[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1661 Introduced in House (IH)]







108th CONGRESS
  1st Session
                                H. R. 1661

   To provide balanced taxpayer protections in tax administrations, 
including elimination of abusive tax strategies, simplification of the 
          earned income tax credit, and taxpayer protections.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             April 8, 2003

Mr. Rangel (for himself, Mr. Stark, Mr. Matsui, Mr. Levin, Mr. Cardin, 
     Mr. McDermott, Mr. Kleczka, Mr. Lewis of Georgia, Mr. Neal of 
 Massachusetts, Mr. McNulty, Mr. Jefferson, Mr. Becerra, Mr. Doggett, 
  Mr. Sandlin, and Mrs. Jones of Ohio) introduced the following bill; 
         which was referred to the Committee on Ways and Means

_______________________________________________________________________

                                 A BILL


 
   To provide balanced taxpayer protections in tax administrations, 
including elimination of abusive tax strategies, simplification of the 
          earned income tax credit, and taxpayer protections.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; REFERENCE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Taxpayer and 
Fairness Protection Act of 2003''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.
    (c) Table of Contents.--The table of contents for this Act is as 
follows:

Sec. 1. Short title; reference; table of contents.
             TITLE I--ELIMINATION OF ABUSIVE TAX STRATEGIES

Sec. 101. Findings and purpose.
                        Subtitle A--Tax Shelters

          Part I--Provisions Designed to Curtail Tax Shelters

Sec. 111. Clarification of economic substance doctrine.
Sec. 112. Penalty for failing to disclose reportable transaction.
Sec. 113. Accuracy-related penalty for listed transactions and other 
                            reportable transactions having a 
                            significant tax avoidance purpose.
Sec. 114. Penalty for understatements attributable to transactions 
                            lacking economic substance, etc.
Sec. 115. Modifications of substantial understatement penalty for 
                            nonreportable transactions.
Sec. 116. Tax shelter exception to confidentiality privileges relating 
                            to taxpayer communications.
Sec. 117. Disclosure of reportable transactions.
Sec. 118. Modifications to penalty for failure to register tax 
                            shelters.
Sec. 119. Modification of penalty for failure to maintain lists of 
                            investors.
Sec. 120. Modification of actions to enjoin certain conduct related to 
                            tax shelters and reportable transactions.
Sec. 121. Understatement of taxpayer's liability by income tax return 
                            preparer.
Sec. 122. Penalty on failure to report interests in foreign financial 
                            accounts.
Sec. 123. Frivolous tax submissions.
Sec. 124. Regulation of individuals practicing before the Department of 
                            Treasury.
Sec. 125. Penalty on promoters of tax shelters.
Sec. 126. Statute of limitations for taxable years for which listed 
                            transactions not reported.
Sec. 127. Denial of deduction for interest on underpayments 
                            attributable to nondisclosed reportable and 
                            noneconomic substance transactions.
                       Part II--Other Provisions

Sec. 131. Limitation on transfer or importation of built-in losses.
Sec. 132. Disallowance of certain partnership loss transfers.
Sec. 133. No reduction of basis under section 734 in stock held by 
                            partnership in corporate partner.
Sec. 134. Repeal of special rules for FASITS.
Sec. 135. Expanded disallowance of deduction for interest on 
                            convertible debt.
Sec. 136. Expanded authority to disallow tax benefits under section 
                            269.
Sec. 137. Modifications of certain rules relating to controlled foreign 
                            corporations.
Sec. 138. Basis for determining loss always reduced by nontaxed portion 
                            of dividends.
Sec. 139. Affirmation of consolidated return regulation authority.
Subtitle B--Prevention of corporate expatriation to avoid United States 
                               income tax

Sec. 151. Prevention of corporate expatriation to avoid United States 
                            income tax.
          TITLE II--SIMPLIFICATION OF EARNED INCOME TAX CREDIT

Sec. 201. Simplification of earned income tax credit.
         TITLE III--TAXPAYER PROTECTIONS AND IRS ACCOUNTABILITY

                Subtitle A--Penalty and Interest Reforms

Sec. 301. Failure to pay estimated tax penalty converted to interest 
                            charge on accumulated unpaid balance.
Sec. 302. Abatement of interest.
Sec. 303. Deposits made to suspend running of interest on potential 
                            underpayments.
Sec. 304. Expansion of interest netting for individuals.
Sec. 305. Waiver of certain penalties for first-time unintentional 
                            minor errors.
Sec. 306. Frivolous tax submissions.
Sec. 307. Clarification of application of Federal tax deposit penalty.
             Subtitle B--Fairness of Collection Procedures

Sec. 311. Partial payment of tax liability in installment agreements.
Sec. 312. Extension of time for return of property.
Sec. 313. Individuals held harmless on wrongful levy, etc., on 
                            individual retirement plan.
Sec. 314. Seven-day threshold on tolling of statute of limitations 
                            during tax review.
Sec. 315. Study of liens and levies.
                 Subtitle C--Tax Administration Reforms

Sec. 331. Revisions relating to termination of employment of Internal 
                            Revenue Service employees for misconduct.
Sec. 332. Confirmation of authority of tax court to apply doctrine of 
                            equitable recoupment.
Sec. 333. Jurisdiction of Tax Court over collection due process cases.
Sec. 334. Office of Chief Counsel review of offers in compromise.
Sec. 335. Access of National Taxpayer Advocate to independent legal 
                            counsel.
Sec. 336. Payment of motor fuel excise tax refunds by direct deposit.
Sec. 337. Family business tax simplification.
Sec. 338. Suspension of tax-exempt status of terrorist organizations.
Sec. 339. Tax refund anticipation loans.
Sec. 340. Fairness in tax audit coverage.
               Subtitle D--Confidentiality and Disclosure

Sec. 341. Collection activities with respect to joint return 
                            disclosable to either spouse based on oral 
                            request.
Sec. 342. Taxpayer representatives not subject to examination on sole 
                            basis of representation of taxpayers.
Sec. 343. Disclosure in judicial or administrative tax proceedings of 
                            return and return information of persons 
                            who are not party to such proceedings.
Sec. 344. Prohibition of disclosure of taxpayer identification 
                            information with respect to disclosure of 
                            accepted offers-in-compromise.
Sec. 345. Compliance by contractors with confidentiality safeguards.
Sec. 346. Higher standards for requests for and consents to disclosure.
Sec. 347. Notice to taxpayer concerning administrative determination of 
                            browsing; annual report.
Sec. 348. Expanded disclosure in emergency circumstances.
Sec. 349. Disclosure of taxpayer identity for tax refund purposes.
Sec. 350. Disclosure to State officials of proposed actions related to 
                            section 501(c)(3) organizations.
Sec. 351. Confidentiality of taxpayer communications with the Office of 
                            the Taxpayer Advocate.
                       Subtitle E--Miscellaneous

Sec. 361. Clarification of definition of church tax inquiry.
Sec. 362. Expansion of declaratory judgment remedy to tax-exempt 
                            organizations.
Sec. 363. Employee misconduct report to include summary of complaints 
                            by category.
Sec. 364. Annual report on awards of costs and certain fees in 
                            administrative and court proceedings.
Sec. 365. Annual report on abatement of penalties.
Sec. 366. Better means of communicating with taxpayers.
Sec. 367. Explanation of statute of limitations and consequences of 
                            failure to file.
Sec. 368. Amendment to Treasury auction reforms.
Sec. 369. Enrolled agents.
Sec. 370. Financial management service fees.
Sec. 371. Extension of Internal Revenue Service user fees.
                Subtitle F--Low-Income Taxpayer Clinics

Sec. 381. Low-income taxpayer clinics.
Sec. 382. Matching grants to low income return preparation clinics.
      Subtitle G--Federal-State Unemployment Assistance Agreements

Sec. 391. Applicability of certain Federal-State Agreements relating to 
                            unemployment assistance.

             TITLE I--ELIMINATION OF ABUSIVE TAX STRATEGIES

SEC. 101. 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 title 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.

                        Subtitle A--Tax Shelters

          Part I--Provisions Designed to Curtail Tax Shelters

SEC. 111. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

    (a) In General.--Section 7701 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 tax 
                                effects and, if there is any Federal 
                                tax effects, also apart from any 
                                foreign, State, or local tax effects) 
                                the taxpayer's economic position, and
                                    ``(II) the taxpayer has a 
                                substantial nontax purpose for entering 
                                into such transaction and the 
                                transaction is a reasonable means of 
                                accomplishing such purpose.
                            ``(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 is substantially in excess of the present 
                value of the anticipated economic returns of the person 
                lending the money or providing the financial capital. A 
                public offering shall be treated as a borrowing, or an 
                acquisition of financial capital, from a tax-
                indifferent party if it is reasonably expected that at 
                least 50 percent of the offering will be placed with 
                tax-indifferent parties.
                    ``(B) Artificial income shifting and basis 
                adjustments.--The form of a transaction with a tax-
                indifferent party shall not be respected if--
                            ``(i) it results in an allocation of income 
                        or gain to the tax-indifferent party in excess 
                        of such party's economic income or gain, or
                            ``(ii) it results in a basis adjustment or 
                        shifting of basis on account of overstating the 
                        income or gain of the tax-indifferent party.
            ``(3) Definitions and special rules.--For purposes of this 
        subsection--
                    ``(A) Economic substance doctrine.--The term 
                `economic substance doctrine' means the common law 
                doctrine under which tax benefits under subtitle A with 
                respect to a transaction are not allowable if the 
                transaction does not have economic substance or lacks a 
                business purpose.
                    ``(B) Tax-indifferent party.--The term `tax-
                indifferent party' means any person or entity not 
                subject to tax imposed by subtitle A. A person shall be 
                treated as a tax-indifferent party with respect to a 
                transaction if the items taken into account with 
                respect to the transaction have no substantial impact 
                on such person's liability under subtitle A.
                    ``(C) Substantial nontax purpose.--In applying 
                subclause (II) of paragraph (1)(B)(i), a purpose of 
achieving a financial accounting benefit shall not be taken into 
account in determining whether a transaction has a substantial nontax 
purpose if the origin of such financial accounting benefit is a 
reduction of income tax.
                    ``(D) 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.
                    ``(E) 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, and the requirements of this 
        subsection shall be construed as being in addition to any such 
        other rule of law.
            ``(5) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry out the 
        purposes of this subsection. Such regulations may include 
        exemptions from the application of this subsection.''
    (b) Effective Date.--The amendments made by this section shall 
apply to transactions entered into after February 13, 2003.

SEC. 112. PENALTY FOR FAILING TO DISCLOSE REPORTABLE TRANSACTION.

    (a) In General.--Part I of subchapter B of chapter 68 (relating to 
assessable penalties) is amended by inserting after section 6707 the 
following new section:

``SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORTABLE TRANSACTION 
              INFORMATION WITH RETURN OR STATEMENT.

    ``(a) Imposition of Penalty.--Any person who fails to include on 
any return or statement any information with respect to a reportable 
transaction which is required under section 6011 to be included with 
such return or statement shall pay a penalty in the amount determined 
under subsection (b).
    ``(b) Amount of Penalty.--
            ``(1) In general.--Except as provided in paragraphs (2) and 
        (3), the amount of the penalty under subsection (a) shall be 
        $50,000.
            ``(2) Listed transaction.--The amount of the penalty under 
        subsection (a) with respect to a listed transaction shall be 
        $100,000.
            ``(3) Increase in penalty for large entities and high net 
        worth individuals.--
                    ``(A) In general.--In the case of a failure under 
                subsection (a) by--
                            ``(i) a large entity, or
                            ``(ii) a high net worth individual,
                the penalty under paragraph (1) or (2) shall be twice 
                the amount determined without regard to this paragraph.
                    ``(B) Large entity.--For purposes of subparagraph 
                (A), the term `large entity' means, with respect to any 
                taxable year, a person (other than a natural person) 
                with gross receipts in excess of $10,000,000 for the 
                taxable year in which the reportable transaction occurs 
                or the preceding taxable year. Rules similar to the 
                rules of paragraph (2) and subparagraphs (B), (C), and 
                (D) of paragraph (3) of section 448(c) shall apply for 
                purposes of this subparagraph.
                    ``(C) High net worth individual.--For purposes of 
                subparagraph (A), the term `high net worth individual' 
                means, with respect to a reportable transaction, a 
                natural person whose net worth exceeds $2,000,000 
                immediately before the transaction.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Reportable transaction.--The term `reportable 
        transaction' means any transaction with respect to which 
        information is required to be included with a return or 
        statement because, as determined under regulations prescribed 
        under section 6011, such transaction is of a type which the 
        Secretary determines as having a potential for tax avoidance or 
        evasion.
            ``(2) Listed transaction.--Except as provided in 
        regulations, the term `listed transaction' means 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.
    ``(d) Authority To Rescind Penalty.--
            ``(1) In general.--The Commissioner of Internal Revenue may 
        rescind all or any portion of any penalty imposed by this 
        section with respect to any violation if--
                    ``(A) the violation is with respect to a reportable 
                transaction other than a listed transaction,
                    ``(B) the person on whom the penalty is imposed has 
                a history of complying with the requirements of this 
                title,
                    ``(C) it is shown that the violation is due to an 
                unintentional mistake of fact;
                    ``(D) imposing the penalty would be against equity 
                and good conscience, and
                    ``(E) rescinding the penalty would promote 
                compliance with the requirements of this title and 
                effective tax administration.
            ``(2) Discretion.--The exercise of authority under 
        paragraph (1) shall be at the sole discretion of the 
        Commissioner and may be delegated only to the head of the 
        Office of Tax Shelter Analysis. The Commissioner, in the 
        Commissioner's sole discretion, may establish a procedure to 
        determine if a penalty should be referred to the Commissioner 
        or the head of such Office for a determination under paragraph 
        (1).
            ``(3) No appeal.--Notwithstanding any other provision of 
        law, any determination under this subsection may not be 
        reviewed in any administrative or judicial proceeding.
            ``(4) Records.--If a penalty is rescinded under paragraph 
        (1), the Commissioner shall place in the file in the Office of 
        the Commissioner the opinion of the Commissioner or the head of 
        the Office of Tax Shelter Analysis with respect to the 
        determination, including--
                    ``(A) the facts and circumstances of the 
                transaction,
                    ``(B) the reasons for the rescission, and
                    ``(C) the amount of the penalty rescinded.
            ``(5) Report.--The Commissioner shall each year report to 
        the Committee on Ways and Means of the House of Representatives 
        and the Committee on Finance of the Senate--
                    ``(A) a summary of the total number and aggregate 
                amount of penalties imposed, and rescinded, under this 
                section, and
                    ``(B) a description of each penalty rescinded under 
                this subsection and the reasons therefor.
    ``(e) Penalty Reported to SEC.--In the case of a person--
            ``(1) which is required to file periodic reports under 
        section 13 or 15(d) of the Securities Exchange Act of 1934 or 
        is required to be consolidated with another person for purposes 
        of such reports, and
            ``(2) which--
                    ``(A) is required to pay a penalty under this 
                section with respect to a listed transaction,
                    ``(B) is required to pay a penalty under section 
                6662A with respect to any reportable transaction at a 
                rate prescribed under section 6662A(c), or
                    ``(C) is required to pay a penalty under section 
                6662B with respect to any noneconomic substance 
                transaction,
the requirement to pay such penalty shall be disclosed in such reports 
filed by such person for such periods as the Secretary shall specify. 
Failure to make a disclosure in accordance with the preceding sentence 
shall be treated as a failure to which the penalty under subsection 
(b)(2) applies.
    ``(f) Coordination With Other Penalties.--The penalty imposed by 
this section is in addition to any penalty imposed under this title.''
    (b) Conforming Amendment.--The table of sections for part I of 
subchapter B of chapter 68 is amended by inserting after the item 
relating to section 6707 the following:

                              ``Sec. 6707A. Penalty for failure to 
                                        include reportable transaction 
                                        information with return or 
                                        statement.''
    (c) Effective Date.--The amendments made by this section shall 
apply to returns and statements the due date for which is after the 
date of the enactment of this Act.

SEC. 113. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS AND OTHER 
              REPORTABLE TRANSACTIONS HAVING A SIGNIFICANT TAX 
              AVOIDANCE PURPOSE.

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

``SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERSTATEMENTS 
              WITH RESPECT TO REPORTABLE TRANSACTIONS.

