157
(d) TRANSFERS SUBJECT TO GIFT TAX.—
(1) IN
GENERAL.—Subsection (a) of section 
2501 (relating to taxable transfers) is amended by 
striking paragraph (4), by redesignating paragraph 
(5) as paragraph (4), and by striking paragraph (3) 
and inserting the following new paragraph: 
‘‘(3) EXCEPTION.—
‘‘(A) CERTAIN
INDIVIDUALS.—Paragraph 
(2) shall not apply in the case of a donor to 
whom section 877(b) applies for the taxable 
year which includes the date of the transfer. 
‘‘(B) CREDIT FOR FOREIGN GIFT TAXES.—
The tax imposed by this section solely by reason 
of this paragraph shall be credited with the 
amount of any gift tax actually paid to any for-
eign country in respect of any gift which is tax-
able under this section solely by reason of this 
paragraph.’’
(2) TRANSFERS
OF
CERTAIN
STOCK.—Sub-
section (a) of section 2501 is amended by adding at 
the end the following new paragraph: 
‘‘(5) TRANSFERS OF CERTAIN STOCK.—
‘‘(A) IN GENERAL.—In the case of a trans-
fer of stock in a foreign corporation described 
in subparagraph (B) by a donor to whom sec-
158
tion 877(b) applies for the taxable year which 
includes the date of the transfer—
‘‘(i) section 2511(a) shall be applied 
without regard to whether such stock is 
situated within the United States, and 
‘‘(ii) the value of such stock for pur-
poses of this chapter shall be its U.S.-asset 
value determined under subparagraph (C). 
‘‘(B) 
FOREIGN
CORPORATION
DE-
SCRIBED.—A foreign corporation is described in 
this subparagraph with respect to a donor if—
‘‘(i) the donor owned (within the 
meaning of section 958(a)) at the time of 
such transfer 10 percent or more of the 
total combined voting power of all classes 
of stock entitled to vote of the foreign cor-
poration, and 
‘‘(ii) such donor owned (within the 
meaning of section 958(a)), or is consid-
ered to have owned (by applying the own-
ership rules of section 958(b)), at the time 
of such transfer, more than 50 percent 
of—
159
‘‘(I) the total combined voting 
power of all classes of stock entitled 
to vote of such corporation, or 
‘‘(II) the total value of the stock 
of such corporation. 
‘‘(C) U.S.-ASSET VALUE.—For purposes of 
subparagraph (A), the U.S.-asset value of stock 
shall be the amount which bears the same ratio 
to the fair market value of such stock at the 
time of transfer as—
‘‘(i) the fair market value (at such 
time) of the assets owned by such foreign 
corporation and situated in the United 
States, bears to 
‘‘(ii) the total fair market value (at 
such time) of all assets owned by such for-
eign corporation.’’ 
(e) ENHANCED INFORMATION REPORTING FROM IN-
DIVIDUALS LOSING UNITED STATES CITIZENSHIP.—
(1) IN
GENERAL.—Subsection (a) of section 
6039G is amended to read as follows: 
‘‘(a) IN GENERAL.—Notwithstanding any other pro-
vision of law, any individual to whom section 877(b) ap-
plies for any taxable year shall provide a statement for
160
such taxable year which includes the information described 
in subsection (b).’’. 
(2) INFORMATION
TO
BE
PROVIDED.—Sub-
section (b) of section 6039G is amended to read as 
follows: 
‘‘(b) INFORMATION TO BE PROVIDED.—Information 
required under subsection (a) shall include—
‘‘(1) the taxpayer’s TIN, 
‘‘(2) the mailing address of such individual’s 
principal foreign residence, 
‘‘(3) the foreign country in which such indi-
vidual is residing, 
‘‘(4) the foreign country of which such indi-
vidual is a citizen, 
‘‘(5) information detailing the income, assets, 
and liabilities of such individual, 
‘‘(6) the number of days during any portion of 
which that the individual was physically present in 
the United States during the taxable year, and 
‘‘(7) such other information as the Secretary 
may prescribe.’’. 
(3) INCREASE IN PENALTY.—Subsection (d) of 
section 6039G is amended to read as follows: 
‘‘(d) PENALTY.—If—
161
‘‘(1) an individual is required to file a state-
ment under subsection (a) for any taxable year, and 
‘‘(2) fails to file such a statement with the Sec-
retary on or before the date such statement is re-
quired to be filed or fails to include all the informa-
tion required to be shown on the statement or in-
cludes incorrect information, 
such individual shall pay a penalty of $10,000 unless it 
is shown that such failure is due to reasonable cause and 
not to willful neglect.’’. 
(4) 
CONFORMING
AMENDMENT.—Section 
6039G is amended by striking subsections (c), (f), 
and (g) and by redesignating subsections (d) and (e) 
as subsection (c) and (d), respectively. 
(f) EFFECTIVE DATE.—The amendments made by 
this section shall apply to individuals who expatriate after 
February 27, 2003. 
SEC. 2006. REPORTING OF TAXABLE MERGERS AND ACQUI-
SITIONS. 
(a) IN GENERAL.—Subpart B of part III of sub-
chapter A of chapter 61 is amended by inserting after sec-
tion 6043 the following new section: 
‘‘SEC. 6043A. TAXABLE MERGERS AND ACQUISITIONS. 
‘‘(a) IN GENERAL.—According to the forms or regu-
lations prescribed by the Secretary, the acquiring corpora-
162
tion in any taxable acquisition shall make a return setting 
forth—
‘‘(1) a description of the acquisition, 
‘‘(2) the name and address of each shareholder 
of the acquired corporation who is required to recog-
nize gain (if any) as a result of the acquisition, 
‘‘(3) the amount of money and the fair market 
value of other property transferred to each such 
shareholder as part of such acquisition, and 
‘‘(4) such other information as the Secretary 
may prescribe. 
To the extent provided by the Secretary, the requirements 
of this section applicable to the acquiring corporation shall 
be applicable to the acquired corporation and not to the 
acquiring corporation. 
‘‘(b) NOMINEES.—According to the forms or regula-
tions prescribed by the Secretary—
‘‘(1) REPORTING.—Any person who holds stock 
as a nominee for another person shall furnish in the 
manner prescribed by the Secretary to such other 
person the information provided by the corporation 
under subsection (d). 
‘‘(2) REPORTING TO NOMINEES.—In the case of 
stock held by any person as a nominee, references in 
this section (other than in subsection (c)) to a share-
163
holder shall be treated as a reference to the nomi-
nee. 
‘‘(c) TAXABLE ACQUISITION.—For purposes of this 
section, the term ‘taxable acquisition’ means any acquisi-
tion by a corporation of stock in or property of another 
corporation if any shareholder of the acquired corporation 
is required to recognize gain (if any) as a result of such 
acquisition. 
