< Back to S. 1111 (110th Congress, 2007–2009)

Text of the Fair Flat Tax Act of 2007

This bill was introduced on April 16, 2007, in a previous session of Congress, but was not enacted. The text of the bill below is as of Apr 16, 2007 (Introduced).

Source: GPO

II

110th CONGRESS

1st Session

S. 1111

IN THE SENATE OF THE UNITED STATES

April 16, 2007

introduced the following bill; which was read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to make the Federal income tax system simpler, fairer, and more fiscally responsible, and for other purposes.

1.

Short title; amendment of 1986 Code; table of contents

(a)

Short Title

This Act may be cited as the Fair Flat Tax Act of 2007.

(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; amendment of 1986 Code; table of contents.

Sec. 2. Purpose.

TITLE I—INDIVIDUAL INCOME TAX REFORMS

Sec. 101. 3 progressive individual income tax rates for all forms of income.

Sec. 102. Health care standard deduction.

Sec. 103. Increase in basic standard deduction.

Sec. 104. Refundable credit for State and local income, sales, and real and personal property taxes.

Sec. 105. Earned income child credit and earned income credit for childless taxpayers.

Sec. 106. Repeal of individual alternative minimum tax.

Sec. 107. Termination of various exclusions, exemptions, deductions, and credits.

TITLE II—CORPORATE AND BUSINESS INCOME TAX REFORMS

Sec. 201. Corporate flat tax.

Sec. 202. Treatment of travel on corporate aircraft.

Sec. 203. Termination of various preferential treatments.

Sec. 204. Elimination of tax expenditures that subsidize inefficiencies in the health care system.

Sec. 205. Pass-through business entity transparency.

Sec. 206. Modification of effective date of leasing provisions of the American Jobs Creation Act of 2004.

Sec. 207. Revaluation of LIFO inventories of large integrated oil companies.

Sec. 208. Modifications of foreign tax credit rules applicable to large integrated oil companies which are dual capacity taxpayers.

Sec. 209. Repeal of lower of cost or market value of inventory rule.

Sec. 210. Reinstitution of per country foreign tax credit.

Sec. 211. Application of rules treating inverted corporations as domestic corporations to certain transactions occurring after March 20, 2002.

TITLE III—Other provisions

Subtitle A—Improvements in tax compliance

Sec. 301. Information reporting on payments to corporations.

Sec. 302. Broker reporting of customer's basis in securities transactions.

Sec. 303. Additional reporting requirements by regulation.

Sec. 304. Increase in information return penalties.

Sec. 305. E-filing requirement for certain large organizations.

Sec. 306. Implementation of standards clarifying when employee leasing companies can be held liable for their clients' Federal employment taxes.

Sec. 307. Modification of collection due process procedures for employment tax liabilities.

Sec. 308. Expansion of IRS access to information in National Directory of New Hires for tax administration purposes.

Sec. 309. Disclosure of prisoner return information to Federal Bureau of Prisons.

Sec. 310. Modification of criminal penalties for willful failures involving tax payments and filing requirements.

Sec. 311. Understatement of taxpayer liability by return preparers.

Sec. 312. Penalties for failure to file certain returns electronically.

Sec. 313. Penalty for filing erroneous refund claims.

Subtitle B—Requiring economic substance

Sec. 321. Clarification of economic substance doctrine.

Sec. 322. Penalty for understatements attributable to transactions lacking economic substance, etc.

Sec. 323. Denial of deduction for interest on underpayments attributable to noneconomic substance transactions.

Subtitle C—Miscellaneous

Sec. 331. Denial of deduction for punitive damages.

TITLE IV—TECHNICAL AND CONFORMING AMENDMENTS; SUNSET

Sec. 401. Technical and conforming amendments.

Sec. 402. Sunset.

2.

Purpose

The purpose of this Act is to amend the Internal Revenue Code of 1986—

(1)

to make the Federal individual income tax system simpler, fairer, and more transparent by—

(A)

recognizing the overall Federal, State, and local tax burden on individual Americans, especially the regressive nature of State and local taxes, and providing a Federal income tax credit for State and local income, sales, and property taxes,

(B)

providing for an earned income tax credit for childless taxpayers and a new earned income child credit,

(C)

repealing the individual alternative minimum tax,

(D)

increasing the basic standard deduction and maintaining itemized deductions for principal residence mortgage interest and charitable contributions,

(E)

reducing the number of exclusions, exemptions, deductions, and credits, and

(F)

treating all income equally,

(2)

to make the Federal corporate income tax rate a flat 35 percent and eliminate special tax preferences that favor particular types of businesses or activities, and

(3)

to partially offset the Federal budget deficit through the increased fiscal responsibility resulting from these reforms.

I

INDIVIDUAL INCOME TAX REFORMS

101.

3 progressive individual income tax rates for all forms of income

(a)

Married Individuals Filing Joint Returns and Surviving Spouses

The table contained in section 1(a) is amended to read as follows:

If taxable income is:The tax is:
Not over $30,00015% of taxable income.
Over $30,000 but not over $120,000$4,500, plus 25% of the excess over $30,000
Over $120,000$27,000, plus 35% of the excess over $120,000

.

(b)

Heads of Households

The table contained in section 1(b) is amended to read as follows:

If taxable income is:The tax is:
Not over $16,00015% of taxable income.
Over $16,000 but not over $105,000$2,400, plus 25% of the excess over $16,000
Over $105,000$24,650, plus 35% of the excess over $105,000

.

(c)

Unmarried Individuals (Other Than Surviving Spouses and Heads of Households)

The table contained in section 1(c) is amended to read as follows:

If taxable income is:The tax is:
Not over $15,00015% of taxable income.
Over $15,000 but not over $60,000$2,250, plus 25% of the excess over $15,000
Over $60,000$13,500, plus 35% of the excess over $60,000

.

(d)

Married Individuals Filing Separate Returns

The table contained in section 1(d) is amended to read as follows:

If taxable income is:The tax is:
Not over $15,00015% of taxable income.
Over $15,000 but not over $60,000$2,250, plus 25% of the excess over $15,000
Over $60,000$13,500, plus 35% of the excess over $60,000

.

(e)

Conforming Amendments to Inflation Adjustment

Section 1(f) is amended—

(1)

by striking 1993 in paragraph (1) and inserting 2008,

(2)

by striking except as provided in paragraph (8) in paragraph (2)(A),

(3)

by striking 1992 in paragraph (3)(B) and inserting 2007,

(4)

by striking paragraphs (7) and (8), and

(5)

by striking Phaseout of Marriage Penalty in 15-Percent Bracket; in the heading thereof.

(f)

Repeal of Rate Differential for Capital Gains and Dividends

(1)

Repeal of 2003 rate reduction

Section 303 of the Jobs and Growth Tax Relief Reconciliation Act of 2003 is amended by striking December 3, 2008 and inserting December 31, 2007.

(2)

Termination of pre-2003 capital gain rate differential

Section 1(h) is amended (after the application of paragraph (1)) by adding at the end the following new paragraph:

(13)

Termination

This section shall not apply to taxable years beginning after December 31, 2007.

.

(g)

Additional Conforming Amendments

(1)

Section 1 is amended by striking subsection (i).

(2)

The Internal Revenue Code of 1986 is amended by striking calendar year 1992 each place it appears and inserting calendar year 2007.

(3)

Section 1445(e)(1) (after the application of subsection (g)(1)) is amended by striking (or, to the extent provided in regulations, 20 percent).

(h)

Effective Date

The amendments made by this section shall apply to taxable years beginning after December 31, 2007.

102.

Health care standard deduction

(a)

In general

Section 62(a) (defining adjusted gross income) is amended by inserting after paragraph (21) the following new paragraph:

(22)

Individual shared responsibility payments

(A)

In general

In the case of a taxpayer with gross income for the taxable year exceeding 100 percent of the poverty line (adjusted for the size of the family involved) for the calendar year in which such taxable year begins and who is enrolled in a HAPI plan under the Healthy Americans Act, the deduction allowable under section 213 by reason of subsection (d)(1)(D) thereof (determined without regard to any income limitation under subsection (a) thereof) in an amount equal to the applicable fraction times, in the case of—

(i)

coverage of an individual, $6,025,

(ii)

coverage of a married couple or domestic partnership (as determined by a State) without dependent children, $12,050,

(iii)

coverage of an unmarried individual with 1 or more dependent children, $8,610, plus $2,000 for each dependent child, and

(iv)

coverage of a married couple or domestic partnership (as determined by a State) with 1 or more dependent children, $15,210, plus $2,000 for each dependent child.

