I
107TH CONGRESS
1ST SESSION
H. R. 2520
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
JULY 17, 2001
Mr. DOGGETT (for himself, Mr. RANGEL, Mr. STARK, Mr. MATSUI, Mr.
COYNE, Mr. LEVIN, Mr. MCDERMOTT, Mr. KLECZKA, Mr. LEWIS of
Georgia, Mr. NEAL of Massachusetts, Mr. MCNULTY, Mr. JEFFERSON,
Mr. BECERRA, Mrs. THURMAN, Mr. ALLEN, Mr. BONIOR, Mr. HINCHEY,
Mr. MCGOVERN, Mr. GEORGE MILLER of California, Ms. SANCHEZ, Ms.
SCHAKOWSKY, Mr. TIERNEY, and Mrs. JONES of Ohio) introduced the
following bill; which was referred to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to 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.
This Act may be cited as the ‘‘Abusive Tax Shelter
Shutdown Act of 2001’’.
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—CLARIFICATION 
OF
ECONOMIC SUBSTANCE DOC-
TRINE
SEC. 101. CLARIFICATION OF ECONOMIC SUBSTANCE DOC-
TRINE.
(a) IN GENERAL.—Section 7701 of the Internal Rev-
enue Code of 1986 is amended by redesignating subsection
(m) as subsection (n) and by inserting after subsection
(l) the following new subsection:
‘‘(m) CLARIFICATION
OF ECONOMIC SUBSTANCE
DOCTRINE; ETC.—
‘‘(1) GENERAL RULES.—
‘‘(A) IN GENERAL.—In applying the eco-
nomic substance doctrine, the determination of
whether a transaction has economic substance
shall be made as provided in this paragraph.
‘‘(B) DEFINITION
OF
ECONOMIC
SUB-
STANCE.—For purposes of subparagraph (A)—
‘‘(i) IN GENERAL.—A transaction has
economic substance only if—
‘‘(I) the transaction changes in a
meaningful way (apart from Federal
income tax effects) the taxpayer’s eco-
nomic 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 are 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) 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.
‘‘(D) 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 referred to in section 6662(i)(2), and the
requirements of this subsection shall be construed as
being in addition to any such other rule of law.’’
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to transactions after the date of
the enactment of this Act.
TITLE II—PENALTIES
SEC. 201. INCREASE IN PENALTY ON UNDERPAYMENTS RE-
SULTING FROM FAILURE TO SATISFY CER-
TAIN COMMON LAW RULES.
(a) IN GENERAL.—Section 6662 of the Internal Rev-
enue Code of 1986 (relating to imposition of accuracy-re-
lated penalty) is amended by adding at the end the fol-
lowing new subsection:
‘‘(i) INCREASE IN PENALTY IN CASE OF FAILURE TO
SATISFY CERTAIN COMMON LAW RULES.—
‘‘(1) IN GENERAL.—To the extent that an un-
derpayment is attributable to a disallowance de-
scribed in paragraph (2)—
‘‘(A) subsection (a) shall be applied with
respect to such portion by substituting ‘40 per-
cent’ for ‘20 percent’, and
‘‘(B) subsection (d)(2)(B) and section
6664(c) shall not apply.
‘‘(2) DISALLOWANCES DESCRIBED.—A disallow-
ance is described in this subsection if such disallow-
ance is on account of—
‘‘(A) a lack of economic substance (within
the meaning of section 7701(m)(1)) for the
transaction giving rise to the claimed benefit or
the transaction was not respected under section
7701(m)(2),
‘‘(B) a lack of business purpose for such
transaction or because the form of the trans-
action does not reflect its substance, or
‘‘(C) a failure to meet the requirements of
any other similar rule of law.
‘‘(3) INCREASE IN PENALTY NOT TO APPLY IF
COMPLIANCE WITH DISCLOSURE REQUIREMENTS.—
Paragraph (1)(A) shall not apply if the taxpayer dis-
closes to the Secretary (as such time and in such
manner as the Secretary shall prescribe) such infor-
mation as the Secretary shall prescribe with respect
to such transaction.’’.
(b) MODIFICATIONS TO PENALTY ON SUBSTANTIAL
UNDERSTATEMENT OF INCOME TAX.—
(1) MODIFICATION OF THRESHOLD.—Subpara-
graph (A) of section 6662(d)(1) of such Code is
amended to read as follows:
‘‘(A) IN GENERAL.—For purposes of this
section, there is a substantial understatement of
income tax for any taxable year if the amount
of the understatement for the taxable year ex-
ceeds the lesser of—
‘‘(i) $500,000, or
‘‘(ii) the greater of 10 percent of the
tax required to be shown on the return for
the taxable year or $5,000.’’
