[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[S. 1565 Introduced in Senate (IS)]








109th CONGRESS
  1st Session
                                S. 1565

To restrict the use of abusive tax shelters and offshore tax havens to 
    inappropriately avoid Federal taxation, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             July 29, 2005

  Mr. Levin (for himself, Mr. Coleman, and Mr. Obama) introduced the 
 following bill; which was read twice and referred to the Committee on 
                                Finance

_______________________________________________________________________

                                 A BILL


 
To restrict the use of abusive tax shelters and offshore tax havens to 
    inappropriately avoid Federal taxation, 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 ``Tax Shelter and 
Tax Haven Reform 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.
              TITLE I--STRENGTHENING TAX SHELTER PENALTIES

Sec. 101. Penalty for promoting abusive tax shelters.
Sec. 102. Penalty for aiding and abetting the understatement of tax 
                            liability.
               TITLE II--PREVENTING ABUSIVE TAX SHELTERS

Sec. 201. Prohibited fee arrangement.
Sec. 202. Preventing tax shelter activities by financial institutions.
Sec. 203. Information sharing for enforcement purposes.
Sec. 204. Disclosure of information to Congress.
Sec. 205. Tax opinion standards for tax practitioners.
Sec. 206. Whistleblower reforms.
Sec. 207. Denial of deduction for certain fines, penalties, and other 
                            amounts.
Sec. 208. Sense of the Senate on tax enforcement priorities.
                TITLE III--REQUIRING ECONOMIC SUBSTANCE

Sec. 301. Clarification of economic substance doctrine.
Sec. 302. Penalty for understatements attributable to transactions 
                            lacking economic substance, etc.
Sec. 303. Denial of deduction for interest on underpayments 
                            attributable to noneconomic substance 
                            transactions.
              TITLE IV--DETERRING UNCOOPERATIVE TAX HAVENS

Sec. 401. Disclosing payments to persons in uncooperative tax havens.
Sec. 402. Deterring uncooperative tax havens by restricting allowable 
                            tax benefits.
Sec. 403. Doubling of certain penalties, fines, and interest on 
                            underpayments related to certain offshore 
                            financial arrangements.
Sec. 404. Treasury regulations on foreign tax credit.

              TITLE I--STRENGTHENING TAX SHELTER PENALTIES

SEC. 101. PENALTY FOR PROMOTING ABUSIVE TAX SHELTERS.

    (a) Penalty for Promoting Abusive Tax Shelters.--Section 6700 
(relating to promoting abusive tax shelters, etc.) is amended--
            (1) by redesignating subsections (b) and (c) as subsections 
        (d) and (e), respectively,
            (2) by striking ``a penalty'' and all that follows through 
        the period in the first sentence of subsection (a) and 
        inserting ``a penalty determined under subsection (b)'', and
            (3) by inserting after subsection (a) the following new 
        subsections:
    ``(b) Amount of Penalty; Calculation of Penalty; Liability for 
Penalty.--
            ``(1) Amount of penalty.--The amount of the penalty imposed 
        by subsection (a) shall not exceed the greater of--
                    ``(A) 150 percent of the gross income derived (or 
                to be derived) from such activity by the person or 
                persons subject to such penalty, and
                    ``(B) if readily subject to calculation, the total 
                amount of underpayment by the taxpayer (including 
                penalties, interest, and taxes) in connection with such 
                activity.
            ``(2) Calculation of penalty.--The penalty amount 
        determined under paragraph (1) shall be calculated with respect 
        to each instance of an activity described in subsection (a), 
        each instance in which income was derived by the person or 
        persons subject to such penalty, and each person who 
        participated in such an activity.
            ``(3) Liability for penalty.--If more than 1 person is 
        liable under subsection (a) with respect to such activity, all 
        such persons shall be jointly and severally liable for the 
        penalty under such subsection.
    ``(c) Penalty Not Deductible.--The payment of any penalty imposed 
under this section or the payment of any amount to settle or avoid the 
imposition of such penalty shall not be considered an ordinary and 
necessary expense in carrying on a trade or business for purposes of 
this title and shall not be deductible by the person who is subject to 
such penalty or who makes such payment.''.
    (b) Conforming Amendment.--Section 6700(a) is amended by striking 
the last sentence.
    (c) Effective Date.--The amendments made by this section shall 
apply to activities after the date of the enactment of this Act.

SEC. 102. PENALTY FOR AIDING AND ABETTING THE UNDERSTATEMENT OF TAX 
              LIABILITY.

