[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 2210 Introduced in Senate (IS)]
108th CONGRESS
2d Session
S. 2210
To restrict the use of abusive tax shelters and offshore tax havens to
inappropriately avoid Federal taxation, and for other purposes.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
March 12, 2004
Mr. Levin (for himself and Mr. Coleman) introduced the following bill;
which was read twice and referred to the Committee on Finance
_______________________________________________________________________
A BILL
To restrict the use of abusive tax shelters and offshore tax havens to
inappropriately avoid Federal taxation, and for other purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE; ETC.
(a) Short Title.--This Act may be cited as the ``Tax Shelter and
Tax Haven Reform 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 for this Act is as
follows:
Sec. 1. Short title; etc.
TITLE I--STRENGTHENING TAX SHELTER PENALTIES
Sec. 101. Penalty for promoting abusive tax shelters.
Sec. 102. Penalty for aiding and abetting the understatement of tax
liability.
Sec. 103. Penalty for failing to register tax shelter.
Sec. 104. Penalty for failing to maintain client list.
Sec. 105. Penalty for failing to disclose potentially abusive tax
shelter.
Sec. 106. Improved disclosure of potentially abusive tax shelters.
Sec. 107. Extension of statute of limitations for undisclosed tax
shelter.
Sec. 108. Expansion of injunctive relief to stop certain conduct
related to tax shelter or understatement of
tax liability.
Sec. 109. Penalty for failing to report interests in foreign financial
accounts.
TITLE II--PREVENTING ABUSIVE TAX SHELTERS
Sec. 201. Censure, civil fines, and tax opinion standards for tax
practitioners.
Sec. 202. Expansion of tax shelter exception to tax practitioner
privilege.
Sec. 203. Information sharing for enforcement purposes.
Sec. 204. Disclosure of information to Congress.
Sec. 205. Contingent fee prohibition.
Sec. 206. Sense of the Senate on tax enforcement priorities.
TITLE III--REQUIRING ECONOMIC SUBSTANCE
Sec. 301. Clarification of economic substance doctrine.
Sec. 302. Accuracy-related penalty for listed transactions and other
potentially abusive tax shelters having a
significant tax avoidance purpose.
Sec. 303. Penalty for understatements attributable to transactions
lacking economic substance, etc.
Sec. 304. Denial of deduction for interest on underpayments
attributable to noneconomic substance
transactions.
TITLE IV--DETERRING UNCOOPERATIVE TAX HAVENS
Sec. 401. Disclosing payments to persons in uncooperative tax havens.
Sec. 402. Deterring uncooperative tax havens by restricting allowable
tax benefits.
TITLE I--STRENGTHENING TAX SHELTER PENALTIES
SEC. 101. PENALTY FOR PROMOTING ABUSIVE TAX SHELTERS.
(a) Penalty for Promoting Abusive Tax Shelters.--Section 6700
(relating to promoting abusive tax shelters, etc.) is amended--
(1) by redesignating subsections (b) and (c) as subsections
(d) and (e), respectively,
(2) by striking ``a penalty'' and all that follows through
the period in the first sentence of subsection (a) and
inserting ``a penalty determined under subsection (b)'', and
(3) by inserting after subsection (a) the following new
subsections:
``(b) Amount of Penalty; Calculation of Penalty; Liability for
Penalty.--
``(1) Amount of penalty.--The amount of the penalty imposed
by subsection (a) shall not exceed the greater of--
``(A) 150 percent of the gross income derived (or
to be derived) from such activity by the person or
persons subject to such penalty, and
``(B) if readily subject to calculation, the total
amount of underpayment by the taxpayer (including
penalties, interest, and taxes) in connection with such
activity.
``(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) Effective Date.--The amendments made by this section shall
apply to activities after the date of the enactment of this Act.
SEC. 102. PENALTY FOR AIDING AND ABETTING THE UNDERSTATEMENT OF TAX
LIABILITY.
(a) In General.--Section 6701(a) (relating to imposition of
penalty) is amended--
(1) by inserting ``the tax liability or'' after ``respect
to,'' in paragraph (1),
(2) by inserting ``aid, assistance, procurement, or advice
with respect to such'' before ``portion'' both places it
appears in paragraphs (2) and (3), and
(3) by inserting ``instance of aid, assistance,
procurement, or advice or each such'' before ``document'' in
the matter following paragraph (3).
(b) Amount of Penalty.--Subsection (b) of section 6701 (relating to
penalties for aiding and abetting understatement of tax liability) is
amended to read as follows:
``(b) Amount of Penalty; Calculation of Penalty; Liability for
Penalty.--
``(1) Amount of penalty.--The amount of the penalty imposed
by subsection (a) shall not exceed the greater of--
``(i) 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,
and
``(ii) if readily subject to calculation,
the total amount of underpayment by the
taxpayer (including penalties, interest, and
taxes) in connection with the understatement of
the liability for tax.
``(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.
SEC. 103. PENALTY FOR FAILURE TO REGISTER TAX SHELTER.
(a) In General.--Section 6707 (relating to failure to furnish
information regarding tax shelters) is amended to read as follows:
``SEC. 6707. FAILURE TO FURNISH INFORMATION ON POTENTIALLY ABUSIVE TAX
SHELTER OR LISTED TRANSACTION.
``(a) In General.--If a person who is required to file a return
under section 6111 with respect to any potentially abusive tax
shelter--
``(1) fails to file such return on or before the date
prescribed therefor, or
``(2) files false or incomplete information with the
Secretary with respect to such shelter,
such person shall pay a penalty with respect to such return in the
amount determined under subsection (b).
``(b) Amount of Penalty.--
``(1) In general.--Except as provided in paragraph (2), the
penalty imposed under subsection (a) with respect to any
failure shall be not less than $50,000 and not more than
$100,000.
``(2) Listed transactions.--The penalty imposed under
subsection (a) with respect to any listed transaction shall be
an amount equal to the greater of--
``(A) $200,000, or
``(B) 100 percent of the gross income derived by
such person for providing aid, assistance, procurement,
advice, or other services with respect to the listed
transaction before the date the return including the
transaction is filed under section 6111.
Subparagraph (B) shall be applied by substituting `150 percent'
for `100 percent' in the case of an intentional failure or act
described in subsection (a).
``(c) Certain Rules To Apply.--The provisions of section 6707A(d)
allowing the Commissioner of Internal Revenue to rescind a penalty
under certain circumstances shall apply to any penalty imposed under
this section.
``(d) Potentially Abusive Tax Shelters and Listed Transactions.--
The terms `potentially abusive tax shelter' and `listed transaction'
have the respective meanings given to such terms by section 6707A(c).
