections for subpart B of 
part II of subchapter K of chapter 1 is amended 
by striking the item relating to section 734 and 
inserting the following new item: 
‘‘Sec. 734. Adjustment to basis of undistributed partnership prop-
erty where section 754 election or substantial basis 
reduction.’’ 
(d) EFFECTIVE DATES.— 
(1) SUBSECTION (a).—The amendment made by 
subsection (a) shall apply to contributions made after 
the date of the enactment of this Act. 
(2) SUBSECTION (b).— 
(A) IN GENERAL.—Except as provided in 
subparagraph (B), the amendments made by 
subsection (b) shall apply to transfers after the 
date of the enactment of this Act.
277 
(B) TRANSITION RULE.—In the case of an 
electing investment partnership which is in ex-
istence on June 4, 2004, section 743(e)(6)(H) of 
the Internal Revenue Code of 1986, as added by 
this section, shall not apply to such partnership 
and section 743(e)(6)(I) of such Code, as so 
added, shall be applied by substituting ‘‘20 
years’’ for ‘‘15 years’’. 
(3) SUBSECTION (c).—The amendments made by 
subsection (c) shall apply to distributions after the 
date of the enactment of this Act. 
SEC. 634. NO REDUCTION OF BASIS UNDER SECTION 734 IN 
STOCK 
HELD 
BY 
PARTNERSHIP 
IN 
COR-
PORATE PARTNER. 
(a) IN GENERAL.—Section 755 is amended by adding 
at the end the following new subsection: 
‘‘(c) NO ALLOCATION OF BASIS DECREASE TO STOCK 
OF CORPORATE PARTNER.—In making an allocation under 
subsection (a) of any decrease in the adjusted basis of part-
nership property under section 734(b)— 
‘‘(1) no allocation may be made to stock in a 
corporation (or any person related (within the mean-
ing of sections 267(b) and 707(b)(1)) to such corpora-
tion) which is a partner in the partnership, and
278 
‘‘(2) any amount not allocable to stock by reason 
of paragraph (1) shall be allocated under subsection 
(a) to other partnership property. 
Gain shall be recognized to the partnership to the extent 
that the amount required to be allocated under paragraph 
(2) to other partnership property exceeds the aggregate ad-
justed basis of such other property immediately before the 
allocation required by paragraph (2).’’ 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to distributions after the date of the en-
actment of this Act. 
SEC. 635. REPEAL OF SPECIAL RULES FOR FASITS. 
(a) IN GENERAL.—Part V of subchapter M of chapter 
1 (relating to financial asset securitization investment 
trusts) is hereby repealed. 
(b) CONFORMING AMENDMENTS.— 
(1) Paragraph (6) of section 56(g) is amended by 
striking ‘‘REMIC, or FASIT’’ and inserting ‘‘or 
REMIC’’. 
(2) Clause (ii) of section 382(l)(4)(B) is amended 
by striking ‘‘a REMIC to which part IV of subchapter 
M applies, or a FASIT to which part V of subchapter 
M applies,’’ and inserting ‘‘or a REMIC to which 
part IV of subchapter M applies,’’.
279 
(3) Paragraph (1) of section 582(c) is amended 
by striking ‘‘, and any regular interest in a FASIT,’’. 
(4) Subparagraph (E) of section 856(c)(5) is 
amended by striking the last sentence. 
(5)(A) Section 860G(a)(1) is amended by adding 
at the end the following new sentence: ‘‘An interest 
shall not fail to qualify as a regular interest solely be-
cause the specified principal amount of the regular 
interest (or the amount of interest accrued on the reg-
ular interest) can be reduced as a result of the non-
occurrence of 1 or more contingent payments with re-
spect to any reverse mortgage loan held by the 
REMIC if, on the startup day for the REMIC, the 
sponsor reasonably believes that all principal and in-
terest due under the regular interest will be paid at 
or prior to the liquidation of the REMIC.’’. 
(B) The last sentence of section 860G(a)(3) is 
amended by inserting ‘‘, and any reverse mortgage 
loan (and each balance increase on such loan meeting 
the requirements of subparagraph (A)(iii)) shall be 
treated as an obligation secured by an interest in real 
property’’ before the period at the end. 
(6) Paragraph (3) of section 860G(a) is amended 
by adding ‘‘and’’ at the end of subparagraph (B), by
280 
striking ‘‘, and’’ at the end of subparagraph (C) and 
inserting a period, and by striking subparagraph (D). 
(7) Section 860G(a)(3), as amended by para-
graph (6), is amended by adding at the end the fol-
lowing new sentence: ‘‘For purposes of subparagraph 
(A), if more than 50 percent of the obligations trans-
ferred to, or purchased by, the REMIC are originated 
by the United States or any State (or any political 
subdivision, agency, or instrumentality of the United 
States or any State) and are principally secured by 
an interest in real property, then each obligation 
transferred to, or purchased by, the REMIC shall be 
treated as secured by an interest in real property.’’. 
(8)(A) Section 860G(a)(3)(A) is amended by 
striking ‘‘or’’ at the end of clause (i), by inserting 
‘‘or’’ at the end of clause (ii), and by inserting after 
clause (ii) the following new clause: 
‘‘(iii) represents an increase in the 
principal amount under the original terms 
of an obligation described in clause (i) or 
(ii) if such increase— 
‘‘(I) is attributable to an advance 
made to the obligor pursuant to the 
original terms of the obligation,
281 
‘‘(II) occurs after the startup day, 
and 
‘‘(III) is purchased by the REMIC 
pursuant to a fixed price contract in 
effect on the startup day.’’. 
(B) Section 860G(a)(7)(B) is amended to read as 
follows: 
‘‘(B) QUALIFIED RESERVE FUND.—For pur-
poses of subparagraph (A), the term ‘qualified 
reserve fund’ means any reasonably required re-
serve to— 
‘‘(i) provide for full payment of ex-
penses of the REMIC or amounts due on 
regular interests in the event of defaults on 
qualified mortgages or lower than expected 
returns on cash flow investments, or 
‘‘(ii) provide a source of funds for the 
purchase of obligations described in clause 
(ii) or (iii) of paragraph (3)(A). 
The aggregate fair market value of the assets held 
in any such reserve shall not exceed 50 percent 
of the aggregate fair market value of all of the 
assets of the REMIC on the startup day, and the 
amount of any such reserve shall be promptly 
and appropriately reduced to the extent the
282 
amount held in such reserve is no longer reason-
ably required for purposes specified in clause (i) 
or (ii) of this subparagraph.’’. 
(9) Subparagraph (C) of section 1202(e)(4) is 
amended by striking ‘‘REMIC, or FASIT’’ and in-
serting ‘‘or REMIC’’. 