    ``(a) Imposition of Penalty.--If a taxpayer has a reportable 
transaction understatement for any taxable year, there shall be added 
to the tax an amount equal to 20 percent of the amount of such 
understatement.
    ``(b) Reportable Transaction Understatement.--For purposes of this 
section--
            ``(1) In general.--The term `reportable transaction 
        understatement' means the sum of--
                    ``(A) the product of--
                            ``(i) the amount of the increase (if any) 
                        in taxable income which results from a 
                        difference between the proper tax treatment of 
                        an item to which this section applies and the 
                        taxpayer's treatment of such item (as shown on 
                        the taxpayer's return of tax), and
                            ``(ii) the highest rate of tax imposed by 
                        section 1 (section 11 in the case of a taxpayer 
                        which is a corporation), and
                    ``(B) the amount of the decrease (if any) in the 
                aggregate amount of credits determined under subtitle A 
                which results from a difference between the taxpayer's 
                treatment of an item to which this section applies (as 
                shown on the taxpayer's return of tax) and the proper 
                tax treatment of such item.
        For purposes of subparagraph (A), any reduction of the excess 
        of deductions allowed for the taxable year over gross income 
        for such year, and any reduction in the amount of capital 
        losses which would (without regard to section 1211) be allowed 
        for such year, shall be treated as an increase in taxable 
        income.
            ``(2) Items to which section applies.--This section shall 
        apply to any item which is attributable to--
                    ``(A) any listed transaction, and
                    ``(B) any reportable transaction (other than a 
                listed transaction) if a significant purpose of such 
                transaction is the avoidance or evasion of Federal 
                income tax.
    ``(c) Higher Penalty for Nondisclosed Listed and Other Avoidance 
Transactions.--
            ``(1) In general.--Subsection (a) shall be applied by 
        substituting `30 percent' for `20 percent' with respect to the 
        portion of any reportable transaction understatement with 
        respect to which the requirement of section 6664(d)(2)(A) is 
        not met.
            ``(2) Rules applicable to compromise of penalty.--
                    ``(A) 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 paragraph (1) applies, only the 
                Commissioner of Internal Revenue may compromise all or 
                any portion of such penalty.
                    ``(B) Applicable rules.--The rules of paragraphs 
                (3), (4), and (5) of section 6707A(d) shall apply for 
                purposes of subparagraph (A).
    ``(d) Definitions of Reportable and Listed Transactions.--For 
purposes of this section, the terms `reportable transaction' and 
`listed transaction' have the respective meanings given to such terms 
by section 6707A(c).
    ``(e) Special Rules.--
            ``(1) Coordination with penalties, etc., on other 
        understatements.--In the case of an understatement (as defined 
        in section 6662(d)(2))--
                    ``(A) the amount of such understatement (determined 
                without regard to this paragraph) shall be increased by 
the aggregate amount of reportable transaction understatements and 
noneconomic substance transaction understatements for purposes of 
determining whether such understatement is a substantial understatement 
under section 6662(d)(1), and
                    ``(B) the addition to tax under section 6662(a) 
                shall apply only to the excess of the amount of the 
                substantial understatement (if any) after the 
                application of subparagraph (A) over the aggregate 
                amount of reportable transaction understatements and 
                noneconomic substance transaction understatements.
            ``(2) Coordination with other penalties.--
                    ``(A) Application of fraud penalty.--References to 
                an underpayment in section 6663 shall be treated as 
                including references to a reportable transaction 
                understatement and a noneconomic substance transaction 
                understatement.
                    ``(B) No double penalty.--This section shall not 
                apply to any portion of an understatement on which a 
                penalty is imposed under section 6662B or 6663.
            ``(3) Special rule for amended returns.--Except as provided 
        in regulations, in no event shall any tax treatment included 
        with an amendment or supplement to a return of tax be taken 
        into account in determining the amount of any reportable 
        transaction understatement or noneconomic substance transaction 
        understatement if the amendment or supplement is filed after 
        the earlier of the date the taxpayer is first contacted by the 
        Secretary regarding the examination of the return or such other 
        date as is specified by the Secretary.
            ``(4) Noneconomic substance transaction understatement.--
        For purposes of this subsection, the term `noneconomic 
        substance transaction understatement' has the meaning given 
        such term by section 6662B(c).
            ``(5) Cross reference.--

                                ``For reporting of section 6662A(c) 
penalty to the Securities and Exchange Commission, see section 
6707A(e).''
    (b) Determination of Other Understatements.--Subparagraph (A) of 
section 6662(d)(2) is amended by adding at the end the following flush 
sentence:
                ``The excess under the preceding sentence shall be 
                determined without regard to items to which section 
                6662A applies and without regard to items with respect 
                to which a penalty is imposed by section 6662B.''
    (c) Reasonable Cause Exception.--
            (1) In general.--Section 6664 is amended by adding at the 
        end the following new subsection:
    ``(d) Reasonable Cause Exception for Reportable Transaction 
Understatements.--
            ``(1) In general.--No penalty shall be imposed under 
        section 6662A with respect to any portion of a reportable 
        transaction understatement if it is shown that there was a 
        reasonable cause for such portion and that the taxpayer acted 
        in good faith with respect to such portion.
            ``(2) Special rules.--Paragraph (1) shall not apply to any 
        reportable transaction understatement unless--
                    ``(A) the relevant facts affecting the tax 
                treatment of the item are adequately disclosed in 
                accordance with the regulations prescribed under 
                section 6011,
                    ``(B) there is or was substantial authority for 
                such treatment, and
                    ``(C) the taxpayer reasonably believed that such 
                treatment was more likely than not the proper 
                treatment.
        A taxpayer failing to adequately disclose in accordance with 
        section 6011 shall be treated as meeting the requirements of 
        subparagraph (A) if the penalty for such failure was rescinded 
        under section 6707A(d).
            ``(3) Rules relating to reasonable belief.--For purposes of 
        paragraph (2)(C)--
                    ``(A) In general.--A taxpayer shall be treated as 
                having a reasonable belief with respect to the tax 
                treatment of an item only if such belief--
                            ``(i) is based on the facts and law that 
                        exist at the time the return of tax which 
                        includes such tax treatment is filed, and
                            ``(ii) relates solely to the taxpayer's 
                        chances of success on the merits of such 
                        treatment and does not take into account the 
                        possibility that a return will not be audited, 
                        such treatment will not be raised on audit, or 
                        such treatment will be resolved through 
                        settlement if it is raised.
                    ``(B) Certain opinions may not be relied upon.--
                            ``(i) In general.--An opinion of a tax 
                        advisor may not be relied upon to establish the 
                        reasonable belief of a taxpayer if--
                                    ``(I) the tax advisor is described 
                                in clause (ii), or
                                    ``(II) the opinion is described in 
                                clause (iii).
                            ``(ii) Disqualified tax advisors.--A tax 
                        advisor is described in this clause if the tax 
                        advisor--
                                    ``(I) is a material advisor (within 
                                the meaning of section 6111(b)(1)) who 
                                participates in the organization, 
                                management, promotion, or sale of the 
                                transaction or who is related (within 
                                the meaning of section 267(b) or 
                                707(b)(1)) to any person who so 
                                participates,
                                    ``(II) is compensated directly or 
                                indirectly by a material advisor with 
                                respect to the transaction,
                                    ``(III) has a fee arrangement with 
                                respect to the transaction which is 
                                contingent on all or part of the 
                                intended tax benefits from the 
                                transaction being sustained, or
                                    ``(IV) as determined under 
                                regulations prescribed by the 
                                Secretary, has a continuing financial 
                                interest with respect to the 
                                transaction.
                            ``(iii) Disqualified opinions.--For 
                        purposes of clause (i), an opinion is 
                        disqualified if the opinion--
                                    ``(I) is based on unreasonable 
                                factual or legal assumptions (including 
                                assumptions as to future events),
                                    ``(II) unreasonably relies on 
                                representations, statements, findings, 
                                or agreements of the taxpayer or any 
                                other person,
                                    ``(III) does not identify and 
                                consider all relevant facts, or
                                    ``(IV) fails to meet any other 
                                requirement as the Secretary may 
                                prescribe.''
            (2) Conforming amendment.--The heading for subsection (c) 
        of section 6664 is amended by inserting ``for Underpayments'' 
        after ``Exception''.
    (d) Conforming Amendments.--
            (1) Subparagraph (C) of section 461(i)(3) is amended by 
        striking ``section 6662(d)(2)(C)(iii)'' and inserting ``section 
        1274(b)(3)(C)''.
            (2) Paragraph (3) of section 1274(b) is amended--
                    (A) by striking ``(as defined in section 
                6662(d)(2)(C)(iii))'' in subparagraph (B)(i), and
                    (B) by adding at the end the following new 
                subparagraph:
                    ``(C) Tax shelter.--For purposes of subparagraph 
                (B), the term `tax shelter' means--
                            ``(i) a partnership or other entity,
                            ``(ii) any investment plan or arrangement, 
                        or
                            ``(iii) any other plan or arrangement,
                if a significant purpose of such partnership, entity, 
                plan, or arrangement is the avoidance or evasion of 
                Federal income tax.''
            (3) Section 6662(d)(2) is amended by striking subparagraphs 
        (C) and (D).
            (4) Section 6664(c)(1) is amended by striking ``this part'' 
        and inserting ``section 6662 or 6663''.
            (5) Subsection (b) of section 7525 is amended by striking 
        ``section 6662(d)(2)(C)(iii)'' and inserting ``section 
        1274(b)(3)(C)''.
            (6)(A) The heading for section 6662 is amended to read as 
        follows:

``SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERPAYMENTS.''

            (B) The table of sections for part II of subchapter A of 
        chapter 68 is amended by striking the item relating to section 
        6662 and inserting the following new items:

                              ``Sec. 6662. Imposition of accuracy-
                                        related penalty on 
                                        underpayments.
                              ``Sec. 6662A. Imposition of accuracy-
                                        related penalty on 
                                        understatements with respect to 
                                        reportable transactions.''
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after the date of the enactment of this 
Act.

SEC. 114. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS 
              LACKING ECONOMIC SUBSTANCE, ETC.

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

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

    ``(a) Imposition of Penalty.--If a taxpayer has an noneconomic 
substance transaction understatement for any taxable year, there shall 
be added to the tax an amount equal to 40 percent of the amount of such 
understatement.
    ``(b) Reduction of Penalty for Disclosed Transactions.--Subsection 
(a) shall be applied by substituting `20 percent' for `40 percent' with 
respect to the portion of any noneconomic substance transaction 
understatement with respect to which the relevant facts affecting the 
tax treatment of the item are adequately disclosed in the return or a 
statement attached to the return.
    ``(c) Noneconomic Substance Transaction Understatement.--For 
purposes of this section--
            ``(1) In general.--The term `noneconomic substance 
        transaction understatement' means any amount which would be an 
        understatement under section 6662A(b)(1) if section 6662A were 
        applied by taking into account items attributable to 
        noneconomic substance transactions rather than items to which 
        section 6662A would apply without regard to this paragraph.
            ``(2) Noneconomic substance transaction.--The term 
        `noneconomic substance transaction' means any transaction if--
                    ``(A) there is a lack of economic substance (within 
                the meaning of section 7701(m)(1)) for the transaction 
                giving rise to the claimed tax benefit or the 
                transaction was not respected under section 7701(m)(2), 
                or
                    ``(B) the transaction fails to meet the 
                requirements of any similar rule of law.
    ``(d) Rules Applicable To Compromise of Penalty.--
            ``(1) In general.--If the 1st letter of proposed deficiency 
        which allows the taxpayer an opportunity for administrative 
        review in the Internal Revenue Service Office of Appeals has 
        been sent with respect to a penalty to which this section 
        applies, only the Commissioner of Internal Revenue may 
        compromise all or any portion of such penalty.
            ``(2) Applicable rules.--The rules of paragraphs (3), (4), 
        and (5) of section 6707A(d) shall apply for purposes of 
        paragraph (1).
    ``(e) Coordination With Other Penalties.--Except as otherwise 
provided in this part, the penalty imposed by this section shall be in 
addition to any other penalty imposed by this title.
    ``(f) Cross References.--

                                ``(1) For coordination of penalty with 
understatements under section 6662 and other special rules, see section 
6662A(e).
                                ``(2) For reporting of penalty imposed 
under this section to the Securities and Exchange Commission, see 
section 6707A(e).''
    (b) 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.''
    (c) Effective Date.--The amendments made by this section shall 
apply to transactions entered into after February 13, 2003.

SEC. 115. MODIFICATIONS OF SUBSTANTIAL UNDERSTATEMENT PENALTY FOR 
              NONREPORTABLE TRANSACTIONS.

    (a) Substantial Understatement of Corporations.--Section 
6662(d)(1)(B) (relating to special rule for corporations) is amended to 
read as follows:
                    ``(B) Special rule for corporations.--In the case 
                of a corporation other than an S corporation or a 
                personal holding company (as defined in section 542), 
                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) 10 percent of the tax required to be 
                        shown on the return for the taxable year (or, 
                        if greater, $10,000), or
                            ``(ii) $10,000,000.''
    (b) Reduction for Understatement of Taxpayer Due to Position of 
Taxpayer or Disclosed Item.--
            (1) In general.--Section 6662(d)(2)(B)(i) (relating to 
        substantial authority) is amended to read as follows:
                            ``(i) the tax treatment of any item by the 
                        taxpayer if the taxpayer had reasonable belief 
                        that the tax treatment was more likely than not 
                        the proper treatment, or''.
            (2) Conforming amendment.--Section 6662(d) is amended by 
        adding at the end the following new paragraph:
            ``(3) Secretarial list.--For purposes of this subsection, 
        section 6664(d)(2), and section 6694(a)(1), the Secretary may 
        prescribe a list of positions for which the Secretary believes 
        there is not substantial authority or there is no reasonable 
        belief that the tax treatment is more likely than not 
the proper tax treatment. Such list (and any revisions thereof) shall 
be published in the Federal Register or the Internal Revenue 
Bulletin.''
    (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. 116. TAX SHELTER EXCEPTION TO CONFIDENTIALITY PRIVILEGES RELATING 
              TO TAXPAYER COMMUNICATIONS.

    (a) In General.--Section 7525(b) (relating to section not to apply 
to communications regarding corporate tax shelters) is amended to read 
as follows:
    ``(b) Section Not To Apply to Communications Regarding Tax 
Shelters.--The privilege under subsection (a) shall not apply to any 
written communication which is--
            ``(1) between a federally authorized tax practitioner and--
                    ``(A) any person,
                    ``(B) any director, officer, employee, agent, or 
                representative of the person, or
                    ``(C) any other person holding a capital or profits 
                interest in the person, and
            ``(2) in connection with the promotion of the direct or 
        indirect participation of the person in any tax shelter (as 
        defined in section 1274(b)(3)(C)).''
    (b) Effective Date.--The amendment made by this section shall apply 
to communications made on or after the date of the enactment of this 
Act.

SEC. 117. DISCLOSURE OF REPORTABLE TRANSACTIONS.

    (a) In General.--Section 6111 (relating to registration of tax 
shelters) is amended to read as follows:

``SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS.

    ``(a) In General.--Each material advisor with respect to any 
reportable transaction shall make a return (in such form as the 
Secretary may prescribe) setting forth--
            ``(1) information identifying and describing the 
        transaction,
            ``(2) information describing any potential tax benefits 
        expected to result from the transaction, and
            ``(3) such other information as the Secretary may 
        prescribe.
Such return shall be filed not later than the date specified by the 
Secretary.
    ``(b) Definitions.--For purposes of this section--
            ``(1) Material advisor.--
                    ``(A) In general.--The term `material advisor' 
                means any person--
                            ``(i) who provides any material aid, 
                        assistance, or advice with respect to 
                        organizing, promoting, selling, implementing, 
                        or carrying out any reportable transaction, and
                            ``(ii) who directly or indirectly derives 
                        gross income in excess of the threshold amount 
                        for such aid, assistance, or advice.
                    ``(B) Threshold amount.--For purposes of 
                subparagraph (A), the threshold amount is--
                            ``(i) $50,000 in the case of a reportable 
                        transaction substantially all of the tax 
                        benefits from which are provided to natural 
                        persons, and
                            ``(ii) $250,000 in any other case.
            ``(2) Reportable transaction.--The term `reportable 
        transaction' has the meaning given to such term by section 
        6707A(c).
    ``(c) Regulations.--The Secretary may prescribe regulations which 
provide--
            ``(1) that only 1 person shall be required to meet the 
        requirements of subsection (a) in cases in which 2 or more 
        persons would otherwise be required to meet such requirements,
            ``(2) exemptions from the requirements of this section, and
            ``(3) such rules as may be necessary or appropriate to 
        carry out the purposes of this section.''
    (b) Conforming Amendments.--
            (1) The item relating to section 6111 in the table of 
        sections for subchapter B of chapter 61 is amended to read as 
        follows:

                              ``Sec. 6111. Disclosure of reportable 
                                        transactions.''
            (2)(A) So much of section 6112 as precedes subsection (c) 
        thereof is amended to read as follows:

``SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANSACTIONS MUST KEEP 
              LISTS OF ADVISEES.

    ``(a) In General.--Each material advisor (as defined in section 
6111) with respect to any reportable transaction (as defined in section 
6707A(c)) shall maintain, in such manner as the Secretary may by 
regulations prescribe, a list--
            ``(1) identifying each person with respect to whom such 
        advisor acted as such a material advisor with respect to such 
        transaction, and
            ``(2) containing such other information as the Secretary 
        may by regulations require.
This section shall apply without regard to whether a material advisor 
is required to file a return under section 6111 with respect to such 
transaction.''
            (B) Section 6112 is amended by redesignating subsection (c) 
        as subsection (b).
            (C) Section 6112(b), as redesignated by subparagraph (B), 
        is amended--
                    (i) by inserting ``written'' before ``request'' in 
                paragraph (1)(A), and
                    (ii) by striking ``shall prescribe'' in paragraph 
                (2) and inserting ``may prescribe''.
            (D) The item relating to section 6112 in the table of 
        sections for subchapter B of chapter 61 is amended to read as 
        follows:

                              ``Sec. 6112. Material advisors of 
                                        reportable transactions must 
                                        keep lists of advisees.''
            (3)(A) The heading for section 6708 is amended to read as 
        follows:

``SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES WITH RESPECT TO 
              REPORTABLE TRANSACTIONS.''

            (B) The item relating to section 6708 in the table of 
        sections for part I of subchapter B of chapter 68 is amended to 
        read as follows:

                              ``Sec. 6708. Failure to maintain lists of 
                                        advisees with respect to 
                                        reportable transactions.''
    (c) Effective Date.--The amendments made by this section shall 
apply to transactions with respect to which material aid, assistance, 
or advice referred to in section 6111(b)(1)(A)(i) of the Internal 
Revenue Code of 1986 (as added by this section) is provided after the 
date of the enactment of this Act.

SEC. 118. MODIFICATIONS TO PENALTY FOR FAILURE TO REGISTER TAX 
              SHELTERS.

    (a) In General.--Section 6707 (relating to failure to furnish 
information regarding tax shelters) is amended to read as follows:

``SEC. 6707. FAILURE TO FURNISH INFORMATION REGARDING REPORTABLE 
              TRANSACTIONS.