‘‘(d) STATEMENTS TO BE FURNISHED TO SHARE-
HOLDERS.—According to the forms or regulations pre-
scribed by the Secretary, every person required to make 
a return under subsection (a) shall furnish to each share-
holder whose name is required to be set forth in such re-
turn a written statement showing—
‘‘(1) the name, address, and phone number of 
the information contact of the person required to 
make such return, 
‘‘(2) the information required to be shown on 
such return with respect to such shareholder, and 
‘‘(3) such other information as the Secretary 
may prescribe. 
The written statement required under the preceding sen-
tence shall be furnished to the shareholder on or before 
January 31 of the year following the calendar year during 
which the taxable acquisition occurred.’’
164
(b) ASSESSABLE PENALTIES.—
(1) Subparagraph (B) of section 6724(d)(1) 
(relating to definitions) is amended by redesignating 
clauses (ii) through (xvii) as clauses (iii) through 
(xviii), respectively, and by inserting after clause (i) 
the following new clause: 
‘‘(ii) section 6043A(a) (relating to re-
turns relating to taxable mergers and ac-
quisitions),’’. 
(2) Paragraph (2) of section 6724(d) is amend-
ed by redesignating subparagraphs (F) through 
(AA) as subparagraphs (G) through (BB), respec-
tively, and by inserting after subparagraph (E) the 
following new subparagraph: 
‘‘(F) subsections (b) and (d) of section 
6043A (relating to returns relating to taxable 
mergers and acquisitions).’’. 
(c) CLERICAL AMENDMENT.—The table of sections 
for subpart B of part III of subchapter A of chapter 61 
is amended by inserting after the item relating to section 
6043 the following new item:
‘‘Sec. 6043A. Returns relating to taxable mergers and acquisi-
tions.’’.
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to acquisitions after the date of 
the enactment of this Act.
165
SEC. 2007. STUDIES. 
(a) TRANSFER PRICING RULES.—The Secretary of 
the Treasury or the Secretary’s delegate shall conduct a 
study regarding the effectiveness of current transfer pric-
ing rules and compliance efforts in ensuring that cross-
border transfers and other related-party transactions, par-
ticularly transactions involving intangible assets, service 
contracts, or leases cannot be used improperly to shift in-
come out of the United States. The study shall include 
a review of the contemporaneous documentation and pen-
alty rules under section 6662 of the Internal Revenue 
Code of 1986, a review of the regulatory and administra-
tive guidance implementing the principles of section 482 
of such Code to transactions involving intangible property 
and services and to cost-sharing arrangements, and an ex-
amination of whether increased disclosure of cross-border 
transactions should be required. The study shall set forth 
specific recommendations to address all abuses identified 
in the study. Not later than June 30, 2004, such Sec-
retary or delegate shall submit to the Congress a report 
of such study. 
(b) INCOME TAX TREATIES.—The Secretary of the 
Treasury or the Secretary’s delegate shall conduct a study 
of United States income tax treaties to identify any inap-
propriate reductions in United States withholding tax that 
provide opportunities for shifting income out of the United
166
States, and to evaluate whether existing anti-abuse mecha-
nisms are operating properly. The study shall include spe-
cific recommendations to address all inappropriate uses of 
tax treaties. Not later than December 31, 2003, such Sec-
retary or delegate shall submit to the Congress a report 
of such study. 
(c) IMPACT OF CORPORATE EXPATRIATION PROVI-
SIONS.—The Secretary of the Treasury or the Secretary’s 
delegate shall conduct a study of the impact of the provi-
sions of this title on earnings stripping and corporate ex-
patriation. The study shall include such recommendations 
as such Secretary or delegate may have to improve the 
impact of such provisions in carrying out the purposes of 
this title. Not later than December 31, 2005, such Sec-
retary or delegate shall submit to the Congress a report 
of such study.
TITLE III—PROVISIONS 
RELATING TO TAX SHELTERS
Subtitle A—Taxpayer-Related 
Provisions 
SEC. 3001. PENALTY FOR FAILING TO DISCLOSE REPORT-
ABLE TRANSACTIONS. 
(a) IN GENERAL.—Part I of subchapter B of chapter 
68 (relating to assessable penalties) is amended by insert-
ing after section 6707 the following new section:
167
‘‘SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORT-
ABLE TRANSACTION INFORMATION WITH RE-
TURN. 
‘‘(a) IMPOSITION
OF PENALTY.—Any person who 
fails to include on any return or statement any informa-
tion with respect to a reportable transaction which is re-
quired under section 6011 to be included with such return 
or statement shall pay a penalty in the amount determined 
under subsection (b). 
‘‘(b) AMOUNT OF PENALTY.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the amount of the penalty under sub-
section (a) shall be—
‘‘(A) $10,000 in the case of a natural per-
son, and 
‘‘(B) $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, and 
‘‘(B) $200,000 in any other case. 
‘‘(c) DEFINITIONS.—For purposes of this section—
‘‘(1) REPORTABLE
TRANSACTION.—The term 
‘reportable transaction’ means any transaction with 
respect to which information is required to be in-
168
cluded with a return or statement because, as deter-
mined under regulations prescribed under section 
6011, such transaction is of a type which the Sec-
retary determines as having a potential for tax 
avoidance or evasion. 
‘‘(2) LISTED TRANSACTION.—The term ‘listed 
transaction’ means a reportable transaction which is 
the same as, or substantially similar to, a trans-
action specifically identified by the Secretary as a 
tax avoidance transaction for purposes of section 
6011. 
‘‘(d) AUTHORITY TO RESCIND PENALTY.—
‘‘(1) IN GENERAL.—The Commissioner of In-
ternal Revenue may rescind all or any portion of any 
penalty imposed by this section with respect to any 
violation if—
‘‘(A) the violation is with respect to a re-
portable transaction other than a listed trans-
action, and 
‘‘(B) rescinding the penalty would promote 
compliance with the requirements of this title 
and effective tax administration. 
‘‘(2) NO
JUDICIAL
APPEAL.—Notwithstanding 
any other provision of law, any determination under
169
this subsection may not be reviewed in any judicial 
proceeding. 
‘‘(3) 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) a statement of the facts and cir-
cumstances relating to the violation, 
‘‘(B) the reasons for the rescission, and 
‘‘(C) the amount of the penalty rescinded. 
‘‘(e) COORDINATION WITH OTHER PENALTIES.—The 
penalty imposed by this section shall be in addition to any 
other penalty imposed by this title.’’
