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(3)(A) Subpart C of part II of subchapter C of
chapter 1 (relating to collapsible corporations) is re-
pealed.
(B)(i) Section 338(h) is amended by striking
paragraph (14).
(ii) Sections 467(c)(5)(C), 1255(b)(2), and
1257(d) are each amended by striking ‘‘, 341(e)(12),’’.
(iii) The table of subparts for part II of sub-
chapter C of chapter 1 is amended by striking the
item related to subpart C.
(4) Section 531 is amended—
(A) by inserting ‘‘the taxable percentage of’’
after ‘‘equal to’’, and
(B) by adding at the end the following:
‘‘For purposes of this section, the taxable per-
centage is 100 percent minus the applicable per-
centage (as defined in section 116(a)(2)).’’
(5) Section 541 is amended—
(A) by inserting ‘‘the taxable percentage of’’
after ‘‘equal to’’, and
(B) by adding at the end the following:
‘‘For purposes of this section, the taxable per-
centage is 100 percent minus the applicable per-
centage (as defined in section 116(a)(2)).’’
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(6) Section 584(c) is amended by adding at the
end the following new flush sentence:
‘‘The proportionate share of each participant in the amount
of dividends received by the common trust fund and to
which section 116 applies shall be considered for purposes
of such paragraph as having been received by such partici-
pant.’’.
(7) Section 643(a) is amended by redesignating
paragraph (7) as paragraph (8) and by inserting
after paragraph (6) the following new paragraph:
‘‘(7) EXCLUDED DIVIDENDS.—There shall be in-
cluded the amount of any dividends excluded from
gross income under section 116 (relating to partial
exclusion of dividends).’’.
(8) Paragraph (5) of section 702(a) is amended
to read as follows:
‘‘(5) dividends with respect to which section 116
or part VII of subchapter B applies,’’.
(9)(A) Section 1059(a) is amended by striking
‘‘corporation’’ each place it appears and inserting
‘‘taxpayer’’.
(B)(i) The heading for section 1059 is amended
by striking ‘‘CORPORATE’’.
(ii) The item relating to section 1059 in the table
of sections for part IV of subchapter O of chapter 1
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is amended by striking ‘‘Corporate shareholder’s’’ and
inserting ‘‘Shareholder’s’’.
(f) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2002.
TITLE III—REVENUE
PROVISIONS
Subtitle A—Provisions Designed To
Curtail Tax Shelters
SEC. 301. CLARIFICATION OF ECONOMIC SUBSTANCE DOC-
TRINE.
(a) IN GENERAL.—Section 7701 is amended by redes-
ignating subsection (n) as subsection (o) and by inserting
after subsection (m) the following new subsection:
‘‘(n) CLARIFICATION OF ECONOMIC SUBSTANCE DOC-
TRINE; 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—
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‘‘(I) the transaction changes in a
meaningful way (apart from Federal
tax effects) the taxpayer’s economic po-
sition, and
‘‘(II) the taxpayer has a substan-
tial nontax purpose for entering into
such transaction and the transaction is
a reasonable means of accomplishing
such purpose.
In applying subclause (II), a purpose of
achieving a financial accounting benefit
shall not be taken into account in deter-
mining whether a transaction has a sub-
stantial nontax purpose if the origin of such
financial accounting benefit is a reduction
of income tax.
‘‘(ii) SPECIAL RULE WHERE TAXPAYER
RELIES ON PROFIT POTENTIAL.—A trans-
action shall not be treated as having eco-
nomic substance by reason of having a po-
tential 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 expected
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net tax benefits that would be allowed
if the transaction were respected, and
‘‘(II) the reasonably expected pre-
tax profit from the transaction exceeds
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 deductions
to be claimed with respect to the transaction is
substantially in excess of the present value of the
anticipated economic returns of the person lend-
ing the money or providing the financial capital.
A public offering shall be treated as a borrowing,
or an acquisition of financial capital, from a
tax-indifferent party if it is reasonably expected
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that at least 50 percent of the offering will be
placed with tax-indifferent parties.
‘‘(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 overstating
the income or gain of the tax-indifferent
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 enti-
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ty 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 transaction have
no substantial impact on such person’s liability
under subtitle A.
