H.R. 4997 (108^th): Fiscally Responsible Family Tax Relief Act of 2004

HR 4997 IH

To amend the Internal Revenue Code of 1986 to provide tax relief for middle income taxpayers, and for other purposes.

July 22, 2004

Mr. STENHOLM (for himself, Mr. ALEXANDER, Mr. BACA, Mr. BERRY, Mr. BISHOP of Georgia, Mr. BOSWELL, Mr. BOYD, Mr. CARDOZA, Mr. CASE, Mr. CHANDLER, Mr. COOPER, Mr. CRAMER, Mr. DAVIS of Tennessee, Ms. HARMAN, Ms. HERSETH, Mr. HILL, Mr. HOLDEN, Mr. LUCAS of Kentucky, Mr. MICHAUD, Mr. MOORE, Mr. PETERSON of Minnesota, Mr. POMEROY, Mr. ROSS, Mr. SANDLIN, Mr. SCHIFF, Mr. SCOTT of Georgia, Mr. TANNER, Mrs. TAUSCHER, Mr. TAYLOR of Mississippi, Mr. THOMPSON of California, Mr. TURNER of Texas, Ms. LORETTA SANCHEZ of California, Mr. ISRAEL, Mr. FORD, and Mr. MCINTYRE) introduced the following bill; which was referred to the Committee on Ways and Means

To amend the Internal Revenue Code of 1986 to provide tax relief for middle income taxpayers, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE; ETC.

(a) SHORT TITLE- This Act may be cited as the ‘Fiscally Responsible Family Tax Relief Act of 2004’.

(b) AMENDMENT OF 1986 CODE- Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.

(c) TABLE OF CONTENTS- The table of contents for this Act is as follows:

Sec. 1. Short title; etc.

TITLE I--EXTENSION OF CERTAIN EXPIRING PROVISIONS

Sec. 101. Extension of family tax provisions through 2005.

Sec. 102. Acceleration of increase in refundability of the child tax credit.

Sec. 103. Application of EGTRRA sunset to this title.

TITLE II--UNIFORM DEFINITION OF CHILD

Sec. 201. Uniform definition of child, etc.

Sec. 202. Modifications of definition of head of household.

Sec. 203. Modifications of dependent care credit.

Sec. 204. Modifications of child tax credit.

Sec. 205. Modifications of earned income credit.

Sec. 206. Modifications of deduction for personal exemption for dependents.

Sec. 207. Technical and conforming amendments.

Sec. 208. Effective date.

TITLE III--REVENUE PROVISIONS

Subtitle A--Provisions Designed To Curtail Tax Shelters

Sec. 301. Clarification of economic substance doctrine.

Sec. 302. Penalty for failing to disclose reportable transaction.

Sec. 303. Accuracy-related penalty for listed transactions and other reportable transactions having a significant tax avoidance purpose.

Sec. 304. Penalty for understatements attributable to transactions lacking economic substance, etc.

Sec. 305. Modifications of substantial understatement penalty for nonreportable transactions.

Sec. 306. Tax shelter exception to confidentiality privileges relating to taxpayer communications.

Sec. 307. Disclosure of reportable transactions.

Sec. 308. Modifications to penalty for failure to register tax shelters.

Sec. 309. Modification of penalty for failure to maintain lists of investors.

Sec. 310. Modification of actions to enjoin certain conduct related to tax shelters and reportable transactions.

Sec. 311. Understatement of taxpayer’s liability by income tax return preparer.

Sec. 312. Penalty on failure to report interests in foreign financial accounts.

Sec. 313. Frivolous tax submissions.

Sec. 314. Regulation of individuals practicing before the Department of Treasury.

Sec. 315. Penalty for promoting abusive tax shelters.

Sec. 316. Statute of limitations for taxable years for which required listed transactions not reported.

Sec. 317. Denial of deduction for interest on underpayments attributable to nondisclosed reportable and noneconomic substance transactions.

Sec. 318. Authorization of appropriations for tax law enforcement.

Sec. 319. Penalty for aiding and abetting the understatement of tax liability.

Subtitle B--Enron-Related Tax Shelter Provisions

Sec. 321. Limitation on transfer or importation of built-in losses.

Sec. 322. No reduction of basis under section 734 in stock held by partnership in corporate partner.

Sec. 323. Repeal of special rules for FASITs.

Sec. 324. Expanded disallowance of deduction for interest on convertible debt.

Sec. 325. Expanded authority to disallow tax benefits under section 269.

Sec. 326. Modification of interaction between subpart F and passive foreign investment company rules.

Subtitle C--Extension of Customs User Fees

Sec. 331. Extension of customs user fees.

TITLE I--EXTENSION OF CERTAIN EXPIRING PROVISIONS

SEC. 101. EXTENSION OF FAMILY TAX PROVISIONS THROUGH 2005.

(a) CHILD CREDIT- The table contained in section 24(a)(2) (relating to per child amount) is amended--

(1) by striking ‘2005,’ in the second item, and

(2) by striking ‘or 2004’ in the first item and inserting ‘, 2004, or 2005’.

(b) MARRIAGE PENALTY RELIEF IN STANDARD DEDUCTION- Paragraph (7) of section 63(c) (relating to applicable percentage) is amended by striking ‘174’ and inserting ‘200’.

(c) MARRIAGE PENALTY RELIEF IN 15-PERCENT INCOME TAX BRACKET- Subparagraph (B) of section 1(f)(8) (relating to applicable percentage) is amended by striking ‘180’ and inserting ‘200’.

(d) 10-PERCENT RATE BRACKET- Paragraph (1) of section 1(i) (relating to rate reductions after 2000) is amended--

(1) by striking ‘2004’ in subparagraph (B)(i) and inserting ‘2005’, and

(2) by inserting ‘and 2005’ after ‘2004’ in subparagraph (C)(ii).

(e) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2004.

SEC. 102. ACCELERATION OF INCREASE IN REFUNDABILITY OF THE CHILD TAX CREDIT.

(a) ACCELERATION OF REFUNDABILITY- Section 24(d)(1)(B)(i) (relating to portion of credit refundable) is amended by striking ‘(10 percent in the case of taxable years beginning before January 1, 2005)’.

(b) EARNED INCOME INCLUDES COMBAT PAY- Section 24(d)(1) is amended by adding at the end the following new sentence: ‘For purposes of subparagraph (B), any amount excluded from gross income by reason of section 112 shall be treated as earned income which is taken into account in computing taxable income for the taxable year.’.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2003.

SEC. 103. APPLICATION OF EGTRRA SUNSET TO THIS TITLE.

Each amendment made by this title shall be subject to title IX of the Economic Growth and Tax Relief Reconciliation Act of 2001 to the same extent and in the same manner as the provision of such Act to which such amendment relates.

TITLE II--UNIFORM DEFINITION OF CHILD

SEC. 201. UNIFORM DEFINITION OF CHILD, ETC.

Section 152 is amended to read as follows:

‘SEC. 152. DEPENDENT DEFINED.

‘(a) IN GENERAL- For purposes of this subtitle, the term ‘dependent’ means--

‘(1) a qualifying child, or

‘(2) a qualifying relative.

‘(b) EXCEPTIONS- For purposes of this section--

‘(1) DEPENDENTS INELIGIBLE- If an individual is a dependent of a taxpayer for any taxable

year of such taxpayer beginning in a calendar year, such individual shall be treated as having no dependents for any taxable year of such individual beginning in such calendar year.

‘(2) MARRIED DEPENDENTS- An individual shall not be treated as a dependent of a taxpayer under subsection (a) if such individual has made a joint return with the individual’s spouse under section 6013 for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins.

‘(3) CITIZENS OR NATIONALS OF OTHER COUNTRIES-

‘(A) IN GENERAL- The term ‘dependent’ does not include an individual who is not a citizen or national of the United States unless such individual is a resident of the United States or a country contiguous to the United States.

‘(B) EXCEPTION FOR ADOPTED CHILD- Subparagraph (A) shall not exclude any child of a taxpayer (within the meaning of subsection (f)(1)(B)) from the definition of ‘dependent’ if--

‘(i) for the taxable year of the taxpayer, the child has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household, and

‘(ii) the taxpayer is a citizen or national of the United States.

‘(c) QUALIFYING CHILD- For purposes of this section--

‘(1) IN GENERAL- The term ‘qualifying child’ means, with respect to any taxpayer for any taxable year, an individual--

‘(A) who bears a relationship to the taxpayer described in paragraph (2),

‘(B) who has the same principal place of abode as the taxpayer for more than one-half of such taxable year,

‘(C) who meets the age requirements of paragraph (3), and

‘(D) who has not provided over one-half of such individual’s own support for the calendar year in which the taxable year of the taxpayer begins.

‘(2) RELATIONSHIP- For purposes of paragraph (1)(A), an individual bears a relationship to the taxpayer described in this paragraph if such individual is--

‘(A) a child of the taxpayer or a descendant of such a child, or

‘(B) a brother, sister, stepbrother, or stepsister of the taxpayer or a descendant of any such relative.

‘(3) AGE REQUIREMENTS-

‘(A) IN GENERAL- For purposes of paragraph (1)(C), an individual meets the requirements of this paragraph if such individual--

‘(i) has not attained the age of 19 as of the close of the calendar year in which the taxable year of the taxpayer begins, or

‘(ii) is a student who has not attained the age of 24 as of the close of such calendar year.

‘(B) SPECIAL RULE FOR DISABLED- In the case of an individual who is permanently and totally disabled (as defined in section 22(e)(3)) at any time during such calendar year, the requirements of subparagraph (A) shall be treated as met with respect to such individual.

