I 
108TH CONGRESS 
1ST SESSION H. R. 2615
To provide funding for infrastructure investment to restore the United States 
economy and to enhance the security of transportation and environmental 
facilities throughout the United States. 
IN THE HOUSE OF REPRESENTATIVES 
JUNE 26, 2003
Mr. COSTELLO (for himself, Mr. DAVIS of Tennessee, Mr. OBERSTAR, Mr. RA-
HALL, Mr. FILNER, Mr. MENENDEZ, Mr. CUMMINGS, Mr. LIPINSKI, Mrs. 
TAUSCHER, Mr. BISHOP of New York, Mr. BLUMENAUER, Mr. EMAN-
UEL, Mr. NADLER, Mr. CLAY, Mr. HOLDEN, Ms. NORTON, Mr. HONDA, 
Mr. CAPUANO, Mr. BAIRD, Ms. EDDIE BERNICE JOHNSON of Texas, Mr. 
MICHAUD, Mr. LARSEN of Washington, Mr. WEINER, Mr. DEFAZIO, Ms. 
MILLENDER-MCDONALD, Ms. BERKLEY, Mr. PASCRELL, Mr. BOSWELL, 
Ms. CORRINE BROWN of Florida, Ms. CARSON of Indiana, Mr. THOMP-
SON of California, Mr. HOEFFEL, Mr. LAMPSON, Mr. MATHESON, and 
Mr. CARSON of Oklahoma) introduced the following bill; which was re-
ferred to the Committee on Transportation and Infrastructure, and in ad-
dition to the Committees on Ways and Means, Energy and Commerce, 
Financial Services, and Agriculture, for a period to be subsequently deter-
mined by the Speaker, in each case for consideration of such provisions 
as fall within the jurisdiction of the committee concerned 
A BILL 
To provide funding for infrastructure investment to restore 
the United States economy and to enhance the security 
of transportation and environmental facilities throughout 
the United States.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; TABLE OF CONTENTS. 
(a) SHORT TITLE.—This Act may be cited as the 
‘‘Rebuild America Act of 2003’’. 
(b) TABLE OF CONTENTS.—
Sec. 1. Short title; table of contents. 
Sec. 2. Findings and purposes. 
TITLE I—HIGHWAY INFRASTRUCTURE INVESTMENT 
Sec. 101. Federal-aid highway program obligation ceiling. 
TITLE II—TRANSIT INFRASTRUCTURE INVESTMENT 
Sec. 201. Additional authorizations for formula grants. 
Sec. 202. Federal transit program obligation ceiling. 
TITLE III—AVIATION INFRASTRUCTURE INVESTMENT 
Sec. 301. Increased funding for airport planning and development. 
Sec. 302. Airport security improvement projects. 
TITLE IV—RAIL INFRASTRUCTURE INVESTMENT 
Subtitle A—Credit for Amtrak Bonds 
Sec. 401. Credit to holders of qualified Amtrak bonds. 
Subtitle B—High-Speed Rail Provisions 
Sec. 411. Department of transportation approval for qualified Amtrak projects. 
Sec. 412. Multiyear capital spending plan and oversight. 
Sec. 413. Issuance of regulations. 
Sec. 414. Sense of Congress regarding effect on Amtrak funding. 
Sec. 415. Effective date. 
Subtitle C—Amtrak Capital Investment 
Sec. 421. Authorization of appropriations. 
Subtitle D—Capital Investment for Railroad Rehabilitation 
Sec. 431. Capital grants for railroad track. 
Sec. 432. Regulatory procedure amendments. 
TITLE V—PORT SECURITY INFRASTRUCTURE INVESTMENT 
Sec. 501. Authorization of appropriations for grants to implement security 
plans. 
TITLE VI—ENVIRONMENTAL INFRASTRUCTURE INVESTMENT 
Sec. 601. General authority for capitalization grants. 
Sec. 602. Capitalization grants agreements. 
Sec. 603. Water pollution control revolving funds. 
Sec. 604. Authorization of appropriations for clean water State revolving funds.
Sec. 605. Wet weather. 
Sec. 606. Safe drinking water State revolving funds. 
TITLE VII—WATER RESOURCES INFRASTRUCTURE INVESTMENT 
Sec. 701. Increased funding for Corps of Engineers projects. 
TITLE VIII—ECONOMIC DEVELOPMENT INFRASTRUCTURE 
INVESTMENT 
Sec. 801. Public works and economic development. 
Sec. 802. Appalachian regional development. 
Sec. 803. Delta regional development. 
Sec. 804. Northern Great Plains regional development. 
TITLE IX—PUBLIC BUILDINGS INFRASTRUCTURE INVESTMENT 
Sec. 901. Security enhancements for GSA properties. 
TITLE X—GENERAL PROVISIONS 
Sec. 1001. Priority consideration for security projects. 
Sec. 1002. Temporary waiver of non-Federal share. 
Sec. 1003. Maintenance of effort. 
Sec. 1004. Labor standards. 
Sec. 1005. Buy America. 
TITLE XI—REVENUE OFFSETS 
Sec. 1100. Amendment of 1986 code. 
Subtitle A—Provisions Designed To Curtail Tax Shelters 
Sec. 1101. Clarification of economic substance doctrine. 
Sec. 1102. Penalty for failing to disclose reportable transaction. 
Sec. 1103. Accuracy-related penalty for listed transactions and other reportable 
transactions having a significant tax avoidance purpose. 
Sec. 1104. Penalty for understatements attributable to transactions lacking 
economic substance, etc. 
Sec. 1105. Modifications of substantial understatement penalty for nonreport-
able transactions. 
Sec. 1106. Tax shelter exception to confidentiality privileges relating to tax-
payer communications. 
Sec. 1107. Disclosure of reportable transactions. 
Sec. 1108. Modifications to penalty for failure to register tax shelters. 
Sec. 1109. Modification of penalty for failure to maintain lists of investors. 
Sec. 1110. Modification of actions to enjoin certain conduct related to tax shel-
ters and reportable transactions. 
Sec. 1111. Understatement of taxpayer’s liability by income tax return pre-
parer. 
Sec. 1112. Penalty on failure to report interests in foreign financial accounts. 
Sec. 1113. Frivolous tax submissions. 
Sec. 1114. Regulation of individuals practicing before the Department of Treas-
ury. 
Sec. 1115. Penalty on promoters of tax shelters. 
Sec. 1116. Statute of limitations for taxable years for which listed transactions 
not reported.
(7) In addition, 4,600,000 people seeking full-
time employment are working only part-time. An ad-
ditional 5,500,000 have completely dropped out of 
the labor force because they cannot find work, and 
therefore are not counted as unemployed. 
(8) As labor markets tightened in the late 
1990’s, even low- and middle-income workers seemed 
to gain some wage bargaining power. But, with the 
Bush recession, family incomes are falling across the 
board, and falling most rapidly among lower-income 
workers. 
(9) In 75 urban areas, highway congestion 
alone costs travelers 3,600,000,000 hours of delay, 
5,700,000,000 
gallons 
of 
wasted 
fuel, 
and 
$67,500,000,000 in lost productivity and wasted fuel 
each 
year 
(more 
than 
three 
times 
the 
$22,000,000,000 cost in 1982). 
(10) Similarly, States indicate that 40 percent 
of assessed waters, or 20,000 discrete areas of the 
Nation’s lakes, rivers, streams, and coastal waters, 
do not meet State water quality standards. 
(11) States, cities, transit authorities, airport 
authorities, and other entities have thousands of 
ready-to-go infrastructure projects, which will create
long-term capital assets for the United States and 
which can help stimulate the Nation’s economy. 
(12) Each $1,000,000,000 of Federal funding 
invested in infrastructure construction creates ap-
proximately 47,500 jobs and $6,200,000,000 in eco-
nomic activity. 
(b) PURPOSES.—The purposes of this Act are as fol-
lows: 
(1) To invest in the Nation’s infrastructure to 
enhance the safety, security, and efficiency of high-
way, transit, aviation, rail, port, environmental, 
water resources, and public buildings infrastructure. 
(2) To create jobs and economic activity to put 
people back to work and stimulate the Nation’s 
economy. 
(3) To create long-term capital assets for the 
Nation that will help the United States address its 
enormous infrastructure needs and improve its eco-
nomic productivity. 
(4) To demonstrate the commitment of the 
Federal Government to economic recovery, thereby 
increasing the confidence of consumers and busi-
nesses.
TITLE I—HIGHWAY 
INFRASTRUCTURE INVESTMENT 
SEC. 101. FEDERAL-AID HIGHWAY PROGRAM OBLIGATION 
CEILING. 
Section 1102 of the Transportation Equity Act for 
the 21st Century (112 Stat. 115) is amended by adding 
at the end the following: 
‘‘(j) INCREASE IN OBLIGATION LIMIT FOR FISCAL 
YEAR 2003.—Notwithstanding any other provision of law, 
limitations on obligations imposed by subsection (a) for 
fiscal year 2003 shall be $36,600,000,000. Such sum shall 
be distributed in accordance with this section, except that 
a program subject to a reduction in funds under sub-
section (f) shall receive an amount of obligation authority 
equal to the amount of contract authority available for 
such program in such fiscal year.’’. 
TITLE II—TRANSIT 
INFRASTRUCTURE INVESTMENT 
SEC. 201. ADDITIONAL AUTHORIZATIONS FOR FORMULA 
GRANTS. 
(a) 
FROM
THE
TRUST
FUND.—Section 
5338(a)(2)(A)(v) of title 49, United States Code, is 
amended by striking ‘‘$3,071,200,000’’ and inserting 
‘‘$5,471,200,000’’.