    ``(a) In General.--If a person who is required to file a return 
under section 6111(a) with respect to any reportable transaction--
            ``(1) fails to file such return on or before the date 
        prescribed therefor, or
            ``(2) files false or incomplete information with the 
        Secretary with respect to such transaction,
such person shall pay a penalty with respect to such return in the 
amount determined under subsection (b).
    ``(b) Amount of Penalty.--
            ``(1) In general.--Except as provided in paragraph (2), the 
        penalty imposed under subsection (a) with respect to any 
        failure shall be $50,000.
            ``(2) Listed transactions.--The penalty imposed under 
        subsection (a) with respect to any listed transaction shall be 
        an amount equal to the greater of--
                    ``(A) $200,000, or
                    ``(B) 50 percent of the gross income derived by 
                such person with respect to aid, assistance, or advice 
                which is provided with respect to the reportable 
                transaction before the date the return including the 
                transaction is filed under section 6111.
        Subparagraph (B) shall be applied by substituting `75 percent' 
        for `50 percent' in the case of an intentional failure or act 
        described in subsection (a).
    ``(c) Rescission Authority.--The provisions of section 6707A(d) 
(relating to authority of Commissioner to rescind penalty) shall apply 
to any penalty imposed under this section.
    ``(d) Reportable and Listed Transactions.--The terms `reportable 
transaction' and `listed transaction' have the respective meanings 
given to such terms by section 6707A(c).''.
    (b) Clerical Amendment.--The item relating to section 6707 in the 
table of sections for part I of subchapter B of chapter 68 is amended 
by striking ``tax shelters'' and inserting ``reportable transactions''.
    (c) Effective Date.--The amendments made by this section shall 
apply to returns the due date for which is after the date of the 
enactment of this Act.

SEC. 119. MODIFICATION OF PENALTY FOR FAILURE TO MAINTAIN LISTS OF 
              INVESTORS.

    (a) In General.--Subsection (a) of section 6708 is amended to read 
as follows:
    ``(a) Imposition of Penalty.--
            ``(1) In general.--If any person who is required to 
        maintain a list under section 6112(a) fails to make such list 
        available upon written request to the Secretary in accordance 
        with section 6112(b)(1)(A) within 20 business days after the 
        date of the Secretary's request, such person shall pay a 
        penalty of $10,000 for each day of such failure after such 20th 
        day.
            ``(2) Reasonable cause exception.--No penalty shall be 
        imposed by paragraph (1) with respect to the failure on any day 
        if such failure is due to reasonable cause.''
    (b) Effective Date.--The amendment made by this section shall apply 
to requests made after the date of the enactment of this Act.

SEC. 120. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN CONDUCT RELATED TO 
              TAX SHELTERS AND REPORTABLE TRANSACTIONS.

    (a) In General.--Section 7408 (relating to action to enjoin 
promoters of abusive tax shelters, etc.) is amended by redesignating 
subsection (c) as subsection (d) and by striking subsections (a) and 
(b) and inserting the following new subsections:
    ``(a) Authority To Seek Injunction.--A civil action in the name of 
the United States to enjoin any person from further engaging in 
specified conduct may be commenced at the request of the Secretary. Any 
action under this section shall be brought in the district court of the 
United States for the district in which such person resides, has his 
principal place of business, or has engaged in specified conduct. The 
court may exercise its jurisdiction over such action (as provided in 
section 7402(a)) separate and apart from any other action brought by 
the United States against such person.
    ``(b) Adjudication and Decree.--In any action under subsection (a), 
if the court finds--
            ``(1) that the person has engaged in any specified conduct, 
        and
            ``(2) that injunctive relief is appropriate to prevent 
        recurrence of such conduct,
the court may enjoin such person from engaging in such conduct or in 
any other activity subject to penalty under this title.
    ``(c) Specified Conduct.--For purposes of this section, the term 
`specified conduct' means any action, or failure to take action, 
subject to penalty under section 6700, 6701, 6707, or 6708.''
    (b) Conforming Amendments.--
            (1) The heading for section 7408 is amended to read as 
        follows:

``SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RELATED TO TAX 
              SHELTERS AND REPORTABLE TRANSACTIONS.''

            (2) The table of sections for subchapter A of chapter 67 is 
        amended by striking the item relating to section 7408 and 
        inserting the following new item:

        ``Sec. 7408. Actions to enjoin specified conduct related to tax 
                            shelters and reportable transactions.''
    (c) Effective Date.--The amendment made by this section shall take 
effect on the day after the date of the enactment of this Act.

SEC. 121. UNDERSTATEMENT OF TAXPAYER'S LIABILITY BY INCOME TAX RETURN 
              PREPARER.

    (a) Standards Conformed to Taxpayer Standards.--Section 6694(a) 
(relating to understatements due to unrealistic positions) is amended--
            (1) by striking ``realistic possibility of being sustained 
        on its merits'' in paragraph (1) and inserting ``reasonable 
        belief that the tax treatment in such position was more likely 
        than not the proper treatment'',
            (2) by striking ``or was frivolous'' in paragraph (3) and 
        inserting ``or there was no reasonable basis for the tax 
        treatment of such position'', and
            (3) by striking ``Unrealistic'' in the heading and 
        inserting ``Improper''.
    (b) Amount of Penalty.--Section 6694 is amended--
            (1) by striking ``$250'' in subsection (a) and inserting 
        ``$1,000'', and
            (2) by striking ``$1,000'' in subsection (b) and inserting 
        ``$5,000''.
    (c) Effective Date.--The amendments made by this section shall 
apply to documents prepared after the date of the enactment of this 
Act.

SEC. 122. PENALTY ON FAILURE TO REPORT INTERESTS IN FOREIGN FINANCIAL 
              ACCOUNTS.

    (a) In General.--Section 5321(a)(5) of title 31, United States 
Code, is amended to read as follows:
            ``(5) Foreign financial agency transaction violation.--
                    ``(A) Penalty authorized.--The Secretary of the 
                Treasury may impose a civil money penalty on any person 
                who violates, or causes any violation of, any provision 
                of section 5314.
                    ``(B) Amount of penalty.--
                            ``(i) In general.--Except as provided in 
                        subparagraph (C), the amount of any civil 
                        penalty imposed under subparagraph (A) shall 
                        not exceed $5,000.
                            ``(ii) Reasonable cause exception.--No 
                        penalty shall be imposed under subparagraph (A) 
                        with respect to any violation if--
                                    ``(I) such violation was due to 
                                reasonable cause, and
                                    ``(II) the amount of the 
                                transaction or the balance in the 
                                account at the time of the transaction 
                                was properly reported.
                    ``(C) Willful violations.--In the case of any 
                person willfully violating, or willfully causing any 
                violation of, any provision of section 5314--
                            ``(i) the maximum penalty under 
                        subparagraph (B)(i) shall be increased to the 
                        greater of--
                                    ``(I) $25,000, or
                                    ``(II) the amount (not exceeding 
                                $100,000) determined under subparagraph 
                                (D), and
                            ``(ii) subparagraph (B)(ii) shall not 
                        apply.
                    ``(D) Amount.--The amount determined under this 
                subparagraph is--
                            ``(i) in the case of a violation involving 
                        a transaction, the amount of the transaction, 
                        or
                            ``(ii) in the case of a violation involving 
                        a failure to report the existence of an account 
                        or any identifying information required to be 
                        provided with respect to an account, the 
                        balance in the account at the time of the 
                        violation.''
    (b) Effective Date.--The amendment made by this section shall apply 
to violations occurring after the date of the enactment of this Act.

SEC. 123. FRIVOLOUS TAX SUBMISSIONS.

    (a) Civil Penalties.--Section 6702 is amended to read as follows:

``SEC. 6702. FRIVOLOUS TAX SUBMISSIONS.

    ``(a) Civil Penalty for Frivolous Tax Returns.--A person shall pay 
a penalty of $5,000 if--
            ``(1) such person files what purports to be a return of a 
        tax imposed by this title but which--
                    ``(A) does not contain information on which the 
                substantial correctness of the self-assessment may be 
                judged, or
                    ``(B) contains information that on its face 
                indicates that the self-assessment is substantially 
                incorrect; and
            ``(2) the conduct referred to in paragraph (1)--
                    ``(A) is based on a position which the Secretary 
                has identified as frivolous under subsection (c), or
                    ``(B) reflects a desire to delay or impede the 
                administration of Federal tax laws.
    ``(b) Civil Penalty for Specified Frivolous Submissions.--
            ``(1) Imposition of penalty.--Except as provided in 
        paragraph (3), any person who submits a specified frivolous 
        submission shall pay a penalty of $5,000.
            ``(2) Specified frivolous submission.--For purposes of this 
        section--
                    ``(A) Specified frivolous submission.--The term 
                `specified frivolous submission' means a specified 
                submission if any portion of such submission--
                            ``(i) is based on a position which the 
                        Secretary has identified as frivolous under 
                        subsection (c), or
                            ``(ii) reflects a desire to delay or impede 
                        the administration of Federal tax laws.
                    ``(B) Specified submission.--The term `specified 
                submission' means--
                            ``(i) a request for a hearing under--
                                    ``(I) section 6320 (relating to 
                                notice and opportunity for hearing upon 
                                filing of notice of lien), or
                                    ``(II) section 6330 (relating to 
                                notice and opportunity for hearing 
                                before levy), and
                            ``(ii) an application under--
                                    ``(I) section 6159 (relating to 
                                agreements for payment of tax liability 
                                in installments),
                                    ``(II) section 7122 (relating to 
                                compromises), or
                                    ``(III) section 7811 (relating to 
                                taxpayer assistance orders).
            ``(3) Opportunity to withdraw submission.--If the Secretary 
        provides a person with notice that a submission is a specified 
        frivolous submission and such person withdraws such submission 
        within 30 days after such notice, the penalty imposed under 
        paragraph (1) shall not apply with respect to such submission.
    ``(c) Listing of Frivolous Positions.--The Secretary shall 
prescribe (and periodically revise) a list of positions which the 
Secretary has identified as being frivolous for purposes of this 
subsection. The Secretary shall not include in such list any position 
that the Secretary determines meets the requirement of section 
6662(d)(2)(B)(ii)(II).
    ``(d) Reduction of Penalty.--The Secretary may reduce the amount of 
any penalty imposed under this section if the Secretary determines that 
such reduction would promote compliance with and administration of the 
Federal tax laws.
    ``(e) Penalties in Addition to Other Penalties.--The penalties 
imposed by this section shall be in addition to any other penalty 
provided by law.''
    (b) Treatment of Frivolous Requests for Hearings Before Levy.--
            (1) Frivolous requests disregarded.--Section 6330 (relating 
        to notice and opportunity for hearing before levy) is amended 
        by adding at the end the following new subsection:
    ``(g) Frivolous Requests for Hearing, etc.--Notwithstanding any 
other provision of this section, if the Secretary determines that any 
portion of a request for a hearing under this section or section 6320 
meets the requirement of clause (i) or (ii) of section 6702(b)(2)(A), 
then the Secretary may treat such portion as if it were never submitted 
and such portion shall not be subject to any further administrative or 
judicial review.''
            (2) Preclusion from raising frivolous issues at hearing.--
        Section 6330(c)(4) is amended--
                    (A) by striking ``(A)'' and inserting ``(A)(i)'';
                    (B) by striking ``(B)'' and inserting ``(ii)'';
                    (C) by striking the period at the end of the first 
                sentence and inserting ``; or''; and
                    (D) by inserting after subparagraph (A)(ii) (as so 
                redesignated) the following:
                    ``(B) the issue meets the requirement of clause (i) 
                or (ii) of section 6702(b)(2)(A).''
            (3) Statement of grounds.--Section 6330(b)(1) is amended by 
        striking ``under subsection (a)(3)(B)'' and inserting ``in 
        writing under subsection (a)(3)(B) and states the grounds for 
        the requested hearing''.
    (c) Treatment of Frivolous Requests for Hearings Upon Filing of 
Notice of Lien.--Section 6320 is amended--
            (1) in subsection (b)(1), by striking ``under subsection 
        (a)(3)(B)'' and inserting ``in writing under subsection 
        (a)(3)(B) and states the grounds for the requested hearing'', 
        and
            (2) in subsection (c), by striking ``and (e)'' and 
        inserting ``(e), and (g)''.
    (d) Treatment of Frivolous Applications for Offers-in-Compromise 
and Installment Agreements.--Section 7122 is amended by adding at the 
end the following new subsection:
    ``(e) Frivolous Submissions, etc.--Notwithstanding any other 
provision of this section, if the Secretary determines that any portion 
of an application for an offer-in-compromise or installment agreement 
submitted under this section or section 6159 meets the requirement of 
clause (i) or (ii) of section 6702(b)(2)(A), then the Secretary may 
treat such portion as if it were never submitted and such portion shall 
not be subject to any further administrative or judicial review.''
    (e) Clerical Amendment.--The table of sections for part I of 
subchapter B of chapter 68 is amended by striking the item relating to 
section 6702 and inserting the following new item:

                              ``Sec. 6702. Frivolous tax submissions.''
    (f) Effective Date.--The amendments made by this section shall 
apply to submissions made and issues raised after the date on which the 
Secretary first prescribes a list under section 6702(c) of the Internal 
Revenue Code of 1986, as amended by subsection (a).

SEC. 124. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE DEPARTMENT OF 
              TREASURY.

    (a) Censure; Imposition of Penalty.--
            (1) In general.--Section 330(b) of title 31, United States 
        Code, is amended--
                    (A) by inserting ``, or censure,'' after 
                ``Department'', and
                    (B) by adding at the end the following new flush 
                sentence:
``The Secretary may impose a monetary penalty on any representative 
described in the preceding sentence. If the representative was acting 
on behalf of an employer or any firm or other entity in connection with 
the conduct giving rise to such penalty, the Secretary may impose a 
monetary penalty on such employer, firm, or entity if it knew, or 
reasonably should have known, of such conduct. Such penalty shall not 
exceed the gross income derived (or to be derived) from the conduct 
giving rise to the penalty and may be in addition to, or in lieu of, 
any suspension, disbarment, or censure.''
            (2) Effective date.--The amendments made by this subsection 
        shall apply to actions taken after the date of the enactment of 
        this Act.
    (b) Tax Shelter Opinions, etc.--Section 330 of such title 31 is 
amended by adding at the end the following new subsection:
    ``(d) Nothing in this section or in any other provision of law 
shall be construed to limit the authority of the Secretary of the 
Treasury to impose standards applicable to the rendering of written 
advice with respect to any entity, transaction plan or arrangement, or 
other plan or arrangement, which is of a type which the Secretary 
determines as having a potential for tax avoidance or evasion.''

SEC. 125. PENALTY ON PROMOTERS OF TAX SHELTERS.

    (a) Penalty on Promoting Abusive Tax Shelters.--Section 6700(a) is 
amended by adding at the end the following new sentence: 
``Notwithstanding the first sentence, if an activity with respect to 
which a penalty imposed under this subsection involves a statement 
described in paragraph (2)(A), the amount of the penalty shall be equal 
to 50 percent of the gross income derived (or to be derived) from such 
activity by the person on which the penalty is imposed.''
    (b) Effective Date.--The amendment made by this section shall apply 
to activities after the date of the enactment of this Act.

SEC. 126. STATUTE OF LIMITATIONS FOR TAXABLE YEARS FOR WHICH LISTED 
              TRANSACTIONS NOT REPORTED.

    (a) In General.--Section 6501(e)(1) (relating to substantial 
omission of items for income taxes) is amended by adding at the end the 
following new subparagraph:
                    ``(C) Listed transactions.--If a taxpayer fails to 
                include on any return or statement for any taxable year 
                any information with respect to a listed transaction 
                (as defined in section 6707A(c)(2)) which is required 
under section 6011 to be included with such return or statement, the 
tax for such taxable year may be assessed, or a proceeding in court for 
collection of such tax may be begun without assessment, at any time 
within 6 years after the time the return is filed. This subparagraph 
shall not apply to any taxable year if the time for assessment or 
beginning the proceeding in court has expired before the time a 
transaction is treated as a listed transaction under section 6011.''
    (b) Effective Date.--The amendment made by this section shall apply 
to transactions after the date of the enactment of this Act in taxable 
years ending after such date.

SEC. 127. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS 
              ATTRIBUTABLE TO NONDISCLOSED REPORTABLE AND NONECONOMIC 
              SUBSTANCE TRANSACTIONS.

    (a) In General.--Section 163 (relating to deduction for interest) 
is amended by redesignating subsection (m) as subsection (n) and by 
inserting after subsection (l) the following new subsection:
    ``(m) Interest on Unpaid Taxes Attributable To Nondisclosed 
Reportable Transactions and Noneconomic Substance Transactions.--No 
deduction shall be allowed under this chapter for any interest paid or 
accrued under section 6601 on any underpayment of tax which is 
attributable to--
            ``(1) the portion of any reportable transaction 
        understatement (as defined in section 6662A(b)) with respect to 
        which the requirement of section 6664(d)(2)(A) is not met, or
            ``(2) any noneconomic substance transaction understatement 
        (as defined in section 6662B(c)).''
    (b) Effective Date.--The amendments made by this section shall 
apply to transactions after the date of the enactment of this Act in 
taxable years ending after such date.

                       Part II--Other Provisions

SEC. 131. LIMITATION ON TRANSFER OR IMPORTATION OF BUILT-IN LOSSES.

