II
109th CONGRESS
1st Session
S. 1565
IN THE SENATE OF THE UNITED STATES
July 29, 2005
Mr. Levin (for himself, Mr. Coleman, and Mr. Obama) 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.
Short title; etc
Short title
This Act may be cited
as the Tax Shelter and Tax Haven
Reform Act of 2005
.
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.
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.
TITLE II—Preventing abusive tax shelters
Sec. 201. Prohibited fee arrangement.
Sec. 202. Preventing tax shelter activities by financial institutions.
Sec. 203. Information sharing for enforcement purposes.
Sec. 204. Disclosure of information to Congress.
Sec. 205. Tax opinion standards for tax practitioners.
Sec. 206. Whistleblower reforms.
Sec. 207. Denial of deduction for certain fines, penalties, and other amounts.
Sec. 208. Sense of the Senate on tax enforcement priorities.
TITLE III—Requiring economic substance
Sec. 301. Clarification of economic substance doctrine.
Sec. 302. Penalty for understatements attributable to transactions lacking economic substance, etc.
Sec. 303. 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.
Sec. 403. Doubling of certain penalties, fines, and interest on underpayments related to certain offshore financial arrangements.
Sec. 404. Treasury regulations on foreign tax credit.
Strengthening tax shelter penalties
Penalty for promoting abusive tax shelters
Penalty for promoting abusive tax shelters
Section 6700 (relating to promoting abusive tax shelters, etc.) is amended—
by redesignating subsections (b) and (c) as subsections (d) and (e), respectively,
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
by inserting after subsection (a) the following new subsections:
Amount of penalty; calculation of penalty; liability for penalty
Amount of penalty
The amount of the penalty imposed by subsection (a) shall not exceed the greater of—
150 percent of the gross income derived (or to be derived) from such activity by the person or persons subject to such penalty, and
if readily subject to calculation, the total amount of underpayment by the taxpayer (including penalties, interest, and taxes) in connection with such activity.
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.
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.
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.
.
Conforming amendment
Section 6700(a) is amended by striking the last sentence.
Effective date
The amendments made by this section shall apply to activities after the date of the enactment of this Act.
Penalty for aiding and abetting the understatement of tax liability
In general
Section 6701(a) (relating to imposition of penalty) is amended—
by inserting the tax liability
or
after respect to,
in paragraph (1),
by inserting aid, assistance,
procurement, or advice with respect to such
before
portion
both places it appears in paragraphs (2) and (3),
and
by inserting instance of aid,
assistance, procurement, or advice or each such
before
document
in the matter following paragraph (3).
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:
Amount of penalty; calculation of penalty; liability for penalty
Amount of penalty
The amount of the penalty imposed by subsection (a) shall not exceed the greater of—
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
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.
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.
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.
.
Penalty not deductible
Section 6701 is amended by adding at the end the following new subsection:
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.
.
Effective date
The amendments made by this section shall apply to activities after the date of the enactment of this Act.
Preventing abusive tax shelters
Prohibited fee arrangement
In general
Section 6701, as amended by this Act, is amended—
by redesignating subsections (f) and (g) as subsections (g) and (h), respectively,
by striking subsection (a).
in paragraphs (2) and (3) of subsection (g) (as redesignated by paragraph (1))
and inserting subsection (a) or (f).
, and
by inserting after subsection (e) the following new subsection:
Prohibited fee arrangement
In general
Any person who makes an agreement for, charges, or collects a fee which is for services provided in connection with the internal revenue laws, and the amount of which is calculated according to, or is dependent upon, a projected or actual amount of—
tax savings or benefits, or
losses which can be used to offset other taxable income,
Rules
The Secretary may issue rules to carry out the purposes of this subsection and may provide exceptions for fee arrangements that are in the public interest.
.
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.
Preventing tax shelter activities by financial institutions
Examinations
Development of examination techniques
Each of the Federal banking agencies and the Commission shall, in consultation with the Internal Revenue Service, develop examination techniques to detect potential violations of section 6700 or 6701 of the Internal Revenue Code of 1986, by depository institutions, brokers, dealers, and investment advisers, as appropriate.
