[Congressional Bills 107th Congress]
[From the U.S. Government Publishing Office]
[H.R. 2520 Introduced in House (IH)]
107th CONGRESS
1st Session
H. R. 2520
To amend the Internal Revenue Code of 1986 to curb tax abuses by
disallowing tax benefits claimed to arise from transactions without
substantial economic substance, and for other purposes.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
July 17, 2001
Mr. Doggett (for himself, Mr. Rangel, Mr. Stark, Mr. Matsui, Mr. Coyne,
Mr. Levin, Mr. McDermott, Mr. Kleczka, Mr. Lewis of Georgia, Mr. Neal
of Massachusetts, Mr. McNulty, Mr. Jefferson, Mr. Becerra, Mrs.
Thurman, Mr. Allen, Mr. Bonior, Mr. Hinchey, Mr. McGovern, Mr. George
Miller of California, Ms. Sanchez, Ms. Schakowsky, Mr. Tierney, and
Mrs. Jones of Ohio) introduced the following bill; which was referred
to the Committee on Ways and Means
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to curb tax abuses by
disallowing tax benefits claimed to arise from transactions without
substantial economic substance, 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.
This Act may be cited as the ``Abusive Tax Shelter Shutdown Act of
2001''.
SEC. 2. FINDINGS AND PURPOSE.
(a) Findings.--The Congress hereby finds that:
(1) Many corporate tax shelter transactions are complicated
ways of accomplishing nothing aside from claimed tax benefits,
and the legal opinions justifying those transactions take an
inappropriately narrow and restrictive view of well-developed
court doctrines under which--
(A) the taxation of a transaction is determined in
accordance with its substance and not merely its form,
(B) transactions which have no significant effect
on the taxpayer's economic or beneficial interests
except for tax benefits are treated as sham
transactions and disregarded,
(C) transactions involving multiple steps are
collapsed when those steps have no substantial economic
meaning and are merely designed to create tax benefits,
(D) transactions with no business purpose are not
given effect, and
(E) in the absence of a specific congressional
authorization, it is presumed that Congress did not
intend a transaction to result in a negative tax where
the taxpayer's economic position or rate of return is
better after tax than before tax.
(2) Permitting aggressive and abusive tax shelters not only
results in large revenue losses but also undermines voluntary
compliance with the Internal Revenue Code of 1986.
(b) Purpose.--The purpose of this Act is to eliminate abusive tax
shelters by denying tax attributes claimed to arise from transactions
that do not meet a heightened economic substance requirement and by
repealing the provision that permits legal opinions to be used to avoid
penalties on tax underpayments resulting from transactions without
significant economic substance or business purpose.
TITLE I--CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE
SEC. 101. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.
(a) In General.--Section 7701 of the Internal Revenue Code of 1986
is amended by redesignating subsection (m) as subsection (n) and by
inserting after subsection (l) the following new subsection:
``(m) Clarification of Economic Substance Doctrine; Etc.--
``(1) General rules.--
``(A) In general.--In applying the economic
substance doctrine, the determination of whether a
transaction has economic substance shall be made as
provided in this paragraph.
``(B) Definition of economic substance.--For
purposes of subparagraph (A)--
``(i) In general.--A transaction has
economic substance only if--
``(I) the transaction changes in a
meaningful way (apart from Federal
income 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.
``(ii) Special rule where taxpayer relies
on profit potential.--A transaction shall not
be treated as having economic substance by
reason of having a potential for profit
unless--
``(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 are 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, the expected net tax
benefits shall not include the benefits of
depreciation, or any tax credit, with respect to the
leased property and 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 referred to in section
6662(i)(2), and the requirements of this subsection shall be
construed as being in addition to any such other rule of law.''
(b) Effective Date.--The amendments made by this section shall
apply to transactions after the date of the enactment of this Act.
TITLE II--PENALTIES
SEC. 201. INCREASE IN PENALTY ON UNDERPAYMENTS RESULTING FROM FAILURE
TO SATISFY CERTAIN COMMON LAW RULES.