    (a) In General.--Section 362 (relating to basis to corporations) is 
amended by adding at the end the following new subsection:
    ``(e) Limitations on Built-In Losses.--
            ``(1) Limitation on importation of built-in losses.--
                    ``(A) 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 subparagraph 
                (B) which is acquired in such transaction shall 
                (notwithstanding subsections (a) and (b)) be its fair 
                market value immediately after such transaction.
                    ``(B) Property described.--For purposes of 
                subparagraph (A), property is described in this 
                paragraph if--
                            ``(i) 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
                            ``(ii) 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.
                    ``(C) Importation of net built-in loss.--For 
                purposes of subparagraph (A), there is an importation 
                of a net built-in loss in a transaction if the 
                transferee's aggregate adjusted bases of property 
                described in subparagraph (B) which is transferred in 
                such transaction would (but for this paragraph) exceed 
                the fair market value of such property immediately 
                after such transaction.''
            ``(2) Limitation on transfer of built-in losses in section 
        351 transactions.--
                    ``(A) In general.--If--
                            ``(i) property is transferred in any 
                        transaction which is described in subsection 
                        (a) and which is not described in paragraph (1) 
                        of this subsection, and
                            ``(ii) the transferee's aggregate adjusted 
                        bases of the property so transferred would (but 
                        for this paragraph) exceed the fair market 
                        value of such property immediately after such 
                        transaction,
                then, notwithstanding subsection (a), the transferee's 
                aggregate adjusted bases of the property so transferred 
                shall not exceed the fair market value of such property 
                immediately after such transaction.
                    ``(B) Allocation of basis reduction.--The aggregate 
                reduction in basis by reason of subparagraph (A) shall 
                be allocated among the property so transferred in 
                proportion to their respective built-in losses 
                immediately before the transaction.
                    ``(C) Exception for transfers within affiliated 
                group.--Subparagraph (A) shall not apply to any 
                transaction if the transferor owns stock in the 
                transferee meeting the requirements of section 
                1504(a)(2). In the case of property to which 
                subparagraph (A) does not apply by reason of the 
                preceding sentence, the transferor's basis in the stock 
                received for such property shall not exceed its fair 
                market value immediately after the transfer.''
    (b) Comparable Treatment Where Liquidation.--Paragraph (1) of 
section 334(b) (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)(1)(B) 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. 132. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS TRANSFERS.

    (a) Treatment of Contributed Property With Built-In Loss.--
Paragraph (1) of section 704(c) 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 
        (determined without regard to subparagraph (C)(ii)) 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 
        (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 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 is amended by 
        adding at the end the following new subsection:
    ``(d) Substantial Built-In Loss.--
            ``(1) In general.--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 by more than $250,000 the basis of 
        such partner's interest in the partnership.
            ``(2) Regulations.--The Secretary shall prescribe such 
        regulations as may be appropriate to carry out the purposes of 
        paragraph (1) and section 734(d), including regulations 
        aggregating related partnerships and disregarding property 
        acquired by the partnership in an attempt to avoid such 
        purposes.''
            (4) Clerical amendments.--
                    (A) The section heading for section 743 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 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 
        (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 is amended 
        by inserting ``or unless there is a substantial basis 
        reduction'' after ``section 754 is in effect''.
            (3) Substantial basis reduction.--Section 734 is amended by 
        adding at the end the following new subsection:
    ``(d) Substantial Basis Reduction.--
            ``(1) In general.--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 $250,000.
            ``(2) Regulations.--

                                ``For regulations to carry out this 
subsection, see section 743(d)(2).''
            (4) Clerical amendments.--
                    (A) The section heading for section 734 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 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 (b) 
        shall apply to transfers after the date of the enactment of 
        this Act.
            (3) Subsection (c).--The amendments made by subsection (c) 
        shall apply to distributions after the date of the enactment of 
        this Act.

SEC. 133. NO REDUCTION OF BASIS UNDER SECTION 734 IN STOCK HELD BY 
              PARTNERSHIP IN CORPORATE PARTNER.

    (a) In General.--Section 755 is amended by adding at the end the 
following new subsection:
    ``(c) No Allocation of Basis Decrease to Stock of Corporate 
Partner.--In making an allocation under subsection (a) of any decrease 
in the adjusted basis of partnership property under section 734(b)--
            ``(1) no allocation may be made to stock in a corporation 
        which is a partner in the partnership, and
            ``(2) any amount not allocable to stock by reason of 
        paragraph (1) shall be allocated under subsection (a) to other 
        partnership property.
Gain shall be recognized to the partnership to the extent that the 
amount required to be allocated under paragraph (2) to other 
partnership property exceeds the aggregate adjusted basis of such other 
property immediately before the allocation required by paragraph (2).''
    (b) Effective Date.--The amendment made by this section shall apply 
to distributions after the date of the enactment of this Act.

SEC. 134. REPEAL OF SPECIAL RULES FOR FASITS.

    (a) In General.--Part V of subchapter M of chapter 1 (relating to 
financial asset securitization investment trusts) is hereby repealed.
    (b) Conforming Amendments.--
            (1) Paragraph (6) of section 56(g) is amended by striking 
        ``REMIC, or FASIT'' and inserting ``or REMIC''.
            (2) Clause (ii) of section 382(l)(4)(B) is amended by 
        striking ``a REMIC to which part IV of subchapter M applies, or 
        a FASIT to which part V of subchapter M applies,'' and 
        inserting ``or a REMIC to which part IV of subchapter M 
        applies,''.
            (3) Paragraph (1) of section 582(c) is amended by striking 
        ``, and any regular interest in a FASIT,''.
            (4) Subparagraph (E) of section 856(c)(5) is amended by 
        striking the last sentence.
            (5) Paragraph (5) of section 860G(a) is amended by adding 
        ``and'' at the end of subparagraph (B), by striking ``, and'' 
        at the end of subparagraph (C) and inserting a period, and by 
        striking subparagraph (D).
            (6) Subparagraph (C) of section 1202(e)(4) is amended by 
        striking ``REMIC, or FASIT'' and inserting ``or REMIC''.
            (7) Subparagraph (C) of section 7701(a)(19) is amended by 
        adding ``and'' at the end of clause (ix), by striking ``, and'' 
        at the end of clause (x) and inserting a period, and by 
        striking clause (xi).
            (8) The table of parts for subchapter M of chapter 1 is 
        amended by striking the item relating to part V.
    (c) Effective Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after December 31, 2003.
            (2) Exception for existing fasits.--
                    (A) In general.--Paragraph (1) shall not apply to 
                any FASIT in existence on the date of the enactment of 
                this Act.
                    (B) Transfer of additional assets not permitted.--
                Except as provided in regulations prescribed by the 
                Secretary of the Treasury or the Secretary's delegate, 
                subparagraph (A) shall cease to apply as of the 
                earliest date after the date of the enactment of this 
                Act that any property is transferred to the FASIT.

SEC. 135. EXPANDED DISALLOWANCE OF DEDUCTION FOR INTEREST ON 
              CONVERTIBLE DEBT.

    (a) In General.--Paragraph (2) of section 163(l) is amended by 
striking ``or a related party'' and inserting ``or equity held by the 
issuer (or any related party) in any other person''.
    (b) Conforming Amendment.--Paragraph (3) of section 163(l) is 
amended by striking ``or a related party'' in the material preceding 
subparagraph (A) and inserting ``or any other person''.
    (c) Effective Date.--The amendments made by this section shall 
apply to debt instruments issued after the date of the enactment of 
this Act.

SEC. 136. EXPANDED AUTHORITY TO DISALLOW TAX BENEFITS UNDER SECTION 
              269.

    (a) In General.--Subsection (a) of section 269 (relating to 
acquisitions made to evade or avoid income tax) is amended to read as 
follows:
    ``(a) In General.--If--
            ``(1)(A) any person acquires stock in a corporation, or
            ``(B) any corporation acquires, directly or indirectly, 
        property of another corporation and the basis of such property, 
        in the hands of the acquiring corporation, is determined by 
        reference to the basis in the hands of the transferor 
        corporation, and
            ``(2) the principal purpose for which such acquisition was 
        made is evasion or avoidance of Federal income tax by securing 
        the benefit of a deduction, credit, or other allowance,
then the Secretary may disallow such deduction, credit, or other 
allowance.''
    (b) Effective Date.--The amendment made by this section shall apply 
to stock and property acquired after February 13, 2003.

SEC. 137. MODIFICATIONS OF CERTAIN RULES RELATING TO CONTROLLED FOREIGN 
              CORPORATIONS.

    (a) Limitation on Exception From PFIC Rules for United States 
Shareholders of Controlled Foreign Corporations.--Paragraph (2) of 
section 1297(e) (relating to passive investment company) is amended by 
adding at the end the following flush sentence:
        ``Such term shall not include any period if there is only a 
        remote likelihood of an inclusion in gross income under section 
        951(a)(1)(A)(i) of subpart F income of such corporation for 
        such period.''
    (b) Determination of Pro Rata Share of Subpart F Income.--
Subsection (a) of section 951 (relating to amounts included in gross 
income of United States shareholders) is amended by adding at the end 
the following new paragraph:
            ``(4) Special rules for determining pro rata share of 
        subpart f income.--The pro rata share under paragraph (2) shall 
        be determined by disregarding--
                    ``(A) any rights lacking substantial economic 
                effect, and
                    ``(B) stock owned by a shareholder who is a tax-
                indifferent party (as defined in section 7701(m)(3)) if 
                the amount which would (but for this paragraph) be 
                allocated to such shareholder does not reflect such 
                shareholder's economic share of the earnings and 
                profits of the corporation.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years on controlled foreign corporation beginning 
after February 13, 2003, and to taxable years of United States 
shareholder in which or with which such taxable years of controlled 
foreign corporations end.

SEC. 138. BASIS FOR DETERMINING LOSS ALWAYS REDUCED BY NONTAXED PORTION 
              OF DIVIDENDS.

    (a) In General.--Section 1059 (relating to corporate shareholder's 
basis in stock reduced by nontaxed portion of extraordinary dividends) 
is amended by redesignating subsection (g) as subsection (h) and by 
inserting after subsection (f) the following new subsection:
    ``(g) Basis for Determining Loss Always Reduced by Nontaxed Portion 
of Dividends.--The basis of stock in a corporation (for purposes of 
determining loss) shall be reduced by the nontaxed portion of any 
dividend received with respect to such stock if this section does not 
otherwise apply to such dividend.''
    (b) Effective Date.--The amendment made by this section shall apply 
to dividends received after the date of the enactment of this Act.

SEC. 139. AFFIRMATION OF CONSOLIDATED RETURN REGULATION AUTHORITY.

    (a) In General.--Section 1502 (relating to consolidated return 
regulations) is amended by adding at the end the following new 
sentence: ``In prescribing such regulations, the Secretary may 
prescribe rules applicable to corporations filing consolidated returns 
under section 1501 that are different from other provisions of this 
title that would apply if such corporations filed separate returns.''
    (b) Result Not Overturned.--Notwithstanding subsection (a), the 
Internal Revenue Code of 1986 shall be construed by treating Treasury 
regulation Sec. 1.1502-20(c)(1)(iii) (as in effect on January 1, 2001) 
as being inapplicable to the type of factual situation in 255 F.3d 1357 
(Fed. Cir. 2001).
    (c) Effective Date.--The provisions of this section shall apply to 
taxable years beginning before, on, or after the date of the enactment 
of this Act.

Subtitle B--Prevention of Corporate Expatriation to Avoid United States 
                               Income Tax

SEC. 151. PREVENTION OF CORPORATE EXPATRIATION TO AVOID UNITED STATES 
              INCOME TAX.

    (a) In General.--Paragraph (4) of section 7701(a) (defining 
domestic) is amended to read as follows:
            ``(4) Domestic.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the term `domestic' when applied to a 
                corporation or partnership means created or organized 
                in the United States or under the law of the United 
                States or of any State unless, in the case of a 
                partnership, the Secretary provides otherwise by 
                regulations.
                    ``(B) Certain corporations treated as domestic.--
                            ``(i) In general.--The acquiring 
                        corporation in a corporate expatriation 
                        transaction shall be treated as a domestic 
                        corporation.
                            ``(ii) Corporate expatriation 
                        transaction.--For purposes of this 
                        subparagraph, the term `corporate expatriation 
                        transaction' means any transaction if--
                                    ``(I) a nominally foreign 
                                corporation (referred to in this 
                                subparagraph as the `acquiring 
                                corporation') acquires, as a result of 
                                such transaction, directly or 
                                indirectly substantially all of the 
                                properties held directly or indirectly 
                                by a domestic corporation, and
                                    ``(II) immediately after the 
                                transaction, more than 80 percent of 
                                the stock (by vote or value) of the 
                                acquiring corporation is held by former 
                                shareholders of the domestic 
                                corporation by reason of holding stock 
                                in the domestic corporation.
                            ``(iii) Lower stock ownership requirement 
                        in certain cases.--Subclause (II) of clause 
                        (ii) shall be applied by substituting `50 
                        percent' for `80 percent' with respect to any 
                        nominally foreign corporation if--
                                    ``(I) such corporation does not 
                                have substantial business activities 
                                (when compared to the total business 
                                activities of the expanded affiliated 
                                group) in the foreign country in which 
                                or under the law of which the 
                                corporation is created or organized, 
                                and
                                    ``(II) the stock of the corporation 
                                is publicly traded and the principal 
                                market for the public trading of such 
                                stock is in the United States.
                            ``(iv) Partnership transactions.--The term 
                        `corporate expatriation transaction' includes 
                        any transaction if--
                                    ``(I) a nominally foreign 
                                corporation (referred to in this 
                                subparagraph as the `acquiring 
                                corporation') acquires, as a result of 
                                such transaction, directly or 
                                indirectly properties constituting a 
                                trade or business of a domestic 
                                partnership,
                                    ``(II) immediately after the 
                                transaction, more than 80 percent of 
                                the stock (by vote or value) of the 
                                acquiring corporation is held by former 
                                partners of the domestic partnership or 
                                related foreign partnerships 
                                (determined without regard to stock of 
                                the acquiring corporation which is sold 
                                in a public offering related to the 
                                transaction), and
                                    ``(III) the acquiring corporation 
                                meets the requirements of subclauses 
                                (I) and (II) of clause (iii).
                            ``(v) Special rules.--For purposes of this 
                        subparagraph--
                                    ``(I) a series of related 
                                transactions shall be treated as 1 
                                transaction, and
                                    ``(II) stock held by members of the 
                                expanded affiliated group which 
                                includes the acquiring corporation 
                                shall not be taken into account in 
                                determining ownership.
                            ``(vi) Other definitions.--For purposes of 
                        this subparagraph--
                                    ``(I) Nominally foreign 
                                corporation.--The term `nominally 
                                foreign corporation' means any 
                                corporation which would (but for this 
                                subparagraph) be treated as a foreign 
                                corporation.
                                    ``(II) Expanded affiliated group.--
                                The term `expanded affiliated group' 
                                means an affiliated group (as defined 
                                in section 1504(a) without regard to 
                                section 1504(b)).
                                    ``(III) Related foreign 
                                partnership.--A foreign partnership is 
                                related to a domestic partnership if 
                                they are under common control (within 
                                the meaning of section 482), or they 
                                shared the same trademark or 
                                tradename.''
    (b) Effective Dates.--
            (1) In general.--The amendment made by this section shall 
        apply to corporate expatriation transactions completed after 
        September 11, 2001.
            (2) Special rule.--The amendment made by this section shall 
        also apply to corporate expatriation transactions completed on 
        or before September 11, 2001, but only with respect to taxable 
        years of the acquiring corporation beginning after December 31, 
        2003.

          TITLE II--SIMPLIFICATION OF EARNED INCOME TAX CREDIT

SEC. 201. SIMPLIFICATION OF EARNED INCOME TAX CREDIT.

    (a) Repeal of Denial of Credit Where Investment Income.--Section 32 
is amended by striking subsection (i).
    (b) Earned Income To Include Only Amounts Includible in Gross 
Income.--Section 32(c)(2)(B) is amended by striking ``and'' at the end 
of clause (iv), by striking the period at the end of clause (v) and 
inserting ``, and'', and by adding at the end the following new clause:
                        ``(vi) the requirement under subparagraph 
                        (A)(i) that an amount be includible in gross 
                        income shall not apply if such amount is exempt 
                        from tax under section 7873 or is derived 
                        directly from restricted and allotted land 
                        under the Act of February 8, 1887 (commonly 
                        known as the Indian General Allotment Act) (25 
                        U.S.C. 331 et seq.) or from land held under 
                        Acts or treaties containing an exception 
                        provision similar to the Indian General 
                        Allotment Act.''
    (c) Modification of Joint Return Requirement.--Subsection (d) of 
section 32 is amended to read as follows:
    ``(d) Married Individuals.--
            ``(1) In general.--If the taxpayer is married at the close 
        of the taxable year, the credit shall be allowed under 
        subsection (a) only if the taxpayer and his spouse file a joint 
        return for the taxable year.
            ``(2) Marital status.--For purposes of paragraph (1), an 
        individual legally separated from his spouse under a decree of 
        divorce or of separate maintenance shall not be considered as 
        married.
            ``(3) Certain married individuals living apart.--For 
        purposes of paragraph (1), if--
                    ``(A) an individual --
                            ``(i) is married and files a separate 
                        return, and
                            ``(ii) has a qualifying child who is a son, 
                        daughter, stepson, or stepdaughter of such 
                        individual, and
                    ``(B) during the last 6 months of such taxable 
                year, such individual and such individual's spouse do 
                not have the same principal place of abode,
        such individual shall not be considered as married.''
    (d) Expansion of Mathematical Error Authority.--Paragraph (2) of 
section 6213(g) is amended by striking ``and'' at the end of 
subparagraph (K), by striking the period at the end of subparagraph (L) 
and inserting ``, and'', and by inserting after subparagraph (L) the 
following new subparagraph:
                    ``(M) the entry on the return claiming the credit 
                under section 32 with respect to a child if, according 
                to the Federal Case Registry of Child Support Orders 
                established under section 453(h) of the Social Security 
                Act, the taxpayer is a noncustodial parent of such 
                child.''
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.
    (f) Precertification of Earned Income Credit.--Nothing in any 
provision of law shall be construed as authorizing precertification of 
the earned income credit under section 32 of the Internal Revenue Code 
of 1986.

         TITLE III--TAXPAYER PROTECTIONS AND IRS ACCOUNTABILITY

                Subtitle A--Penalty and Interest Reforms

SEC. 301. FAILURE TO PAY ESTIMATED TAX PENALTY CONVERTED TO INTEREST 
              CHARGE ON ACCUMULATED UNPAID BALANCE.

