I
106TH CONGRESS
1ST SESSION
H. R. 2255
To amend the Internal Revenue Code of 1986 to curb tax abuses by dis-
allowing tax benefits claimed to arise from transactions without substan-
tial economic substance.
IN THE HOUSE OF REPRESENTATIVES
JUNE 17, 1999
Mr. DOGGETT (for himself, Mr. STARK, Mr. HINCHEY, Mr. TIERNEY, Mr.
ALLEN, Mr. LUTHER, Mr. BONIOR, and Mr. FARR of California) intro-
duced the following bill; which was referred to the Committee on Ways
and Means
A BILL
To amend the Internal Revenue Code of 1986 to curb tax
abuses by disallowing tax benefits claimed to arise from
transactions without substantial economic substance.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Abusive Tax Shelter
Shutdown Act of 1999’’.
SEC. 2. FINDINGS AND PURPOSE.
(a) FINDINGS.—The Congress hereby finds that:
(1) Many corporate tax shelter transactions are
complicated ways of accomplishing nothing aside
from claimed tax benefits, and the legal opinions
justifying those transactions take an inappropriately
narrow and restrictive view of well-developed court
doctrines under which—
(A) the taxation of a transaction is deter-
mined in accordance with its substance and not
merely its form,
(B) transactions which have no significant
effect on the taxpayer’s economic or beneficial
interests except for tax benefits are treated as
sham transactions and disregarded,
(C) transactions involving multiple steps
are collapsed when those steps have no substan-
tial economic meaning and are merely designed
to create tax benefits,
(D) transactions with no business purpose
are not given effect, and
(E) in the absence of a specific congres-
sional authorization, it is presumed that Con-
gress did not intend a transaction to result in
a negative tax where the taxpayer’s economic
position or rate of return is better after tax
than before tax.
(2) Permitting aggressive and abusive tax shel-
ters not only results in large revenue losses but also
undermines the sense of voluntary compliance with
the Internal Revenue Code of 1986.
(b) PURPOSE.—The purpose of this Act is to elimi-
nate abusive tax shelters by denying tax attributes claimed
to arise from transactions that do not meet a heightened
economic substance requirement and by repealing the pro-
vision that permits legal opinions to be used to avoid pen-
alties on tax underpayments resulting from transactions
without significant economic substance or business pur-
pose.
SEC. 
3. 
DISALLOWANCE 
OF 
NONECONOMIC 
TAX 
AT-
TRIBUTES.
Section 7701 of the Internal Revenue Code of 1986
is amended by redesignating subsection (m) as subsection
(n) and by inserting after subsection (l) the following new
subsection:
‘‘(m) DISALLOWANCE OF NONECONOMIC TAX AT-
TRIBUTES.—
‘‘(1) IN GENERAL.—In determining liability for
any tax under subtitle A, noneconomic tax attributes
shall not be allowed.
‘‘(2) NONECONOMIC
TAX
ATTRIBUTE.—For
purposes of this subsection, a noneconomic tax at-
tribute is any deduction, loss, or credit claimed to
result from any transaction unless—
‘‘(A) the transaction changes in a mean-
ingful way (apart from Federal income tax con-
sequences) the taxpayer’s economic position,
and
‘‘(B)(i) the present value of the reasonably
expected potential income from the transaction
(and the taxpayer’s risk of loss from the trans-
action) are substantial in relationship to the
present value of the tax benefits claimed, or
‘‘(ii) in the case of a transaction which is
in substance the borrowing of money or the ac-
quisition of financial capital, the deductions
claimed with respect to the transaction for any
period are not significantly in excess of the eco-
nomic return for such period realized by the
person lending the money or providing the fi-
nancial capital.
‘‘(3) PRESUMPTION OF NONECONOMIC TAX AT-
TRIBUTES.—For purposes of paragraph (2), the fol-
lowing factors shall give rise to a presumption that
a transaction fails to meet the requirements of para-
graph (2):
‘‘(A) The fact that the payments, liabil-
ities, or assets that purport to create a loss (or
other benefit) for tax purposes are not reflected
to any meaningful extent on the taxpayer’s
books and records for financial reporting pur-
poses.
‘‘(B) The fact that the transaction results
in an allocation of income or gain to a tax-indif-
ferent party which is substantially in excess of
such party’s economic income or gain from the
transaction.
‘‘(4) TREATMENT OF BUILT-IN LOSS.—The de-
termination of whether a transaction results in the
realization of a built-in loss shall be made under
subtitle A as if this subsection had not been enacted.
For purposes of the preceding sentence, the term
‘built-in loss’ means any loss or deduction to the ex-
tent that such loss or deduction had economically
been incurred before such transaction is entered into
and to the extent that the loss or deduction was eco-
nomically borne by the taxpayer.
‘‘(5) DEFINITION
AND
SPECIAL
RULES.—For
purposes of this subsection—
‘‘(A) 
TAX-INDIFFERENT
PARTY.—The
term ‘tax-indifferent party’ means any person
or entity exempt from tax under subtitle A. A
person shall be treated as a tax-indifferent
party with respect to a transaction if, by reason
of such person’s method of accounting, the
items taken into account with respect to the
transaction have no substantial impact on such
person’s liability under subtitle A.
‘‘(B) 
SERIES
OF
RELATED
TRANS-
ACTION.—A transaction which is part of a se-
ries of related transactions shall be treated as
meeting the requirements of paragraph (2) only
if—
‘‘(i) such transaction meets such re-
quirements without regard to the other
transactions, and
‘‘(ii) such transactions, if treated as 1
transaction, would meet such requirements.
