I 
108TH CONGRESS 
1ST SESSION H. R. 1661
To provide balanced taxpayer protections in tax administrations, including 
elimination of abusive tax strategies, simplification of the earned income 
tax credit, and taxpayer protections. 
IN THE HOUSE OF REPRESENTATIVES 
APRIL 8, 2003
Mr. RANGEL (for himself, Mr. STARK, Mr. MATSUI, Mr. LEVIN, Mr. CARDIN, 
Mr. MCDERMOTT, Mr. KLECZKA, Mr. LEWIS of Georgia, Mr. NEAL of 
Massachusetts, Mr. MCNULTY, Mr. JEFFERSON, Mr. BECERRA, Mr. 
DOGGETT, Mr. SANDLIN, and Mrs. JONES of Ohio) introduced the fol-
lowing bill; which was referred to the Committee on Ways and Means 
A BILL 
To provide balanced taxpayer protections in tax administra-
tions, including elimination of abusive tax strategies, sim-
plification of the earned income tax credit, and taxpayer 
protections.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; REFERENCE; TABLE OF CON-
TENTS. 
(a) SHORT TITLE.—This Act may be cited as the 
‘‘Taxpayer and Fairness Protection Act of 2003’’.
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
ment or repeal is expressed in terms of an amendment 
to, or repeal of, a section or other provision, the reference 
shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986. 
(c) TABLE OF CONTENTS.—The table of contents for 
this Act is as follows:
Sec. 1. Short title; reference; table of contents. 
TITLE I—ELIMINATION OF ABUSIVE TAX STRATEGIES 
Sec. 101. Findings and purpose. 
Subtitle A—Tax Shelters 
PART I—PROVISIONS DESIGNED TO CURTAIL TAX SHELTERS 
Sec. 111. Clarification of economic substance doctrine. 
Sec. 112. Penalty for failing to disclose reportable transaction. 
Sec. 113. Accuracy-related penalty for listed transactions and other reportable 
transactions having a significant tax avoidance purpose. 
Sec. 114. Penalty for understatements attributable to transactions lacking eco-
nomic substance, etc. 
Sec. 115. Modifications of substantial understatement penalty for nonreportable 
transactions. 
Sec. 116. Tax shelter exception to confidentiality privileges relating to taxpayer 
communications. 
Sec. 117. Disclosure of reportable transactions. 
Sec. 118. Modifications to penalty for failure to register tax shelters. 
Sec. 119. Modification of penalty for failure to maintain lists of investors. 
Sec. 120. Modification of actions to enjoin certain conduct related to tax shel-
ters and reportable transactions. 
Sec. 121. Understatement of taxpayer’s liability by income tax return preparer. 
Sec. 122. Penalty on failure to report interests in foreign financial accounts. 
Sec. 123. Frivolous tax submissions. 
Sec. 124. Regulation of individuals practicing before the Department of Treas-
ury. 
Sec. 125. Penalty on promoters of tax shelters. 
Sec. 126. Statute of limitations for taxable years for which listed transactions 
not reported. 
Sec. 127. Denial of deduction for interest on underpayments attributable to 
nondisclosed reportable and noneconomic substance trans-
actions. 
PART II—OTHER PROVISIONS
Sec. 131. Limitation on transfer or importation of built-in losses. 
Sec. 132. Disallowance of certain partnership loss transfers. 
Sec. 133. No reduction of basis under section 734 in stock held by partnership 
in corporate partner. 
Sec. 134. Repeal of special rules for FASITS. 
Sec. 135. Expanded disallowance of deduction for interest on convertible debt. 
Sec. 136. Expanded authority to disallow tax benefits under section 269. 
Sec. 137. Modifications of certain rules relating to controlled foreign corpora-
tions. 
Sec. 138. Basis for determining loss always reduced by nontaxed portion of 
dividends. 
Sec. 139. Affirmation of consolidated return regulation authority. 
Subtitle B—Prevention of corporate expatriation to avoid United States 
income tax 
Sec. 151. Prevention of corporate expatriation to avoid United States income 
tax. 
TITLE II—SIMPLIFICATION OF EARNED INCOME TAX CREDIT 
Sec. 201. Simplification of earned income tax credit. 
TITLE III—TAXPAYER PROTECTIONS AND IRS ACCOUNTABILITY 
Subtitle A—Penalty and Interest Reforms 
Sec. 301. Failure to pay estimated tax penalty converted to interest charge on 
accumulated unpaid balance. 
Sec. 302. Abatement of interest. 
Sec. 303. Deposits made to suspend running of interest on potential underpay-
ments. 
Sec. 304. Expansion of interest netting for individuals. 
Sec. 305. Waiver of certain penalties for first-time unintentional minor errors. 
Sec. 306. Frivolous tax submissions. 
Sec. 307. Clarification of application of Federal tax deposit penalty. 
Subtitle B—Fairness of Collection Procedures 
Sec. 311. Partial payment of tax liability in installment agreements. 
Sec. 312. Extension of time for return of property. 
Sec. 313. Individuals held harmless on wrongful levy, etc., on individual retire-
ment plan. 
Sec. 314. Seven-day threshold on tolling of statute of limitations during tax re-
view. 
Sec. 315. Study of liens and levies. 
Subtitle C—Tax Administration Reforms 
Sec. 331. Revisions relating to termination of employment of Internal Revenue 
Service employees for misconduct. 
Sec. 332. Confirmation of authority of tax court to apply doctrine of equitable 
recoupment. 
Sec. 333. Jurisdiction of Tax Court over collection due process cases. 
Sec. 334. Office of Chief Counsel review of offers in compromise. 
Sec. 335. Access of National Taxpayer Advocate to independent legal counsel. 
Sec. 336. Payment of motor fuel excise tax refunds by direct deposit. 
Sec. 337. Family business tax simplification.
Sec. 338. Suspension of tax-exempt status of terrorist organizations. 
Sec. 339. Tax refund anticipation loans. 
Sec. 340. Fairness in tax audit coverage. 
Subtitle D—Confidentiality and Disclosure 
Sec. 341. Collection activities with respect to joint return disclosable to either 
spouse based on oral request. 
Sec. 342. Taxpayer representatives not subject to examination on sole basis of 
representation of taxpayers. 
Sec. 343. Disclosure in judicial or administrative tax proceedings of return and 
return information of persons who are not party to such pro-
ceedings. 
Sec. 344. Prohibition of disclosure of taxpayer identification information with 
respect to disclosure of accepted offers-in-compromise. 
Sec. 345. Compliance by contractors with confidentiality safeguards. 
Sec. 346. Higher standards for requests for and consents to disclosure. 
Sec. 347. Notice to taxpayer concerning administrative determination of brows-
ing; annual report. 
Sec. 348. Expanded disclosure in emergency circumstances. 
Sec. 349. Disclosure of taxpayer identity for tax refund purposes. 
Sec. 350. Disclosure to State officials of proposed actions related to section 
501(c)(3) organizations. 
Sec. 351. Confidentiality of taxpayer communications with the Office of the 
Taxpayer Advocate. 
Subtitle E—Miscellaneous 
Sec. 361. Clarification of definition of church tax inquiry. 
Sec. 362. Expansion of declaratory judgment remedy to tax-exempt organiza-
tions. 
Sec. 363. Employee misconduct report to include summary of complaints by 
category. 
Sec. 364. Annual report on awards of costs and certain fees in administrative 
and court proceedings. 
Sec. 365. Annual report on abatement of penalties. 
Sec. 366. Better means of communicating with taxpayers. 
Sec. 367. Explanation of statute of limitations and consequences of failure to 
file. 
Sec. 368. Amendment to Treasury auction reforms. 
Sec. 369. Enrolled agents. 
Sec. 370. Financial management service fees. 
Sec. 371. Extension of Internal Revenue Service user fees. 
Subtitle F—Low-Income Taxpayer Clinics 
Sec. 381. Low-income taxpayer clinics.
Sec. 382. Matching grants to low income return preparation clinics. 
Subtitle G—Federal-State Unemployment Assistance Agreements 
Sec. 391. Applicability of certain Federal-State Agreements relating to unem-
ployment assistance.
TITLE I—ELIMINATION OF 
ABUSIVE TAX STRATEGIES
SEC. 101. 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 voluntary compliance with the Internal 
Revenue Code of 1986. 
(b) PURPOSE.—The purpose of this title 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. 
Subtitle A—Tax Shelters
Part I—Provisions Designed to 
Curtail Tax Shelters 
SEC. 111. CLARIFICATION OF ECONOMIC SUBSTANCE DOC-
TRINE. 
(a) IN GENERAL.—Section 7701 is amended by re-
designating subsection (m) as subsection (n) and by in-
serting after subsection (l) the following new subsection:
‘‘(m) CLARIFICATION
OF ECONOMIC SUBSTANCE 
DOCTRINE; ETC.—
‘‘(1) GENERAL RULES.—
‘‘(A) IN GENERAL.—In applying the eco-
nomic substance doctrine, the determination of 
whether a transaction has economic substance 
shall be made as provided in this paragraph. 
‘‘(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 and, if there is any Federal 
tax effects, also apart from any for-
eign, State, or local tax effects) the 
taxpayer’s economic position, and 
‘‘(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. 
‘‘(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 
‘‘(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 
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 
or entity not subject to tax imposed by subtitle 
A. A person shall be treated as a tax-indifferent 
party with respect to a transaction if the items 
taken into account with respect to the trans-
action have no substantial impact on such per-
son’s liability under subtitle A. 
‘‘(C) SUBSTANTIAL NONTAX PURPOSE.—In 
applying subclause (II) of paragraph (1)(B)(i),
a purpose of achieving a financial accounting 
benefit shall not be taken into account in deter-
mining whether a transaction has a substantial 
nontax purpose if the origin of such financial 
accounting benefit is a reduction of income tax. 
‘‘(D) EXCEPTION FOR PERSONAL TRANS-
ACTIONS OF INDIVIDUALS.—In the case of an 
individual, this subsection shall apply only to
transactions entered into in connection with a 
trade or business or an activity engaged in for 
the production of income. 
‘‘(E) TREATMENT OF LESSORS.—In apply-
ing subclause (I) of paragraph (1)(B)(ii) to the 
lessor of tangible property subject to a lease, 
the expected net tax benefits shall not include 
the benefits of depreciation, or any tax credit, 
with respect to the leased property and sub-
clause (II) of paragraph (1)(B)(ii) shall be dis-
regarded in determining whether any of such 
benefits are allowable.
‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF-
FECTED.—Except as specifically provided in this 
subsection, the provisions of this subsection shall not 
be construed as altering or supplanting any other 
rule of law, and the requirements of this subsection 
shall be construed as being in addition to any such 
other rule of law. 
‘‘(5) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section. Such regulations may include exemptions 
from the application of this subsection.’’
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions entered into after 
February 13, 2003. 
SEC. 112. PENALTY FOR FAILING TO DISCLOSE REPORT-
ABLE TRANSACTION. 
(a) IN GENERAL.—Part I of subchapter B of chapter 
68 (relating to assessable penalties) is amended by insert-
ing after section 6707 the following new section: 
‘‘SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORT-
ABLE TRANSACTION INFORMATION WITH RE-
TURN OR STATEMENT. 
‘‘(a) IMPOSITION
OF PENALTY.—Any person who 
fails to include on any return or statement any informa-
tion with respect to a reportable transaction which is re-
quired under section 6011 to be included with such return 
or statement shall pay a penalty in the amount determined 
under subsection (b). 
‘‘(b) AMOUNT OF PENALTY.—
‘‘(1) IN GENERAL.—Except as provided in para-
graphs (2) and (3), the amount of the penalty under 
subsection (a) shall be $50,000. 
‘‘(2) LISTED
TRANSACTION.—The amount of 
the penalty under subsection (a) with respect to a 
listed transaction shall be $100,000.
‘‘(3) INCREASE IN PENALTY FOR LARGE ENTI-
TIES AND HIGH NET WORTH INDIVIDUALS.—
‘‘(A) IN GENERAL.—In the case of a fail-
ure under subsection (a) by—
‘‘(i) a large entity, or 
‘‘(ii) a high net worth individual, 
the penalty under paragraph (1) or (2) shall be 
twice the amount determined without regard to 
this paragraph. 
‘‘(B) LARGE
ENTITY.—For purposes of 
subparagraph (A), the term ‘large entity’ 
means, with respect to any taxable year, a per-
son (other than a natural person) with gross re-
ceipts in excess of $10,000,000 for the taxable 
year in which the reportable transaction occurs 
or the preceding taxable year. Rules similar to 
the rules of paragraph (2) and subparagraphs 
(B), (C), and (D) of paragraph (3) of section 
448(c) shall apply for purposes of this subpara-
graph. 
‘‘(C) HIGH NET WORTH INDIVIDUAL.—For 
purposes of subparagraph (A), the term ‘high 
net worth individual’ means, with respect to a 
reportable transaction, a natural person whose
net worth exceeds $2,000,000 immediately be-
fore the transaction. 
‘‘(c) DEFINITIONS.—For purposes of this section—
‘‘(1) REPORTABLE
TRANSACTION.—The term 
‘reportable transaction’ means any transaction with 
respect to which information is required to be in-
cluded with a return or statement because, as deter-
mined under regulations prescribed under section 
6011, such transaction is of a type which the Sec-
retary determines as having a potential for tax 
avoidance or evasion. 
‘‘(2) LISTED
TRANSACTION.—Except as pro-
vided in regulations, 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 avoidance trans-
action for purposes of section 6011. 
