[Congressional Bills 110th Congress]
[From the U.S. Government Publishing Office]
[H.R. 6595 Introduced in House (IH)]







110th CONGRESS
  2d Session
                                H. R. 6595

To amend the Internal Revenue Code of 1986 to provide middle class tax 
      relief while closing tax loopholes, and for other purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             July 24, 2008

 Mr. Walz of Minnesota (for himself, Mr. Ellison, Mr. Emanuel, and Mr. 
    Hill) 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 provide middle class tax 
      relief while closing tax loopholes, 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 ``Middle Class Tax 
Fairness Act of 2008''.
    (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--TAX RELIEF PROVISIONS

Sec. 101. Temporary increase in standard deduction.
Sec. 102. Additional standard deduction for real property taxes for 
                            nonitemizers.
Sec. 103. Refundable child credit.
                      TITLE II--REVENUE PROVISIONS

Sec. 201. Income of partners for performing investment management 
                            services treated as ordinary income 
                            received for performance of services.
Sec. 202. Limitation of deduction for income attributable to domestic 
                            production of oil, gas, or primary products 
                            thereof.
Sec. 203. Limitation on treaty benefits for certain deductible 
                            payments.
Sec. 204. Returns relating to payments made in settlement of payment 
                            card and third party network transactions.
Sec. 205. High income individuals subject to overall limitation on 
                            itemized deductions and phaseout of 
                            deductions for personal exemptions.
Sec. 206. Nonqualified deferred compensation from certain tax 
                            indifferent parties.
Sec. 207. Broker reporting of customer's basis in securities 
                            transactions.
Sec. 208. Repeal of worldwide allocation of interest.
Sec. 209. Clarification of economic substance doctrine.
                      TITLE III--DEFICIT REDUCTION

Sec. 301. Deficit reduction.

                     TITLE I--TAX RELIEF PROVISIONS

SEC. 101. TEMPORARY INCREASE IN STANDARD DEDUCTION.

    (a) In General.--Section 63(c) is amended by adding at the end the 
following new paragraph:
            ``(7) Increase in basic standard deduction for 2008 and 
        2009.--In the case of any taxable year beginning in 2008 or 
        2009, for purposes of paragraph (1)(A), the basic standard 
        deduction for any such taxable year shall, in lieu of the 
        amount determined under paragraph (2), be 200 percent of the 
        amount in effect under paragraph (2) for such taxable year, 
        determined after the application of paragraph (4).''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 2007.

SEC. 102. 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) in the case of any taxable year beginning in 
                2008 or 2009, the real property tax deduction.''.
    (b) Definition.--Section 63(c), as amended, 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 the lesser 
        of--
                    ``(A) the amount allowable as a deduction under 
                this chapter for State and local taxes described in 
                section 164(a)(1), or
                    ``(B) $350 ($700 in the case of a joint return).
        Any taxes taken into account under section 62(a) shall not be 
        taken into account under this paragraph.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 103. REFUNDABLE CHILD CREDIT.

    (a) Modification of Threshold Amount.--Clause (i) of section 
24(d)(1)(B) is amended by inserting ``($8,500 in the case of taxable 
years beginning in 2008 or 2009)'' after ``$10,000''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 2007.

                      TITLE II--REVENUE PROVISIONS

SEC. 201. INCOME OF PARTNERS FOR PERFORMING INVESTMENT MANAGEMENT 
              SERVICES TREATED AS ORDINARY INCOME RECEIVED FOR 
              PERFORMANCE OF SERVICES.

    (a) In General.--Part I of subchapter K of chapter 1 is amended by 
adding at the end the following new section:

``SEC. 710. SPECIAL RULES FOR PARTNERS PROVIDING INVESTMENT MANAGEMENT 
              SERVICES TO PARTNERSHIP.

