[Congressional Record Volume 148, Number 49 (Friday, April 26, 2002)]
[Senate]
[Pages S3467-S3471]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. KERRY:
  S. 2339. A bill to amend the Internal Revenue Code of 1986 to curb 
tax abuses by disallowing tax benefits claimed to arise from 
transactions without substantial economic substance, to curb tax abuses 
involving identified tax havens, and for other purposes; to the 
Committee on Finance.
 Mr. KERRY. Mr. President, the recent demise of Enron 
Corporation has generated national attention and shed light on an 
alarming trend. A growing number of corporations and individuals are 
exploiting tax havens in the Caribbean and elsewhere to evade and avoid 
paying taxes.
  Often cloaked in a web of bank secrecy and taxpayer privacy, 
businesses and individuals operating in offshore financial centers 
create sham corporations and partnerships. By sheltering tax-dodgers 
and tax cheats, these overseas tax havens undermine confidence and 
trust in our Federal Government. The spread of illegal tax haven 
activity punishes those who play by the rules. The end result is higher 
taxes on the little guy--those who comply with the law. They are stuck 
paying the tab, forced to make up for the lost revenue through 
unnecessarily high taxes.
  The vast majority of American businesses and individuals do not 
engage in abusive tax schemes. These taxpayers' activities will be 
unaffected by the Tax Haven and Abusive Tax Shelter Reform Act of 2002. 
The legislation will not stand in the way of legitimate tax planning 
and business activity. However, the bill will create real consequences 
for those individuals who flout the law, and those businesses who 
engage in transactions with no real business purpose other than 
generating artificial losses and deductions.
  The exact details of Enron's tax avoidance practices are still under 
investigation by the Senate Finance Committee. What we do know is the 
energy conglomerate held over 800 subsidiaries in tax haven 
jurisdictions. Enron created 692 subsidiaries in the Cayman Islands 
alone. Through the use of sophisticated financial instruments, at least 
one analyst estimates Enron was able to avoid income taxes in four of 
the last five years.
  Enron is not alone. The use of offshore tax havens by corporations 
and wealthy individuals is widespread. Through accounting tricks and 
tax loopholes, large companies not only avoid corporate income taxes, 
they claim sizable tax refunds. In a typical example, a corporation 
establishes a foreign subsidiary not subject to American taxes, shifts 
profits to the subsidiary which then sends them back to the parent 
corporation in a form that is considered not taxable under U.S. law.
  While some corporations use loopholes to skirt the edges of the law, 
other individuals use tax havens outright illegally. The Internet has 
simplified the process of launching a corporation or opening an account 
offshore. While Americans are taxed on their worldwide earnings, 
individuals operating in offshore financial centers gamble that the IRS 
will never uncover their overseas income.
  Taxpayers select tax havens because they offer little or no taxation 
on income in their jurisdiction and have privacy rules that help 
taxpayers hide what they are doing. Once the transfers are established, 
income is often repatriated back to the U.S. owners through loans, 
credit cards, or debit cards. By using complex transactions and 
multiple entities, the individuals using these schemes hide their 
income and avoid potential tax liabilities.
  The scope of the problem is daunting. Assets in offshore entities 
have climbed from an estimated $200 billion in 1983, to an estimated $5 
trillion today. One private sector estimate suggests the use of tax 
havens to illegally shelter income results in the loss of $70 billion 
annually. The IRS estimates that in tax year 2000, about 740,000 
taxpayers used abusive schemes, both domestic and offshore.
  Clearly, Congress must act to restore public confidence in our 
federal tax system. We can start by ensuring that honest, middle-class 
Americans are not the only ones left holding the bill. Unfortunately, 
the Bush administration has shied away from aggressively attacking tax 
evasion. Last May, Treasury Secretary Paul O'Neill voiced support for 
abolishing the corporate income tax. The Treasury Department recently 
fought to water down an international campaign to reform tax haven 
practices led by the Organization for Economic Cooperation and 
Development, OECD. Last fall, the Administration sought to repeal the 
corporate alternative minimum tax, a tax designed to ensure that large 
corporations do not entirely escape taxation.
  Exempting our Nation's largest firms from taxation altogether is not 
the answer. On the contrary, Congress should take steps to ensure that 
criminal tax evasion is detected and addressed accordingly. The Tax 
Haven and Abusive Tax Shelter Reform Act of 2002 would impose strict 
measures against nations identified as uncooperative tax havens those 
which use confidentiality rules and practices to undermine tax 
enforcement and administration or refuse to participate in effective 
information exchange agreements. The legislation would limit foreign 
tax credits claimed by taxpayers operating in uncooperative tax havens. 
It would require a strict reporting of outbound transfers by U.S. 
taxpayers. The bill imposes a new civil penalty on U.S. taxpayers who 
fail to report an interest in an offshore account. Finally, it mandates 
a comprehensive review of the offshore tax evasion problem, including 
specific mechanisms used by taxpayers to shelter income and assets. By 
imposing real consequences for jurisdictions which are identified as 
uncooperative tax havens, the bill pierces the veil of secrecy which 
shields tax cheats from scrutiny and provides a strong incentive for 
otherwise uncooperative tax havens to enter into commitments with the 
United States to reform their practices.
  The peddling of abusive corporate tax shelters also demands 
attention. Pre-packaged, tax-motivated transactions with no real 
economic risk or business purpose--but which capitalize on technical 
ambiguities in the tax code--are sold to corporations by creative 
practitioners to generate artificial losses and deductions. Provisions 
in the Tax Haven and Abusive Tax Shelter Reform Act of 2002, identical 
to those introduced in the House by Rep. Lloyd Doggett, D-TX, would 
disallow tax benefits from transactions that have no real business 
purpose other than tax