    (a) Penalty Moved to Interest Chapter of Code.--The Internal 
Revenue Code of 1986 is amended by redesignating section 6654 as 
section 6641 and by moving section 6641 (as so redesignated) from part 
I of subchapter A of chapter 68 to the end of subchapter E of chapter 
67 (as added by subsection (e)(1) of this section).
    (b) Penalty Converted to Interest Charge.--The heading and 
subsections (a) and (b) of section 6641 (as so redesignated) are 
amended to read as follows:

``SEC. 6641. INTEREST ON FAILURE BY INDIVIDUAL TO PAY ESTIMATED INCOME 
              TAX.

    ``(a) In General.--Interest shall be paid on any underpayment of 
estimated tax by an individual for a taxable year for each day of such 
underpayment. The amount of such interest for any day shall be the 
product of the underpayment rate established under subsection (b)(2) 
multiplied by the amount of the underpayment.
    ``(b) Amount of Underpayment; Interest Rate.--For purposes of 
subsection (a)--
            ``(1) Amount.--The amount of the underpayment on any day 
        shall be the excess of--
                    ``(A) the sum of the required installments for the 
                taxable year the due dates for which are on or before 
                such day, over
                    ``(B) the sum of the amounts (if any) of estimated 
                tax payments made on or before such day on such 
                required installments.
            ``(2) Determination of interest rate.--
                    ``(A) In general.--The underpayment rate with 
                respect to any day in an installment underpayment 
                period shall be the underpayment rate established under 
                section 6621 for the first day of the calendar quarter 
                in which such installment underpayment period begins.
                    ``(B) Installment underpayment period.--For 
                purposes of subparagraph (A), the term `installment 
                underpayment period' means the period beginning on the 
                day after the due date for a required installment and 
                ending on the due date for the subsequent required 
                installment (or in the case of the 4th required 
                installment, the 15th day of the 4th month following 
                the close of a taxable year).
                    ``(C) Daily rate.--The rate determined under 
                subparagraph (A) shall be applied on a daily basis and 
                shall be based on the assumption of 365 days in a 
                calendar year.
            ``(3) Termination of estimated tax interest.--No day after 
        the end of the installment underpayment period for the 4th 
        required installment specified in paragraph (2)(B) for a 
        taxable year shall be treated as a day of underpayment with 
        respect to such taxable year.''.
    (c) Increase in Safe Harbor Where Tax is Small.--
            (1) In general.--Clause (i) of section 6641(d)(1)(B) (as so 
        redesignated) is amended to read as follows:
                            ``(i) the lesser of--
                                    ``(I) 90 percent of the tax shown 
                                on the return for the taxable year (or, 
                                if no return is filed, 90 percent of 
                                the tax for such year), or
                                    ``(II) the tax shown on the return 
                                for the taxable year (or, if no return 
                                is filed, the tax for such year) 
                                reduced (but not below zero) by $1,600, 
                                or''.
            (2) Conforming amendment.--Subsection (e) of section 6641 
        (as so redesignated) is amended by striking paragraph (1) and 
        redesignating paragraphs (2) and (3) as paragraphs (1) and (2), 
        respectively.
    (d) Conforming Amendments.--
            (1) Paragraphs (1) and (2) of subsection (e) (as 
        redesignated by subsection (c)(2)) and subsection (h) of 
        section 6641 (as so designated) are each amended by striking 
        ``addition to tax'' each place it occurs and inserting 
        ``interest''.
            (2) Section 167(g)(5)(D) is amended by striking ``6654'' 
        and inserting ``6641''.
            (3) Section 460(b)(1) is amended by striking ``6654'' and 
        inserting ``6641''.
            (4) Section 3510(b) is amended--
                    (A) by striking ``section 6654'' in paragraph (1) 
                and inserting ``section 6641'';
                    (B) by amending paragraph (2)(B) to read as 
                follows:
                    ``(B) no interest would be required to be paid (but 
                for this section) under 6641 for such taxable year by 
                reason of the $1,600 amount specified in section 
                6641(d)(1)(B)(i)(II).'';
                    (C) by striking ``section 6654(d)(2)'' in paragraph 
                (3) and inserting ``section 6641(d)(2)''; and
                    (D) by striking paragraph (4).
            (5) Section 6201(b)(1) is amended by striking ``6654'' and 
        inserting ``6641''.
            (6) Section 6601(h) is amended by striking ``6654'' and 
        inserting ``6641''.
            (7) Section 6621(b)(2)(B) is amended by striking ``addition 
        to tax under section 6654'' and inserting ``interest required 
        to be paid under section 6641''.
            (8) Section 6622(b) is amended--
                    (A) by striking ``Penalty for'' in the heading; and
                    (B) by striking ``addition to tax under section 
                6654 or 6655'' and inserting ``interest required to be 
                paid under section 6641 or addition to tax under 
                section 6655''.
            (9) Section 6658(a) is amended--
                    (A) by striking ``6654, or 6655'' and inserting 
                ``or 6655, and no interest shall be required to be paid 
                under section 6641,''; and
                    (B) by inserting ``or paying interest'' after ``the 
                tax'' in paragraph (2)(B)(ii).
            (10) Section 6665(b) is amended--
                    (A) in the matter preceding paragraph (1) by 
                striking ``, 6654,''; and
                    (B) in paragraph (2) by striking ``6654 or''.
            (11) Section 7203 is amended by striking ``section 6654 or 
        6655'' and inserting ``section 6655 or interest required to be 
        paid under section 6641''.
    (e) Clerical Amendments.--
            (1) Chapter 67 is amended by inserting after subchapter D 
        the following:

  ``Subchapter E--Interest on Failure by Individual to Pay Estimated 
                               Income Tax

                              ``Sec. 6641. Interest on failure by 
                                        individual to pay estimated 
                                        income tax.''.
            (2) The table of subchapters for chapter 67 is amended by 
        adding at the end the following new items:

                              ``Subchapter D. Notice requirements.
                              ``Subchapter E. Interest on failure by 
                                        individual to pay estimated 
                                        income tax.''.
            (3) The table of sections for part I of subchapter A of 
        chapter 68 is amended by striking the item relating to section 
        6654.
    (f) Effective Date.--The amendments made by this section shall 
apply to installment payments for taxable years beginning after 
December 31, 2003.

SEC. 302. ABATEMENT OF INTEREST.

    (a) Abatement of Interest With Respect to Erroneous Refund Check 
Without Regard to Size of Refund.--Paragraph (2) of section 6404(e) is 
amended by striking ``unless--'' and all that follows and inserting 
``unless the taxpayer (or a related party) has in any way caused such 
erroneous refund.''.
    (b) Abatement of Interest to Extent Interest is Attributable to 
Taxpayer Reliance on Written Statements of the IRS.--Subsection (f) of 
section 6404 is amended--
            (1) in the subsection heading, by striking ``Penalty or 
        Addition'' and inserting ``Interest, Penalty, or Addition''; 
        and
            (2) in paragraph (1) and in subparagraph (B) of paragraph 
        (2), by striking ``penalty or addition'' and inserting 
        ``interest, penalty, or addition''.
    (c) Effective Date.--The amendments made by this section shall 
apply with respect to interest accruing on or after the date of the 
enactment of this Act.

SEC. 303. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON POTENTIAL 
              UNDERPAYMENTS.

    (a) In General.--Subchapter A of chapter 67 (relating to interest 
on underpayments) is amended by adding at the end the following new 
section:

``SEC. 6603. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON POTENTIAL 
              UNDERPAYMENTS, ETC.

    ``(a) Authority To Make Deposits Other Than As Payment of Tax.--A 
taxpayer may make a cash deposit with the Secretary which may be used 
by the Secretary to pay any tax imposed under subtitle A or B or 
chapter 41, 42, 43, or 44 which has not been assessed at the time of 
the deposit. Such a deposit shall be made in such manner as the 
Secretary shall prescribe.
    ``(b) No Interest Imposed.--To the extent that such deposit is used 
by the Secretary to pay tax, for purposes of section 6601 (relating to 
interest on underpayments), the tax shall be treated as paid when the 
deposit is made.
    ``(c) Return of Deposit.--Except in a case where the Secretary 
determines that collection of tax is in jeopardy, the Secretary shall 
return to the taxpayer any amount of the deposit (to the extent not 
used for a payment of tax) which the taxpayer requests in writing.
    ``(d) Payment of Interest.--
            ``(1) In general.--For purposes of section 6611 (relating 
        to interest on overpayments), a deposit which is returned to a 
        taxpayer shall be treated as a payment of tax for any period to 
        the extent (and only to the extent) attributable to a 
        disputable tax for such period. Under regulations prescribed by 
        the Secretary, rules similar to the rules of section 6611(b)(2) 
        shall apply.
            ``(2) Disputable tax.--
                    ``(A) In general.--For purposes of this section, 
                the term `disputable tax' means the amount of tax 
                specified at the time of the deposit as the taxpayer's 
                reasonable estimate of the maximum amount of any tax 
                attributable to disputable items.
                    ``(B) Safe harbor based on 30-day letter.--In the 
                case of a taxpayer who has been issued a 30-day letter, 
                the maximum amount of tax under subparagraph (A) shall 
                not be less than the amount of the proposed deficiency 
                specified in such letter.
            ``(3) Other definitions.--For purposes of paragraph (2)--
                    ``(A) Disputable item.--The term `disputable item' 
                means any item of income, gain, loss, deduction, or 
                credit if the taxpayer--
                            ``(i) has a reasonable basis for its 
                        treatment of such item, and
                            ``(ii) reasonably believes that the 
                        Secretary also has a reasonable basis for 
                        disallowing the taxpayer's treatment of such 
                        item.
                    ``(B) 30-day letter.--The term `30-day letter' 
                means the first letter of proposed deficiency which 
                allows the taxpayer an opportunity for administrative 
                review in the Internal Revenue Service Office of 
                Appeals.
            ``(4) Rate of interest.--The rate of interest allowable 
        under this subsection shall be the Federal short-term rate 
        determined under section 6621(b), compounded daily.
    ``(e) Use of Deposits.--
            ``(1) Payment of tax.--Except as otherwise provided by the 
        taxpayer, deposits shall be treated as used for the payment of 
        tax in the order deposited.
            ``(B) Returns of deposits.--Deposits shall be treated as 
        returned to the taxpayer on a last-in, first-out basis.''.
    (b) Clerical Amendment.--The table of sections for subchapter A of 
chapter 67 is amended by adding at the end the following new item:

                              ``Sec. 6603. Deposits made to suspend 
                                        running of interest on 
                                        potential underpayments, 
                                        etc.''.
    (c) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to deposits made after the date of the enactment of this 
        Act.
            (2) Coordination with deposits made under revenue procedure 
        84-58.--In the case of an amount held by the Secretary of the 
        Treasury or his delegate on the date of the enactment of this 
        Act as a deposit in the nature of a cash bond deposit pursuant 
        to Revenue Procedure 84-58, the date that the taxpayer 
        identifies such amount as a deposit made pursuant to section 
        6603 of the Internal Revenue Code (as added by this Act) shall 
        be treated as the date such amount is deposited for purposes of 
        such section 6603.

SEC. 304. EXPANSION OF INTEREST NETTING FOR INDIVIDUALS.

    (a) In General.--Subsection (d) of section 6621 (relating to 
elimination of interest on overlapping periods of tax overpayments and 
underpayments) is amended by adding at the end the following: ``Solely 
for purposes of the preceding sentence, section 6611(e) shall not apply 
in the case of an individual.''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to interest accrued after December 31, 2003.

SEC. 305. WAIVER OF CERTAIN PENALTIES FOR FIRST-TIME UNINTENTIONAL 
              MINOR ERRORS.

    (a) In General.--Section 6651 (relating to failure to file tax 
return or to pay tax) is amended by adding at the end the following new 
subsection:
    ``(i) Treatment of First-Time Unintentional Minor Errors.--
            ``(1) In general.--In the case of a return of tax imposed 
        by subtitle A filed by an individual, the Secretary may waive 
        an addition to tax under subsection (a) if--
                    ``(A) the individual has a history of compliance 
                with the requirements of this title,
                    ``(B) it is shown that the failure is due to an 
                unintentional minor error,
                    ``(C) the penalty would be grossly disproportionate 
                to the action or expense that would have been needed to 
                avoid the error, and imposing the penalty would be 
                against equity and good conscience,
                    ``(D) waiving the penalty would promote compliance 
                with the requirements of this title and effective tax 
                administration, and
                    ``(E) the taxpayer took all reasonable steps to 
                remedy the error promptly after discovering it.
            ``(2) Exceptions.--Paragraph (1) shall not apply if--
                    ``(A) the Secretary has waived any addition to tax 
                under this subsection with respect to any prior failure 
                by such individual,
                    ``(B) the failure is a mathematical or clerical 
                error (as defined in section 6213(g)(2)), or
                    ``(C) the failure is the lack of a required 
                signature.''.
    (b) Effective Date.--The amendment made by this section shall take 
effect on January 1, 2004.

SEC. 306. FRIVOLOUS TAX SUBMISSIONS.

    (a) Civil Penalties.--Section 6702 is amended to read as follows:

``SEC. 6702. FRIVOLOUS TAX SUBMISSIONS.

    ``(a) Civil Penalty for Frivolous Tax Returns.--A person shall pay 
a penalty of $5,000 if--
            ``(1) such person files what purports to be a return of a 
        tax imposed by this title but which--
                    ``(A) does not contain information on which the 
                substantial correctness of the self-assessment may be 
                judged, or
                    ``(B) contains information that on its face 
                indicates that the self-assessment is substantially 
                incorrect; and
            ``(2) the conduct referred to in paragraph (1)--
                    ``(A) is based on a position which the Secretary 
                has identified as frivolous under subsection (c), or
                    ``(B) reflects a desire to delay or impede the 
                administration of Federal tax laws.
    ``(b) Civil Penalty for Specified Frivolous Submissions.--
            ``(1) Imposition of Penalty.--Except as provided in 
        paragraph (3), any person who submits a specified frivolous 
        submission shall pay a penalty of $5,000.
            ``(2) Specified frivolous submission.--For purposes of this 
        section--
                    ``(A) Specified frivolous submission.--The term 
                `specified frivolous submission' means a specified 
                submission if any portion of such submission is based 
                on a position which the Secretary has identified as 
                frivolous under subsection (c).
                    ``(B) Specified submission.--The term `specified 
                submission' means--
                            ``(i) a request for a hearing under--
                                    ``(I) section 6320 (relating to 
                                notice and opportunity for hearing upon 
                                filing of notice of lien), or
                                    ``(II) section 6330 (relating to 
                                notice and opportunity for hearing 
                                before levy), and
                            ``(ii) an application under--
                                    ``(I) section 7811 (relating to 
                                taxpayer assistance orders),
                                    ``(II) section 6159 (relating to 
                                agreements for payment of tax liability 
                                in installments), or
                                    ``(III) section 7122 (relating to 
                                compromises).
            ``(3) Opportunity to withdraw submission.--If the Secretary 
        provides a person with notice that a submission is a specified 
        frivolous submission and such person withdraws such submission 
        within 30 days after such notice, the penalty imposed under 
        paragraph (1) shall not apply with respect to such submission.
    ``(c) Listing of Frivolous Positions.--The Secretary shall 
prescribe (and periodically revise) a list of positions which the 
Secretary has identified as being frivolous for purposes of this 
subsection. The Secretary shall not include in such list any position 
that the Secretary determines meets the requirement of section 
6662(d)(2)(B)(ii)(II).
    ``(d) Reduction of Penalty.--The Secretary may reduce the amount of 
any penalty imposed under this section if the Secretary determines that 
such reduction would promote compliance with and administration of the 
Federal tax laws.
    ``(e) Penalties in Addition to Other Penalties.--The penalties 
imposed by this section shall be in addition to any other penalty 
provided by law.''.
    (b) Clerical Amendment.--The table of sections for part I of 
subchapter B of chapter 68 is amended by striking the item relating to 
section 6702 and inserting the following new item:

                              ``Sec. 6702. Frivolous tax 
                                        submissions.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to submissions made and issues raised after the date on which the 
Secretary first prescribes a list under section 6702(c) of the Internal 
Revenue Code of 1986, as amended by subsection (a).

SEC. 307. CLARIFICATION OF APPLICATION OF FEDERAL TAX DEPOSIT PENALTY.

    Nothing in section 6656 of the Internal Revenue Code of 1986 shall 
be construed to permit the percentage specified in subsection 
(b)(1)(A)(iii) thereof to apply other than in a case where the failure 
is for more than 15 days.

             Subtitle B--Fairness of Collection Procedures

SEC. 311. PARTIAL PAYMENT OF TAX LIABILITY IN INSTALLMENT AGREEMENTS.

    (a) In General.--
            (1) Section 6159(a) (relating to authorization of 
        agreements) is amended--
                    (A) by striking ``satisfy liability for payment 
                of'' and inserting ``make payment on'', and
                    (B) by inserting ``full or partial'' after 
                ``facilitate''.
            (2) Section 6159(c) (relating to Secretary required to 
        enter into installment agreements in certain cases) is amended 
        in the matter preceding paragraph (1) by inserting ``full'' 
        before ``payment''.
    (b) Requirement To Review Partial Payment Agreements Every Two 
Years.--Section 6159 is amended by redesignating subsections (d) and 
(e) as subsections (e) and (f), respectively, and inserting after 
subsection (c) the following new subsection:
    ``(d) Secretary Required To Review Installment Agreements for 
Partial Collection Every Two Years.--In the case of an agreement 
entered into by the Secretary under subsection (a) for partial 
collection of a tax liability, the Secretary shall review the agreement 
at least once every 2 years.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to agreements entered into on or after the date of the enactment 
of this Act.

SEC. 312. EXTENSION OF TIME FOR RETURN OF PROPERTY.

    (a) Extension of Time for Return of Property Subject to Levy.--
Subsection (b) of section 6343 (relating to return of property) is 
amended by striking ``9 months'' and inserting ``2 years''.
    (b) Period of Limitation on Suits.--Subsection (c) of section 6532 
(relating to suits by persons other than taxpayers) is amended--
            (1) in paragraph (1) by striking ``9 months'' and inserting 
        ``2 years'', and
            (2) in paragraph (2) by striking ``9-month'' and inserting 
        ``2-year''.
    (c) Effective Date.--The amendments made by this section shall 
apply to--
            (1) levies made after the date of the enactment of this 
        Act, and
            (2) levies made on or before such date if the 9-month 
        period has not expired under section 6343(b) of the Internal 
        Revenue Code of 1986 (without regard to this section) as of 
        such date.