(b) CONFORMING AMENDMENT.—The table of sec-
tions for part I of subchapter B of chapter 68 is amended 
by inserting after the item relating to section 6707 the 
following:
‘‘Sec. 6707A. Penalty for failure to include reportable transaction 
information with return.’’
(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.
170
(d) REPORT.—The Commissioner of Internal Rev-
enue shall annually report to the Committee on Ways and 
Means of the House of Representatives and the Committee 
on Finance of the Senate—
(1) a summary of the total number and aggre-
gate amount of penalties imposed, and rescinded, 
under section 6707A of the Internal Revenue Code 
of 1986, and 
(2) a description of each penalty rescinded 
under section 6707(c) of such Code and the reasons 
therefor.
SEC. 3002. ACCURACY-RELATED PENALTY FOR LISTED 
TRANSACTIONS, OTHER REPORTABLE TRANS-
ACTIONS HAVING A SIGNIFICANT TAX AVOID-
ANCE PURPOSE, ETC. 
(a) IN GENERAL.—Subchapter A of chapter 68 is 
amended by inserting after section 6662 the following new 
section: 
‘‘SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PEN-
ALTY ON UNDERSTATEMENTS WITH RESPECT 
TO REPORTABLE TRANSACTIONS. 
‘‘(a) IMPOSITION OF PENALTY.—If a taxpayer has a 
reportable transaction understatement for any taxable 
year, there shall be added to the tax an amount equal to 
20 percent of the amount of such understatement.
171
‘‘(b) REPORTABLE
TRANSACTION
UNDERSTATE-
MENT.—For purposes of this section—
‘‘(1) IN GENERAL.—The term ‘reportable trans-
action understatement’ means the sum of—
‘‘(A) the product of—
‘‘(i) the amount of the increase (if 
any) in taxable income which results from 
a difference between the proper tax treat-
ment of an item to which this section ap-
plies and the taxpayer’s treatment of such 
item (as shown on the taxpayer’s return of 
tax), and 
‘‘(ii) the highest rate of tax imposed 
by section 1 (section 11 in the case of a 
taxpayer which is a corporation), and 
‘‘(B) the amount of the decrease (if any) 
in the aggregate amount of credits determined 
under subtitle A which results from a difference 
between the taxpayer’s treatment of an item to 
which this section applies (as shown on the tax-
payer’s return of tax) and the proper tax treat-
ment of such item. 
For purposes of subparagraph (A), any reduction of 
the excess of deductions allowed for the taxable year 
over gross income for such year, and any reduction
172
in the amount of capital losses which would (without 
regard to section 1211) be allowed for such year, 
shall be treated as an increase in taxable income. 
‘‘(2) ITEMS TO WHICH SECTION APPLIES.—This 
section shall apply to any item which is attributable 
to—
‘‘(A) any listed transaction, and 
‘‘(B) any reportable transaction (other 
than a listed transaction) if a significant pur-
pose of such transaction is the avoidance or 
evasion of Federal income tax. 
‘‘(c) HIGHER PENALTY FOR NONDISCLOSED TRANS-
ACTIONS.—Subsection (a) shall be applied 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. 
‘‘(d) DEFINITIONS
OF REPORTABLE
AND LISTED 
TRANSACTIONS.—For purposes of this section, the terms 
‘reportable transaction’ and ‘listed transaction’ have the 
respective meanings given to such terms by section 
6707A(c). 
‘‘(e) SPECIAL RULES.—
173
‘‘(1) COORDINATION
WITH
PENALTIES, ETC., 
ON OTHER UNDERSTATEMENTS.—In the case of an 
understatement (as defined in section 6662(d)(2))—
‘‘(A) the amount of such understatement 
(determined without regard to this paragraph) 
shall be increased by the aggregate amount of 
reportable transaction understatements for pur-
poses of determining whether such understate-
ment 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. 
‘‘(2) 
COORDINATION
WITH
OTHER
PEN-
ALTIES.—
‘‘(A) APPLICATION OF FRAUD PENALTY.—
References to an underpayment in section 6663 
shall be treated as including references to a re-
portable transaction understatement. 
‘‘(B) NO DOUBLE PENALTY.—This section 
shall not apply to any portion of an understate-
174
ment on which a penalty is imposed under sec-
tion 6663.’’
‘‘(3) 
SPECIAL
RULE
FOR
AMENDED
RE-
TURNS.—Except as provided in regulations, in no 
event shall any tax treatment included with an 
amendment or supplement to a return of tax be 
taken into account in determining the amount of any 
reportable transaction understatement if the amend-
ment or supplement is filed after the earlier of the 
date the taxpayer is first contacted by the Secretary 
regarding the examination of the return or such 
other date as is specified by the Secretary.’’
(b) DETERMINATION
OF
OTHER
UNDERSTATE-
MENTS.—Subparagraph (A) of section 6662(d)(2) is 
amended by adding at the end the following flush sen-
tence: 
‘‘The excess under the preceding sentence shall 
be determined without regard to items to which 
section 6662A applies.’’
(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.—
175
‘‘(1) IN
GENERAL.—No penalty shall be im-
posed under section 6662A with respect to any por-
tion of a reportable transaction understatement if it 
is shown that there was a reasonable cause for such 
portion and that the taxpayer acted in good faith 
with respect to such portion. 
‘‘(2) SPECIAL RULES.—Paragraph (1) shall not 
apply to any reportable transaction understatement 
unless—
‘‘(A) the relevant facts affecting the tax 
treatment of the item are adequately disclosed 
in accordance with the regulations prescribed 
under section 6011, 
‘‘(B) there is or was substantial authority 
for such treatment, and 
‘‘(C) the taxpayer reasonably believed that 
such treatment was more likely than not the 
proper treatment. 
A taxpayer failing to adequately disclose in accord-
ance with section 6011 shall be treated as meeting 
the requirements of subparagraph (A) if the penalty 
for such failure was rescinded under section 
6707A(d). 
‘‘(3) RULES
RELATING
TO
REASONABLE
BE-
LIEF.—For purposes of paragraph (2)(C)—
176
‘‘(A) IN GENERAL.—A taxpayer shall be 
treated as having a reasonable belief with re-
spect to the tax treatment of an item only if 
such belief—
‘‘(i) is based on the facts and law that 
exist at the time the return of tax which 
includes such tax treatment is filed, and 
‘‘(ii) relates solely to the taxpayer’s 
chances of success on the merits of such 
treatment and does not take into account 
the possibility that a return will not be au-
dited, such treatment will not be raised on 
audit, or such treatment will be resolved 
through settlement if it is raised. 
‘‘(B) CERTAIN OPINIONS MAY NOT BE RE-
LIED UPON.—
‘‘(i) IN GENERAL.—An opinion of a 
tax advisor may not be relied upon to es-
tablish the reasonable belief of a taxpayer 
if—
‘‘(I) the tax advisor is described 
in clause (ii), or 
‘‘(II) the opinion is described in 
clause (iii).