‘(4) SPECIAL RULE RELATING TO 2 OR MORE CLAIMING QUALIFYING CHILD-

‘(A) IN GENERAL- Except as provided in subparagraph (B) and subsection (e), if (but for this paragraph) an individual may be and is claimed as a qualifying child by 2 or more taxpayers for a taxable year beginning in the same calendar year, such individual shall be treated as the qualifying child of the taxpayer who is--

‘(i) a parent of the individual, or

‘(ii) if clause (i) does not apply, the taxpayer with the highest adjusted gross income for such taxable year.

‘(B) MORE THAN 1 PARENT CLAIMING QUALIFYING CHILD- If the parents claiming any qualifying child do not file a joint return together, such child shall be treated as the qualifying child of--

‘(i) the parent with whom the child resided for the longest period of time during the taxable year, or

‘(ii) if the child resides with both parents for the same amount of time during such taxable year, the parent with the highest adjusted gross income.

‘(d) QUALIFYING RELATIVE- For purposes of this section--

‘(1) IN GENERAL- The term ‘qualifying relative’ means, with respect to any taxpayer for any taxable year, an individual--

‘(A) who bears a relationship to the taxpayer described in paragraph (2),

‘(B) whose gross income for the calendar year in which such taxable year begins is less than the exemption amount (as defined in section 151(d)),

‘(C) with respect to whom the taxpayer provides over one-half of the individual’s support for the calendar year in which such taxable year begins, and

‘(D) who is not a qualifying child of such taxpayer or of any other taxpayer for any taxable year beginning in the calendar year in which such taxable year begins.

‘(2) RELATIONSHIP- For purposes of paragraph (1)(A), an individual bears a relationship to the taxpayer described in this paragraph if the individual is any of the following with respect to the taxpayer:

‘(A) A child or a descendant of a child.

‘(B) A brother, sister, stepbrother, or stepsister.

‘(C) The father or mother, or an ancestor of either.

‘(D) A stepfather or stepmother.

‘(E) A son or daughter of a brother or sister of the taxpayer.

‘(F) A brother or sister of the father or mother of the taxpayer.

‘(G) A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

‘(H) An individual (other than an individual who at any time during the taxable year was the spouse, determined without regard to section 7703, of the taxpayer) who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household.

‘(3) SPECIAL RULE RELATING TO MULTIPLE SUPPORT AGREEMENTS- For purposes of paragraph (1)(C), over one-half of the support of an individual for a calendar year shall be treated as received from the taxpayer if--

‘(A) no one person contributed over one-half of such support,

‘(B) over one-half of such support was received from 2 or more persons each of whom, but for the fact that any such person alone did not contribute over one-half of such support, would have been entitled to claim such individual as a dependent for a taxable year beginning in such calendar year,

‘(C) the taxpayer contributed over 10 percent of such support, and

‘(D) each person described in subparagraph (B) (other than the taxpayer) who contributed over 10 percent of such support files a written declaration (in such manner and form as the Secretary may by regulations prescribe) that such person will not claim such individual as a dependent for any taxable year beginning in such calendar year.

‘(4) SPECIAL RULE RELATING TO INCOME OF HANDICAPPED DEPENDENTS-

‘(A) IN GENERAL- For purposes of paragraph (1)(B), the gross income of an individual who is permanently and totally disabled (as defined in section 22(e)(3)) at any time during the taxable year shall not include income attributable to services performed by the individual at a sheltered workshop if--

‘(i) the availability of medical care at such workshop is the principal reason for the individual’s presence there, and

‘(ii) the income arises solely from activities at such workshop which are incident to such medical care.

‘(B) SHELTERED WORKSHOP DEFINED- For purposes of subparagraph (A), the term ‘sheltered workshop’ means a school--

‘(i) which provides special instruction or training designed to alleviate the disability of the individual, and

‘(ii) which is operated by an organization described in section 501(c)(3) and exempt from tax under section 501(a), or by a State, a possession of the United States, any political subdivision of any of the foregoing, the United States, or the District of Columbia.

‘(5) SPECIAL RULES FOR SUPPORT- For purposes of this subsection--

‘(A) payments to a spouse which are includible in the gross income of such spouse under section 71 or 682 shall not be treated as a payment by the payor spouse for the support of any dependent, and

‘(B) in the case of the remarriage of a parent, support of a child received from the parent’s spouse shall be treated as received from the parent.

‘(e) SPECIAL RULE FOR DIVORCED PARENTS-

‘(1) IN GENERAL- Notwithstanding subsection (c)(4) or (d)(1)(C), if--

‘(A) a child receives over one-half of the child’s support during the calendar year from the child’s parents--

‘(i) who are divorced or legally separated under a decree of divorce or separate maintenance,

‘(ii) who are separated under a written separation agreement, or

‘(iii) who live apart at all times during the last 6 months of the calendar year, and

‘(B) such child is in the custody of 1 or both of the child’s parents for more than one-half of the calendar year,

such child shall be treated as being the qualifying child or qualifying relative of the noncustodial parent for a calendar year if the requirements described in paragraph (2) are met.

‘(2) REQUIREMENTS- For purposes of paragraph (1), the requirements described in this paragraph are met if--

‘(A) a decree of divorce or separate maintenance or written separation agreement between the parents applicable to the taxable year beginning in such calendar year provides that--

‘(i) the noncustodial parent shall be entitled to any deduction allowable under section 151 for such child, or

‘(ii) the custodial parent will sign a written declaration (in such manner and form as the Secretary may prescribe) that such parent will not claim such child as a dependent for such taxable year, or

‘(B) in the case of such an agreement executed before January 1, 1985, the noncustodial

parent provides at least $600 for the support of such child during such calendar year.

For purposes of subparagraph (B), amounts expended for the support of a child or children shall be treated as received from the noncustodial parent to the extent that such parent provided amounts for such support.

‘(3) CUSTODIAL PARENT AND NONCUSTODIAL PARENT- For purposes of this subsection--

‘(A) CUSTODIAL PARENT- The term ‘custodial parent’ means the parent with whom a child shared the same principal place of abode for the greater portion of the calendar year.

‘(B) NONCUSTODIAL PARENT- The term ‘noncustodial parent’ means the parent who is not the custodial parent.

‘(4) EXCEPTION FOR MULTIPLE-SUPPORT AGREEMENTS- This subsection shall not apply in any case where over one-half of the support of the child is treated as having been received from a taxpayer under the provision of subsection (d)(3).

‘(f) OTHER DEFINITIONS AND RULES- For purposes of this section--

‘(1) CHILD DEFINED-

‘(A) IN GENERAL- The term ‘child’ means an individual who is--

‘(i) a son, daughter, stepson, or stepdaughter of the taxpayer, or

‘(ii) an eligible foster child of the taxpayer.

‘(B) ADOPTED CHILD- In determining whether any of the relationships specified in subparagraph (A)(i) or paragraph (4) exists, a legally adopted individual of the taxpayer, or an individual who is lawfully placed with the taxpayer for legal adoption by the taxpayer, shall be treated as a child of such individual by blood.

‘(C) ELIGIBLE FOSTER CHILD- For purposes of subparagraph (A)(ii), the term ‘eligible foster child’ means an individual who is placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.

‘(2) STUDENT DEFINED- The term ‘student’ means an individual who during each of 5 calendar months during the calendar year in which the taxable year of the taxpayer begins--

‘(A) is a full-time student at an educational organization described in section 170(b)(1)(A)(ii), or

‘(B) is pursuing a full-time course of institutional on-farm training under the supervision of an accredited agent of an educational organization described in section 170(b)(1)(A)(ii) or of a State or political subdivision of a State.

‘(3) DETERMINATION OF HOUSEHOLD STATUS- An individual shall not be treated as a member of the taxpayer’s household if at any time during the taxable year of the taxpayer the relationship between such individual and the taxpayer is in violation of local law.

‘(4) BROTHER AND SISTER- The terms ‘brother’ and ‘sister’ include a brother or sister by the half blood.

‘(5) SPECIAL SUPPORT TEST IN CASE OF STUDENTS- For purposes of subsections (c)(1)(D) and (d)(1)(C), in the case of an individual who is--

‘(A) a child of the taxpayer, and

‘(B) a student,

amounts received as scholarships for study at an educational organization described in section 170(b)(1)(A)(ii) shall not be taken into account.

‘(6) TREATMENT OF MISSING CHILDREN-

‘(A) IN GENERAL- Solely for the purposes referred to in subparagraph (B), a child of the taxpayer--

‘(i) who is presumed by law enforcement authorities to have been kidnapped by someone who is not a member of the family of such child or the taxpayer, and

‘(ii) who had, for the taxable year in which the kidnapping occurred, the same principal place of abode as the taxpayer for more than one-half of the portion of such year before the date of the kidnapping,

shall be treated as meeting the requirement of subsection (c)(1)(B) with respect to a taxpayer for all taxable years ending during the period that the child is kidnapped.

‘(B) PURPOSES- Subparagraph (A) shall apply solely for purposes of determining--

‘(i) the deduction under section 151(c),

‘(ii) the credit under section 24 (relating to child tax credit),

‘(iii) whether an individual is a surviving spouse or a head of a household (as such terms are defined in section 2), and

‘(iv) the earned income credit under section 32.

‘(C) COMPARABLE TREATMENT OF CERTAIN QUALIFYING RELATIVES- For purposes of this section, a child of the taxpayer--

‘(i) who is presumed by law enforcement authorities to have been kidnapped by someone who is not a member of the family of such child or the taxpayer, and

‘(ii) who was (without regard to this paragraph) a qualifying relative of the taxpayer for the portion of the taxable year before the date of the kidnapping,

shall be treated as a qualifying relative of the taxpayer for all taxable years ending during the period that the child is kidnapped.

‘(D) TERMINATION OF TREATMENT- Subparagraphs (A) and (C) shall cease to apply as of the first taxable year of the taxpayer beginning after the calendar year in which there is a determination that the child is dead (or, if

earlier, in which the child would have attained age 18).