(a) In General.--Section 6662 of the Internal Revenue Code of 1986
(relating to imposition of accuracy-related penalty) is amended by
adding at the end the following new subsection:
``(i) Increase in Penalty in Case of Failure To Satisfy Certain
Common Law Rules.--
``(1) In general.--To the extent that an underpayment is
attributable to a disallowance described in paragraph (2)--
``(A) subsection (a) shall be applied with respect
to such portion by substituting `40 percent' for `20
percent', and
``(B) subsection (d)(2)(B) and section 6664(c)
shall not apply.
``(2) Disallowances described.--A disallowance is described
in this subsection if such disallowance is on account of--
``(A) a lack of economic substance (within the
meaning of section 7701(m)(1)) for the transaction
giving rise to the claimed benefit or the transaction
was not respected under section 7701(m)(2),
``(B) a lack of business purpose for such
transaction or because the form of the transaction does
not reflect its substance, or
``(C) a failure to meet the requirements of any
other similar rule of law.
``(3) Increase in penalty not to apply if compliance with
disclosure requirements.--Paragraph (1)(A) shall not apply if
the taxpayer discloses to the Secretary (as such time and in
such manner as the Secretary shall prescribe) such information
as the Secretary shall prescribe with respect to such
transaction.''.
(b) Modifications to Penalty on Substantial Understatement of
Income Tax.--
(1) Modification of threshold.--Subparagraph (A) of section
6662(d)(1) of such Code is amended to read as follows:
``(A) In general.--For purposes of this section,
there is a substantial understatement of income tax for
any taxable year if the amount of the understatement
for the taxable year exceeds the lesser of--
``(i) $500,000, or
``(ii) the greater of 10 percent of the tax
required to be shown on the return for the
taxable year or $5,000.''
(2) Modification of penalty on tax shelters, etc.--Clauses
(i) and (ii) of section 6662(d)(2)(C) of such Code are amended
to read as follows:
``(i) In general.--Subparagraph (B) shall
not apply to any item attributable to a tax
shelter.''
``(ii) Determination of understatements
with respect to tax shelters, etc.--In any case
in which there are one or more items
attributable to a tax shelter, the amount of
the understatement under subparagraph (A) shall
in no event be less than the amount of
understatement which would be determined for
the taxable year if all items shown on the
return which are not attributable to any tax
shelter were treated as being correct. A
similar rule shall apply in cases to which
subsection (i) applies, whether or not the
items are attributable to a tax shelter.''
(c) Treatment of Amended Returns.--Subsection (a) of section 6664
of such Code is amended by adding at the end the following new
sentence: ``For purposes of this subsection, an amended return shall be
disregarded if such return is filed on or after the date the taxpayer
is first contacted by the Secretary regarding the examination of the
return.''
SEC. 202. PENALTY ON PROMOTERS OF TAX AVOIDANCE STRATEGIES WHICH HAVE
NO ECONOMIC SUBSTANCE, ETC.
(a) Penalty.--
(1) In general.--Section 6700 of the Internal Revenue Code
of 1986 (relating to promoting abusive tax shelters, etc.) is
amended by redesignating subsection (c) as subsection (d) and
by inserting after subsection (b) the following new subsection:
``(c) Penalty on Substantial Promoters for Promoting Tax Avoidance
Strategies Which Have No Economic Substance, Etc.--
``(1) Imposition of penalty.--Any substantial promoter of a
tax avoidance strategy shall pay a penalty in the amount
determined under paragraph (2) with respect to such strategy if
such strategy (or any similar strategy promoted by such
promoter) fails to meet the requirements of any rule of law
referred to in section 6662(i)(2).
``(2) Amount of penalty.--The penalty under paragraph (1)
with respect to a promoter of a tax avoidance strategy is an
amount equal to 100 percent of the gross income derived (or to
be derived) by such promoter from such strategy.
