[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 135 Introduced in Senate (IS)]







108th CONGRESS
  1st Session
                                 S. 135

To amend the Internal Revenue Code of 1986 to expand the 10 percent tax 
  bracket, to freeze the rate of the top tax brackets, to provide an 
   immediate $4,000,000 estate tax exemption and complete estate tax 
 exclusion for family-owned businesses while eliminating the repeal of 
                the estate tax, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                            January 9, 2003

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

_______________________________________________________________________

                                 A BILL


 
To amend the Internal Revenue Code of 1986 to expand the 10 percent tax 
  bracket, to freeze the rate of the top tax brackets, to provide an 
   immediate $4,000,000 estate tax exemption and complete estate tax 
 exclusion for family-owned businesses while eliminating the repeal of 
                the estate tax, and for other purposes.

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

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Dayton Fair Tax Cut Act''.

SEC. 2. TABLE OF CONTENTS.

    (a) Table of Contents.--The table of contents of this Act is as 
follows:

Sec. 1. Short title.
Sec. 2. Table of contents.
                      TITLE I--10 PERCENT BRACKET

Sec. 101. Expansion of 10 percent bracket.
                          TITLE II--TAX RATES

Sec. 201. Repeal of income tax rate reductions for highest income 
                            taxpayers.
                         TITLE III--ESTATE TAX

Sec. 301. Estate tax with full tax deduction for family-owned business 
                            interests.
                   TITLE IV--TAX SHELTER TRANSACTIONS

Sec. 401. Findings and purpose.
        Subtitle A--Clarification of Economic Substance Doctrine

Sec. 411. Clarification of economic substance doctrine.
                         Subtitle B--Penalties

Sec. 421. Increase in penalty on underpayments resulting from failure 
                            to satisfy certain common law rules.
Sec. 422. Penalty on promoters of tax avoidance strategies which have 
                            no economic substance, etc.
Sec. 423. Modifications of penalties for aiding and abetting 
                            understatement of tax liability involving 
                            tax shelters.
Sec. 424. Failure to maintain lists.
Sec. 425. Penalty for failing to disclose reportable transaction.
Sec. 426. Registration of certain tax shelters without corporate 
                            participants.
Sec. 427. Effective dates.
  Subtitle C--Limitation on Importation or Transfer of Built-in Losses

Sec. 431. Limitation on importation of built-in losses.
Sec. 432. Disallowance of partnership loss transfers.
                    TITLE V--EXPATRIATE CORPORATIONS

Sec. 501. Foreign corporations created through inversion transactions 
                            taxed as domestic corporations.
                       TITLE VI--CHILD TAX CREDIT

Sec. 601. Acceleration of child tax credit.
                   TITLE VII--MARRIAGE PENALTY RELIEF

Sec. 701. Acceleration of marriage penalty relief provisions.
                  TITLE VIII--ALTERNATIVE MINIMUM TAX

Sec. 801. Alternative minimum tax relief.

                      TITLE I--10 PERCENT BRACKET

SEC. 101. EXPANSION OF 10 PERCENT BRACKET.

    (a) In General.--Subparagraph (B) of section 1(i)(1) of the 
Internal Revenue Code of 1986 (relating to initial bracket amount) is 
amended by--
            (1) striking ``$14,000 ($12,000 in the case of taxable 
        years beginning before January 1, 2008)'' in clause (i) and 
        inserting ``$24,000'', and
            (2) striking ``$10,000'' in clause (ii) and inserting 
        ``$15,000''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

                          TITLE II--TAX RATES

SEC. 201. REPEAL OF INCOME TAX RATE REDUCTIONS FOR HIGHEST INCOME 
              TAXPAYERS.

    (a) In General.--The table contained in section 1(i)(2) of the 
Internal Revenue Code of 1986 (relating to reductions in rates after 
June 30, 2001) is amended--
            (1) in the second column, by striking ``29.0%'' and 
        inserting ``30.0%'',
            (2) in the second column, by striking ``28.9%'' and 
        inserting ``30.0%'',
            (3) in the third column, by striking ``34.0%'' and 
        inserting ``35.0%'',
            (4) in the third column, by striking ``33.0%'' and 
        inserting ``35.0%'',
            (5) in the last column, by striking ``37.6%'' and inserting 
        ``38.6%'', and
            (6) in the last column, by striking ``35.0%'' and inserting 
        ``38.6%''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

                         TITLE III--ESTATE TAX

SEC. 301. ESTATE TAX WITH FULL TAX DEDUCTION FOR FAMILY-OWNED BUSINESS 
              INTERESTS.