‘(7) CROSS REFERENCES-

‘For provision treating child as dependent of both parents for purposes of certain provisions, see sections 105(b), 132(h)(2)(B), and 213(d)(5).’.

SEC. 202. MODIFICATIONS OF DEFINITION OF HEAD OF HOUSEHOLD.

(a) HEAD OF HOUSEHOLD- Clause (i) of section 2(b)(1)(A) is amended to read as follows:

‘(i) a qualifying child of the individual (as defined in section 152(c), determined without regard to section 152(e)), but not if such child--

‘(I) is married at the close of the taxpayer’s taxable year, and

‘(II) is not a dependent of such individual by reason of section 152(b)(2) or 152(b)(3), or both, or’.

(b) CONFORMING AMENDMENTS-

(1) Section 2(b)(2) is amended by striking subparagraph (A) and by redesignating subparagraphs (B), (C), and (D) as subparagraphs (A), (B), and (C), respectively.

(2) Clauses (i) and (ii) of section 2(b)(3)(B) are amended to read as follows:

‘(i) subparagraph (H) of section 152(d)(2), or

‘(ii) paragraph (3) of section 152(d).’.

SEC. 203. MODIFICATIONS OF DEPENDENT CARE CREDIT.

(a) IN GENERAL- Section 21(a)(1) is amended by striking ‘In the case of an individual who maintains a household which includes as a member one or more qualifying individuals (as defined in subsection (b)(1))’ and inserting ‘In the case of an individual for which there are 1 or more qualifying individuals (as defined in subsection (b)(1)) with respect to such individual’.

(b) QUALIFYING INDIVIDUAL- Paragraph (1) of section 21(b) is amended to read as follows:

‘(1) QUALIFYING INDIVIDUAL- The term ‘qualifying individual’ means--

‘(A) a dependent of the taxpayer (as defined in section 152(a)(1)) who has not attained age 13,

‘(B) a dependent of the taxpayer who is physically or mentally incapable of caring for himself or herself and who has the same principal place of abode as the taxpayer for more than one-half of such taxable year, or

‘(C) the spouse of the taxpayer, if the spouse is physically or mentally incapable of caring for himself or herself and who has the same principal place of abode as the taxpayer for more than one-half of such taxable year.’.

(c) CONFORMING AMENDMENT- Paragraph (1) of section 21(e) is amended to read as follows:

‘(1) PLACE OF ABODE- An individual shall not be treated as having the same principal place of abode of the taxpayer if at any time during the taxable year of the taxpayer the relationship between the individual and the taxpayer is in violation of local law.’.

SEC. 204. MODIFICATIONS OF CHILD TAX CREDIT.

(a) IN GENERAL- Paragraph (1) of section 24(c) is amended to read as follows:

‘(1) IN GENERAL- The term ‘qualifying child’ means a qualifying child of the taxpayer (as defined in section 152(c)) who has not attained age 17.’.

(b) CONFORMING AMENDMENT- Section 24(c)(2) is amended by striking ‘the first sentence of section 152(b)(3)’ and inserting ‘subparagraph (A) of section 152(b)(3)’.

SEC. 205. MODIFICATIONS OF EARNED INCOME CREDIT.

(a) QUALIFYING CHILD- Paragraph (3) of section 32(c) is amended to read as follows:

‘(3) QUALIFYING CHILD-

‘(A) IN GENERAL- The term ‘qualifying child’ means a qualifying child of the taxpayer (as defined in section 152(c), determined without regard to paragraph (1)(D) thereof and section 152(e)).

‘(B) MARRIED INDIVIDUAL- The term ‘qualifying child’ shall not include an individual who is married as of the close of the taxpayer’s taxable year unless the taxpayer is entitled to a deduction under section 151 for such taxable year with respect to such individual (or would be so entitled but for section 152(e)).

‘(C) PLACE OF ABODE- For purposes of subparagraph (A), the requirements of section 152(c)(1)(B) shall be met only if the principal place of abode is in the United States.

‘(D) IDENTIFICATION REQUIREMENTS-

‘(i) IN GENERAL- A qualifying child shall not be taken into account under subsection (b) unless the taxpayer includes the name, age, and TIN of the qualifying child on the return of tax for the taxable year.

‘(ii) OTHER METHODS- The Secretary may prescribe other methods for providing the information described in clause (i).’.

(b) CONFORMING AMENDMENTS-

(1) Section 32(c)(1) is amended by striking subparagraph (C) and by redesignating subparagraphs (D), (E), (F), and (G) as subparagraphs (C), (D), (E), and (F), respectively.

(2) Section 32(c)(4) is amended by striking ‘(3)(E)’ and inserting ‘(3)(C)’.

(3) Section 32(m) is amended by striking ‘subsections (c)(1)(F)’ and inserting ‘subsections (c)(1)(E)’.

SEC. 206. MODIFICATIONS OF DEDUCTION FOR PERSONAL EXEMPTION FOR DEPENDENTS.

Subsection (c) of section 151 is amended to read as follows:

‘(c) ADDITIONAL EXEMPTION FOR DEPENDENTS- An exemption of the exemption amount for each individual who is a dependent (as defined in section 152) of the taxpayer for the taxable year.’.

SEC. 207. TECHNICAL AND CONFORMING AMENDMENTS.

(1) Section 2(a)(1)(B)(i) is amended by inserting ‘, determined without regard to subsections

(b)(1), (b)(2), and (d)(1)(B) thereof’ after ‘section 152’.

(2) Section 21(e)(5) is amended--

(A) by striking ‘paragraph (2) or (4) of’ in subparagraph (A), and

(B) by striking ‘within the meaning of section 152(e)(1)’ and inserting ‘as defined in section 152(e)(3)(A)’.

(3) Section 21(e)(6)(B) is amended by striking ‘section 151(c)(3)’ and inserting ‘section 152(f)(1)’.

(4) Section 25B(c)(2)(B) is amended by striking ‘151(c)(4)’ and inserting ‘152(f)(2)’.

(5)(A) Subparagraphs (A) and (B) of section 51(i)(1) are each amended by striking ‘paragraphs (1) through (8) of section 152(a)’ both places it appears and inserting ‘subparagraphs (A) through (G) of section 152(d)(2)’.

(B) Section 51(i)(1)(C) is amended by striking ‘152(a)(9)’ and inserting ‘152(d)(2)(H)’.

(6) Section 72(t)(2)(D)(i)(III) is amended by inserting ‘, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof’ after ‘section 152’.

(7) Section 72(t)(7)(A)(iii) is amended by striking ‘151(c)(3)’ and inserting ‘152(f)(1)’.

(8) Section 42(i)(3)(D)(ii)(I) is amended by inserting ‘, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof’ after ‘section 152’.

(9) Subsections (b) and (c)(1) of section 105 are amended by inserting ‘, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof’ after ‘section 152’.

(10) Section 120(d)(4) is amended by inserting ‘(determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof)’ after ‘section 152’.

(11) Section 125(e)(1)(D) is amended by inserting ‘, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof’ after ‘section 152’.

(12) Section 129(c)(2) is amended by striking ‘151(c)(3)’ and inserting ‘152(f)(1)’.

(13) The first sentence of section 132(h)(2)(B) is amended by striking ‘151(c)(3)’ and inserting ‘152(f)(1)’.

(14) Section 153 is amended by striking paragraph (1) and by redesignating paragraphs (2), (3), and (4) as paragraphs (1), (2), and (3), respectively.

(15) Section 170(g)(1) is amended by inserting ‘(determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof)’ after ‘section 152’.

(16) Section 170(g)(3) is amended by striking ‘paragraphs (1) through (8) of section 152(a)’ and inserting ‘subparagraphs (A) through (G) of section 152(d)(2)’.

(17) Section 213(a) is amended by inserting ‘, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof’ after ‘section 152’.

(18) The second sentence of section 213(d)(11) is amended by striking ‘paragraphs (1) through (8) of section 152(a)’ and inserting ‘subparagraphs (A) through (G) of section 152(d)(2)’.

(19) Section 220(d)(2)(A) is amended by inserting ‘, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof’ after ‘section 152’.

(20) Section 221(d)(4) is amended by inserting ‘(determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof)’ after ‘section 152’.

(21) Section 529(e)(2)(B) is amended by striking ‘paragraphs (1) through (8) of section 152(a)’ and inserting ‘subparagraphs (A) through (G) of section 152(d)(2)’.

(22) Section 2032A(c)(7)(D) is amended by striking ‘section 151(c)(4)’ and inserting ‘section 152(f)(2)’.

(23) Section 2057(d)(2)(B) is amended by inserting ‘, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof’ after ‘section 152’.

(24) Section 7701(a)(17) is amended by striking ‘152(b)(4), 682,’ and inserting ‘682’.

(25) Section 7702B(f)(2)(C)(iii) is amended by striking ‘paragraphs (1) through (8) of section 152(a)’ and inserting ‘subparagraphs (A) through (G) of section 152(d)(2)’.

(26) Section 7703(b)(1) is amended--

(A) by striking ‘151(c)(3)’ and inserting ‘152(f)(1)’, and

(B) by striking ‘paragraph (2) or (4) of’.

SEC. 208. EFFECTIVE DATE.

The amendments made by this title shall apply to taxable years beginning after December 31, 2004.

TITLE III--REVENUE PROVISIONS

Subtitle A--Provisions Designed To Curtail Tax Shelters

SEC. 301. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

(a) IN GENERAL- Section 7701 is amended by redesignating subsection (n) as subsection (o) and by inserting after subsection (m) the following new subsection:

‘(n) 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 SUBSTANCE- 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) the taxpayer has a substantial 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 determining whether a transaction has a substantial 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 transaction shall not be treated as having economic substance by reason of having a potential for profit unless--

‘(I) the present value of the reasonably expected pre-tax profit from the transaction is substantial in relation to the present value of the expected net tax benefits that would be allowed if the transaction were respected, and

‘(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 lending 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.