‘‘(d) AUTHORITY TO RESCIND PENALTY.—
‘‘(1) IN GENERAL.—The Commissioner of In-
ternal 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,
‘‘(B) the person on whom the penalty is 
imposed has a history of complying with the re-
quirements of this title, 
‘‘(C) it is shown that the violation is due 
to an unintentional mistake of fact; 
‘‘(D) imposing the penalty would be 
against equity and good conscience, and 
‘‘(E) rescinding the penalty would promote 
compliance with the requirements of this title 
and effective tax administration. 
‘‘(2) DISCRETION.—The exercise of authority 
under paragraph (1) shall be at the sole discretion 
of the Commissioner and may be delegated only to 
the head of the Office of Tax Shelter Analysis. The 
Commissioner, in the Commissioner’s sole discretion, 
may establish a procedure to determine if a penalty 
should be referred to the Commissioner or the head 
of such Office for a determination under paragraph 
(1). 
‘‘(3) NO APPEAL.—Notwithstanding any other 
provision of law, any determination under this sub-
section may not be reviewed in any administrative or 
judicial proceeding. 
‘‘(4) 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 
Shelter Analysis with respect to the determination, 
including—
‘‘(A) the facts and circumstances of the 
transaction, 
‘‘(B) the reasons for the rescission, and 
‘‘(C) the amount of the penalty rescinded. 
‘‘(5) REPORT.—The Commissioner shall each 
year report to the Committee on Ways and Means 
of the House of Representatives and the Committee 
on Finance of the Senate—
‘‘(A) a summary of the total number and 
aggregate amount of penalties imposed, and re-
scinded, under this section, and
‘‘(B) a description of each penalty re-
scinded under this subsection and the reasons 
therefor. 
‘‘(e) PENALTY REPORTED TO SEC.—In the case of 
a person—
‘‘(1) which is required to file periodic reports 
under section 13 or 15(d) of the Securities Ex-
change Act of 1934 or is required to be consolidated 
with another person for purposes of such reports, 
and
‘‘(2) which— 
‘‘(A) is required to pay a penalty under 
this section with respect to a listed transaction, 
‘‘(B) is required to pay a penalty under 
section 6662A with respect to any reportable 
transaction at a rate prescribed under section 
6662A(c), or 
‘‘(C) is required to pay a penalty under 
section 6662B with respect to any noneconomic 
substance transaction, 
the requirement to pay such penalty shall be disclosed in 
such reports filed by such person for such periods as the 
Secretary shall specify. Failure to make a disclosure in 
accordance with the preceding sentence shall be treated 
as a failure to which the penalty under subsection (b)(2) 
applies. 
‘‘(f) COORDINATION WITH OTHER PENALTIES.—The 
penalty imposed by this section is in addition to any pen-
alty imposed under this title.’’
(b) CONFORMING AMENDMENT.—The table of sec-
tions for part I of subchapter B of chapter 68 is amended 
by inserting after the item relating to section 6707 the 
following:
‘‘Sec. 6707A. Penalty for failure to include reportable transaction 
information with return or statement.’’
(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.
SEC. 113. ACCURACY-RELATED PENALTY FOR LISTED 
TRANSACTIONS AND OTHER REPORTABLE 
TRANSACTIONS HAVING A SIGNIFICANT TAX 
AVOIDANCE PURPOSE. 
(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 PEN-
ALTY 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 percent 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 difference between the proper tax treat-
ment of an item to which this section ap-
plies and 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 
taxpayer 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 pur-
pose of such transaction is the avoidance or 
evasion of Federal income tax. 
‘‘(c) HIGHER PENALTY FOR NONDISCLOSED LISTED 
AND OTHER AVOIDANCE TRANSACTIONS.—
‘‘(1) IN GENERAL.—Subsection (a) shall be ap-
plied by substituting ‘30 percent’ for ‘20 percent’ 
with respect to the portion of any reportable trans-
action understatement with respect to which the re-
quirement of section 6664(d)(2)(A) is not met. 
‘‘(2) RULES APPLICABLE TO COMPROMISE OF 
PENALTY.—
‘‘(A) IN
GENERAL.—If the 1st letter of 
proposed deficiency which allows the taxpayer 
an opportunity for administrative review in the 
Internal Revenue Service Office of Appeals has 
been sent with respect to a penalty to which 
paragraph (1) applies, only the Commissioner 
of Internal Revenue may compromise all or any 
portion of such penalty. 
‘‘(B) APPLICABLE
RULES.—The rules of 
paragraphs (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 under-
statement 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, or 
‘‘(IV) as determined under regu-
lations prescribed by the Secretary, 
has a continuing 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 
factual or legal assumptions (includ-
ing 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 AMENDMENT.—The heading 
for subsection (c) of section 6664 is amended by in-
serting ‘‘FOR
UNDERPAYMENTS’’ after ‘‘EXCEP-
TION’’. 
(d) CONFORMING AMENDMENTS.—
(1) Subparagraph (C) of section 461(i)(3) is 
amended by striking ‘‘section 6662(d)(2)(C)(iii)’’ 
and inserting ‘‘section 1274(b)(3)(C)’’. 
(2) Paragraph (3) of section 1274(b) is amend-
ed—
(A) by striking ‘‘(as defined in section 
6662(d)(2)(C)(iii))’’ in subparagraph (B)(i), 
and 
(B) by adding at the end the following new 
subparagraph:
‘‘(C) TAX SHELTER.—For purposes of sub-
paragraph (B), the term ‘tax shelter’ means—
‘‘(i) a partnership or other entity, 
‘‘(ii) any investment plan or arrange-
ment, or 
‘‘(iii) any other plan or arrangement, 
if a significant purpose of such partnership, en-
tity, plan, or arrangement is the avoidance or 
evasion of Federal income tax.’’
(3) Section 6662(d)(2) is amended by striking 
subparagraphs (C) and (D). 
(4) Section 6664(c)(1) is amended by striking 
‘‘this part’’ and inserting ‘‘section 6662 or 6663’’. 
(5) Subsection (b) of section 7525 is amended 
by striking ‘‘section 6662(d)(2)(C)(iii)’’ and insert-
ing ‘‘section 1274(b)(3)(C)’’. 
(6)(A) The heading for section 6662 is amend-
ed to read as follows: 
‘‘SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY 
ON UNDERPAYMENTS.’’
(B) The table of sections for part II of sub-
chapter A of chapter 68 is amended by striking the 
item relating to section 6662 and inserting the fol-
lowing new items:
‘‘Sec. 6662. Imposition of accuracy-related penalty on underpay-
ments.
‘‘Sec. 6662A. Imposition of accuracy-related penalty on under-
statements with respect to reportable transactions.’’
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years ending after the 
date of the enactment of this Act. 
SEC. 114. PENALTY FOR UNDERSTATEMENTS ATTRIB-
UTABLE TO TRANSACTIONS LACKING ECO-
NOMIC SUBSTANCE, ETC. 
(a) IN GENERAL.—Subchapter A of chapter 68 is 
amended by inserting after section 6662A the following 
new section: 
‘‘SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIB-
UTABLE TO TRANSACTIONS LACKING ECO-
NOMIC SUBSTANCE, ETC. 
‘‘(a) IMPOSITION OF PENALTY.—If a taxpayer has an 
noneconomic substance transaction understatement for 
any taxable year, there shall be added to the tax an 
amount equal to 40 percent of the amount of such under-
statement. 
‘‘(b) REDUCTION
OF PENALTY
FOR DISCLOSED 
TRANSACTIONS.—Subsection (a) shall be applied by sub-
stituting ‘20 percent’ for ‘40 percent’ with respect to the 
portion of any noneconomic substance transaction under-
statement with respect to which the relevant facts affect-
ing the tax treatment of the item are adequately disclosed 
in the return or a statement attached to the return.
‘‘(c) NONECONOMIC SUBSTANCE TRANSACTION UN-
DERSTATEMENT.—For purposes of this section—
‘‘(1) IN
GENERAL.—The term ‘noneconomic 
substance transaction understatement’ means any 
amount which would be an understatement under 
section 6662A(b)(1) if section 6662A were applied 
by taking into account items attributable to non-
economic substance transactions rather than items 
to which section 6662A would apply without regard 
to this paragraph. 
‘‘(2) 
NONECONOMIC
SUBSTANCE
TRANS-
ACTION.—The term ‘noneconomic substance trans-
action’ means any transaction if—
‘‘(A) there is a lack of economic substance 
(within the meaning of section 7701(m)(1)) for 
the transaction giving rise to the claimed tax 
benefit or the transaction was not respected 
under section 7701(m)(2), or 
‘‘(B) the transaction fails to meet the re-
quirements of any similar rule of law. 
‘‘(d) RULES APPLICABLE TO COMPROMISE OF PEN-
ALTY.—
‘‘(1) IN GENERAL.—If the 1st letter of pro-
posed deficiency which allows the taxpayer an oppor-
tunity for administrative review in the Internal Rev-
enue Service Office of Appeals has been sent with 
respect to a penalty to which this section applies, 
only the Commissioner of Internal Revenue may 
compromise all or any portion of such penalty. 
‘‘(2) APPLICABLE RULES.—The rules of para-
graphs (3), (4), and (5) of section 6707A(d) shall 
apply for purposes of paragraph (1). 
‘‘(e) COORDINATION WITH OTHER PENALTIES.—Ex-
cept as otherwise provided in this part, the penalty im-
posed by this section shall be in addition to any other pen-
alty imposed by this title. 
‘‘(f) CROSS REFERENCES.—
‘‘(1) For coordination of penalty with understate-
ments under section 6662 and other special rules, 
see section 6662A(e). 
‘‘(2) For reporting of penalty imposed under this 
section to the Securities and Exchange Commission, 
see section 6707A(e).’’
(b) CLERICAL AMENDMENT.—The table of sections 
for part II of subchapter A of chapter 68 is amended by 
inserting after the item relating to section 6662A the fol-
lowing new item:
‘‘Sec. 6662B. Penalty for understatements attributable to trans-
actions lacking economic substance, etc.’’
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions entered into after 
February 13, 2003.
SEC. 115. 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
CORPORA-
TIONS.—In the case of a corporation other than 
an S corporation or a personal holding company 
(as defined in section 542), there is a substan-
tial understatement of income tax for any tax-
able year if the amount of the understatement 
for the taxable year exceeds the lesser of—
‘‘(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) REDUCTION FOR UNDERSTATEMENT OF TAX-
PAYER DUE TO POSITION OF TAXPAYER OR DISCLOSED 
ITEM.—
(1) IN
GENERAL.—Section 6662(d)(2)(B)(i) 
(relating to substantial authority) is amended to 
read as follows: 
‘‘(i) the tax treatment of any item by 
the taxpayer if the taxpayer had reason-
able belief that the tax treatment was more 
likely than not the proper treatment, or’’. 
(2) 
CONFORMING
AMENDMENT.—Section 
6662(d) is amended by adding at the end the fol-
lowing new paragraph: 
‘‘(3) SECRETARIAL LIST.—For purposes of this 
subsection, 
section 
6664(d)(2), 
and 
section 
6694(a)(1), the Secretary may prescribe a list of po-
sitions for which the Secretary believes there is not 
substantial authority or there is no reasonable belief 
that the tax treatment is more likely than not the
proper tax treatment. Such list (and any revisions 
thereof) shall be published in the Federal Register 
or the Internal Revenue Bulletin.’’
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
the date of the enactment of this Act. 
SEC. 116. TAX SHELTER EXCEPTION TO CONFIDENTIALITY 
PRIVILEGES RELATING TO TAXPAYER COM-
MUNICATIONS. 
(a) IN GENERAL.—Section 7525(b) (relating to sec-
tion 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-
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 1274(b)(3)(C)).’’
(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. 117. 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,
‘‘(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 
advisor’ means any person—
‘‘(i) who provides any material aid, 
assistance, or advice with respect to orga-
nizing, promoting, selling, implementing, 
or carrying out any reportable transaction, 
and 
‘‘(ii) who directly or indirectly derives 
gross income in excess of the threshold 
amount for such aid, assistance, or advice. 
‘‘(B) THRESHOLD AMOUNT.—For purposes 
of subparagraph (A), the threshold amount is—
‘‘(i) $50,000 in the case of a report-
able transaction substantially all of the tax 
benefits from which are provided to nat-
ural persons, and 
‘‘(ii) $250,000 in any other case.
‘‘(2) REPORTABLE
TRANSACTION.—The term 
‘reportable transaction’ has the meaning given to 
such term by section 6707A(c). 
‘‘(c) REGULATIONS.—The Secretary may prescribe 
regulations 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 re-
quired 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)(A) So much of section 6112 as precedes 
subsection (c) thereof is amended to read as follows: 
‘‘SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANS-
ACTIONS MUST KEEP LISTS OF ADVISEES. 
‘‘(a) IN GENERAL.—Each material advisor (as de-
fined in section 6111) with respect to any reportable 
transaction (as defined in section 6707A(c)) shall main-
tain, in such manner as the Secretary may by regulations 
prescribe, a list—
‘‘(1) identifying each person with respect to 
whom such advisor acted as such a material advisor 
with respect to such transaction, and 
‘‘(2) containing such other information as the 
Secretary may by regulations require. 
This section shall apply without regard to whether a mate-
rial advisor is required to file a return under section 6111 
with respect to such transaction.’’
(B) Section 6112 is amended by redesignating 
subsection (c) as subsection (b).