‘‘(C) EXCEPTION
FOR
PERSONAL
TRANS-
ACTIONS OF INDIVIDUALS.—In the case of an in-
dividual, 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.
‘‘(D) TREATMENT OF LESSORS.—A lessor of
tangible property subject to a lease shall be treat-
ed as satisfying the requirements of paragraph
(1)(B)(ii) with respect to the leased property if
such lease satisfies such requirements as provided
by the Secretary.
‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF-
FECTED.—Except as specifically provided in this sub-
section, 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.
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‘‘(5) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or appro-
priate to carry out the purposes of this subsection.
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 on or after
May 8, 2003.
SEC. 302. 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 inserting
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 information with
respect to a reportable transaction which is required under
section 6011 to be included with such return or statement
shall pay a penalty in the amount determined under sub-
section (b).
‘‘(b) AMOUNT OF PENALTY.—
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‘‘(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 ENTITIES
AND HIGH NET WORTH INDIVIDUALS.—
‘‘(A) IN GENERAL.—In the case of a failure
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 sub-
paragraph (A), the term ‘large entity’ means,
with respect to any taxable year, a person (other
than a natural person) with gross receipts in ex-
cess of $10,000,000 for the taxable year in which
the reportable transaction occurs or the pre-
ceding 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 subparagraph.
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‘‘(C) HIGH NET WORTH INDIVIDUAL.—For
purposes of subparagraph (A), the term ‘high net
worth individual’ means, with respect to a re-
portable transaction, a natural person whose net
worth exceeds $2,000,000 immediately before the
transaction.
‘‘(c) DEFINITIONS.—For purposes of this section—
‘‘(1) REPORTABLE TRANSACTION.—The term ‘re-
portable transaction’ means any transaction with re-
spect to which information is required to be included
with a return or statement because, as determined
under regulations prescribed under section 6011, such
transaction is of a type which the Secretary deter-
mines as having a potential for tax avoidance or eva-
sion.
‘‘(2) LISTED TRANSACTION.—Except as provided
in regulations, the term ‘listed transaction’ means a
reportable transaction which is the same as, or sub-
stantially similar to, a transaction specifically identi-
fied by the Secretary as a tax avoidance transaction
for purposes of section 6011.
‘‘(d) AUTHORITY TO RESCIND PENALTY.—
‘‘(1) IN GENERAL.—The Commissioner of Inter-
nal Revenue may rescind all or any portion of any
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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 im-
posed 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 Com-
missioner, 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-
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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 rescinded
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 Exchange
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Act of 1934 or is required to be consolidated with an-
other 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 sec-
tion 6662A with respect to any reportable trans-
action at a rate prescribed under section
6662A(c), or
‘‘(C) is required to pay a penalty under sec-
tion 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 ac-
cordance 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 sections
for part I of subchapter B of chapter 68 is amended by
inserting after the item relating to section 6707 the fol-
lowing:
‘‘Sec. 6707A. Penalty for failure to include reportable transaction
information with return or statement.’’.
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(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. 
303. 
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 PENALTY
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 per-
cent 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 dif-
ference between the proper tax treatment of
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an item to which this section applies 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 tax-
payer 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 purpose of
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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 transaction
understatement with respect to which the requirement
of section 6664(d)(2)(A) is not met.
‘‘(2) RULES
APPLICABLE
TO
COMPROMISE
OF
PENALTY.—
‘‘(A) IN GENERAL.—If the 1st letter of pro-
posed deficiency which allows the taxpayer an
opportunity for administrative review in the In-
ternal 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 (2), (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 ‘re-
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portable transaction’ and ‘listed transaction’ have the re-
spective 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 under-
statement (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 re-
portable transaction understatements and non-
economic substance transaction understatements
for purposes of determining whether such under-
statement is a substantial understatement under
section 6662(d)(1), and
‘‘(B) the addition to tax under section
6662(a) shall apply only to the excess of the
amount of the substantial understatement (if
any) after the application of subparagraph (A)
over the aggregate amount of reportable trans-
action understatements and noneconomic sub-
stance transaction understatements.
