[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[H.R. 2625 Introduced in House (IH)]






109th CONGRESS
  1st Session
                                H. R. 2625

   To amend the Internal Revenue Code of 1986 to curb tax abuses by 
  disallowing tax benefits claimed to arise from transactions without 
        substantial economic substance, and for other purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                              May 25, 2005

Mr. Doggett (for himself, Mr. Levin, Mr. Stark, Mr. McDermott, Mr. Neal 
of Massachusetts, Mr. McNulty, Mr. Lewis of Georgia, Mr. Jefferson, Mr. 
Becerra, Mr. Emanuel, Mr. Allen, Ms. Baldwin, Mr. Berman, Mr. Brown of 
Ohio, Mrs. Capps, Mr. Case, Mr. Conyers, Mr. Costello, Mr. Crowley, Mr. 
Davis of Illinois, Mr. DeFazio, Ms. DeGette, Ms. DeLauro, Mr. Farr, Mr. 
Fattah, Mr. Filner, Mr. Gene Green of Texas, Mr. Grijalva, Ms. Jackson-
  Lee of Texas, Mr. Kucinich, Ms. Lee, Mr. Markey, Mr. McGovern, Mrs. 
Maloney, Mr. George Miller of California, Mr. Nadler, Mrs. Napolitano, 
   Mr. Oberstar, Mr. Ryan of Ohio, Mr. Sabo, Ms. Loretta Sanchez of 
 California, Mr. Sanders, Ms. Schakowsky, Mr. Sherman, Ms. Slaughter, 
Mr. Strickland, Ms. Solis, Mr. Taylor of Mississippi, Mr. Tierney, Mrs. 
  Jones of Ohio, Ms. Waters, and Mr. Waxman) introduced the following 
      bill; which was referred to the Committee on Ways and Means

_______________________________________________________________________

                                 A BILL


 
   To amend the Internal Revenue Code of 1986 to curb tax abuses by 
  disallowing tax benefits claimed to arise from transactions without 
        substantial economic substance, and for other purposes.

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

SECTION 1. SHORT TITLE; ETC.

    (a) Short Title.--This Act may be cited as the ``Abusive Tax 
Shelter Shutdown and Taxpayer Accountability Act of 2005''.
    (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; etc.
Sec. 2. Findings and purpose.
          TITLE I--PROVISIONS DESIGNED TO CURTAIL TAX SHELTERS

Sec. 101. Clarification of economic substance doctrine.
Sec. 102. Modification of penalty for failing to disclose reportable 
                            transaction.
Sec. 103. Penalty for understatements attributable to transactions 
                            lacking economic substance, etc.
Sec. 104. Required disclosure by material advisors not subject to claim 
                            of confidentiality.
Sec. 105. Understatement of taxpayer's liability by income tax return 
                            preparer.
Sec. 106. Frivolous tax submissions.
Sec. 107. Denial of deduction for interest on Underpayments 
                            attributable to nondisclosed reportable and 
                            noneconomic substance transactions.
                       TITLE II--OTHER PROVISIONS

Sec. 201. Expanded authority to disallow tax benefits under Section 
                            269.
Sec. 202. Modifications of certain rules relating to controlled foreign 
                            corporations.
Sec. 203. Basis for determining loss always reduced by nontaxed portion 
                            of dividends.

SEC. 2. FINDINGS AND PURPOSE.

    (a) Findings.--The Congress hereby finds that:
            (1) Many corporate tax shelter transactions are complicated 
        ways of accomplishing nothing aside from claimed tax benefits, 
        and the legal opinions justifying those transactions take an 
        inappropriately narrow and restrictive view of well-developed 
        court doctrines under which--
                    (A) the taxation of a transaction is determined in 
                accordance with its substance and not merely its form,
                    (B) transactions which have no significant effect 
                on the taxpayer's economic or beneficial interests 
                except for tax benefits are treated as sham 
                transactions and disregarded,
                    (C) transactions involving multiple steps are 
                collapsed when those steps have no substantial economic 
                meaning and are merely designed to create tax benefits,
                    (D) transactions with no business purpose are not 
                given effect, and
                    (E) in the absence of a specific congressional 
                authorization, it is presumed that Congress did not 
                intend a transaction to result in a negative tax where 
                the taxpayer's economic position or rate of return is 
                better after tax than before tax.
            (2) Permitting aggressive and abusive tax shelters not only 
        results in large revenue losses but also undermines voluntary 
        compliance with the Internal Revenue Code of 1986.
    (b) Purpose.--The purpose of this Act is to eliminate abusive tax 
shelters by denying tax attributes claimed to arise from transactions 
that do not meet a heightened economic substance requirement and by 
repealing the provision that permits legal opinions to be used to avoid 
penalties on tax underpayments resulting from transactions without 
significant economic substance or business purpose.

