To provide alternative minimum tax relief, and for other purposes.

SA 5634. Mr. CONRAD proposed an amendment to the bill H.R. 6049, to
amend the Internal Revenue Code of 1986 to provide incentives for
energy production and conservation, to extend certain expiring
provisions, to provide individual income tax relief, and for other
purposes; as follows:

At the end add the following:

DIVISION B--ALTERNATIVE MINIMUM TAX RELIEF

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF
CONTENTS.

(a) Short Title.--This division may be cited as the
``Alternative Minimum Tax Relief Act of 2008''.
(b) Amendment of 1986 Code.--Except as otherwise expressly
provided, whenever in

[[Page S9301]]

this division 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
division is as follows:

DIVISION B--ALTERNATIVE MINIMUM TAX RELIEF

Sec. 1. Short title; amendment of 1986 Code; table of contents.

TITLE I--ALTERNATIVE MINIMUM TAX RELIEF

Sec. 101. Extension of alternative minimum tax relief for nonrefundable
personal credits.
Sec. 102. Extension of increased alternative minimum tax exemption
amount.
Sec. 103. Increase of AMT refundable credit amount for individuals with
long-term unused credits for prior year minimum tax
liability, etc.

TITLE II--REVENUE PROVISIONS

Subtitle A--General Provisions

Sec. 201. Tax on crude oil and natural gas produced from the outer
Continental Shelf in the Gulf of Mexico.
Sec. 202. Nonqualified deferred compensation from certain tax
indifferent parties.
Sec. 203. Delay in application of worldwide allocation of interest.

Subtitle B--Economic Substance Doctrine

Sec. 211. Clarification of economic substance doctrine.
Sec. 212. Penalty for understatements attributable to transactions
lacking economic substance, etc.
Sec. 213. Denial of deduction for interest on underpayments
attributable to noneconomic substance transactions.

TITLE I--ALTERNATIVE MINIMUM TAX RELIEF

SEC. 101. EXTENSION OF ALTERNATIVE MINIMUM TAX RELIEF FOR
NONREFUNDABLE PERSONAL CREDITS.

(a) In General.--Paragraph (2) of section 26(a) (relating
to special rule for taxable years 2000 through 2007) is
amended--
(1) by striking ``or 2007'' and inserting ``2007, or
2008'', and
(2) by striking ``2007'' in the heading thereof and
inserting ``2008''.
(b)  Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
2007.

SEC. 102. EXTENSION OF INCREASED ALTERNATIVE MINIMUM TAX
EXEMPTION AMOUNT.

(a) In General.--Paragraph (1) of section 55(d) (relating
to exemption amount) is amended--
(1) by striking ``($66,250 in the case of taxable years
beginning in 2007)'' in subparagraph (A) and inserting
``($69,950 in the case of taxable years beginning in 2008)'',
and
(2) by striking ``($44,350 in the case of taxable years
beginning in 2007)'' in subparagraph (B) and inserting
``($46,200 in the case of taxable years beginning in 2008)''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
2007.

SEC. 103. INCREASE OF AMT REFUNDABLE CREDIT AMOUNT FOR
INDIVIDUALS WITH LONG-TERM UNUSED CREDITS FOR
PRIOR YEAR MINIMUM TAX LIABILITY, ETC.