(C) Section 6112(b), as redesignated by sub-
paragraph (B), is amended—
(i) by inserting ‘‘written’’ before ‘‘request’’ 
in paragraph (1)(A), and 
(ii) by striking ‘‘shall prescribe’’ in para-
graph (2) and inserting ‘‘may prescribe’’. 
(D) The item relating to section 6112 in the 
table of sections for subchapter B of chapter 61 is 
amended to read as follows:
‘‘Sec. 6112. Material advisors of reportable transactions must 
keep lists of advisees.’’
(3)(A) The heading for section 6708 is amend-
ed 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 chap-
ter 68 is amended to read as follows:
‘‘Sec. 6708. Failure to maintain lists of advisees with respect to 
reportable transactions.’’
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions with respect to 
which material aid, assistance, or advice referred to in sec-
tion 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. 
SEC. 118. MODIFICATIONS TO PENALTY FOR FAILURE TO 
REGISTER TAX SHELTERS. 
(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 
reportable 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. 
‘‘(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 de-
rived by such person with respect to aid, assist-
ance, or advice which is provided with respect 
to the reportable transaction before the date the 
return including the transaction 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 
section 6707A(d) (relating to authority of Commissioner
to rescind penalty) shall apply to any penalty imposed 
under this section. 
‘‘(d) REPORTABLE AND LISTED TRANSACTIONS.—
The terms ‘reportable transaction’ and ‘listed transaction’ 
have the respective meanings given to such terms by sec-
tion 6707A(c).’’. 
(b) CLERICAL AMENDMENT.—The item relating to 
section 6707 in the table of sections for part I of sub-
chapter B of chapter 68 is amended by striking ‘‘tax shel-
ters’’ and inserting ‘‘reportable transactions’’. 
(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. 119. 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)(1)(A) within 20 business days after the 
date of the Secretary’s request, such person shall
pay a penalty of $10,000 for each day of such fail-
ure after such 20th day. 
‘‘(2) REASONABLE
CAUSE
EXCEPTION.—No 
penalty shall be imposed by paragraph (1) with re-
spect to the failure on any day if such failure is due 
to reasonable 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. 120. 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 amend-
ed by redesignating subsection (c) as subsection (d) and 
by striking subsections (a) and (b) and inserting the fol-
lowing 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 spec-
ified conduct. The court may exercise its jurisdiction over
such action (as provided in section 7402(a)) separate and 
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 speci-
fied 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 
section, the term ‘specified conduct’ means any action, or 
failure 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 67 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 
reportable transactions.’’
(c) EFFECTIVE DATE.—The amendment made by 
this section shall take effect on the day after the date of 
the enactment of this Act.
SEC. 121. UNDERSTATEMENT OF TAXPAYER’S LIABILITY BY 
INCOME TAX RETURN PREPARER. 
(a) STANDARDS CONFORMED TO TAXPAYER STAND-
ARDS.—Section 6694(a) (relating to understatements due 
to unrealistic positions) is amended—
(1) by striking ‘‘realistic possibility of being 
sustained on its merits’’ in paragraph (1) and in-
serting ‘‘reasonable belief that the tax treatment in 
such position was more likely than not the proper 
treatment’’, 
(2) by striking ‘‘or was frivolous’’ in paragraph 
(3) and inserting ‘‘or there was no reasonable basis 
for the tax treatment of such position’’, and 
(3) by striking ‘‘UNREALISTIC’’ in the heading 
and inserting ‘‘IMPROPER’’. 
(b) AMOUNT OF PENALTY.—Section 6694 is amend-
ed—
(1) by striking ‘‘$250’’ in subsection (a) and in-
serting ‘‘$1,000’’, and
(2) by striking ‘‘$1,000’’ in subsection (b) and 
inserting ‘‘$5,000’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to documents prepared after the 
date of the enactment of this Act. 
SEC. 122. 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
TRANS-
ACTION 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 pro-
vided in subparagraph (C), the amount of 
any civil penalty imposed under subpara-
graph (A) shall not exceed $5,000. 
‘‘(ii) REASONABLE
CAUSE
EXCEP-
TION.—No penalty shall be imposed under 
subparagraph (A) with respect to any vio-
lation if—
‘‘(I) such violation was due to 
reasonable cause, and 
‘‘(II) the amount of the trans-
action or the balance in the account 
at the time of the transaction was 
properly reported. 
‘‘(C) WILLFUL VIOLATIONS.—In the case 
of any person willfully violating, or willfully 
causing any violation of, any provision of sec-
tion 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-
quired to be provided with respect to an 
account, 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. 123. FRIVOLOUS TAX SUBMISSIONS. 
(a) CIVIL PENALTIES.—Section 6702 is amended to 
read as follows: 
‘‘SEC. 6702. FRIVOLOUS TAX SUBMISSIONS. 
‘‘(a) CIVIL PENALTY
FOR FRIVOLOUS TAX RE-
TURNS.—A person shall pay a penalty of $5,000 if—
‘‘(1) such person files what purports to be a re-
turn of a tax imposed by this title but which—
‘‘(A) does not contain information on 
which the substantial correctness of the self-as-
sessment may be judged, or 
‘‘(B) contains information that on its face 
indicates that the self-assessment is substan-
tially incorrect; and 
‘‘(2) the conduct referred to in paragraph (1)—
‘‘(A) is based on a position which the Sec-
retary has identified as frivolous under sub-
section (c), or 
‘‘(B) reflects a desire to delay or impede 
the administration of Federal tax laws. 
‘‘(b) CIVIL PENALTY
FOR SPECIFIED FRIVOLOUS 
SUBMISSIONS.—
‘‘(1) IMPOSITION OF PENALTY.—Except as pro-
vided in paragraph (3), any person who submits a 
specified frivolous submission shall pay a penalty of 
$5,000. 
‘‘(2) SPECIFIED FRIVOLOUS SUBMISSION.—For 
purposes of this section—
‘‘(A) 
SPECIFIED
FRIVOLOUS
SUBMIS-
SION.—The term ‘specified frivolous submis-
sion’ means a specified submission if any por-
tion of such submission—
‘‘(i) is based on a position which the 
Secretary has identified as frivolous under 
subsection (c), or 
‘‘(ii) reflects a desire to delay or im-
pede the administration of Federal tax 
laws. 
‘‘(B) SPECIFIED SUBMISSION.—The term 
‘specified submission’ means—
‘‘(i) a request for a hearing under—
‘‘(I) section 6320 (relating to no-
tice and opportunity for hearing upon 
filing of notice of lien), or 
‘‘(II) section 6330 (relating to 
notice and opportunity for hearing be-
fore levy), and 
‘‘(ii) an application under— 
‘‘(I) section 6159 (relating to 
agreements for payment of tax liabil-
ity in installments), 
‘‘(II) section 7122 (relating to 
compromises), or 
‘‘(III) section 7811 (relating to 
taxpayer assistance orders). 
‘‘(3) OPPORTUNITY
TO
WITHDRAW
SUBMIS-
SION.—If the Secretary provides a person with no-
tice that a submission is a specified frivolous sub-
mission and such person withdraws such submission 
within 30 days after such notice, the penalty im-
posed under paragraph (1) shall not apply with re-
spect to such submission. 
‘‘(c) LISTING OF FRIVOLOUS POSITIONS.—The Sec-
retary shall prescribe (and periodically revise) a list of po-
sitions which the Secretary has identified as being frivo-
lous for purposes of this subsection. The Secretary shall 
not include in such list any position that the Secretary 
determines 
meets 
the 
requirement 
of 
section 
6662(d)(2)(B)(ii)(II). 
‘‘(d) REDUCTION OF PENALTY.—The Secretary may 
reduce the amount of any penalty imposed under this sec-
tion if the Secretary determines that such reduction would
promote compliance with and administration of the Fed-
eral tax laws. 
‘‘(e) PENALTIES
IN ADDITION
TO OTHER PEN-
ALTIES.—The penalties imposed by this section shall be 
in addition to any other penalty provided by law.’’
(b) TREATMENT
OF FRIVOLOUS REQUESTS
FOR 
HEARINGS BEFORE LEVY.—
(1) FRIVOLOUS
REQUESTS
DISREGARDED.—
Section 6330 (relating to notice and opportunity for 
hearing before levy) is amended by adding at the 
end the following new subsection: 
‘‘(g) FRIVOLOUS REQUESTS FOR HEARING, ETC.—
Notwithstanding any other provision of this section, if the 
Secretary determines that any portion of a request for a 
hearing under this section or section 6320 meets the re-
quirement of clause (i) or (ii) of section 6702(b)(2)(A), 
then the Secretary may treat such portion as if it were
never submitted and such portion shall not be subject to 
any further administrative or judicial review.’’
(2) PRECLUSION
FROM
RAISING
FRIVOLOUS 
ISSUES AT HEARING.—Section 6330(c)(4) is amend-
ed—
(A) by striking ‘‘(A)’’ and inserting 
‘‘(A)(i)’’; 
(B) by striking ‘‘(B)’’ and inserting ‘‘(ii)’’; 
(C) by striking the period at the end of the 
first sentence and inserting ‘‘; or’’; and 
(D) by inserting after subparagraph (A)(ii) 
(as so redesignated) the following: 
‘‘(B) the issue meets the requirement of 
clause (i) or (ii) of section 6702(b)(2)(A).’’
(3) 
STATEMENT
OF
GROUNDS.—Section 
6330(b)(1) is amended by striking ‘‘under sub-
section (a)(3)(B)’’ and inserting ‘‘in writing under 
subsection (a)(3)(B) and states the grounds for the 
requested hearing’’. 
(c) TREATMENT
OF FRIVOLOUS REQUESTS
FOR 
HEARINGS UPON FILING OF NOTICE OF LIEN.—Section 
6320 is amended—
(1) in subsection (b)(1), by striking ‘‘under sub-
section (a)(3)(B)’’ and inserting ‘‘in writing under
subsection (a)(3)(B) and states the grounds for the 
requested hearing’’, and 
(2) in subsection (c), by striking ‘‘and (e)’’ and 
inserting ‘‘(e), and (g)’’. 
(d) TREATMENT OF FRIVOLOUS APPLICATIONS FOR 
OFFERS-IN-COMPROMISE
AND
INSTALLMENT
AGREE-
MENTS.—Section 7122 is amended by adding at the end 
the following new subsection: 
‘‘(e) 
FRIVOLOUS
SUBMISSIONS, 
ETC.—Notwith-
standing any other provision of this section, if the Sec-
retary determines that any portion of an application for 
an offer-in-compromise or installment agreement sub-
mitted under this section or section 6159 meets the re-
quirement of clause (i) or (ii) of section 6702(b)(2)(A), 
then the Secretary may treat such portion as if it were 
never submitted and such portion shall not be subject to 
any further administrative or judicial review.’’
(e) CLERICAL AMENDMENT.—The table of sections 
for part I of subchapter B of chapter 68 is amended by 
striking the item relating to section 6702 and inserting 
the following new item:
‘‘Sec. 6702. Frivolous tax submissions.’’
(f) EFFECTIVE DATE.—The amendments made by 
this section shall apply to submissions made and issues 
raised after the date on which the Secretary first pre-
scribes a list under section 6702(c) of the Internal Rev-
enue Code of 1986, as amended by subsection (a). 
SEC. 124. REGULATION OF INDIVIDUALS PRACTICING BE-
FORE THE DEPARTMENT OF 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 
derived) from the conduct giving rise to the penalty and 
may be in addition to, or in lieu of, any suspension, disbar-
ment, or censure.’’
(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 fol-
lowing 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.’’
SEC. 125. PENALTY ON PROMOTERS OF TAX SHELTERS. 
(a) PENALTY ON PROMOTING ABUSIVE TAX SHEL-
TERS.—Section 6700(a) is amended by adding at the end 
the following new sentence: ‘‘Notwithstanding the first 
sentence, if an activity with respect to which a penalty 
imposed under this subsection involves a statement de-
scribed 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 penalty is imposed.’’
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to activities after the date of the 
enactment of this Act.
SEC. 126. STATUTE OF LIMITATIONS FOR TAXABLE YEARS 
FOR WHICH LISTED TRANSACTIONS NOT RE-
PORTED. 
(a) IN GENERAL.—Section 6501(e)(1) (relating to 
substantial omission of items for income taxes) is amended 
by adding at the end the following new subparagraph: 
‘‘(C) LISTED
TRANSACTIONS.—If a tax-
payer fails to include on any return or state-
ment for any taxable year any information with 
respect to a listed transaction (as defined in
section 6707A(c)(2)) which is required under 
section 6011 to be included with such return 
or statement, the tax for such taxable year may 
be assessed, or a proceeding in court for collec-
tion of such tax may be begun without assess-
ment, at any time within 6 years after the time 
the return is filed. This subparagraph shall not 
apply to any taxable year if the time for assess-
ment or beginning the proceeding in court has 
expired before the time a transaction is treated 
as a listed transaction under section 6011.’’ 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to transactions after the date of 
the enactment of this Act in taxable years ending after 
such date.
SEC. 127. DENIAL OF DEDUCTION FOR INTEREST ON UN-
DERPAYMENTS ATTRIBUTABLE TO NONDIS-
CLOSED REPORTABLE AND NONECONOMIC 
SUBSTANCE 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 
following new subsection: 
‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE 
TO NONDISCLOSED REPORTABLE TRANSACTIONS
AND 
NONECONOMIC SUBSTANCE 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—
‘‘(1) the portion of any reportable transaction 
understatement (as defined in section 6662A(b)) 
with respect to which the requirement of section 
6664(d)(2)(A) is not met, or 
‘‘(2) any noneconomic substance transaction 
understatement (as defined in section 6662B(c)).’’
