[Congressional Bills 110th Congress]
[From the U.S. Government Publishing Office]
[S. 96 Introduced in Senate (IS)]







110th CONGRESS
  1st Session
                                 S. 96

   To amend the Internal Revenue Code of 1986 to ensure a fairer and 
  simpler method of taxing controlled foreign corporations of United 
States shareholders, to treat certain foreign corporations managed and 
controlled in the United States as domestic corporations, to codify the 
economic substance doctrine, and to eliminate the top corporate income 
                   tax rate, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                            January 4, 2007

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

_______________________________________________________________________

                                 A BILL


 
   To amend the Internal Revenue Code of 1986 to ensure a fairer and 
  simpler method of taxing controlled foreign corporations of United 
States shareholders, to treat certain foreign corporations managed and 
controlled in the United States as domestic corporations, to codify the 
economic substance doctrine, and to eliminate the top corporate income 
                   tax rate, 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; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``Export Products 
Not Jobs Act''.
    (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.

             TITLE I--FOREIGN TAX REFORM AND SIMPLIFICATION

SEC. 101. REFORM AND SIMPLIFICATION OF SUBPART F.

    (a) In General.--Subpart F of part III of subchapter N of chapter 1 
(relating to controlled foreign corporations) is amended by striking 
sections 952, 953, and 954 and inserting the following:

``SEC. 952. SUBPART F INCOME DEFINED.

    ``(a) In General.--For purposes of this subpart, except as provided 
in this section, the term `subpart F income' means the gross income of 
the controlled foreign corporation.
    ``(b) Exceptions for Certain Types of Income.--Subpart F income 
shall not include--
            ``(1) the active home country income (as defined in section 
        953) of the controlled foreign corporation for the taxable 
        year, or
            ``(2) any item of income for the taxable year from sources 
        within the United States which is effectively connected with 
        the conduct by the controlled foreign corporation of a trade or 
        business within the United States unless such item is exempt 
        from taxation (or is subject to a reduced rate of tax) pursuant 
        to a treaty obligation of the United States.
For purposes of paragraph (2), income described in paragraph (2) or (3) 
of section 921(d) shall be treated as derived from sources within the 
United States and any exemption (or reduction) with respect to the tax 
imposed by section 884 shall not be taken into account.
    ``(c) Limitation Based on Earnings and Profits.--
            ``(1) In general.--For purposes of subsection (a), the 
        subpart F income of any controlled foreign corporation for any 
        taxable year shall not exceed the earnings and profits of such 
        corporation for such taxable year.
            ``(2) Recharacterization in subsequent taxable years.--If 
        the subpart F income of any controlled foreign corporation for 
        any taxable year was reduced by reason of paragraph (1), any 
        excess of the earnings and profits of such corporation for any 
        subsequent taxable year over the subpart F income of such 
        foreign corporation for such taxable year shall be 
        recharacterized as subpart F income under rules similar to the 
        rules applicable under section 904(f)(5).
            ``(3) Special rule for determining earnings and profits.--
        For purposes of this subsection, earnings and profits of any 
        controlled foreign corporation shall be determined without 
        regard to paragraphs (4), (5), and (6) of section 312(n). Under 
        regulations, the preceding sentence shall not apply to the 
        extent it would increase earnings and profits by an amount 
        which was previously distributed by the controlled foreign 
        corporation.
    ``(d) De Minimis Exception.--If the subpart F income of a 
controlled foreign corporation for any taxable year (determined without 
regard to this subsection and section 954(a)) is less than the lesser 
of--
            ``(1) 5 percent of gross income, or
            ``(2) $1,000,000,
the subpart F income of such corporation for such taxable year shall be 
treated as being equal to zero.
    ``(e) Special Rules Relating to Boycotts, Bribes, and Certain 
Foreign Countries.--
            ``(1) In general.--Subpart F income of a controlled foreign 
        corporation for any taxable year (determined without regard to 
        this subsection) shall be increased by the sum of--
                    ``(A) the product of--
                            ``(i) the gross income of the corporation 
                        reduced by its subpart F income (as so 
                        determined), and
                            ``(ii) the international boycott factor (as 
                        determined under section 999),
                    ``(B) the sum of the amounts of any illegal bribes, 
                kickbacks, or other payments (within the meaning of 
                section 162(c)) paid by or on behalf of the corporation 
                during the taxable year of the corporation directly or 
                indirectly to an official, employee, or agent in fact 
                of a government, and
                    ``(C) the gross income of such corporation which is 
                derived from any foreign country during any period 
                during which section 901(j) applies to such foreign 
                country and which is not otherwise treated as subpart F 
                income (as so determined).
            ``(2) Special rule for illegal payments.--The payments 
        referred to in paragraph (1)(B) are payments which would be 
        unlawful under the Foreign Corrupt Practices Act of 1977 if the 
        payor were a United States person.
            ``(3) Income derived from foreign country.--The Secretary 
        shall prescribe such regulations as may be necessary or 
        appropriate to carry out the purposes of paragraph (1)(C), 
        including regulations which treat income paid through 1 or more 
        entities as derived from a foreign country to which section 
        901(j) applies if such income was, without regard to such 
        entities, derived from such country.

