I 
108TH CONGRESS 
1ST SESSION H. R. 2046
To amend the Internal Revenue Code of 1986 to rebuild America through 
job creation. 
IN THE HOUSE OF REPRESENTATIVES 
MAY 9, 2003
Mr. RANGEL (for himself, Mr. ANDREWS, Mr. BACA, Mr. BELL, Mr. 
BLUMENAUER, Mr. BROWN of Ohio, Mrs. CHRISTENSEN, Mr. CUMMINGS, 
Mr. DAVIS of Illinois, Mr. DELAHUNT, Ms. DELAURO, Mr. ENGEL, Ms. 
ESHOO, Mr. ETHERIDGE, Mr. GUTIERREZ, Mr. HILL, Mr. HOLT, Mr. 
HONDA, Mr. HOYER, Mr. LANTOS, Ms. LEE, Mr. LEVIN, Mr. MCGOV-
ERN, Mr. MENENDEZ, Mr. MICHAUD, Ms. MILLENDER-MCDONALD, Mr. 
GEORGE
MILLER
of California, Mr. OBERSTAR, Mr. ORTIZ, Mr. 
PALLONE, Ms. PELOSI, Mr. PRICE of North Carolina, Mr. ROTHMAN, Mr. 
RYAN of Ohio, Mr. SABO, Mr. SANDLIN, Ms. SLAUGHTER, Mrs. JONES 
of Ohio, Ms. WATERS, Mr. WAXMAN, and Mr. BALLANCE) 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 rebuild 
America through job creation.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; REFERENCES; TABLE OF CON-
TENTS. 
(a) SHORT TITLE.—This Act may be cited as the 
‘‘Jobs and Growth Reconciliation 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.—The table of contents of 
this Act is as follows:
Sec. 1. Short title; references; table of contents. 
TITLE I—IMMEDIATE STIMULUS AND JOB CREATION 
Subtitle A—Family Tax Relief 
Sec. 101. Acceleration of increase in child tax credit. 
Sec. 102. Increase in standard deduction for married taxpayers filing joint re-
turns accelerated. 
Sec. 103. Acceleration of 10-percent individual income tax rate bracket expan-
sion. 
Sec. 104. Acceleration of elimination of marriage penalty in earned income 
credit. 
Subtitle B—Incentives to Hire the Long-Term Unemployed 
Sec. 111. Incentives to hire the long-term unemployed. 
Subtitle C—Extension of Unemployment Benefits 
Sec. 121. Short title. 
PART I—TEMPORARY EXTENDED UNEMPLOYMENT COMPENSATION 
Sec. 131. References. 
Sec. 132. Extension of the Temporary Extended Unemployment Compensation 
Act of 2002. 
Sec. 133. Entitlement to additional weeks of temporary extended unemployment 
compensation. 
Sec. 134. Extended benefit periods. 
PART II—UNEMPLOYMENT BENEFITS FOR INDIVIDUALS QUALIFYING BASED 
ON PART-TIME WORK OR AN ALTERNATIVE BASE PERIOD 
Sec. 141. Federal-State agreements. 
Sec. 142. Payments to States having agreements under this part. 
Sec. 143. Financing provisions. 
Sec. 144. Definitions. 
Sec. 145. Applicability.
PART III—ENHANCED UNEMPLOYMENT BENEFITS 
Sec. 151. Federal-State agreements. 
Sec. 152. Payments to States having agreements under this part. 
Sec. 153. Definitions. 
Sec. 154. Applicability. 
Subtitle D—Trust Fund to Meet Nation’s Pressing Needs 
Sec. 161. Trust fund to meet nation’s pressing needs. 
TITLE II—LONG-TERM JOB CREATION AND GROWTH 
Sec. 201. Increase and extension of bonus depreciation. 
Sec. 202. Increased expensing for small business. 
Sec. 203. Deduction relating to income attributable to United States production 
activities. 
TITLE III—FISCAL RESPONSIBILITY AND PROVISIONS 
ADDRESSING CORPORATE ABUSE 
Subtitle A— General Provisions 
Sec. 301. Freeze of top individual income tax rates. 
Sec. 302. Restoration of phaseouts of deductions for personal exemptions and 
of itemized deductions. 
Sec. 303. Repeal of exclusion for extraterritorial income. 
Subtitle B—Abusive Tax Shelter Shutdown and Taxpayer Accountability 
PART I—PROVISIONS DESIGNED TO CURTAIL TAX SHELTERS 
Sec. 311. Clarification of economic substance doctrine. 
Sec. 312. Penalty for failing to disclose reportable transaction. 
Sec. 313. Accuracy-related penalty for listed transactions and other reportable 
transactions having a significant tax avoidance purpose. 
Sec. 314. Penalty for understatements attributable to transactions lacking eco-
nomic substance, etc. 
Sec. 315. Modifications of substantial understatement penalty for nonreportable 
transactions. 
Sec. 316. Tax shelter exception to confidentiality privileges relating to taxpayer 
communications. 
Sec. 317. Disclosure of reportable transactions. 
Sec. 318. Modifications to penalty for failure to register tax shelters. 
Sec. 319. Modification of penalty for failure to maintain lists of investors. 
Sec. 320. Modification of actions to enjoin certain conduct related to tax shel-
ters and reportable transactions. 
Sec. 321. Understatement of taxpayer’s liability by income tax return preparer. 
Sec. 322. Penalty on failure to report interests in foreign financial accounts. 
Sec. 323. Frivolous tax submissions. 
Sec. 324. Regulation of individuals practicing before the department of treas-
ury. 
Sec. 325. Penalty on promoters of tax shelters. 
Sec. 326. Statute of limitations for taxable years for which listed transactions 
not reported. 
Sec. 327. Denial of deduction for interest on underpayments attributable to 
nondisclosed reportable and noneconomic substance trans-
actions.
PART II—OTHER PROVISIONS 
Sec. 331. Limitation on transfer or importation of built-in losses. 
Sec. 332. Disallowance of certain partnership loss transfers. 
Sec. 333. No reduction of basis under section 734 in stock held by partnership 
in corporate partner. 
Sec. 334. Repeal of special rules for fasits. 
Sec. 335. Expanded disallowance of deduction for interest on convertible debt. 
Sec. 336. Expanded authority to disallow tax benefits under section 269. 
Sec. 337. Modifications of certain rules relating to controlled foreign corpora-
tions. 
Sec. 338. Basis for determining loss always reduced by nontaxed portion of 
dividends. 
Sec. 339. Affirmation of consolidated return regulation authority. 
Subtitle C—Prevention of Corporate Expatriation To Avoid United States 
Income Tax 
Sec. 341. Prevention of corporate expatriation to avoid United States income 
tax. 
Subtitle D—Inclusion in Gross Income of Funded Deferred Compensation of 
Corporate Insiders 
Sec. 351. Inclusion in gross income of funded deferred compensation of cor-
porate insiders.
TITLE I—IMMEDIATE STIMULUS 
AND JOB CREATION 
Subtitle A—Family Tax Relief 
SEC. 101. ACCELERATION OF INCREASE IN CHILD TAX 
CREDIT. 
(a) IN GENERAL.—The items relating to calendar 
years 2001 through 2008 in the table contained in para-
graph (2) of section 24(a) (relating to per child amount) 
are amended to read as follows:
‘‘2003 thru 2009 ......................................................................
$800
2010 or thereafter ..................................................................
1,000’’.
(b) ACCELERATION OF INCREASE IN REFUNDABLE 
PORTION OF CREDIT.—
(1) 
IN
GENERAL.—Clause 
(i) 
of 
section 
24(d)(1)(B) is amended to read as follows: 
‘‘(i) 15 percent of so much of the tax-
payer’s earned income (within the meaning 
of section 32) which is taken into account 
in computing taxable income for the tax-
able year as exceeds $7,500, or’’. 
(2) CONFORMING AMENDMENT.—Paragraph (3) 
of section 24(d) is amended—
(A) by striking ‘‘$10,000’’ and inserting 
‘‘$7,500’’, and 
(B) by striking ‘‘2000’’ and inserting 
‘‘2002’’.
(c) EFFECTIVE DATES.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002. 
SEC. 102. INCREASE IN STANDARD DEDUCTION FOR MAR-
RIED TAXPAYERS FILING JOINT RETURNS AC-
CELERATED. 
(a) IN GENERAL.—Subparagraph (A) of section 
63(c)(2), as amended by the Economic Growth and Tax 
Relief Reconciliation Act of 2001, is amended by striking 
‘‘the applicable percentage of’’ and inserting ‘‘twice’’. 
(b) CONFORMING AMENDMENTS.—
(1) Section 301(d) of the Economic Growth and 
Tax Relief Reconciliation Act of 2001 is amended by 
striking ‘‘2004’’ and inserting ‘‘2002’’. 
(2) Section 63(c) is amended by striking para-
graph (7). 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002. 
SEC. 103. ACCELERATION OF 10-PERCENT INDIVIDUAL IN-
COME TAX RATE BRACKET EXPANSION. 
(a) IN GENERAL.—Clause (i) of section 1(i)(1)(B) 
(relating to the initial bracket amount) is amended by 
striking ‘‘($12,000 in the case of taxable years beginning 
before January 1, 2008)’’. 
(b) INFLATION ADJUSTMENT.—Subparagraph (C) of 
section 1(i)(1) is amended to read as follows: 
‘‘(C) INFLATION
ADJUSTMENT.—In pre-
scribing the tables under subsection (f)—
‘‘(i) no adjustment shall be made in 
the $14,000 amount for any taxable year 
beginning before 2004, and 
‘‘(ii) the adjustment in such amount 
with respect to taxable years beginning 
after 2003 shall be determined under sub-
section (f)(3) by substituting ‘2003’ for 
‘1992’ in subparagraph (B) thereof.’’
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by 
this section shall apply to taxable years beginning 
after December 31, 2002. 
(2) TABLES FOR 2003.—The Secretary of the 
Treasury shall modify each table which has been 
prescribed under section 1(f) of the Internal Rev-
enue Code of 1986 for taxable years beginning in 
2003 and which relates to the amendment made by 
this section to reflect such amendment. 
SEC. 104. ACCELERATION OF ELIMINATION OF MARRIAGE 
PENALTY IN EARNED INCOME CREDIT. 
(a) IN GENERAL.—Subparagraph (B) of section 
32(b)(2) is amended to read as follows: 
‘‘(B) JOINT RETURNS.—In the case of a 
joint return filed by an eligible individual and 
such individual’s spouse, the phaseout amount 
determined under subparagraph (A) shall be in-
creased by $3,000.’’
(b) CONFORMING AMENDMENT.—Clause (ii) of sec-
tion 32(j)(1)(B) is amended by striking ‘‘2007’’ and in-
serting ‘‘2002’’.
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002. 
Subtitle B—Incentives to Hire the 
Long-Term Unemployed 
SEC. 111. INCENTIVES TO HIRE THE LONG-TERM UNEM-
PLOYED. 
(a) IN GENERAL.—Paragraph (1) of section 51(d) 
(relating to members of targeted groups) is amended by 
striking ‘‘or’’ at the end of subparagraph (G), by striking 
the period at the end of subparagraph (H) and inserting 
‘‘, or’’, and by adding at the end the following new sub-
paragraph: 
‘‘(I) a qualified long-term unemployed indi-
vidual.’’