SEC. 313. INDIVIDUALS HELD HARMLESS ON WRONGFUL LEVY, ETC., ON 
              INDIVIDUAL RETIREMENT PLAN.

    (a) In General.--Section 6343 (relating to authority to release 
levy and return property) is amended by adding at the end the following 
new subsection:
    ``(f) Individuals Held Harmless on Wrongful Levy, etc. on 
Individual Retirement Plan.--
            ``(1) In general.--If the Secretary determines that an 
        individual retirement plan has been levied upon in a case to 
        which subsection (b) or (d)(2)(A) applies, an amount equal to 
        the sum of--
                    ``(A) the amount of money returned by the Secretary 
                on account of such levy, and
                    ``(B) interest paid under subsection (c) on such 
                amount of money,
        may be deposited into an individual retirement plan (other than 
        an endowment contract) to which a rollover from the plan levied 
        upon is permitted.
            ``(2) Treatment as rollover.--The distribution on account 
        of the levy and any deposit under paragraph (1) with respect to 
        such distribution shall be treated for purposes of this title 
        as if such distribution and deposit were part of a rollover 
        described in section 408(d)(3)(A)(i); except that--
                    ``(A) interest paid under subsection (c) shall be 
                treated as part of such distribution and as not 
                includible in gross income,
                    ``(B) the 60-day requirement in such section shall 
                be treated as met if the deposit is made not later than 
                the 60th day after the day on which the individual 
                receives an amount under paragraph (1) from the 
                Secretary, and
                    ``(C) such deposit shall not be taken into account 
                under section 408(d)(3)(B).
            ``(3) Refund, etc., of income tax on levy.--If any amount 
        is includible in gross income for a taxable year by reason of a 
        levy referred to in paragraph (1) and any portion of such 
        amount is treated as a rollover under paragraph (2), any tax 
        imposed by chapter 1 on such portion shall not be assessed, and 
        if assessed shall be abated, and if collected shall be credited 
        or refunded as an overpayment made on the due date for filing 
        the return of tax for such taxable year.
            ``(4) Interest.--Notwithstanding subsection (d), interest 
        shall be allowed under subsection (c) in a case in which the 
        Secretary makes a determination described in subsection 
        (d)(2)(A) with respect to a levy upon an individual retirement 
        plan.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to amounts paid under subsections (b), (c), and (d)(2)(A) of section 
6343 of the Internal Revenue Code of 1986 after December 31, 2003.

SEC. 314. SEVEN-DAY THRESHOLD ON TOLLING OF STATUTE OF LIMITATIONS 
              DURING TAX REVIEW.

    (a) In General.--Section 7811(d)(1) (relating to suspension of 
running of period of limitation) is amended by inserting after 
``application,'' the following: ``but only if the date of such decision 
is at least 7 days after the date of the taxpayer's application''.
    (b) Effective Date.--The amendment made by this section shall apply 
to applications filed after the date of the enactment of this Act.

SEC. 315. STUDY OF LIENS AND LEVIES.

    The Secretary of the Treasury, or the Secretary's delegate, shall 
conduct a study of the practices of the Internal Revenue Service 
concerning liens and levies. The study shall examine--
            (1) the declining use of liens and levies by the Internal 
        Revenue Service, and
            (2) the practicality of recording liens and 
        levying against property in cases in which the cost of such 
        actions exceeds the amount to be realized from such property.
Not later than 1 year after the date of the enactment of this Act, the 
Secretary shall submit such study to the Committee on Ways and Means of 
the House of Representatives and the Committee on Finance of the 
Senate.

                 Subtitle C--Tax Administration Reforms

SEC. 331. REVISIONS RELATING TO TERMINATION OF EMPLOYMENT OF INTERNAL 
              REVENUE SERVICE EMPLOYEES FOR MISCONDUCT.

    (a) In General.--Subchapter A of chapter 80 (relating to 
application of internal revenue laws) is amended by inserting after 
section 7804 the following new section:

``SEC. 7804A. DISCIPLINARY ACTIONS FOR MISCONDUCT.

    ``(a) Disciplinary Actions.--
            ``(1) In general.--Subject to subsection (c), the 
        Commissioner shall take an action in accordance with the 
        guidelines established under paragraph (2) against any employee 
        of the Internal Revenue Service if there is a final 
        administrative or judicial determination that such employee 
        committed any act or omission described under subsection (b) in 
        the performance of the employee's official duties or where a 
        nexus to the employee's position exists.
            ``(2) Guidelines.--The Commissioner shall issue guidelines 
        for determining the appropriate level of discipline, up to and 
        including termination of employment, for committing any act or 
        omission described under subsection (b).
    ``(b) Acts or Omissions.--The acts or omissions described under 
this subsection are--
            ``(1) willful failure to obtain the required approval 
        signatures on documents authorizing the seizure of a taxpayer's 
        home, personal belongings, or business assets;
            ``(2) willfully providing a false statement under oath with 
        respect to a material matter involving a taxpayer or taxpayer 
        representative;
            ``(3) with respect to a taxpayer or taxpayer 
        representative, the willful violation of--
                    ``(A) any right under the Constitution of the 
                United States;
                    ``(B) any civil right established under--
                            ``(i) title VI or VII of the Civil Rights 
                        Act of 1964;
                            ``(ii) title IX of the Education Amendments 
                        of 1972;
                            ``(iii) the Age Discrimination in 
                        Employment Act of 1967;
                            ``(iv) the Age Discrimination Act of 1975;
                            ``(v) section 501 or 504 of the 
                        Rehabilitation Act of 1973; or
                            ``(vi) title I of the Americans with 
                        Disabilities Act of 1990; or
                    ``(C) the Internal Revenue Service policy on 
                unauthorized inspection of returns or return 
                information;
            ``(4) willfully falsifying or destroying documents to 
        conceal mistakes made by any employee with respect to a matter 
        involving a taxpayer or taxpayer representative;
            ``(5) assault or battery on a taxpayer or taxpayer 
        representative, but only if there is a criminal conviction, or 
        a final adverse judgment by a court in a civil case, with 
        respect to the assault or battery;
            ``(6) willful violations of this title, Department of the 
        Treasury regulations, or policies of the Internal Revenue 
        Service (including the Internal Revenue Manual) for the purpose 
        of retaliating against, or harassing, a taxpayer or taxpayer 
        representative;
            ``(7) willful misuse of the provisions of section 6103 for 
        the purpose of concealing information from a congressional 
        inquiry;
            ``(8) willful failure to file any return of tax required 
        under this title on or before the date prescribed therefor 
        (including any extensions) when a tax is due and owing, unless 
        such failure is due to reasonable cause and not due to willful 
        neglect;
            ``(9) willful understatement of Federal tax liability, 
        unless such understatement is due to reasonable cause and not 
        due to willful neglect; and
            ``(10) threatening to audit a taxpayer, or to take other 
        action under this title, for the purpose of extracting personal 
        gain or benefit.
    ``(c) Determinations of Commissioner.--
            ``(1) In general.--The Commissioner may take a personnel 
        action other than a disciplinary action provided for in the 
        guidelines under subsection (a)(2) for an act or omission 
        described under subsection (b).
            ``(2) Discretion.--The exercise of authority under 
        paragraph (1) shall be at the sole discretion of the 
        Commissioner and may not be delegated to any other officer. The 
        Commissioner, in his sole discretion, may establish a procedure 
        to determine if an individual should be referred to the 
        Commissioner for a determination by the Commissioner under 
        paragraph (1).
            ``(3) No appeal.--Notwithstanding any other provision of 
        law, any determination of the Commissioner under this 
        subsection may not be reviewed in any administrative or 
        judicial proceeding. A finding that an act or omission 
        described under subsection (b) occurred may be reviewed.
    ``(d) Definition.--For the purposes of the provisions described in 
clauses (i), (ii), and (iv) of subsection (b)(3)(B), references to a 
program or activity regarding Federal financial assistance or an 
education program or activity receiving Federal financial assistance 
shall include any program or activity conducted by the Internal Revenue 
Service for a taxpayer.
    ``(e) Annual Report.--The Commissioner shall submit to Congress 
annually a report on disciplinary actions under this section.''.
    (b) Clerical Amendment.--The table of sections for chapter 80 is 
amended by inserting after the item relating to section 7804 the 
following new item:

                              ``Sec. 7804A. Disciplinary actions for 
                                        misconduct.''.
    (c) Repeal of Superseded Section.--Section 1203 of the Internal 
Revenue Service Restructuring and Reform Act of 1998 (Public Law 105-
206; 112 Stat. 720) is repealed.
    (d) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 332. CONFIRMATION OF AUTHORITY OF TAX COURT TO APPLY DOCTRINE OF 
              EQUITABLE RECOUPMENT.

    (a) Confirmation of Authority of Tax Court To Apply Doctrine of 
Equitable Recoupment.--Subsection (b) of section 6214 (relating to 
jurisdiction over other years and quarters) is amended by adding at the 
end the following new sentence: ``Notwithstanding the preceding 
sentence, the Tax Court may apply the doctrine of equitable recoupment 
to the same extent that it is available in civil tax cases before the 
district courts of the United States and the United States Court of 
Federal Claims.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to any action or proceeding in the Tax Court with respect to 
which a decision has not become final (as determined under section 7481 
of the Internal Revenue Code of 1986) as of the date of the enactment 
of this Act.

SEC. 333. JURISDICTION OF TAX COURT OVER COLLECTION DUE PROCESS CASES.

    (a) In General.--Section 6330(d)(1) (relating to judicial review of 
determination) is amended to read as follows:
            ``(1) Judicial review of determination.--The person may, 
        within 30 days of a determination under this section, appeal 
        such determination to the Tax Court (and the Tax Court shall 
        have jurisdiction with respect to such matter).''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to judicial appeals filed after the date of the enactment of this 
Act.

SEC. 334. OFFICE OF CHIEF COUNSEL REVIEW OF OFFERS IN COMPROMISE.

    (a) In General.--Section 7122(b) (relating to record) is amended by 
striking ``Whenever a compromise'' and all that follows through ``his 
delegate'' and inserting ``If the Secretary determines that an opinion 
of the General Counsel for the Department of the Treasury, or the 
Counsel's delegate, is required with respect to a compromise, there 
shall be placed on file in the office of the Secretary such opinion''.
    (b) Conforming Amendments.--Section 7122(b) is amended by striking 
the second and third sentences.
    (c) Effective Date.--The amendments made by this section shall 
apply to offers-in-compromise submitted or pending on or after the date 
of the enactment of this Act.

SEC. 335. ACCESS OF NATIONAL TAXPAYER ADVOCATE TO INDEPENDENT LEGAL 
              COUNSEL.

    Clause (i) of section 7803(c)(2)(D) (relating to personnel actions) 
is amended by striking ``and'' at the end of subclause (I), by striking 
the period at the end of subclause (II) and inserting ``, and'', and by 
adding at the end the following new subclause:
                                    ``(III) appoint a counsel in the 
                                Office of the Taxpayer Advocate to 
                                report solely to the National Taxpayer 
                                Advocate.''.

SEC. 336. PAYMENT OF MOTOR FUEL EXCISE TAX REFUNDS BY DIRECT DEPOSIT.

    (a) In General.--Subchapter II of chapter 33 of title 31, United 
States Code, is amended by adding at the end the following new section:
``Sec. 3337. Payment of motor fuel excise tax refunds by direct deposit
    ``The Secretary of the Treasury shall make payments under sections 
6420, 6421, and 6427 of the Internal Revenue Code of 1986 by electronic 
funds transfer (as defined in section 3332(j)(1)) if the person who is 
entitled to the payment--
            ``(1) elects to receive the payment by electronic funds 
        transfer; and
            ``(2) satisfies the requirements of section 3332(g) with 
        respect to such payment at such time and in such manner as the 
        Secretary may require.''.
    (b) Clerical Amendment.--The table of sections for subchapter II of 
chapter 33 of title 31, United States Code, is amended by adding at the 
end the following new item:

``3337. Payment of motor fuel excise tax refunds by direct deposit.''.

SEC. 337. FAMILY BUSINESS TAX SIMPLIFICATION.

    (a) In General.--Section 761 (defining terms for purposes of 
partnerships) is amended by redesignating subsection (f) as subsection 
(g) and by inserting after subsection (e) the following new subsection:
    ``(f) Qualified Joint Venture.--
            ``(1) In general.--In the case of a qualified joint venture 
        conducted by a husband and wife who file a joint return for the 
        taxable year, for purposes of this title--
                    ``(A) such joint venture shall not be treated as a 
                partnership,
                    ``(B) all items of income, gain, loss, deduction, 
                and credit shall be divided between the spouses in 
                accordance with their respective interests in the 
                venture, and
                    ``(C) each spouse shall take into account such 
                spouse's respective share of such items as if they were 
                attributable to a trade or business conducted by such 
                spouse as a sole proprietor.
            ``(2) Qualified joint venture.--For purposes of paragraph 
        (1), the term `qualified joint venture' means any joint venture 
        involving the conduct of a trade or business if--
                    ``(A) the only members of such joint venture are a 
                husband and wife,
                    ``(B) both spouses materially participate (within 
                the meaning of section 469(h) without regard to 
                paragraph (5) thereof) in such trade or business, and
                    ``(C) both spouses elect the application of this 
                subsection.''.
    (b) Net Earnings From Self-Employment.--
            (1) Subsection (a) of section 1402 (defining net earnings 
        from self-employment) is amended by striking ``and'' at the end 
        of paragraph (14), by striking the period at the end of 
        paragraph (15) and inserting ``; and'', and by inserting after 
        paragraph (15) the following new paragraph:
            ``(16) notwithstanding the preceding provisions of this 
        subsection, each spouse's share of income or loss from a 
        qualified joint venture shall be taken into account as provided 
        in section 761(f) in determining net earnings from self-
        employment of such spouse.''.
            (2) Subsection (a) of section 211 of the Social Security 
        Act (defining net earnings from self-employment) is amended by 
        striking ``and'' at the end of paragraph (14), by striking the 
        period at the end of paragraph (15) and inserting ``; and'', 
        and by inserting after paragraph (15) the following new 
        paragraph:
            ``(16) Notwithstanding the preceding provisions of this 
        subsection, each spouse's share of income or loss from a 
        qualified joint venture shall be taken into account as provided 
        in section 761(f) of the Internal Revenue Code of 1986 in 
        determining net earnings from self-employment of such 
        spouse.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 338. SUSPENSION OF TAX-EXEMPT STATUS OF TERRORIST ORGANIZATIONS.

    (a) In General.--Section 501 (relating to exemption from tax on 
corporations, certain trusts, etc.) is amended by redesignating 
subsection (p) as subsection (q) and by inserting after subsection (o) 
the following new subsection:
    ``(p) Suspension of Tax-Exempt Status of Terrorist Organizations.--
            ``(1) In general.--The exemption from tax under subsection 
        (a) with respect to any organization described in paragraph 
        (2), and the eligibility of any organization described in 
        paragraph (2) to apply for recognition of exemption under 
        subsection (a), shall be suspended during the period described 
        in paragraph (3).
            ``(2) Terrorist organizations.--An organization is 
        described in this paragraph if such organization is designated 
        or otherwise individually identified--
                    ``(A) under section 212(a)(3)(B)(vi)(II) or 219 of 
                the Immigration and Nationality Act as a terrorist 
                organization or foreign terrorist organization,
                    ``(B) in or pursuant to an Executive order which is 
                related to terrorism and issued under the authority of 
                the International Emergency Economic Powers Act or 
                section 5 of the United Nations Participation Act of 
                1945 for the purpose of imposing on such organization 
                an economic or other sanction, or
                    ``(C) in or pursuant to an Executive order issued 
                under the authority of any Federal law if--
                            ``(i) the organization is designated or 
                        otherwise individually identified in or 
                        pursuant to such Executive order as supporting 
                        or engaging in terrorist activity (as defined 
                        in section 212(a)(3)(B) of the Immigration and 
                        Nationality Act) or supporting terrorism (as 
                        defined in section 140(d)(2) of the Foreign 
                        Relations Authorization Act, Fiscal Years 1988 
                        and 1989); and
                            ``(ii) such Executive order refers to this 
                        subsection.
            ``(3) Period of suspension.--With respect to any 
        organization described in paragraph (2), the period of 
        suspension--
                    ``(A) begins on the later of--
                            ``(i) the date of the first publication of 
                        a designation or identification described in 
                        paragraph (2) with respect to such 
                        organization, or
                            ``(ii) the date of the enactment of this 
                        subsection, and
                    ``(B) ends on the first date that all designations 
                and identifications described in paragraph (2) with 
                respect to such organization are rescinded pursuant to 
                the law or Executive order under which such designation 
                or identification was made.
            ``(4) Denial of deduction.--No deduction shall be allowed 
        under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 
        2106(a)(2), or 2522 for any contribution to an organization 
        described in paragraph (2) during the period described in 
        paragraph (3).
            ``(5) Denial of administrative or judicial challenge of 
        suspension or denial of deduction.--Notwithstanding section 
        7428 or any other provision of law, no organization or other 
        person may challenge a suspension under paragraph (1), a 
        designation or identification described in paragraph (2), the 
        period of suspension described in paragraph (3), or a denial of 
        a deduction under paragraph (4) in any administrative or 
        judicial proceeding relating to the Federal tax liability of 
        such organization or other person.
            ``(6) Erroneous designation.--
                    ``(A) In general.--If--
                            ``(i) the tax exemption of any organization 
                        described in paragraph (2) is suspended under 
                        paragraph (1),
                            ``(ii) each designation and identification 
                        described in paragraph (2) which has been made 
                        with respect to such organization is determined 
                        to be erroneous pursuant to the law or 
                        Executive order under which such designation or 
                        identification was made, and
                            ``(iii) the erroneous designations and 
                        identifications result in an overpayment of 
                        income tax for any taxable year by such 
                        organization,
                credit or refund (with interest) with respect to such 
                overpayment shall be made.
                    ``(B) Waiver of limitations.--If the credit or 
                refund of any overpayment of tax described in 
                subparagraph (A)(iii) is prevented at any time by the 
                operation of any law or rule of law (including res 
                judicata), such credit or refund may nevertheless be 
                allowed or made if the claim therefor is filed before 
                the close of the 1-year period beginning on the date of 
                the last determination described in subparagraph 
                (A)(ii).
            ``(7) Notice of suspensions.--If the tax exemption of any 
        organization is suspended under this subsection, the Internal 
        Revenue Service shall update the listings of tax-exempt 
        organizations and shall publish appropriate notice to taxpayers 
        of such suspension and of the fact that contributions to such 
        organization are not deductible during the period of such 
        suspension.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to designations made before, on, or after the date of the 
enactment of this Act.

