‘‘(q) TREATMENT OF TRAVEL ON CORPORATE AIR-
CRAFT.—The rate at which an amount allowable as a de-
duction under this chapter for the use of an aircraft owned 
by the taxpayer is determined shall not exceed the rate 
at which an amount paid or included in income by an em-
ployee of such taxpayer for the personal use of such air-
craft is determined.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2005. 
SEC. 203. VALUATION OF EMPLOYEE PERSONAL USE OF 
NONCOMMERCIAL AIRCRAFT. 
(a) IN GENERAL.—For purposes of Federal income 
tax inclusion, the value of any employee personal use of 
noncommercial aircraft shall equal the excess (if any) of— 
(1) greater of— 
(A) the fair market value of such use, or 
(B) the actual cost of such use (including 
all fixed and variable costs), over 
(2) any amount paid by or on behalf of such 
employee for such use. 
(b) EFFECTIVE DATE.—Subsection (a) shall apply to 
use after the date of the enactment of this Act. 
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SEC. 204. ELIMINATION OF TAX EXPENDITURES THAT SUB-
SIDIZE 
INEFFICIENCIES 
IN 
THE 
HEALTH 
CARE SYSTEM. 
Not later than 180 days after the date of the enact-
ment of this Act, the Secretary of the Treasury shall re-
port to the Committee on Finance of the Senate and the 
Committee on Ways and Means of the House of Rep-
resentatives recommendations regarding the elimination of 
Federal tax incentives which subsidize inefficiencies in the 
health care system and if eliminated would result in Fed-
eral budget savings of not less than $10,000,000,000 an-
nually. 
SEC. 
205. 
PASS-THROUGH 
BUSINESS 
ENTITY 
TRANS-
PARENCY. 
Not later than 90 days after the date of the enact-
ment of this Act, the Secretary of the Treasury shall re-
port to the Committee on Finance of the Senate and the 
Committee on Ways and Means of the House of Rep-
resentatives regarding the implementation of additional 
reporting requirements with respect to any pass-through 
entity with the goal of the reduction of tax avoidance 
through the use of such entities, In addition, the Secretary 
shall develop procedures to share such report data with 
State revenue agencies under the disclosure requirements 
of section 6103(d) of the Internal Revenue Code of 1986. 
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SEC. 206. BROKER REPORTING OF CUSTOMER’S BASIS IN 
SECURITIES TRANSACTIONS. 
(a) IN GENERAL.—Section 6045 (relating to returns 
of brokers) is amended by adding at the end the following 
new subsection: 
‘‘(g) ADDITIONAL INFORMATION REQUIRED IN THE 
CASE OF SECURITIES TRANSACTIONS.— 
‘‘(1) IN GENERAL.—If a broker is otherwise re-
quired to make a return under subsection (a) with 
respect to any applicable security, the broker shall 
include in such return the information described in 
paragraph (2). 
‘‘(2) ADDITIONAL INFORMATION REQUIRED.— 
‘‘(A) IN GENERAL.—The information re-
quired under paragraph (1) to be shown on a 
return with respect to an applicable security of 
a customer shall include for each reported ap-
plicable security the customer’s adjusted basis 
in such security. 
‘‘(B) EXEMPTION FROM REQUIREMENT.— 
The Secretary shall issue such regulations or 
guidance as necessary concerning the applica-
tion of the requirement under subparagraph (A) 
in cases in which a broker in making a return 
does not have sufficient information to meet 
such requirement with respect to the reported 
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applicable security. Such regulations or guid-
ance may— 
‘‘(i) require such other information re-
lated to such adjusted basis as the Sec-
retary may prescribe, and 
‘‘(ii) exempt classes of cases in which 
the broker does not have sufficient infor-
mation to meet either the requirement 
under subparagraph (A) or the require-
ment under clause (i). 
‘‘(3) INFORMATION TRANSFERS.—To the extent 
provided in regulations, there shall be such ex-
changes of information between brokers as such reg-
ulations may require for purposes of enabling such 
brokers to meet the requirements of this subsection. 
