to such investigation, examination or pro-
ceeding.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to disclosures and to information 
and document requests made after the date of the enact-
ment of this Act. 
SEC. 307. DISCLOSURE OF INFORMATION TO CONGRESS. 
(a) DISCLOSURE BY TAX RETURN PREPARER.— 
(1) IN GENERAL.—Subparagraph (B) of section 
7216(b)(1) (relating to disclosures) is amended to 
read as follows: 
‘‘(B) pursuant to any 1 of the following 
documents, if clearly identified: 
‘‘(i) The order of any Federal, State, 
or local court of record. 
‘‘(ii) A subpoena issued by a Federal 
or State grand jury. 
‘‘(iii) An administrative order, sum-
mons, or subpoena which is issued in the 
performance of its duties by— 
‘‘(I) any Federal agency, includ-
ing Congress or any committee or 
subcommittee thereof, or 
‘‘(II) any State agency, body, or 
commission charged under the laws of 
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the State or a political subdivision of 
the State with the licensing, registra-
tion, or regulation of tax return pre-
parers.’’. 
(2) EFFECTIVE DATE.—The amendment made 
by this subsection shall apply to disclosures made 
after the date of the enactment of this Act pursuant 
to any document in effect on or after such date. 
(b) DISCLOSURE BY SECRETARY.—Paragraph (2) of 
section 6104(a) (relating to inspection of applications for 
tax exemption or notice of status) is amended to read as 
follows: 
‘‘(2) INSPECTION BY CONGRESS.— 
‘‘(A) IN
GENERAL.—Upon receipt of a 
written request from a committee or sub-
committee of Congress, copies of documents re-
lated to a determination by the Secretary to 
grant, deny, revoke, or restore an organization’s 
exemption from taxation under section 501 
shall be provided to such committee or sub-
committee, including any application, notice of 
status, or supporting information provided by 
such organization to the Internal Revenue Serv-
ice; any letter, analysis, or other document pro-
duced by or for the Internal Revenue Service 
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evaluating, determining, explaining, or relating 
to the tax exempt status of such organization 
(other than returns, unless such returns are 
available to the public under this section or sec-
tion 6103 or 6110); and any communication be-
tween the Internal Revenue Service and any 
other party relating to the tax exempt status of 
such organization. 
‘‘(B) ADDITIONAL INFORMATION.—Section 
6103(f) shall apply with respect to— 
‘‘(i) the application for exemption of 
any organization described in subsection 
(c) or (d) of section 501 which is exempt 
from taxation under section 501(a) for any 
taxable year and any application referred 
to in subparagraph (B) of subsection 
(a)(1) of this section, and 
‘‘(ii) any other papers which are in 
the possession of the Secretary and which 
relate to such application, 
as if such papers constituted returns.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to disclosures and to information 
and document requests made after the date of the enact-
ment of this Act. 
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SEC. 308. TAX OPINION STANDARDS FOR TAX PRACTI-
TIONERS. 
Section 330(d) of title 31, United States Code, is 
amended to read as follows: 
‘‘(d) The Secretary of the Treasury shall impose 
standards applicable to the rendering of written advice 
with respect to any listed transaction or any entity, plan, 
arrangement, or other transaction which has a potential 
for tax avoidance or evasion. Such standards shall ad-
dress, but not be limited to, the following issues: 
‘‘(1) Independence of the practitioner issuing 
such written advice from persons promoting, mar-
keting, or recommending the subject of the advice. 
‘‘(2) Collaboration among practitioners, or be-
tween a practitioner and other party, which could re-
sult in such collaborating parties having a joint fi-
nancial interest in the subject of the advice. 
‘‘(3) Avoidance of conflicts of interest which 
would impair auditor independence. 
‘‘(4) For written advice issued by a firm, stand-
ards for reviewing the advice and ensuring the con-
sensus support of the firm for positions taken. 
‘‘(5) Reliance on reasonable factual representa-
tions by the taxpayer and other parties. 
‘‘(6) Appropriateness of the fees charged by the 
practitioner for the written advice. 
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‘‘(7) Preventing practitioners and firms from 
aiding or abetting the understatement of tax liability 
by clients. 
‘‘(8) Banning the promotion of potentially abu-
sive or illegal tax shelters.’’. 