    (a) Elimination of Estate Tax Repeal.--
            (1) In general.--Subtitle A of title V, sections 511(d), 
        511(e), and 521(b)(2), and subtitle E of title V of the 
        Economic Growth and Tax Relief Reconciliation Act of 2001 are 
        repealed.
            (2) Conforming amendments.--
                    (A) The table contained in section 2001(c)(2)(B) of 
                the Internal Revenue Code of 1986 is amended by 
                striking ``2007, 2008, and 2009'' and inserting ``2007 
                and thereafter''.
                    (B) Section 901 of the Economic Growth and Tax 
                Relief Reconciliation Act of 2001 is amended--
                            (i) by striking ``this Act'' and all that 
                        follows through ``2010.'' in subsection (a) and 
                        inserting ``this Act (other than title V) shall 
                        not apply to taxable, plan, or limitation years 
                        beginning after December 31, 2010.'', and
                            (ii) by striking ``, estates, gifts, and 
                        transfers'' in subsection (b).
    (b) Increase in Exclusion Amount.--Subsection (c) of section 2010 
of the Internal Revenue Code of 1986 is amended by striking ``were the 
applicable exclusion amount'' and all that follows and inserting 
``$4,000,000.''.
    (c) Full Tax Deduction for Family-Owned Business Interests.--
            (1) In general.--Section 2057(a) of the Internal Revenue 
        Code of 1986 (relating to deduction for family-owned business 
        interests) is amended--
                    (A) by striking paragraphs (2) and (3), and
                    (B) by striking ``General Rule.--'' and all that 
                follows through ``For purposes'' and inserting 
                ``Allowance of Deduction.--For purposes''.
            (2) Permanent deduction.--Section 2057 of such Code is 
        amended by striking subsection (j).
    (d) Effective Date.--The amendments made by this section shall 
apply to the estates of decedents dying, and gifts made, after December 
31, 2002.

                   TITLE IV--TAX SHELTER TRANSACTIONS

SEC. 401. 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--Clarification of Economic Substance Doctrine

SEC. 411. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

    (a) In General.--Section 7701 of the Internal Revenue Code of 1986 
(relating to definitions) is amended by redesignating subsection (n) as 
subsection (o) and by inserting after subsection (m) the following new 
subsection:
    ``(n) Clarification of Economic Substance Doctrine; Etc.--
            ``(1) General rules.--
                    ``(A) In general.--In applying the economic 
                substance doctrine, the determination of whether a 
                transaction has economic substance shall be made as 
                provided in this paragraph.
                    ``(B) Definition of economic substance.--For 
                purposes of subparagraph (A)--
                            ``(i) In general.--A transaction has 
                        economic substance only if--
                                    ``(I) the transaction changes in a 
                                meaningful way (apart from Federal 
                                income tax effects) the taxpayer's 
                                economic position, and
                                    ``(II) the taxpayer has a 
                                substantial nontax purpose for entering 
                                into such transaction and the 
                                transaction is a reasonable means of 
                                accomplishing such purpose.
                            ``(ii) Special rule where taxpayer relies 
                        on profit potential.--A transaction shall not 
                        be treated as having economic substance by 
                        reason of having a potential for profit 
                        unless--
                                    ``(I) the present value of the 
                                reasonably expected pre-tax profit 
from the transaction is substantial in relation to the present value of 
the expected net tax benefits that would be allowed if the transaction 
were respected, and
                                    ``(II) the reasonably expected pre-
                                tax profit from the transaction exceeds 
                                a risk-free rate of return.
                    ``(C) Treatment of fees and foreign taxes.--Fees 
                and other transaction expenses and foreign taxes shall 
                be taken into account as expenses in determining pre-
                tax profit under subparagraph (B)(ii).
            ``(2) Special rules for transactions with tax-indifferent 
        parties.--
                    ``(A) Special rules for financing transactions.--
                The form of a transaction which is in substance the 
                borrowing of money or the acquisition of financial 
                capital directly or indirectly from a tax-indifferent 
                party shall not be respected if the present value of 
                the deductions to be claimed with respect to the 
                transaction are substantially in excess of the present 
                value of the anticipated economic returns of the person 
                lending the money or providing the financial capital. A 
                public offering shall be treated as a borrowing, or an 
                acquisition of financial capital, from a tax-
                indifferent party if it is reasonably expected that at 
                least 50 percent of the offering will be placed with 
                tax-indifferent parties.
                    ``(B) Artificial income shifting and basis 
                adjustments.--The form of a transaction with a tax-
                indifferent party shall not be respected if--
                            ``(i) it results in an allocation of income 
                        or gain to the tax-indifferent party in excess 
                        of such party's economic income or gain, or
                            ``(ii) it results in a basis adjustment or 
                        shifting of basis on account of overstating the 
                        income or gain of the tax-indifferent party.
            ``(3) Definitions and special rules.--For purposes of this 
        subsection--
                    ``(A) Economic substance doctrine.--The term 
                `economic substance doctrine' means the common law 
                doctrine under which tax benefits under subtitle A with 
                respect to a transaction are not allowable if the 
                transaction does not have economic substance or lacks a 
                business purpose.
                    ``(B) Tax-indifferent party.--The term `tax-
                indifferent party' means any person or entity not 
                subject to tax imposed by subtitle A. A person shall be 
                treated as a tax-indifferent party with respect to a 
                transaction if the items taken into account with 
                respect to the transaction have no substantial impact 
                on such person's liability under subtitle A.
                    ``(C) Exception for personal transactions of 
                individuals.--In the case of an individual, this 
                subsection shall apply only to transactions entered 
                into in connection with a trade or business or an 
activity engaged in for the production of income.
                    ``(D) Treatment of lessors.--In applying subclause 
                (I) of paragraph (1)(B)(ii) to the lessor of tangible 
                property subject to a lease, the expected net tax 
                benefits shall not include the benefits of 
                depreciation, or any tax credit, with respect to the 
                leased property and subclause (II) of paragraph 
                (1)(B)(ii) shall be disregarded in determining whether 
                any of such benefits are allowable.
            ``(4) Other common law doctrines not affected.--Except as 
        specifically provided in this subsection, the provisions of 
        this subsection shall not be construed as altering or 
        supplanting any other rule of law referred to in section 
        6662(i)(2), and the requirements of this subsection shall be 
        construed as being in addition to any such other rule of 
        law.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to transactions after the date of the enactment of this Act.