[[Page S3468]]

savings. In addition, they expand disclosure requirements so that the 
IRS is fully aware of dubious tax schemes and tighten penalties against 
gross underpayments resulting from illegal tax shelters.
  A tax system which asks working families to pay their fair share, but 
gives large corporations such as Enron a free ride, is a national 
disgrace. And as tax havens and shelters proliferate, confidence in the 
integrity and fairness of our tax system and government declines. 
Middle-class families rightly conclude that our own government cannot 
effectively enforce its laws. The administration, while proposing new 
disclosure requirements, has offered little in the way of substantive 
changes to alter the tax treatment of transactions which clearly serve 
no real business purpose other than tax avoidance. Furthermore, the 
administration has undermined international efforts to aggressively 
address sheltering activity in tax havens. The Tax Haven and Abusive 
Tax Shelter Reform Act of 2002 is the first step in what will surely be 
a long road to restoring the confidence and faith of the vast majority 
of hard-working, law-abiding Americans who pay taxes on every dollar 
they earn. I urge my colleagues to join me in this effort, and I ask 
that a summary of the legislation as well as the full text of the bill 
be printed in the Record.
  The material follows:

                                S. 2339

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

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Tax Haven and Abusive Tax 
     Shelter Reform Act of 2002''.

         TITLE I--CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE

     SEC. 101. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

       (a) In General.--Section 7701 of the Internal Revenue Code 
     of 1986 is amended by redesignating subsection (n) as 
     subsection (o) and by inserting after subsection (m) the 
     following new subsection:
       ``(n) Clarification of Economic Substance Doctrine; Etc.--
       ``(1) General rules.--
       ``(A) In general.--In applying the economic substance 
     doctrine, the determination of whether a transaction has 
     economic substance shall be made as provided in this 
     paragraph.
       ``(B) Definition of economic substance.--For purposes of 
     subparagraph (A)--
       ``(i) In general.--A transaction has economic substance 
     only if--

       ``(I) the transaction changes in a meaningful way (apart 
     from Federal income tax effects) the taxpayer's economic 
     position, and
       ``(II) the taxpayer has a substantial nontax purpose for 
     entering into such transaction and the transaction is a 
     reasonable means of accomplishing such purpose.

       ``(ii) Special rule where taxpayer relies on profit 
     potential.--A transaction shall not be treated as having 
     economic substance by reason of having a potential for profit 
     unless--

       ``(I) the present value of the reasonably expected pre-tax 
     profit from the transaction is substantial in relation to the 
     present value of the expected net tax benefits that would be 
     allowed if the transaction were respected, and
       ``(II) the reasonably expected pre-tax profit from the 
     transaction exceeds a risk-free rate of return.

       ``(C) Treatment of fees and foreign taxes.--Fees and other 
     transaction expenses and foreign taxes shall be taken into 
     account as expenses in determining pre-tax profit under 
     subparagraph (B)(ii).
       ``(2) Special rules for transactions with tax-indifferent 
     parties.--
       ``(A) Special rules for financing transactions.--The form 
     of a transaction which is in substance the borrowing of money 
     or the acquisition of financial capital directly or 
     indirectly from a tax-indifferent party shall not be 
     respected if the present value of the deductions to be 
     claimed with respect to the transaction are 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 subclause (I) of 
     paragraph (1)(B)(ii) to the lessor of tangible property 
     subject to a lease, the expected net tax benefits shall not 
     include the benefits of depreciation, or any tax credit, with 
     respect to the leased property and subclause (II) of 
     paragraph (1)(B)(ii) shall be disregarded in determining 
     whether any of such benefits are allowable.
       ``(4) Other common law doctrines not affected.--Except as 
     specifically provided in this subsection, the provisions of 
     this subsection shall not be construed as altering or 
     supplanting any other rule of law referred to in section 
     6662(i)(2), and the requirements of this subsection shall be 
     construed as being in addition to any such other rule of 
     law.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to transactions after the date of the enactment 
     of this Act.