‘(B) ARTIFICIAL INCOME SHIFTING AND BASIS ADJUSTMENTS- The form of a transaction with a tax-indifferent party shall not be respected if--

‘(i) it results in an allocation of income 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 benefits under subtitle A with respect to a transaction 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 transaction have no substantial impact on such person’s liability under subtitle A.

‘(C) EXCEPTION FOR PERSONAL TRANSACTIONS 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 applying 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 include the benefits of--

‘(I) depreciation,

‘(II) any tax credit, or

‘(III) any other deduction as provided in guidance by the Secretary, and

‘(ii) subclause (II) of paragraph (1)(B)(ii) shall be disregarded in determining whether any of such benefits are allowable.

‘(4) OTHER COMMON LAW DOCTRINES NOT AFFECTED- 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, 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 prescribe such regulations as may be necessary or appropriate 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. 302. PENALTY FOR FAILING TO DISCLOSE REPORTABLE TRANSACTION.

(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 REPORTABLE TRANSACTION INFORMATION WITH RETURN OR STATEMENT.

‘(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 subsection (b).

‘(b) AMOUNT OF PENALTY-

‘(1) IN GENERAL- Except as provided in paragraphs (2) and (3), the amount of the penalty under subsection (a) shall be $50,000.

‘(2) LISTED TRANSACTION- The amount of the penalty under subsection (a) with respect to a listed transaction shall be $100,000.

‘(3) INCREASE IN PENALTY FOR LARGE ENTITIES AND HIGH NET WORTH INDIVIDUALS-

‘(A) IN GENERAL- In the case of a failure under subsection (a) by--

‘(i) a large entity, or

‘(ii) a high net worth individual,

the penalty under paragraph (1) or (2) shall be twice the amount determined without regard to this paragraph.

‘(B) LARGE ENTITY- For purposes of subparagraph (A), the term ‘large entity’ means, with respect to any taxable year, a person (other than a natural person) with gross receipts in excess of $10,000,000 for the taxable year in which the reportable transaction occurs or the preceding taxable year. Rules similar to the rules of paragraph (2) and subparagraphs (B), (C), and (D) of paragraph (3) of section 448(c) shall apply for purposes of this subparagraph.

‘(C) HIGH NET WORTH INDIVIDUAL- For purposes of subparagraph (A), the term ‘high net worth individual’ means, with respect to a reportable transaction, a natural person whose net worth exceeds $2,000,000 immediately before the transaction.

‘(c) DEFINITIONS- For purposes of this section--

‘(1) REPORTABLE TRANSACTION- The term ‘reportable transaction’ means any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion.

‘(2) LISTED TRANSACTION- Except as provided in regulations, 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 avoidance transaction for purposes of section 6011.

‘(d) AUTHORITY TO RESCIND PENALTY-

‘(1) IN GENERAL- The Commissioner of Internal Revenue may rescind all or any portion of any penalty imposed by this section with respect to any violation if--

‘(A) the violation is with respect to a reportable transaction other than a listed transaction,

‘(B) the person on whom the penalty is imposed has a history of complying with the requirements of this title,

‘(C) it is shown that the violation is due to an unintentional mistake of fact;

‘(D) imposing the penalty would be against equity and good conscience, and

‘(E) rescinding the penalty would promote compliance with the requirements of this title and effective tax administration.

‘(2) DISCRETION- The exercise of authority under paragraph (1) shall be at the sole discretion of the Commissioner and may be delegated only to the head of the Office of Tax Shelter Analysis. The Commissioner, in the Commissioner’s sole discretion, may establish a procedure to determine if a penalty should be referred to the Commissioner or the head of such Office for a determination under paragraph (1).

‘(3) NO APPEAL- Notwithstanding any other provision of law, any determination under this subsection may not be reviewed in any administrative or judicial proceeding.

‘(4) RECORDS- If a penalty is rescinded under paragraph (1), the Commissioner shall place in the file in the Office of the Commissioner the opinion of the Commissioner or the head of the Office of Tax Shelter Analysis with respect to the determination, including--

‘(A) the facts and circumstances of the transaction,

‘(B) the reasons for the rescission, and

‘(C) the amount of the penalty rescinded.

‘(5) REPORT- The Commissioner shall each year report to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate--

‘(A) a summary of the total number and aggregate amount of penalties imposed, and rescinded, under this section, and

‘(B) a description of each penalty rescinded under this subsection and the reasons therefor.

‘(e) PENALTY REPORTED TO SEC- In the case of a person--

‘(1) which is required to file periodic reports under section 13 or 15(d) of the Securities Exchange Act of 1934 or is required to be consolidated with another person for purposes of such reports, and

‘(2) which--

‘(A) is required to pay a penalty under this section with respect to a listed transaction,

‘(B) is required to pay a penalty under section 6662A with respect to any reportable transaction at a rate prescribed under section 6662A(c), or

‘(C) is required to pay a penalty under section 6662B with respect to any noneconomic substance transaction,

the requirement to pay such penalty shall be disclosed in such reports filed by such person for such periods as the Secretary shall specify. Failure to make a disclosure in accordance with the preceding sentence shall be treated as a failure to which the penalty under subsection (b)(2) applies.

‘(f) COORDINATION WITH OTHER PENALTIES- The penalty imposed by this section is in addition to any penalty imposed under this title.’.

(b) DISCLOSURE BY SECRETARY-

(1) IN GENERAL- Section 6103 is amended by redesignating subsection (q) as subsection (r) and by inserting after subsection (p) the following new subsection:

‘(q) DISCLOSURE RELATING TO PAYMENTS OF CERTAIN PENALTIES- Notwithstanding any other provision of this section, the Secretary shall make public the name of any person required to pay a penalty described in section 6707A(e)(2) and the amount of the penalty.’.

(2) RECORDS- Section 6103(p)(3)(A) is amended by striking ‘or (n)’ and inserting ‘(n), or (q)’.

(c) CONFORMING AMENDMENT- The table of sections for part I of subchapter B of chapter 68 is amended by inserting after the item relating to section 6707 the following:

‘Sec. 6707A. Penalty for failure to include reportable transaction information with return or statement.’.

(d) 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.

SEC. 303. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS AND OTHER REPORTABLE TRANSACTIONS HAVING A SIGNIFICANT TAX AVOIDANCE PURPOSE.

(a) IN GENERAL- Subchapter A of chapter 68 is amended by inserting after section 6662 the following new section:

‘SEC. 6662A. IMPOSITION OF ACCURACY-RELATED 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 percent of the amount of such understatement.

‘(b) REPORTABLE TRANSACTION UNDERSTATEMENT- For purposes of this section--

‘(1) IN GENERAL- The term ‘reportable transaction understatement’ means the sum of--

‘(A) the product of--

‘(i) the amount of the increase (if any) in taxable income which results from a difference between the proper tax 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 taxpayer which is a corporation), and

‘(B) the amount of the decrease (if any) in the aggregate amount of credits determined under subtitle A which results from a difference between the taxpayer’s treatment of an item to which this section applies (as shown on the taxpayer’s return of tax) and the proper tax treatment 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 LISTED AND OTHER AVOIDANCE TRANSACTIONS-

‘(1) IN GENERAL- 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.

‘(2) RULES APPLICABLE TO ASSERTION AND COMPROMISE OF PENALTY-

‘(A) IN GENERAL- Only upon the approval by the Chief Counsel for the Internal Revenue Service or the Chief Counsel’s delegate at the national office of the Internal Revenue Service may a penalty to which paragraph (1) applies be included in a 1st letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in the Internal Revenue Service Office of Appeals. If such a letter is provided to the taxpayer, only the Commissioner of Internal Revenue may compromise all or any portion of such penalty.

‘(B) APPLICABLE RULES- The rules of paragraphs (2), (3), (4), and (5) of section 6707A(d) shall apply for purposes of subparagraph (A).

‘(d) DEFINITIONS OF REPORTABLE AND LISTED TRANSACTIONS- For purposes of this section, the terms ‘reportable transaction’ and ‘listed transaction’ have the respective meanings given to such terms by section 6707A(c).

‘(e) SPECIAL RULES-

‘(1) COORDINATION WITH PENALTIES, ETC., ON OTHER UNDERSTATEMENTS- In the case of an understatement (as defined in section 6662(d)(2))--

‘(A) the amount of such understatement (determined without regard to this paragraph) shall be increased by the aggregate amount of reportable transaction understatements and noneconomic substance transaction understatements for purposes of determining whether

such understatement is a substantial understatement under section 6662(d)(1), and

‘(B) the addition to tax under section 6662(a) shall apply only to the excess of the amount of the substantial understatement (if any) after the application of subparagraph (A) over the aggregate amount of reportable transaction understatements and noneconomic substance transaction 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 reportable transaction understatement and a noneconomic substance transaction understatement.

‘(B) NO DOUBLE PENALTY- This section shall not apply to any portion of an understatement on which a penalty is imposed under section 6662B or 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 transaction understatement or noneconomic substance transaction understatement if the amendment or supplement is filed after the earlier of the date the taxpayer is first contacted by the Secretary regarding the examination of the return or such other date as is specified by the Secretary.

‘(4) NONECONOMIC SUBSTANCE TRANSACTION UNDERSTATEMENT- For purposes of this subsection, the term ‘noneconomic substance transaction understatement’ has the meaning given such term by section 6662B(c).

‘(5) CROSS REFERENCE-

‘For reporting of section 6662A(c) penalty to the Securities and Exchange Commission, see section 6707A(e).’.

(b) DETERMINATION OF OTHER UNDERSTATEMENTS- 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 section 6662A applies and without regard to items with respect to which a penalty is imposed by section 6662B.’.