(b) QUALIFIED LONG-TERM UNEMPLOYED INDI-
VIDUAL.—Subsection (d) of section 51 is amended by re-
designating paragraphs (10), (11), and (12) as para-
graphs (11), (12), and (13), respectively, and by inserting 
after paragraph (9) the following new paragraph: 
‘‘(10) QUALIFIED
LONG-TERM
UNEMPLOYED 
INDIVIDUAL.—
‘‘(A) IN
GENERAL.—The term ‘qualified 
long-term unemployed individual’ means any in-
dividual who is certified by the designated local 
agency—
‘‘(i) as having exhausted, during the 
1-year period ending on the hiring date, all 
rights to regular unemployment compensa-
tion under State or Federal law, and 
‘‘(ii) as having a hiring date which is 
during the 1-year period beginning on the 
date of the enactment of this paragraph. 
Subsection (c)(4) shall not apply to any quali-
fied long-term unemployed individual. 
‘‘(B) EXHAUSTION
OF
BENEFITS.—For 
purposes of subparagraph (A), an individual 
shall be deemed to have exhausted such individ-
ual’s rights to regular compensation when—
‘‘(i) no payments of regular com-
pensation can be made under such law be-
cause such individual has received all reg-
ular compensation available to such indi-
vidual based on employment or wages dur-
ing such individual’s base period, or 
‘‘(ii) such individual’s rights to such 
compensation have been terminated by rea-
son of the expiration of the benefit year 
with respect to which such rights existed.’’
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to individuals who begin work for 
the employer after the date of the enactment of this Act. 
Subtitle C—Extension of 
Unemployment Benefits 
SEC. 121. SHORT TITLE. 
This subtitle may be cited as the ‘‘Unemployment 
Benefits Extension Act’’. 
PART I—TEMPORARY EXTENDED 
UNEMPLOYMENT COMPENSATION 
SEC. 131. REFERENCES. 
Except as otherwise expressly provided, whenever in 
this part an amendment is expressed in terms of an 
amendment to a section or other provision, the reference 
shall be considered to be made to a section or other provi-
sion of the Temporary Extended Unemployment Com-
pensation Act of 2002 (Public Law 107–147; 26 U.S.C. 
3304 note). 
SEC. 132. EXTENSION OF THE TEMPORARY EXTENDED UN-
EMPLOYMENT COMPENSATION ACT OF 2002. 
(a) EXTENSION
OF
PROGRAM.—Section 208 is 
amended to read as follows:
‘‘SEC. 208. APPLICABILITY. 
‘‘(a) IN GENERAL.—Subject to subsection (b), an 
agreement entered into under this title shall apply to 
weeks of unemployment—
‘‘(1) beginning after the date on which such 
agreement is entered into; and 
‘‘(2) ending before March 1, 2004. 
‘‘(b) TRANSITION.—In the case of an individual who 
is receiving temporary extended unemployment compensa-
tion for the week which immediately precedes the first day 
of the week that includes March 1, 2004, temporary ex-
tended unemployment compensation shall continue to be 
payable to such individual for any week thereafter from 
the account from which such individual received com-
pensation for the week immediately preceding that termi-
nation date. No compensation shall be payable by reason 
of the preceding sentence for any week beginning after Oc-
tober 31, 2004.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall take effect as if included in the enact-
ment of the Temporary Extended Unemployment Com-
pensation Act of 2002 (Public Law 107–147; 116 Stat. 
21).
SEC. 133. ENTITLEMENT TO ADDITIONAL WEEKS OF TEM-
PORARY EXTENDED UNEMPLOYMENT COM-
PENSATION. 
(a) WEEKS OF TEUC AMOUNTS.—Paragraph (1) of 
section 203(b) is amended to read as follows: 
‘‘(1) IN GENERAL.—The amount established in 
an account under subsection (a) shall be equal to 26 
times the individual’s weekly benefit amount for the 
benefit year.’’. 
(b) 
WEEKS
OF
TEUC–X 
AMOUNTS.—Section 
203(c)(1) is amended by striking ‘‘an amount equal to the 
amount originally established in such account (as deter-
mined under subsection (b)(1))’’ and inserting ‘‘7 times 
the individual’s weekly benefit amount for the benefit 
year’’. 
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by 
this section—
(A) shall take effect as if included in the 
enactment of the Temporary Extended Unem-
ployment Compensation Act of 2002 (Public 
Law 107–147; 116 Stat. 21); but
(B) shall apply only with respect to weeks 
of unemployment beginning on or after the date 
of enactment of this Act, subject to paragraph 
(2).
(2) SPECIAL RULES.—In the case of an indi-
vidual for whom a temporary extended unemploy-
ment account was established before the date of en-
actment of this Act, the Temporary Extended Un-
employment Compensation Act of 2002 (as amended 
by this part) shall be applied subject to the fol-
lowing: 
(A) Any amounts deposited in the individ-
ual’s temporary extended unemployment com-
pensation account by reason of section 203(c) 
of such Act (commonly known as ‘‘TEUC–X 
amounts’’) before the date of enactment of this 
Act shall be treated as amounts deposited by 
reason of section 203(b) of such Act (commonly 
known as ‘‘TEUC amounts’’), as amended by 
subsection (a). 
(B) For purposes of determining whether 
the individual is eligible for any TEUC–X 
amounts under such Act, as amended by this 
part—
(i) any determination made under sec-
tion 203(c) of such Act before the applica-
tion of the amendments made by this part 
shall be disregarded; and
(ii) any such determination shall in-
stead be made by applying section 203(c) 
of such Act, as amended by this part—
(I) as of the time that all 
amounts established in such account 
in accordance with section 203(b) of 
such Act (as amended by this part, 
and including any amounts described 
in subparagraph (A)) are in fact ex-
hausted, except that 
(II) if such individual’s account 
was both augmented by and exhausted 
of all TEUC–X amounts before the 
date of enactment of this Act, such 
determination shall be made as if ex-
haustion (as described in section 
203(c)(1) of such Act) had not oc-
curred until such date of enactment. 
SEC. 134. EXTENDED BENEFIT PERIODS. 
(a) APPLICATION OF REVISED RATE OF INSURED 
UNEMPLOYMENT.—Section 207 is amended—
(1) by striking ‘‘In’’ and inserting ‘‘(a) IN GEN-
ERAL.—In’’; and 
(2) by adding at the end the following:
‘‘(b) INSURED UNEMPLOYMENT RATE.—For pur-
poses of carrying out section 203(c) with respect to weeks 
of unemployment beginning on or after the date of enact-
ment of this subsection, the term ‘rate of insured unem-
ployment’, as used in section 203(d) of the Federal-State 
Extended Unemployment Compensation Act of 1970 (26 
U.S.C. 3304 note), has the meaning given such term 
under section 203(e)(1) of such Act, except that individ-
uals exhausting their right to regular compensation during 
the most recent 3 calendar months for which data are 
available before the close of the period for which such rate 
is being determined shall be taken into account as if they 
were individuals filing claims for regular compensation for 
each week during the period for which such rate is being 
determined, and section 203(d)(1)(A) of such Act shall be 
applied by substituting ‘either (or both)’ for ‘each’.’’. 
(b) ADDITIONAL EXTENDED BENEFIT PERIOD TRIG-
GER.—
(1) IN GENERAL.—Section 203(c) is amended 
by adding at the end the following: 
‘‘(3) ADDITIONAL EXTENDED BENEFIT PERIOD 
TRIGGER.—
‘‘(A) IN GENERAL.—Effective with respect 
to compensation for weeks of unemployment be-
ginning on or after the date of enactment of
this paragraph, an agreement under this title 
shall provide that, in addition to any other ex-
tended benefit period trigger, for purposes of 
beginning or ending any extended benefit period 
under this section—
‘‘(i) there is a State ‘on’ indicator for 
a week if—
‘‘(I) the average rate of total un-
employment in such State (seasonally 
adjusted) for the period consisting of 
the most recent 3 months for which 
data for all States are published be-
fore the close of such week equals or 
exceeds 6 percent; and 
‘‘(II) the average rate of total 
unemployment in such State (season-
ally adjusted) for the 3-month period 
referred to in subclause (I) equals or 
exceeds 110 percent of such average 
rate for either (or both) of the cor-
responding 3-month periods ending in 
the 2 preceding calendar years; and 
‘‘(ii) there is a State ‘off’ indicator for 
a week if either the requirements of sub-
clause (I) or (II) of clause (i) are not satis-
fied. 
‘‘(B) NO EFFECT ON OTHER DETERMINA-
TIONS.—Notwithstanding the provisions of any 
agreement described in subparagraph (A), any 
week for which there would otherwise be a 
State ‘on’ indicator shall continue to be such a 
week and shall not be determined to be a week 
for which there is a State ‘off’ indicator. 
‘‘(C) DETERMINATIONS
MADE
BY
THE 
SECRETARY.—For purposes of this subsection, 
determinations of the rate of total unemploy-
ment in any State for any period (and of any 
seasonal adjustment) shall be made by the Sec-
retary.’’. 
(2) 
CONFORMING
AMENDMENT.—Section 
203(c)(1) is amended by inserting ‘‘or (3)’’ after 
‘‘paragraph (2)’’.
PART II—UNEMPLOYMENT BENEFITS FOR INDI-
VIDUALS QUALIFYING BASED ON PART-TIME 
WORK OR AN ALTERNATIVE BASE PERIOD 
SEC. 141. FEDERAL-STATE AGREEMENTS. 
(a) IN GENERAL.—Any State which desires to do so 
may enter into and participate in an agreement under this 
part with the Secretary of Labor (hereinafter in this part
referred to as the ‘‘Secretary’’). Any State which is a party 
to an agreement under this part may, upon providing 30 
days’ written notice to the Secretary, terminate such 
agreement. 
(b) PROVISIONS OF AGREEMENT.—
(1) IN GENERAL.—Any agreement under sub-
section (a) shall provide that the State agency of the 
State will make payments of regular compensation 
to individuals in amounts and to the extent that they 
would be determined if the State law were applied 
with the modifications described in paragraph (2). 
(2) MODIFICATIONS
DESCRIBED.—The modi-
fications described in this paragraph are as follows: 
(A) In the case of an individual who is not 
eligible for regular compensation under the 
State law because of the use of a definition of 
base period that does not count wages earned 
in the most recently completed calendar quar-
ter, eligibility for compensation under this part 
shall be determined by applying a base period 
ending at the close of the most recently com-
pleted calendar quarter. 
(B) In the case of an individual who is not 
eligible for regular compensation under the 
State law because such individual does not meet
requirements relating to availability for work, 
active search for work, or refusal to accept 
work, because such individual is seeking, or is 
available for, less than full-time work, com-
pensation under this part shall not be denied by 
such State to an otherwise eligible individual 
who seeks less than full-time work or fails to 
accept full-time work. 
(c) COORDINATION RULE.—The modifications de-
scribed in subsection (b)(2) shall also apply in determining 
the amount of benefits payable under any Federal law to 
the extent that those benefits are determined by reference 
to regular compensation payable under the State law of 
the State involved. 
SEC. 142. PAYMENTS TO STATES HAVING AGREEMENTS 
UNDER THIS PART. 
(a) GENERAL RULE.—There shall be paid to each 
State which has entered into an agreement under this part 
an amount equal to—
(1) 100 percent of any regular compensation 
made payable to individuals by such State by virtue 
of the modifications which are described in section 
141(b)(2) and deemed to be in effect with respect to 
such State pursuant to section 141(b)(1), and 
(2) 100 percent of any regular compensation—
(A) which is paid to individuals by such 
State by reason of the fact that its State law 
contains provisions comparable to the modifica-
tions described in section 141(b)(2), but only 
(B) to the extent that those amounts 
would, if such amounts were instead payable by 
virtue of the State law’s being deemed to be so 
modified pursuant to section 141(b)(1), have 
been reimbursable under paragraph (1). 