    ``(a) Treatment of Distributive Share of Partnership Items.--For 
purposes of this title, in the case of an investment services 
partnership interest--
            ``(1) In general.--Notwithstanding section 702(b)--
                    ``(A) any net income with respect to such interest 
                for any partnership taxable year shall be treated as 
                ordinary income for the performance of services, and
                    ``(B) any net loss with respect to such interest 
                for such year, to the extent not disallowed under 
                paragraph (2) for such year, shall be treated as an 
                ordinary loss.
        All items of income, gain, deduction, and loss which are taken 
        into account in computing net income or net loss shall be 
        treated as ordinary income or ordinary loss (as the case may 
        be).
            ``(2) Treatment of losses.--
                    ``(A) Limitation.--Any net loss with respect to 
                such interest shall be allowed for any partnership 
                taxable year only to the extent that such loss does not 
                exceed the excess (if any) of--
                            ``(i) the aggregate net income with respect 
                        to such interest for all prior partnership 
                        taxable years, over
                            ``(ii) the aggregate net loss with respect 
                        to such interest not disallowed under this 
                        subparagraph for all prior partnership taxable 
                        years.
                    ``(B) Carryforward.--Any net loss for any 
                partnership taxable year which is not allowed by reason 
                of subparagraph (A) shall be treated as an item of loss 
                with respect to such partnership interest for the 
                succeeding partnership taxable year.
                    ``(C) Basis adjustment.--No adjustment to the basis 
                of a partnership interest shall be made on account of 
                any net loss which is not allowed by reason of 
                subparagraph (A).
                    ``(D) Exception for basis attributable to purchase 
                of a partnership interest.--In the case of an 
                investment services partnership interest acquired by 
                purchase, paragraph (1)(B) shall not apply to so much 
                of any net loss with respect to such interest for any 
                taxable year as does not exceed the excess of--
                            ``(i) the basis of such interest 
                        immediately after such purchase, over
                            ``(ii) the aggregate net loss with respect 
                        to such interest to which paragraph (1)(B) did 
                        not apply by reason of this subparagraph for 
                        all prior taxable years.
                Any net loss to which paragraph (1)(B) does not apply 
                by reason of this subparagraph shall not be taken into 
                account under subparagraph (A).
                    ``(E) Prior partnership years.--Any reference in 
                this paragraph to prior partnership taxable years shall 
                only include prior partnership taxable years to which 
                this section applies.
            ``(3) Net income and loss.--For purposes of this section--
                    ``(A) Net income.--The term `net income' means, 
                with respect to any investment services partnership 
                interest, for any partnership taxable year, the excess 
                (if any) of--
                            ``(i) all items of income and gain taken 
                        into account by the holder of such interest 
                        under section 702 with respect to such interest 
                        for such year, over
                            ``(ii) all items of deduction and loss so 
                        taken into account.
                    ``(B) Net loss.--The term `net loss' means with 
                respect to such interest for such year, the excess (if 
                any) of the amount described in subparagraph (A)(ii) 
                over the amount described in subparagraph (A)(i).
    ``(b) Dispositions of Partnership Interests.--
            ``(1) Gain.--Any gain on the disposition of an investment 
        services partnership interest shall be treated as ordinary 
        income for the performance of services.
            ``(2) Loss.--Any loss on the disposition of an investment 
        services partnership interest shall be treated as an ordinary 
        loss to the extent of the excess (if any) of--
                    ``(A) the aggregate net income with respect to such 
                interest for all partnership taxable years, over
                    ``(B) the aggregate net loss with respect to such 
                interest allowed under subsection (a)(2) for all 
                partnership taxable years.
            ``(3) Disposition of portion of interest.--In the case of 
        any disposition of an investment services partnership interest, 
        the amount of net loss which otherwise would have (but for 
        subsection (a)(2)(C)) applied to reduce the basis of such 
        interest shall be disregarded for purposes of this section for 
        all succeeding partnership taxable years.
            ``(4) Distributions of partnership property.--In the case 
        of any distribution of property by a partnership with respect 
        to any investment services partnership interest held by a 
        partner--
                    ``(A) the excess (if any) of--
                            ``(i) the fair market value of such 
                        property at the time of such distribution, over
                            ``(ii) the adjusted basis of such property 
                        in the hands of the partnership,
                shall be taken into account as an increase in such 
                partner's distributive share of the taxable income of 
                the partnership (except to the extent such excess is 
                otherwise taken into account in determining the taxable 
                income of the partnership),
                    ``(B) such property shall be treated for purposes 
                of subpart B of part II as money distributed to such 
                partner in an amount equal to such fair market value, 
                and
                    ``(C) the basis of such property in the hands of 
                such partner shall be such fair market value.
        Subsection (b) of section 734 shall be applied without regard 
        to the preceding sentence.
            ``(5) Application of section 751.--In applying section 
        751(a), an investment services partnership interest shall be 
        treated as an inventory item.
    ``(c) Investment Services Partnership Interest.--For purposes of 
this section--
            ``(1) In general.--The term `investment services 
        partnership interest' means any interest in a partnership which 
        is held by any person if such person provides (directly or 
        indirectly) a substantial quantity of any of the following 
        services with respect to the assets of the partnership in the 
        conduct of the trade or business of providing such services:
                    ``(A) Advising as to the advisability of investing 
                in, purchasing, or selling any specified asset.
                    ``(B) Managing, acquiring, or disposing of any 
                specified asset.
                    ``(C) Arranging financing with respect to acquiring 
                specified assets.
                    ``(D) Any activity in support of any service 
                described in subparagraphs (A) through (C).
        For purposes of this paragraph, the term `specified asset' 
        means securities (as defined in section 475(c)(2) without 
        regard to the last sentence thereof), real estate, commodities 
        (as defined in section 475(e)(2))), or options or derivative 
        contracts with respect to securities (as so defined), real 
        estate, or commodities (as so defined).
            ``(2) Exception for certain capital interests.--
                    ``(A) In general.--If--
                            ``(i) a portion of an investment services 
                        partnership interest is acquired on account of 
                        a contribution of invested capital, and
                            ``(ii) the partnership makes a reasonable 
                        allocation of partnership items between the 
                        portion of the distributive share that is with 
                        respect to invested capital and the portion of 
                        such distributive share that is not with 
                        respect to invested capital,
                then subsection (a) shall not apply to the portion of 
                the distributive share that is with respect to invested 
                capital. An allocation will not be treated as 
                reasonable for purposes of this subparagraph if such 
                allocation would result in the partnership allocating a 
                greater portion of income to invested capital than any 
                other partner not providing services would have been 
                allocated with respect to the same amount of invested 
                capital.
                    ``(B) Special rule for dispositions.--In any case 
                to which subparagraph (A) applies, subsection (b) shall 
                not apply to any gain or loss allocable to invested 
                capital. The portion of any gain or loss attributable 
                to invested capital is the proportion of such gain or 
                loss which is based on the distributive share of gain 
                or loss that would have been allocable to invested 
                capital under subparagraph (A) if the partnership sold 
                all of its assets immediately before the disposition.
                    ``(C) Invested capital.--For purposes of this 
                paragraph, the term `invested capital' means, the fair 
                market value at the time of contribution of any money 
                or other property contributed to the partnership.
                    ``(D) Treatment of certain loans.--
                            ``(i) Proceeds of partnership loans not 
                        treated as invested capital of service 
                        providing partners.--For purposes of this 
                        paragraph, an investment services partnership 
                        interest shall not be treated as acquired on 
                        account of a contribution of invested capital 
                        to the extent that such capital is attributable 
                        to the proceeds of any loan or other advance 
                        made or guaranteed, directly or indirectly, by 
                        any partner or the partnership.
                            ``(ii) Loans from nonservice providing 
                        partners to the partnership treated as invested 
                        capital.--For purposes of this paragraph, any 
                        loan or other advance to the partnership made 
                        or guaranteed, directly or indirectly, by a 
                        partner not providing services to the 
                        partnership shall be treated as invested 
                        capital of such partner and amounts of income 
                        and loss treated as allocable to invested 
                        capital shall be adjusted accordingly.
    ``(d) Other Income and Gain in Connection With Investment 
Management Services.--
            ``(1) In general.--If--
                    ``(A) a person performs (directly or indirectly) 
                investment management services for any entity,
                    ``(B) such person holds a disqualified interest 
                with respect to such entity, and
                    ``(C) the value of such interest (or payments 
                thereunder) is substantially related to the amount of 
                income or gain (whether or not realized) from the 
                assets with respect to which the investment management 
                services are performed,
        any income or gain with respect to such interest shall be 
        treated as ordinary income for the performance of services. 
        Rules similar to the rules of subsection (c)(2) shall apply 
        where such interest was acquired on account of invested capital 
        in such entity.
            ``(2) Definitions.--For purposes of this subsection--
                    ``(A) Disqualified interest.--The term 
                `disqualified interest' means, with respect to any 
                entity--
                            ``(i) any interest in such entity other 
                        than indebtedness,
                            ``(ii) convertible or contingent debt of 
                        such entity,
                            ``(iii) any option or other right to 
                        acquire property described in clause (i) or 
                        (ii), and
                            ``(iv) any derivative instrument entered 
                        into (directly or indirectly) with such entity 
                        or any investor in such entity.
                Such term shall not include a partnership interest and 
                shall not include stock in a taxable corporation.
                    ``(B) Taxable corporation.--The term `taxable 
                corporation' means--
                            ``(i) a domestic C corporation, or
                            ``(ii) a foreign corporation subject to a 
                        comprehensive foreign income tax.
                    ``(C) Investment management services.--The term 
                `investment management services' means a substantial 
                quantity of any of the services described in subsection 
                (c)(1) which are provided in the conduct of the trade 
                or business of providing such services.
                    ``(D) Comprehensive foreign income tax.--The term 
                `comprehensive foreign income tax' means, with respect 
                to any foreign corporation, the income tax of a foreign 
                country if--
                            ``(i) such corporation is eligible for the 
                        benefits of a comprehensive income tax treaty 
                        between such foreign country and the United 
                        States, or
                            ``(ii) such corporation demonstrates to the 
                        satisfaction of the Secretary that such foreign 
                        country has a comprehensive income tax.
    ``(e) Regulations.--The Secretary shall prescribe such regulations 
as are necessary or appropriate to carry out the purposes of this 
section, including regulations to--
            ``(1) prevent the avoidance of the purposes of this 
        section, and
            ``(2) coordinate this section with the other provisions of 
        this subchapter.
    ``(f) Cross Reference.--For 40 percent no fault penalty on certain 
underpayments due to the avoidance of this section, see section 
6662.''.
    (b) Application to Real Estate Investment Trusts.--
            (1) In general.--Subsection (c) of section 856 is amended 
        by adding at the end the following new paragraph:
            ``(9) Exception from recharacterization of income from 
        investment services partnership interests.--
                    ``(A) In general.--Paragraphs (2), (3), and (4) 
                shall be applied without regard to section 710 
                (relating to special rules for partners providing 
                investment management services to partnership).
                    ``(B) Special rule for partnerships owned by 
                reits.--Section 7704 shall be applied without regard to 
                section 710 in the case of a partnership which meets 
                each of the following requirements:
                            ``(i) Such partnership is treated as 
                        publicly traded under section 7704 solely by 
                        reason of interests in such partnership being 
                        convertible into interests in a real estate 
                        investment trust which is publicly traded.
                            ``(ii) 50 percent or more of the capital 
                        and profits interests of such partnership are 
                        owned, directly or indirectly, at all times 
                        during the taxable year by such real estate 
                        investment trust (determined with the 
                        application of section 267(c)).
                            ``(iii) Such partnership meets the 
                        requirements of paragraphs (2), (3), and (4) 
                        (applied without regard to section 710).''.
            (2) Conforming amendment.--Paragraph (4) of section 7704(d) 
        is amended by inserting ``(determined without regard to section 
        856(c)(8))'' after ``856(c)(2)''.
    (c) Imposition of Penalty on Underpayments.--
            (1) In general.--Subsection (b) of section 6662 is amended 
        by inserting after paragraph (5) the following new paragraph:
            ``(6) The application of subsection (d) of section 710 or 
        the regulations prescribed under section 710(e) to prevent the 
        avoidance of the purposes of section 710.''.
            (2) Amount of penalty.--
                    (A) In general.--Section 6662 is amended by adding 
                at the end the following new subsection:
    ``(i) Increase in Penalty in Case of Property Transferred for 
Investment Management Services.--In the case of any portion of an 
underpayment to which this section applies by reason of subsection 
(b)(6), subsection (a) shall be applied with respect to such portion by 
substituting `40 percent' for `20 percent'.''.
                    (B) Conforming amendments.--Subparagraph (B) of 
                section 6662A(e)(2) is amended--
                            (i) by striking ``section 6662(h)'' and 
                        inserting ``subsection (h) or (i) of section 
                        6662'', and
                            (ii) by striking ``gross valuation 
                        misstatement penalty'' in the heading and 
                        inserting ``certain increased underpayment 
                        penalties''.
            (3) Reasonable cause exception not applicable.--Subsection 
        (c) of section 6664 is amended--
                    (A) by redesignating paragraphs (2) and (3) as 
                paragraphs (3) and (4), respectively,
                    (B) by striking ``paragraph (2)'' in paragraph (4), 
                as so redesignated, and inserting ``paragraph (3)'', 
                and
                    (C) by inserting after paragraph (1) the following 
                new paragraph:
            ``(2) Exception.--Paragraph (1) shall not apply to any 
        portion of an underpayment to which this section applies by 
        reason of subsection (b)(6).''.
    (d) Conforming Amendments.--
            (1) Subsection (d) of section 731 is amended by inserting 
        ``section 710(b)(4) (relating to distributions of partnership 
        property),'' before ``section 736''.
            (2) Section 741 is amended by inserting ``or section 710 
        (relating to special rules for partners providing investment 
        management services to partnership)'' before the period at the 
        end.
            (3) Paragraph (13) of section 1402(a) is amended--
                    (A) by striking ``other than guaranteed'' and 
                inserting ``other than--
                    ``(A) guaranteed'',
                    (B) by striking the semicolon at the end and 
                inserting ``, and'', and
                    (C) by adding at the end the following new 
                subparagraph:
                    ``(B) any income treated as ordinary income under 
                section 710 received by an individual who provides 
                investment management services (as defined in section 
                710(d)(2));''.
            (4) Paragraph (12) of section 211(a) of the Social Security 
        Act is amended--
                    (A) by striking ``other than guaranteed'' and 
                inserting ``other than--
                    ``(A) guaranteed'',
                    (B) by striking the semicolon at the end and 
                inserting ``, and'', and
                    (C) by adding at the end the following new 
                subparagraph:
                    ``(B) any income treated as ordinary income under 
                section 710 of the Internal Revenue Code of 1986 
                received by an individual who provides investment 
                management services (as defined in section 710(d)(2) of 
                such Code);''.
            (5) The table of sections for part I of subchapter K of 
        chapter 1 is amended by adding at the end the following new 
        item:

``Sec. 710. Special rules for partners providing investment management 
                            services to partnership.''.
    (e) Effective Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years ending after June 18, 2008.
            (2) Partnership taxable years which include effective 
        date.--In applying section 710(a) of the Internal Revenue Code 
        of 1986 (as added by this section) in the case of any 
        partnership taxable year which includes June 18, 2008, the 
        amount of the net income referred to in such section shall be 
        treated as being the lesser of the net income for the entire 
        partnership taxable year or the net income determined by only 
        taking into account items attributable to the portion of the 
        partnership taxable year which is after such date.
            (3) Dispositions of partnership interests.--Section 710(b) 
        of the Internal Revenue Code of 1986 (as added by this section) 
        shall apply to dispositions and distributions after June 18, 
        2008.
            (4) Other income and gain in connection with investment 
        management services.--Section 710(d) of such Code (as added by 
        this section) shall take effect on June 18, 2008.
            (5) Publicly traded partnerships.--For purposes of applying 
        section 7704, the amendments made by this section shall apply 
        to taxable years beginning after December 31, 2010.

SEC. 202. LIMITATION OF DEDUCTION FOR INCOME ATTRIBUTABLE TO DOMESTIC 
              PRODUCTION OF OIL, GAS, OR PRIMARY PRODUCTS THEREOF.

    (a) Denial of Deduction for Major Integrated Oil Companies for 
Income Attributable to Domestic Production of Oil, Gas, or Primary 
Products Thereof.--
            (1) In general.--Subparagraph (B) of section 199(c)(4) 
        (relating to exceptions) is amended by striking ``or'' at the 
        end of clause (ii), by striking the period at the end of clause 
        (iii) and inserting ``, or'', and by inserting after clause 
        (iii) the following new clause:
                            ``(iv) in the case of any major integrated 
                        oil company (as defined in section 
                        167(h)(5)(B)), the production, refining, 
                        processing, transportation, or distribution of 
                        oil, gas, or any primary product thereof during 
                        any taxable year described in section 
                        167(h)(5)(B).''.
            (2) Primary product.--Section 199(c)(4)(B) is amended by 
        adding at the end the following flush sentence:
                ``For purposes of clause (iv), the term `primary 
                product' has the same meaning as when used in section 
                927(a)(2)(C), as in effect before its repeal.''.
    (b) Limitation on Oil Related Qualified Production Activities 
Income for Taxpayers Other Than Major Integrated Oil Companies.--
            (1) In general.--Section 199(d) is amended by redesignating 
        paragraph (9) as paragraph (10) and by inserting after 
        paragraph (8) the following new paragraph:
            ``(9) Special rule for taxpayers with oil related qualified 
        production activities income.--
                    ``(A) In general.--If a taxpayer (other than a 
                major integrated oil company (as defined in section 
                167(h)(5)(B))) has oil related qualified production 
                activities income for any taxable year beginning after 
                2009, the amount of the deduction under subsection (a) 
                shall be reduced by 3 percent of the least of--
                            ``(i) the oil related qualified production 
                        activities income of the taxpayer for the 
                        taxable year,
                            ``(ii) the qualified production activities 
                        income of the taxpayer for the taxable year, or
                            ``(iii) taxable income (determined without 
                        regard to this section).
                    ``(B) Oil related qualified production activities 
                income.--The term `oil related qualified production 
                activities income' means for any taxable year the 
                qualified production activities income which is 
                attributable to the production, refining, processing, 
                transportation, or distribution of oil, gas, or any 
                primary product thereof during such taxable year.''.
            (2) Conforming amendment.--Section 199(d)(2) (relating to 
        application to individuals) is amended by striking ``subsection 
        (a)(1)(B)'' and inserting ``subsections (a)(1)(B) and 
        (d)(9)(A)(iii)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2008.

SEC. 203. LIMITATION ON TREATY BENEFITS FOR CERTAIN DEDUCTIBLE 
              PAYMENTS.

    (a) In General.--Section 894 (relating to income affected by 
treaty) is amended by adding at the end the following new subsection:
    ``(d) Limitation on Treaty Benefits for Certain Deductible 
Payments.--
            ``(1) In general.--In the case of any deductible related-
        party payment, any withholding tax imposed under chapter 3 (and 
        any tax imposed under subpart A or B of this part) with respect 
        to such payment may not be reduced under any treaty of the 
        United States unless any such withholding tax would be reduced 
        under a treaty of the United States if such payment were made 
        directly to the foreign parent corporation.
            ``(2) Deductible related-party payment.--For purposes of 
        this subsection, the term `deductible related-party payment' 
        means any payment made, directly or indirectly, by any person 
        to any other person if the payment is allowable as a deduction 
        under this chapter and both persons are members of the same 
        foreign controlled group of entities.
            ``(3) Foreign controlled group of entities.--For purposes 
        of this subsection--
                    ``(A) In general.--The term `foreign controlled 
                group of entities' means a controlled group of entities 
                the common parent of which is a foreign corporation.
                    ``(B) Controlled group of entities.--The term 
                `controlled group of entities' means a controlled group 
                of corporations as defined in section 1563(a)(1), 
                except that--
                            ``(i) `more than 50 percent' shall be 
                        substituted for `at least 80 percent' each 
                        place it appears therein, and
                            ``(ii) the determination shall be made 
                        without regard to subsections (a)(4) and (b)(2) 
                        of section 1563.
                A partnership or any other entity (other than a 
                corporation) shall be treated as a member of a 
                controlled group of entities if such entity is 
                controlled (within the meaning of section 954(d)(3)) by 
                members of such group (including any entity treated as 
                a member of such group by reason of this sentence).
            ``(4) Foreign parent corporation.--For purposes of this 
        subsection, the term `foreign parent corporation' means, with 
        respect to any deductible related-party payment, the common 
        parent of the foreign controlled group of entities referred to 
        in paragraph (3)(A).
            ``(5) Regulations.--The Secretary may prescribe such 
        regulations or other guidance as are necessary or appropriate 
        to carry out the purposes of this subsection, including 
        regulations or other guidance which provide for--
                    ``(A) the treatment of two or more persons as 
                members of a foreign controlled group of entities if 
                such persons would be the common parent of such group 
                if treated as one corporation, and
                    ``(B) the treatment of any member of a foreign 
                controlled group of entities as the common parent of 
                such group if such treatment is appropriate taking into 
                account the economic relationships among such 
                entities.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to payments made after the date of the enactment of this Act.

SEC. 204. RETURNS RELATING TO PAYMENTS MADE IN SETTLEMENT OF PAYMENT 
              CARD AND THIRD PARTY NETWORK TRANSACTIONS.

    (a) In General.--Subpart B of part III of subchapter A of chapter 
61 is amended by adding at the end the following new section:

``SEC. 6050W. RETURNS RELATING TO PAYMENTS MADE IN SETTLEMENT OF 
              PAYMENT CARD AND THIRD PARTY NETWORK TRANSACTIONS.