Frequency
Not less frequently than once in each 2-year period, each of the Federal banking agencies and the Commission shall implement the examination techniques developed under paragraph (1) with respect to each of the depository institutions, brokers, dealers, or investment advisers subject to their enforcement authority. Such examination shall, to the extent possible, be combined with any examination by such agency otherwise required or authorized by Federal law.
Report to internal revenue service
In any case in which an examination conducted under this section with respect to a financial institution or other entity reveals a potential violation, such agency shall promptly notify the Internal Revenue Service of such potential violation for investigation and enforcement by the Internal Revenue Service in accordance with applicable provisions of law.
Report to congress
The Federal banking agencies and the Commission shall submit a joint written report to Congress in 2007 and 2010 on their progress in preventing violations of sections 6700 and 6701 of the Internal Revenue Code of 1986, by depository institutions, brokers, dealers, and investment advisers, as appropriate.
Definitions
For purposes of this section—
the terms broker
,
dealer
, and investment adviser
have the same
meanings as in section 3 of the Securities Exchange Act of 1934 (15 U.S.C.
78c);
the term Commission
means
the Securities and Exchange Commission;
the term depository
institution
has the same meaning as in section 3(c) of the Federal
Deposit Insurance Act (12 U.S.C. 1813(c));
the term Federal banking
agencies
has the same meaning as in section 3(q) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(q)); and
the term Secretary
means the
Secretary of the Treasury.
Information sharing for enforcement purposes
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:
Disclosure of returns and return information related to promotion of prohibited tax shelters or tax avoidance schemes
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.
Requirements
A request meets the requirements of this subparagraph if it sets forth—
the nature of the investigation, examination, or proceeding,
the statutory authority under which such investigation, examination, or proceeding is being conducted,
the name or names of the financial institution, issuer, or public accounting firm to which such return information relates,
the taxable period or periods to which such return information relates, and
the specific reason or reasons why such disclosure is, or may be, relevant to such investigation, examination or proceeding.
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.
.
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:
Disclosure of returns and return information for use in financial and accounting fraud investigations
Written request
Upon receipt by the Secretary of a written request which meets the requirements of subparagraph (B) from the head of the United States Securities and Exchange Commission or the Public Company Accounting Oversight Board, a return or return information shall be disclosed to such requestor’s officers and employees who are personally and directly engaged in an investigation, examination, or proceeding by such requester to evaluate the accuracy of a financial statement or report or to determine whether to require a restatement, penalize, or deter conduct by an issuer, investment company, or public accounting firm, or associated person, in connection with a potential or actual violation of auditing standards or prohibitions against false or misleading statements or omissions in financial statements or reports. Such disclosure shall be solely for use by such officers and employees in such investigation, examination, or proceeding.
Requirements
A request meets the requirements of this subparagraph if it sets forth—
the nature of the investigation, examination, or proceeding,
the statutory authority under which such investigation, examination, or proceeding is being conducted,
the name or names of the issuer, investment company, or public accounting firm to which such return information relates,
the taxable period or periods to which such return information relates, and
the specific reason or reasons why such disclosure is, or may be, relevant to such investigation, examination or proceeding.
.
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.
Disclosure of information to Congress
Disclosure by tax return preparer
In general
Subparagraph (B) of section 7216(b)(1) (relating to disclosures) is amended to read as follows:
pursuant to any 1 of the following documents, if clearly identified:
The order of any Federal, State, or local court of record.
A subpoena issued by a Federal or State grand jury.
An administrative order, summons, or subpoena which is issued in the performance of its duties by—
any Federal agency, including Congress or any committee or subcommittee thereof, or
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.
.
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.
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:
Inspection by Congress
In general
Upon receipt of a written request from a committee or subcommittee of Congress, copies of documents related to a determination by the Secretary to grant, deny, revoke, or restore an organization’s exemption from taxation under section 501 shall be provided to such committee or subcommittee, including any application, notice of status, or supporting information provided by such organization to the Internal Revenue Service; any letter, analysis, or other document produced by or for the Internal Revenue Service evaluating, determining, explaining, or relating to the tax exempt status of such organization (other than returns, unless such returns are available to the public under this section or section 6103 or 6110); and any communication between the Internal Revenue Service and any other party relating to the tax exempt status of such organization.