(b) DETERMINATION OF AMOUNT.—Sums under sub-
section (a) payable to any State by reason of such State 
having an agreement under this part shall be payable, ei-
ther in advance or by way of reimbursement (as may be 
determined by the Secretary), in such amounts as the Sec-
retary estimates the State will be entitled to receive under 
this part for each calendar month, reduced or increased, 
as the case may be, by any amount by which the Secretary 
finds that the Secretary’s estimates for any prior calendar 
month were greater or less than the amounts which should 
have been paid to the State. Such estimates may be made 
on the basis of such statistical, sampling, or other method 
as may be agreed upon by the Secretary and the State 
agency of the State involved. 
(c) ADMINISTRATIVE
AND
OTHER
EXPENSES.—
There is hereby appropriated out of the employment secu-
rity administration account of the Unemployment Trust 
Fund (as established by section 901(a) of the Social Secu-
rity Act) $500,000,000 to reimburse States for the costs 
of the administration of agreements under this part (in-
cluding any improvements in technology in connection 
therewith) and to provide reemployment services to unem-
ployment compensation claimants in States having agree-
ments under this part. Each State’s share of the amount 
appropriated by the preceding sentence shall be deter-
mined by the Secretary according to the factors described 
in section 302(a) of the Social Security Act and certified 
by the Secretary to the Secretary of the Treasury. 
SEC. 143. FINANCING PROVISIONS. 
(a) IN GENERAL.—Funds in the extended unemploy-
ment compensation account (as established by section 
905(a) of the Social Security Act), and the Federal unem-
ployment account (as established by section 904(g) of the 
Social Security Act), of the Unemployment Trust Fund 
shall be used, in accordance with subsection (b), for the 
making of payments (described in section 142(a)) to 
States having agreements entered into under this part. 
(b) CERTIFICATION.—The Secretary shall from time 
to time certify to the Secretary of the Treasury for pay-
ment to each State the sums described in section 142(a) 
which are payable to such State under this part. The Sec-
retary of the Treasury, prior to audit or settlement by the 
General Accounting Office, shall make payments to the 
State in accordance with such certification by transfers 
from the extended unemployment compensation account 
(or, to the extent that there are insufficient funds in that 
account, from the Federal unemployment account) to the 
account of such State in the Unemployment Trust Fund. 
SEC. 144. DEFINITIONS. 
For purposes of this part: 
(1) IN GENERAL.—The terms ‘‘compensation’’, 
‘‘regular compensation’’, ‘‘base period’’, ‘‘State’’, 
‘‘State agency’’, ‘‘State law’’, and ‘‘week’’ have the 
respective meanings given such terms under section 
205 of the Federal-State Extended Unemployment 
Compensation Act of 1970, subject to paragraph 
(2). 
(2) STATE
LAW
AND
REGULAR
COMPENSA-
TION.—In the case of a State entering into an 
agreement under this part—
(A) ‘‘State law’’ shall be considered to 
refer to the State law of such State, applied in 
conformance with the modifications described in 
section 201(b)(2), and 
(B) ‘‘regular compensation’’ shall be con-
sidered to refer to such compensation, deter-
mined under its State law (applied in the man-
ner described in subparagraph (A)), 
except as otherwise provided or where the context 
clearly indicates otherwise. 
SEC. 145. APPLICABILITY. 
An agreement entered into under this part shall apply 
to weeks of unemployment—
(1) beginning after the date on which such 
agreement is entered into, and 
(2) ending before July 1, 2004. 
PART III—ENHANCED UNEMPLOYMENT 
BENEFITS 
SEC. 151. FEDERAL-STATE AGREEMENTS. 
(a) IN GENERAL.—Any State which desires to do so 
may enter into and participate in an agreement under this 
part with the Secretary of Labor (hereinafter in this part 
referred to as the ‘‘Secretary’’). Any State which is a party 
to an agreement under this part may, upon providing 30 
days’ written notice to the Secretary, terminate such 
agreement. 
(b) PROVISIONS OF AGREEMENT.—
(1) IN GENERAL.—Any agreement under sub-
section (a) shall provide that the State agency of the 
State will make payments of regular compensation 
to individuals in amounts and to the extent that they
would be determined if the State law were applied 
with the modification described in paragraph (2). 
(2) MODIFICATION DESCRIBED.—The modifica-
tion described in this paragraph is that the amount 
of regular compensation (including dependents’ al-
lowances) payable for any week shall be equal to the 
amount determined under the State law (before the 
application of this paragraph), plus an additional—
(A) 15 percent, or 
(B) $25, 
whichever is greater. 
(c) NONREDUCTION RULE.—Each agreement shall 
provide that such agreement shall not apply (or shall cease 
to apply) upon a determination by the Secretary that the 
method governing the computation of regular compensa-
tion under the State law of that State has been modified 
in a way such that—
(1) the average weekly amount of regular com-
pensation which will be payable during the period of 
the agreement (determined disregarding the modi-
fication described in subsection (b)(2)) will be less 
than 
(2) the average weekly amount of regular com-
pensation which would otherwise have been payable
during such period under the State law, as in effect 
on September 11, 2001. 
(d) COORDINATION RULE.—The modification de-
scribed in subsection (b)(2) shall also apply in determining 
the amount of benefits payable under any Federal law to 
the extent that those benefits are determined by reference 
to regular compensation payable under the State law of 
the State involved. 
SEC. 152. PAYMENTS TO STATES HAVING AGREEMENTS 
UNDER THIS PART. 
(a) GENERAL RULE.—There shall be paid to each 
State which has entered into an agreement under this part 
an amount equal to 100 percent of any regular compensa-
tion made payable to individuals by such State by virtue 
of the modification described in section 151(b)(2) and 
deemed to be in effect with respect to such State pursuant 
to section 151(b)(1). 
(b) DETERMINATION OF AMOUNT.—Sums under sub-
section (a) payable to any State by reason of such State 
having an agreement under this part shall be payable, ei-
ther in advance or by way of reimbursement (as may be 
determined by the Secretary), in such amounts as the Sec-
retary estimates the State will be entitled to receive under 
this part for each calendar month, reduced or increased, 
as the case may be, by any amount by which the Secretary
finds that the Secretary’s estimates for any prior calendar 
month were greater or less than the amounts which should 
have been paid to the State. Such estimates may be made 
on the basis of such statistical, sampling, or other method 
as may be agreed upon by the Secretary and the State 
agency of the State involved. 
SEC. 153. DEFINITIONS. 
For purposes of this part: 
(1) IN GENERAL.—The terms ‘‘compensation’’, 
‘‘regular compensation’’, ‘‘extended compensation’’, 
‘‘additional compensation’’, ‘‘benefit year’’, ‘‘base pe-
riod’’, ‘‘State’’, ‘‘State agency’’, ‘‘State law’’, and 
‘‘week’’ have the respective meanings given such 
terms under section 205 of the Federal-State Ex-
tended Unemployment Compensation Act of 1970, 
subject to paragraph (2). 
(2) STATE
LAW
AND
REGULAR
COMPENSA-
TION.—In the case of a State entering into an 
agreement under this part—
(A) ‘‘State law’’ shall be considered to 
refer to the State law of such State, applied in 
conformance with the modification described in 
section 151(b)(2), subject to section 151(c), 
and
(B) ‘‘regular compensation’’ shall be con-
sidered to refer to such compensation, deter-
mined under its State law (applied in the man-
ner described in subparagraph (A)), 
except as otherwise provided or where the context 
clearly indicates otherwise. 
SEC. 154. APPLICABILITY. 
(a) IN GENERAL.—An agreement entered into under 
this part shall apply to weeks of unemployment—
(1) beginning after the date on which such 
agreement is entered into, and 
(2) ending before January 1, 2004. 
Subtitle D—Trust Fund to Meet 
Nation’s Pressing Needs 
SEC. 161. TRUST FUND TO MEET NATION’S PRESSING 
NEEDS. 
(a) CREATION OF TRUST FUND.—There is estab-
lished in the Treasury of the United States a trust fund 
to be known as the ‘Pressing Domestic Needs Trust 
Fund’, consisting of such amounts as may be transferred 
to the Trust Fund as provided in this section. 
(b) TRANSFERS TO FUND.—There are hereby trans-
ferred from the general Fund of the Treasury to the 
Pressing Domestic Needs Trust Fund so much of the ad-
ditional amounts received in the Treasury by reason of the
amendments made by title III of this Act as does not ex-
ceed—
(1) $18,000,000,000 to be used for increasing 
Federal matching funds under medicaid, and 
(2) $26,000,000,000 to be used for infrastruc-
ture improvements, homeland security, community 
development, and education. 
(c) EXPENDITURES.—Amounts in the Pressing Do-
mestic Needs Trust Fund shall be available, as provided 
by appropriation Acts, for purposes and in the amount 
specified in subsection (b). 
Subtitle D—Trust Fund to Meet 
Nation’s Pressing Needs 
SEC. 161. TRUST FUND TO MEET NATION’S PRESSING 
NEEDS. 
(a) CREATION OF TRUST FUND.—There is estab-
lished in the Treasury of the United States a trust fund 
to be known as the ‘Pressing Domestic Needs Trust 
Fund’, consisting of such amounts as may be transferred 
to the Trust Fund as provided in this section. 
(b) TRANSFERS TO FUND.—There are hereby trans-
ferred from the general Fund of the Treasury to the 
Pressing Domestic Needs Trust Fund so much of the ad-
ditional amounts received in the Treasury by reason of the
amendments made by title III of this Act as does not ex-
ceed—
(1) $18,000,000,000 to be used for increasing 
Federal matching funds under medicaid, and 
(2) $26,000,000,000 to be used for infrastruc-
ture improvements, homeland security, community 
development, and education. 
(c) EXPENDITURES.—Amounts in the Pressing Do-
mestic Needs Trust Fund shall be available, as provided 
by appropriation Acts, for purposes and in the amount 
specified in subsection (b). 
TITLE II—LONG-TERM JOB 
CREATION AND GROWTH
SEC. 201. INCREASE AND EXTENSION OF BONUS DEPRECIA-
TION. 
(a) IN GENERAL.—Section 168(k) (relating to special 
allowance for certain property acquired after September 
10, 2001, and before September 11, 2004) is amended by 
adding at the end the following new paragraph: 
‘‘(4) 50-PERCENT
BONUS
DEPRECIATION
FOR 
CERTAIN PROPERTY.—
‘‘(A) IN GENERAL.—In the case of 50-per-
cent bonus depreciation property—
‘‘(i) paragraph (1)(A) shall be applied 
by substituting ‘50 percent’ for ‘30 per-
cent’, and 
‘‘(ii) except as provided in paragraph 
(2)(C), such property shall be treated as 
qualified property for purposes of this sub-
section. 
‘‘(B) 50-PERCENT
BONUS
DEPRECIATION 
PROPERTY.—For purposes of this subsection, 
the term ‘50-percent bonus depreciation prop-
erty’ means property described in paragraph 
(2)(A)(i)—
‘‘(i) the original use of which com-
mences with the taxpayer after April 30, 
2003, 
‘‘(ii) which is acquired by the taxpayer 
after April 30, 2003, and before May 1, 
2004, but only if no written binding con-
tract for the acquisition was in effect be-
fore May 1, 2003, and 
‘‘(iii) which is placed in service by the 
taxpayer before January 1, 2005, or, in 
the case of property described in para-
graph (2)(B) (as modified by subpara-
graph (C) of this paragraph), before Janu-
ary 1, 2006. 
