S. 268: CUT Loopholes Act

113th Congress, 2013–2015. Text as of Feb 11, 2013 (Introduced).

Status & Summary | PDF | Source: GPO and Cato Institute Deepbills

II

113th CONGRESS

1st Session

S. 268

IN THE SENATE OF THE UNITED STATES

February 11, 2013

(for himself and Mr. Whitehouse) introduced the following bill; which was read twice and referred to the Committee on Finance

A BILL

To reduce the deficit and protect important programs by ending tax loopholes.

1.

Short title; etc

(a)

Short title

This Act may be cited as the Cut Unjustified Tax Loopholes Act or CUT Loopholes Act .

(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 of this Act is as follows:

Sec. 1. Short title; etc.

TITLE I—Ending offshore tax abuses

Subtitle A—Deterring the use of tax havens for tax evasion

Sec. 101. Authorizing special measures against foreign jurisdictions, financial institutions, and others that significantly impede United States tax enforcement.

Sec. 102. Strengthening the Foreign Account Tax Compliance Act (FATCA).

Sec. 103. Treatment of foreign corporations managed and controlled in the United States as domestic corporations.

Sec. 104. Reporting United States beneficial owners of foreign owned financial accounts.

Sec. 105. Swap payments made from the United States to persons offshore.

Subtitle B—Other measures To combat tax haven and tax shelter abuses

Sec. 111. Country-by-country reporting.

Sec. 112. Penalty for failing to disclose offshore holdings.

Sec. 113. Deadline for anti-money laundering rule for investment advisers.

Sec. 114. Anti-money laundering requirements for formation agents.

Sec. 115. Strengthening John Doe summons proceedings.

Sec. 116. Improving enforcement of foreign financial account reporting.

Subtitle C—Ending offshore tax avoidance

Sec. 121. Allocation of expenses and taxes on basis of repatriation of foreign income.

Sec. 122. Excess income from transfers of intangibles to low-taxed affiliates treated as subpart F income.

Sec. 123. Limitations on income shifting through intangible property transfers.

Sec. 124. Limitation on earnings stripping by expatriated entities.

Sec. 125. Repeal of check-the-box rules for certain foreign entities and CFC look-thru rules.

Sec. 126. Prohibition on offshore loan abuse.

TITLE II—Strengthening tax enforcement

Subtitle A—Combating tax shelter promotion

Sec. 201. Penalty for promoting abusive tax shelters.

Sec. 202. Penalty for aiding and abetting the understatement of tax liability.

Sec. 203. Prohibited fee arrangement.

Sec. 204. Preventing tax shelter activities by financial institutions.

Sec. 205. Information sharing for enforcement purposes.

Sec. 206. Disclosure of information to Congress.

Sec. 207. Tax opinion standards for tax practitioners.

Subtitle B—Simplify tax lien procedure

Sec. 211. Short title.

Sec. 212. Findings and purpose.

Sec. 213. National tax lien filing system.

TITLE III—Ending excessive corporate tax deductions for stock options

Sec. 301. Consistent treatment of stock options by corporations.

Sec. 302. Application of executive pay deduction limit.

TITLE IV—Closing the derivatives blended rate loophole

Sec. 401. Short title.

Sec. 402. Modifications to treatment of section 1256 contracts.

Sec. 403. Modifications to treatment of dealers in securities and commodities.

TITLE V—Ending the tar sands oil spill loophole

Sec. 501. Short title.

Sec. 502. Requirements for contribution to the Oil Spill Liability Trust Fund.

Sec. 503. Extension of Oil Spill Liability Trust Fund financing rate.

Sec. 504. Technical amendment.

TITLE VI—Ending the carried interest loophole

Sec. 601. Short title; etc.

Sec. 602. Partnership interests transferred in connection with performance of services.

Sec. 603. Special rules for partners providing investment management services to partnerships.

I

Ending offshore tax abuses

A

Deterring the use of tax havens for tax evasion

101.

Authorizing special measures against foreign jurisdictions, financial institutions, and others that significantly impede United States tax enforcement

Section 5318A of title 31, United States Code, is amended—

(1)

by striking the section heading and inserting the following:

5318A.

Special measures for jurisdictions, financial institutions, or international transactions that are of primary money laundering concern or significantly impede United States tax enforcement

;

(2)

in subsection (a), by striking the subsection heading and inserting the following:

(a)

Special measures To counter money laundering and efforts to significantly impede United States tax enforcement

;

(3)

in subsection (c)

(A)

by striking the subsection heading and inserting the following:

(c)

Consultations and information To be considered in finding jurisdictions, institutions, types of accounts, or transactions To be of primary money laundering concern or To be significantly impeding United States tax enforcement

; and

(B)

by inserting at the end of paragraph (2) thereof the following new subparagraph:

(C)

Other considerations

The fact that a jurisdiction or financial institution is cooperating with the United States on implementing the requirements specified in chapter 4 of the Internal Revenue Code of 1986 may be favorably considered in evaluating whether such jurisdiction or financial institution is significantly impeding United States tax enforcement.

;

(4)

in subsection (a)(1), by inserting or is significantly impeding United States tax enforcement after primary money laundering concern;

(5)

in subsection (a)(4)

(A)

in subparagraph (A)

(i)

by inserting in matters involving money laundering, before shall consult; and

(ii)

by striking and at the end;

(B)

by redesignating subparagraph (B) as subparagraph (C); and

(C)

by inserting after subparagraph (A) the following:

(B)

in matters involving United States tax enforcement, shall consult with the Commissioner of the Internal Revenue, the Secretary of State, the Attorney General of the United States, and in the sole discretion of the Secretary, such other agencies and interested parties as the Secretary may find to be appropriate; and

;

(6)

in each of paragraphs (1)(A), (2), (3), and (4) of subsection (b), by inserting or to be significantly impeding United States tax enforcement after primary money laundering concern each place that term appears;

(7)

in subsection (b), by striking paragraph (5) and inserting the following:

(5)

Prohibitions or conditions on opening or maintaining certain correspondent or payable-through accounts or authorizing certain payment cards

If the Secretary finds a jurisdiction outside of the United States, 1 or more financial institutions operating outside of the United States, or 1 or more classes of transactions within or involving a jurisdiction outside of the United States to be of primary money laundering concern or to be significantly impeding United States tax enforcement, the Secretary, in consultation with the Secretary of State, the Attorney General of the United States, and the Chairman of the Board of Governors of the Federal Reserve System, may prohibit, or impose conditions upon—

(A)

the opening or maintaining in the United States of a correspondent account or payable-through account; or

(B)

the authorization, approval, or use in the United States of a credit card, charge card, debit card, or similar credit or debit financial instrument by any domestic financial institution, financial agency, or credit card company or association, for or on behalf of a foreign banking institution, if such correspondent account, payable-through account, credit card, charge card, debit card, or similar credit or debit financial instrument, involves any such jurisdiction or institution, or if any such transaction may be conducted through such correspondent account, payable-through account, credit card, charge card, debit card, or similar credit or debit financial instrument.

; and

(8)

in subsection (c)(1), by inserting or is significantly impeding United States tax enforcement after primary money laundering concern;

(9)

in subsection (c)(2)(A)

(A)

in clause (ii), by striking bank secrecy or special regulatory advantages and inserting bank, tax, corporate, trust, or financial secrecy or regulatory advantages;

(B)

in clause (iii), by striking supervisory and counter-money and inserting supervisory, international tax enforcement, and counter-money;

(C)

in clause (v), by striking banking or secrecy and inserting banking, tax, or secrecy; and

(D)

in clause (vi), by inserting , tax treaty, or tax information exchange agreement after treaty;

(10)

in subsection (c)(2)(B)

(A)

in clause (i), by inserting or tax evasion after money laundering; and

(B)

in clause (iii), by inserting , tax evasion, after money laundering; and

(11)

in subsection (d), by inserting involving money laundering, and shall notify, in writing, the Committee on Finance of the Senate and the Committee on Ways and Means of the House of Representatives of any such action involving United States tax enforcement after such action.

102.

Strengthening the Foreign Account Tax Compliance Act (FATCA)

(a)

Reporting activities with respect to passive foreign investment companies

Section 1298(f) is amended by inserting , or who directly or indirectly forms, transfers assets to, is a beneficiary of, has a beneficial interest in, or receives money or property or the use thereof from, after shareholder of.

(b)

Withholdable payments to foreign financial institutions

Section 1471(d) is amended—

(1)

by inserting or transaction after any depository in paragraph (2)(A), and

(2)

by striking or any interest and all that follows in paragraph (5)(C) and inserting derivatives, or any interest (including a futures or forward contract, swap, or option) in such securities, partnership interests, commodities, or derivatives..

(c)

Withholdable payments to other foreign financial institutions

Section 1472 is amended—

(1)

by inserting as a result of any customer identification, anti-money laundering, anti-corruption, or similar obligation to identify account holders, after reason to know, in subsection (b)(2), and

(2)

by inserting as posing a low risk of tax evasion after this subsection in subsection (c)(1)(G).

(d)

Definitions

Clauses (i) and (ii) of section 1473(2)(A) are each amended by inserting or as a beneficial owner after indirectly.

(e)

Special rules

Section 1474(c) is amended—

(1)

by inserting , except that information provided under sections 1471(c) or 1472(b) may be disclosed to any Federal law enforcement agency, upon request or upon the initiation of the Secretary, to investigate or address a possible violation of United States law after shall apply in paragraph (1), and

(2)

by inserting , or has had an agreement terminated under such section, after section 1471(b) in paragraph (2).

(f)

Information with respect to foreign financial assets

Section 6038D(a) is amended by inserting ownership or beneficial ownership after holds any.

(g)

Establishing presumptions for entities and transactions involving non-FATCA institutions

(1)

Presumptions for tax purposes

(A)

In general

Chapter 76 is amended by inserting after section 7491 the following new subchapter:

F

Presumptions for certain legal proceedings

Sec. 7492. Presumptions pertaining to entities and transactions involving non-FATCA institutions.

7492.

Presumptions pertaining to entities and transactions involving non-FATCA institutions

(a)

Control

For purposes of any United States civil judicial or administrative proceeding to determine or collect tax, there shall be a rebuttable presumption that a United States person (other than an entity with shares regularly traded on an established securities market) who, directly or indirectly, formed, transferred assets to, was a beneficiary of, had a beneficial interest in, or received money or property or the use thereof from an entity, including a trust, corporation, limited liability company, partnership, or foundation (other than an entity with shares regularly traded on an established securities market), that holds an account, or in any other manner has assets, in a non-FATCA institution, exercised control over such entity. The presumption of control created by this subsection shall not be applied to prevent the Secretary from determining or arguing the absence of control.

(b)

Transfers of income

For purposes of any United States civil judicial or administrative proceeding to determine or collect tax, there shall be a rebuttable presumption that any amount or thing of value received by a United States person (other than an entity with shares regularly traded on an established securities market) directly or indirectly from an account or from an entity (other than an entity with shares regularly traded on an established securities market) that holds an account, or in any other manner has assets, in a non-FATCA institution, constitutes income of such person taxable in the year of receipt; and any amount or thing of value paid or transferred by or on behalf of a United States person (other than an entity with shares regularly traded on an established securities market) directly or indirectly to an account, or entity (other than an entity with shares regularly traded on an established securities market) that holds an account, or in any other manner has assets, in a non-FATCA institution, represents previously unreported income of such person taxable in the year of the transfer.

(c)

Rebutting the presumptions

The presumptions established in this section may be rebutted only by clear and convincing evidence, including detailed documentary, testimonial, and transactional evidence, establishing that—

(1)

in subsection (a), such taxpayer exercised no control, directly or indirectly, over account or entity at the time in question, and

(2)

in subsection (b), such amounts or things of value did not represent income related to such United States person.

Any court having jurisdiction of a civil proceeding in which control of such an offshore account or offshore entity or the income character of such receipts or amounts transferred is an issue shall prohibit the introduction by the taxpayer of any foreign based document that is not authenticated in open court by a person with knowledge of such document, or any other evidence supplied by a person outside the jurisdiction of a United States court, unless such person appears before the court.

.

(B)

The table of subchapters for chapter 76 is amended by inserting after the item relating to subchapter E the following new item:

Subchapter F—Presumptions for certain legal proceedings

.

(2)

Definition of non-fatca institution

Section 7701(a) is amended by adding at the end the following new paragraph:

(51)

Non-fatca institution

The term non-FATCA institution means any financial institution that does not meet the reporting requirements of section 1471(b).

.

(3)

Presumptions for securities law purposes

Section 21 of the Securities Exchange Act of 1934 (15 U.S.C. 78u) is amended by adding at the end the following new subsection:

(j)

Presumptions pertaining to control and beneficial ownership

(1)

Control

For purposes of any civil judicial or administrative proceeding under this title, there shall be a rebuttable presumption that a United States person (other than an entity with shares regularly traded on an established securities market) who, directly or indirectly, formed, transferred assets to, was a beneficiary of, had a beneficial interest in, or received money or property or the use thereof from an entity, including a trust, corporation, limited liability company, partnership, or foundation (other than an entity with shares regularly traded on an established securities market), that holds an account, or in any other manner has assets, in a non-FATCA institution (as defined in section 7701(a)(51) of the Internal Revenue Code of 1986), exercised control over such entity. The presumption of control created by this paragraph shall not be applied to prevent the Commission from determining or arguing the absence of control.