(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 REPORTABLE TRANSACTION UNDERSTATEMENTS-

‘(1) IN GENERAL- No penalty shall be imposed under section 6662A with respect to any portion of a reportable transaction understatement if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.

‘(2) SPECIAL RULES- Paragraph (1) shall not apply to any reportable transaction understatement unless--

‘(A) the relevant facts affecting the tax treatment of the item are adequately disclosed in accordance with the regulations prescribed under section 6011,

‘(B) there is or was substantial authority for such treatment, and

‘(C) the taxpayer reasonably believed that such treatment was more likely than not the proper treatment.

A taxpayer failing to adequately disclose in accordance 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 BELIEF- For purposes of paragraph (2)(C)--

‘(A) IN GENERAL- A taxpayer shall be treated as having a reasonable belief with respect to the tax treatment of an item only if such belief--

‘(i) is based on the facts and law that exist at the time the return of tax which includes such tax treatment is filed, and

‘(ii) relates solely to the taxpayer’s chances of success on the merits of such treatment and does not take into account the possibility that a return will not be audited, 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 RELIED UPON-

‘(i) IN GENERAL- An opinion of a tax advisor may not be relied upon to establish 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--

‘(I) is a material advisor (within the meaning of section 6111(b)(1)) who participates in the organization, management, promotion, or sale of the transaction or who is related (within the meaning of section 267(b) or 707(b)(1)) to any person who so participates,

‘(II) is compensated directly or indirectly by a material advisor with respect to the transaction,

‘(III) has a fee arrangement with respect to the transaction which is contingent on all or part of the intended tax benefits from the transaction being sustained,

‘(IV) has an arrangement with respect to the transaction which provides that contractual disputes between the taxpayer and the advisor

are to be settled by arbitration or which limits damages by reference to fees paid to the advisor for such transaction, or

‘(V) as determined under regulations 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 disqualified if the opinion--

‘(I) is based on unreasonable factual or legal assumptions (including assumptions as to future events),

‘(II) unreasonably relies on representations, statements, findings, or agreements of the taxpayer or any other person,

‘(III) does not identify and consider all relevant facts,

‘(IV) is not signed by all individuals who are principal authors of the opinion, or

‘(V) fails to meet any other requirement as the Secretary may prescribe.’.

(2) CONFORMING AMENDMENT- The heading for subsection (c) of section 6664 is amended by inserting ‘FOR UNDERPAYMENTS’ after ‘EXCEPTION’.

(d) CONFORMING AMENDMENTS-

(1) Subparagraph (C) of section 461(i)(3) is amended by striking ‘section 6662(d)(2)(C)(iii)’ and inserting ‘section 1274(b)(3)(C)’.

(2) Paragraph (3) of section 1274(b) is amended--

(A) by striking ‘(as defined in section 6662(d)(2)(C)(iii))’ in subparagraph (B)(i), and

(B) by adding at the end the following new subparagraph:

‘(C) TAX SHELTER- For purposes of subparagraph (B), the term ‘tax shelter’ means--

‘(i) a partnership or other entity,

‘(ii) any investment plan or arrangement, or

‘(iii) any other plan or arrangement,

if a significant purpose of such partnership, entity, plan, or arrangement is the avoidance or evasion of Federal income tax.’.

(3) Section 6662(d)(2) is amended by striking subparagraphs (C) and (D).

(4) Section 6664(c)(1) is amended by striking ‘this part’ and inserting ‘section 6662 or 6663’.

(5) Subsection (b) of section 7525 is amended by striking ‘section 6662(d)(2)(C)(iii)’ and inserting ‘section 1274(b)(3)(C)’.

(6)(A) The heading for section 6662 is amended to read as follows:

‘SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERPAYMENTS.’.

(B) The table of sections for part II of subchapter A of chapter 68 is amended by striking the item relating to section 6662 and inserting the following new items:

‘Sec. 6662. Imposition of accuracy-related penalty on underpayments.

‘Sec. 6662A. Imposition of accuracy-related penalty on understatements with respect to reportable transactions.’.

(e) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years ending after the date of the enactment of this Act.

SEC. 304. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS LACKING ECONOMIC SUBSTANCE, ETC.

(a) IN GENERAL- Subchapter A of chapter 68 is amended by inserting after section 6662A the following new section:

‘SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS LACKING ECONOMIC 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 TRANSACTIONS- 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 UNDERSTATEMENT- 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 noneconomic substance transactions rather than items to which section 6662A would apply without regard to this paragraph.

‘(2) NONECONOMIC SUBSTANCE TRANSACTION- The term ‘noneconomic substance transaction’ means any transaction if--

‘(A) there is a lack of economic substance (within the meaning of section 7701(n)(1)) for the transaction giving rise to the claimed benefit or the transaction was not respected under section 7701(n)(2), or

‘(B) the transaction fails to meet the requirements of any similar rule of law.

‘(d) RULES APPLICABLE TO COMPROMISE OF PENALTY-

‘(1) IN GENERAL- If the 1st letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in the Internal Revenue Service Office of Appeals has been sent with respect to a penalty to which this section applies, only the Commissioner of Internal Revenue may compromise all or any portion of such penalty.

‘(2) APPLICABLE RULES- The rules of paragraphs (2), (3), (4), and (5) of section 6707A(d) shall apply for purposes of paragraph (1).

‘(e) COORDINATION WITH OTHER PENALTIES- Except as otherwise provided in this part, the penalty imposed by this section shall be in addition to any other penalty imposed by this title.

‘(f) CROSS REFERENCES-

‘(1) For coordination of penalty with understatements 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 Commission, see section 6707A(e).’.

(b) 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 following new item:

‘Sec. 6662B. Penalty for understatements attributable to transactions lacking economic substance, etc.’.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to transactions entered into after the date of the enactment of this Act.

SEC. 305. MODIFICATIONS OF SUBSTANTIAL UNDERSTATEMENT PENALTY FOR NONREPORTABLE TRANSACTIONS.

(a) SUBSTANTIAL UNDERSTATEMENT OF CORPORATIONS- 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 corporation or a personal holding company (as defined in section 542), there is a substantial understatement of income tax for any taxable year if the amount of the understatement for the taxable year exceeds the lesser of--

‘(i) 10 percent of the tax required to be shown on the return for the taxable year (or, if greater, $10,000), or

‘(ii) $10,000,000.’.

(b) REDUCTION FOR UNDERSTATEMENT OF TAXPAYER DUE TO POSITION OF TAXPAYER OR DISCLOSED ITEM-

(1) IN GENERAL- Section 6662(d)(2)(B)(i) (relating to substantial authority) is amended to read as follows:

‘(i) the tax treatment of any item by the taxpayer if the taxpayer had reasonable belief that the tax treatment was more likely than not the proper treatment, or’.

(2) CONFORMING AMENDMENT- Section 6662(d) is amended by adding at the end the following new paragraph:

‘(3) SECRETARIAL LIST- For purposes of this subsection, section 6664(d)(2), and section 6694(a)(1), the Secretary may prescribe a list of positions for which the Secretary believes there is not substantial authority or there is no reasonable belief that the tax treatment is more likely than not the proper tax treatment. Such list (and any revisions thereof) shall be published in the Federal Register or the Internal Revenue Bulletin.’.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

SEC. 306. TAX SHELTER EXCEPTION TO CONFIDENTIALITY PRIVILEGES RELATING TO TAXPAYER COMMUNICATIONS.

(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 subsection (a) shall not apply to any written communication which is--

‘(1) between a federally authorized tax practitioner and--

‘(A) any person,

‘(B) any director, officer, employee, agent, or representative of the person, or

‘(C) any other person holding a capital or profits interest in the person, and

‘(2) in connection with the promotion of the direct or indirect participation of the person in any tax shelter (as defined in section 1274(b)(3)(C)).’.

(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. 307. DISCLOSURE OF REPORTABLE TRANSACTIONS.

(a) IN GENERAL- Section 6111 (relating to registration of tax shelters) is amended to read as follows:

‘SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS.

‘(a) IN GENERAL- Each material advisor with respect 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.

Such return shall be filed not later than the date specified by the Secretary.

‘(b) DEFINITIONS- For purposes of this section--

‘(1) MATERIAL ADVISOR-

‘(A) IN GENERAL- The term ‘material advisor’ means any person--

‘(i) who provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and

‘(ii) who directly or indirectly derives gross income in excess of the threshold amount for such aid, assistance, or advice.

‘(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 benefits from which are provided to natural persons, and

‘(ii) $250,000 in any other case.

‘(2) REPORTABLE TRANSACTION- The term ‘reportable transaction’ has the meaning given to such term by section 6707A(c).

‘(c) REGULATIONS- The Secretary may prescribe regulations which provide--

‘(1) that only 1 person shall be required to meet the requirements of subsection (a) in cases in which 2 or more persons would otherwise be required to meet such requirements,

‘(2) exemptions from the requirements of this section, and

‘(3) such rules as may be necessary or appropriate 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)(A) So much of section 6112 as precedes subsection (c) thereof is amended to read as follows:

‘SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANSACTIONS MUST KEEP LISTS OF ADVISEES.

‘(a) IN GENERAL- Each material advisor (as defined in section 6111) with respect to any reportable transaction (as defined in section 6707A(c)) shall maintain, in such manner as the Secretary may by regulations prescribe, a list--

‘(1) identifying each person with respect to whom such advisor acted as such a material advisor with respect to such transaction, and

‘(2) containing such other information as the Secretary may by regulations require.

This section shall apply without regard to whether a material advisor is required to file a return under section 6111 with respect to such transaction.’.

(B) Section 6112 is amended by redesignating subsection (c) as subsection (b).