177
‘‘(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)) 
and participates in the organization, 
management, promotion, or sale of 
the transaction or is related (within 
the meaning of section 267(b) or 
707(b)(1)) to any person who so par-
ticipates, 
‘‘(II) is compensated directly or 
indirectly by a material advisor with 
respect to the transaction, 
‘‘(III) has a fee arrangement 
with respect to the transaction which 
is contingent on all or part of the in-
tended tax benefits from the trans-
action being sustained, or 
‘‘(IV) as determined under regu-
lations prescribed by the Secretary, 
has a disqualifying financial interest 
with respect to the transaction.
178
‘‘(iii) DISQUALIFIED
OPINIONS.—For 
purposes of clause (i), an opinion is dis-
qualified if the opinion—
‘‘(I) is based on unreasonable 
factual or legal assumptions (includ-
ing assumptions as to future events), 
‘‘(II) unreasonably relies on rep-
resentations, statements, findings, or 
agreements of the taxpayer or any 
other person, 
‘‘(III) does not identify and con-
sider all relevant facts, or 
‘‘(IV) fails to meet any other re-
quirement as the Secretary may pre-
scribe.’’
(2) CONFORMING AMENDMENTS.—
(A) Paragraph (1) of section 6664(c) is 
amended by striking ‘‘this part’’ and inserting 
‘‘section 6662 or 6663’’. 
(B) The heading for subsection (c) of sec-
tion 6664 is amended by inserting ‘‘FOR UN-
DERPAYMENTS’’ after ‘‘EXCEPTION’’. 
(d) REDUCTION IN PENALTY FOR SUBSTANTIAL UN-
DERSTATEMENT OF INCOME TAX NOT TO APPLY TO TAX 
SHELTERS.—Subparagraph (C) of section 6662(d)(2) (re-
179
lating to substantial understatement of income tax) is 
amended to read as follows: 
‘‘(C) REDUCTION NOT TO APPLY TO TAX 
SHELTERS.—
‘‘(i) IN GENERAL.—Subparagraph (B) 
shall not apply to any item attributable to 
a tax shelter. 
‘‘(ii) TAX SHELTER.—For purposes of 
clause (i), the term ‘tax shelter’ means—
‘‘(I) a partnership or other enti-
ty, 
‘‘(II) any investment plan or ar-
rangement, or 
‘‘(III) any other plan or arrange-
ment, 
if a significant purpose of such partner-
ship, entity, plan, or arrangement is the 
avoidance or evasion of Federal income 
tax.’’
(e) CONFORMING AMENDMENTS.—
(1) Sections 461(i)(3)(C), 1274(b)(3), and 
7525(b) are each amended by striking ‘‘section 
6662(d)(2)(C)(iii)’’ 
and 
inserting 
‘‘section 
6662(d)(2)(C)(ii)’’.
180
(2) The heading for section 6662 is amended to 
read as follows: 
‘‘SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY 
ON UNDERPAYMENTS.’’
(3) 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 under-
statements with respect to reportable transactions.’’
(f) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years ending after the 
date of the enactment of this Act. 
SEC. 3003. TAX SHELTER EXCEPTION TO CONFIDENTIALITY 
PRIVILEGES RELATING TO TAXPAYER COM-
MUNICATIONS. 
(a) IN GENERAL.—Section 7525(b) (relating to sec-
tion not to apply to communications regarding corporate 
tax shelters) is amended to read as follows: 
‘‘(b) SECTION NOT TO APPLY TO COMMUNICATIONS 
REGARDING TAX SHELTERS.—The privilege under sub-
section (a) shall not apply to any written communication 
which is—
‘‘(1) between a federally authorized tax practi-
tioner and—
181
‘‘(A) any person, 
‘‘(B) any director, officer, employee, agent, 
or representative of the person, or 
‘‘(C) any other person holding a capital or 
profits interest in the person, and 
‘‘(2) in connection with the promotion of the di-
rect or indirect participation of the person in any 
tax 
shelter 
(as 
defined 
in 
section 
6662(d)(2)(C)(ii)).’’
(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. 3004. STATUTE OF LIMITATIONS FOR TAXABLE YEARS 
FOR 
WHICH 
REQUIRED 
LISTED 
TRANS-
ACTIONS NOT REPORTED. 
(a) IN GENERAL.—Section 6501(c) (relating to ex-
ceptions) is amended by adding at the end the following 
new paragraph: 
‘‘(10) 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 statement, the time for assess-
ment of any tax imposed by this title with respect
182
to such transaction shall not expire before the date 
which is 1 year after the earlier of—
‘‘(A) the date on which the Secretary is 
furnished the information so required, or 
‘‘(B) the date that a material advisor (as 
defined in section 6111) meets the requirements 
of section 6112 with respect to a request by the 
Secretary under section 6112(b) relating to 
such transaction with respect to such tax-
payer.’’
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years with respect to 
which the period for assessing a deficiency did not expire 
before July 24, 2003. 
SEC. 3005. 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,
183
‘‘(2) information describing any potential tax 
benefits expected to result from the transaction, and 
‘‘(3) such other information as the Secretary 
may prescribe. 
Such return shall be filed not later than the date specified 
by the Secretary. 
‘‘(b) DEFINITIONS.—For purposes of this section—
‘‘(1) MATERIAL ADVISOR.—
‘‘(A) IN
GENERAL.—The term ‘material 
advisor’ means any person—
‘‘(i) who provides any material aid, 
assistance, or advice with respect to orga-
nizing, managing, promoting, selling, im-
plementing, or carrying out any reportable 
transaction, and 
‘‘(ii) who directly or indirectly derives 
gross income in excess of the threshold 
amount (or such other amount as may be 
prescribed by the Secretary) for such ad-
vice or assistance. 
‘‘(B) THRESHOLD AMOUNT.—For purposes 
of subparagraph (A), the threshold amount is—
‘‘(i) $50,000 in the case of a report-
able transaction substantially all of the tax
184
benefits from which are provided to nat-
ural persons, and 
‘‘(ii) $250,000 in any other case. 
‘‘(2) REPORTABLE
TRANSACTION.—The term 
‘reportable transaction’ has the meaning given to 
such term by section 6707A(c). 
‘‘(c) REGULATIONS.—The Secretary may prescribe 
regulations which provide—
‘‘(1) that only 1 person shall be required to 
meet the requirements of subsection (a) in cases in 
which 2 or more persons would otherwise be re-
quired to meet such requirements, 
‘‘(2) exemptions from the requirements of this 
section, and 
‘‘(3) such rules as may be necessary or appro-
priate to carry out the purposes of this section.’’
