179
scribed in this subparagraph if, for each year in 
the 10-year period ending on the date of loss of 
United States citizenship or termination of resi-
dency, the individual was physically present in 
the United States for 30 days or less. The rule 
of section 7701(b)(3)(D)(ii) shall apply for pur-
poses of this subparagraph.’’. 
(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.’’
180
(2) TRANSFERS OF CERTAIN STOCK.—Subsection 
(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 section 
877(b) applies for the taxable year which in-
cludes the date of the transfer—
‘‘(i) section 2511(a) shall be applied 
without regard to whether such stock is situ-
ated 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 DESCRIBED.—
A foreign corporation is described in this sub-
paragraph 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 corporation, 
and
181
‘‘(ii) such donor owned (within the 
meaning of section 958(a)), or is considered 
to have owned (by applying the ownership 
rules of section 958(b)), at the time of such 
transfer, more than 50 percent of—
‘‘(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 INDI-
VIDUALS LOSING UNITED STATES CITIZENSHIP.—
182
(1) IN
GENERAL.—Subsection (a) of section 
6039G is amended to read as follows: 
‘‘(a) IN GENERAL.—Notwithstanding any other provi-
sion of law, any individual to whom section 877(b) applies 
for any taxable year shall provide a statement for such tax-
able year which includes the information described in sub-
section (b).’’. 
(2) INFORMATION TO BE PROVIDED.—Subsection 
(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 individual 
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.’’.
183
(3) INCREASE IN PENALTY.—Subsection (d) of 
section 6039G is amended to read as follows: 
‘‘(d) PENALTY.—If—
‘‘(1) an individual is required to file a statement 
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 required 
to be filed or fails to include all the information re-
quired to be shown on the statement or includes incor-
rect 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 sub-
section (c) and (d), respectively. 
(f) EFFECTIVE DATE.—The amendments made by this 
section shall apply to individuals who expatriate after Feb-
ruary 27, 2003. 
SEC. 2006. REPORTING OF TAXABLE MERGERS AND ACQUI-
SITIONS. 
(a) IN GENERAL.—Subpart B of part III of subchapter 
A of chapter 61 is amended by inserting after section 6043 
the following new section:
186
uary 31 of the year following the calendar year during 
which the taxable acquisition occurred.’’
(b) ASSESSABLE PENALTIES.—
(1) Subparagraph (B) of section 6724(d)(1) (re-
lating to definitions) is amended by redesignating 
clauses (ii) through (xviii) as clauses (iii) through 
(xix), respectively, and by inserting after clause (i) 
the following new clause: 
‘‘(ii) section 6043A(a) (relating to re-
turns relating to taxable mergers and acqui-
sitions),’’. 
(2) Paragraph (2) of section 6724(d) is amended 
by redesignating subparagraphs (F) through (BB) as 
subparagraphs (G) through (CC), respectively, 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.’’.
187
(d) EFFECTIVE DATE.—The amendments made by this 
section shall apply to acquisitions after the date of the en-
actment of this Act. 
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 pricing rules 
and compliance efforts in ensuring that cross-border trans-
fers and other related-party transactions, particularly 
transactions involving intangible assets, service contracts, 
or leases cannot be used improperly to shift income out of 
the United States. The study shall include a review of the 
contemporaneous documentation and penalty rules under 
section 6662 of the Internal Revenue Code of 1986, a review 
of the regulatory and administrative guidance imple-
menting the principles of section 482 of such Code to trans-
actions involving intangible property and services and to 
cost-sharing arrangements, and an examination 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 Secretary 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
188
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 
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 June 30, 2004, such Secretary 
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 expa-
triation. 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 Secretary or dele-
gate shall submit to the Congress a report of such study.
189
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 inserting 
after section 6707 the following new section: 
‘‘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 information with 
respect to a reportable transaction which is required under 
section 6011 to be included with such return or statement 
shall pay a penalty in the amount determined under sub-
section (b). 
‘‘(b) AMOUNT OF PENALTY.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the amount of the penalty under subsection 
(a) shall be—
‘‘(A) $10,000 in the case of a natural per-
son, and 
‘‘(B) $50,000 in any other case.
190
‘‘(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 per-
son, and 
‘‘(B) $200,000 in any other case. 
