I 
108TH CONGRESS 
1ST SESSION H. R. 3655
To amend the Internal Revenue Code of 1986 to replace the earned income 
credit, the child tax credit, and the deduction for dependents with a 
simplified family tax credit. 
IN THE HOUSE OF REPRESENTATIVES 
DECEMBER 8, 2003
Mr. KUCINICH (for himself, Ms. LEE, and Mr. SANDERS) introduced the 
following bill; which was referred to the Committee on Ways and Means 
A BILL 
To amend the Internal Revenue Code of 1986 to replace 
the earned income credit, the child tax credit, and the 
deduction for dependents with a simplified family tax 
credit.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE, ETC. 
(a) SHORT TITLE.—This Act may be cited as the 
‘‘Progressive Tax Act of 2003’’. 
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
ment or repeal is expressed in terms of an amendment
to, or repeal of, a section or other provision, the reference 
shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986. 
(c) TABLE OF CONTENTS.—
Sec. 1. Short title, etc. 
TITLE I—TAX RELIEF 
Sec. 101. Simplified family credit. 
Sec. 102. Child support included in gross income of recipient and allowed as 
deduction to payor. 
Sec. 103. Refundable credit for payroll taxes. 
TITLE II—PROVISIONS RELATING TO CORPORATE TAX 
Subtitle A—Provisions Designed To Curtail Tax Shelters 
Sec. 201. Clarification of economic substance doctrine. 
Sec. 202. Penalty for failing to disclose reportable transaction. 
Sec. 203. Accuracy-related penalty for listed transactions and other reportable 
transactions having a significant tax avoidance purpose. 
Sec. 204. Penalty for understatements attributable to transactions lacking eco-
nomic substance, etc. 
Sec. 205. Modifications of substantial understatement penalty for nonreportable 
transactions. 
Sec. 206. Tax shelter exception to confidentiality privileges relating to taxpayer 
communications. 
Sec. 207. Disclosure of reportable transactions. 
Sec. 208. Modifications to penalty for failure to register tax shelters. 
Sec. 209. Modification of penalty for failure to maintain lists of investors. 
Sec. 210. Modification of actions to enjoin certain conduct related to tax shel-
ters and reportable transactions. 
Sec. 211. Understatement of taxpayer’s liability by income tax return preparer. 
Sec. 212. Penalty on failure to report interests in foreign financial accounts. 
Sec. 213. Frivolous tax submissions. 
Sec. 214. Regulation of individuals practicing before the Department of Treas-
ury. 
Sec. 215. Penalty on promoters of tax shelters. 
Sec. 216. Statute of limitations for taxable years for which listed transactions 
not reported. 
Sec. 217. Denial of deduction for interest on underpayments attributable to 
nondisclosed reportable and noneconomic substance trans-
actions. 
Subtitle B—Other Provisions 
Sec. 221. Limitation on transfer or importation of built-in losses. 
Sec. 222. Disallowance of certain partnership loss transfers. 
Sec. 223. No reduction of basis under section 734 in stock held by partnership 
in corporate partner. 
Sec. 224. Repeal of special rules for FASITS. 
Sec. 225. Expanded disallowance of deduction for interest on convertible debt.
Sec. 226. Expanded authority to disallow tax benefits under section 269. 
Sec. 227. Modifications of certain rules relating to controlled foreign corpora-
tions. 
Sec. 228. Basis for determining loss always reduced by nontaxed portion of 
dividends. 
Sec. 229. Affirmation of consolidated return regulation authority. 
TITLE III—OTHER REVENUE OFFSETS 
Sec. 301. Modification of individual income tax brackets and rates. 
Sec. 302. Repeal of removal of limitations on itemized deductions and exemp-
tion amount. 
Sec. 303. Individual capital gains and dividends treated as ordinary income. 
Sec. 304. Restoration and modifications of estate tax; repeal of carryover basis. 
Sec. 305. Extension of superfund, oil spill liability, and leaking underground 
storage tank taxes. 
Sec. 306. Limitation on certain business provisions enacted in 2002 and 2003. 
Sec. 307. Repeal of exclusion for parking transportation fringe benefit. 
Sec. 308. Repeal of certain deductions relating to second homes.
TITLE I—TAX RELIEF 
SEC. 101. SIMPLIFIED FAMILY CREDIT. 
(a) IN GENERAL.—Section 32 of the Internal Rev-
enue Code of 1986 (relating to earned income credit) is 
amended to read as follows: 
‘‘SEC. 32. SIMPLIFIED FAMILY CREDIT. 
‘‘(a) ALLOWANCE OF CREDIT.—In the case of an eli-
gible individual, there shall be allowed as a credit against 
the tax imposed by this subtitle for the taxable year an 
amount equal to 50 percent of the taxpayer’s modified ad-
justed gross income for the taxable year. 
‘‘(b) LIMITATIONS.—For purposes of subsection 
(a)—
‘‘(1) LIMITATION BASED ON QUALIFYING CHIL-
DREN.—The amount of the credit allowable to a tax-
payer under paragraph (1) for any taxable year shall 
not exceed the lesser of—
‘‘(A) $2,000 multiplied by the number of 
qualifying children of the taxpayer, and 
‘‘(B) 50 percent of earned income. 
‘‘(2) LIMITATION BASED ON ADJUSTED GROSS 
INCOME.—
‘‘(A) IN
GENERAL.—The amount of the 
credit allowable under subsection (a) shall be 
reduced (but not below zero) by $50 for each 
$1,000 (or fraction thereof) by which the tax-
payer’s modified adjusted gross income exceeds 
the threshold amount. 