                          TITLE II--PENALTIES

     SEC. 201. INCREASE IN PENALTY ON UNDERPAYMENTS RESULTING FROM 
                   FAILURE TO SATISFY CERTAIN COMMON LAW RULES.

       (a) In General.--Section 6662 of the Internal Revenue Code 
     of 1986 (relating to imposition of accuracy-related penalty) 
     is amended by adding at the end the following new subsection:
       ``(i) Increase in Penalty in Case of Failure To Satisfy 
     Certain Common Law Rules.--
       ``(1) In general.--To the extent that an underpayment is 
     attributable to a disallowance described in paragraph (2)--
       ``(A) subsection (a) shall be applied with respect to such 
     portion by substituting `40 percent' for `20 percent', and
       ``(B) subsection (d)(2)(B) and section 6664(c) shall not 
     apply.
       ``(2) Disallowances described.--A disallowance is described 
     in this subsection if such disallowance is on account of--
       ``(A) a lack of economic substance (within the meaning of 
     section 7701(n)(1)) for the transaction giving rise to the 
     claimed benefit or the transaction was not respected under 
     section 7701(n)(2),
       ``(B) a lack of business purpose for such transaction or 
     because the form of the transaction does not reflect its 
     substance, or
       ``(C) a failure to meet the requirements of any other 
     similar rule of law.
       ``(3) Increase in penalty not to apply if compliance with 
     disclosure requirements.--Paragraph (1)(A) shall not apply if 
     the taxpayer discloses to the Secretary (as such time and in 
     such manner as the Secretary shall prescribe) such 
     information as the Secretary shall prescribe with respect to 
     such transaction.''.
       (b) Modifications to Penalty on Substantial Understatement 
     of Income Tax.--
       (1) Modification of threshold.--Subparagraph (A) of section 
     6662(d)(1) of the Internal Revenue Code of 1986 is amended to 
     read as follows:
       ``(A) In general.--For purposes of this section, there is a 
     substantial understatement of income tax for any taxable year 
     if the amount of the understatement for the taxable year 
     exceeds the lesser of--
       ``(i) $500,000, or
       ``(ii) the greater of 10 percent of the tax required to be 
     shown on the return for the taxable year or $5,000.''.
       (2) Modification of penalty on tax shelters, etc.--Clauses 
     (i) and (ii) of section 6662(d)(2)(C) of such Code are 
     amended to read as follows:
       ``(i) In general.--Subparagraph (B) shall not apply to any 
     item attributable to a tax shelter.''.
       ``(ii) Determination of understatements with respect to tax 
     shelters, etc.--In any case in which there are one or more 
     items attributable to a tax shelter, the amount of the 
     understatement under subparagraph (A) shall in no event be 
     less than the amount of understatement which would be 
     determined for the taxable year if all items shown on the 
     return which are not attributable to any tax shelter were 
     treated as being correct. A similar rule shall apply in cases 
     to which subsection (i) applies, whether or not the items are 
     attributable to a tax shelter.''.
       (c) Treatment of Amended Returns.--Subsection (a) of 
     section 6664 of the Internal Revenue Code of 1986 is amended 
     by adding at the end the following new sentence: ``For 
     purposes of this subsection, an amended return shall be 
     disregarded if such return is filed on or after the date the 
     taxpayer is first contacted by the Secretary regarding the 
     examination of the return.''.

[[Page S3469]]

     SEC. 202. PENALTY ON PROMOTERS OF TAX AVOIDANCE STRATEGIES 
                   WHICH HAVE NO ECONOMIC SUBSTANCE, ETC.