(b) 
FROM
THE
GENERAL
FUND.—Section 
5338(a)(2)(B)(v) of title 49, United States Code, is 
amended by striking ‘‘$767,800,000’’ and inserting 
‘‘$1,367,800,000’’. 
(c) AVAILABILITY OF AMOUNTS.—Notwithstanding 
sections 5307(k)(2) and section 5336(i), any increase in 
the amounts apportioned to a recipient attributable to the 
amendments made by subsections (a) and (b) of this sec-
tion may be obligated by the recipient for 1 year after 
the last day of the fiscal year in which the amount is ap-
portioned. Not later than 30 days after the end of the 
1-year period, an amount that is not obligated at the end 
of that period shall be added to the amount that may be 
apportioned under the urbanized area formula program of 
section 5336 of title 49, United States Code. 
SEC. 202. FEDERAL TRANSIT PROGRAM OBLIGATION CEIL-
ING. 
Section 3040(5) of the Transportation Equity Act for 
the 21st Century (112 Stat. 394) is amended by striking 
‘‘$7,226,000,000’’ and inserting ‘‘$10,226,000,000’’.
TITLE III—AVIATION 
INFRASTRUCTURE INVESTMENT 
SEC. 301. INCREASED FUNDING FOR AIRPORT PLANNING 
AND DEVELOPMENT. 
(a) IN GENERAL.—Section 48103(5) of title 49, 
United 
States 
Code, 
is 
amended 
by 
striking 
‘‘$3,400,000,000’’ and inserting ‘‘$5,400,000,000.’’. 
SEC. 302. AIRPORT SECURITY IMPROVEMENT PROJECTS. 
(a) GRANT AUTHORITY.—Subject to the require-
ments of this section, the Under Secretary for Border and 
Transportation Security shall make grants to airport 
sponsors—
(1) for projects to replace baggage conveyer 
systems related to aviation security; 
(2) for projects to reconfigure terminal baggage 
areas as needed to install explosive detection sys-
tems; and 
(3) for such other airport security improvement 
projects as the Under Secretary determines appro-
priate. 
(b) APPLICATIONS.—A sponsor seeking a grant 
under this section shall submit to the Under Secretary an 
application in such form and containing such information 
as the Under Secretary prescribes.
(c) APPROVAL.—The Under Secretary may approve 
an application of a sponsor for a grant under this section 
only if the Under Secretary determines that the project 
will improve security at an airport or improve the effi-
ciency of the airport without lessening security. 
(d) LETTERS OF INTENT.—
(1) ISSUANCE.—The Under Secretary may 
issue a letter of intent to a sponsor committing to 
obligate from future budget authority an amount, 
not more than the Federal Government’s share of 
the project’s cost, for an airport security improve-
ment project (including interest costs and costs of 
formulating the project). 
(2) SCHEDULE.—A letter of intent under this 
subsection shall establish a schedule under which the 
Under Secretary will reimburse the sponsor for the 
Government’s share of the project’s costs, as 
amounts become available, if the sponsor, after the 
Under Secretary issues the letter, carries out the 
project without receiving amounts under this section. 
(3) PRIORITY.—In making grants under this 
section in a fiscal year, the Under Secretary shall 
fulfill intentions to obligate under this subsection. 
(4) NOTICE TO UNDER SECRETARY.—A sponsor 
that has been issued a letter of intent under this
subsection shall notify the Under Secretary of the 
sponsors’s intent to carry out an airport security im-
provement project before the project begins. 
(5) NOTICE TO CONGRESS.—The Under Sec-
retary shall transmit to the Committees on Appro-
priations and Transportation and Infrastructure of 
the House of Representatives and the Committees 
on Appropriations and Commerce, Science and 
Transportation of the Senate a written notification 
at least 3 days before the issuance of a letter of in-
tent under this section. 
(6) LIMITATIONS.—A letter of intent issued 
under this subsection is not an obligation of the 
Government under section 1501 of title 31, and the 
letter is not deemed to be an administrative commit-
ment for financing. An obligation or administrative 
commitment may be made only as amounts are pro-
vided in authorization and appropriations laws. 
(7) APPLICABILITY
OF
CERTAIN
REQUIRE-
MENTS.—The requirements that apply to grants and 
letters of intent issued under chapter 471 shall 
apply to grants and letters of intent issued under 
this section. 
(8) STATUTORY
CONSTRUCTION.—Nothing in 
this subsection shall be construed to prohibit the ob-
ligation of amounts pursuant to a letter of intent 
under this subsection in the same fiscal year as the 
letter of intent is issued. 
(e) FEDERAL SHARE.—The Government’s share of 
the cost of a project under this section shall be 90 percent 
for a project at an airport having at least 0.25 percent 
of the total number of passenger boardings each year at 
all airports and 95 percent for a project at any other air-
port. 
(f) SPONSOR DEFINED.—In this section, the term 
‘‘sponsor’’ has the meaning given that term in section 
47102. 
(g) AUTHORIZATION OF APPROPRIATIONS.—There is 
authorized to be appropriated $1,000,000,000 for fiscal 
year 2003 to carry out this section.
TITLE IV—RAIL 
INFRASTRUCTURE INVESTMENT 
Subtitle A—Credit for Amtrak 
Bonds 
SEC. 401. CREDIT TO HOLDERS OF QUALIFIED AMTRAK 
BONDS. 
(a) IN GENERAL.—Part IV of subchapter A of chap-
ter 1 of the Internal Revenue Code of 1986 (relating to 
credits against tax) is amended by adding at the end the 
following new subpart:
‘‘Subpart H—Nonrefundable Credit for Holders of 
Qualified Amtrak Bonds
‘‘Sec. 54. Credit to holders of qualified Amtrak bonds.
‘‘SEC. 54. CREDIT TO HOLDERS OF QUALIFIED AMTRAK 
BONDS. 
‘‘(a) ALLOWANCE OF CREDIT.—In the case of a tax-
payer who holds a qualified Amtrak bond on a credit al-
lowance date of such bond which occurs during the taxable 
year, there shall be allowed as a credit against the tax 
imposed by this chapter for such taxable year an amount 
equal to the sum of the credits determined under sub-
section (b) with respect to credit allowance dates during 
such year on which the taxpayer holds such bond. 
‘‘(b) AMOUNT OF CREDIT.—
‘‘(1) IN GENERAL.—The amount of the credit 
determined under this subsection with respect to any 
credit allowance date for a qualified Amtrak bond is 
25 percent of the annual credit determined with re-
spect to such bond. 
‘‘(2) ANNUAL CREDIT.—The annual credit de-
termined with respect to any qualified Amtrak bond 
is the product of—
‘‘(A) the applicable credit rate, multiplied 
by 
‘‘(B) the outstanding face amount of the 
bond.
‘‘(3) APPLICABLE CREDIT RATE.—For purposes 
of paragraph (2), the applicable credit rate with re-
spect to an issue is the rate equal to an average 
market yield (as of the day before the date of sale 
of the issue) on outstanding long-term corporate 
debt obligations (determined under regulations pre-
scribed by the Secretary). 
‘‘(4) CREDIT ALLOWANCE DATE.—For purposes 
of this section, the term ‘credit allowance date’ 
means—
‘‘(A) March 15, 
‘‘(B) June 15, 
‘‘(C) September 15, and 
‘‘(D) December 15. 
Such term includes the last day on which the bond 
is outstanding. 
‘‘(5) SPECIAL RULE FOR ISSUANCE AND RE-
DEMPTION.—In the case of a bond which is issued 
during the 3-month period ending on a credit allow-
ance date, the amount of the credit determined 
under this subsection with respect to such credit al-
lowance date shall be a ratable portion of the credit 
otherwise determined based on the portion of the 3-
month period during which the bond is outstanding.
A similar rule shall apply when the bond is re-
deemed. 
‘‘(c) LIMITATION BASED ON AMOUNT OF TAX.—
‘‘(1) IN GENERAL.—The credit allowed under 
subsection (a) for any taxable year shall not exceed 
the excess of—
‘‘(A) the sum of the regular tax liability 
(as defined in section 26(b)) plus the tax im-
posed by section 55, over 
‘‘(B) the sum of the credits allowable 
under this part (other than this subpart and 
subpart C). 
‘‘(2) CARRYOVER OF UNUSED CREDIT.—If the 
credit allowable under subsection (a) exceeds the 
limitation imposed by paragraph (1) for such taxable 
year, such excess shall be carried to the succeeding 
taxable year and added to the credit allowable under 
subsection (a) for such taxable year. 
‘‘(d) CREDIT INCLUDED IN GROSS INCOME.—Gross 
income includes the amount of the credit allowed to the 
taxpayer under this section (determined without regard to 
subsection (c)) and the amount so included shall be treat-
ed as interest income.
‘‘(e) QUALIFIED AMTRAK BOND.—For purposes of 
this part, the term ‘qualified Amtrak bond’ means any 
bond issued as part of an issue if—
‘‘(1) 95 percent or more of the proceeds from 
the sale of such issue are to be used for expenditures 
incurred after the date of the enactment of this sec-
tion for any qualified project, 
‘‘(2) the bond is issued by the National Rail-
road Passenger Corporation, is in registered form, 
and meets the bond limitation requirements under 
subsection (f), 
‘‘(3) the issuer designates such bond for pur-
poses of this section, 
‘‘(4) the issuer certifies that it meets the State 
contribution requirement of subsection (k) with re-
spect to such project, as in effect on the date of the 
enactment of this section, 
‘‘(5) the issuer certifies that it has obtained the 
written approval of the Secretary of Transportation 
for such project in accordance with section 26301 of 
title 49, United States Code, as in effect on the date 
of the enactment of this section, 
‘‘(6) the term of each bond which is part of 
such issue does not exceed 20 years,
‘‘(7) the payment of principal with respect to 
such bond is the obligation of the National Railroad 
Passenger Corporation, and 
‘‘(8) the issue meets the requirements of sub-
section (g) (relating to arbitrage). 