(B)

Applicable fraction

For purposes of subparagraph (A), the applicable fraction is the fraction (not to exceed 1)—

(i)

the numerator of which is the gross income of the taxpayer for the taxable year expressed as a percentage of the poverty line (adjusted for the size of the family involved) minus such poverty line for the calendar year in which such taxable year begins, and

(ii)

the denominator of which is 400 percent of the poverty line (adjusted for the size of the family involved) minus such poverty line.

(C)

Phaseout of deduction amount

(i)

In general

The amount otherwise determined under subparagraph (A) for any taxable year shall be reduced by the amount determined under clause (ii).

(ii)

Amount of reduction

The amount determined under this clause shall be the amount which bears the same ratio to the amount determined under subparagraph (A) as—

(I)

the excess of the taxpayer’s modified adjusted gross income for such taxable year, over $62,500 ($125,000 in the case of a joint return), bears to

(II)

$62,500 ($125,000 in the case of a joint return).

Any amount determined under this clause which is not a multiple of $1,000 shall be rounded to the next lowest $1,000.
(D)

Inflation adjustment

In the case of any taxable year beginning in a calendar year after 2009, each dollar amount contained in subparagraph (A) and subparagraph (C)(ii)(I) shall be increased by an amount equal to such dollar amount, multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting calendar year 2008 for calendar year 1992 in subparagraph (B) thereof. Any increase determined under the preceding sentence shall be rounded to the nearest multiple of $50 ($1,000 in the case of the dollar amount contained in subparagraph (C)(ii)(I)).

(E)

Determination of modified adjusted gross income

(i)

In general

For purposes of this paragraph, the term modified adjusted gross income means adjusted gross income—

(ii)

determined without regard to this section and sections 86, 135, 137, 199, 221, 222, 911, 931, and 933, and

(iii)

increased by—

(I)

the amount of interest received or accrued during the taxable year which is exempt from tax under this title, and

(II)

the amount of any social security benefits (as defined in section 86(d)) received or accrued during the taxable year.

(F)

Poverty line

For purposes of this paragraph, the term poverty line has the meaning given such term in section 673(2) of the Community Health Services Block Grant Act (42 U.S.C. 9902(2)), including any revision required by such section.

.

(b)

Conforming amendment

Section 213(d)(1)(D) is amended by inserting amounts paid under section 3421 and after including.

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2007.

103.

Increase in basic standard deduction

(a)

In General

Paragraph (2) of section 63(c) (defining standard deduction) is amended to read as follows:

(2)

Basic standard deduction

For purposes of paragraph (1), the basic standard deduction is—

(A)

200 percent of the dollar amount in effect under subparagraph (C) for the taxable year in the case of—

(i)

a joint return, or

(ii)

a surviving spouse (as defined in section 2(a)),

(B)

$26,250 in the case of a head of household (as defined in section 2(b)), reduced by any deduction allowed under section 62(a)(22) for such taxable year, or

(C)

$15,000 in any other case, reduced by any deduction allowed under section 62(a)(22) for such taxable year.

.

(b)

Conforming Amendment to Inflation Adjustment

Section 63(c)(4)(B)(i) is amended by striking (2)(B), (2)(C), or.

(c)

Effective Date

The amendments made by this section shall apply to taxable years beginning after December 31, 2007.

104.

Refundable credit for State and local income, sales, and real and personal property taxes

(a)

General Rule

Subpart C of part IV of subchapter A of chapter 1 (relating to refundable credits) is amended by redesignating section 36 as section 37 and by inserting after section 35 the following new section:

36.

Credit for State and local income, sales, and real and personal property taxes

(a)

Allowance of Credit

In the case of an individual, there shall be allowed as a credit against the tax imposed by this subtitle for the taxable year an amount equal to 10 percent of the qualified State and local taxes paid by the taxpayer for such year.

(b)

Qualified State and Local Taxes

For purposes of this section, the term qualified State and local taxes means—

(1)

State and local income taxes,

(2)

State and local general sales taxes,

(3)

State and local real property taxes, and

(4)

State and local personal property taxes.

(c)

Definitions and Special Rules

For purposes of this section—

(1)

State or local taxes

A State or local tax includes only a tax imposed by a State, a possession of the United States, or a political subdivision of any of the foregoing, or by the District of Columbia.

(2)

General sales taxes

(A)

In general

The term general sales tax means a tax imposed at one rate with respect to the sale at retail of a broad range of classes of items.

(B)

Application of rules

Rules similar to the rules under subparagraphs (C), (D), (E), (F), (G), and (H) of section 164(b)(5) shall apply.

(3)

Personal property taxes

The term personal property tax means an ad valorem tax which is imposed on an annual basis in respect of personal property.

(4)

Application of rules to property taxes

Rules similar to the rules of subsections (c) and (d) of section 164 shall apply.

(5)

No credit for married individuals filing separate returns

If the taxpayer is a married individual (within the meaning of section 7703), this section shall apply only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year.

(6)

Denial of credit to dependents

No credit shall be allowed under this section to any individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which such individual’s taxable year begins.

(7)

Denial of double benefit

Any amount taken into account in determining the credit allowable under this section may not be taken into account in determining any credit or deduction under any other provision of this chapter.

.

(b)

Technical Amendments

(1)

Paragraph (2) of section 1324(b) of title 31, United States Code, is amended by inserting or from section 36 of such Code before the period at the end.

(2)

The table of sections for subpart C of part IV of subchapter A of chapter 1 is amended by striking the item relating to section 36 and inserting the following:

Sec. 36. Credit for state and local income, sales, and real and personal property taxes.

Sec. 37. Overpayments of tax.

.

(c)

Report Regarding Use of Credit by Renters

Not later than 180 days after the date of the enactment of this Act, the Secretary of the Treasury shall report to the Committee on Finance of the Senate and the Committee on Ways and Means of the House of Representatives recommendations regarding the treatment of a portion of rental payments in a manner similar to real property taxes under section 36 of the Internal Revenue Code of 1986 (as added by this section).

(d)

Effective Date

The amendments made by this section shall apply to taxable years beginning after December 31, 2007.

105.

Earned income child credit and earned income credit for childless taxpayers

(a)

In General

Subsection (a) of section 32 (relating to earned income) is amended to read as follows:

(a)

Allowance of Earned Income Child Credit and Earned Income Credit

(1)

In general

There shall be allowed as a credit against the tax imposed by this subtitle for the taxable year—

(A)

in the case of any eligible individual with 1 or more qualifying children, an amount equal to the earned income child credit amount, and

(B)

in the case of any eligible individual with no qualifying children, an amount equal to the earned income credit amount.

(2)

Earned income child credit amount

For purposes of this section, the earned income child credit amount is equal to the sum of—

(A)

the credit percentage of so much of the taxpayer’s earned income for the taxable year as does not exceed the earned income limit amount, plus

(B)

the supplemental child credit amount determined under subsection (n) for such taxable year.

(3)

Earned income credit amount

For purposes of this section, the earned income credit amount is equal to the credit percentage of so much of the taxpayer’s earned income for the taxable year as does not exceed the earned income limit amount.

(4)

Limitation

The amount of the credit allowable to a taxpayer under paragraph (2)(A) or (3) for any taxable year shall not exceed the excess (if any) of—

(A)

the credit percentage of the earned income amount, over

(B)

the phaseout percentage of so much of the adjusted gross income (or, if greater, the earned income) of the taxpayer for the taxable year as exceeds the phaseout amount.

.

(b)

Supplemental Child Credit Amount

Section 32 is amended by adding at the end the following new subsection:

(n)

Supplemental Child Credit Amount

(1)

In general

For purposes of subsection (a)(2)(B), the supplemental child credit amount for any taxable year is equal to the lesser of—

(A)

the credit which would be allowed under section 24 for such taxable year without regard to the limitation under section 24(b)(3) with respect to any qualifying child as defined under subsection (c)(3), or

(B)

the amount by which the aggregate amount of credits allowed by subpart A for such taxable year would increase if the limitation imposed by section 24(b)(3) were increased by the excess (if any) of—

(i)

15 percent of so much of the taxpayer’s earned income which is taken into account in computing taxable income for the taxable year as exceeds $10,000, or

(ii)

in the case of a taxpayer with 3 or more qualifying children (as so defined), the excess (if any) of—

(I)

the taxpayer’s social security taxes for the taxable year, over

(II)

the credit allowed under this section for the taxable year.