(2)

Beneficial ownership

For purposes of any civil judicial or administrative proceeding under this title, there shall be a rebuttable presumption that securities that are nominally owned by an entity, including a trust, corporation, limited liability company, partnership, or foundation (other than an entity with shares regularly traded on an established securities market), and that are held in a non-FATCA institution (as so defined), are beneficially owned by any United States person (other than an entity with shares regularly traded on an established securities market) who directly or indirectly exercised control over such entity. The presumption of beneficial ownership created by this paragraph shall not be applied to prevent the Commission from determining or arguing the absence of beneficial ownership.

.

(4)

Presumption for reporting purposes relating to foreign financial accounts

Section 5314 of title 31, United States Code, is amended by adding at the end the following new subsection:

(d)

Rebuttable presumption

For purposes of this section, there shall be a rebuttable presumption that any account with a non-FATCA institution (as defined in section 7701(a)(51) of the Internal Revenue Code of 1986) contains funds in an amount that is at least sufficient to require a report prescribed by regulations under this section.

.

(5)

Regulatory authority

Not later than 180 days after the date of enactment of this Act, the Secretary of the Treasury and the Chairman of the Securities and Exchange Commission shall each adopt regulations or other guidance necessary to implement the amendments made by this subsection. The Secretary and the Chairman may, by regulation or guidance, provide that the presumption of control shall not extend to particular classes of transactions, such as corporate reorganizations or transactions below a specified dollar threshold, if either determines that applying such amendments to such transactions is not necessary to carry out the purposes of such amendments.

(h)

Effective date

The amendments made by this section shall take effect on the date which is 180 days after the date of enactment of this Act, whether or not regulations are issued under subsection (g)(5).

103.

Treatment of foreign corporations managed and controlled in the United States as domestic corporations

(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)

Certain corporations managed and controlled in the United States treated as domestic for income tax

(1)

In general

Notwithstanding subsection (a)(4), in the case of a corporation described in paragraph (2) if—

(A)

the corporation would not otherwise be treated as a domestic corporation for purposes of this title, but

(B)

the management and control of the corporation occurs, directly or indirectly, primarily within the United States,

then, solely for purposes of chapter 1 (and any other provision of this title relating to chapter 1), the corporation shall be treated as a domestic corporation.
(2)

Corporation described

(A)

In general

A corporation is described in this paragraph if—

(i)

the stock of such corporation is regularly traded on an established securities market, or

(ii)

the aggregate gross assets of such corporation (or any predecessor thereof), including assets under management for investors, whether held directly or indirectly, at any time during the taxable year or any preceding taxable year is $50,000,000 or more.

(B)

General exception

A corporation shall not be treated as described in this paragraph if—

(i)

such corporation was treated as a corporation described in this paragraph in a preceding taxable year,

(ii)

such corporation—

(I)

is not regularly traded on an established securities market, and

(II)

has, and is reasonably expected to continue to have, aggregate gross assets (including assets under management for investors, whether held directly or indirectly) of less than $50,000,000, and

(iii)

the Secretary grants a waiver to such corporation under this subparagraph.

(C)

Exception from gross assets test

Subparagraph (A)(ii) shall not apply to a corporation which is a controlled foreign corporation (as defined in section 957) and which is a member of an affiliated group (as defined section 1504, but determined without regard to section 1504(b)(3)) the common parent of which—

(i)

is a domestic corporation (determined without regard to this subsection), and

(ii)

has substantial assets (other than cash and cash equivalents and other than stock of foreign subsidiaries) held for use in the active conduct of a trade or business in the United States.

(3)

Management and control

(A)

In general

The Secretary shall prescribe regulations for purposes of determining cases in which the management and control of a corporation is to be treated as occurring primarily within the United States.

(B)

Executive officers and senior management

Such regulations shall provide that—

(i)

the management and control of a corporation shall be treated as occurring primarily within the United States if substantially all of the executive officers and senior management of the corporation who exercise day-to-day responsibility for making decisions involving strategic, financial, and operational policies of the corporation are located primarily within the United States, and

(ii)

individuals who are not executive officers and senior management of the corporation (including individuals who are officers or employees of other corporations in the same chain of corporations as the corporation) shall be treated as executive officers and senior management if such individuals exercise the day-to-day responsibilities of the corporation described in clause (i).

(C)

Corporations primarily holding investment assets

Such regulations shall also provide that the management and control of a corporation shall be treated as occurring primarily within the United States if—

(i)

the assets of such corporation (directly or indirectly) consist primarily of assets being managed on behalf of investors, and

(ii)

decisions about how to invest the assets are made in the United States.

.

(b)

Effective date

The amendments made by this section shall apply to taxable years beginning on or after the date which is 2 years after the date of the enactment of this Act, whether or not regulations are issued under section 7701(p)(3) of the Internal Revenue Code of 1986, as added by this section.

104.

Reporting United States beneficial owners of foreign owned financial accounts

(a)

In general

Subpart B of part III of subchapter A of chapter 61 is amended by inserting after section 6045B the following new sections:

6045C.

Returns regarding United States beneficial owners of financial accounts located in the United States and held in the name of a foreign entity

(a)

Requirement of return

If—

(1)

any withholding agent under sections 1441 and 1442 has the control, receipt, custody, disposal, or payment of any amount constituting gross income from sources within the United States of any foreign entity, including a trust, corporation, limited liability company, partnership, or foundation (other than an entity with shares regularly traded on an established securities market), and

(2)

such withholding agent determines for purposes of titles 14, 18, or 31 of the United States Code that a United States person has any beneficial interest in the foreign entity or in the account in such entity's name (hereafter in this section referred to as United States beneficial owner),

then the withholding agent shall make a return according to the forms or regulations prescribed by the Secretary.
(b)

Required information

For purposes of subsection (a) the information required to be included on the return shall include—

(1)

the name, address, and, if known, the taxpayer identification number of the United States beneficial owner,

(2)

the known facts pertaining to the relationship of such United States beneficial owner to the foreign entity and the account,

(3)

the gross amount of income from sources within the United States (including gross proceeds from brokerage transactions), and

(4)

such other information as the Secretary may by forms or regulations provide.

(c)

Statements To Be furnished to beneficial owners with respect to whom information is required To Be reported

A withholding agent required to make a return under subsection (a) shall furnish to each United States beneficial owner whose name is required to be set forth in such return a statement showing—

(1)

the name, address, and telephone number of the information contact of the person required to make such return, and

(2)

the information required to be shown on such return with respect to such United States beneficial owner.

The written statement required under the preceding sentence shall be furnished to the United States beneficial owner on or before January 31 of the year following the calendar year for which the return under subsection (a) was required to be made. In the event the person filing such return does not have a current address for the United States beneficial owner, such written statement may be mailed to the address of the foreign entity.
6045D.

Returns by financial institutions regarding establishment of accounts in non-FATCA institutions

(a)

Requirement of return

Any financial institution directly or indirectly opening a bank, brokerage, or other financial account for or on behalf of an offshore entity, including a trust, corporation, limited liability company, partnership, or foundation (other than an entity with shares regularly traded on an established securities market), in a non-FATCA institution (as defined in section 7701(a)(51)) at the direction of, on behalf of, or for the benefit of a United States person shall make a return according to the forms or regulations prescribed by the Secretary.

(b)

Required information

For purposes of subsection (a) the information required to be included on the return shall include—

(1)

the name, address, and taxpayer identification number of such United States person,

(2)

the name and address of the financial institution at which a financial account is opened, the type of account, the account number, the name under which the account was opened, and the amount of the initial deposit,

(3)

if the account is held in the name of an entity, the name and address of such entity, the type of entity, and the name and address of any company formation agent or other professional employed to form or acquire the entity, and

(4)

such other information as the Secretary may by forms or regulations provide.

(c)

Statements To be furnished to United States persons with respect to whom information is required To be reported

A financial institution required to make a return under subsection (a) shall furnish to each United States person whose name is required to be set forth in such return a statement showing—

(1)

the name, address, and telephone number of the information contact of the person required to make such return, and

(2)

the information required to be shown on such return with respect to such United States person.

The written statement required under the preceding sentence shall be furnished to such United States person on or before January 31 of the year following the calendar year for which the return under subsection (a) was required to be made.
(d)

Exemption

The Secretary may by regulations exempt any class of United States persons or any class of accounts or entities from the requirements of this section if the Secretary determines that applying this section to such persons, accounts, or entities is not necessary to carry out the purposes of this section.

.

(b)

Penalties

(1)

Returns

Section 6724(d)(1)(B) is amended by striking or at the end of clause (xxiv), by striking and at the end of clause (xxv), and by adding after clause (xxv) the following new clauses:

(xxvi)

section 6045C(a) (relating to returns regarding United States beneficial owners of financial accounts located in the United States and held in the name of a foreign entity), or

(xxvii)

section 6045D(a) (relating to returns by financial institutions regarding establishment of accounts at non-FATCA institutions), and

.

(2)

Payee statements

Section 6724(d)(2) is amended by striking or at the end of subparagraph (GG), by striking the period at the end of subparagraph (HH), and by inserting after subparagraph (HH) the following new subparagraphs:

(II)

section 6045C(c) (relating to returns regarding United States beneficial owners of financial accounts located in the United States and held in the name of a foreign entity),

(JJ)

section 6045D(c) (relating to returns by financial institutions regarding establishment of accounts at non-FATCA institutions).

.

(c)

Clerical amendment

The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by inserting after the item relating to section 6045B the following new items:

Sec. 6045C. Returns regarding United States beneficial owners of financial accounts located in the United States and held in the name of a foreign entity.

Sec. 6045D. Returns by financial institutions regarding establishment of accounts at non-FATCA institutions.

.

(d)

Additional penalties

(1)

Additional penalties on banks

Section 5239(b)(1) of the Revised Statutes of the United States (12 U.S.C. 93(b)(1)) is amended by inserting or any of the provisions of section 6045D of the Internal Revenue Code of 1986, after any regulation issued pursuant to,.

(2)

Additional penalties on securities firms

Section 21(d)(3)(A) of the Securities Exchange Act of 1934 (15 U.S.C. 78u(d)(3)(A)) is amended by inserting any of the provisions of section 6045D of the Internal Revenue Code of 1986, after the rules or regulations thereunder,.

(e)

Regulatory authority and effective date

(1)

Regulatory Authority

Not later than 180 days after the date of the enactment of this Act, the Secretary of the Treasury shall adopt regulations, forms, or other guidance necessary to implement this section.

(2)

Effective Date

Section 6045C of the Internal Revenue Code of 1986 (as added by this section) and the amendment made by subsection (d)(1) shall take effect with respect to amounts paid into foreign owned accounts located in the United States after December 31 of the year of the date of the enactment of this Act. Section 6045D of such Code (as so added) and the amendment made by subsection (d)(2) shall take effect with respect to accounts opened after December 31 of the year of the date of the enactment of this Act.

105.

Swap payments made from the United States to persons offshore

(a)

Tax on swap payments received by foreign persons

Section 871(a)(1) is amended—

(1)

by inserting swap payments (as identified in section 1256(b)(2)(B)), after annuities, in subparagraph (A), and

(2)

by adding at the end the following new sentence: In the case of swap payments, the source of a swap payment is determined by reference to the location of the payor..

(b)

Tax on swap payments received by foreign corporations

Section 881(a) is amended—

(1)

by inserting swap payments (as identified in section 1256(b)(2)(B)), after annuities, in paragraph (1), and

(2)

by adding at the end the following new sentence: In the case of swap payments, the source of a swap payment is determined by reference to the location of the payor..

B

Other measures To combat tax haven and tax shelter abuses

111.

Country-by-country reporting

(a)

Country-by-Country reporting

Section 13 of the Securities Exchange Act of 1934 (15 U.S.C. 78m) is amended by adding at the end the following new subsection:

(s)

Disclosure of financial performance on a country-by-Country basis

(1)

Definitions

In this subsection—

(A)

the term issuer group means the issuer, each subsidiary of the issuer, and each entity under the control of the issuer; and

(B)

the term country of operation means each country in which a member of the issuer group is incorporated, organized, maintains employees, or conducts significant business activities.

(2)

Rules required

The Commission shall issue rules that require each issuer to include in an annual report filed by the issuer with the Commission information on a country-by-country basis during the covered period, consisting of—

(A)

a list of each country of operation and the name of each entity of the issuer group domiciled in each country of operation;

(B)

the number of employees physically working in each country of operation;

(C)

the total pre-tax gross revenues of each member of the issuer group in each country of operation;

(D)

the total amount of payments made to governments by each member of the issuer group in each country of operation, without exception, including, and set forth according to—

(i)

total Federal, regional, local, and other tax assessed against each member of the issuer group with respect to each country of operation during the covered period; and

(ii)

after any tax deductions, tax credits, tax forgiveness, or other tax benefits or waivers, the total amount of tax paid from the treasury of each member of the issuer group to the government of each country of operation during the covered period; and

(E)

such other financial information as the Commission may determine is necessary or appropriate in the public interest or for the protection of investors.

.

(b)

Rulemaking

(1)

Deadlines

The Securities and Exchange Commission (in this section referred to as the Commission) shall—

(A)

not later than 270 days after the date of enactment of this Act, issue a proposed rule to carry out this section and the amendment made by this section; and

(B)

not later than 1 year after the date of enactment of this Act, issue a final rule to carry out this section and the amendment made by this section.