    ``(a) In General.--Each payment settlement entity shall make a 
return for each calendar year setting forth--
            ``(1) the name, address, and TIN of each participating 
        payee to whom one or more payments in settlement of reportable 
        payment transactions are made, and
            ``(2) the gross amount of the reportable payment 
        transactions with respect to each such participating payee.
Such return shall be made at such time and in such form and manner as 
the Secretary may require by regulations.
    ``(b) Payment Settlement Entity.--For purposes of this section--
            ``(1) In general.--The term `payment settlement entity' 
        means--
                    ``(A) in the case of a payment card transaction, 
                the merchant acquiring entity, and
                    ``(B) in the case of a third party network 
                transaction, the third party settlement organization.
            ``(2) Merchant acquiring entity.--The term `merchant 
        acquiring entity' means the bank or other organization which 
        has the contractual obligation to make payment to participating 
        payees in settlement of payment card transactions.
            ``(3) Third party settlement organization.--The term `third 
        party settlement organization' means the central organization 
        which has the contractual obligation to make payment to 
        participating payees of third party network transactions.
            ``(4) Special rules related to intermediaries.--For 
        purposes of this section--
                    ``(A) Aggregated payees.--In any case where 
                reportable payment transactions of more than one 
                participating payee are settled through an 
                intermediary--
                            ``(i) such intermediary shall be treated as 
                        the participating payee for purposes of 
                        determining the reporting obligations of the 
                        payment settlement entity with respect to such 
                        transactions, and
                            ``(ii) such intermediary shall be treated 
                        as the payment settlement entity with respect 
                        to the settlement of such transactions with the 
                        participating payees.
                    ``(B) Electronic payment facilitators.--In any case 
                where an electronic payment facilitator or other third 
                party makes payments in settlement of reportable 
                payment transactions on behalf of the payment 
                settlement entity, the return under subsection (a) 
                shall be made by such electronic payment facilitator or 
                other third party in lieu of the payment settlement 
                entity.
    ``(c) Reportable Payment Transaction.--For purposes of this 
section--
            ``(1) In general.--The term `reportable payment 
        transaction' means any payment card transaction and any third 
        party network transaction.
            ``(2) Payment card transaction.--The term `payment card 
        transaction' means any transaction in which a payment card is 
        accepted as payment.
            ``(3) Third party network transaction.--The term `third 
        party network transaction' means any transaction which is 
        settled through a third party payment network.
    ``(d) Other Definitions.--For purposes of this section--
            ``(1) Participating payee.--
                    ``(A) In general.--The term `participating payee' 
                means--
                            ``(i) in the case of a payment card 
                        transaction, any person who accepts a payment 
                        card as payment, and
                            ``(ii) in the case of a third party network 
                        transaction, any person who accepts payment 
                        from a third party settlement organization in 
                        settlement of such transaction.
                    ``(B) Exclusion of foreign persons.--Except as 
                provided by the Secretary in regulations or other 
                guidance, such term shall not include any person with a 
                foreign address.
                    ``(C) Inclusion of governmental units.--The term 
                `person' includes any governmental unit (and any agency 
                or instrumentality thereof).
            ``(2) Payment card.--The term `payment card' means any card 
        which is issued pursuant to an agreement or arrangement which 
        provides for--
                    ``(A) one or more issuers of such cards,
                    ``(B) a network of persons unrelated to each other, 
                and to the issuer, who agree to accept such cards as 
                payment, and
                    ``(C) standards and mechanisms for settling the 
                transactions between the merchant acquiring entities 
                and the persons who agree to accept such cards as 
                payment.
        The acceptance as payment of any account number or other 
        indicia associated with a payment card shall be treated for 
        purposes of this section in the same manner as accepting such 
        payment card as payment.
            ``(3) Third party payment network.--The term `third party 
        payment network' means any agreement or arrangement--
                    ``(A) which involves the establishment of accounts 
                with a central organization by a substantial number of 
                persons who--
                            ``(i) are unrelated to such organization,
                            ``(ii) provide goods or services, and
                            ``(iii) have agreed to settle transactions 
                        for the provision of such goods or services 
                        pursuant to such agreement or arrangement,
                    ``(B) which provides for standards and mechanisms 
                for settling such transactions, and
                    ``(C) which guarantees persons providing goods or 
                services pursuant to such agreement or arrangement that 
                such persons will be paid for providing such goods or 
                services.
        Such term shall not include any agreement or arrangement which 
        provides for the issuance of payment cards.
    ``(e) Exception for De Minimis Payments by Third Party Settlement 
Organizations.--A third party settlement organization shall be required 
to report any information under subsection (a) with respect to third 
party network transactions of any participating payee only if--
            ``(1) the amount which would otherwise be reported under 
        subsection (a)(2) with respect to such transactions exceeds 
        $20,000, and
            ``(2) the aggregate number of such transactions exceeds 
        200.
    ``(f) Statements To Be Furnished to Persons With Respect to Whom 
Information Is Required.--Every person required to make a return under 
subsection (a) shall furnish to each person with respect to whom such a 
return is required a written statement showing--
            ``(1) the name, address, and phone number of the 
        information contact of the person required to make such return, 
        and
            ``(2) the gross amount of the reportable payment 
        transactions with respect to the person required to be shown on 
        the return.
The written statement required under the preceding sentence shall be 
furnished to the person on or before January 31 of the year following 
the calendar year for which the return under subsection (a) was 
required to be made. Such statement may be furnished electronically, 
and if so, the email address of the person required to make such return 
may be shown in lieu of the phone number.
    ``(g) Regulations.--The Secretary may prescribe such regulations or 
other guidance as may be necessary or appropriate to carry out this 
section, including rules to prevent the reporting of the same 
transaction more than once.''.
    (b) Penalty for Failure To File.--
            (1) Return.--Subparagraph (B) of section 6724(d)(1) is 
        amended--
                    (A) by striking ``or'' at the end of clause (xx),
                    (B) by redesignating the clause (xix) that follows 
                clause (xx) as clause (xxi),
                    (C) by striking ``and'' at the end of clause (xxi), 
                as redesignated by subparagraph (B) and inserting 
                ``or'', and
                    (D) by adding at the end the following:
                            ``(xxii) section 6050W (relating to returns 
                        to payments made in settlement of payment card 
                        transactions), and''.
            (2) Statement.--Paragraph (2) of section 6724(d) is amended 
        by striking ``or'' at the end of subparagraph (BB), by striking 
        the period at the end of the subparagraph (CC) and inserting 
        ``, or'', and by inserting after subparagraph (CC) the 
        following:
                    ``(DD) section 6050W(c) (relating to returns 
                relating to payments made in settlement of payment card 
                transactions).''.
    (c) Application of Backup Withholding.--Paragraph (3) of section 
3406(b) is amended by striking ``or'' at the end of subparagraph (D), 
by striking the period at the end of subparagraph (E) and inserting ``, 
or'', and by adding at the end the following new subparagraph:
                    ``(F) section 6050W (relating to returns relating 
                to payments made in settlement of payment card 
                transactions).''.
    (d) Clerical Amendment.--The table of sections for subpart B of 
part III of subchapter A of chapter 61 is amended by inserting after 
the item relating to section 6050V the following:

``Sec. 6050W. Returns relating to payments made in settlement of 
                            payment card and third party network 
                            transactions.''.
    (e) Effective Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        returns for calendar years beginning after December 31, 2010.
            (2) Application of backup withholding.--
                    (A) In general.--The amendment made by subsection 
                (c) shall apply to amounts paid after December 31, 
                2011.
                    (B) Eligibility for tin matching program.--Solely 
                for purposes of carrying out any TIN matching program 
                established by the Secretary under section 3406(i) of 
                the Internal Revenue Code of 1986--
                            (i) the amendments made this section shall 
                        be treated as taking effect on the date of the 
                        enactment of this Act, and
                            (ii) each person responsible for setting 
                        the standards and mechanisms referred to in 
                        section 6050W(d)(2)(C) of such Code, as added 
                        by this section, for settling transactions 
                        involving payment cards shall be treated in the 
                        same manner as a payment settlement entity.

SEC. 205. HIGH INCOME INDIVIDUALS SUBJECT TO OVERALL LIMITATION ON 
              ITEMIZED DEDUCTIONS AND PHASEOUT OF DEDUCTIONS FOR 
              PERSONAL EXEMPTIONS.

    (a) Overall Limitation on Itemized Deductions.--Section 68 
(relating to overall limitation on itemized deductions) is amended by 
striking subsections (f) and (g) and inserting the following new 
subsection:
    ``(f) Phaseout of Limitation.--
            ``(1) In general.--In the case of a taxpayer whose adjusted 
        gross income is not more than $250,000 ($500,000 in the case of 
        a joint return or a surviving spouse (as defined in section 
        2(a)))--
                    ``(A) in the case of any taxable year beginning in 
                2008 or 2009, the reduction under subsection (a) shall 
                be equal to \1/3\ of the amount which would (but for 
                this subsection) be the amount of such reduction, and
                    ``(B) in the case of any taxable year beginning 
                after 2009, subsection (a) shall not apply.
            ``(2) Phaseout based on income.--
                    ``(A) In general.--In the case of a taxpayer whose 
                adjusted gross income is more than $250,000 ($500,000 
                in the case of a joint return or a surviving spouse (as 
                defined in section 2(a))), the reduction under 
                subsection (a) shall be equal to the applicable 
                fraction of the amount which would (but for this 
                subsection) be the amount of such reduction.
                    ``(B) Applicable fraction.--For purposes of 
                subparagraph (A), the term `applicable fraction' 
                means--
                            ``(i) in the case of any taxable year 
                        beginning in 2008 or 2009, a fraction (not in 
                        excess of 1) equal to the sum of--
                                    ``(I) \1/3\, plus
                                    ``(II) \1/30\ for each $1,000 (or 
                                fraction thereof) by which the 
                                taxpayer's adjusted gross income 
                                exceeds $250,000 ($500,000 in the case 
                                of a joint return or a surviving spouse 
                                (as defined in section 2(a))), and
                            ``(ii) in the case of any taxable year 
                        beginning in 2010, a fraction (not in excess of 
                        1) equal to \1/20\ for each $1,000 (or fraction 
                        thereof) by which the taxpayer's adjusted gross 
                        income exceeds $250,000 ($500,000 in the case 
                        of a joint return or a surviving spouse (as 
                        defined in section 2(a))).''.
    (b) Phaseout of Deductions for Personal Exemptions.--Paragraph (3) 
of section 151(d) is amended by striking subparagraphs (E) and (F) and 
inserting the following new subparagraphs:
                    ``(E) Reduction of phaseout.--In the case of a 
                taxpayer whose adjusted gross income is not more than 
                $250,000 ($500,000 in the case of a joint return or a 
                surviving spouse (as defined in section 2(a)))--
                            ``(i) in the case of any taxable year 
                        beginning in 2008 or 2009, the reduction under 
                        subparagraph (A) shall be equal to \1/3\ of the 
                        amount which would (but for this subparagraph) 
                        be the amount of such reduction, and
                            ``(ii) in the case of any taxable year 
                        beginning after 2009, subparagraph (A) shall 
                        not apply.
                    ``(F) Phaseout based on income.--In the case of a 
                taxpayer whose adjusted gross income is more than 
                $250,000 ($500,000 in the case of a joint return or a 
                surviving spouse (as defined in section 2(a))), the 
                reduction under subparagraph (A) shall be equal to the 
                applicable fraction of the amount which would (but for 
                this subparagraph) be the amount of such reduction.
                    ``(G) Applicable fraction.--For purposes of 
                subparagraph (F), the term `applicable fraction' 
                means--
                            ``(i) in the case of any taxable year 
                        beginning in 2008 or 2009, the fraction (not in 
                        excess of 1) equal to the sum of--
                                    ``(I) \1/3\, plus
                                    ``(II) \1/30\ for each $1,000 (or 
                                fraction thereof) by which the 
                                taxpayer's adjusted gross income 
                                exceeds $250,000 ($500,000 in the case 
                                of a joint return or a surviving spouse 
                                (as defined in section 2(a))), and
                            ``(ii) in the case of any taxable year 
                        beginning in 2010, the fraction (not in excess 
                        of 1) equal to \1/20\ for each $1,000 (or 
                        fraction thereof) by which the taxpayer's 
                        adjusted gross income exceeds $250,000 
                        ($500,000 in the case of a joint return or a 
                        surviving spouse (as defined in section 
                        2(a))).''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 206. NONQUALIFIED DEFERRED COMPENSATION FROM CERTAIN TAX 
              INDIFFERENT PARTIES.

