‘‘(B) any property acquired by bequest, de-
vise, or inheritance directly or indirectly from
an individual who, at the time of death, was an
expatriate.
‘‘(2) EXCEPTIONS FOR TRANSFERS OTHERWISE
SUBJECT TO ESTATE OR GIFT TAX.—Such term shall
not include—
‘‘(A) any property shown on a timely filed
return of tax imposed by chapter 12 which is a
taxable gift by the expatriate, and
‘‘(B) any property shown on a timely filed
return of tax imposed by chapter 11 of the es-
tate of the expatriate.
‘‘(3) TRANSFERS IN TRUST.—Any covered gift
or bequest which is made in trust shall be treated
as made to the beneficiaries of such trust in propor-
tion to their respective interests in such trust (as de-
termined under section 877A(f)(3)).
‘‘(f) EXPATRIATE.—For purposes of this section, the
term ‘expatriate’ has the meaning given to such term by
section 877A(e)(1).’’.
(2) CLERICAL
AMENDMENT.—The table of
chapters for subtitle B of such Code is amended by
inserting after the item relating to chapter 13 the
following new item:
‘‘Chapter 13A. Gifts and bequests from expatriates.’’
(c) DEFINITION
OF
TERMINATION
OF
UNITED
STATES CITIZENSHIP.—Section 7701(a) of such Code is
amended by adding at the end the following new para-
graph:
‘‘(47) TERMINATION OF UNITED STATES CITI-
ZENSHIP.—
‘‘(A) IN
GENERAL.—An individual shall
not cease to be treated as a United States cit-
izen before the date on which the individual’s
citizenship is treated as relinquished under sec-
tion 877A(e)(3).
‘‘(B) DUAL CITIZENS.—Under regulations
prescribed by the Secretary, subparagraph (A)
shall not apply to an individual who became at
birth a citizen of the United States and a cit-
izen of another country.’’
(d) CONFORMING AMENDMENT.—Paragraph (1) of
section 6039G(d) of such Code is amended by inserting
‘‘or 877A’’ after ‘‘section 877’’.
(e) CLERICAL AMENDMENT.—The table of sections
for subpart A of part II of subchapter N of chapter 1
of such Code is amended by inserting after the item relat-
ing to section 877 the following new item:
‘‘Sec. 877A. Tax responsibilities of expatriation.’’.
(f) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in this
subsection, the amendments made by this section
shall apply to expatriates (within the meaning of
section 877A(e) of the Internal Revenue Code of
1986, as added by this section) whose expatriation
date (as so defined) occurs on or after March 9,
2000.
(2) GIFTS
AND
BEQUESTS.—Chapter 13A of
the Internal Revenue Code of 1986 (as added by
subsection (b)) shall apply to covered gifts and be-
quests (as defined in section 2681 of such Code, as
so added) received on or after March 9, 2000.
PART II—DISALLOWANCE OF NONECONOMIC TAX
ATTRIBUTES
Subpart A—Disallowance of Noneconomic Tax At-
tributes; Increase in Penalty With Respect to
Disallowed Noneconomic Tax Attributes
SEC. 266. DISALLOWANCE OF NONECONOMIC TAX AT-
TRIBUTES.
Section 7701 of the Internal Revenue Code of 1986
is amended by redesignating subsection (m) as subsection
(n) and by inserting after subsection (l) the following new
subsection:
‘‘(m) DISALLOWANCE OF NONECONOMIC TAX AT-
TRIBUTES.—
‘‘(1) IN GENERAL.—In determining liability for
any tax under subtitle A, noneconomic tax attributes
shall not be allowed.
‘‘(2) NONECONOMIC
TAX
ATTRIBUTE.—For
purposes of this subsection, a noneconomic tax at-
tribute is any deduction, loss, or credit claimed to
result from any transaction unless—
‘‘(A) the transaction changes in a mean-
ingful way (apart from Federal income tax con-
sequences) the taxpayer’s economic position,
and
‘‘(B)(i) the present value of the reasonably
expected potential income from the transaction
(and the taxpayer’s risk of loss from the trans-
action) are substantial in relationship to the
present value of the tax benefits claimed, or
‘‘(ii) in the case of a transaction which is
in substance the borrowing of money or the ac-
quisition of financial capital, the deductions
claimed with respect to the transaction for any
period are not significantly in excess of the eco-
nomic return for such period realized by the
person lending the money or providing the fi-
nancial capital.