``(3) Tax avoidance strategy.--For purposes of this
subsection, the term `tax avoidance strategy' means any entity,
plan, arrangement, or transaction a significant purpose of the
structure of which is the avoidance or evasion of Federal
income tax.
``(4) Substantial promoter.--For purposes of this
subsection--
``(A) In general.--The term `substantial promoter'
means, with respect to any tax avoidance strategy, any
promoter if--
``(i) such promoter offers such strategy to
more than 1 potential participant, and
``(ii) such promoter may receive fees in
excess of $500,000 in the aggregate with
respect to such strategy.
``(B) Aggregation rules.--For purposes of this
paragraph--
``(i) Related persons.--A promoter and all
persons related to such promoter shall be
treated as 1 person who is a promoter.
``(ii) Similar strategies.--All similar tax
avoidance strategies of a promoter shall be
treated as 1 tax avoidance strategy.
``(C) Promoter.--The term `promoter' means any
person who participates in the promotion, offering, or
sale of the tax avoidance strategy.
``(D) Related person.--Persons are related if they
bear a relationship to each other which is described in
section 267(b) or 707(b).
``(4) Coordination with subsection (a).--No penalty shall
be imposed by this subsection on any promoter with respect to a
tax avoidance strategy if a penalty is imposed under subsection
(a) on such promoter with respect to such strategy.''
(2) Conforming amendment.--Subsection (d) of section 6700
of such Code is amended--
(A) by striking ``Penalty'' and inserting
``Penalties'', and
(B) by striking ``penalty'' the first place it
appears in the text and inserting ``penalties''.
(b) Increase in Penalty on Promoting Abusive Tax Shelters.--The
first sentence of section 6700(a) of such Code is amended by striking
``a penalty equal to'' and all that follows and inserting ``a penalty
equal to the greater of $1,000 or 100 percent of the gross income
derived (or to be derived) by such person from such activity.''
SEC. 203. MODIFICATIONS OF PENALTIES FOR AIDING AND ABETTING
UNDERSTATEMENT OF TAX LIABILITY INVOLVING TAX SHELTERS.
(a) Imposition of Penalty.--Section 6701(a) of the Internal Revenue
Code of 1986 (relating to imposition of penalty) is amended to read as
follows:
``(a) Imposition of Penalties.--
``(1) In general.--Any person--
``(A) who aids or assists in, procures, or advises
with respect to, the preparation or presentation of any
portion of a return, affidavit, claim, or other
document,
``(B) who knows (or has reason to believe) that
such portion will be used in connection with any
material matter arising under the internal revenue
laws, and
``(C) who knows that such portion (if so used)
would result in an understatement of the liability for
tax of another person,
shall pay a penalty with respect to each such document in the
amount determined under subsection (b).
``(2) Certain tax shelters.--If--
``(A) any person--
``(i) aids or assists in, procures, or
advises with respect to the creation,
organization, sale, implementation, management,
or reporting of a tax shelter (as defined in
section 6662(d)(2)(C)(iii)) or of any entity,
plan, arrangement, or transaction that fails to
meet the requirements of any rule of law
referred to in section 6662(i)(2), and
``(ii) opines, advises, represents, or
otherwise indicates (directly or indirectly)
that the taxpayer's tax treatment of items
attributable to such tax shelter or such
entity, plan, arrangement, or transaction and
giving rise to an understatement of tax
liability would more likely than not prevail or
not give rise to a penalty,
``(B) such opinion, advice, representation, or
indication is unreasonable,
then such person shall pay a penalty in the amount determined
under subsection (b). If a standard higher than the more likely
than not standard was used in any such opinion, advice,
representation, or indication, then subparagraph (A)(ii) shall
be applied as if such standard were substituted for the more
likely than not standard.''