The amount of the credit allowed under this subsection shall not be treated as a credit allowed under subpart A and shall reduce the amount of credit otherwise allowable under section 24(a) without regard to section 24(b)(3).
(2)

Social security taxes

For purposes of paragraph (1)—

(A)

In general

The term social security taxes means, with respect to any taxpayer for any taxable year—

(i)

the amount of the taxes imposed by section 3101 and 3201(a) on amounts received by the taxpayer during the calendar year in which the taxable year begins,

(ii)

50 percent of the taxes imposed by section 1401 on the self-employment income of the taxpayer for the taxable year, and

(iii)

50 percent of the taxes imposed by section 3211(a)(1) on amounts received by the taxpayer during the calendar year in which the taxable year begins.

(B)

Coordination with special refund of social security taxes

The term social security taxes shall not include any taxes to the extent the taxpayer is entitled to a special refund of such taxes under section 6413(c).

(C)

Special rule

Any amounts paid pursuant to an agreement under section 3121(l) (relating to agreements entered into by American employers with respect to foreign affiliates) which are equivalent to the taxes referred to in subparagraph (A)(i) shall be treated as taxes referred to in such paragraph.

(3)

Inflation adjustment

In the case of any taxable year beginning in a calendar year after 2007, the $10,000 amount contained in paragraph (1)(B) shall be increased by an amount equal to—

(A)

such dollar amount, multiplied by

(B)

the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting calendar year 2000 for calendar year 1992 in subparagraph (B) thereof.

Any increase determined under the preceding sentence shall be rounded to the nearest multiple of $50.

.

(c)

Conforming Amendment

Section 24(d) is amended by adding at the end the following new paragraph:

(4)

Termination

This subsection shall not apply with respect to any taxable year beginning after December 31, 2007.

.

(d)

Certain Treatment of Earned Income Made Permanent

Clause (vi) of section 32(c)(2)(B) is amended to read as follows:

(vi)

a taxpayer may elect to treat amounts excluded from gross income by reason of section 112 as earned income.

.

(e)

Repeal of Disqualified Investment Income Test

Subsection (i) of section 32 is repealed.

(f)

Effective Date

The amendments made by this section shall apply to taxable years beginning after December 31, 2007.

106.

Repeal of individual alternative minimum tax

(a)

In General

Section 55(a) (relating to alternative minimum tax imposed) is amended by adding at the end the following new flush sentence:

For purposes of this title, the tentative minimum tax on any taxpayer other than a corporation for any taxable year beginning after December 31, 2007, shall be zero.

.

(b)

Modification of Limitation on Use of Credit for Prior Year Minimum Tax Liability

Subsection (c) of section 53 (relating to credit for prior year minimum tax liability) is amended to read as follows:

(c)

Limitation

(1)

In general

Except as provided in paragraph (2), the credit allowable under subsection (a) for any taxable year shall not exceed the excess (if any) of—

(A)

the regular tax liability of the taxpayer for such taxable year reduced by the sum of the credits allowable under subparts A, B, D, E, and F of this part, over

(B)

the tentative minimum tax for the taxable year.

(2)

Taxable years beginning after 2007

In the case of any taxable year beginning after 2007, the credit allowable under subsection (a) to a taxpayer other than a corporation for any taxable year shall not exceed 90 percent of the regular tax liability of the taxpayer for such taxable year reduced by the sum of the credits allowable under subparts A, B, D, E, and F of this part.

.

(c)

Effective Date

The amendments made by this section shall apply to taxable years beginning after December 31, 2007.

107.

Termination of various exclusions, exemptions, deductions, and credits

(a)

In General

Subchapter C of chapter 90 (relating to provisions affecting more than one subtitle) is amended by adding at the end the following new section:

7875.

Termination of certain provisions

The following provisions shall not apply to taxable years beginning after December 31, 2007:

(1)

Section 67 (relating to 2-percent floor on miscellaneous itemized deductions).

(2)

Section 74(c) (relating to exclusion of certain employee achievement awards).

(3)

Section 79 (relating to exclusion of group-term life insurance purchased for employees).

(4)

Section 119 (relating to exclusion of meals or lodging furnished for the convenience of the employer).

(5)

Section 125 (relating to exclusion of cafeteria plan benefits).

(6)

Section 132 (relating to certain fringe benefits), except with respect to subsection (a)(5) thereof (relating to exclusion of qualified transportation fringe).

(7)

Section 163(h)(4)(A)(i)(II) (relating to definition of qualified residence).

(8)

Section 165(d) (relating to deduction for wagering losses).

(9)

Section 217 (relating to deduction for moving expenses).

(10)

Section 454 (relating to deferral of tax on obligations issued at discount).

(11)

Section 501(c)(9) (relating to tax-exempt status of voluntary employees’ beneficiary associations).

(12)

Section 911 (relating to exclusion of earned income of citizens or residents of the United States living abroad).

(13)

Section 912 (relating to exemption for certain allowances).

.

(b)

Conforming Amendment

The table of sections for subchapter C of chapter 90 is amended by adding at the end the following new item:

Sec. 7875. Termination of certain provisions.

.

II

CORPORATE AND BUSINESS INCOME TAX REFORMS

201.

Corporate flat tax

(a)

In General

Subsection (b) of section 11 (relating to tax imposed) is amended to read as follows:

(b)

Amount of Tax

The amount of tax imposed by subsection (a) shall be equal to 35 percent of the taxable income.

.

(b)

Conforming Amendments

(1)

Section 280C(c)(3)(B)(ii)(II) is amended by striking maximum rate of tax under section 11(b)(1) and inserting rate of tax under section 11(b).

(2)

Sections 860E(e)(2)(B), 860E(e)(6)(A)(ii), 860K(d)(2)(A)(ii), 860K(e)(1)(B)(ii), 1446(b)(2)(B), and 7874(e)(1)(B) are each amended by striking highest rate of tax specified in section 11(b)(1) and inserting rate of tax specified in section 11(b).

(3)

Section 904(b)(3)(D)(ii) is amended by striking (determined without regard to the last sentence of section 11(b)(1)).

(4)

Section 962 is amended by striking subsection (c) and by redesignating subsection (d) as subsection (c).

(5)

Section 1201(a) is amended by striking (determined without regard to the last 2 sentences of section 11(b)(1)).

(6)

Section 1561(a) is amended—

(A)

by striking paragraph (1) and by redesignating paragraphs (2), (3), and (4) as paragraphs (1), (2), and (3), respectively,

(B)

by striking The amounts specified in paragraph (1), the and inserting The,

(C)

by striking paragraph (2) and inserting paragraph (1),

(D)

by striking paragraph (3) both places it appears and inserting paragraph (2),

(E)

by striking paragraph (4) and inserting paragraph (3), and

(F)

by striking the fourth sentence.

(7)

Subsection (b) of section 1561 is amended to read as follows:

(b)

Certain Short Taxable Years

If a corporation has a short taxable year which does not include a December 31 and is a component member of a controlled group of corporations with respect to such taxable year, then for purposes of this subtitle, the amount to be used in computing the accumulated earnings credit under section 535(c)(2) and (3) of such corporation for such taxable year shall be the amount specified in subsection (a)(1) divided by the number of corporations which are component members of such group on the last day of such taxable year. For purposes of the preceding sentence, section 1563(b) shall be applied as if such last day were substituted for December 31.

.

(c)

Effective Date

The amendments made by this section shall apply to taxable years beginning after December 31, 2007.

202.

Treatment of travel on corporate aircraft

(a)

In General

Section 162 (relating to trade or business expenses) is amended by redesignating subsection (q) as subsection (r) and by inserting after subsection (p) the following new subsection:

(q)

Treatment of Travel on Corporate Aircraft

The rate at which an amount allowable as a deduction under this chapter for the use of an aircraft owned by the taxpayer is determined shall not exceed the rate at which an amount paid or included in income by an employee of such taxpayer for the personal use of such aircraft is determined.

.

(b)

Effective Date

The amendments made by this section shall apply to taxable years beginning after December 31, 2007.