‘‘(3) PRESUMPTION OF NONECONOMIC TAX AT-
TRIBUTES.—For purposes of paragraph (2), the fol-
lowing factors shall give rise to a presumption that
a transaction fails to meet the requirements of para-
graph (2):
‘‘(A) The fact that the payments, liabil-
ities, or assets that purport to create a loss (or
other benefit) for tax purposes are not reflected
to any meaningful extent on the taxpayer’s
books and records for financial reporting pur-
poses.
‘‘(B) The fact that the transaction results
in an allocation of income or gain to a tax-indif-
ferent party which is substantially in excess of
such party’s economic income or gain from the
transaction.
‘‘(4) TREATMENT OF BUILT-IN LOSS.—The de-
termination of whether a transaction results in the
realization of a built-in loss shall be made under
subtitle A as if this subsection had not been enacted.
For purposes of the preceding sentence, the term
‘built-in loss’ means any loss or deduction to the ex-
tent that such loss or deduction had economically
been incurred before such transaction is entered into
and to the extent that the loss or deduction was eco-
nomically borne by the taxpayer.
‘‘(5) DEFINITION
AND
SPECIAL
RULES.—For
purposes of this subsection—
‘‘(A) 
TAX-INDIFFERENT
PARTY.—The
term ‘tax-indifferent party’ means any person
or entity exempt from tax under subtitle A. A
person shall be treated as a tax-indifferent
party with respect to a transaction if, by reason
of such person’s method of accounting, the
items taken into account with respect to the
transaction have no substantial impact on such
person’s liability under subtitle A.
‘‘(B) 
SERIES
OF
RELATED
TRANS-
ACTION.—A transaction which is part of a se-
ries of related transactions shall be treated as
meeting the requirements of paragraph (2) only
if—
‘‘(i) such transaction meets such re-
quirements without regard to the other
transactions, and
‘‘(ii) such transactions, if treated as 1
transaction, would meet such requirements.
A similar rule shall apply to a multiple step
transaction with each step being treated as a
separate related transaction.
‘‘(C) NORMAL BUSINESS TRANSACTIONS.—
In the case of a transaction which is an integral
part of a taxpayer’s trade or business and
which is entered into in the normal course of
such trade or business, the determination of the
potential income from such transaction shall be
made by taking into account its relationship to
the overall trade or business of the taxpayer.
‘‘(D) TREATMENT
OF
FEES.—In deter-
mining whether there is risk of loss from a
transaction (and the amount thereof), potential
loss of fees and other transaction expenses shall
be disregarded.
‘‘(E) TREATMENT OF ECONOMIC RETURN
ENHANCEMENTS.—The following shall be treat-
ed as economic returns and not tax benefits:
‘‘(i) The credit under section 29 (re-
lating to credit for producing fuel from a
nonconventional source).
‘‘(ii) The credit under section 42 (re-
lating to low-income housing credit).
‘‘(iii) The credit under section 45 (re-
lating to electricity produced from certain
renewable resources).
‘‘(iv) The credit under section 1397E
(relating to credit to holders of qualified
zone academy bonds) or any similar pro-
gram hereafter enacted.
‘‘(v) Any other tax benefit specified in
regulations.
‘‘(F) 
EXCEPTIONS
FOR
NONBUSINESS
TRANSACTIONS.—
‘‘(i) INDIVIDUALS.—In the case of an
individual, this subsection shall only apply
to transactions entered into in connection
with a trade or business or activity en-
gaged in for profit.
‘‘(ii) CHARITABLE TRANSFERS.—This
subsection shall not apply in determining
the amount allowable as a deduction under
section 170, 545(b)(2), 556(b)(2), or
642(c).