(a) In General.--Paragraph (2) of section 53(e) is amended
to read as follows:
``(2) AMT refundable credit amount.--For purposes of
paragraph (1), the term `AMT refundable credit amount' means,
with respect to any taxable year, the amount (not in excess
of the long-term unused minimum tax credit for such taxable
year) equal to the greater of--
``(A) 50 percent of the long-term unused minimum tax credit
for such taxable year, or
``(B) the amount (if any) of the AMT refundable credit
amount determined under this paragraph for the taxpayer's
preceding taxable year (determined without regard to
subsection (f)(2)).''.
(b) Treatment of Certain Underpayments, Interest, and
Penalties Attributable to the Treatment of Incentive Stock
Options.--Section 53 is amended by adding at the end the
following new subsection:
``(f) Treatment of Certain Underpayments, Interest, and
Penalties Attributable to the Treatment of Incentive Stock
Options.--
``(1) Abatement.--Any underpayment of tax outstanding on
the date of the enactment of this subsection which is
attributable to the application of section 56(b)(3) for any
taxable year ending before January 1, 2008 (and any interest
or penalty with respect to such underpayment which is
outstanding on such date of enactment), is hereby abated. The
amount determined under subsection (b)(1) shall not include
any tax abated under the preceding sentence.
``(2) Increase in credit for certain interest and penalties
already paid.--The AMT refundable credit amount, and the
minimum tax credit determined under subsection (b), for the
taxpayer's first 2 taxable years beginning after December 31,
2007, shall each be increased by 50 percent of the aggregate
amount of the interest and penalties which were paid by the
taxpayer before the date of the enactment of this subsection
and which would (but for such payment) have been abated under
paragraph (1).''.
(c) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to taxable years
beginning after December 31, 2007.
(2) Abatement.--Section 53(f)(1), as added by subsection
(b), shall take effect on the date of the enactment of this
Act.

TITLE II--REVENUE PROVISIONS

Subtitle A--General Provisions

SEC. 201. TAX ON CRUDE OIL AND NATURAL GAS PRODUCED FROM THE
OUTER CONTINENTAL SHELF IN THE GULF OF MEXICO.

(a) In General.--Subtitle E (relating to alcohol, tobacco,
and certain other excise taxes) is amended by adding at the
end the following new chapter:

``CHAPTER 56--TAX ON SEVERANCE OF CRUDE OIL AND NATURAL GAS FROM THE
OUTER CONTINENTAL SHELF IN THE GULF OF MEXICO

``Sec. 5896. Imposition of tax.
``Sec. 5897. Taxable crude oil or natural gas and removal price.
``Sec. 5898. Special rules and definitions.

``SEC. 5896. IMPOSITION OF TAX.

``(a) In General.--In addition to any other tax imposed
under this title, there is hereby imposed a tax equal to 13
percent of the removal price of any taxable crude oil or
natural gas removed from the premises during any taxable
period.
``(b) Credit for Federal Royalties Paid.--
``(1) In general.--There shall be allowed as a credit
against the tax imposed by subsection (a) with respect to the
production of any taxable crude oil or natural gas an amount
equal to the aggregate amount of royalties paid under Federal
law with respect to such production.
``(2) Limitation.--The aggregate amount of credits allowed
under paragraph (1) to any taxpayer for any taxable period
shall not exceed the amount of tax imposed by subsection (a)
for such taxable period.
``(c) Tax Paid by Producer.--The tax imposed by this
section shall be paid by the producer of the taxable crude
oil or natural gas.

``SEC. 5897. TAXABLE CRUDE OIL OR NATURAL GAS AND REMOVAL
PRICE.

``(a) Taxable Crude Oil or Natural Gas.--For purposes of
this chapter, the term `taxable crude oil or natural gas'
means crude oil or natural gas which is produced from Federal
submerged lands on the outer Continental Shelf in the Gulf of
Mexico pursuant to a lease entered into with the United
States which authorizes the production.
``(b) Removal Price.--For purposes of this chapter--
``(1) In general.--Except as otherwise provided in this
subsection, the term `removal price' means--
``(A) in the case of taxable crude oil, the amount for
which a barrel of such crude oil is sold, and
``(B) in the case of taxable natural gas, the amount per
1,000 cubic feet for which such natural gas is sold.
``(2) Sales between related persons.--In the case of a sale
between related persons, the removal price shall not be less
than the constructive sales price for purposes of determining
gross income from the property under section 613.
``(3) Oil or gas removed from property before sale.--If
crude oil or natural gas is removed from the property before
it is sold, the removal price shall be the constructive sales
price for purposes of determining gross income from the
property under section 613.
``(4) Refining begun on property.--If the manufacture or
conversion of crude oil into refined products begins before
such oil is removed from the property--
``(A) such oil shall be treated as removed on the day such
manufacture or conversion begins, and
``(B) the removal price shall be the constructive sales
price for purposes of determining gross income from the
property under section 613.
``(5) Property.--The term `property' has the meaning given
such term by section 614.