(10) Clause (xi) of section 7701(a)(19)(C) is 
amended— 
(A) by striking ‘‘and any regular interest in 
a FASIT,’’, and 
(B) by striking ‘‘or FASIT’’ each place it 
appears. 
(11) Subparagraph (A) of section 7701(i)(2) is 
amended by striking ‘‘or a FASIT’’. 
(12) The table of parts for subchapter M of chap-
ter 1 is amended by striking the item relating to part 
V. 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall 
take effect on January 1, 2005. 
(2) EXCEPTION
FOR
EXISTING
FASITS.—Para-
graph (1) shall not apply to any FASIT in existence 
on the date of the enactment of this Act to the extent 
that regular interests issued by the FASIT before such
283 
date continue to remain outstanding in accordance 
with the original terms of issuance. 
SEC. 636. LIMITATION ON TRANSFER OF BUILT-IN LOSSES 
ON REMIC RESIDUALS. 
(a) IN GENERAL.—Section 362 (relating to basis to 
corporations) is amended by adding at the end the following 
new subsection: 
‘‘(e) LIMITATION ON TRANSFER OF BUILT-IN LOSSES 
ON REMIC RESIDUALS IN SECTION 351 TRANSACTIONS.— 
If— 
‘‘(1) a residual interest (as defined in section 
860G(a)(2)) in a REMIC is transferred in any trans-
action which is described in subsection (a), and 
‘‘(2) the transferee’s adjusted basis in such resid-
ual interest would (but for this paragraph) exceed its 
fair market value immediately after such transaction, 
then, notwithstanding subsection (a), the transferee’s ad-
justed basis in such residual interest shall not exceed its 
fair market value (whether or not greater than zero) imme-
diately after such transaction.’’ 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to transactions after the date of the en-
actment of this Act.
284 
SEC. 637. CLARIFICATION OF BANKING BUSINESS FOR PUR-
POSES OF DETERMINING INVESTMENT OF 
EARNINGS IN UNITED STATES PROPERTY. 
(a) IN
GENERAL.—Subparagraph (A) of section 
956(c)(2) is amended to read as follows: 
‘‘(A) obligations of the United States, 
money, or deposits with persons described in 
paragraph (4);’’. 
(b) ELIGIBLE PERSONS.—Section 956(c) (relating to 
exceptions to definition of United States property) is 
amended by adding at the end the following new paragraph: 
‘‘(4) FINANCIAL SERVICES PROVIDERS.— 
‘‘(A) IN GENERAL.—For purposes of para-
graph (2)(A), a person is described in this para-
graph if at least 80 percent of the person’s in-
come is from the active conduct of a banking 
business which is derived from persons who are 
not related persons. 
‘‘(B) SPECIAL
RULES.—For purposes of 
subparagraph (A) all related persons shall be 
treated as 1 person in applying the 80-percent 
test. 
‘‘(C) RELATED PERSON.—For purposes of 
this paragraph, a person is a related person to 
another person if—
285 
‘‘(i) the related person bears a relation-
ship to such person specified in section 
267(b) or 707(b)(1), or 
‘‘(ii) such persons are members of the 
same controlled group of corporations (as 
defined in section 1563(a), except that ‘more 
than 50 percent’ shall be substituted for ‘at 
least 80 percent’ each place it appears 
therein).’’. 
(c) EFFECTIVE DATE.—The amendment made by this 
section shall take effect on the date of the enactment of this 
Act. 
SEC. 638. ALTERNATIVE TAX FOR CERTAIN SMALL INSUR-
ANCE COMPANIES. 
(a) IN GENERAL.—Clause (i) of section 831(b)(2)(A) 
is amended by striking ‘‘$1,200,000’’ and inserting 
‘‘$1,890,000’’. 
(b) INFLATION ADJUSTMENT.—Paragraph (2) of sec-
tion 831(b) is amended by adding at the end the following 
new subparagraph: 
‘‘(C) INFLATION ADJUSTMENT.—In the case 
of any taxable year beginning in a calendar year 
after 2004, the $1,890,000 amount in subpara-
graph (A) shall be increased by an amount equal 
to—
286 
‘‘(i) $1,890,000, multiplied by 
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) for such cal-
endar year by substituting ‘calendar year 
2003’ for ‘calendar year 1992’ in subpara-
graph (B) thereof. 
If the amount as adjusted under the preceding 
sentence is not a multiple of $1,000, such 
amount shall be rounded to the next lowest mul-
tiple of $1,000.’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2003. 
SEC. 639. DENIAL OF DEDUCTION FOR INTEREST ON UN-
DERPAYMENTS ATTRIBUTABLE TO NONDIS-
CLOSED REPORTABLE TRANSACTIONS. 
(a) IN GENERAL.—Section 163 (relating to deduction 
for interest) is amended by redesignating subsection (m) as 
subsection (n) and by inserting after subsection (l) the fol-
lowing new subsection: 
‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE TO 
NONDISCLOSED REPORTABLE TRANSACTIONS.—No deduc-
tion shall be allowed under this chapter for any interest 
paid or accrued under section 6601 on any underpayment 
of tax which is attributable to the portion of any reportable
287 
transaction 
understatement 
(as 
defined 
in 
section 
6662A(b)) with respect to which the requirement of section 
6664(d)(2)(A) is not met.’’. 
(b) EFFECTIVE DATE.—The amendments made by this 
section shall apply to transactions in taxable years begin-
ning after the date of the enactment of this Act. 
SEC. 640. CLARIFICATION OF RULES FOR PAYMENT OF ESTI-
MATED TAX FOR CERTAIN DEEMED ASSET 
SALES. 
(a) IN GENERAL.—Paragraph (13) of section 338(h) 
(relating to tax on deemed sale not taken into account for 
estimated tax purposes) is amended by adding at the end 
the following: ‘‘The preceding sentence shall not apply with 
respect to a qualified stock purchase for which an election 
is made under paragraph (10).’’. 
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to transactions occurring after the 
date of the enactment of this Act. 
SEC. 641. RECOGNITION OF GAIN FROM THE SALE OF A 
PRINCIPAL RESIDENCE ACQUIRED IN A LIKE- 
KIND EXCHANGE WITHIN 5 YEARS OF SALE. 
(a) IN GENERAL.—Section 121(d) (relating to special 
rules for exclusion of gain from sale of principal residence) 
is amended by adding at the end the following new para-
graph:
288 
‘‘(10) PROPERTY ACQUIRED IN LIKE-KIND EX-
CHANGE.—If a taxpayer acquired property in an ex-
change to which section 1031 applied, subsection (a) 
shall not apply to the sale or exchange of such prop-
erty if it occurs during the 5-year period beginning 
with the date of the acquisition of such property.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to sales or exchanges after the date of 
the enactment of this Act. 