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions after the date of 
the enactment of this Act in taxable years ending after 
such date.
Part II—Other Provisions 
SEC. 131. LIMITATION ON TRANSFER OR IMPORTATION OF 
BUILT-IN LOSSES. 
(a) IN GENERAL.—Section 362 (relating to basis to 
corporations) is amended by adding at the end the fol-
lowing new subsection: 
‘‘(e) LIMITATIONS ON BUILT-IN LOSSES.—
‘‘(1) LIMITATION ON IMPORTATION OF BUILT-
IN LOSSES.—
‘‘(A) IN GENERAL.—If in any transaction 
described in subsection (a) or (b) there would 
(but for this subsection) be an importation of a 
net built-in loss, the basis of each property de-
scribed in subparagraph (B) which is acquired 
in such transaction shall (notwithstanding sub-
sections (a) and (b)) be its fair market value 
immediately after such transaction. 
‘‘(B) PROPERTY
DESCRIBED.—For pur-
poses of subparagraph (A), property is de-
scribed in this paragraph if—
‘‘(i) gain or loss with respect to such 
property is not subject to tax under this 
subtitle in the hands of the transferor im-
mediately before the transfer, and
‘‘(ii) gain or loss with respect to such 
property is subject to such tax in the 
hands of the transferee immediately after 
such transfer. 
In any case in which the transferor is a part-
nership, the preceding sentence shall be applied 
by treating each partner in such partnership as 
holding such partner’s proportionate share of 
the property of such partnership. 
‘‘(C) IMPORTATION
OF
NET
BUILT-IN 
LOSS.—For purposes of subparagraph (A), 
there is an importation of a net built-in loss in 
a transaction if the transferee’s aggregate ad-
justed bases of property described in subpara-
graph (B) which is transferred in such trans-
action would (but for this paragraph) exceed 
the fair market value of such property imme-
diately after such transaction.’’
‘‘(2) LIMITATION ON TRANSFER OF BUILT-IN 
LOSSES IN SECTION 351 TRANSACTIONS.—
‘‘(A) IN GENERAL.—If—
‘‘(i) property is transferred in any 
transaction which is described in sub-
section (a) and which is not described in 
paragraph (1) of this subsection, and
‘‘(ii) the transferee’s aggregate ad-
justed bases of the property so transferred 
would (but for this paragraph) exceed the 
fair market value of such property imme-
diately after such transaction, 
then, notwithstanding subsection (a), the trans-
feree’s aggregate adjusted bases of the property 
so transferred shall not exceed the fair market 
value of such property immediately after such 
transaction. 
‘‘(B) ALLOCATION
OF
BASIS
REDUC-
TION.—The aggregate reduction in basis by 
reason of subparagraph (A) shall be allocated 
among the property so transferred in proportion 
to their respective built-in losses immediately 
before the transaction. 
‘‘(C) EXCEPTION FOR TRANSFERS WITHIN 
AFFILIATED
GROUP.—Subparagraph (A) shall 
not apply to any transaction if the transferor 
owns stock in the transferee meeting the re-
quirements of section 1504(a)(2). In the case of 
property to which subparagraph (A) does not 
apply by reason of the preceding sentence, the 
transferor’s basis in the stock received for such
property shall not exceed its fair market value 
immediately after the transfer.’’ 
(b) COMPARABLE TREATMENT WHERE LIQUIDA-
TION.—Paragraph (1) of section 334(b) (relating to liq-
uidation of subsidiary) is amended to read as follows: 
‘‘(1) IN GENERAL.—If property is received by a 
corporate distributee in a distribution in a complete 
liquidation to which section 332 applies (or in a 
transfer described in section 337(b)(1)), the basis of 
such property in the hands of such distributee shall 
be the same as it would be in the hands of the trans-
feror; except that the basis of such property in the 
hands of such distributee shall be the fair market
value of the property at the time of the distribu-
tion—
‘‘(A) in any case in which gain or loss is 
recognized by the liquidating corporation with 
respect to such property, or 
‘‘(B) in any case in which the liquidating 
corporation is a foreign corporation, the cor-
porate distributee is a domestic corporation, 
and the corporate distributee’s aggregate ad-
justed bases of property described in section 
362(e)(1)(B) which is distributed in such liq-
uidation would (but for this subparagraph) ex-
ceed the fair market value of such property im-
mediately after such liquidation.’’
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions after the date of 
the enactment of this Act. 
SEC. 132. 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), 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 
contributed property in the hands of the 
partnership shall be treated as being equal
to its fair market value immediately after 
the contribution. 
For purposes of subparagraph (C), the term ‘built-
in loss’ means the excess of the adjusted basis of the 
property (determined without regard to subpara-
graph (C)(ii)) over its fair market value immediately 
after the contribution.’’
(b) ADJUSTMENT TO BASIS OF PARTNERSHIP PROP-
ERTY
ON TRANSFER
OF PARTNERSHIP INTEREST
IF 
THERE IS SUBSTANTIAL BUILT-IN LOSS.—
(1) ADJUSTMENT
REQUIRED.—Subsection (a) 
of section 743 (relating to optional adjustment to 
basis of partnership property) is amended by insert-
ing before the period ‘‘or unless the partnership has 
a substantial built-in loss immediately after such 
transfer’’. 
(2) ADJUSTMENT.—Subsection (b) of section 
743 is amended by inserting ‘‘or with respect to 
which there is 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 sec-
tion, a partnership has a substantial built-in loss 
with respect to a transfer of an interest in a part-
nership if the transferee partner’s proportionate 
share of the adjusted basis of the partnership prop-
erty exceeds by more than $250,000 the basis of 
such partner’s interest in the partnership. 
‘‘(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.’’
(4) CLERICAL AMENDMENTS.—
(A) The section heading for section 743 is 
amended to read as follows: 
‘‘SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROP-
ERTY 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 amend-
ed by striking the item relating to section 743 
and inserting the following new item:
‘‘Sec. 743. Adjustment to basis of partnership property where sec-
tion 754 election or substantial built-in loss.’’
(c) ADJUSTMENT
TO BASIS
OF UNDISTRIBUTED 
PARTNERSHIP PROPERTY
IF THERE IS SUBSTANTIAL 
BASIS REDUCTION.—
(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 substantial basis reduction’’. 
(2) ADJUSTMENT.—Subsection (b) of section 
734 is amended by inserting ‘‘or unless there is a 
substantial 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 sec-
tion, there is a substantial basis reduction with re-
spect to a distribution if the sum of the amounts de-
scribed in subparagraphs (A) and (B) of subsection 
(b)(2) exceeds $250,000. 
‘‘(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 amend-
ed 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).—The amendments made 
by subsection (b) shall apply to transfers after the 
date of the enactment of this Act. 
(3) SUBSECTION (c).—The amendments made 
by subsection (c) shall apply to distributions after 
the date of the enactment of this Act.
SEC. 133. 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 alloca-
tion under subsection (a) of any decrease in the adjusted 
basis of partnership property under section 734(b)—
‘‘(1) no allocation may be made to stock in a 
corporation which is a partner in the partnership, 
and 
‘‘(2) any amount not allocable to stock by rea-
son of paragraph (1) shall be allocated under sub-
section (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 
adjusted 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 enactment of this Act.
SEC. 134. REPEAL OF SPECIAL RULES FOR FASITS. 
(a) IN GENERAL.—Part V of subchapter M of chap-
ter 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 amend-
ed by striking ‘‘a REMIC to which part IV of sub-
chapter 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,’’. 
(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) Paragraph (5) of section 860G(a) is amend-
ed by adding ‘‘and’’ at the end of subparagraph (B), 
by striking ‘‘, and’’ at the end of subparagraph (C) 
and inserting a period, and by striking subparagraph 
(D). 
(6) Subparagraph (C) of section 1202(e)(4) is 
amended by striking ‘‘REMIC, or FASIT’’ and in-
serting ‘‘or REMIC’’.
(7) Subparagraph (C) of section 7701(a)(19) is 
amended by adding ‘‘and’’ at the end of clause (ix), 
by striking ‘‘, and’’ at the end of clause (x) and in-
serting a period, and by striking clause (xi). 
(8) The table of parts for subchapter M of 
chapter 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 apply to taxable years beginning after Decem-
ber 31, 2003. 
(2) EXCEPTION FOR EXISTING FASITS.—
(A) IN GENERAL.—Paragraph (1) shall not 
apply to any FASIT in existence on the date of 
the enactment of this Act. 
(B) TRANSFER
OF
ADDITIONAL
ASSETS 
NOT PERMITTED.—Except as provided in regu-
lations prescribed by the Secretary of the 
Treasury or the Secretary’s delegate, subpara-
graph (A) shall cease to apply as of the earliest 
date after the date of the enactment of this Act 
that any property is transferred to the FASIT.
SEC. 135. EXPANDED DISALLOWANCE OF DEDUCTION FOR 
INTEREST ON CONVERTIBLE DEBT. 
(a) IN GENERAL.—Paragraph (2) of section 163(l) 
is amended by striking ‘‘or a related party’’ and inserting 
‘‘or equity held by the issuer (or any related party) in any 
other person’’. 
(b) CONFORMING AMENDMENT.—Paragraph (3) of 
section 163(l) is amended by striking ‘‘or a related party’’ 
in the material preceding subparagraph (A) and inserting 
‘‘or any other person’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to debt instruments issued after 
the date of the enactment of this Act. 
SEC. 136. EXPANDED AUTHORITY TO DISALLOW TAX BENE-
FITS UNDER SECTION 269. 
(a) IN GENERAL.—Subsection (a) of section 269 (re-
lating to acquisitions made to evade or avoid income tax) 
is amended to read as follows: 
‘‘(a) IN GENERAL.—If—
‘‘(1)(A) any person acquires stock in a corpora-
tion, or 
‘‘(B) any corporation acquires, directly or indi-
rectly, property of another corporation and the basis 
of such property, in the hands of the acquiring cor-
poration, is determined by reference to the basis in 
the hands of the transferor corporation, and
‘‘(2) the principal purpose for which such acqui-
sition was made is evasion or avoidance of Federal 
income tax by securing the benefit of a deduction, 
credit, or other allowance, 
then the Secretary may disallow such deduction, credit, 
or other allowance.’’
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to stock and property acquired 
after February 13, 2003. 
SEC. 137. MODIFICATIONS OF CERTAIN RULES RELATING 
TO CONTROLLED FOREIGN CORPORATIONS. 
(a) LIMITATION ON EXCEPTION FROM PFIC RULES 
FOR UNITED STATES SHAREHOLDERS OF CONTROLLED 
FOREIGN
CORPORATIONS.—Paragraph (2) of section 
1297(e) (relating to passive investment company) is 
amended by adding at the end the following flush sen-
tence: 
‘‘Such term shall not include any period if there is 
only a remote likelihood of an inclusion in gross in-
come under section 951(a)(1)(A)(i) of subpart F in-
come of such corporation for such period.’’
(b) DETERMINATION OF PRO RATA SHARE OF SUB-
PART F INCOME.—Subsection (a) of section 951 (relating 
to amounts included in gross income of United States
shareholders) is amended by adding at the end the fol-
lowing new paragraph: 
‘‘(4) SPECIAL RULES FOR DETERMINING PRO 
RATA SHARE OF SUBPART F INCOME.—The pro rata 
share under paragraph (2) shall be determined by 
disregarding—
‘‘(A) any rights lacking substantial eco-
nomic effect, and 
‘‘(B) stock owned by a shareholder who is 
a tax-indifferent party (as defined in section 
7701(m)(3)) if the amount which would (but 
for this paragraph) be allocated to such share-
holder does not reflect such shareholder’s eco-
nomic share of the earnings and profits of the 
corporation.’’
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years on controlled for-
eign corporation beginning after February 13, 2003, and 
to taxable years of United States shareholder in which or
with which such taxable years of controlled foreign cor-
porations end.
SEC. 138. BASIS FOR DETERMINING LOSS ALWAYS RE-
DUCED BY NONTAXED PORTION OF DIVI-
DENDS. 
(a) IN GENERAL.—Section 1059 (relating to cor-
porate shareholder’s basis in stock reduced by nontaxed 
portion of extraordinary dividends) is amended by redesig-
nating subsection (g) as subsection (h) and by inserting 
after subsection (f) the following new subsection: 
‘‘(g) BASIS FOR DETERMINING LOSS ALWAYS RE-
DUCED BY NONTAXED PORTION OF DIVIDENDS.—The 
basis of stock in a corporation (for purposes of deter-
mining loss) shall be reduced by the nontaxed portion of 
any dividend received with respect to such stock if this 
section does not otherwise apply to such dividend.’’
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to dividends received after the date 
of the enactment of this Act. 
SEC. 139. AFFIRMATION OF CONSOLIDATED RETURN REGU-
LATION AUTHORITY. 
(a) IN GENERAL.—Section 1502 (relating to consoli-
dated return regulations) is amended by adding at the end 
the following new sentence: ‘‘In prescribing such regula-
tions, the Secretary may prescribe rules applicable to cor-
porations filing consolidated returns under section 1501 
that are different from other provisions of this title that 
would apply if such corporations filed separate returns.’’
(b) RESULT NOT OVERTURNED.—Notwithstanding 
subsection (a), the Internal Revenue Code of 1986 shall 
be construed by treating Treasury regulation § 1.1502–
20(c)(1)(iii) (as in effect on January 1, 2001) as being 
inapplicable to the type of factual situation in 255 F.3d 
1357 (Fed. Cir. 2001). 
