247 
shall be increased by the aggregate amount of 
reportable transaction understatements for pur-
poses of determining whether such understate-
ment is a substantial understatement under 
section 6662(d)(1), and 
‘‘(B) the addition to tax under section 
6662(a) shall apply only to the excess of the 
amount of the substantial understatement (if 
any) after the application of subparagraph (A) 
over the aggregate amount of reportable trans-
action understatements. 
‘‘(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. 
‘‘(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 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
248 
taken into account in determining the amount of any 
reportable transaction understatement if the amend-
ment or supplement is filed after the earlier 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.’’. 
(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.’’. 
(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.
249 
‘‘(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—
250 
‘‘(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))
251 
and participates in the organization, 
management, promotion, or sale of 
the transaction or is related (within 
the meaning of section 267(b) or 
707(b)(1)) to any person who so par-
ticipates, 
‘‘(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 disqualifying 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),
252 
‘‘(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 AMENDMENTS.— 
(A) Paragraph (1) of section 6664(c) is 
amended by striking ‘‘this part’’ and inserting 
‘‘section 6662 or 6663’’. 
(B) The heading for subsection (c) of sec-
tion 6664 is amended by inserting ‘‘FOR UN-
DERPAYMENTS’’ after ‘‘EXCEPTION’’. 
(d) REDUCTION IN PENALTY FOR SUBSTANTIAL UN-
DERSTATEMENT OF INCOME TAX NOT TO APPLY TO TAX 
SHELTERS.—Subparagraph (C) of section 6662(d)(2) (re-
lating to substantial understatement of income tax) is 
amended to read as follows: 
‘‘(C) REDUCTION NOT TO APPLY TO TAX 
SHELTERS.—
253 
‘‘(i) IN GENERAL.—Subparagraph (B) 
shall not apply to any item attributable to 
a tax shelter. 
‘‘(ii) TAX SHELTER.—For purposes of 
clause (i), the term ‘tax shelter’ means— 
‘‘(I) a partnership or other enti-
ty, 
‘‘(II) any investment plan or ar-
rangement, or 
‘‘(III) any other plan or arrange-
ment, 
if a significant purpose of such partner-
ship, entity, plan, or arrangement is the 
avoidance or evasion of Federal income 
tax.’’. 
(e) CONFORMING AMENDMENTS.— 
(1) Sections 461(i)(3)(C), 1274(b)(3), and 
7525(b) are each amended by striking ‘‘section 
6662(d)(2)(C)(iii)’’ 
and 
inserting 
‘‘section 
6662(d)(2)(C)(ii)’’. 
(2) The heading for section 6662 is amended to 
read as follows:
254 
‘‘SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY 
ON UNDERPAYMENTS.’’ 
(3) 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 trans-
actions.’’. 
(f) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years ending after the 
date of the enactment of this Act. 
SEC. 613. 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,
255 
‘‘(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 
6662(d)(2)(C)(ii)).’’. 
(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. 614. STATUTE OF LIMITATIONS FOR TAXABLE YEARS 
FOR 
WHICH 
REQUIRED 
LISTED 
TRANS-
ACTIONS NOT REPORTED. 
(a) IN GENERAL.—Section 6501(c) (relating to ex-
ceptions) is amended by adding at the end the following 
new paragraph: 
‘‘(10) LISTED TRANSACTIONS.—If a taxpayer 
fails to include on any return or statement 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 time for assess-
ment of any tax imposed by this title with respect
256 
to such transaction shall not expire before the date 
which is 1 year after the earlier of— 
‘‘(A) the date on which the Secretary is 
furnished the information so required, or 
‘‘(B) the date that a material advisor (as 
defined in section 6111) meets the requirements 
of section 6112 with respect to a request by the 
Secretary under section 6112(b) relating to 
such transaction with respect to such tax-
payer.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years with respect to 
which the period for assessing a deficiency did not expire 
before the date of the enactment of this Act. 