Additional information
Section 6103(f) shall apply with respect to—
the application for exemption of any organization described in subsection (c) or (d) of section 501 which is exempt from taxation under section 501(a) for any taxable year and any application referred to in subparagraph (B) of subsection (a)(1) of this section, and
any other papers which are in the possession of the Secretary and which relate to such application,
.
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.
Tax opinion standards for tax practitioners
Section 330(d) of title 31, United States Code, is amended to read as follows:
The Secretary of the Treasury shall impose standards applicable to the rendering of written advice with respect to any listed transaction or any entity, plan, arrangement, or other transaction which has a potential for tax avoidance or evasion. Such standards shall address, but not be limited to, the following issues:
Independence of the practitioner issuing such written advice from persons promoting, marketing, or recommending the subject of the advice.
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.
Avoidance of conflicts of interest which would impair auditor independence.
For written advice issued by a firm, standards for reviewing the advice and ensuring the consensus support of the firm for positions taken.
Reliance on reasonable factual representations by the taxpayer and other parties.
Appropriateness of the fees charged by the practitioner for the written advice.
Preventing practitioners and firms from aiding or abetting the understatement of tax liability by clients.
Banning the promotion of potentially abusive or illegal tax shelters.
.
Whistleblower reforms
In general
Section 7623 (relating to expenses of detection of underpayments and fraud, etc.) is amended—
by striking “The Secretary” and inserting “(a) In General.—The Secretary”,
by striking and
at the end
of paragraph (1) and inserting or
,
by striking (other than
interest)
, and
by adding at the end the following new subsections:
Awards to whistleblowers
In general
If the Secretary proceeds with any administrative or judicial action described in subsection (a) based on information brought to the Secretary’s attention by an individual, such individual shall, subject to paragraph (2), receive as an award at least 15 percent but not more than 30 percent of the collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from the action (including any related actions) or from any settlement in response to such action. The determination of the amount of such award by the Whistleblower Office shall depend upon the extent to which the individual substantially contributed to such action, and shall be determined at the sole discretion of the Whistleblower Office.
Award in case of less substantial contribution
In general
In the event the action described in paragraph (1) is one which the Whistleblower Office determines to be based principally on disclosures of specific allegations (other than information provided by the individual described in paragraph (1)) resulting from a judicial or administrative hearing, from a governmental report, hearing, audit, or investigation, or from the news media, the Whistleblower Office may award such sums as it considers appropriate, but in no case more than 10 percent of the collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from the action (including any related actions) or from any settlement in response to such action, taking into account the significance of the individual’s information and the role of such individual and any legal representative of such individual in contributing to such action.
Nonapplication of paragraph where individual is original source of information
Subparagraph (A) shall not apply if the information resulting in the initiation of the action described in paragraph (1) was originally provided by the individual described in paragraph (1).
Application of this subsection
This subsection shall apply with respect to any action—
against any taxpayer, but in the case of any individual, only if such individual’s gross income exceeds $200,000 for any taxable year subject to such action, and
if the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $20,000.
Additional rules
No contract necessary
No contract with the Internal Revenue Service is necessary for any individual to receive an award under this subsection.
Representation
Any individual described in paragraph (1) or (2) may be represented by counsel.
Award not subject to individual alternative minimum tax
No award received under this subsection shall be included in gross income for purposes of determining alternative minimum taxable income.
Whistleblower Office
In general
There is established
in the Internal Revenue Service an office to be known as the
Whistleblower Office
which—
shall analyze information received from any individual described in subsection (b) and either investigate the matter itself or assign it to the appropriate Internal Revenue Service office,
shall monitor any action taken with respect to such matter,
shall inform such individual that it has accepted the individual’s information for further review,
may require such individual and any legal representative of such individual to not disclose any information so provided,
may ask for additional assistance from such individual or any legal representative of such individual, and
shall determine the amount to be awarded to such individual under subsection (b).
Funding for office
From the amounts available for expenditure under subsection (a), the Whistleblower Office shall be credited with an amount equal to the awards made under subsection (b). These funds shall be used to maintain the Whistleblower Office and also to reimburse other Internal Revenue Service offices for related costs, such as costs of investigation and collection.