       (a) Penalty.--
       (1) In general.--Section 6700 of the Internal Revenue Code 
     of 1986 (relating to promoting abusive tax shelters, etc.) is 
     amended by redesignating subsection (c) as subsection (d) and 
     by inserting after subsection (b) the following new 
     subsection:
       ``(c) Penalty on Substantial Promoters for Promoting Tax 
     Avoidance Strategies Which Have No Economic Substance, Etc.--
       ``(1) Imposition of penalty.--Any substantial promoter of a 
     tax avoidance strategy shall pay a penalty in the amount 
     determined under paragraph (2) with respect to such strategy 
     if such strategy (or any similar strategy promoted by such 
     promoter) fails to meet the requirements of any rule of law 
     referred to in section 6662(i)(2).
       ``(2) Amount of penalty.--The penalty under paragraph (1) 
     with respect to a promoter of a tax avoidance strategy is an 
     amount equal to 100 percent of the gross income derived (or 
     to be derived) by such promoter from such strategy.
       ``(3) Tax avoidance strategy.--For purposes of this 
     subsection, the term `tax avoidance strategy' means any 
     entity, plan, arrangement, or transaction a significant 
     purpose of the structure of which is the avoidance or evasion 
     of Federal income tax.
       ``(4) Substantial promoter.--For purposes of this 
     subsection--
       ``(A) In general.--The term `substantial promoter' means, 
     with respect to any tax avoidance strategy, any promoter if--
       ``(i) such promoter offers such strategy to more than 1 
     potential participant, and
       ``(ii) such promoter may receive fees in excess of $500,000 
     in the aggregate with respect to such strategy.
       ``(B) Aggregation rules.--For purposes of this paragraph--
       ``(i) Related persons.--A promoter and all persons related 
     to such promoter shall be treated as 1 person who is a 
     promoter.
       ``(ii) Similar strategies.--All similar tax avoidance 
     strategies of a promoter shall be treated as 1 tax avoidance 
     strategy.
       ``(C) Promoter.--The term `promoter' means any person who 
     participates in the promotion, offering, or sale of the tax 
     avoidance strategy.
       ``(D) Related person.--Persons are related if they bear a 
     relationship to each other which is described in section 
     267(b) or 707(b).
       ``(4) Coordination with subsection (a).--No penalty shall 
     be imposed by this subsection on any promoter with respect to 
     a tax avoidance strategy if a penalty is imposed under 
     subsection (a) on such promoter with respect to such 
     strategy.''.
       (2) Conforming amendment.--Subsection (d) of section 6700 
     of such Code is amended--
       (A) by striking ``Penalty'' and inserting ``Penalties'', 
     and
       (B) by striking ``penalty'' the first place it appears in 
     the text and inserting ``penalties''.
       (b) Increase in Penalty on Promoting Abusive Tax 
     Shelters.--The first sentence of section 6700(a) of the 
     Internal Revenue Code of 1986 is amended by striking ``a 
     penalty equal to'' and all that follows and inserting ``a 
     penalty equal to the greater of $1,000 or 100 percent of the 
     gross income derived (or to be derived) by such person from 
     such activity.''.

     SEC. 203. MODIFICATIONS OF PENALTIES FOR AIDING AND ABETTING 
                   UNDERSTATEMENT OF TAX LIABILITY INVOLVING TAX 
                   SHELTERS.

       (a) Imposition of Penalty.--Section 6701(a) of the Internal 
     Revenue Code of 1986 (relating to imposition of penalty) is 
     amended to read as follows:
       ``(a) Imposition of Penalties.--
       ``(1) In general.--Any person--
       ``(A) who aids or assists in, procures, or advises with 
     respect to, the preparation or presentation of any portion of 
     a return, affidavit, claim, or other document,
       ``(B) who knows (or has reason to believe) that such 
     portion will be used in connection with any material matter 
     arising under the internal revenue laws, and
       ``(C) who knows that such portion (if so used) would result 
     in an understatement of the liability for tax of another 
     person,

     shall pay a penalty with respect to each such document in the 
     amount determined under subsection (b).
       ``(2) Certain tax shelters.--If--
       ``(A) any person--
       ``(i) aids or assists in, procures, or advises with respect 
     to the creation, organization, sale, implementation, 
     management, or reporting of a tax shelter (as defined in 
     section 6662(d)(2)(C)(iii)) or of any entity, plan, 
     arrangement, or transaction that fails to meet the 
     requirements of any rule of law referred to in section 
     6662(i)(2), and
       ``(ii) opines, advises, represents, or otherwise indicates 
     (directly or indirectly) that the taxpayer's tax treatment of 
     items attributable to such tax shelter or such entity, plan, 
     arrangement, or transaction and giving rise to an 
     understatement of tax liability would more likely than not 
     prevail or not give rise to a penalty,
       ``(B) such opinion, advice, representation, or indication 
     is unreasonable,