SEC. 642. PREVENTION OF MISMATCHING OF INTEREST 
AND ORIGINAL ISSUE DISCOUNT DEDUC-
TIONS AND INCOME INCLUSIONS IN TRANS-
ACTIONS WITH RELATED FOREIGN PERSONS. 
(a) ORIGINAL ISSUE DISCOUNT.—Section 163(e)(3) 
(relating to special rule for original issue discount on obli-
gation held by related foreign person) is amended by redes-
ignating subparagraph (B) as subparagraph (C) and by in-
serting after subparagraph (A) the following new subpara-
graph: 
‘‘(B) SPECIAL RULE FOR CERTAIN FOREIGN 
ENTITIES.— 
‘‘(i) IN GENERAL.—In the case of any 
debt instrument having original issue dis-
count which is held by a related foreign per-
son which is a foreign personal holding
289 
company (as defined in section 552), a con-
trolled foreign corporation (as defined in 
section 957), or a passive foreign investment 
company (as defined in section 1297), a de-
duction shall be allowable to the issuer with 
respect to such original issue discount for 
any taxable year before the taxable year in 
which paid only to the extent such original 
issue discount (reduced by properly allow-
able deductions and qualified deficits under 
section 952(c)(1)(B)) is includible during 
such prior taxable year in the gross income 
of a United States person who owns (within 
the meaning of section 958(a)) stock in such 
corporation. 
‘‘(ii) SECRETARIAL
AUTHORITY.—The 
Secretary may by regulation exempt trans-
actions from the application of clause (i), 
including any transaction which is entered 
into by a payor in the ordinary course of 
a trade or business in which the payor is 
predominantly engaged.’’. 
(b) INTEREST AND OTHER DEDUCTIBLE AMOUNTS.— 
Section 267(a)(3) is amended— 
(1) by striking ‘‘The Secretary’’ and inserting:
290 
‘‘(A) IN GENERAL.—The Secretary’’, and 
(2) by adding at the end the following new sub-
paragraph: 
‘‘(B) SPECIAL RULE FOR CERTAIN FOREIGN 
ENTITIES.— 
‘‘(i) IN
GENERAL.—Notwithstanding 
subparagraph (A), in the case of any item 
payable to a foreign personal holding com-
pany (as defined in section 552), a con-
trolled foreign corporation (as defined in 
section 957), or a passive foreign investment 
company (as defined in section 1297), a de-
duction shall be allowable to the payor with 
respect to such amount for any taxable year 
before the taxable year in which paid only 
to the extent that an amount attributable to 
such item (reduced by properly allowable 
deductions and qualified deficits under sec-
tion 952(c)(1)(B)) is includible during such 
prior taxable year in the gross income of a 
United States person who owns (within the 
meaning of section 958(a)) stock in such 
corporation. 
‘‘(ii) SECRETARIAL
AUTHORITY.—The 
Secretary may by regulation exempt trans-
291 
actions from the application of clause (i), 
including any transaction which is entered 
into by a payor in the ordinary course of 
a trade or business in which the payor is 
predominantly engaged and in which the 
payment of the accrued amounts occurs 
within 81⁄2 months after accrual or within 
such other period as the Secretary may pre-
scribe.’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to payments accrued on or after the date 
of the enactment of this Act. 
SEC. 643. EXCLUSION FROM GROSS INCOME FOR INTEREST 
ON OVERPAYMENTS OF INCOME TAX BY INDI-
VIDUALS. 
(a) IN GENERAL.—Part III of subchapter B of chapter 
1 (relating to items specifically excluded from gross income) 
is amended by inserting after section 139A the following 
new section: 
‘‘SEC. 139B. EXCLUSION FROM GROSS INCOME FOR INTER-
EST ON OVERPAYMENTS OF INCOME TAX BY 
INDIVIDUALS. 
‘‘(a) IN GENERAL.—In the case of an individual, gross 
income shall not include interest paid under section 6611 
on any overpayment of tax imposed by this subtitle.
292 
‘‘(b) EXCEPTION.—Subsection (a) shall not apply in 
the case of a failure to claim items resulting in the overpay-
ment on the original return if the Secretary determines that 
the principal purpose of such failure is to take advantage 
of subsection (a). 
‘‘(c) SPECIAL RULE FOR DETERMINING MODIFIED AD-
JUSTED GROSS INCOME.—For purposes of this title, interest 
not included in gross income under subsection (a) shall not 
be treated as interest which is exempt from tax for purposes 
of sections 32(i)(2)(B) and 6012(d) or any computation in 
which interest exempt from tax under this title is added 
to adjusted gross income.’’. 
(b) CLERICAL AMENDMENT.—The table of sections for 
part III of subchapter B of chapter 1 is amended by insert-
ing after the item relating to section 139A the following 
new item: 
‘‘Sec. 139B. Exclusion from gross income for interest on overpay-
ments of income tax by individuals.’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to interest received in calendar years 
beginning after the date of the enactment of this Act. 
SEC. 644. DEPOSITS MADE TO SUSPEND RUNNING OF IN-
TEREST ON POTENTIAL UNDERPAYMENTS. 
(a) IN GENERAL.—Subchapter A of chapter 67 (relat-
ing to interest on underpayments) is amended by adding 
at the end the following new section:
293 
‘‘SEC. 6603. DEPOSITS MADE TO SUSPEND RUNNING OF IN-
TEREST ON POTENTIAL UNDERPAYMENTS, 
ETC. 
‘‘(a) AUTHORITY TO MAKE DEPOSITS OTHER THAN 
AS PAYMENT OF TAX.—A taxpayer may make a cash de-
posit with the Secretary which may be used by the Sec-
retary to pay any tax imposed under subtitle A or B or 
chapter 41, 42, 43, or 44 which has not been assessed at 
the time of the deposit. Such a deposit shall be made in 
such manner as the Secretary shall prescribe. 
‘‘(b) NO INTEREST IMPOSED.—To the extent that such 
deposit is used by the Secretary to pay tax, for purposes 
of section 6601 (relating to interest on underpayments), the 
tax shall be treated as paid when the deposit is made. 
‘‘(c) RETURN OF DEPOSIT.—Except in a case where 
the Secretary determines that collection of tax is in jeop-
ardy, the Secretary shall return to the taxpayer any 
amount of the deposit (to the extent not used for a payment 
of tax) which the taxpayer requests in writing. 
‘‘(d) PAYMENT OF INTEREST.— 
‘‘(1) IN GENERAL.—For purposes of section 6611 
(relating to interest on overpayments), a deposit 
which is returned to a taxpayer shall be treated as a 
payment of tax for any period to the extent (and only 
to the extent) attributable to a disputable tax for such 
period. Under regulations prescribed by the Secretary,
294 
rules similar to the rules of section 6611(b)(2) shall 
apply. 