‘‘(2) COORDINATION WITH OTHER PENALTIES.—
‘‘(A) APPLICATION OF FRAUD PENALTY.—
References to an underpayment in section 6663
shall be treated as including references to a re-
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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 RETURNS.—
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 trans-
action understatement or noneconomic substance
transaction understatement if the amendment or sup-
plement is filed after the earlier of the date the tax-
payer 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 substance
transaction understatement’ has the meaning
given such term by section 6662B(c).
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‘‘(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 sentence:
‘‘The excess under the preceding sentence shall be
determined without regard to items to which sec-
tion 6662A applies and without regard to items
with respect to which a penalty is imposed 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 imposed
under section 6662A with respect to any portion 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—
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‘‘(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 respect
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 in-
cludes 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
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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 estab-
lish 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, man-
agement, 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 par-
ticipates,
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‘‘(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 con-
tingent on all or part of the intended
tax benefits from the transaction being
sustained, or
‘‘(IV) as determined under regula-
tions prescribed by the Secretary, has a
continuing financial interest with re-
spect to the transaction.
‘‘(iii) DISQUALIFIED
OPINIONS.—For
purposes of clause (i), an opinion is dis-
qualified if the opinion—
‘‘(I) is based on unreasonable fac-
tual or legal assumptions (including
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
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‘‘(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 inserting
‘‘FOR UNDERPAYMENTS’’ after ‘‘EXCEPTION’’.
(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
amended—
(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.’’.
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(3) Section 6662(d)(2) is amended by striking
subparagraphs (C) and (D).
(4) Section 6664(c)(1) is amended by striking
‘‘this part’’ and inserting ‘‘section 6662 or 6663’’.
(5) Subsection (b) of section 7525 is amended by
striking ‘‘section 6662(d)(2)(C)(iii)’’ and inserting
‘‘section 1274(b)(3)(C)’’.
(6)(A) The heading for section 6662 is amended
to read as follows:
‘‘SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY
ON UNDERPAYMENTS.’’.
(B) The table of sections for part II of sub-
chapter A of chapter 68 is amended by striking the
item relating to section 6662 and inserting the fol-
lowing new items:
‘‘Sec. 6662. Imposition of accuracy-related penalty on underpay-
ments.
‘‘Sec. 6662A. Imposition of accuracy-related penalty on understate-
ments with respect to reportable transactions.’’.
(e) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years ending after the date
of the enactment of this Act.
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SEC. 
304. 
PENALTY 
FOR 
UNDERSTATEMENTS 
ATTRIB-
UTABLE TO TRANSACTIONS LACKING ECO-
NOMIC SUBSTANCE, ETC.
(a) IN GENERAL.—Subchapter A of chapter 68 is
amended by inserting after section 6662A the following new
section:
‘‘SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIB-
UTABLE TO TRANSACTIONS LACKING ECO-
NOMIC SUBSTANCE, ETC.
‘‘(a) IMPOSITION OF PENALTY.—If a taxpayer has an
noneconomic substance transaction understatement for any
taxable year, there shall be added to the tax an amount
equal to 40 percent of the amount of such understatement.
‘‘(b) REDUCTION OF PENALTY FOR DISCLOSED TRANS-
ACTIONS.—Subsection (a) shall be applied by substituting
‘20 percent’ for ‘40 percent’ with respect to the portion of
any noneconomic substance transaction understatement
with respect to which the relevant facts affecting the tax
treatment of the item are adequately disclosed in the return
or a statement attached to the return.
‘‘(c) NONECONOMIC SUBSTANCE TRANSACTION UNDER-
STATEMENT.—For purposes of this section—
‘‘(1) IN GENERAL.—The term ‘noneconomic sub-
stance 
transaction 
understatement’ 
means 
any
amount which would be an understatement under sec-
tion 6662A(b)(1) if section 6662A were applied by
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taking into account items attributable to noneconomic
substance transactions rather than items to which sec-
tion 6662A would apply without regard to this para-
graph.