``(e) 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) Clerical Amendment.--The item relating to section 6707 in the
table of sections for part I of subchapter B of chapter 68 is amended
by striking ``regarding tax shelters'' and inserting ``on potentially
abusive tax shelter or listed transaction''.
(c) Effective Date.--The amendments made by this section shall
apply to returns the due date for which is after the date of the
enactment of this Act.
SEC. 104. PENALTY FOR FAILING TO MAINTAIN CLIENT LIST.
(a) In General.--Subsection (a) of section 6708 (relating to
failure to maintain lists of investors in potentially abusive tax
shelters) is amended to read as follows:
``(a) Imposition of Penalty.--
``(1) In general.--If any person who is required to
maintain a list under section 6112(a) fails to make such list
available upon written request to the Secretary in accordance
with section 6112(b)(1)(A) within 20 business days after the
date of the Secretary's request, such person shall pay a
penalty of $10,000 for each day of such failure after such 20th
day. If such person makes available an incomplete list upon
such request, such person shall pay a penalty of $100 per each
omitted name for each day of such omission after such 20th day.
``(2) Good cause exception.--No penalty shall be imposed by
paragraph (1) with respect to the failure on any day if, in the
judgment of the Secretary, such failure is due to good
cause.''.
(b) Penalty Not Deductible.--Section 6708 is amended by adding at
the end the following new 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.''.
(c) Effective Date.--The amendments made by this section shall
apply to requests made by the Secretary of the Treasury after the date
of the enactment of this Act.
SEC. 105. PENALTY FOR FAILING TO DISCLOSE POTENTIALLY ABUSIVE TAX
SHELTER.
(a) In General.--Part I of subchapter B of chapter 68 (relating to
assessable penalties) is amended by inserting after section 6707 the
following new section:
``SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE POTENTIALLY ABUSIVE TAX
SHELTER INFORMATION WITH RETURN OR STATEMENT.
``(a) Imposition of Penalty.--Any person who fails to include on
any return or statement any information with respect to a potentially
abusive tax shelter which is required under section 6011 to be included
with such return or statement shall pay a penalty in the amount
determined under subsection (b).
``(b) Amount of Penalty.--
``(1) In general.--Except as provided in paragraphs (2) and
(3), the amount of the penalty under subsection (a) shall be
$50,000.
``(2) Listed transaction.--Except as provided in paragraph
3, the amount of the penalty under subsection (a) with respect
to a listed transaction shall be $100,000.
``(3) Increase in penalty for intentional nondisclosure.--
In the case of an intentional failure by any person under
subsection (a), the penalty under paragraph (1) shall be
$100,000 and the penalty under paragraph (2) shall be $200,000.
``(c) Definitions.--For purposes of this section--
``(1) Potentially abusive tax shelter.--The term
`potentially abusive tax shelter' means any transaction with
respect to which information is required to be included with a
return or statement, because the Secretary has determined by
regulation or otherwise that such transaction has a potential
for tax avoidance or evasion.
``(2) Listed transaction.--Except as provided in
regulations, the term `listed transaction' means a potentially
abusive tax shelter which is the same as, or substantially
similar to, a transaction specifically identified by the
Secretary as a tax avoidance transaction for purposes of
section 6011.
``(d) Authority To Rescind Penalty.--
``(1) In general.--The Commissioner of Internal Revenue may
rescind all or any portion of a penalty imposed by this section
with respect to any violation if--
``(A) the violation is with respect to a
potentially abusive tax shelter other than a listed
transaction,
``(B) the person on whom the penalty is imposed has
a history of complying with the requirements of this
title,
``(C) it is shown that the violation is due to an
unintentional mistake of fact,
``(D) imposing the penalty would be against equity
and good conscience, and
``(E) rescinding the penalty would promote
compliance with the requirements of this title and
effective tax administration.
``(2) Discretion.--The exercise of authority under
paragraph (1) shall be at the sole discretion of the
Commissioner and may be delegated only to the head of the
Office of Tax Shelter Analysis. The Commissioner, in the
Commissioner's sole discretion, may establish a procedure to
determine if a penalty should be referred to the Commissioner
or the head of such Office for a determination under paragraph
(1).
``(3) No appeal.--Notwithstanding any other provision of
law, any determination under this subsection may not be
reviewed in any administrative or judicial proceeding.
``(4) Records.--If a penalty is rescinded under paragraph
(1), the Commissioner shall place in the file in the Office of
the Commissioner the opinion of the Commissioner or the head of
the Office of Tax Shelter Analysis with respect to the
determination, including--
``(A) the facts and circumstances of the
transaction,
``(B) the reasons for the rescission, and
``(C) the amount of the penalty rescinded.
A copy of such opinion shall be provided upon written request
to the Committee on Ways and Means of the House of
Representatives, the Committee on Finance of the Senate, the
Joint Committee on Taxation, or the General Accounting Office.
``(5) Report.--The Commissioner shall each year report to
the Committee on Ways and Means of the House of Representatives
and the Committee on Finance of the Senate--
``(A) a summary of the total number and aggregate
amount of penalties imposed, and rescinded, under this
section, and
``(B) a description of each penalty rescinded under
this subsection and the reasons therefor.
``(e) Penalty Reported to SEC.--In the case of a person--
``(1) which is required to file periodic reports under
section 13 or 15(d) of the Securities Exchange Act of 1934 or
is required to be consolidated with another person for purposes
of such reports, and
``(2) which--
``(A) is required to pay a penalty under this
section with respect to a listed transaction,
``(B) is required to pay a penalty under section
6662A with respect to any potentially abusive tax
shelter at a rate prescribed under section 6662A(c), or
``(C) is required to pay a penalty under section
6662B with respect to any noneconomic substance
transaction,
the requirement to pay such penalty shall be disclosed in such reports
filed by such person for such periods as the Secretary shall specify.
Failure to make a disclosure in accordance with the preceding sentence
shall be treated as a failure to which the penalty under subsection
(b)(2) applies.
``(f) Penalty in Addition to Other Penalties.--The penalty imposed
by this section shall be in addition to any other penalty provided by
law.
``(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.''.
(b) Conforming Amendment.--The table of sections for part I of
subchapter B of chapter 68 is amended by inserting after the item
relating to section 6707 the following:
``Sec. 6707A. Penalty for failure to
include potentially abusive tax
shelter information with return
or statement.''.
(c) Effective Date.--The amendments made by this section shall
apply to returns and statements the due date for which is after the
date of the enactment of this Act.
SEC. 106. IMPROVED DISCLOSURE OF POTENTIALLY ABUSIVE TAX SHELTERS.