‘‘(f) LIMITATIONS
ON AMOUNT
OF BONDS DES-
IGNATED.—
‘‘(1) IN GENERAL.—There is a qualified Am-
trak bond limitation for each fiscal year. Such limi-
tation is—
‘‘(A) $1,400,000,000 for each of the fiscal 
years 2003 through 2012, and 
‘‘(B) zero after fiscal year 2012. 
‘‘(2) LIMITS ON BONDS FOR NORTHEAST RAIL 
CORRIDOR AND INDIVIDUAL STATES.—
‘‘(A) NORTHEAST
RAIL
CORRIDOR.—Not 
more than $3,000,000,000 of the limitation 
under paragraph (1) may be designated for 
qualified projects on the northeast rail corridor 
between Washington, D.C., and Boston, Massa-
chusetts. 
‘‘(B) 
INDIVIDUAL
STATES.—Not 
more 
than $3,000,000,000 of the limitation under 
paragraph (1) may be designated for any indi-
vidual State. The dollar limitation under this
more qualified projects within the 3-year period 
beginning on such date, 
‘‘(B) to incur a binding commitment with 
a third party to spend at least 10 percent of the 
proceeds from the sale of the issue, or to com-
mence construction, with respect to such 
projects within the 6-month period beginning on 
such date, and 
‘‘(C) to proceed with due diligence to com-
plete such projects and to spend the proceeds 
from the sale of the issue. 
‘‘(2) RULES REGARDING CONTINUING COMPLI-
ANCE AFTER 3-YEAR DETERMINATION.—If at least 
95 percent of the proceeds from the sale of the issue 
is not expended for 1 or more qualified projects 
within the 3-year period beginning on the date of 
issuance, but the requirements of paragraph (1) are 
otherwise met, an issue shall be treated as con-
tinuing to meet the requirements of this subsection 
if either—
‘‘(A) the issuer uses all unspent proceeds 
from the sale of the issue to redeem bonds of 
the issue within 90 days after the end of such 
3-year period, or 
‘‘(B) the following requirements are met:
‘‘(i) The issuer spends at least 75 per-
cent of the proceeds from the sale of the 
issue for 1 or more qualified projects with-
in the 3-year period beginning on the date 
of issuance.
‘‘(ii) Either—
‘‘(I) the issuer spends at least 95 
percent of the proceeds from the sale 
of the issue for 1 or more qualified 
projects within the 4-year period be-
ginning on the date of issuance, or 
‘‘(II) the issuer pays to the Fed-
eral Government any earnings on the 
proceeds from the sale of the issue 
that accrue after the end of the 3-year 
period beginning on the date of 
issuance and uses all unspent pro-
ceeds from the sale of the issue to re-
deem bonds of the issue within 90 
days after the end of the 4-year pe-
riod 
beginning 
on 
the 
date 
of 
issuance. 
‘‘(h) RECAPTURE OF PORTION OF CREDIT WHERE 
CESSATION OF COMPLIANCE.—
‘‘(1) IN GENERAL.—If any bond which when 
issued purported to be a qualified Amtrak bond 
ceases to be such a qualified bond, the issuer shall 
pay to the United States (at the time required by 
the Secretary) an amount equal to the sum of—
‘‘(A) the aggregate of the credits allowable 
under this section with respect to such bond 
(determined without regard to subsection (c)) 
for taxable years ending during the calendar 
year in which such cessation occurs and the 2 
preceding calendar years, and 
‘‘(B) interest at the underpayment rate 
under section 6621 on the amount determined 
under subparagraph (A) for each calendar year 
for the period beginning on the first day of 
such calendar year. 
‘‘(2) FAILURE TO PAY.—If the issuer fails to 
timely pay the amount required by paragraph (1) 
with respect to such bond, the tax imposed by this 
chapter on each holder of any such bond which is 
part of such issue shall be increased (for the taxable 
year of the holder in which such cessation occurs) by 
the aggregate decrease in the credits allowed under 
this section to such holder for taxable years begin-
ning in such 3 calendar years which would have re-
sulted solely from denying any credit under this sec-
tion with respect to such issue for such taxable 
years. 
‘‘(3) SPECIAL RULES.—
‘‘(A) TAX
BENEFIT
RULE.—The tax for 
the taxable year shall be increased under para-
graph (2) only with respect to credits allowed 
by reason of this section which were used to re-
duce tax liability. In the case of credits not so 
used to reduce tax liability, the carryforwards 
and carrybacks under section 39 shall be appro-
priately adjusted. 
‘‘(B) NO CREDITS AGAINST TAX.—Any in-
crease in tax under paragraph (2) shall not be 
treated as a tax imposed by this chapter for 
purposes of determining—
‘‘(i) the amount of any credit allow-
able under this part, or 
‘‘(ii) the amount of the tax imposed 
by section 55. 
‘‘(i) TRUST ACCOUNT.—
‘‘(1) IN
GENERAL.—The following amounts 
shall be held in a trust account by a trustee inde-
pendent of the National Railroad Passenger Cor-
poration:
‘‘(A) The proceeds from the sale of all 
bonds designated for purposes of this section. 
‘‘(B) The amount of any matching con-
tributions with respect to such bonds. 
‘‘(C) The temporary period investment 
earnings on proceeds from the sale of such 
bonds. 
‘‘(D) Any earnings on any amounts de-
scribed in subparagraph (A), (B), or (C). 
‘‘(2) USE OF FUNDS.—Amounts in the trust ac-
count may be used only to pay costs of qualified 
projects and redeem qualified Amtrak bonds, except 
that amounts withdrawn from the trust account to 
pay costs of qualified projects may not exceed the 
aggregate proceeds from the sale of all qualified Am-
trak bonds issued under this section. 
‘‘(3) USE OF REMAINING FUNDS IN TRUST AC-
COUNT.—Upon the redemption of all qualified Am-
trak bonds issued under this section, any remaining 
amounts in the trust account described in paragraph 
(1) shall be available to the issuer for any qualified 
project. 
‘‘(j) QUALIFIED PROJECT.—For purposes of this sec-
tion—
capital improvements, including station rehabili-
tation or construction, development of inter-
modal facilities, track or signal improvements, 
or the elimination of grade crossings, for the 
improvement of train speeds or safety (or both) 
for other intercity passenger rail corridors and 
for the Alaska Railroad.
‘‘(2) REFINANCING
RULES.—For purposes of 
paragraph (1), a refinancing shall constitute a quali-
fied project only if the indebtedness being refinanced 
(including any obligation directly or indirectly refi-
nanced by such indebtedness) was originally incurred 
by the issuer—
‘‘(A) after the date of the enactment of 
this section, 
‘‘(B) for a term of not more than 3 years, 
‘‘(C) to finance or acquire capital improve-
ments described in paragraph (1), and 
‘‘(D) in anticipation of being refinanced 
with proceeds of a qualified Amtrak bond. 
‘‘(k) STATE CONTRIBUTION REQUIREMENTS.—
‘‘(1) IN GENERAL.—For purposes of subsection 
(e)(4), the State contribution requirement of this 
subsection is met with respect to any qualified 
project if the National Railroad Passenger Corpora-
tion has received from 1 or more States, not later 
than the date of issuance of the bond, matching con-
tributions of not less than 20 percent of the cost of 
the qualified project. 
‘‘(2) NO STATE CONTRIBUTION REQUIREMENT 
FOR
CERTAIN
QUALIFIED
PROJECTS.—The State 
contribution requirement of this subsection is zero 
with respect to the following projects: 
‘‘(A) Any qualified project for the acquisi-
tion and installation of platform facilities, per-
formance of railroad force account work nec-
essary to complete improvements below street 
grade, and any other necessary improvements 
related to construction at the railroad station at 
the James A. Farley Post Office Building in 
New York City, New York. 
‘‘(B) Any project described in subsection 
(j)(1)(C) for the Alaska Railroad. 
‘‘(3) STATE
MATCHING
CONTRIBUTIONS
MAY 
NOT INCLUDE FEDERAL FUNDS.—For purposes of 
this subsection, State matching contributions shall 
not be derived, directly or indirectly, from Federal 
funds, including any transfers from the Highway 
Trust Fund under section 9503.
‘‘(l) OTHER DEFINITIONS AND SPECIAL RULES.—
For purposes of this section—
‘‘(1) BOND.—The term ‘bond’ includes any ob-
ligation. 
‘‘(2) TREATMENT OF CHANGES IN USE.—For 
purposes of subsection (e)(1), the proceeds from the 
sale of an issue shall not be treated as used for a 
qualified project to the extent that the issuer takes 
any action within its control which causes such pro-
ceeds not to be used for a qualified project. The Sec-
retary shall prescribe regulations specifying remedial 
actions that may be taken (including conditions to 
taking such remedial actions) to prevent an action 
described in the preceding sentence from causing a 
bond to fail to be a qualified Amtrak bond. 
‘‘(3) PARTNERSHIP; 
S
CORPORATION; 
AND 
OTHER
PASS-THRU
ENTITIES.—Under regulations 
prescribed by the Secretary, in the case of a partner-
ship, trust, S corporation, or other pass-thru entity, 
rules similar to the rules of section 41(g) shall apply 
with respect to the credit allowable under subsection 
(a). 