(b) CONFORMING AMENDMENTS.—
(1) The item relating to section 6111 in the 
table of sections for subchapter B of chapter 61 is 
amended to read as follows:
‘‘Sec. 6111. Disclosure of reportable transactions.’’
(2) So much of section 6112 as precedes sub-
section (c) thereof is amended to read as follows:
185
‘‘SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANS-
ACTIONS MUST KEEP LISTS OF ADVISEES, 
ETC. 
‘‘(a) IN GENERAL.—Each material advisor (as de-
fined in section 6111) with respect to any reportable 
transaction (as defined in section 6707A(c)) shall (wheth-
er or not required to file a return under section 6111 with 
respect to such transaction) 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 a material advisor with 
respect to such transaction, and 
‘‘(2) containing such other information as the 
Secretary may by regulations require.’’
(3) Section 6112 is amended—
(A) by redesignating subsection (c) as sub-
section (b), 
(B) by inserting ‘‘written’’ before ‘‘re-
quest’’ in subsection (b)(1) (as so redesig-
nated), and 
(C) by striking ‘‘shall prescribe’’ in sub-
section (b)(2) (as so redesignated) and inserting 
‘‘may prescribe’’. 
(4) The item relating to section 6112 in the 
table of sections for subchapter B of chapter 61 is 
amended to read as follows:
186
‘‘Sec. 6112. Material advisors of reportable transactions must 
keep lists of advisees, etc.’’
(5)(A) The heading for section 6708 is amend-
ed to read as follows: 
‘‘SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES 
WITH RESPECT TO REPORTABLE TRANS-
ACTIONS.’’
(B) The item relating to section 6708 in the 
table of sections for part I of subchapter B of chap-
ter 68 is amended to read as follows:
‘‘Sec. 6708. Failure to maintain lists of advisees with respect to 
reportable transactions.’’
(c) REQUIRED DISCLOSURE NOT SUBJECT TO CLAIM 
OF
CONFIDENTIALITY.—Paragraph 
(1) 
of 
section 
6112(b), as redesignated by subsection (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.’’. 
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall apply to transactions with respect to which ma-
terial 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 enactment of this Act.
187
(2) NO CLAIM OF CONFIDENTIALITY AGAINST 
DISCLOSURE.—The amendment made by subsection 
(c) shall take effect as if included in the amend-
ments made by section 142 of the Deficit Reduction 
Act of 1984. 
SEC. 3006. FAILURE TO FURNISH INFORMATION REGARD-
ING REPORTABLE TRANSACTIONS. 
(a) IN GENERAL.—Section 6707 (relating to failure 
to furnish information regarding tax shelters) is amended 
to read as follows: 
‘‘SEC. 6707. FAILURE TO FURNISH INFORMATION REGARD-
ING REPORTABLE TRANSACTIONS. 
‘‘(a) IN GENERAL.—If a person who is required to 
file a return under section 6111(a) with respect to any 
reportable transaction—
‘‘(1) fails to file such return on or before the 
date prescribed therefor, or 
‘‘(2) files false or incomplete information with 
the Secretary with respect to such transaction, 
such person shall pay a penalty with respect to such return 
in the amount determined under subsection (b). 
‘‘(b) AMOUNT OF PENALTY.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the penalty imposed under subsection (a) 
with respect to any failure shall be $50,000.
188
‘‘(2) LISTED TRANSACTIONS.—The penalty im-
posed under subsection (a) with respect to any listed 
transaction shall be an amount equal to the greater 
of—
‘‘(A) $200,000, or 
‘‘(B) 50 percent of the gross income de-
rived by such person with respect to aid, assist-
ance, or advice which is provided with respect 
to the listed transaction before the date the re-
turn is filed under section 6111. 
Subparagraph (B) shall be applied by substituting 
‘75 percent’ for ‘50 percent’ in the case of an inten-
tional failure or act described in subsection (a). 
‘‘(c) RESCISSION AUTHORITY.—The provisions of 
section 6707A(d) (relating to authority of Commissioner 
to rescind penalty) shall apply to any penalty imposed 
under this section. 
‘‘(d) REPORTABLE AND LISTED TRANSACTIONS.—
For purposes of this section, the terms ‘reportable trans-
action’ and ‘listed transaction’ have the respective mean-
ings given to such terms by section 6707A(c).’’
(b) CLERICAL AMENDMENT.—The item relating to 
section 6707 in the table of sections for part I of sub-
chapter B of chapter 68 is amended by striking ‘‘tax shel-
ters’’ and inserting ‘‘reportable transactions’’.
189
(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. 3007. 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) 
within 20 business days after the date of such re-
quest, such person shall pay a penalty of $10,000 
for each day of such failure after such 20th day. 
‘‘(2) REASONABLE
CAUSE
EXCEPTION.—No 
penalty shall be imposed by paragraph (1) with re-
spect to the failure on any day if such failure is due 
to reasonable cause. 
‘‘(3) LIMITATION
ON
AUTHORITY
TO
COM-
PROMISE PENALTY.—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 imposed by this section, only the Com-
190
missioner of Internal Revenue may compromise all 
or any portion of such penalty.’’
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to requests made after the date 
of the enactment of this Act. 
SEC. 3008. PENALTY ON PROMOTERS OF TAX SHELTERS. 
(a) PENALTY ON PROMOTING ABUSIVE TAX SHEL-
TERS.—Section 6700(a) is amended by adding at the end 
the following new sentence: ‘‘Notwithstanding the first 
sentence, if an activity with respect to which a penalty 
imposed under this subsection involves a statement de-
scribed in paragraph (2)(A), the amount of the penalty 
shall be equal to 50 percent of the gross income derived 
(or to be derived) from such activity by the person on 
which the penalty is imposed.’’
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to activities after the date of the 
enactment of this Act. 
SEC. 3009. 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:
191
‘‘(B) 
SPECIAL
RULE
FOR
CORPORA-
TIONS.—In the case of a corporation other than 
an S corporation or a personal holding company 
(as defined in section 542), there is a substan-
tial understatement of income tax for any tax-
able year if the amount of the understatement 
for the taxable year exceeds the lesser of—
‘‘(i) 10 percent of the tax required to 
be shown on the return for the taxable 
year (or, if greater, $10,000), or 
‘‘(ii) $10,000,000.’’
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
the date of the enactment of this Act. 
SEC. 3010. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN 
CONDUCT RELATED TO TAX SHELTERS AND 
REPORTABLE TRANSACTIONS. 