‘‘(c) DEFINITIONS.—For purposes of this section—
‘‘(1) REPORTABLE TRANSACTION.—The term ‘re-
portable transaction’ means any transaction with re-
spect to which information is required to be included 
with a return or statement because, as determined 
under regulations prescribed under section 6011, such 
transaction is of a type which the Secretary deter-
mines as having a potential for tax avoidance or eva-
sion. 
‘‘(2) LISTED
TRANSACTION.—The term ‘listed 
transaction’ means a reportable transaction which is 
the same as, or substantially similar to, a transaction 
specifically identified by the Secretary as a tax avoid-
ance transaction for purposes of section 6011. 
‘‘(d) AUTHORITY TO RESCIND PENALTY.—
‘‘(1) IN GENERAL.—The Commissioner of Inter-
nal Revenue may rescind all or any portion of any 
penalty imposed by this section with respect to any 
violation if—
192
inserting after the item relating to section 6707 the fol-
lowing:
‘‘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. 
(d) REPORT.—The Commissioner of Internal Revenue 
shall annually report to the Committee on Ways and Means 
of the House of Representatives and the Committee on Fi-
nance 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:
193
‘‘SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PENALTY 
ON UNDERSTATEMENTS WITH RESPECT TO 
REPORTABLE TRANSACTIONS. 
‘‘(a) IMPOSITION OF PENALTY.—If a taxpayer has a 
reportable transaction understatement for any taxable year, 
there shall be added to the tax an amount equal to 20 per-
cent of the amount of such understatement. 
‘‘(b) 
REPORTABLE
TRANSACTION
UNDERSTATE-
MENT.—For purposes of this section—
‘‘(1) IN GENERAL.—The term ‘reportable trans-
action understatement’ means the sum of—
‘‘(A) the product of—
‘‘(i) the amount of the increase (if any) 
in taxable income which results from a dif-
ference between the proper tax treatment of 
an item to which this section applies and 
the taxpayer’s treatment of such item (as 
shown on the taxpayer’s return of tax), and 
‘‘(ii) the highest rate of tax imposed by 
section 1 (section 11 in the case of a tax-
payer which is a corporation), and 
‘‘(B) the amount of the decrease (if any) in 
the aggregate amount of credits determined 
under subtitle A which results from a difference 
between the taxpayer’s treatment of an item to 
which this section applies (as shown on the tax-
194
payer’s return of tax) and the proper tax treat-
ment of such item. 
For purposes of subparagraph (A), any reduction of 
the excess of deductions allowed for the taxable year 
over gross income for such year, and any reduction 
in the amount of capital losses which would (without 
regard to section 1211) be allowed for such year, shall 
be treated as an increase in taxable income. 
‘‘(2) ITEMS TO WHICH SECTION APPLIES.—This 
section shall apply to any item which is attributable 
to—
‘‘(A) any listed transaction, and 
‘‘(B) any reportable transaction (other than 
a listed transaction) if a significant purpose of 
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 ‘re-
portable transaction’ and ‘listed transaction’ have the re-
spective meanings given to such terms by section 6707A(c).
195
‘‘(e) SPECIAL RULES.—
‘‘(1) COORDINATION WITH PENALTIES, ETC., ON 
OTHER UNDERSTATEMENTS.—In the case of an under-
statement (as defined in section 6662(d)(2))—
‘‘(A) the amount of such understatement 
(determined without regard to this paragraph) 
shall be increased by the aggregate amount of re-
portable transaction understatements for pur-
poses of determining whether such understate-
ment is a substantial understatement under sec-
tion 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 PENALTIES.—
‘‘(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-
196
ment on which a penalty is imposed under sec-
tion 6663. 