                         Subtitle B--Penalties

SEC. 421. INCREASE IN PENALTY ON UNDERPAYMENTS RESULTING FROM FAILURE 
              TO SATISFY CERTAIN COMMON LAW RULES.

    (a) In General.--Section 6662 of the Internal Revenue Code of 1986 
(relating to imposition of accuracy-related penalty) is amended by 
adding at the end the following new subsection:
    ``(i) Increase in Penalty in Case of Failure To Satisfy Certain 
Common Law Rules.--
            ``(1) In general.--To the extent that an underpayment is 
        attributable to a disallowance described in paragraph (2)--
                    ``(A) subsection (a) shall be applied with respect 
                to such portion by substituting `40 percent' for `20 
                percent', and
                    ``(B) subsection (d)(2)(B) and section 6664(c) 
                shall not apply.
            ``(2) Disallowances described.--A disallowance is described 
        in this subsection if such disallowance is on account of--
                    ``(A) a lack of economic substance (within the 
                meaning of section 7701(n)(1)) for the transaction 
                giving rise to the claimed benefit or the transaction 
                was not respected under section 7701(n)(2),
                    ``(B) a lack of business purpose for such 
                transaction or because the form of the transaction does 
                not reflect its substance, or
                    ``(C) a failure to meet the requirements of any 
                other similar rule of law.
            ``(3) Increase in penalty not to apply if compliance with 
        disclosure requirements.--Paragraph (1)(A) shall not apply if 
        the taxpayer discloses to the Secretary (as such time and in 
        such manner as the Secretary shall prescribe) such information 
        as the Secretary shall prescribe with respect to such 
        transaction.''.
    (b) Modifications to Penalty on Substantial Understatement of 
Income Tax.--
            (1) Modification of threshold.--Subparagraph (A) of section 
        6662(d)(1) of the Internal Revenue Code of 1986 is amended to 
        read as follows:
                    ``(A) In general.--For purposes of this section, 
                there is a substantial understatement of income tax for 
                any taxable year if the amount of the understatement 
                for the taxable year exceeds the lesser of--
                            ``(i) $500,000, or
                            ``(ii) the greater of 10 percent of the tax 
                        required to be shown on the return for the 
                        taxable year or $5,000.''.
            (2) Modification of penalty on tax shelters, etc.--Clauses 
        (i) and (ii) of section 6662(d)(2)(C) of such Code are amended 
        to read as follows:
                            ``(i) In general.--Subparagraph (B) shall 
                        not apply to any item attributable to a tax 
                        shelter.
                            ``(ii) Determination of understatements 
                        with respect to tax shelters, etc.--In any case 
                        in which there are one or more items 
                        attributable to a tax shelter, the amount of 
                        the understatement under subparagraph (A) shall 
                        in no event be less than the amount of 
                        understatement which would be determined for 
                        the taxable year if all items shown on the 
                        return which are not attributable to any tax 
                        shelter were treated as being correct. A 
                        similar rule shall apply in cases to which 
                        subsection (i) applies, whether or not the 
                        items are attributable to a tax shelter.''.
    (c) Treatment of Amended Returns.--Subsection (a) of section 6664 
of the Internal Revenue Code of 1986 is amended by adding at the end 
the following new sentence: ``For purposes of this subsection, an 
amended return shall be disregarded if such return is filed on or after 
the date the taxpayer is first contacted by the Secretary regarding the 
examination of the return.''.

SEC. 422. PENALTY ON PROMOTERS OF TAX AVOIDANCE STRATEGIES WHICH HAVE 
              NO ECONOMIC SUBSTANCE, ETC.