SEC. 309. DENIAL OF DEDUCTION FOR CERTAIN FINES, 
PENALTIES, AND OTHER AMOUNTS. 
(a) IN GENERAL.—Subsection (f) of section 162 (re-
lating to trade or business expenses) is amended to read 
as follows: 
‘‘(f) FINES, PENALTIES, AND OTHER AMOUNTS.— 
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), no deduction otherwise allowable shall be 
allowed under this chapter for any amount paid or 
incurred (whether by suit, agreement, or otherwise) 
to, or at the direction of, a government or entity de-
scribed in paragraph (4) in relation to the violation 
of any law or the investigation or inquiry by such 
government or entity into the potential violation of 
any law. 
‘‘(2) EXCEPTION FOR AMOUNTS CONSTITUTING 
RESTITUTION.—Paragraph (1) shall not apply to 
any amount which— 
‘‘(A) the taxpayer establishes constitutes 
restitution (including remediation of property) 
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for damage or harm caused by or which may be 
caused by the violation of any law or the poten-
tial violation of any law, and 
‘‘(B) is identified as restitution in the 
court order or settlement agreement. 
Identification pursuant to subparagraph (B) alone 
shall not satisfy the requirement under subpara-
graph (A). This paragraph shall not apply to any 
amount paid or incurred as reimbursement to the 
government or entity for the costs of any investiga-
tion or litigation. 
‘‘(3) EXCEPTION FOR AMOUNTS PAID OR IN-
CURRED AS THE RESULT OF CERTAIN COURT OR-
DERS.—Paragraph (1) shall not apply to any 
amount paid or incurred by order of a court in a 
suit in which no government or entity described in 
paragraph (4) is a party. 
‘‘(4) 
CERTAIN
NONGOVERNMENTAL
REGU-
LATORY ENTITIES.—An entity is described in this 
paragraph if it is— 
‘‘(A) a nongovernmental entity which exer-
cises self-regulatory powers (including imposing 
sanctions) in connection with a qualified board 
or exchange (as defined in section 1256(g)(7)), 
or 
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‘‘(B) to the extent provided in regulations, 
a nongovernmental entity which exercises self- 
regulatory powers (including imposing sanc-
tions) as part of performing an essential gov-
ernmental function. 
‘‘(5) EXCEPTION FOR TAXES DUE.—Paragraph 
(1) shall not apply to any amount paid or incurred 
as taxes due.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to amounts paid or incurred on 
or after the date of the enactment of this Act, except that 
such amendment shall not apply to amounts paid or in-
curred under any binding order or agreement entered into 
before such date. Such exception shall not apply to an 
order or agreement requiring court approval unless the ap-
proval was obtained before such date. 
TITLE IV—REQUIRING 
ECONOMIC SUBSTANCE 
SEC. 401. CLARIFICATION OF ECONOMIC SUBSTANCE DOC-
TRINE. 
(a) IN GENERAL.—Section 7701, as amended by sec-
tion 103, is amended by redesignating subsection (p) as 
subsection (q) and by inserting after subsection (o) the 
following new subsection: 
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‘‘(p) CLARIFICATION
OF
ECONOMIC
SUBSTANCE 
DOCTRINE; ETC.— 
‘‘(1) GENERAL RULES.— 
‘‘(A) IN GENERAL.—In any case in which 
a court determines that the economic substance 
doctrine is relevant for purposes of this title to 
a transaction (or series of transactions), such 
transaction (or series of transactions) shall have 
economic substance only if the requirements of 
this paragraph are met. 
‘‘(B) DEFINITION
OF
ECONOMIC
SUB-
STANCE.—For purposes of subparagraph (A)— 
‘‘(i) IN GENERAL.—A transaction has 
economic substance only if— 
‘‘(I) the transaction changes in a 
meaningful way (apart from Federal 
tax effects) the taxpayer’s economic 
position, and 
‘‘(II) subject to clause (iii), the 
taxpayer has a substantial purpose 
(other than a Federal tax purpose) for 
entering into such transaction. 
‘‘(ii) SPECIAL
RULE
WHERE
TAX-
PAYER RELIES ON PROFIT POTENTIAL.—A 
transaction shall not be treated as having 
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economic substance solely by reason of 
having a potential for profit unless the 
present value of the reasonably expected 
pre-Federal tax profit from the transaction 
is substantial in relation to the present 
value of the expected net Federal tax bene-
fits that would be allowed if the trans-
action were respected. In determining pre- 
Federal tax profit, there shall be taken 
into account fees and other transaction ex-
penses and to the extent provided by the 
Secretary, foreign taxes. 