    (a) In General.--Subpart B of part II of subchapter E of chapter 1 
is amended by inserting after section 457 the following new section:

``SEC. 457A. NONQUALIFIED DEFERRED COMPENSATION FROM CERTAIN TAX 
              INDIFFERENT PARTIES.

    ``(a) In General.--Any compensation which is deferred under a 
nonqualified deferred compensation plan of a nonqualified entity shall 
be includible in gross income when there is no substantial risk of 
forfeiture of the rights to such compensation.
    ``(b) Nonqualified Entity.--For purposes of this section, the term 
`nonqualified entity' means--
            ``(1) any foreign corporation unless substantially all of 
        its income is--
                    ``(A) effectively connected with the conduct of a 
                trade or business in the United States, or
                    ``(B) subject to a comprehensive foreign income 
                tax, and
            ``(2) any partnership unless substantially all of its 
        income is allocated to persons other than--
                    ``(A) foreign persons with respect to whom such 
                income is not subject to a comprehensive foreign income 
                tax, and
                    ``(B) organizations which are exempt from tax under 
                this title.
    ``(c) Determinability of Amounts of Compensation.--
            ``(1) In general.--If the amount of any compensation is not 
        determinable at the time that such compensation is otherwise 
        includible in gross income under subsection (a)--
                    ``(A) such amount shall be so includible in gross 
                income when determinable, and
                    ``(B) the tax imposed under this chapter for the 
                taxable year in which such compensation is includible 
                in gross income shall be increased by the sum of--
                            ``(i) the amount of interest determined 
                        under paragraph (2), and
                            ``(ii) an amount equal to 20 percent of the 
                        amount of such compensation.
            ``(2) Interest.--For purposes of paragraph (1)(B)(i), the 
        interest determined under this paragraph for any taxable year 
        is the amount of interest at the underpayment rate under 
        section 6621 plus 1 percentage point on the underpayments that 
        would have occurred had the deferred compensation been 
        includible in gross income for the taxable year in which first 
        deferred or, if later, the first taxable year in which such 
        deferred compensation is not subject to a substantial risk of 
        forfeiture.
    ``(d) Other Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Substantial risk of forfeiture.--
                    ``(A) In general.--The rights of a person to 
                compensation shall be treated as subject to a 
                substantial risk of forfeiture only if such person's 
                rights to such compensation are conditioned upon the 
                future performance of substantial services by any 
                individual.
                    ``(B) Exception for compensation based on gain 
                recognized on an investment asset.--
                            ``(i) In general.--To the extent provided 
                        in regulations prescribed by the Secretary, if 
                        compensation is determined solely by reference 
                        to the amount of gain recognized on the 
                        disposition of an investment asset, such 
                        compensation shall be treated as subject to a 
                        substantial risk of forfeiture until the date 
                        of such disposition.
                            ``(ii) Investment asset.--For purposes of 
                        clause (i), the term `investment asset' means 
                        any single asset (other than an investment fund 
                        or similar entity)--
                                    ``(I) acquired directly by an 
                                investment fund or similar entity,
                                    ``(II) with respect to which such 
                                entity does not (nor does any person 
                                related to such entity) participate in 
                                the active management of such asset (or 
                                if such asset is an interest in an 
                                entity, in the active management of the 
                                activities of such entity), and
                                    ``(III) substantially all of any 
                                gain on the disposition of which (other 
                                than such deferred compensation) is 
                                allocated to investors in such entity.
                            ``(iii) Coordination with special rule.--
                        Paragraph (3)(B) shall not apply to any 
                        compensation to which clause (i) applies.
            ``(2) Comprehensive foreign income tax.--The term 
        `comprehensive foreign income tax' means, with respect to any 
        foreign person, the income tax of a foreign country if--
                    ``(A) such person is eligible for the benefits of a 
                comprehensive income tax treaty between such foreign 
                country and the United States, or
                    ``(B) such person demonstrates to the satisfaction 
                of the Secretary that such foreign country has a 
                comprehensive income tax.
            ``(3) Nonqualified deferred compensation plan.--
                    ``(A) In general.--The term `nonqualified deferred 
                compensation plan' has the meaning given such term 
                under section 409A(d), except that such term shall 
                include any plan that provides a right to compensation 
                based on the appreciation in value of a specified 
                number of equity units of the service recipient.
                    ``(B) Exception.--Compensation shall not be treated 
                as deferred for purposes of this section if the service 
                provider receives payment of such compensation not 
                later than 12 months after the end of the taxable year 
                of the service recipient during which the right to the 
                payment of such compensation is no longer subject to a 
                substantial risk of forfeiture.
            ``(4) Exception for certain compensation with respect to 
        effectively connected income.--In the case a foreign 
        corporation with income which is taxable under section 882, 
        this section shall not apply to compensation which, had such 
        compensation had been paid in cash on the date that such 
        compensation ceased to be subject to a substantial risk of 
        forfeiture, would have been deductible by such foreign 
        corporation against such income.
            ``(5) Application of rules.--Rules similar to the rules of 
        paragraphs (5) and (6) of section 409A(d) shall apply.
    ``(e) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section, including regulations disregarding a substantial risk of 
forfeiture in cases where necessary to carry out the purposes of this 
section.''.
    (b) Conforming Amendment.--Section 26(b)(2) is amended by striking 
``and'' at the end of subparagraph (U), by striking the period at the 
end of subparagraph (V) and inserting ``, and'', and by adding at the 
end the following new subparagraph:
                    ``(W) section 457A(c)(1)(B) (relating to 
                determinability of amounts of compensation).''.
    (c) Clerical Amendment.--The table of sections of subpart B of part 
II of subchapter E of chapter 1 is amended by inserting after the item 
relating to section 457 the following new item:

``Sec. 457A. Nonqualified deferred compensation from certain tax 
                            indifferent parties.''.
    (d) Effective Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        amounts deferred which are attributable to services performed 
        after December 31, 2008.
            (2) Application to existing deferrals.--In the case of any 
        amount deferred to which the amendments made by this section do 
        not apply solely by reason of the fact that the amount is 
        attributable to services performed before January 1, 2009, to 
        the extent such amount is not includible in gross income in a 
        taxable year beginning before 2018, such amounts shall be 
        includible in gross income in the later of--
                    (A) the last taxable year beginning before 2018, or
                    (B) the taxable year in which there is no 
                substantial risk of forfeiture of the rights to such 
                compensation (determined in the same manner as 
                determined for purposes of section 457A of the Internal 
                Revenue Code of 1986, as added by this section).
            (3) Charitable contributions of existing deferrals 
        permitted.--
                    (A) In general.--Subsection (b) of section 170 of 
                the Internal Revenue Code of 1986 shall not apply to 
                (and subsections (b) and (d) of such section shall be 
                applied without regard to) so much of the taxpayer's 
                qualified contributions made during the taxpayer's last 
                taxable year beginning before 2018 as does not exceed 
                the taxpayer's qualified inclusion amount. For purposes 
                of subsection (b) of section 170 of such Code, the 
                taxpayer's contribution base for such last taxable year 
                shall be reduced by the amount of the taxpayer's 
                qualified contributions to which such subsection does 
                not apply by reason the preceding sentence.
                    (B) Qualified contributions.--For purposes of this 
                paragraph, the term ``qualified contributions'' means 
                the aggregate charitable contributions (as defined in 
                section 170(c) of such Code) paid in cash by the 
                taxpayer to organizations described in section 
                170(b)(1)(A) of such Code (other than any organization 
                described in section 509(a)(3) of such Code or any fund 
                or account described in section 4966(d)(2) of such 
                Code).
                    (C) Qualified inclusion amount.--For purposes of 
                this paragraph, the term ``qualified inclusion amount'' 
                means the amount includible in the taxpayer's gross 
                income for the last taxable year beginning before 2018 
                by reason of paragraph (2).
            (4) Accelerated payments.--No later than 120 days after the 
        date of the enactment of this Act, the Secretary shall issue 
        guidance providing a limited period of time during which a 
        nonqualified deferred compensation arrangement attributable to 
        services performed on or before December 31, 2008, may, without 
        violating the requirements of section 409A(a) of the Internal 
        Revenue Code of 1986, be amended to conform the date of 
        distribution to the date the amounts are required to be 
        included in income.
            (5) Certain back-to-back arrangements.--If the taxpayer is 
        also a service recipient and maintains one or more nonqualified 
        deferred compensation arrangements for its service providers 
        under which any amount is attributable to services performed on 
        or before December 31, 2008, the guidance issued under 
        paragraph (4) shall permit such arrangements to be amended to 
        conform the dates of distribution under such arrangement to the 
        date amounts are required to be included in the income of such 
        taxpayer under this subsection.
            (6) Accelerated payment not treated as material 
        modification.--Any amendment to a nonqualified deferred 
        compensation arrangement made pursuant to paragraph (4) or (5) 
        shall not be treated as a material modification of the 
        arrangement for purposes of section 409A of the Internal 
        Revenue Code of 1986.