‘‘(2) NONECONOMIC SUBSTANCE TRANSACTION.—
The term ‘noneconomic substance transaction’ means
any transaction if—
‘‘(A) there is a lack of economic substance
(within the meaning of section 7701(n)(1)) for
the transaction giving rise to the claimed benefit
or the transaction was not respected under sec-
tion 7701(n)(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 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 this section applies, only the
Commissioner of Internal Revenue may compromise
all or any portion of such penalty.
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‘‘(2) APPLICABLE
RULES.—The rules of para-
graphs (2), (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 imposed
by this section shall be in addition to any other penalty
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 insert-
ing after the item relating to section 6662A the following
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 on or after
May 8, 2003.
SEC. 305. 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:
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‘‘(B) SPECIAL RULE FOR CORPORATIONS.—
In the case of a corporation other than an S cor-
poration or a personal holding company (as de-
fined in section 542), there is a substantial un-
derstatement of income tax for any taxable year
if the amount of the understatement for the tax-
able 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 TAXPAYER
DUE TO POSITION OF TAXPAYER OR DISCLOSED ITEM.—
(1) IN GENERAL.—Section 6662(d)(2)(B)(i) (re-
lating to substantial authority) is amended to read as
follows:
‘‘(i) the tax treatment of any item by
the taxpayer if the taxpayer had reasonable
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 following new
paragraph:
‘‘(3) SECRETARIAL LIST.—For purposes of this
subsection, section 6664(d)(2), and section 6694(a)(1),
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the Secretary may prescribe a list of positions 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. 306. TAX SHELTER EXCEPTION TO CONFIDENTIALITY
PRIVILEGES RELATING TO TAXPAYER COM-
MUNICATIONS.
(a) IN GENERAL.—Section 7525(b) (relating to section
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
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‘‘(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. 307. 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.—
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‘‘(A) IN GENERAL.—The term ‘material ad-
visor’ 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 reportable
transaction substantially all of the tax bene-
fits from which are provided to natural per-
sons, and
‘‘(ii) $250,000 in any other case.
‘‘(2) REPORTABLE TRANSACTION.—The term ‘re-
portable transaction’ has the meaning given to such
term by section 6707A(c).
‘‘(c) REGULATIONS.—The Secretary may prescribe reg-
ulations which provide—
‘‘(1) that only 1 person shall be required to meet
the requirements of subsection (a) in cases in which
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2 or more persons would otherwise be required 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 sub-
section (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 defined
in section 6111) with respect to any reportable transaction
(as defined in section 6707A(c)) shall maintain, in such
manner as the Secretary may by regulations prescribe, a
list—
‘‘(1) identifying each person with respect to
whom such advisor acted as such a material advisor
with respect to such transaction, and
‘‘(2) containing such other information as the
Secretary may by regulations require.
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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 subpara-
graph (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 amended
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 chapter
68 is amended to read as follows:
‘‘Sec. 6708. Failure to maintain lists of advisees with respect to re-
portable transactions.’’.
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(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 section
6111(b)(1)(A)(i) of the Internal Revenue Code of 1986 (as
added by this section) is provided after the date of the enact-
ment of this Act.
SEC. 308. 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 report-
able 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.—
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‘‘(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 derived
by such person with respect to aid, assistance, or
advice which is provided with respect to the list-
ed transaction before the date the return includ-
ing 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 sec-
tion 6707A(d) (relating to authority of Commissioner to re-
scind 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 section
6707A(c).’’.
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(b) CLERICAL AMENDMENT.—The item relating to sec-
tion 6707 in the table of sections for part I of subchapter
B of chapter 68 is amended by striking ‘‘tax shelters’’ 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. 309. 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 failure after
such 20th day.
‘‘(2) REASONABLE CAUSE EXCEPTION.—No pen-
alty shall be imposed by paragraph (1) with respect
to the failure on any day if such failure is due to rea-
sonable cause.’’.
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(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to requests made after the date of the
enactment of this Act.
SEC. 310. 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 amended
by redesignating subsection (c) as subsection (d) and by
striking subsections (a) and (b) and inserting the following
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 speci-
fied 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—
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‘‘(1) that the person has engaged in any specified
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 sec-
tion, the term ‘specified conduct’ means any action, or fail-
ure 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 re-
portable transactions.’’.