(2)

Data format

The information required to be provided by this section shall be provided by the issuer in a format prescribed by the Commission, and shall be made available to the public online, in such format as the Commission shall prescribe.

(3)

Effective date

Subsection (s) of section 13 of the Securities Exchange Act of 1934, as added by this section, shall become effective 1 year after the date on which the Commission issues a final rule under this section.

112.

Penalty for failing to disclose offshore holdings

(a)

Securities Exchange Act of 1934

Section 21(d)(3)(B) of the Securities Exchange Act of 1934 (15 U.S.C. 78u(d)(3)(B)) is amended by adding at the end the following:

(iv)

Fourth tier

Notwithstanding clauses (i), (ii), and (iii), for each violation, the amount of the penalty shall not exceed $1,000,000 for any natural person or $10,000,000 for any other person, if—

(I)

such person directly or indirectly controlled any foreign entity, including any trust, corporation, limited liability company, partnership, or foundation through which an issuer purchased, sold, or held equity or debt instruments;

(II)

such person knowingly or recklessly failed to disclose any such holding, purchase, or sale by the issuer; and

(III)

the holding, purchase, or sale would have been otherwise subject to disclosure by the issuer or such person under this title.

.

(b)

Securities Act of 1933

Section 20(d)(2) of the Securities Act of 1933 (15 U.S.C. 77t(d)(2)) is amended by adding at the end the following:

(D)

Fourth tier

Notwithstanding subparagraphs (A), (B), and (C), for each violation, the amount of the penalty shall not exceed $1,000,000 for any natural person or $10,000,000 for any other person, if—

(i)

such person directly or indirectly controlled any foreign entity, including any trust, corporation, limited liability company, partnership, or foundation through which an issuer purchased, sold, or held equity or debt instruments;

(ii)

such person knowingly or recklessly failed to disclose any such holding, purchase, or sale by the issuer; and

(iii)

the holding, purchase, or sale would have been otherwise subject to disclosure by the issuer or such person under this title.

.

(c)

Investment Advisers Act of 1940

Section 203(i)(2) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–3(i)(2)) is amended by adding at the end the following:

(D)

Fourth tier

Notwithstanding subparagraphs (A), (B), and (C), for each violation, the amount of the penalty shall not exceed $1,000,000 for any natural person or $10,000,000 for any other person, if—

(i)

such person directly or indirectly controlled any foreign entity, including any trust, corporation, limited liability company, partnership, or foundation through which an issuer purchased, sold, or held equity or debt instruments;

(ii)

such person knowingly or recklessly failed to disclose any such holding, purchase, or sale by the issuer; and

(iii)

the holding, purchase, or sale would have been otherwise subject to disclosure by the issuer or such person under this title.

.

113.

Deadline for anti-money laundering rule for investment advisers

(a)

Anti-Money laundering obligations for investment advisers

Section 5312(a)(2) of title 31, United States Code, is amended—

(1)

in subparagraph (Y), by striking or at the end;

(2)

by redesigning subparagraph (Z) as subparagraph (BB); and

(3)

by inserting after subparagraph (Y) the following:

(Z)

an investment adviser;

.

(b)

Rules required

The Secretary of the Treasury shall—

(1)

in consultation with the Chairman of the Securities and Exchange Commission and the Chairman of the Commodity Futures Trading Commission, not later than 270 days after the date of enactment of this Act, publish a proposed rule in the Federal Register to carry out the amendments made by this section; and

(2)

not later than 180 days after the date of enactment of this Act, publish a final rule in the Federal Register on the matter described in paragraph (1).

(c)

Contents

The final rule published under this section shall require, at a minimum, each investment adviser (as defined in section 202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–2(a)(11))) registered with the Securities and Exchange Commission pursuant to section 203 of that Act (15 U.S.C. 80b–3)

(1)

to submit suspicious activity reports and establish an anti-money laundering program under subsections (g) and (h), respectively, of section 5318 of title 31, United States Code; and

(2)

to comply with—

(A)

the customer identification program requirements under section 5318(l) of title 31, United States Code; and

(B)

the due diligence requirements under section 5318(i) of title 31, United States Code.

114.

Anti-money laundering requirements for formation agents

(a)

Anti-Money laundering obligations for formation agents

Section 5312(a)(2) of title 31, United States Code, as amended by section 113 of this Act, is amended by inserting after subparagraph (Z) the following:

(AA)

any person engaged in the business of forming new corporations, limited liability companies, partnerships, trusts, or other legal entities; or

.

(b)

Deadline for anti-Money laundering rule for formation agents

(1)

Proposed rule

The Secretary of the Treasury, in consultation with the Attorney General of the United States, the Secretary of Homeland Security, and the Commissioner of Internal Revenue, shall—

(A)

not later than 120 days after the date of enactment of this Act, publish a proposed rule in the Federal Register requiring persons described in section 5312(a)(2)(AA) of title 31, United States Code, as added by this section, to establish anti-money laundering programs under section 5318(h) of that title; and

(B)

not later than 270 days after the date of enactment of this Act, publish a final rule in the Federal Register on the matter described in subparagraph (A).

(2)

Exclusions

The rule promulgated under this subsection shall exclude from the category of persons engaged in the business of forming new corporations or other entities—

(A)

any government agency; and

(B)

any attorney or law firm that uses a paid formation agent operating within the United States to form such corporations or other entities.

115.

Strengthening John Doe summons proceedings

(a)

In general

Subsection (f) of section 7609 is amended to read as follows:

(f)

Additional requirement in the case of a John Doe summons

(1)

General Rule

Any summons described in subsection (c)(1) which does not identify the person with respect to whose liability the summons is issued may be served only after a court proceeding in which the Secretary establishes that—

(A)

the summons relates to the investigation of a particular person or ascertainable group or class of persons,

(B)

there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law, and

(C)

the information sought to be obtained from the examination of the records or testimony (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources.

(2)

Exception

Paragraph (1) shall not apply to any summons which specifies that it is limited to information regarding a United States correspondent account (as defined in section 5318A(e)(1)(B) of title 31, United States Code) or a United States payable-through account (as defined in section 5318A(e)(1)(C) of such title) of a financial institution that is held at a non-FATCA institution (as defined in section 7701(a)(51)).

(3)

Presumption in cases involving non-fatca institutions

For purposes of this section, in any case in which the particular person or ascertainable group or class of persons have financial accounts in or transactions related to a non-FATCA institution (as defined in section 7701(a)(51)), there shall be a presumption that there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with provisions of internal revenue law.

(4)

Project John Doe summonses

(A)

In general

Notwithstanding the requirements of paragraph (1), the Secretary may issue a summons described in paragraph (1) if the summons—

(i)

relates to a project which is approved under subparagraph (B),

(ii)

is issued to a person who is a member of the group or class established under subparagraph (B)(i), and

(iii)

is issued within 3 years of the date on which such project was approved under subparagraph (B).

(B)

Approval of projects

A project may only be approved under this subparagraph after a court proceeding in which the Secretary establishes that—

(i)

any summons issues with respect to the project will be issued to a member of an ascertainable group or class of persons, and

(ii)

any summons issued with respect to such project will meet the requirements of paragraph (1).

(C)

Extension

Upon application of the Secretary, the court may extend the time for issuing such summonses under subparagraph (A)(i) for additional 3-year periods, but only if the court continues to exercise oversight of such project under subparagraph (D).

(D)

Ongoing court oversight

During any period in which the Secretary is authorized to issue summonses in relation to a project approved under subparagraph (B) (including during any extension under subparagraph (C)), the Secretary shall report annually to the court on the use of such authority, provide copies of all summonses with such report, and comply with the court's direction with respect to the issuance of any John Doe summons under such project.

.

(b)

Jurisdiction of court

(1)

In general

Paragraph (1) of section 7609(h) is amended by inserting after the first sentence the following new sentence: Any United States district court in which a member of the group or class to which a summons may be issued resides or is found shall have jurisdiction to hear and determine the approval of a project under subsection (f)(2)(B)..

(2)

Conforming amendment

The first sentence of section 7609(h)(1) is amended by striking (f) and inserting (f)(1).

(c)

Effective date

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

116.

Improving enforcement of foreign financial account reporting

(a)

Clarifying the connection of foreign financial account reporting to tax administration

Paragraph (4) of section 6103(b) is amended by adding at the end the following new sentence:

For purposes of subparagraph (A)(i), section 5314 of title 31, United States Code, and sections 5321 and 5322 of such title (as such sections pertain to such section 5314), shall be considered related statutes.

.

(b)

Simplifying the calculation of foreign financial account reporting penalties

Section 5321(a)(5)(D)(ii) of title 31, United States Code, is amended by striking the balance in the account at the time of the violation and inserting the highest balance in the account during the reporting period to which the violation relates.

(c)

Clarifying the use of suspicious activity reports under the Bank Secrecy Act for civil tax law enforcement

Section 5319 of title 31, United States Code, is amended by inserting the civil and criminal enforcement divisions of the Internal Revenue Service, after including.

C

Ending offshore tax avoidance

121.

Allocation of expenses and taxes on basis of repatriation of foreign income

(a)

In general

Part III of subchapter N of chapter 1 is amended by inserting after subpart G the following new subpart:

H

Special Rules for Allocation of Foreign-Related Deductions and Foreign Tax Credits

Sec. 975. Deductions allocated to deferred foreign income may not offset United States source income.

Sec. 976. Amount of foreign taxes computed on overall basis.

Sec. 977. Application of subpart.

975.

Deductions allocated to deferred foreign income may not offset United States source income

(a)

Current year deductions

For purposes of this chapter, foreign-related deductions for any taxable year—

(1)

shall be taken into account for such taxable year only to the extent that such deductions are allocable to currently-taxed foreign income, and

(2)

to the extent not so allowed, shall be taken into account in subsequent taxable years as provided in subsection (b).

Foreign-related deductions shall be allocated to currently taxed foreign income in the same proportion which currently taxed foreign income bears to the sum of currently taxed foreign income and deferred foreign income.
(b)

Deductions related to repatriated deferred foreign income

(1)

In general

If there is repatriated foreign income for a taxable year, the portion of the previously deferred deductions allocated to the repatriated foreign income shall be taken into account for the taxable year as a deduction allocated to income from sources outside the United States. Any such amount shall not be included in foreign-related deductions for purposes of applying subsection (a) to such taxable year.

(2)

Portion of previously deferred deductions

For purposes of paragraph (1), the portion of the previously deferred deductions allocated to repatriated foreign income is—

(A)

the amount which bears the same proportion to such deductions, as

(B)

the repatriated income bears to the previously deferred foreign income.

(c)

Definitions and special rule

For purposes of this section—

(1)

Foreign-related deductions

The term foreign-related deductions means the total amount of deductions and expenses which would be allocated or apportioned to gross income from sources without the United States for the taxable year if both the currently-taxed foreign income and deferred foreign income were taken into account.

(2)

Currently-taxed foreign income

The term currently-taxed foreign income means the amount of gross income from sources without the United States for the taxable year (determined without regard to repatriated foreign income for such year).

(3)

Deferred foreign income

The term deferred foreign income means the excess of—

(A)

the amount that would be includible in gross income under subpart F of this part for the taxable year if—

(i)

all controlled foreign corporations were treated as one controlled foreign corporation, and

(ii)

all earnings and profits of all controlled foreign corporations were subpart F income (as defined in section 952), over

(B)

the sum of—

(i)

all dividends received during the taxable year from controlled foreign corporations, plus

(ii)

amounts includible in gross income under section 951(a).

(4)

Previously deferred foreign income

The term previously deferred foreign income means the aggregate amount of deferred foreign income for all prior taxable years to which this part applies, determined as of the beginning of the taxable year, reduced by the repatriated foreign income for all such prior taxable years.

(5)

Repatriated foreign income

The term repatriated foreign income means the amount included in gross income on account of distributions out of previously deferred foreign income.

(6)

Previously deferred deductions

The term previously deferred deductions means the aggregate amount of foreign-related deductions not taken into account under subsection (a) for all prior taxable years (determined as of the beginning of the taxable year), reduced by any amounts taken into account under subsection (b) for such prior taxable years.

(7)

Treatment of certain foreign taxes

(A)

Paid by controlled foreign corporation

Section 78 shall not apply for purposes of determining currently-taxed foreign income and deferred foreign income.

(B)

Paid by taxpayer

For purposes of determining currently-taxed foreign income, gross income from sources without the United States shall be reduced by the aggregate amount of taxes described in the applicable paragraph of section 901(b) which are paid by the taxpayer (without regard to sections 902 and 960) during the taxable year.

(8)

Coordination with section 976

In determining currently-taxed foreign income and deferred foreign income, the amount of deemed foreign tax credits shall be determined with regard to section 976.

976.

Amount of foreign taxes computed on overall basis

(a)

Current year allowance

For purposes of this chapter, the amount taken into account as foreign income taxes for any taxable year shall be an amount which bears the same ratio to the total foreign income taxes for that taxable year as—

(1)

the currently-taxed foreign income for such taxable year, bears to

(2)

the sum of the currently-taxed foreign income and deferred foreign income for such year.

The portion of the total foreign income taxes for any taxable year not taken into account under the preceding sentence for a taxable year shall only be taken into account as provided in subsection (b) (and shall not be taken into account for purposes of applying sections 902 and 960).
(b)

Allowance related to repatriated deferred foreign income

(1)

In general

If there is repatriated foreign income for any taxable year, the portion of the previously deferred foreign income taxes paid or accrued during such taxable year shall be taken into account for the taxable year as foreign taxes paid or accrued. Any such taxes so taken into account shall not be included in foreign income taxes for purposes of applying subsection (a) to such taxable year.