SEC. 207. BROKER REPORTING OF CUSTOMER'S BASIS IN SECURITIES 
              TRANSACTIONS.

    (a) In General.--
            (1) Broker reporting for securities transactions.--Section 
        6045 (relating to returns of brokers) is amended by adding at 
        the end the following new subsection:
    ``(g) Additional Information Required in the Case of Securities 
Transactions, etc.--
            ``(1) In general.--If a broker is otherwise required to 
        make a return under subsection (a) with respect to the gross 
        proceeds of the sale of a covered security, the broker shall 
        include in such return the information described in paragraph 
        (2).
            ``(2) Additional information required.--
                    ``(A) In general.--The information required under 
                paragraph (1) to be shown on a return with respect to a 
                covered security of a customer shall include the 
                customer's adjusted basis in such security and whether 
                any gain or loss with respect to such security is long-
                term or short-term (within the meaning of section 
                1222).
                    ``(B) Determination of adjusted basis.--For 
                purposes of subparagraph (A)--
                            ``(i) In general.--The customer's adjusted 
                        basis shall be determined--
                                    ``(I) in the case of any security 
                                (other than any stock for which an 
                                average basis method is permissible 
                                under section 1012), in accordance with 
                                the first-in first-out method unless 
                                the customer notifies the broker by 
                                means of making an adequate 
                                identification of the stock sold or 
                                transferred, and
                                    ``(II) in the case of any stock for 
                                which an average basis method is 
                                permissible under section 1012, in 
                                accordance with the broker's default 
                                method unless the customer notifies the 
                                broker that he elects another 
                                acceptable method under section 1012 
                                with respect to the account in which 
                                such stock is held.
                            ``(ii) Exception for wash sales.--Except as 
                        otherwise provided by the Secretary, the 
                        customer's adjusted basis shall be determined 
                        without regard to section 1091 (relating to 
                        loss from wash sales of stock or securities) 
                        unless the transactions occur in the same 
                        account with respect to identical securities.
            ``(3) Covered security.--For purposes of this subsection--
                    ``(A) In general.--The term `covered security' 
                means any specified security acquired on or after the 
                applicable date if such security--
                            ``(i) was acquired through a transaction in 
                        the account in which such security is held, or
                            ``(ii) was transferred to such account from 
                        an account in which such security was a covered 
                        security, but only if the broker received a 
                        statement under section 6045A with respect to 
                        the transfer.
                    ``(B) Specified security.--The term `specified 
                security' means--
                            ``(i) any share of stock in a corporation,
                            ``(ii) any note, bond, debenture, or other 
                        evidence of indebtedness,
                            ``(iii) any commodity, or contract or 
                        derivative with respect to such commodity, if 
                        the Secretary determines that adjusted basis 
                        reporting is appropriate for purposes of this 
                        subsection, and
                            ``(iv) any other financial instrument with 
                        respect to which the Secretary determines that 
                        adjusted basis reporting is appropriate for 
                        purposes of this subsection.
                    ``(C) Applicable date.--The term `applicable date' 
                means--
                            ``(i) January 1, 2010, in the case of any 
                        specified security which is stock in a 
                        corporation (other than any stock described in 
                        clause (ii)),
                            ``(ii) January 1, 2011, in the case of any 
                        stock for which an average basis method is 
                        permissible under section 1012, and
                            ``(iii) January 1, 2012, or such later date 
                        determined by the Secretary in the case of any 
                        other specified security.
            ``(4) Treatment of s corporations.--In the case of the sale 
        of a covered security acquired by an S corporation (other than 
        a financial institution) after December 31, 2011, such S 
        corporation shall be treated in the same manner as a 
        partnership for purposes of this section.
            ``(5) Special rules for short sales.--In the case of a 
        short sale, reporting under this section shall be made for the 
        year in which such sale is closed.''.
            (2) Broker information required with respect to options.--
        Section 6045, as amended by subsection (a), is amended by 
        adding at the end the following new subsection:
    ``(h) Application to Options on Securities.--
            ``(1) Exercise of option.--For purposes of this section, if 
        a covered security is acquired or disposed of pursuant to the 
        exercise of an option that was granted or acquired in the same 
        account as the covered security, the amount received with 
        respect to the grant or paid with respect to the acquisition of 
        such option shall be treated as an adjustment to gross proceeds 
        or as an adjustment to basis, as the case may be.
            ``(2) Lapse or closing transaction.--In the case of the 
        lapse (or closing transaction (as defined in section 
        1234(b)(2)(A))) of an option on a specified security or the 
        exercise of a cash-settled option on a specified security, 
        reporting under subsections (a) and (g) with respect to such 
        option shall be made for the calendar year which includes the 
        date of such lapse, closing transaction, or exercise.
            ``(3) Prospective application.--Paragraphs (1) and (2) 
        shall not apply to any option which is granted or acquired 
        before January 1, 2012.
            ``(4) Definitions.--For purposes of this subsection, the 
        terms `covered security' and `specified security' shall have 
        the meanings given such terms in subsection (g)(3).''.
            (3) Extension of period for statements sent to customers.--
                    (A) In general.--Subsection (b) of section 6045 is 
                amended by striking ``January 31'' and inserting 
                ``February 15''.
                    (B) Statements related to substitute payments.--
                Subsection (d) of section 6045 is amended--
                            (i) by striking ``at such time and'', and
                            (ii) by inserting after ``other item.'' the 
                        following new sentence: ``The written statement 
                        required under the preceding sentence shall be 
                        furnished on or before February 15 of the year 
                        following the calendar year in which the 
                        payment was made.''.
                    (C) Other statements.--Subsection (b) of section 
                6045 is amended by adding at the end the following: 
                ``In the case of a consolidated reporting statement (as 
                defined in regulations) with respect to any account, 
                any statement which would otherwise be required to be 
                furnished on or before January 31 of a calendar year 
                with respect to any item reportable to the taxpayer 
                shall instead be required to be furnished on or before 
                February 15 of such calendar year if furnished with 
                such consolidated reporting statement.''.
    (b) Determination of Basis of Certain Securities on Account by 
Account or Average Basis Method.--Section 1012 (relating to basis of 
property-cost) is amended--
            (1) by striking ``The basis of property'' and inserting the 
        following:
    ``(a) In General.--The basis of property'',
            (2) by striking ``The cost of real property'' and inserting 
        the following:
    ``(b) Special Rule for Apportioned Real Estate Taxes.--The cost of 
real property'', and
            (3) by adding at the end the following new subsections:
    ``(c) Determinations by Account.--
            ``(1) In general.--In the case of the sale, exchange, or 
        other disposition of a specified security on or after the 
        applicable date, the conventions prescribed by regulations 
        under this section shall be applied on an account by account 
        basis.
            ``(2) Application to open-end funds.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), any stock in an open-end fund 
                acquired before January 1, 2011, shall be treated as a 
                separate account from any such stock acquired on or 
                after such date.
                    ``(B) Election by open-end fund for treatment as 
                single account.--If an open-end fund elects to have 
                this subparagraph apply with respect to one or more of 
                its stockholders--
                            ``(i) subparagraph (A) shall not apply with 
                        respect to any stock in such fund held by such 
                        stockholders, and
                            ``(ii) all stock in such fund which is held 
                        by such stockholders shall be treated as 
                        covered securities described in section 
                        6045(g)(3) without regard to the date of the 
                        acquisition of such stock.
                A rule similar to the rule of the preceding sentence 
                shall apply with respect to a broker holding stock in 
                an open-end fund as a nominee.
            ``(3) Definitions.--For purposes of this section--
                    ``(A) Open-end fund.--The term `open-end fund' 
                means a regulated investment company (as defined in 
                section 851) which is offering for sale or has 
                outstanding any redeemable security of which it is the 
                issuer. Any stock which is traded on an established 
                securities exchange shall not be treated as stock in an 
                open-end fund.
                    ``(B) Specified security; applicable date.--The 
                terms `specified security' and `applicable date' shall 
                have the meaning given such terms in section 6045(g).
    ``(d) Average Basis for Stock Acquired Pursuant to a Dividend 
Reinvestment Plan.--
            ``(1) In general.--In the case of any stock acquired after 
        December 31, 2010, in connection with a dividend reinvestment 
        plan, the basis of such stock while held as part of such plan 
        shall be determined using one of the methods which may be used 
        for determining the basis of stock in an open-end fund.
            ``(2) Treatment after transfer.--In the case of the 
        transfer to another account of stock to which paragraph (1) 
        applies, such stock shall have a cost basis in such other 
        account equal to its basis in the dividend reinvestment plan 
        immediately before such transfer (properly adjusted for any 
        fees or other charges taken into account in connection with 
        such transfer).
            ``(3) Separate accounts; election for treatment as single 
        account.--Rules similar to the rules of subsection (c)(2) shall 
        apply for purposes of this subsection.
            ``(4) Dividend reinvestment plan.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `dividend reinvestment 
                plan' means any arrangement under which dividends on 
                any stock are reinvested in stock identical to the 
                stock with respect to which the dividends are paid.
                    ``(B) Initial stock acquisition treated as acquired 
                in connection with plan.--Stock shall be treated as 
                acquired in connection with a dividend reinvestment 
                plan if such stock is acquired pursuant to such plan or 
                if the dividends paid on such stock are subject to such 
                plan.''.
    (c) Information by Transferors To Aid Brokers.--
            (1) In general.--Subpart B of part III of subchapter A of 
        chapter 61 is amended by inserting after section 6045 the 
        following new section:

``SEC. 6045A. INFORMATION REQUIRED IN CONNECTION WITH TRANSFERS OF 
              COVERED SECURITIES TO BROKERS.

    ``(a) Furnishing of Information.--Every applicable person which 
transfers to a broker (as defined in section 6045(c)(1)) a security 
which is a covered security (as defined in section 6045(g)(3)) in the 
hands of such applicable person shall furnish to such broker a written 
statement in such manner and setting forth such information as the 
Secretary may by regulations prescribe for purposes of enabling such 
broker to meet the requirements of section 6045(g).
    ``(b) Applicable Person.--For purposes of subsection (a), the term 
`applicable person' means--
            ``(1) any broker (as defined in section 6045(c)(1)), and
            ``(2) any other person as provided by the Secretary in 
        regulations.
    ``(c) Time for Furnishing Statement.--Except as otherwise provided 
by the Secretary, any statement required by subsection (a) shall be 
furnished not later than 15 days after the date of the transfer 
described in such subsection.''.
            (2) Assessable penalties.--Paragraph (2) of section 6724(d) 
        (defining payee statement) is amended by redesignating 
        subparagraphs (I) through (DD) as subparagraphs (J) through 
        (EE), respectively, and by inserting after subparagraph (H) the 
        following new subparagraph:
                    ``(I) section 6045A (relating to information 
                required in connection with transfers of covered 
                securities to brokers),''.
            (3) Clerical amendment.--The table of sections for subpart 
        B of part III of subchapter A of chapter 61 is amended by 
        inserting after the item relating to section 6045 the following 
        new item:

``Sec. 6045A. Information required in connection with transfers of 
                            covered securities to brokers.''.
    (d) Additional Issuer Information To Aid Brokers.--
            (1) In general.--Subpart B of part III of subchapter A of 
        chapter 61, as amended by subsection (b), is amended by 
        inserting after section 6045A the following new section:

``SEC. 6045B. RETURNS RELATING TO ACTIONS AFFECTING BASIS OF SPECIFIED 
              SECURITIES.

    ``(a) In General.--According to the forms or regulations prescribed 
by the Secretary, any issuer of a specified security shall make a 
return setting forth--
            ``(1) a description of any organizational action which 
        affects the basis of such specified security of such issuer,
            ``(2) the quantitative effect on the basis of such 
        specified security resulting from such action, and
            ``(3) such other information as the Secretary may 
        prescribe.
    ``(b) Time for Filing Return.--Any return required by subsection 
(a) shall be filed not later than the earlier of--
            ``(1) 45 days after the date of the action described in 
        subsection (a), or
            ``(2) January 15 of the year following the calendar year 
        during which such action occurred.
    ``(c) Statements To Be Furnished to Holders of Specified Securities 
or Their Nominees.--According to the forms or regulations prescribed by 
the Secretary, every person required to make a return under subsection 
(a) with respect to a specified security shall furnish to the nominee 
with respect to the specified security (or certificate holder if there 
is no nominee) a written statement showing--
            ``(1) the name, address, and phone number of the 
        information contact of the person required to make such return,
            ``(2) the information required to be shown on such return 
        with respect to such security, and
            ``(3) such other information as the Secretary may 
        prescribe.
The written statement required under the preceding sentence shall be 
furnished to the holder on or before January 15 of the year following 
the calendar year during which the action described in subsection (a) 
occurred.
    ``(d) Specified Security.--For purposes of this section, the term 
`specified security' has the meaning given such term by section 
6045(g)(3)(B). No return shall be required under this section with 
respect to actions described in subsection (a) with respect to a 
specified security which occur before the applicable date (as defined 
in section 6045(g)(3)(C)) with respect to such security.
    ``(e) Public Reporting in Lieu of Return.--The Secretary may waive 
the requirements under subsections (a) and (c) with respect to a 
specified security, if the person required to make the return under 
subsection (a) makes publicly available, in such form and manner as the 
Secretary determines necessary to carry out the purposes of this 
section--
            ``(1) the name, address, phone number, and email address of 
        the information contact of such person, and
            ``(2) the information described in paragraphs (1), (2), and 
        (3) of subsection (a).''.
            (2) Assessable penalties.--
                    (A) Subparagraph (B) of section 6724(d)(1) 
                (defining information return) is amended by 
                redesignating clause (iv) and each of the clauses which 
                follow as clauses (v) through (xxiii), respectively, 
                and by inserting after clause (iii) the following new 
                clause:
                            ``(iv) section 6045B(a) (relating to 
                        returns relating to actions affecting basis of 
                        specified securities),''.
                    (B) Paragraph (2) of section 6724(d) (defining 
                payee statement), as amended by subsection (c)(2), is 
                amended by redesignating subparagraphs (J) through (EE) 
                as subparagraphs (K) through (FF), respectively, and by 
                inserting after subparagraph (I) the following new 
                subparagraph:
                    ``(J) subsections (c) and (e) of section 6045B 
                (relating to returns relating to actions affecting 
                basis of specified securities),''.
            (3) Clerical amendment.--The table of sections for subpart 
        B of part III of subchapter A of chapter 61, as amended by 
        subsection (b)(3), is amended by inserting after the item 
        relating to section 6045A the following new item:

``Sec. 6045B. Returns relating to actions affecting basis of specified 
                            securities.''.
    (e) Effective Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall take 
        effect on January 1, 2010.
            (2) Extension of period for statements sent to customers.--
        The amendments made by subsection (a)(3) shall apply to 
        statements required to be furnished after December 31, 2008.

SEC. 208. REPEAL OF WORLDWIDE ALLOCATION OF INTEREST.

    (a) In General.--Section 864 is amended by striking subsection (f) 
and by redesignating subsection (g) as subsection (f).
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2008.