``SEC. 5898. SPECIAL RULES AND DEFINITIONS.

``(a) Administrative Requirements.--
``(1) Withholding and deposit of tax.--The Secretary shall
provide for the withholding and deposit of the tax imposed
under section 5896 on a quarterly basis.
``(2) Records and information.--Each taxpayer liable for
tax under section 5896 shall keep such records, make such
returns, and furnish such information (to the Secretary and
to other persons having an interest in the taxable crude oil
or natural gas) with respect to such oil as the Secretary may
by regulations prescribe.
``(3) Taxable periods; return of tax.--
``(A) Taxable period.--Except as provided by the Secretary,
each calendar year shall constitute a taxable period.
``(B) Returns.--The Secretary shall provide for the filing,
and the time for filing, of the return of the tax imposed
under section 5896.
``(b) Definitions.--For purposes of this chapter--
``(1) Producer.--The term `producer' means the holder of
the economic interest with respect to the crude oil or
natural gas.
``(2) Crude oil.--The term `crude oil' includes crude oil
condensates and natural gasoline.

[[Page S9302]]

``(3) Premises and crude oil product.--The terms `premises'
and `crude oil product' have the same meanings as when used
for purposes of determining gross income from the property
under section 613.
``(c) Adjustment of Removal Price.--In determining the
removal price of oil or natural gas from a property in the
case of any transaction, the Secretary may adjust the removal
price to reflect clearly the fair market value of oil or
natural gas removed.
``(d) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out
the purposes of this chapter.''.
(b) Deductibility of Tax.--The first sentence of section
164(a) (relating to deduction for taxes) is amended by
inserting after paragraph (5) the following new paragraph:
``(6) The tax imposed by section 5896(a) (after application
of section 5896(b)) on the severance of crude oil or natural
gas from the outer Continental Shelf in the Gulf of
Mexico.''.
(c) Clerical Amendment.--The table of chapters for subtitle
E is amended by adding at the end the following new item:

``Chapter 56. Tax on severance of crude oil and natural gas from the
outer Continental Shelf in the Gulf of Mexico.''.

(d) Effective Date.--The amendments made by this section
shall apply to crude oil or natural gas removed after
December 31, 2008.

SEC. 202. NONQUALIFIED DEFERRED COMPENSATION FROM CERTAIN TAX
INDIFFERENT PARTIES.

(a) In General.--Subpart B of part II of subchapter E of
chapter 1 is amended by inserting after section 457 the
following new section:

``SEC. 457A. NONQUALIFIED DEFERRED COMPENSATION FROM CERTAIN
TAX INDIFFERENT PARTIES.