‘‘(C) SPECIAL
RULES.—Rules similar to 
the rules of subparagraphs (B) and (D) of 
paragraph (2) shall apply for purposes of this 
paragraph; except that reference to September 
10, 2001, shall be treated as references to April 
30, 2003. 
‘‘(D) AUTOMOBILES.—Paragraph (2)(E) 
shall be applied by substituting ‘$9,200’ for 
‘$4,600’ in the case of 50-percent bonus depre-
ciation property. 
‘‘(E) ELECTION OF 30 PERCENT BONUS.—
If a taxpayer makes an election under this sub-
paragraph with respect to any class of property 
for any taxable year, subparagraph (A)(i) shall 
not apply to all property in such class placed in 
service during such taxable year.’’
(b) MODIFICATION TO 30-PERCENT BONUS DEPRE-
CIATION PROPERTY.—
(1) PORTION
OF
BASIS
TAKEN
INTO
AC-
COUNT.—Subparagraphs (B)(ii) and (D)(i) of sec-
tion 168(k)(2) are each amended by striking ‘‘Sep-
tember 11, 2004’’ each place it appears and insert-
ing ‘‘January 1, 2005’’.
(2) 
ELECTION.—Clause 
(iii) 
of 
section 
168(k)(2)(C) is amended by adding at the end the 
following: ‘‘The preceding sentence shall be applied 
separately with respect to property treated as quali-
fied property by paragraph (4) and other qualified 
property.’’
(3) ACQUISITION DATE.—Clause (iii) of section 
168(k)(2)(A) is amended by striking ‘‘September 11, 
2004’’ each place it appears and inserting ‘‘January 
1, 2005’’. 
(c) CONFORMING AMENDMENTS.—
(1) The subsection heading for section 168(k) is 
amended by striking ‘‘SEPTEMBER 11, 2004’’ and 
inserting ‘‘JANUARY 1, 2005’’. 
(2) The heading for clause (i) of section 
1400L(b)(2)(C) is amended by striking ‘‘30-PER-
CENT ADDITIONAL ALLOWABLE PROPERTY’’ and in-
serting ‘‘BONUS DEPRECIATION PROPERTY UNDER 
SECTION 168(k)’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years ending after the 
date of the enactment of this Act.
SEC. 202. INCREASED EXPENSING FOR SMALL BUSINESS. 
(a) IN GENERAL.—Paragraph (1) of section 179(b) 
(relating to dollar limitation) is amended to read as fol-
lows: 
‘‘(1) DOLLAR LIMITATION.—The aggregate cost 
which may be taken into account under subsection 
(a) for any taxable year shall not exceed $25,000 
($75,000 in the case of taxable years beginning in 
2003 or 2004).’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2002. 
SEC. 203. DEDUCTION RELATING TO INCOME ATTRIB-
UTABLE TO UNITED STATES PRODUCTION 
ACTIVITIES. 
(a) IN GENERAL.—Part VIII of subchapter B of 
chapter 1 (relating to special deductions for corporations) 
is amended by adding at the end the following new section: 
‘‘SEC. 250. INCOME ATTRIBUTABLE TO DOMESTIC PRODUC-
TION ACTIVITIES. 
‘‘(a) IN GENERAL.—In the case of a corporation, 
there shall be allowed as a deduction an amount equal to 
10 percent of the qualified production activities income of 
the corporation for the taxable year. 
‘‘(b) PHASEIN.—In the case of taxable years begin-
ning in 2006, 2007, 2008 or 2009, subsection (a) shall
be applied by substituting for the percentage contained 
therein the transition percentage determined under the 
following table:
‘‘Taxable years 
The transition 
beginning in: 
percentage is: 
2006 ............................................................................
2007 ............................................................................
2008 ............................................................................
2009 ............................................................................
‘‘(c) 
QUALIFIED
PRODUCTION
ACTIVITIES
IN-
COME.—For purposes of this section, the term ‘qualified 
production activities income’ means the product of—
‘‘(1) the portion of the modified taxable income 
of the taxpayer which is attributable to domestic 
production activities, and 
‘‘(2) the domestic/foreign fraction. 
‘‘(d) DETERMINATION OF INCOME ATTRIBUTABLE 
TO DOMESTIC PRODUCTION ACTIVITIES.—For purposes 
of this section—
‘‘(1) IN GENERAL.—The portion of the modified 
taxable income which is attributable to domestic pro-
duction activities is so much of the modified taxable 
income for the taxable year as does not exceed—
‘‘(A) the taxpayer’s domestic production 
gross receipts for such taxable year, reduced by 
‘‘(B) the sum of—
‘‘(i) the costs of goods sold that are 
allocable to such receipts,
‘‘(ii) other deductions, expenses, or 
losses directly allocable to such receipts, 
and 
‘‘(iii) a ratable portion of other deduc-
tions, expenses, and losses that are not di-
rectly allocable to such receipts or another 
class of income. 
‘‘(2) ALLOCATION
METHOD.—Except as pro-
vided in regulations, allocations under clauses (ii) 
and (iii) of paragraph (1)(B) shall be made under 
the principles used in determining the portion of tax-
able income from sources within and without the 
United States. 
‘‘(3) SPECIAL RULE.—
‘‘(A) For purposes of determining costs 
under clause (i) of paragraph (1)(B), any item 
or service brought into the United States with-
out a transfer price meeting the requirements 
of section 482 shall be treated as acquired by 
purchase, and its cost shall be treated as not 
less than its value when it entered the United 
States. A similar rule shall apply in determining 
the adjusted basis of leased or rented property 
where the lease or rental gives rise to domestic 
production gross receipts.
‘‘(B) In the case of any property described 
in subparagraph (A) that had been exported by 
the taxpayer for further manufacture, the in-
crease in cost (or adjusted basis) under sub-
paragraph (A) shall not exceed the difference 
between the value of the property when ex-
ported and the value of the property when 
brought back into the United States after the 
further manufacture. 
‘‘(4) MODIFIED TAXABLE INCOME.—The term 
‘modified taxable income’ means taxable income 
computed without regard to the deduction allowable 
under this section. 
‘‘(e) DOMESTIC PRODUCTION GROSS RECEIPTS.—
For purposes of this section—
‘‘(1) IN GENERAL.—The term ‘domestic produc-
tion gross receipts’ means the gross receipts of the 
taxpayer which are derived from—
‘‘(A) any sale, exchange, or other disposi-
tion of, or 
‘‘(B) any lease, rental or license of, 
qualifying production property which was manufac-
tured, produced, grown, or extracted in whole or in 
significant part by the taxpayer within the United 
States.
‘‘(2) SPECIAL RULE.—The term ‘domestic pro-
duction gross receipts’ includes gross receipts of the 
taxpayer from the sale, exchange, or other disposi-
tion of replacement parts if— 
‘‘(A) such parts are sold by the taxpayer 
as replacement parts for qualified production 
property produced or manufactured in whole or 
significant part by the taxpayer in the United 
States, and 
‘‘(B) the taxpayer (or a related party) 
owns the designs for such parts. 
‘‘(3) RELATED
PARTY.—The term ‘related 
party’ means any corporation which is a member of 
the taxpayer’s expanded affiliated group. 
‘‘(f) QUALIFYING
PRODUCTION
PROPERTY.—For 
purposes of this section—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this paragraph, the term ‘qualifying produc-
tion property’ means—
‘‘(A) any tangible personal property, 
‘‘(B) any computer software, and 
‘‘(C) any films, tapes, records, or similar 
reproductions.
‘‘(2) EXCLUSIONS FROM QUALIFYING PRODUC-
TION PROPERTY.—The term ‘qualifying production 
property’ shall not include—
‘‘(A) consumable property that is sold, 
leased, or licensed by the taxpayer as an inte-
gral part of the provision of services, 
‘‘(B) oil or gas (or any primary product 
thereof), 
‘‘(C) electricity, 
‘‘(D) water supplied by pipeline to the con-
sumer, 
‘‘(E) any unprocessed timber which is 
softwood, 
‘‘(F) utility services, or 
‘‘(G) any property (not described in para-
graph (1)(B)) which is a film, tape, recording, 
book, magazine, newspaper, or similar property 
the market for which is primarily topical or oth-
erwise essentially transitory in nature. 
For purposes of subparagraph (E), the term ‘un-
processed timber’ means any log, cant, or similar 
form of timber. 
‘‘(g) DOMESTIC/FOREIGN FRACTION.—For purposes 
of this section—
‘‘(1) IN GENERAL.—The term ‘domestic/foreign 
fraction’ means a fraction—
‘‘(A) the numerator of which is the value 
of the domestic production of the taxpayer, and 
‘‘(B) the denominator of which is the value 
of the worldwide production of the taxpayer. 
‘‘(2) VALUE OF DOMESTIC PRODUCTION.—The 
value of domestic production is the excess of—
‘‘(A) the domestic production gross re-
ceipts, over 
‘‘(B) the cost of purchased inputs allocable 
to such receipts that are deductible under this 
chapter for the taxable year. 
‘‘(3) PURCHASED INPUTS.—
‘‘(A) IN GENERAL.—Purchased inputs are 
any of the following items acquired by pur-
chase: 
‘‘(i) Services (other than services of 
employees) used in manufacture, produc-
tion, growth, or extraction activities. 
‘‘(ii) Items consumed in connection 
with such activities.
‘‘(iii) Items incorporated as part of 
the property being manufactured, pro-
duced, grown, or extracted.
‘‘(B) SPECIAL RULE.—Rules similar to the 
rules of subsection (d)(3) shall apply for pur-
poses of this subsection. 
‘‘(4) VALUE OF WORLDWIDE PRODUCTION.—
‘‘(A) IN GENERAL.—The value of world-
wide production shall be determined under the 
principles of paragraph (2), except that—
‘‘(i) worldwide production gross re-
ceipts shall be taken into account, and 
‘‘(ii) paragraph (3)(B) shall not apply. 
‘‘(B) WORLDWIDE PRODUCTION GROSS RE-
CEIPTS.—The worldwide production gross re-
ceipts is the amount that would be determined 
under subsection (e) if such subsection were ap-
plied without any reference to the United 
States. 
‘‘(5) 
SPECIAL
RULE
FOR
AFFILIATED 
GROUPS.—
‘‘(A) IN GENERAL.—In the case of a tax-
payer that is a member of an expanded affili-
ated group, the domestic/foreign fraction shall 
be the amount determined under the preceding 
provisions of this subsection by treating all 
members of such group as a single corporation.
‘‘(B) EXPANDED
AFFILIATED
GROUP.—
The term ‘expanded affiliated group’ means an 
affiliated group as defined in section 1504(a), 
determined—
‘‘(i) by substituting ‘50 percent’ for 
‘80 percent’ each place it appears, and 
‘‘(ii) without regard to paragraphs 
(2), (3), and (4) of section 1504(b). 
‘‘(h) DEFINITIONS AND SPECIAL RULES.—
‘‘(1) UNITED
STATES.—For purposes of this 
section, the term ‘United States’ includes the Com-
monwealth of Puerto Rico and any other possession 
of the United States. 
‘‘(2) SPECIAL RULE FOR PARTNERSHIPS.—For 
purposes of this section, a corporation’s distributive 
share of any partnership item shall be taken into ac-
count as if directly realized by the corporation. 