‘‘(6) ECONOMIC SUBSTANCE DOCTRINE, ETC.,
NOT AFFECTED.—The provisions of this subsection
shall not be construed as altering or supplanting any
rule of law referred to in section 6662(i)(2)(B) and
the requirements of this subsection shall be con-
strued as being in addition to any such rule of law.’’
SEC. 267. INCREASE IN SUBSTANTIAL UNDERPAYMENT
PENALTY WITH RESPECT TO DISALLOWED
NONECONOMIC TAX ATTRIBUTES.
(a) IN GENERAL.—Section 6662 of the Internal Rev-
enue Code of 1986 (relating to imposition of accuracy-re-
lated penalty) is amended by adding at the end the fol-
lowing new subsection:
‘‘(i) INCREASE
IN PENALTY
IN CASE
OF DIS-
ALLOWED NONECONOMIC TAX ATTRIBUTES.—
‘‘(1) IN GENERAL.—In the case of the portion
of the underpayment to which this subsection
applies—
‘‘(A) subsection (a) shall be applied with
respect to such portion by substituting ‘40 per-
cent’ for ‘20 percent’, and
‘‘(B) subsection (d)(2)(B) and section
6664(c) shall not apply.
‘‘(2) UNDERPAYMENTS TO WHICH SUBSECTION
APPLIES.—This subsection shall apply to an under-
payment to which this section applies by reason of
paragraph (1) or (2) of subsection (b) but—
‘‘(A) only to the extent that such under-
payment is attributable to—
‘‘(i) the disallowance of any non-
economic tax attribute (determined under
section 7701(m)), or
‘‘(ii) the disallowance of any other
benefit—
‘‘(I) because of a lack of eco-
nomic substance or business purpose
for the transaction giving rise to the
claimed benefit,
‘‘(II) because the form of the
transaction did not reflect its sub-
stance, or
‘‘(III) because of any other simi-
lar rule of law, and
‘‘(B) only if the underpayment so attrib-
utable exceeds $1,000,000.
‘‘(3) INCREASE IN PENALTY NOT TO APPLY IF
COMPLIANCE WITH DISCLOSURE REQUIREMENTS.—
Paragraph (1)(A) shall not apply if the taxpayer—
‘‘(A) discloses to the Secretary within 30
days after the closing of the transaction appro-
priate documents describing the transaction,
and
‘‘(B) files with the taxpayer’s return of tax
imposed by subtitle A—
‘‘(i) a statement verifying that such
disclosure has been made,
‘‘(ii) a detailed description of the
facts, assumptions of facts, and factual
conclusions with respect to the business or
economic purposes or objectives of the
transaction that are relied upon to support
the manner in which it is reported on the
return,
‘‘(iii) a description of the due dili-
gence performed to ascertain the accuracy
of such facts, assumptions, and factual
conclusions,
‘‘(iv)(I) a statement (signed by the
senior financial officer of the corporation
under penalty of perjury) that the facts,
assumptions, or factual conclusions relied
upon in reporting the transaction are true
and correct as of the date the return is
filed, to the best of such officer’s knowl-
edge and belief, and
‘‘(II) if the actual facts varied materi-
ally from the facts, assumptions, or factual
conclusions relied upon, a statement de-
scribing such variances,
‘‘(v) copies of any written material
provided in connection with the offer of the
transaction to the taxpayer by a third
party,
‘‘(vi) a full description of any express
or implied agreement or arrangement with
any advisor, or with any offeror, that the
fee payable to such person would be con-
tingent or subject to possible reimburse-
ment, and
‘‘(vii) a full description of any express
or implied warranty from any person with
respect to the anticipated tax results from
the transaction.’’
(b) MODIFICATIONS TO PENALTY ON SUBSTANTIAL
UNDERSTATEMENT OF INCOME TAX.—
(1) MODIFICATION OF THRESHOLD.—Subpara-
graph (A) of section 6662(d)(2) of such Code is
amended to read as follows:
‘‘(A) IN GENERAL.—For purposes of this
section, there is a substantial understatement of
income tax for any taxable year if the amount
of the understatement for the taxable year ex-
ceeds the lesser of—
‘‘(i) $1,000,000, or
‘‘(ii) the greater of 10 percent of the
tax required to be shown on the return for
the taxable year or $5,000.’’