(a) In General.--Section 6111 (relating to registration of tax
shelters) is amended to read as follows:
``SEC. 6111. DISCLOSURE OF POTENTIALLY ABUSIVE TAX SHELTERS.
``(a) In General.--Each material advisor with respect to any
potentially abusive tax shelter shall make a return (in such form as
the Secretary may prescribe) setting forth--
``(1) information identifying and describing such shelter,
``(2) information describing any potential tax benefits
expected to result from the shelter, and
``(3) such other information as the Secretary may
prescribe.
Such return shall be filed not later than the date which is 30 days
before the date on which the first sale of such shelter occurs or on
any other date specified by the Secretary.
``(b) Definitions.--For purposes of this section--
``(1) Material advisor.--
``(A) In general.--The term `material advisor'
means any person--
``(i) who provides any material aid,
assistance, or advice with respect to
designing, organizing, managing, promoting,
selling, implementing, or carrying out any
potentially abusive tax shelter, and
``(ii) who directly or indirectly derives
gross income in excess of the threshold amount
for such aid, assistance, or advice.
``(B) Threshold amount.--For purposes of
subparagraph (A), the threshold amount is--
``(i) $50,000 in the case of a potentially
abusive tax shelter substantially all of the
tax benefits from which are provided to natural
persons, and
``(ii) $100,000 in any other case.
``(2) Potentially abusive tax shelter.--The term
`potentially abusive tax shelter' has the meaning given to such
term by section 6707A(c).
``(c) Regulations.--The Secretary may prescribe regulations which
provide--
``(1) that only 1 person shall be required to meet the
requirements of subsection (a) in cases in which 2 or more
persons would otherwise be required to meet such requirements,
``(2) exemptions from the requirements of this section, and
``(3) such rules as may be necessary or appropriate to
carry out the purposes of this section.''.
(b) Conforming Amendments.--
(1) The item relating to section 6111 in the table of
sections for subchapter B of chapter 61 is amended to read as
follows:
``Sec. 6111. Disclosure of potentially
abusive tax shelters.''.
(2)(A) So much of section 6112 as precedes subsection (c)
thereof is amended to read as follows:
``SEC. 6112. MATERIAL ADVISORS OF POTENTIALLY ABUSIVE TAX SHELTERS MUST
KEEP CLIENT LISTS.
``(a) In General.--Each material advisor (as defined in section
6111) with respect to any potentially abusive tax shelter (as defined
in section 6707A(c)) shall maintain, in such manner as the Secretary
may by regulations prescribe, a list--
``(1) identifying each person with respect to whom such
advisor acted as such a material advisor with respect to such
shelter, and
``(2) containing such other information as the Secretary
may by regulations require.
This section shall apply without regard to whether a material advisor
is required to file a return under section 6111 with respect to such
transaction.''.
(B) Section 6112 is amended by redesignating subsection (c)
as subsection (b).
(C) Section 6112(b), as redesignated by subparagraph (B),
is amended--
(i) by inserting ``written'' before ``request'' in
paragraph (1)(A), and
(ii) by striking ``shall prescribe'' in paragraph
(2) and inserting ``may prescribe''.
(D) The item relating to section 6112 in the table of
sections for subchapter B of chapter 61 is amended to read as
follows:
``Sec. 6112. Material advisors of
potentially abusive tax
shelters must keep client
lists.''.
(3)(A) The heading for section 6708 is amended to read as
follows:
``SEC. 6708. FAILURE TO MAINTAIN CLIENT LISTS WITH RESPECT TO
POTENTIALLY ABUSIVE TAX SHELTERS.''.
(B) The item relating to section 6708 in the table of
sections for part I of subchapter B of chapter 68 is amended to
read as follows:
``Sec. 6708. Failure to maintain client
lists with respect to
potentially abusive tax
shelters.''.
(c) Required Disclosure Not Subject to Claim of Confidentiality.--
Section 6112(b)(1), as redesignated by subsection (b)(2)(B), is amended
by adding at the end the following new flush sentence:
``For purposes of this section, the identity of any person on
such list shall not be privileged.''.
(d) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to transactions
with respect to which material aid, assistance, or advice
referred to in section 6111(b)(1)(A)(i) of the Internal Revenue
Code of 1986 (as added by this section) is provided after the
date of the enactment of this Act.
(2) No claim of confidentiality against disclosure.--The
amendment made by subsection (c) shall take effect as if
included in the amendments made by section 142 of the Deficit
Reduction Act of 1984.
SEC. 107. EXTENSION OF STATUTE OF LIMITATIONS FOR UNDISCLOSED TAX
SHELTER.
(a) In General.--Section 6501(c) (relating to exceptions) is
amended by adding at the end the following new paragraph:
``(10) Potentially abusive tax shelters.--If a taxpayer
fails to include on any return or statement for any taxable
year any information with respect to a potentially abusive tax
shelter (as defined in section 6707A(c)) which is required
under section 6011 to be included with such return or
statement, the time for assessment of any tax imposed by this
title with respect to such transaction shall not expire before
the date which is 2 years after the earlier of--
``(A) the date on which the Secretary is furnished
the information so required; or
``(B) the date that a material advisor (as defined
in section 6111) meets the requirements of section 6112
with respect to a request by the Secretary under
section 6112(b) relating to such transaction with
respect to such taxpayer.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years with respect to which the period for assessing a
deficiency did not expire before the date of the enactment of this Act.
SEC. 108. EXPANSION OF INJUNCTIVE RELIEF TO STOP CERTAIN CONDUCT
RELATED TO TAX SHELTER OR UNDERSTATEMENT OF TAX
LIABILITY.
(a) In General.--Section 7408 (relating to action to enjoin
promoters of abusive tax shelters, etc.) is amended by redesignating
subsection (c) as subsection (d) and by striking subsections (a) and
(b) and inserting the following new subsections:
``(a) Authority To Seek Injunction.--A civil action in the name of
the United States to enjoin any person from further engaging in
specified conduct may be commenced at the request of the Secretary. Any
action under this section shall be brought in the district court of the
United States for the district in which such person resides, has his
principal place of business, or has engaged in specified conduct. The
court may exercise its jurisdiction over such action (as provided in
section 7402(a)) separate and apart from any other action brought by
the United States against such person.
``(b) Adjudication and Decree.--In any action under subsection (a),
if the court finds--
``(1) that the person has engaged in any specified conduct,
and
``(2) that injunctive relief is appropriate to prevent
recurrence of such conduct,
the court may enjoin such person from engaging in such conduct or in
any other activity subject to penalty under this title.
``(c) Specified Conduct.--For purposes of this section, the term
`specified conduct' means any action, or failure to take action,
subject to penalty under section 6700, 6701, 6707, 6707A, 6708, or
7206.''.