    (a) In General.--Section 6701(a) (relating to imposition of 
penalty) is amended--
            (1) by inserting ``the tax liability or'' after ``respect 
        to,'' in paragraph (1),
            (2) by inserting ``aid, assistance, procurement, or advice 
        with respect to such'' before ``portion'' both places it 
        appears in paragraphs (2) and (3), and
            (3) by inserting ``instance of aid, assistance, 
        procurement, or advice or each such'' before ``document'' in 
        the matter following paragraph (3).
    (b) Amount of Penalty.--Subsection (b) of section 6701 (relating to 
penalties for aiding and abetting understatement of tax liability) is 
amended to read as follows:
    ``(b) Amount of Penalty; Calculation of Penalty; Liability for 
Penalty.--
            ``(1) Amount of penalty.--The amount of the penalty imposed 
        by subsection (a) shall not exceed the greater of--
                    ``(A) 150 percent of the gross income derived (or 
                to be derived) from such aid, assistance, procurement, 
                or advice provided by the person or persons subject to 
                such penalty, and
                    ``(B) if readily subject to calculation, the total 
                amount of underpayment by the taxpayer (including 
                penalties, interest, and taxes) in connection with the 
                understatement of the liability for tax.
            ``(2) Calculation of penalty.--The penalty amount 
        determined under paragraph (1) shall be calculated with respect 
        to each instance of aid, assistance, procurement, or advice 
        described in subsection (a), each instance in which income was 
        derived by the person or persons subject to such penalty, and 
        each person who made such an understatement of the liability 
        for tax.
            ``(3) Liability for penalty.--If more than 1 person is 
        liable under subsection (a) with respect to providing such aid, 
        assistance, procurement, or advice, all such persons shall be 
        jointly and severally liable for the penalty under such 
        subsection.''.
    (c) Penalty Not Deductible.--Section 6701 is amended by adding at 
the end the following new subsection:
    ``(g) Penalty Not Deductible.--The payment of any penalty imposed 
under this section or the payment of any amount to settle or avoid the 
imposition of such penalty shall not be considered an ordinary and 
necessary expense in carrying on a trade or business for purposes of 
this title and shall not be deductible by the person who is subject to 
such penalty or who makes such payment.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to activities after the date of the enactment of this Act.

               TITLE II--PREVENTING ABUSIVE TAX SHELTERS

SEC. 201. PROHIBITED FEE ARRANGEMENT.

    (a) In General.--Section 6701, as amended by this Act, is amended--
            (1) by redesignating subsections (f) and (g) as subsections 
        (g) and (h), respectively,
            (2) by striking ``subsection (a).'' in paragraphs (2) and 
        (3) of subsection (g) (as redesignated by paragraph (1)) and 
        inserting ``subsection (a) or (f).'', and
            (3) by inserting after subsection (e) the following new 
        subsection:
    ``(f) Prohibited Fee Arrangement.--
            ``(1) In general.--Any person who makes an agreement for, 
        charges, or collects a fee which is for services provided in 
        connection with the internal revenue laws, and the amount of 
        which is calculated according to, or is dependent upon, a 
        projected or actual amount of--
                    ``(A) tax savings or benefits, or
                    ``(B) losses which can be used to offset other 
                taxable income,
        shall pay a penalty with respect to each such fee activity in 
        the amount determined under subsection (b).
            ``(2) Rules.--The Secretary may issue rules to carry out 
        the purposes of this subsection and may provide exceptions for 
        fee arrangements that are in the public interest.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to fee agreements, charges, and collections made after the date 
of the enactment of this Act.

SEC. 202. PREVENTING TAX SHELTER ACTIVITIES BY FINANCIAL INSTITUTIONS.

    (a) Examinations.--
            (1) Development of examination techniques.--Each of the 
        Federal banking agencies and the Commission shall, in 
        consultation with the Internal Revenue Service, develop 
        examination techniques to detect potential violations of 
        section 6700 or 6701 of the Internal Revenue Code of 1986, by 
        depository institutions, brokers, dealers, and investment 
        advisers, as appropriate.
            (2) Frequency.--Not less frequently than once in each 2-
        year period, each of the Federal banking agencies and the 
        Commission shall implement the examination techniques developed 
        under paragraph (1) with respect to each of the depository 
        institutions, brokers, dealers, or investment advisers subject 
        to their enforcement authority. Such examination shall, to the 
        extent possible, be combined with any examination by such 
        agency otherwise required or authorized by Federal law.
    (b) Report to Internal Revenue Service.--In any case in which an 
examination conducted under this section with respect to a financial 
institution or other entity reveals a potential violation, such agency 
shall promptly notify the Internal Revenue Service of such potential 
violation for investigation and enforcement by the Internal Revenue 
Service in accordance with applicable provisions of law.
    (c) Report to Congress.--The Federal banking agencies and the 
Commission shall submit a joint written report to Congress in 2007 and 
2010 on their progress in preventing violations of sections 6700 and 
6701 of the Internal Revenue Code of 1986, by depository institutions, 
brokers, dealers, and investment advisers, as appropriate.
    (d) Definitions.--For purposes of this section--
            (1) the terms ``broker'', ``dealer'', and ``investment 
        adviser'' have the same meanings as in section 3 of the 
        Securities Exchange Act of 1934 (15 U.S.C. 78c);
            (2) the term ``Commission'' means the Securities and 
        Exchange Commission;
            (3) the term ``depository institution'' has the same 
        meaning as in section 3(c) of the Federal Deposit Insurance Act 
        (12 U.S.C. 1813(c));
            (4) the term ``Federal banking agencies'' has the same 
        meaning as in section 3(q) of the Federal Deposit Insurance Act 
        (12 U.S.C. 1813(q)); and
            (5) the term ``Secretary'' means the Secretary of the 
        Treasury.

