Short title

This Act may be cited as the

Nonitemizer Real Property Tax Deduction Act of 2006

Additional standard deduction for real property taxes for nonitemizers

(a)

In general

Section 63(c)(1) (defining standard deduction) 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 new subparagraph:

(C)the real property tax deduction.

(b)

Definition

Section 63(c) is amended by adding at the end the following new paragraph:

(8)

Real property tax deduction

For purposes of paragraph (1), the real property tax deduction is so much of the amount of State and local real property taxes (within the meaning of section 164) paid or accrued by the taxpayer during the taxable year which do not exceed $500 ($1,000 in the case of a joint return).

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2006.

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 any case in which a court determines that the economic substance doctrine is relevant for purposes of this title to a transaction (or series of transactions), such transaction (or series of transactions) shall have economic substance only if the requirements of this paragraph are met. (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) 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.

In applying subclause (II), 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.

(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)

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 paragraph (1)(B)(ii) to the lessor of tangible property subject to a lease— (i)the expected net tax benefits with respect to the leased property shall not include the benefits of— (I)depreciation, (II)any tax credit, or (III)any other deduction as provided in guidance by the Secretary, and (ii)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 the date of the enactment of this Act.

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:

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(o)(1)) for the transaction giving rise to the claimed benefit or the transaction was not respected under section 7701(o)(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 (2) and (3) 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)The second sentence of section 6662(d)(2)(A) 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 both places it appears, (B)in paragraph (2)(A), by inserting 6662B or before 6663, (C)in paragraph (2)(B), by inserting or 6662B after section 6662, (D)in paragraph (3), by inserting or noneconomic substance transaction understatement after reportable transaction understatement, and (E)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).

(3)Subsection (e) of section 6707A is amended— (A)by striking or at the end of subparagraph (B), and (B)by striking subparagraph (C) and inserting the following new subparagraphs:

(C)is required to pay a penalty under section 6662B with respect to any noneconomic substance transaction, or (D)is required to pay a penalty under section 6662(h) with respect to any transaction and would (but for section 6662A(e)(2)(C)) have been subject to penalty under section 6662A at a rate prescribed under section 6662A(c) or under section 6662B,

(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 the date of the enactment of this Act.