``SEC. 953. ACTIVE HOME COUNTRY INCOME.

    ``(a) In General.--For purposes of section 952(b), the term `active 
home country income' means, with respect to any controlled foreign 
corporation, income derived from the active and regular conduct of 1 or 
more trades or businesses within the home country of such corporation 
which constitutes--
            ``(1) qualified property income, or
            ``(2) qualified services income.
    ``(b) Qualified Property Income.--For purposes of this section--
            ``(1) In general.--The term `qualified property income' 
        means income derived in connection with--
                    ``(A) the manufacture, production, growth, or 
                extraction (in whole or in substantial part)of any 
                personal property within the home country of the 
                controlled foreign corporation, or
                    ``(B) the resale by the controlled foreign 
                corporation within its home country of personal 
                property manufactured, produced, grown, or extracted 
                (in whole or in substantial part) within that home 
                country.
            ``(2) Property must be used or consumed in home country.--
        Paragraph (1) shall only apply to income if the personal 
        property is sold for use or consumption within the home 
        country.
    ``(c) Qualified Services Income.--For purposes of this section--
            ``(1) In general.--The term `qualified services income' 
        means income (other than qualified property income) derived in 
        connection with the providing of services in transactions with 
        customers which, at the time the services are provided, are 
        located in the home country of such corporation.
            ``(2) Services must be used in home country.--Paragraph (1) 
        shall only apply to income if the services--
                    ``(A) are used or consumed in the home country of 
                the controlled foreign corporation, or
                    ``(B) are used in the active conduct of a trade or 
                business by the recipient and substantially all of the 
                activities in connection with the trade or business are 
                conducted by the recipient in such home country.
            ``(3) Special rule for insurance income.--If income of a 
        controlled foreign corporation--
                    ``(A) is attributable to the issuing (or 
                reinsuring) of an insurance or annuity contract, and
                    ``(B) would (subject to the modifications under 
                section 954(c)(2)(B)) be taxed under subchapter L of 
                this chapter if such income were the income of a 
                domestic corporation,
        such income shall be treated as qualified services income only 
        if the contract covers only risks in connection with property 
        in, liability arising out of activity in, or lives or health of 
        residents of, the home country of such corporation.
            ``(4) Anti-abuse rule.--For purposes of this subsection, 
        there shall be disregarded any item of income of a controlled 
        foreign corporation derived in connection with any trade or 
        business if, in the conduct of the trade or business, the 
        corporation is not engaged in regular and continuous 
        transactions with customers which are not related persons.
    ``(d) Home Country.--For purposes of this section, the term `home 
country' means, with respect to a controlled foreign corporation, the 
country in which such corporation is created or organized.

``SEC. 954. OTHER RULES AND DEFINITIONS RELATING TO SUBPART F INCOME.