(a) IN GENERAL.—Section 7408 (relating to action 
to enjoin promoters of abusive tax shelters, etc.) is amend-
ed by redesignating subsection (c) as subsection (d) and 
by striking subsections (a) and (b) and inserting the fol-
lowing new subsections: 
‘‘(a) AUTHORITY TO SEEK INJUNCTION.—A civil ac-
tion in the name of the United States to enjoin any person 
from further engaging in specified conduct may be com-
192
menced at the request of the Secretary. Any action under 
this section shall be brought in the district court of the 
United States for the district in which such person resides, 
has his principal place of business, or has engaged in spec-
ified conduct. The court may exercise its jurisdiction over 
such action (as provided in section 7402(a)) separate and 
apart from any other action brought by the United States 
against such person. 
‘‘(b) ADJUDICATION AND DECREE.—In any action 
under subsection (a), if the court finds—
‘‘(1) that the person has engaged in any speci-
fied conduct, and 
‘‘(2) that injunctive relief is appropriate to pre-
vent recurrence of such conduct, 
the court may enjoin such person from engaging in such 
conduct or in any other activity subject to penalty under 
this title. 
‘‘(c) SPECIFIED CONDUCT.—For purposes of this 
section, the term ‘specified conduct’ means any action, or 
failure to take action, subject to penalty under section 
6700, 6701, 6707, or 6708.’’
(b) CONFORMING AMENDMENTS.—
(1) The heading for section 7408 is amended to 
read as follows:
193
‘‘SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RE-
LATED TO TAX SHELTERS AND REPORTABLE 
TRANSACTIONS.’’
(2) The table of sections for subchapter A of 
chapter 67 is amended by striking the item relating 
to section 7408 and inserting the following new 
item:
‘‘Sec. 7408. Actions to enjoin specified conduct related to tax shelters and 
reportable transactions.’’
(c) EFFECTIVE DATE.—The amendment made by 
this section shall take effect on the day after the date of 
the enactment of this Act. 
SEC. 3011. PENALTY ON FAILURE TO REPORT INTERESTS 
IN FOREIGN FINANCIAL ACCOUNTS. 
(a) IN GENERAL.—Section 5321(a)(5) of title 31, 
United States Code, is amended to read as follows: 
‘‘(5) FOREIGN
FINANCIAL
AGENCY
TRANS-
ACTION VIOLATION.—
‘‘(A) PENALTY
AUTHORIZED.—The Sec-
retary of the Treasury may impose a civil 
money penalty on any person who violates, or 
causes any violation of, any provision of section 
5314. 
‘‘(B) AMOUNT OF PENALTY.—
‘‘(i) IN
GENERAL.—Except as pro-
vided in subparagraph (C), the amount of
194
any civil penalty imposed under subpara-
graph (A) shall not exceed $5,000. 
‘‘(ii) REASONABLE
CAUSE
EXCEP-
TION.—No penalty shall be imposed under 
subparagraph (A) with respect to any vio-
lation if—
‘‘(I) such violation was due to 
reasonable cause, and 
‘‘(II) the amount of the trans-
action or the balance in the account 
at the time of the transaction was 
properly reported. 
‘‘(C) WILLFUL VIOLATIONS.—In the case 
of any person willfully violating, or willfully 
causing any violation of, any provision of sec-
tion 5314—
‘‘(i) the maximum penalty under sub-
paragraph (B)(i) shall be increased to the 
greater of—
‘‘(I) $25,000, or 
‘‘(II) the amount (not exceeding 
$100,000) determined under subpara-
graph (D), and 
‘‘(ii) subparagraph (B)(ii) shall not 
apply.
195
‘‘(D) AMOUNT.—The amount determined 
under this subparagraph is—
‘‘(i) in the case of a violation involving 
a transaction, the amount of the trans-
action, or 
‘‘(ii) in the case of a violation involv-
ing a failure to report the existence of an 
account or any identifying information re-
quired to be provided with respect to an 
account, the balance in the account at the 
time of the violation.’’
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to violations occurring after the 
date of the enactment of this Act. 
SEC. 3012. REGULATION OF INDIVIDUALS PRACTICING BE-
FORE THE DEPARTMENT OF THE TREASURY. 
(a) CENSURE; IMPOSITION OF PENALTY.—
(1) IN GENERAL.—Section 330(b) of title 31, 
United States Code, is amended—
(A) by inserting ‘‘, or censure,’’ after ‘‘De-
partment’’, and 
(B) by adding at the end the following new 
flush sentence: 
‘‘The Secretary may impose a monetary penalty on any 
representative described in the preceding sentence. If the
196
representative was acting on behalf of an employer or any 
firm or other entity in connection with the conduct giving 
rise to such penalty, the Secretary may impose a monetary 
penalty on such employer, firm, or entity if it knew, or 
reasonably should have known, of such conduct. Such pen-
alty shall not exceed the gross income derived (or to be 
derived) from the conduct giving rise to the penalty. Any 
such penalty imposed on an individual may be in addition 
to, or in lieu of, any suspension, disbarment, or censure 
of such indivdiual.’’
(2) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to actions taken after 
the date of the enactment of this Act. 
(b) TAX SHELTER OPINIONS, ETC.—Section 330 of 
such title 31 is amended by adding at the end the fol-
lowing new subsection: 
‘‘(d) Nothing in this section or in any other provision 
of law shall be construed to limit the authority of the Sec-
retary of the Treasury to impose standards applicable to 
the rendering of written advice with respect to any entity, 
transaction plan or arrangement, or other plan or arrange-
ment, which is of a type which the Secretary determines 
as having a potential for tax avoidance or evasion.’’
197
Subtitle B—Other Provisions 
SEC. 3021. TREATMENT OF STRIPPED INTERESTS IN BOND 
AND PREFERRED STOCK FUNDS, ETC. 
(a) IN GENERAL.—Section 1286 (relating to tax 
treatment of stripped bonds) is amended by redesignating 
subsection (f) as subsection (g) and by inserting after sub-
section (e) the following new subsection: 
‘‘(f) TREATMENT OF STRIPPED INTERESTS IN BOND 
AND PREFERRED STOCK FUNDS, ETC.—In the case of an 
account or entity substantially all of the assets of which 
consist of bonds, preferred stock, or a combination thereof, 
the Secretary may by regulations provide that rules simi-
lar to the rules of this section and 305(e), as appropriate, 
shall apply to interests in such account or entity to which 
(but for this subsection) this section or section 305(e), as 
the case may be, would not apply.’’
(b) CROSS REFERENCE.—Subsection (e) of section 
305 is amended by adding at the end the following new 
paragraph: 
‘‘(7) CROSS REFERENCE.—
‘‘For treatment of stripped interests in certain ac-
counts or entities holding preferred stock, see sec-
tion 1286(f).’’
