‘‘(2) 
NONECONOMIC
SUBSTANCE
TRANS-
ACTION.—The term ‘noneconomic substance trans-
action’ means any transaction if there is a lack of 
economic substance (within the meaning of section 
7701(p)(1)(B)) for the transaction giving rise to the 
claimed benefit. 
‘‘(d) RULES
APPLICABLE
TO
ASSERTION, COM-
PROMISE, AND COLLECTION OF PENALTY.— 
‘‘(1) IN GENERAL.—Only the Chief Counsel for 
the Internal Revenue Service may assert a penalty 
imposed under this section or may compromise all or 
any portion of such penalty. The Chief Counsel may 
delegate the authority under this paragraph only to 
an individual holding the position of chief of a 
branch within the Office of the Chief Counsel for the 
Internal Revenue Service. 
‘‘(2) SPECIFIC REQUIREMENTS.— 
‘‘(A) ASSERTION OF PENALTY.—The Chief 
Counsel for the Internal Revenue Service (or 
the Chief Counsel’s delegate under paragraph 
(1)) shall not assert a penalty imposed under 
this section unless, before the assertion of the 
penalty, the taxpayer is provided— 
‘‘(i) a notice of intent to assert the 
penalty, and 
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‘‘(ii) an opportunity to provide to the 
Commissioner (or the Chief Counsel’s dele-
gate under paragraph (1)) a written re-
sponse to the proposed penalty within a 
reasonable period of time after such notice. 
‘‘(B) COMPROMISE OF PENALTY.—A com-
promise shall not result in a reduction in the 
penalty imposed by this section in an amount 
greater than the amount which bears the same 
ratio to the amount of the penalty determined 
without regard to the compromise as— 
‘‘(i) the reduction under the com-
promise in the noneconomic substance 
transaction understatement to which the 
penalty relates, bears to 
‘‘(ii) the amount of the noneconomic 
substance transaction understatement de-
termined without regard to the com-
promise. 
‘‘(3) RULES
RELATING
TO
RELEVANCY
RE-
QUIREMENT.— 
‘‘(A) DETERMINATION OF RELEVANCE BY 
CHIEF COUNSEL.—The Chief Counsel for the 
Internal Revenue Service (or the Chief Coun-
sel’s delegate under paragraph (1)) may assert, 
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compromise, or collect a penalty imposed by 
this section with respect to a noneconomic sub-
stance transaction even if there has not been a 
court determination that the economic sub-
stance doctrine was relevant for purposes of 
this title to the transaction if the Chief Counsel 
(or delegate) determines that either was so rel-
evant. 
‘‘(B) FINAL ORDER OF COURT.—If there is 
a final order of a court that determines that the 
economic substance doctrine was not relevant 
for purposes of this title to a transaction (or se-
ries of transactions), any penalty imposed under 
this section with respect to the transaction (or 
series of transactions) shall be rescinded. 
‘‘(4) APPLICABLE RULES.—The rules of para-
graphs (2) and (3) of section 6707A(d) shall apply 
to a compromise under 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.— 
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‘‘(1) For coordination of penalty with understatements 
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).’’. 
(2) COORDINATION WITH OTHER UNDERSTATE-
MENTS AND PENALTIES.— 
(A) The second sentence of section 
6662(d)(2)(A) is amended by inserting ‘‘and 
without regard to items with respect to which 
a penalty is imposed by section 6662B’’ before 
the period at the end. 