(b) Conforming Amendments.--
(1) The heading for section 7408 is amended to read as
follows:
``SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RELATED TO TAX SHELTER
OR UNDERSTATEMENT OF TAX LIABILITY.''.
(2) The table of sections for subchapter A of chapter 67 is
amended by striking the item relating to section 7408 and
inserting the following new item:
``Sec. 7408. Actions to enjoin specified conduct related to tax
shelter or understatement of liability.''.
(c) Effective Date.--The amendment made by this section shall take
effect on the day after the date of the enactment of this Act.
SEC. 109. PENALTY FOR FAILING TO REPORT INTERESTS IN FOREIGN FINANCIAL
ACCOUNTS.
(a) In General.--Section 5321(a)(5) of title 31, United States
Code, is amended to read as follows:
``(5) Foreign financial agency transaction violation.--
``(A) Penalty authorized.--The Secretary of the
Treasury may impose a civil money penalty on any person
who violates, or causes any violation of, any provision
of section 5314.
``(B) Amount of penalty.--
``(i) In general.--Except as provided in
subparagraph (C), the amount of any civil
penalty imposed under subparagraph (A) shall
not exceed $10,000.
``(ii) Reasonable cause exception.--No
penalty shall be imposed under subparagraph (A)
with respect to any violation if--
``(I) such violation was due to
reasonable cause, and
``(II) the amount of the
transaction or the balance in the
account at the time of the transaction
was properly reported.
``(C) Willful violations.--In the case of any
person willfully violating, or willfully causing any
violation of, any provision of section 5314, the amount
of the civil penalty imposed under subparagraph (A)
shall be--
``(i) not less than $5,000,
``(ii) not more than 50 percent of the
amount determined under subparagraph (D), and
``(iii) subparagraph (B)(ii) shall not
apply.
``(D) Amount.--The amount determined under this
subparagraph is--
``(i) in the case of a violation involving
a transaction, the amount of the transaction,
or
``(ii) in the case of a violation involving
a failure to report the existence of an account
or any identifying information required to be
provided with respect to an account, the
balance in the account at the time of the
violation.''.
(b) Effective Date.--The amendment made by this section shall apply
to violations occurring after the date of the enactment of this Act.
TITLE II--PREVENTING ABUSIVE TAX SHELTERS
SEC. 201. CENSURE, CIVIL FINES, AND TAX OPINION STANDARDS FOR TAX
PRACTITIONERS.
(a) Censure; Imposition of Monetary Penalty.--
(1) In general.--Section 330(b) of title 31, United States
Code, is amended--
(A) by inserting ``, or censure,'' after
``Department'', and
(B) by adding at the end the following new flush
sentence:
``The Secretary may impose a monetary penalty on any representative
described in the preceding sentence. If the representative was acting
on behalf of an employer or any firm or other entity in connection with
the conduct giving rise to such penalty, the Secretary may impose a
monetary penalty on such employer, firm, or entity if it knew, or
reasonably should have known, of such conduct. Such penalty may be in
addition to, or in lieu of, any suspension, disbarment, or censure of
the representative.''.
(2) Effective date.--The amendments made by this subsection
shall apply to actions taken after the date of the enactment of
this Act.
(b) Tax Opinion Standards.--Section 330 of such title 31 is amended
by adding at the end the following new subsection:
``(d) The Secretary of the Treasury shall impose standards
applicable to the rendering of written advice with respect to any
potentially abusive tax shelter or any entity, plan, arrangement, or
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.''.
SEC. 202. EXPANSION OF TAX SHELTER EXCEPTION TO TAX PRACTITIONER
PRIVILEGE.
(a) In General.--Subsection (b) of section 7525 (relating to
confidentiality privileges relating to taxpayer communications) is
amended to read as follows:
``(b) No Privilege for Communications Regarding Tax Shelters.--The
privilege under subsection (a) shall not apply to any communication
which is--
``(1) between a federally authorized tax practitioner and--
``(A) any person,
``(B) any director, officer, employee, agent, or
representative of the person, or
``(C) any other person holding a capital or profits
interest in the person, and
``(2) in connection with the promotion of the direct or
indirect participation of the person in any tax shelter (as
defined in section 1274(b)(3)(C), 6662, or 6707A).''.
(b) Effective Date.--The amendment made by this section shall apply
to communications made on or after the date of the enactment of this
Act.
SEC. 203. INFORMATION SHARING FOR ENFORCEMENT PURPOSES.
(a) Promotion of Prohibited Tax Shelters or Tax Avoidance
Schemes.--Section 6103(h) (relating to disclosure to certain Federal
officers and employees for purposes of tax administration, etc.) 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.
``(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)
(relating to disclosure to Federal officers or employees for
administration of Federal laws not relating to tax administration) 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, 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.
SEC. 204. DISCLOSURE OF INFORMATION TO CONGRESS.
(a) Disclosure by Tax Return Preparer.--
(1) In general.--Subparagraph (B) of section 7216(b)(1)
(relating to disclosures) 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)
(relating to inspection of applications for tax exemption or notice of
status) 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 or 527 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 or
notice of status of any political organization
which is exempt from taxation under section 527
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.
SEC. 205. CONTINGENT FEE PROHIBITION.
(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) Contingent Fee Prohibition.--
``(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 which is
contingent upon the actual or projected achievement of--
``(A) Federal 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) Regulations.--The Secretary may issue rules to carry
out the purposes of this subsection and may provide for
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.
SEC. 206. SENSE OF THE SENATE ON TAX ENFORCEMENT PRIORITIES.
It is the sense of the Senate that additional funds should be
appropriated for Internal Revenue Service enforcement efforts and that
the Internal Revenue Service should devote proportionately more of its
enforcement funds--
(1) to combat the promotion of abusive tax shelters for
corporations and high net worth individuals and the aiding and
abetting of tax evasion,
(2) to stop accounting, law, and financial firms involved
in such promotion and aiding and abetting, and
(3) to combat the use of offshore financial accounts to
conceal taxable income.
TITLE III--REQUIRING ECONOMIC SUBSTANCE
SEC. 301. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.
(a) In General.--Section 7701 (relating to definitions) is amended
by redesignating subsection (n) as subsection (o) and by inserting
after subsection (m) the following new subsection:
``(n) Clarification of Economic Substance Doctrine; Etc.--
``(1) General rules.--
``(A) In general.--In applying the economic
substance doctrine, the determination of whether a
transaction satisfies such doctrine shall be made as
provided in this subsection.