‘‘(4) BONDS
HELD
BY
REGULATED
INVEST-
MENT COMPANIES.—If any qualified Amtrak bond is 
held by a regulated investment company, the credit
determined under subsection (a) shall be allowed to 
shareholders of such company under procedures pre-
scribed by the Secretary. 
‘‘(5) REPORTING.—Issuers of qualified Amtrak 
bonds shall submit reports similar to the reports re-
quired under section 149(e).’’. 
(b) AMENDMENTS TO OTHER CODE SECTIONS.—
(1) REPORTING.—Subsection (d) of section 
6049 of the Internal Revenue Code of 1986 (relating 
to returns regarding payments of interest) is amend-
ed by adding at the end the following new para-
graph: 
‘‘(8) REPORTING OF CREDIT ON QUALIFIED AM-
TRAK BONDS.—
‘‘(A) IN GENERAL.—For purposes of sub-
section (a), the term ‘interest’ includes amounts 
includible in gross income under section 54(d) 
and such amounts shall be treated as paid on 
the credit allowance date (as defined in section 
54(b)(4)). 
‘‘(B) 
REPORTING
TO
CORPORATIONS, 
ETC.—Except as otherwise provided in regula-
tions, in the case of any interest described in 
subparagraph (A), subsection (b)(4) shall be
applied without regard to subparagraphs (A), 
(H), (I), (J), (K), and (L)(i) of such subsection. 
‘‘(C) REGULATORY AUTHORITY.—The Sec-
retary may prescribe such regulations as are 
necessary or appropriate to carry out the pur-
poses of this paragraph, including regulations 
which require more frequent or more detailed 
reporting.’’. 
(2) TREATMENT
FOR
ESTIMATED
TAX
PUR-
POSES.—
(A) INDIVIDUAL.—Section 6654 of such 
Code (relating to failure by individual to pay es-
timated income tax) is amended by redesig-
nating subsection (m) as subsection (n) and by 
inserting after subsection (l) the following new 
subsection: 
‘‘(m) SPECIAL RULE FOR HOLDERS OF QUALIFIED 
AMTRAK BONDS.—For purposes of this section, the credit 
allowed by section 54 to a taxpayer by reason of holding 
a qualified Amtrak bond on a credit allowance date shall 
be treated as if it were a payment of estimated tax made 
by the taxpayer on such date.’’. 
(B) CORPORATE.—Section 6655 of such 
Code (relating to failure by corporation to pay 
estimated income tax) is amended by adding at
the end of subsection (g) the following new 
paragraph: 
‘‘(5) SPECIAL RULE FOR HOLDERS OF QUALI-
FIED AMTRAK BONDS.—For purposes of this section, 
the credit allowed by section 54 to a taxpayer by 
reason of holding a qualified Amtrak bond on a 
credit allowance date shall be treated as if it were 
a payment of estimated tax made by the taxpayer on 
such date.’’. 
(3) EXCLUSION FROM GROSS INCOME OF CON-
TRIBUTIONS
BY
AMTRAK
TO
OTHER
RAIL
CAR-
RIERS.—
(A) IN GENERAL.—Section 118 of the In-
ternal Revenue Code of 1986 (relating to con-
tributions to the capital of a corporation) is 
amended by redesignating subsections (d) and 
(e) as subsections (e) and (f), respectively, and 
by inserting after subsection (c) the following 
new subsection: 
‘‘(d) SPECIAL RULE FOR CONTRIBUTIONS BY AM-
TRAK TO OTHER RAIL CARRIERS.—For purposes of this 
section, the term ‘contribution to the capital of the tax-
payer’ does not include any contribution by the National 
Railroad Passenger Corporation of personal or real prop-
erty funded by the proceeds of qualified Amtrak bonds 
under section 54.’’. 
(B) 
CONFORMING
AMENDMENT.—Sub-
section (b) of such section 118 is amended by 
striking ‘‘subsection (c)’’ and inserting ‘‘sub-
sections (c) and (d)’’. 
(4) PROTECTION OF HIGHWAY TRUST FUND.—
Section 9503 of such Code (relating to Highway 
Trust Fund) is amended by adding at the end the 
following new subsection: 
‘‘(g) SPECIAL RULE RELATING TO NATIONAL RAIL-
ROAD PASSENGER CORPORATION.—Except as provided in 
subsection (c), as in effect on the date of the enactment 
of this subsection, amounts in the Highway Trust Fund 
may not be used to provide funds to the National Railroad 
Passenger Corporation for any purpose, including issuance 
of any qualified Amtrak bond pursuant to section 54. The 
preceding sentence may not be waived by any provision 
of law which is not contained or referenced in this title, 
whether such provision of law is a subsequently enacted 
provision or directly or indirectly seeks to waive the appli-
cation of such sentence.’’. 
(c) CLERICAL AMENDMENTS.—
(1) The table of subparts for part IV of sub-
chapter A of chapter 1 is amended by adding at the 
end the following new item:
‘‘Subpart H. Nonrefundable Credit for Holders of Qualified Am-
trak Bonds.’’.
(2) Section 6401(b)(1) is amended by striking 
‘‘and G’’ and inserting ‘‘G, and H’’. 
(d) ANNUAL REPORT BY TREASURY ON AMTRAK 
TRUST ACCOUNT.—The Secretary of the Treasury shall 
annually report to Congress as to whether the amount de-
posited in the trust account established by the National 
Railroad Passenger Corporation under section 54(i) of the 
Internal Revenue Code of 1986, as added by this section, 
is sufficient to fully repay at maturity the principal of any 
outstanding qualified Amtrak bonds issued pursuant to 
section 54 of such Code (as so added), together with 
amounts expected to be deposited into such account, as 
certified by the National Railroad Passenger Corporation 
in accordance with procedures prescribed by the Secretary 
of the Treasury. 
(e) ISSUANCE OF REGULATIONS.—The Secretary of 
the Treasury shall issue regulations required under section 
54 of the Internal Revenue Code of 1986 (as added by 
this section) not later than 90 days after the date of the 
enactment of this Act.
(f) EFFECTIVE DATE.—The amendments made by 
this section shall apply to obligations issued after the date 
of enactment of this Act. 
Subtitle B—High-Speed Rail 
Provisions 
SEC. 411. DEPARTMENT OF TRANSPORTATION APPROVAL 
FOR QUALIFIED AMTRAK PROJECTS. 
(a) AMENDMENT.—Part D of subtitle V of title 49, 
United States Code, is amended by adding at the end the 
following new chapter: 
‘‘CHAPTER 263—HIGH-SPEED RAIL 
INITIATIVES
‘‘Sec. 
‘‘26301. Department of Transportation approval for qualified high-speed rail 
projects. 
‘‘26302. Qualified projects. 
‘‘26303. State contribution requirements.’’.
‘‘§ 26301. Department of Transportation approval for 
qualified high-speed rail projects 
‘‘(a) IN GENERAL.—The written approval of a quali-
fied project by the Secretary of Transportation required 
for purposes of subsection (e)(5) of section 54 of the Inter-
nal Revenue Code of 1986 (relating to credit to holders 
of qualified Amtrak bonds) shall include—
‘‘(1) the finding by the Inspector General of the 
Department of Transportation described in sub-
section (b);
‘‘(2) the certification by the Secretary of Trans-
portation described in subsection (c); and 
‘‘(3) the agreement by the National Railroad 
Passenger Corporation described in subsection (d). 
‘‘(b) FINDING BY INSPECTOR GENERAL.—For pur-
poses of subsection (a), the finding described in this sub-
section is a finding by the Inspector General of the De-
partment of Transportation that there is a reasonable like-
lihood that the proposed project will result in a positive 
financial contribution to the National Railroad Passenger 
Corporation and that the investment evaluation process 
includes consideration of a return on investment, 
leveraging of funds (including State capital and operating 
contributions), cost effectiveness, safety improvement, mo-
bility improvement, and feasibility. 
‘‘(c) CERTIFICATION.—For purposes of subsection 
(a), the certification described in this subsection is a cer-
tification by the Secretary of Transportation that the 
issuer of the qualified Amtrak bond—
‘‘(1) except with respect to projects described in 
section 54(j)(1)(C) of the Internal Revenue Code of 
1986, has entered into a written agreement with the 
owners of rail properties which are to be improved 
by the project to be funded by the qualified Amtrak
bond, as to the scope and estimated cost of such 
project and the impact on rail freight capacity; and
‘‘(2) has met the State contribution require-
ments described in section 26303. 
The National Railroad Passenger Corporation shall not 
exercise its rights under section 24308(a)(2) to resolve 
disputes with respect to a project to be funded by a quali-
fied Amtrak bond, or with respect to the cost of such a 
project, unless the project is intended to result in railroad 
speeds of 79 miles per hour or less.
‘‘(d) AGREEMENT
BY AMTRAK TO ISSUE ADDI-
TIONAL BONDS FOR PROJECTS OF OTHER CARRIERS.—
‘‘(1) IN GENERAL.—For purposes of subsection 
(a), the agreement described in this subsection is an 
agreement by the National Railroad Passenger Cor-
poration with the Secretary of Transportation to 
issue bonds which meet the requirements of section 
54 of the Internal Revenue Code of 1986 for use in 
financing projects described in paragraph (2). 