    (a) Penalty.--
            (1) In general.--Section 6700 of the Internal Revenue Code 
        of 1986 (relating to promoting abusive tax shelters, etc.) is 
        amended by redesignating subsection (c) as subsection (d) and 
        by inserting after subsection (b) the following new subsection:
    ``(c) Penalty on Substantial Promoters for Promoting Tax Avoidance 
Strategies Which Have No Economic Substance, Etc.--
            ``(1) Imposition of penalty.--Any substantial promoter of a 
        tax avoidance strategy shall pay a penalty in the amount 
        determined under paragraph (2) with respect to such strategy if 
        such strategy (or any similar strategy promoted by such 
        promoter) fails to meet the requirements of any rule of law 
        referred to in section 6662(i)(2).
            ``(2) Amount of penalty.--The penalty under paragraph (1) 
        with respect to a promoter of a tax avoidance strategy is an 
        amount equal to 100 percent of the gross income derived (or to 
        be derived) by such promoter from such strategy.
            ``(3) Tax avoidance strategy.--For purposes of this 
        subsection, the term `tax avoidance strategy' means any entity, 
        plan, arrangement, or transaction a significant purpose of the 
        structure of which is the avoidance or evasion of Federal 
        income tax.
            ``(4) Substantial promoter.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `substantial promoter' 
                means, with respect to any tax avoidance strategy, any 
                promoter if--
                            ``(i) such promoter offers such strategy to 
                        more than 1 potential participant, and
                            ``(ii) such promoter may receive fees in 
                        excess of $500,000 in the aggregate with 
                        respect to such strategy.
                    ``(B) Aggregation rules.--For purposes of this 
                paragraph--
                            ``(i) Related persons.--A promoter and all 
                        persons related to such promoter shall be 
                        treated as 1 person who is a promoter.
                            ``(ii) Similar strategies.--All similar tax 
                        avoidance strategies of a promoter shall be 
                        treated as 1 tax avoidance strategy.
                    ``(C) Promoter.--The term `promoter' means any 
                person who participates in the promotion, offering, or 
                sale of the tax avoidance strategy.
                    ``(D) Related person.--Persons are related if they 
                bear a relationship to each other which is described in 
                section 267(b) or 707(b).
            ``(4) Coordination with subsection (a).--No penalty shall 
        be imposed by this subsection on any promoter with respect to a 
        tax avoidance strategy if a penalty is imposed under subsection 
        (a) on such promoter with respect to such strategy.''.
            (2) Conforming amendment.--Subsection (d) of section 6700 
        of such Code is amended--
                    (A) by striking ``Penalty'' and inserting 
                ``Penalties'', and
                    (B) by striking ``penalty'' the first place it 
                appears in the text and inserting ``penalties''.
    (b) Increase in Penalty on Promoting Abusive Tax Shelters.--The 
first sentence of section 6700(a) of the Internal Revenue Code of 1986 
is amended by striking ``a penalty equal to'' and all that follows and 
inserting ``a penalty equal to the greater of $1,000 or 100 percent of 
the gross income derived (or to be derived) by such person from such 
activity.''.

SEC. 423. MODIFICATIONS OF PENALTIES FOR AIDING AND ABETTING 
              UNDERSTATEMENT OF TAX LIABILITY INVOLVING TAX SHELTERS.

    (a) Imposition of Penalty.--Section 6701(a) of the Internal Revenue 
Code of 1986 (relating to imposition of penalty) is amended to read as 
follows:
    ``(a) Imposition of Penalties.--
            ``(1) In general.--Any person--
                    ``(A) who aids or assists in, procures, or advises 
                with respect to, the preparation or presentation of any 
                portion of a return, affidavit, claim, or other 
                document,
                    ``(B) who knows (or has reason to believe) that 
                such portion will be used in connection with any 
                material matter arising under the internal revenue 
                laws, and
                    ``(C) who knows that such portion (if so used) 
                would result in an understatement of the liability for 
                tax of another person,
        shall pay a penalty with respect to each such document in the 
        amount determined under subsection (b).
            ``(2) Certain tax shelters.--If--
                    ``(A) any person--
                            ``(i) aids or assists in, procures, or 
                        advises with respect to the creation, 
                        organization, sale, implementation, management, 
                        or reporting of a tax shelter (as defined in 
                        section 6662(d)(2)(C)(iii)) or of any entity, 
                        plan, arrangement, or transaction that fails to 
                        meet the requirements of any rule of law 
                        referred to in section 6662(i)(2), and
                            ``(ii) opines, advises, represents, or 
                        otherwise indicates (directly or indirectly) 
                        that the taxpayer's tax treatment of items 
                        attributable to such tax shelter or such 
                        entity, plan, arrangement, or transaction and 
                        giving rise to an understatement of tax 
                        liability would more likely than not prevail or 
                        not give rise to a penalty, and
                    ``(B) such opinion, advice, representation, or 
                indication is unreasonable,
        then such person shall pay a penalty in the amount determined 
        under subsection (b). If a standard higher than the more likely 
        than not standard was used in any such opinion, advice, 
        representation, or indication, then subparagraph (A)(ii) shall 
        be applied as if such standard were substituted for the more 
        likely than not standard.''.
    (b) Amount of Penalty.--Section 6701(b) of the Internal Revenue 
Code of 1986 (relating to amount of penalty) is amended--
            (1) by inserting ``or (3)'' after ``paragraph (2)'' in 
        paragraph (1),
            (2) by striking ``subsection (a)'' each place it appears 
        and inserting ``subsection (a)(1)'', and
            (3) by redesignating paragraph (3) as paragraph (4) and by 
        adding after paragraph (2) the following:
            ``(3) Tax shelters.--In the case of--
                    ``(A) a penalty imposed by subsection (a)(1) which 
                involves a return, affidavit, claim, or other document 
                relating to a tax shelter or an entity, plan, 
                arrangement, or transaction that fails to meet the 
                requirements of any rule of law referred to in section 
                6662(i)(2), and
                    ``(B) any penalty imposed by subsection (a)(2),
        the amount of the penalty shall be equal to 100 percent of the 
        gross proceeds derived (or to be derived) by the person in 
        connection with the tax shelter or entity, plan, arrangement, 
        or transaction.''.
    (c) Referral and Publication.--If a penalty is imposed under 
section 6701(a)(2) of the Internal Revenue Code of 1986 (as added by 
subsection (a)) on any person, the Secretary of the Treasury shall--
            (1) notify the Director of Practice of the Internal Revenue 
        Service and any appropriate State licensing authority of the 
        penalty and the circumstances under which it was imposed, and
            (2) publish the identity of the person and the fact the 
        penalty was imposed on the person.
    (d) Conforming Amendments.--
            (1) Section 6701(d) of the Internal Revenue Code of 1986 is 
        amended by striking ``Subsection (a)'' and inserting 
        ``Subsection (a)(1)''.
            (2) Section 6701(e) of such Code is amended by striking 
        ``subsection (a)(1)'' and inserting ``subsection (a)(1)(A)''.
            (3) Section 6701(f) of such Code is amended by inserting 
        ``, tax shelter, or entity, plan, arrangement, or transaction'' 
        after ``document'' each place it appears.