‘‘(3) COORDINATION WITH MINIMUM TAX.—The 
deduction under this section shall be allowed for 
purposes of the tax imposed by section 55; except 
that for purposes of section 55, alternative minimum 
taxable income shall be taken into account in deter-
mining the deduction under this section.
‘‘(4) ORDERING
RULE.—The amount of any 
other deduction allowable under this chapter shall be 
determined as if this section had not been enacted. 
‘‘(5) 
COORDINATION
WITH
TRANSITION 
RULES.—For purposes of this section—
‘‘(A) domestic production gross receipts 
shall not include gross receipts from any trans-
action if the binding contract transition relief of 
section 303(c)(2) of the Jobs and Growth Rec-
onciliation Tax Act of 2003 applies to such 
transaction, and 
‘‘(B) any deduction allowed under section 
2(e) of such Act shall be disregarded in deter-
mining the portion of the taxable income which 
is attributable to domestic production gross re-
ceipts.’’. 
(b) CLERICAL AMENDMENT.—The table of sections 
for part VIII of subchapter B of chapter 1 is amended 
by adding at the end the following new item:
‘‘Sec. 250. Income attributable to domestic production activi-
ties.’’.
(c) EFFECTIVE DATE.—
‘‘(1) IN GENERAL.—The amendments made by 
this section shall apply to taxable years beginning 
after 2005.
‘‘(2) APPLICATION OF SECTION 15.—Section 15 
of the Internal Revenue Code of 1986 shall apply to 
the amendments made by this section as if they were 
changes in a rate of tax. 
TITLE 
III—FISCAL 
RESPONSI-
BILITY AND PROVISIONS AD-
DRESSING 
CORPORATE 
ABUSE 
Subtitle A— General Provisions 
SEC. 301. FREEZE OF TOP INDIVIDUAL INCOME TAX RATES. 
(a) FREEZE
OF TOP INDIVIDUAL INCOME TAX 
RATES.—Paragraph (2) of section 1(i) (relating to reduc-
tions in rates after June 30, 2001) is amended—
(1) in the column for the highest rate—
(A) by striking ‘‘37.6’’ and inserting 
‘‘38.6’’, and 
(B) by striking ‘‘35.0’’ and inserting 
‘‘38.6’’, and 
(2) in the column for the next highest rate—
(A) by striking ‘‘34.0’’ and inserting 
‘‘35.0’’, and 
(B) by striking ‘‘33.0’’ and inserting 
‘‘35.0’’.
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003. 
(c) RESTORATION OF RATE REDUCTIONS IF FUNDS 
NOT
COMMITTED
TO
MEET
NATION’S
PRESSING 
NEEDS.—
(1) IN GENERAL.—On December 31, 2003, the 
Director of the Office of Management and Budget 
shall determine whether there is a noncommitted 
balance in the Pressing Domestic Needs Trust Fund 
(established by section 161 of this Act). If such a 
noncommitted balance is determined, the Secretary 
of the Treasury shall reduce the rates otherwise ap-
plicable under the amendment made by subsection 
(a) so that the total revenue raised by such amend-
ment is reduced by the amount of such noncom-
mitted balance. 
(2) NONCOMMITTED BALANCE.—For purposes 
of paragraph (1), the noncommitted balance of the 
trust fund is the portion of the amounts in the trust 
fund which are not committed to meeting the press-
ing needs specified in section 161. 
(d) RESTORATION OF RATE REDUCTIONS IF BAL-
ANCED BUDGET.—The amendments made by this section 
shall cease to apply to any taxable year beginning after
a calendar year if there is no deficit in the Federal budget 
for the fiscal year ending in such calendar year. 
SEC. 302. RESTORATION OF PHASEOUTS OF DEDUCTIONS 
FOR 
PERSONAL 
EXEMPTIONS 
AND 
OF 
ITEMIZED DEDUCTIONS. 
(a) PHASEOUT OF PERSONAL EXEMPTIONS.—Para-
graph (3) of section 151(d) is amended by striking sub-
paragraphs (E) and (F). 
(b) PHASEOUT OF ITEMIZED DEDUCTIONS.—Section 
68 (relating to overall limitation on itemized deductions) 
is amended by striking subsections (f) and (g). 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002. 
SEC. 303. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL 
INCOME. 
(a) IN GENERAL.—Section 114 is hereby repealed. 
(b) CONFORMING AMENDMENTS.—
(1) Subpart E of part III of subchapter N of 
chapter 1 (relating to qualifying foreign trade in-
come) is hereby repealed. 
(2) The table of subparts for such part III is 
amended by striking the item relating to subpart E.
(3) The table of sections for part III of sub-
chapter B of chapter 1 is amended by striking the 
item relating to section 114. 
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by 
this section shall apply to transactions occurring 
after the date of the enactment of this Act. 
(2) BINDING
CONTRACTS.—The amendments 
made by this section shall not apply to any trans-
action in the ordinary course of a trade or business 
which occurs pursuant to a binding contract—
(A) which is between the taxpayer and a 
person who is not a related person (as defined 
in section 943(b)(3) of such Code, as in effect 
on the day before the date of the enactment of 
this Act), and 
(B) which is in effect on April 11, 2003, 
and at all times thereafter. 
For purposes of this paragraph, a binding contract 
shall include a purchase option, renewal option, or 
replacement option which is included in such con-
tract. 
(d) REVOCATION OF SECTION 943(e) ELECTIONS.—
(1) IN GENERAL.—In the case of a corporation 
that elected to be treated as a domestic corporation
under section 943(e) of the Internal Revenue Code 
of 1986 (as in effect on the day before the date of 
the enactment of this Act)—
(A) the corporation may revoke such elec-
tion, effective as of the date of the enactment 
of this Act, and 
(B) if the corporation does revoke such 
election—
(i) such corporation shall be treated 
as a domestic corporation transferring (as 
of the date of the enactment of this Act) 
all of its property to a foreign corporation 
in connection with an exchange described 
in section 354 of the Internal Revenue 
Code of 1986, and 
(ii) no gain or loss shall be recognized 
on such transfer. 
(2) 
EXCEPTION.—Subparagraph 
(B)(ii) 
of 
paragraph (1) shall not apply to gain on any asset 
held by the revoking corporation if—
(A) the basis of such asset is determined 
in whole or in part by reference to the basis of 
such asset in the hands of the person from 
whom the revoking corporation acquired such 
asset,
(B) the asset was acquired by transfer (not 
as a result of the election under section 943(e) 
of such Code) occurring on or after the 1st day 
on which its election under section 943(e) of 
such Code was effective, and 
(C) a principal purpose of the acquisition 
was the reduction or avoidance of tax. 
(e) GENERAL TRANSITION.—
(1) IN GENERAL.—In the case of a taxable year 
ending after the date of the enactment of this Act 
and beginning before January 1, 2009, for purposes 
of chapter 1 of such Code, each current FSC/ETI 
beneficiary shall be allowed a deduction equal to the 
transition amount determined under this subsection 
with respect to such beneficiary for such year. 
(2) CURRENT
FSC/ETI
BENEFICIARY.—The 
term ‘‘current FSC/ETI beneficiary’’ means any cor-
poration which entered into one or more transactions 
during its taxable year beginning in calendar year 
2001 with respect to which FSC/ETI benefits were 
allowable. 
(3) TRANSITION
AMOUNT.—For purposes of 
this subsection—
(A) IN GENERAL.—The transition amount 
applicable to any current FSC/ETI beneficiary
for any taxable year is the phaseout percentage 
of the adjusted base period amount. 
(B) PHASEOUT PERCENTAGE.—
(i) IN
GENERAL.—In the case of a 
taxpayer using the calendar year as its 
taxable year, the phaseout percentage shall 
be determined under the following table:
The phaseout 
‘‘Years: 
percentage is:
2004 and 2005 ............................................................
100
2006 ............................................................................
2007 ............................................................................
2008 ............................................................................
2009 and thereafter ....................................................
(ii) SPECIAL
RULE
FOR
2003.—The 
phaseout percentage for 2003 shall be the 
amount that bears the same ratio to 100 
percent as the number of days after the 
date of the enactment of this Act bears to 
365. 
(iii) SPECIAL RULE FOR FISCAL YEAR 
TAXPAYERS.—In the case of a taxpayer 
not using the calendar year as its taxable 
year, the phaseout percentage is the 
weighted average of the phaseout percent-
ages determined under the preceding provi-
sions of this paragraph with respect to cal-
endar years any portion of which is in-
cluded in the taxpayer’s taxable year. The
weighted average shall be determined on 
the basis of the respective portions of the 
taxable year in each calendar year. 
(4) ADJUSTED BASE PERIOD AMOUNT.—
For purposes of this subsection—
(A) IN GENERAL.—In the case of a 
taxpayer using the calendar year as its 
taxable year, the adjusted base period 
amount for any taxable year is the base 
period amount multiplied by the applicable 
percentage, as determined in the following 
table:
The applicable 
‘‘Years: 
percentage is:
2003 ............................................................................
100
2004 ............................................................................
100
2005 ............................................................................
105
2006 ............................................................................
110
2007 ............................................................................
115
2008 ............................................................................
120
2009 and thereafter ....................................................
(B) BASE
PERIOD
AMOUNT.—The 
base period amount is the aggregate FSC/
ETI benefits for the taxpayer’s taxable 
year beginning in calendar year 2001. 
(C) SPECIAL RULES FOR FISCAL YEAR 
TAXPAYERS, ETC.—Rules similar to rules 
of clauses (ii) and (iii) of paragraph (3)(B) 
shall apply for purposes of this paragraph.
(5) FSC/ETI BENEFIT.—For purposes of this 
subsection, the term ‘‘FSC/ETI benefit’’ means—
(A) amounts excludable from gross income 
under section 114 of such Code, and 
(B) the exempt foreign trade income of re-
lated foreign sales corporations from property 
acquired from the taxpayer (determined without 
regard to section 923(a)(5) of such Code (relat-
ing to special rule for military property), as in 
effect on the day before the date of the enact-
ment of the FSC Repeal and Extraterritorial 
Income Exclusion Act of 2000). 
In determining the FSC/ETI benefit there shall be 
excluded any amount attributable to a transaction 
with respect to which the taxpayer is the lessor un-
less the leased property was manufactured or pro-
duced in whole or in part by the taxpayer. 
(6) SPECIAL RULE FOR FARM COOPERATIVES.—
Under regulations prescribed by the Secretary, de-
terminations under this subsection with respect to 
an organization described in section 943(g)(1) of 
such Code, as in effect on the day before the date 
of the enactment of this Act, shall be made at the 
cooperative level and the purposes of this subsection
shall be carried out by excluding amounts from the 
gross income of its patrons. 
(7) CERTAIN RULES TO APPLY.—Rules similar 
to the rules of section 41(f) of such Code shall apply 
for purposes of this subsection. 
(8) COORDINATION WITH BINDING CONTRACT 
RULE.—The deduction determined under paragraph 
(1) for any taxable year shall be reduced by the 
phaseout percentage of any FSC/ETI benefit real-
ized for the taxable year by reason of subsection 
(c)(2). The preceding sentence shall not apply to any 
FSC/ETI benefit attributable to a transaction de-
scribed in the last sentence of paragraph (5). 
(9) SPECIAL RULE FOR TAXABLE YEAR WHICH 
INCLUDES DATE OF ENACTMENT.—In the case of a 
taxable year which includes the date of the enact-
ment of this Act, the deduction allowed under this 
subsection to any current FSC/ETI beneficiary shall 
in no event exceed—
(A) 100 percent of such beneficiary’s ad-
justed base period amount for calendar year 
2003, reduced by 
(B) the aggregate FSC/ETI benefits of 
such beneficiary with respect to transactions oc-
curring during the portion of the taxable year 
ending on the date of the enactment of this Act. 