(2)

Portion of previously deferred foreign income taxes

For purposes of paragraph (1), the portion of the previously deferred foreign income taxes allocated to repatriated deferred foreign income is—

(A)

the amount which bears the same proportion to such taxes, as

(B)

the repatriated deferred income bears to the previously deferred foreign income.

(c)

Definitions and special rule

For purposes of this section—

(1)

Previously deferred foreign income taxes

The term previously deferred foreign income taxes means the aggregate amount of total foreign income taxes not taken into account under subsection (a) for all prior taxable years (determined as of the beginning of the taxable year), reduced by any amounts taken into account under subsection (b) for such prior taxable years.

(2)

Total foreign income taxes

The term total foreign income taxes means the sum of foreign income taxes paid or accrued during the taxable year (determined without regard to section 904(c)) plus the increase in foreign income taxes that would be paid or accrued during the taxable year under sections 902 and 960 if—

(A)

all controlled foreign corporations were treated as one controlled foreign corporation, and

(B)

all earnings and profits of all controlled foreign corporations were subpart F income (as defined in section 952).

(3)

Foreign income taxes

The term foreign income taxes means any income, war profits, or excess profits taxes paid by the taxpayer to any foreign country or possession of the United States.

(4)

Currently-taxed foreign income and deferred foreign income

The terms currently-taxed foreign income and deferred foreign income have the meanings given such terms by section 975(c)).

977.

Application of subpart

This subpart—

(1)

shall be applied before subpart A, and

(2)

shall be applied separately with respect to the categories of income specified in section 904(d)(1).

.

(b)

Clerical amendment

The table of subparts for part III of subpart N of chapter 1 is amended by inserting after the item relating to subpart G the following new item:

Subpart H. Special Rules for Allocation of Foreign-Related Deductions and Foreign Tax Credits.

.

(c)

Effective date

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

122.

Excess income from transfers of intangibles to low-taxed affiliates treated as subpart F income

(a)

In general

Subsection (a) of section 954 is amended by inserting after paragraph (3) the following new paragraph:

(4)

the foreign base company excess intangible income for the taxable year (determined under subsection (f) and reduced as provided in subsection (b)(5)), and

.

(b)

Foreign base company excess intangible income

Section 954 is amended by inserting after subsection (e) the following new subsection:

(f)

Foreign base company excess intangible income

For purposes of subsection (a)(4) and this subsection:

(1)

Foreign base company excess intangible income defined

(A)

In general

The term foreign base company excess intangible income means, with respect to any covered intangible, the excess of—

(i)

the sum of—

(I)

gross income from the sale, lease, license, or other disposition of property in which such covered intangible is used directly or indirectly, and

(II)

gross income from the provision of services related to such covered intangible or in connection with property in which such covered intangible is used directly or indirectly, over

(ii)

150 percent of the costs properly allocated and apportioned to the gross income taken into account under clause (i) other than expenses for interest and taxes and any expenses which are not directly allocable to such gross income.

(B)

Same country income not taken into account

If—

(i)

the sale, lease, license, or other disposition of the property referred to in subparagraph (A)(i)(I) is for use, consumption, or disposition in the country under the laws of which the controlled foreign corporation is created or organized, or

(ii)

the services referred to in subparagraph (A)(i)(II) are performed in such country,

the gross income from such sale, lease, license, or other disposition, or provision of services, shall not be taken into account under subparagraph (A)(i).
(2)

Exception based on effective foreign income tax rate

(A)

In general

Foreign base company excess intangible income shall not include the applicable percentage of any item of income received by a controlled foreign corporation if the taxpayer establishes to the satisfaction of the Secretary that such income was subject to an effective rate of income tax imposed by a foreign country in excess of 5 percent.

(B)

Applicable percentage

For purposes of subparagraph (A), the term applicable percentage means the ratio (expressed as a percentage), not greater than 100 percent, of—

(i)

the number of percentage points by which the effective rate of income tax referred to in subparagraph (A) exceeds 5 percentage points, over

(ii)

10 percentage points.

(C)

Treatment of losses in determining effective rate of foreign income tax

For purposes of determining the effective rate of income tax imposed by any foreign country—

(i)

such effective rate shall be determined without regard to any losses carried to the relevant taxable year, and

(ii)

to the extent the income with respect to such intangible reduces losses in the relevant taxable year, such effective rate shall be treated as being the effective rate which would have been imposed on such income without regard to such losses.

(3)

Covered intangible

The term covered intangible means, with respect to any controlled foreign corporation, any intangible property (as defined in section 936(h)(3)(B))—

(A)

which is sold, leased, licensed, or otherwise transferred (directly or indirectly) to such controlled foreign corporation from a related person, or

(B)

with respect to which such controlled foreign corporation and one or more related persons has (directly or indirectly) entered into any shared risk or development agreement (including any cost sharing agreement).

(4)

Related person

The term related person has the meaning given such term in subsection (d)(3).

.

(c)

Separate basket for foreign tax credit

Subsection (d) of section 904 is amended by redesignating paragraph (7) as paragraph (8) and by inserting after paragraph (6) the following new paragraph:

(6)

Separate application to foreign base company excess intangible income

(A)

In general

Subsections (a), (b), and (c) of this section and sections 902, 907, and 960 shall be applied separately with respect to each item of income which is taken into account under section 954(a)(4) as foreign base company excess intangible income.

(B)

Regulations

The Secretary may issue such regulations or other guidance as is necessary or appropriate to carry out the purposes of this subsection, including regulations or other guidance which provides that related items of income may be aggregated for purposes of this paragraph.

.

(d)

Conforming amendments

(1)

Paragraph (4) of section 954(b) is amended by inserting foreign base company excess intangible income described in subsection (a)(4) or before foreign base company oil-related income in the last sentence thereof.

(2)

Subsection (b) of section 954 is amended by adding at the end the following new paragraph:

(7)

Foreign base company excess intangible income not treated as another kind of base company income

Income of a corporation which is foreign base company excess intangible income shall not be considered foreign base company income of such corporation under paragraph (2), (3), or (5) of subsection (a).

.

(e)

Effective date

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

123.

Limitations on income shifting through intangible property transfers

(a)

Clarification of definition of intangible asset

Clause (vi) of section 936(h)(3)(B) is amended by inserting (including any section 197 intangible described in subparagraph (A), (B), or (C)(i) of subsection (d)(1) of such section) after item.

(b)

Clarification of allowable valuation methods

(1)

Foreign corporations

Paragraph (2) of section 367(d) is amended by adding at the end the following new subparagraph:

(D)

Regulatory authority

For purposes of the last sentence of subparagraph (A), the Secretary may require—

(i)

the valuation of transfers of intangible property on an aggregate basis, or

(ii)

the valuation of such a transfer on the basis of the realistic alternatives to such a transfer,

in any case in which the Secretary determines that such basis is the most reliable means of valuation of such transfers.

.

(2)

Allocation among taxpayers

Section 482 is amended by adding at the end the following: For purposes of the preceding sentence, the Secretary may require the valuation of transfers of intangible property on an aggregate basis or the valuation of such a transfer on the basis of the realistic alternatives to such a transfer, in any case in which the Secretary determines that such basis is the most reliable means of valuation of such transfers..

(c)

Effective date

(1)

In general

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

(2)

No inference

Nothing in the amendment made by subsection (a) shall be construed to create any inference with respect to the application of section 936(h)(3) of the Internal Revenue Code of 1986, or the authority of the Secretary of the Treasury to provide regulations for such application, on or before the date of the enactment of such amendment.

124.

Limitation on earnings stripping by expatriated entities

(a)

In general

Subsection (j) of section 163 is amended—

(1)

by redesignating paragraph (9) as paragraph (10), and

(2)

by inserting after paragraph (8) the following new paragraph:

(9)

Special rules for expatriated entities

(A)

In general

In the case of a corporation to which this subsection applies which is an expatriated entity, this subsection shall apply to such corporation with the following modifications:

(i)

Paragraph (2)(A) shall be applied without regard to clause (ii) thereof.

(ii)

Paragraph (1)(B) shall be applied—

(I)

without regard to the parenthetical, and

(II)

by substituting in the 1st succeeding taxable year and in the 2nd through 10th succeeding taxable years to the extent not previously taken into account under this subparagraph for in the succeeding taxable year.

(iii)

Paragraph (2)(B) shall be applied—

(I)

without regard to clauses (ii) and (iii), and

(II)

by substituting 25 percent of the adjusted taxable income of the corporation for such taxable year for the matter of clause (i)(II) thereof.

(B)

Expatriated entity

For purposes of this paragraph—

(i)

In general

With respect to a corporation and a taxable year, the term expatriated entity has the meaning given such term by section 7874(a)(2), determined as if such section and the regulations under such section as in effect on the first day of such taxable year applied to all taxable years of the corporation beginning after July 10, 1989.

(ii)

Exception for surrogates treated as a domestic corporation

The term expatriated entity does not include a surrogate foreign corporation which is treated as a domestic corporation by reason of section 7874(b).

.

(b)

Effective date

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

125.

Repeal of check-the-box rules for certain foreign entities and CFC look-thru rules

(a)

Check-the-Box rules

Paragraph (3) of section 7701(a) is amended—

(1)

by striking and, and

(2)

by inserting after insurance companies the following:

, and any foreign business entity that—

(A)

has a single owner that does not have limited liability, or

(B)

has one or more members all of which have limited liability

.

(b)

Look-Thru rule

Subparagraph (C) of section 954(c)(6) is amended to read as follows:

(C)

Termination

Subparagraph (A) shall not apply to dividends, interest, rents, and royalties received or accrued after the date of the enactment of the CUT Loopholes Act.

.

126.

Prohibition on offshore loan abuse

(a)

In general

Subpart F of part III of subchapter N of chapter 1 is amended by adding at the end the following new section:

966.

Income inclusion for loans to United States shareholders from controlled foreign corporations

(a)

In general

In the case of a United States shareholder, there shall be included in income for the taxable year an amount equal to the disqualified CFC loan amount.

(b)

Disqualified CFC loan amount

(1)

In general

For purposes of this section, the disqualified CFC loan amount for any taxable year is an amount equal to the lesser of—

(A)

the aggregate amount of obligations of the United States shareholder which originated in such taxable year and are held (directly or indirectly) by controlled foreign corporations, or

(B)

the foreign group earnings amount.

(2)

Exception

In determining the amount of obligations under subparagraph (A), there shall be excluded any obligation described in section 956(c)(2)(C).

(3)

Carryforward of certain amounts

If, for any taxable year, the amount under subparagraph (A) exceeds the amount under subparagraph (B), such excess shall be taken into account as an obligation to which subparagraph (A) applies for the succeeding taxable year.

(4)

Foreign group earnings amount

For purposes of this section, the term foreign group earnings amount means the aggregate earnings and profits of all controlled foreign corporations in the worldwide affiliated group (as defined in section 864(f)(1)(C)) of the United States shareholder, determined—

(A)

as of the last day of the taxable year of the United States shareholder, and

(B)

without regard to any distributions made during such taxable year.

(c)

Denial of interest deduction

No deduction shall be allowed for interest paid or accrued with respect to obligations taken into account under subsection (b).

(d)

Treatment of income source

Any amount included in income under subsection (a) shall be treated as income from sources within the United States.

.

(b)

Coordination with section 956

Paragraph (2) of section 956(c) is amended by striking and at the end of subparagraph (K), by striking the period at the end of subparagraph (L)(ii) and inserting ; and, and by inserting after subparagraph (L) the following new subparagraph:

(M)

any obligation which is taken into account in determining the disqualified CFC loan amount under section 966.

.

(c)

Clerical amendment

The table of sections for subpart F of part III of subchapter N of chapter 1 is amended by adding at the end the following new item:

Sec. 966. Income inclusion for loans to certain United States shareholders from controlled foreign corporations.

.

(d)

Effective date

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

II

Strengthening tax enforcement

A

Combating tax shelter promotion

201.

Penalty for promoting abusive tax shelters

(a)

Penalty for promoting abusive tax shelters

Section 6700 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 150 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 considered an ordinary and necessary expense in carrying on a trade or business for purposes of this title and shall not be deductible by the person who is subject to such penalty or who makes such payment.

.

(b)

Conforming amendment

Section 6700(a) is amended by striking the last sentence.

(c)

Effective date

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

202.

Penalty for aiding and abetting the understatement of tax liability

(a)

In general

Section 6701(a) 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 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 150 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 considered an ordinary and necessary expense in carrying on a trade or business for purposes of this title and 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.

203.

Prohibited fee arrangement

(a)

In general

Section 6701, as amended by this Act, is amended—

(1)

by redesignating subsections (f) and (g) as subsections (g) and (h), respectively,

(2)

by striking subsection (a). in paragraphs (2) and (3) of subsection (g) (as redesignated by paragraph (1)) and inserting subsection (a) or (f)., and

(3)

by inserting after subsection (e) the following new subsection:

(f)

Prohibited fee arrangement

(1)

In general

Any person who makes an agreement for, charges, or collects a fee which is for services provided in connection with the internal revenue laws, and the amount of which is calculated according to, or is dependent upon, a projected or actual amount of—

(A)

tax savings or benefits, or

(B)

losses which can be used to offset other taxable income,

shall pay a penalty with respect to each such fee activity in the amount determined under subsection (b).
(2)

Rules

The Secretary may issue rules to carry out the purposes of this subsection and may provide exceptions for fee arrangements that are in the public interest.