‘‘(B) THRESHOLD AMOUNT.—For purposes 
of subparagraph (A), the term ‘threshold 
amount’ means—
‘‘(i) $150,000 in the case of a joint 
return, 
‘‘(ii) $100,000 in the case of an indi-
vidual who is not married, and 
‘‘(iii) $75,000 in the case of a married 
individual filing a separate return.
For purposes of this paragraph, marital status 
shall be determined under section 7703. 
‘‘(3) LIMITATION ON AMOUNT OF REFUNDABLE 
CREDIT.—
‘‘(A) IN
GENERAL.—The amount of the 
credit allowed under subsection (a) for a tax-
able year which is allowed under this subpart 
shall not exceed the earned income of the tax-
payer for such year. 
‘‘(B) ALLOWANCE OF REMAINING AMOUNT 
OF CREDIT.—The excess of—
‘‘(i) the amount of the credit allowed 
under subsection (a), over 
‘‘(ii) the amount of the credit allowed 
under this subpart by reason of subpara-
graph (A), 
shall be treated as a credit allowed under sub-
part B for such taxable year and not under this 
subpart. 
‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) ELIGIBLE INDIVIDUAL.—
‘‘(A) IN GENERAL.—The term ‘eligible in-
dividual’ means any individual who has a quali-
fying child for the taxable year. 
‘‘(B) INDIVIDUAL
WHO
IS
QUALIFYING 
CHILD
INELIGIBLE.—If an individual is the 
qualifying child of a taxpayer for any taxable 
year of such taxpayer beginning in a calendar
year, such individual shall not be treated as an 
eligible individual for any taxable year of such 
individual beginning in such calendar year. 
‘‘(C) EXCEPTION FOR INDIVIDUAL CLAIM-
ING BENEFITS UNDER SECTION 911.—The term 
‘eligible individual’ does not include any indi-
vidual who claims the benefits of section 911 
(relating to citizens or residents living abroad) 
for the taxable year. 
‘‘(D) LIMITATION ON ELIGIBILITY OF NON-
RESIDENT
ALIENS.—The term ‘eligible indi-
vidual’ shall not include any individual who is 
a nonresident alien individual for any portion of 
the taxable year unless such individual is treat-
ed for such taxable year as a resident of the 
United States for purposes of this chapter by 
reason of an election under subsection (g) or 
(h) of section 6013. 
‘‘(E) IDENTIFICATION NUMBER REQUIRE-
MENT.—No credit shall be allowed under this 
section to an eligible individual who does not in-
clude on the return of tax for the taxable 
year—
‘‘(i) such individual’s taxpayer identi-
fication number, and
‘‘(ii) if the individual is married (with-
in the meaning of section 7703), the tax-
payer identification number of such indi-
vidual’s spouse. 
‘‘(F) INDIVIDUALS WHO DO NOT INCLUDE 
TIN, ETC., OF ANY QUALIFYING CHILD.—No 
credit shall be allowed under this section to any 
eligible individual who has one or more quali-
fying children if no qualifying child of such in-
dividual is taken into account under subsection 
(b) by reason of paragraph (2)(F). 
‘‘(2) QUALIFYING CHILD.—
‘‘(A) IN GENERAL.—The term ‘qualifying 
child’ means, with respect to any taxpayer for 
any taxable year, an individual—
‘‘(i) who bears a relationship to the 
taxpayer described in subparagraph (B), 
‘‘(ii) who has the same principal place 
of abode as the taxpayer for more than 
one-half of such taxable year (or, in the 
case of a student, meets the requirements 
of subparagraph (F)), and 
‘‘(iii) who meets the age requirements 
of subparagraph (C). 
‘‘(B) RELATIONSHIP TEST.—
‘‘(i) 
IN
GENERAL.—An 
individual 
bears a relationship to the taxpayer de-
scribed in this subparagraph if such indi-
vidual is—
‘‘(I) a son, daughter, stepson, or 
stepdaughter, or a descendant of any 
such individual, 
‘‘(II) a brother, sister, step-
brother, or stepsister, or a descendant 
of any such individual, who the tax-
payer cares for as the taxpayer’s own 
child, or 
‘‘(III) an eligible foster child of 
the taxpayer. 
‘‘(ii) MARRIED CHILDREN.—Clause (i) 
shall not apply to any individual who has 
made a joint return with his spouse under 
section 6013 for the taxable year beginning 
in the calendar year in which the taxable 
year of the taxpayer begins. 
‘‘(iii) ELIGIBLE FOSTER CHILD.—For 
purposes of clause (i), the term ‘eligible 
foster child’ means an individual not de-
scribed in subclause (I) or (II) of clause (i) 
who—
‘‘(I) is placed with the taxpayer 
by an authorized placement agency, 
and 
‘‘(II) the taxpayer cares for as 
the taxpayer’s own child. 
‘‘(iv) ADOPTION.—For purposes of 
this subparagraph, a child who is legally 
adopted, or who is placed with the tax-
payer by an authorized placement agency 
for adoption by the taxpayer, shall be 
treated as a child by blood. 
‘‘(C) AGE REQUIREMENTS.—An individual 
meets the requirements of this subparagraph if 
such individual—
‘‘(i) has not attained the age of 19 as 
of the close of the calendar year in which 
the taxable year of the taxpayer begins, 
‘‘(ii) is a student who has not attained 
the age of 24 as of the close of such cal-
endar year, or
‘‘(iii) is permanently and totally dis-
abled (as defined in section 22(e)(3)) at 
any time during the taxable year. 