(c) EFFECTIVE DATE.—The amendment made by this
section shall take effect on the day after the date of the en-
actment of this Act.
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SEC. 311. 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 sus-
tained on its merits’’ in paragraph (1) and inserting
‘‘reasonable belief that the tax treatment in such posi-
tion 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
amended—
(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.
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SEC. 312. 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 TRANSACTION
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 provided
in subparagraph (C), the amount of any
civil penalty imposed under subparagraph
(A) shall not exceed $5,000.
‘‘(ii) 
REASONABLE
CAUSE
EXCEP-
TION.—No penalty shall be imposed under
subparagraph (A) with respect to any viola-
tion 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 prop-
erly reported.
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‘‘(C) WILLFUL VIOLATIONS.—In the case of
any person willfully violating, or willfully caus-
ing any violation of, any provision of section
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 ac-
count, the balance in the account at the
time of the violation.’’.
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(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to violations occurring after the date of
the enactment of this Act.
SEC. 313. 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-assessment
may be judged, or
‘‘(B) contains information that on its face
indicates that the self-assessment is substantially
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 SUB-
MISSIONS.—
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‘‘(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 SUBMISSION.—
The term ‘specified frivolous submission’ means
a specified submission if any portion 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 no-
tice and opportunity for hearing before
levy), and
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‘‘(ii) an application under—
‘‘(I) section 6159 (relating to
agreements for payment of tax liability
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 notice
that a submission is a specified frivolous submission
and such person withdraws such submission within
30 days after such notice, the penalty imposed under
paragraph (1) shall not apply with respect to such
submission.
‘‘(c) LISTING OF FRIVOLOUS POSITIONS.—The Sec-
retary shall prescribe (and periodically revise) a list of posi-
tions which the Secretary has identified as being frivolous
for purposes of this subsection. The Secretary shall not in-
clude in such list any position that the Secretary deter-
mines 
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
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promote compliance with and administration of the Federal
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 HEAR-
INGS BEFORE LEVY.—
(1) FRIVOLOUS REQUESTS DISREGARDED.—Sec-
tion 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 require-
ment of clause (i) or (ii) of section 6702(b)(2)(A), then the
Secretary may treat such portion as if it were never sub-
mitted 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
amended—
(A) by striking ‘‘(A)’’ and inserting
‘‘(A)(i)’’;
(B) by striking ‘‘(B)’’ and inserting ‘‘(ii)’’;
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(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 subsection
(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 HEAR-
INGS 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 re-
quested 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:
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‘‘(e) 
FRIVOLOUS
SUBMISSIONS, 
ETC.—Notwith-
standing any other provision of this section, if the Secretary
determines that any portion of an application for an offer-
in-compromise or installment agreement submitted under
this section or section 6159 meets the requirement 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 prescribes a list
under section 6702(c) of the Internal Revenue Code of 1986,
as amended by subsection (a).
SEC. 314. 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 sen-
tence, if an activity with respect to which a penalty im-
posed under this subsection involves a statement described
in paragraph (2)(A), the amount of the penalty shall be
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equal to 50 percent of the gross income derived (or to be
derived) from such activity by the person on which the pen-
alty is imposed.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to activities after the date of the enact-
ment of this Act.
SEC. 315. STATUTE OF LIMITATIONS FOR TAXABLE YEARS
FOR WHICH LISTED TRANSACTIONS NOT RE-
PORTED.
(a) IN GENERAL.—Section 6501(e)(1) (relating to sub-
stantial omission of items for income taxes) is amended by
adding at the end the following new subparagraph:
‘‘(C) LISTED TRANSACTIONS.—If a taxpayer
fails to include on any return or statement for
any taxable year any information with respect
to a listed transaction (as defined in section
6707A(c)(2)) which is required under section
6011 to be included with such return or state-
ment, the tax for such taxable year may be as-
sessed, 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 re-
turn is filed. This subparagraph shall not apply
to any taxable year if the time for assessment or
beginning the proceeding in court has expired be-
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fore 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 in taxable years begin-
ning after the date of the enactment of this Act.
