S.Amdt. 814

1. Adds Subtitle G--High Gas Price Relief at the end of title XV

   Adds a section

   In H.R. 6 · Placed on Calendar Senate

   (4) The term "a control or prohibition respecting a new fuel" means a control or prohibition on the formulation, composition, or emissions characteristics of a fuel that would require the increase or decrease of a constituent in gasoline or diesel fuel.

   Inserted: Subtitle G--High Gas Price Relief

   Inserted: PART I--RELIEF FOR RURAL COMMUTERS

   Inserted: SEC. 1581. EXCLUSION FOR CERTAIN FUEL COSTS OF RURAL COMMUTERS.

   Inserted: (a) In General.--Section 132(f)(1) (defining qualified transportation fringe) is amended by adding at the end the following new subparagraph:

   Inserted: "(D) In the case of an eligible rural commuter, the cost of fuel for a highway vehicle of the taxpayer the primary purpose of which is to travel between the taxpayer's residence and place of employment.".

   Inserted: (b) Limitation on Exclusion.--Section 132(f)(2) (relating to limitation on exclusion) is amended by striking "and" at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting ", and", and by adding at the end the following new subparagraph:

   Inserted: "(C) $50 per month in the case of the benefit described in subparagraph (D).".

   Inserted: (c) Eligible Rural Commuter.--Section 132(f)(5) (relating to definitions) is amended by adding at the end the following new subparagraph:

   Inserted: "(F) Eligible rural commuter.--The term 'eligible rural commuter' means any employee--

   Inserted: "(i) who resides in a rural area (as defined by the Bureau of the Census),

   Inserted: "(ii) who works in an area which is not accessible by a transit system designed primarily to provide daily work trips within a local commuting area, and

   Inserted: "(iii) who is not be eligible to claim any qualified transportation fringe described in subparagraph (A) or (B) of paragraph (1).".

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   Inserted: (d) Effective Date.--The amendments made by this section shall apply to expenses incurred on and after the date of the enactment of this Act and before January 1, 2006.

   Inserted: PART II--ECONOMIC SUBSTANCE DOCTRINE

   Inserted: SEC. 1582. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

   Inserted: (a) In General.--Section 7701 is amended by redesignating subsection (o) as subsection (p) and by inserting after subsection (n) the following new subsection:

   Inserted: "(o) Clarification of Economic Substance Doctrine; Etc.--

   Inserted: "(1) General rules.--

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

   Inserted: "(B) Definition of economic substance.--For purposes of subparagraph (A)--

   Inserted: "(i) In general.--A transaction has economic substance only if--

   Inserted: "(I) the transaction changes in a meaningful way (apart from Federal tax effects) the taxpayer's economic position, and

   Inserted: "(II) the taxpayer has a substantial nontax purpose for entering into such transaction and the transaction is a reasonable means of accomplishing such purpose.

   Inserted: In applying subclause (II), a purpose of achieving a financial accounting benefit shall not be taken into account in determining whether a transaction has a substantial nontax purpose if the origin of such financial accounting benefit is a reduction of income tax.

   Inserted: "(ii) Special rule where taxpayer relies on profit potential.--A transaction shall not be treated as having economic substance by reason of having a potential for profit unless--

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

   Inserted: "(II) the reasonably expected pre-tax profit from the transaction exceeds a risk-free rate of return.

   Inserted: "(C) Treatment of fees and foreign taxes.--Fees and other transaction expenses and foreign taxes shall be taken into account as expenses in determining pre-tax profit under subparagraph (B)(ii).

   Inserted: "(2) Special rules for transactions with tax-indifferent parties.--

   Inserted: "(A) Special rules for financing transactions.--The form of a transaction which is in substance the borrowing of money or the acquisition of financial capital directly or indirectly from a tax-indifferent party shall not be respected if the present value of the deductions to be claimed with respect to the transaction is substantially in excess of the present value of the anticipated economic returns of the person lending the money or providing the financial capital. A public offering shall be treated as a borrowing, or an acquisition of financial capital, from a tax-indifferent party if it is reasonably expected that at least 50 percent of the offering will be placed with tax-indifferent parties.

   Inserted: "(B) Artificial income shifting and basis adjustments.--The form of a transaction with a tax-indifferent party shall not be respected if--

   Inserted: "(i) it results in an allocation of income or gain to the tax-indifferent party in excess of such party's economic income or gain, or

   Inserted: "(ii) it results in a basis adjustment or shifting of basis on account of overstating the income or gain of the tax-indifferent party.

   Inserted: "(3) Definitions and special rules.--For purposes of this subsection--

   Inserted: "(A) Economic substance doctrine.--The term 'economic substance doctrine' means the common law doctrine under which tax benefits under subtitle A with respect to a transaction are not allowable if the transaction does not have economic substance or lacks a business purpose.

   Inserted: "(B) Tax-indifferent party.--The term 'tax-indifferent party' means any person or entity not subject to tax imposed by subtitle A. A person shall be treated as a tax-indifferent party with respect to a transaction if the items taken into account with respect to the transaction have no substantial impact on such person's liability under subtitle A.