SEC. 424. FAILURE TO MAINTAIN LISTS.

    Section 6708(a) of the Internal Revenue Code of 1986 (relating to 
failure to maintain lists of investors in potentially abusive tax 
shelters) is amended by adding at the end the following: ``In the case 
of a tax shelter (as defined in section 6662(d)(2)(C)(iii)) or entity, 
plan, arrangement, or transaction that fails to meet the requirements 
of any rule of law referred to in section 6662(i)(2), the penalty shall 
be equal to 50 percent of the gross proceeds derived (or to be derived) 
from each person with respect to which there was a failure and the 
limitation of the preceding sentence shall not apply.''.

SEC. 425. PENALTY FOR FAILING TO DISCLOSE REPORTABLE TRANSACTION.

    (a) In General.--Part I of subchapter B of chapter 68 of the 
Internal Revenue Code of 1986 (relating to assessable penalties) is 
amended by inserting after section 6707 the following new section:

``SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE TAX SHELTER INFORMATION 
              WITH RETURN.

    ``(a) Imposition of Penalty.--Any person who fails to include with 
its return of Federal income tax any information required to be 
included under section 6011 with respect to a reportable transaction 
shall pay a penalty in the amount determined under subsection (b). No 
penalty shall be imposed on any such failure if it is shown that such 
failure is due to reasonable cause.
    ``(b) Amount of Penalty.--
            ``(1) In general.--The amount of the penalty under 
        subsection (a) shall be equal to the greater of--
                    ``(A) 5 percent of any increase in Federal tax 
                which results from a difference between the taxpayer's 
                treatment (as shown on its return) of items 
                attributable to the reportable transaction to which the 
                failure relates and the proper tax treatment of such 
                items, or
                    ``(B) $100,000.
        For purposes of subparagraph (A), the last sentence of section 
        6664(a) shall apply.
            ``(2) Listed transaction.--If the failure under subsection 
        (a) relates to a reportable transaction which is the same as, 
        or substantially similar to, a transaction specifically 
        identified by the Secretary as a tax avoidance transaction for 
        purposes of section 6011, paragraph (1)(A) shall be applied by 
        substituting `10 percent' for `5 percent'.
    ``(c) Reportable Transaction.--For purposes of this section, the 
term `reportable transaction' means any transaction with respect to 
which information is required under section 6011 to be included with a 
taxpayer's return of tax because, as determined under regulations 
prescribed under section 6011, such transaction has characteristics 
which may be indicative of a tax avoidance transaction.
    ``(d) Coordination With Other Penalties.--The penalty imposed by 
this section is in addition to any penalty imposed under section 
6662.''.
    (b) Conforming Amendment.--The table of sections for part I of 
subchapter B of chapter 68 of the Internal Revenue Code of 1986 is 
amended by inserting after the item relating to section 6707 the 
following:

``Sec. 6707A. Penalty for failure to include tax shelter information 
                            with return.''.

SEC. 426. REGISTRATION OF CERTAIN TAX SHELTERS WITHOUT CORPORATE 
              PARTICIPANTS.

    Section 6111(d)(1)(A) of the Internal Revenue Code of 1986 
(relating to certain confidential arrangements treated as tax shelters) 
is amended by striking ``for a direct or indirect participant which is 
a corporation''.

SEC. 427. EFFECTIVE DATES.