(c) EFFECTIVE DATE.—The provisions of this section 
shall apply to taxable years beginning before, on, or after 
the date of the enactment of this Act. 
Subtitle 
B—Prevention 
of 
Cor-
porate Expatriation to Avoid 
United States Income Tax
SEC. 151. PREVENTION OF CORPORATE EXPATRIATION TO 
AVOID UNITED STATES INCOME TAX. 
(a) IN GENERAL.—Paragraph (4) of section 7701(a) 
(defining domestic) is amended to read as follows: 
‘‘(4) DOMESTIC.—
‘‘(A) IN GENERAL.—Except as provided in 
subparagraph (B), the term ‘domestic’ when ap-
plied to a corporation or partnership means cre-
ated or organized in the United States or under 
the law of the United States or of any State 
unless, in the case of a partnership, the Sec-
retary provides otherwise by regulations.
‘‘(B) CERTAIN
CORPORATIONS
TREATED 
AS DOMESTIC.—
‘‘(i) IN GENERAL.—The acquiring cor-
poration in a corporate expatriation trans-
action shall be treated as a domestic cor-
poration. 
‘‘(ii) 
CORPORATE
EXPATRIATION 
TRANSACTION.—For purposes of this sub-
paragraph, the term ‘corporate expatria-
tion transaction’ means any transaction 
if—
‘‘(I) a nominally foreign corpora-
tion (referred to in this subparagraph 
as the ‘acquiring corporation’) ac-
quires, as a result of such transaction, 
directly or indirectly substantially all 
of the properties held directly or indi-
rectly by a domestic corporation, and 
‘‘(II) immediately after the trans-
action, more than 80 percent of the 
stock (by vote or value) of the acquir-
ing corporation is held by former 
shareholders of the domestic corpora-
tion by reason of holding stock in the 
domestic corporation.
‘‘(iii) LOWER STOCK OWNERSHIP RE-
QUIREMENT
IN
CERTAIN
CASES.—Sub-
clause (II) of clause (ii) shall be applied by 
substituting ‘50 percent’ for ‘80 percent’ 
with respect to any nominally foreign cor-
poration if—
‘‘(I) such corporation does not 
have substantial business activities 
(when compared to the total business 
activities of the expanded affiliated 
group) in the foreign country in which 
or under the law of which the corpora-
tion is created or organized, and 
‘‘(II) the stock of the corporation 
is publicly traded and the principal 
market for the public trading of such 
stock is in the United States. 
‘‘(iv) PARTNERSHIP TRANSACTIONS.—
The term ‘corporate expatriation trans-
action’ includes any transaction if—
‘‘(I) a nominally foreign corpora-
tion (referred to in this subparagraph 
as the ‘acquiring corporation’) ac-
quires, as a result of such transaction, 
directly or indirectly properties consti-
tuting a trade or business of a domes-
tic partnership, 
‘‘(II) immediately after the trans-
action, more than 80 percent of the 
stock (by vote or value) of the acquir-
ing corporation is held by former 
partners of the domestic partnership 
or related foreign partnerships (deter-
mined without regard to stock of the 
acquiring corporation which is sold in 
a public offering related to the trans-
action), and 
‘‘(III) the acquiring corporation 
meets the requirements of subclauses 
(I) and (II) of clause (iii). 
‘‘(v) SPECIAL RULES.—For purposes 
of this subparagraph—
‘‘(I) a series of related trans-
actions shall be treated as 1 trans-
action, and 
‘‘(II) stock held by members of 
the expanded affiliated group which 
includes the acquiring corporation 
shall not be taken into account in de-
termining ownership.
‘‘(vi) OTHER DEFINITIONS.—For pur-
poses of this subparagraph—
‘‘(I) NOMINALLY FOREIGN COR-
PORATION.—The term ‘nominally for-
eign corporation’ means any corpora-
tion which would (but for this sub-
paragraph) be treated as a foreign 
corporation. 
‘‘(II) 
EXPANDED
AFFILIATED 
GROUP.—The term ‘expanded affili-
ated group’ means an affiliated group 
(as defined in section 1504(a) without 
regard to section 1504(b)). 
‘‘(III) RELATED FOREIGN PART-
NERSHIP.—A foreign partnership is 
related to a domestic partnership if 
they are under common control (with-
in the meaning of section 482), or 
they shared the same trademark or 
tradename.’’
(b) EFFECTIVE DATES.—
(1) IN
GENERAL.—The amendment made by 
this section shall apply to corporate expatriation 
transactions completed after September 11, 2001.
(2) SPECIAL RULE.—The amendment made by 
this section shall also apply to corporate expatriation 
transactions completed on or before September 11, 
2001, but only with respect to taxable years of the 
acquiring corporation beginning after December 31, 
2003. 
TITLE II—SIMPLIFICATION OF 
EARNED INCOME TAX CREDIT 
SEC. 201. SIMPLIFICATION OF EARNED INCOME TAX CRED-
IT. 
(a) REPEAL OF DENIAL OF CREDIT WHERE INVEST-
MENT INCOME.—Section 32 is amended by striking sub-
section (i). 
(b) EARNED INCOME TO INCLUDE ONLY AMOUNTS 
INCLUDIBLE IN GROSS INCOME.—Section 32(c)(2)(B) is 
amended by striking ‘‘and’’ at the end of clause (iv), by 
striking the period at the end of clause (v) and inserting 
‘‘, and’’, and by adding at the end the following new 
clause: 
‘‘(vi) the requirement under subparagraph 
(A)(i) that an amount be includible in 
gross income shall not apply if such 
amount is exempt from tax under section 
7873 or is derived directly from restricted 
and allotted land under the Act of Feb-
ruary 8, 1887 (commonly known as the In-
dian General Allotment Act) (25 U.S.C. 
331 et seq.) or from land held under Acts 
or treaties containing an exception provi-
sion similar to the Indian General Allot-
ment Act.’’
(c) MODIFICATION
OF JOINT RETURN REQUIRE-
MENT.—Subsection (d) of section 32 is amended to read 
as follows: 
‘‘(d) MARRIED INDIVIDUALS.—
‘‘(1) IN GENERAL.—If the taxpayer is married 
at the close of the taxable year, the credit shall be 
allowed under subsection (a) only if the taxpayer 
and his spouse file a joint return for the taxable 
year. 
‘‘(2) MARITAL STATUS.—For purposes of para-
graph (1), an individual legally separated from his 
spouse under a decree of divorce or of separate 
maintenance shall not be considered as married. 
‘‘(3) CERTAIN
MARRIED
INDIVIDUALS
LIVING 
APART.—For purposes of paragraph (1), if—
‘‘(A) an individual —
‘‘(i) is married and files a separate re-
turn, and
‘‘(ii) has a qualifying child who is a 
son, daughter, stepson, or stepdaughter of 
such individual, and 
‘‘(B) during the last 6 months of such tax-
able year, such individual and such individual’s 
spouse do not have the same principal place of 
abode, 
such individual shall not be considered as married.’’
(d) EXPANSION OF MATHEMATICAL ERROR AUTHOR-
ITY.—Paragraph (2) of section 6213(g) is amended by 
striking ‘‘and’’ at the end of subparagraph (K), by striking 
the period at the end of subparagraph (L) and inserting 
‘‘, and’’, and by inserting after subparagraph (L) the fol-
lowing new subparagraph: 
‘‘(M) the entry on the return claiming the 
credit under section 32 with respect to a child 
if, according to the Federal Case Registry of 
Child Support Orders established under section 
453(h) of the Social Security Act, the taxpayer 
is a noncustodial parent of such child.’’
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003. 
(f) PRECERTIFICATION OF EARNED INCOME CRED-
IT.—Nothing in any provision of law shall be construed
as authorizing precertification of the earned income credit 
under section 32 of the Internal Revenue Code of 1986. 
TITLE III—TAXPAYER PROTEC-
TIONS 
AND 
IRS 
ACCOUNT-
ABILITY 
Subtitle A—Penalty and Interest 
Reforms 
SEC. 301. FAILURE TO PAY ESTIMATED TAX PENALTY CON-
VERTED TO INTEREST CHARGE ON ACCUMU-
LATED UNPAID BALANCE. 
(a) PENALTY MOVED TO INTEREST CHAPTER OF 
CODE.—The Internal Revenue Code of 1986 is amended 
by redesignating section 6654 as section 6641 and by 
moving section 6641 (as so redesignated) from part I of 
subchapter A of chapter 68 to the end of subchapter E 
of chapter 67 (as added by subsection (e)(1) of this sec-
tion). 
(b) PENALTY CONVERTED TO INTEREST CHARGE.—
The heading and subsections (a) and (b) of section 6641 
(as so redesignated) are amended to read as follows: 
‘‘SEC. 6641. INTEREST ON FAILURE BY INDIVIDUAL TO PAY 
ESTIMATED INCOME TAX. 
‘‘(a) IN GENERAL.—Interest shall be paid on any un-
derpayment of estimated tax by an individual for a taxable 
year for each day of such underpayment. The amount of
such interest for any day shall be the product of the un-
derpayment rate established under subsection (b)(2) mul-
tiplied by the amount of the underpayment. 
‘‘(b) AMOUNT
OF
UNDERPAYMENT; INTEREST 
RATE.—For purposes of subsection (a)—
‘‘(1) AMOUNT.—The amount of the under-
payment on any day shall be the excess of—
‘‘(A) the sum of the required installments 
for the taxable year the due dates for which are 
on or before such day, over 
‘‘(B) the sum of the amounts (if any) of 
estimated tax payments made on or before such 
day on such required installments. 
‘‘(2) DETERMINATION OF INTEREST RATE.—
‘‘(A) IN
GENERAL.—The underpayment 
rate with respect to any day in an installment 
underpayment period shall be the under-
payment rate established under section 6621 
for the first day of the calendar quarter in 
which such installment underpayment period 
begins. 
‘‘(B) INSTALLMENT
UNDERPAYMENT
PE-
RIOD.—For purposes of subparagraph (A), the 
term ‘installment underpayment period’ means 
the period beginning on the day after the due
date for a required installment and ending on 
the due date for the subsequent required in-
stallment (or in the case of the 4th required in-
stallment, the 15th day of the 4th month fol-
lowing the close of a taxable year). 
‘‘(C) DAILY RATE.—The rate determined 
under subparagraph (A) shall be applied on a 
daily basis and shall be based on the assump-
tion of 365 days in a calendar year. 
‘‘(3) TERMINATION OF ESTIMATED TAX INTER-
EST.—No day after the end of the installment un-
derpayment period for the 4th required installment 
specified in paragraph (2)(B) for a taxable year 
shall be treated as a day of underpayment with re-
spect to such taxable year.’’. 
(c) INCREASE
IN SAFE HARBOR WHERE TAX
IS 
SMALL.—
(1) 
IN
GENERAL.—Clause 
(i) 
of 
section 
6641(d)(1)(B) (as so redesignated) is amended to 
read as follows: 
‘‘(i) the lesser of—
‘‘(I) 90 percent of the tax shown 
on the return for the taxable year (or, 
if no return is filed, 90 percent of the 
tax for such year), or
‘‘(II) the tax shown on the return 
for the taxable year (or, if no return 
is filed, the tax for such year) reduced 
(but not below zero) by $1,600, or’’. 
(2) CONFORMING AMENDMENT.—Subsection (e) 
of section 6641 (as so redesignated) is amended by 
striking paragraph (1) and redesignating paragraphs 
(2) and (3) as paragraphs (1) and (2), respectively. 
(d) CONFORMING AMENDMENTS.—
(1) Paragraphs (1) and (2) of subsection (e) 
(as redesignated by subsection (c)(2)) and sub-
section (h) of section 6641 (as so designated) are 
each amended by striking ‘‘addition to tax’’ each 
place it occurs and inserting ‘‘interest’’. 
(2) Section 167(g)(5)(D) is amended by strik-
ing ‘‘6654’’ and inserting ‘‘6641’’. 
(3) Section 460(b)(1) is amended by striking 
‘‘6654’’ and inserting ‘‘6641’’. 
(4) Section 3510(b) is amended—
(A) by striking ‘‘section 6654’’ in para-
graph (1) and inserting ‘‘section 6641’’; 
(B) by amending paragraph (2)(B) to read 
as follows: 
‘‘(B) no interest would be required to be 
paid (but for this section) under 6641 for such
taxable year by reason of the $1,600 amount 
specified in section 6641(d)(1)(B)(i)(II).’’; 
(C) by striking ‘‘section 6654(d)(2)’’ in 
paragraph 
(3) 
and 
inserting 
‘‘section 
6641(d)(2)’’; and 
(D) by striking paragraph (4). 
(5) Section 6201(b)(1) is amended by striking 
‘‘6654’’ and inserting ‘‘6641’’. 
(6) Section 6601(h) is amended by striking 
‘‘6654’’ and inserting ‘‘6641’’. 
(7) Section 6621(b)(2)(B) is amended by strik-
ing ‘‘addition to tax under section 6654’’ and insert-
ing ‘‘interest required to be paid under section 
6641’’. 
(8) Section 6622(b) is amended—
(A) by striking ‘‘PENALTY
FOR’’ in the 
heading; and 
(B) by striking ‘‘addition to tax under sec-
tion 6654 or 6655’’ and inserting ‘‘interest re-
quired to be paid under section 6641 or addi-
tion to tax under section 6655’’. 