SEC. 316. 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 fol-
lowing new subsection:
‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE TO
NONDISCLOSED REPORTABLE TRANSACTIONS
AND NON-
ECONOMIC SUBSTANCE TRANSACTIONS.—No deduction shall
be allowed under this chapter for any interest paid or ac-
crued 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 un-
derstatement (as defined in section 6662B(c)).’’.
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(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to transactions in taxable years begin-
ning after the date of the enactment of this Act.
Subtitle B—Enron-Related Tax
Shelter Provisions
SEC. 321. 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 following
new subsection:
‘‘(e) LIMITATIONS ON BUILT-IN LOSSES.—
‘‘(1) LIMITATION ON IMPORTATION OF BUILT-IN
LOSSES.—
‘‘(A) IN GENERAL.—If in any transaction
described in subsection (a) or (b) there would
(but for this subsection) be an importation of a
net built-in loss, the basis of each property de-
scribed in subparagraph (B) which is acquired
in such transaction shall (notwithstanding sub-
sections (a) and (b)) be its fair market value im-
mediately after such transaction.
‘‘(B) PROPERTY DESCRIBED.—For purposes
of subparagraph (A), property is described in
this subparagraph if—
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‘‘(i) gain or loss with respect to such
property is not subject to tax under this
subtitle in the hands of the transferor imme-
diately 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 partner-
ship, the preceding sentence shall be applied by
treating each partner in such partnership as
holding such partner’s proportionate share of the
property of such partnership.
‘‘(C) 
IMPORTATION
OF
NET
BUILT-IN
LOSS.—For purposes of subparagraph (A), there
is an importation of a net built-in loss in a
transaction if the transferee’s aggregate adjusted
bases of property described in subparagraph (B)
which is transferred in such transaction would
(but for this paragraph) exceed the fair market
value of such property immediately after such
transaction.’’.
‘‘(2) LIMITATION
ON
TRANSFER
OF
BUILT-IN
LOSSES IN SECTION 351 TRANSACTIONS.—
‘‘(A) IN GENERAL.—If—
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‘‘(i) property is transferred by a trans-
feror in any transaction which is described
in subsection (a) and which is not described
in paragraph (1) of this subsection, and
‘‘(ii) the transferee’s aggregate adjusted
bases of such property so transferred would
(but for this paragraph) exceed the fair
market value of such property immediately
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 trans-
action.
‘‘(B) ALLOCATION OF BASIS REDUCTION.—
The aggregate reduction in basis by reason of
subparagraph (A) shall be allocated among the
property so transferred in proportion to their re-
spective 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 require-
ments of section 1504(a)(2). In the case of prop-
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erty to which subparagraph (A) does not apply
by reason of the preceding sentence, the trans-
feror’s basis in the stock received for such prop-
erty shall not exceed its fair market value imme-
diately after the transfer.’’.
(b) COMPARABLE
TREATMENT
WHERE
LIQUIDA-
TION.—Paragraph (1) of section 334(b) (relating to liquida-
tion of subsidiary) is amended to read as follows:
‘‘(1) IN GENERAL.—If property is received by a
corporate distributee in a distribution in a complete
liquidation to which section 332 applies (or in a
transfer described in section 337(b)(1)), the basis of
such property in the hands of such distributee shall
be the same as it would be in the hands of the trans-
feror; except that the basis of such property in the
hands of such distributee shall be the fair market
value of the property at the time of the distribution—
‘‘(A) in any case in which gain or loss is
recognized by the liquidating corporation with
respect to such property, or
‘‘(B) in any case in which the liquidating
corporation is a foreign corporation, the cor-
porate distributee is a domestic corporation, and
the corporate distributee’s aggregate adjusted
bases 
of 
property 
described 
in 
section
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362(e)(1)(B) which is distributed in such liq-
uidation would (but for this subparagraph) ex-
ceed the fair market value of such property im-
mediately after such liquidation.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to transactions after February 13, 2003.
SEC. 322. NO REDUCTION OF BASIS UNDER SECTION 734 IN
STOCK 
HELD 
BY 
PARTNERSHIP 
IN 
COR-
PORATE PARTNER.