‘‘(3) SPECIAL RULE FOR AMENDED RETURNS.—
Except as provided in regulations, in no event shall 
any tax treatment included with an amendment or 
supplement to a return of tax be taken into account 
in determining the amount of any reportable trans-
action understatement if the amendment or supple-
ment is filed after the earlier of the date the taxpayer 
is first contacted by the Secretary regarding the ex-
amination of the return or such other date as is speci-
fied 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 sentence: 
‘‘The excess under the preceding sentence shall be 
determined without regard to items to which sec-
tion 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.— 
‘‘(1) IN GENERAL.—No penalty shall be imposed 
under section 6662A with respect to any portion of a
197
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)—
‘‘(A) IN
GENERAL.—A taxpayer shall be 
treated as having a reasonable belief with respect
198
to the tax treatment of an item only if such be-
lief—
‘‘(i) is based on the facts and law that 
exist at the time the return of tax which in-
cludes such tax treatment is filed, and 
‘‘(ii) relates solely to the taxpayer’s 
chances of success on the merits of such 
treatment and does not take into account 
the possibility that a return will not be au-
dited, such treatment will not be raised on 
audit, or such treatment will be resolved 
through settlement if it is raised. 
‘‘(B) CERTAIN OPINIONS MAY NOT BE RE-
LIED UPON.—
‘‘(i) IN
GENERAL.—An opinion of a 
tax advisor may not be relied upon to estab-
lish the reasonable belief of a taxpayer if—
‘‘(I) the tax advisor is described 
in clause (ii), or 
‘‘(II) the opinion is described in 
clause (iii). 
‘‘(ii) DISQUALIFIED TAX ADVISORS.—A 
tax advisor is described in this clause if the 
tax advisor—
199
‘‘(I) is a material advisor (within 
the meaning of section 6111(b)(1)) and 
participates in the organization, man-
agement, 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 con-
tingent on all or part of the intended 
tax benefits from the transaction being 
sustained, or 
‘‘(IV) as determined under regula-
tions prescribed by the Secretary, has a 
disqualifying financial interest with 
respect to the transaction.
‘‘(iii) DISQUALIFIED
OPINIONS.—For 
purposes of clause (i), an opinion is dis-
qualified if the opinion—
200
‘‘(I) is based on unreasonable fac-
tual or legal assumptions (including 
assumptions as to future events), 
‘‘(II) unreasonably relies on rep-
resentations, statements, findings, or 
agreements of the taxpayer or any 
other person, 
‘‘(III) does not identify and con-
sider all relevant facts, or 
‘‘(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 section 
6664 is amended by inserting ‘‘FOR UNDERPAY-
MENTS’’ 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-
lating to substantial understatement of income tax) is 
amended to read as follows:
201
‘‘(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 entity, 
‘‘(II) any investment plan or ar-
rangement, or 
‘‘(III) any other plan or arrange-
ment, 
if a significant purpose of such partnership, 
entity, plan, or arrangement is the avoid-
ance 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)’’. 
(2) The heading for section 6662 is amended to 
read as follows:
202
‘‘SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY 
ON UNDERPAYMENTS.’’
(3) The table of sections for part II of subchapter 
A of chapter 68 is amended by striking the item relat-
ing to section 6662 and inserting the following new 
items:
‘‘Sec. 6662. Imposition of accuracy-related penalty on underpay-
ments. 
‘‘Sec. 6662A. Imposition of accuracy-related penalty on understate-
ments with respect to reportable transactions.’’
(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 section 
not to apply to communications regarding corporate tax 
shelters) is amended to read as follows: 
‘‘(b) SECTION NOT TO APPLY TO COMMUNICATIONS 
REGARDING TAX SHELTERS.—The privilege under sub-
section (a) shall not apply to any written communication 
which is—
‘‘(1) between a federally authorized tax practi-
tioner and—
‘‘(A) any person,
203
‘‘(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 excep-
tions) 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 assessment of 
any tax imposed by this title with respect to such 
transaction shall not expire before the date which is 
1 year after the earlier of—
204
‘‘(A) the date on which the Secretary is fur-
nished 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 taxpayer.’’
(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 
the date of the enactment of this Act. 
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,
‘‘(2) information describing any potential tax 
benefits expected to result from the transaction, and 
‘‘(3) such other information as the Secretary 
may prescribe.
205
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 ad-
visor’ 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 advice 
or assistance. 
‘‘(B) THRESHOLD AMOUNT.—For purposes 
of subparagraph (A), the threshold amount is—
‘‘(i) $50,000 in the case of a reportable 
transaction substantially all of the tax bene-
fits from which are provided to natural per-
sons, and 
‘‘(ii) $250,000 in any other case.
206
‘‘(2) REPORTABLE TRANSACTION.—The term ‘re-
portable transaction’ has the meaning given to such 
term by section 6707A(c). 