(2) REDUCTION OF PENALTY ON ACCOUNT OF
DISCLOSURE NOT TO APPLY TO TAX SHELTERS.—
Subparagraph (C) of section 6662(d)(2) of such
Code is amended by striking clause (ii), by redesig-
nating clause (iii) as clause (ii), and by striking
clause (i) and inserting the following new clause:
‘‘(i) IN GENERAL.—Subparagraph (B)
shall not apply to any item attributable to
a tax shelter.’’
(c) TREATMENT
OF
AMENDED
RETURNS.—Sub-
section (a) of section 6664 of such Code is amended by
adding at the end the following new sentence: ‘‘For pur-
poses of this subsection, an amended return shall be dis-
regarded if such return is filed on or after the date the
taxpayer is first contacted by the Secretary regarding the
examination of the return.’’
SEC. 268. PENALTY ON MARKETED TAX AVOIDANCE STRAT-
EGIES WHICH HAVE NO ECONOMIC SUB-
STANCE, ETC.
(a) PENALTY.—
(1) IN GENERAL.—Section 6700 of the Internal
Revenue Code of 1986 (relating to promoting abu-
sive tax shelters, etc.) is amended by redesignating
subsection (c) as subsection (d) and by inserting
after subsection (b) the following new subsection:
‘‘(c) PENALTY ON SUBSTANTIAL PROMOTERS FOR
PROMOTING TAX AVOIDANCE STRATEGIES WHICH HAVE
NO ECONOMIC SUBSTANCE, ETC.—
‘‘(1) IMPOSITION OF PENALTY.—Any substan-
tial promoter of a tax avoidance strategy shall pay
a penalty in the amount determined under para-
graph (2) with respect to such strategy if any tax
benefit attributable to such strategy (or any similar
strategy promoted by such promoter) is not allow-
able by reason of any rule of law referred to in sec-
tion 6662(i)(2)(A).
‘‘(2) AMOUNT
OF
PENALTY.—The penalty
under paragraph (1) with respect to a promoter of
a tax avoidance strategy is an amount equal to 100
percent of the gross income derived (or to be de-
rived) by such promoter from such strategy.
‘‘(3) TAX
AVOIDANCE
STRATEGY.—For pur-
poses of this subsection, the term ‘tax avoidance
strategy’ means any entity, plan, arrangement, or
transaction a significant purpose of the structure of
which is the avoidance or evasion of Federal income
tax.
‘‘(4) SUBSTANTIAL PROMOTER.—For purposes
of this subsection —
‘‘(A) IN GENERAL.—The term ‘substantial
promoter’ means, with respect to any tax avoid-
ance strategy, any promoter if—
‘‘(i) such promoter offers such strat-
egy to more than 1 potential participant,
and
‘‘(ii) such promoter may receive fees
in excess of $1,000,000 in the aggregate
with respect to such strategy.
‘‘(B) AGGREGATION RULES.—For purposes
of this paragraph—
‘‘(i) RELATED PERSONS.—A promoter
and all persons related to such promoter
shall be treated as 1 person.
‘‘(ii) SIMILAR STRATEGIES.—All simi-
lar tax avoidance strategies of a promoter
shall be treated as 1 tax avoidance strat-
egy.
‘‘(C) PROMOTER.—The term ‘promoter’
means any person who participates in the pro-
motion, offering, or sale of the tax avoidance
strategy.
‘‘(D) RELATED PERSON.—Persons are re-
lated if they bear a relationship to each other
which is described in section 267(b) or 707(b).
‘‘(4) COORDINATION WITH SUBSECTION (a).—
No penalty shall be imposed by this subsection on
any promoter with respect to a tax avoidance strat-
egy if a penalty is imposed under subsection (a) on
such promoter with respect to such strategy.’’
(2) CONFORMING AMENDMENT.—Subsection (d)
of section 6700 of such Code is amended—
(A) by striking ‘‘PENALTY’’ and inserting
‘‘PENALTIES’’, and
(B) by striking ‘‘penalty’’ the first place it
appears in the text and inserting ‘‘penalties’’.