SEC. 203. INFORMATION SHARING FOR ENFORCEMENT PURPOSES.

    (a) Promotion of Prohibited Tax Shelters or Tax Avoidance 
Schemes.--Section 6103(h) (relating to disclosure to certain Federal 
officers and employees for purposes of tax administration, etc.) is 
amended by adding at the end the following new paragraph:
            ``(7) Disclosure of returns and return information related 
        to promotion of prohibited tax shelters or tax avoidance 
        schemes.--
                    ``(A) Written request.--Upon receipt by the 
                Secretary of a written request which meets the 
                requirements of subparagraph (B) from the head of the 
                United States Securities and Exchange Commission, an 
                appropriate Federal banking agency as defined under 
                section 1813(q) of title 12, United States Code, or the 
                Public Company Accounting Oversight Board, a return or 
                return information shall be disclosed to such 
                requestor's officers and employees who are personally 
                and directly engaged in an investigation, examination, 
                or proceeding by such requestor to evaluate, determine, 
                penalize, or deter conduct by a financial institution, 
                issuer, or public accounting firm, or associated 
                person, in connection with a potential or actual 
                violation of section 6700 (promotion of abusive tax 
                shelters), 6701 (aiding and abetting understatement of 
                tax liability), or activities related to promoting or 
                facilitating inappropriate tax avoidance or tax 
                evasion. Such disclosure shall be solely for use by 
                such officers and employees in such investigation, 
                examination, or proceeding.
                    ``(B) Requirements.--A request meets the 
                requirements of this subparagraph if it sets forth--
                            ``(i) the nature of the investigation, 
                        examination, or proceeding,
                            ``(ii) the statutory authority under which 
                        such investigation, examination, or proceeding 
                        is being conducted,
                            ``(iii) the name or names of the financial 
                        institution, issuer, or public accounting firm 
                        to which such return information relates,
                            ``(iv) the taxable period or periods to 
                        which such return information relates, and
                            ``(v) the specific reason or reasons why 
                        such disclosure is, or may be, relevant to such 
                        investigation, examination or proceeding.
                    ``(C) Financial institution.--For the purposes of 
                this paragraph, the term `financial institution' means 
                a depository institution, foreign bank, insured 
                institution, industrial loan company, broker, dealer, 
                investment company, investment advisor, or other entity 
                subject to regulation or oversight by the United States 
                Securities and Exchange Commission or an appropriate 
                Federal banking agency.''.
    (b) Financial and Accounting Fraud Investigations.--Section 6103(i) 
(relating to disclosure to Federal officers or employees for 
administration of Federal laws not relating to tax administration) is 
amended by adding at the end the following new paragraph:
            ``(9) Disclosure of returns and return information for use 
        in financial and accounting fraud investigations.--
                    ``(A) Written request.--Upon receipt by the 
                Secretary of a written request which meets the 
                requirements of subparagraph (B) from the head of the 
                United States Securities and Exchange Commission or the 
                Public Company Accounting Oversight Board, a return or 
                return information shall be disclosed to such 
                requestor's officers and employees who are personally 
                and directly engaged in an investigation, examination, 
                or proceeding by such requester to evaluate the 
                accuracy of a financial statement or report or to 
                determine whether to require a restatement, penalize, 
                or deter conduct by an issuer, investment company, or 
                public accounting firm, or associated person, in 
                connection with a potential or actual violation of 
                auditing standards or prohibitions against false or 
                misleading statements or omissions in financial 
                statements or reports. Such disclosure shall be solely 
                for use by such officers and employees in such 
                investigation, examination, or proceeding.
                    ``(B) Requirements.--A request meets the 
                requirements of this subparagraph if it sets forth--
                            ``(i) the nature of the investigation, 
                        examination, or proceeding,
                            ``(ii) the statutory authority under which 
                        such investigation, examination, or proceeding 
                        is being conducted,
                            ``(iii) the name or names of the issuer, 
                        investment company, or public accounting firm 
                        to which such return information relates,
                            ``(iv) the taxable period or periods to 
                        which such return information relates, and
                            ``(v) the specific reason or reasons why 
                        such disclosure is, or may be, relevant to such 
                        investigation, examination or proceeding.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to disclosures and to information and document requests made 
after the date of the enactment of this Act.

SEC. 204. DISCLOSURE OF INFORMATION TO CONGRESS.