     then such person shall pay a penalty in the amount determined 
     under subsection (b). If a standard higher than the more 
     likely than not standard was used in any such opinion, 
     advice, representation, or indication, then subparagraph 
     (A)(ii) shall be applied as if such standard were substituted 
     for the more likely than not standard.''.
       (b) Amount of Penalty.--Section 6701(b) of the Internal 
     Revenue Code of 1986 (relating to amount of penalty) is 
     amended--
       (1) by inserting ``or (3)'' after ``paragraph (2)'' in 
     paragraph (1),
       (2) by striking ``subsection (a)'' each place it appears 
     and inserting ``subsection (a)(1)'', and
       (3) by redesignating paragraph (3) as paragraph (4) and by 
     adding after paragraph (2) the following new paragraph:
       ``(3) Tax shelters.--In the case of--
       ``(A) a penalty imposed by subsection (a)(1) which involves 
     a return, affidavit, claim, or other document relating to a 
     tax shelter or an entity, plan, arrangement, or transaction 
     that fails to meet the requirements of any rule of law 
     referred to in section 6662(i)(2), and
       ``(B) any penalty imposed by subsection (a)(2),

     the amount of the penalty shall be equal to 100 percent of 
     the gross proceeds derived (or to be derived) by the person 
     in connection with the tax shelter or entity, plan, 
     arrangement, or transaction.''.
       (c) Referral and Publication.--If a penalty is imposed 
     under section 6701(a)(2) of the Internal Revenue Code of 1986 
     (as added by subsection (a)) on any person, the Secretary of 
     the Treasury shall--
       (1) notify the Director of Practice of the Internal Revenue 
     Service and any appropriate State licensing authority of the 
     penalty and the circumstances under which it was imposed, and
       (2) publish the identity of the person and the fact the 
     penalty was imposed on the person.
       (d) Conforming Amendments.--
       (1) Section 6701(d) of the Internal Revenue Code of 1986 is 
     amended by striking ``Subsection (a)'' and inserting 
     ``Subsection (a)(1)''.
       (2) Section 6701(e) of such Code is amended by striking 
     ``subsection (a)(1)'' and inserting ``subsection (a)(1)(A)''.
       (3) Section 6701(f) of such Code is amended by inserting 
     ``, tax shelter, or entity, plan, arrangement, or 
     transaction'' after ``document'' each place it appears.

     SEC. 204. FAILURE TO MAINTAIN LISTS.

       Section 6708(a) of the Internal Revenue Code of 1986 
     (relating to failure to maintain lists of investors in 
     potentially abusive tax shelters) is amended by adding at the 
     end the following: ``In the case of a tax shelter (as defined 
     in section 6662(d)(2)(C)(iii)) or entity, plan, arrangement, 
     or transaction that fails to meet the requirements of any 
     rule of law referred to in section 6662(i)(2), the penalty 
     shall be equal to 50 percent of the gross proceeds derived 
     (or to be derived) from each person with respect to which 
     there was a failure and the limitation of the preceding 
     sentence shall not apply.''.

     SEC. 205. PENALTY FOR FAILING TO DISCLOSE REPORTABLE 
                   TRANSACTION.

       (a) In General.--Part I of subchapter B of chapter 68 of 
     the Internal Revenue Code of 1986 (relating to assessable 
     penalties) is amended by inserting after section 6707 the 
     following new section:

     ``SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE TAX SHELTER 
                   INFORMATION WITH RETURN.

       ``(a) Imposition of Penalty.--Any person who fails to 
     include with its return of Federal income tax any information 
     required to be included under section 6011 with respect to a 
     reportable transaction shall pay a penalty in the amount 
     determined under subsection (b). No penalty shall be imposed 
     on any such failure if it is shown that such failure is due 
     to reasonable cause.
       ``(b) Amount of Penalty.--
       ``(1) In general.--The amount of the penalty under 
     subsection (a) shall be equal to the greater of--
       ``(A) 5 percent of any increase in Federal tax which 
     results from a difference between the taxpayer's treatment 
     (as shown on its return) of items attributable to the 
     reportable transaction to which the failure relates and the 
     proper tax treatment of such items, or
       ``(B) $100,000.
     For purposes of subparagraph (A), the last sentence of 
     section 6664(a) shall apply.
       ``(2) Listed transaction.--If the failure under subsection 
     (a) relates to a reportable transaction which is the same as, 
     or substantially similar to, a transaction specifically 
     identified by the Secretary as a tax avoidance transaction 
     for purposes of section 6011, paragraph (1)(A) shall be 
     applied by substituting `10 percent' for `5 percent'.
       ``(c) Reportable Transaction.--For purposes of this 
     section, the term `reportable transaction' means any 
     transaction with respect to which information is required 
     under section 6011 to be included with a taxpayer's return of 
     tax because, as determined under regulations prescribed under 
     section 6011, such transaction has characteristics which may 
     be indicative of a tax avoidance transaction.
       ``(d) Coordination With Other Penalties.--The penalty 
     imposed by this section is in addition to any penalty imposed 
     under section 6662.''.
       (b) Conforming Amendment.--The table of sections for part I 
     of subchapter B of chapter 68 of the Internal Revenue Code of 
     1986 is amended by inserting after the item relating to 
     section 6707 the following in item:

``Sec. 6707A. Penalty for failure to include tax shelter information on 
              return.''.