(b) INCREASE IN PENALTY ON PROMOTING ABUSIVE
TAX SHELTERS.—The first sentence of section 6700(a)
of such Code is amended by striking ‘‘a penalty equal to’’
and all that follows and inserting ‘‘a penalty equal to the
greater of $1,000 or 100 percent of the gross income de-
rived (or to be derived) by such person from such activ-
ity.’’
SEC. 269. EFFECTIVE DATES.
(a) IN GENERAL.—Except as provided in subsections
(b) and (c), the amendments made by this subpart shall
apply to transactions after the date of the enactment of
this Act.
(b) SECTION 267.—The amendments made by sub-
sections (b) and (c) of section 267 shall apply to taxable
years ending after the date of the enactment of this Act.
(c) SECTION 268.—The amendments made by sub-
section (a) of section 268 shall apply to any tax avoidance
strategy (as defined in section 6700(c) of the Internal
Revenue Code of 1986, as amended by this title) interests
in which are offered to potential participants after the
date of the enactment of this Act.
Subpart B—Limitations on Importation or Transfer
of Built-in Losses
SEC. 271. LIMITATION ON IMPORTATION OF BUILT-IN
LOSSES.
(a) IN GENERAL.—Section 362 of the Internal Rev-
enue Code of 1986 (relating to basis to corporations) is
amended by adding at the end the following new sub-
section:
‘‘(e) LIMITATION
ON IMPORTATION
OF BUILT-IN
LOSSES.—
‘‘(1) IN GENERAL.—If in any transaction de-
scribed in subsection (a) or (b) there would (but for
this subsection) be an importation of a net built-in
loss, the basis of each property described in para-
graph (2) which is acquired in such transaction shall
(notwithstanding subsections (a) and (b)) be its fair
market value immediately after such transaction.
‘‘(2) PROPERTY DESCRIBED.—For purposes of
paragraph (1), property is described in this para-
graph if—
‘‘(A) gain or loss with respect to such
property is not subject to tax under this subtitle
in the hands of the transferor immediately be-
fore the transfer, and
‘‘(B) gain or loss with respect to such
property is subject to such tax in the hands of
the transferee immediately after such transfer.
In any case in which the transferor is a partnership,
the preceding sentence shall be applied by treating
each partner in such partnership as holding such
partner’s proportionate share of the property of such
partnership.
‘‘(3) IMPORTATION OF NET BUILT-IN LOSS.—
For purposes of paragraph (1), there is an importa-
tion of a net built-in loss in a transaction if the
transferee’s aggregate adjusted bases of property de-
scribed in paragraph (2) which is transferred in
such transaction would (but for this subsection) ex-
ceed the fair market value of such property imme-
diately after such transaction.’’
(b) COMPARABLE TREATMENT WHERE LIQUIDA-
TION.—Paragraph (1) of section 334(b) of such Code (re-
lating to liquidation of subsidiary) is amended to read as
follows:
‘‘(1) IN GENERAL.—If property is received by a
corporate distributee in a distribution in a complete
liquidation to which section 332 applies (or in a
transfer described in section 337(b)(1)), the basis of
such property in the hands of such distributee shall
be the same as it would be in the hands of the trans-
feror; except that the basis of such property in the
hands of such distributee shall be the fair market
value of the property at the time of the
distribution—
‘‘(A) in any case in which gain or loss is
recognized by the liquidating corporation with
respect to such property, or
‘‘(B) in any case in which the liquidating
corporation is a foreign corporation, the cor-
porate distributee is a domestic corporation,
and the corporate distributee’s aggregate ad-
justed bases of property described in section
362(e)(2) which is distributed in such liquida-
tion would (but for this subparagraph) exceed
the fair market value of such property imme-
diately after such liquidation.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to transactions after the date of
the enactment of this Act.
SEC. 272. DISALLOWANCE OF PARTNERSHIP LOSS TRANS-
FERS.