‘‘(2) DISPUTABLE TAX.— 
‘‘(A) IN
GENERAL.—For purposes of this 
section, the term ‘disputable tax’ means the 
amount of tax specified at the time of the deposit 
as the taxpayer’s reasonable estimate of the max-
imum amount of any tax attributable to disput-
able items. 
‘‘(B) SAFE HARBOR BASED ON 30-DAY LET-
TER.—In the case of a taxpayer who has been 
issued a 30-day letter, the maximum amount of 
tax under subparagraph (A) shall not be less 
than the amount of the proposed deficiency speci-
fied in such letter. 
‘‘(3) OTHER
DEFINITIONS.—For purposes of 
paragraph (2)— 
‘‘(A) DISPUTABLE ITEM.—The term ‘disput-
able item’ means any item of income, gain, loss, 
deduction, or credit if the taxpayer— 
‘‘(i) has a reasonable basis for its 
treatment of such item, and 
‘‘(ii) reasonably believes that the Sec-
retary also has a reasonable basis for dis-
295 
allowing the taxpayer’s treatment of such 
item. 
‘‘(B) 30-DAY
LETTER.—The term ‘30-day 
letter’ means the first letter of proposed defi-
ciency which allows the taxpayer an opportunity 
for administrative review in the Internal Rev-
enue Service Office of Appeals. 
‘‘(4) RATE OF INTEREST.—The rate of interest 
allowable under this subsection shall be the Federal 
short-term rate determined under section 6621(b), 
compounded daily. 
‘‘(e) USE OF DEPOSITS.— 
‘‘(1) PAYMENT
OF
TAX.—Except as otherwise 
provided by the taxpayer, deposits shall be treated as 
used for the payment of tax in the order deposited. 
‘‘(2) RETURNS OF DEPOSITS.—Deposits shall be 
treated as returned to the taxpayer on a last-in, first- 
out basis.’’. 
(b) CLERICAL AMENDMENT.—The table of sections for 
subchapter A of chapter 67 is amended by adding at the 
end the following new item: 
‘‘Sec. 6603. Deposits made to suspend running of interest on poten-
tial underpayments, etc.’’. 
(c) EFFECTIVE DATE.—
296 
(1) IN
GENERAL.—The amendments made by 
this section shall apply to deposits made after the 
date of the enactment of this Act. 
(2) COORDINATION WITH DEPOSITS MADE UNDER 
REVENUE
PROCEDURE
84–58.—In the case of an 
amount held by the Secretary of the Treasury or his 
delegate on the date of the enactment of this Act as 
a deposit in the nature of a cash bond deposit pursu-
ant to Revenue Procedure 84–58, the date that the 
taxpayer identifies such amount as a deposit made 
pursuant to section 6603 of the Internal Revenue 
Code (as added by this Act) shall be treated as the 
date such amount is deposited for purposes of such 
section 6603. 
SEC. 645. PARTIAL PAYMENT OF TAX LIABILITY IN INSTALL-
MENT AGREEMENTS. 
(a) IN GENERAL.— 
(1) Section 6159(a) (relating to authorization of 
agreements) is amended— 
(A) by striking ‘‘satisfy liability for pay-
ment of’’ and inserting ‘‘make payment on’’, and 
(B) by inserting ‘‘full or partial’’ after ‘‘fa-
cilitate’’. 
(2) Section 6159(c) (relating to Secretary re-
quired to enter into installment agreements in certain
297 
cases) is amended in the matter preceding paragraph 
(1) by inserting ‘‘full’’ before ‘‘payment’’. 
(b) REQUIREMENT TO REVIEW PARTIAL PAYMENT 
AGREEMENTS
EVERY
TWO
YEARS.—Section 6159 is 
amended by redesignating subsections (d) and (e) as sub-
sections (e) and (f), respectively, and inserting after sub-
section (c) the following new subsection: 
‘‘(d) SECRETARY REQUIRED TO REVIEW INSTALL-
MENT AGREEMENTS FOR PARTIAL COLLECTION EVERY TWO 
YEARS.—In the case of an agreement entered into by the 
Secretary under subsection (a) for partial collection of a 
tax liability, the Secretary shall review the agreement at 
least once every 2 years.’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to agreements entered into on or after 
the date of the enactment of this Act. 
SEC. 646. AFFIRMATION OF CONSOLIDATED RETURN REGU-
LATION AUTHORITY. 
(a) IN GENERAL.—Section 1502 is amended by adding 
at the end the following new sentence: ‘‘In carrying out the 
preceding sentence, the Secretary may prescribe rules that 
are different from the provisions of chapter 1 that would 
apply if such corporations filed separate returns.’’. 
(b) RESULT NOT OVERTURNED.—Notwithstanding the 
amendment made by subsection (a), the Internal Revenue
298 
Code of 1986 shall be construed by treating Treasury Regu-
lation § 1.1502-20(c)(1)(iii) (as in effect on January 1, 
2001) as being inapplicable to the factual situation in Rite 
Aid Corporation and Subsidiary Corporations v. United 
States, 255 F.3d 1357 (Fed. Cir. 2001). 
(c) EFFECTIVE DATE.—This section, and the amend-
ment made by this section, shall apply to taxable years be-
ginning before, on, or after the date of the enactment of this 
Act. 
PART III—LEASING 
SEC. 647. REFORM OF TAX TREATMENT OF CERTAIN LEAS-
ING ARRANGEMENTS. 
(a) CLARIFICATION OF RECOVERY PERIOD FOR TAX- 
EXEMPT USE PROPERTY SUBJECT TO LEASE.—Subpara-
graph (A) of section 168(g)(3) (relating to special rules for 
determining class life) is amended by inserting ‘‘(notwith-
standing any other subparagraph of this paragraph)’’ after 
‘‘shall’’. 
(b) LIMITATION ON DEPRECIATION PERIOD FOR SOFT-
WARE LEASED TO TAX-EXEMPT ENTITY.—Paragraph (1) 
of section 167(f) is amended by adding at the end the fol-
lowing new subparagraph: 
‘‘(C) TAX-EXEMPT USE PROPERTY SUBJECT 
TO
LEASE.—In the case of computer software 
which would be tax-exempt use property as de-
299 
fined in subsection (h) of section 168 if such sec-
tion applied to computer software, the useful life 
under subparagraph (A) shall not be less than 
125 percent of the lease term (within the mean-
ing of section 168(i)(3)).’’. 
(c) LEASE TERM TO INCLUDE RELATED SERVICE 
CONTRACTS.—Subparagraph (A) of section 168(i)(3) (relat-
ing to lease term) is amended by striking ‘‘and’’ at the end 
of clause (i), by redesignating clause (ii) as clause (iii), and 
by inserting after clause (i) the following new clause: 
‘‘(ii) the term of a lease shall include 
the term of any service contract or similar 
arrangement (whether or not treated as a 
lease under section 7701(e))— 
‘‘(I) which is part of the same 
transaction (or series of related trans-
actions) which includes the lease, and 
‘‘(II) which is with respect to the 
property subject to the lease or substan-
tially similar property, and’’. 
