I 
109TH CONGRESS 
1ST SESSION H. R. 2625 
To amend the Internal Revenue Code of 1986 to curb tax abuses by dis-
allowing tax benefits claimed to arise from transactions without substan-
tial economic substance, and for other purposes. 
IN THE HOUSE OF REPRESENTATIVES 
MAY 25, 2005 
Mr. DOGGETT (for himself, Mr. LEVIN, Mr. STARK, Mr. MCDERMOTT, Mr. 
NEAL of Massachusetts, Mr. MCNULTY, Mr. LEWIS of Georgia, Mr. JEF-
FERSON, Mr. BECERRA, Mr. EMANUEL, Mr. ALLEN, Ms. BALDWIN, Mr. 
BERMAN, Mr. BROWN of Ohio, Mrs. CAPPS, Mr. CASE, Mr. CONYERS, 
Mr. COSTELLO, Mr. CROWLEY, Mr. DAVIS of Illinois, Mr. DEFAZIO, Ms. 
DEGETTE, Ms. DELAURO, Mr. FARR, Mr. FATTAH, Mr. FILNER, Mr. 
GENE GREEN of Texas, Mr. GRIJALVA, Ms. JACKSON-LEE of Texas, Mr. 
KUCINICH, Ms. LEE, Mr. MARKEY, Mr. MCGOVERN, Mrs. MALONEY, Mr. 
GEORGE MILLER of California, Mr. NADLER, Mrs. NAPOLITANO, Mr. 
OBERSTAR, Mr. RYAN of Ohio, Mr. SABO, Ms. LORETTA SANCHEZ of 
California, Mr. SANDERS, Ms. SCHAKOWSKY, Mr. SHERMAN, Ms. 
SLAUGHTER, Mr. STRICKLAND, Ms. SOLIS, Mr. TAYLOR of Mississippi, 
Mr. TIERNEY, Mrs. JONES of Ohio, Ms. WATERS, and Mr. WAXMAN) in-
troduced the following bill; which was referred to the Committee on Ways 
and Means 
A BILL 
To amend the Internal Revenue Code of 1986 to curb tax 
abuses by disallowing tax benefits claimed to arise from 
transactions without substantial economic substance, and 
for other purposes. 
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; ETC. 
(a) SHORT TITLE.—This Act may be cited as the 
‘‘Abusive Tax Shelter Shutdown and Taxpayer Account-
ability Act of 2005’’. 
(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 for 
this Act is as follows: 
Sec. 1. Short title; etc. 
Sec. 2. Findings and purpose. 
TITLE I—PROVISIONS DESIGNED TO CURTAIL TAX SHELTERS 
Sec. 101. Clarification of economic substance doctrine. 
Sec. 102. Modification of penalty for failing to disclose reportable transaction. 
Sec. 103. Penalty for understatements attributable to transactions lacking eco-
nomic substance, etc. 
Sec. 104. Required disclosure by material advisors not subject to claim of con-
fidentiality. 
Sec. 105. Understatement of taxpayer’s liability by income tax return preparer. 
Sec. 106. Frivolous tax submissions. 
Sec. 107. Denial of deduction for interest on Underpayments attributable to 
nondisclosed reportable and noneconomic substance trans-
actions. 
TITLE II—OTHER PROVISIONS 
Sec. 201. Expanded authority to disallow tax benefits under Section 269. 
Sec. 202. Modifications of certain rules relating to controlled foreign corpora-
tions. 
Sec. 203. Basis for determining loss always reduced by nontaxed portion of 
dividends. 
SEC. 2. FINDINGS AND PURPOSE. 
(a) FINDINGS.—The Congress hereby finds that:
(1) Many corporate tax shelter transactions are 
complicated ways of accomplishing nothing aside 
from claimed tax benefits, and the legal opinions 
justifying those transactions take an inappropriately 
narrow and restrictive view of well-developed court 
doctrines under which— 
(A) the taxation of a transaction is deter-
mined in accordance with its substance and not 
merely its form, 
(B) transactions which have no significant 
effect on the taxpayer’s economic or beneficial 
interests except for tax benefits are treated as 
sham transactions and disregarded, 
(C) transactions involving multiple steps 
are collapsed when those steps have no substan-
tial economic meaning and are merely designed 
to create tax benefits, 
(D) transactions with no business purpose 
are not given effect, and 
(E) in the absence of a specific congres-
sional authorization, it is presumed that Con-
gress did not intend a transaction to result in 
a negative tax where the taxpayer’s economic 
position or rate of return is better after tax 
than before tax.
(2) Permitting aggressive and abusive tax shel-
ters not only results in large revenue losses but also 
undermines voluntary compliance with the Internal 
Revenue Code of 1986. 