‘‘(4) DEFINITIONS.—For purposes of this sub-
section, the term ‘applicable security’ means any— 
‘‘(A) security described in subparagraph 
(A) or (C) of section 475(c)(2), 
‘‘(B) interest in a regulated investment 
company (as defined in section 851), or 
‘‘(C) other financial instrument designated 
in regulations prescribed by the Secretary.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to returns the due date for which 
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(determined without regard to extensions) is after Decem-
ber 31, 2008, with respect to securities acquired after De-
cember 31, 2007. 
SEC. 207. REPEAL OF LOWER COST OR MARKET INVENTORY 
METHOD. 
(a) IN GENERAL.—Section 471 (relating to general 
rule for inventories) is amended by redesignating sub-
section (c) as subsection (d) and by inserting after sub-
section (b) the following new subsection: 
‘‘(c) PROHIBITION ON USE OF LOWER COST OR MAR-
KET METHOD.— 
‘‘(1) IN GENERAL.—For any taxable year be-
ginning after December 31, 2006, a taxpayer may 
not use any method which values inventories at cost 
or market, whichever is lower. 
‘‘(2) 3-YEAR AVERAGING FOR INCREASES IN IN-
VENTORY VALUE.—In the case of a taxpayer that 
used a method which values inventories at cost or 
market, whichever is lower, for the taxable year end-
ing with or within December 31, 2006, the begin-
ning inventory for the first taxable year beginning 
after such date shall be valued both with and with-
out the application of paragraph (1). Any change in 
the inventory amount resulting from the application 
of the preceding sentence shall be taken into account 
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ratably in each of the 3 taxable years beginning with 
the first taxable year for which the method described 
in subsection (b) is first used. 
‘‘(3) CERTAIN ADJUSTMENTS NOT TO APPLY.— 
Section 481 shall not apply with respect to any 
change in the method of accounting which is re-
quired by this subsection.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to taxable years beginning after 
December 31, 2006. 
SEC. 208. IMPOSITION OF WITHHOLDING ON CERTAIN PAY-
MENTS MADE BY GOVERNMENT ENTITIES. 
(a) IN GENERAL.—Section 3402 is amended by add-
ing at the end the following new subsection: 
‘‘(t) EXTENSION
OF WITHHOLDING
TO CERTAIN 
PAYMENTS MADE BY GOVERNMENT ENTITIES.— 
‘‘(1) GENERAL RULE.—The Government of the 
United States, every State, every political subdivi-
sion thereof, and every instrumentality of the fore-
going (including multi-State agencies) making any 
payment for goods and services which is subject to 
withholding shall deduct and withhold form such 
payment a tax in an amount equal to 3 percent of 
such payment. 
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‘‘(2) EXCEPTIONS.—Paragraph (1) shall not 
apply to any payment— 
‘‘(A) except as provided in subparagraph 
(B), which is subject to withholding under any 
other provision of this chapter or chapter 3, 
‘‘(B) which is subject to withholding under 
section 3406 and from which amounts are being 
withheld under such section, 
‘‘(C) of interest, 
‘‘(D) for real property, 
‘‘(E) to any tax-exempt entity, foreign gov-
ernment, or other entity subject to the require-
ments of paragraph (1), 
‘‘(F) made pursuant to a classified or con-
fidential 
contract 
(as 
defined 
in 
section 
6050M(e)(3)), and 
‘‘(G) made by a political subdivision of a 
State (or any instrumentality thereof) which 
makes less than $100,000,000 of such pay-
ments annually. 
‘‘(3) COORDINATION WITH OTHER SECTIONS.— 
For purposes of sections 3403 and 3404 and for 
purposes of so much of subtitle F (except section 
7205) as relates to this chapter, payments to any 
person of any payment for goods and services which 
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is subject to withholding shall be treated as if such 
payments were wages paid by an employer to an em-
ployee.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to payments made after December 
31, 2006. 
Subtitle B—Provisions Designed to 
Curtail Tax Shelters 
SEC. 211. PENALTY FOR PROMOTING ABUSIVE TAX SHEL-
TERS. 