``(a) In General.--Any compensation which is deferred under
a nonqualified deferred compensation plan of a nonqualified
entity shall be includible in gross income when there is no
substantial risk of forfeiture of the rights to such
compensation.
``(b) Nonqualified Entity.--For purposes of this section,
the term `nonqualified entity' means--
``(1) any foreign corporation unless substantially all of
its income is--
``(A) effectively connected with the conduct of a trade or
business in the United States, or
``(B) subject to a comprehensive foreign income tax, and
``(2) any partnership unless substantially all of its
income is allocated to persons other than--
``(A) foreign persons with respect to whom such income is
not subject to a comprehensive foreign income tax, and
``(B) organizations which are exempt from tax under this
title.
``(c) Determinability of Amounts of Compensation.--
``(1) In general.--If the amount of any compensation is not
determinable at the time that such compensation is otherwise
includible in gross income under subsection (a)--
``(A) such amount shall be so includible in gross income
when determinable, and
``(B) the tax imposed under this chapter for the taxable
year in which such compensation is includible in gross income
shall be increased by the sum of--
``(i) the amount of interest determined under paragraph
(2), and
``(ii) an amount equal to 20 percent of the amount of such
compensation.
``(2) Interest.--For purposes of paragraph (1)(B)(i), the
interest determined under this paragraph for any taxable year
is the amount of interest at the underpayment rate under
section 6621 plus 1 percentage point on the underpayments
that would have occurred had the deferred compensation been
includible in gross income for the taxable year in which
first deferred or, if later, the first taxable year in which
such deferred compensation is not subject to a substantial
risk of forfeiture.
``(d) Other Definitions and Special Rules.--For purposes of
this section--
``(1) Substantial risk of forfeiture.--
``(A) In general.--The rights of a person to compensation
shall be treated as subject to a substantial risk of
forfeiture only if such person's rights to such compensation
are conditioned upon the future performance of substantial
services by any individual.
``(B) Exception for compensation based on gain recognized
on an investment asset.--
``(i) In general.--To the extent provided in regulations
prescribed by the Secretary, if compensation is determined
solely by reference to the amount of gain recognized on the
disposition of an investment asset, such compensation shall
be treated as subject to a substantial risk of forfeiture
until the date of such disposition.
``(ii) Investment asset.--For purposes of clause (i), the
term `investment asset' means any single asset (other than an
investment fund or similar entity)--

``(I) acquired directly by an investment fund or similar
entity,
``(II) with respect to which such entity does not (nor does
any person related to such entity) participate in the active
management of such asset (or if such asset is an interest in
an entity, in the active management of the activities of such
entity), and
``(III) substantially all of any gain on the disposition of
which (other than such deferred compensation) is allocated to
investors in such entity.

``(iii) Coordination with special rule.--Paragraph (3)(B)
shall not apply to any compensation to which clause (i)
applies.
``(2) Comprehensive foreign income tax.--The term
`comprehensive foreign income tax' means, with respect to any
foreign person, the income tax of a foreign country if--
``(A) such person is eligible for the benefits of a
comprehensive income tax treaty between such foreign country
and the United States, or
``(B) such person demonstrates to the satisfaction of the
Secretary that such foreign country has a comprehensive
income tax.
``(3) Nonqualified deferred compensation plan.--
``(A) In general.--The term `nonqualified deferred
compensation plan' has the meaning given such term under
section 409A(d), except that such term shall include any plan
that provides a right to compensation based on the
appreciation in value of a specified number of equity units
of the service recipient.
``(B) Exception.--Compensation shall not be treated as
deferred for purposes of this section if the service provider
receives payment of such compensation not later than 12
months after the end of the taxable year of the service
recipient during which the right to the payment of such
compensation is no longer subject to a substantial risk of
forfeiture.
``(4) Exception for certain compensation with respect to
effectively connected income.--In the case a foreign
corporation with income which is taxable under section 882,
this section shall not apply to compensation which, had such
compensation had been paid in cash on the date that such
compensation ceased to be subject to a substantial risk of
forfeiture, would have been deductible by such foreign
corporation against such income.
``(5) Application of rules.--Rules similar to the rules of
paragraphs (5) and (6) of section 409A(d) shall apply.
``(e) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out
the purposes of this section, including regulations
disregarding a substantial risk of forfeiture in cases where
necessary to carry out the purposes of this section.''.
(b) Conforming Amendment.--Section 26(b)(2), as amended by
the Housing Assistance Tax Act of 2008, is amended by
striking ``and'' at the end of subparagraph (V), by striking
the period at the end of subparagraph (W) and inserting ``,
and'', and by adding at the end the following new
subparagraph:
``(X) section 457A(c)(1)(B) (relating to determinability of
amounts of compensation).''.
(c) Clerical Amendment.--The table of sections of subpart B
of part II of subchapter E of chapter 1 is amended by
inserting after the item relating to section 457 the
following new item:

``Sec. 457A. Nonqualified deferred compensation from certain tax
indifferent parties.''.