Subtitle B—Abusive Tax Shelter 
Shutdown and Taxpayer Ac-
countability 
PART I—PROVISIONS DESIGNED TO CURTAIL TAX 
SHELTERS 
SEC. 311. CLARIFICATION OF ECONOMIC SUBSTANCE DOC-
TRINE. 
(a) IN GENERAL.—Section 7701 is amended by re-
designating subsection (m) as subsection (n) and by in-
serting after subsection (l) the following new subsection: 
‘‘(m) CLARIFICATION
OF ECONOMIC SUBSTANCE 
DOCTRINE; ETC.—
‘‘(1) GENERAL RULES.—
‘‘(A) IN GENERAL.—In applying the eco-
nomic substance doctrine, the determination of 
whether a transaction has economic substance 
shall be made as provided in this paragraph. 
‘‘(B) DEFINITION
OF
ECONOMIC
SUB-
STANCE.—For purposes of subparagraph (A)—
‘‘(i) IN GENERAL.—A transaction has 
economic substance only if—
‘‘(I) the transaction changes in a 
meaningful way (apart from Federal
tax effects and, if there is any Federal 
tax effects, also apart from any for-
eign, State, or local tax effects) the 
taxpayer’s economic position, and 
‘‘(II) the taxpayer has a substan-
tial nontax purpose for entering into 
such transaction and the transaction 
is a reasonable means of accom-
plishing such purpose. 
‘‘(ii) SPECIAL
RULE
WHERE
TAX-
PAYER RELIES ON PROFIT POTENTIAL.—A 
transaction shall not be treated as having 
economic substance by reason of having a 
potential for profit unless—
‘‘(I) the present value of the rea-
sonably expected pre-tax profit from 
the transaction is substantial in rela-
tion to the present value of the ex-
pected net tax benefits that would be 
allowed if the transaction were re-
spected, and 
‘‘(II) the reasonably expected 
pre-tax profit from the transaction ex-
ceeds a risk-free rate of return.
‘‘(C) TREATMENT OF FEES AND FOREIGN 
TAXES.—Fees and other transaction expenses 
and foreign taxes shall be taken into account as 
expenses in determining pre-tax profit under 
subparagraph (B)(ii). 
‘‘(2) SPECIAL RULES FOR TRANSACTIONS WITH 
TAX-INDIFFERENT PARTIES.—
‘‘(A) SPECIAL
RULES
FOR
FINANCING 
TRANSACTIONS.—The form of a transaction 
which is in substance the borrowing of money 
or the acquisition of financial capital directly or 
indirectly from a tax-indifferent party shall not 
be respected if the present value of the deduc-
tions to be claimed with respect to the trans-
action is substantially in excess of the present 
value of the anticipated economic returns of the 
person lending the money or providing the fi-
nancial capital. A public offering shall be treat-
ed as a borrowing, or an acquisition of financial 
capital, from a tax-indifferent party if it is rea-
sonably expected that at least 50 percent of the 
offering will be placed with tax-indifferent par-
ties. 
‘‘(B) ARTIFICIAL INCOME SHIFTING AND 
BASIS
ADJUSTMENTS.—The form of a trans-
action with a tax-indifferent party shall not be 
respected if—
‘‘(i) it results in an allocation of in-
come or gain to the tax-indifferent party in 
excess of such party’s economic income or 
gain, or 
‘‘(ii) it results in a basis adjustment 
or shifting of basis on account of over-
stating the income or gain of the tax-indif-
ferent party. 
‘‘(3) DEFINITIONS AND SPECIAL RULES.—For 
purposes of this subsection—
‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.—
The term ‘economic substance doctrine’ means 
the common law doctrine under which tax bene-
fits under subtitle A with respect to a trans-
action are not allowable if the transaction does 
not have economic substance or lacks a business 
purpose. 
‘‘(B) 
TAX-INDIFFERENT
PARTY.—The 
term ‘tax-indifferent party’ means any person 
or entity not subject to tax imposed by subtitle 
A. A person shall be treated as a tax-indifferent 
party with respect to a transaction if the items 
taken into account with respect to the trans-
action have no substantial impact on such per-
son’s liability under subtitle A. 
‘‘(C) SUBSTANTIAL NONTAX PURPOSE.—In 
applying subclause (II) of paragraph (1)(B)(i), 
a purpose of achieving a financial accounting 
benefit shall not be taken into account in deter-
mining whether a transaction has a substantial 
nontax purpose if the origin of such financial 
accounting benefit is a reduction of income tax. 
‘‘(D) EXCEPTION FOR PERSONAL TRANS-
ACTIONS OF INDIVIDUALS.—In the case of an 
individual, this subsection shall apply only to 
transactions entered into in connection with a 
trade or business or an activity engaged in for 
the production of income. 
‘‘(E) TREATMENT OF LESSORS.—In apply-
ing subclause (I) of paragraph (1)(B)(ii) to the 
lessor of tangible property subject to a lease, 
the expected net tax benefits shall not include 
the benefits of depreciation, or any tax credit, 
with respect to the leased property and sub-
clause (II) of paragraph (1)(B)(ii) shall be dis-
regarded in determining whether any of such 
benefits are allowable.
‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF-
FECTED.—Except as specifically provided in this 
subsection, the provisions of this subsection shall not 
be construed as altering or supplanting any other 
rule of law, and the requirements of this subsection 
shall be construed as being in addition to any such 
other rule of law. 
‘‘(5) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section. Such regulations may include exemptions 
from the application of this subsection.’’
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions entered into after 
February 13, 2003. 
SEC. 312. 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. 313. ACCURACY-RELATED PENALTY FOR LISTED 
TRANSACTIONS AND OTHER REPORTABLE 
TRANSACTIONS HAVING A SIGNIFICANT TAX 
AVOIDANCE PURPOSE. 
(a) IN GENERAL.—Subchapter A of chapter 68 is 
amended by inserting after section 6662 the following new 
section:
‘‘SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PEN-
ALTY ON UNDERSTATEMENTS WITH RESPECT 
TO REPORTABLE TRANSACTIONS. 
‘‘(a) IMPOSITION OF PENALTY.—If a taxpayer has a 
reportable transaction understatement for any taxable 
year, there shall be added to the tax an amount equal to 
20 percent of the amount of such understatement. 
‘‘(b) REPORTABLE
TRANSACTION
UNDERSTATE-
MENT.—For purposes of this section—
‘‘(1) IN GENERAL.—The term ‘reportable trans-
action understatement’ means the sum of—
‘‘(A) the product of—
‘‘(i) the amount of the increase (if 
any) in taxable income which results from 
a difference between the proper tax treat-
ment of an item to which this section ap-
plies and the taxpayer’s treatment of such 
item (as shown on the taxpayer’s return of 
tax), and 
‘‘(ii) the highest rate of tax imposed 
by section 1 (section 11 in the case of a 
taxpayer which is a corporation), and 
‘‘(B) the amount of the decrease (if any) 
in the aggregate amount of credits determined 
under subtitle A which results from a difference 
between the taxpayer’s treatment of an item to
which this section applies (as shown on the tax-
payer’s return of tax) and the proper tax treat-
ment of such item. 
For purposes of subparagraph (A), any reduction of 
the excess of deductions allowed for the taxable year 
over gross income for such year, and any reduction 
in the amount of capital losses which would (without 
regard to section 1211) be allowed for such year, 
shall be treated as an increase in taxable income. 
‘‘(2) ITEMS TO WHICH SECTION APPLIES.—This 
section shall apply to any item which is attributable 
to—
‘‘(A) any listed transaction, and 
‘‘(B) any reportable transaction (other 
than a listed transaction) if a significant pur-
pose of such transaction is the avoidance or 
evasion of Federal income tax. 
‘‘(c) HIGHER PENALTY FOR NONDISCLOSED LISTED 
AND OTHER AVOIDANCE TRANSACTIONS.—
‘‘(1) IN GENERAL.—Subsection (a) shall be ap-
plied by substituting ‘30 percent’ for ‘20 percent’ 
with respect to the portion of any reportable trans-
action understatement with respect to which the re-
quirement of section 6664(d)(2)(A) is not met.
‘‘(2) RULES APPLICABLE TO COMPROMISE OF 
PENALTY.—
‘‘(A) IN
GENERAL.—If the 1st letter of 
proposed deficiency which allows the taxpayer 
an opportunity for administrative review in the 
Internal Revenue Service Office of Appeals has 
been sent with respect to a penalty to which 
paragraph (1) applies, only the Commissioner 
of Internal Revenue may compromise all or any 
portion of such penalty. 
‘‘(B) APPLICABLE
RULES.—The rules of 
paragraphs (3), (4), and (5) of section 
6707A(d) shall apply for purposes of subpara-
graph (A). 
‘‘(d) DEFINITIONS
OF REPORTABLE
AND LISTED 
TRANSACTIONS.—For purposes of this section, the terms 
‘reportable transaction’ and ‘listed transaction’ have the 
respective meanings given to such terms by section 
6707A(c). 
‘‘(e) SPECIAL RULES.—
‘‘(1) COORDINATION
WITH
PENALTIES, ETC., 
ON OTHER UNDERSTATEMENTS.—In the case of an 
understatement (as defined in section 6662(d)(2))—
‘‘(A) the amount of such understatement 
(determined without regard to this paragraph)
shall be increased by the aggregate amount of 
reportable transaction understatements and 
noneconomic substance transaction understate-
ments for purposes of determining whether 
such understatement is a substantial under-
statement under section 6662(d)(1), and 
‘‘(B) the addition to tax under section 
6662(a) shall apply only to the excess of the 
amount of the substantial understatement (if 
any) after the application of subparagraph (A) 
over the aggregate amount of reportable trans-
action understatements and noneconomic sub-
stance transaction understatements. 
‘‘(2) 
COORDINATION
WITH
OTHER
PEN-
ALTIES.—
‘‘(A) APPLICATION OF FRAUD PENALTY.—
References to an underpayment in section 6663 
shall be treated as including references to a re-
portable transaction understatement and a non-
economic substance transaction understatement. 
‘‘(B) NO DOUBLE PENALTY.—This section 
shall not apply to any portion of an understate-
ment on which a penalty is imposed under sec-
tion 6662B or 6663.
‘‘(3) 
SPECIAL
RULE
FOR
AMENDED
RE-
TURNS.—Except as provided in regulations, in no 
event shall any tax treatment included with an 
amendment or supplement to a return of tax be 
taken into account in determining the amount of any 
reportable transaction understatement or non-
economic substance transaction understatement if 
the amendment or supplement is filed after the ear-
lier of the date the taxpayer is first contacted by the 
Secretary regarding the examination of the return or 
such other date as is specified by the Secretary. 
‘‘(4) NONECONOMIC
SUBSTANCE
TRANS-
ACTION
UNDERSTATEMENT.—For purposes of 
this subsection, the term ‘noneconomic sub-
stance transaction understatement’ has the 
meaning given such term by section 6662B(c). 
‘‘(5) CROSS REFERENCE.—
‘‘For reporting of section 6662A(c) penalty to the 
Securities and Exchange Commission, see section 
6707A(e).’’
(b) DETERMINATION
OF
OTHER
UNDERSTATE-
MENTS.—Subparagraph (A) of section 6662(d)(2) is 
amended by adding at the end the following flush sen-
tence: 
‘‘The excess under the preceding sentence shall 
be determined without regard to items to which 
section 6662A applies and without regard to
items with respect to which a penalty is im-
posed by section 6662B.’’