    (a) Disclosure by Tax Return Preparer.--
            (1) In general.--Subparagraph (B) of section 7216(b)(1) 
        (relating to disclosures) is amended to read as follows:
                    ``(B) pursuant to any 1 of the following documents, 
                if clearly identified:
                            ``(i) The order of any Federal, State, or 
                        local court of record.
                            ``(ii) A subpoena issued by a Federal or 
                        State grand jury.
                            ``(iii) An administrative order, summons, 
                        or subpoena which is issued in the performance 
                        of its duties by--
                                    ``(I) any Federal agency, including 
                                Congress or any committee or 
                                subcommittee thereof, or
                                    ``(II) any State agency, body, or 
                                commission charged under the laws of 
                                the State or a political subdivision of 
                                the State with the licensing, 
                                registration, or regulation of tax 
                                return preparers.''.
            (2) Effective date.--The amendment made by this subsection 
        shall apply to disclosures made after the date of the enactment 
        of this Act pursuant to any document in effect on or after such 
        date.
    (b) Disclosure by Secretary.--Paragraph (2) of section 6104(a) 
(relating to inspection of applications for tax exemption or notice of 
status) is amended to read as follows:
            ``(2) Inspection by congress.--
                    ``(A) In general.--Upon receipt of a written 
                request from a committee or subcommittee of Congress, 
                copies of documents related to a determination by the 
                Secretary to grant, deny, revoke, or restore an 
                organization's exemption from taxation under section 
                501 shall be provided to such committee or 
                subcommittee, including any application, notice of 
                status, or supporting information provided by such 
                organization to the Internal Revenue Service; any 
                letter, analysis, or other document produced by or for 
                the Internal Revenue Service evaluating, determining, 
                explaining, or relating to the tax exempt status of 
                such organization (other than returns, unless such 
                returns are available to the public under this section 
                or section 6103 or 6110); and any communication between 
                the Internal Revenue Service and any other party 
                relating to the tax exempt status of such organization.
                    ``(B) Additional information.--Section 6103(f) 
                shall apply with respect to--
                            ``(i) the application for exemption of any 
                        organization described in subsection (c) or (d) 
                        of section 501 which is exempt from taxation 
                        under section 501(a) for any taxable year and 
                        any application referred to in subparagraph (B) 
                        of subsection (a)(1) of this section, and
                            ``(ii) any other papers which are in the 
                        possession of the Secretary and which relate to 
                        such application,
                as if such papers constituted returns.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to disclosures and to information and document requests made 
after the date of the enactment of this Act.

SEC. 205. TAX OPINION STANDARDS FOR TAX PRACTITIONERS.

    Section 330(d) of title 31, United States Code, is amended to read 
as follows:
    ``(d) The Secretary of the Treasury shall impose standards 
applicable to the rendering of written advice with respect to any 
listed transaction or any entity, plan, arrangement, or other 
transaction which has a potential for tax avoidance or evasion. Such 
standards shall address, but not be limited to, the following issues:
            ``(1) Independence of the practitioner issuing such written 
        advice from persons promoting, marketing, or recommending the 
        subject of the advice.
            ``(2) Collaboration among practitioners, or between a 
        practitioner and other party, which could result in such 
        collaborating parties having a joint financial interest in the 
        subject of the advice.
            ``(3) Avoidance of conflicts of interest which would impair 
        auditor independence.
            ``(4) For written advice issued by a firm, standards for 
        reviewing the advice and ensuring the consensus support of the 
        firm for positions taken.
            ``(5) Reliance on reasonable factual representations by the 
        taxpayer and other parties.
            ``(6) Appropriateness of the fees charged by the 
        practitioner for the written advice.
            ``(7) Preventing practitioners and firms from aiding or 
        abetting the understatement of tax liability by clients.
            ``(8) Banning the promotion of potentially abusive or 
        illegal tax shelters.''.

SEC. 206. WHISTLEBLOWER REFORMS.