``(B) Application of economic substance doctrine.--
For purposes of subparagraph (A)--
``(i) In general.--A transaction satisfies
the economic substance doctrine only if--
``(I) the transaction changes in a
meaningful way, apart from Federal tax
effects (and, if there are any Federal tax effects, also apart from any
foreign, State, or local tax effects), the taxpayer's economic
position, and
``(II) the taxpayer has a
substantial nontax purpose for entering
into such transaction and the
transaction is a reasonable means of
accomplishing such purpose.
In applying subclause (II), a purpose of
achieving a financial accounting benefit shall
not be taken into account in determining
whether a transaction has a substantial nontax
purpose if the origin of such financial
accounting benefit is a reduction of income tax
or achievement of a tax benefit.
``(ii) Special rule where taxpayer relies
on profit potential.--A transaction shall not
be treated as satisfying the economic substance
doctrine by reason of having a potential for
profit unless--
``(I) the present value of the
reasonably expected pre-tax profit from
the transaction is substantial in
relation to the present value of the
expected net tax benefits that would be
allowed if the transaction were
respected, and
``(II) the reasonably expected pre-
tax profit from the transaction exceeds
a risk-free rate of return.
``(C) Treatment of fees and foreign taxes.--Fees
and other transaction expenses and foreign taxes shall
be taken into account as expenses in determining pre-
tax profit under subparagraph (B)(ii).
``(2) Special rules for transactions with tax-indifferent
parties.--
``(A) Special rules for financing transactions.--
The form of a transaction which is in substance the
borrowing of money or the acquisition of financial
capital directly or indirectly from a tax-indifferent
party shall not be respected if the present value of
the deductions to be claimed with respect to the
transaction is substantially in excess of the present
value of the anticipated economic returns of the person
lending the money or providing the financial capital. A
public offering shall be treated as a borrowing, or an
acquisition of financial capital, from a tax-
indifferent party if it is reasonably expected that at
least 50 percent of the offering will be placed with
tax-indifferent parties.
``(B) Artificial income shifting and basis
adjustments.--The form of a transaction with a tax-
indifferent party shall not be respected if--
``(i) it results in an allocation of income
or gain to the tax-indifferent party in excess
of such party's economic income or gain, or
``(ii) it results in a basis adjustment or
shifting of basis on account of overstating the
income or gain of the tax-indifferent party.
``(3) Definitions and special rules.--For purposes of this
subsection--
``(A) Economic substance doctrine.--The term
`economic substance doctrine' means the common law
doctrine under which tax benefits under subtitle A with
respect to a transaction are not allowable if the
transaction does not have economic substance or lacks a
business purpose.
``(B) Tax-indifferent party.--The term `tax-
indifferent party' means any person or entity not
subject to tax imposed by subtitle A. A person shall be
treated as a tax-indifferent party with respect to a
transaction if the items taken into account with
respect to the transaction have no substantial impact
on such person's liability under subtitle A.
``(C) Exception for personal transactions of
individuals.--In the case of an individual, this
subsection shall apply only to transactions entered
into in connection with a trade or business or an
activity engaged in for the production of income.
``(D) Treatment of lessors.--In applying subclause
(I) of paragraph (1)(B)(ii) to the lessor of tangible
property subject to a lease--
``(i) the expected net tax benefits with
respect to the leased property shall not
include the benefits of--
``(I) depreciation,
``(II) any tax credit, or
``(III) any other deduction as
provided in guidance by the Secretary,
and
``(ii) subclause (II) of paragraph
(1)(B)(ii) shall be disregarded in determining
whether any of such benefits are allowable.
``(4) Other common law doctrines not affected.--Except as
specifically provided in this subsection, the provisions of
this subsection shall not be construed as altering or
supplanting any other rule of law, and the requirements of this
subsection shall be construed as being in addition to any such
other rule of law.
``(5) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this subsection. Such regulations may include
exemptions from the application of this subsection.''.
(b) Effective Date.--The amendments made by this section shall
apply to transactions entered into after the date of the enactment of
this Act.
SEC. 302. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS AND OTHER
POTENTIALLY ABUSIVE TAX SHELTERS HAVING A SIGNIFICANT TAX
AVOIDANCE PURPOSE.
(a) In General.--Subchapter A of chapter 68 is amended by inserting
after section 6662 the following new section:
``SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERSTATEMENTS
WITH RESPECT TO POTENTIALLY ABUSIVE TAX SHELTER.
``(a) Imposition of Penalty.--If a taxpayer has a potentially
abusive tax shelter understatement for any taxable year, there shall be
added to the tax an amount equal to 20 percent of the amount of such
understatement.
``(b) Potentially Abusive Tax Shelter Understatement.--For purposes
of this section--
``(1) In general.--The term `potentially abusive tax
shelter understatement' means the sum of--
``(A) the product of--
``(i) the amount of the increase (if any)
in taxable income which results from a
difference between the proper tax treatment of
an item to which this section applies and the
taxpayer's treatment of such item (as shown on
the taxpayer's return of tax), and
``(ii) the highest rate of tax imposed by
section 1 (section 11 in the case of a taxpayer
which is a corporation), and
``(B) the amount of the decrease (if any) in the
aggregate amount of credits determined under subtitle A
which results from a difference between the taxpayer's
treatment of an item to which this section applies (as
shown on the taxpayer's return of tax) and the proper
tax treatment of such item.
For purposes of subparagraph (A), any reduction of the excess
of deductions allowed for the taxable year over gross income
for such year, and any reduction in the amount of capital
losses which would (without regard to section 1211) be allowed
for such year, shall be treated as an increase in taxable
income.
``(2) Items to which section applies.--This section shall
apply to any item which is attributable to--
``(A) any listed transaction, and
``(B) any potentially abusive tax shelter (other
than a listed transaction) if a significant purpose of
such transaction is the avoidance or evasion of Federal
income tax.
``(c) Higher Penalty for Nondisclosed Listed and Other Avoidance
Transactions.--
``(1) In general.--Subsection (a) shall be applied by
substituting `30 percent' for `20 percent' with respect to the
portion of any potentially abusive tax shelter understatement
with respect to which the requirement of section 6664(d)(2)(A)
is not met.
``(2) Rules applicable to assertion and compromise of
penalty.--
``(A) In general.--Only upon the approval by the
Chief Counsel for the Internal Revenue Service or the
Chief Counsel's delegate at the national office of the
Internal Revenue Service may a penalty to which
paragraph (1) applies be included in a 1st letter of
proposed deficiency which allows the taxpayer an
opportunity for administrative review in the Internal
Revenue Service Office of Appeals. If such a letter is
provided to the taxpayer, only the Commissioner of
Internal Revenue may compromise all or any portion of
such penalty.