    ``(a) Deductions To Be Taken Into Account.--For purposes of 
determining the subpart F income of a controlled foreign corporation 
for any taxable year, gross income, and any category of income 
described in subsection (b) or (c) of section 953, shall be reduced by 
deductions (including taxes) properly allocable to such income or 
category. The Secretary shall prescribe regulations for the application 
of this subsection.
    ``(b) Election by Controlled Foreign Corporation To Be Treated as 
Domestic Corporation.--
            ``(1) In general.--If--
                    ``(A) a foreign corporation is a controlled foreign 
                corporation which makes an election to have this 
                subsection apply and waives all benefits to such 
                corporation granted by the United States under any 
                treaty, and
                    ``(B) such foreign corporation meets such 
                requirements as the Secretary shall prescribe to ensure 
                that the taxes imposed by this chapter on such foreign 
                corporation are paid,
        such corporation shall be treated as a domestic corporation for 
        purposes of this title.
            ``(2) Period during which election is in effect.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), an election under paragraph (1) shall 
                apply to the taxable year for which made and all 
                subsequent taxable years unless revoked with the 
                consent of the Secretary.
                    ``(B) Termination.--If a corporation which made an 
                election under paragraph (1) for any taxable year fails 
                to meet the requirements of subparagraph (B) of 
                paragraph (1) for any subsequent taxable year, such 
                election shall not apply to such subsequent taxable 
                year and all succeeding taxable years.
            ``(3) Treatment of losses.--If any corporation treated as a 
        domestic corporation under this subsection is treated as a 
        member of an affiliated group for purposes of chapter 6 
        (relating to consolidated returns), any loss of such 
        corporation shall be treated as a dual consolidated loss for 
        purposes of section 1503(d) without regard to paragraph (2)(B) 
        thereof.
            ``(4) Effect of election.--
                    ``(A) In general.--For purposes of section 367, any 
                foreign corporation making an election under paragraph 
                (1) shall be treated as transferring (as of the 1st day 
                of the 1st taxable year to which such election applies) 
                all of its assets to a domestic corporation in 
                connection with an exchange to which section 354 
                applies.
                    ``(B) Exception for pre-2008 earnings and profit.--
                            ``(i) In general.--Earnings and profits of 
                        the foreign corporation accumulated in taxable 
                        years beginning before January 1, 2008, shall 
                        not be included in the gross income of the 
                        persons holding stock in such corporation by 
                        reason of subparagraph (A).
                            ``(ii) Treatment of distributions.--For 
                        purposes of this title, any distribution made 
                        by a corporation to which an election under 
                        paragraph (1) applies out of earnings and 
                        profits accumulated in taxable years beginning 
                        before January 1, 2008, shall be treated as a 
                        distribution made by a foreign corporation.
                            ``(iii) Certain rules to continue to apply 
                        to pre-2008 earnings.--The provisions specified 
                        in clause (iv) shall be applied without regard 
                        to paragraph (1), except that, in the case of a 
                        corporation to which an election under 
                        paragraph (1) applies, only earnings and 
                        profits accumulated in taxable years beginning 
                        before January 1, 2008, shall be taken into 
                        account.
                            ``(iv) Specified provisions.--The 
                        provisions specified in this clause are:
                                    ``(I) Section 1248 (relating to 
                                gain from certain sales or exchanges of 
                                stock in certain foreign corporations).
                                    ``(II) Subpart F of part III of 
                                subchapter N to the extent such subpart 
                                relates to earnings invested in United 
                                States property or amounts referred to 
                                in clause (ii) or (iii) of section 
                                951(a)(1)(A).
            ``(5) Effect of termination.--For purposes of section 367, 
        if--
                    ``(A) an election is made by a corporation under 
                paragraph (1) for any taxable year, and
                    ``(B) such election ceases to apply for any 
                subsequent taxable year,
        such corporation shall be treated as a domestic corporation 
        transferring (as of the 1st day of such subsequent taxable 
        year) all of its property to a foreign corporation in 
        connection with an exchange to which section 354 applies.
    ``(c) Special Rule for Certain Captive Insurance Companies.--
            ``(1) In general.--Solely for purposes of applying this 
        subpart to related person insurance income--
                    ``(A) the term `United States shareholder' means, 
                with respect to any foreign corporation, a United 
                States person (as defined in section 957(c)) who owns 
                (within the meaning of section 958(a)) any stock of the 