    (a) In General.--Section 7623 (relating to expenses of detection of 
underpayments and fraud, etc.) is amended--
            (1) by striking ``The Secretary'' and inserting ``(a) In 
        General.--The Secretary'',
            (2) by striking ``and'' at the end of paragraph (1) and 
        inserting ``or'',
            (3) by striking ``(other than interest)'', and
            (4) by adding at the end the following new subsections:
    ``(b) Awards to Whistleblowers.--
            ``(1) In general.--If the Secretary proceeds with any 
        administrative or judicial action described in subsection (a) 
        based on information brought to the Secretary's attention by an 
        individual, such individual shall, subject to paragraph (2), 
        receive as an award at least 15 percent but not more than 30 
        percent of the collected proceeds (including penalties, 
        interest, additions to tax, and additional amounts) resulting 
        from the action (including any related actions) or from any 
        settlement in response to such action. The determination of the 
        amount of such award by the Whistleblower Office shall depend 
        upon the extent to which the individual substantially 
        contributed to such action, and shall be determined at the sole 
        discretion of the Whistleblower Office.
            ``(2) Award in case of less substantial contribution.--
                    ``(A) In general.--In the event the action 
                described in paragraph (1) is one which the 
                Whistleblower Office determines to be based principally 
                on disclosures of specific allegations (other than 
                information provided by the individual described in 
                paragraph (1)) resulting from a judicial or 
                administrative hearing, from a governmental report, 
                hearing, audit, or investigation, or from the news 
                media, the Whistleblower Office may award such sums as 
                it considers appropriate, but in no case more than 10 
                percent of the collected proceeds (including penalties, 
                interest, additions to tax, and additional amounts) 
                resulting from the action (including any related 
                actions) or from any settlement in response to such 
                action, taking into account the significance of the 
                individual's information and the role of such 
                individual and any legal representative of such 
                individual in contributing to such action.
                    ``(B) Nonapplication of paragraph where individual 
                is original source of information.--Subparagraph (A) 
                shall not apply if the information resulting in the 
                initiation of the action described in paragraph (1) was 
                originally provided by the individual described in 
                paragraph (1).
            ``(3) Application of this subsection.--This subsection 
        shall apply with respect to any action--
                    ``(A) against any taxpayer, but in the case of any 
                individual, only if such individual's gross income 
                exceeds $200,000 for any taxable year subject to such 
                action, and
                    ``(B) if the tax, penalties, interest, additions to 
                tax, and additional amounts in dispute exceed $20,000.
            ``(4) Additional rules.--
                    ``(A) No contract necessary.--No contract with the 
                Internal Revenue Service is necessary for any 
                individual to receive an award under this subsection.
                    ``(B) Representation.--Any individual described in 
                paragraph (1) or (2) may be represented by counsel.
                    ``(C) Award not subject to individual alternative 
                minimum tax.--No award received under this subsection 
                shall be included in gross income for purposes of 
                determining alternative minimum taxable income.
    ``(c) Whistleblower Office.--
            ``(1) In general.--There is established in the Internal 
        Revenue Service an office to be known as the `Whistleblower 
        Office' which--
                    ``(A) shall analyze information received from any 
                individual described in subsection (b) and either 
                investigate the matter itself or assign it to the 
                appropriate Internal Revenue Service office,
                    ``(B) shall monitor any action taken with respect 
                to such matter,
                    ``(C) shall inform such individual that it has 
                accepted the individual's information for further 
                review,
                    ``(D) may require such individual and any legal 
                representative of such individual to not disclose any 
                information so provided,
                    ``(E) may ask for additional assistance from such 
                individual or any legal representative of such 
                individual, and
                    ``(F) shall determine the amount to be awarded to 
                such individual under subsection (b).
            ``(2) Funding for office.--From the amounts available for 
        expenditure under subsection (a), the Whistleblower Office 
        shall be credited with an amount equal to the awards made under 
        subsection (b). These funds shall be used to maintain the 
        Whistleblower Office and also to reimburse other Internal 
        Revenue Service offices for related costs, such as costs of 
        investigation and collection.
            ``(3) Request for assistance.--
                    ``(A) In general.--Any assistance requested under 
                paragraph (1)(E) shall be under the direction and 
                control of the Whistleblower Office or the office 
                assigned to investigate the matter under subparagraph 
                (A). To the extent the disclosure of any returns or 
                return information to the individual or legal 
                representative is required for the performance of such 
                assistance, such disclosure shall be pursuant to a 
                contract entered into between the Secretary and the 
                recipients of such disclosure subject to section 
                6103(n).
                    ``(B) Funding of assistance.--From the funds made 
                available to the Whistleblower Office under paragraph 
                (2), the Whistleblower Office may reimburse the costs 
                incurred by any legal representative in providing 
                assistance described in subparagraph (A).''.
    (b) Effective Date.--The amendments made by this section shall 
apply to information provided on or after the date of the enactment of 
this Act.

SEC. 207. DENIAL OF DEDUCTION FOR CERTAIN FINES, PENALTIES, AND OTHER 
              AMOUNTS.