(d) EXPANSION OF SHORT-TERM LEASE EXEMPTION 
FOR QUALIFIED TECHNOLOGICAL EQUIPMENT.—Subpara-
graph (A) of section 168(h)(3) is amended by adding at 
the end the following new sentence: ‘‘Notwithstanding sub-
section (i)(3)(A)(i), in determining a lease term for pur-
300 
poses of the preceding sentence, there shall not be taken into 
account any option of the lessee to renew at the fair market 
value rent determined at the time of renewal; except that 
the aggregate period not taken into account by reason of 
this sentence shall not exceed 24 months.’’ 
SEC. 648. LIMITATION ON DEDUCTIONS ALLOCABLE TO 
PROPERTY 
USED 
BY 
GOVERNMENTS 
OR 
OTHER TAX-EXEMPT ENTITIES. 
(a) IN GENERAL.—Subpart C of part II of subchapter 
E of chapter 1 (relating to taxable year for which deduc-
tions taken) is amended by adding at the end the following 
new section: 
‘‘SEC. 470. LIMITATION ON DEDUCTIONS ALLOCABLE TO 
PROPERTY 
USED 
BY 
GOVERNMENTS 
OR 
OTHER TAX-EXEMPT ENTITIES. 
‘‘(a) LIMITATION ON LOSSES.—Except as otherwise 
provided in this section, a tax-exempt use loss for any tax-
able year shall not be allowed. 
‘‘(b) DISALLOWED LOSS CARRIED TO NEXT YEAR.— 
Any tax-exempt use loss with respect to any tax-exempt use 
property which is disallowed under subsection (a) for any 
taxable year shall be treated as a deduction with respect 
to such property in the next taxable year. 
‘‘(c) DEFINITIONS.—For purposes of this section—
301 
‘‘(1) TAX-EXEMPT USE LOSS.—The term ‘tax-ex-
empt use loss’ means, with respect to any taxable 
year, the amount (if any) by which— 
‘‘(A) the sum of— 
‘‘(i) the aggregate deductions (other 
than interest) directly allocable to a tax-ex-
empt use property, plus 
‘‘(ii) the aggregate deductions for inter-
est properly allocable to such property, ex-
ceed 
‘‘(B) the aggregate income from such prop-
erty. 
‘‘(2) TAX-EXEMPT
USE
PROPERTY.—The term 
‘tax-exempt use property’ has the meaning given to 
such term by section 168(h) (without regard to para-
graphs (1)(C) and (3) thereof and determined as if 
property described in section 167(f)(1)(B) were tan-
gible property). Such term shall not include property 
which would (but for this sentence) be tax-exempt use 
property solely by reason of section 168(h)(6) if any 
credit is allowable under section 42 or 47 with respect 
to such property. 
‘‘(d) EXCEPTION FOR CERTAIN LEASES.—This section 
shall not apply to any lease of property which meets the 
requirements of all of the following paragraphs:
302 
‘‘(1) AVAILABILITY OF FUNDS.— 
‘‘(A) IN
GENERAL.—A lease of property 
meets the requirements of this paragraph if (at 
any time during the lease term) not more than 
an allowable amount of funds are— 
‘‘(i) subject to any arrangement re-
ferred to in subparagraph (B), or 
‘‘(ii) set aside or expected to be set 
aside, 
to or for the benefit of the lessor or any lender, 
or to or for the benefit of the lessee to satisfy the 
lessee’s obligations or options under the lease. 
For purposes of clause (ii), funds shall be treated 
as set aside or expected to be set aside only if a 
reasonable person would conclude, based on the 
facts and circumstances, that such funds are set 
aside or expected to be set aside. 
‘‘(B) ARRANGEMENTS.—The arrangements 
referred to in this subparagraph include a defea-
sance arrangement, a loan by the lessee to the 
lessor or any lender, a deposit arrangement, a 
letter of credit collateralized with cash or cash 
equivalents, a payment undertaking agreement, 
prepaid rent (within the meaning of the regula-
tions under section 467), a sinking fund ar-
303 
rangement, a guaranteed investment contract, fi-
nancial guaranty insurance, and any similar 
arrangement (whether or not such arrangement 
provides credit support). 
‘‘(C) ALLOWABLE AMOUNT.— 
‘‘(i) IN GENERAL.—Except as otherwise 
provided in this subparagraph, the term ‘al-
lowable amount’ means an amount equal to 
20 percent of the lessor’s adjusted basis in 
the property at the time the lease is entered 
into. 
‘‘(ii) HIGHER AMOUNT PERMITTED IN 
CERTAIN CASES.—To the extent provided in 
regulations, a higher percentage shall be 
permitted under clause (i) where necessary 
because of the credit-worthiness of the lessee. 
In no event may such regulations permit a 
percentage of more than 50 percent. 
‘‘(iii) OPTION
TO
PURCHASE
OTHER 
THAN AT FAIR MARKET VALUE.—If under 
the lease the lessee has the option to pur-
chase the property for a fixed price or for 
other than the fair market value of the 
property (determined at the time of exer-
cise), the allowable amount at the time such
304 
option may be exercised may not exceed 50 
percent of the price at which such option 
may be exercised. 
‘‘(iv) NO
ALLOWABLE
AMOUNT
FOR 
CERTAIN
ARRANGEMENTS.—The allowable 
amount shall be zero with respect to any ar-
rangement which involves— 
‘‘(I) a loan from the lessee to the 
lessor or a lender, 
‘‘(II) any deposit received, letter 
of credit issued, or payment under-
taking agreement entered into by a 
lender otherwise involved in the trans-
action, or 
‘‘(III) in the case of a transaction 
which involves a lender, any credit 
support made available to the lessor in 
which any such lender does not have a 
claim that is senior to the lessor. 
For purposes of subclause (I), the term 
‘loan’ shall not include any amount treated 
as a loan under section 467 with respect to 
a section 467 rental agreement. 
‘‘(2) LESSOR MUST MAKE SUBSTANTIAL EQUITY 
INVESTMENT.—
305 
‘‘(A) IN
GENERAL.—A lease of property 
meets the requirements of this paragraph if— 
‘‘(i) the lessor— 
‘‘(I) has at the time the lease is 
entered into an unconditional at-risk 
equity investment (as determined by 
the Secretary) in the property of at 
least 20 percent of the lessor’s adjusted 
basis in the property as of that time, 
and 
‘‘(II) maintains such investment 
throughout the term of the lease, and 
‘‘(ii) the fair market value of the prop-
erty at the end of the lease term is reason-
ably expected to be equal to at least 20 per-
cent of such basis. 