[[Page S3470]]

     SEC. 206. REGISTRATION OF CERTAIN TAX SHELTERS WITHOUT 
                   CORPORATE PARTICIPANTS.

       Section 6111(d)(1)(A) of the Internal Revenue Code of 1986 
     (relating to certain confidential arrangements treated as tax 
     shelters) is amended by striking ``for a direct or indirect 
     participant which is a corporation''.

     SEC. 207. EFFECTIVE DATES.

       (a) In General.--Except as provided in subsections (b) and 
     (c), the amendments made by this title shall apply to 
     transactions after the date of the enactment of this Act.
       (b) Section 201.--The amendments made by subsections (b) 
     and (c) of section 201 shall apply to taxable years ending 
     after the date of the enactment of this Act.
       (c) Section 202.--The amendments made by subsection (a) of 
     section 202 shall apply to any tax avoidance strategy (as 
     defined in section 6700(c) of the Internal Revenue Code of 
     1986, as amended by this title) interests in which are 
     offered to potential participants after the date of the 
     enactment of this Act.
       (d) Section 206.--The amendment made by section 206 shall 
     apply to any tax shelter interest which is offered to 
     potential participants after the date of the enactment of 
     this Act.

          TITLE III--DISCOURAGING USE OF IDENTIFIED TAX HAVENS

     SEC. 301. REPORTING OF PAYMENTS TO PERSONS IN IDENTIFIED TAX 
                   HAVENS.

       (a) In General.--Subpart A of part III of subchapter A of 
     chapter 61 of the Internal Revenue Code of 1986 is amended by 
     inserting after section 6038C the following new section:

     ``SEC. 6038D. PAYMENTS TO PERSONS IN IDENTIFIED TAX HAVENS.

       ``(a) In General.--Each United States person who transfers 
     money or other property directly or indirectly to any 
     identified tax haven or to any person who is a resident of 
     any identified tax haven shall furnish to the Secretary, at 
     such time and in such manner as the Secretary shall by 
     regulations prescribe, such information with respect to such 
     transfer as the Secretary may require in such regulations.
       ``(b) Exceptions.--Subsection (a) shall not apply to a 
     transfer by a United States person if--
       ``(1) the transferee certifies to such person that 
     information about such transfer shall be made available (in 
     such manner and at such time as the Secretary shall 
     prescribe) to the Secretary on request, or
       ``(2) the amount of money (and the fair market value of 
     property) transferred is less than $10,000.

     Related transfers shall be treated as 1 transfer for purposes 
     of paragraph (2).
       ``(c) Identified Tax Haven.--For purposes of this section--
       ``(1) In general.--The term `identified tax haven' means 
     any foreign jurisdiction which is on the list maintained by 
     the Secretary as being a jurisdiction--
       ``(A) which imposes no or nominal taxation either generally 
     or on specified classes of income, and
       ``(B) has strict confidentiality rules and practices, or 
     has ineffective information exchange practices, which 
     effectively limit or restrict the ability of the United 
     States to obtain information relevant to the imposition of 
     taxes under this title.
       ``(2) Ineffective information exchange practices.--For 
     purposes of paragraph (1), a jurisdiction shall be treated as 
     having ineffective information exchange practices during any 
     period during which the Secretary determines that the 
     exchange of information between the United States and such 
     jurisdiction is inadequate to prevent evasion or avoidance of 
     the United States income tax by United States persons or to 
     permit the effective enforcement of the taxes imposed by this 
     title.
       ``(d) Penalty for Failure To File Information.--If a United 
     States person fails to furnish the information required by 
     subsection (a) with respect to any transfer within the time 
     prescribed therefor (including extensions), such United 
     States person shall pay (upon notice and demand by the 
     Secretary and in the same manner as tax) an amount equal to 
     20 percent of the amount of such transfer.
       ``(e) Simplified Reporting.--The Secretary may by 
     regulations provide for simplified reporting under this 
     section for United States persons making large volumes of 
     similar payments.
       ``(f) Regulations.--The Secretary shall prescribe such 
     regulations as may be appropriate to carry out this 
     section.''
       (b) Clerical Amendment.--The table of sections for such 
     subpart A is amended by inserting after the item relating to 
     section 6038C the following new item:

``Sec. 6038D. Payments to persons in identified tax havens.''

       (c) Effective Date.--The amendments made by this section 
     shall apply to transfers after the date of the enactment of 
     this Act.
       (d) Reports.--The Secretary of the Treasury shall submit 
     annual reports to the Congress on the application of section 
     6038D of the Internal Revenue Code of 1986 (as added by this 
     section).