    (a) In General.--Subsection (f) of section 162 (relating to trade 
or business expenses) is amended to read as follows:
    ``(f) Fines, Penalties, and Other Amounts.--
            ``(1) In general.--Except as provided in paragraph (2), no 
        deduction otherwise allowable shall be allowed under this 
        chapter for any amount paid or incurred (whether by suit, 
        agreement, or otherwise) to, or at the direction of, a 
        government or entity described in paragraph (4) in relation to 
        the violation of any law or the investigation or inquiry by 
        such government or entity into the potential violation of any 
        law.
            ``(2) Exception for amounts constituting restitution.--
        Paragraph (1) shall not apply to any amount which--
                    ``(A) the taxpayer establishes constitutes 
                restitution (including remediation of property) for 
                damage or harm caused by or which may be caused by the 
                violation of any law or the potential violation of any 
                law, and
                    ``(B) is identified as restitution in the court 
                order or settlement agreement.
        Identification pursuant to subparagraph (B) alone shall not 
        satisfy the requirement under subparagraph (A). This paragraph 
        shall not apply to any amount paid or incurred as reimbursement 
        to the government or entity for the costs of any investigation 
        or litigation.
            ``(3) Exception for amounts paid or incurred as the result 
        of certain court orders.--Paragraph (1) shall not apply to any 
        amount paid or incurred by order of a court in a suit in which 
        no government or entity described in paragraph (4) is a party.
            ``(4) Certain nongovernmental regulatory entities.--An 
        entity is described in this paragraph if it is--
                    ``(A) a nongovernmental entity which exercises 
                self-regulatory powers (including imposing sanctions) 
                in connection with a qualified board or exchange (as 
                defined in section 1256(g)(7)), or
                    ``(B) to the extent provided in regulations, a 
                nongovernmental entity which exercises self-regulatory 
                powers (including imposing sanctions) as part of 
                performing an essential governmental function.
            ``(5) Exception for taxes due.--Paragraph (1) shall not 
        apply to any amount paid or incurred as taxes due.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to amounts paid or incurred on or after the date of the enactment of 
this Act, except that such amendment shall not apply to amounts paid or 
incurred under any binding order or agreement entered into before such 
date. Such exception shall not apply to an order or agreement requiring 
court approval unless the approval was obtained before such date.

SEC. 208. SENSE OF THE SENATE ON TAX ENFORCEMENT PRIORITIES.

    It is the sense of the Senate that additional funds should be 
appropriated for Internal Revenue Service enforcement efforts and that 
the Internal Revenue Service should devote proportionately more of its 
enforcement funds--
            (1) to combat the promotion of abusive tax shelters for 
        corporations and high net worth individuals and the aiding and 
        abetting of tax evasion,
            (2) to stop accounting, law, and financial firms involved 
        in such promotion and aiding and abetting, and
            (3) to combat the use of offshore financial accounts to 
        conceal taxable income.

                TITLE III--REQUIRING ECONOMIC SUBSTANCE

SEC. 301. 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.

SEC. 302. 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(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 ``and a 
                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,
                    (E) in paragraph (2)(C)(ii), by inserting ``and 
                section 6662B'' after ``This section'',
                    (F) in paragraph (3), by inserting ``or noneconomic 
                substance transaction understatement'' after 
                ``reportable transaction understatement'', and
                    (G) 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.

SEC. 303. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS 
              ATTRIBUTABLE TO NONECONOMIC SUBSTANCE TRANSACTIONS.

    (a) In General.--Section 163(m) (relating to interest on unpaid 
taxes attributable to nondisclosed reportable transactions) is 
amended--
            (1) by striking ``attributable'' and all that follows and 
        inserting the following: ``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)).'', and
            (2) by inserting ``and noneconomic substance transactions'' 
        after ``transactions''.
    (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 IV--DETERRING UNCOOPERATIVE TAX HAVENS

SEC. 401. DISCLOSING PAYMENTS TO PERSONS IN UNCOOPERATIVE TAX HAVENS.

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

``SEC. 6038D. DETERRING UNCOOPERATIVE TAX HAVENS THROUGH LISTING AND 
              REPORTING REQUIREMENTS.

    ``(a) In General.--Each United States person who transfers money or 
other property directly or indirectly to any uncooperative tax haven, 
to any financial institution licensed by or operating in any 
uncooperative tax haven, or to any person who is a resident of any 
uncooperative tax haven shall furnish to the Secretary, at such time 
and in such manner as the Secretary shall by regulation prescribe, such 
information with respect to such transfer as the Secretary may require.
    ``(b) Exceptions.--Subsection (a) shall not apply to a transfer by 
a United States person if the amount of money (and the fair market 
value of property) transferred is less than $10,000. Related transfers 
shall be treated as 1 transfer for purposes of this subsection.
    ``(c) Uncooperative Tax Haven.--For purposes of this section--
            ``(1) In general.--The term `uncooperative tax haven' means 
        any foreign jurisdiction which is identified on a list 
        maintained by the Secretary under paragraph (2) as being a 
        jurisdiction--
                    ``(A) which imposes no or nominal taxation either 
                generally or on specified classes of income, and
                    ``(B) has corporate, business, bank, or tax secrecy 
                or confidentiality rules and practices, or has 
                ineffective information exchange practices which, in 
                the judgment of the Secretary, effectively limit or 
                restrict the ability of the United States to obtain 
                information relevant to the enforcement of this title.
            ``(2) Maintenance of list.--Not later than November 1 of 
        each calendar year, the Secretary shall issue a list of foreign 
        jurisdictions which the Secretary determines qualify as 
        uncooperative tax havens under paragraph (1).
            ``(3) Ineffective information exchange practices.--For 
        purposes of paragraph (1), a jurisdiction shall be deemed to 
        have ineffective information exchange practices if the 
        Secretary determines that during any taxable year ending in the 
        12-month period preceding the issuance of the list under 
        paragraph (2)--
                    ``(A) the exchange of information between the 
                United States and such jurisdiction was inadequate to 
                prevent evasion or avoidance of United States income 
                tax by United States persons or to enable the United 
                States effectively to enforce this title, or
                    ``(B) such jurisdiction was identified by an 
                intergovernmental group or organization of which the 
                United States is a member as uncooperative with 
                international tax enforcement or information exchange 
                and the United States concurs in the determination.
    ``(d) Penalty for Failure to File Information.--If a United States 
person fails to furnish the information required by subsection (a) with 
respect to any transfer within the time prescribed therefor (including 
extensions), such United States person shall pay (upon notice and 
demand by the Secretary and in the same manner as tax) an amount equal 
to 20 percent of the amount of such transfer.
    ``(e) Simplified Reporting.--The Secretary may by regulations 
provide for simplified reporting under this section for United States 
persons making large volumes of similar payments.
    ``(f) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.''.
    (b) Clerical Amendment.--The table of sections for such subpart A 
is amended by inserting after the item relating to section 6038C the 
following new item:

``Sec. 6038D. Deterring uncooperative tax havens through listing and 
                            reporting requirements.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to transfers after the date which is 180 days after the date of 
the enactment of this Act.

SEC. 402. DETERRING UNCOOPERATIVE TAX HAVENS BY RESTRICTING ALLOWABLE 
              TAX BENEFITS.

    (a) Limitation on Deferral.--
            (1) In general.--Subsection (a) of section 952 (defining 
        subpart F income) is amended by striking ``and'' at the end of 
        paragraph (4), by striking the period at the end of paragraph 
        (5) and inserting ``, and'', and by inserting after paragraph 
        (5) the following new paragraph:
            ``(6) an amount equal to the applicable fraction (as 
        defined in subsection (e)) of the income of such corporation 
        other than income which--
                    ``(A) is attributable to earnings and profits of 
                the foreign corporation included in the gross income of 
                a United States person under section 951 (other than by 
                reason of this paragraph or paragraph (3)(A)(i)), or
                    ``(B) is described in subsection (b).''.
            (2) Applicable fraction.--Section 952 is amended by adding 
        at the end the following new subsection:
    ``(e) Identified Tax Haven Income Which Is Subpart F Income.--
            ``(1) In general.--For purposes of subsection (a)(6), the 
        term `applicable fraction' means the fraction--
                    ``(A) the numerator of which is the aggregate 
                identified tax haven income for the taxable year, and
                    ``(B) the denominator of which is the aggregate 
                income for the taxable year which is from sources 
                outside the United States.
            ``(2) Identified tax haven income.--For purposes of 
        paragraph (1), the term `identified tax haven income' means 
        income for the taxable year which is attributable to a foreign 
        jurisdiction for any period during which such jurisdiction has 
        been identified as an uncooperative tax haven under section 
        6038D(c).
            ``(3) Regulations.--The Secretary shall prescribe 
        regulations similar to the regulations issued under section 
        999(c) to carry out the purposes of this subsection.''.
    (b) Denial of Foreign Tax Credit.--Section 901 (relating to taxes 
of foreign countries and of possessions of United States) is amended by 
redesignating subsection (m) as subsection (n) and by inserting after 
subsection (l) the following new subsection:
    ``(m) Reduction of Foreign Tax Credit, etc., for Identified Tax 
Haven Income.--
            ``(1) In general.--Notwithstanding any other provision of 
        this part--
                    ``(A) no credit shall be allowed under subsection 
                (a) for any income, war profits, or excess profits 
                taxes paid or accrued (or deemed paid under section 902 
                or 960) to any foreign jurisdiction if such taxes are 
                with respect to income attributable to a period during 
                which such jurisdiction has been identified as an 
                uncooperative tax haven under section 6038D(c), and
                    ``(B) subsections (a), (b), (c), and (d) of section 
                904 and sections 902 and 960 shall be applied 
                separately with respect to all income of a taxpayer 
                attributable to periods described in subparagraph (A) 
                with respect to all such jurisdictions.
            ``(2) Taxes allowed as a deduction, etc.--Sections 275 and 
        78 shall not apply to any tax which is not allowable as a 
        credit under subsection (a) by reason of this subsection.
            ``(3) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry out the 
        purposes of this subsection, including regulations which treat 
        income paid through 1 or more entities as derived from a 
        foreign jurisdiction to which this subsection applies if such 
        income was, without regard to such entities, derived from such 
        jurisdiction.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

SEC. 403. DOUBLING OF CERTAIN PENALTIES, FINES, AND INTEREST ON 
              UNDERPAYMENTS RELATED TO CERTAIN OFFSHORE FINANCIAL 
              ARRANGEMENTS.