.

(b)

Effective date

The amendments made by this section shall apply to fee agreements, charges, and collections made after the date of the enactment of this Act.

204.

Preventing tax shelter activities by financial institutions

(a)

Examinations

(1)

Development of examination techniques

Each of the Federal banking agencies and the Commission shall, in consultation with the Internal Revenue Service, develop examination techniques to detect potential violations of section 6700 or 6701 of the Internal Revenue Code of 1986, by depository institutions, brokers, dealers, and investment advisers, as appropriate.

(2)

Implementation

Each of the Federal banking agencies and the Commission shall implement the examination techniques developed under paragraph (1) with respect to each of the depository institutions, brokers, dealers, or investment advisers subject to their enforcement authority. Such examination shall, to the extent possible, be combined with any examination by such agency otherwise required or authorized by Federal law.

(b)

Report to internal revenue service

In any case in which an examination conducted under this section with respect to a financial institution or other entity reveals a potential violation, such agency shall promptly notify the Internal Revenue Service of such potential violation for investigation and enforcement by the Internal Revenue Service, in accordance with applicable provisions of law.

(c)

Report to congress

The Federal banking agencies and the Commission shall submit a joint written report to Congress in 2014 on their progress in preventing violations of sections 6700 and 6701 of the Internal Revenue Code of 1986, by depository institutions, brokers, dealers, and investment advisers, as appropriate.

(d)

Definitions

For purposes of this section—

(1)

the terms broker, dealer, and investment adviser have the same meanings as in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c);

(2)

the term Commission means the Securities and Exchange Commission;

(3)

the term depository institution has the same meaning as in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c));

(4)

the term Federal banking agencies has the same meaning as in section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. 1813(q)); and

(5)

the term Secretary means the Secretary of the Treasury.

205.

Information sharing for enforcement purposes

(a)

Promotion of prohibited tax shelters or tax avoidance schemes

Section 6103(h) is amended by adding at the end the following new paragraph:

(7)

Disclosure of returns and return information related to promotion of prohibited tax shelters or tax avoidance schemes

(A)

Written request

Upon receipt by the Secretary of a written request which meets the requirements of subparagraph (B) from the head of the United States Securities and Exchange Commission, an appropriate Federal banking agency as defined under section 1813(q) of title 12, United States Code, or the Public Company Accounting Oversight Board, a return or return information shall be disclosed to such requestor’s officers and employees who are personally and directly engaged in an investigation, examination, or proceeding by such requestor to evaluate, determine, penalize, or deter conduct by a financial institution, issuer, or public accounting firm, or associated person, in connection with a potential or actual violation of section 6700 (promotion of abusive tax shelters), 6701 (aiding and abetting understatement of tax liability), or activities related to promoting or facilitating inappropriate tax avoidance or tax evasion. Such disclosure shall be solely for use by such officers and employees in such investigation, examination, or proceeding. In the discretion of the Secretary, such disclosure may take the form of the participation of Internal Revenue Service employees in a joint investigation, examination, or proceeding with the Securities and Exchange Commission, Federal banking agency, or Public Company Accounting Oversight Board.

(B)

Requirements

A request meets the requirements of this subparagraph if it sets forth—

(i)

the nature of the investigation, examination, or proceeding,

(ii)

the statutory authority under which such investigation, examination, or proceeding is being conducted,

(iii)

the name or names of the financial institution, issuer, or public accounting firm to which such return information relates,

(iv)

the taxable period or periods to which such return information relates, and

(v)

the specific reason or reasons why such disclosure is, or may be, relevant to such investigation, examination or proceeding.

(C)

Financial institution

For the purposes of this paragraph, the term financial institution means a depository institution, foreign bank, insured institution, industrial loan company, broker, dealer, investment company, investment advisor, or other entity subject to regulation or oversight by the United States Securities and Exchange Commission or an appropriate Federal banking agency.

.

(b)

Financial and accounting fraud investigations

Section 6103(i) is amended by adding at the end the following new paragraph:

(9)

Disclosure of returns and return information for use in financial and accounting fraud investigations

(A)

Written request

Upon receipt by the Secretary of a written request which meets the requirements of subparagraph (B) from the head of the United States Securities and Exchange Commission or the Public Company Accounting Oversight Board, a return or return information shall be disclosed to such requestor’s officers and employees who are personally and directly engaged in an investigation, examination, or proceeding by such requester to evaluate the accuracy of a financial statement or report, or to determine whether to require a restatement, penalize, or deter conduct by an issuer, investment company, or public accounting firm, or associated person, in connection with a potential or actual violation of auditing standards or prohibitions against false or misleading statements or omissions in financial statements or reports. Such disclosure shall be solely for use by such officers and employees in such investigation, examination, or proceeding.

(B)

Requirements

A request meets the requirements of this subparagraph if it sets forth—

(i)

the nature of the investigation, examination, or proceeding,

(ii)

the statutory authority under which such investigation, examination, or proceeding is being conducted,

(iii)

the name or names of the issuer, investment company, or public accounting firm to which such return information relates,

(iv)

the taxable period or periods to which such return information relates, and

(v)

the specific reason or reasons why such disclosure is, or may be, relevant to such investigation, examination or proceeding.

.

(c)

Effective date

The amendments made by this section shall apply to disclosures and to information and document requests made after the date of the enactment of this Act.

206.

Disclosure of information to Congress

(a)

Disclosure by tax return preparer

(1)

In general

Subparagraph (B) of section 7216(b)(1) is amended to read as follows:

(B)

pursuant to any 1 of the following documents, if clearly identified:

(i)

The order of any Federal, State, or local court of record.

(ii)

A subpoena issued by a Federal or State grand jury.

(iii)

An administrative order, summons, or subpoena which is issued in the performance of its duties by—

(I)

any Federal agency, including Congress or any committee or subcommittee thereof, or

(II)

any State agency, body, or commission charged under the laws of the State or a political subdivision of the State with the licensing, registration, or regulation of tax return preparers.

.

(2)

Effective date

The amendment made by this subsection shall apply to disclosures made after the date of the enactment of this Act pursuant to any document in effect on or after such date.

(b)

Disclosure by Secretary

Paragraph (2) of section 6104(a) is amended to read as follows:

(2)

Inspection by Congress

(A)

In general

Upon receipt of a written request from a committee or subcommittee of Congress, copies of documents related to a determination by the Secretary to grant, deny, revoke, or restore an organization’s exemption from taxation under section 501 shall be provided to such committee or subcommittee, including any application, notice of status, or supporting information provided by such organization to the Internal Revenue Service; any letter, analysis, or other document produced by or for the Internal Revenue Service evaluating, determining, explaining, or relating to the tax exempt status of such organization (other than returns, unless such returns are available to the public under this section or section 6103 or 6110); and any communication between the Internal Revenue Service and any other party relating to the tax exempt status of such organization.

(B)

Additional information

Section 6103(f) shall apply with respect to—

(i)

the application for exemption of any organization described in subsection (c) or (d) of section 501 which is exempt from taxation under section 501(a) for any taxable year and any application referred to in subparagraph (B) of subsection (a)(1) of this section, and

(ii)

any other papers which are in the possession of the Secretary and which relate to such application,

as if such papers constituted returns.

.

(c)

Effective date

The amendments made by this section shall apply to disclosures and to information and document requests made after the date of the enactment of this Act.

207.

Tax opinion standards for tax practitioners

Section 330(d) of title 31, United States Code, is amended to read as follows:

(d)

The Secretary of the Treasury shall impose standards applicable to the rendering of written advice with respect to any listed transaction or any entity, plan, arrangement, or other transaction which has a potential for tax avoidance or evasion. Such standards shall address, but not be limited to, the following issues:

(1)

Independence of the practitioner issuing such written advice from persons promoting, marketing, or recommending the subject of the advice.

(2)

Collaboration among practitioners, or between a practitioner and other party, which could result in such collaborating parties having a joint financial interest in the subject of the advice.

(3)

Avoidance of conflicts of interest which would impair auditor independence.

(4)

For written advice issued by a firm, standards for reviewing the advice and ensuring the consensus support of the firm for positions taken.

(5)

Reliance on reasonable factual representations by the taxpayer and other parties.

(6)

Appropriateness of the fees charged by the practitioner for the written advice.

(7)

Preventing practitioners and firms from aiding or abetting the understatement of tax liability by clients.

(8)

Banning the promotion of potentially abusive or illegal tax shelters.

.

B

Simplify tax lien procedure

211.

Short title

This subtitle may be cited as the Tax Lien Simplification Act .

212.

Findings and purpose

(a)

Findings

Congress makes the following findings:

(1)

The present decentralized system for filing Federal tax liens in local property offices, which was established before the advent of modern computers, the Internet, and e-government programs, is inefficient, burdensome, and expensive.

(2)

Current technology permits the creation of a centralized Federal tax lien filing system which can provide for enhanced public notice of and access to accurate tax lien information in a manner that is more efficient, more timely, and less burdensome than the existing tax lien filing system; which would expedite the release of liens; and which would be less expensive for both taxpayers and users.

(b)

Purpose

The purpose of this subtitle is to simplify and modernize the process for filing notices of Federal tax liens, to improve public access to tax lien information, and to save taxpayer dollars by establishing a nationwide, Internet accessible, and fully searchable filing system for Federal tax liens which would replace the current system of local tax lien filings.

213.

National tax lien filing system

(a)

Filing of notice of lien

Subsection (f) of section 6323 is amended to read as follows:

(f)

Filing of notice; form

(1)

Filing of notice

The notice referred to in subsection (a) shall be filed in the Federal tax lien registry operated under subsection (k). The filing of a notice of lien, or a certificate of release, discharge, subordination, or nonattachment of lien, or a notice of withdrawal of a notice of lien, in the Federal tax lien registry shall be effective for purposes of determining lien priority regardless of the nature or location of the property interest to which the lien attaches.

(2)

Form

The form and content of the notice referred to in subsection (a) shall be prescribed by the Secretary. Such notice shall be valid notwithstanding any other provision of law regarding the form or content of a notice of lien.

(3)

Other national filing systems

Once the Federal tax lien registry is operational under subsection (k), the filing of a notice of lien shall be governed by this title and shall not be subject to any other Federal law establishing a place or places for the filing of liens or encumbrances under a national filing system.

.

(b)

Refiling of notice

Paragraph (2) of section 6323(g) is amended to read as follows:

(2)

Refiling

A notice of lien may be refiled in the Federal tax lien registry operated under subsection (k).

.

(c)

Release of tax liens or discharge of property

(1)

In general

Section 6325(a) is amended by inserting , and shall cause the certificate of release to be filed in the Federal tax lien registry operated under section 6323(k), after internal revenue tax.

(2)

Release of tax liens expedited from 30 to 20 days

Section 6325(a) is amended by striking not later than 30 days and inserting not later than 20 days.

(3)

Discharge of property from lien

Section 6325(b) is amended—

(A)

by inserting , and shall cause the certificate of discharge to be filed in the Federal tax lien registry operated under section 6323(k), after under this chapter in paragraph (1),

(B)

by inserting , and shall cause the certificate of discharge to be filed in such Federal tax lien registry, after property subject to the lien in paragraph (2),

(C)

by inserting , and shall cause the certificate of discharge to be filed in such Federal tax lien registry, after property subject to the lien in paragraph (3), and

(D)

by inserting , and shall cause the certificate of discharge of property to be filed in such Federal tax lien registry, after certificate of discharge of such property in paragraph (4).

(4)

Discharge of property from estate or gift tax lien

Section 6325(c) is amended by inserting , and shall cause the certificate of discharge to be filed in the Federal tax lien registry operated under section 6323(k), after imposed by section 6324 .

(5)

Subordination of lien

Section 6325(d) is amended by inserting , and shall cause the certificate of subordination to be filed in the Federal tax lien registry operated under section 6323(k), after subject to such lien.

(6)

Nonattachment of lien

Section 6325(e) is amended by inserting , and shall cause the certificate of nonattachment to be filed in the Federal tax lien registry operated under section 6323(k), after property of such person.

(7)

Effect of certificate

Paragraphs (1) and (2)(B) of section 6325(f) are each amended by striking in the same office as the notice of lien to which it relates is filed (if such notice of lien has been filed) and inserting in the Federal tax lien registry operated under section 6323(k) .

(8)

Release following administrative appeal

Section 6326(b) is amended—

(A)

by striking and shall include and insert , shall include, and

(B)

by inserting , and shall cause the certificate of release to be filed in the Federal tax lien registry operated under section 6323(k), after erroneous.

(9)

Withdrawal of notice

Section 6323(j)(1) is amended by striking at the same office as the withdrawn notice and inserting in the Federal tax lien registry operated under section 6323(k).

(10)

Conforming amendments

Section 6325 is amended by striking subsection (g) and by redesignating subsection (h) as subsection (g).