    (a) In General.--Except as provided in subsections (b) and (c), the 
amendments made by this subtitle shall apply to transactions after the 
date of the enactment of this Act.
    (b) Section 421.--The amendments made by subsections (b) and (c) of 
section 421 shall apply to taxable years ending after the date of the 
enactment of this Act.
    (c) Section 422.--The amendments made by subsection (a) of section 
422 shall apply to any tax avoidance strategy (as defined in section 
6700(c) of the Internal Revenue Code of 1986, as amended by this title) 
which is offered to potential participants after the date of the 
enactment of this Act.
    (d) Section 426.--The amendment made by section 426 shall apply to 
any tax shelter interest which is offered to potential participants 
after the date of the enactment of this Act.

  Subtitle C--Limitation on Importation or Transfer of Built-in Losses

SEC. 431. LIMITATION ON IMPORTATION OF BUILT-IN LOSSES.

    (a) In General.--Section 362 of the Internal Revenue Code of 1986 
(relating to basis corporations) is amended by adding at the end the 
following new subsection:
    ``(e) Limitation on Importation of Built-in Losses.--
            ``(1) In general.--If in any transaction described in 
        subsection (a) or (b) there would (but for this subsection) be 
        an importation of a net built-in loss, the basis of each 
        property described in paragraph (2) which is acquired in such 
        transaction shall (notwithstanding subsections (a) and (b)) be 
        its fair market value immediately after such transaction.
            ``(2) Property described.--For purposes of paragraph (1), 
        property is described in this paragraph if--
                    ``(A) gain or loss with respect to such property is 
                not subject to tax under this subtitle in the hands of 
                the transferor immediately before the transfer, and
                    ``(B) gain or loss with respect to such property is 
                subject to such tax in the hands of the transferee 
                immediately after such transfer.
        In any case in which the transferor is a partnership, the 
        preceding sentence shall be applied by treating each partner in 
        such partnership as holding such partner's proportionate share 
of the property of such partnership.
            ``(3) Importation of net built-in loss.--For purposes of 
        paragraph (1), there is an importation of a net built-in loss 
        in a transaction if the transferee's aggregate adjusted bases 
        of property described in paragraph (2) which is transferred in 
        such transaction would (but for this subsection) exceed the 
        fair market value of such property immediately after such 
        transaction.''.
    (b) Comparable Treatment Where Liquidation.--Paragraph (1) of 
section 334(b) of the Internal Revenue Code of 1986 (relating to 
liquidation of subsidiary) is amended to read as follows:
            ``(1) In general.--If property is received by a corporate 
        distributee in a distribution in a complete liquidation to 
        which section 332 applies (or in a transfer described in 
        section 337(b)(1)), the basis of such property in the hands of 
        such distributee shall be the same as it would be in the hands 
        of the transferor; except that the basis of such property in 
        the hands of such distributee shall be the fair market value of 
        the property at the time of the distribution--
                    ``(A) in any case in which gain or loss is 
                recognized by the liquidating corporation with respect 
                to such property, or
                    ``(B) in any case in which the liquidating 
                corporation is a foreign corporation, the corporate 
                distributee is a domestic corporation, and the 
                corporate distributee's aggregate adjusted bases of 
                property described in section 362(e)(2) which is 
                distributed in such liquidation would (but for this 
                subparagraph) exceed the fair market value of such 
                property immediately after such liquidation.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to transactions after the date of the enactment of this Act.

SEC. 432. DISALLOWANCE OF PARTNERSHIP LOSS TRANSFERS.

    (a) Treatment of Contributed Property With Built-In Loss.--
Paragraph (1) of section 704(c) of the Internal Revenue Code of 1986 is 
amended by striking ``and'' at the end of subparagraph (A), by striking 
the period at the end of subparagraph (B) and inserting ``, and'', and 
by adding at the end the following:
                    ``(C) if any property so contributed has a built-in 
                loss--
                            ``(i) such built-in loss shall be taken 
                        into account only in determining the amount of 
                        items allocated to the contributing partner, 
                        and
                            ``(ii) except as provided in regulations, 
                        in determining the amount of items allocated to 
                        other partners, the basis of the contributed 
                        property in the hands of the partnership shall 
                        be treated as being equal to its fair market 
                        value immediately after the contribution.
        For purposes of subparagraph (C), the term `built-in loss' 
        means the excess of the adjusted basis of the property over its 
        fair market value immediately after the contribution.''.
    (b) Adjustment to Basis of Partnership Property on Transfer of 
Partnership Interest If There Is Substantial Built-In Loss.--
            (1) Adjustment required.--Subsection (a) of section 743 of 
        the Internal Revenue Code of 1986 (relating to optional 
        adjustment to basis of partnership property) is amended by 
        inserting before the period ``or unless the partnership has a 
        substantial built-in loss immediately after such transfer''.
            (2) Adjustment.--Subsection (b) of section 743 of such Code 
        is amended by inserting ``or with respect to which there is a 
        substantial built-in loss immediately after such transfer'' 
        after ``section 754 is in effect''.
            (3) Substantial built-in loss.--Section 743 of such Code is 
        amended by adding at the end the following new subsection:
    ``(d) Substantial Built-In Loss.--For purposes of this section, a 
partnership has a substantial built-in loss with respect to a transfer 
of an interest in a partnership if the transferee partner's 
proportionate share of the adjusted basis of the partnership property 
exceeds 110 percent of the basis of such partner's interest in the 
partnership.''.
            (4) Clerical amendments.--
                    (A) The section heading for section 743 of such 
                Code is amended to read as follows:

``SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROPERTY WHERE SECTION 
              754 ELECTION OR SUBSTANTIAL BUILT-IN LOSS.''.