‘‘(c) REGULATIONS.—The Secretary may prescribe reg-
ulations which provide—
‘‘(1) that only 1 person shall be required to meet 
the requirements of subsection (a) in cases in which 
2 or more persons would otherwise be required to meet 
such requirements, 
‘‘(2) exemptions from the requirements of this 
section, and 
‘‘(3) such rules as may be necessary or appro-
priate to carry out the purposes of this section.’’
(b) CONFORMING AMENDMENTS.—
(1) The item relating to section 6111 in the table 
of sections for subchapter B of chapter 61 is amended 
to read as follows:
‘‘Sec. 6111. Disclosure of reportable transactions.’’
(2) So much of section 6112 as precedes sub-
section (c) thereof is amended to read as follows: 
‘‘SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANS-
ACTIONS MUST KEEP LISTS OF ADVISEES, 
ETC. 
‘‘(a) IN GENERAL.—Each material advisor (as defined 
in section 6111) with respect to any reportable transaction 
(as defined in section 6707A(c)) shall (whether or not re-
207
quired to file a return under section 6111 with respect to 
such transaction) maintain (in such manner as the Sec-
retary 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 ‘‘request’’ 
in subsection (b)(1) (as so redesignated), 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:
‘‘Sec. 6112. Material advisors of reportable transactions must keep 
lists of advisees, etc.’’
(5)(A) The heading for section 6708 is amended 
to read as follows:
208
‘‘SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES 
WITH 
RESPECT 
TO 
REPORTABLE 
TRANS-
ACTIONS.’’
(B) The item relating to section 6708 in the 
table of sections for part I of subchapter B of chapter 
68 is amended to read as follows:
‘‘Sec. 6708. Failure to maintain lists of advisees with respect to re-
portable transactions.’’
(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 per-
son 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 material 
aid, assistance, or advice referred to in section 
6111(b)(1)(A)(i) of the Internal Revenue Code of 1986 
(as added by this section) is provided after the date 
of the enactment of this Act. 
(2) NO CLAIM OF CONFIDENTIALITY AGAINST DIS-
CLOSURE.—The amendment made by subsection (c) 
shall take effect as if included in the amendments
209
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 report-
able transaction—
‘‘(1) fails to file such return on or before the date 
prescribed therefor, or 
‘‘(2) files false or incomplete information with 
the Secretary with respect to such transaction, 
such person shall pay a penalty with respect to such return 
in the amount determined under subsection (b). 
‘‘(b) AMOUNT OF PENALTY.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the penalty imposed under subsection (a) 
with respect to any failure shall be $50,000.
‘‘(2) LISTED TRANSACTIONS.—The penalty im-
posed under subsection (a) with respect to any listed
210
transaction shall be an amount equal to the greater 
of—
‘‘(A) $200,000, or 
‘‘(B) 50 percent of the gross income derived 
by such person with respect to aid, assistance, or 
advice which is provided with respect to the list-
ed transaction before the date the return is filed 
under section 6111. 
Subparagraph (B) shall be applied by substituting 
‘75 percent’ for ‘50 percent’ in the case of an inten-
tional failure or act described in subsection (a). 
‘‘(c) RESCISSION AUTHORITY.—The provisions of sec-
tion 6707A(d) (relating to authority of Commissioner to re-
scind penalty) shall apply to any penalty imposed under 
this section. 
‘‘(d) REPORTABLE AND LISTED TRANSACTIONS.—For 
purposes of this section, the terms ‘reportable transaction’ 
and ‘listed transaction’ have the respective meanings given 
to such terms by section 6707A(c).’’
(b) CLERICAL AMENDMENT.—The item relating to sec-
tion 6707 in the table of sections for part I of subchapter 
B of chapter 68 is amended by striking ‘‘tax shelters’’ and 
inserting ‘‘reportable transactions’’.
211
(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 request, 
such person shall pay a penalty of $10,000 for each 
day of such failure after such 20th day. 
‘‘(2) REASONABLE CAUSE EXCEPTION.—No pen-
alty shall be imposed by paragraph (1) with respect 
to the failure on any day if such failure is due to rea-
sonable cause.’’. 