‘‘(B) RISK
OF
LOSS.—For purposes of 
clause (ii), the fair market value at the end of 
the lease term shall be reduced to the extent that 
a person other than the lessor bears a risk of loss 
in the value of the property. 
‘‘(C) PARAGRAPH NOT TO APPLY TO SHORT- 
TERM LEASES.—This paragraph shall not apply 
to any lease with a lease term of 5 years or less.
306 
‘‘(3) LESSEE MAY NOT BEAR MORE THAN MINI-
MAL RISK OF LOSS.— 
‘‘(A) IN
GENERAL.—A lease of property 
meets the requirements of this paragraph if there 
is no arrangement under which the lessee 
bears— 
‘‘(i) any portion of the loss that would 
occur if the fair market value of the leased 
property were 25 percent less than its rea-
sonably expected fair market value at the 
time the lease is terminated, or 
‘‘(ii) more than 50 percent of the loss 
that would occur if the fair market value of 
the leased property at the time the lease is 
terminated were zero. 
‘‘(B) EXCEPTION.—The Secretary may by 
regulations provide that the requirements of this 
paragraph are not met where the lessee bears 
more than a minimal risk of loss. 
‘‘(C) PARAGRAPH NOT TO APPLY TO SHORT- 
TERM LEASES.—This paragraph shall not apply 
to any lease with a lease term of 5 years or less. 
‘‘(e) SPECIAL RULES.— 
‘‘(1) TREATMENT OF FORMER TAX-EXEMPT USE 
PROPERTY.—
307 
‘‘(A) IN
GENERAL.—In the case of any 
former tax-exempt use property— 
‘‘(i) any deduction allowable under 
subsection (b) with respect to such property 
for any taxable year shall be allowed only 
to the extent of any net income (without re-
gard to such deduction) from such property 
for such taxable year, and 
‘‘(ii) any portion of such unused de-
duction remaining after application of 
clause (i) shall be treated as a deduction al-
lowable under subsection (b) with respect to 
such property in the next taxable year. 
‘‘(B) FORMER
TAX-EXEMPT
USE
PROP-
ERTY.—For purposes of this subsection, the term 
‘former tax-exempt use property’ means any 
property which— 
‘‘(i) is not tax-exempt use property for 
the taxable year, but 
‘‘(ii) was tax-exempt use property for 
any prior taxable year. 
‘‘(2) DISPOSITION
OF
ENTIRE
INTEREST
IN 
PROPERTY.—If during the taxable year a taxpayer 
disposes of the taxpayer’s entire interest in tax-ex-
empt use property (or former tax-exempt use prop-
308 
erty), rules similar to the rules of section 469(g) shall 
apply for purposes of this section. 
‘‘(3) COORDINATION
WITH
SECTION
469.—This 
section shall be applied before the application of sec-
tion 469. 
‘‘(4) COORDINATION
WITH
SECTIONS
1031
AND 
1033.— 
‘‘(A) IN GENERAL.—Sections 1031(a) and 
1033(a) shall not apply if— 
‘‘(i) the exchanged or converted prop-
erty is tax-exempt use property subject to a 
lease which was entered into before March 
13, 2004, and which would not have met the 
requirements of subsection (d) had such re-
quirements been in effect when the lease was 
entered into, or 
‘‘(ii) the replacement property is tax- 
exempt use property subject to a lease which 
does not meet the requirements of subsection 
(d). 
‘‘(B) ADJUSTED
BASIS.—In the case of 
property acquired by the lessor in a transaction 
to which section 1031 or 1033 applies, the ad-
justed basis of such property for purposes of this 
section shall be equal to the lesser of—
309 
‘‘(i) the fair market value of the prop-
erty as of the beginning of the lease term, 
or 
‘‘(ii) the amount which would be the 
lessor’s adjusted basis if such sections did 
not apply to such transaction. 
‘‘(f) OTHER DEFINITIONS.—For purposes of this sec-
tion— 
‘‘(1) RELATED PARTIES.—The terms ‘lessor’, ‘les-
see’, and ‘lender’ each include any related party 
(within the meaning of section 197(f)(9)(C)(i)). 
‘‘(2) LEASE TERM.—The term ‘lease term’ has 
the meaning given to such term by section 168(i)(3). 
‘‘(3) LENDER.—The term ‘lender’ means, with 
respect to any lease, a person that makes a loan to 
the lessor which is secured (or economically similar to 
being secured) by the lease or the leased property. 
‘‘(4) LOAN.—The term ‘loan’ includes any simi-
lar arrangement. 
‘‘(g) REGULATIONS.—The Secretary shall prescribe 
such regulations as may be necessary or appropriate to 
carry out the provisions of this section, including regula-
tions which— 
‘‘(1) allow in appropriate cases the aggregation 
of property subject to the same lease, and
310 
‘‘(2) provide for the determination of the alloca-
tion of interest expense for purposes of this section.’’. 
(b) CONFORMING AMENDMENT.—The table of sections 
for subpart C of part II of subchapter E of chapter 1 is 
amended by adding at the end the following new item: 
‘‘Sec. 470. Limitation on deductions allocable to property used by 
governments or other tax-exempt entities.’’. 
SEC. 649. EFFECTIVE DATE. 
(a) IN GENERAL.—Except as provided in this section, 
the amendments made by this part shall apply to leases 
entered into after March 12, 2004. 
(b) EXCEPTION.— 
(1) IN
GENERAL.—The amendments made by 
this part shall not apply to qualified transportation 
property. 
(2) QUALIFIED
TRANSPORTATION
PROPERTY.— 
For purposes of paragraph (1), the term ‘‘qualified 
transportation property’’ means domestic property 
subject to a lease with respect to which a formal ap-
plication— 
(A) was submitted for approval to the Fed-
eral Transit Administration (an agency of the 
Department of Transportation) after June 30, 
2003, and before March 13, 2004, 
(B) is approved by the Federal Transit Ad-
ministration before January 1, 2005, and
311 
(C) includes a description of such property 
and the value of such property. 
(3) EXCHANGES AND CONVERSION OF TAX-EX-
EMPT USE PROPERTY.—Section 470(e)(4) of the Inter-
nal Revenue Code of 1986, as added by this section, 
shall apply to property exchanged or converted after 
the date of the enactment of this Act. 
Subtitle C—Reduction of Fuel Tax 
Evasion 
SEC. 651. EXEMPTION FROM CERTAIN EXCISE TAXES FOR 
MOBILE MACHINERY. 