                    (B) The table of sections for subpart C of part II 
                of subchapter K of chapter 1 of such Code is amended by 
                striking the item relating to section 743 and inserting 
                the following new item:

                              ``Sec. 743. Adjustment to basis of 
                                        partnership property where 
                                        section 754 election or 
                                        substantial built-in loss.''.
    (c) Adjustment to Basis of Undistributed Partnership Property if 
There Is Substantial Basis Reduction.--
            (1) Adjustment required.--Subsection (a) of section 734 of 
        the Internal Revenue Code of 1986 (relating to optional 
        adjustment to basis of undistributed partnership property) is 
        amended by inserting before the period ``or unless there is a 
        substantial basis reduction''.
            (2) Adjustment.--Subsection (b) of section 734 of such Code 
        is amended by inserting ``or unless there is a substantial 
        basis reduction'' after ``section 754 is in effect''.
            (3) Substantial basis reduction.--Section 734 of such Code 
        is amended by adding at the end the following new subsection:
    ``(d) Substantial Basis Reduction.--For purposes of this section, 
there is a substantial basis reduction with respect to a distribution 
if the sum of the amounts described in subparagraphs (A) and (B) of 
subsection (b)(2) exceeds 10 percent of the aggregate adjusted basis  
of partnership property immediately after the distribution.''.
            (4) Clerical amendments.--
                    (A) The section heading for section 734 of such 
                Code is amended to read as follows:

``SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED PARTNERSHIP PROPERTY 
              WHERE SECTION 754 ELECTION OR SUBSTANTIAL BASIS 
              REDUCTION.''.

                    (B) The table of sections for subpart B of part II 
                of subchapter K of chapter 1 of such Code is amended by 
                striking the item relating to section 734 and inserting 
                the following new item:

                              ``Sec. 734. Adjustment to basis of 
                                        undistributed partnership 
                                        property where section 754 
                                        election or substantial basis 
                                        reduction.''.
    (d) Effective Dates.--
            (1) Subsection (a).--The amendment made by subsection (a) 
        shall apply to contributions made after the date of the 
        enactment of this Act.
            (2) Subsection (b).--The amendments made by subsection (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.

                    TITLE V--EXPATRIATE CORPORATIONS

SEC. 501. FOREIGN CORPORATIONS CREATED THROUGH INVERSION TRANSACTIONS 
              TAXED AS DOMESTIC CORPORATIONS.

    (a) In General.--Paragraph (4) of section 7701(a) of the Internal 
Revenue Code of 1986 (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) Inversion transactions disregarded.--
                            ``(i) In general.--A corporation which 
                        would (but for this subparagraph) be treated as 
                        a foreign corporation shall be treated as a 
                        domestic corporation if such corporation is an 
                        inverted domestic corporation.
                            ``(ii) Inverted domestic corporation.--For 
                        purposes of clause (i), a foreign corporation 
                        is an inverted domestic corporation if, 
                        immediately after a transaction in which--
                                    ``(I) property is directly or 
                                indirectly transferred by a domestic 
                                corporation to such foreign 
                                corporation, or
                                    ``(II) stock in a domestic 
                                corporation is transferred directly or 
                                indirectly by its shareholders to such 
                                foreign corporation,
                        more than 50 percent of the stock (by vote or 
                        value) of such foreign corporation is held by 
                        former shareholders of the domestic corporation 
                        by reason of holding stock in such domestic 
                        corporation.
                            ``(iii) Regulations relating to inverted 
                        domestic corporations.--The Secretary may by 
                        regulations provide that clause (i) shall not 
                        apply to a foreign corporation which is an 
                        inverted domestic corporation if, immediately 
                        before the transaction described in clause 
                        (ii), such foreign corporation was engaged in 
                        the active conduct of 1 or more trades or 
                        businesses which are substantial in relation to 
                        the trades or businesses which the domestic 
                        corporation described in clause (ii) was 
                        engaged in the active conduct of at such 
                        time.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years of any inverted domestic corporation beginning after 
December 31, 2002, without regard to whether the corporation became an 
inverted domestic corporation before, on, or after such date.

                       TITLE VI--CHILD TAX CREDIT

SEC. 601. ACCELERATION OF CHILD TAX CREDIT.

    (a) In General.--Subsection (a) of section 24 of the Internal 
Revenue Code of 1986 (relating to child tax credit) is amended by 
striking ``the per child amount'' and all that follows and inserting 
``$1,000''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2002.

                   TITLE VII--MARRIAGE PENALTY RELIEF

SEC. 701. ACCELERATION OF MARRIAGE PENALTY RELIEF PROVISIONS.