‘‘(2) PROJECTS
COVERED.—For purposes of 
paragraph (1), the projects described in this para-
graph are any project described in subsection 
(j)(1)(B) or (j)(1)(C) of section 54 of the Internal 
Revenue Code of 1986 for an intercity rail passenger
carrier other than the National Railroad Passenger 
Corporation or for the Alaska Railroad. 
‘‘(3) 
ADDITIONAL
REQUIREMENTS.—Any 
project financed by bonds referred to in paragraph 
(1) shall be carried out by the intercity rail pas-
senger carrier other than the National Railroad Pas-
senger Corporation, through a contract entered into 
by the National Railroad Passenger Corporation 
with such carrier. Such other intercity rail passenger 
carrier, in carrying out the project, shall be subject 
to the provisions of this subtitle governing the Na-
tional Railroad Passenger Corporation. 
‘‘(4) DEFINITION.—For purposes of this sub-
section, the term ‘intercity rail passenger carrier’ 
means any rail carrier (as such term is defined in 
section 24102(7)) that is part of the interstate sys-
tem of rail transportation and that provides intercity 
rail passenger transportation (as such term is de-
fined in section 24102(5)). 
‘‘(e) ADDITIONAL SELECTION CRITERIA.—In deter-
mining projects to be approved under this section (other 
than projects for the Alaska Railroad), or to be included 
in an agreement under subsection (d), the Secretary of 
Transportation shall give preference to—
‘‘(1) any project with a State matching con-
tribution rate exceeding 20 percent; 
‘‘(2) projects expected to have a significant im-
pact on air traffic congestion; 
‘‘(3) projects expected to also improve com-
muter rail operations; 
‘‘(4) projects that anticipate fares designed to 
recover costs and generate a return on investment; 
and 
‘‘(5) projects that promote regional balance in 
infrastructure investment and the national interest 
in ensuring the development of a nationwide high-
speed rail transportation network. 
‘‘§ 26302. Qualified projects 
‘‘For purposes of this chapter: 
‘‘(1) IN GENERAL.—The term ‘qualified project’ 
means—
‘‘(A) the acquisition, financing, or refi-
nancing of equipment, rolling stock, and other 
capital improvements (including the introduc-
tion of new high-speed technologies such as 
magnetic levitation systems), including track or 
signal improvements or the elimination of grade 
crossings, for the northeast rail corridor be-
tween Washington, D.C., and Boston, Massa-
chusetts;
‘‘(B) the acquisition, financing, or refi-
nancing of equipment, rolling stock, and other 
capital improvements (including the introduc-
tion of new high-speed technologies such as 
magnetic levitation systems), including develop-
ment of intermodal facilities, track or signal im-
provements, or the elimination of grade cross-
ings, for the improvement of train speeds or 
safety (or both) on the high-speed rail corridors 
designated under section 104(d)(2) of title 23, 
United States Code, as in effect on the date of 
the enactment of this section; and 
‘‘(C) the acquisition, financing, or refi-
nancing of equipment, rolling stock, and other 
capital improvements, including station rehabili-
tation or construction, development of inter-
modal facilities, track or signal improvements, 
or the elimination of grade crossings, for the 
improvement of train speeds or safety (or both) 
for other intercity passenger rail corridors and 
for the Alaska Railroad. 
‘‘(2) REFINANCING
RULES.—For purposes of 
paragraph (1), a refinancing shall constitute a quali-
fied project only if the indebtedness being refinanced 
(including any obligation directly or indirectly refi-
nanced by such indebtedness) was originally incurred 
by the issuer—
‘‘(A) after the date of the enactment of 
this section; 
‘‘(B) for a term of not more than 3 years; 
‘‘(C) to finance or acquire capital improve-
ments described in paragraph (1); and 
‘‘(D) in anticipation of being refinanced 
with proceeds of a qualified Amtrak bond. 
‘‘§ 26303. State contribution requirements 
‘‘(a) 
IN
GENERAL.—For 
purposes 
of 
section 
26301(c)(2), the State contribution requirement of this 
section is met with respect to any qualified project if the 
National Railroad Passenger Corporation has received 
from 1 or more States, not later than the date of issuance 
of the bond, matching contributions of not less than 20 
percent of the cost of the qualified project. 
‘‘(b) NO STATE CONTRIBUTION REQUIREMENT FOR 
CERTAIN QUALIFIED PROJECTS.—The State contribution 
requirement of this section is zero with respect to the fol-
lowing projects: 
‘‘(1) Any qualified project for the acquisition 
and installation of platform facilities, performance of
railroad force account work necessary to complete 
improvements below street grade, and any other nec-
essary improvements related to construction at the 
railroad station at the James A. Farley Post Office 
Building in New York City, New York. 
‘‘(2) Any project described in subsection 
(j)(1)(C) of section 54 of the Internal Revenue Code 
of 1986 for the Alaska Railroad. 
‘‘(c) STATE MATCHING CONTRIBUTIONS MAY NOT 
INCLUDE FEDERAL FUNDS.—For purposes of this sec-
tion, State matching contributions shall not be derived, di-
rectly or indirectly, from Federal funds, including any 
transfers from the Highway Trust Fund under section 
9503 of the Internal Revenue Code of 1986.’’. 
(b) TABLE OF CHAPTERS AMENDMENT.—The table 
of chapters of subtitle V of title 49, United States Code, 
is amended by inserting after the item relating to chapter 
261 the following new item:
‘‘263. HIGH-SPEED RAIL INITIATIVES ........................................... 26301’’.
SEC. 412. MULTIYEAR CAPITAL SPENDING PLAN AND OVER-
SIGHT. 
(a) AMENDMENT.—Chapter 243 of title 49, United 
States Code, is amended by adding at the end the fol-
lowing new section:
‘‘§ 24316. Multiyear capital spending plan and over-
sight 
‘‘(a) AMTRAK CAPITAL SPENDING PLAN.—
‘‘(1) IN
GENERAL.—The National Railroad 
Passenger Corporation shall annually submit to the 
President and Congress a multiyear capital spending 
plan, as approved by the Board of Directors of the 
Corporation. 
‘‘(2) CONTENTS
OF
PLAN.—Such plan shall 
identify the capital investment needs of the Corpora-
tion over a period of not less than 5 years and the 
funding sources available to finance such needs and 
shall prioritize such needs according to corporate 
goals and strategies. 
‘‘(3) INITIAL
SUBMISSION
DATE.—The first 
plan shall be submitted before the issuance of any 
qualified Amtrak bonds by the National Railroad 
Passenger Corporation pursuant to section 54 of the 
Internal Revenue Code of 1986. 
‘‘(b) OVERSIGHT
OF QUALIFIED PROJECTS.—The 
Secretary of Transportation shall contract for an annual 
independent assessment of the costs and benefits of the 
qualified projects financed by qualified Amtrak bonds pur-
suant to section 54 of the Internal Revenue Code of 1986, 
including an assessment of the investment evaluation proc-
ess of the Corporation. The annual assessment shall be 
included in the plan submitted under subsection (a).’’. 
(b) TABLE OF SECTIONS AMENDMENT.—The table of 
sections of chapter 243 of title 49, United States Code, 
is amended by adding after the item relating to section 
24315 the following new item:
‘‘24316. Multiyear capital spending plan and oversight.’’.
SEC. 413. ISSUANCE OF REGULATIONS. 
The Secretary of Transportation shall issue regula-
tions for carrying out chapter 263 of title 49, United 
States Code (as added by section 411 of this Act), not 
later than 90 days after the date of the enactment of this 
Act. 
SEC. 414. SENSE OF CONGRESS REGARDING EFFECT ON 
AMTRAK FUNDING. 
It is the sense of the Congress that the proceeds of 
qualified Amtrak bonds issued under section 54 of the In-
ternal Revenue Code of 1986 are intended to finance the 
construction of qualified projects (as defined in section 
26302 of title 49, United States Code, as added by section 
411 of this Act) and are not intended to meet the regular, 
ongoing capital funding needs of the National Railroad 
Passenger Corporation.
SEC. 415. EFFECTIVE DATE. 
The amendments made by this subtitle shall apply to 
obligations issued after the date of the enactment of this 
Act. 
Subtitle C—Amtrak Capital 
Investment 
SEC. 421. AUTHORIZATION OF APPROPRIATIONS. 
Section 24104(a) of title 49, United States Code, is 
amended—
(1) by inserting ‘‘(1)’’ after ‘‘IN GENERAL.—’’; 
(2) by redesignating paragraphs (1) through 
(5) as subparagraphs (A) through (E), respectively; 
and 
(3) by adding at the end the following new 
paragraph: 
‘‘(2) There are authorized to be appropriated to the 
Secretary of Transportation $2,500,000,000 for fiscal 
year 2003 for the benefit of Amtrak for capital expendi-
tures including—
‘‘(A) New York, Washington, D.C., and Balti-
more tunnel life safety projects; 
‘‘(B) bridges, tracks, and other improvements 
to increase the capacity and reliability of rail pas-
senger transportation; and
‘‘(C) 
equipment, 
including 
acquisition 
of 
trainsets and rolling stock, for operation in federally 
designated corridors. 
At least 2⁄3 of amounts expended under subparagraph (C) 
shall be for operations outside the Northeast Corridor.’’. 
Subtitle D—Capital Investment for 
Railroad Rehabilitation 
SEC. 431. CAPITAL GRANTS FOR RAILROAD TRACK. 
(a) CHAPTER 223.—
(1) AMENDMENT.—Chapter 223 of title 49, 
United States Code, is amended to read as follows: 
‘‘CHAPTER 223—CAPITAL GRANTS FOR 
RAILROAD TRACK
‘‘Sec. 
‘‘22301. Capital grants for railroad track.