(B) Subsection (e) of section 6662A is 
amended— 
(i) in paragraph (1), by inserting 
‘‘and noneconomic substance transaction 
understatements’’ after ‘‘reportable trans-
action understatements’’ both places it ap-
pears, 
(ii) in paragraph (2)(A)— 
(I) by inserting ‘‘6662B or’’ be-
fore ‘‘6663’’ in the text, and 
(II) by striking ‘‘PENALTY’’ in 
the heading and inserting ‘‘AND ECO-
NOMIC SUBSTANCE PENALTIES’’, 
(iii) in paragraph (2)(B)— 
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(I) by inserting ‘‘and section 
6662B’’ after ‘‘This section’’, and 
(II) by striking ‘‘PENALTY’’ in 
the heading and inserting ‘‘AND ECO-
NOMIC SUBSTANCE PENALTIES’’, 
(iv) in paragraph (3), by inserting ‘‘or 
noneconomic substance transaction under-
statement’’ after ‘‘reportable transaction 
understatement’’, and 
(v) by adding at the end the following 
new paragraph: 
‘‘(4) NONECONOMIC SUBSTANCE TRANSACTION 
UNDERSTATEMENT.—For purposes of this sub-
section, the term ‘noneconomic substance trans-
action understatement’ has the meaning given such 
term by section 6662B(c).’’. 
(C) Subsection (e) of section 6707A is 
amended— 
(i) by striking ‘‘or’’ at the end of sub-
paragraph (B), and 
(ii) by striking subparagraph (C) and 
inserting the following new subparagraphs: 
‘‘(C) is required to pay a penalty under 
section 6662B with respect to any noneconomic 
substance transaction, or 
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‘‘(D) is required to pay a penalty under 
section 6662(h) with respect to any transaction 
and would (but for section 6662A(e)(2)(B)) 
have been subject to penalty under section 
6662A at a rate prescribed under section 
6662A(c) or to penalty under section 6662B,’’. 
(3) CLERICAL AMENDMENT.—The table of sec-
tions for part II of subchapter A of chapter 68 is 
amended by inserting after the item relating to sec-
tion 6662A the following new item: 
‘‘Sec. 6662B. Penalty for understatements attributable to transactions lacking 
economic substance, etc.’’. 
(c) DENIAL OF DEDUCTION FOR INTEREST ON UN-
DERPAYMENTS ATTRIBUTABLE TO NONECONOMIC SUB-
STANCE TRANSACTIONS.—Section 163(m) (relating to in-
terest on unpaid taxes attributable to nondisclosed report-
able transactions) is amended— 
(1) by striking ‘‘attributable’’ and all that fol-
lows and inserting the following: ‘‘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)).’’, 
and 
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(2) by inserting ‘‘AND NONECONOMIC SUB-
STANCE TRANSACTIONS’’ in the heading thereof 
after ‘‘TRANSACTIONS’’. 
(d) PENALTIES FOR UNDERPAYMENTS.— 
(1) PENALTY
FOR
UNDERPAYMENTS
ATTRIB-
UTABLE TO TRANSACTIONS LACKING ECONOMIC SUB-
STANCE.— 
(A) IN GENERAL.—Subsection (b) of sec-
tion 6662, as amended by this Act, is amended 
by inserting after paragraph (6) the following 
new paragraph: 
‘‘(7) Any disallowance of claimed tax benefits 
by reason of a transaction lacking economic sub-
stance (within the meaning of section 7701(p)) or 
failing to meet the requirements of any similar rule 
of law.’’. 
(B) INCREASED
PENALTY
FOR
NONDIS-
CLOSED
TRANSACTIONS.—Section 6662, as 
amended by this Act, is amended by adding at 
the end the following new subsection: 
‘‘(j) INCREASE IN PENALTY IN CASE OF NONDIS-
CLOSED NONECONOMIC SUBSTANCE TRANSACTIONS.— 
‘‘(1) IN GENERAL.—To the extent that a por-
tion of the underpayment to which this section ap-
plies is attributable to one or more nondisclosed non-
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economic substance transactions, subsection (a) shall 
be applied with respect to such portion by sub-
stituting ‘40 percent’ for ‘20 percent’. 
‘‘(2) 
NONDISCLOSED
NONECONOMIC
SUB-
STANCE TRANSACTIONS.—For purposes of this sub-
section, the term ‘nondisclosed noneconomic sub-
stance transaction’ means any portion of a trans-
action described in subsection (b)(7) with respect to 
which the relevant facts affecting the tax treatment 
are not adequately disclosed in the return nor in a 
statement attached to the return. 