(C) Section 6112(b), as redesignated by subparagraph (B), is amended--

(i) by inserting ‘written’ before ‘request’ in paragraph (1)(A), and

(ii) by striking ‘shall prescribe’ in paragraph (2) and inserting ‘may prescribe’.

(D) 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.’.

(3)(A) The heading for section 6708 is amended to read as follows:

‘SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES WITH RESPECT TO REPORTABLE TRANSACTIONS.’.

(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 reportable transactions.’.

(c) REQUIRED DISCLOSURE NOT SUBJECT TO CLAIM OF CONFIDENTIALITY- Subparagraph (A) of section 6112(b)(1), as redesignated by subsection (b)(2)(B), is amended by adding at the end the following new flush sentence:

‘For purposes of this section, the identity of any person on such list shall not be privileged.’.

(d) EFFECTIVE DATE-

(1) IN GENERAL- Except as provided in paragraph (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 DISCLOSURE- The amendment made by subsection (c) shall take effect as if included in the amendments made by section 142 of the Deficit Reduction Act of 1984.

SEC. 308. MODIFICATIONS TO PENALTY FOR FAILURE TO REGISTER TAX SHELTERS.

(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 REGARDING REPORTABLE TRANSACTIONS.

‘(a) IN GENERAL- If a person who is required to file a return under section 6111(a) with respect to any reportable transaction--

‘(1) fails to file such return on or before the date prescribed therefor, or

‘(2) files false or incomplete information with the Secretary with respect to such transaction,

such person shall pay a penalty with respect to such return in the amount determined under subsection (b).

‘(b) AMOUNT OF PENALTY-

‘(1) IN GENERAL- Except as provided in paragraph (2), the penalty imposed under subsection (a) with respect to any failure shall be $50,000.

‘(2) LISTED TRANSACTIONS- The penalty imposed under subsection (a) with respect to any listed transaction shall be an amount equal to the greater of--

‘(A) $200,000, or

‘(B) 50 percent of the gross income derived by such person with respect to aid, assistance, or advice which is provided with respect to the listed transaction before the date the return including the transaction is filed under section 6111.

Subparagraph (B) shall be applied by substituting ‘75 percent’ for ‘50 percent’ in the case of an intentional failure or act described in subsection (a).

‘(c) CERTAIN RULES TO APPLY- The provisions of section 6707A(d) shall apply to any penalty imposed under this section.

‘(d) REPORTABLE AND LISTED TRANSACTIONS- 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 section 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’.

(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. 309. 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 required 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)(1)(A) within 20 business days after the date of the Secretary’s 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 penalty shall be imposed by paragraph (1) with respect to the failure on any day if such failure is due to reasonable 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. 310. 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 action in the name of the United States to enjoin any person from further engaging in specified conduct may be commenced 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 specified conduct. The court may exercise its jurisdiction over such action (as provided in section 7402(a)) separate and apart from any other action brought by the United States against such person.

‘(b) ADJUDICATION AND DECREE- In any action under subsection (a), if the court finds--

‘(1) that the person has engaged in any specified conduct, and

‘(2) that injunctive relief is appropriate to prevent recurrence of such conduct,

the court may enjoin such person from engaging in such conduct or in any other activity subject to penalty under this title.

‘(c) SPECIFIED CONDUCT- For purposes of this section, the term ‘specified conduct’ means any action, or failure to take action, which is--

‘(1) subject to penalty under section 6700, 6701, 6707, or 6708, or

‘(2) in violation of any requirement under regulations issued under section 320 of title 31, United States Code.’.

(b) CONFORMING AMENDMENTS-

(1) The heading for section 7408 is amended to read as follows:

‘SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RELATED TO TAX SHELTERS AND REPORTABLE TRANSACTIONS.’.

(2) The table of sections for subchapter A of chapter 67 is amended by striking the item relating to section 7408 and inserting the following new item:

‘Sec. 7408. Actions to enjoin specified conduct related to tax shelters and reportable transactions.’.

(c) EFFECTIVE DATE- The amendment made by this section shall take effect on the day after the date of the enactment of this Act.

SEC. 311. UNDERSTATEMENT OF TAXPAYER’S LIABILITY BY INCOME TAX RETURN PREPARER.

(a) STANDARDS CONFORMED TO TAXPAYER STANDARDS- Section 6694(a) (relating to understatements due to unrealistic positions) is amended--

(1) by striking ‘realistic possibility of being sustained on its merits’ in paragraph (1) and inserting ‘reasonable belief that the tax treatment in such position was more likely than not the proper treatment’,

(2) by striking ‘or was frivolous’ in paragraph (3) and inserting ‘or there was no reasonable basis for the tax treatment of such position’, and

(3) by striking ‘UNREALISTIC’ in the heading and inserting ‘IMPROPER’.

(b) AMOUNT OF PENALTY- Section 6694 is amended--

(1) by striking ‘$250’ in subsection (a) and inserting ‘$1,000’, and

(2) by striking ‘$1,000’ in subsection (b) and inserting ‘$5,000’.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to documents prepared after the date of the enactment of this Act.

SEC. 312. 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 Secretary 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 $10,000.

‘(ii) REASONABLE CAUSE EXCEPTION- No penalty shall be imposed under subparagraph (A) with respect to any violation if--

‘(I) such violation was due to reasonable cause, and

‘(II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.

‘(C) WILLFUL VIOLATIONS- In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314--

‘(i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of--

‘(I) $100,000, or

‘(II) 50 percent of the amount determined under subparagraph (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 transaction, or

‘(ii) in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.’.

(b) EFFECTIVE DATE- The amendment made by this section shall apply to violations occurring after the date of the enactment of this Act.

SEC. 313. FRIVOLOUS TAX SUBMISSIONS.

(a) CIVIL PENALTIES- Section 6702 is amended to read as follows:

‘SEC. 6702. FRIVOLOUS TAX SUBMISSIONS.

‘(a) CIVIL PENALTY FOR FRIVOLOUS TAX RETURNS- A person shall pay a penalty of $5,000 if--

‘(1) such person files what purports to be a return of a tax imposed by this title but which--

‘(A) does not contain information on which the substantial correctness of the self-assessment may be judged, or

‘(B) contains information that on its face indicates that the self-assessment is substantially incorrect; and

‘(2) the conduct referred to in paragraph (1)--

‘(A) is based on a position which the Secretary has identified as frivolous under subsection (c), or

‘(B) reflects a desire to delay or impede the administration of Federal tax laws.

‘(b) CIVIL PENALTY FOR SPECIFIED FRIVOLOUS SUBMISSIONS-

‘(1) IMPOSITION OF PENALTY- Except as provided in paragraph (3), any person who submits a specified frivolous submission shall pay a penalty of $5,000.

‘(2) SPECIFIED FRIVOLOUS SUBMISSION- For purposes of this section--

‘(A) SPECIFIED FRIVOLOUS SUBMISSION- The term ‘specified frivolous submission’ means a specified submission if any portion of such submission--

‘(i) is based on a position which the Secretary has identified as frivolous under subsection (c), or

‘(ii) reflects a desire to delay or impede the administration of Federal tax laws.

‘(B) SPECIFIED SUBMISSION- The term ‘specified submission’ means--

‘(i) a request for a hearing under--

‘(I) section 6320 (relating to notice and opportunity for hearing upon filing of notice of lien), or

‘(II) section 6330 (relating to notice and opportunity for hearing before levy), and

‘(ii) an application under--

‘(I) section 6159 (relating to agreements for payment of tax liability in installments),

‘(II) section 7122 (relating to compromises), or

‘(III) section 7811 (relating to taxpayer assistance orders).

‘(3) OPPORTUNITY TO WITHDRAW SUBMISSION- If the Secretary provides a person with notice that a submission is a specified frivolous submission and such person withdraws such submission within 30 days after such notice, the penalty imposed under paragraph (1) shall not apply with respect to such submission.

‘(c) LISTING OF FRIVOLOUS POSITIONS- The Secretary shall prescribe (and periodically revise) a list of positions which the Secretary has identified as being frivolous for purposes of this subsection. The Secretary shall not include in such list any position that the Secretary determines meets the requirement of section 6662(d)(2)(B)(ii)(II).

‘(d) REDUCTION OF PENALTY- The Secretary may reduce the amount of any penalty imposed under this section if the Secretary determines that such reduction would promote compliance with and administration of the Federal tax laws.

‘(e) PENALTIES IN ADDITION TO OTHER PENALTIES- The penalties imposed by this section shall be in addition to any other penalty provided by law.’.

(b) TREATMENT OF FRIVOLOUS REQUESTS FOR HEARINGS BEFORE LEVY-

(1) FRIVOLOUS REQUESTS DISREGARDED- Section 6330 (relating to notice and opportunity for hearing before levy) is amended by adding at the end the following new subsection:

‘(g) FRIVOLOUS REQUESTS FOR HEARING, ETC- Notwithstanding any other provision of this section, if the Secretary determines that any portion of a request for a hearing under this section or section 6320 meets the requirement of clause (i) or (ii) of section 6702(b)(2)(A), then the Secretary may treat such portion as if it were never submitted and such portion shall not be subject to any further administrative or judicial review.’.

(2) PRECLUSION FROM RAISING FRIVOLOUS ISSUES AT HEARING- Section 6330(c)(4) is amended--

(A) by striking ‘(A)’ and inserting ‘(A)(i)’;

(B) by striking ‘(B)’ and inserting ‘(ii)’;

(C) by striking the period at the end of the first sentence and inserting ‘; or’; and

(D) by inserting after subparagraph (A)(ii) (as so redesignated) the following:

‘(B) the issue meets the requirement of clause (i) or (ii) of section 6702(b)(2)(A).’.

(3) STATEMENT OF GROUNDS- Section 6330(b)(1) is amended by striking ‘under subsection (a)(3)(B)’ and inserting ‘in writing under subsection (a)(3)(B) and states the grounds for the requested hearing’.