     SEC. 302. REDUCTION OF CERTAIN TAX BENEFITS WITH RESPECT TO 
                   INCOME FROM IDENTIFIED TAX HAVENS.

       (a) Limitation on Deferral.--
       (1) In general.--Subsection (a) of section 952 of the 
     Internal Revenue Code of 1986 (defining subpart F income) is 
     amended by striking ``and'' at the end of paragraph (4), by 
     striking the period at the end of paragraph (5) and inserting 
     ``, and'', and by inserting after paragraph (5) the following 
     new paragraph:
       ``(6) an amount equal to the applicable fraction (as 
     defined in subsection (e)) of the income of such corporation 
     other than income which--
       ``(A) is attributable to earnings and profits of the 
     foreign corporation included in the gross income of a United 
     States person under section 951 (other than by reason of this 
     paragraph or paragraph (3)(A)(i)), or
       ``(B) is described in subsection (b).''
       (2) Applicable fraction.--Section 952 of such Code is 
     amended by adding at the end the following new subsection:
       ``(e) Tax Haven Income Which is Subpart F Income.--
       ``(1) In general.--For purposes of subsection (a)(6), the 
     term `applicable fraction' means the fraction--
       ``(A) the numerator of which is the aggregate identified 
     tax haven income for the taxable year, and
       ``(B) the denominator of which the aggregate income for the 
     taxable year which is from sources outside the United States.

     Rules similar to the regulations under section 999(c) shall 
     apply for purposes of this paragraph.
       ``(2) Identified tax haven income.--For purposes of 
     paragraph (1), the term `identified tax haven income' means 
     income for the taxable year which is attributable to a 
     foreign jurisdiction for any period during which such 
     jurisdiction is an identified tax haven (as defined in 
     section 6038D(c)).''
       (b) Denial of Foreign Tax Credit.--Section 901 of such Code 
     (relating to taxes of foreign countries and of possessions of 
     United States) is amended by redesignating subsection (l) as 
     subsection (m) and by inserting after subsection (k) the 
     following new subsection:
       ``(l) Reduction of Foreign Tax Credit, Etc., With Respect 
     to Identified Tax Havens.--
       ``(1) In general.--Notwithstanding any other provision of 
     this part--
       ``(A) no credit shall be allowed under subsection (a) for 
     any income, war profits, or excess profits taxes paid or 
     accrued (or deemed paid under section 902 or 960) to any 
     foreign jurisdiction if such taxes are with respect to income 
     attributable to a period during which such jurisdiction is an 
     identified tax haven (as defined in section 6038D(c)), and
       ``(B) subsections (a), (b), (c), and (d) of section 904 and 
     sections 902 and 960 shall be applied separately with respect 
     to all income of a taxpayer attributable to periods described 
     in subparagraph (A) with respect to all such jurisdictions.
       ``(2) Taxes allowed as a deduction, etc.--Sections 275 and 
     78 shall not apply to any tax which is not allowable as a 
     credit under subsection (a) by reason of this subsection.
       ``(3) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this subsection, including regulations which 
     treat income paid through 1 or more entities as derived from 
     a foreign jurisdiction to which this subsection applies if 
     such income was, without regard to such entities, derived 
     from such jurisdiction.''
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 303. FAILURE TO REPORT INTERESTS IN FOREIGN FINANCIAL 
                   ACCOUNTS.

       (a) In General.--Part I of subchapter B of chapter 68 of 
     the Internal Revenue Code of 1986 (relating to additions to 
     tax, additional amounts, and assessable penalties) is amended 
     by adding at the end the following new section:

     ``SEC. 6717. FAILURE TO MEET REQUIREMENTS WITH RESPECT TO 
                   INTERESTS IN FOREIGN FINANCIAL ACCOUNTS.

       ``(a) Imposition of Penalty.--Any person who fails to keep 
     any records, or fails to file any report, required under 
     section 5314 of title 31, United States Code, with respect to 
     any foreign financial agency transaction shall pay a penalty 
     of $5,000 for each such failure.
       ``(b) Reasonable Cause Exception.--No penalty shall be 
     imposed under subsection (a) with respect to any failure if 
     it is shown that such failure is due to reasonable cause.
       ``(c) Penalty in Addition to Other Penalties.--The penalty 
     imposed under subsection (a) shall be in addition to any 
     other penalty imposed by law, including any penalty imposed 
     under section 5320(a)(5) or 5321 of title 31, United States 
     Code.
       ``(d) Deficiency Procedures not to Apply.--Subchapter B of 
     chapter 63 (relating to deficiency procedures for income, 
     estate, gift, any certain excise taxes) shall not apply in 
     respect of the assessment or collection of any penalty 
     imposed under subsection (a).''
       (b) Conforming Amendment.--The table of sections for part I 
     of subchapter B of chapter 68 of such Code is amended by 
     adding at the end the following new item:

``Sec. 6717. Failure to meet requirements with respect to interests in 
              foreign financial accounts.''