(a) PENALTY FOR PROMOTING ABUSIVE TAX SHEL-
TERS.—Section 6700 (relating to promoting abusive tax 
shelters, etc.) is amended— 
(1) by redesignating subsections (b) and (c) as 
subsections (d) and (e), respectively, 
(2) by striking ‘‘a penalty’’ and all that follows 
through the period in the first sentence of subsection 
(a) and inserting ‘‘a penalty determined under sub-
section (b)’’, and 
(3) by inserting after subsection (a) the fol-
lowing new subsections: 
‘‘(b) AMOUNT OF PENALTY; CALCULATION OF PEN-
ALTY; LIABILITY FOR PENALTY.— 
‘‘(1) AMOUNT OF PENALTY.—The amount of 
the penalty imposed by subsection (a) shall be 100 
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percent of the gross income derived (or to be de-
rived) from such activity by the person or persons 
subject to such penalty. 
‘‘(2) CALCULATION OF PENALTY.—The penalty 
amount determined under paragraph (1) shall be 
calculated with respect to each instance of an activ-
ity described in subsection (a), each instance in 
which income was derived by the person or persons 
subject to such penalty, and each person who par-
ticipated in such an activity. 
‘‘(3) LIABILITY FOR PENALTY.—If more than 1 
person is liable under subsection (a) with respect to 
such activity, all such persons shall be jointly and 
severally liable for the penalty under such sub-
section. 
‘‘(c) PENALTY NOT DEDUCTIBLE.—The payment of 
any penalty imposed under this section or the payment 
of any amount to settle or avoid the imposition of such 
penalty shall not be considered an ordinary and necessary 
expense in carrying on a trade or business for purposes 
of this title and shall not be deductible by the person who 
is subject to such penalty or who makes such payment.’’. 
(b) CONFORMING AMENDMENT.—Section 6700(a) is 
amended by striking the last sentence. 
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(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to the activities described in para-
graphs (1) and (2) of section 6700(a) of the Internal Rev-
enue Code of 1986 and after the date of the enactment 
of this Act. 
SEC. 212. PENALTY FOR AIDING AND ABETTING THE UN-
DERSTATEMENT OF TAX LIABILITY. 
(a) IN GENERAL.—Section 6701(a) (relating to impo-
sition of penalty) is amended— 
(1) by inserting ‘‘, or tax liability reflected in,’’ 
after ‘‘the preparation or presentation of’’ in para-
graph (1), 
(2) by inserting ‘‘aid, assistance, procurement, 
or advice with respect to such’’ before ‘‘portion’’ 
both places it appears in paragraphs (2) and (3), 
and 
(3) by inserting ‘‘instance of aid, assistance, 
procurement, or advice or each such’’ before ‘‘docu-
ment’’ in the matter following paragraph (3). 
(b) AMOUNT OF PENALTY.—Subsection (b) of section 
6701 (relating to penalties for aiding and abetting under-
statement of tax liability) is amended to read as follows: 
‘‘(b) AMOUNT OF PENALTY; CALCULATION OF PEN-
ALTY; LIABILITY FOR PENALTY.— 
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‘‘(1) AMOUNT OF PENALTY.—The amount of 
the penalty imposed by subsection (a) shall be 100 
percent of the gross income derived (or to be de-
rived) from such aid, assistance, procurement, or ad-
vice provided by the person or persons subject to 
such penalty. 
‘‘(2) CALCULATION OF PENALTY.—The penalty 
amount determined under paragraph (1) shall be 
calculated with respect to each instance of aid, as-
sistance, procurement, or advice described in sub-
section (a), each instance in which income was de-
rived by the person or persons subject to such pen-
alty, and each person who made such an understate-
ment of the liability for tax. 
‘‘(3) LIABILITY FOR PENALTY.—If more than 1 
person is liable under subsection (a) with respect to 
providing such aid, assistance, procurement, or ad-
vice, all such persons shall be jointly and severally 
liable for the penalty under such subsection.’’. 