(d)

Federal tax lien registry

Section 6323 is amended by adding at the end the following new subsection:

(k)

Federal tax lien registry

(1)

In general

The Federal tax lien registry operated under this subsection shall be established and maintained by the Secretary and shall be accessible to and searchable by the public through the Internet at no cost to access or search. The registry shall identify the taxpayer to whom the Federal tax lien applies and reflect the date and time the notice of lien was filed, and shall be made searchable by, at a minimum, taxpayer name, the State of the taxpayer’s address as shown on the notice of lien, the type of tax, and the tax period. The registry shall also provide for the filing of certificates of release, discharge, subordination, and nonattachment of Federal tax liens, as authorized in sections 6325 and 6326, and may provide for publishing such other documents or information with respect to Federal tax liens as the Secretary may by regulation provide under paragraph (2)(C).

(2)

Administrative action

(A)

In general

The Secretary shall issue regulations or other guidance providing for the maintenance, reliability, accessibility, and use of the Federal tax lien registry established under paragraph (1). Such regulations or guidance shall address, among other matters, issues related to periods during which the registry may be unavailable for use due to routine maintenance or other activities.

(B)

Fees

The Secretary may charge a taxpayer's account with a reasonable filing fee for each notice of lien and each related certificate, notice, or other filing recorded in the Federal tax lien registry with respect to such taxpayer, in an amount determined by the Secretary to be sufficient to defray the costs of operating the registry. The Secretary may also charge a reasonable fee to any person who requests and receives under section 6323(d)(1) information or a certified copy of a filing in the Federal tax lien registry to defray the costs of providing such information or copies.

(C)

Filing of other items on registry

The Secretary may, by regulation, provide for the filing of items on the registry other than Federal tax liens, including criminal fine judgments under section 3613 of title 18, United States Code, and civil judgments under section 3201 of such title, if the Secretary determines that it would be useful and appropriate to do so.

.

(e)

Certified copies of information from registry

Section 6323, as amended by subsection (d), is amended by adding at the end the following new subsection:

(l)

Certified copies of information from Federal registry

The Secretary shall make available in a certificate that can be admitted into evidence in the courts of the United States without extrinsic evidence of its authenticity the following information to any person that submits a request in a form specified by the Secretary:

(1)

Whether there is on file in the Federal tax lien registry operated under subsection (k) at a date and time specified by the Secretary, but not a date earlier than 3 days before the creation of the certificate, any notice of a lien that—

(A)

designates a particular taxpayer,

(B)

has not been fully satisfied, become legally unenforceable, or been released or withdrawn, and

(C)

if the request so states, has been fully satisfied, become legally unenforceable, or been released or withdrawn, and a record of which is maintained on the registry at the time of filing of the request,

(2)

the date and time of filing of and the information provided in each notice of lien, and

(3)

if the request so states, the date and time of filing of and the information provided in each certificate of release, discharge, subordination, or non-attachment and each notice of withdrawal recorded in the registry with respect to each notice of lien.

.

(f)

Effective date; implementation of registry

(1)

Effective date

The amendments made by this section shall take effect on the date determined by the Secretary of the Treasury under paragraph (2)(E) and, except as provided in paragraph (2)(F), shall apply to notices of liens filed after such date.

(2)

Implementation of Federal tax lien registry

(A)

Pilot project

Prior to the implementation of the Federal tax lien registry under section 6323(k)(1) of the Internal Revenue Code of 1986 (as added by this section), the Secretary of the Treasury, or the Secretary's delegate, shall conduct and shall complete by not later than 2 years after the date of the enactment of this Act 1 or more pilot projects to test the accessibility, reliability, and effectiveness of the electronic systems designed to operate the registry.

(B)

GAO review

Within 3 months after the completion of such a pilot project, the Government Accountability Office shall provide a written evaluation of the project results and provide such evaluation to the Secretary of the Treasury, the Commissioner of Internal Revenue, and appropriate committees in Congress. The Secretary and Commissioner shall cooperate with, and provide information requested by, the Government Accountability Office to enable the evaluation to be completed by the date specified.

(C)

Nationwide test

Upon the completion of 1 or more such pilot projects and after making a determination that the electronic systems designed to operate the Federal tax lien registry are sufficiently accessible, reliable, and effective, the Secretary of the Treasury, or the Secretary's delegate, shall conduct a nationwide test of the Federal tax lien registry to evaluate its capabilities and functionality.

(D)

Data protection

Prior to the implementation of such registry, the Secretary of the Treasury, or the Secretary's delegate, shall take appropriate steps to—

(i)

secure and prevent tampering with the data recorded in the registry,

(ii)

review the information currently provided in public lien filings and determine whether any such information should be excluded or protected from public viewing in such registry, and

(iii)

develop a system, after consultation with the States, industry, and other interested parties, and after consideration of search criteria developed for other public filing systems including Article 9 of the Uniform Commercial Code, that will enable users of the registry, when examining tax lien information for a taxpayer with a common name, to identify through reasonable efforts the specific person to whom such tax lien relates.

(E)

Declaration of registry effective date

Upon the successful completion of a nationwide test of the Federal tax lien registry system, the Secretary of the Treasury shall determine and announce publicly a date upon which the registry shall take effect and become operational.

(F)

Orderly transition

In order to permit an orderly transition to the Federal tax lien registry, the Secretary of the Treasury may by regulation prescribe for the continued filing of notices of Federal tax liens in the offices of the States, counties, and other governmental subdivisions after the determination of an effective date under subparagraph (E) under the provisions of section 6323(f) as in effect before such effective date, for an appropriate period not to exceed 2 years after such effective date.

III

Ending excessive corporate tax deductions for stock options

301.

Consistent treatment of stock options by corporations

(a)

Consistent treatment for wage deduction

(1)

In general

Section 83(h) is amended—

(A)

by striking In the case of and inserting:

(1)

In general

In the case of

, and

(B)

by adding at the end the following new paragraph:

(2)

Stock options

In the case of property transferred to a person in connection with a stock option, any deduction related to such stock option shall be allowed only under section 162(q) and paragraph (1) shall not apply.

.

(2)

Treatment of compensation paid with stock options

Section 162 is amended by redesignating subsection (q) as subsection (r) and by inserting after subsection (p) the following new subsection:

(q)

Treatment of compensation paid with stock options

(1)

In general

In the case of compensation for personal services that is paid with stock options, the deduction under subsection (a)(1) shall not exceed the amount the taxpayer has treated as compensation cost with respect to such stock options for the purpose of ascertaining income, profit, or loss in a report or statement to shareholders, partners, or other proprietors (or to beneficiaries), and shall be taken into account in the same period that such compensation cost is recognized for such purpose.

(2)

Special rules for controlled groups

The Secretary may prescribe rules for the application of paragraph (1) in cases where the stock option is granted by—

(A)

a parent or subsidiary corporation (within the meaning of section 424) of the taxpayer, or

(B)

another corporation.

.

(b)

Consistent treatment for research tax credit

Section 41(b)(2)(D) is amended by inserting at the end the following new clause:

(iv)

Special rule for stock options

The amount which may be treated as wages for any taxable year in connection with the issuance of a stock option shall not exceed the amount allowed for such taxable year as a compensation deduction under section 162(q) with respect to such stock option.

.

(c)

Application of amendments

The amendments made by this section shall apply to stock options exercised after the date of the enactment of this Act, except that—

(1)

such amendments shall not apply to stock options that were granted before such date and that vested in taxable periods beginning on or before June 15, 2005,

(2)

for stock options that were granted before such date of enactment and vested during taxable periods beginning after June 15, 2005, and ending before such date of enactment, a deduction under section 162(q) of the Internal Revenue Code of 1986 (as added by subsection (a)(2)) shall be allowed in the first taxable period of the taxpayer that ends after such date of enactment,

(3)

for public entities reporting as small business issuers and for non-public entities required to file public reports of financial condition, paragraphs (1) and (2) shall be applied by substituting December 15, 2005 for June 15, 2005, and

(4)

no deduction shall be allowed under section 83(h) or section 162(q) of such Code with respect to any stock option the vesting date of which is changed to accelerate the time at which the option may be exercised in order to avoid the applicability of such amendments.

302.

Application of executive pay deduction limit

(a)

In general

Subparagraph (D) of section 162(m)(4) is amended to read as follows:

(D)

Stock option compensation

The term applicable employee remuneration shall include any compensation deducted under subsection (q), and such compensation shall not qualify as performance-based compensation under subparagraph (C).

.

(b)

Effective date

The amendment made by this section shall apply to stock options exercised or granted after the date of the enactment of this Act.

IV

Closing the derivatives blended rate loophole

401.

Short title

This title may be cited as the Closing the Derivatives Blended Rate Loophole Act .

402.

Modifications to treatment of section 1256 contracts

(a)

Elimination of blended capital gain or loss treatment in favor of short-Term capital gain or loss

(1)

In general

Paragraph (3) of section 1256(a) is amended to read as follows:

(3)

any gain or loss with respect to a section 1256 contract shall be treated as short-term capital gain or loss, and

.

(2)

Conforming amendments

Subsection (f) of section 1256 is amended by striking paragraphs (2), (3), and (4) and by redesignating paragraph (5) as paragraph (2).

(b)

Conforming amendments

(1)

Clause (iv) of section 988(c)(1)(E) is amended to read as follows:

(iv)

Treatment of certain currency contracts

Except as provided in regulations, in the case of a qualified fund, any bank forward contract, any foreign currency futures contract traded on a foreign exchange, or to the extent provided in regulations any similar instrument, which is not otherwise a section 1256 contract shall be treated as a section 1256 contract for purposes of section 1256.

.

(2)

Subparagraph (A) of section 1212(c)(1) is amended by striking preceding taxable year and all that follows and inserting preceding taxable year, the amount so allowed shall be treated as short-term capital loss from section 1256 contracts..

(3)

Subparagraph (A) of section 1212(c)(6) is amended by striking preceding taxable year and all that follows and inserting preceding taxable year, the amount allowed as a carryback shall be treated as short-term gain for the loss year..

(4)

Subparagraph (B) of section 1212(c)(6) is amended by striking or long-term.

(5)

Subsection (f) of section 1256 is amended by striking paragraphs (3) and (4) and by redesignating paragraph (5) as paragraph (3).

(c)

Effective dates

(1)

In general

Except as provided in paragraph (2), the amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

(2)

Conforming amendments

The amendments made by paragraphs (2), (3), and (4) of subsection (b) shall apply to losses for taxable years beginning after the date of the enactment of this Act.

403.

Modifications to treatment of dealers in securities and commodities

(a)

Modification of definition of security

Paragraph (2) of section 475(c) is amended by striking the second sentence.

(b)

Required mark to market for dealers in commodities

Subsection (e) of section 475 is amended—

(1)

by striking In the case of a dealer in commodities who elects the application of this subsection, this section shall apply to commodities held by such dealer in paragraph (1) and inserting This section shall apply to commodities held by a dealer in commodities, and

(2)

by striking paragraph (3).

(c)

Commodities derivatives dealers

Clause (i) of section 1221(b)(1)(B) is amended by striking a note, bond, or other evidence of indebtedness, or a section 1256 contract (as defined in section 1256(b)) and inserting or a note, bond, or other evidence of indebtedness).

(d)

Technical amendment

Paragraph (1) of section 1402(i) is amended by striking subsection (a)(3)(A) and inserting subsection (a)(3).

(e)

Effective date

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

V

Ending the tar sands oil spill loophole

501.

Short title

This title may be cited as the Closing the Oil Spill Cleanup Loophole Act .

502.

Requirements for contribution to the Oil Spill Liability Trust Fund

(a)

In general

Paragraph (1) of section 4612(a) is amended to read as follows:

(1)

Crude oil

The term crude oil includes crude oil condensates, natural gasoline, shale oil, any bitumen or bituminous mixture, any oil derived from a bitumen or bituminous mixture, and any oil derived from kerogen-bearing sources.

.

(b)

Regulatory authority To address other types of crude oil and petroleum products

Subsection (a) of section 4612 is amended by adding at the end the following new paragraph:

(10)

Regulatory authority to address other types of crude oil and petroleum products

Under such regulations as the Secretary may prescribe, after consultation with the Administrator of the Environmental Protection Agency, the Secretary may include as crude oil or as a petroleum product subject to tax under section 4611, any fuel feedstock or finished fuel product customarily transported by pipeline, vessel, railcar, or tanker truck if the Secretary determines that—

(A)

the classification of such fuel feedstock or finished fuel product is consistent with the definition of oil under the Oil Pollution Act of 1990, and

(B)

such fuel feedstock or finished fuel product is produced in sufficient commercial quantities as to pose a significant risk of hazard in the event of a discharge.

.

(c)

Removing restrictions relating to oil wells and extraction methods

Paragraph (2) of section 4612(a) is amended by striking from a well located.

(d)

Effective date

The amendments made by this section shall apply to oil and petroleum products received or entered during calendar quarters beginning more than 60 days after the date of the enactment of this Act, regardless of whether the Secretary of the Treasury has promulgated regulations implementing such amendments.

503.

Extension of Oil Spill Liability Trust Fund financing rate

Section 4611 is amended by striking subsection (f).

504.

Technical amendment

Subclause (I) of section 4612(e)(2)(B)(ii) is amended by striking tranferred and inserting transferred.

VI

Ending the carried interest loophole

601.

Short title; etc

This title may be cited as the Carried Interest Fairness Act of 2012 .

602.