    (a) Elimination of Marriage Penalty in Standard Deduction.--
            (1) In general.--Paragraph (2) of section 63(c) of the 
        Internal Revenue Code of 1986 (relating to standard deduction) 
        is amended--
                    (A) by striking ``$5,000'' in subparagraph (A) and 
                inserting ``200 percent of the dollar amount in effect 
                under subparagraph (C) for the taxable year'';
                    (B) by adding ``or'' at the end of subparagraph 
                (B);
                    (C) by striking ``in the case of'' and all that 
                follows in subparagraph (C) and inserting ``in any 
                other case.''; and
                    (D) by striking subparagraph (D).
            (2) Technical amendments.--
                    (A) Subparagraph (B) of section 1(f)(6) of such 
                Code is amended by striking ``(other than with'' and 
                all that follows through ``shall be applied'' and 
                inserting ``(other than with respect to sections 
63(c)(4) and 151(d)(4)(A)) shall be applied''.
                    (B) Paragraph (4) of section 63(c) of such Code is 
                amended by adding at the end the following flush 
                sentence:
        ``The preceding sentence shall not apply to the amount referred 
        to in paragraph (2)(A).''.
            (3) Effective date.--The amendments made by this section 
        shall apply to taxable years beginning after December 31, 2002.
    (b) Elimination of Marriage Penalty in 15-percent bracket.--
            (1) In general.--Section 1(f) of the Internal Revenue Code 
        of 1986 (relating to adjustments in tax tables so that 
        inflation will not result in tax increases) is amended by 
        adding at the end the following new paragraph:
            ``(8) Elimination of marriage penalty in 15-percent 
        bracket.--
                    ``(A) In general.--With respect to taxable years 
                beginning after December 31, 2002, in prescribing the 
                tables under paragraph (1)--
                            ``(i) the maximum taxable income in the 15-
                        percent rate bracket in the table contained in 
                        subsection (a) (and the minimum taxable income 
                        in the next higher taxable income bracket in 
                        such table) shall be 200 percent of the maximum 
                        taxable income in the 15-percent rate bracket 
                        in the table contained in subsection (c) (after 
                        any other adjustment under this subsection), 
                        and
                            ``(ii) the comparable taxable income 
                        amounts in the table contained in subsection 
                        (d) shall be \1/2\ of the amounts determined 
                        under clause (i).
                    ``(B) Rounding.--If any amount determined under 
                subparagraph (A)(i) is not a multiple of $50, such 
                amount shall be rounded to the next lowest multiple of 
                $50.''.
            (2) Technical amendments.--
                    (A) Subparagraph (A) of section 1(f)(2) of such 
                Code is amended by inserting ``except as provided in 
                paragraph (8),'' before ``by increasing''.
                    (B) The heading for subsection (f) of section 1 is 
                amended by inserting ``Elimination of Marriage Penalty 
                in 15-Percent Bracket;'' before ``Adjustments''.
            (3) Effective date.--The amendments made by this section 
        shall apply to taxable years beginning after December 31, 2002.
    (c) Marriage Penalty Relief for Earned Income Credit.--
            (1) Increased phaseout amount.--
                    (A) In general.--Section 32(b)(2)(B) of the 
                Internal Revenue Code of 1986 (relating to amounts) is 
                amended by striking ```increased by--'' and all that 
                follows and inserting ``increased by $3,000.''.
                    (B) Inflation adjustment.--Paragraph (1)(B)(ii) of 
                section 32(j) of such Code (relating to inflation 
                adjustments) is amended to read as follows:
                            ``(ii) in the case of the $3,000 amount in 
                        subsection (b)(2)(B), by substituting `calendar 
                        year 2003' for `calendar year 1992' in 
                        subparagraph (B) of such section 1.''.
                    (C) Effective date.--The amendments made by this 
                paragraph shall apply to taxable years beginning after 
                December 31, 2002.
            (2) Expansion of mathematical error authority.--
                    (A) In general.--Paragraph (2) of section 6213(g) 
                of such Code 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.''.
                    (B) Effective date.--The amendment made by this 
                paragraph shall take effect on January 1, 2003.
    (d) Conforming Amendments.--
            (1) Repeal of Amendments.--Sections 301, 302, and 303(g) of 
        the Economic Growth and Tax Relief Reconciliation Act of 2001 
        are repealed.
            (2) Repeal of Sunset.--Title IX of the Economic Growth and 
        Tax Relief Reconciliation Act of 2001 (relating to sunset of 
        provisions of such Act) shall not apply to section 303 (other 
        than subsection (g) of such section) of such Act (relating to 
        marriage penalty relief).

                  TITLE VIII--ALTERNATIVE MINIMUM TAX

SEC. 801. ALTERNATIVE MINIMUM TAX RELIEF.

    (a) In General.--Paragraph (2) of section 26(a) of the Internal 
Revenue Code of 1986 is amended--
            (1) by striking ``2000, 2001, 2002, or 2003'' and inserting 
        ``2003, 2004, or 2005'', and
            (2) in the heading by striking ``2000, 2001, 2002, and 
        2003'' in the heading and inserting ``2003, 2004, and 2005''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.
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