[Congressional Bills 107th Congress]
[From the U.S. Government Publishing Office]
[S. 2339 Introduced in Senate (IS)]







107th CONGRESS
  2d Session
                                S. 2339

   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, to curb tax abuses involving identified 
                  tax havens, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             April 26, 2002

   Mr. Kerry introduced the following bill; which was read twice and 
                  referred to the Committee on Finance

_______________________________________________________________________

                                 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, to curb tax abuses involving identified 
                  tax havens, 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 ``Tax Haven and Abusive Tax Shelter 
Reform Act of 2002''.

         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 (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 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(n)(1)) for the transaction 
                giving rise to the claimed benefit or the transaction 
                was not respected under section 7701(n)(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 the Internal Revenue Code of 1986 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 the Internal Revenue Code of 1986 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 the Internal Revenue Code of 1986 
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 the Internal Revenue 
Code of 1986 (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 new paragraph:
            ``(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 the Internal Revenue Code of 1986 (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 the Internal Revenue Code of 1986 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 the Internal Revenue Code of 1986 is 
amended by inserting after the item relating to section 6707 the 
following in item:

``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--DISCOURAGING USE OF IDENTIFIED TAX HAVENS

SEC. 301. REPORTING OF PAYMENTS TO PERSONS IN IDENTIFIED TAX HAVENS.

    (a) In General.--Subpart A of part III of subchapter A of chapter 
61 of the Internal Revenue Code of 1986 is amended by inserting after 
section 6038C the following new section:

``SEC. 6038D. PAYMENTS TO PERSONS IN IDENTIFIED TAX HAVENS.

    ``(a) In General.--Each United States person who transfers money or 
other property directly or indirectly to any identified tax haven or to 
any person who is a resident of any identified tax haven shall furnish 
to the Secretary, at such time and in such manner as the Secretary 
shall by regulations prescribe, such information with respect to such 
transfer as the Secretary may require in such regulations.
    ``(b) Exceptions.--Subsection (a) shall not apply to a transfer by 
a United States person if--
            ``(1) the transferee certifies to such person that 
        information about such transfer shall be made available (in 
        such manner and at such time as the Secretary shall prescribe) 
        to the Secretary on request, or
            ``(2) 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 
paragraph (2).
    ``(c) Identified Tax Haven.--For purposes of this section--
            ``(1) In general.--The term `identified tax haven' means 
        any foreign jurisdiction which is on the list maintained by the 
Secretary as being a jurisdiction--
                    ``(A) which imposes no or nominal taxation either 
                generally or on specified classes of income, and
                    ``(B) has strict confidentiality rules and 
                practices, or has ineffective information exchange 
                practices, which effectively limit or restrict the 
                ability of the United States to obtain information 
                relevant to the imposition of taxes under this title.
            ``(2) Ineffective information exchange practices.--For 
        purposes of paragraph (1), a jurisdiction shall be treated as 
        having ineffective information exchange practices during any 
        period during which the Secretary determines that the exchange 
        of information between the United States and such jurisdiction 
        is inadequate to prevent evasion or avoidance of the United 
        States income tax by United States persons or to permit the 
        effective enforcement of the taxes imposed by this title.
    ``(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 appropriate to carry out 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. Payments to persons in identified tax havens.''
    (c) Effective Date.--The amendments made by this section shall 
apply to transfers after the date of the enactment of this Act.
    (d) Reports.--The Secretary of the Treasury shall submit annual 
reports to the Congress on the application of section 6038D of the 
Internal Revenue Code of 1986 (as added by this section).

SEC. 302. REDUCTION OF CERTAIN TAX BENEFITS WITH RESPECT TO INCOME FROM 
              IDENTIFIED TAX HAVENS.

    (a) Limitation on Deferral.--
            (1) In general.--Subsection (a) of section 952 of the 
        Internal Revenue Code of 1986 (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 of such Code is 
        amended by adding at the end the following new subsection:
    ``(e) 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 the aggregate income 
                for the taxable year which is from sources outside the 
                United States.
        Rules similar to the regulations under section 999(c) shall 
        apply for purposes of this paragraph.
            ``(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 is 
        an identified tax haven (as defined in section 6038D(c)).''
    (b) Denial of Foreign Tax Credit.--Section 901 of such Code 
(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., With Respect to 
Identified Tax Havens.--
            ``(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 is an identified tax haven (as 
                defined in 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.

SEC. 303. FAILURE TO REPORT INTERESTS IN FOREIGN FINANCIAL ACCOUNTS.

    (a) In General.--Part I of subchapter B of chapter 68 of the 
Internal Revenue Code of 1986 (relating to additions to tax, additional 
amounts, and assessable penalties) is amended by adding at the end the 
following new section:

``SEC. 6717. FAILURE TO MEET REQUIREMENTS WITH RESPECT TO INTERESTS IN 
              FOREIGN FINANCIAL ACCOUNTS.

    ``(a) Imposition of Penalty.--Any person who fails to keep any 
records, or fails to file any report, required under section 5314 of 
title 31, United States Code, with respect to any foreign financial 
agency transaction shall pay a penalty of $5,000 for each such failure.
    ``(b) Reasonable Cause Exception.--No penalty shall be imposed 
under subsection (a) with respect to any failure if it is shown that 
such failure is due to reasonable cause.
    ``(c) Penalty in Addition to Other Penalties.--The penalty imposed 
under subsection (a) shall be in addition to any other penalty imposed 
by law, including any penalty imposed under section 5320(a)(5) or 5321 
of title 31, United States Code.
    ``(d) Deficiency Procedures Not To Apply.--Subchapter B of chapter 
63 (relating to deficiency procedures for income, estate, gift, any 
certain excise taxes) shall not apply in respect of the assessment or 
collection of any penalty imposed under subsection (a).''
    (b) Conforming Amendment.--The table of sections for part I of 
subchapter B of chapter 68 of such Code is amended by adding at the end 
the following new item:

``Sec. 6717. Failure to meet requirements with respect to interests in 
                            foreign financial accounts.''
    (c) Effective Date.--The amendments made by this section shall 
apply to failures occurring on or after the date of the enactment of 
this Act.

SEC. 304. STUDY OF OFFSHORE TAX HAVENS.

    (a) In General.--The Joint Committee on Taxation shall conduct a 
study of the use of offshore tax havens by United States taxpayers to 
evade and avoid Federal income taxes. Such study shall include an 
examination of--
            (1) mechanisms used by United States taxpayers to illegally 
        hide income and assets from detection,
            (2) the extent to which foreign tax, banking, and financial 
        practices encourage noncompliance with Federal income tax laws,
            (3) the status and effectiveness of information exchange 
        agreements between the United States and tax haven 
        jurisdictions,
            (4) the status and effectiveness of efforts by the 
        Organization for Economic Cooperation and Development (OECD) to 
        identify and eliminate harmful tax practices in tax haven 
        jurisdictions,
            (5) the effectiveness of--
                    (A) efforts by Internal Revenue Service to identify 
                sources of illegal offshore activity, and
                    (B) Federal civil and criminal penalties designed 
                to deter offshore tax evasion, and
            (6) the economic and revenue implications of tax avoidance 
        activity.
    (b) Report.--The Joint Committee on Taxation shall submit a report 
of the results of the study conducted under subsection (a) to the 
Committee on Ways and Means of the House of Representatives and the 
Committee on Finance of the Senate not later than 12 months after the 
date of the enactment of this Act. Such report shall include any 
recommendations, including recommendations for legislative changes, as 
the Joint Committee on Taxation determines appropriate to curb the 
spread of offshore tax avoidance and evasion.
                                 <all>