deficiency which allows the taxpayer an oppor-
tunity for administrative review in the Internal 
Revenue Service Office of Appeals. If such a 
letter is provided to the taxpayer, only the Com-
missioner of Internal Revenue may compromise 
all or any portion of such penalty. 
‘‘(B) APPLICABLE
RULES.—The rules of 
paragraphs (2), (3), (4), and (5) of section 
6707A(d) shall apply for purposes of subpara-
graph (A). 
‘‘(d) DEFINITIONS
OF 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). 
‘‘(e) SPECIAL RULES.— 
‘‘(1) COORDINATION
WITH
PENALTIES, ETC., 
ON OTHER UNDERSTATEMENTS.—In the case of an 
understatement (as defined in section 6662(d)(2))— 
‘‘(A) the amount of such understatement 
(determined without regard to this paragraph) 
shall be increased by the aggregate amount of 
reportable transaction understatements and 
noneconomic substance transaction understate-
ments for purposes of determining whether such
understatement is a substantial understatement 
under section 6662(d)(1), and 
‘‘(B) the addition to tax under section 
6662(a) shall apply only to the excess of the 
amount of the substantial understatement (if 
any) after the application of subparagraph (A) 
over the aggregate amount of reportable trans-
action understatements and noneconomic sub-
stance transaction understatements. 
‘‘(2) 
COORDINATION
WITH
OTHER
PEN-
ALTIES.— 
‘‘(A) APPLICATION OF FRAUD PENALTY.— 
References to an underpayment in section 6663 
shall be treated as including references to a re-
portable transaction understatement and a non-
economic substance transaction understatement. 
‘‘(B) NO DOUBLE PENALTY.—This section 
shall not apply to any portion of an understate-
ment on which a penalty is imposed under sec-
tion 6662B or 6663. 
‘‘(3) 
SPECIAL
RULE
FOR
AMENDED
RE-
TURNS.—Except as provided in regulations, in no 
event shall any tax treatment included with an 
amendment or supplement to a return of tax be 
taken into account in determining the amount of any
reportable transaction understatement or non-
economic substance transaction understatement if 
the amendment or supplement is filed after the ear-
lier of the date the taxpayer is first contacted by the 
Secretary regarding the examination of the return or 
such other date as is specified by the Secretary. 
‘‘(4) NONECONOMIC SUBSTANCE TRANSACTION 
UNDERSTATEMENT.—For purposes of this sub-
section, the term ‘noneconomic substance trans-
action understatement’ has the meaning given such 
term by section 6662B(c). 
‘‘(5) CROSS REFERENCE.— 
‘‘For reporting of section 6662A(c) penalty to the 
Securities and Exchange Commission, see section 
6707A(e).’’. 
(b) DETERMINATION
OF
OTHER
UNDERSTATE-
MENTS.—Subparagraph (A) of section 6662(d)(2) is 
amended by adding at the end the following flush sen-
tence: 
‘‘The excess under the preceding sentence shall 
be determined without regard to items to which 
section 6662A applies and without regard to 
items with respect to which a penalty is im-
posed by section 6662B.’’. 
(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 im-
posed under section 6662A with respect to any por-
tion 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 
‘‘(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 re-
spect to the tax treatment of an item only if 
such belief— 
‘‘(i) is based on the facts and law that 
exist at the time the return of tax which 
includes 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.— 
‘‘(i) IN GENERAL.—An opinion of a 
tax advisor may not be relied upon to es-
tablish 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)) 
who participates in the organization, 
management, promotion, or sale of 
the transaction or who is related 
(within the meaning of section 267(b) 
or 707(b)(1)) to any person who so 
participates, 
‘‘(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 contingent on all or part of the in-
tended tax benefits from the trans-
action being sustained, 
‘‘(IV) has an arrangement with 
respect to the transaction which pro-
vides that contractual disputes be-
tween the taxpayer and the advisor