(c) REASONABLE CAUSE EXCEPTION.—
(1) IN GENERAL.—Section 6664 is amended by 
adding at the end the following new subsection: 
‘‘(d) REASONABLE CAUSE EXCEPTION FOR REPORT-
ABLE TRANSACTION UNDERSTATEMENTS.— 
‘‘(1) IN
GENERAL.—No penalty shall be im-
posed under section 6662A with respect to any por-
tion of a reportable transaction understatement if it 
is shown that there was a reasonable cause for such 
portion and that the taxpayer acted in good faith 
with respect to such portion. 
‘‘(2) SPECIAL RULES.—Paragraph (1) shall not 
apply to any reportable transaction understatement 
unless—
‘‘(A) the relevant facts affecting the tax 
treatment of the item are adequately disclosed 
in accordance with the regulations prescribed 
under section 6011, 
‘‘(B) there is or was substantial authority 
for such treatment, and 
‘‘(C) the taxpayer reasonably believed that 
such treatment was more likely than not the 
proper treatment.
A taxpayer failing to adequately disclose in accord-
ance with section 6011 shall be treated as meeting 
the requirements of subparagraph (A) if the penalty 
for such failure was rescinded under section 
6707A(d). 
‘‘(3) RULES
RELATING
TO
REASONABLE
BE-
LIEF.—For purposes of paragraph (2)(C)—
‘‘(A) IN GENERAL.—A taxpayer shall be 
treated as having a reasonable belief with re-
spect to the tax treatment of an item only if 
such belief—
‘‘(i) is based on the facts and law that 
exist at the time the return of tax which 
includes such tax treatment is filed, and 
‘‘(ii) relates solely to the taxpayer’s 
chances of success on the merits of such 
treatment and does not take into account 
the possibility that a return will not be au-
dited, such treatment will not be raised on 
audit, or such treatment will be resolved 
through settlement if it is raised. 
‘‘(B) CERTAIN OPINIONS MAY NOT BE RE-
LIED UPON.—
‘‘(i) IN GENERAL.—An opinion of a 
tax advisor may not be relied upon to es-
tablish the reasonable belief of a taxpayer 
if—
‘‘(I) the tax advisor is described 
in clause (ii), or 
‘‘(II) the opinion is described in 
clause (iii). 
‘‘(ii) DISQUALIFIED TAX ADVISORS.—
A tax advisor is described in this clause if 
the tax advisor—
‘‘(I) is a material advisor (within 
the meaning of section 6111(b)(1)) 
who participates in the organization, 
management, promotion, or sale of 
the transaction or who is related 
(within the meaning of section 267(b) 
or 707(b)(1)) to any person who so 
participates, 
‘‘(II) is compensated directly or 
indirectly by a material advisor with 
respect to the transaction, 
‘‘(III) has a fee arrangement 
with respect to the transaction which 
is contingent on all or part of the in-
tended tax benefits from the trans-
action being sustained, or
‘‘(IV) as determined under regu-
lations prescribed by the Secretary, 
has a continuing financial interest 
with respect to the transaction. 
‘‘(iii) DISQUALIFIED
OPINIONS.—For 
purposes of clause (i), an opinion is dis-
qualified if the opinion—
‘‘(I) is based on unreasonable 
factual or legal assumptions (includ-
ing assumptions as to future events), 
‘‘(II) unreasonably relies on rep-
resentations, statements, findings, or 
agreements of the taxpayer or any 
other person, 
‘‘(III) does not identify and con-
sider all relevant facts, or 
‘‘(IV) fails to meet any other re-
quirement as the Secretary may pre-
scribe.’’
(2) CONFORMING AMENDMENT.—The heading 
for subsection (c) of section 6664 is amended by in-
serting ‘‘FOR
UNDERPAYMENTS’’ after ‘‘EXCEP-
TION’’. 
(d) CONFORMING AMENDMENTS.—
(1) Subparagraph (C) of section 461(i)(3) is 
amended by striking ‘‘section 6662(d)(2)(C)(iii)’’ 
and inserting ‘‘section 1274(b)(3)(C)’’. 
(2) Paragraph (3) of section 1274(b) is amend-
ed—
(A) by striking ‘‘(as defined in section 
6662(d)(2)(C)(iii))’’ in subparagraph (B)(i), 
and 
(B) by adding at the end the following new 
subparagraph: 
‘‘(C) TAX SHELTER.—For purposes of sub-
paragraph (B), the term ‘tax shelter’ means—
‘‘(i) a partnership or other entity, 
‘‘(ii) any investment plan or arrange-
ment, or 
‘‘(iii) any other plan or arrangement, 
if a significant purpose of such partnership, en-
tity, plan, or arrangement is the avoidance or 
evasion of Federal income tax.’’
(3) Section 6662(d)(2) is amended by striking 
subparagraphs (C) and (D). 
(4) Section 6664(c)(1) is amended by striking 
‘‘this part’’ and inserting ‘‘section 6662 or 6663’’.
‘‘SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIB-
UTABLE TO TRANSACTIONS LACKING ECO-
NOMIC SUBSTANCE, ETC. 
‘‘(a) IMPOSITION OF PENALTY.—If a taxpayer has an 
noneconomic substance transaction understatement for 
any taxable year, there shall be added to the tax an 
amount equal to 40 percent of the amount of such under-
statement. 
‘‘(b) REDUCTION
OF PENALTY
FOR DISCLOSED 
TRANSACTIONS.—Subsection (a) shall be applied by sub-
stituting ‘20 percent’ for ‘40 percent’ with respect to the 
portion of any noneconomic substance transaction under-
statement with respect to which the relevant facts affect-
ing the tax treatment of the item are adequately disclosed 
in the return or a statement attached to the return. 
‘‘(c) NONECONOMIC SUBSTANCE TRANSACTION UN-
DERSTATEMENT.—For purposes of this section—
‘‘(1) IN
GENERAL.—The term ‘noneconomic 
substance transaction understatement’ means any 
amount which would be an understatement under 
section 6662A(b)(1) if section 6662A were applied 
by taking into account items attributable to non-
economic substance transactions rather than items 
to which section 6662A would apply without regard 
to this paragraph.
‘‘(2) 
NONECONOMIC
SUBSTANCE
TRANS-
ACTION.—The term ‘noneconomic substance trans-
action’ means any transaction if—
‘‘(A) there is a lack of economic substance 
(within the meaning of section 7701(m)(1)) for 
the transaction giving rise to the claimed tax 
benefit or the transaction was not respected 
under section 7701(m)(2), or 
‘‘(B) the transaction fails to meet the re-
quirements of any similar rule of law. 
‘‘(d) RULES APPLICABLE TO COMPROMISE OF PEN-
ALTY.—
‘‘(1) IN GENERAL.—If the 1st letter of pro-
posed deficiency which allows the taxpayer an oppor-
tunity for administrative review in the Internal Rev-
enue Service Office of Appeals has been sent with 
respect to a penalty to which this section applies, 
only the Commissioner of Internal Revenue may 
compromise all or any portion of such penalty. 
‘‘(2) APPLICABLE RULES.—The rules of para-
graphs (3), (4), and (5) of section 6707A(d) shall 
apply for purposes of paragraph (1). 
‘‘(e) COORDINATION WITH OTHER PENALTIES.—Ex-
cept as otherwise provided in this part, the penalty im-
posed by this section shall be in addition to any other pen-
alty imposed by this title. 
‘‘(f) CROSS REFERENCES.—
‘‘(1) For coordination of penalty with understate-
ments under section 6662 and other special rules, 
see section 6662A(e). 
‘‘(2) For reporting of penalty imposed under this 
section to the Securities and Exchange Commission, 
see section 6707A(e).’’
(b) CLERICAL AMENDMENT.—The table of sections 
for part II of subchapter A of chapter 68 is amended by 
inserting after the item relating to section 6662A the fol-
lowing new item:
‘‘Sec. 6662B. Penalty for understatements attributable to trans-
actions lacking economic substance, etc.’’
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions entered into after 
February 13, 2003. 
SEC. 315. 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. 316. 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. 317. 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. 318. 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. 319. 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. 320. 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. 321. 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. 322. 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-
TIONNo 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. 323. FRIVOLOUS TAX SUBMISSIONS. 
(a) CIVIL PENALTIES.—Section 6702 is amended to 
read as follows: 
‘‘SEC. 6702. FRIVOLOUS TAX SUBMISSIONS. 
‘‘(a) CIVIL PENALTY
FOR FRIVOLOUS TAX RE-
TURNS.—A person shall pay a penalty of $5,000 if—
‘‘(1) such person files what purports to be a re-
turn of a tax imposed by this title but which—
‘‘(A) does not contain information on 
which the substantial correctness of the self-as-
sessment may be judged, or 
‘‘(B) contains information that on its face 
indicates that the self-assessment is substan-
tially incorrect; and 
‘‘(2) the conduct referred to in paragraph (1)— 
‘‘(A) is based on a position which the Sec-
retary has identified as frivolous under sub-
section (c), or 
‘‘(B) reflects a desire to delay or impede 
the administration of Federal tax laws. 
‘‘(b) CIVIL PENALTY
FOR SPECIFIED FRIVOLOUS 
SUBMISSIONS.—
‘‘(1) IMPOSITION OF PENALTY.—Except as pro-
vided in paragraph (3), any person who submits a 
specified frivolous submission shall pay a penalty of 
$5,000. 
‘‘(2) SPECIFIED FRIVOLOUS SUBMISSION.—For 
purposes of this section—
‘‘(A) 
SPECIFIED
FRIVOLOUS
SUBMIS-
SION.—The term ‘specified frivolous submis-
sion’ means a specified submission if any por-
tion of such submission—
‘‘(i) is based on a position which the 
Secretary has identified as frivolous under 
subsection (c), or 
‘‘(ii) reflects a desire to delay or im-
pede the administration of Federal tax 
laws. 
‘‘(B) SPECIFIED SUBMISSION.—The term 
‘specified submission’ means—
‘‘(i) a request for a hearing under—
‘‘(I) section 6320 (relating to no-
tice and opportunity for hearing upon 
filing of notice of lien), or 
‘‘(II) section 6330 (relating to 
notice and opportunity for hearing be-
fore levy), and
‘‘(ii) an application under—
‘‘(I) section 6159 (relating to 
agreements for payment of tax liabil-
ity in installments), 
‘‘(II) section 7122 (relating to 
compromises), or 
‘‘(III) section 7811 (relating to 
taxpayer assistance orders). 
‘‘(3) OPPORTUNITY
TO
WITHDRAW
SUBMIS-
SION.—If the Secretary provides a person with no-
tice that a submission is a specified frivolous sub-
mission and such person withdraws such submission 
within 30 days after such notice, the penalty im-
posed under paragraph (1) shall not apply with re-
spect to such submission. 
‘‘(c) LISTING OF FRIVOLOUS POSITIONS.—The Sec-
retary shall prescribe (and periodically revise) a list of po-
sitions which the Secretary has identified as being frivo-
lous for purposes of this subsection. The Secretary shall 
not include in such list any position that the Secretary 
determines 
meets 
the 
requirement 
of 
section 
6662(d)(2)(B)(ii)(II). 
‘‘(d) REDUCTION OF PENALTY.—The Secretary may 
reduce the amount of any penalty imposed under this sec-
tion if the Secretary determines that such reduction would
promote compliance with and administration of the Fed-
eral tax laws. 