SEC. 615. 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,
257 
‘‘(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, managing, promoting, selling, im-
plementing, or carrying out any reportable 
transaction, and 
‘‘(ii) who directly or indirectly derives 
gross income in excess of the threshold 
amount (or such other amount as may be 
prescribed by the Secretary) for such ad-
vice or assistance. 
‘‘(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
258 
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) So much of section 6112 as precedes sub-
section (c) thereof is amended to read as follows:
259 
‘‘SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANS-
ACTIONS MUST KEEP LISTS OF ADVISEES, 
ETC. 
‘‘(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 (wheth-
er or not required to file a return under section 6111 with 
respect to such transaction) maintain (in such manner as 
the Secretary may by regulations prescribe) a list— 
‘‘(1) identifying each person with respect to 
whom such advisor acted as a material advisor with 
respect to such transaction, and 
‘‘(2) containing such other information as the 
Secretary may by regulations require.’’. 
(3) Section 6112 is amended— 
(A) by redesignating subsection (c) as sub-
section (b), 
(B) by inserting ‘‘written’’ before ‘‘re-
quest’’ in subsection (b)(1) (as so redesig-
nated), and 
(C) by striking ‘‘shall prescribe’’ in sub-
section (b)(2) (as so redesignated) and inserting 
‘‘may prescribe’’. 
(4) The item relating to section 6112 in the 
table of sections for subchapter B of chapter 61 is 
amended to read as follows:
260 
‘‘Sec. 6112. Material advisors of reportable transactions must 
keep lists of advisees, etc.’’. 
(5)(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. 616. FAILURE TO FURNISH INFORMATION REGARDING 
REPORTABLE TRANSACTIONS. 
(a) IN GENERAL.—Section 6707 (relating to failure 
to furnish information regarding tax shelters) is amended 
to read as follows:
261 
‘‘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 listed transaction before the date the re-
turn is filed under section 6111.
262 
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.— 
For purposes of this section, the terms ‘reportable trans-
action’ and ‘listed transaction’ have the respective mean-
ings given to such terms by section 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. 617. 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
263 
to make such list available upon written request to 
the Secretary in accordance with section 6112(b) 
within 20 business days after the date of such re-
quest, such person shall pay a penalty of $10,000 
for each day of such failure 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. 618. 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.
264 
SEC. 619. 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) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
the date of the enactment of this Act. 
SEC. 620. 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
265 
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
266 
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 76 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. 621. 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
267 
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
268 
‘‘(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. 622. REGULATION OF INDIVIDUALS PRACTICING BE-
FORE THE DEPARTMENT OF THE TREASURY. 
(a) CENSURE; IMPOSITION OF PENALTY.— 
(1) IN GENERAL.—Section 330(b) of title 31, 
United States Code, is amended—
269 
(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. Any 
such penalty imposed on an individual may be in addition 
to, or in lieu of, any suspension, disbarment, or censure 
of such individual.’’ 
(2) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to actions taken after 
the date of the enactment of this Act. 
(b) TAX SHELTER OPINIONS, ETC.—Section 330 of 
such title 31 is amended by adding at the end the fol-
lowing new subsection: 
‘‘(d) Nothing in this section or in any other provision 
of law shall be construed to limit the authority of the Sec-
retary of the Treasury to impose standards applicable to
270 
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.’’. 
Part II—Other Provisions 
SEC. 631. TREATMENT OF STRIPPED INTERESTS IN BOND 
AND PREFERRED STOCK FUNDS, ETC. 