(2) MODIFICATION OF PENALTY ON TAX SHEL-
TERS, 
ETC.—Clauses (i) and (ii) of section
6662(d)(2)(C) of such Code are amended to read as
follows:
‘‘(i) IN GENERAL.—Subparagraph (B)
shall not apply to any item attributable to
a tax shelter.’’
‘‘(ii) DETERMINATION
OF
UNDER-
STATEMENTS
WITH
RESPECT
TO
TAX
SHELTERS, ETC.—In any case in which
there are one or more items attributable to
a tax shelter, the amount of the under-
statement under subparagraph (A) shall in
no event be less than the amount of under-
statement which would be determined for
the taxable year if all items shown on the
return which are not attributable to any
tax shelter were treated as being correct. A
similar rule shall apply in cases to which
subsection (i) applies, whether or not the
items are attributable to a tax shelter.’’
(c) TREATMENT
OF
AMENDED
RETURNS.—Sub-
section (a) of section 6664 of such Code is amended by
adding at the end the following new sentence: ‘‘For pur-
poses of this subsection, an amended return shall be dis-
regarded if such return is filed on or after the date the
taxpayer is first contacted by the Secretary regarding the
examination of the return.’’
SEC. 202. PENALTY ON PROMOTERS OF TAX AVOIDANCE
STRATEGIES WHICH HAVE NO ECONOMIC
SUBSTANCE, ETC.
(a) PENALTY.—
(1) IN GENERAL.—Section 6700 of the Internal
Revenue Code of 1986 (relating to promoting abu-
sive tax shelters, etc.) is amended by redesignating
subsection (c) as subsection (d) and by inserting
after subsection (b) the following new subsection:
‘‘(c) PENALTY ON SUBSTANTIAL PROMOTERS FOR
PROMOTING TAX AVOIDANCE STRATEGIES WHICH HAVE
NO ECONOMIC SUBSTANCE, ETC.—
‘‘(1) IMPOSITION OF PENALTY.—Any substan-
tial promoter of a tax avoidance strategy shall pay
a penalty in the amount determined under para-
graph (2) with respect to such strategy if such strat-
egy (or any similar strategy promoted by such pro-
moter) fails to meet the requirements of any rule of
law referred to in section 6662(i)(2).
‘‘(2) AMOUNT
OF
PENALTY.—The penalty
under paragraph (1) with respect to a promoter of
a tax avoidance strategy is an amount equal to 100
percent of the gross income derived (or to be de-
rived) by such promoter from such strategy.
‘‘(3) TAX
AVOIDANCE
STRATEGY.—For pur-
poses of this subsection, the term ‘tax avoidance
strategy’ means any entity, plan, arrangement, or
transaction a significant purpose of the structure of
which is the avoidance or evasion of Federal income
tax.
‘‘(4) SUBSTANTIAL PROMOTER.—For purposes
of this subsection—
‘‘(A) IN GENERAL.—The term ‘substantial
promoter’ means, with respect to any tax avoid-
ance strategy, any promoter if—
‘‘(i) such promoter offers such strat-
egy to more than 1 potential participant,
and
‘‘(ii) such promoter may receive fees
in excess of $500,000 in the aggregate
with respect to such strategy.
‘‘(B) AGGREGATION RULES.—For purposes
of this paragraph—
‘‘(i) RELATED PERSONS.—A promoter
and all persons related to such promoter
shall be treated as 1 person who is a pro-
moter.
‘‘(ii) SIMILAR STRATEGIES.—All simi-
lar tax avoidance strategies of a promoter
shall be treated as 1 tax avoidance strat-
egy.
‘‘(C) PROMOTER.—The term ‘promoter’
means any person who participates in the pro-
motion, offering, or sale of the tax avoidance
strategy.
‘‘(D) RELATED PERSON.—Persons are re-
lated if they bear a relationship to each other
which is described in section 267(b) or 707(b).
‘‘(4) COORDINATION WITH SUBSECTION (a).—
No penalty shall be imposed by this subsection on
any promoter with respect to a tax avoidance strat-
egy if a penalty is imposed under subsection (a) on
such promoter with respect to such strategy.’’