(a) TREATMENT OF CONTRIBUTED PROPERTY WITH
BUILT-IN LOSS.—Paragraph (1) of section 704(c) of the
Internal Revenue Code of 1986 is amended by striking
‘‘and’’ at the end of subparagraph (A), by striking the
period at the end of subparagraph (B) and inserting ‘‘,
and’’, and by adding at the end the following:
‘‘(C) if any property so contributed has a
built-in loss—
‘‘(i) such built-in loss shall be taken
into account only in determining the
amount of items allocated to the contrib-
uting partner, and
‘‘(ii) except as provided in regulations,
in determining the amount of items allo-
cated to other partners, the basis of the
contributed property in the hands of the
partnership shall be treated as being equal
to its fair market value immediately after
the contribution.
For purposes of subparagraph (C), the term ‘built-
in loss’ means the excess of the adjusted basis of the
property over its fair market value immediately after
the contribution.’’
(b) ADJUSTMENT TO BASIS OF PARTNERSHIP PROP-
ERTY
ON TRANSFER
OF PARTNERSHIP INTEREST IF
THERE IS SUBSTANTIAL BUILT-IN LOSS.—
(1) ADJUSTMENT
REQUIRED.—Subsection (a)
of section 743 of such Code (relating to optional ad-
justment to basis of partnership property) is amend-
ed by inserting before the period ‘‘or unless the part-
nership has a substantial built-in loss immediately
after such transfer’’.
(2) ADJUSTMENT.—Subsection (b) of section
743 of such Code is amended by inserting ‘‘or with
respect to which there is a substantial built-in loss
immediately after such transfer’’ after ‘‘section 754
is in effect’’.
(3) SUBSTANTIAL BUILT-IN LOSS.—Section 743
of such Code is amended by adding at the end the
following new subsection:
‘‘(d) SUBSTANTIAL BUILT-IN LOSS.—For purposes
of this section, a partnership has a substantial built-in loss
with respect to a transfer of an interest in a partnership
if the transferee partner’s proportionate share of the ad-
justed basis of the partnership property exceeds 110 per-
cent of the basis of such partner’s interest in the partner-
ship.’’
(4) CLERICAL AMENDMENTS.—
(A) The section heading for section 743 of
such Code is amended to read as follows:
‘‘SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROP-
ERTY WHERE SECTION 754 ELECTION OR
SUBSTANTIAL BUILT-IN LOSS.’’
(B) The table of sections for subpart C of
part II of subchapter K of chapter 1 of such
Code is amended by striking the item relating
to section 743 and inserting the following new
item:
‘‘Sec. 743. Adjustment to basis of partnership property where sec-
tion 754 election or substantial built-in loss.’’
(c) ADJUSTMENT
TO BASIS
OF UNDISTRIBUTED
PARTNERSHIP PROPERTY IF THERE
IS SUBSTANTIAL
BASIS REDUCTION.—
(1) ADJUSTMENT
REQUIRED.—Subsection (a)
of section 734 of such Code (relating to optional ad-
justment to basis of undistributed partnership prop-
erty) is amended by inserting before the period ‘‘or
unless there is a substantial downward adjustment’’.
‘‘(I) any interest in an entity if
the return on such interest is limited
and preferred, and
‘‘(II) interests (not described in
subclause (I)) in any entity if substan-
tially all of the assets of such entity
consist (directly or indirectly) of any
assets described in subclause (I), any
preceding clause, or clause (viii).’’
(b) CERTAIN TRANSFERS DEEMED TO BE TO IN-
VESTMENT COMPANIES.—Subsection (e) of section 351 of
such Code is amended by adding at the end the following
new paragraph:
‘‘(3) TRANSFERS OF MARKETABLE SECURITIES
TO CERTAIN CORPORATIONS.—A transfer of property
to a corporation if—
‘‘(A) such property is marketable securities
(as defined in section 731(c)(2)), other than a
diversified portfolio of securities,
‘‘(B) such corporation—
‘‘(i) is registered under the Invest-
ment Company Act of 1940 as an invest-
ment company, or is exempt from registra-
tion as a investment company under sec-
tion 3(c)(7) of such Act because interests