203.

Termination of various preferential treatments

(a)

In General

Section 7875, as added by section 107, is amended—

(1)

by inserting (or transactions in the case of sections referred to in paragraphs (21), (22), (23), (24), and (27)) after taxable years beginning, and

(2)

by adding at the end the following new paragraphs:

(14)

Section 43 (relating to enhanced oil recovery credit).

(15)

Section 263(c) (relating to intangible drilling and development costs in the case of oil and gas wells and geothermal wells).

(16)

Section 382(l)(5) (relating to exception from net operating loss limitations for corporations in bankruptcy proceeding).

(17)

Section 451(i) (relating to special rules for sales or dispositions to implement Federal Energy Regulatory Commission or State electric restructuring policy).

(18)

Section 453A (relating to special rules for nondealers), but only with respect to the dollar limitation under subsection (b)(1) thereof and subsection (b)(3) thereof (relating to exception for personal use and farm property).

(19)

Section 460(e)(1) (relating to special rules for long-term home construction contracts or other short-term construction contracts).

(20)

Section 613A (relating to percentage depletion in case of oil and gas wells).

(21)

Section 616 (relating to development costs).

(22)

Sections 861(a)(6), 862(a)(6), 863(b)(2), 863(b)(3), and 865(b) (relating to inventory property sales source rule exception).

.

(b)

Full Tax Rate on Nuclear Decommissioning Reserve Fund

Subparagraph (B) of section 468A(e)(2) is amended to read as follows:

(B)

Rate of tax

For purposes of subparagraph (A), the rate set forth in this subparagraph is 35 percent.

.

(c)

Deferral of Active Income of Controlled Foreign Corporations

Section 952 (relating to subpart F income defined) is amended by adding at the end the following new subsection:

(e)

Special Application of Subpart

(1)

In general

For taxable years beginning after December 31, 2007, notwithstanding any other provision of this subpart, the term subpart F income means, in the case of any controlled foreign corporation, the income of such corporation derived from any foreign country.

(2)

Applicable rules

Rules similar to the rules under the last sentence of subsection (a) and subsection (d) shall apply to this subsection.

.

(d)

Deferral of Active Financing Income

Section 953(e)(10) is amended—

(1)

by striking January 1, 2009 and inserting January 1, 2008, and

(2)

by striking December 31, 2008 and inserting December 31, 2007.

(e)

Depreciation on Equipment in Excess of Alternative Depreciation System

Section 168(g)(1) (relating to alternative depreciation system) is amended by striking and at the end of subparagraph (D), by adding and at the end of subparagraph (E), and by inserting after subparagraph (E) the following new subparagraph:

(F)

notwithstanding subsection (a), any tangible property placed in service after December 31, 2007,

.

(f)

Effective Date

The amendments made by subsections (b), (c), and (d) shall apply to taxable years beginning after December 31, 2007.

204.

Elimination of tax expenditures that subsidize inefficiencies in the health care system

Not later than 180 days after the date of the enactment of this Act, the Secretary of the Treasury shall report to the Committee on Finance of the Senate and the Committee on Ways and Means of the House of Representatives recommendations regarding the elimination of Federal tax incentives which subsidize inefficiencies in the health care system and if eliminated would result in Federal budget savings of not less than $10,000,000,000 annually.

205.

Pass-through business entity transparency

Not later than 90 days after the date of the enactment of this Act, the Secretary of the Treasury shall report to the Committee on Finance of the Senate and the Committee on Ways and Means of the House of Representatives regarding the implementation of additional reporting requirements with respect to any pass-through entity with the goal of the reduction of tax avoidance through the use of such entities. In addition, the Secretary shall develop procedures to share such report data with State revenue agencies under the disclosure requirements of section 6103(d) of the Internal Revenue Code of 1986.

206.

Modification of effective date of leasing provisions of the American Jobs Creation Act of 2004

(a)

Leases to Foreign Entities

Section 849(b) of the American Jobs Creation Act of 2004 is amended by adding at the end the following new paragraph:

(5)

Leases to foreign entities

In the case of tax-exempt use property leased to a tax-exempt entity which is a foreign person or entity, the amendments made by this part shall apply to taxable years beginning after December 31, 2006, with respect to leases entered into on or before March 12, 2004.

.

(b)

Effective Date

The amendment made by this section shall take effect as if included in the enactment of the American Jobs Creation Act of 2004.

207.

Revaluation of LIFO inventories of large integrated oil companies

(a)

General rule

Notwithstanding any other provision of law, if a taxpayer is an applicable integrated oil company for its last taxable year ending in calendar year 2006, the taxpayer shall—

(1)

increase, effective as of the close of such taxable year, the value of each historic LIFO layer of inventories of crude oil, natural gas, or any other petroleum product (within the meaning of section 4611) by the layer adjustment amount, and

(2)

decrease its cost of goods sold for such taxable year by the aggregate amount of the increases under paragraph (1).

If the aggregate amount of the increases under paragraph (1) exceed the taxpayer’s cost of goods sold for such taxable year, the taxpayer’s gross income for such taxable year shall be increased by the amount of such excess.
(b)

Layer adjustment amount

For purposes of this section—

(1)

In general

The term layer adjustment amount means, with respect to any historic LIFO layer, the product of—

(A)

$18.75, and

(B)

the number of barrels of crude oil (or in the case of natural gas or other petroleum products, the number of barrel-of-oil equivalents) represented by the layer.

(2)

Barrel-of-oil equivalent

The term barrel-of-oil equivalent has the meaning given such term by section 29(d)(5) (as in effect before its redesignation by the Energy Tax Incentives Act of 2005).

(c)

Application of requirement

(1)

No change in method of accounting

Any adjustment required by this section shall not be treated as a change in method of accounting.

(2)

Underpayments of estimated tax

No addition to the tax shall be made under section 6655 of the Internal Revenue Code of 1986 (relating to failure by corporation to pay estimated tax) with respect to any underpayment of an installment required to be paid with respect to the taxable year described in subsection (a) to the extent such underpayment was created or increased by this section.

(d)

Applicable integrated oil company

For purposes of this section, the term applicable integrated oil company means an integrated oil company (as defined in section 291(b)(4) of the Internal Revenue Code of 1986) which has an average daily worldwide production of crude oil of at least 500,000 barrels for the taxable year and which had gross receipts in excess of $1,000,000,000 for its last taxable year ending during calendar year 2006. For purposes of this subsection all persons treated as a single employer under subsections (a) and (b) of section 52 of the Internal Revenue Code of 1986 shall be treated as 1 person and, in the case of a short taxable year, the rule under section 448(c)(3)(B) shall apply.

208.

Modifications of foreign tax credit rules applicable to large integrated oil companies which are dual capacity taxpayers

(a)

In general

Section 901 (relating to credit for taxes of foreign countries and of possessions of the United States) is amended by redesignating subsection (n) as subsection (o) and by inserting after subsection (l) the following new subsection:

(m)

Special rules relating to large integrated oil companies which are dual capacity taxpayers

(1)

General rule

Notwithstanding any other provision of this chapter, any amount paid or accrued by a dual capacity taxpayer which is a large integrated oil company to a foreign country or possession of the United States for any period shall not be considered a tax—

(A)

if, for such period, the foreign country or possession does not impose a generally applicable income tax, or

(B)

to the extent such amount exceeds the amount (determined in accordance with regulations) which—

(i)

is paid by such dual capacity taxpayer pursuant to the generally applicable income tax imposed by the country or possession, or

(ii)

would be paid if the generally applicable income tax imposed by the country or possession were applicable to such dual capacity taxpayer.

Nothing in this paragraph shall be construed to imply the proper treatment of any such amount not in excess of the amount determined under subparagraph (B).
(2)

Dual capacity taxpayer

For purposes of this subsection, the term dual capacity taxpayer means, with respect to any foreign country or possession of the United States, a person who—

(A)

is subject to a levy of such country or possession, and

(B)

receives (or will receive) directly or indirectly a specific economic benefit (as determined in accordance with regulations) from such country or possession.

(3)

Generally applicable income tax

For purposes of this subsection—

(A)

In general

The term generally applicable income tax means an income tax (or a series of income taxes) which is generally imposed under the laws of a foreign country or possession on income derived from the conduct of a trade or business within such country or possession.