‘‘(iii) SPECIAL
RULES
FOR
DETER-
MINING
WHETHER
NON-FEDERAL
TAX 
PURPOSE.—For 
purposes 
of 
clause 
(i)(II)— 
‘‘(I) a purpose of achieving a fi-
nancial accounting benefit shall not be 
taken into account in determining 
whether a transaction has a substan-
tial purpose (other than a Federal tax 
purpose) if the origin of such financial 
accounting benefit is a reduction of 
Federal tax, and 
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‘‘(II) the taxpayer shall not be 
treated as having a substantial pur-
pose (other than a Federal tax pur-
pose) with respect to a transaction if 
the only such purpose is the reduction 
of non-Federal taxes and the trans-
action will result in a reduction of 
Federal taxes substantially equal to, 
or greater than, the reduction in non- 
Federal taxes because of similarities 
between the laws imposing the taxes. 
‘‘(2) 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) 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 
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trade or business or an activity engaged in for 
the production of income. 
‘‘(3) OTHER PROVISIONS NOT AFFECTED.—Ex-
cept as specifically provided in this subsection, the 
provisions of this subsection shall not be construed 
as altering or supplanting any other rule of law or 
provision of this title, and the requirements of this 
subsection shall be construed as being in addition to 
any such other rule of law or provision of this title. 
‘‘(4) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section. Such regulations may include exemptions 
from the application of this subsection.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions entered into after 
the date of the enactment of this Act. 
SEC. 402. 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 30 percent of the amount of such under-
statement. 
‘‘(b) REDUCTION
OF PENALTY
FOR DISCLOSED 
TRANSACTIONS.—Subsection (a) shall be applied by sub-
stituting ‘20 percent’ for ‘30 percent’ with respect to the 
portion of any noneconomic substance transaction under-
statement with respect to which the relevant facts affect-
ing the tax treatment of the item are adequately disclosed 
in the return or a statement attached to the return. 
‘‘(c) NONECONOMIC SUBSTANCE TRANSACTION UN-
DERSTATEMENT.—For purposes of this section— 
‘‘(1) IN
GENERAL.—The term ‘noneconomic 
substance transaction understatement’ means any 
amount which would be an understatement under 
section 6662A(b)(1) if section 6662A were applied 
by taking into account items attributable to non-
economic substance transactions rather than items 
to which section 6662A would apply without regard 
to this paragraph. 
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‘‘(ii) an opportunity to provide to the 
Commissioner (or the Chief Counsel’s dele-
gate under paragraph (1)) a written re-
sponse to the proposed penalty within a 
reasonable period of time after such notice. 
‘‘(B) COMPROMISE OF PENALTY.—A com-
promise shall not result in a reduction in the 
penalty imposed by this section in an amount 
greater than the amount which bears the same 
ratio to the amount of the penalty determined 
without regard to the compromise as— 
‘‘(i) the reduction under the com-
promise in the noneconomic substance 
transaction understatement to which the 
penalty relates, bears to 
‘‘(ii) the amount of the noneconomic 
substance transaction understatement de-
termined without regard to the com-
promise. 
‘‘(3) RULES
RELATING
TO
RELEVANCY
RE-
QUIREMENT.— 
‘‘(A) DETERMINATION OF RELEVANCE BY 
CHIEF COUNSEL.—The Chief Counsel for the 
Internal Revenue Service (or the Chief Coun-
sel’s delegate under paragraph (1)) may assert, 
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compromise, or collect a penalty imposed by 
this section with respect to a noneconomic sub-
stance transaction even if there has not been a 
court determination that the economic sub-
stance doctrine was relevant for purposes of 
this title to the transaction if the Chief Counsel 
(or delegate) determines that either was so rel-
evant. 
‘‘(B) FINAL ORDER OF COURT.—If there is 
a final order of a court that determines that the 
economic substance doctrine was not relevant 
for purposes of this title to a transaction (or se-
ries of transactions), any penalty imposed under 
this section with respect to the transaction (or 
series of transactions) shall be rescinded. 