‘‘§ 22301. Capital grants for railroad track 
‘‘(a) ESTABLISHMENT OF PROGRAM.—
‘‘(1) 
ESTABLISHMENT.—The 
Secretary 
of 
Transportation shall establish a program of capital 
grants for the rehabilitation, preservation, or im-
provement of railroad track (including roadbed, 
bridges, and related track structures) of class II and 
class III railroads. Such grants shall be for rehabili-
tating, preserving, or improving track used primarily 
for freight transportation to a standard ensuring 
that the track can be operated safely and efficiently,
including grants for rehabilitating, preserving, or im-
proving track to handle 286,000 pound rail cars. 
Grants may be provided under this chapter—
‘‘(A) directly to the class II or class III 
railroad; or 
‘‘(B) with the concurrence of the class II 
or class III railroad, to a State or local govern-
ment. 
‘‘(2) STATE COOPERATION.—Class II and class 
III railroad applicants for a grant under this chap-
ter are encouraged to utilize the expertise and assist-
ance of State transportation agencies in applying for 
and administering such grants. State transportation 
agencies are encouraged to provide such expertise 
and assistance to such railroads.
‘‘(3) INTERIM REGULATIONS.—Not later than 
December 31, 2003, the Secretary shall issue tem-
porary regulations to implement the program under 
this section. Subchapter II of chapter 5 of title 5 
does not apply to a temporary regulation issued 
under this paragraph or to an amendment to such 
a temporary regulation. 
‘‘(4) FINAL REGULATIONS.—Not later than Oc-
tober 1, 2004, the Secretary shall issue final regula-
tions to implement the program under this section.
‘‘(b) MAXIMUM FEDERAL SHARE.—The maximum 
Federal share for carrying out a project under this section 
shall be 80 percent of the project cost. The non-Federal 
share may be provided by any non-Federal source in cash, 
equipment, or supplies. Other in-kind contributions may 
be approved by the Secretary on a case by case basis con-
sistent with this chapter. 
‘‘(c) PROJECT ELIGIBILITY.—For a project to be eli-
gible for assistance under this section the track must have 
been operated or owned by a class II or class III railroad 
as of the date of the enactment of this section. 
‘‘(d) USE OF FUNDS.—Grants provided under this 
section shall be used to implement track capital projects 
as soon as possible. In no event shall grant funds be con-
tractually obligated for a project later than the end of the 
third Federal fiscal year following the year in which the 
grant was awarded. Any funds not so obligated by the end 
of such fiscal year shall be returned to the Secretary for 
reallocation. 
‘‘(e) ADDITIONAL PURPOSE.—In addition to making 
grants for projects as provided in subsection (a), the Sec-
retary may also make grants to supplement direct loans 
or loan guarantees made under title V of the Railroad Re-
vitalization and Regulatory Reform Act of 1976 (45 
U.S.C. 821 et seq.), for projects described in the last sen-
tence of section 502(d) of such title. Grants made under 
this subsection may be used, in whole or in part, for pay-
ing credit risk premiums, lowering rates of interest, or 
providing for a holiday on principal payments. Credit risk 
premiums funded under this section shall be exempt from 
the non-Federal source requirement of section 502(f)(1) 
of the Railroad Revitalization and Regulatory Reform Act 
of 1976 (45 U.S.C. 822(f)(1)). 
‘‘(f) EMPLOYEE PROTECTION.—The Secretary shall 
require as a condition of any grant made under this sec-
tion that the recipient railroad provide a fair arrangement 
at least as protective of the interests of employees who 
are affected by the project to be funded with the grant 
as the terms imposed under section 11326(a), as in effect 
on the date of the enactment of this section. 
‘‘(g) LABOR STANDARDS.—
‘‘(1) PREVAILING WAGES.—The Secretary shall 
ensure that laborers and mechanics employed by 
contractors and subcontractors in construction work 
financed by a grant made under this section will be 
paid wages not less than those prevailing on similar 
construction in the locality, as determined by the 
Secretary of Labor under section 3142 of title 40 
(known as the Davis-Bacon Act). The Secretary 
shall make a grant under this section only after
being assured that required labor standards will be 
maintained on the construction work. 
‘‘(2) WAGE RATES.—Wage rates in a collective 
bargaining agreement negotiated under the Railway 
Labor Act (45 U.S.C. 151 et seq.) are deemed for 
purposes of this subsection to comply with section 
3142 of title 40 (known as the Davis-Bacon Act). 
‘‘(h) AUTHORIZATION OF APPROPRIATIONS.—There 
is authorized to be appropriated to the Secretary of Trans-
portation $500,000,000 for fiscal year 2003 for carrying 
out this section.’’. 
(2) CONFORMING AMENDMENT.—The item re-
lating to chapter 223 in the table of chapters of sub-
title V of title 49, United States Code, is amended 
to read as follows:
‘‘223. CAPITAL GRANTS FOR RAILROAD TRACK .......................... 22301’’.
(b) RAILROAD REHABILITATION AND IMPROVEMENT 
FINANCING.—Section 502 of the Railroad Revitalization 
and Regulatory Reform Act of 1976 (45 U.S.C. 822(d)) 
is amended—
(1) in subsection (d)—
(A) by striking ‘‘$3,500,000,000’’ and in-
serting ‘‘$5,000,000,000’’; and 
(B) by striking ‘‘$1,000,000,000’’ and in-
serting ‘‘$1,500,000,000’’; and
(2) by adding at the end the following new sub-
section: 
‘‘(i) GRANTS.—The Secretary may make grants to 
supplement direct loans or loan guarantees made under 
this title. Grants made under this subsection may be used, 
in whole or in part, for paying credit risk premiums, low-
ering rates of interest, or providing for a holiday on prin-
cipal payments. Credit risk premiums funded under this 
subsection shall be exempt from the non-Federal source 
requirement of subsection (f)(1). There is authorized to 
be appropriated to the Secretary for fiscal year 2003 for 
carrying out this subsection $250,000,000.’’. 
SEC. 432. REGULATORY PROCEDURE AMENDMENTS. 
(a) COHORTS OF LOANS.—Section 502(f) of the Rail-
road Revitalization and Regulatory Reform Act of 1976 
(45 U.S.C. 822(f)) is amended—
(1) in paragraph (2)—
(A) by striking ‘‘and’’ at the end of sub-
paragraph (D); 
(B) by redesignating subparagraph (E) as 
subparagraph (F); and 
(C) by adding after subparagraph (D) the 
following new subparagraph:
(c) TIME LIMIT FOR APPROVAL OR DISAPPROVAL.—
Section 502 of the Railroad Revitalization and Regulatory 
Reform Act of 1976 (45 U.S.C. 822), as amended by this 
Act, is further amended by adding at the end the following 
new subsection: 
‘‘(j) TIME LIMIT FOR APPROVAL OR DISAPPROVAL.—
Not later than 30 days after receiving a complete applica-
tion for a direct loan or loan guarantee under this section, 
the Secretary shall approve or disapprove the applica-
tion.’’. 
(d) FEES AND CHARGES.—Section 503 of the Rail-
road Revitalization and Regulatory Reform Act of 1976 
(45 U.S.C. 823) is amended by adding at the end the fol-
lowing new subsection: 
‘‘(l) FEES AND CHARGES.—Except as provided in 
this title, the Secretary may not assess any fees, including 
user fees, or charges in connection with a direct loan or 
loan guarantee provided under section 502.’’. 
(e) SUBSTANTIVE CRITERIA AND STANDARDS.—Not 
later than 30 days after the date of the enactment of this 
Act, the Secretary of Transportation shall publish in the 
Federal Register and post on the Department of Trans-
portation web site the substantive criteria and standards 
used by the Secretary to determine whether to approve 
or disapprove applications submitted under section 502 of
the Railroad Revitalization and Regulatory Reform Act of 
1976 (45 U.S.C. 822).
TITLE V—PORT SECURITY 
INFRASTRUCTURE INVESTMENT 
SEC. 
501. 
AUTHORIZATION 
OF 
APPROPRIATIONS 
FOR 
GRANTS TO IMPLEMENT SECURITY PLANS. 
For grants under section 70107 of title 46, United 
States Code, there is authorized to be appropriated to the 
Secretary of Transportation (in addition to any amounts 
appropriated before the date of the enactment of this Act) 
$2,500,000,000 for fiscal year 2003. 
TITLE VI—ENVIRONMENTAL 
INFRASTRUCTURE INVESTMENT 
SEC. 601. GENERAL AUTHORITY FOR CAPITALIZATION 
GRANTS. 
Section 601(a) of the Federal Water Pollution Con-
trol Act (33 U.S.C. 1381(a)) is amended by striking ‘‘(1) 
for construction’’ and all that follows through the period 
at the end and inserting ‘‘to accomplish the objectives, 
goals, and policies of this Act.’’. 
SEC. 602. CAPITALIZATION GRANTS AGREEMENTS. 
(a) REQUIREMENTS FOR CONSTRUCTION OF TREAT-
MENT WORKS.—Section 602(b)(6) of the Federal Water 
Pollution Control Act (33 U.S.C. 1382(b)(6)) is amend-
ed—
(1) by striking ‘‘treatment works’’ the first 
place it appears and inserting ‘‘activities’’; 
(2) by striking ‘‘before fiscal year 1995’’ and all 
that follows through ‘‘section 205(m) of this Act’’ 
and inserting ‘‘with funds made available from a 
State water pollution control revolving fund under 
this title’’; and 
(3) by striking ‘‘201(b)’’ and all that follows 
through ‘‘218’’ and inserting ‘‘204(b)(1), 211’’. 