    (a) Determination of Penalty.--
            (1) In general.--Notwithstanding any other provision of 
        law, in the case of an applicable taxpayer--
                    (A) the determination as to whether any interest or 
                applicable penalty is to be imposed with respect to any 
                arrangement described in paragraph (2), or to any 
                underpayment of Federal income tax attributable to 
                items arising in connection with any such arrangement, 
                shall be made without regard to the rules of 
                subsections (b), (c), and (d) of section 6664 of the 
                Internal Revenue Code of 1986, and
                    (B) if any such interest or applicable penalty is 
                imposed, the amount of such interest or penalty shall 
                be equal to twice that determined without regard to 
                this section.
            (2) Applicable taxpayer.--For purposes of this subsection--
                    (A) In general.--The term ``applicable taxpayer'' 
                means a taxpayer which--
                            (i) has underreported its United States 
                        income tax liability with respect to any item 
                        which directly or indirectly involves--
                                    (I) any financial arrangement which 
                                in any manner relies on the use of an 
                                offshore payment mechanism (including 
                                credit, debit, or charge cards) issued 
                                by a bank or other entity in a foreign 
                                jurisdiction, or
                                    (II) any offshore financial 
                                arrangement (including any arrangement 
                                with foreign banks, financial 
                                institutions, corporations, 
                                partnerships, trusts, or other 
                                entities), and
                            (ii) has not signed a closing agreement 
                        pursuant to the Voluntary Offshore Compliance 
                        Initiative established by the Department of the 
                        Treasury under Revenue Procedure 2003-11 or 
                        voluntarily disclosed its participation in such 
                        arrangement by notifying the Internal Revenue 
                        Service of such arrangement prior to the issue 
                        being raised by the Internal Revenue Service 
                        during an examination.
                    (B) Authority to waive.--The Secretary of the 
                Treasury or the Secretary's delegate may waive the 
                application of paragraph (1) for any taxpayer if the 
                Secretary or the Secretary's delegate determines that--
                            (i) the use of such offshore payment 
                        mechanism or financial arrangement was 
                        incidental to the transaction,
                            (ii) in the case of a trade or business, 
                        such use took place in the ordinary course of 
                        the trade or business of the taxpayer, and
                            (iii) such waiver would serve the public 
                        interest.
                    (C) Issues raised.--For purposes of subparagraph 
                (A)(ii), an item shall be treated as an issue raised 
                during an examination if the individual examining the 
                return--
                            (i) communicates to the taxpayer knowledge 
                        about the specific item, or
                            (ii) has made a request to the taxpayer for 
                        information and the taxpayer could not make a 
                        complete response to that request without 
                        giving the examiner knowledge of the specific 
                        item.
    (b) Definitions and Rules.--For purposes of this section--
            (1) Applicable penalty.--The term ``applicable penalty'' 
        means any penalty, addition to tax, or fine imposed under 
        chapter 68 of the Internal Revenue Code of 1986.
            (2) Fees and expenses.--The Secretary of the Treasury may 
        retain and use an amount not in excess of 25 percent of all 
        additional interest, penalties, additions to tax, and fines 
        collected under this section to be used for enforcement and 
        collection activities of the Internal Revenue Service. The 
        Secretary shall keep adequate records regarding amounts so 
        retained and used. The amount credited as paid by any taxpayer 
        shall be determined without regard to this paragraph.
    (c) Report by Secretary.--The Secretary shall each year conduct a 
study and report to Congress on the implementation of this section 
during the preceding year, including statistics on the number of 
taxpayers affected by such implementation and the amount of interest 
and applicable penalties asserted, waived, and assessed during such 
preceding year.
    (d) Effective Date.--The provisions of this section shall apply to 
interest, penalties, additions to tax, and fines with respect to any 
taxable year if, as of the date of the enactment of this Act, the 
assessment of any tax, penalty, or interest with respect to such 
taxable year is not prevented by the operation of any law or rule of 
law.

SEC. 404. TREASURY REGULATIONS ON FOREIGN TAX CREDIT.

    (a) In General.--Section 901 (relating to taxes of foreign 
countries and of possessions of United States), as amended by section 
402, is amended by redesignating subsection (n) as subsection (o) and 
by inserting after subsection (m) the following new subsection:
    ``(n) Regulations.--The Secretary may prescribe regulations 
disallowing a credit under subsection (a) for all or a portion of any 
foreign tax, or allocating a foreign tax among 2 or more persons, in 
cases where the foreign tax is imposed on any person in respect of 
income of another person or in other cases involving the inappropriate 
separation of the foreign tax from the related foreign income.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to transactions entered into after the date of the enactment of 
this Act.
                                 <all>