‘‘(D) IDENTIFICATION REQUIREMENTS.—
‘‘(i) IN GENERAL.—A qualifying child 
shall not be taken into account under sub-
section (b) unless the taxpayer includes the 
name, age, and TIN of the qualifying child 
on the return of tax for the taxable year. 
‘‘(ii) OTHER
METHODS.—The Sec-
retary may prescribe other methods for 
providing the information described in 
clause (i). 
‘‘(E) ABODE
MUST
BE
IN
THE
UNITED 
STATES.—The requirements of subparagraph 
(A)(ii) shall be met only if the principal place 
of abode is in the United States. 
‘‘(F ) SPECIAL RULES RELATING TO STU-
DENTS.—For purposes of this paragraph—
‘‘(i) STUDENT
DEFINED.—The term 
‘student’ means an individual who during 
each of 5 calendar months during the cal-
endar year in which the taxable year of the 
taxpayer begins—
‘‘(I) is a full-time student at an 
educational organization described in 
section 170(b)(1)(A)(ii); or 
‘‘(II) is pursuing a full-time 
course of institutional on-farm train-
ing under the supervision of an ac-
credited agent of an educational orga-
nization 
described 
in 
section 
170(b)(1)(A)(ii) or of a State or polit-
ical subdivision of a State. 
‘‘(ii) SUPPORT TEST.—In the case of 
an individual who is a student, the indi-
vidual meets the requirements of this sub-
paragraph if such individual is a dependent 
(within the meaning of section 152). 
‘‘(G) 2
OR
MORE
CLAIMING
QUALIFYING 
CHILD.—
‘‘(i) IN
GENERAL.—Except as pro-
vided in clause (ii), if (but for this sub-
paragraph) an individual may be claimed, 
and is claimed, as a qualifying child by 2 
or more taxpayers for a taxable year begin-
ning in the same calendar year, such indi-
vidual shall be treated as the qualifying 
child of the taxpayer who is—
‘‘(I) a parent of the individual, or 
‘‘(II) if subclause (I) does not 
apply, the taxpayer with the highest 
adjusted gross income for such tax-
able year.
‘‘(4) MODIFIED
ADJUSTED
GROSS
INCOME.—
The term ‘modified adjusted gross income’ means 
adjusted gross income increased by any amount ex-
cluded from gross income under section 911, 931, or 
933. 
‘‘(5) TREATMENT
OF
MILITARY
PERSONNEL 
STATIONED
OUTSIDE
THE
UNITED
STATES.—For 
purposes of subparagraphs (A)(ii) and (E) of para-
graph (3), the principal place of abode of a member 
of the Armed Forces of the United States shall be 
treated as in the United States during any period 
during which such member is stationed outside the 
United States while serving on extended active duty 
with the Armed Forces of the United States. For 
purposes of the preceding sentence, the term ‘ex-
tended active duty’ means any period of active duty 
pursuant to a call or order to such duty for a period 
in excess of 90 days or for an indefinite period. 
‘‘(d) MARRIED INDIVIDUALS.—In the case of an indi-
vidual who is married (within the meaning of section
7703), this section shall apply only if a joint return is filed 
for the taxable year under section 6013. 
‘‘(e) TAXABLE YEAR MUST BE FULL TAXABLE 
YEAR.—Except in the case of a taxable year closed by rea-
son of the death of the taxpayer, no credit shall be allow-
able under this section in the case of a taxable year cov-
ering a period of less than 12 months. 
‘‘(f) INFLATION ADJUSTMENTS.—
‘‘(1) IN GENERAL.—In the case of any taxable 
year beginning after 2004, each of the dollar 
amounts in subsections (b)(1)(A) and (b)(2)(B) shall 
be increased by an amount equal to—
‘‘(A) such dollar amount, multiplied by 
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for the calendar 
year in which the taxable year begins, deter-
mined by substituting ‘calendar year 2003’ for 
‘calendar year 1992’ in subparagraph (B) 
thereof. 
‘‘(2) ROUNDING.—If any dollar amount in sub-
section (b)(1)(A) after being increased under para-
graph (1) is not a multiple of $10, such dollar 
amount shall be rounded to the nearest multiple of 
$10, and if any dollar amount in subsection 
(b)(2)(B) after being increased under paragraph (1) 
is not a multiple of $1,000, such dollar amount shall 
be rounded to the nearest multiple of $1,000. 
‘‘(i) COORDINATION WITH CERTAIN MEANS-TESTED 
PROGRAMS.—For purposes of—
‘‘(1) the United States Housing Act of 1937,
‘‘(2) title V of the Housing Act of 1949, 
‘‘(3) section 101 of the Housing and Urban De-
velopment Act of 1965, 
‘‘(4) sections 221(d)(3), 235, and 236 of the 
National Housing Act, and 
‘‘(5) the Food Stamp Act of 1977—
any refund made to an individual (or the spouse of an 
individual) by reason of this section, and any payment 
made to such individual (or such spouse) by an employer 
under section 3507, shall not be treated as income (and 
shall not be taken into account in determining resources 
for the month of its receipt and the following month). 
‘‘(j) IDENTIFICATION NUMBERS.—Solely for pur-
poses of subsections (c)(1)(F) and (c)(3)(D), a taxpayer 
identification number means a social security number 
issued to an individual by the Social Security Administra-
tion (other than a social security number issued pursuant 
to clause (II) (or that portion of clause (III) that relates 
to clause (II)) of section 205(c)(2)(B)(i) of the Social Se-
curity Act).’’. 