(9) Section 6658(a) is amended—
(A) by striking ‘‘6654, or 6655’’ and in-
serting ‘‘or 6655, and no interest shall be re-
quired to be paid under section 6641,’’; and
(B) by inserting ‘‘or paying interest’’ after 
‘‘the tax’’ in paragraph (2)(B)(ii). 
(10) Section 6665(b) is amended—
(A) in the matter preceding paragraph (1) 
by striking ‘‘, 6654,’’; and 
(B) in paragraph (2) by striking ‘‘6654 
or’’. 
(11) Section 7203 is amended by striking ‘‘sec-
tion 6654 or 6655’’ and inserting ‘‘section 6655 or 
interest required to be paid under section 6641’’. 
(e) CLERICAL AMENDMENTS.—
(1) Chapter 67 is amended by inserting after 
subchapter D the following: 
‘‘Subchapter E—Interest on Failure by 
Individual to Pay Estimated Income Tax
‘‘Sec. 6641. Interest on failure by individual to pay estimated in-
come tax.’’.
(2) The table of subchapters for chapter 67 is 
amended by adding at the end the following new 
items:
‘‘Subchapter D. Notice requirements. 
‘‘Subchapter E. Interest on failure by individual to pay estimated 
income tax.’’.
(3) The table of sections for part I of sub-
chapter A of chapter 68 is amended by striking the 
item relating to section 6654.
(f) EFFECTIVE DATE.—The amendments made by 
this section shall apply to installment payments for taxable 
years beginning after December 31, 2003. 
SEC. 302. ABATEMENT OF INTEREST. 
(a) ABATEMENT OF INTEREST WITH RESPECT TO 
ERRONEOUS REFUND CHECK WITHOUT REGARD TO SIZE 
OF REFUND.—Paragraph (2) of section 6404(e) is amend-
ed by striking ‘‘unless—’’ and all that follows and insert-
ing ‘‘unless the taxpayer (or a related party) has in any 
way caused such erroneous refund.’’. 
(b) ABATEMENT OF INTEREST TO EXTENT INTER-
EST
IS ATTRIBUTABLE
TO TAXPAYER RELIANCE
ON 
WRITTEN STATEMENTS OF THE IRS.—Subsection (f) of 
section 6404 is amended—
(1) in the subsection heading, by striking 
‘‘PENALTY OR ADDITION’’ and inserting ‘‘INTEREST, 
PENALTY, OR ADDITION’’; and 
(2) in paragraph (1) and in subparagraph (B) 
of paragraph (2), by striking ‘‘penalty or addition’’ 
and inserting ‘‘interest, penalty, or addition’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply with respect to interest accruing 
on or after the date of the enactment of this Act.
SEC. 303. DEPOSITS MADE TO SUSPEND RUNNING OF IN-
TEREST ON POTENTIAL UNDERPAYMENTS. 
(a) IN GENERAL.—Subchapter A of chapter 67 (re-
lating to interest on underpayments) is amended by add-
ing at the end the following new section: 
‘‘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 pur-
poses of section 6601 (relating to interest on underpay-
ments), 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 pay-
ment 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 de-
posit 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, 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 de-
posit as the taxpayer’s reasonable estimate of 
the maximum amount of any tax attributable to 
disputable items. 
‘‘(B) SAFE
HARBOR
BASED
ON
30-DAY 
LETTER.—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 de-
ficiency specified in such letter.
‘‘(3) OTHER
DEFINITIONS.—For purposes of 
paragraph (2)—
‘‘(A) DISPUTABLE ITEM.—The term ‘dis-
putable 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-
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 depos-
ited.
‘‘(B) 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 po-
tential underpayments, etc.’’.
(c) EFFECTIVE DATE.—
(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 
pursuant to Revenue Procedure 84–58, the date that 
the taxpayer identifies such amount as a deposit 
made pursuant to section 6603 of the Internal Rev-
enue Code (as added by this Act) shall be treated as 
the date such amount is deposited for purposes of 
such section 6603.
SEC. 304. EXPANSION OF INTEREST NETTING FOR INDIVID-
UALS. 
(a) IN GENERAL.—Subsection (d) of section 6621 
(relating to elimination of interest on overlapping periods 
of tax overpayments and underpayments) is amended by 
adding at the end the following: ‘‘Solely for purposes of 
the preceding sentence, section 6611(e) shall not apply in 
the case of an individual.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to interest accrued after Decem-
ber 31, 2003. 
SEC. 305. WAIVER OF CERTAIN PENALTIES FOR FIRST-TIME 
UNINTENTIONAL MINOR ERRORS. 
(a) IN GENERAL.—Section 6651 (relating to failure 
to file tax return or to pay tax) is amended by adding 
at the end the following new subsection: 
‘‘(i) TREATMENT OF FIRST-TIME UNINTENTIONAL 
MINOR ERRORS.—
‘‘(1) IN GENERAL.—In the case of a return of 
tax imposed by subtitle A filed by an individual, the 
Secretary may waive an addition to tax under sub-
section (a) if—
‘‘(A) the individual has a history of compli-
ance with the requirements of this title, 
‘‘(B) it is shown that the failure is due to 
an unintentional minor error,
‘‘(C) the penalty would be grossly dis-
proportionate to the action or expense that 
would have been needed to avoid the error, and 
imposing the penalty would be against equity 
and good conscience, 
‘‘(D) waiving the penalty would promote 
compliance with the requirements of this title 
and effective tax administration, and 
‘‘(E) the taxpayer took all reasonable steps 
to remedy the error promptly after discovering 
it. 
‘‘(2) EXCEPTIONS.—Paragraph (1) shall not 
apply if—
‘‘(A) the Secretary has waived any addition 
to tax under this subsection with respect to any 
prior failure by such individual, 
‘‘(B) the failure is a mathematical or cler-
ical error (as defined in section 6213(g)(2)), or 
‘‘(C) the failure is the lack of a required 
signature.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall take effect on January 1, 2004.
SEC. 306. FRIVOLOUS TAX SUBMISSIONS. 
(a) CIVIL PENALTIES.—Section 6702 is amended to 
read as follows:
‘‘SEC. 6702. FRIVOLOUS TAX SUBMISSIONS. 
‘‘(a) CIVIL PENALTY
FOR FRIVOLOUS TAX RE-
TURNS.—A person shall pay a penalty of $5,000 if—
‘‘(1) such person files what purports to be a re-
turn of a tax imposed by this title but which—
‘‘(A) does not contain information on 
which the substantial correctness of the self-as-
sessment may be judged, or 
‘‘(B) contains information that on its face 
indicates that the self-assessment is substan-
tially incorrect; and 
‘‘(2) the conduct referred to in paragraph (1)— 
‘‘(A) is based on a position which the Sec-
retary has identified as frivolous under sub-
section (c), or 
‘‘(B) reflects a desire to delay or impede 
the administration of Federal tax laws. 
‘‘(b) CIVIL PENALTY
FOR SPECIFIED FRIVOLOUS 
SUBMISSIONS.—
‘‘(1) IMPOSITION OF PENALTY.—Except as pro-
vided in paragraph (3), any person who submits a 
specified frivolous submission shall pay a penalty of 
$5,000. 
‘‘(2) SPECIFIED FRIVOLOUS SUBMISSION.—For 
purposes of this section—
‘‘(A) 
SPECIFIED
FRIVOLOUS
SUBMIS-
SION.—The term ‘specified frivolous submis-
sion’ means a specified submission if any por-
tion of such submission is based on a position 
which the Secretary has identified as frivolous 
under subsection (c). 
‘‘(B) SPECIFIED SUBMISSION.—The term 
‘specified submission’ means—
‘‘(i) a request for a hearing under—
‘‘(I) section 6320 (relating to no-
tice and opportunity for hearing upon 
filing of notice of lien), or 
‘‘(II) section 6330 (relating to 
notice and opportunity for hearing be-
fore levy), and 
‘‘(ii) an application under—
‘‘(I) section 7811 (relating to 
taxpayer assistance orders), 
‘‘(II) section 6159 (relating to 
agreements for payment of tax liabil-
ity in installments), or 
‘‘(III) section 7122 (relating to 
compromises). 
‘‘(3) OPPORTUNITY
TO
WITHDRAW
SUBMIS-
SION.—If the Secretary provides a person with no-
tice that a submission is a specified frivolous sub-
mission and such person withdraws such submission 
within 30 days after such notice, the penalty im-
posed under paragraph (1) shall not apply with re-
spect to such submission. 
‘‘(c) LISTING OF FRIVOLOUS POSITIONS.—The Sec-
retary shall prescribe (and periodically revise) a list of po-
sitions which the Secretary has identified as being frivo-
lous for purposes of this subsection. The Secretary shall 
not include in such list any position that the Secretary 
determines 
meets 
the 
requirement 
of 
section 
6662(d)(2)(B)(ii)(II). 
‘‘(d) REDUCTION OF PENALTY.—The Secretary may 
reduce the amount of any penalty imposed under this sec-
tion if the Secretary determines that such reduction would 
promote compliance with and administration of the Fed-
eral tax laws. 
‘‘(e) PENALTIES
IN ADDITION
TO OTHER PEN-
ALTIES.—The penalties imposed by this section shall be 
in addition to any other penalty provided by law.’’. 
(b) CLERICAL AMENDMENT.—The table of sections 
for part I of subchapter B of chapter 68 is amended by 
striking the item relating to section 6702 and inserting 
the following new item:
‘‘Sec. 6702. Frivolous tax submissions.’’.
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to submissions made and issues 
raised after the date on which the Secretary first pre-
scribes a list under section 6702(c) of the Internal Rev-
enue Code of 1986, as amended by subsection (a). 
SEC. 307. CLARIFICATION OF APPLICATION OF FEDERAL 
TAX DEPOSIT PENALTY. 
Nothing in section 6656 of the Internal Revenue 
Code of 1986 shall be construed to permit the percentage 
specified in subsection (b)(1)(A)(iii) thereof to apply other 
than in a case where the failure is for more than 15 days. 
Subtitle B—Fairness of Collection 
Procedures 
SEC. 311. PARTIAL PAYMENT OF TAX LIABILITY IN IN-
STALLMENT 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 cer-
tain cases) is amended in the matter preceding para-
graph (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. 312. EXTENSION OF TIME FOR RETURN OF PROPERTY. 
(a) EXTENSION OF TIME FOR RETURN OF PROPERTY 
SUBJECT TO LEVY.—Subsection (b) of section 6343 (re-
lating to return of property) is amended by striking ‘‘9 
months’’ and inserting ‘‘2 years’’. 
(b) PERIOD OF LIMITATION ON SUITS.—Subsection 
(c) of section 6532 (relating to suits by persons other than 
taxpayers) is amended—
(1) in paragraph (1) by striking ‘‘9 months’’ 
and inserting ‘‘2 years’’, and 
(2) in paragraph (2) by striking ‘‘9-month’’ and 
inserting ‘‘2-year’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to—
(1) levies made after the date of the enactment 
of this Act, and 
(2) levies made on or before such date if the 9-
month period has not expired under section 6343(b) 
of the Internal Revenue Code of 1986 (without re-
gard to this section) as of such date.
SEC. 313. INDIVIDUALS HELD HARMLESS ON WRONGFUL 
LEVY, ETC., ON INDIVIDUAL RETIREMENT 
PLAN. 
(a) IN GENERAL.—Section 6343 (relating to author-
ity to release levy and return property) is amended by add-
ing at the end the following new subsection: 
‘‘(f) INDIVIDUALS HELD HARMLESS ON WRONGFUL 
LEVY, ETC. ON INDIVIDUAL RETIREMENT PLAN.—
‘‘(1) IN GENERAL.—If the Secretary determines 
that an individual retirement plan has been levied 
upon in a case to which subsection (b) or (d)(2)(A) 
applies, an amount equal to the sum of—
‘‘(A) the amount of money returned by the 
Secretary on account of such levy, and 
‘‘(B) interest paid under subsection (c) on 
such amount of money, 
may be deposited into an individual retirement plan 
(other than an endowment contract) to which a roll-
over from the plan levied upon is permitted. 
‘‘(2) TREATMENT AS ROLLOVER.—The distribu-
tion on account of the levy and any deposit under 
paragraph (1) with respect to such distribution shall 
be treated for purposes of this title as if such dis-
tribution and deposit were part of a rollover de-
scribed in section 408(d)(3)(A)(i); except that—
‘‘(A) interest paid under subsection (c) 
shall be treated as part of such distribution and 
as not includible in gross income, 
‘‘(B) the 60-day requirement in such sec-
tion shall be treated as met if the deposit is 
made not later than the 60th day after the day 
on which the individual receives an amount 
under paragraph (1) from the Secretary, and 
‘‘(C) such deposit shall not be taken into 
account under section 408(d)(3)(B). 
‘‘(3) REFUND, ETC., OF
INCOME
TAX
ON 
LEVY.—If any amount is includible in gross income
100
for a taxable year by reason of a levy referred to in 
paragraph (1) and any portion of such amount is 
treated as a rollover under paragraph (2), any tax 
imposed by chapter 1 on such portion shall not be 
assessed, and if assessed shall be abated, and if col-
lected shall be credited or refunded as an overpay-
ment made on the due date for filing the return of 
tax for such taxable year. 
‘‘(4) INTEREST.—Notwithstanding subsection 
(d), interest shall be allowed under subsection (c) in 
a case in which the Secretary makes a determination 
described in subsection (d)(2)(A) with respect to a 
levy upon an individual retirement plan.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to amounts paid under subsections 
(b), (c), and (d)(2)(A) of section 6343 of the Internal Rev-
enue Code of 1986 after December 31, 2003. 