SEC. 339. TAX REFUND ANTICIPATION LOANS.

    The Secretary of the Treasury may not provide any direct deposit 
indicator with respect to a taxpayer to any tax return preparer, 
financial institution, or other person that charges taxpayers interest 
rates (including fees) on refund anticipation loans in excess of the 
consumer loan usury rate limit of the State in which the taxpayer is 
domiciled.

SEC. 340. FAIRNESS IN TAX AUDIT COVERAGE.

    (a) Mandatory Audits of High Risk Taxpayers.--The Secretary of the 
Treasury shall conduct audits of all taxpayers whom the Secretary 
determines are likely to have--
            (1) an unpaid Federal income tax liability of more than 
        $1,000,000, or
            (2) to have unreported income or structured transactions 
        which are considered by the Secretary to be high risk.
    (b) Rate of Audits.--The Secretary of the Treasury shall conduct 
audits of high income taxpayers likely to owe taxes at a rate which is 
not less than the rate at which the Secretary conducts audits of low 
income taxpayers likely to owe taxes.

               Subtitle D--Confidentiality and Disclosure

SEC. 341. COLLECTION ACTIVITIES WITH RESPECT TO JOINT RETURN 
              DISCLOSABLE TO EITHER SPOUSE BASED ON ORAL REQUEST.

    (a) In General.--Paragraph (8) of section 6103(e) (relating to 
disclosure of collection activities with respect to joint return) is 
amended by striking ``in writing'' the first place it appears.
    (b) Effective Date.--The amendment made by this section shall apply 
to requests made after the date of the enactment of this Act.

SEC. 342. TAXPAYER REPRESENTATIVES NOT SUBJECT TO EXAMINATION ON SOLE 
              BASIS OF REPRESENTATION OF TAXPAYERS.

    (a) In General.--Paragraph (1) of section 6103(h) (relating to 
disclosure to certain Federal officers and employees for purposes of 
tax administration, etc.) is amended--
            (1) by striking ``Returns'' and inserting the following:
                    ``(A) In general.--Returns'', and
            (2) by adding at the end the following new subparagraph:
                    ``(B) Taxpayer representatives.--Notwithstanding 
                subparagraph (A), the return of the representative of a 
                taxpayer whose return is being examined by an officer 
                or employee of the Department of the Treasury shall not 
                be open to inspection by such officer or employee on 
                the sole basis of the representative's relationship to 
                the taxpayer unless a supervisor of such officer or 
                employee has approved the inspection of the return of 
                such representative on a basis other than by reason of 
                such relationship.''.
    (b) Effective Date.--The amendment made by this section shall take 
effect on the date which is 180 days after the date of the enactment of 
this Act.

SEC. 343. DISCLOSURE IN JUDICIAL OR ADMINISTRATIVE TAX PROCEEDINGS OF 
              RETURN AND RETURN INFORMATION OF PERSONS WHO ARE NOT 
              PARTY TO SUCH PROCEEDINGS.

    (a) In General.--Paragraph (4) of 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 subparagraph:
                    ``(B) Disclosure in judicial or administrative tax 
                proceedings of return and return information of persons 
                not party to such proceedings.--
                            ``(i) Notice.--Return or return information 
                        of any person who is not a party to a judicial 
                        or administrative proceeding described in this 
                        paragraph shall not be disclosed under clause 
                        (ii) or (iii) of subparagraph (A) until after 
                        the Secretary makes a reasonable effort to give 
                        notice to such person and an opportunity for 
                        such person to request the deletion of matter 
                        from such return or return information, 
                        including any of the items referred to in 
                        paragraphs (1) through (7) of section 6110(c). 
                        Such notice shall include a statement of the 
                        issue or issues the resolution of which is the 
                        reason such return or return information is 
                        sought. In the case of S corporations, 
                        partnerships, estates, and trusts, such notice 
                        shall be made at the entity level.
                            ``(ii) Disclosure limited to pertinent 
                        portion.--The only portion of a return or 
                        return information described in clause (i) 
                        which may be disclosed under subparagraph (A) 
                        is that portion of such return or return 
                        information that directly relates to the 
                        resolution of an issue in such proceeding.
                            ``(iii) Exceptions.--Clause (i) shall not 
                        apply--
                                    ``(I) to any civil action under 
                                section 7407, 7408, or 7409,
                                    ``(II) to any ex parte proceeding 
                                for obtaining a search warrant, order 
                                for entry on premises or safe deposit 
                                boxes, or similar ex parte proceeding,
                                    ``(III) to disclosure of third 
                                party return information by indictment 
                                or criminal information, or
                                    ``(IV) if the Attorney General or 
                                the Attorney General's delegate 
                                determines that the application of such 
                                clause would seriously impair a 
                                criminal tax investigation or 
                                proceeding.''.
    (b) Conforming Amendments.--Paragraph (4) of section 6103(h) is 
amended by--
            (1) by striking ``proceedings.--A return'' and inserting 
        ``proceedings.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), a return'';
            (2) by redesignating subparagraphs (A), (B), (C), and (D) 
        as clauses (i), (ii), (iii), and (iv), respectively; and
            (3) in the matter following clause (iv) (as so 
        redesignated), by striking ``subparagraph (A), (B), or (C)'' 
        and inserting ``clause (i), (ii), or (iii)'' and by moving such 
        matter 2 ems to the right.
    (c) Effective Date.--The amendments made by this section shall 
apply to proceedings commenced after the date of the enactment of this 
Act.

SEC. 344. PROHIBITION OF DISCLOSURE OF TAXPAYER IDENTIFICATION 
              INFORMATION WITH RESPECT TO DISCLOSURE OF ACCEPTED 
              OFFERS-IN-COMPROMISE.

    (a)  General.--Paragraph (1) of section 6103(k) (relating to 
disclosure of certain returns and return information for tax 
administrative purposes) is amended by inserting ``(other than the 
taxpayer's address and TIN)'' after ``Return information''.
    (b) Effective Date.--The amendment made by this section shall apply 
to disclosures made after the date of the enactment of this Act.

SEC. 345. COMPLIANCE BY CONTRACTORS WITH CONFIDENTIALITY SAFEGUARDS.

    (a) In General.--Section 6103(p) (relating to State law 
requirements) is amended by adding at the end the following new 
paragraph:
            ``(9) Disclosure to contractors and other agents.--
        Notwithstanding any other provision of this section, no return 
        or return information shall be disclosed to any contractor or 
        other agent of a Federal, State, or local agency unless such 
        agency, to the satisfaction of the Secretary--
                    ``(A) has requirements in effect which require each 
                such contractor or other agent which would have access 
                to returns or return information to provide safeguards 
                (within the meaning of paragraph (4)) to protect the 
                confidentiality of such returns or return information,
                    ``(B) agrees to conduct an annual, on-site review 
                (mid-point review in the case of contracts of less than 
                1 year in duration) of each such contractor or other 
                agent to determine compliance with such requirements,
                    ``(C) submits the findings of the most recent 
                review conducted under subparagraph (B) to the 
                Secretary as part of the report required by paragraph 
                (4)(E), and
                    ``(D) certifies to the Secretary for the most 
                recent annual period that each such contractor or other 
                agent is in compliance with all such requirements.
        The certification required by subparagraph (D) shall include 
        the name and address of each contractor and other agent, a 
        description of the contract of the contractor or other agent 
        with the agency, and the duration of such contract.''.
    (b) Conforming Amendment.--Subparagraph (B) of section 6103(p)(8) 
is amended by inserting ``or paragraph (9)'' after ``subparagraph 
(A)''.
    (c) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to disclosures made after December 31, 2003.
            (2) Certifications.--The first certification under section 
        6103(p)(9)(D) of the Internal Revenue Code of 1986, as added by 
        subsection (a), shall be made with respect to calendar year 
        2004.

SEC. 346. HIGHER STANDARDS FOR REQUESTS FOR AND CONSENTS TO DISCLOSURE.

    (a) In General.--Subsection (c) of section 6103 (relating to 
disclosure of returns and return information to designee of taxpayer) 
is amended by adding at the end the following new paragraphs:
            ``(2) Requirements for valid requests and consents.--A 
        request for or consent to disclosure under paragraph (1) shall 
        only be valid for purposes of this section, sections 7213, 
        7213A, and 7431 if--
                    ``(A) at the time of execution, such request or 
                consent designates a recipient of such disclosure and 
                is dated, and
                    ``(B) at the time such request or consent is 
                submitted to the Secretary, the submitter of such 
                request or consent certifies, under penalty of perjury, 
                that such request or consent complied with subparagraph 
                (A).
            ``(3) Restrictions on persons obtaining information.--Any 
        person shall, as a condition for receiving return or return 
        information under paragraph (1)--
                    ``(A) ensure that such return and return 
                information is kept confidential,
                    ``(B) use such return and return information only 
                for the purpose for which it was requested, and
                    ``(C) not disclose such return and return 
                information except to accomplish the purpose for which 
                it was requested, unless a separate consent from the 
                taxpayer is obtained.
            ``(4) Requirements for form prescribed by secretary.--For 
        purposes of this subsection, the Secretary shall prescribe a 
        form for requests and consents which shall--
                    ``(A) contain a warning, prominently displayed, 
                informing the taxpayer that the form should not be 
                signed unless it is completed,
                    ``(B) state that if the taxpayer believes there is 
                an attempt to coerce him to sign an incomplete or blank 
                form, the taxpayer should report the matter to the 
                Treasury Inspector General for Tax Administration, and
                    ``(C) contain the address and telephone number of 
                the Treasury Inspector General for Tax 
                Administration.''.
    (b) Report.--Not later than 18 months after the date of the 
enactment of this Act, the Treasury Inspector General for Tax 
Administration shall submit a report to the Congress on compliance with 
the designation and certification requirements applicable to requests 
for or consent to disclosure of returns and return information under 
section 6103(c) of the Internal Revenue Code of 1986, as amended by 
subsection (a). Such report shall--
            (1) evaluate (on the basis of random sampling) whether--
                    (A) the amendment made by subsection (a) is 
                achieving the purposes of this section;
                    (B) requesters and submitters for such disclosure 
                are continuing to evade the purposes of this section 
                and, if so, how; and
                    (C) the sanctions for violations of such 
                requirements are adequate; and
            (2) include such recommendations that the Treasury 
        Inspector General for Tax Administration considers necessary or 
        appropriate to better achieve the purposes of this section.
    (c) Conforming Amendments.--
            (1) Section 6103(c) is amended by striking ``Taxpayer.--The 
        Secretary'' and inserting ``Taxpayer.--
            ``(1) In General.--The Secretary''.
            (2) Section 7213(a)(1) is amended by striking ``section 
        6103(n)'' and inserting ``subsections (c) and (n) of section 
        6103''.
            (3) Section 7213A(a)(1)(B) is amended by striking 
        ``subsection (l)(18) or (n) of section 6103'' and inserting 
        ``subsection (c), (l)(18), or (n) of section 6103''.
    (d) Effective Date.--The amendments made by this section shall 
apply to requests and consents made after 3 months after the date of 
the enactment of this Act.

SEC. 347. NOTICE TO TAXPAYER CONCERNING ADMINISTRATIVE DETERMINATION OF 
              BROWSING; ANNUAL REPORT.

    (a) Notice to Taxpayer.--Subsection (e) of section 7431 (relating 
to notification of unlawful inspection and disclosure) is amended by 
adding at the end the following: ``The Secretary shall also notify such 
taxpayer if the Treasury Inspector General for Tax Administration 
substantiates that such taxpayer's return or return information was 
inspected or disclosed in violation of any of the provisions specified 
in paragraph (1), (2), or (3).''.
    (b) Reports.--Subsection (p) of section 6103 (relating to procedure 
and recordkeeping), is amended by adding at the end the following new 
paragraph:
            ``(10) Report on unauthorized disclosure and inspection.--
        As part of the report required by paragraph (3)(C) for each 
        calendar year, the Secretary shall furnish information 
        regarding the unauthorized disclosure and inspection of returns 
        and return information, including the number, status, and 
        results of--
                    ``(A) administrative investigations,
                    ``(B) civil lawsuits brought under section 7431 
                (including the amounts for which such lawsuits were 
                settled and the amounts of damages awarded), and
                    ``(C) criminal prosecutions.''.
    (c) Effective Date.--
            (1) Notice.--The amendment made by subsection (a) shall 
        apply to determinations made after the date of the enactment of 
        this Act.
            (2) Reports.--The amendment made by subsection (b) shall 
        apply to calendar years ending after the date of the enactment 
        of this Act.

SEC. 348. EXPANDED DISCLOSURE IN EMERGENCY CIRCUMSTANCES.

    (a) In General.--Section 6103(i)(3)(B) (relating to danger of death 
or physical injury) is amended by striking ``or State'' and inserting 
``, State, or local''.
    (b) Effective Date.--The amendment made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 349. DISCLOSURE OF TAXPAYER IDENTITY FOR TAX REFUND PURPOSES.

    (a) In General.--Paragraph (1) of section 6103(m) (relating to 
disclosure of taxpayer identity information) is amended by striking 
``and other media'' and by inserting ``, other media, and through any 
other means of mass communication,''.
    (b) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 350. DISCLOSURE TO STATE OFFICIALS OF PROPOSED ACTIONS RELATED TO 
              SECTION 501(C)(3) ORGANIZATIONS.

    (a) In General.--Subsection (c) of section 6104 is amended by 
striking paragraph (2) and inserting the following new paragraphs:
            ``(2) Disclosure of proposed actions.--
                    ``(A) Specific notifications.--In the case of an 
                organization to which paragraph (1) applies, the 
                Secretary may disclose to the appropriate State 
                officer--
                            ``(i) a notice of proposed refusal to 
                        recognize such organization as an organization 
                        described in section 501(c)(3) or a notice of 
                        proposed revocation of such organization's 
                        recognition as an organization exempt from 
                        taxation,
                            ``(ii) the issuance of a letter of proposed 
                        deficiency of tax imposed under section 507 or 
                        chapter 41 or 42, and
                            ``(iii) the names, addresses, and taxpayer 
                        identification numbers of organizations that 
                        have applied for recognition as organizations 
                        described in section 501(c)(3).
                    ``(B) Additional disclosures.--Returns and return 
                information of organizations with respect to which 
                information is disclosed under subparagraph (A) may be 
                made available for inspection by or disclosed to an 
                appropriate State officer.
                    ``(C) Procedures for disclosure.--Information may 
                be inspected or disclosed under subparagraph (A) or (B) 
                only--
                            ``(i) upon written request by an 
                        appropriate State officer, and
                            ``(ii) for the purpose of, and only to the 
                        extent necessary in, the administration of 
                        State laws regulating such organizations.
                Such information may only be inspected by or disclosed 
                to a person other than the appropriate State officer if 
                such person is an officer or employee of the State and 
                is designated by the appropriate State officer to 
                receive the returns or return information under this 
                paragraph on behalf of the appropriate State officer.
                    ``(D) Disclosures other than by request.--The 
                Secretary may make available for inspection or disclose 
                returns and return information of an organization to 
                which paragraph (1) applies to an appropriate State 
                officer of any State if the Secretary determines that 
                such inspection or disclosure may facilitate the 
                resolution of State or Federal issues relating to the 
                tax-exempt status of such organization.
            ``(3) Use in administrative and judicial civil 
        proceedings.--Returns and return information disclosed pursuant 
        to this subsection may be disclosed in administrative and 
        judicial civil proceedings pertaining to the enforcement of 
        State laws regulating such organizations in a manner prescribed 
        by the Secretary similar to that for tax administration 
        proceedings under section 6103(h)(4).
            ``(4) No disclosure if impairment.--Returns and return 
        information shall not be disclosed under this subsection, or in 
        any proceeding described in paragraph (3), to the extent that 
        the Secretary determines that such disclosure would seriously 
        impair Federal tax administration.
            ``(5) Definitions.--For purposes of this subsection--
                    ``(A) Return and return information.--The terms 
                `return' and `return information' have the respective 
                meanings given to such terms by section 6103(b).
                    ``(B) Appropriate state officer.--The term 
                `appropriate State officer' means--
                            ``(i) the State attorney general, or
                            ``(ii) any other State official charged 
                        with overseeing organizations of the type 
                        described in section 501(c)(3).''.
    (b) Conforming Amendments.--
            (1) Subparagraph (A) of section 6103(p)(3) is amended by 
        inserting ``and section 6104(c)'' after ``section'' in the 
        first sentence.
            (2) Paragraph (4) of section 6103(p) is amended--
                    (A) in the matter preceding subparagraph (A), by 
                inserting ``, or any appropriate State officer (as 
                defined in section 6104(c)),'' before ``or any other 
                person'',
                    (B) in subparagraph (F)(i), by inserting ``or any 
                appropriate State officer (as defined in section 
                6104(c)),'' before ``or any other person'', and
                    (C) in the matter following subparagraph (F), by 
                inserting ``, an appropriate State officer (as defined 
                in section 6104(c)),'' after ``including an agency'' 
                each place it appears.
            (3) Paragraph (2) of section 7213(a) is amended by 
        inserting ``or under section 6104(c)'' after ``6103''.
            (4) Paragraph (2) of section 7213A(a) is amended by 
        inserting ``or 6104(c)'' after ``6103''.
            (5) Paragraph (2) of section 7431(a) is amended by 
        inserting ``(including any disclosure in violation of section 
        6104(c))'' after ``6103''.
    (c) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act but shall not apply to 
requests made before such date.