(b) REPEALS OF OTHER PROVISIONS.—
(1) CHILD CREDIT.—Section 24 is hereby re-
pealed. 
(2) DEDUCTION FOR EXEMPTION FOR DEPEND-
ENTS DISALLOWED TO CREDIT RECIPIENTS.—Sub-
section (c) of section 151 is amended by adding at 
the end the following new paragraph: 
‘‘(7) DEDUCTION
FOR
EXEMPTION
FOR
DE-
PENDENTS DISALLOWED TO CREDIT RECIPIENTS.—
No exemption shall be allowed under this section for 
a dependent for a taxable year if a credit is allowed 
under section 32 with respect to such dependent for 
such taxable year.’’. 
(c) CONFORMING AMENDMENTS.—
(1) AMENDMENTS
RELATING
TO
REPEAL
OF 
CHILD CREDIT.—
(A) Sections 25(e)(1)(C) and 1400C(d) (as 
in effect for taxable years after December 31, 
2003) are both amended by striking ‘‘24,’’. 
(B) Section 501(c)(26) is amended by in-
serting ‘‘(as in effect before the enactment of 
the Progressive Tax Act of 2003)’’ after ‘‘sec-
tion 24(c)’’. 
(C) Section 6213(g)(2) is amended—
(i) by striking subparagraph (I), and 
(ii) in subparagraph (L), by striking 
‘‘21, 24, or 32’’ and inserting ‘‘21 or 32’’. 
(2) AMENDMENTS
RELATING
TO
REPEAL
OF 
DEDUCTION FOR EXEMPTION FOR DEPENDENTS.—
(A) Section 2(a) is amended by striking ‘‘a 
deduction for the taxable year under section 
151’’ and inserting ‘‘a credit for the taxable 
year under section 32’’. 
(B) Section 2(b) is amended by striking ‘‘a 
deduction for the taxable year for such person 
under section 151’’ and inserting ‘‘a credit for 
the taxable year for such person under section 
32’’. 
(C) Section 21(b)(1)(A) is amended by 
striking ‘‘a deduction under section 151(c)’’ 
and inserting ‘‘a credit under section 32’’. 
(D) Section 21(e)(6)(A) is amended by 
striking ‘‘deduction under section 151(c)’’ and 
inserting ‘‘credit under section 32’’. 
(E) 
Sections 
25A(f)(1)(A)(iii) 
and 
25A(g)(3) are amended by striking ‘‘deduction 
under section 151’’ both places it appears and 
inserting ‘‘credit under section 32’’. 
(F) Section 25B(c)(2)(A) is amended by 
striking ‘‘deduction under section 151’’ and in-
serting ‘‘credit under section 32’’. 
(G) Section 35(d)(1)(B) is amended by 
striking ‘‘deduction under section 151(c)’’ and 
inserting ‘‘credit under section 32’’.
(H) Section 35(g)(4) is amended by strik-
ing ‘‘deduction under section 151’’ and insert-
ing ‘‘credit under section 32’’. 
(I) Section 63(c)(5) is amended by striking 
‘‘deduction under section 151’’ and inserting 
‘‘credit under section 32’’. 
(J) Section 129(c)(1) is amended by strik-
ing ‘‘deduction is allowable under section 151(c) 
(relating to personal exemptions for depend-
ents) ’’ and inserting ‘‘credit is allowable under 
section 32 (relating to simplified family cred-
it)’’. 
(K) Section 135(c)(2)(A)(iii) is amended 
by striking ‘‘deduction under section 151’’ and 
inserting ‘‘credit under section 32’’. 
(L) Section 220(b)(6) is amended by strik-
ing ‘‘deduction under section 151’’ and insert-
ing ‘‘credit under section 32’’.
(M) Section 221(c) is amended by striking 
‘‘deduction under section 151’’ and inserting 
‘‘credit under section 32’’. 
(N) Section 222(c)(3) is amended by strik-
ing ‘‘deduction under section 151’’ and insert-
ing ‘‘credit under section 32’’.
(O) Section 2032A(c)(7)(D) is amended by 
striking ‘‘section 151(c)(4)’’ and inserting ‘‘sec-
tion 32(c)(3)(F)’’. 
(P) Section 6012(a)(1)(A) is amended by 
striking ‘‘an exemption for such spouse under 
section 151(c)’’ and inserting ‘‘a credit for such 
spouse under section 32’’. 
(Q) Section 7703(b)(1) is amended by 
striking ‘‘deduction for the taxable year under 
section 151’’ and inserting ‘‘credit for the tax-
able year under section 32’’. 
(d) CLERICAL AMENDMENT.—The table of sections 
for subpart C of part IV of subchapter A of chapter 1 
is amended by striking the item relating to section 32 and 
inserting the following:
‘‘Sec. 32. Simplified family credit.’’.
(e) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by 
this section shall apply to taxable years beginning 
after December 31, 2003. 
(2) TRANSITIONAL RULE FOR NONCUSTODIAL 
PARENTS.—
(A) IN GENERAL.—If, on the last day of 
the taxable year, an eligible individual is the 
noncustodial parent of a qualifying child, the 
Internal Revenue Code of 1986 shall be applied
to such individual without regard to the amend-
ments made by this section. 