(b) ASSISTANCE FOR SMALL TREATMENT WORKS.—
Section 602 of the Federal Water Pollution Control Act 
(33 U.S.C. 1382) is amended by adding at the end the 
following: 
‘‘(c) 
ASSISTANCE
FOR
SMALL
TREATMENT 
WORKS.—
‘‘(1) SIMPLIFIED PROCEDURES.—Not later than 
1 year after the date of the enactment of this sub-
section, the Administrator shall assist the States in 
establishing simplified procedures for small treat-
ment works to obtain assistance under this title. 
‘‘(2) PUBLICATION
OF
MANUAL.—Not later 
than 2 years after the date of the enactment of this 
subsection, and after providing notice and oppor-
tunity for public comment, the Administrator shall 
publish a manual to assist small treatment works in
obtaining assistance under this title and publish in 
the Federal Register notice of the availability of the 
manual. 
‘‘(3) SMALL
TREATMENT
WORKS
DEFINED.—
For purposes of this title, the term ‘small treatment 
works’ means treatment works for which a munici-
pality or intermunicipal, interstate, or State agency 
seeks assistance under this title and which serves a 
population of 20,000 or fewer.’’. 
SEC. 
603. 
WATER 
POLLUTION 
CONTROL 
REVOLVING 
FUNDS. 
(a) PROJECTS AND ACTIVITIES ELIGIBLE FOR AS-
SISTANCE.—Section 603(c) of the Federal Water Pollution 
Control Act (33 U.S.C. 1383(c)) is amended to read as 
follows: 
‘‘(c) PROJECTS AND ACTIVITIES ELIGIBLE FOR AS-
SISTANCE.—
‘‘(1) IN
GENERAL.—The amounts of funds 
available to each State water pollution control re-
volving fund shall be used only for providing finan-
cial assistance—
‘‘(A) to a municipality, intermunicipal 
agency, interstate agency, or State agency for 
construction of a publicly owned treatment 
works (as defined in section 212 of this Act);
‘‘(B) for implementation of lake protection 
programs and projects under section 314; 
‘‘(C) for implementation of a management 
program established under section 319; 
‘‘(D) for implementation of a conservation 
and management plan established under section 
320; 
‘‘(E) for restoration or protection of pub-
licly or privately owned riparian areas, includ-
ing acquisition of property rights; 
‘‘(F) to a municipality, intermunicipal 
agency, interstate agency, or State agency for 
implementation of measures to improve the effi-
ciency of public water use; 
‘‘(G) for development and implementation 
of plans by a public recipient to prevent water 
pollution; 
‘‘(H) for acquisition of lands necessary to 
meet any mitigation requirements related to 
construction of a publicly owned treatment 
works; and 
‘‘(I) for measures to increase the security 
of publicly owned treatment works. 
‘‘(2) FUND
AMOUNTS.—The water pollution 
control revolving fund of a State shall be established,
maintained, and credited with repayments, and the 
fund balance shall be available in perpetuity for pro-
viding financial assistance for activities described in 
paragraph (1). Fees charged by a State to recipients 
of such assistance may be deposited in the fund for 
the purpose of financing the cost of administration 
of this title.’’.
(b) 
EXTENDED
REPAYMENT
PERIOD.—Section 
603(d)(1) of the Federal Water Pollution Control Act (33 
U.S.C. 1383(d)(1)) is amended—
(1) in subparagraph (A) by striking ‘‘20 years’’ 
and inserting ‘‘the lesser of 30 years or the expected 
life of the project to be financed with the proceeds 
of the loan’’; and 
(2) in subparagraph (B) by striking ‘‘not later 
than 20 years after project completion’’ and insert-
ing ‘‘upon the expiration of the term of the loan’’. 
(c) ADMINISTRATIVE EXPENSES.—Section 603(d)(7) 
of the Federal Water Pollution Control Act (33 U.S.C. 
1383(d)(7)) is amended by inserting before the period at 
the end the following: ‘‘or $400,000 per year, or 1⁄5 per-
cent per year of the current valuation of the fund, which-
ever is greatest, plus the amount of any fees collected by 
the State for such purpose regardless of the source’’.
(d) TECHNICAL
AND PLANNING ASSISTANCE
FOR 
SMALL SYSTEMS.—Section 603(d) of the Federal Water 
Pollution Control Act (33 U.S.C. 1383(d)) is amended—
(1) by striking ‘‘and’’ at the end of paragraph 
(6); 
(2) by striking the period at the end of para-
graph (7) and inserting ‘‘; and’’; and 
(3) by adding at the end the following: 
‘‘(8) to provide to owners and operators of 
small treatment works (as defined in section 602(c)) 
with technical and planning assistance and assist-
ance in financial management, user fee analysis, 
budgeting, capital improvement planning, facility op-
eration and maintenance, repair schedules, and other 
activities to improve wastewater treatment plant op-
erations; except that such amounts shall not exceed 
2 percent of all grant awards to such fund under 
this title.’’. 
(e) ADDITIONAL SUBSIDIZATION.—Section 603 of 
the Federal Water Pollution Control Act is amended by 
adding at the end the following: 
‘‘(i) ADDITIONAL SUBSIDIZATION.—
‘‘(1) IN
GENERAL.—In any case in which a 
State provides assistance to a municipality or inter-
municipal, interstate, or State agency under sub-
section (d), the State may provide additional sub-
sidization, including forgiveness of principal and 
negative interest loans—
‘‘(A) to benefit a municipality that—
‘‘(i) meets the State’s affordability 
criteria established under paragraph (2); 
or 
‘‘(ii) does not meet the State’s afford-
ability criteria if the recipient—
‘‘(I) seeks additional subsidiza-
tion to benefit individual ratepayers in 
the residential user rate class; 
‘‘(II) demonstrates to the State 
that such ratepayers will experience a 
significant hardship from the increase 
in rates necessary to finance the 
project or activity for which assistance 
is sought; and 
‘‘(III) ensures, as part of an as-
sistance agreement between the State 
and the recipient, that the additional 
subsidization 
provided 
under 
this 
paragraph is directed through a user 
charge rate system (or other appro-
priate method) to such ratepayers; or
‘‘(B) to implement alternative processes, 
materials, and techniques (including non-
structural protection of surface waters, new or 
improved methods of waste treatment, and pol-
lutant trading) that may result in increased en-
vironmental benefit when compared to standard 
processes, materials, and techniques. 
‘‘(2) AFFORDABILITY CRITERIA.—
‘‘(A) ESTABLISHMENT.—On or before Sep-
tember 30, 2004, and after providing notice 
and an opportunity for public comment, a State 
shall establish affordability criteria to assist in 
identifying municipalities that would experience 
a significant hardship raising the revenue nec-
essary to finance a project or activity eligible 
for assistance under section 603(c)(1) if addi-
tional subsidization is not provided. Such cri-
teria shall be based on income data, population 
trends, and other data determined relevant by 
the State. 
‘‘(B) EXISTING CRITERIA.—If a State has 
previously established, after providing notice 
and an opportunity for public comment, afford-
ability criteria that meet the requirements of 
subparagraph (A), the State may use the cri-
teria for the purposes of this subsection. For 
purposes of this Act, any such criteria shall be 
treated as affordability criteria established 
under this paragraph. 
‘‘(C) INFORMATION TO ASSIST STATES.—
The Administrator may publish information to 
assist States in establishing affordability cri-
teria under subparagraph (A). 
‘‘(3) PRIORITY.—A State may give priority to a 
recipient for a project or activity eligible for funding 
under section 603(c)(1) if the recipient meets the 
State’s affordability criteria.’’. 
SEC. 
604. 
AUTHORIZATION 
OF 
APPROPRIATIONS 
FOR 
CLEAN WATER STATE REVOLVING FUNDS. 
Section 607 of the Federal Water Pollution Control 
Act (33 U.S.C. 1387) is amended—
(1) by striking ‘‘and’’ at the end of paragraph 
(4); 
(2) by striking the period at the end of para-
graph (5) and inserting ‘‘; and’’; and 
(3) by adding at the end the following: 
‘‘(6) $8,500,000,000 for fiscal year 2003.’’. 
SEC. 605. WET WEATHER. 
Section 221(f) of the Federal Water Pollution Con-
trol Act (33 U.S.C. 1301(f)) is amended by inserting after
the first sentence the following: ‘‘In addition, there is au-
thorized to be appropriated to carry out this section an 
additional $1,500,000,000 for fiscal year 2003.’’. 
SEC. 606. SAFE DRINKING WATER STATE REVOLVING 
FUNDS. 
Section 1452(m) of title XIV of the Public Health 
Service Act (commonly known as the ‘‘Safe Drinking 
Water Act’’) (42 U.S.C. 300j–12(m)) is amended by in-
serting after the first sentence the following: ‘‘In addition, 
there is authorized to be appropriated to carry out this 
section an additional $1,500,000,000 for fiscal year 
2003.’’. 
TITLE VII—WATER RESOURCES 
INFRASTRUCTURE INVESTMENT 
SEC. 701. INCREASED FUNDING FOR CORPS OF ENGINEERS 
PROJECTS. 
In addition to other amounts authorized to be appro-
priated, there are authorized to be appropriated to the 
Secretary of the Army $1,500,000,000 for fiscal year 
2003, of which such sums as are necessary may be derived 
from the Harbor Maintenance Trust Fund and the Inland 
Wterways Trust Fund, to carry out construction, oper-
ation, and maintenance activities for authorized civil func-
tions under the supervision of the Chief of Engineers.