``(B) Applicable rules.--The rules of paragraphs
(2), (3), (4), and (5) of section 6707A(d) shall apply
for purposes of subparagraph (A).
``(d) Definitions of Potentially Abusive Tax Shelter and Listed
Transaction.--For purposes of this section, the terms `potentially
abusive tax shelter' and `listed transaction' have the respective
meanings given to such terms by section 6707A(c).
``(e) Special Rules.--
``(1) Coordination with penalties, etc., on other
understatements.--In the case of an understatement (as defined
in section 6662(d)(2))--
``(A) the amount of such understatement (determined
without regard to this paragraph) shall be increased by
the aggregate amount of potentially abusive tax shelter
understatements and noneconomic substance transaction
understatements for purposes of determining whether
such understatement is a substantial understatement
under section 6662(d)(1), and
``(B) the addition to tax under section 6662(a)
shall apply only to the excess of the amount of the
substantial understatement (if any) after the
application of subparagraph (A) over the aggregate
amount of potentially abusive tax shelter
understatements and noneconomic substance transaction
understatements.
``(2) Coordination with other penalties.--
``(A) Application of fraud penalty.--References to
an underpayment in section 6663 shall be treated as
including references to a potentially abusive tax
shelter understatement and a noneconomic substance
transaction understatement.
``(B) No double penalty.--This section shall not
apply to any portion of an understatement on which a
penalty is imposed under section 6662B or 6663.
``(3) Special rule for amended returns.--Except as provided
in regulations, in no event shall any tax treatment included
with an amendment or supplement to a return of tax be taken
into account in determining the amount of any potentially
abusive tax shelter understatement or noneconomic substance
transaction understatement if the amendment or supplement is
filed after the earlier of the date the taxpayer is first
contacted by the Secretary regarding the examination of the
return or such other date as is specified by the Secretary.
``(4) Noneconomic substance transaction
understatement.--For purposes of this subsection, the
term `noneconomic substance transaction understatement'
has the meaning given such term by section 6662B(c).
``(5) Cross reference.--
``For reporting of section 6662A(c)
penalty to the Securities and Exchange Commission, see section
6707A(e).''.
(b) Determination of Other Understatements.--Subparagraph (A) of
section 6662(d)(2) is amended by adding at the end the following flush
sentence:
``The excess under the preceding sentence shall be
determined without regard to items to which section
6662A applies and without regard to items with respect
to which a penalty is imposed by section 6662B.''.
(c) Reasonable Cause Exception.--
(1) In general.--Section 6664 is amended by adding at the
end the following new subsection:
``(d) Reasonable Cause Exception for Potentially Abusive Tax
Shelter Understatements.--
``(1) In general.--No penalty shall be imposed under
section 6662A with respect to any portion of a potentially
abusive tax shelter understatement if it is shown that there
was a reasonable cause for such portion and that the taxpayer
acted in good faith with respect to such portion.
``(2) Special rules.--Paragraph (1) shall not apply to any
potentially abusive tax shelter understatement unless--
``(A) the relevant facts affecting the tax
treatment of the item are adequately disclosed in
accordance with the regulations prescribed under
section 6011,
``(B) there is or was substantial authority for
such treatment, and
``(C) the taxpayer reasonably believed that such
treatment was more likely than not the proper
treatment.
A taxpayer failing to adequately disclose in accordance with
section 6011 shall be treated as meeting the requirements of
subparagraph (A) if the penalty for such failure was rescinded
under section 6707A(d).
``(3) Rules relating to reasonable belief.--For purposes of
paragraph (2)(C)--
``(A) In general.--A taxpayer shall be treated as
having a reasonable belief with respect to the tax
treatment of an item only if such belief--
``(i) is based on the facts and law that
exist at the time the return of tax which
includes such tax treatment is filed, and
``(ii) relates solely to the taxpayer's
chances of success on the merits of such
treatment and does not take into account the
possibility that a return will not be audited,
such treatment will not be raised on audit, or
such treatment will be resolved through
settlement if it is raised.
``(B) Certain opinions may not be relied upon.--
``(i) In general.--An opinion of a tax
advisor may not be relied upon to establish the
reasonable belief of a taxpayer if--
``(I) the tax advisor is described
in clause (ii), or
``(II) the opinion is described in
clause (iii).
``(ii) Disqualified tax advisors.--A tax
advisor is described in this clause if the tax
advisor--
``(I) is a material advisor (within
the meaning of section 6111(b)(1)) who
participates in the organization,
management, promotion, or sale of the
transaction or who is related (within
the meaning of section 267(b) or
707(b)(1)) to any person who so
participates,
``(II) is compensated directly or
indirectly by a material advisor with
respect to the transaction,
``(III) has a fee arrangement with
respect to the transaction which is
contingent on all or part of the
intended tax benefits from the
transaction being sustained, or
``(IV) as determined under
regulations prescribed by the
Secretary, has a disqualifying
financial interest with respect to the
transaction.
``(iii) Disqualified opinions.--For
purposes of clause (i), an opinion is
disqualified if the opinion--
``(I) is based on unreasonable
factual or legal assumptions (including
assumptions as to future events),
``(II) unreasonably relies on
representations, statements, findings,
or agreements of the taxpayer or any
other person,
``(III) does not identify and
consider all relevant facts, or
``(IV) fails to meet any other
requirement as the Secretary may
prescribe.''.
(2) Conforming amendment.--The heading for subsection (c)
of section 6664 is amended by inserting ``for Underpayments''
after ``Exception''.
(d) Conforming Amendments.--
(1) Subparagraph (C) of section 461(i)(3) is amended by
striking ``section 6662(d)(2)(C)(iii)'' and inserting ``section
1274(b)(3)(C)''.
(2) Paragraph (3) of section 1274(b) is amended--
(A) by striking ``(as defined in section
6662(d)(2)(C)(iii))'' in subparagraph (B)(i), and
(B) by adding at the end the following new
subparagraph:
``(C) Tax shelter.--For purposes of subparagraph
(B), the term `tax shelter' means--
``(i) a partnership or other entity,
``(ii) any investment plan or arrangement,
or
``(iii) any other plan or arrangement,
if a significant purpose of such partnership, entity,
plan, or arrangement is the avoidance or evasion of
Federal income tax.''.
(3) Section 6662(d)(2) is amended by striking subparagraphs
(C) and (D).
(4) Section 6664(c)(1) is amended by striking ``this part''
and inserting ``section 6662 or 6663''.
(5) Subsection (b) of section 7525 is amended by striking
``section 6662(d)(2)(C)(iii)'' and inserting ``section
1274(b)(3)(C)''.