(d) Effective Date.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall apply
to amounts deferred which are attributable to services
performed after December 31, 2008.
(2) Application to existing deferrals.--In the case of any
amount deferred to which the amendments made by this section
do not apply solely by reason of the fact that the amount is
attributable to services performed before January 1, 2009, to
the extent such amount is not includible in gross income in a
taxable year beginning before 2018, such amounts shall be
includible in gross income in the later of--
(A) the last taxable year beginning before 2018, or
(B) the taxable year in which there is no substantial risk
of forfeiture of the rights to such compensation (determined
in the same manner as determined for purposes of section 457A
of the Internal Revenue Code of 1986, as added by this
section).
(3) Accelerated payments.--No later than 120 days after the
date of the enactment of this Act, the Secretary shall issue
guidance providing a limited period of time during which a
nonqualified deferred compensation arrangement attributable
to services performed on or before December 31, 2008, may,
without violating the requirements of section 409A(a) of the
Internal Revenue Code of 1986, be amended to conform the date
of distribution to the date the amounts are required to be
included in income.
(4) Certain back-to-back arrangements.--If the taxpayer is
also a service recipient and maintains one or more
nonqualified deferred compensation arrangements for its
service providers under which any amount is attributable to
services performed on or before December 31, 2008, the
guidance issued under paragraph (4) shall permit such
arrangements to be amended to conform the dates of
distribution under such arrangement to the date amounts are
required to be included in the income of such taxpayer under
this subsection.
(5) Accelerated payment not treated as material
modification.--Any amendment to a nonqualified deferred
compensation arrangement made pursuant to paragraph (4) or
(5) shall not be treated as a material modification of the
arrangement for purposes of section 409A of the Internal
Revenue Code of 1986.

[[Page S9303]]

SEC. 203. DELAY IN APPLICATION OF WORLDWIDE ALLOCATION OF
INTEREST.

(a) In General.--Paragraphs (5)(D) and (6) of section
864(f), as amended by the Housing Assistance Tax Act of 2008,
are each amended by striking ``December 31, 2010'' and
inserting ``December 31, 2016''.
(b) First Year Limitation.--Paragraph (7) of section
864(f), as added by Housing Assistance Tax Act of 2008, is
amended by striking ``30 percent'' and inserting ``50
percent''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
2008.

Subtitle B--Economic Substance Doctrine

SEC. 211. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

(a) In General.--Section 7701 is amended by redesignating
subsection (p) as subsection (q) and by inserting after
subsection (o) the following new subsection:
``(p) Clarification of Economic Substance Doctrine; Etc.--
``(1) General rules.--
``(A) In general.--In any case in which a court determines
that the economic substance doctrine is relevant for purposes
of this title to a transaction (or series of transactions),
such transaction (or series of transactions) shall have
economic substance only if the requirements of this paragraph
are met.
``(B) Definition of economic substance.--For purposes of
subparagraph (A)--
``(i) In general.--A transaction has economic substance
only if--

``(I) the transaction changes in a meaningful way (apart
from Federal tax effects) the taxpayer's economic position,
and
``(II) subject to clause (iii), the taxpayer has a
substantial purpose (other than a Federal tax purpose) for
entering into such transaction.

``(ii) Special rule where taxpayer relies on profit
potential.--A transaction shall not be treated as having
economic substance solely by reason of having a potential for
profit unless the present value of the reasonably expected
pre-Federal tax profit from the transaction is substantial in
relation to the present value of the expected net Federal tax
benefits that would be allowed if the transaction were
respected. In determining pre-Federal tax profit, there shall
be taken into account fees and other transaction expenses and
to the extent provided by the Secretary, foreign taxes.
``(iii) Special rules for determining whether non-federal
tax purpose.--For purposes of clause (i)(II)--

``(I) a purpose of achieving a financial accounting benefit
shall not be taken into account in determining whether a
transaction has a substantial purpose (other than a Federal
tax purpose) if the origin of such financial accounting
benefit is a reduction of Federal tax, and
``(II) the taxpayer shall not be treated as having a
substantial purpose (other than a Federal tax purpose) with
respect to a transaction if the only such purpose is the
reduction of non-Federal taxes and the transaction will
result in a reduction of Federal taxes substantially equal
to, or greater than, the reduction in non-Federal taxes
because of similarities between the laws imposing the taxes.