                foreign corporation,
                    ``(B) the term `controlled foreign corporation' has 
                the meaning given to such term by section 957(a) 
                determined by substituting `25 percent or more' for 
                `more than 50 percent', and
                    ``(C) the pro rata share referred to in section 
                951(a)(1)(A)(i) shall be determined under paragraph (5) 
                of this subsection.
            ``(2) Related person insurance income.--For purposes of 
        this subsection--
                    ``(A) In general.--The term `related person 
                insurance income' means any income which--
                            ``(i) is attributable to a policy of 
                        insurance or reinsurance with respect to which 
                        the person (directly or indirectly) insured is 
                        a United States shareholder in the foreign 
                        corporation or a related person to such a 
                        shareholder, and
                            ``(ii) would (subject to the modifications 
                        provided by subparagraph (B)) be taxed under 
                        subchapter L of this chapter if such income 
                        were the income of a domestic insurance 
                        company.
                    ``(B) Special rules.--For purposes of subparagraph 
                (A)--
                            ``(i) The following provisions of 
                        subchapter L shall not apply:
                                    ``(I) The small life insurance 
                                company deduction.
                                    ``(II) Section 805(a)(5) (relating 
                                to operations loss deduction).
                                    ``(III) Section 832(c)(5) (relating 
                                to certain capital losses).
                            ``(ii) The items referred to in--
                                    ``(I) section 803(a)(1) (relating 
                                to gross amount of premiums and other 
                                considerations),
                                    ``(II) section 803(a)(2) (relating 
                                to net decrease in reserves),
                                    ``(III) section 805(a)(2) (relating 
                                to net increase in reserves), and
                                    ``(IV) section 832(b)(4) (relating 
                                to premiums earned on insurance 
                                contracts),
                        shall be taken into account only to the extent 
                        they are in respect of any reinsurance or the 
                        issuing of any insurance or annuity contract 
                        described in subparagraph (A).
                            ``(iii) Reserves for any insurance or 
                        annuity contract shall be determined in the 
                        same manner as if the controlled foreign 
                        corporation were subject to tax under 
                        subchapter L, except that in applying such 
                        subchapter--
                                    ``(I) the interest rate determined 
                                for the functional currency of the 
                                corporation and which, except as 
                                provided by the Secretary, is 
                                calculated in the same manner as the 
                                Federal mid-term rate under section 
                                1274(d), shall be substituted for the 
                                applicable Federal interest rate,
                                    ``(II) the highest assumed interest 
                                rate permitted to be used in 
                                determining foreign statement reserves 
                                shall be substituted for the prevailing 
                                State assumed interest rate, and
                                    ``(III) tables for mortality and 
                                morbidity which reasonably reflect the 
                                current mortality and morbidity risks 
                                in the corporation's home country shall 
                                be substituted for the mortality and 
                                morbidity tables otherwise used for 
                                such subchapter.
                            ``(iv) All items of income, expenses, 
                        losses, and deductions shall be properly 
                        allocated or apportioned under regulations 
                        prescribed by the Secretary.
            ``(3) Exception for corporations not held by insureds.--
        Paragraph (1) shall not apply to any foreign corporation if at 
        all times during the taxable year of such foreign corporation--
                    ``(A) less than 20 percent of the total combined 
                voting power of all classes of stock of such 
                corporation entitled to vote, and
                    ``(B) less than 20 percent of the total value of 
                such corporation,
        is owned (directly or indirectly under the principles of 
        section 883(c)(4)) by persons who are (directly or indirectly) 
        insured under any policy of insurance or reinsurance issued by 
        such corporation or who are related persons to any such person.
            ``(4) Treatment of mutual insurance companies.--In the case 
        of a mutual insurance company--
                    ``(A) this subsection shall apply,
                    ``(B) policyholders of such company shall be 
                treated as shareholders, and
                    ``(C) appropriate adjustments in the application of 
                this subpart shall be made under regulations prescribed 
                by the Secretary.