‘‘(4) APPLICABLE RULES.—The rules of para-
graphs (2) and (3) of section 6707A(d) shall apply 
to a compromise under paragraph (1). 
‘‘(e) COORDINATION WITH OTHER PENALTIES.—Ex-
cept as otherwise provided in this part, the penalty im-
posed by this section shall be in addition to any other pen-
alty imposed by this title. 
‘‘(f) CROSS REFERENCES.— 
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‘‘(1) For coordination of penalty with under-
statements under section 6662 and other special 
rules, see section 6662A(e). 
‘‘(2) For reporting of penalty imposed under 
this section to the Securities and Exchange Commis-
sion, see section 6707A(e).’’. 
(b) COORDINATION WITH OTHER UNDERSTATE-
MENTS AND PENALTIES.— 
(1) 
The 
second 
sentence 
of 
section 
6662(d)(2)(A) is amended by inserting ‘‘and without 
regard to items with respect to which a penalty is 
imposed by section 6662B’’ before the period at the 
end. 
(2) Subsection (e) of section 6662A is amend-
ed— 
(A) in paragraph (1), by inserting ‘‘and 
noneconomic substance transaction understate-
ments’’ after ‘‘reportable transaction under-
statements’’ both places it appears, 
(B) in paragraph (2)(A)— 
(i) by inserting ‘‘6662B or’’ before 
‘‘6663’’ in the text, and 
(ii) by striking ‘‘PENALTY’’ in the 
heading and inserting ‘‘AND ECONOMIC 
SUBSTANCE PENALTIES’’, 
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(C) in paragraph (2)(B)— 
(i) by inserting ‘‘and section 6662B’’ 
after ‘‘This section’’, and 
(ii) by striking ‘‘PENALTY’’ in the 
heading and inserting ‘‘AND ECONOMIC 
SUBSTANCE PENALTIES’’, 
(D) in paragraph (3), by inserting ‘‘or 
noneconomic substance transaction understate-
ment’’ after ‘‘reportable transaction understate-
ment’’, and 
(E) by adding at the end the following new 
paragraph: 
‘‘(4) NONECONOMIC SUBSTANCE TRANSACTION 
UNDERSTATEMENT.—For purposes of this sub-
section, the term ‘noneconomic substance trans-
action understatement’ has the meaning given such 
term by section 6662B(c).’’. 
(3) Subsection (e) of section 6707A is amend-
ed— 
(A) by striking ‘‘or’’ at the end of subpara-
graph (B), and 
(B) by striking subparagraph (C) and in-
serting the following new subparagraphs: 
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‘‘(C) is required to pay a penalty under 
section 6662B with respect to any noneconomic 
substance transaction, or 
‘‘(D) is required to pay a penalty under 
section 6662(h) with respect to any transaction 
and would (but for section 6662A(e)(2)(B)) 
have been subject to penalty under section 
6662A at a rate prescribed under section 
6662A(c) or to penalty under section 6662B,’’. 
(c) CLERICAL AMENDMENT.—The table of sections 
for part II of subchapter A of chapter 68 is amended by 
inserting after the item relating to section 6662A the fol-
lowing new item: 
‘‘Sec. 6662B. Penalty for understatements attributable to transactions lacking 
economic substance, etc.’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions entered into after 
the date of the enactment of this Act. 
SEC. 403. DENIAL OF DEDUCTION FOR INTEREST ON UN-
DERPAYMENTS 
ATTRIBUTABLE 
TO 
NON-
ECONOMIC SUBSTANCE TRANSACTIONS. 
(a) IN GENERAL.—Section 163(m) (relating to inter-
est on unpaid taxes attributable to nondisclosed reportable 
transactions) is amended— 
(1) by striking ‘‘attributable’’ and all that fol-
lows and inserting the following: ‘‘attributable to— 
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‘‘(1) the portion of any reportable transaction 
understatement (as defined in section 6662A(b)) 
with respect to which the requirement of section 
6664(d)(2)(A) is not met, or 
‘‘(2) any noneconomic substance transaction 
understatement (as defined in section 6662B(c)).’’, 
and 
(2) by inserting ‘‘AND NONECONOMIC SUB-
STANCE TRANSACTIONS’’ in the heading thereof 
after ‘‘TRANSACTIONS’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions after the date of 
the enactment of this Act in taxable years ending after 
such date. 
Æ 
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