SEC. 314. SEVEN-DAY THRESHOLD ON TOLLING OF STAT-
UTE OF LIMITATIONS DURING TAX REVIEW. 
(a) IN GENERAL.—Section 7811(d)(1) (relating to 
suspension of running of period of limitation) is amended 
by inserting after ‘‘application,’’ the following: ‘‘but only 
if the date of such decision is at least 7 days after the 
date of the taxpayer’s application’’.
101
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to applications filed after the date 
of the enactment of this Act. 
SEC. 315. STUDY OF LIENS AND LEVIES. 
The Secretary of the Treasury, or the Secretary’s del-
egate, shall conduct a study of the practices of the Inter-
nal Revenue Service concerning liens and levies. The study 
shall examine—
(1) the declining use of liens and levies by the 
Internal Revenue Service, and 
(2) the practicality of recording liens and
levying against property in cases in which the cost 
of such actions exceeds the amount to be realized 
from such property. 
Not later than 1 year after the date of the enactment of 
this Act, the Secretary shall submit such study to the 
Committee on Ways and Means of the House of Rep-
resentatives and the Committee on Finance of the Senate.
102
Subtitle C—Tax Administration 
Reforms 
SEC. 331. REVISIONS RELATING TO TERMINATION OF EM-
PLOYMENT OF INTERNAL REVENUE SERVICE 
EMPLOYEES FOR MISCONDUCT. 
(a) IN GENERAL.—Subchapter A of chapter 80 (re-
lating to application of internal revenue laws) is amended 
by inserting after section 7804 the following new section: 
‘‘SEC. 7804A. DISCIPLINARY ACTIONS FOR MISCONDUCT. 
‘‘(a) DISCIPLINARY ACTIONS.—
‘‘(1) IN GENERAL.—Subject to subsection (c), 
the Commissioner shall take an action in accordance 
with the guidelines established under paragraph (2) 
against any employee of the Internal Revenue Serv-
ice if there is a final administrative or judicial deter-
mination that such employee committed any act or 
omission described under subsection (b) in the per-
formance of the employee’s official duties or where 
a nexus to the employee’s position exists. 
‘‘(2) GUIDELINES.—The Commissioner shall 
issue guidelines for determining the appropriate level 
of discipline, up to and including termination of em-
ployment, for committing any act or omission de-
scribed under subsection (b).
103
‘‘(b) ACTS OR OMISSIONS.—The acts or omissions de-
scribed under this subsection are—
‘‘(1) willful failure to obtain the required ap-
proval signatures on documents authorizing the sei-
zure of a taxpayer’s home, personal belongings, or 
business assets; 
‘‘(2) willfully providing a false statement under 
oath with respect to a material matter involving a 
taxpayer or taxpayer representative; 
‘‘(3) with respect to a taxpayer or taxpayer rep-
resentative, the willful violation of—
‘‘(A) any right under the Constitution of 
the United States; 
‘‘(B) any civil right established under—
‘‘(i) title VI or VII of the Civil Rights 
Act of 1964; 
‘‘(ii) title IX of the Education Amend-
ments of 1972; 
‘‘(iii) the Age Discrimination in Em-
ployment Act of 1967; 
‘‘(iv) the Age Discrimination Act of 
1975; 
‘‘(v) section 501 or 504 of the Reha-
bilitation Act of 1973; or
104
‘‘(vi) title I of the Americans with 
Disabilities Act of 1990; or 
‘‘(C) the Internal Revenue Service policy 
on unauthorized inspection of returns or return 
information; 
‘‘(4) willfully falsifying or destroying documents 
to conceal mistakes made by any employee with re-
spect to a matter involving a taxpayer or taxpayer 
representative; 
‘‘(5) assault or battery on a taxpayer or tax-
payer representative, but only if there is a criminal 
conviction, or a final adverse judgment by a court in 
a civil case, with respect to the assault or battery; 
‘‘(6) willful violations of this title, Department 
of the Treasury regulations, or policies of the Inter-
nal Revenue Service (including the Internal Revenue 
Manual) for the purpose of retaliating against, or 
harassing, a taxpayer or taxpayer representative; 
‘‘(7) willful misuse of the provisions of section 
6103 for the purpose of concealing information from 
a congressional inquiry; 
‘‘(8) willful failure to file any return of tax re-
quired under this title on or before the date pre-
scribed therefor (including any extensions) when a
105
tax is due and owing, unless such failure is due to 
reasonable cause and not due to willful neglect; 
‘‘(9) willful understatement of Federal tax li-
ability, unless such understatement is due to reason-
able cause and not due to willful neglect; and 
‘‘(10) threatening to audit a taxpayer, or to 
take other action under this title, for the purpose of 
extracting personal gain or benefit. 
‘‘(c) DETERMINATIONS OF COMMISSIONER.—
‘‘(1) IN
GENERAL.—The Commissioner may 
take a personnel action other than a disciplinary ac-
tion provided for in the guidelines under subsection 
(a)(2) for an act or omission described under sub-
section (b). 
‘‘(2) DISCRETION.—The exercise of authority 
under paragraph (1) shall be at the sole discretion 
of the Commissioner and may not be delegated to 
any other officer. The Commissioner, in his sole dis-
cretion, may establish a procedure to determine if an 
individual should be referred to the Commissioner 
for a determination by the Commissioner under 
paragraph (1). 
‘‘(3) NO APPEAL.—Notwithstanding any other 
provision of law, any determination of the Commis-
sioner under this subsection may not be reviewed in
106
any administrative or judicial proceeding. A finding 
that an act or omission described under subsection 
(b) occurred may be reviewed. 
‘‘(d) DEFINITION.—For the purposes of the provi-
sions described in clauses (i), (ii), and (iv) of subsection 
(b)(3)(B), references to a program or activity regarding 
Federal financial assistance or an education program or 
activity receiving Federal financial assistance shall include 
any program or activity conducted by the Internal Rev-
enue Service for a taxpayer. 
‘‘(e) ANNUAL REPORT.—The Commissioner shall 
submit to Congress annually a report on disciplinary ac-
tions under this section.’’. 
(b) CLERICAL AMENDMENT.—The table of sections 
for chapter 80 is amended by inserting after the item re-
lating to section 7804 the following new item:
‘‘Sec. 7804A. Disciplinary actions for misconduct.’’.
(c) REPEAL
OF SUPERSEDED SECTION.—Section 
1203 of the Internal Revenue Service Restructuring and 
Reform Act of 1998 (Public Law 105–206; 112 Stat. 720) 
is repealed. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on the date of the enactment 
of this Act.
107
SEC. 332. CONFIRMATION OF AUTHORITY OF TAX COURT 
TO 
APPLY 
DOCTRINE 
OF 
EQUITABLE 
RECOUPMENT. 
(a) CONFIRMATION OF AUTHORITY OF TAX COURT 
TO APPLY DOCTRINE OF EQUITABLE RECOUPMENT.—
Subsection (b) of section 6214 (relating to jurisdiction 
over other years and quarters) is amended by adding at 
the end the following new sentence: ‘‘Notwithstanding the 
preceding sentence, the Tax Court may apply the doctrine 
of equitable recoupment to the same extent that it is avail-
able in civil tax cases before the district courts of the 
United States and the United States Court of Federal 
Claims.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to any action or proceeding in the 
Tax Court with respect to which a decision has not become 
final (as determined under section 7481 of the Internal 
Revenue Code of 1986) as of the date of the enactment 
of this Act. 
SEC. 333. JURISDICTION OF TAX COURT OVER COLLECTION 
DUE PROCESS CASES. 
(a) IN GENERAL.—Section 6330(d)(1) (relating to 
judicial review of determination) is amended to read as 
follows: 
‘‘(1) JUDICIAL REVIEW OF DETERMINATION.—
The person may, within 30 days of a determination
108
under this section, appeal such determination to the 
Tax Court (and the Tax Court shall have jurisdic-
tion with respect to such matter).’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to judicial appeals filed after 
the date of the enactment of this Act. 
SEC. 334. OFFICE OF CHIEF COUNSEL REVIEW OF OFFERS 
IN COMPROMISE. 
(a) IN GENERAL.—Section 7122(b) (relating to 
record) is amended by striking ‘‘Whenever a compromise’’ 
and all that follows through ‘‘his delegate’’ and inserting 
‘‘If the Secretary determines that an opinion of the Gen-
eral Counsel for the Department of the Treasury, or the 
Counsel’s delegate, is required with respect to a com-
promise, there shall be placed on file in the office of the 
Secretary such opinion’’. 
(b) CONFORMING AMENDMENTS.—Section 7122(b) is 
amended by striking the second and third sentences. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to offers-in-compromise submitted 
or pending on or after the date of the enactment of this 
Act.
109
SEC. 335. ACCESS OF NATIONAL TAXPAYER ADVOCATE TO 
INDEPENDENT LEGAL COUNSEL. 
Clause (i) of section 7803(c)(2)(D) (relating to per-
sonnel actions) is amended by striking ‘‘and’’ at the end 
of subclause (I), by striking the period at the end of sub-
clause (II) and inserting ‘‘, and’’, and by adding at the 
end the following new subclause: 
‘‘(III) appoint a counsel in the 
Office of the Taxpayer Advocate to re-
port solely to the National Taxpayer 
Advocate.’’. 
SEC. 336. PAYMENT OF MOTOR FUEL EXCISE TAX REFUNDS 
BY DIRECT DEPOSIT. 
(a) IN GENERAL.—Subchapter II of chapter 33 of 
title 31, United States Code, is amended by adding at the 
end the following new section: 
‘‘§ 3337. Payment of motor fuel excise tax refunds by 
direct deposit 
‘‘The Secretary of the Treasury shall make payments 
under sections 6420, 6421, and 6427 of the Internal Rev-
enue Code of 1986 by electronic funds transfer (as defined 
in section 3332(j)(1)) if the person who is entitled to the 
payment—
‘‘(1) elects to receive the payment by electronic 
funds transfer; and
110
‘‘(2) satisfies the requirements of section 
3332(g) with respect to such payment at such time 
and in such manner as the Secretary may require.’’. 
(b) CLERICAL AMENDMENT.—The table of sections 
for subchapter II of chapter 33 of title 31, United States 
Code, is amended by adding at the end the following new 
item:
‘‘3337. Payment of motor fuel excise tax refunds by direct deposit.’’.
SEC. 337. FAMILY BUSINESS TAX SIMPLIFICATION. 
(a) IN GENERAL.—Section 761 (defining terms for 
purposes of partnerships) is amended by redesignating 
subsection (f) as subsection (g) and by inserting after sub-
section (e) the following new subsection: 
‘‘(f) QUALIFIED JOINT VENTURE.—
‘‘(1) IN GENERAL.—In the case of a qualified 
joint venture conducted by a husband and wife who 
file a joint return for the taxable year, for purposes 
of this title—
‘‘(A) such joint venture shall not be treat-
ed as a partnership, 
‘‘(B) all items of income, gain, loss, deduc-
tion, and credit shall be divided between the 
spouses in accordance with their respective in-
terests in the venture, and 
‘‘(C) each spouse shall take into account 
such spouse’s respective share of such items as
111
if they were attributable to a trade or business 
conducted by such spouse as a sole proprietor. 
‘‘(2) QUALIFIED
JOINT
VENTURE.—For pur-
poses of paragraph (1), the term ‘qualified joint ven-
ture’ means any joint venture involving the conduct 
of a trade or business if—
‘‘(A) the only members of such joint ven-
ture are a husband and wife, 
‘‘(B) both spouses materially participate 
(within the meaning of section 469(h) without 
regard to paragraph (5) thereof) in such trade 
or business, and 
‘‘(C) both spouses elect the application of 
this subsection.’’. 
(b) NET EARNINGS FROM SELF-EMPLOYMENT.—
(1) Subsection (a) of section 1402 (defining net 
earnings from self-employment) is amended by strik-
ing ‘‘and’’ at the end of paragraph (14), by striking 
the period at the end of paragraph (15) and insert-
ing ‘‘; and’’, and by inserting after paragraph (15) 
the following new paragraph: 
‘‘(16) notwithstanding the preceding provisions 
of this subsection, each spouse’s share of income or 
loss from a qualified joint venture shall be taken 
into account as provided in section 761(f) in deter-
112
mining net earnings from self-employment of such 
spouse.’’. 
(2) Subsection (a) of section 211 of the Social 
Security Act (defining net earnings from self-em-
ployment) is amended by striking ‘‘and’’ at the end 
of paragraph (14), by striking the period at the end 
of paragraph (15) and inserting ‘‘; and’’, and by in-
serting after paragraph (15) the following new para-
graph: 
‘‘(16) Notwithstanding the preceding provisions 
of this subsection, each spouse’s share of income or 
loss from a qualified joint venture shall be taken 
into account as provided in section 761(f) of the In-
ternal Revenue Code of 1986 in determining net 
earnings from self-employment of such spouse.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002. 
SEC. 338. SUSPENSION OF TAX-EXEMPT STATUS OF TER-
RORIST ORGANIZATIONS. 
(a) IN GENERAL.—Section 501 (relating to exemp-
tion from tax on corporations, certain trusts, etc.) is 
amended by redesignating subsection (p) as subsection (q) 
and by inserting after subsection (o) the following new 
subsection:
113
‘‘(p) SUSPENSION OF TAX-EXEMPT STATUS OF TER-
RORIST ORGANIZATIONS.—
‘‘(1) IN
GENERAL.—The exemption from tax 
under subsection (a) with respect to any organiza-
tion described in paragraph (2), and the eligibility of 
any organization described in paragraph (2) to apply 
for recognition of exemption under subsection (a), 
shall be suspended during the period described in 
paragraph (3). 