(a) IN GENERAL.—Section 1286 (relating to tax 
treatment of stripped bonds) is amended by redesignating 
subsection (f) as subsection (g) and by inserting after sub-
section (e) the following new subsection: 
‘‘(f) TREATMENT OF STRIPPED INTERESTS IN BOND 
AND PREFERRED STOCK FUNDS, ETC.—In the case of an 
account or entity substantially all of the assets of which 
consist of bonds, preferred stock, or a combination thereof, 
the Secretary may by regulations provide that rules simi-
lar to the rules of this section and 305(e), as appropriate, 
shall apply to interests in such account or entity to which 
(but for this subsection) this section or section 305(e), as 
the case may be, would not apply.’’. 
(b) CROSS REFERENCE.—Subsection (e) of section 
305 is amended by adding at the end the following new 
paragraph:
271 
‘‘(7) CROSS REFERENCE.— 
‘‘For treatment of stripped interests in certain ac-
counts or entities holding preferred stock, see sec-
tion 1286(f).’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to purchases and dispositions after 
the date of the enactment of this Act. 
SEC. 632. MINIMUM HOLDING PERIOD FOR FOREIGN TAX 
CREDIT ON WITHHOLDING TAXES ON INCOME 
OTHER THAN DIVIDENDS. 
(a) IN GENERAL.—Section 901 is amended by redes-
ignating subsection (l) as subsection (m) and by inserting 
after subsection (k) the following new subsection: 
‘‘(l) MINIMUM HOLDING PERIOD FOR WITHHOLDING 
TAXES ON GAIN AND INCOME OTHER THAN DIVIDENDS 
ETC.— 
‘‘(1) IN GENERAL.—In no event shall a credit 
be allowed under subsection (a) for any withholding 
tax (as defined in subsection (k)) on any item of in-
come or gain with respect to any property if— 
‘‘(A) such property is held by the recipient 
of the item for 15 days or less during the 30- 
day period beginning on the date which is 15 
days before the date on which the right to re-
ceive payment of such item arises, or 
‘‘(B) to the extent that the recipient of the 
item is under an obligation (whether pursuant
272 
to a short sale or otherwise) to make related 
payments with respect to positions in substan-
tially similar or related property. 
This paragraph shall not apply to any dividend to 
which subsection (k) applies. 
‘‘(2) EXCEPTION FOR TAXES PAID BY DEAL-
ERS.— 
‘‘(A) IN
GENERAL.—Paragraph (1) shall 
not apply to any qualified tax with respect to 
any property held in the active conduct in a for-
eign country of a business as a dealer in such 
property. 
‘‘(B) QUALIFIED
TAX.—For purposes of 
subparagraph (A), the term ‘qualified tax’ 
means a tax paid to a foreign country (other 
than the foreign country referred to in subpara-
graph (A)) if— 
‘‘(i) the item to which such tax is at-
tributable is subject to taxation on a net 
basis by the country referred to in sub-
paragraph (A), and 
‘‘(ii) such country allows a credit 
against its net basis tax for the full 
amount of the tax paid to such other for-
eign country.
273 
‘‘(C) DEALER.—For purposes of subpara-
graph (A), the term ‘dealer’ means— 
‘‘(i) with respect to a security, any 
person to whom paragraphs (1) and (2) of 
subsection (k) would not apply by reason 
of paragraph (4) thereof if such security 
were stock, and 
‘‘(ii) with respect to any other prop-
erty, any person with respect to whom 
such property is described in section 
1221(a)(1). 
‘‘(D) REGULATIONS.—The Secretary may 
prescribe such regulations as may be appro-
priate to carry out this paragraph, including 
regulations to prevent the abuse of the excep-
tion provided by this paragraph and to treat 
other taxes as qualified taxes. 
‘‘(3) EXCEPTIONS.—The Secretary may by reg-
ulation provide that paragraph (1) shall not apply to 
property where the Secretary determines that the 
application of paragraph (1) to such property is not 
necessary to carry out the purposes of this sub-
section. 
‘‘(4) CERTAIN RULES TO APPLY.—Rules similar 
to the rules of paragraphs (5), (6), and (7) of sub-
274 
section (k) shall apply for purposes of this sub-
section. 