            ``(5) Determination of pro rata share.--
                    ``(A) In general.--The pro rata share determined 
                under this paragraph for any United States shareholder 
                is the lesser of--
                            ``(i) the amount which would be determined 
                        under paragraph (2) of section 951(a) if--
                                    ``(I) only related person insurance 
                                income were taken into account,
                                    ``(II) stock owned (within the 
                                meaning of section 958(a)) by United 
                                States shareholders on the last day of 
                                the taxable year were the only stock in 
                                the foreign corporation, and
                                    ``(III) only distributions received 
                                by United States shareholders were 
                                taken into account under subparagraph 
                                (B) of such paragraph (2), or
                            ``(ii) the amount which would be determined 
                        under paragraph (2) of section 951(a) if the 
                        entire earnings and profits of the foreign 
                        corporation for the taxable year were subpart F 
                        income.
                    ``(B) Coordination with other provisions.--The 
                Secretary shall prescribe regulations providing for 
                such modifications to the provisions of this subpart as 
                may be necessary or appropriate by reason of 
                subparagraph (A).
            ``(6) Related person.--For purposes of this subsection--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the term `related person' has the 
                meaning given such term by subsection (d)(3).
                    ``(B) Treatment of certain liability insurance 
                policies.--In the case of any policy of insurance 
                covering liability arising from services performed as a 
                director, officer, or employee of a corporation or as a 
                partner or employee of a partnership, the person 
                performing such services and the entity for which such 
                services are performed shall be treated as related 
                persons.
            ``(7) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out the purposes of 
        this subsection, including--
                    ``(A) regulations preventing the avoidance of this 
                subsection through cross insurance arrangements or 
                otherwise, and
                    ``(B) regulations which may provide that a person 
                will not be treated as a United States shareholder 
                under paragraph (1) with respect to any foreign 
                corporation if neither such person (nor any related 
                person to such person) is (directly or indirectly) 
                insured under any policy of insurance or reinsurance 
                issued by such foreign corporation.
    ``(d) Other Definitions and Rules.--For purposes of this section--
            ``(1) Treatment of branches.--If--
                    ``(A) a controlled foreign corporation carries on 
                activities through a branch or similar establishment 
                with a home country other than the home country of such 
                corporation, and
                    ``(B) the carrying on of such activities in such 
                manner has substantially the same effect as if such 
                branch or similar establishment were a wholly owned 
                subsidiary of such corporation,
        this subpart shall, under regulations prescribed by the 
        Secretary, be applied as if such branch or other establishment 
        were a wholly owned subsidiary of such corporation.
            ``(2) Home country.--For purposes of paragraph (1)--
                    ``(A) In general.--The term `home country' has the 
                meaning given such term by section 953(d).
                    ``(B) Branch.--In the case of a branch or similar 
                establishment, the term `home country' means the 
                foreign country in which--
                            ``(i) the principal place of business of 
                        the branch or similar establishment is located, 
                        and
                            ``(ii) separate books and accounts are 
                        maintained.
            ``(3) Related person defined.--For purposes of this 
        section, a person is a related person with respect to a 
        controlled foreign corporation, if--
                    ``(A) such person is an individual, corporation, 
                partnership, trust, or estate which controls, or is 
                controlled by, the controlled foreign corporation, or
                    ``(B) such person is a corporation, partnership, 
                trust, or estate which is controlled by the same person 
                or persons which control the controlled foreign 
                corporation.
        For purposes of the preceding sentence, control means, with 
        respect to a corporation, the ownership, directly or 
        indirectly, of stock possessing more than 50 percent of the 
        total voting power of all classes of stock entitled to vote or 
        of the total value of stock of such corporation. In the case of 
        a partnership, trust, or estate, control means the ownership, 
        directly or indirectly, of more than 50 percent (by value) of 
        the beneficial interests in such partnership, trust, or estate. 
        For purposes of this paragraph, rules similar to the rules of 
        section 958 shall apply.''.
    (b) Conforming Amendment.--The table of sections for subpart F of 
part III of subchapter N of chapter 1 is amended by striking the items 
relating to sections 953 and 954 and inserting:

``Sec. 953. Active home country income.
``Sec. 954. Other rules and definitions relating to subpart F 
                            income.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years of controlled foreign corporations beginning 
after December 31, 2007, and taxable years of United States 
shareholders with or within which such taxable years of such 
corporations end.

SEC. 102. TREATMENT OF FOREIGN CORPORATIONS MANAGED AND CONTROLLED IN 
              THE UNITED STATES AS DOMESTIC CORPORATIONS.

    (a) In General.--Section 7701(a)(4) of the Internal Revenue Code of 
1986 (defining domestic) is amended to read as follows:
            ``(4) Domestic.--
                    ``(A) In general.--The term `domestic' means, when 
                applied to a corporation or partnership, a corporation 
                or partnership which is created or organized in the 
                United States or under the law of the United States or 
                of any State unless, in the case of a partnership, the 
                Secretary provides otherwise by regulations.
                    ``(B) Income tax exception for publicly-traded 
                corporations managed and controlled in the united 
                states.--Notwithstanding subparagraph (A), in the case 
                of a corporation the stock of which is regularly traded 
                on an established securities market, if--
                            ``(i) the corporation would not otherwise 
                        be treated as a domestic corporation for 
                        purposes of this title, but
                            ``(ii) the management and control of the 
                        corporation occurs primarily within the United 
                        States,
                then, solely for purposes of chapter 1 (and any other 
                provision of this title relating to chapter 1), the 
                corporation shall be treated as a domestic corporation.
                    ``(C) Management and control.--For purposes of this 
                paragraph, the management and control of a corporation 
                shall be treated as primarily occurring within the 
                United States if substantially all of the executive 
                officers and senior management of the corporation who 
                exercise day-to-day responsibility for making decisions 
                involving strategic, financial, and operational 
                policies of the corporation are primarily located 
                within the United States. The Secretary may by 
                regulations include other individuals not described in 
                the preceding sentence in the determination of whether 
                the management and control of the corporation occurs 
                primarily within the United States if such other 
                individuals exercise the day-to day responsibilities 
                described in the preceding sentence.''.
    (b) Effective Dates.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning on or after the date which is 
        2 years after the date of the enactment of this Act.
            (2) Transition rule for corporations organized in treaty 
        countries.--If--
                    (A) a corporation is in existence on the date of 
                the enactment of this Act, and
                    (B) the corporation was created or organized under 
                the laws of a foreign country with which the United 
                States has, on such date, a comprehensive income tax 
                treaty which the Secretary of the Treasury determines 
                is satisfactory for purposes of this paragraph and 
                which includes an exchange of information program,
        section 7701(a)(4)(B) of the Internal Revenue Code of 1986 (as 
        added by the amendments made by this section) shall not apply 
        to the corporation with respect to taxable years ending in any 
        continuous period beginning on such date during which the 
        corporation is eligible for the benefits of such treaty (or any 
        successor treaty with such foreign country meeting the 
        requirements of this paragraph).

                 TITLE II--ECONOMIC SUBSTANCE DOCTRINE

SEC. 201. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

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

SEC. 202. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS 
              LACKING ECONOMIC SUBSTANCE, ETC.

    (a) In General.--Subchapter A of chapter 68 is amended by inserting 
after section 6662A the following new section:

``SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS 
              LACKING ECONOMIC SUBSTANCE, ETC.

    ``(a) Imposition of Penalty.--If a taxpayer has an noneconomic 
substance transaction understatement for any taxable year, there shall 
be added to the tax an amount equal to 40 percent of the amount of such 
understatement.
    ``(b) Reduction of Penalty for Disclosed Transactions.--Subsection 
(a) shall be applied by substituting `20 percent' for `40 percent' with 
respect to the portion of any noneconomic substance transaction 
understatement with respect to which the relevant facts affecting the 
tax treatment of the item are adequately disclosed in the return or a 
statement attached to the return.
    ``(c) Noneconomic Substance Transaction Understatement.--For 
purposes of this section--
            ``(1) In general.--The term `noneconomic substance 
        transaction understatement' means any amount which would be an 
        understatement under section 6662A(b)(1) if section 6662A were 
        applied by taking into account items attributable to 
        noneconomic substance transactions rather than items to which 
        section 6662A would apply without regard to this paragraph.
            ``(2) Noneconomic substance transaction.--The term 
        `noneconomic substance transaction' means any transaction if--
                    ``(A) there is a lack of economic substance (within 
                the meaning of section 7701(o)(1)) for the transaction 
                giving rise to the claimed benefit or the transaction 
                was not respected under section 7701(o)(2), or
                    ``(B) the transaction fails to meet the 
                requirements of any similar rule of law.
    ``(d) Rules Applicable to Compromise of Penalty.--
            ``(1) In general.--If the 1st letter of proposed deficiency 
        which allows the taxpayer an opportunity for administrative 
        review in the Internal Revenue Service Office of Appeals has 
        been sent with respect to a penalty to which this section 
        applies, only the Commissioner of Internal Revenue may 
        compromise all or any portion of such penalty.
            ``(2) Applicable rules.--The rules of paragraphs (2) and 
        (3) of section 6707A(d) shall apply for purposes of paragraph 
        (1).
    ``(e) Coordination With Other Penalties.--Except as otherwise 
provided in this part, the penalty imposed by this section shall be in 
addition to any other penalty imposed by this title.
    ``(f) Cross References.--

