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‘‘(II) the taxpayer has a substan-
tial nontax purpose for entering into
such transaction and the transaction is
a reasonable means of accomplishing
such purpose.
In applying subclause (II), a purpose of
achieving a financial accounting benefit
shall not be taken into account in deter-
mining whether a transaction has a sub-
stantial nontax purpose if the origin of such
financial accounting benefit is a reduction
of income tax.
‘‘(ii) SPECIAL RULE WHERE TAXPAYER
RELIES ON PROFIT POTENTIAL.—A trans-
action shall not be treated as having eco-
nomic substance by reason of having a po-
tential 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 expected
net tax benefits that would be allowed
if the transaction were respected, and
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‘‘(II) the reasonably expected pre-
tax profit from the transaction exceeds
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 deductions
to be claimed with respect to the transaction is
substantially in excess of the present value of the
anticipated economic returns of the person lend-
ing the money or providing the financial capital.
A public offering shall be treated as a borrowing,
or an acquisition of financial capital, from a
tax-indifferent party if it is reasonably expected
that at least 50 percent of the offering will be
placed with tax-indifferent parties.
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‘‘(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 overstating
the income or gain of the tax-indifferent
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 enti-
ty not subject to tax imposed by subtitle A. A
person shall be treated as a tax-indifferent party
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with respect to a transaction if the items taken
into account with respect to the transaction have
no substantial impact on such person’s liability
under subtitle A.
‘‘(C) EXCEPTION
FOR
PERSONAL
TRANS-
ACTIONS OF INDIVIDUALS.—In the case of an in-
dividual, 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 paragraph (1)(B)(ii) to the lessor of tangible
property subject to a lease—
‘‘(i) the expected net tax benefits with
respect to the leased property shall not in-
clude the benefits of—
‘‘(I) depreciation,
‘‘(II) any tax credit, or
‘‘(III) any other deduction as pro-
vided in guidance by the Secretary,
and
‘‘(ii) subclause (II) of paragraph
(1)(B)(ii) shall be disregarded in deter-
mining whether any of such benefits are al-
lowable.
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‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF-
FECTED.—Except as specifically provided in this sub-
section, the provisions of this subsection shall not be
construed as altering or supplanting any other rule of
law, and the requirements of this subsection shall be
construed as being in addition to any such other rule
of law.
‘‘(5) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or appro-
priate to carry out the purposes of this subsection.
Such regulations may include exemptions from the
application of this subsection.’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to transactions entered into after the
date of the enactment of this Act.
SEC. 
412. 
PENALTY 
FOR 
UNDERSTATEMENTS 
ATTRIB-
UTABLE TO TRANSACTIONS LACKING ECO-
NOMIC SUBSTANCE, ETC.
(a) IN GENERAL.—Subchapter A of chapter 68 is
amended by inserting after section 6662A the following new
section:
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‘‘SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIB-
UTABLE TO TRANSACTIONS LACKING ECO-
NOMIC SUBSTANCE, ETC.
‘‘(a) IMPOSITION OF PENALTY.—If a taxpayer has an
noneconomic substance transaction understatement for any
taxable year, there shall be added to the tax an amount
equal to 40 percent of the amount of such understatement.
‘‘(b) REDUCTION OF PENALTY FOR DISCLOSED TRANS-
ACTIONS.—Subsection (a) shall be applied by substituting
‘20 percent’ for ‘40 percent’ with respect to the portion of
any noneconomic substance transaction understatement
with respect to which the relevant facts affecting the tax
treatment of the item are adequately disclosed in the return
or a statement attached to the return.
‘‘(c) NONECONOMIC SUBSTANCE TRANSACTION UNDER-
STATEMENT.—For purposes of this section—
‘‘(1) IN GENERAL.—The term ‘noneconomic sub-
stance 
transaction 
understatement’ 
means 
any
amount which would be an understatement under sec-
tion 6662A(b)(1) if section 6662A were applied by
taking into account items attributable to noneconomic
substance transactions rather than items to which sec-
tion 6662A would apply without regard to this para-
graph.