(B)

Exceptions

Such term shall not include a tax unless it has substantial application, by its terms and in practice, to—

(i)

persons who are not dual capacity taxpayers, and

(ii)

persons who are citizens or residents of the foreign country or possession.

(4)

Large integrated oil company

For purposes of this subsection, the term large integrated oil company means, with respect to any taxable year, an integrated oil company (as defined in section 291(b)(4)) which—

(A)

had gross receipts in excess of $1,000,000,000 for such taxable year, and

(B)

has an average daily worldwide production of crude oil of at least 500,000 barrels for such taxable year.

(b)

Effective date

(1)

In general

The amendments made by this section shall apply to taxes paid or accrued in taxable years beginning after the date of the enactment of this Act.

(2)

Contrary treaty obligations upheld

The amendments made by this section shall not apply to the extent contrary to any treaty obligation of the United States.

209.

Repeal of lower of cost or market value of inventory rule

(a)

In general

Subsection (a) of section 471 (relating to general rules for inventories) is amended to read as follows:

(a)

General rule

Whenever in the opinion of the Secretary the use of inventories is necessary in order clearly to determine the income of the taxpayer, inventories shall be valued at cost.

.

(b)

Effective date

The amendment made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

210.

Reinstitution of per country foreign tax credit

(a)

In general

Subsection (a) of section 904 (relating to limitation on credit) is amended to read as follows:

(a)

Limitation

The amount of the credit in respect of the tax paid or accrued to any foreign country or possession of the United States shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer's taxable income from sources within such country or possession (but not in excess of the taxpayer's entire taxable income) bears to such taxpayer's entire taxable income for the same taxable year.

.

(b)

Effective date

The amendment made by this section shall apply to taxable years beginning after December 31, 2007.

211.

Application of rules treating inverted corporations as domestic corporations to certain transactions occurring after March 20, 2002

(a)

In General

Section 7874(b) (relating to inverted corporations treated as domestic corporations) is amended to read as follows:

(b)

Inverted Corporations Treated as Domestic Corporations

(1)

In general

Notwithstanding section 7701(a)(4), a foreign corporation shall be treated for purposes of this title as a domestic corporation if such corporation would be a surrogate foreign corporation if subsection (a)(2) were applied by substituting 80 percent for 60 percent.

(2)

Special rule for certain transactions occurring after march 20, 2002

(A)

In general

If—

(i)

paragraph (1) does not apply to a foreign corporation, but

(ii)

paragraph (1) would apply to such corporation if, in addition to the substitution under paragraph (1), subsection (a)(2) were applied by substituting March 20, 2002 for March 4, 2003 each place it appears,

then paragraph (1) shall apply to such corporation but only with respect to taxable years of such corporation beginning after December 31, 2006.
(B)

Special rules

Subject to such rules as the Secretary may prescribe, in the case of a corporation to which paragraph (1) applies by reason of this paragraph—

(i)

the corporation shall be treated, as of the close of its last taxable year beginning before January 1, 2007, as having transferred all of its assets, liabilities, and earnings and profits to a domestic corporation in a transaction with respect to which no tax is imposed under this title,

(ii)

the bases of the assets transferred in the transaction to the domestic corporation shall be the same as the bases of the assets in the hands of the foreign corporation, subject to any adjustments under this title for built-in losses,

(iii)

the basis of the stock of any shareholder in the domestic corporation shall be the same as the basis of the stock of the shareholder in the foreign corporation for which it is treated as exchanged, and

(iv)

the transfer of any earnings and profits by reason of clause (i) shall be disregarded in determining any deemed dividend or foreign tax creditable to the domestic corporation with respect to such transfer.

(C)

Regulations

The Secretary may prescribe such regulations as may be necessary or appropriate to carry out this paragraph, including regulations to prevent the avoidance of the purposes of this paragraph.

.

(b)

Effective Date

The amendment made by this section shall apply to taxable years beginning after December 31, 2006.

III

Other provisions

A

Improvements in tax compliance

301.

Information reporting on payments to corporations

(a)

In general

Section 6041(a) (relating to payments of $600 or more) is amended by inserting (including any corporation other than a corporation exempt from taxation) after another person.

(b)

Effective date

The amendment made by this section shall apply to payments made after December 31, 2007.

302.

Broker reporting of customer's basis in securities transactions

(a)

In general

Section 6045 (relating to returns of brokers) is amended by adding at the end the following new subsection:

(g)

Additional information required in the case of securities transactions

(1)

In general

If a broker is otherwise required to make a return under subsection (a) with respect to any applicable security, the broker shall include in such return the information described in paragraph (2).

(2)

Additional information required

(A)

In general

The information required under paragraph (1) to be shown on a return with respect to an applicable security of a customer shall include for each reported applicable security the customer's adjusted basis in such security.

(B)

Exemption from requirement

The Secretary shall issue such regulations or guidance as necessary concerning the application of the requirement under subparagraph (A) in cases in which a broker in making a return does not have sufficient information to meet such requirement with respect to the reported applicable security. Such regulations or guidance may—

(i)

require such other information related to such adjusted basis as the Secretary may prescribe, and

(ii)

exempt classes of cases in which the broker does not have sufficient information to meet either the requirement under subparagraph (A) or the requirement under clause (i).

(3)

Information transfers

To the extent provided in regulations, there shall be such exchanges of information between brokers as such regulations may require for purposes of enabling such brokers to meet the requirements of this subsection.

(4)

Definitions

For purposes of this subsection, the term applicable security means any—

(A)

security described in subparagraph (A) or (C) of section 475(c)(2),

(B)

interest in a regulated investment company (as defined in section 851), or

(C)

other financial instrument designated in regulations prescribed by the Secretary.

.

(b)

Determination of basis of certain securities by FIFO method

Section 1012 (relating to basis of property—cost) is amended by adding at the end the following new sentence: Except to the extent provided in regulations, the basis of any applicable security reportable under section 6045 (by reason of subsection (g) thereof) shall be determined on a first-in, first-out method..

(c)

Effective date

The amendments made by this section shall apply to sales and transfers occurring after December 31, 2007, with respect to securities acquired before, on, or after such date.

303.

Additional reporting requirements by regulation

The Secretary of the Treasury is authorized to issue regulations under which with respect to payments made after December 31, 2007—

(1)

any merchant acquiring bank is required to annually report to the Secretary the gross reimbursement payments made to merchants in a calendar year, unless the benefit of such reporting does not justify the cost of compliance, as determined by the Secretary,

(2)

any contractor receiving payments of $600 or more in a calendar year from a particular business is required to furnish such business the contractor's certified taxpayer identification number or be subject to withholding on such payments at a flat rate percentage selected by the contractor, and

(3)

any Federal, State, or local government is required to report to the Secretary any non-wage payment to procure property and services, other than payments of interest, payments for real property, payments to tax-exempt entities or foreign governments, intergovernmental payments, and payments made pursuant to a classified or confidential contract.

304.

Increase in information return penalties

(a)

Failure To file correct information returns

(1)

In general

Section 6721(a)(1) is amended—

(A)

by striking $50 and inserting $250, and

(B)

by striking $250,000 and inserting $3,000,000.

(2)

Reduction where correction in specified period

(A)

Correction within 30 days

Section 6721(b)(1) is amended—

(i)

by striking $15 and inserting $50,

(ii)

by striking $50 and inserting $250, and

(iii)

by striking $75,000 and inserting $500,000.

(B)

Failures corrected on or before August 1

Section 6721(b)(2) is amended—

(i)

by striking $30 and inserting $100,

(ii)

by striking $50 and inserting $250, and

(iii)

by striking $150,000 and inserting $1,500,000.

(3)

Lower limitation for persons with gross receipts of not more than $5,000,000

Section 6721(d)(1) is amended—

(A)

in subparagraph (A)—

(i)

by striking $100,000 and inserting $1,000,000, and

(ii)

by striking $250,000 and inserting $3,000,000,

(B)

in subparagraph (B)—

(i)

by striking $25,000 and inserting $175,000, and

(ii)

by striking $75,000 and inserting $500,000, and

(C)

in subparagraph (C)—

(i)

by striking $50,000 and inserting $500,000, and

(ii)

by striking $150,000 and inserting $1,500,000.

(4)

Penalty in case of intentional disregard

Section 6721(e) is amended—

(A)

by striking $100 in paragraph (2) and inserting $500,

(B)

by striking $250,000 in paragraph (3)(A) and inserting $3,000,000.