(B) DEFINITIONS.—For purposes of sub-
paragraph (A), the terms ‘eligible individual’ 
and ‘qualifying child’ shall have the meanings 
given such terms by section 32(c) of the Inter-
nal Revenue Code of 1986 (as amended by this 
section). 
SEC. 102. CHILD SUPPORT INCLUDED IN GROSS INCOME OF 
RECIPIENT AND ALLOWED AS DEDUCTION TO 
PAYOR. 
(a) CHILD SUPPORT INCLUDED IN GROSS INCOME.—
Subsection (c) of section 71 of the Internal Revenue Code 
of 1986 (relating to alimony and separate maintenance 
payments) is amended to read as follows: 
‘‘(c) PAYMENTS TO SUPPORT CHILDREN.—Notwith-
standing any other provision of this section, the term ‘ali-
mony or separate maintenance payment’ includes any pay-
ment or part of a payment which the terms of the divorce 
or separation instrument fix (in terms of an amount of 
money or a part of the payment) as a sum which is pay-
able for the support of children of the payor spouse.’’. 
(b) CLARIFICATION THAT CHILD SUPPORT AL-
LOWED AS DEDUCTION.—Subsection (b) of section 215
(relating to alimony, etc., payments) is amended by strik-
ing ‘‘section 71(b)’’ and inserting ‘‘section 71’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003. 
SEC. 103. REFUNDABLE CREDIT FOR PAYROLL TAXES. 
(a) IN GENERAL.—Subpart C of part IV of sub-
chapter A of chapter 1 of the Internal Revenue Code of 
1986 (relating to refundable credits) is amended by redes-
ignating section 36 as section 37 and by inserting after 
section 35 the following new section: 
‘‘SEC. 36. CREDIT FOR PAYROLL TAXES. 
‘‘(a) IN GENERAL.—In the case of an individual, 
there shall be allowed as a credit against the tax imposed 
by this subtitle for the taxable year an amount equal to 
the social security taxes paid with respect to the individual 
for the taxable year. 
‘‘(b) LIMITATION BASED ON ADJUSTED GROSS IN-
COME.—The amount which (but for this subsection) would 
be allowable as a credit under this section shall be reduced 
(but not below zero) by the amount which bears the same 
ratio to the amount which would be so taken into account 
as—
‘‘(1) the excess of—
‘‘(A) the taxpayer’s modified adjusted 
gross income for such taxable year, over 
‘‘(B) $15,000 ($30,000 in the case of a 
joint return), bears to 
‘‘(2) $15,000. 
For purposes of the preceding sentence, the term ‘modi-
fied adjusted gross income’ means adjusted gross income 
increased by any amount excluded from gross income 
under section 911, 931, or 933. 
‘‘(c) SOCIAL SECURITY TAXES.—For purposes of this 
section—
‘‘(1) IN GENERAL.—The term ‘social security 
taxes’ means, with respect to an individual for the 
taxable year, the sum of—
‘‘(A) the amount of the taxes imposed by 
section 3101, 3111, 3201, 3211, and 3221 on 
amounts received by the taxpayer during the 
calendar year in which the taxable year begins, 
and 
‘‘(B) the taxes imposed by section 1401 on 
the self-employment income of the taxpayer for 
the taxable year. 
‘‘(2) COORDINATION WITH SPECIAL REFUND OF 
SOCIAL SECURITY TAXES.—The term ‘social security 
taxes’ shall not include any taxes to the extent the
taxpayer is entitled to a special refund of such taxes 
under section 6413(c). 
‘‘(3) SPECIAL RULE.—Any amounts paid pursu-
ant to an agreement under section 3121(l) (relating 
to agreements entered into by American employers 
with respect to foreign affiliates) which are equiva-
lent to the taxes referred to in paragraph (1)(A) 
shall be treated as taxes referred to in such para-
graph.’’.
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (2) of section 1324(b) of title 
31, United States Code, is amended by inserting ‘‘or 
36’’ after ‘‘section 35’’. 
(2) The table of sections for subpart C of part 
IV of subchapter A of chapter 1 of the Internal Rev-
enue Code of 1986 is amended by striking the last 
item and inserting the following new items:
‘‘Sec. 36. Credit for payroll taxes. 
‘‘Sec. 37. Overpayments of tax.’’.
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003.
TITLE II—PROVISIONS 
RELATING TO CORPORATE TAX 
Subtitle A—Provisions Designed To 
Curtail Tax Shelters 
SEC. 201. 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 
December 31, 2003. 
SEC. 202. 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. 203. 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 arrange-
ment— 
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. 204. 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 
December 31, 2003. 
SEC. 205. 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. 206. 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. 207. DISCLOSURE OF REPORTABLE TRANSACTIONS. 
(a) IN GENERAL.—Section 6111 (relating to registra-
tion of tax shelters) is amended to read as follows: 
‘‘SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS. 
‘‘(a) IN GENERAL.—Each material advisor with re-
spect to any reportable transaction shall make a return 
(in such form as the Secretary may prescribe) setting 
forth—
‘‘(1) information identifying and describing the 
transaction, 
‘‘(2) information describing any potential tax 
benefits expected to result from the transaction, and 
‘‘(3) such other information as the Secretary 
may prescribe. 
Such return shall be filed not later than the date specified 
by the Secretary. 