(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
212
the following new sentence: ‘‘Notwithstanding the first sen-
tence, if an activity with respect to which a penalty im-
posed under this subsection involves a statement described 
in paragraph (2)(A), the amount of the penalty shall be 
equal to 50 percent of the gross income derived (or to be 
derived) from such activity by the person on which the pen-
alty is imposed.’’
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to activities after the date of the enact-
ment of this Act. 
SEC. 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: 
‘‘(B) SPECIAL RULE FOR CORPORATIONS.—
In the case of a corporation other than an S cor-
poration or a personal holding company (as de-
fined in section 542), there is a substantial un-
derstatement of income tax for any taxable year 
if the amount of the understatement for the tax-
able year exceeds the lesser of—
213
‘‘(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 amended 
by redesignating subsection (c) as subsection (d) and by 
striking subsections (a) and (b) and inserting the following 
new subsections: 
‘‘(a) AUTHORITY TO SEEK INJUNCTION.—A civil ac-
tion in the name of the United States to enjoin any person 
from further engaging in specified conduct may be com-
menced at the request of the Secretary. Any action under 
this section shall be brought in the district court of the 
United States for the district in which such person resides, 
has his principal place of business, or has engaged in speci-
fied conduct. The court may exercise its jurisdiction over 
such action (as provided in section 7402(a)) separate and
214
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 specified 
conduct, and 
‘‘(2) that injunctive relief is appropriate to pre-
vent recurrence of such conduct, 
the court may enjoin such person from engaging in such 
conduct or in any other activity subject to penalty under 
this title. 
‘‘(c) SPECIFIED CONDUCT.—For purposes of this sec-
tion, the term ‘specified conduct’ means any action, or fail-
ure to take action, subject to penalty under section 6700, 
6701, 6707, or 6708.’’
(b) CONFORMING AMENDMENTS.—
(1) The heading for section 7408 is amended to 
read as follows:
‘‘SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RE-
LATED TO TAX SHELTERS AND REPORTABLE 
TRANSACTIONS.’’
(2) The table of sections for subchapter A of 
chapter 76 is amended by striking the item relating 
to section 7408 and inserting the following new item:
‘‘Sec. 7408. Actions to enjoin specified conduct related to tax shelters and re-
portable transactions.’’
215
(c) EFFECTIVE DATE.—The amendment made by this 
section shall take effect on the day after the date of the en-
actment of this Act. 
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 TRANSACTION 
VIOLATION.—
‘‘(A) PENALTY
AUTHORIZED.—The Sec-
retary of the Treasury may impose a civil money 
penalty on any person who violates, or causes 
any violation of, any provision of section 5314. 
‘‘(B) AMOUNT OF PENALTY.—
‘‘(i) IN GENERAL.—Except as provided 
in subparagraph (C), the amount of any 
civil penalty imposed under subparagraph 
(A) shall not exceed $5,000. 
‘‘(ii) 
REASONABLE
CAUSE
EXCEP-
TION.—No penalty shall be imposed under 
subparagraph (A) with respect to any viola-
tion if—
‘‘(I) such violation was due to 
reasonable cause, and
216
‘‘(II) the amount of the trans-
action or the balance in the account at 
the time of the transaction was prop-
erly reported. 
‘‘(C) WILLFUL VIOLATIONS.—In the case of 
any person willfully violating, or willfully caus-
ing any violation of, any provision of section 
5314—
‘‘(i) the maximum penalty under sub-
paragraph (B)(i) shall be increased to the 
greater of—
‘‘(I) $25,000, or 
‘‘(II) the amount (not exceeding 
$100,000) determined under subpara-
graph (D), and 
‘‘(ii) subparagraph (B)(ii) shall not 
apply. 
‘‘(D) AMOUNT.—The amount determined 
under this subparagraph is—
‘‘(i) in the case of a violation involving 
a transaction, the amount of the trans-
action, or 
‘‘(ii) in the case of a violation involv-
ing a failure to report the existence of an 
account or any identifying information re-
217
quired to be provided with respect to an ac-
count, 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 
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 de-
rived) from the conduct giving rise to the penalty. Any such 
penalty imposed on an individual may be in addition to,
218
or in lieu of, any suspension, disbarment, or censure of such 
individual.’’
(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 following 
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.’’