          TITLE I--PROVISIONS DESIGNED TO CURTAIL TAX SHELTERS

SEC. 101. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

    (a) In General.--Section 7701 is amended by redesignating 
subsection (o) as subsection (p) and by inserting after subsection (n) 
the following new subsection:
    ``(o) 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 are 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. 102. MODIFICATION OF PENALTY FOR FAILING TO DISCLOSE REPORTABLE 
              TRANSACTION.

    (a) Increase in Penalty for Large Entities and High Net Worth 
Individuals.--
            (1) In general.--Subsection (b) of section 6707A is amended 
        to read as follows:
    ``(b) Amount of Penalty.--
            ``(1) In general.--Except as provided in paragraph (2), the 
        amount of the penalty under subsection (a) shall be--
                    ``(A) $10,000 in the case of a natural person who 
                is not a high net worth individual,
                    ``(B) $100,000 in the case of a large entity or a 
                high net worth individual, and
                    ``(C) $50,000 in any other case.
            ``(2) Listed transaction.--The amount of the penalty under 
        subsection (a) with respect to a listed transaction shall be--
                    ``(A) $100,000 in the case of a natural person who 
                is not a high net worth individual, and
                    ``(B) $200,000 in any other case.''.
            (2) Large entities and high net worth individuals 
        defined.--Subsection (c) of section 6707A is amended by adding 
        at the end the following new paragraphs:
            ``(1) Large entity.--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.
            ``(2) High net worth individual.--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.''.
    (b) Restriction of Authority to Rescind Penalty.--Paragraph (1) of 
section 6707A(d) is amended by striking ``and'' at the end of 
subparagraph (A), by redesignating subparagraph (B) as subparagraph 
(E), and by inserting after subparagraph (A) the following new 
subparagraphs:
                    ``(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''.
    (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. 103. 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) Coordination With Other Understatements and Penalties.--
            (1) Subparagraph (A) of section 6662(d)(2) is amended by 
        inserting ``and without regard to items with respect to which a 
        penalty is imposed by section 6662B'' before the period at the 
        end.
            (2) Subsection (e) of section 6662A is amended--
                    (A) in paragraph (1), by inserting ``and 
                noneconomic substance transaction understatements'' 
                after ``reportable transaction understatements'' each 
                place it appears,
                    (B) in paragraph (2)(A) and (3), by inserting ``and 
                noneconomic substance transaction understatement'' 
                after ``reportable transaction understatement'',
                    (C) in paragraph (2)(B), by inserting ``6662B or'' 
                before ``6663'',
                    (D) in paragraph (2)(C)(i), by inserting ``or 
                section 6662B'' before the period at the end, and
                    (E) in paragraph (2)(C)(ii), by inserting ``and 
                section 6662B'' after ``This section'', and
                    (F) by adding at the end the following new 
                paragraph:
            ``(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). ''.
    (c) 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.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to transactions entered into after February 13, 2003. Sections 
6662(d)(2)(A) and 6662A(e) of the Internal Revenue Code of 1986 shall 
apply to such transactions to the extent such sections relate to such 
amendments.

SEC. 104. REQUIRED DISCLOSURE BY MATERIAL ADVISORS NOT SUBJECT TO CLAIM 
              OF CONFIDENTIALITY.

    (a) In General.--Paragraph (1) of section 6112(b) is amended by 
adding at the end the following new flush sentence:
        ``For purposes of this section, the identity of any person on 
        such list shall not be privileged.''.
    (b) Effective Date.--The amendment made by this section shall take 
effect as if included in the amendments made by section 142 of the 
Deficit Reduction Act of 1984.

SEC. 105. 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. 106. 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. 107. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS 
              ATTRIBUTABLE TO NONDISCLOSED REPORTABLE AND NONECONOMIC 
              SUBSTANCE TRANSACTIONS.

    (a) In General.--Subsection (m) of section 163 is amended to read 
as follows:
    ``(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.

                       TITLE II--OTHER PROVISIONS

SEC. 201. 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. 202. 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. 203. 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.
                                 <all>