Request for assistance
In general
Any assistance requested under paragraph (1)(E) shall be under the direction and control of the Whistleblower Office or the office assigned to investigate the matter under subparagraph (A). To the extent the disclosure of any returns or return information to the individual or legal representative is required for the performance of such assistance, such disclosure shall be pursuant to a contract entered into between the Secretary and the recipients of such disclosure subject to section 6103(n).
Funding of assistance
From the funds made available to the Whistleblower Office under paragraph (2), the Whistleblower Office may reimburse the costs incurred by any legal representative in providing assistance described in subparagraph (A).
.
Effective date
The amendments made by this section shall apply to information provided on or after the date of the enactment of this Act.
Denial of deduction for certain fines, penalties, and other amounts
In general
Subsection (f) of section 162 (relating to trade or business expenses) is amended to read as follows:
Fines, penalties, and other amounts
In general
Except as provided in paragraph (2), no deduction otherwise allowable shall be allowed under this chapter for any amount paid or incurred (whether by suit, agreement, or otherwise) to, or at the direction of, a government or entity described in paragraph (4) in relation to the violation of any law or the investigation or inquiry by such government or entity into the potential violation of any law.
Exception for amounts constituting restitution
Paragraph (1) shall not apply to any amount which—
the taxpayer establishes constitutes restitution (including remediation of property) for damage or harm caused by or which may be caused by the violation of any law or the potential violation of any law, and
is identified as restitution in the court order or settlement agreement.
Exception for amounts paid or incurred as the result of certain court orders
Paragraph (1) shall not apply to any amount paid or incurred by order of a court in a suit in which no government or entity described in paragraph (4) is a party.
Certain nongovernmental regulatory entities
An entity is described in this paragraph if it is—
a nongovernmental entity which exercises self-regulatory powers (including imposing sanctions) in connection with a qualified board or exchange (as defined in section 1256(g)(7)), or
to the extent provided in regulations, a nongovernmental entity which exercises self-regulatory powers (including imposing sanctions) as part of performing an essential governmental function.
Exception for taxes due
Paragraph (1) shall not apply to any amount paid or incurred as taxes due.
.
Effective date
The amendment made by this section shall apply to amounts paid or incurred on or after the date of the enactment of this Act, except that such amendment shall not apply to amounts paid or incurred under any binding order or agreement entered into before such date. Such exception shall not apply to an order or agreement requiring court approval unless the approval was obtained before such date.
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—
to combat the promotion of abusive tax shelters for corporations and high net worth individuals and the aiding and abetting of tax evasion,
to stop accounting, law, and financial firms involved in such promotion and aiding and abetting, and
to combat the use of offshore financial accounts to conceal taxable income.
Requiring economic substance
Clarification of economic substance doctrine
In general
Section 7701 is amended by redesignating subsection (o) as subsection (p) and by inserting after subsection (n) the following new subsection:
Clarification of economic substance doctrine; etc
General rules
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.
Definition of economic substance
For purposes of subparagraph (A)—
In general
A transaction has economic substance only if—
the transaction changes in a meaningful way (apart from Federal tax effects) the taxpayer’s economic position, and
the taxpayer has a substantial nontax purpose for entering into such transaction and the transaction is a reasonable means of accomplishing such purpose.
Special rule where taxpayer relies on profit potential
A transaction shall not be treated as having economic substance by reason of having a potential for profit unless—
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
the reasonably expected pre-tax profit from the transaction exceeds a risk-free rate of return.
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).
Special rules for transactions with tax-indifferent parties
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.
Artificial income shifting and basis adjustments
The form of a transaction with a tax-indifferent party shall not be respected if—
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
it results in a basis adjustment or shifting of basis on account of overstating the income or gain of the tax-indifferent party.
Definitions and special rules
For purposes of this subsection—
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.
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.
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.
Treatment of lessors
In applying paragraph (1)(B)(ii) to the lessor of tangible property subject to a lease—
the expected net tax benefits with respect to the leased property shall not include the benefits of—
depreciation,
any tax credit, or
any other deduction as provided in guidance by the Secretary, and
subclause (II) of paragraph (1)(B)(ii) shall be disregarded in determining whether any of such benefits are allowable.
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.
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.
.