(2) CONFORMING AMENDMENT.—Subsection (d)
of section 6700 of such Code is amended—
(A) by striking ‘‘PENALTY’’ and inserting
‘‘PENALTIES’’, and
(B) by striking ‘‘penalty’’ the first place it
appears in the text and inserting ‘‘penalties’’.
(b) INCREASE IN PENALTY ON PROMOTING ABUSIVE
TAX SHELTERS.—The first sentence of section 6700(a)
of such Code is amended by striking ‘‘a penalty equal to’’
and all that follows and inserting ‘‘a penalty equal to the
greater of $1,000 or 100 percent of the gross income de-
rived (or to be derived) by such person from such activ-
ity.’’
SEC. 203. MODIFICATIONS OF PENALTIES FOR AIDING AND
ABETTING UNDERSTATEMENT OF TAX LI-
ABILITY INVOLVING TAX SHELTERS.
(a) IMPOSITION OF PENALTY.—Section 6701(a) of
the Internal Revenue Code of 1986 (relating to imposition
of penalty) is amended to read as follows:
‘‘(a) IMPOSITION OF PENALTIES.—
‘‘(1) IN GENERAL.—Any person—
‘‘(A) who aids or assists in, procures, or
advises with respect to, the preparation or pres-
entation of any portion of a return, affidavit,
claim, or other document,
‘‘(B) who knows (or has reason to believe)
that such portion will be used in connection
with any material matter arising under the in-
ternal revenue laws, and
‘‘(C) who knows that such portion (if so
used) would result in an understatement of the
liability for tax of another person,
shall pay a penalty with respect to each such docu-
ment in the amount determined under subsection
(b).
‘‘(2) CERTAIN TAX SHELTERS.—If—
‘‘(A) any person—
‘‘(i) aids or assists in, procures, or ad-
vises with respect to the creation, organiza-
tion, sale, implementation, management, or
reporting of a tax shelter (as defined in
section 6662(d)(2)(C)(iii)) or of any entity,
plan, arrangement, or transaction that
fails to meet the requirements of any rule
of law referred to in section 6662(i)(2),
and
‘‘(ii) opines, advises, represents, or
otherwise indicates (directly or indirectly)
that the taxpayer’s tax treatment of items
attributable to such tax shelter or such en-
tity, plan, arrangement, or transaction and
giving rise to an understatement of tax li-
ability would more likely than not prevail
or not give rise to a penalty,
‘‘(B) such opinion, advice, representation,
or indication is unreasonable,
then such person shall pay a penalty in the amount
determined under subsection (b). If a standard high-
er than the more likely than not standard was used
in any such opinion, advice, representation, or indi-
cation, then subparagraph (A)(ii) shall be applied as
if such standard were substituted for the more likely
than not standard.’’
(b) AMOUNT OF PENALTY.—Section 6701(b) of such
Code (relating to amount of penalty) is amended—
(1) by inserting ‘‘or (3)’’ after ‘‘paragraph (2)’’
in paragraph (1),
(2) by striking ‘‘subsection (a)’’ each place it
appears and inserting ‘‘subsection (a)(1)’’, and
(3) by redesignating paragraph (3) as para-
graph (4) and by adding after paragraph (2) the fol-
lowing:
‘‘(3) TAX SHELTERS.—In the case of—
‘‘(A) a penalty imposed by subsection
(a)(1) which involves a return, affidavit, claim,
or other document relating to a tax shelter or
an entity, plan, arrangement, or transaction
that fails to meet the requirements of any rule
of law referred to in section 6662(i)(2), and
‘‘(B) any penalty imposed by subsection
(a)(2),
the amount of the penalty shall be equal to 100 per-
cent of the gross proceeds derived (or to be derived)
by the person in connection with the tax shelter or
entity, plan, arrangement, or transaction.’’
(c) REFERRAL AND PUBLICATION.—If a penalty is
imposed under section 6701(a)(2) of such Code (as added
by subsection (a)) on any person, the Secretary of the
Treasury shall—
(1) notify the Director of Practice of the Inter-
nal Revenue Service and any appropriate State li-
censing authority of the penalty and the cir-
cumstances under which it was imposed, and
(2) publish the identity of the person and the
fact the penalty was imposed on the person.
(d) CONFORMING AMENDMENTS.—
(1) Section 6701(d) of such Code is amended
by striking ‘‘Subsection (a)’’ and inserting ‘‘Sub-
section (a)(1)’’.