SEC. 209. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

    (a) In General.--Section 7701 is amended by redesignating 
subsection (p) as subsection (q) and by inserting after subsection (o) 
the following new subsection:
    ``(p) 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) subject to clause (iii), the 
                                taxpayer has a substantial purpose 
                                (other than a Federal tax purpose) for 
                                entering into such transaction.
                            ``(ii) Special rule where taxpayer relies 
                        on profit potential.--A transaction shall not 
                        be treated as having economic substance solely 
                        by reason of having a potential for profit 
                        unless the present value of the reasonably 
                        expected pre-Federal tax profit from the 
                        transaction is substantial in relation to the 
                        present value of the expected net Federal tax 
                        benefits that would be allowed if the 
                        transaction were respected. In determining pre-
                        Federal tax profit, there shall be taken into 
                        account fees and other transaction expenses and 
                        to the extent provided by the Secretary, 
                        foreign taxes.
                            ``(iii) Special rules for determining 
                        whether non-federal tax purpose.--For purposes 
                        of clause (i)(II)--
                                    ``(I) a purpose of achieving a 
                                financial accounting benefit shall not 
                                be taken into account in determining 
                                whether a transaction has a substantial 
                                purpose (other than a Federal tax 
                                purpose) if the origin of such 
                                financial accounting benefit is a 
                                reduction of Federal tax, and
                                    ``(II) the taxpayer shall not be 
                                treated as having a substantial purpose 
                                (other than a Federal tax purpose) with 
                                respect to a transaction if the only 
                                such purpose is the reduction of non-
                                Federal taxes and the transaction will 
                                result in a reduction of Federal taxes 
                                substantially equal to, or greater 
                                than, the reduction in non-Federal 
                                taxes because of similarities between 
                                the laws imposing the taxes.
            ``(2) 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) 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.
            ``(3) Other provisions 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 or provision of this title, 
        and the requirements of this subsection shall be construed as 
        being in addition to any such other rule of law or provision of 
        this title.
            ``(4) 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) Penalty for Understatements Attributable to Transactions 
Lacking Economic Substance, etc.--
            (1) 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 30 percent of the amount of such 
understatement.
    ``(b) Reduction of Penalty for Disclosed Transactions.--Subsection 
(a) shall be applied by substituting `20 percent' for `30 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 
        there is a lack of economic substance (within the meaning of 
        section 7701(p)(1)(B)) for the transaction giving rise to the 
        claimed benefit.
    ``(d) Rules Applicable to Assertion, Compromise, and Collection of 
Penalty.--
            ``(1) In general.--Only the Chief Counsel for the Internal 
        Revenue Service may assert a penalty imposed under this section 
        or may compromise all or any portion of such penalty. The Chief 
        Counsel may delegate the authority under this paragraph only to 
        an individual holding the position of chief of a branch within 
        the Office of the Chief Counsel for the Internal Revenue 
        Service.
            ``(2) Specific requirements.--
                    ``(A) Assertion of penalty.--The Chief Counsel for 
                the Internal Revenue Service (or the Chief Counsel's 
                delegate under paragraph (1)) shall not assert a 
                penalty imposed under this section unless, before the 
                assertion of the penalty, the taxpayer is provided--
                            ``(i) a notice of intent to assert the 
                        penalty, and
                            ``(ii) an opportunity to provide to the 
                        Commissioner (or the Chief Counsel's delegate 
                        under paragraph (1)) a written response to the 
                        proposed penalty within a reasonable period of 
                        time after such notice.
                    ``(B) Compromise of penalty.--A compromise shall 
                not result in a reduction in the penalty imposed by 
                this section in an amount greater than the amount which 
                bears the same ratio to the amount of the penalty 
                determined without regard to the compromise as--
                            ``(i) the reduction under the compromise in 
                        the noneconomic substance transaction 
                        understatement to which the penalty relates, 
                        bears to
                            ``(ii) the amount of the noneconomic 
                        substance transaction understatement determined 
                        without regard to the compromise.
            ``(3) Rules relating to relevancy requirement.--
                    ``(A) Determination of relevance by chief 
                counsel.--The Chief Counsel for the Internal Revenue 
                Service (or the Chief Counsel's delegate under 
                paragraph (1)) may assert, compromise, or collect a 
                penalty imposed by this section with respect to a 
                noneconomic substance transaction even if there has not 
                been a court determination that the economic substance 
                doctrine was relevant for purposes of this title to the 
                transaction if the Chief Counsel (or delegate) 
                determines that either was so relevant.
                    ``(B) Final order of court.--If there is a final 
                order of a court that determines that the economic 
                substance doctrine was not relevant for purposes of 
                this title to a transaction (or series of 
                transactions), any penalty imposed under this section 
                with respect to the transaction (or series of 
                transactions) shall be rescinded.
            ``(4) Applicable rules.--The rules of paragraphs (2) and 
        (3) of section 6707A(d) shall apply to a compromise under 
        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).''.
            (2) Coordination with other understatements and 
        penalties.--
                    (A) 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.
                    (B) Subsection (e) of section 6662A is amended--
                            (i) in paragraph (1), by inserting ``and 
                        noneconomic substance transaction 
                        understatements'' after ``reportable 
                        transaction understatements'' both places it 
                        appears,
                            (ii) in paragraph (2)(A)--
                                    (I) by inserting ``6662B or'' 
                                before ``6663'' in the text, and
                                    (II) by striking ``penalty'' in the 
                                heading and inserting ``and economic 
                                substance penalties'',
                            (iii) in paragraph (2)(B)--
                                    (I) by inserting ``and section 
                                6662B'' after ``This section'', and
                                    (II) by striking ``penalty'' in the 
                                heading and inserting ``and economic 
                                substance penalties'',
                            (iv) in paragraph (3), by inserting ``or 
                        noneconomic substance transaction 
                        understatement'' after ``reportable transaction 
                        understatement'', and
                            (v) 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) Subsection (e) of section 6707A is amended--
                            (i) by striking ``or'' at the end of 
                        subparagraph (B), and
                            (ii) 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)(B)) have been subject to 
                penalty under section 6662A at a rate prescribed under 
                section 6662A(c) or to penalty under section 6662B,''.
            (3) Clerical amendment.--The table of sections for part II 
        of subchapter A of chapter 68 is amended by inserting after the 
        item relating to section 6662A the following new item:

``Sec. 6662B. Penalty for understatements attributable to transactions 
                            lacking economic substance, etc.''.
    (c) Denial of Deduction for Interest on Underpayments Attributable 
to Noneconomic Substance Transactions.--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'' 
        in the heading thereof after ``Transactions''.
    (d) Penalties for Underpayments.--
            (1) Penalty for underpayments attributable to transactions 
        lacking economic substance.--
                    (A) In general.--Subsection (b) of section 6662, as 
                amended by this Act, is amended by inserting after 
                paragraph (6) the following new paragraph:
            ``(7) Any disallowance of claimed tax benefits by reason of 
        a transaction lacking economic substance (within the meaning of 
        section 7701(p)) or failing to meet the requirements of any 
        similar rule of law.''.
                    (B) Increased penalty for nondisclosed 
                transactions.--Section 6662, as amended by this Act, is 
                amended by adding at the end the following new 
                subsection:
    ``(j) Increase in Penalty in Case of Nondisclosed Noneconomic 
Substance Transactions.--
            ``(1) In general.--To the extent that a portion of the 
        underpayment to which this section applies is attributable to 
        one or more nondisclosed noneconomic substance transactions, 
        subsection (a) shall be applied with respect to such portion by 
        substituting `40 percent' for `20 percent'.
            ``(2) Nondisclosed noneconomic substance transactions.--For 
        purposes of this subsection, the term `nondisclosed noneconomic 
        substance transaction' means any portion of a transaction 
        described in subsection (b)(7) with respect to which the 
        relevant facts affecting the tax treatment are not adequately 
        disclosed in the return nor in a statement attached to the 
        return.
            ``(3) Special rule for amended returns.--Except as provided 
        in regulations, in no event shall any amendment or supplement 
        to a return of tax be taken into account for purposes of this 
        subsection if the amendment or supplement is filed after the 
        earlier of the date the taxpayer is first contacted by the 
        Secretary regarding the examination of the return or such other 
        date as is specified by the Secretary.''.
                    (C) Conforming amendment.--Subparagraph (B) of 
                section 6662A(e)(2), as amended by this Act, is amended 
                by striking ``subsection (h) or (i)'' and inserting 
                ``subsections (h), (i), or (j)''.
            (2) Reasonable cause exception not applicable to 
        noneconomic substance transactions, tax shelters, and certain 
        large corporations.--Paragraph (2) of section 6664(c), as 
        amended by this Act, is amended--
                    (A) by striking ``shall not apply to any portion'' 
                and inserting ``shall not apply--
                    ``(A) to any portion'',
                    (B) by striking the period at the end and inserting 
                a comma, and
                    (C) by adding at the end the following new 
                subparagraphs:
                    ``(B) to any portion of an underpayment which is 
                attributable to one or more tax shelters (as defined in 
                section 6662(d)(2)(C)) or transactions described in 
                section 6662(b)(7), and
                    ``(C) to any taxpayer if such taxpayer is a 
                specified large corporation (as defined in section 
                6662(d)(2)(D)(ii)).''.
            (3) Special understatement reduction rule for certain large 
        corporations.--
                    (A) In general.--Paragraph (2) of section 6662(d) 
                is amended by adding at the end the following new 
                subparagraph:
                    ``(D) Special reduction rule for certain large 
                corporations.--
                            ``(i) In general.--In the case of any 
                        specified large corporation--
                                    ``(I) subparagraph (B) shall not 
                                apply, and
                                    ``(II) the amount of the 
                                understatement under subparagraph (A) 
                                shall be reduced by that portion of the 
                                understatement which is attributable to 
                                any item with respect to which the 
                                taxpayer has a reasonable belief that 
                                the tax treatment of such item by the 
                                taxpayer is more likely than not the 
                                proper tax treatment of such item.
                            ``(ii) Specified large corporation.--
                                    ``(I) In general.--For purposes of 
                                this subparagraph, the term `specified 
                                large corporation' means any 
                                corporation with gross receipts in 
                                excess of $100,000,000 for the taxable 
                                year involved.
                                    ``(II) Aggregation rule.--All 
                                persons treated as a single employer 
                                under section 52(a) shall be treated as 
                                one person for purposes of subclause 
                                (I).''.
                    (B) Conforming amendment.--Subparagraph (C) of 
                section 6662(d)(2) is amended by striking 
                ``Subparagraph (B)'' and inserting ``Subparagraphs (B) 
                and (D)(i)(II)''.
    (e) Effective Dates.--
            (1) Except as provided in paragraphs (2) and (3), the 
        amendments made by this section shall apply to transactions 
        entered into after the date of the enactment of this Act.
            (2) The amendments made by this subsection (c) shall apply 
        to transactions after the date of the enactment of this Act in 
        taxable years ending after such date.
            (3) The amendments made by subsection (d) shall apply to 
        taxable years beginning after the date of the enactment of this 
        Act.

                      TITLE III--DEFICIT REDUCTION

SEC. 301. DEFICIT REDUCTION.

    The net increase in receipts to the Treasury by reason of this Act 
shall be used for deficit reduction purposes.
                                 <all>