(c) PENALTY NOT DEDUCTIBLE.—Section 6701 is 
amended by adding at the end the following new sub-
section: 
‘‘(g) PENALTY NOT DEDUCTIBLE.—The payment of 
any penalty imposed under this section or the payment 
of any amount to settle or avoid the imposition of such 
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penalty shall not be considered an ordinary and necessary 
expense in carrying on a trade or business for purposes 
of this title and shall not be deductible by the person who 
is subject to such penalty or who makes such payment.’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to the activities described in sec-
tion 6701(a) of the Internal Revenue Code of 1986 after 
the date of the enactment of this Act. 
SEC. 213. INCREASE IN CRIMINAL MONETARY PENALTY 
LIMITATION FOR THE UNDERPAYMENT OR 
OVERPAYMENT OF TAX DUE TO FRAUD. 
(a) IN GENERAL.—Section 7206 (relating to fraud 
and false statements) is amended— 
(1) by striking ‘‘Any person who—’’ and insert-
ing ‘‘(a) IN GENERAL.—Any person who—’’, and 
(2) by adding at the end the following new sub-
section: 
‘‘(b) INCREASE IN MONETARY LIMITATION FOR UN-
DERPAYMENT
OR
OVERPAYMENT
OF
TAX
DUE
TO 
FRAUD.—If any portion of any underpayment (as defined 
in section 6664(a)) or overpayment (as defined in section 
6401(a)) of tax required to be shown on a return is attrib-
utable to fraudulent action described in subsection (a), the 
applicable dollar amount under subsection (a) shall in no 
event be less than an amount equal to such portion. A 
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rule similar to the rule under section 6663(b) shall apply 
for purposes of determining the portion so attributable.’’. 
(b) INCREASE IN PENALTIES.— 
(1) ATTEMPT TO EVADE OR DEFEAT TAX.— 
Section 7201 is amended— 
(A) by striking ‘‘$100,000’’ and inserting 
‘‘$500,000’’, 
(B) by striking ‘‘$500,000’’ and inserting 
‘‘$1,000,000’’, and 
(C) by striking ‘‘5 years’’ and inserting 
‘‘10 years’’. 
(2) WILLFUL FAILURE TO FILE RETURN, SUP-
PLY INFORMATION, OR PAY TAX.—Section 7203 is 
amended— 
(A) in the first sentence— 
(i) by striking ‘‘Any person’’ and in-
serting the following: 
‘‘(a) IN GENERAL.—Any person’’, and 
(ii) by striking ‘‘$25,000’’ and insert-
ing ‘‘$50,000’’, 
(B) in the third sentence, by striking ‘‘sec-
tion’’ and inserting ‘‘subsection’’, and 
(C) by adding at the end the following new 
subsection: 
‘‘(b) AGGRAVATED FAILURE TO FILE.— 
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‘‘(1) IN GENERAL.—In the case of any failure 
described in paragraph (2), the first sentence of sub-
section (a) shall be applied by substituting— 
‘‘(A) ‘felony’ for ‘misdemeanor’ 
‘‘(B) ‘$500,000 ($1,000,000’ for ‘$25,000 
($100,000’, and 
‘‘(C) ‘10 years’ for ‘1 year’. 
‘‘(2) FAILURE DESCRIBED.—A failure described 
in this paragraph is a failure to make a return de-
scribed in subsection (a) for a period of 3 or more 
consecutive taxable years.’’. 
(3) FRAUD AND FALSE STATEMENTS.—Section 
7206(a) (as redesignated by subsection (a)) is 
amended— 
(A) by striking ‘‘$100,000’’ and inserting 
‘‘$500,000’’, 
(B) by striking ‘‘$500,000’’ and inserting 
‘‘$1,000,000’’, and 
(C) by striking ‘‘3 years’’ and inserting ‘‘5 
years’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to actions, and failures to act, oc-
curring after the date of the enactment of this Act. 