(b) PURPOSE.—The purpose of this Act is to elimi-
nate abusive tax shelters by denying tax attributes claimed 
to arise from transactions that do not meet a heightened 
economic substance requirement and by repealing the pro-
vision that permits legal opinions to be used to avoid pen-
alties on tax underpayments resulting from transactions 
without significant economic substance or business pur-
pose. 
TITLE I—PROVISIONS DESIGNED 
TO CURTAIL TAX SHELTERS 
SEC. 101. CLARIFICATION OF ECONOMIC SUBSTANCE DOC-
TRINE. 
(a) IN GENERAL.—Section 7701 is amended by re-
designating subsection (o) as subsection (p) and by insert-
ing after subsection (n) the following new subsection: 
‘‘(o) 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 are any Fed-
eral tax effects, also apart from any 
foreign, 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. 102. MODIFICATION OF PENALTY FOR FAILING TO DIS-
CLOSE REPORTABLE TRANSACTION. 
(a) INCREASE IN PENALTY FOR LARGE ENTITIES 
AND HIGH NET WORTH INDIVIDUALS.— 
(1) IN
GENERAL.—Subsection (b) of section 
6707A is amended to read as follows: 
‘‘(b) AMOUNT OF PENALTY.— 
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the amount of the penalty under sub-
section (a) shall be— 
‘‘(A) $10,000 in the case of a natural per-
son who is not a high net worth individual, 
‘‘(B) $100,000 in the case of a large entity 
or a high net worth individual, and 
‘‘(C) $50,000 in any other case. 
‘‘(2) LISTED
TRANSACTION.—The amount of 
the penalty under subsection (a) with respect to a 
listed transaction shall be— 
‘‘(A) $100,000 in the case of a natural 
person who is not a high net worth individual, 
and 
‘‘(B) $200,000 in any other case.’’. 
(2) LARGE ENTITIES AND HIGH NET WORTH IN-
DIVIDUALS
DEFINED.—Subsection (c) of section 
6707A is amended by adding at the end the fol-
lowing new paragraphs:
‘‘(1) LARGE ENTITY.—The term ‘large entity’ 
means, with respect to any taxable year, a person 
(other than a natural person) with gross receipts 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 para-
graph (3) of section 448(c) shall apply for purposes 
of this subparagraph. 
‘‘(2) HIGH
NET
WORTH
INDIVIDUAL.—The 
term ‘high net worth individual’ means, with respect 
to a reportable transaction, a natural person whose 
net worth exceeds $2,000,000 immediately before 
the transaction.’’. 
(b) RESTRICTION OF AUTHORITY TO RESCIND PEN-
ALTY.—Paragraph (1) of section 6707A(d) is amended by 
striking ‘‘and’’ at the end of subparagraph (A), by redesig-
nating subparagraph (B) as subparagraph (E), and by in-
serting after subparagraph (A) the following new subpara-
graphs: 
‘‘(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’’. 
(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. 103. 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 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 under-
statements 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 Commis-
sion, see section 6707A(e).’’. 
(b) COORDINATION WITH OTHER UNDERSTATE-
MENTS AND PENALTIES.— 
(1) Subparagraph (A) of section 6662(d)(2) 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. 
(2) Subsection (e) of section 6662A is amend-
ed— 
(A) in paragraph (1), by inserting ‘‘and 
noneconomic substance transaction understate-
ments’’ after ‘‘reportable transaction under-
statements’’ each place it appears, 
(B) in paragraph (2)(A) and (3), by insert-
ing ‘‘and noneconomic substance transaction 
understatement’’ after ‘‘reportable transaction 
understatement’’, 
(C) in paragraph (2)(B), by inserting 
‘‘6662B or’’ before ‘‘6663’’, 
(D) in paragraph (2)(C)(i), by inserting 
‘‘or section 6662B’’ before the period at the 
end, and 
(E) in paragraph (2)(C)(ii), by inserting 
‘‘and section 6662B’’ after ‘‘This section’’, and 
(F) 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) 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 transactions lacking 
economic substance, etc.’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions entered into after 
February 13, 2003. Sections 6662(d)(2)(A) and 6662A(e) 
of the Internal Revenue Code of 1986 shall apply to such 
transactions to the extent such sections relate to such 
amendments. 
SEC. 104. REQUIRED DISCLOSURE BY MATERIAL ADVISORS 
NOT SUBJECT TO CLAIM OF CONFIDEN-
TIALITY. 
(a) IN GENERAL.—Paragraph (1) of section 6112(b) 
is amended by adding at the end the following new flush 
sentence: 
‘‘For purposes of this section, the identity of any 
person on such list shall not be privileged.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall take effect as if included in the amend-
ments made by section 142 of the Deficit Reduction Act 
of 1984.
SEC. 105. 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.