``(2) Definitions and special rules.--For purposes of this
subsection--
``(A) Economic substance doctrine.--The term `economic
substance doctrine' means the common law doctrine under which
tax benefits under subtitle A with respect to a transaction
are not allowable if the transaction does not have economic
substance or lacks a business purpose.
``(B) 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.
``(3) Other provisions 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 or provision of this title,
and the requirements of this subsection shall be construed as
being in addition to any such other rule of law or provision
of this title.
``(4) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out
the purposes of this subsection. Such regulations may include
exemptions from the application of this subsection.''.
(b) Effective Date.--The amendments made by this section
shall apply to transactions entered into after the date of
the enactment of this Act.

SEC. 212. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO
TRANSACTIONS LACKING ECONOMIC SUBSTANCE, ETC.

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

``SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO
TRANSACTIONS LACKING ECONOMIC SUBSTANCE, ETC.

``(a) Imposition of Penalty.--If a taxpayer has an
noneconomic substance transaction understatement for any
taxable year, there shall be added to the tax an amount equal
to 30 percent of the amount of such understatement.
``(b) Reduction of Penalty for Disclosed Transactions.--
Subsection (a) shall be applied by substituting `20 percent'
for `30 percent' with respect to the portion of any
noneconomic substance transaction understatement with respect
to which the relevant facts affecting the tax treatment of
the item are adequately disclosed in the return or a
statement attached to the return.
``(c) Noneconomic Substance Transaction Understatement.--
For purposes of this section--
``(1) In general.--The term `noneconomic substance
transaction understatement' means any amount which would be
an understatement under section 6662A(b)(1) if section 6662A
were applied by taking into account items attributable to
noneconomic substance transactions rather than items to which
section 6662A would apply without regard to this paragraph.
``(2) Noneconomic substance transaction.--The term
`noneconomic substance transaction' means any transaction if
there is a lack of economic substance (within the meaning of
section 7701(p)(1)(B)) for the transaction giving rise to the
claimed benefit.
``(d) Rules Applicable To Assertion, Compromise, and
Collection of Penalty.--
``(1) In general.--Only the Chief Counsel for the Internal
Revenue Service may assert a penalty imposed under this
section or may compromise all or any portion of such penalty.
The Chief Counsel may delegate the authority under this
paragraph only to an individual holding the position of chief
of a branch within the Office of the Chief Counsel for the
Internal Revenue Service.
``(2) Specific requirements.--
``(A) Assertion of penalty.--The Chief Counsel for the
Internal Revenue Service (or the Chief Counsel's delegate
under paragraph (1)) shall not assert a penalty imposed under
this section unless, before the assertion of the penalty, the
taxpayer is provided--
``(i) a notice of intent to assert the penalty, and
``(ii) an opportunity to provide to the Commissioner (or
the Chief Counsel's delegate under paragraph (1)) a written
response to the proposed penalty within a reasonable period
of time after such notice.
``(B) Compromise of penalty.--A compromise shall not result
in a reduction in the penalty imposed by this section in an
amount greater than the amount which bears the same ratio to
the amount of the penalty determined without regard to the
compromise as--
``(i) the reduction under the compromise in the noneconomic
substance transaction understatement to which the penalty
relates, bears to
``(ii) the amount of the noneconomic substance transaction
understatement determined without regard to the compromise.
``(3) Rules relating to relevancy requirement.--
``(A) Determination of relevance by chief counsel.--The
Chief Counsel for the Internal Revenue Service (or the Chief
Counsel's delegate under paragraph (1)) may assert,
compromise, or collect a penalty imposed by this section with
respect to a noneconomic substance transaction even if there
has not been a court determination that the economic
substance doctrine was relevant for purposes of this title to
the transaction if the Chief Counsel (or delegate) determines
that either was so relevant.
``(B) Final order of court.--If there is a final order of a
court that determines that the economic substance doctrine
was not relevant for purposes of this title to a transaction
(or series of transactions), any penalty imposed under this
section with respect to the transaction (or series of
transactions) shall be rescinded.
``(4) Applicable rules.--The rules of paragraphs (2) and
(3) of section 6707A(d) shall apply to a compromise under
paragraph (1).
``(e) Coordination With Other Penalties.--Except as
otherwise provided in this part, the penalty imposed by this
section shall be in addition to any other penalty imposed by
this title.
``(f) Cross References.--
``(1) For coordination of penalty with understatements
under section 6662 and other special rules, see section
6662A(e).
``(2) For reporting of penalty imposed under this section
to the Securities and Exchange Commission, see section
6707A(e).''.
(b) Coordination With Other Understatements and
Penalties.--
(1) The second sentence of section 6662(d)(2)(A) is amended
by inserting ``and without regard to items with respect to
which a penalty is imposed by section 6662B'' before the
period at the end.
(2) Subsection (e) of section 6662A is amended--
(A) in paragraph (1), by inserting ``and noneconomic
substance transaction understatements'' after ``reportable
transaction understatements'' both places it appears,
(B) in paragraph (2)(A)--
(i) by inserting ``6662B or'' before ``6663'' in the text,
and
(ii) by striking ``PENALTY'' in the heading and inserting
``AND ECONOMIC SUBSTANCE PENALTIES'',
(C) in paragraph (2)(B)--
(i) by inserting ``and section 6662B'' after ``This
section'', and
(ii) by striking ``PENALTY'' in the heading and inserting
``AND ECONOMIC SUBSTANCE PENALTIES'',
(D) in paragraph (3), by inserting ``or noneconomic
substance transaction understatement'' after ``reportable
transaction understatement'', and
(E) by adding at the end the following new paragraph:

[[Page S9304]]

``(4) Noneconomic substance transaction understatement.--
For purposes of this subsection, the term `noneconomic
substance transaction understatement' has the meaning given
such term by section 6662B(c).''.
(3) Subsection (e) of section 6707A is amended--
(A) by striking ``or'' at the end of subparagraph (B), and
(B) by striking subparagraph (C) and inserting the
following new subparagraphs:
``(C) is required to pay a penalty under section 6662B with
respect to any noneconomic substance transaction, or
``(D) is required to pay a penalty under section 6662(h)
with respect to any transaction and would (but for section
6662A(e)(2)(B)) have been subject to penalty under section
6662A at a rate prescribed under section 6662A(c) or to
penalty under section 6662B,''.
(c) Clerical Amendment.--The table of sections for part II
of subchapter A of chapter 68 is amended by inserting after
the item relating to section 6662A the following new item:

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

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

SEC. 213. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS
ATTRIBUTABLE TO NONECONOMIC SUBSTANCE
TRANSACTIONS.

(a) In General.--Section 163(m) (relating to interest on
unpaid taxes attributable to nondisclosed reportable
transactions) is amended--
(1) by striking ``attributable'' and all that follows and
inserting the following: ``attributable to--
``(1) the portion of any reportable transaction
understatement (as defined in section 6662A(b)) with respect
to which the requirement of section 6664(d)(2)(A) is not met,
or
``(2) any noneconomic substance transaction understatement
(as defined in section 6662B(c)).'', and
(2) by inserting ``AND NONECONOMIC SUBSTANCE TRANSACTIONS''
in the heading thereof after ``TRANSACTIONS''.
(b) Effective Date.--The amendments made by this section
shall apply to transactions after the date of the enactment
of this Act in taxable years ending after such date.
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