A similar rule shall apply to a multiple step
transaction with each step being treated as a
separate related transaction.
‘‘(C) NORMAL BUSINESS TRANSACTIONS.—
In the case of a transaction which is an integral
part of a taxpayer’s trade or business and
which is entered into in the normal course of
such trade or business, the determination of the
potential income from such transaction shall be
made by taking into account its relationship to
the overall trade or business of the taxpayer.
‘‘(D) TREATMENT
OF
FEES.—In deter-
mining whether there is risk of loss from a
transaction (and the amount thereof), potential
loss of fees and other transaction expenses shall
be disregarded.
‘‘(E) TREATMENT OF ECONOMIC RETURN
ENHANCEMENTS.—The following shall be treat-
ed as economic returns and not tax benefits:
‘‘(i) The credit under section 29 (re-
lating to credit for producing fuel from a
nonconventional source).
‘‘(ii) The credit under section 42 (re-
lating to low-income housing credit).
‘‘(iii) The credit under section 45 (re-
lating to electricity produced from certain
renewable resources).
‘‘(iv) The credit under section 1397E
(relating to credit to holders of qualified
zone academy bonds) or any similar pro-
gram hereafter enacted.
‘‘(v) Any other tax benefit specified in
regulations.
‘‘(F) 
EXCEPTIONS
FOR
NONBUSINESS
TRANSACTIONS.—
‘‘(i) INDIVIDUALS.—In the case of an
individual, this subsection shall only apply
to transactions entered into in connection
with a trade or business or activity en-
gaged in for profit.
‘‘(ii) CHARITABLE TRANSFERS.—This
subsection shall not apply in determining
the amount allowable as a deduction under
section 170, 545(b)(2), 556(b)(2), or
642(c).
‘‘(6) ECONOMIC SUBSTANCE DOCTRINE, ETC.,
NOT AFFECTED.—The provisions of this subsection
shall not be construed as altering or supplanting any
rule of law referred to in section 6662(i)(2)(B) and
the requirements of this subsection shall be con-
strued as being in addition to any such rule of law.’’
SEC. 4. INCREASE IN SUBSTANTIAL UNDERPAYMENT PEN-
ALTY WITH RESPECT TO DISALLOWED NON-
ECONOMIC TAX ATTRIBUTES.
Section 6662 of the Internal Revenue Code of 1986
(relating to imposition of accuracy-related penalty) is
amended by adding at the end the following new sub-
section:
‘‘(i) INCREASE
IN PENALTY
IN CASE
OF DIS-
ALLOWED NONECONOMIC TAX ATTRIBUTES.—
‘‘(1) IN GENERAL.—In the case of the portion
of the underpayment to which this subsection
applies—
‘‘(A) subsection (a) shall be applied with
respect to such portion by substituting ‘40 per-
cent’ for ‘20 percent’, and
‘‘(B) subsection (d)(2)(B) and section
6664(c) shall not apply.
‘‘(2) UNDERPAYMENTS TO WHICH SUBSECTION
APPLIES.—This subsection shall apply to an under-
payment to which this section applies by reason of
paragraph (1) or (2) of subsection (b) to the extent
that such underpayment is attributable to—
‘‘(A) the disallowance of any noneconomic
tax 
attribute 
(determined 
under 
section
7701(m)), or
‘‘(B) 
the 
disallowance 
of 
any 
other
benefit—
‘‘(i) because of a lack of economic
substance or business purpose for the
transaction giving rise to the claimed ben-
efit,
‘‘(ii) because the form of the trans-
action did not reflect its substance, or
‘‘(iii) because of any other similar rule
of law.
‘‘(3) INCREASE IN PENALTY NOT TO APPLY IF
COMPLIANCE WITH DISCLOSURE REQUIREMENTS.—
Paragraph (1)(A) shall not apply if the taxpayer—
‘‘(A) discloses to the Secretary within 30
days after the closing of the transaction appro-
priate documents describing the transaction,
and
‘‘(B) files with the taxpayer’s return of tax
imposed by subtitle A—
‘‘(i) a statement verifying that such
disclosure has been made,
‘‘(ii) a detailed description of the
facts, assumptions of facts, and factual
conclusions with respect to the business or
economic purposes or objectives of the
transaction that are relied upon to support
the manner in which it is reported on the
return,
‘‘(iii) a description of the due dili-
gence performed to ascertain the accuracy
of such facts, assumptions, and factual
conclusions,
‘‘(iv)(I) a statement (signed by the
senior financial officer of the corporation
under penalty of perjury) that the facts,
assumptions, or factual conclusions relied
upon in reporting the transaction are true
and correct as of the date the return is
filed, to the best of such officer’s knowl-
edge and belief, and
‘‘(II) if the actual facts varied materi-
ally from the facts, assumptions, or factual
conclusions relied upon, a statement de-
scribing such variances,
‘‘(v) copies of any written material
provided in connection with the offer of the
transaction to the taxpayer by a third
party,
‘‘(vi) a full description of any express
or implied agreement or arrangement with
any advisor, or with any offeror, that the
fee payable to such person would be con-
tingent or subject to possible reimburse-
ment, and
‘‘(vii) a full description of any express
or implied warranty from any person with
respect to the anticipated tax results from
the transaction.’’
SEC. 5. EFFECTIVE DATE.
The amendments made by this Act shall apply to
transactions after the date of the enactment of this Act.
Æ