(6)(A) The heading for section 6662 is amended to read as
follows:
``SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY ON
UNDERPAYMENTS.''.
(B) The table of sections for part II of subchapter A of
chapter 68 is amended by striking the item relating to section
6662 and inserting the following new items:
``Sec. 6662. Imposition of accuracy-
related penalty on
underpayments.
``Sec. 6662A. Imposition of accuracy-
related penalty on
understatements with respect to
potentially abusive tax
shelter.''.
(e) Effective Date.--The amendments made by this section shall
apply to taxable years ending after the date of the enactment of this
Act.
SEC. 303. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS
LACKING ECONOMIC SUBSTANCE, ETC.
(a) In General.--Subchapter A of chapter 68, as amended by section
302, 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 a noneconomic
substance transaction understatement for any taxable year, there shall
be added to the tax an amount equal to 40 percent of the amount of such
understatement.
``(b) Reduction of Penalty for Disclosed Transactions.--Subsection
(a) shall be applied by substituting `20 percent' for `40 percent' with
respect to the portion of any noneconomic substance transaction
understatement with respect to which the relevant information affecting
the tax treatment of the item is 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 the sum of--
``(A) the product of--
``(i) the amount of the increase (if any)
in taxable income which results from a
difference between the proper tax treatment of
an item attributable to a noneconomic substance
transaction and the taxpayer's treatment of
such item (as shown on the taxpayer's return of
tax), and
``(ii) the highest rate of tax imposed by
section 1 (section 11 in the case of a taxpayer
which is a corporation), and
``(B) the amount of the decrease (if any) in the
aggregate amount of credits determined under subtitle A
which results from a difference between the taxpayer's
treatment of an item attributable to a noneconomic
substance transaction (as shown on the taxpayer's
return of tax) and the proper tax treatment of such
item.
For purposes of subparagraph (A), any reduction of the excess
of deductions allowed for the taxable year over gross income
for such year, and any reduction in the amount of capital
losses which would (without regard to section 1211) be allowed
for such year, shall be treated as an increase in taxable
income.
``(2) Noneconomic substance transaction.--The term
`noneconomic substance transaction' means any transaction if--
``(A) there is a lack of economic substance (within
the meaning of section 7701(n)(1)) for the transaction
giving rise to the claimed benefit or the transaction
was not respected under section 7701(n)(2), or
``(B) the transaction fails to meet the
requirements of any similar rule of law.
``(d) Rules Applicable To Compromise of Penalty.--
``(1) In general.--If the 1st letter of proposed deficiency
which allows the taxpayer an opportunity for administrative
review in the Internal Revenue Service Office of Appeals has
been sent with respect to a penalty to which this section
applies, only the Commissioner of Internal Revenue may
compromise all or any portion of such penalty.
``(2) Discretion.--The exercise of authority under
paragraph (1) shall be at the sole discretion of the
Commissioner and may be delegated only to the head of the
Office of Tax Shelter Analysis. The Commissioner, in the
Commissioner's sole discretion, may establish a procedure to
determine if a penalty should be referred to the Commissioner
or the head of such Office for a determination under paragraph
(1).
``(3) No appeal.--Notwithstanding any other provision of
law, any determination under this subsection may not be
reviewed in any administrative or judicial proceeding.
``(4) Records.--If a penalty is rescinded under paragraph
(1), the Commissioner shall place in the file in the Office of
the Commissioner the opinion of the Commissioner or the head of
the Office of Tax Shelter Analysis with respect to the
determination, including--
``(A) the facts and circumstances of the
transaction,
``(B) the reasons for the rescission, and
``(C) the amount of the penalty rescinded.
``(5) Report.--The Commissioner shall each year report to
the Committee on Ways and Means of the House of Representatives
and the Committee on Finance of the Senate--
``(A) a summary of the total number and aggregate
amount of penalties imposed, and rescinded, under this
section, and
``(B) a description of each penalty rescinded under
this subsection and the reasons therefor.
``(e) Penalty Reported to SEC.--In the case of a person--
``(1) which is required to file periodic reports under
section 13 or 15(d) of the Securities Exchange Act of 1934 or
is required to be consolidated with another person for purposes
of such reports, and
``(2) which is required to pay a penalty under this section
with respect to any noneconomic substance transaction,
the requirement to pay such penalty shall be disclosed in such reports
filed by such person for such periods as the Secretary shall specify.
Failure to make a disclosure in accordance with the preceding sentence
shall be treated as a failure to which the penalty under subsection (b)
applies.
``(f) Special Rules.--
``(1) Coordination with penalties, etc., on other
understatements.--In the case of an understatement (as defined
in section 6662(d)(2))--
``(A) the amount of such understatement (determined
without regard to this paragraph) shall be increased by
the aggregate amount of noneconomic substance
transaction understatements for purposes of determining
whether such understatement is a substantial
understatement under section 6662(d)(1), and
``(B) the addition to tax under section 6662(a)
shall apply only to the excess of the amount of the
substantial understatement (if any) after the
application of subparagraph (A) over the aggregate
amount of noneconomic substance transaction
understatements.
``(2) Coordination with other penalties.--
``(A) In general.--Except as otherwise provided in
subparagraph (C), the penalty imposed by this section
shall be in addition to any other penalty imposed by
this title.
``(B) Application of fraud penalty.--References to
an underpayment in section 6663 shall be treated as
including references to a noneconomic substance
transaction understatement.
``(C) No double penalty.--This section shall not
apply to any portion of an understatement on which a
penalty is imposed under section 6663.
``(3) Special rule for amended returns.--Except as provided
in regulations, in no event shall any tax treatment included
with an amendment or supplement to a return of tax be taken
into account in determining the amount of any noneconomic
substance transaction understatement if the amendment or
supplement is filed after the earlier of the date the taxpayer
is first contacted by the Secretary regarding the examination
of the return or such other date as is specified by the
Secretary.''.
(b) Clerical Amendment.--The table of sections for part II of
subchapter A of chapter 68, as amended by section 302, is amended by
inserting after the item relating to section 6662 the following new
item:
``Sec. 6662B. Penalty for understatements
attributable to transactions
lacking economic substance,
etc.''.
(c) Effective Date.--The amendments made by this section shall
apply to transactions entered after the date of the enactment of this
Act.
SEC. 304. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS
ATTRIBUTABLE TO NONECONOMIC SUBSTANCE TRANSACTIONS.
(a) In General.--Section 163 (relating to deduction for interest)
is amended by redesignating subsection (m) as subsection (n) and by
inserting after subsection (l) the following new subsection:
``(m) Interest on Unpaid Taxes Attributable To Noneconomic
Substance Transactions.--No deduction shall be allowed under this
chapter for any interest paid or accrued under section 6601 on any
underpayment of tax which is attributable to any noneconomic substance
transaction understatement (as defined in section 6662A(c)(1)).''.