Partnership interests transferred in connection with performance of services

(a)

Modification to election To include partnership interest in gross income in year of transfer

Subsection (c) of section 83 is amended by redesignating paragraph (4) as paragraph (5) and by inserting after paragraph (3) the following new paragraph:

(4)

Partnership interests

Except as provided by the Secretary

(A)

In general

In the case of any transfer of an interest in a partnership in connection with the provision of services to (or for the benefit of) such partnership—

(i)

the fair market value of such interest shall be treated for purposes of this section as being equal to the amount of the distribution which the partner would receive if the partnership sold (at the time of the transfer) all of its assets at fair market value and distributed the proceeds of such sale (reduced by the liabilities of the partnership) to its partners in liquidation of the partnership, and

(ii)

the person receiving such interest shall be treated as having made the election under subsection (b)(1) unless such person makes an election under this paragraph to have such subsection not apply.

(B)

Election

The election under subparagraph (A)(ii) shall be made under rules similar to the rules of subsection (b)(2).

.

(b)

Effective date

The amendments made by this section shall apply to interests in partnerships transferred after the date of the enactment of this Act.

603.

Special rules for partners providing investment management services to partnerships

(a)

In general

Part I of subchapter K of chapter 1 is amended by adding at the end the following new section:

710.

Special rules for partners providing investment management services to partnerships

(a)

Treatment of distributive share of partnership items

For purposes of this title, in the case of an investment services partnership interest—

(1)

In general

Notwithstanding section 702(b)

(A)

an amount equal to the net capital gain with respect to such interest for any partnership taxable year shall be treated as ordinary income, and

(B)

subject to the limitation of paragraph (2), an amount equal to the net capital loss with respect to such interest for any partnership taxable year shall be treated as an ordinary loss.

(2)

Recharacterization of losses limited to recharacterized gains

The amount treated as ordinary loss under paragraph (1)(B) for any taxable year shall not exceed the excess (if any) of—

(A)

the aggregate amount treated as ordinary income under paragraph (1)(A) with respect to the investment services partnership interest for all preceding partnership taxable years to which this section applies, over

(B)

the aggregate amount treated as ordinary loss under paragraph (1)(B) with respect to such interest for all preceding partnership taxable years to which this section applies.

(3)

Allocation to items of gain and loss

(A)

Net capital gain

The amount treated as ordinary income under paragraph (1)(A) shall be allocated ratably among the items of long-term capital gain taken into account in determining such net capital gain.

(B)

Net capital loss

The amount treated as ordinary loss under paragraph (1)(B) shall be allocated ratably among the items of long-term capital loss and short-term capital loss taken into account in determining such net capital loss.

(4)

Terms relating to capital gains and losses

For purposes of this section—

(A)

In general

Net capital gain, long-term capital gain, and long-term capital loss, with respect to any investment services partnership interest for any taxable year, shall be determined under section 1222, except that such section shall be applied—

(i)

without regard to the recharacterization of any item as ordinary income or ordinary loss under this section,

(ii)

by only taking into account items of gain and loss taken into account by the holder of such interest under section 702 with respect to such interest for such taxable year, and

(iii)

by treating property which is taken into account in determining gains and losses to which section 1231 applies as capital assets held for more than 1 year.

(B)

Net capital loss

The term net capital loss means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges. Rules similar to the rules of clauses (i) through (iii) of subparagraph (A) shall apply for purposes of the preceding sentence.

(5)

Special rules for dividends

(A)

Individuals

Any dividend allocated to any investment services partnership interest shall not be treated as qualified dividend income for purposes of section 1(h).

(B)

Corporations

No deduction shall be allowed under section 243 or 245 with respect to any dividend allocated to any investment services partnership interest.

(6)

Special rule for qualified small business stock

Section 1202 shall not apply to any gain from the sale or exchange of qualified small business stock (as defined in section 1202(c)) allocated with respect to any investment services partnership interest.

(b)

Dispositions of partnership interests

(1)

Gain

(A)

In general

Any gain on the disposition of an investment services partnership interest shall be—

(i)

treated as ordinary income, and

(ii)

recognized notwithstanding any other provision of this subtitle.

(B)

Gift and transfers at death

In the case of a disposition of an investment services partnership interest by gift or by reason of death of the taxpayer—

(i)

subparagraph (A) shall not apply,

(ii)

such interest shall be treated as an investment services partnership interest in the hands of the person acquiring such interest, and

(iii)

any amount that would have been treated as ordinary income under this subsection had the decedent sold such interest immediately before death shall be treated as an item of income in respect of a decedent under section 691.

(2)

Loss

Any loss on the disposition of an investment services partnership interest shall be treated as an ordinary loss to the extent of the excess (if any) of—

(A)

the aggregate amount treated as ordinary income under subsection (a) with respect to such interest for all partnership taxable years to which this section applies, over

(B)

the aggregate amount treated as ordinary loss under subsection (a) with respect to such interest for all partnership taxable years to which this section applies.

(3)

Election with respect to certain exchanges

Paragraph (1)(A)(ii) shall not apply to the contribution of an investment services partnership interest to a partnership in exchange for an interest in such partnership if—

(A)

the taxpayer makes an irrevocable election to treat the partnership interest received in the exchange as an investment services partnership interest, and

(B)

the taxpayer agrees to comply with such reporting and recordkeeping requirements as the Secretary may prescribe.

(4)

Distributions of partnership property

(A)

In general

In the case of any distribution of property by a partnership with respect to any investment services partnership interest held by a partner, the partner receiving such property shall recognize gain equal to the excess (if any) of—

(i)

the fair market value of such property at the time of such distribution, over

(ii)

the adjusted basis of such property in the hands of such partner (determined without regard to subparagraph (C)).

(B)

Treatment of gain as ordinary income

Any gain recognized by such partner under subparagraph (A) shall be treated as ordinary income to the same extent and in the same manner as the increase in such partner’s distributive share of the taxable income of the partnership would be treated under subsection (a) if, immediately prior to the distribution, the partnership had sold the distributed property at fair market value and all of the gain from such disposition were allocated to such partner. For purposes of applying subsection (a)(2), any gain treated as ordinary income under this subparagraph shall be treated as an amount treated as ordinary income under subsection (a)(1)(A).

(C)

Adjustment of basis

In the case a distribution to which subparagraph (A) applies, the basis of the distributed property in the hands of the distributee partner shall be the fair market value of such property.

(D)

Special rules with respect to mergers, divisions, and technical terminations

In the case of a taxpayer which satisfies requirements similar to the requirements of subparagraphs (A) and (B) of paragraph (3), this paragraph and paragraph (1)(A)(ii) shall not apply to the distribution of a partnership interest if such distribution is in connection with a contribution (or deemed contribution) of any property of the partnership to which section 721 applies pursuant to a transaction described in paragraph (1)(B) or (2) of section 708(b).

(c)

Investment services partnership interest

For purposes of this section—

(1)

In general

The term investment services partnership interest means any interest in an investment partnership acquired or held by any person in connection with the conduct of a trade or business described in paragraph (2) by such person (or any person related to such person). An interest in an investment partnership held by any person—

(A)

shall not be treated as an investment services partnership interest for any period before the first date on which it is so held in connection with such a trade or business,

(B)

shall not cease to be an investment services partnership interest merely because such person holds such interest other than in connection with such a trade or business, and

(C)

shall be treated as an investment services partnership interest if acquired from a related person in whose hands such interest was an investment services partnership interest.

(2)

Businesses to which this section applies

A trade or business is described in this paragraph if such trade or business primarily involves the performance of any of the following services with respect to assets held (directly or indirectly) by the investment partnership referred to in paragraph (1):

(A)

Advising as to the advisability of investing in, purchasing, or selling any specified asset.

(B)

Managing, acquiring, or disposing of any specified asset.

(C)

Arranging financing with respect to acquiring specified assets.

(D)

Any activity in support of any service described in subparagraphs (A) through (C).

(3)

Investment partnership

(A)

In general

The term investment partnership means any partnership if, at the end of any calendar quarter ending after the date of enactment of this section—

(i)

substantially all of the assets of the partnership are specified assets (determined without regard to any section 197 intangible within the meaning of section 197(d)), and

(ii)

more than half of the capital of the partnership is attributable to qualified capital interests which (in the hands of the owners of such interests) constitute property not held in connection with a trade or business.

(B)

Special rules for determining if property not held in connection with trade or business

Except as otherwise provided by the Secretary, for purposes of determining whether any interest in a partnership constitutes property not held in connection with a trade or business under subparagraph (A)(ii)

(i)

any election under subsection (e) or (f) of section 475 shall be disregarded, and

(ii)

paragraph (5)(B) shall not apply.

(C)

Antiabuse rules

The Secretary may issue regulations or other guidance which prevent the avoidance of the purposes of subparagraph (A), including regulations or other guidance which treat convertible and contingent debt (and other debt having the attributes of equity) as a capital interest in the partnership.

(D)

Controlled groups of entities

(i)

In general

In the case of a controlled group of entities, if an interest in the partnership received in exchange for a contribution to the capital of the partnership by any member of such controlled group would (in the hands of such member) constitute property held in connection with a trade or business, then any interest in such partnership held by any member of such group shall be treated for purposes of subparagraph (A) as constituting (in the hands of such member) property held in connection with a trade or business.

(ii)

Controlled group of entities

For purposes of clause (i), the term controlled group of entities means a controlled group of corporations as defined in section 1563(a)(1), applied without regard to subsections (a)(4) and (b)(2) of section 1563. A partnership or any other entity (other than a corporation) shall be treated as a member of a controlled group of entities if such entity is controlled (within the meaning of section 954(d)(3)) by members of such group (including any entity treated as a member of such group by reason of this sentence).

(E)

Special rule for corporations

For purposes of this paragraph, in the case of a corporation, the determination of whether property is held in connection with a trade or business shall be determined as if the taxpayer were an individual.

(4)

Specified asset

The term specified asset means securities (as defined in section 475(c)(2) without regard to the last sentence thereof), real estate held for rental or investment, interests in partnerships, commodities (as defined in section 475(e)(2)), cash or cash equivalents, or options or derivative contracts with respect to any of the foregoing.

(5)

Related persons

(A)

In general

A person shall be treated as related to another person if the relationship between such persons is described in section 267(b) or 707(b).

(B)

Attribution of partner services

Any service described in paragraph (2) which is provided by a partner of a partnership shall be treated as also provided by such partnership.

(d)

Exception for certain capital interests

(1)

In general

In the case of any portion of an investment services partnership interest which is a qualified capital interest, all items of gain and loss (and any dividends) which are allocated to such qualified capital interest shall not be taken into account under subsection (a) if—

(A)

allocations of items are made by the partnership to such qualified capital interest in the same manner as such allocations are made to other qualified capital interests held by partners who do not provide any services described in subsection (c)(2) and who are not related to the partner holding the qualified capital interest, and

(B)

the allocations made to such other interests are significant compared to the allocations made to such qualified capital interest.

(2)

Authority to provide exceptions to allocation requirements

To the extent provided by the Secretary in regulations or other guidance—

(A)

Allocations to portion of qualified capital interest

Paragraph (1) may be applied separately with respect to a portion of a qualified capital interest.

(B)

No or insignificant allocations to nonservice providers

In any case in which the requirements of paragraph (1)(B) are not satisfied, items of gain and loss (and any dividends) shall not be taken into account under subsection (a) to the extent that such items are properly allocable under such regulations or other guidance to qualified capital interests.

(C)

Allocations to service providers’ qualified capital interests which are less than other allocations

Allocations shall not be treated as failing to meet the requirement of paragraph (1)(A) merely because the allocations to the qualified capital interest represent a lower return than the allocations made to the other qualified capital interests referred to in such paragraph.

(3)

Special rule for changes in services and capital contributions

In the case of an interest in a partnership which was not an investment services partnership interest and which, by reason of a change in the services with respect to assets held (directly or indirectly) by the partnership or by reason of a change in the capital contributions to such partnership, becomes an investment services partnership interest, the qualified capital interest of the holder of such partnership interest immediately after such change shall not, for purposes of this subsection, be less than the fair market value of such interest (determined immediately before such change).

(4)

Special rule for tiered partnerships

Except as otherwise provided by the Secretary, in the case of tiered partnerships, all items which are allocated in a manner which meets the requirements of paragraph (1) to qualified capital interests in a lower-tier partnership shall retain such character to the extent allocated on the basis of qualified capital interests in any upper-tier partnership.

(5)

Exception for no-self-charged carry and management fee provisions

Except as otherwise provided by the Secretary, an interest shall not fail to be treated as satisfying the requirement of paragraph (1)(A) merely because the allocations made by the partnership to such interest do not reflect the cost of services described in subsection (c)(2) which are provided (directly or indirectly) to the partnership by the holder of such interest (or a related person).

(6)

Special rule for dispositions

In the case of any investment services partnership interest any portion of which is a qualified capital interest, subsection (b) shall not apply to so much of any gain or loss as bears the same proportion to the entire amount of such gain or loss as—

(A)

the distributive share of gain or loss that would have been allocated to the qualified capital interest (consistent with the requirements of paragraph (1)) if the partnership had sold all of its assets at fair market value immediately before the disposition, bears to

(B)

the distributive share of gain or loss that would have been so allocated to the investment services partnership interest of which such qualified capital interest is a part.

(7)

Qualified capital interest

For purposes of this section—

(A)

In general

The term qualified capital interest means so much of a partner’s interest in the capital of the partnership as is attributable to—

(i)

the fair market value of any money or other property contributed to the partnership in exchange for such interest (determined without regard to section 752(a)),

(ii)

any amounts which have been included in gross income under section 83 with respect to the transfer of such interest, and

(iii)

the excess (if any) of—

(I)

any items of income and gain taken into account under section 702 with respect to such interest, over

(II)

any items of deduction and loss so taken into account.