   Inserted: "(C) Exception for personal transactions of individuals.--In the case of an individual, this subsection shall apply only to transactions entered into in connection with a trade or business or an activity engaged in for the production of income.

   Inserted: "(D) Treatment of lessors.--In applying paragraph (1)(B)(ii) to the lessor of tangible property subject to a lease--

   Inserted: "(i) the expected net tax benefits with respect to the leased property shall not include the benefits of--

   Inserted: "(I) depreciation,

   Inserted: "(II) any tax credit, or

   Inserted: "(III) any other deduction as provided in guidance by the Secretary, and

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

   Inserted: "(4) Other common law doctrines not affected.--Except as specifically provided in this subsection, the provisions of this subsection shall not be construed as altering or supplanting any other rule of law, and the requirements of this subsection shall be construed as being in addition to any such other rule of law.

   Inserted: "(5) Regulations.--The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection. Such regulations may include exemptions from the application of this subsection.".

   Inserted: (b) Effective Date.--The amendments made by this section shall apply to transactions entered into after the date of the enactment of this Act.

   Inserted: SEC. 1583. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS LACKING ECONOMIC SUBSTANCE, ETC.

   Inserted: (a) In General.--Subchapter A of chapter 68 is amended by inserting after section 6662A the following new section:

   Inserted: "SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS LACKING ECONOMIC SUBSTANCE, ETC.

   Inserted: "(a) Imposition of Penalty.--If a taxpayer has an noneconomic substance transaction understatement for any taxable year, there shall be added to the tax an amount equal to 40 percent of the amount of such understatement.

   Inserted: "(b) Reduction of Penalty for Disclosed Transactions.--Subsection (a) shall be applied by substituting '20 percent' for '40 percent' with respect to the portion of any noneconomic substance transaction understatement with respect to which the relevant facts affecting the tax treatment of the item are adequately disclosed in the return or a statement attached to the return.

   Inserted: "(c) Noneconomic Substance Transaction Understatement.--For purposes of this section--

   Inserted: "(1) In general.--The term 'noneconomic substance transaction understatement' means any amount which would be an understatement under section 6662A(b)(1) if section 6662A were applied by taking into account items attributable to noneconomic substance transactions rather than items to which section 6662A would apply without regard to this paragraph.

   Inserted: "(2) Noneconomic substance transaction.--The term 'noneconomic substance transaction' means any transaction if--

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

   Inserted: "(B) the transaction fails to meet the requirements of any similar rule of law.

   Inserted: "(d) Rules Applicable to Compromise of Penalty.--

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

   Inserted: "(2) Applicable rules.--The rules of paragraphs (2) and (3) of section 6707A(d) shall apply for purposes of paragraph (1).

   Inserted: "(e) Coordination With Other Penalties.--Except as otherwise provided in this part, the penalty imposed by this section shall be in addition to any other penalty imposed by this title.

   Inserted: "(f) Cross References.--

   Inserted: "(1) For coordination of penalty with understatements under section 6662 and other special rules, see section 6662A(e).

   Inserted: "(2) For reporting of penalty imposed under this section to the Securities and Exchange Commission, see section 6707A(e).".

   Inserted: (b) Coordination With Other Understatements and Penalties.--

   Inserted: (1) The second sentence of section 6662(d)(2)(A) is amended by inserting "and without regard to items with respect to which a penalty is imposed by section 6662B" before the period at the end.

   Inserted: (2) Subsection (e) of section 6662A is amended--

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

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

   Inserted: (C) in paragraph (2)(B), by inserting "6662B or" before "6663",

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

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

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

   Inserted: (G) by adding at the end the following new paragraph:

   Inserted: "(4) Noneconomic substance transaction understatement.--For purposes of this subsection, the term 'noneconomic substance transaction understatement' has the meaning given such term by section 6662B(c).".

   Inserted: (3) Subsection (e) of section 6707A is amended--

   Inserted: (A) by striking "or" at the end of subparagraph (B), and

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

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

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

   Inserted: (c) Clerical Amendment.--The table of sections for part II of subchapter A of chapter 68 is amended by inserting after the item relating to section 6662A the following new item:

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

   Inserted: (d) Effective Date.--The amendments made by this section shall apply to transactions entered into after the date of the enactment of this Act.

   Inserted: SEC. 1584. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS ATTRIBUTABLE TO NONECONOMIC SUBSTANCE TRANSACTIONS.

   Inserted: (a) In General.--Section 163(m) (relating to interest on unpaid taxes attributable to nondisclosed reportable transactions) is amended--

   Inserted: (1) by striking "attributable" and all that follows and inserting the following: "attributable to--

   Inserted: "(1) the portion of any reportable transaction understatement (as defined in section 6662A(b)) with respect to which the requirement of section 6664(d)(2)(A) is not met, or

   Inserted: "(2) any noneconomic substance transaction understatement (as defined in section 6662B(c)).", and

   Inserted: (2) by inserting "and Noneconomic Substance Transactions" in the heading thereof after "Transactions".

   Inserted: (b) Effective Date.--The amendments made by this section shall apply to transactions after the date of the enactment of this Act in taxable years ending after such date.

   Original wording

   At the end of title XV (as agreed to) add the following:

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As printed