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Subtitle C—Economic Substance 
Doctrine 
SEC. 221. CLARIFICATION OF ECONOMIC SUBSTANCE DOC-
TRINE. 
(a) IN GENERAL.—Section 7701 is amended by re-
designating subsection (o) as subsection (p) and by insert-
ing after subsection (n) the following new subsection: 
‘‘(o) CLARIFICATION
OF
ECONOMIC
SUBSTANCE 
DOCTRINE; ETC.— 
‘‘(1) GENERAL RULES.— 
‘‘(A) IN GENERAL.—In any case in which 
a court determines that the economic substance 
doctrine is relevant for purposes of this title to 
a transaction (or series of transactions), such 
transaction (or series of transactions) shall have 
economic substance only if the requirements of 
this paragraph are met. 
‘‘(B) DEFINITION
OF
ECONOMIC
SUB-
STANCE.—For purposes of subparagraph (A)— 
‘‘(i) IN GENERAL.—A transaction has 
economic substance only if— 
‘‘(I) the transaction changes in a 
meaningful way (apart from Federal 
tax effects) the taxpayer’s economic 
position, and 
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‘‘(II) the taxpayer has a substan-
tial nontax purpose for entering into 
such transaction and the transaction 
is a reasonable means of accom-
plishing such purpose. 
In applying subclause (II), a purpose of 
achieving a financial accounting benefit 
shall not be taken into account in deter-
mining whether a transaction has a sub-
stantial nontax purpose if the origin of 
such financial accounting benefit is a re-
duction of income tax. 
‘‘(ii) SPECIAL
RULE
WHERE
TAX-
PAYER RELIES ON PROFIT POTENTIAL.—A 
transaction shall not be treated as having 
economic substance by reason of having a 
potential for profit unless— 
‘‘(I) the present value of the rea-
sonably expected pre-tax profit from 
the transaction is substantial in rela-
tion to the present value of the ex-
pected net tax benefits that would be 
allowed if the transaction were re-
spected, and 
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‘‘(II) the reasonably expected 
pre-tax profit from the transaction ex-
ceeds a risk-free rate of return. 
‘‘(C) TREATMENT OF FEES AND FOREIGN 
TAXES.—Fees and other transaction expenses 
and foreign taxes shall be taken into account as 
expenses in determining pre-tax profit under 
subparagraph (B)(ii). 
‘‘(2) SPECIAL RULES FOR TRANSACTIONS WITH 
TAX-INDIFFERENT PARTIES.— 
‘‘(A) SPECIAL
RULES
FOR
FINANCING 
TRANSACTIONS.—The form of a transaction 
which is in substance the borrowing of money 
or the acquisition of financial capital directly or 
indirectly from a tax-indifferent party shall not 
be respected if the present value of the deduc-
tions to be claimed with respect to the trans-
action is substantially in excess of the present 
value of the anticipated economic returns of the 
person lending the money or providing the fi-
nancial capital. A public offering shall be treat-
ed as a borrowing, or an acquisition of financial 
capital, from a tax-indifferent party if it is rea-
sonably expected that at least 50 percent of the 
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offering will be placed with tax-indifferent par-
ties. 
‘‘(B) ARTIFICIAL INCOME SHIFTING AND 
BASIS
ADJUSTMENTS.—The form of a trans-
action with a tax-indifferent party shall not be 
respected if— 
‘‘(i) it results in an allocation of in-
come or gain to the tax-indifferent party in 
excess of such party’s economic income or 
gain, or 
‘‘(ii) it results in a basis adjustment 
or shifting of basis on account of over-
stating the income or gain of the tax-indif-
ferent party. 
‘‘(3) DEFINITIONS AND SPECIAL RULES.—For 
purposes of this subsection— 
‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.— 
The term ‘economic substance doctrine’ means 
the common law doctrine under which tax bene-
fits under subtitle A with respect to a trans-
action are not allowable if the transaction does 
not have economic substance or lacks a business 
purpose. 
‘‘(B) 
TAX-INDIFFERENT
PARTY.—The 
term ‘tax-indifferent party’ means any person 
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