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to purchases and dispositions after 
the date of the enactment of this Act.
198
SEC. 3022. MINIMUM HOLDING PERIOD FOR FOREIGN TAX 
CREDIT ON WITHHOLDING TAXES ON INCOME 
OTHER THAN DIVIDENDS. 
(a) IN GENERAL.—Section 901 is amended by redes-
ignating subsection (l) as subsection (m) and by inserting 
after subsection (k) the following new subsection: 
‘‘(l) MINIMUM HOLDING PERIOD FOR WITHHOLDING 
TAXES ON GAIN AND INCOME OTHER THAN DIVIDENDS 
ETC.—
‘‘(1) IN GENERAL.—In no event shall a credit 
be allowed under subsection (a) for any withholding 
tax (as defined in subsection (k)) on any item of in-
come or gain with respect to any property if—
‘‘(A) such property is held by the recipient 
of the item for 15 days or less during the 30-
day period beginning on the date which is 15 
days before the date on which the right to re-
ceive payment of such item arises, or 
‘‘(B) to the extent that the recipient of the 
item is under an obligation (whether pursuant 
to a short sale or otherwise) to make related 
payments with respect to positions in substan-
tially similar or related property. 
This paragraph shall not apply to any dividend to 
which subsection (k) applies.
199
‘‘(2) EXCEPTION FOR TAXES PAID BY DEAL-
ERS.—
‘‘(A) IN
GENERAL.—Paragraph (1) shall 
not apply to any qualified tax with respect to 
any property held in the active conduct in a for-
eign country of a business as a dealer in such 
property. 
‘‘(B) QUALIFIED
TAX.—For purposes of 
subparagraph (A), the term ‘qualified tax’ 
means a tax paid to a foreign country (other 
than the foreign country referred to in subpara-
graph (A)) if— 
‘‘(i) the item to which such tax is at-
tributable is subject to taxation on a net 
basis by the country referred to in sub-
paragraph (A), and 
‘‘(ii) such country allows a credit 
against its net basis tax for the full 
amount of the tax paid to such other for-
eign country. 
‘‘(C) DEALER.—For purposes of subpara-
graph (A), the term ‘dealer’ means—
‘‘(i) with respect to a security, any 
person to whom paragraphs (1) and (2) of 
subsection (k) would not apply by reason
200
of paragraph (4) thereof if such security 
were stock, and 
‘‘(ii) with respect to any other prop-
erty, any person with respect to whom 
such property is described in section 
1221(a)(1). 
‘‘(D) REGULATIONS.—The Secretary may 
prescribe such regulations as may be appro-
priate to carry out this paragraph, including 
regulations to prevent the abuse of the excep-
tion provided by this paragraph and to treat 
other taxes as qualified taxes. 
‘‘(3) EXCEPTIONS.—The Secretary may by reg-
ulation provide that paragraph (1) shall not apply to 
property where the Secretary determines that the 
application of paragraph (1) to such property is not 
necessary to carry out the purposes of this sub-
section. 
‘‘(4) CERTAIN RULES TO APPLY.—Rules similar 
to the rules of paragraphs (5), (6), and (7) of sub-
section (k) shall apply for purposes of this sub-
section. 
‘‘(5) DETERMINATION OF HOLDING PERIOD.—
Holding periods shall be determined for purposes of
201
this subsection without regard to section 1235 or 
any similar rule.’’
(b) CONFORMING AMENDMENT.—The heading of 
subsection (k) of section 901 is amended by inserting ‘‘ON 
DIVIDENDS’’ after ‘‘TAXES’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to amounts paid or accrued more 
than 30 days after the date of the enactment of this Act. 
SEC. 3023. AFFIRMATION OF CONSOLIDATED RETURN REG-
ULATION AUTHORITY. 
(a) IN GENERAL.—Section 1502 is amended by add-
ing at the end the following new sentence: ‘‘In carrying 
out the preceding sentence, the Secretary may prescribe 
rules that are different from the provisions of chapter 1 
that would apply if such corporations filed separate re-
turns.’’. 
(b) RESULT NOT OVERTURNED.—Notwithstanding 
the amendment made by subsection (a), the Internal Rev-
enue Code of 1986 shall be construed by treating Treasury 
Regulation § 1.1502-20(c)(1)(iii) (as in effect on January 
1, 2001) as being inapplicable to the factual situation in 
Rite Aid Corporation and Subsidiary Corporations v. 
United States, 255 F.3d 1357 (Fed. Cir. 2001). 
(c) EFFECTIVE DATE.—This section, and the amend-
ment made by this section, shall apply to taxable years
202
beginning before, on, or after the date of the enactment 
of this Act. 
SEC. 3024. DISALLOWANCE OF CERTAIN PARTNERSHIP 
LOSS TRANSFERS. 
(a) TREATMENT OF CONTRIBUTED PROPERTY WITH 
BUILT-IN LOSS.—Paragraph (1) of section 704(c) is 
amended by striking ‘‘and’’ at the end of subparagraph 
(A), by striking the period at the end of subparagraph 
(B) and inserting ‘‘, and’’, and by adding at the end the 
following: 
‘‘(C) if any property so contributed has a 
built-in loss—
‘‘(i) such built-in loss shall be taken 
into account only in determining the 
amount of items allocated to the contrib-
uting partner, and 
‘‘(ii) except as provided in regulations, 
in determining the amount of items allo-
cated to other partners, the basis of the 
contributed property in the hands of the 
partnership shall be treated as being equal 
to its fair market value at the time of con-
tribution. 
For purposes of subparagraph (C), the term ‘built-
in loss’ means the excess of the adjusted basis of the
203
property (determined without regard to subpara-
graph (C)(ii)) over its fair market value at the time 
of contribution.’’
(b) ADJUSTMENT TO BASIS OF PARTNERSHIP PROP-
ERTY
ON TRANSFER
OF PARTNERSHIP INTEREST IF 
THERE IS SUBSTANTIAL BUILT-IN LOSS.—
(1) ADJUSTMENT
REQUIRED.—Subsection (a) 
of section 743 (relating to optional adjustment to 
basis of partnership property) is amended by insert-
ing before the period ‘‘or unless the partnership has 
a substantial built-in loss immediately after such 
transfer’’. 
(2) ADJUSTMENT.—Subsection (b) of section 
743 is amended by inserting ‘‘or with respect to 
which there is a substantial built-in loss immediately 
after such transfer’’ after ‘‘section 754 is in effect’’. 
(3) SUBSTANTIAL BUILT-IN LOSS.—Section 743 
is amended by adding at the end the following new 
subsection: 
‘‘(d) SUBSTANTIAL BUILT-IN LOSS.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, a partnership has a substantial built-in loss 
with respect to a transfer of an interest in a part-
nership if the partnership’s adjusted basis in the
204
partnership property exceeds by more than $250,000 
the fair market value of such property. 