(B)

Adjustment to qualified capital interest

(i)

Distributions and losses

The qualified capital interest shall be reduced by distributions from the partnership with respect to such interest and by the excess (if any) of the amount described in subparagraph (A)(iii)(II) over the amount described in subparagraph (A)(iii)(I).

(ii)

Special rule for contributions of property

In the case of any contribution of property described in subparagraph (A)(i) with respect to which the fair market value of such property is not equal to the adjusted basis of such property immediately before such contribution, proper adjustments shall be made to the qualified capital interest to take into account such difference consistent with such regulations or other guidance as the Secretary may provide.

(C)

Technical terminations, etc., disregarded

No increase or decrease in the qualified capital interest of any partner shall result from a termination, merger, consolidation, or division described in section 708, or any similar transaction.

(8)

Treatment of certain loans

(A)

Proceeds of partnership loans not treated as qualified capital interest of service providing partners

For purposes of this subsection, an investment services partnership interest shall not be treated as a qualified capital interest to the extent that such interest is acquired in connection with the proceeds of any loan or other advance made or guaranteed, directly or indirectly, by any other partner or the partnership (or any person related to any such other partner or the partnership). The preceding sentence shall not apply to the extent the loan or other advance is repaid before the date of the enactment of this section unless such repayment is made with the proceeds of a loan or other advance described in the preceding sentence.

(B)

Reduction in allocations to qualified capital interests for loans from nonservice-providing partners to the partnership

For purposes of this subsection, any loan or other advance to the partnership made or guaranteed, directly or indirectly, by a partner not providing services described in subsection (c)(2) to the partnership (or any person related to such partner) shall be taken into account in determining the qualified capital interests of the partners in the partnership.

(e)

Other income and gain in connection with investment management services

(1)

In general

If—

(A)

a person performs (directly or indirectly) investment management services for any investment entity,

(B)

such person holds (directly or indirectly) a disqualified interest with respect to such entity, and

(C)

the value of such interest (or payments thereunder) is substantially related to the amount of income or gain (whether or not realized) from the assets with respect to which the investment management services are performed,

any income or gain with respect to such interest shall be treated as ordinary income. Rules similar to the rules of subsections (a)(5) and (d) shall apply for purposes of this subsection.
(2)

Definitions

For purposes of this subsection—

(A)

Disqualified interest

(i)

In general

The term disqualified interest means, with respect to any investment entity—

(I)

any interest in such entity other than indebtedness,

(II)

convertible or contingent debt of such entity,

(III)

any option or other right to acquire property described in subclause (I) or (II), and

(IV)

any derivative instrument entered into (directly or indirectly) with such entity or any investor in such entity.

(ii)

Exceptions

Such term shall not include—

(I)

a partnership interest,

(II)

except as provided by the Secretary, any interest in a taxable corporation, and

(III)

except as provided by the Secretary, stock in an S corporation.

(B)

Taxable corporation

The term taxable corporation means—

(i)

a domestic C corporation, or

(ii)

a foreign corporation substantially all of the income of which is—

(I)

effectively connected with the conduct of a trade or business in the United States, or

(II)

subject to a comprehensive foreign income tax (as defined in section 457A(d)(2)).

(C)

Investment management services

The term investment management services means a substantial quantity of any of the services described in subsection (c)(2).

(D)

Investment entity

The term investment entity means any entity which, if it were a partnership, would be an investment partnership.

(f)

Regulations

The Secretary shall prescribe such regulations or other guidance as is necessary or appropriate to carry out the purposes of this section, including regulations or other guidance to—

(1)

provide modifications to the application of this section (including treating related persons as not related to one another) to the extent such modification is consistent with the purposes of this section,

(2)

prevent the avoidance of the purposes of this section, and

(3)

coordinate this section with the other provisions of this title.

(g)

Cross-Reference

For 40 percent penalty on certain underpayments due to the avoidance of this section, see section 6662.

.

(b)

Application of section 751 to indirect dispositions of investment services partnership interests

(1)

In general

Subsection (a) of section 751 is amended by striking or at the end of paragraph (1), by inserting or at the end of paragraph (2), and by inserting after paragraph (2) the following new paragraph:

(3)

investment services partnership interests held by the partnership,

.

(2)

Certain distributions treated as sales or exchanges

Subparagraph (A) of section 751(b)(1) 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)

investment services partnership interests held by the partnership,

.

(3)

Application of special rules in the case of tiered partnerships

Subsection (f) of section 751 is amended—

(A)

by striking or at the end of paragraph (1), by inserting or at the end of paragraph (2), and by inserting after paragraph (2) the following new paragraph:

(3)

an investment services partnership interest held by the partnership,

, and

(B)

by striking partner. and inserting partner (other than a partnership in which it holds an investment services partnership interest)..

(4)

Investment services partnership interests; qualified capital interests

Section 751 is amended by adding at the end the following new subsection:

(g)

Investment services partnership interests

For purposes of this section—

(1)

In general

The term investment services partnership interest has the meaning given such term by section 710(c).

(2)

Adjustments for qualified capital interests

The amount to which subsection (a) applies by reason of paragraph (3) thereof shall not include so much of such amount as is attributable to any portion of the investment services partnership interest which is a qualified capital interest (determined under rules similar to the rules of section 710(d)).

(3)

Exception for publicly traded partnerships

In the case of an exchange of an interest in a publicly traded partnership (as defined in section 7704) to which subsection (a) applies—

(A)

this section shall be applied without regard to subsections (a)(3), (b)(1)(A)(iii), and (f)(3), and

(B)

such partnership shall be treated as owning its proportionate share of the property of any other partnership in which it is a partner.

(4)

Recognition of gains

Any gain with respect to which subsection (a) applies by reason of paragraph (3) thereof shall be recognized notwithstanding any other provision of this title.

(5)

Coordination with inventory items

An investment services partnership interest held by the partnership shall not be treated as an inventory item of the partnership.

(6)

Prevention of double counting

Under regulations or other guidance prescribed by the Secretary, subsection (a)(3) shall not apply with respect to any amount to which section 710 applies.

(7)

Valuation methods

The Secretary shall prescribe regulations or other guidance which provide the acceptable methods for valuing investment services partnership interests for purposes of this section.

.

(c)

Treatment for purposes of section 7704

Subsection (d) of section 7704 is amended by adding at the end the following new paragraph:

(6)

Income from certain carried interests not qualified

(A)

In general

Specified carried interest income shall not be treated as qualifying income.

(B)

Specified carried interest income

For purposes of this paragraph—

(i)

In general

The term specified carried interest income means—

(I)

any item of income or gain allocated to an investment services partnership interest (as defined in section 710(c)) held by the partnership,

(II)

any gain on the disposition of an investment services partnership interest (as so defined) or a partnership interest to which (in the hands of the partnership) section 751 applies, and

(III)

any income or gain taken into account by the partnership under subsection (b)(4) or (e) of section 710.

(ii)

Exception for qualified capital interests

A rule similar to the rule of section 710(d) shall apply for purposes of clause (i).

(C)

Coordination with other provisions

Subparagraph (A) shall not apply to any item described in paragraph (1)(E) (or so much of paragraph (1)(F) as relates to paragraph (1)(E)).

(D)

Special rules for certain partnerships

(i)

Certain partnerships owned by real estate investment trusts

Subparagraph (A) shall not apply in the case of a partnership which meets each of the following requirements:

(I)

Such partnership is treated as publicly traded under this section solely by reason of interests in such partnership being convertible into interests in a real estate investment trust which is publicly traded.

(II)

Fifty percent or more of the capital and profits interests of such partnership are owned, directly or indirectly, at all times during the taxable year by such real estate investment trust (determined with the application of section 267(c)).

(III)

Such partnership meets the requirements of paragraphs (2), (3), and (4) of section 856(c).

(ii)

Certain partnerships owning other publicly traded partnerships

Subparagraph (A) shall not apply in the case of a partnership which meets each of the following requirements:

(I)

Substantially all of the assets of such partnership consist of interests in one or more publicly traded partnerships (determined without regard to subsection (b)(2)).

(II)

Substantially all of the income of such partnership is ordinary income or section 1231 gain (as defined in section 1231(a)(3)).

(E)

Transitional rule

Subparagraph (A) shall not apply to any taxable year of the partnership beginning before the date which is 10 years after the date of the enactment of this paragraph.

.

(d)

Imposition of penalty on underpayments

(1)

In general

Subsection (b) of section 6662 is amended by inserting after paragraph (7) the following new paragraph:

(8)

The application of section 710(e) or the regulations or other guidance prescribed under section 710(f) to prevent the avoidance of the purposes of section 710.

.

(2)

Amount of penalty

(A)

In general

Section 6662 is amended by adding at the end the following new subsection:

(k)

Increase in penalty in case of property transferred for investment management services

In the case of any portion of an underpayment to which this section applies by reason of subsection (b)(8), subsection (a) shall be applied with respect to such portion by substituting 40 percent for 20 percent.

.

(B)

Conforming amendment

Subparagraph (B) of section 6662A(e)(2) is amended by striking or (i) and inserting , (i), or (k).

(3)

Special rules for application of reasonable cause exception

Subsection (c) of section 6664 is amended—

(A)

by redesignating paragraphs (3) and (4) as paragraphs (4) and (5), respectively;

(B)

by striking paragraph (3) in paragraph (5)(A), as so redesignated, and inserting paragraph (4); and

(C)

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

(3)

Special rule for underpayments attributable to investment management services

(A)

In general

Paragraph (1) shall not apply to any portion of an underpayment to which section 6662 applies by reason of subsection (b)(8) unless—

(i)

the relevant facts affecting the tax treatment of the item are adequately disclosed,

(ii)

there is or was substantial authority for such treatment, and

(iii)

the taxpayer reasonably believed that such treatment was more likely than not the proper treatment.

(B)

Rules relating to reasonable belief

Rules similar to the rules of subsection (d)(3) shall apply for purposes of subparagraph (A)(iii).

.

(e)

Income and loss from investment services partnership interests taken into account in determining net earnings from self-Employment

(1)

Internal Revenue Code

(A)

In general

Section 1402(a) is amended by striking and at the end of paragraph (16), by striking the period at the end of paragraph (17) and inserting ; and, and by inserting after paragraph (17) the following new paragraph:

(18)

notwithstanding the preceding provisions of this subsection, in the case of any individual engaged in the trade or business of providing services described in section 710(c)(2) with respect to any entity, investment services partnership income or loss (as defined in subsection (m)) of such individual with respect to such entity shall be taken into account in determining the net earnings from self-employment of such individual.

.

(B)

Investment services partnership income or loss

Section 1402 is amended by adding at the end the following new subsection:

(m)

Investment services partnership income or loss

For purposes of subsection (a)

(1)

In general

The term investment services partnership income or loss means, with respect to any investment services partnership interest (as defined in section 710(c)) or disqualified interest (as defined in section 710(e)), the net of—

(A)

the amounts treated as ordinary income or ordinary loss under subsections (b) and (e) of section 710 with respect to such interest,

(B)

all items of income, gain, loss, and deduction allocated to such interest, and

(C)

the amounts treated as realized from the sale or exchange of property other than a capital asset under section 751 with respect to such interest.

(2)

Exception for qualified capital interests

A rule similar to the rule of section 710(d) shall apply for purposes of applying paragraph (1)(B).

.

(2)

Social Security Act

Section 211(a) of the Social Security Act is amended by striking and at the end of paragraph (15), by striking the period at the end of paragraph (16) and inserting ; and, and by inserting after paragraph (16) the following new paragraph:

(17)

Notwithstanding the preceding provisions of this subsection, in the case of any individual engaged in the trade or business of providing services described in section 710(c)(2) of the Internal Revenue Code of 1986 with respect to any entity, investment services partnership income or loss (as defined in section 1402(m) of such Code) shall be taken into account in determining the net earnings from self-employment of such individual.

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(f)

Conforming amendments

(1)

Subsection (d) of section 731 is amended by inserting section 710(b)(4) (relating to distributions of partnership property), after to the extent otherwise provided by.

(2)

Section 741 is amended by inserting or section 710 (relating to special rules for partners providing investment management services to partnerships) before the period at the end.

(3)

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

Sec. 710. Special rules for partners providing investment management services to partnerships.

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(g)

Effective date

(1)

In general

Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years ending after the date of the enactment of this Act.

(2)

Partnership taxable years which include effective date

In applying section 710(a) of the Internal Revenue Code of 1986 (as added by this section) in the case of any partnership taxable year which includes the date of the enactment of this Act, the amount of the net capital gain referred to in such section shall be treated as being the lesser of the net capital gain for the entire partnership taxable year or the net capital gain determined by only taking into account items attributable to the portion of the partnership taxable year which is after such date.

(3)

Dispositions of partnership interests

(A)

In general

Section 710(b) of such Code (as added by this section) shall apply to dispositions and distributions after the date of the enactment of this Act.

(B)

Indirect dispositions

The amendments made by subsection (b) shall apply to transactions after the date of the enactment of this Act.

(4)

Other income and gain in connection with investment management services

Section 710(e) of such Code (as added by this section) shall take effect on the date of the enactment of this Act.