(a) IN GENERAL.—Section 755 is amended by adding
at the end the following new subsection:
‘‘(c) NO ALLOCATION OF BASIS DECREASE TO STOCK
OF CORPORATE PARTNER.—In making an allocation under
subsection (a) of any decrease in the adjusted basis of part-
nership property under section 734(b)—
‘‘(1) no allocation may be made to stock in a
corporation (or any person which is related (within
the meaning of section 267(b) or 707(b)(1)) to such
corporation) which is a partner in the partnership,
and
‘‘(2) any amount not allocable to stock by reason
of paragraph (1) shall be allocated under subsection
(a) to other partnership property.
Gain shall be recognized to the partnership to the extent
that the amount required to be allocated under paragraph
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(2) to other partnership property exceeds the aggregate ad-
justed basis of such other property immediately before the
allocation required by paragraph (2).’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to distributions after February 13, 2003.
SEC. 323. REPEAL OF SPECIAL RULES FOR FASITS.
(a) IN GENERAL.—Part V of subchapter M of chapter
1 (relating to financial asset securitization investment
trusts) is hereby repealed.
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (6) of section 56(g) is amended by
striking ‘‘REMIC, or FASIT’’ and inserting ‘‘or
REMIC’’.
(2) Clause (ii) of section 382(l)(4)(B) is amended
by striking ‘‘a REMIC to which part IV of subchapter
M applies, or a FASIT to which part V of subchapter
M applies,’’ and inserting ‘‘or a REMIC to which
part IV of subchapter M applies,’’.
(3) Paragraph (1) of section 582(c) is amended
by striking ‘‘, and any regular interest in a FASIT,’’.
(4) Subparagraph (E) of section 856(c)(5) is
amended by striking the last sentence.
(5) Paragraph (5) of section 860G(a) is amended
by adding ‘‘and’’ at the end of subparagraph (B), by
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striking ‘‘, and’’ at the end of subparagraph (C) and
inserting a period, and by striking subparagraph (D).
(6) Subparagraph (C) of section 1202(e)(4) is
amended by striking ‘‘REMIC, or FASIT’’ and in-
serting ‘‘or REMIC’’.
(7) Subparagraph (C) of section 7701(a)(19) is
amended by adding ‘‘and’’ at the end of clause (ix),
by striking ‘‘, and’’ at the end of clause (x) and in-
serting a period, and by striking clause (xi).
(8) The table of parts for subchapter M of chap-
ter 1 is amended by striking the item relating to part
V.
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall
take effect on February 14, 2003.
(2) EXCEPTION
FOR
EXISTING
FASITS.—The
amendments made by this section shall not apply to
any FASIT in existence on the date of the enactment
of this Act to the extent that regular interests issued
by the FASIT before such date continue to remain
outstanding in accordance with the original terms of
issuance of such interests.
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SEC. 324. EXPANDED DISALLOWANCE OF DEDUCTION FOR
INTEREST ON CONVERTIBLE DEBT.
(a) IN GENERAL.—Paragraph (2) of section 163(l) is
amended by striking ‘‘or a related party’’ and inserting ‘‘or
equity held by the issuer (or any related party) in any other
person’’.
(b) EXCEPTION FOR CERTAIN INSTRUMENTS ISSUED
BY DEALERS IN SECURITIES.—Section 163(l) is amended
by redesignating paragraphs (4) and (5) as paragraphs (5)
and (6) and by inserting after paragraph (3) the following
new paragraph:
‘‘(4) EXCEPTION
FOR
CERTAIN
INSTRUMENTS
ISSUED BY DEALERS IN SECURITIES.—For purposes
of this subsection, the term ‘disqualified debt instru-
ment’ does not include indebtedness issued by a dealer
in securities (or a related party) which is payable in,
or by reference to, equity (other than equity of the
issuer or a related party) held by such dealer in its
capacity as a dealer in securities. For purposes of
this paragraph, the term ‘dealer in securities’ has the
meaning given such term by section 475.’’.
(c) CONFORMING AMENDMENT.—Paragraph (3) of sec-
tion 163(l) is amended by striking ‘‘or a related party’’ in
the material preceding subparagraph (A) and inserting ‘‘or
any other person’’.