(b) Amount of Penalty.--Section 6701(b) of such Code (relating to
amount of penalty) is amended--
(1) by inserting ``or (3)'' after ``paragraph (2)'' in
paragraph (1),
(2) by striking ``subsection (a)'' each place it appears
and inserting ``subsection (a)(1)'', and
(3) by redesignating paragraph (3) as paragraph (4) and by
adding after paragraph (2) the following:
``(3) Tax shelters.--In the case of--
``(A) a penalty imposed by subsection (a)(1) which
involves a return, affidavit, claim, or other document
relating to a tax shelter or an entity, plan,
arrangement, or transaction that fails to meet the
requirements of any rule of law referred to in section
6662(i)(2), and
``(B) any penalty imposed by subsection (a)(2),
the amount of the penalty shall be equal to 100 percent of the
gross proceeds derived (or to be derived) by the person in
connection with the tax shelter or entity, plan, arrangement,
or transaction.''
(c) Referral and Publication.--If a penalty is imposed under
section 6701(a)(2) of such Code (as added by subsection (a)) on any
person, the Secretary of the Treasury shall--
(1) notify the Director of Practice of the Internal Revenue
Service and any appropriate State licensing authority of the
penalty and the circumstances under which it was imposed, and
(2) publish the identity of the person and the fact the
penalty was imposed on the person.
(d) Conforming Amendments.--
(1) Section 6701(d) of such Code is amended by striking
``Subsection (a)'' and inserting ``Subsection (a)(1)''.
(2) Section 6701(e) of such Code is amended by striking
``subsection (a)(1)'' and inserting ``subsection (a)(1)(A)''.
(3) Section 6701(f) of such Code is amended by inserting
``, tax shelter, or entity, plan, arrangement, or transaction''
after ``document'' each place it appears.
SEC. 204. FAILURE TO MAINTAIN LISTS.
Section 6708(a) of the Internal Revenue Code of 1986 (relating to
failure to maintain lists of investors in potentially abusive tax
shelters) is amended by adding at the end the following: ``In the case
of a tax shelter (as defined in section 6662(d)(2)(C)(iii)) or entity,
plan, arrangement, or transaction that fails to meet the requirements
of any rule of law referred to in section 6662(i)(2), the penalty shall
be equal to 50 percent of the gross proceeds derived (or to be derived)
from each person with respect to which there was a failure and the
limitation of the preceding sentence shall not apply.''
SEC. 205. PENALTY FOR FAILING TO DISCLOSE REPORTABLE TRANSACTION.
(a) In General.--Part I of subchapter B of chapter 68 of the
Internal Revenue Code of 1986 (relating to assessable penalties) is
amended by inserting after section 6707 the following new section:
``SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE TAX SHELTER INFORMATION
WITH RETURN.
``(a) Imposition of Penalty.--Any person who fails to include with
its return of Federal income tax any information required to be
included under section 6011 with respect to a reportable transaction
shall pay a penalty in the amount determined under subsection (b). No
penalty shall be imposed on any such failure if it is shown that such
failure is due to reasonable cause.
``(b) Amount of Penalty.--
``(1) In general.--The amount of the penalty under
subsection (a) shall be equal to the greater of--
``(A) 5 percent of any increase in Federal tax
which results from a difference between the taxpayer's
treatment (as shown on its return) of items
attributable to the reportable transaction to which the
failure relates and the proper tax treatment of such
items, or
``(B) $100,000.
For purposes of subparagraph (A), the last sentence of section
6664(a) shall apply.
``(2) Listed transaction.--If the failure under subsection
(a) relates to a reportable transaction 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, paragraph (1)(A) shall be applied by
substituting `10 percent' for `5 percent'.
``(c) Reportable Transaction.--For purposes of this section, the
term `reportable transaction' means any transaction with respect to
which information is required under section 6011 to be included with a
taxpayer's return of tax because, as determined under regulations
prescribed under section 6011, such transaction has characteristics
which may be indicative of a tax avoidance transaction.
``(d) Coordination With Other Penalties.--The penalty imposed by
this section is in addition to any penalty imposed under section
6662.''