‘‘(3) 
SPECIAL
RULE
FOR
AMENDED
RE-
TURNS.—Except as provided in regulations, in no 
event shall any amendment or supplement to a re-
turn of tax be taken into account for purposes of 
this subsection if the amendment or supplement is 
filed after the earlier of the date the taxpayer is first 
contacted by the Secretary regarding the examina-
tion of the return or such other date as is specified 
by the Secretary.’’. 
(C) CONFORMING AMENDMENT.—Subpara-
graph (B) of section 6662A(e)(2), as amended 
by this Act, is amended by striking ‘‘subsection 
(h) or (i)’’ and inserting ‘‘subsections (h), (i), 
or (j)’’. 
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(2) REASONABLE CAUSE EXCEPTION NOT AP-
PLICABLE
TO
NONECONOMIC
SUBSTANCE
TRANS-
ACTIONS, TAX SHELTERS, AND CERTAIN LARGE COR-
PORATIONS.—Paragraph (2) of section 6664(c), as 
amended by this Act, is amended— 
(A) by striking ‘‘shall not apply to any 
portion’’ and inserting ‘‘shall not apply— 
‘‘(A) to any portion’’, 
(B) by striking the period at the end and 
inserting a comma, and 
(C) by adding at the end the following new 
subparagraphs: 
‘‘(B) to any portion of an underpayment 
which is attributable to one or more tax shelters 
(as defined in section 6662(d)(2)(C)) or trans-
actions described in section 6662(b)(7), and 
‘‘(C) to any taxpayer if such taxpayer is a 
specified large corporation (as defined in section 
6662(d)(2)(D)(ii)).’’. 
(3) SPECIAL
UNDERSTATEMENT
REDUCTION 
RULE FOR CERTAIN LARGE CORPORATIONS.— 
(A) IN GENERAL.—Paragraph (2) of sec-
tion 6662(d) is amended by adding at the end 
the following new subparagraph: 
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‘‘(D) SPECIAL REDUCTION RULE FOR CER-
TAIN LARGE CORPORATIONS.— 
‘‘(i) IN GENERAL.—In the case of any 
specified large corporation— 
‘‘(I) subparagraph (B) shall not 
apply, and 
‘‘(II) the amount of the under-
statement under subparagraph (A) 
shall be reduced by that portion of the 
understatement which is attributable 
to any item with respect to which the 
taxpayer has a reasonable belief that 
the tax treatment of such item by the 
taxpayer is more likely than not the 
proper tax treatment of such item. 
‘‘(ii) SPECIFIED
LARGE
CORPORA-
TION.— 
‘‘(I) IN GENERAL.—For purposes 
of this subparagraph, the term ‘speci-
fied large corporation’ means any cor-
poration with gross receipts in excess 
of $100,000,000 for the taxable year 
involved. 
‘‘(II) AGGREGATION
RULE.—All 
persons treated as a single employer 
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under section 52(a) shall be treated as 
one person for purposes of subclause 
(I).’’. 
(B) CONFORMING AMENDMENT.—Subpara-
graph (C) of section 6662(d)(2) is amended by 
striking ‘‘Subparagraph (B)’’ and inserting 
‘‘Subparagraphs (B) and (D)(i)(II)’’. 
(e) EFFECTIVE DATES.— 
(1) Except as provided in paragraphs (2) and 
(3), the amendments made by this section shall 
apply to transactions entered into after the date of 
the enactment of this Act. 
(2) The amendments made by this subsection 
(c) shall apply to transactions after the date of the 
enactment of this Act in taxable years ending after 
such date. 
(3) The amendments made by subsection (d) 
shall apply to taxable years beginning after the date 
of the enactment of this Act. 
TITLE III—DEFICIT REDUCTION 
SEC. 301. DEFICIT REDUCTION. 
The net increase in receipts to the Treasury by rea-
son of this Act shall be used for deficit reduction purposes. 
Æ 
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