(c) TREATMENT OF FRIVOLOUS REQUESTS FOR HEARINGS UPON FILING OF NOTICE OF LIEN- Section 6320 is amended--

(1) in subsection (b)(1), by striking ‘under subsection (a)(3)(B)’ and inserting ‘in writing under subsection (a)(3)(B) and states the grounds for the requested hearing’, and

(2) in subsection (c), by striking ‘and (e)’ and inserting ‘(e), and (g)’.

(d) TREATMENT OF FRIVOLOUS APPLICATIONS FOR OFFERS-IN-COMPROMISE AND INSTALLMENT AGREEMENTS- Section 7122 is amended by adding at the end the following new subsection:

‘(e) FRIVOLOUS SUBMISSIONS, ETC- Notwithstanding any other provision of this section, if the Secretary determines that any portion of an application for an offer-in-compromise or installment agreement submitted under this section or section 6159 meets the requirement of clause (i) or (ii) of section 6702(b)(2)(A), then the Secretary may treat such portion as if it were never submitted and such portion shall not be subject to any further administrative or judicial review.’.

(e) CLERICAL AMENDMENT- The table of sections for part I of subchapter B of chapter 68 is amended by striking the item relating to section 6702 and inserting the following new item:

‘Sec. 6702. Frivolous tax submissions.’.

(f) EFFECTIVE DATE- The amendments made by this section shall apply to submissions made and issues raised after the date on which the Secretary first prescribes a list under section 6702(c) of the Internal Revenue Code of 1986, as amended by subsection (a).

SEC. 314. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE DEPARTMENT OF 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 ‘Department’, 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 penalty shall not exceed the gross income derived (or to be derived) from the conduct giving rise to the penalty and may be in addition to, or in lieu of, any suspension, disbarment, or censure of the representative.’.

(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 Secretary 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 arrangement, which is of a type which the Secretary determines as having a potential for tax avoidance or evasion.’.

SEC. 315. PENALTY FOR PROMOTING ABUSIVE TAX SHELTERS.

(a) PENALTY FOR PROMOTING ABUSIVE TAX SHELTERS- Section 6700 (relating to promoting abusive tax shelters, etc.) is amended--

(1) by redesignating subsections (b) and (c) as subsections (d) and (e), respectively,

(2) by striking ‘a penalty’ and all that follows through the period in the first sentence of subsection (a) and inserting ‘a penalty determined under subsection (b)’, and

(3) by inserting after subsection (a) the following new subsections:

‘(b) AMOUNT OF PENALTY; CALCULATION OF PENALTY; LIABILITY FOR PENALTY-

‘(1) AMOUNT OF PENALTY- The amount of the penalty imposed by subsection (a) shall not exceed 100 percent of the gross income derived (or to be derived) from such activity by the person or persons subject to such penalty.

‘(2) CALCULATION OF PENALTY- The penalty amount determined under paragraph (1) shall be calculated with respect to each instance of an activity described in subsection (a), each instance in which income was derived by the person or persons subject to such penalty, and each person who participated in such an activity.

‘(3) LIABILITY FOR PENALTY- If more than 1 person is liable under subsection (a) with respect to such activity, all such persons shall be jointly and severally liable for the penalty under such subsection.

‘(c) PENALTY NOT DEDUCTIBLE- The payment of any penalty imposed under this section or the payment of any amount to settle or avoid the imposition of such penalty shall not be deductible by the person who is subject to such penalty or who makes such payment.’.

(b) EFFECTIVE DATE- The amendments made by this section shall apply to activities after the date of the enactment of this Act.

SEC. 316. STATUTE OF LIMITATIONS FOR TAXABLE YEARS FOR WHICH REQUIRED LISTED TRANSACTIONS NOT REPORTED.

(a) IN GENERAL- Section 6501(c) (relating to exceptions) 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--

‘(A) the date on which the Secretary is furnished the information so required; or

‘(B) the date that a material advisor (as defined in section 6111) meets the requirements of section 6112 with respect to a request by the Secretary under section 6112(b) relating to such transaction with respect to such 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. 317. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS ATTRIBUTABLE TO NONDISCLOSED REPORTABLE AND NONECONOMIC SUBSTANCE TRANSACTIONS.

(a) IN GENERAL- Section 163 (relating to deduction for interest) is amended by redesignating subsection (m) as subsection (n) and by inserting after subsection (l) the following new subsection:

‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE TO NONDISCLOSED REPORTABLE TRANSACTIONS AND NONECONOMIC SUBSTANCE TRANSACTIONS- No deduction shall be allowed under this chapter for any interest paid or accrued under section 6601 on any underpayment of tax which is attributable to--

‘(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)).’.

(b) EFFECTIVE DATE- The amendments made by this section shall apply to transactions in taxable years beginning after the date of the enactment of this Act.

SEC. 318. AUTHORIZATION OF APPROPRIATIONS FOR TAX LAW ENFORCEMENT.

There is authorized to be appropriated $300,000,000 for each fiscal year beginning after September 30, 2003, for the purpose of carrying out tax law enforcement to combat tax avoidance transactions and other tax shelters, including the use of offshore financial accounts to conceal taxable income.

SEC. 319. PENALTY FOR AIDING AND ABETTING THE UNDERSTATEMENT OF TAX LIABILITY.

(a) IN GENERAL- Section 6701(a) (relating to imposition of penalty) is amended--

(1) by inserting ‘the tax liability or’ after ‘respect to,’ in paragraph (1),

(2) by inserting ‘aid, assistance, procurement, or advice with respect to such’ before ‘portion’ both places it appears in paragraphs (2) and (3), and

(3) by inserting ‘instance of aid, assistance, procurement, or advice or each such’ before ‘document’ in the matter following paragraph (3).

(b) AMOUNT OF PENALTY- Subsection (b) of section 6701 (relating to penalties for aiding and abetting understatement of tax liability) is amended to read as follows:

‘(b) AMOUNT OF PENALTY; CALCULATION OF PENALTY; LIABILITY FOR PENALTY-

‘(1) AMOUNT OF PENALTY- The amount of the penalty imposed by subsection (a) shall not exceed 100 percent of the gross income derived (or to be derived) from such aid, assistance, procurement, or advice provided by the person or persons subject to such penalty.

‘(2) CALCULATION OF PENALTY- The penalty amount determined under paragraph (1) shall be calculated with respect to each instance of aid, assistance, procurement, or advice described in subsection (a), each instance in which income was derived by the person or persons subject to such penalty, and each person who made such an understatement of the liability for tax.

‘(3) LIABILITY FOR PENALTY- If more than 1 person is liable under subsection (a) with respect to providing such aid, assistance, procurement, or advice, all such persons shall be jointly and severally liable for the penalty under such subsection.’.

(c) PENALTY NOT DEDUCTIBLE- Section 6701 is amended by adding at the end the following new subsection:

‘(g) PENALTY NOT DEDUCTIBLE- The payment of any penalty imposed under this section or the payment of any amount to settle or avoid the imposition of such penalty shall not be deductible by the person who is subject to such penalty or who makes such payment.’.

(d) EFFECTIVE DATE- The amendments made by this section shall apply to activities after the date of the enactment of this Act.

Subtitle B--Enron-Related Tax Shelter Provisions

SEC. 321. LIMITATION ON TRANSFER OR IMPORTATION OF BUILT-IN LOSSES.

(a) IN GENERAL- Section 362 (relating to basis to corporations) is amended by adding at the end the following new subsection:

‘(e) LIMITATIONS ON BUILT-IN LOSSES-

‘(1) LIMITATION ON IMPORTATION OF BUILT-IN LOSSES-

‘(A) IN GENERAL- If in any transaction described 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 subparagraph (B) which is acquired in such transaction shall (notwithstanding subsections (a) and (b)) be its fair market value immediately after such transaction.

‘(B) PROPERTY DESCRIBED- For purposes of subparagraph (A), property is described in this subparagraph if--

‘(i) gain or loss with respect to such property is not subject to tax under this subtitle in the hands of the transferor immediately before the transfer, and

‘(ii) 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.

‘(C) IMPORTATION OF NET BUILT-IN LOSS- For purposes of subparagraph (A), there is an importation of a net built-in loss in a transaction if the transferee’s aggregate adjusted bases of property described in subparagraph (B) which is transferred in such transaction would (but for this paragraph) exceed the fair market value of such property immediately after such transaction.

‘(2) LIMITATION ON TRANSFER OF BUILT-IN LOSSES IN SECTION 351 TRANSACTIONS-

‘(A) IN GENERAL- If--

‘(i) property is transferred by a transferor in any transaction which is described in subsection (a) and which is not described in paragraph (1) of this subsection, and

‘(ii) the transferee’s aggregate adjusted bases of such property so transferred would (but for this paragraph) exceed the fair market value of such property immediately after such transaction,

then, notwithstanding subsection (a), the transferee’s aggregate adjusted bases of the property so transferred shall not exceed the fair market value of such property immediately after such transaction.

‘(B) ALLOCATION OF BASIS REDUCTION- The aggregate reduction in basis by reason of subparagraph (A) shall be allocated among the property so transferred in proportion to their respective built-in losses immediately before the transaction.

‘(C) EXCEPTION FOR TRANSFERS WITHIN AFFILIATED GROUP- Subparagraph (A) shall not apply to any transaction if the transferor owns stock in the transferee meeting the requirements of section 1504(a)(2). In the case of property to which subparagraph (A) does not apply by reason of the preceding sentence, the transferor’s basis in the stock received for such property shall not exceed its fair market value immediately after the transfer.’.

(b) COMPARABLE TREATMENT WHERE LIQUIDATION- Paragraph (1) of section 334(b) (relating 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 transferor; 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 corporate distributee is a domestic corporation, and the corporate distributee’s aggregate adjusted bases of property described in section 362(e)(1)(B) which is distributed in such liquidation would (but for this subparagraph) exceed the fair market value of such property immediately after such liquidation.’.