‘‘(5) DETERMINATION OF HOLDING PERIOD.— 
Holding periods shall be determined for purposes of 
this subsection without regard to section 1235 or 
any similar rule.’’. 
(b) CONFORMING AMENDMENT.—The heading of 
subsection (k) of section 901 is amended by inserting ‘‘ON 
DIVIDENDS’’ after ‘‘TAXES’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to amounts paid or accrued more 
than 30 days after the date of the enactment of this Act. 
SEC. 633. 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
275 
amount of items allocated to the contrib-
uting partner, and 
‘‘(ii) except as provided in regulations, 
in determining the amount of items allo-
cated to other partners, the basis of the 
contributed property in the hands of the 
partnership shall be treated as being equal 
to its fair market value at the time of con-
tribution. 
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 at the time 
of contribution.’’. 
(b) SPECIAL RULES FOR TRANSFERS OF PARTNER-
SHIP INTEREST IF THERE IS SUBSTANTIAL BUILT-IN 
LOSS.— 
(1) ADJUSTMENT OF PARTNERSHIP BASIS RE-
QUIRED.—Subsection (a) of section 743 (relating to 
optional adjustment to basis of partnership prop-
erty) is amended by inserting 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 which has a sub-
276 
stantial built-in loss immediately after such trans-
fer’’ after ‘‘section 754 is in effect’’. 
(3) SUBSTANTIAL BUILT-IN LOSS.—Section 743 
is amended by adding at the end the following new 
subsection: 
‘‘(d) SUBSTANTIAL BUILT-IN LOSS.— 
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, a partnership has a substantial built-in loss 
with respect to a transfer of an interest in a part-
nership if the partnership’s adjusted basis in the 
partnership property exceeds by more than $250,000 
the fair market value of such property. 
‘‘(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) ALTERNATIVE
RULES
FOR
ELECTING
IN-
VESTMENT PARTNERSHIPS.— 
(A) IN GENERAL.—Section 743 is amended 
by adding at the end the following new sub-
section:
277 
‘‘(e) ALTERNATIVE RULES FOR ELECTING INVEST-
MENT PARTNERSHIPS.— 
‘‘(1) 
NO
ADJUSTMENT
OF
PARTNERSHIP 
BASIS.—For purposes of this section, an electing in-
vestment partnership shall not be treated as having 
a substantial built-in loss with respect to any trans-
fer occurring while the election under paragraph 
(6)(A) is in effect. 
‘‘(2) LOSS DEFERRAL FOR TRANSFEREE PART-
NER.—In the case of a transfer of an interest in an 
electing investment partnership, the transferee part-
ner’s distributive share of losses (without regard to 
gains) from the sale or exchange of partnership 
property shall not be allowed except to the extent 
that it is established that such losses exceed the loss 
(if any) recognized by the transferor (or any prior 
transferor to the extent not fully offset by a prior 
disallowance under this paragraph) on the transfer 
of the partnership interest. 
‘‘(3) NO REDUCTION IN PARTNERSHIP BASIS.— 
Losses disallowed under paragraph (2) shall not de-
crease the transferee partner’s basis in the partner-
ship interest. 
‘‘(4) EFFECT OF TERMINATION OF PARTNER-
SHIP.—This subsection shall be applied without re-
278 
gard to any termination of a partnership under sec-
tion 708(b)(1)(B). 
‘‘(5) CERTAIN BASIS REDUCTIONS TREATED AS 
LOSSES.—In the case of a transferee partner whose 
basis in property distributed by the partnership is 
reduced under section 732(a)(2), the amount of the 
loss recognized by the transferor on the transfer of 
the partnership interest which is taken into account 
under paragraph (2) shall be reduced by the amount 
of such basis reduction. 