‘‘(2) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be appropriate to 
carry out the purposes of paragraph (1) and section 
734(d), including regulations aggregating related 
partnerships and disregarding property acquired by 
the partnership in an attempt to avoid such pur-
poses.’’
(4) CLERICAL AMENDMENTS.—
(A) The section heading for section 743 is 
amended to read as follows: 
‘‘SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROP-
ERTY WHERE SECTION 754 ELECTION OR 
SUBSTANTIAL BUILT-IN LOSS.’’
(B) The table of sections for subpart C of 
part II of subchapter K of chapter 1 is amend-
ed by striking the item relating to section 743 
and inserting the following new item:
‘‘Sec. 743. Adjustment to basis of partnership property where sec-
tion 754 election or substantial built-in loss.’’
(c) ADJUSTMENT
TO BASIS
OF UNDISTRIBUTED 
PARTNERSHIP PROPERTY
IF THERE IS SUBSTANTIAL 
BASIS REDUCTION.—
(1) ADJUSTMENT
REQUIRED.—Subsection (a) 
of section 734 (relating to optional adjustment to
205
basis of undistributed partnership property) is 
amended by inserting before the period ‘‘or unless 
there is a substantial basis reduction’’. 
(2) ADJUSTMENT.—Subsection (b) of section 
734 is amended by inserting ‘‘or unless there is a 
substantial basis reduction’’ after ‘‘section 754 is in 
effect’’. 
(3) SUBSTANTIAL BASIS REDUCTION.—Section 
734 is amended by adding at the end the following 
new subsection: 
‘‘(d) SUBSTANTIAL BASIS REDUCTION.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, there is a substantial basis reduction with re-
spect to a distribution if the sum of the amounts de-
scribed in subparagraphs (A) and (B) of subsection 
(b)(2) exceeds $250,000. 
‘‘(2) REGULATIONS.—
‘‘For regulations to carry out this subsection, see 
section 743(d)(2).’’
(4) CLERICAL AMENDMENTS.—
(A) The section heading for section 734 is 
amended to read as follows:
206
‘‘SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED 
PARTNERSHIP PROPERTY WHERE SECTION 
754 ELECTION OR SUBSTANTIAL BASIS RE-
DUCTION.’’
(B) The table of sections for subpart B of 
part II of subchapter K of chapter 1 is amend-
ed by striking the item relating to section 734 
and inserting the following new item:
‘‘Sec. 734. Adjustment to basis of undistributed partnership prop-
erty where section 754 election or substantial basis 
reduction.’’
(d) EFFECTIVE DATES.—
(1) SUBSECTION (a).—The amendment made 
by subsection (a) shall apply to contributions made 
after the date of the enactment of this Act. 
(2) SUBSECTION (b).—The amendments made 
by subsection (b) shall apply to transfers after the 
date of the enactment of this Act. 
(3) SUBSECTION (c).—The amendments made 
by subsection (c) shall apply to distributions after 
the date of the enactment of this Act. 
SEC. 3025. 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:
207
‘‘(c) NO ALLOCATION
OF BASIS DECREASE
TO 
STOCK OF CORPORATE PARTNER.—In making an alloca-
tion under subsection (a) of any decrease in the adjusted 
basis of partnership property under section 734(b)—
‘‘(1) no allocation may be made to stock in a 
corporation (or any person related (within the mean-
ing of sections 267(b) and 707(b)(1)) to such cor-
poration) which is a partner in the partnership, and 
‘‘(2) any amount not allocable to stock by rea-
son of paragraph (1) shall be allocated under sub-
section (a) to other partnership property. 
Gain shall be recognized to the partnership to the extent 
that the amount required to be allocated under paragraph 
(2) to other partnership property exceeds the aggregate 
adjusted 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 the date of 
the enactment of this Act. 
SEC. 3026. REPEAL OF SPECIAL RULES FOR FASITS. 
(a) IN GENERAL.—Part V of subchapter M of chap-
ter 1 (relating to financial asset securitization investment 
trusts) is hereby repealed. 
(b) CONFORMING AMENDMENTS.—
208
(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 amend-
ed by striking ‘‘a REMIC to which part IV of sub-
chapter 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 amend-
ed by adding ‘‘and’’ at the end of subparagraph (B), 
by 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).
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‘‘(1) a residual interest (as defined in section 
860G(a)(2)) in a REMIC is transferred in any 
transaction which is described in subsection (a), and 
‘‘(2) the transferee’s adjusted basis in such re-
sidual interest would (but for this paragraph) exceed 
its fair market value immediately after such trans-
action, 
then, notwithstanding subsection (a), the transferee’s ad-
justed basis in such residual interest shall not exceed its 
fair market value (whether or not greater than zero) im-
mediately after such transaction.’’ 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to transactions after the date of 
the enactment of this Act. 
SEC. 3028. CLARIFICATION OF BANKING BUSINESS FOR 
PURPOSES OF DETERMINING INVESTMENT 
OF EARNINGS IN UNITED STATES PROPERTY. 
(a) IN GENERAL.—Subparagraph (A) of section 
956(c)(2) is amended to read as follows: 
‘‘(A) obligations of the United States, 
money, or deposits with banks (as defined by 
section 2(c) of the Bank Holding Company Act 
of 1956 (12 U.S.C. 1841(c));’’.
211
(b) EFFECTIVE DATE.—The amendment made by 
this section shall take effect on the date of the enactment 
of this Act. 
SEC. 3029. CLARIFICATION OF EXEMPTION FROM TAX FOR 
SMALL PROPERTY AND CASUALTY INSUR-
ANCE COMPANIES. 
(a) IN GENERAL.—Section 501(c)(15)(A) is amended 
to read as follows: 
‘‘(A) Insurance companies (as defined in 
section 816(a)) other than life (including inter-
insurers and reciprocal underwriters) if—
‘‘(i) the gross receipts for the taxable 
year do not exceed $600,000, and 
‘‘(ii) more than 50 percent of such 
gross receipts consist of premiums.’’. 
(b) 
CONTROLLED
GROUP
RULE.—Section 
501(c)(15)(C) is amended by inserting ‘‘, except that in 
applying 
section 
1563 
for 
purposes 
of 
section 
831(b)(2)(B)(ii), subparagraphs (B) and (C) of section 
1563(b)(2) shall be disregarded’’ before the period at the 
end. 
(c) CONFORMING AMENDMENT.—Clause (i) of sec-
tion 831(b)(2)(A) is amended by striking ‘‘exceed 
$350,000 but’’.