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 treat-
ment of stripped bonds) is amended by redesignating sub-
section (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
219
consist of bonds, preferred stock, or a combination thereof, 
the Secretary may by regulations provide that rules similar 
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 para-
graph: 
‘‘(7) CROSS REFERENCE.—
‘‘For treatment of stripped interests in certain ac-
counts or entities holding preferred stock, see section 
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.
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 redesig-
nating 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
220
(as defined in subsection (k)) on any item of income 
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 receive pay-
ment 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 pay-
ments with respect to positions in substantially 
similar or related property. 
This paragraph shall not apply to any dividend to 
which subsection (k) applies. 
‘‘(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 sub-
paragraph (A), the term ‘qualified tax’ means a 
tax paid to a foreign country (other than the for-
221
eign country referred to in subparagraph (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 subpara-
graph (A), and 
‘‘(ii) such country allows a credit 
against its net basis tax for the full amount 
of the tax paid to such other foreign coun-
try. 
‘‘(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 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 appropriate 
to carry out this paragraph, including regula-
tions to prevent the abuse of the exception pro-
222
vided by this paragraph and to treat other taxes 
as qualified taxes. 
‘‘(3) EXCEPTIONS.—The Secretary may by regu-
lation provide that paragraph (1) shall not apply to 
property where the Secretary determines that the ap-
plication of paragraph (1) to such property is not 
necessary to carry out the purposes of this subsection. 
‘‘(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 subsection. 
‘‘(5) DETERMINATION
OF
HOLDING
PERIOD.—
Holding periods shall be determined for purposes of 
this subsection without regard to section 1235 or any 
similar rule.’’
(b) CONFORMING AMENDMENT.—The heading of sub-
section (k) of section 901 is amended by inserting ‘‘ON DIVI-
DENDS’’ 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. 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),
223
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 con-
tributed property in the hands of the part-
nership shall be treated as being equal to its 
fair market value at the time of contribu-
tion. 
For purposes of subparagraph (C), the term ‘built-in 
loss’ means the excess of the adjusted basis of the 
property (determined without regard to subparagraph 
(C)(ii)) over its fair market value at the time of con-
tribution.’’
(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
224
of partnership property) is amended by inserting be-
fore the period ‘‘or unless the partnership has a sub-
stantial 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 section, 
a partnership has a substantial built-in loss with re-
spect to a transfer of an interest in a partnership if 
the partnership’s adjusted basis in the partnership 
property exceeds by more than $250,000 the fair mar-
ket 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.—
225
(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 SUB-
STANTIAL BUILT-IN LOSS.’’
(B) The table of sections for subpart C of 
part II of subchapter K of chapter 1 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 PART-
NERSHIP PROPERTY IF THERE IS SUBSTANTIAL BASIS RE-
DUCTION.—
(1) ADJUSTMENT REQUIRED.—Subsection (a) of 
section 734 (relating to optional adjustment to basis 
of undistributed partnership property) is amended by 
inserting before the period ‘‘or unless there is a sub-
stantial basis reduction’’. 
(2) ADJUSTMENT.—Subsection (b) of section 734 
is amended by inserting ‘‘or unless there is a substan-
tial 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.—
226
‘‘(1) IN GENERAL.—For purposes 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) ex-
ceeds $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: 
‘‘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 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.
227
(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. 3024. NO REDUCTION OF BASIS UNDER SECTION 734 IN 
STOCK 
HELD 
BY 
PARTNERSHIP 
IN 
COR-
PORATE PARTNER. 
(a) IN GENERAL.—Section 755 is amended by adding 
at the end the following new subsection: 
‘‘(c) NO ALLOCATION OF BASIS DECREASE TO STOCK 
OF CORPORATE PARTNER.—In making an allocation under 
subsection (a) of any decrease in the adjusted basis of part-
nership property under section 734(b)—
‘‘(1) no allocation may be made to stock in a 
corporation (or any person related (within the mean-
ing of sections 267(b) and 707(b)(1)) to such corpora-
tion) which is a partner in the partnership, and 
‘‘(2) any amount not allocable to stock by reason 
of paragraph (1) shall be allocated under subsection 
(a) to other partnership property. 
Gain shall be recognized to the partnership to the extent 
that the amount required to be allocated under paragraph 
(2) to other partnership property exceeds the aggregate ad-