‘‘(b) DEFINITIONS.—For purposes of this section—
‘‘(1) MATERIAL ADVISOR.—
‘‘(A) IN
GENERAL.—The term ‘material 
advisor’ means any person—
‘‘(i) who provides any material aid, 
assistance, or advice with respect to orga-
nizing, promoting, selling, implementing, 
or carrying out any reportable transaction, 
and 
‘‘(ii) who directly or indirectly derives 
gross income in excess of the threshold 
amount for such aid, assistance, or advice. 
‘‘(B) THRESHOLD AMOUNT.—For purposes 
of subparagraph (A), the threshold amount is—
‘‘(i) $50,000 in the case of a report-
able transaction substantially all of the tax 
benefits from which are provided to nat-
ural persons, and 
‘‘(ii) $250,000 in any other case. 
‘‘(2) REPORTABLE
TRANSACTION.—The term 
‘reportable transaction’ has the meaning given to 
such term by section 6707A(c). 
‘‘(c) REGULATIONS.—The Secretary may prescribe 
regulations which provide—
‘‘(1) that only 1 person shall be required to 
meet the requirements of subsection (a) in cases in
which 2 or more persons would otherwise be re-
quired to meet such requirements, 
‘‘(2) exemptions from the requirements of this 
section, and 
‘‘(3) such rules as may be necessary or appro-
priate to carry out the purposes of this section.’’
(b) CONFORMING AMENDMENTS.—
(1) The item relating to section 6111 in the 
table of sections for subchapter B of chapter 61 is 
amended to read as follows:
‘‘Sec. 6111. Disclosure of reportable transactions.’’
(2)(A) So much of section 6112 as precedes 
subsection (c) thereof is amended to read as follows: 
‘‘SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANS-
ACTIONS MUST KEEP LISTS OF ADVISEES. 
‘‘(a) IN GENERAL.—Each material advisor (as de-
fined in section 6111) with respect to any reportable 
transaction (as defined in section 6707A(c)) shall main-
tain, in such manner as the Secretary may by regulations 
prescribe, a list—
‘‘(1) identifying each person with respect to 
whom such advisor acted as such a material advisor 
with respect to such transaction, and 
‘‘(2) containing such other information as the 
Secretary may by regulations require.
This section shall apply without regard to whether a mate-
rial advisor is required to file a return under section 6111 
with respect to such transaction.’’
(B) Section 6112 is amended by redesignating 
subsection (c) as subsection (b).
(C) Section 6112(b), as redesignated by sub-
paragraph (B), is amended—
(i) by inserting ‘‘written’’ before ‘‘request’’ 
in paragraph (1)(A), and 
(ii) by striking ‘‘shall prescribe’’ in para-
graph (2) and inserting ‘‘may prescribe’’. 
(D) The item relating to section 6112 in the 
table of sections for subchapter B of chapter 61 is 
amended to read as follows:
‘‘Sec. 6112. Material advisors of reportable transactions must 
keep lists of advisees.’’
(3)(A) The heading for section 6708 is amend-
ed to read as follows: 
‘‘SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES 
WITH RESPECT TO REPORTABLE TRANS-
ACTIONS.’’
(B) The item relating to section 6708 in the 
table of sections for part I of subchapter B of chap-
ter 68 is amended to read as follows:
‘‘Sec. 6708. Failure to maintain lists of advisees with respect to 
reportable transactions.’’
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions with respect to 
which material aid, assistance, or advice referred to in sec-
tion 6111(b)(1)(A)(i) of the Internal Revenue Code of 
1986 (as added by this section) is provided after the date 
of the enactment of this Act. 
SEC. 208. MODIFICATIONS TO PENALTY FOR FAILURE TO 
REGISTER TAX SHELTERS. 
(a) IN GENERAL.—Section 6707 (relating to failure 
to furnish information regarding tax shelters) is amended 
to read as follows: 
‘‘SEC. 6707. FAILURE TO FURNISH INFORMATION REGARD-
ING REPORTABLE TRANSACTIONS. 
‘‘(a) IN GENERAL.—If a person who is required to 
file a return under section 6111(a) with respect to any 
reportable transaction—
‘‘(1) fails to file such return on or before the 
date prescribed therefor, or 
‘‘(2) files false or incomplete information with 
the Secretary with respect to such transaction, 
such person shall pay a penalty with respect to such return 
in the amount determined under subsection (b). 
‘‘(b) AMOUNT OF PENALTY.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the penalty imposed under subsection (a) 
with respect to any failure shall be $50,000. 
‘‘(2) LISTED TRANSACTIONS.—The penalty im-
posed under subsection (a) with respect to any listed 
transaction shall be an amount equal to the greater 
of—
‘‘(A) $200,000, or 
‘‘(B) 50 percent of the gross income de-
rived by such person with respect to aid, assist-
ance, or advice which is provided with respect 
to the reportable transaction before the date the 
return including the transaction is filed under 
section 6111. 
Subparagraph (B) shall be applied by substituting 
‘75 percent’ for ‘50 percent’ in the case of an inten-
tional failure or act described in subsection (a). 
‘‘(c) RESCISSION AUTHORITY.—The provisions of 
section 6707A(d) (relating to authority of Commissioner 
to rescind penalty) shall apply to any penalty imposed 
under this section. 
‘‘(d) REPORTABLE AND LISTED TRANSACTIONS.—
The terms ‘reportable transaction’ and ‘listed transaction’ 
have the respective meanings given to such terms by sec-
tion 6707A(c).’’.
(b) CLERICAL AMENDMENT.—The item relating to 
section 6707 in the table of sections for part I of sub-
chapter B of chapter 68 is amended by striking ‘‘tax shel-
ters’’ and inserting ‘‘reportable transactions’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to returns the due date for which 
is after the date of the enactment of this Act. 