(a) EXEMPTION FROM TAX ON HEAVY TRUCKS AND 
TRAILERS SOLD AT RETAIL.— 
(1) IN GENERAL.—Section 4053 (relating to ex-
emptions) is amended by adding at the end the fol-
lowing new paragraph: 
‘‘(8) MOBILE
MACHINERY.—Any vehicle which 
consists of a chassis— 
‘‘(A) to which there has been permanently 
mounted (by welding, bolting, riveting, or other 
means) machinery or equipment to perform a 
construction, manufacturing, processing, farm-
ing, mining, drilling, timbering, or similar oper-
ation if the operation of the machinery or equip-
312 
ment is unrelated to transportation on or off the 
public highways, 
‘‘(B) which has been specially designed to 
serve only as a mobile carriage and mount (and 
a power source, where applicable) for the par-
ticular machinery or equipment involved, wheth-
er or not such machinery or equipment is in op-
eration, and 
‘‘(C) which, by reason of such special de-
sign, could not, without substantial structural 
modification, be used as a component of a vehicle 
designed to perform a function of transporting 
any load other than that particular machinery 
or equipment or similar machinery or equipment 
requiring such a specially designed chassis.’’. 
(2) EFFECTIVE DATE.—The amendment made by 
this subsection shall take effect on the day after the 
date of the enactment of this Act. 
(b) EXEMPTION FROM TAX ON USE OF CERTAIN VEHI-
CLES.— 
(1) IN GENERAL.—Section 4483 (relating to ex-
emptions) is amended by redesignating subsection (g) 
as subsection (h) and by inserting after subsection (f) 
the following new subsection:
313 
‘‘(g) EXEMPTION FOR MOBILE MACHINERY.—No tax 
shall be imposed by section 4481 on the use of any vehicle 
described in section 4053(8).’’. 
(2) EFFECTIVE DATE.—The amendments made 
by this subsection shall take effect on the day after the 
date of the enactment of this Act. 
(c) EXEMPTION FROM TAX ON TIRES.— 
(1) IN GENERAL.—Section 4072(b)(2) is amend-
ed by adding at the end the following flush sentence: 
‘‘Such term shall not include tires of a type used ex-
clusively on vehicles described in section 4053(8).’’. 
(2) EFFECTIVE DATE.—The amendment made by 
this subsection shall take effect on the day after the 
date of the enactment of this Act. 
(d) REFUND OF FUEL TAXES.— 
(1) IN GENERAL.—Section 6421(e)(2) (defining 
off-highway business use) is amended by adding at 
the end the following new subparagraph: 
‘‘(C) USES IN MOBILE MACHINERY.— 
‘‘(i) IN GENERAL.—The term ‘off-high-
way business use’ shall include any use in 
a vehicle which meets the requirements de-
scribed in clause (ii).
314 
‘‘(ii) REQUIREMENTS FOR MOBILE MA-
CHINERY.—The requirements described in 
this clause are— 
‘‘(I) the design-based test, and 
‘‘(II) the use-based test. 
‘‘(iii) DESIGN-BASED TEST.—For pur-
poses of clause (ii)(I), the design-based test 
is met if the vehicle consists of a chassis— 
‘‘(I) to which there has been per-
manently mounted (by welding, bolt-
ing, riveting, or other means) machin-
ery or equipment to perform a con-
struction, manufacturing, processing, 
farming, mining, drilling, timbering, 
or similar operation if the operation of 
the machinery or equipment is unre-
lated to transportation on or off the 
public highways, 
‘‘(II) which has been specially de-
signed to serve only as a mobile car-
riage and mount (and a power source, 
where applicable) for the particular 
machinery 
or 
equipment 
involved, 
whether or not such machinery or 
equipment is in operation, and
315 
‘‘(III) which, by reason of such 
special design, could not, without sub-
stantial structural modification, be 
used as a component of a vehicle de-
signed to perform a function of trans-
porting any load other than that par-
ticular machinery or equipment or 
similar machinery or equipment re-
quiring such a specially designed chas-
sis. 
‘‘(iv) USE-BASED TEST.—For purposes 
of clause (ii)(II), the use-based test is met if 
the use of the vehicle on public highways 
was less than 7,500 miles during the tax-
payer’s taxable year.’’. 
(2) NO TAX-FREE SALES.—Subsection (b) of sec-
tion 4082, as amended by section 652, is amended by 
inserting before the period at the end ‘‘and such term 
shall not include any use described in section 
6421(e)(2)(C)’’. 
(3) ANNUAL
REFUND
OF
TAX
PAID.—Section 
6427(i)(2) (relating to exceptions) is amended by add-
ing at the end the following new subparagraph: 
‘‘(C) NONAPPLICATION
OF
PARAGRAPH.— 
This paragraph shall not apply to any fuel used
316 
solely in any off-highway business use described 
in section 6421(e)(2)(C).’’. 
(4) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to taxable years begin-
ning after the date of the enactment of this Act. 
SEC. 652. TAXATION OF AVIATION-GRADE KEROSENE. 
(a) RATE OF TAX.— 
(1) IN GENERAL.—Subparagraph (A) of section 
4081(a)(2) is amended by striking ‘‘and’’ at the end 
of clause (ii), by striking the period at the end of 
clause (iii) and inserting ‘‘, and’’, and by adding at 
the end the following new clause: 
‘‘(iv) in the case of aviation-grade ker-
osene, 21.8 cents per gallon.’’. 
(2) COMMERCIAL AVIATION.—Paragraph (2) of 
section 4081(a) is amended by adding at the end the 
following new subparagraph: 
‘‘(C) TAXES
IMPOSED
ON
FUEL
USED
IN 
COMMERCIAL AVIATION.—In the case of aviation- 
grade kerosene which is removed from any refin-
ery or terminal directly into the fuel tank of an 
aircraft for use in commercial aviation, the rate 
of tax under subparagraph (A)(iv) shall be 4.3 
cents per gallon.’’.
317 
(3) CERTAIN REFUELER TRUCKS, TANKERS, AND 
TANK WAGONS TREATED AS TERMINAL.—Subsection 
(a) of section 4081 is amended by adding at the end 
the following new paragraph: 
‘‘(3) CERTAIN
REFUELER
TRUCKS, TANKERS, 
AND TANK WAGONS TREATED AS TERMINAL.— 
‘‘(A) IN GENERAL.—In the case of aviation- 
grade kerosene which is removed from any ter-
minal directly into the fuel tank of an aircraft 
(determined without regard to any refueler truck, 
tanker, or tank wagon which meets the require-
ments of subparagraph (B)), a refueler truck, 
tanker, or tank wagon shall be treated as part of 
such terminal if— 
‘‘(i) such truck, tanker, or wagon meets 
the requirements of subparagraph (B) with 
respect to an airport, and 
‘‘(ii) except in the case of exigent cir-
cumstances identified by the Secretary in 
regulations, no vehicle registered for high-
way use is loaded with aviation-grade ker-
osene at such terminal. 