‘‘(e) PENALTIES
IN ADDITION
TO OTHER PEN-
ALTIES.—The penalties imposed by this section shall be 
in addition to any other penalty provided by law.’’
(b) TREATMENT
OF FRIVOLOUS REQUESTS
FOR 
HEARINGS BEFORE LEVY.—
(1) FRIVOLOUS
REQUESTS
DISREGARDED.—
Section 6330 (relating to notice and opportunity for 
hearing before levy) is amended by adding at the 
end the following new subsection: 
‘‘(g) FRIVOLOUS REQUESTS FOR HEARING, ETC.—
Notwithstanding any other provision of this section, if the 
Secretary determines that any portion of a request for a 
hearing under this section or section 6320 meets the re-
quirement of clause (i) or (ii) of section 6702(b)(2)(A), 
then the Secretary may treat such portion as if it were 
never submitted and such portion shall not be subject to 
any further administrative or judicial review.’’
(2) PRECLUSION
FROM
RAISING
FRIVOLOUS 
ISSUES AT HEARING.—Section 6330(c)(4) is amend-
ed—
(A) by striking ‘‘(A)’’ and inserting 
‘‘(A)(i)’’; 
(B) by striking ‘‘(B)’’ and inserting ‘‘(ii)’’;
(C) by striking the period at the end of the 
first sentence and inserting ‘‘; or’’; and 
(D) by inserting after subparagraph (A)(ii) 
(as so redesignated) the following: 
‘‘(B) the issue meets the requirement of 
clause (i) or (ii) of section 6702(b)(2)(A).’’
(3) 
STATEMENT
OF
GROUNDS.—Section 
6330(b)(1) is amended by striking ‘‘under sub-
section (a)(3)(B)’’ and inserting ‘‘in writing under 
subsection (a)(3)(B) and states the grounds for the 
requested hearing’’. 
(c) TREATMENT
OF FRIVOLOUS REQUESTS
FOR 
HEARINGS UPON FILING OF NOTICE OF LIEN.—Section 
6320 is amended—
(1) in subsection (b)(1), by striking ‘‘under sub-
section (a)(3)(B)’’ and inserting ‘‘in writing under 
subsection (a)(3)(B) and states the grounds for the 
requested hearing’’, and 
(2) in subsection (c), by striking ‘‘and (e)’’ and 
inserting ‘‘(e), and (g)’’. 
(d) TREATMENT OF FRIVOLOUS APPLICATIONS FOR 
OFFERS-IN-COMPROMISE
AND
INSTALLMENT
AGREE-
MENTS.—Section 7122 is amended by adding at the end 
the following new subsection:
‘‘(e) FRIVOLOUS
SUBMISSIONS, ETC.—Notwith-
standing any other provision of this section, if the Sec-
retary determines that any portion of an application for 
an offer-in-compromise or installment agreement sub-
mitted under this section or section 6159 meets the re-
quirement of clause (i) or (ii) of section 6702(b)(2)(A), 
then the Secretary may treat such portion as if it were 
never submitted and such portion shall not be subject to 
any further administrative or judicial review.’’
(e) CLERICAL AMENDMENT.—The table of sections 
for part I of subchapter B of chapter 68 is amended by 
striking the item relating to section 6702 and inserting 
the following new item:
‘‘Sec. 6702. Frivolous tax submissions.’’
(f) EFFECTIVE DATE.—The amendments made by 
this section shall apply to submissions made and issues 
raised after the date on which the Secretary first pre-
scribes a list under section 6702(c) of the Internal Rev-
enue Code of 1986, as amended by subsection (a). 
SEC. 324. REGULATION OF INDIVIDUALS PRACTICING BE-
FORE THE DEPARTMENT OF TREASURY. 
(a) CENSURE; IMPOSITION OF PENALTY.—
(1) IN GENERAL.—Section 330(b) of title 31, 
United States Code, is amended—
(A) by inserting ‘‘, or censure,’’ after ‘‘De-
partment’’, and
(B) by adding at the end the following new 
flush sentence: 
‘‘The Secretary may impose a monetary penalty on any 
representative described in the preceding sentence. If the 
representative was acting on behalf of an employer or any 
firm or other entity in connection with the conduct giving 
rise to such penalty, the Secretary may impose a monetary 
penalty on such employer, firm, or entity if it knew, or 
reasonably should have known, of such conduct. Such pen-
alty shall not exceed the gross income derived (or to be 
derived) from the conduct giving rise to the penalty and 
may be in addition to, or in lieu of, any suspension, disbar-
ment, or censure.’’
(2) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to actions taken after 
the date of the enactment of this Act. 
(b) TAX SHELTER OPINIONS, ETC.—Section 330 of 
such title 31 is amended by adding at the end the fol-
lowing new subsection: 
‘‘(d) Nothing in this section or in any other provision 
of law shall be construed to limit the authority of the Sec-
retary of the Treasury to impose standards applicable to 
the rendering of written advice with respect to any entity, 
transaction plan or arrangement, or other plan or arrange-
100
ment, which is of a type which the Secretary determines 
as having a potential for tax avoidance or evasion.’’
SEC. 325. PENALTY ON PROMOTERS OF TAX SHELTERS. 
(a) PENALTY ON PROMOTING ABUSIVE TAX SHEL-
TERS.—Section 6700(a) is amended by adding at the end 
the following new sentence: ‘‘Notwithstanding the first 
sentence, if an activity with respect to which a penalty 
imposed under this subsection involves a statement de-
scribed in paragraph (2)(A), the amount of the penalty 
shall be equal to 50 percent of the gross income derived 
(or to be derived) from such activity by the person on 
which the penalty is imposed.’’
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to activities after the date of the 
enactment of this Act. 
SEC. 326. STATUTE OF LIMITATIONS FOR TAXABLE YEARS 
FOR WHICH LISTED TRANSACTIONS NOT RE-
PORTED. 
(a) IN GENERAL.—Section 6501(e)(1) (relating to 
substantial omission of items for income taxes) is amended 
by adding at the end the following new subparagraph: 
‘‘(C) LISTED
TRANSACTIONS.—If a tax-
payer fails to include on any return or state-
ment for any taxable year any information with 
respect to a listed transaction (as defined in
101
section 6707A(c)(2)) which is required under 
section 6011 to be included with such return or 
statement, the tax for such taxable year may be 
assessed, or a proceeding in court for collection 
of such tax may be begun without assessment, 
at any time within 6 years after the time the 
return is filed. This subparagraph shall not 
apply to any taxable year if the time for assess-
ment or beginning the proceeding in court has 
expired before the time a transaction is treated 
as a listed transaction under section 6011.’’ 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to transactions after the date of 
the enactment of this Act in taxable years ending after 
such date. 
SEC. 327. DENIAL OF DEDUCTION FOR INTEREST ON UN-
DERPAYMENTS ATTRIBUTABLE TO NONDIS-
CLOSED REPORTABLE AND NONECONOMIC 
SUBSTANCE TRANSACTIONS. 
(a) IN GENERAL.—Section 163 (relating to deduction 
for interest) is amended by redesignating subsection (m) 
as subsection (n) and by inserting after subsection (l) the 
following new subsection: 
‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE 
TO NONDISCLOSED REPORTABLE TRANSACTIONS
AND
102
NONECONOMIC SUBSTANCE TRANSACTIONS.—No deduc-
tion shall be allowed under this chapter for any interest 
paid or accrued under section 6601 on any underpayment 
of tax which is attributable to—
‘‘(1) the portion of any reportable transaction 
understatement (as defined in section 6662A(b)) 
with respect to which the requirement of section 
6664(d)(2)(A) is not met, or 
‘‘(2) any noneconomic substance transaction 
understatement (as defined in section 6662B(c)).’’
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions after the date of 
the enactment of this Act in taxable years ending after 
such date. 
PART II—OTHER PROVISIONS 
SEC. 331. LIMITATION ON TRANSFER OR IMPORTATION OF 
BUILT-IN LOSSES. 
(a) IN GENERAL.—Section 362 (relating to basis to 
corporations) is amended by adding at the end the fol-
lowing new subsection: 
‘‘(e) LIMITATIONS ON BUILT-IN LOSSES.—
‘‘(1) LIMITATION ON IMPORTATION OF BUILT-
IN LOSSES.—
‘‘(A) IN GENERAL.—If in any transaction 
described in subsection (a) or (b) there would
103
(but for this subsection) be an importation of a 
net built-in loss, the basis of each property de-
scribed in subparagraph (B) which is acquired 
in such transaction shall (notwithstanding sub-
sections (a) and (b)) be its fair market value 
immediately after such transaction. 
‘‘(B) PROPERTY
DESCRIBED.—For pur-
poses of subparagraph (A), property is de-
scribed in this paragraph if—
‘‘(i) gain or loss with respect to such 
property is not subject to tax under this 
subtitle in the hands of the transferor im-
mediately before the transfer, and 
‘‘(ii) gain or loss with respect to such 
property is subject to such tax in the 
hands of the transferee immediately after 
such transfer. 
In any case in which the transferor is a part-
nership, the preceding sentence shall be applied 
by treating each partner in such partnership as 
holding such partner’s proportionate share of 
the property of such partnership. 
‘‘(C) IMPORTATION
OF
NET
BUILT-IN 
LOSS.—For purposes of subparagraph (A), 
there is an importation of a net built-in loss in
104
a transaction if the transferee’s aggregate ad-
justed bases of property described in subpara-
graph (B) which is transferred in such trans-
action would (but for this paragraph) exceed 
the fair market value of such property imme-
diately after such transaction.’’
‘‘(2) LIMITATION ON TRANSFER OF BUILT-IN 
LOSSES IN SECTION 351 TRANSACTIONS.—
‘‘(A) IN GENERAL.—If—
‘‘(i) property is transferred in any 
transaction which is described in sub-
section (a) and which is not described in 
paragraph (1) of this subsection, and 
‘‘(ii) the transferee’s aggregate ad-
justed bases of the property so transferred 
would (but for this paragraph) exceed the 
fair market value of such property imme-
diately after such transaction, 
then, notwithstanding subsection (a), the trans-
feree’s aggregate adjusted bases of the property 
so transferred shall not exceed the fair market 
value of such property immediately after such 
transaction. 
‘‘(B) ALLOCATION
OF
BASIS
REDUC-
TION.—The aggregate reduction in basis by
105
reason of subparagraph (A) shall be allocated 
among the property so transferred in proportion 
to their respective built-in losses immediately 
before the transaction. 
‘‘(C) EXCEPTION FOR TRANSFERS WITHIN 
AFFILIATED
GROUP.—Subparagraph (A) shall 
not apply to any transaction if the transferor 
owns stock in the transferee meeting the re-
quirements of section 1504(a)(2). In the case of 
property to which subparagraph (A) does not 
apply by reason of the preceding sentence, the 
transferor’s basis in the stock received for such 
property shall not exceed its fair market value 
immediately after the transfer.’’ 
(b) COMPARABLE TREATMENT WHERE LIQUIDA-
TION.—Paragraph (1) of section 334(b) (relating to liq-
uidation of subsidiary) is amended to read as follows: 
‘‘(1) IN GENERAL.—If property is received by a 
corporate distributee in a distribution in a complete 
liquidation to which section 332 applies (or in a 
transfer described in section 337(b)(1)), the basis of 
such property in the hands of such distributee shall 
be the same as it would be in the hands of the trans-
feror; except that the basis of such property in the 
hands of such distributee shall be the fair market