(b)

Failure To furnish correct payee statements

(1)

In general

Section 6722(a) is amended—

(A)

by striking $50 and inserting $250, and

(B)

by striking $100,000 and inserting $1,000,000.

(2)

Penalty in case of intentional disregard

Section 6722(c) is amended—

(A)

by striking $100 in paragraph (1) and inserting $500, and

(B)

by striking $100,000 in paragraph (2)(A) and inserting $1,000,000.

(c)

Failure To comply with other information reporting requirements

Section 6723 is amended—

(1)

by striking $50 and inserting $250, and

(2)

by striking $100,000 and inserting $1,000,000.

(d)

Effective date

The amendments made by this section shall apply with respect to information returns required to be filed on or after January 1, 2008.

305.

E-filing requirement for certain large organizations

(a)

In general

The first sentence of section 6011(e)(2) is amended to read as follows: In prescribing regulations under paragraph (1), the Secretary shall take into account (among other relevant factors) the ability of the taxpayer to comply at reasonable cost with the requirements of such regulations..

(b)

Conforming amendment

Section 6724 is amended by striking subsection (c).

(c)

Effective date

The amendments made by this section shall apply to taxable years ending on or after December 31, 2008.

306.

Implementation of standards clarifying when employee leasing companies can be held liable for their clients' Federal employment taxes

With respect to employment tax returns required to be filed with respect to wages paid on or after January 1, 2008, the Secretary of the Treasury shall issue regulations establishing—

(1)

standards for holding employee leasing companies jointly and severally liable with their clients for Federal employment taxes under chapters 21, 22, 23, and 24 of the Internal Revenue Code of 1986, and

(2)

standards for holding such companies solely liable for such taxes.

307.

Modification of collection due process procedures for employment tax liabilities

(a)

In general

Section 6330(f) (relating to jeopardy and State refund collection) is amended—

(1)

by striking ; or at the end of paragraph (1) and inserting a comma,

(2)

by adding or at the end of paragraph (2), and

(3)

by inserting after paragraph (2) the following new paragraph:

(3)

the Secretary has served a disqualified employment tax levy,

.

(b)

Disqualified employment tax levy

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

(h)

Disqualified employment tax levy

For purposes of subsection (f), a disqualified employment tax levy is any levy in connection with the collection of employment taxes for any taxable period if the person subject to the levy (or any predecessor thereof) requested a hearing under this section with respect to unpaid employment taxes arising in the most recent 2-year period before the beginning of the taxable period with respect to which the levy is served. For purposes of the preceding sentence, the term employment taxes means any taxes under chapter 21, 22, 23, or 24.

.

(c)

Effective date

The amendments made by this section shall apply to levies served on or after January 1, 2008.

308.

Expansion of IRS access to information in National Directory of New Hires for tax administration purposes

(a)

In general

Paragraph (3) of section 453(j) of the Social Security Act (42 U.S.C. 653(j)) is amended to read as follows:

(3)

Administration of Federal tax laws

The Secretary of the Treasury shall have access to the information in the National Directory of New Hires for purposes of administering the Internal Revenue Code of 1986.

.

(b)

Effective date

The amendment made by this section shall take effect on the date of the enactment of this Act.

309.

Disclosure of prisoner return information to Federal Bureau of Prisons

(a)

Disclosure

(1)

In general

Subsection (l) of section 6103 (relating to disclosure of returns and return information for purposes other than tax administration) is amended by adding at the end the following new paragraph:

(22)

Disclosure of return information of prisoners to Federal Bureau of Prisons

(A)

In general

Under such procedures as the Secretary may prescribe, the Secretary may disclose return information with respect to persons incarcerated in Federal prisons whom the Secretary believes filed or facilitated the filing of false or fraudulent returns to the head of the Federal Bureau of Prisons if the Secretary determines that such disclosure is necessary to permit effective tax administration.

(B)

Disclosure by agency to employees

The head of the Federal Bureau of Prisons may redisclose information received under subparagraph (A)—

(i)

only to those officers and employees of the Bureau who are personally and directly engaged in taking administrative actions to address violations of administrative rules and regulations of the prison facility, and

(ii)

solely for the purposes described in subparagraph (C).

(C)

Restriction on use of disclosed information

Return information disclosed under this paragraph may be used only for the purposes of—

(i)

preventing the filing of false or fraudulent returns; and

(ii)

taking administrative actions against individuals who have filed or attempted to file false or fraudulent returns.

.

(2)

Procedures and record keeping related to disclosure

Subsection (p)(4) of section 6103 is amended—

(A)

by striking (14), or (17) in the matter before subparagraph (A) and inserting (14), (17), or (22), and

(B)

by striking (9), or (16) in subparagraph (F)(i) and inserting (9), (16), or (22).

(3)

Evaluation by Treasury Inspector General for Tax Administration

Paragraph (3) of section 7803(d) is amended by striking and at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting ; and, and by adding at the end the following new subparagraph:

(C)

not later than 3 years after the date of the enactment of section 6103(l)(22), submit a written report to Congress on the implementation of such section.

.

(b)

Annual reports

(1)

In general

The Secretary of the Treasury shall submit to Congress and make publicly available an annual report on the filing of false and fraudulent returns by individuals incarcerated in Federal and State prisons.

(2)

Contents of report

The report submitted under paragraph (1) shall contain statistics on the number of false or fraudulent returns associated with each Federal and State prison and such other information that the Secretary determines is appropriate.

(3)

Exchange of information

For the purpose of gathering information necessary for the reports required under paragraph (1), the Secretary of the Treasury shall enter into agreements with the head of the Federal Bureau of Prisons and the heads of State agencies charged with responsibility for administration of State prisons under which the head of the Bureau or Agency provides to the Secretary not less frequently than annually the names and other identifying information of prisoners incarcerated at each facility administered by the Bureau or Agency.

(c)

Effective date

The amendments made by this section shall apply to disclosures on or after January 1, 2008.

310.

Modification of criminal penalties for willful failures involving tax payments and filing requirements

(a)

Increase in penalty for attempt To evade or defeat tax

Section 7201 (relating to attempt to evade or defeat tax) is amended—

(1)

by striking $100,000 and inserting $500,000,

(2)

by striking $500,000 and inserting $1,000,000, and

(3)

by striking 5 years and inserting 10 years.

(b)

Modification of penalties for willful failure To file return, supply information, or pay tax

(1)

In general

Section 7203 (relating to willful failure to file return, supply information, or pay tax) is amended—

(A)

in the first sentence—

(i)

by striking Any person and inserting the following:

(a)

In General

Any person

, and

(ii)

by striking $25,000 and inserting $50,000,

(B)

in the third sentence, by striking section and inserting subsection, and

(C)

by adding at the end the following new subsection:

(b)

Aggravated Failure To File

(1)

In general

In the case of any failure described in paragraph (2), the first sentence of subsection (a) shall be applied by substituting—

(A)

felony for misdemeanor,

(B)

$250,000 ($500,000 for $50,000 ($100,000, and

(C)

5 years for 1 year.

(2)

Failure described

A failure described in this paragraph is—

(A)

a failure to make a return described in subsection (a) for any 3 taxable years occurring during any period of 5 consecutive taxable years if the aggregate tax liability for such period is not less than $50,000, or

(B)

a failure to make a return if the tax liability giving rise to the requirement to make such return is attributable to an activity which is a felony under any State or Federal law.

.

(2)

Penalty may be applied in addition to other penalties

Section 7204 (relating to fraudulent statement or failure to make statement to employees) is amended by striking the penalty provided in section 6674 and inserting the penalties provided in sections 6674 and 7203(b).

(c)

Fraud and false statements

Section 7206 (relating to fraud and false statements) is amended—

(1)

by striking $100,000 and inserting $500,000,

(2)

by striking $500,000 and inserting $1,000,000, and

(3)

by striking 3 years and inserting 5 years.

(d)

Increase in monetary limitation for underpayment or overpayment of tax due to fraud

Section 7206 (relating to fraud and false statements), as amended by subsection (a)(3), is amended—

(1)

by striking Any person who— and inserting (a) In General.—Any person who—, and

(2)

by adding at the end the following new subsection:

(b)

Increase in monetary limitation for underpayment or overpayment of tax due to fraud

If any portion of any underpayment (as defined in section 6664(a)) or overpayment (as defined in section 6401(a)) of tax required to be shown on a return is attributable to fraudulent action described in subsection (a), the applicable dollar amount under subsection (a) shall in no event be less than an amount equal to such portion. A rule similar to the rule under section 6663(b) shall apply for purposes of determining the portion so attributable.