SEC. 209. MODIFICATION OF PENALTY FOR FAILURE TO 
MAINTAIN LISTS OF INVESTORS. 
(a) IN GENERAL.—Subsection (a) of section 6708 is 
amended to read as follows: 
‘‘(a) IMPOSITION OF PENALTY.—
‘‘(1) IN GENERAL.—If any person who is re-
quired to maintain a list under section 6112(a) fails 
to make such list available upon written request to 
the 
Secretary 
in 
accordance 
with 
section 
6112(b)(1)(A) within 20 business days after the 
date of the Secretary’s request, such person shall 
pay a penalty of $10,000 for each day of such fail-
ure after such 20th day. 
‘‘(2) REASONABLE
CAUSE
EXCEPTION.—No 
penalty shall be imposed by paragraph (1) with re-
spect to the failure on any day if such failure is due 
to reasonable cause.’’
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to requests made after the date 
of the enactment of this Act. 
SEC. 210. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN 
CONDUCT RELATED TO TAX SHELTERS AND 
REPORTABLE TRANSACTIONS. 
(a) IN GENERAL.—Section 7408 (relating to action 
to enjoin promoters of abusive tax shelters, etc.) is amend-
ed by redesignating subsection (c) as subsection (d) and 
by striking subsections (a) and (b) and inserting the fol-
lowing new subsections: 
‘‘(a) AUTHORITY TO SEEK INJUNCTION.—A civil ac-
tion in the name of the United States to enjoin any person 
from further engaging in specified conduct may be com-
menced at the request of the Secretary. Any action under 
this section shall be brought in the district court of the 
United States for the district in which such person resides, 
has his principal place of business, or has engaged in spec-
ified conduct. The court may exercise its jurisdiction over 
such action (as provided in section 7402(a)) separate and 
apart from any other action brought by the United States 
against such person. 
‘‘(b) ADJUDICATION AND DECREE.—In any action 
under subsection (a), if the court finds—
‘‘(1) that the person has engaged in any speci-
fied conduct, and 
‘‘(2) that injunctive relief is appropriate to pre-
vent recurrence of such conduct—
the court may enjoin such person from engaging in such 
conduct or in any other activity subject to penalty under 
this title. 
‘‘(c) SPECIFIED CONDUCT.—For purposes of this 
section, the term ‘specified conduct’ means any action, or 
failure to take action, subject to penalty under section 
6700, 6701, 6707, or 6708.’’
(b) CONFORMING AMENDMENTS.—
(1) The heading for section 7408 is amended to 
read as follows: 
‘‘SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RE-
LATED TO TAX SHELTERS AND REPORTABLE 
TRANSACTIONS.’’
(2) The table of sections for subchapter A of 
chapter 67 is amended by striking the item relating 
to section 7408 and inserting the following new 
item:
‘‘Sec. 7408. Actions to enjoin specified conduct related to tax shelters and 
reportable transactions.’’
(c) EFFECTIVE DATE.—The amendment made by 
this section shall take effect on the day after the date of 
the enactment of this Act.
SEC. 211. UNDERSTATEMENT OF TAXPAYER’S LIABILITY BY 
INCOME TAX RETURN PREPARER. 
(a) STANDARDS CONFORMED TO TAXPAYER STAND-
ARDS.—Section 6694(a) (relating to understatements due 
to unrealistic positions) is amended—
(1) by striking ‘‘realistic possibility of being 
sustained on its merits’’ in paragraph (1) and in-
serting ‘‘reasonable belief that the tax treatment in 
such position was more likely than not the proper 
treatment’’, 
(2) by striking ‘‘or was frivolous’’ in paragraph 
(3) and inserting ‘‘or there was no reasonable basis 
for the tax treatment of such position’’, and 
(3) by striking ‘‘UNREALISTIC’’ in the heading 
and inserting ‘‘IMPROPER’’. 
(b) AMOUNT OF PENALTY.—Section 6694 is amend-
ed—
(1) by striking ‘‘$250’’ in subsection (a) and in-
serting ‘‘$1,000’’, and 
(2) by striking ‘‘$1,000’’ in subsection (b) and 
inserting ‘‘$5,000’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to documents prepared after the 
date of the enactment of this Act.
SEC. 212. PENALTY ON FAILURE TO REPORT INTERESTS IN 
FOREIGN FINANCIAL ACCOUNTS. 
(a) IN GENERAL.—Section 5321(a)(5) of title 31, 
United States Code, is amended to read as follows: 
‘‘(5) FOREIGN
FINANCIAL
AGENCY
TRANS-
ACTION VIOLATION.—
‘‘(A) PENALTY
AUTHORIZED.—The Sec-
retary of the Treasury may impose a civil 
money penalty on any person who violates, or 
causes any violation of, any provision of section 
5314. 
‘‘(B) AMOUNT OF PENALTY.—
‘‘(i) IN
GENERAL.—Except as pro-
vided in subparagraph (C), the amount of 
any civil penalty imposed under subpara-
graph (A) shall not exceed $5,000. 
‘‘(ii) REASONABLE
CAUSE
EXCEP-
TION.—No penalty shall be imposed under 
subparagraph (A) with respect to any vio-
lation if—
‘‘(I) such violation was due to 
reasonable cause, and 
‘‘(II) the amount of the trans-
action or the balance in the account 
at the time of the transaction was 
properly reported.