Effective date
The amendments made by this section shall apply to transactions entered into after the date of the enactment of this Act.
Penalty for understatements attributable to transactions lacking economic substance, etc
In general
Subchapter A of chapter 68 is amended by inserting after section 6662A the following new section:
Penalty for understatements attributable to transactions lacking economic substance, etc
Imposition of penalty
If a taxpayer has an noneconomic substance transaction understatement for any taxable year, there shall be added to the tax an amount equal to 40 percent of the amount of such understatement.
Reduction of penalty for disclosed transactions
Subsection (a) shall be applied by
substituting 20 percent
for 40 percent
with
respect to the portion of any noneconomic substance transaction understatement
with respect to which the relevant facts affecting the tax treatment of the
item are adequately disclosed in the return or a statement attached to the
return.
Noneconomic substance transaction understatement
For purposes of this section—
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.
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(o)(1)) for the transaction giving rise to the claimed benefit or the transaction was not respected under section 7701(o)(2), or
the transaction fails to meet the requirements of any similar rule of law.
Rules applicable to compromise of penalty
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.
Applicable rules
The rules of paragraphs (2) and (3) of section 6707A(d) shall apply for purposes of paragraph (1).
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.
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).
.
Coordination with other understatements and penalties
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.
Subsection (e) of section 6662A is amended—
in paragraph (1), by inserting and
noneconomic substance transaction understatements
after
reportable transaction understatements
both places it
appears,
in paragraph (2)(A), by inserting
and a noneconomic substance transaction understatement
after
reportable transaction understatement
,
in paragraph (2)(B), by inserting
6662B or
before 6663
,
in paragraph (2)(C)(i), by inserting
or section 6662B
before the period at the end,
in paragraph (2)(C)(ii), by inserting
and section 6662B
after This section
,
in paragraph (3), by inserting or
noneconomic substance transaction understatement
after
reportable transaction understatement
, and
by adding at the end the following new paragraph:
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).
.
Subsection (e) of section 6707A is amended—
by striking or
at the end of
subparagraph (B), and
by striking subparagraph (C) and inserting the following new subparagraphs:
is required to pay a penalty under section 6662B with respect to any noneconomic substance transaction, or
is required to pay a penalty under section 6662(h) with respect to any transaction and would (but for section 6662A(e)(2)(C)) have been subject to penalty under section 6662A at a rate prescribed under section 6662A(c) or under section 6662B,
.
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.
.
Effective date
The amendments made by this section shall apply to transactions entered into after the date of the enactment of this Act.
Denial of deduction for interest on underpayments attributable to noneconomic substance transactions
In general
Section 163(m) (relating to interest on unpaid taxes attributable to nondisclosed reportable transactions) is amended—
by striking “attributable” and all that follows and inserting the following: “attributable to—
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
any noneconomic substance transaction understatement (as defined in section 6662B(c)).
, and
by inserting “and Noneconomic Substance Transactions” after “Transactions”.
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.
Deterring uncooperative tax havens
Disclosing payments to persons in uncooperative tax havens
In general
Subpart A of part III of subchapter A of chapter 61 is amended by inserting after section 6038C the following new section:
Deterring uncooperative tax havens through listing and reporting requirements
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.
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.
Uncooperative tax haven
For purposes of this section—
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—
which imposes no or nominal taxation either generally or on specified classes of income, and
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.
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).
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)—
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
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.
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.
Simplified reporting
The Secretary may by regulations provide for simplified reporting under this section for United States persons making large volumes of similar payments.
Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.
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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.
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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.
Deterring uncooperative tax havens by restricting allowable tax benefits
Limitation on deferral
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:
an amount equal to the applicable fraction (as defined in subsection (e)) of the income of such corporation other than income which—
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
is described in subsection (b).
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Applicable fraction
Section 952 is amended by adding at the end the following new subsection:
Identified Tax Haven Income Which is Subpart F Income
In general
For purposes of subsection (a)(6), the term applicable fraction means the fraction—
the numerator of which is the aggregate identified tax haven income for the taxable year, and
the denominator of which is the aggregate income for the taxable year which is from sources outside the United States.
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).
Regulations
The Secretary shall prescribe regulations similar to the regulations issued under section 999(c) to carry out the purposes of this subsection.