(b) Conforming Amendment.--The table of sections for part I of
subchapter B of chapter 68 of such Code is amended by inserting after
the item relating to section 6707 the following:
``Sec. 6707A. Penalty for failure to include tax shelter information on
return.''
SEC. 206. REGISTRATION OF CERTAIN TAX SHELTERS WITHOUT CORPORATE
PARTICIPANTS.
Section 6111(d)(1)(A) of the Internal Revenue Code of 1986
(relating to certain confidential arrangements treated as tax shelters)
is amended by striking ``for a direct or indirect participant which is
a corporation''.
SEC. 207. EFFECTIVE DATES.
(a) In General.--Except as provided in subsections (b) and (c), the
amendments made by this title shall apply to transactions after the
date of the enactment of this Act.
(b) Section 201.--The amendments made by subsections (b) and (c) of
section 201 shall apply to taxable years ending after the date of the
enactment of this Act.
(c) Section 202.--The amendments made by subsection (a) of section
202 shall apply to any tax avoidance strategy (as defined in section
6700(c) of the Internal Revenue Code of 1986, as amended by this title)
interests in which are offered to potential participants after the date
of the enactment of this Act.
(d) Section 206.--The amendment made by section 206 shall apply to
any tax shelter interest which is offered to potential participants
after the date of the enactment of this Act.
TITLE III--LIMITATIONS ON IMPORTATION OR TRANSFER OF BUILT-IN LOSSES
SEC. 301. LIMITATION ON IMPORTATION OF BUILT-IN LOSSES.
(a) In General.--Section 362 of the Internal Revenue Code of 1986
(relating to basis to corporations) is amended by adding at the end the
following new subsection:
``(e) Limitation on Importation of Built-in Losses.--
``(1) In general.--If in any transaction described in
subsection (a) or (b) there would (but for this subsection) be
an importation of a net built-in loss, the basis of each
property described in paragraph (2) which is acquired in such
transaction shall (notwithstanding subsections (a) and (b)) be
its fair market value immediately after such transaction.
``(2) Property described.--For purposes of paragraph (1),
property is described in this paragraph if--
``(A) gain or loss with respect to such property is
not subject to tax under this subtitle in the hands of
the transferor immediately before the transfer, and
``(B) gain or loss with respect to such property is
subject to such tax in the hands of the transferee
immediately after such transfer.
In any case in which the transferor is a partnership, the
preceding sentence shall be applied by treating each partner in
such partnership as holding such partner's proportionate share
of the property of such partnership.
``(3) Importation of net built-in loss.--For purposes of
paragraph (1), there is an importation of a net built-in loss
in a transaction if the transferee's aggregate adjusted bases
of property described in paragraph (2) which is transferred in
such transaction would (but for this subsection) exceed the
fair market value of such property immediately after such
transaction.''
(b) Comparable Treatment Where Liquidation.--Paragraph (1) of
section 334(b) of such Code (relating to liquidation of subsidiary) is
amended to read as follows:
``(1) In general.--If property is received by a corporate
distributee in a distribution in a complete liquidation to
which section 332 applies (or in a transfer described in
section 337(b)(1)), the basis of such property in the hands of
such distributee shall be the same as it would be in the hands
of the transferor; except that the basis of such property in
the hands of such distributee shall be the fair market value of
the property at the time of the distribution--
``(A) in any case in which gain or loss is
recognized by the liquidating corporation with respect
to such property, or
``(B) in any case in which the liquidating
corporation is a foreign corporation, the corporate
distributee is a domestic corporation, and the
corporate distributee's aggregate adjusted bases of
property described in section 362(e)(2) which is
distributed in such liquidation would (but for this
subparagraph) exceed the fair market value of such
property immediately after such liquidation.''
(c) Effective Date.--The amendments made by this section shall
apply to transactions after the date of the enactment of this Act.
SEC. 302. DISALLOWANCE OF PARTNERSHIP LOSS TRANSFERS.