‘‘(6) ELECTING INVESTMENT PARTNERSHIP.— 
For purposes of this subsection, the term ‘electing 
investment partnership’ means any partnership if— 
‘‘(A) the partnership makes an election to 
have this subsection apply, 
‘‘(B) the partnership would be an invest-
ment company under section 3(a)(1)(A) of the 
Investment Company Act of 1940 but for an 
exemption under paragraph (1) or (7) of section 
3(c) of such Act, 
‘‘(C) such partnership has never been en-
gaged in a trade or business, 
‘‘(D) substantially all of the assets of such 
partnership are held for investment,
279 
‘‘(E) at least 95 percent of the assets con-
tributed to such partnership consist of money, 
‘‘(F) no assets contributed to such part-
nership had an adjusted basis in excess of fair 
market value at the time of contribution, 
‘‘(G) all partnership interests of such part-
nership are issued by such partnership pursu-
ant to a private offering and during the 24- 
month period beginning on the date of the first 
capital contribution to such partnership, 
‘‘(H) the partnership agreement of such 
partnership has substantive restrictions on each 
partner’s ability to cause a redemption of the 
partner’s interest, and 
‘‘(I) the partnership agreement of such 
partnership provides for a term that is not in 
excess of 15 years. 
The election described in subparagraph (A), once 
made, shall be irrevocable except with the consent of 
the Secretary. 
‘‘(7) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be appropriate to 
carry out the purposes of this subsection, including 
regulations for applying this subsection to tiered 
partnerships.’’.
280 
(B) INFORMATION
REPORTING.—Section 
6031 is amended by adding at the end the fol-
lowing new subsection: 
‘‘(f) ELECTING INVESTMENT PARTNERSHIPS.—In 
the case of any electing investment partnership (as defined 
in section 743(e)(6)), the information required under sub-
section (b) to be furnished to any partner to whom section 
743(e)(2) applies shall include such information as is nec-
essary to enable the partner to compute the amount of 
losses disallowed under section 743(e).’’. 
(5) CLERICAL AMENDMENTS.— 
(A) The section heading for section 743 is 
amended to read as follows: 
‘‘SEC. 743. SPECIAL RULES 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. Special rules where section 754 election or substantial 
built-in loss.’’. 
(c) ADJUSTMENT
TO BASIS
OF UNDISTRIBUTED 
PARTNERSHIP PROPERTY
IF THERE IS SUBSTANTIAL 
BASIS REDUCTION.— 
(1) ADJUSTMENT
REQUIRED.—Subsection (a) 
of section 734 (relating to optional adjustment to
281 
basis of undistributed partnership property) is 
amended by inserting before the period ‘‘or unless 
there is a substantial basis reduction’’. 
(2) ADJUSTMENT.—Subsection (b) of section 
734 is amended by inserting ‘‘or unless there is a 
substantial basis reduction’’ after ‘‘section 754 is in 
effect’’. 
(3) SUBSTANTIAL BASIS REDUCTION.—Section 
734 is amended by adding at the end the following 
new subsection: 
‘‘(d) SUBSTANTIAL BASIS REDUCTION.— 
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, there is a substantial basis reduction with re-
spect to a distribution if the sum of the amounts de-
scribed in subparagraphs (A) and (B) of subsection 
(b)(2) exceeds $250,000. 
‘‘(2) REGULATIONS.— 
‘‘For regulations to carry out this subsection, see 
section 743(d)(2).’’. 
(4) CLERICAL AMENDMENTS.— 
(A) The section heading for section 734 is 
amended to read as follows:
282 
‘‘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).— 
(A) IN GENERAL.—Except as provided in 
subparagraph (B), the amendments made by 
subsection (b) shall apply to transfers after the 
date of the enactment of this Act. 
(B) TRANSITION RULE.—In the case of an 
electing investment partnership which is in ex-
istence on June 4, 2004, section 743(e)(6)(H) 
of the Internal Revenue Code of 1986, as added 
by this section, shall not apply to such partner-
ship and section 743(e)(6)(I) of such Code, as