(b) Effective Date.--The amendments made by this section shall
apply to transactions in taxable years beginning after the date of the
enactment of this Act.
TITLE IV--DETERRING UNCOOPERATIVE TAX HAVENS
SEC. 401. DISCLOSING PAYMENTS TO PERSONS IN UNCOOPERATIVE TAX HAVENS.
(a) In General.--Subpart A of part III of subchapter A of chapter
61 is amended by inserting after section 6038C the following new
section:
``SEC. 6038D. DETERRING UNCOOPERATIVE TAX HAVENS THROUGH LISTING AND
REPORTING REQUIREMENTS.
``(a) In General.--Each United States person who transfers money or
other property directly or indirectly to any uncooperative tax haven,
to any financial institution licensed by or operating in any
uncooperative tax haven, or to any person who is a resident of any
uncooperative tax haven shall furnish to the Secretary, at such time
and in such manner as the Secretary shall by regulation prescribe, such
information with respect to such transfer as the Secretary may require.
``(b) Exceptions.--Subsection (a) shall not apply to a transfer by
a United States person if the amount of money (and the fair market
value of property) transferred is less than $10,000. Related transfers
shall be treated as 1 transfer for purposes of this subsection.
``(c) Uncooperative Tax Haven.--For purposes of this section--
``(1) In general.--The term `uncooperative tax haven' means
any foreign jurisdiction which is identified on a list
maintained by the Secretary under paragraph (2) as being a
jurisdiction--
``(A) which imposes no or nominal taxation either
generally or on specified classes of income, and
``(B) has corporate, business, bank, or tax secrecy
or confidentiality rules and practices, or has
ineffective information exchange practices which, in
the judgment of the Secretary, effectively limit or
restrict the ability of the United States to obtain
information relevant to the enforcement of this title.
``(2) Maintenance of list.--Not later than November 1 of
each calendar year, the Secretary shall issue a list of foreign
jurisdictions which the Secretary determines qualify as
uncooperative tax havens under paragraph (1).
``(3) Ineffective information exchange practices.--For
purposes of paragraph (1), a jurisdiction shall be deemed to
have ineffective information exchange practices if the
Secretary determines that during any taxable year ending in the
12-month period preceding the issuance of the list under
paragraph (2)--
``(A) the exchange of information between the
United States and such jurisdiction was inadequate to
prevent evasion or avoidance of United States income
tax by United States persons or to enable the United
States effectively to enforce this title, or
``(B) such jurisdiction was identified by an
intergovernmental group or organization of which the
United States is a member as uncooperative with
international tax enforcement or information exchange
and the United States concurs in the determination.
``(d) Penalty for Failure To File Information.--If a United States
person fails to furnish the information required by subsection (a) with
respect to any transfer within the time prescribed therefor (including
extensions), such United States person shall pay (upon notice and
demand by the Secretary and in the same manner as tax) an amount equal
to 20 percent of the amount of such transfer.
``(e) Simplified Reporting.--The Secretary may by regulations
provide for simplified reporting under this section for United States
persons making large volumes of similar payments.
``(f) Regulations.--The Secretary shall prescribe such regulations
as may be necessary or appropriate to carry out the purposes of this
section.''.
(b) Clerical Amendment.--The table of sections for such subpart A
is amended by inserting after the item relating to section 6038C the
following new item:
``Sec. 6038D. Deterring uncooperative tax havens through listing and
reporting requirements.''.
(c) Effective Date.--The amendments made by this section shall
apply to transfers after the date which is 180 days after the date of
the enactment of this Act.
SEC. 402. DETERRING UNCOOPERATIVE TAX HAVENS BY RESTRICTING ALLOWABLE
TAX BENEFITS.
(a) Limitation on Deferral.--
(1) In general.--Subsection (a) of section 952 (defining
subpart F income) is amended by striking ``and'' at the end of
paragraph (4), by striking the period at the end of paragraph
(5) and inserting ``, and'', and by inserting after paragraph
(5) the following new paragraph:
``(6) an amount equal to the applicable fraction (as
defined in subsection (e)) of the income of such corporation
other than income which--
``(A) is attributable to earnings and profits of
the foreign corporation included in the gross income of
a United States person under section 951 (other than by
reason of this paragraph or paragraph (3)(A)(i)), or
``(B) is described in subsection (b).''.
(2) Applicable fraction.--Section 952 is amended by adding
at the end the following new subsection:
``(e) Identified Tax Haven Income Which is Subpart F Income.--
``(1) In general.--For purposes of subsection (a)(6), the
term `applicable fraction' means the fraction--
``(A) the numerator of which is the aggregate
identified tax haven income for the taxable year, and
``(B) the denominator of which is the aggregate
income for the taxable year which is from sources
outside the United States.
``(2) Identified tax haven income.--For purposes of
paragraph (1), the term `identified tax haven income' means
income for the taxable year which is attributable to a foreign
jurisdiction for any period during which such jurisdiction has
been identified as an uncooperative tax haven under section
6038D(c).
``(3) Regulations.--The Secretary shall prescribe
regulations similar to the regulations issued under section
999(c) to carry out the purposes of this subsection.''.
(b) Denial of Foreign Tax Credit.--Section 901 (relating to taxes
of foreign countries and of possessions of United States) is amended by
redesignating subsection (l) as subsection (m) and by inserting after
subsection (k) the following new subsection:
``(l) Reduction of Foreign Tax Credit, Etc., for Identified Tax
Haven Income.--
``(1) In general.--Notwithstanding any other provision of
this part--
``(A) no credit shall be allowed under subsection
(a) for any income, war profits, or excess profits
taxes paid or accrued (or deemed paid under section 902
or 960) to any foreign jurisdiction if such taxes are
with respect to income attributable to a period during
which such jurisdiction has been identified as an
uncooperative tax haven under section 6038D(c), and
``(B) subsections (a), (b), (c), and (d) of section
904 and sections 902 and 960 shall be applied
separately with respect to all income of a taxpayer
attributable to periods described in subparagraph (A)
with respect to all such jurisdictions.
``(2) Taxes allowed as a deduction, etc.--Sections 275 and
78 shall not apply to any tax which is not allowable as a
credit under subsection (a) by reason of this subsection.
``(3) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this subsection, including regulations which treat
income paid through 1 or more entities as derived from a
foreign jurisdiction to which this subsection applies if such
income was, without regard to such entities, derived from such
jurisdiction.''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after the date of the enactment of
this Act.
<all>