(2) Section 6701(e) of such Code is amended by
striking ‘‘subsection (a)(1)’’ and inserting ‘‘sub-
section (a)(1)(A)’’.
(3) Section 6701(f) of such Code is amended by
inserting ‘‘, tax shelter, or entity, plan, arrangement,
or transaction’’ after ‘‘document’’ each place it ap-
pears.
SEC. 204. FAILURE TO MAINTAIN LISTS.
Section 6708(a) of the Internal Revenue Code of
1986 (relating to failure to maintain lists of investors in
potentially abusive tax shelters) is amended by adding at
the end the following: ‘‘In the case of a tax shelter (as
defined in section 6662(d)(2)(C)(iii)) or entity, plan, ar-
rangement, or transaction that fails to meet the require-
ments of any rule of law referred to in section 6662(i)(2),
the penalty shall be equal to 50 percent of the gross pro-
ceeds derived (or to be derived) from each person with re-
spect to which there was a failure and the limitation of
the preceding sentence shall not apply.’’
SEC. 205. PENALTY FOR FAILING TO DISCLOSE REPORT-
ABLE TRANSACTION.
(a) IN GENERAL.—Part I of subchapter B of chapter
68 of the Internal Revenue Code of 1986 (relating to as-
sessable penalties) is amended by inserting after section
6707 the following new section:
‘‘SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE TAX
SHELTER INFORMATION WITH RETURN.
‘‘(a) IMPOSITION
OF PENALTY.—Any person who
fails to include with its return of Federal income tax any
information required to be included under section 6011
with respect to a reportable transaction shall pay a penalty
in the amount determined under subsection (b). No pen-
alty shall be imposed on any such failure if it is shown
that such failure is due to reasonable cause.
‘‘(b) AMOUNT OF PENALTY.—
‘‘(1) IN GENERAL.—The amount of the penalty
under subsection (a) shall be equal to the greater
of—
‘‘(A) 5 percent of any increase in Federal
tax which results from a difference between the
taxpayer’s treatment (as shown on its return)
of items attributable to the reportable trans-
action to which the failure relates and the prop-
er tax treatment of such items, or
‘‘(B) $100,000.
For purposes of subparagraph (A), the last sentence
of section 6664(a) shall apply.
‘‘(2) LISTED
TRANSACTION.—If the failure
under subsection (a) relates to a reportable trans-
action which is the same as, or substantially similar
to, a transaction specifically identified by the Sec-
retary as a tax avoidance transaction for purposes of
section 6011, paragraph (1)(A) shall be applied by
substituting ‘10 percent’ for ‘5 percent’.
‘‘(c) REPORTABLE TRANSACTION.—For purposes of
this section, the term ‘reportable transaction’ means any
transaction with respect to which information is required
under section 6011 to be included with a taxpayer’s return
of tax because, as determined under regulations prescribed
under section 6011, such transaction has characteristics
which may be indicative of a tax avoidance transaction.
‘‘(d) COORDINATION WITH OTHER PENALTIES.—
The penalty imposed by this section is in addition to any
penalty imposed under section 6662.’’
(b) CONFORMING AMENDMENT.—The table of sec-
tions for part I of subchapter B of chapter 68 of such
Code is amended by inserting after the item relating to
section 6707 the following:
‘‘Sec. 6707A. Penalty for failure to include tax shelter information on return.’’
SEC. 206. REGISTRATION OF CERTAIN TAX SHELTERS
WITHOUT CORPORATE PARTICIPANTS.
Section 6111(d)(1)(A) of the Internal Revenue Code
of 1986 (relating to certain confidential arrangements
treated as tax shelters) is amended by striking ‘‘for a di-
rect or indirect participant which is a corporation’’.
SEC. 207. EFFECTIVE DATES.
(a) IN GENERAL.—Except as provided in subsections
(b) and (c), the amendments made by this title shall apply
to transactions after the date of the enactment of this Act.
(b) SECTION 201.—The amendments made by sub-
sections (b) and (c) of section 201 shall apply to taxable
years ending after the date of the enactment of this Act.
(c) SECTION 202.—The amendments made by sub-
section (a) of section 202 shall apply to any tax avoidance
strategy (as defined in section 6700(c) of the Internal
Revenue Code of 1986, as amended by this title) interests
in which are offered to potential participants after the
date of the enactment of this Act.