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Denial of foreign tax credit
Section 901 (relating to taxes of foreign countries and of possessions of United States) is amended by redesignating subsection (m) as subsection (n) and by inserting after subsection (l) the following new subsection:
Reduction of foreign tax credit, etc., for identified tax haven income
In general
Notwithstanding any other provision of this part—
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
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.
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.
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.
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Effective date
The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.
Doubling of certain penalties, fines, and interest on underpayments related to certain offshore financial arrangements
Determination of penalty
In general
Notwithstanding any other provision of law, in the case of an applicable taxpayer—
the determination as to whether any interest or applicable penalty is to be imposed with respect to any arrangement described in paragraph (2), or to any underpayment of Federal income tax attributable to items arising in connection with any such arrangement, shall be made without regard to the rules of subsections (b), (c), and (d) of section 6664 of the Internal Revenue Code of 1986, and
if any such interest or applicable penalty is imposed, the amount of such interest or penalty shall be equal to twice that determined without regard to this section.
Applicable taxpayer
For purposes of this subsection—
In general
The term applicable taxpayer means a taxpayer which—
has underreported its United States income tax liability with respect to any item which directly or indirectly involves—
any financial arrangement which in any manner relies on the use of an offshore payment mechanism (including credit, debit, or charge cards) issued by a bank or other entity in a foreign jurisdiction, or
any offshore financial arrangement (including any arrangement with foreign banks, financial institutions, corporations, partnerships, trusts, or other entities), and
has not signed a closing agreement pursuant to the Voluntary Offshore Compliance Initiative established by the Department of the Treasury under Revenue Procedure 2003–11 or voluntarily disclosed its participation in such arrangement by notifying the Internal Revenue Service of such arrangement prior to the issue being raised by the Internal Revenue Service during an examination.
Authority to waive
The Secretary of the Treasury or the Secretary’s delegate may waive the application of paragraph (1) for any taxpayer if the Secretary or the Secretary’s delegate determines that—
the use of such offshore payment mechanism or financial arrangement was incidental to the transaction,
in the case of a trade or business, such use took place in the ordinary course of the trade or business of the taxpayer, and
such waiver would serve the public interest.
Issues raised
For purposes of subparagraph (A)(ii), an item shall be treated as an issue raised during an examination if the individual examining the return—
communicates to the taxpayer knowledge about the specific item, or
has made a request to the taxpayer for information and the taxpayer could not make a complete response to that request without giving the examiner knowledge of the specific item.
Definitions and rules
For purposes of this section—
Applicable penalty
The term applicable penalty means any penalty, addition to tax, or fine imposed under chapter 68 of the Internal Revenue Code of 1986.
Fees and expenses
The Secretary of the Treasury may retain and use an amount not in excess of 25 percent of all additional interest, penalties, additions to tax, and fines collected under this section to be used for enforcement and collection activities of the Internal Revenue Service. The Secretary shall keep adequate records regarding amounts so retained and used. The amount credited as paid by any taxpayer shall be determined without regard to this paragraph.
Report by Secretary
The Secretary shall each year conduct a study and report to Congress on the implementation of this section during the preceding year, including statistics on the number of taxpayers affected by such implementation and the amount of interest and applicable penalties asserted, waived, and assessed during such preceding year.
Effective date
The provisions of this section shall apply to interest, penalties, additions to tax, and fines with respect to any taxable year if, as of the date of the enactment of this Act, the assessment of any tax, penalty, or interest with respect to such taxable year is not prevented by the operation of any law or rule of law.
Treasury regulations on foreign tax credit
In general
Section 901 (relating to taxes of foreign countries and of possessions of United States), as amended by section 402, is amended by redesignating subsection (n) as subsection (o) and by inserting after subsection (m) the following new subsection:
Regulations
The Secretary may prescribe regulations disallowing a credit under subsection (a) for all or a portion of any foreign tax, or allocating a foreign tax among 2 or more persons, in cases where the foreign tax is imposed on any person in respect of income of another person or in other cases involving the inappropriate separation of the foreign tax from the related foreign income.
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Effective date
The amendments made by this section shall apply to transactions entered into after the date of the enactment of this Act.