(a) Treatment of Contributed Property With Built-In Loss.--
Paragraph (1) of section 704(c) of the Internal Revenue Code of 1986 is
amended by striking ``and'' at the end of subparagraph (A), by striking
the period at the end of subparagraph (B) and inserting ``, and'', and
by adding at the end the following:
``(C) if any property so contributed has a built-in
loss--
``(i) such built-in loss shall be taken
into account only in determining the amount of
items allocated to the contributing partner,
and
``(ii) except as provided in regulations,
in determining the amount of items allocated to
other partners, the basis of the contributed
property in the hands of the partnership shall
be treated as being equal to its fair market
value immediately after the contribution.
For purposes of subparagraph (C), the term `built-in loss'
means the excess of the adjusted basis of the property over its
fair market value immediately after the contribution.''
(b) Adjustment to Basis of Partnership Property on Transfer of
Partnership Interest If There Is Substantial Built-In Loss.--
(1) Adjustment required.--Subsection (a) of section 743 of
such Code (relating to optional adjustment to basis of
partnership property) is amended by inserting before the period
``or unless the partnership has a substantial built-in loss
immediately after such transfer''.
(2) Adjustment.--Subsection (b) of section 743 of such Code
is amended by inserting ``or with respect to which there is a
substantial built-in loss immediately after such transfer''
after ``section 754 is in effect''.
(3) Substantial built-in loss.--Section 743 of such Code is
amended by adding at the end the following new subsection:
``(d) Substantial Built-In Loss.--For purposes of this section, a
partnership has a substantial built-in loss with respect to a transfer
of an interest in a partnership if the transferee partner's
proportionate share of the adjusted basis of the partnership property
exceeds 110 percent of the basis of such partner's interest in the
partnership.''
(4) Clerical amendments.--
(A) The section heading for section 743 of such
Code is amended to read as follows:
``SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROPERTY WHERE SECTION
754 ELECTION OR SUBSTANTIAL BUILT-IN LOSS.''
(B) The table of sections for subpart C of part II
of subchapter K of chapter 1 of such Code is amended by
striking the item relating to section 743 and inserting
the following new item:
``Sec. 743. Adjustment to basis of
partnership property where
section 754 election or
substantial built-in loss.''
(c) Adjustment to Basis of Undistributed Partnership Property if
There Is Substantial Basis Reduction.--
(1) Adjustment required.--Subsection (a) of section 734 of
such Code (relating to optional adjustment to basis of
undistributed partnership property) is amended by inserting
before the period ``or unless there is a substantial basis
reduction''.
(2) Adjustment.--Subsection (b) of section 734 of such Code
is amended by inserting ``or unless there is a substantial
basis reduction'' after ``section 754 is in effect''.
(3) Substantial basis reduction.--Section 734 of such Code
is amended by adding at the end the following new subsection:
``(d) Substantial Basis Reduction.--For purposes of this section,
there is a substantial basis reduction with respect to a distribution
if the sum of the amounts described in subparagraphs (A) and (B) of
subsection (b)(2) exceeds 10 percent of the aggregate adjusted basis of
partnership property immediately after the distribution.''
(4) Clerical amendments.--
(A) The section heading for section 734 of such
Code is amended to read as follows:
``SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED PARTNERSHIP PROPERTY
WHERE SECTION 754 ELECTION OR SUBSTANTIAL BASIS
REDUCTION.''
(B) The table of sections for subpart B of part II
of subchapter K of chapter 1 of such Code is amended by
striking the item relating to section 734 and inserting
the following new item:
``Sec. 734. Adjustment to basis of
undistributed partnership
property where section 754
election or substantial basis
reduction.''
(d) Effective Dates.--
(1) Subsection (a).--The amendment made by subsection (a)
shall apply to contributions made after the date of the
enactment of this Act.
(2) Subsection (b).--The amendments made by subsection (a)
shall apply to transfers after the date of the enactment of
this Act.
(3) Subsection (c).--The amendments made by subsection (a)
shall apply to distributions after the date of the enactment of
this Act.
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