(c) EFFECTIVE DATES-

(1) IN GENERAL- The amendment made by subsection (a) shall apply to transactions after December 31, 2003.

(2) LIQUIDATIONS- The amendment made by subsection (b) shall apply to liquidations after December 31, 2003.

SEC. 322. NO REDUCTION OF BASIS UNDER SECTION 734 IN STOCK HELD BY PARTNERSHIP IN CORPORATE 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 partnership property under section 734(b)--

‘(1) no allocation may be made to stock in a corporation (or any person which is related (within the meaning of section 267(b) or 707(b)(1)) to such corporation) 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 in such manner as the Secretary may prescribe.

Gain shall be recognized to the partnership to the extent that the amount required to be allocated under paragraph (2) to other partnership property exceeds the aggregate adjusted basis of such other property immediately before the allocation required by paragraph (2).’.

(b) EFFECTIVE DATE- The amendment made by this section shall apply to distributions after February 13, 2003.

SEC. 323. REPEAL OF SPECIAL RULES FOR FASITS.

(a) IN GENERAL- Part V of subchapter M of chapter 1 (relating to financial asset securitization investment trusts) is hereby repealed.

(b) CONFORMING AMENDMENTS-

(1) Paragraph (6) of section 56(g) is amended by striking ‘REMIC, or FASIT’ and inserting ‘or REMIC’.

(2) Clause (ii) of section 382(l)(4)(B) is amended by striking ‘a REMIC to which part IV of subchapter M applies, or a FASIT to which part V of subchapter M applies,’ and inserting ‘or a REMIC to which part IV of subchapter M applies,’.

(3) Paragraph (1) of section 582(c) is amended by striking ‘, and any regular interest in a FASIT,’.

(4) Subparagraph (E) of section 856(c)(5) is amended by striking the last sentence.

(5)(A) Section 860G(a)(1) is amended by adding at the end the following new sentence: ‘An interest shall not fail to qualify as a regular interest solely because the specified principal amount of the regular interest (or the amount of interest accrued on the regular interest) can be reduced as a result of the nonoccurrence of 1 or more contingent payments with respect to any reverse mortgage loan held by the REMIC if, on the startup day for the REMIC, the sponsor reasonably believes that all principal and interest due under the regular interest will be paid at or prior to the liquidation of the REMIC.’.

(B) The last sentence of section 860G(a)(3) is amended by inserting ‘, and any reverse mortgage loan (and each balance increase on such loan meeting the requirements of subparagraph (A)(iii)) shall be treated as an obligation secured by an interest in real property’ before the period at the end.

(6) Paragraph (3) of section 860G(a) is amended by adding ‘and’ at the end of subparagraph (B), by striking ‘, and’ at the end of subparagraph (C) and inserting a period, and by striking subparagraph (D).

(7) Section 860G(a)(3), as amended by paragraph (6), is amended by adding at the end the following new sentence: ‘For purposes of subparagraph (A), if more than 50 percent of the obligations transferred to, or purchased by, the REMIC are originated by the United States or any State (or any political subdivision, agency, or instrumentality of the United States or any State) and are principally secured by an interest in real property, then each obligation transferred to, or purchased by, the REMIC shall be treated as secured by an interest in real property.’.

(8)(A) Section 860G(a)(3)(A) is amended by striking ‘or’ at the end of clause (i), by inserting ‘or’ at the end of clause (ii), and by inserting after clause (ii) the following new clause:

‘(iii) represents an increase in the principal amount under the original terms of an obligation described in clause (i) or (ii) if such increase--

‘(I) is attributable to an advance made to the obligor pursuant to the original terms of the obligation,

‘(II) occurs after the startup day, and

‘(III) is purchased by the REMIC pursuant to a fixed price contract in effect on the startup day.’.

(B) Section 860G(a)(7)(B) is amended to read as follows:

‘(B) QUALIFIED RESERVE FUND- For purposes of subparagraph (A), the term ‘qualified reserve fund’ means any reasonably required reserve to--

‘(i) provide for full payment of expenses of the REMIC or amounts due on regular interests in the event of defaults on qualified mortgages or lower than expected returns on cash flow investments, or

‘(ii) provide a source of funds for the purchase of obligations described in clause (ii) or (iii) of paragraph (3)(A).

The aggregate fair market value of the assets held in any such reserve shall not exceed 50 percent of the aggregate fair market value of all of the assets of the REMIC on the startup day, and the amount of any such reserve shall be promptly and appropriately reduced to the extent the amount held in such reserve is no longer reasonably required for purposes specified in clause (i) or (ii) of this subparagraph.’.

(9) Subparagraph (C) of section 1202(e)(4) is amended by striking ‘REMIC, or FASIT’ and inserting ‘or REMIC’.

(10) Clause (xi) of section 7701(a)(19)(C) is amended--

(A) by striking ‘and any regular interest in a FASIT,’, and

(B) by striking ‘or FASIT’ each place it appears.

(11) Subparagraph (A) of section 7701(i)(2) is amended by striking ‘or a FASIT’.

(12) The table of parts for subchapter M of chapter 1 is amended by striking the item relating to part V.

(c) EFFECTIVE DATE-

(1) IN GENERAL- Except as provided in paragraph (2), the amendments made by this section shall take effect on February 14, 2003.

(2) EXCEPTION FOR EXISTING FASITS- Paragraph (1) shall not apply to any FASIT in existence on the date of the enactment of this Act to the extent that regular interests issued by the FASIT before such date continue to remain outstanding in accordance with the original terms of issuance.

SEC. 324. EXPANDED DISALLOWANCE OF DEDUCTION FOR INTEREST ON CONVERTIBLE DEBT.

(a) IN GENERAL- Paragraph (2) of section 163(l) is amended by inserting ‘or equity held by the issuer (or any related party) in any other person’ after ‘or a related party’.

(b) CAPITALIZATION ALLOWED WITH RESPECT TO EQUITY OF PERSONS OTHER THAN ISSUER AND RELATED PARTIES- Section 163(l) is amended by redesignating paragraphs (4) and (5) as paragraphs (5) and (6) and by inserting after paragraph (3) the following new paragraph:

‘(4) CAPITALIZATION ALLOWED WITH RESPECT TO EQUITY OF PERSONS OTHER THAN ISSUER AND RELATED PARTIES- If the disqualified debt instrument of a corporation is payable in equity held by the issuer (or any related party) in any other person (other than a related party), the basis of such equity shall be increased by the amount not allowed as a

deduction by reason of paragraph (1) with respect to the instrument.’.

(c) EXCEPTION FOR CERTAIN INSTRUMENTS ISSUED BY DEALERS IN SECURITIES- Section 163(l), as amended by subsection (b), is amended by redesignating paragraphs (5) and (6) as paragraphs (6) and (7) and by inserting after paragraph (4) the following new paragraph:

‘(5) EXCEPTION FOR CERTAIN INSTRUMENTS ISSUED BY DEALERS IN SECURITIES- For purposes of this subsection, the term ‘disqualified debt instrument’ does not include indebtedness issued by a dealer in securities (or a related party) which is payable in, or by reference to, equity (other than equity of the issuer or a related party) held by such dealer in its capacity as a dealer in securities. For purposes of this paragraph, the term ‘dealer in securities’ has the meaning given such term by section 475.’.

(d) CONFORMING AMENDMENTS- Paragraph (3) of section 163(l) is amended--

(1) by striking ‘or a related party’ in the material preceding subparagraph (A) and inserting ‘or any other person’, and

(2) by striking ‘or interest’ each place it appears.

(e) EFFECTIVE DATE- The amendments made by this section shall apply to debt instruments issued after February 13, 2003.

SEC. 325. EXPANDED AUTHORITY TO DISALLOW TAX BENEFITS UNDER SECTION 269.

(a) IN GENERAL- Subsection (a) of section 269 (relating to acquisitions made to evade or avoid income tax) is amended to read as follows:

‘(a) IN GENERAL- If--

‘(1)(A) any person or persons acquire, directly or indirectly, control of a corporation, or

‘(B) any corporation acquires, directly or indirectly, property of another corporation and the basis of such property, in the hands of the acquiring corporation, is determined by reference to the basis in the hands of the transferor corporation, and

‘(2) the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax,

then the Secretary may disallow such deduction, credit, or other allowance. For purposes of paragraph (1)(A), control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of all shares of all classes of stock of the corporation.’.

(b) EFFECTIVE DATE- The amendment made by this section shall apply to stock and property acquired after February 13, 2003.

SEC. 326. MODIFICATION OF INTERACTION BETWEEN SUBPART F AND PASSIVE FOREIGN INVESTMENT COMPANY RULES.

(a) LIMITATION ON EXCEPTION FROM PFIC RULES FOR UNITED STATES SHAREHOLDERS OF CONTROLLED FOREIGN CORPORATIONS- Paragraph (2) of section 1297(e) (relating to passive foreign investment company) is amended by adding at the end the following flush sentence:

‘Such term shall not include any period if the earning of subpart F income by such corporation during such period would result in only a remote likelihood of an inclusion in gross income under section 951(a)(1)(A)(i).’.

(b) EFFECTIVE DATE- The amendment made by this section shall apply to taxable years of controlled foreign corporations beginning after February 13, 2003, and to taxable years of United States shareholders with or within which such taxable years of controlled foreign corporations end.

Subtitle C--Extension of Customs User Fees

SEC. 331. EXTENSION OF CUSTOMS USER FEES.

Section 13031(j)(3) of the Consolidated Omnibus Budget Reconciliation Act of 1985 (19 U.S.C. 58c(j)(3)) is amended by striking ‘March 1, 2005’ and inserting ‘September 30, 2013’.

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