            ``(1) For coordination of penalty with 
            understatements under section 6662 and other 
            special rules, see section 6662A(e).
            ``(2) For reporting of penalty imposed under 
            this section to the Securities and Exchange 
            Commission, see section 6707A(e).''.
    (b) Coordination With Other Understatements and Penalties.--
            (1) The second sentence of section 6662(d)(2)(A) is amended 
        by inserting ``and without regard to items with respect to 
        which a penalty is imposed by section 6662B'' before the period 
        at the end.
            (2) Subsection (e) of section 6662A is amended--
                    (A) in paragraph (1), by inserting ``and 
                noneconomic substance transaction understatements'' 
                after ``reportable transaction understatements'' both 
                places it appears,
                    (B) in paragraph (2)(A), by inserting ``and a 
                noneconomic substance transaction understatement'' 
                after ``reportable transaction understatement'',
                    (C) in paragraph (2)(B), by inserting ``6662B or'' 
                before ``6663'',
                    (D) in paragraph (2)(C)(i), by inserting ``or 
                section 6662B'' before the period at the end,
                    (E) in paragraph (2)(C)(ii), by inserting ``and 
                section 6662B'' after ``This section'',
                    (F) in paragraph (3), by inserting ``or noneconomic 
                substance transaction understatement'' after 
                ``reportable transaction understatement'', and
                    (G) by adding at the end the following new 
                paragraph:
            ``(4) Noneconomic substance transaction understatement.--
        For purposes of this subsection, the term `noneconomic 
        substance transaction understatement' has the meaning given 
        such term by section 6662B(c).''.
            (3) Subsection (e) of section 6707A is amended--
                    (A) by striking ``or'' at the end of subparagraph 
                (B), and
                    (B) by striking subparagraph (C) and inserting the 
                following new subparagraphs:
                    ``(C) is required to pay a penalty under section 
                6662B with respect to any noneconomic substance 
                transaction, or
                    ``(D) is required to pay a penalty under section 
                6662(h) with respect to any transaction and would (but 
                for section 6662A(e)(2)(C)) have been subject to 
                penalty under section 6662A at a rate prescribed under 
                section 6662A(c) or under section 6662B,''.
    (c) Clerical Amendment.--The table of sections for part II of 
subchapter A of chapter 68 is amended by inserting after the item 
relating to section 6662A the following new item:

``Sec. 6662B. Penalty for understatements attributable to transactions 
                            lacking economic substance, etc.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to transactions entered into after the date of the enactment of 
this Act.

SEC. 203. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS 
              ATTRIBUTABLE TO NONECONOMIC SUBSTANCE TRANSACTIONS.

    (a) In General.--Section 163(m) (relating to interest on unpaid 
taxes attributable to nondisclosed reportable transactions) is 
amended--
            (1) by striking ``attributable'' and all that follows and 
        inserting the following: ``attributable to--
            ``(1) the portion of any reportable transaction 
        understatement (as defined in section 6662A(b)) with respect to 
        which the requirement of section 6664(d)(2)(A) is not met, or
            ``(2) any noneconomic substance transaction understatement 
        (as defined in section 6662B(c)).'', and
            (2) by inserting ``and noneconomic substance transactions'' 
        in the heading thereof after ``transactions''.
    (b) Effective Date.--The amendments made by this section shall 
apply to transactions after the date of the enactment of this Act in 
taxable years ending after such date.

  TITLE III--ELIMINATION OF HIGHEST CORPORATE MARGINAL INCOME TAX RATE

SEC. 301. ELIMINATION OF HIGHEST CORPORATE MARGINAL INCOME TAX RATE.

    (a) In General.--Section 11(b)(1) (relating to amount of tax 
imposed on corporations) is amended by striking subparagraphs (C) and 
(D) and inserting the following new subparagraph:
                    ``(C) 34 percent of so much of the taxable income 
                as exceeds $75,000.''.
    (b) Certain Personal Service Corporations.--Section 11(b)(2) is 
amended by striking ``35 percent'' and inserting ``34 percent''.
    (c) Conforming Amendments.--
            (1) Section 11(b)(1) is amended by striking the last 
        sentence.
            (2) Section 1201(a) is amended--
                    (A) by striking ``35 percent'' each place it 
                appears and inserting ``34 percent'', and
                    (B) by striking ``last 2 sentences'' and inserting 
                ``last sentence''.
            (3) Paragraphs (1) and (2) of section 1445(e) are each 
        amended by striking ``35 percent'' and inserting ``34 
        percent''.
            (4) Section 1561(a) is amended by striking ``last 2 
        sentences'' and inserting ``last sentence''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.
                                 <all>