Such sums shall remain available until September 30, 
2004. 
TITLE VIII—ECONOMIC DEVEL-
OPMENT 
INFRASTRUCTURE 
INVESTMENT 
SEC. 801. PUBLIC WORKS AND ECONOMIC DEVELOPMENT. 
Section 701 of the Public Works and Economic De-
velopment Act of 1965 (42 U.S.C. 3231) is amended—
(1) by inserting ‘‘(a) IN GENERAL.—’’ before 
‘‘There are authorized’’; and 
(2) by adding at the end the following: 
‘‘(b) ADDITIONAL AUTHORIZATION.—In addition to 
amounts authorized by subsection (a), there are author-
ized to be appropriated to carry out this Act 
$1,025,000,000 for fiscal year 2003. Such sums shall re-
main available until September 30, 2004.’’. 
SEC. 802. APPALACHIAN REGIONAL DEVELOPMENT. 
Section 401 of the Appalachian Regional Develop-
ment Act of 1965 (40 U.S.C. App.) is amended by adding 
at the end the following: 
‘‘(c) ADDITIONAL AUTHORIZATION.—In addition to 
amounts authorized by subsection (a), there are author-
ized to be appropriated to the Commission to carry out 
this Act $175,000,000 for fiscal year 2003. Such sums 
shall remain available until September 30, 2004.’’.
SEC. 803. DELTA REGIONAL DEVELOPMENT. 
Section 382M of the Consolidated Farm and Rural 
Development Act (7 U.S.C. 2009aa–12) is amended—
(1) by redesignating subsection (b) as sub-
section (c); 
(2) by inserting after subsection (a) the fol-
lowing: 
‘‘(b) ADDITIONAL AUTHORIZATION.—In addition to 
amounts authorized by subsection (a), there are author-
ized to be appropriated to the Authority to carry out this 
subtitle $175,000,000 for fiscal year 2003. Such sums 
shall remain available until September 30, 2004.’’; and 
(3) in subsection (c) (as so redesignated) by 
striking ‘‘subsection (a)’’ and inserting ‘‘subsections 
(a) and (b)’’.
SEC. 804. NORTHERN GREAT PLAINS REGIONAL DEVELOP-
MENT. 
Section 383M of the Consolidated Farm and Rural 
Development Act (7 U.S.C. 2009bb–12) is amended—
(1) in subsection (b) by striking ‘‘subsection 
(a)’’ and inserting ‘‘this section’’; and 
(2) by adding at the end the following: 
‘‘(d) ADDITIONAL
AUTHORIZATION
FOR
FISCAL 
YEAR 2003.—In addition to amounts authorized by sub-
section (a), there is authorized to be appropriated to the 
Authority to carry out this subtitle $175,000,000 for fiscal
year 2003. Such sums shall remain available until Sep-
tember 30, 2004.’’.
TITLE IX—PUBLIC BUILDINGS 
INFRASTRUCTURE INVESTMENT 
SEC. 901. SECURITY ENHANCEMENTS FOR GSA PROP-
ERTIES. 
(a) AUTHORIZATION OF APPROPRIATIONS.—In addi-
tion to other amounts credited to the Federal Buildings 
Fund established pursuant to section 210(f) of the Fed-
eral Property and Administrative Services Act of 1949 (40 
U.S.C. 490(f)), there is authorized to be appropriated 
$500,000,000 for fiscal year 2003 to be credited to the 
Fund. Such sums shall remain available until September 
30, 2004. 
(b) USE OF FUNDS.—Amounts credited to the Fund 
under this section shall be available to the Administrator 
of General Services to carry out projects and activities for 
enhancing the security of properties under the control of 
the General Services Administration, including general 
purpose office space, courthouses, and border crossing sta-
tions, and for other repair and alteration purposes.
TITLE X—GENERAL PROVISIONS 
SEC. 1001. PRIORITY CONSIDERATION FOR SECURITY 
PROJECTS. 
The head of a Federal department or agency may 
provide financial assistance with any increase in funds au-
thorized or made available by, or with any increase in obli-
gation authority made available by, this Act (including the 
amendments made by this Act) only if the recipient of 
such assistance certifies to the head of such department 
or agency that the recipient will give priority consideration 
to programs or projects that enhance security, to the ex-
tent that such programs or projects are immediately ready 
to be implemented. 
SEC. 1002. TEMPORARY WAIVER OF NON-FEDERAL SHARE. 
(a) IN GENERAL.—Notwithstanding any other provi-
sion of law and subject to subsection (b), in providing fi-
nancial assistance for a program or project with any in-
crease in funds authorized or made available by, or with 
any increase in obligation authority made available by, this 
Act (including the amendments made by this Act (other 
than subtitle A of title I of this Act)), the head of a Fed-
eral department or agency, upon request of the recipient 
of such assistance, may increase the Federal share of the 
cost of the program or project to not to exceed 100 percent 
of such cost.
(b) REPAYMENTS.—Before increasing the Federal 
share of the cost of a program or project under subsection 
(a), the head of a Federal department or agency shall 
enter into a legally binding agreement with the recipient 
of financial assistance for the program or project under 
which the recipient agrees to repay the United States for 
the increased Federal share of the program or project on 
or before September 30, 2005. 
SEC. 1003. MAINTENANCE OF EFFORT. 
The head of a Federal department or agency may 
provide financial assistance for a program or project with 
any increase in funds authorized or made available by, or 
with any increase in obligation authority made available 
by, this Act (including the amendments made by this Act) 
for a fiscal year only if the recipient of such assistance 
certifies to the head of such department or agency that 
the aggregate expenditure of funds of the recipient, exclu-
sive of Federal funds, for such program or project will be 
maintained at a level that does not fall below the average 
level of such expenditure for the preceding 2 fiscal years 
of the recipient. 
SEC. 1004. LABOR STANDARDS. 
(a) PREVAILING WAGES.—The head of a Federal de-
partment or agency providing financial assistance with 
any increase in funds authorized or made available by, or
with any increase in obligation authority made available 
by, this Act (including the amendments made by this Act) 
shall ensure that laborers and mechanics employed by con-
tractors and subcontractors in construction work financed 
by such financial assistance will be paid wages not less 
than those prevailing on similar construction in the local-
ity, as determined by section 3142 of title 40, United 
States Code (known as the Davis-Bacon Act). The head 
of the department or agency shall provide such financial 
assistance only after being assured that required labor 
standards will be maintained on the construction work. 
(b) WAGE RATES.—Wage rates in a collective bar-
gaining agreement negotiated under the Railway Labor 
Act (45 U.S.C. 151 et seq.) are deemed for purposes of 
this section to comply with section 3142 of title 40, United 
States Code (known as the Davis-Bacon Act). 
SEC. 1005. BUY AMERICA. 
(a) PREFERENCE.—The head of a Federal depart-
ment or agency may provide financial assistance for a 
project with any increase in funds authorized or made 
available by, or with any increase in obligation authority 
made available by, this Act (including the amendments 
made by this Act) only if steel and manufactured goods 
used in the project are produced in the United States.
(b) WAIVER.—The head of a Federal department or 
agency may waive subsection (a) if the head of the Federal 
department or agency finds that—
(1) applying subsection (a) would be incon-
sistent with the public interest; 
(2) the steel and goods produced in the United 
States are not produced in a sufficient and reason-
ably available amount or are not of a satisfactory 
quality; 
(3) when procuring a facility or equipment with 
any increase in funds or obligation authority de-
scribed in subsection (a)—
(A) the cost of components and subcompo-
nents produced in the United States is more 
than 60 percent of the cost of all components 
of the facility or equipment; and 
(B) final assembly of the facility or equip-
ment has occurred in the United States; or 
(4) including domestic material will increase the 
cost of the overall project by more than 25 percent. 
(c) LABOR COSTS.—In this section, labor costs in-
volved in final assembly are not included in calculating the 
cost of components.
TITLE XI—REVENUE OFFSETS 
SEC. 1100. AMENDMENT OF 1986 CODE. 
Except as otherwise expressly provided, whenever in 
this title an amendment or repeal is expressed in terms 
of an amendment to, or repeal of, a section or other provi-
sion, the reference shall be considered to be made to a 
section or other provision of the Internal Revenue Code 
of 1986. 
Subtitle A—Provisions Designed To 
Curtail Tax Shelters 
SEC. 1101. 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 are any Fed-
eral tax effects, also apart from any 
foreign, 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. 1102. 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. 1103. 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
TRANS-
ACTION
UNDERSTATEMENT.—For purposes of 
this subsection, the term ‘noneconomic sub-
stance transaction 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. 1104. 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. 1105. 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. 1106. 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. 1107. 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).
100
‘‘(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—
101
‘‘(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:
102
‘‘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. 1108. 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
103
‘‘(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
104
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. 1109. 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
105
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. 1110. 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
106
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
107
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. 1111. 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
108
(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. 1112. 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—
109
‘‘(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
110
‘‘(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. 1113. 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)—
111
‘‘(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—
112
‘‘(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-
113
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
114
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
115
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-
116
scribes a list under section 6702(c) of the Internal Rev-
enue Code of 1986, as amended by subsection (a). 
SEC. 1114. 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.
117
(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. 1115. 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.
118
SEC. 1116. 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 collection 
of such tax may be begun without assessment, 
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.
119
SEC. 1117. 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.
120
Subtitle B—OTHER PROVISIONS 
SEC. 1121. 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
121
‘‘(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
122
‘‘(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
123
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-
124
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. 1122. 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
125
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.—
126
‘‘(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.’’
127
(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.—
128
(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.
129
SEC. 1123. 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.