.

(e)

Effective Date

The amendments made by this section shall apply to actions, and failures to act, occurring after the date of the enactment of this Act.

311.

Understatement of taxpayer liability by return preparers

(a)

Application of return preparer penalties to all tax returns

(1)

Definition of tax return preparer

Paragraph (36) of section 7701(a) (relating to income tax preparer) is amended—

(A)

by striking income each place it appears in the heading and the text, and

(B)

in subparagraph (A), by striking subtitle A each place it appears and inserting this title.

(2)

Conforming amendments

(A)
(i)

Section 6060 is amended by striking income tax return preparers in the heading and inserting tax return preparers.

(ii)

Section 6060(a) is amended—

(I)

by striking an income tax return preparer each place it appears and inserting a tax return preparer,

(II)

by striking each income tax return preparer and inserting each tax return preparer, and

(III)

by striking another income tax return preparer and inserting another tax return preparer.

(iii)

The item relating to section 6060 in the table of sections for subpart F of part III of subchapter A of chapter 61 is amended by striking income tax return preparers and inserting tax return preparers.

(iv)

Subpart F of part III of subchapter A of chapter 61 is amended by striking income tax return preparers in the heading and inserting tax return preparers.

(v)

The item relating to subpart F in the table of subparts for part III of subchapter A of chapter 61 is amended by striking income tax return preparers and inserting tax return preparers.

(B)

Section 6103(k)(5) is amended—

(i)

by striking income tax return preparer each place it appears and inserting tax return preparer, and

(ii)

by striking income tax return preparers each place it appears and inserting tax return preparers.

(C)
(i)

Section 6107 is amended—

(I)

by striking Income tax return preparer in the heading and inserting Tax return preparer,

(II)

by striking an income tax return preparer each place it appears in subsections (a) and (b) and inserting a tax return preparer,

(III)

by striking income tax return preparer in the heading for subsection (b) and inserting tax return preparer, and

(IV)

in subsection (c), by striking income tax return preparers and inserting tax return preparers.

(ii)

The item relating to section 6107 in the table of sections for subchapter B of chapter 61 is amended by striking Income tax return preparer and inserting Tax return preparer.

(D)

Section 6109(a)(4) is amended—

(i)

by striking an income tax return preparer and inserting a tax return preparer, and

(ii)

by striking income return preparer in the heading and inserting tax return preparer.

(E)

Section 6503(k)(4) is amended by striking Income tax return preparers and inserting Tax return preparers.

(F)
(i)

Section 6694 is amended—

(I)

by striking income tax return preparer in the heading and inserting tax return preparer,

(II)

by striking an income tax return preparer each place it appears and inserting a tax return preparer,

(III)

in subsection (c)(2), by striking the income tax return preparer and inserting the tax return preparer,

(IV)

in subsection (e), by striking subtitle A and inserting this title, and

(V)

in subsection (f), by striking income tax return preparer and inserting tax return preparer.

(ii)

The item relating to section 6694 in the table of sections for part I of subchapter B of chapter 68 is amended by striking income tax return preparer and inserting tax return preparer.

(G)
(i)

Section 6695 is amended—

(I)

by striking income in the heading, and

(II)

by striking an income tax return preparer each place it appears and inserting a tax return preparer.

(ii)

Section 6695(f) is amended—

(I)

by striking subtitle A and inserting this title, and

(II)

by striking the income tax return preparer and inserting the tax return preparer.

(iii)

The item relating to section 6695 in the table of sections for part I of subchapter B of chapter 68 is amended by striking income.

(H)

Section 6696(e) is amended by striking subtitle A each place it appears and inserting this title.

(I)
(i)

Section 7407 is amended—

(I)

by striking income tax return preparers in the heading and inserting tax return preparers,

(II)

by striking an income tax return preparer each place it appears and inserting a tax return preparer,

(III)

by striking income tax preparer both places it appears in subsection (a) and inserting tax return preparer, and

(IV)

by striking income tax return in subsection (a) and inserting tax return.

(ii)

The item relating to section 7407 in the table of sections for subchapter A of chapter 76 is amended by striking income tax return preparers and inserting tax return preparers.

(J)
(i)

Section 7427 is amended—

(I)

by striking Income tax return preparers in the heading and inserting Tax return preparers, and

(II)

by striking an income tax return preparer and inserting a tax return preparer.

(ii)

The item relating to section 7427 in the table of sections for subchapter B of chapter 76 is amended to read as follows:

Sec. 7427. Tax return preparers.

.

(b)

Modification of penalty for understatement of taxpayer's liability by tax return preparer

Subsections (a) and (b) of section 6694 are amended to read as follows:

(a)

Understatement due to unreasonable positions

(1)

In general

Any tax return preparer who prepares any return or claim for refund with respect to which any part of an understatement of liability is due to a position described in paragraph (2) shall pay a penalty with respect to each such return or claim in an amount equal to the greater of—

(A)

$1,000, or

(B)

50 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim.

(2)

Unreasonable position

A position is described in this paragraph if—

(A)

the tax return preparer knew (or reasonably should have known) of the position,

(B)

there was not a reasonable belief that the position would more likely than not be sustained on its merits, and

(C)
(i)

the position was not disclosed as provided in section 6662(d)(2)(B)(ii), or

(ii)

there was no reasonable basis for the position.

(3)

Reasonable cause exception

No penalty shall be imposed under this subsection if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith.

(b)

Understatement due to willful or reckless conduct

(1)

In general

Any tax return preparer who prepares any return or claim for refund with respect to which any part of an understatement of liability is due to a conduct described in paragraph (2) shall pay a penalty with respect to each such return or claim in an amount equal to the greater of—

(A)

$5,000, or

(B)

50 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim.

(2)

Willful or reckless conduct

Conduct described in this paragraph is conduct by the tax return preparer which is—

(A)

a willful attempt in any manner to understate the liability for tax on the return or claim, or

(B)

a reckless or intentional disregard of rules or regulations.

(3)

Reduction in penalty

The amount of any penalty payable by any person by reason of this subsection for any return or claim for refund shall be reduced by the amount of the penalty paid by such person by reason of subsection (a).

.

(c)

Effective date

The amendments made by this section shall apply to returns prepared after the date of the enactment of this Act.

312.

Penalties for failure to file certain returns electronically

(a)

In general

Part I of subchapter A of chapter 68 (relating to additions to the tax, additional amounts, and assessable penalties) is amended by inserting after section 6652 the following new section:

6652A.

Failure to file certain returns electronically

(a)

In general

If a person fails to file a return described in section 6651 or 6652(c)(1) in electronic form as required under section 6011(e)—

(1)

such failure shall be treated as a failure to file such return (even if filed in a form other than electronic form), and

(2)

the penalty imposed under section 6651 or 6652(c), whichever is appropriate, shall be equal to the greater of—

(A)

the amount of the penalty under such section, determined without regard to this section, or

(B)

the amount determined under subsection (b).

(b)

Amount of penalty

(1)

In general

Except as provided in paragraphs (2) and (3), the penalty determined under this subsection is equal to $40 for each day during which a failure described under subsection (a) continues. The maximum penalty under this paragraph on failures with respect to any 1 return shall not exceed the lesser of $20,000 or 10 percent of the gross receipts of the taxpayer for the year.

(2)

Increased penalties for taxpayers with gross receipts between $1,000,000 and $100,000,000

(A)

Taxpayers with gross receipts between $1,000,000 and $25,000,000

In the case of a taxpayer having gross receipts exceeding $1,000,000 but not exceeding $25,000,000 for any year—

(i)

the first sentence of paragraph (1) shall be applied by substituting $200 for $40, and

(ii)

in lieu of applying the second sentence of paragraph (1), the maximum penalty under paragraph (1) shall not exceed $100,000.

(B)

Taxpayers with gross receipts over $25,000,000

Except as provided in paragraph (3), in the case of a taxpayer having gross receipts exceeding $25,000,000 for any year—

(i)

the first sentence of paragraph (1) shall be applied by substituting $500 for $40, and

(ii)

in lieu of applying the second sentence of paragraph (1), the maximum penalty under paragraph (1) shall not exceed $250,000.