(d) SECTION 206.—The amendment made by section
206 shall apply to any tax shelter interest which is offered
to potential participants after the date of the enactment
of this Act.
TITLE III—LIMITATIONS ON IM-
PORTATION OR TRANSFER OF
BUILT-IN LOSSES
SEC. 301. LIMITATION ON IMPORTATION OF BUILT-IN
LOSSES.
(a) IN GENERAL.—Section 362 of the Internal Rev-
enue Code of 1986 (relating to basis to corporations) is
amended by adding at the end the following new sub-
section:
‘‘(e) LIMITATION
ON IMPORTATION
OF BUILT-IN
LOSSES.—
‘‘(1) IN GENERAL.—If in any transaction de-
scribed 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 described in para-
graph (2) which is acquired in such transaction shall
(notwithstanding subsections (a) and (b)) be its fair
market value immediately after such transaction.
‘‘(2) PROPERTY DESCRIBED.—For purposes of
paragraph (1), property is described in this para-
graph if—
‘‘(A) gain or loss with respect to such
property is not subject to tax under this subtitle
in the hands of the transferor immediately be-
fore the transfer, and
‘‘(B) 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 partnership,
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.
‘‘(3) IMPORTATION OF NET BUILT-IN LOSS.—
For purposes of paragraph (1), there is an importa-
tion of a net built-in loss in a transaction if the
transferee’s aggregate adjusted bases of property de-
scribed in paragraph (2) which is transferred in
such transaction would (but for this subsection) ex-
ceed the fair market value of such property imme-
diately after such transaction.’’
(b) COMPARABLE TREATMENT WHERE LIQUIDA-
TION.—Paragraph (1) of section 334(b) of such Code (re-
lating to liquidation 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 ad-
justed bases of property described in section
362(e)(2) which is distributed in such liquida-
tion would (but for this subparagraph) exceed
the fair market value of such property imme-
diately after such liquidation.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to transactions after the date of
the enactment of this Act.
SEC. 302. DISALLOWANCE OF PARTNERSHIP LOSS TRANS-
FERS.
(a) TREATMENT OF CONTRIBUTED PROPERTY WITH
BUILT-IN LOSS.—Paragraph (1) of section 704(c) of the
Internal Revenue Code of 1986 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 immediately after
the contribution.
For purposes of subparagraph (C), the term ‘built-
in loss’ means the excess of the adjusted basis of the
property over its fair market value immediately after
the 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 of such Code (relating to optional ad-
justment to basis of partnership property) is amend-
ed by inserting before the period ‘‘or unless the part-
nership has a substantial built-in loss immediately
after such transfer’’.
(2) ADJUSTMENT.—Subsection (b) of section
743 of such Code 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
of such Code is amended by adding at the end the
following new subsection:
‘‘(d) SUBSTANTIAL BUILT-IN LOSS.—For purposes
of this section, a partnership has a substantial built-in loss
with respect to a transfer of an interest in a partnership
if the transferee partner’s proportionate share of the ad-
justed basis of the partnership property exceeds 110 per-
cent of the basis of such partner’s interest in the partner-
ship.’’
(4) CLERICAL AMENDMENTS.—
(A) The section heading for section 743 of
such Code 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 of such
Code is amended 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 of such Code (relating to optional ad-
justment to basis of undistributed partnership prop-
erty) is amended by inserting before the period ‘‘or
unless there is a substantial basis reduction’’.
(2) ADJUSTMENT.—Subsection (b) of section
734 of such Code is amended by inserting ‘‘or unless
there is a substantial basis reduction’’ after ‘‘section
754 is in effect’’.
(3) SUBSTANTIAL BASIS REDUCTION.—Section
734 of such Code is amended by adding at the end
the following new subsection:
‘‘(d) SUBSTANTIAL BASIS REDUCTION.—For pur-
poses of this section, there is a substantial basis reduction
with respect to a distribution if the sum of the amounts
described in subparagraphs (A) and (B) of subsection
(b)(2) exceeds 10 percent of the aggregate adjusted basis
of partnership property immediately after the distribu-
tion.’’
(4) CLERICAL AMENDMENTS.—
(A) The section heading for section 734 of
such Code is amended to read as follows:
‘‘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 of such
Code is amended 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 (a) shall apply to transfers after the
date of the enactment of this Act.
(3) SUBSECTION (c).—The amendments made
by subsection (a) shall apply to distributions after
the date of the enactment of this Act.
Æ