‘‘(2) TERRORIST ORGANIZATIONS.—An organi-
zation is described in this paragraph if such organi-
zation is designated or otherwise individually identi-
fied— 
‘‘(A) under section 212(a)(3)(B)(vi)(II) or 
219 of the Immigration and Nationality Act as 
a terrorist organization or foreign terrorist or-
ganization, 
‘‘(B) in or pursuant to an Executive order 
which is related to terrorism and issued under 
the authority of the International Emergency 
Economic Powers Act or section 5 of the 
United Nations Participation Act of 1945 for 
the purpose of imposing on such organization 
an economic or other sanction, or
114
‘‘(C) in or pursuant to an Executive order 
issued under the authority of any Federal law 
if—
‘‘(i) the organization is designated or 
otherwise individually identified in or pur-
suant to such Executive order as sup-
porting or engaging in terrorist activity (as 
defined in section 212(a)(3)(B) of the Im-
migration and Nationality Act) or sup-
porting terrorism (as defined in section 
140(d)(2) of the Foreign Relations Author-
ization Act, Fiscal Years 1988 and 1989); 
and 
‘‘(ii) such Executive order refers to 
this subsection. 
‘‘(3) PERIOD OF SUSPENSION.—With respect to 
any organization described in paragraph (2), the pe-
riod of suspension—
‘‘(A) begins on the later of—
‘‘(i) the date of the first publication of 
a designation or identification described in 
paragraph (2) with respect to such organi-
zation, or 
‘‘(ii) the date of the enactment of this 
subsection, and
115
‘‘(B) ends on the first date that all des-
ignations and identifications described in para-
graph (2) with respect to such organization are 
rescinded pursuant to the law or Executive 
order under which such designation or identi-
fication was made. 
‘‘(4) DENIAL
OF
DEDUCTION.—No deduction 
shall be allowed under section 170, 545(b)(2), 
556(b)(2), 642(c), 2055, 2106(a)(2), or 2522 for 
any contribution to an organization described in 
paragraph (2) during the period described in para-
graph (3). 
‘‘(5) DENIAL OF ADMINISTRATIVE OR JUDICIAL 
CHALLENGE OF SUSPENSION OR DENIAL OF DEDUC-
TION.—Notwithstanding section 7428 or any other 
provision of law, no organization or other person 
may challenge a suspension under paragraph (1), a 
designation or identification described in paragraph 
(2), the period of suspension described in paragraph 
(3), or a denial of a deduction under paragraph (4) 
in any administrative or judicial proceeding relating 
to the Federal tax liability of such organization or 
other person. 
‘‘(6) ERRONEOUS DESIGNATION.—
‘‘(A) IN GENERAL.—If—
116
‘‘(i) the tax exemption of any organi-
zation described in paragraph (2) is sus-
pended under paragraph (1), 
‘‘(ii) each designation and identifica-
tion described in paragraph (2) which has 
been made with respect to such organiza-
tion is determined to be erroneous pursu-
ant to the law or Executive order under 
which such designation or identification 
was made, and 
‘‘(iii) the erroneous designations and 
identifications result in an overpayment of 
income tax for any taxable year by such 
organization, 
credit or refund (with interest) with respect to 
such overpayment shall be made. 
‘‘(B) WAIVER
OF
LIMITATIONS.—If the 
credit or refund of any overpayment of tax de-
scribed in subparagraph (A)(iii) is prevented at 
any time by the operation of any law or rule of 
law (including res judicata), such credit or re-
fund may nevertheless be allowed or made if the 
claim therefor is filed before the close of the 1-
year period beginning on the date of the last
117
determination 
described 
in 
subparagraph 
(A)(ii). 
‘‘(7) NOTICE OF SUSPENSIONS.—If the tax ex-
emption of any organization is suspended under this 
subsection, the Internal Revenue Service shall up-
date the listings of tax-exempt organizations and 
shall publish appropriate notice to taxpayers of such 
suspension and of the fact that contributions to such 
organization are not deductible during the period of 
such suspension.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to designations made before, on, 
or after the date of the enactment of this Act. 
SEC. 339. TAX REFUND ANTICIPATION LOANS. 
The Secretary of the Treasury may not provide any 
direct deposit indicator with respect to a taxpayer to any 
tax return preparer, financial institution, or other person 
that charges taxpayers interest rates (including fees) on 
refund anticipation loans in excess of the consumer loan 
usury rate limit of the State in which the taxpayer is domi-
ciled. 
SEC. 340. FAIRNESS IN TAX AUDIT COVERAGE. 
(a) MANDATORY
AUDITS
OF
HIGH
RISK
TAX-
PAYERS.—The Secretary of the Treasury shall conduct au-
118
dits of all taxpayers whom the Secretary determines are 
likely to have—
(1) an unpaid Federal income tax liability of 
more than $1,000,000, or 
(2) to have unreported income or structured 
transactions which are considered by the Secretary 
to be high risk. 
(b) RATE OF AUDITS.—The Secretary of the Treas-
ury shall conduct audits of high income taxpayers likely 
to owe taxes at a rate which is not less than the rate at 
which the Secretary conducts audits of low income tax-
payers likely to owe taxes. 
Subtitle D—Confidentiality and 
Disclosure 
SEC. 341. COLLECTION ACTIVITIES WITH RESPECT TO 
JOINT RETURN DISCLOSABLE TO EITHER 
SPOUSE BASED ON ORAL REQUEST. 
(a) IN GENERAL.—Paragraph (8) of section 6103(e) 
(relating to disclosure of collection activities with respect 
to joint return) is amended by striking ‘‘in writing’’ the 
first place it appears. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to requests made after the date 
of the enactment of this Act.
119
SEC. 342. TAXPAYER REPRESENTATIVES NOT SUBJECT TO 
EXAMINATION ON SOLE BASIS OF REPRESEN-
TATION OF TAXPAYERS. 
(a) IN GENERAL.—Paragraph (1) of section 6103(h) 
(relating to disclosure to certain Federal officers and em-
ployees for purposes of tax administration, etc.) is amend-
ed—
(1) by striking ‘‘Returns’’ and inserting the fol-
lowing: 
‘‘(A) IN GENERAL.—Returns’’, and 
(2) by adding at the end the following new sub-
paragraph: 
‘‘(B) TAXPAYER REPRESENTATIVES.—Not-
withstanding subparagraph (A), the return of 
the representative of a taxpayer whose return is 
being examined by an officer or employee of the 
Department of the Treasury shall not be open 
to inspection by such officer or employee on the 
sole basis of the representative’s relationship to 
the taxpayer unless a supervisor of such officer 
or employee has approved the inspection of the 
return of such representative on a basis other 
than by reason of such relationship.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall take effect on the date which is 180 days 
after the date of the enactment of this Act.
120
SEC. 343. DISCLOSURE IN JUDICIAL OR ADMINISTRATIVE 
TAX PROCEEDINGS OF RETURN AND RETURN 
INFORMATION OF PERSONS WHO ARE NOT 
PARTY TO SUCH PROCEEDINGS. 
(a) IN GENERAL.—Paragraph (4) of section 6103(h) 
(relating to disclosure to certain Federal officers and em-
ployees for purposes of tax administration, etc.) is amend-
ed by adding at the end the following new subparagraph: 
‘‘(B) DISCLOSURE IN JUDICIAL OR ADMIN-
ISTRATIVE TAX PROCEEDINGS OF RETURN AND 
RETURN INFORMATION OF PERSONS NOT PARTY 
TO SUCH PROCEEDINGS.—
‘‘(i) NOTICE.—Return or return infor-
mation of any person who is not a party to 
a judicial or administrative proceeding de-
scribed in this paragraph shall not be dis-
closed under clause (ii) or (iii) of subpara-
graph (A) until after the Secretary makes 
a reasonable effort to give notice to such 
person and an opportunity for such person 
to request the deletion of matter from such 
return or return information, including any 
of the items referred to in paragraphs (1) 
through (7) of section 6110(c). Such notice 
shall include a statement of the issue or 
issues the resolution of which is the reason
121
such return or return information is 
sought. In the case of S corporations, part-
nerships, estates, and trusts, such notice 
shall be made at the entity level. 
‘‘(ii) DISCLOSURE LIMITED TO PERTI-
NENT PORTION.—The only portion of a re-
turn or return information described in 
clause (i) which may be disclosed under 
subparagraph (A) is that portion of such 
return or return information that directly 
relates to the resolution of an issue in such 
proceeding. 
‘‘(iii) EXCEPTIONS.—Clause (i) shall 
not apply—
‘‘(I) to any civil action under sec-
tion 7407, 7408, or 7409, 
‘‘(II) to any ex parte proceeding 
for obtaining a search warrant, order 
for entry on premises or safe deposit 
boxes, or similar ex parte proceeding, 
‘‘(III) to disclosure of third party 
return information by indictment or 
criminal information, or 
‘‘(IV) if the Attorney General or 
the Attorney General’s delegate deter-
122
mines that the application of such 
clause would seriously impair a crimi-
nal tax investigation or proceeding.’’. 
(b) CONFORMING AMENDMENTS.—Paragraph (4) of 
section 6103(h) is amended by—
(1) by striking ‘‘PROCEEDINGS.—A return’’ and 
inserting ‘‘PROCEEDINGS.—
‘‘(A) IN GENERAL.—Except as provided in 
subparagraph (B), a return’’; 
(2) by redesignating subparagraphs (A), (B), 
(C), and (D) as clauses (i), (ii), (iii), and (iv), re-
spectively; and 
(3) in the matter following clause (iv) (as so re-
designated), by striking ‘‘subparagraph (A), (B), or 
(C)’’ and inserting ‘‘clause (i), (ii), or (iii)’’ and by 
moving such matter 2 ems to the right. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to proceedings commenced after 
the date of the enactment of this Act. 
SEC. 344. PROHIBITION OF DISCLOSURE OF TAXPAYER 
IDENTIFICATION 
INFORMATION 
WITH 
RE-
SPECT TO DISCLOSURE OF ACCEPTED OF-
FERS-IN-COMPROMISE. 
(a) GENERAL.—Paragraph (1) of section 6103(k) 
(relating to disclosure of certain returns and return infor-
123
mation for tax administrative purposes) is amended by in-
serting ‘‘(other than the taxpayer’s address and TIN)’’ 
after ‘‘Return information’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to disclosures made after the date 
of the enactment of this Act. 
SEC. 345. COMPLIANCE BY CONTRACTORS WITH CONFIDEN-
TIALITY SAFEGUARDS. 
(a) IN GENERAL.—Section 6103(p) (relating to State 
law requirements) is amended by adding at the end the 
following new paragraph: 
‘‘(9) 
DISCLOSURE
TO
CONTRACTORS
AND 
OTHER AGENTS.—Notwithstanding any other provi-
sion of this section, no return or return information 
shall be disclosed to any contractor or other agent 
of a Federal, State, or local agency unless such 
agency, to the satisfaction of the Secretary—
‘‘(A) has requirements in effect which re-
quire each such contractor or other agent which 
would have access to returns or return informa-
tion to provide safeguards (within the meaning 
of paragraph (4)) to protect the confidentiality 
of such returns or return information, 
‘‘(B) agrees to conduct an annual, on-site 
review (mid-point review in the case of con-
124
tracts of less than 1 year in duration) of each 
such contractor or other agent to determine 
compliance with such requirements, 
‘‘(C) submits the findings of the most re-
cent review conducted under subparagraph (B) 
to the Secretary as part of the report required 
by paragraph (4)(E), and 
‘‘(D) certifies to the Secretary for the most 
recent annual period that each such contractor 
or other agent is in compliance with all such re-
quirements. 
The certification required by subparagraph (D) shall 
include the name and address of each contractor and 
other agent, a description of the contract of the con-
tractor or other agent with the agency, and the du-
ration of such contract.’’. 
(b) CONFORMING AMENDMENT.—Subparagraph (B) 
of section 6103(p)(8) is amended by inserting ‘‘or para-
graph (9)’’ after ‘‘subparagraph (A)’’. 
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by 
this section shall apply to disclosures made after De-
cember 31, 2003. 
(2) CERTIFICATIONS.—The first certification 
under section 6103(p)(9)(D) of the Internal Revenue
125
Code of 1986, as added by subsection (a), shall be 
made with respect to calendar year 2004. 
SEC. 346. HIGHER STANDARDS FOR REQUESTS FOR AND 
CONSENTS TO DISCLOSURE. 
(a) IN GENERAL.—Subsection (c) of section 6103 
(relating to disclosure of returns and return information 
to designee of taxpayer) is amended by adding at the end 
the following new paragraphs: 
‘‘(2) REQUIREMENTS
FOR
VALID
REQUESTS 
AND CONSENTS.—A request for or consent to disclo-
sure under paragraph (1) shall only be valid for pur-
poses of this section, sections 7213, 7213A, and 
7431 if—
‘‘(A) at the time of execution, such request 
or consent designates a recipient of such disclo-
sure and is dated, and 
‘‘(B) at the time such request or consent 
is submitted to the Secretary, the submitter of 
such request or consent certifies, under penalty 
of perjury, that such request or consent com-
plied with subparagraph (A). 
‘‘(3) RESTRICTIONS
ON
PERSONS
OBTAINING 
INFORMATION.—Any person shall, as a condition for 
receiving return or return information under para-
graph (1)—