SEC. 351. CONFIDENTIALITY OF TAXPAYER COMMUNICATIONS WITH THE OFFICE OF 
              THE TAXPAYER ADVOCATE.

    (a) In General.--Subsection (c) of section 7803 is amended by 
adding at the end the following new paragraph:
            ``(5) Confidentiality of taxpayer information.--
                    ``(A) In general.--To the extent authorized by the 
                National Taxpayer Advocate or pursuant to guidance 
                issued under subparagraph (B), any officer or employee 
                of the Office of the Taxpayer Advocate may withhold 
                from the Internal Revenue Service and the Department of 
                Justice any information provided by, or regarding 
                contact with, any taxpayer.
                    ``(B) Issuance of guidance.--In consultation with 
                the Chief Counsel for the Internal Revenue Service and 
                subject to the approval of the Commissioner of Internal 
                Revenue, the National Taxpayer Advocate may issue 
                guidance regarding the circumstances (including with 
                respect to litigation) under which, and the persons to 
                whom, employees of the Office of the Taxpayer Advocate 
                shall not disclose information obtained from a 
                taxpayer. To the extent to which any provision of the 
                Internal Revenue Manual would require greater 
                disclosure by employees of the Office of the Taxpayer 
                Advocate than the disclosure required under such 
                guidance, such provision shall not apply.
                    ``(C) Employee protection.--Section 7214(a)(8) 
                shall not apply to any failure to report knowledge or 
                information if--
                            ``(i) such failure to report is authorized 
                        under subparagraph (A), and
                            ``(ii) such knowledge or information is not 
                        of fraud committed by a person against the 
                        United States under any revenue law.''.
    (b) Conforming Amendment.--Subparagraph (A) of section 7803(c)(4) 
is amended by inserting ``and'' at the end of clause (ii), by striking 
``; and'' at the end of clause (iii) and inserting a period, and by 
striking clause (iv).

                       Subtitle E--Miscellaneous

SEC. 361. CLARIFICATION OF DEFINITION OF CHURCH TAX INQUIRY.

    Subsection (i) of section 7611 (relating to section not to apply to 
criminal investigations, etc.) is amended by striking ``or'' at the end 
of paragraph (4), by striking the period at the end of paragraph (5) 
and inserting ``, or'', and by inserting after paragraph (5) the 
following:
            ``(6) information provided by the Secretary related to the 
        standards for exemption from tax under this title and the 
        requirements under this title relating to unrelated business 
        taxable income.''.

SEC. 362. EXPANSION OF DECLARATORY JUDGMENT REMEDY TO TAX-EXEMPT 
              ORGANIZATIONS.

    (a) In General.--Paragraph (1) of section 7428(a) (relating to 
creation of remedy) is amended--
            (1) in subparagraph (B) by inserting after ``509(a))'' the 
        following: ``or as a private operating foundation (as defined 
        in section 4942(j)(3))''; and
            (2) by amending subparagraph (C) to read as follows:
                    ``(C) with respect to the initial qualification or 
                continuing qualification of an organization as an 
                organization described in subsection (c) (other than 
                paragraph (3)) or (d) of section 501 which is exempt 
                from tax under section 501(a), or''.
    (b) Court Jurisdiction.--Subsection (a) of section 7428 is amended 
in the material following paragraph (2) by striking ``United States Tax 
Court, the United States Claims Court, or the district court of the 
United States for the District of Columbia'' and inserting the 
following: ``United States Tax Court (in the case of any such 
determination or failure) or the United States Claims Court or the 
district court of the United States for the District of Columbia (in 
the case of a determination or failure with respect to an issue 
referred to in subparagraph (A) or (B) of paragraph (1)),''.
    (c) Effective Date.--The amendments made by this section shall 
apply to pleadings filed with respect to determinations (or requests 
for determinations) made after the date of the enactment of this Act.

SEC. 363. EMPLOYEE MISCONDUCT REPORT TO INCLUDE SUMMARY OF COMPLAINTS 
              BY CATEGORY.

    (a) In General.--Clause (ii) of section 7803(d)(2)(A) is amended by 
inserting before the semicolon at the end the following: ``, including 
a summary (by category) of the 10 most common complaints made and the 
number of such common complaints''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply with respect to reporting periods ending after the date of the 
enactment of this Act.

SEC. 364. ANNUAL REPORT ON AWARDS OF COSTS AND CERTAIN FEES IN 
              ADMINISTRATIVE AND COURT PROCEEDINGS.

    Not later than 3 months after the close of each Federal fiscal year 
after fiscal year 2003, the Treasury Inspector General for Tax 
Administration shall submit a report to Congress which specifies for 
such year--
            (1) the number of payments made by the United States 
        pursuant to section 7430 of the Internal Revenue Code of 1986 
        (relating to awarding of costs and certain fees);
            (2) the amount of each such payment;
            (3) an analysis of any administrative issue giving rise to 
        such payments; and
            (4) changes (if any) which will be implemented as a result 
        of such analysis and other changes (if any) recommended by the 
        Treasury Inspector General for Tax Administration as a result 
        of such analysis.

SEC. 365. ANNUAL REPORT ON ABATEMENT OF PENALTIES.

    Not later than 6 months after the close of each Federal fiscal year 
after fiscal year 2003, the Treasury Inspector General for Tax 
Administration shall submit a report to Congress on abatements of 
penalties under the Internal Revenue Code of 1986 during such year, 
including information on the reasons and criteria for such abatements.

SEC. 366. BETTER MEANS OF COMMUNICATING WITH TAXPAYERS.

    Not later than 18 months after the date of the enactment of this 
Act, the Treasury Inspector General for Tax Administration shall submit 
a report to Congress evaluating whether technological advances, such as 
e-mail and facsimile transmission, permit the use of alternative means 
for the Internal Revenue Service to communicate with taxpayers.

SEC. 367. EXPLANATION OF STATUTE OF LIMITATIONS AND CONSEQUENCES OF 
              FAILURE TO FILE.

    The Secretary of the Treasury or the Secretary's delegate shall, as 
soon as practicable but not later than 180 days after the date of the 
enactment of this Act, revise the statement required by section 6227 of 
the Omnibus Taxpayer Bill of Rights (Internal Revenue Service 
Publication No. 1), and any instructions booklet accompanying a general 
income tax return form for taxable years beginning after 2002 
(including forms 1040, 1040A, 1040EZ, and any similar or successor 
forms relating thereto), to provide for an explanation of--
            (1) the limitations imposed by section 6511 of the Internal 
        Revenue Code of 1986 on credits and refunds; and
            (2) the consequences under such section 6511 of the failure 
        to file a return of tax.

SEC. 368. AMENDMENT TO TREASURY AUCTION REFORMS.

    (a) In General.--Clause (i) of section 202(c)(4)(B) of the 
Government Securities Act Amendments of 1993 (31 U.S.C. 3121 note) is 
amended by inserting before the semicolon ``(or, if earlier, at the 
time the Secretary releases the minutes of the meeting in accordance 
with paragraph (2))''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to meetings held after the date of the enactment of this Act.

SEC. 369. ENROLLED AGENTS.

    (a) In General.--Chapter 77 (relating to miscellaneous provisions) 
is amended by adding at the end the following new section:

``SEC. 7528. ENROLLED AGENTS.

    ``(a) In General.--The Secretary may prescribe such regulations as 
may be necessary to regulate the conduct of enrolled agents in regards 
to their practice before the Internal Revenue Service.
    ``(b) Use of Credentials.--Any enrolled agents properly licensed to 
practice as required under rules promulgated under section (a) herein 
shall be allowed to use the credentials or designation as `enrolled 
agent', `EA', or `E.A.'.''.
    (b) Clerical Amendment.--The table of sections for chapter 77 is 
amended by adding at the end the following new item:

                              ``Sec. 7528. Enrolled agents.''.
    (c) Prior Regulations.--Nothing in the amendments made by this 
section shall be construed to have any effect on part 10 of title 31, 
Code of Federal Regulations, or any other Federal rule or regulation 
issued before the date of the enactment of this Act.

SEC. 370. FINANCIAL MANAGEMENT SERVICE FEES.

    Notwithstanding any other provision of law, the Financial 
Management Service may charge the Internal Revenue Service, and the 
Internal Revenue Service may pay the Financial Management Service, a 
fee sufficient to cover the full cost of implementing a continuous levy 
program under subsection (h) of section 6331 of the Internal Revenue 
Code of 1986. Any such fee shall be based on actual levies made and 
shall be collected by the Financial Management Service by the retention 
of a portion of amounts collected by levy pursuant to that subsection. 
Amounts received by the Financial Management Service as fees under that 
subsection shall be deposited into the account of the Department of the 
Treasury under section 3711(g)(7) of title 31, United States Code, and 
shall be collected and accounted for in accordance with the provisions 
of that section. The amount credited against the taxpayer's liability 
on account of the continuous levy shall be the amount levied, without 
reduction for the amount paid to the Financial Management Service as a 
fee.

SEC. 371. EXTENSION OF INTERNAL REVENUE SERVICE USER FEES.

    (a) In General.--Chapter 77 (relating to miscellaneous provisions) 
is amended by adding at the end the following new section:

``SEC. 7529. INTERNAL REVENUE SERVICE USER FEES.

    ``(a) General Rule.--The Secretary shall establish a program 
requiring the payment of user fees for--
            ``(1) requests to the Internal Revenue Service for ruling 
        letters, opinion letters, and determination letters, and
            ``(2) other similar requests.
    ``(b) Program Criteria.--
            ``(1) In general.--The fees charged under the program 
        required by subsection (a)--
                    ``(A) shall vary according to categories (or 
                subcategories) established by the Secretary,
                    ``(B) shall be determined after taking into account 
                the average time for (and difficulty of) complying with 
                requests in each category (and subcategory), and
                    ``(C) shall be payable in advance.
            ``(2) Exemptions, etc.--
                    ``(A) In general.--The Secretary shall provide for 
                such exemptions (and reduced fees) under such program 
                as the Secretary determines to be appropriate.
                    ``(B) Exemption for certain requests regarding 
                pension plans.--The Secretary shall not require payment 
                of user fees under such program for requests for 
                determination letters with respect to the qualified 
                status of a pension benefit plan maintained solely by 1 
                or more eligible employers or any trust which is part 
                of the plan. The preceding sentence shall not apply to 
                any request--
                            ``(i) made after the later of--
                                    ``(I) the fifth plan year the 
                                pension benefit plan is in existence, 
                                or
                                    ``(II) the end of any remedial 
                                amendment period with respect to the 
                                plan beginning within the first 5 plan 
                                years, or
                            ``(ii) made by the sponsor of any prototype 
                        or similar plan which the sponsor intends to 
                        market to participating employers.
                    ``(C) Definitions and special rules.--For purposes 
                of subparagraph (B)--
                            ``(i) Pension benefit plan.--The term 
                        `pension benefit plan' means a pension, profit-
                        sharing, stock bonus, annuity, or employee 
                        stock ownership plan.
                            ``(ii) Eligible employer.--The term 
                        `eligible employer' means an eligible employer 
                        (as defined in section 408(p)(2)(C)(i)(I)) 
                        which has at least 1 employee who is not a 
                        highly compensated employee (as defined in 
                        section 414(q)) and is participating in the 
                        plan. The determination of whether an employer 
                        is an eligible employer under subparagraph (B) 
                        shall be made as of the date of the request 
                        described in such subparagraph.
                            ``(iii) Determination of average fees 
                        charged.--For purposes of any determination of 
                        average fees charged, any request to which 
                        subparagraph (B) applies shall not be taken 
                        into account.
            ``(3) Average fee requirement.--The average fee charged 
        under the program required by subsection (a) shall not be less 
        than the amount determined under the following table:

                                                                Average
``Category                                                          Fee
    Employee plan ruling and opinion..............                $250 
    Exempt organization ruling....................                $350 
    Employee plan determination...................                $300 
    Exempt organization determination.............                $275 
    Chief counsel ruling..........................                $200.
    ``(c) Termination.--No fee shall be imposed under this section with 
respect to requests made after September 30, 2013.''.
    (b) Conforming Amendments.--
            (1) The table of sections for chapter 77 is amended by 
        adding at the end the following new item:

                              ``Sec. 7529. Internal Revenue Service 
                                        user fees.''.
            (2) Section 10511 of the Revenue Act of 1987 is repealed.
            (3) Section 620 of the Economic Growth and Tax Relief 
        Reconciliation Act of 2001 is repealed.
    (c) Limitations.--Notwithstanding any other provision of law, any 
fees collected pursuant to section 7527 of the Internal Revenue Code of 
1986, as added by subsection (a), shall not be expended by the Internal 
Revenue Service unless provided by an appropriations Act.
    (d) Effective Date.--The amendments made by this section shall 
apply to requests made after the date of the enactment of this Act.

                Subtitle F--Low-Income Taxpayer Clinics

SEC. 381. LOW-INCOME TAXPAYER CLINICS.

    (a) Limitation on Amount of Grants.--Paragraph (1) of section 
7526(c) (relating to special rules and limitations) is amended by 
striking ``$6,000,000 per year'' and inserting ``$9,000,000 for 2004, 
$12,000,000 for 2005, and $15,000,000 for each year thereafter''.
    (b) Promotion of Clinics.--Section 7526(c) is amended by adding at 
the end the following new paragraph:
            ``(6) Promotion of clinics.--The Secretary is authorized to 
        promote the benefits of and encourage the use of low-income 
        taxpayer clinics through the use of mass communications, 
        referrals, and other means.''.
    (c) Use of Grants for Overhead Expenses Prohibited.--Section 
7526(c), as amended by subsection (b), is further amended by adding at 
the end the following new paragraph:
            ``(7) Use of grants for overhead expenses prohibited.--No 
        grant made under this section may be used for the general 
        overhead expenses of any institution sponsoring a qualified 
        low-income taxpayer clinic.''.
    (d) Eligible Clinics.--
            (1) In general.--Paragraph (2) of section 7526(b) is 
        amended to read as follows:
            ``(2) Eligible clinic.--The term `eligible clinic' means--
                    ``(A) any clinical program at an accredited law, 
                business, or accounting school in which students 
                represent low-income taxpayers in controversies arising 
                under this title; and
                    ``(B) any organization described in section 501(c) 
                and exempt from tax under section 501(a) which 
                satisfies the requirements of paragraph (1) through 
                representation of taxpayers or referral of taxpayers to 
                qualified representatives.''.
            (2) Conforming amendment.--Subparagraph (A) of section 
        7526(b)(1) is amended by striking ``means a clinic'' and 
        inserting ``means an eligible clinic''.

SEC. 382. MATCHING GRANTS TO LOW INCOME RETURN PREPARATION CLINICS.

    (a) In General.--Chapter 77 (relating to miscellaneous provisions) 
is amended by inserting after section 7526 the following new section:

``SEC. 7526A. LOW INCOME RETURN PREPARATION CLINICS.

    ``(a) In General.--The Secretary may, subject to the availability 
of appropriated funds, make grants to provide matching funds for the 
development, expansion, or continuation of qualified return preparation 
clinics.
    ``(b) Definitions.--For purposes of this section--
            ``(1) Qualified return preparation clinic.--
                    ``(A) In general.--The term `qualified return 
                preparation clinic' means an eligible clinic which--
                            ``(i) does not charge more than a nominal 
                        fee for its services (except for reimbursement 
                        of actual costs incurred), and
                            ``(ii) operates programs which assist low-
                        income taxpayers in preparing and filing their 
                        Federal income tax returns, including schedules 
                        reporting sole proprietorship or farm income.
                    ``(B) Assistance to low-income taxpayers.--A clinic 
                is treated as assisting low-income taxpayers under 
                subparagraph (A)(ii) if at least 90 percent of the 
                taxpayers assisted by the clinic have incomes which do 
                not exceed 250 percent of the poverty level, as 
                determined in accordance with criteria established by 
                the Director of the Office of Management and Budget.
            ``(2) Eligible clinic.--The term `eligible clinic' 
        includes--
                    ``(A) a clinical program at an eligible educational 
                institution (as defined in section 529(e)(5)) which 
                satisfies the requirements of paragraph (1) through 
                student assistance of taxpayers in return preparation 
                and filing, and
                    ``(B) an organization described in section 501(c) 
                and exempt from tax under section 501(a) which 
                satisfies the requirements of paragraph (1).
    ``(c) Special Rules and Limitations.--
            ``(1) Aggregate limitation.--Unless otherwise provided by 
        specific appropriation, the Secretary shall not allocate more 
        than $10,000,000 per year (exclusive of costs of administering 
        the program) to grants under this section.
            ``(2) Other applicable rules.--Rules similar to the rules 
        under paragraphs (2) through (7) of section 7526(c) shall apply 
        with respect to the awarding of grants to qualified return 
        preparation clinics.''.
    (b) Clerical Amendment.--The table of sections for chapter 77 is 
amended by inserting after the item relating to section 7526 the 
following new item:

                              ``Sec. 7526A. Low income return 
                                        preparation clinics.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to grants made after the date of the enactment of this Act.

      Subtitle G--Federal-state unemployment assistance agreements

SEC. 391. APPLICABILITY OF CERTAIN FEDERAL-STATE AGREEMENTS RELATING TO 
              UNEMPLOYMENT ASSISTANCE.

    Effective as of May 25, 2003, section 208 of Public Law 107-147 is 
amended--
            (1) in subsection (a)(2), by inserting ``on or'' after 
        ``ending''; and
            (2) in subsection (b), by striking ``May 31'' each place it 
        appears and inserting ``June 1''.
                                 <all>