‘‘(C) WILLFUL VIOLATIONS.—In the case 
of any person willfully violating, or willfully 
causing any violation of, any provision of sec-
tion 5314—
‘‘(i) the maximum penalty under sub-
paragraph (B)(i) shall be increased to the 
greater of—
‘‘(I) $25,000, or 
‘‘(II) the amount (not exceeding 
$100,000) determined under subpara-
graph (D), and 
‘‘(ii) subparagraph (B)(ii) shall not 
apply. 
‘‘(D) AMOUNT.—The amount determined 
under this subparagraph is—
‘‘(i) in the case of a violation involving 
a transaction, the amount of the trans-
action, or 
‘‘(ii) in the case of a violation involv-
ing a failure to report the existence of an 
account or any identifying information re-
quired to be provided with respect to an 
account, the balance in the account at the 
time of the violation.’’
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to violations occurring after the 
date of the enactment of this Act. 
SEC. 213. FRIVOLOUS TAX SUBMISSIONS. 
(a) CIVIL PENALTIES.—Section 6702 is amended to 
read as follows: 
‘‘SEC. 6702. FRIVOLOUS TAX SUBMISSIONS. 
‘‘(a) CIVIL PENALTY
FOR FRIVOLOUS TAX RE-
TURNS.—A person shall pay a penalty of $5,000 if—
‘‘(1) such person files what purports to be a re-
turn of a tax imposed by this title but which—
‘‘(A) does not contain information on 
which the substantial correctness of the self-as-
sessment may be judged, or 
‘‘(B) contains information that on its face 
indicates that the self-assessment is substan-
tially incorrect; and 
‘‘(2) the conduct referred to in paragraph (1)— 
‘‘(A) is based on a position which the Sec-
retary has identified as frivolous under sub-
section (c), or 
‘‘(B) reflects a desire to delay or impede 
the administration of Federal tax laws. 
‘‘(b) CIVIL PENALTY
FOR SPECIFIED FRIVOLOUS 
SUBMISSIONS.—
‘‘(1) IMPOSITION OF PENALTY.—Except as pro-
vided in paragraph (3), any person who submits a 
specified frivolous submission shall pay a penalty of 
$5,000. 
‘‘(2) SPECIFIED FRIVOLOUS SUBMISSION.—For 
purposes of this section—
‘‘(A) 
SPECIFIED
FRIVOLOUS
SUBMIS-
SION.—The term ‘specified frivolous submis-
sion’ means a specified submission if any por-
tion of such submission—
‘‘(i) is based on a position which the 
Secretary has identified as frivolous under 
subsection (c), or 
‘‘(ii) reflects a desire to delay or im-
pede the administration of Federal tax 
laws. 
‘‘(B) SPECIFIED SUBMISSION.—The term 
‘specified submission’ means—
‘‘(i) a request for a hearing under—
‘‘(I) section 6320 (relating to no-
tice and opportunity for hearing upon 
filing of notice of lien), or 
‘‘(II) section 6330 (relating to 
notice and opportunity for hearing be-
fore levy), and
‘‘(ii) an application under— 
‘‘(I) section 6159 (relating to 
agreements for payment of tax liabil-
ity in installments), 
‘‘(II) section 7122 (relating to 
compromises), or 
‘‘(III) section 7811 (relating to 
taxpayer assistance orders). 
‘‘(3) OPPORTUNITY
TO
WITHDRAW
SUBMIS-
SION.—If the Secretary provides a person with no-
tice that a submission is a specified frivolous sub-
mission and such person withdraws such submission 
within 30 days after such notice, the penalty im-
posed under paragraph (1) shall not apply with re-
spect to such submission. 
‘‘(c) LISTING OF FRIVOLOUS POSITIONS.—The Sec-
retary shall prescribe (and periodically revise) a list of po-
sitions which the Secretary has identified as being frivo-
lous for purposes of this subsection. The Secretary shall 
not include in such list any position that the Secretary 
determines 
meets 
the 
requirement 
of 
section 
6662(d)(2)(B)(ii)(II). 
‘‘(d) REDUCTION OF PENALTY.—The Secretary may 
reduce the amount of any penalty imposed under this sec-
tion if the Secretary determines that such reduction would
promote compliance with and administration of the Fed-
eral tax laws. 
‘‘(e) PENALTIES
IN ADDITION
TO OTHER PEN-
ALTIES.—The penalties imposed by this section shall be 
in addition to any other penalty provided by law.’’
(b) TREATMENT
OF FRIVOLOUS REQUESTS
FOR 
HEARINGS BEFORE LEVY.—
(1) FRIVOLOUS
REQUESTS
DISREGARDED.—
Section 6330 (relating to notice and opportunity for 
hearing before levy) is amended by adding at the 
end the following new subsection: 
‘‘(g) FRIVOLOUS REQUESTS FOR HEARING, ETC.—
Notwithstanding any other provision of this section, if the 
Secretary determines that any portion of a request for a 
hearing under this section or section 6320 meets the re-
quirement of clause (i) or (ii) of section 6702(b)(2)(A), 
then the Secretary may treat such portion as if it were 
never submitted and such portion shall not be subject to 
any further administrative or judicial review.’’
(2) PRECLUSION
FROM
RAISING
FRIVOLOUS 
ISSUES AT HEARING.—Section 6330(c)(4) is amend-
ed—
(A) by striking ‘‘(A)’’ and inserting 
‘‘(A)(i)’’; 
(B) by striking ‘‘(B)’’ and inserting ‘‘(ii)’’;