‘‘(B) REQUIREMENTS.—A refueler truck, 
tanker, or tank wagon meets the requirements of
318 
this subparagraph with respect to an airport if 
such truck, tanker, or wagon— 
‘‘(i) is loaded with aviation-grade ker-
osene at such terminal located within such 
airport and delivers such kerosene only into 
aircraft at such airport, 
‘‘(ii) has storage tanks, hose, and cou-
pling equipment designed and used for the 
purposes of fueling aircraft, 
‘‘(iii) is not registered for highway use, 
and 
‘‘(iv) is operated by— 
‘‘(I) the terminal operator of such 
terminal, or 
‘‘(II) a person that makes a daily 
accounting to such terminal operator 
of each delivery of fuel from such truck, 
tanker, or wagon. 
‘‘(C) REPORTING.—The Secretary shall re-
quire under section 4101(d) reporting by such 
terminal operator of— 
‘‘(i) any information obtained under 
subparagraph (B)(iv)(II), and 
‘‘(ii) any similar information main-
tained by such terminal operator with re-
319 
spect to deliveries of fuel made by trucks, 
tankers, or wagons operated by such ter-
minal operator.’’. 
(4) LIABILITY
FOR
TAX
ON
AVIATION-GRADE 
KEROSENE
USED
IN
COMMERCIAL
AVIATION.—Sub-
section (a) of section 4081 is amended by adding at 
the end the following new paragraph: 
‘‘(4) LIABILITY
FOR
TAX
ON
AVIATION-GRADE 
KEROSENE
USED
IN
COMMERCIAL
AVIATION.—For 
purposes of paragraph (2)(C), the person who uses the 
fuel for commercial aviation shall pay the tax im-
posed under such paragraph. For purposes of the pre-
ceding sentence, fuel shall be treated as used when 
such fuel is removed into the fuel tank.’’. 
(5) NONTAXABLE USES.— 
(A) IN GENERAL.—Section 4082 is amended 
by redesignating subsections (e) and (f) as sub-
sections (f) and (g), respectively, and by insert-
ing after subsection (d) the following new sub-
section: 
‘‘(e) AVIATION-GRADE KEROSENE.—In the case of 
aviation-grade kerosene which is exempt from the tax im-
posed by section 4041(c) (other than by reason of a prior 
imposition of tax) and which is removed from any refinery
320 
or terminal directly into the fuel tank of an aircraft, the 
rate of tax under section 4081(a)(2)(A)(iv) shall be zero.’’. 
(B) CONFORMING AMENDMENTS.— 
(i) Subsection (b) of section 4082 is 
amended by adding at the end the following 
new flush sentence: 
‘‘The term ‘nontaxable use’ does not include the use of avia-
tion-grade kerosene in an aircraft.’’. 
(ii) Section 4082(d) is amended by 
striking paragraph (1) and by redesig-
nating paragraphs (2) and (3) as para-
graphs (1) and (2), respectively. 
(6) NONAIRCRAFT USE OF AVIATION-GRADE KER-
OSENE.— 
(A) IN
GENERAL.—Subparagraph (B) of 
section 4041(a)(1) is amended by adding at the 
end the following new sentence: ‘‘This subpara-
graph shall not apply to aviation-grade ker-
osene.’’. 
(B) CONFORMING AMENDMENT.—The head-
ing for paragraph (1) of section 4041(a) is 
amended by inserting ‘‘AND
KEROSENE’’ after 
‘‘DIESEL FUEL’’. 
(b) COMMERCIAL AVIATION.—Section 4083 is amended 
by redesignating subsections (b) and (c) as subsections (c)
321 
and (d), respectively, and by inserting after subsection (a) 
the following new subsection: 
‘‘(b) COMMERCIAL AVIATION.—For purposes of this 
subpart, the term ‘commercial aviation’ means any use of 
an aircraft in a business of transporting persons or prop-
erty for compensation or hire by air, unless properly allo-
cable to any transportation exempt from the taxes imposed 
by sections 4261 and 4271 by reason of section 4281 or 4282 
or by reason of section 4261(h).’’. 
(c) REFUNDS.— 
(1) IN
GENERAL.—Paragraph (4) of section 
6427(l) is amended to read as follows: 
‘‘(4) 
REFUNDS
FOR
AVIATION-GRADE
KER-
OSENE.— 
‘‘(A) NO REFUND OF CERTAIN TAXES ON 
FUEL USED IN COMMERCIAL AVIATION.—In the 
case of aviation-grade kerosene used in commer-
cial aviation (as defined in section 4083(b)) 
(other than supplies for vessels or aircraft within 
the meaning of section 4221(d)(3)), paragraph 
(1) shall not apply to so much of the tax imposed 
by section 4081 as is attributable to— 
‘‘(i) the Leaking Underground Storage 
Tank Trust Fund financing rate imposed 
by such section, and
340 
places it appears and inserting ‘‘sold, destroyed, or 
stolen’’. 
(2) CONFORMING AMENDMENT.—The heading for 
section 4481(c)(2) is amended by striking ‘‘DE-
STROYED
OR
STOLEN’’ and inserting ‘‘SOLD, DE-
STROYED, OR STOLEN’’. 
(b) REPEAL OF INSTALLMENT PAYMENT.— 
(1) Section 6156 (relating to installment pay-
ment of tax on use of highway motor vehicles) is re-
pealed. 
(2) The table of sections for subchapter A of 
chapter 62 is amended by striking the item relating 
to section 6156. 
(c) ELECTRONIC FILING.—Section 4481 is amended by 
redesignating subsection (e) as subsection (f) and by insert-
ing after subsection (d) the following new subsection: 
‘‘(e) ELECTRONIC FILING.—Any taxpayer who files a 
return under this section with respect to 25 or more vehicles 
for any taxable period shall file such return electronically.’’. 
(d) REPEAL OF REDUCTION IN TAX FOR CERTAIN 
TRUCKS.—Section 4483 is amended by striking subsection 
(f). 
(e) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable periods beginning after the 
date of the enactment of this Act.
342 
(2) FILING
OF
CLAIMS.—Section 6427(i) is 
amended by inserting at the end the following new 
paragraph: 
‘‘(5) SPECIAL RULE FOR VENDOR REFUNDS WITH 
RESPECT TO FARMERS.— 
‘‘(A) IN GENERAL.—A claim may be filed 
under subsection (l)(6) by any person with re-
spect to fuel sold by such person for any pe-
riod— 
‘‘(i) for which $200 or more ($100 or 
more in the case of kerosene) is payable 
under subsection (l)(6), 
‘‘(ii) which is not less than 1 week, 
and 
‘‘(iii) which is for not more than 250 
gallons for each farmer for which there is a 
claim. 
Notwithstanding subsection (l)(1), paragraph 
(3)(B) shall apply to claims filed under the pre-
ceding sentence. 
‘‘(B) TIME FOR FILING CLAIM.—No claim 
filed under this paragraph shall be allowed un-
less filed on or before the last day of the first 
quarter following the earliest quarter included in 
the claim.’’.