(3)

Increased penalties for certain taxpayers with gross receipts exceeding $100,000,000

In the case of a return described in section 6651—

(A)

Taxpayers with gross receipts between $100,000,000 and $250,000,000

In the case of a taxpayer having gross receipts exceeding $100,000,000 but not exceeding $250,000,000 for any year—

(i)

the amount of the penalty determined under this subsection shall equal the sum of—

(I)

$50,000, plus

(II)

$1,000 for each day during which such failure continues (twice such amount for each day such failure continues after the first such 60 days), and

(ii)

the maximum amount under clause (i)(II) on failures with respect to any 1 return shall not exceed $200,000.

(B)

Taxpayers with gross receipts over $250,000,000

In the case of a taxpayer having gross receipts exceeding $250,000,000 for any year—

(i)

the amount of the penalty determined under this subsection shall equal the sum of—

(I)

$250,000, plus

(II)

$2,500 for each day during which such failure continues (twice such amount for each day such failure continues after the first such 60 days), and

(ii)

the maximum amount under clause (i)(II) on failures with respect to any 1 return shall not exceed $250,000.

(C)

Exception for certain returns

Subparagraphs (A) and (B) shall not apply to any return of tax imposed under section 511.

.

(b)

Clerical amendment

The table of sections for part I of subchapter A of chapter 68 is amended by inserting after the item relating to section 6652 the following new item:

Sec. 6652A. Failure to file certain returns electronically.

.

(c)

Effective date

The amendments made by this section shall apply to returns required to be filed on or after January 1, 2008.

313.

Penalty for filing erroneous refund claims

(a)

In general

Part I of subchapter B of chapter 68 (relating to assessable penalties) is amended by inserting after section 6675 the following new section:

6676.

Erroneous claim for refund or credit

(a)

Civil penalty

If a claim for refund or credit with respect to income tax (other than a claim for a refund or credit relating to the earned income credit under section 32) is made for an excessive amount, unless it is shown that the claim for such excessive amount has a reasonable basis, the person making such claim shall be liable for a penalty in an amount equal to 20 percent of the excessive amount.

(b)

Excessive amount

For purposes of this section, the term excessive amount means in the case of any person the amount by which the amount of the claim for refund or credit for any taxable year exceeds the amount of such claim allowable under this title for such taxable year.

(c)

Coordination with other penalties

This section shall not apply to any portion of the excessive amount of a claim for refund or credit on which a penalty is imposed under part II of subchapter A of chapter 68.

.

(b)

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 6675 the following new item:

Sec. 6676. Erroneous claim for refund or credit.

.

(c)

Effective date

The amendments made by this section shall apply to any claim—

(1)

filed or submitted after the date of the enactment of this Act, or

(2)

filed or submitted prior to such date but not withdrawn before the date which is 30 days after such date of enactment.

B

Requiring economic substance

321.

Clarification of economic substance doctrine

(a)

In general

Section 7701 is amended by redesignating subsection (p) as subsection (q) and by inserting after subsection (o) the following new subsection:

(p)

Clarification of economic substance doctrine; etc

(1)

General rules

(A)

In general

In any case in which a court determines that the economic substance doctrine is relevant for purposes of this title to a transaction (or series of transactions), such transaction (or series of transactions) shall have economic substance only if the requirements of this paragraph are met.

(B)

Definition of economic 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.

322.

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:

6662B.

Penalty for understatements attributable to transactions lacking economic substance, etc

(a)

Imposition of penalty

If a taxpayer has a 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(p)(1)) for the transaction giving rise to the claimed benefit or the transaction was not respected under section 7701(p)(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 first 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) and (3) 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)

Coordination with other understatements and penalties

(1)

The second sentence of section 6662(d)(2)(A) is amended by inserting and without regard to items with respect to which a penalty is imposed by section 6662B before the period at the end.

(2)

Subsection (e) of section 6662A is amended—

(A)

in paragraph (1), by inserting and noneconomic substance transaction understatements after reportable transaction understatements both places it appears,

(B)

in paragraph (2)(A), by inserting and a noneconomic substance transaction understatement after reportable transaction understatement,

(C)

in paragraph (2)(B), by inserting 6662B or before 6663,

(D)

in paragraph (2)(C)(i), by inserting or section 6662B before the period at the end,

(E)

in paragraph (2)(C)(ii), by inserting and section 6662B after This section,

(F)

in paragraph (3), by inserting or noneconomic substance transaction understatement after reportable transaction understatement, and

(G)

by adding at the end the following new paragraph:

(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).

.

(3)

Subsection (e) of section 6707A is amended—

(A)

by striking or at the end of subparagraph (B), and

(B)

by striking subparagraph (C) and inserting the following new subparagraphs:

(C)

is required to pay a penalty under section 6662B with respect to any noneconomic substance transaction, or

(D)

is required to pay a penalty under section 6662(h) with respect to any transaction and would (but for section 6662A(e)(2)(C)) have been subject to penalty under section 6662A at a rate prescribed under section 6662A(c) or under section 6662B,

.

(c)

Clerical amendment

The table of sections for part II of subchapter A of chapter 68 is amended by inserting after the item relating to section 6662A the following new item:

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

.

(d)

Effective date

The amendments made by this section shall apply to transactions entered into after the date of the enactment of this Act.

323.

Denial of deduction for interest on underpayments attributable to noneconomic substance transactions

(a)

In general

Section 163(m) (relating to interest on unpaid taxes attributable to nondisclosed reportable transactions) is amended—

(1)

by striking “attributable” and all that follows and inserting the following: “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)).

, and

(2)

by inserting “and Noneconomic Substance Transactions” after “Transactions”.

(b)

Effective date

The amendments made by this section shall apply to transactions after the date of the enactment of this Act in taxable years ending after such date.

C

Miscellaneous

331.

Denial of deduction for punitive damages

(a)

Disallowance of Deduction

(1)

In general

Section 162(g) (relating to treble damage payments under the antitrust laws) is amended—

(A)

by redesignating paragraphs (1) and (2) as subparagraphs (A) and (B), respectively,

(B)

by striking If and inserting:

(1)

Treble damages

If

, and

(C)

by adding at the end the following new paragraph:

(2)

Punitive damages

No deduction shall be allowed under this chapter for any amount paid or incurred for punitive damages in connection with any judgment in, or settlement of, any action. This paragraph shall not apply to punitive damages described in section 104(c).

.

(2)

Conforming amendment

The heading for section 162(g) is amended by inserting Or Punitive Damages after Laws.

(b)

Inclusion in Income of Punitive Damages Paid by Insurer or Otherwise

(1)

In general

Part II of subchapter B of chapter 1 (relating to items specifically included in gross income) is amended by adding at the end the following new section:

91.

Punitive damages compensated by insurance or otherwise

Gross income shall include any amount paid to or on behalf of a taxpayer as insurance or otherwise by reason of the taxpayer’s liability (or agreement) to pay punitive damages.

.

(2)

Reporting requirements

Section 6041 (relating to information at source) is amended by adding at the end the following new subsection:

(h)

Section To Apply to Punitive Damages Compensation

This section shall apply to payments by a person to or on behalf of another person as insurance or otherwise by reason of the other person’s liability (or agreement) to pay punitive damages.

.

(3)

Conforming amendment

The table of sections for part II of subchapter B of chapter 1 is amended by adding at the end the following new item:

Sec. 91. Punitive damages compensated by insurance or otherwise.

.

(c)

Effective Date

The amendments made by this section shall apply to damages paid or incurred on or after the date of the enactment of this Act.

IV

TECHNICAL AND CONFORMING AMENDMENTS; SUNSET

401.

Technical and conforming amendments

The Secretary of the Treasury or the Secretary’s delegate shall not later than 90 days after the date of the enactment of this Act, submit to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate a draft of any technical and conforming changes in the Internal Revenue Code of 1986 which are necessary to reflect throughout such Code the purposes of the provisions of, and amendments made by, this Act.

402.

Sunset

(a)

In General

All provisions of, and amendments made by, this Act shall not apply to taxable years beginning after December 31, 2012.

(b)

Application of Code

The Internal Revenue Code of 1986 shall be applied and administered to taxable years described in subsection (a) as if the provisions of, and amendments made by, this Act had never been enacted.