       (c) Effective Date.--The amendments made by this section 
     shall apply to failures occurring on or after the date of the 
     enactment of this Act.

     SEC. 304. STUDY OF OFFSHORE TAX HAVENS.

       (a) In General.--The Joint Committee on Taxation shall 
     conduct a study of the use of offshore tax havens by United 
     States taxpayers to evade and avoid Federal income taxes. 
     Such study shall include an examination of--

[[Page S3471]]

       (1) mechanisms used by United States taxpayers to illegally 
     hide income and assets from detection,
       (2) the extent to which foreign tax, banking, and financial 
     practices encourage noncompliance with Federal income tax 
     laws,
       (3) the status and effectiveness of information exchange 
     agreements between the United States and tax haven 
     jurisdictions,
       (4) the status and effectiveness of efforts by the 
     Organization for Economic Cooperation and Development (OECD) 
     to identify and eliminate harmful tax practices in tax haven 
     jurisdictions,
       (5) the effectiveness of--
       (A) efforts by Internal Revenue Service to identify sources 
     of illegal offshore activity, and
       (B) Federal civil and criminal penalties designed to deter 
     offshore tax evasion, and
       (6) the economic and revenue implications of tax avoidance 
     activity.
       (b) Report.--The Joint Committee on Taxation shall submit a 
     report of the results of the study conducted under subsection 
     (a) to the Committee on Ways and Means of the House of 
     Representatives and the Committee on Finance of the Senate 
     not later than 12 months after the date of the enactment of 
     this Act. Such report shall include any recommendations, 
     including recommendations for legislative changes, as the 
     Joint Committee on Taxation determines appropriate to curb 
     the spread of offshore tax avoidance and evasion.
                                  ____


   Tax Haven and Abusive Tax Shelter Reform Act of 2002--Summary of 
                               Provisions


           I. Ending Meaningless and Abusive Tax Transactions

       Codification of the Economic Substance Doctrine. Large 
     corporations and sophisticated individuals are increasingly 
     taking advantage of vagueness and ambiguities in the tax law 
     to devise complex and unnecessary transactions purely for the 
     purpose of tax avoidance. The legislation, based on H.R. 2520 
     introduced by Rep. Lloyd Doggett, would codify the 
     judicially-developed ``economic substance'' doctrine so that, 
     when applying the doctrine, a transaction would have economic 
     substance only if it changes in a meaningful way (apart from 
     Federal income tax effects) the taxpayer's economic position, 
     and the taxpayer has a substantial nontax purpose for 
     entering into such transaction. In so doing, the Act would 
     disallow sham transactions in which the economic activity 
     purported to give rise to the desired tax benefits does not 
     actually occur. The bill provides that if a profit potential 
     is relied on to demonstrate that a transaction results in a 
     meaningful change in economic position, the present value of 
     the reasonably expected pre-tax profit must be substantial in 
     relation to the present value of the expected net tax 
     benefits that would be allowed if the transaction were 
     respected.


  II. Strengthening Penalties For Participants in Abusive Tax Shelter 
                              Transactions

       Increase Penalty for Underpayments Resulting from Abusive 
     Tax Shelters. Under current law the IRS may impose a 20% 
     accuracy-related penalty where there is a substantial 
     understatement of tax or there is negligence on the part of 
     the taxpayer. The Act would increase the penalty to 40% for 
     underpayments on account of transactions which lack economic 
     substance or business purposes. The higher penalty can be 
     avoided by fully disclosing the transaction. In addition, the 
     bill would amend the definition of a substantial 
     understatement to include underpayments which exceed 
     $500,000, regardless of whether the underpayment exceeds 10 
     percent of the taxpayer's total tax liability.
       Impose Penalty on Abusive Tax Shelter Promoters. The Act 
     imposes a penalty on any substantial promoter of a disallowed 
     tax shelter. The amount of the penalty equals 100 percent of 
     the gross income derived by the promoter from the strategy. 
     In addition, the bill modifies the current penalty for false 
     or fraudulent statements with respect to tax shelters such 
     that the amount of the penalty is the greater (rather than 
     the lesser) of 41,000 or 100 percent of the gross income 
     derived by the promoter.
       Impose Penalty on Individuals Aiding and Abetting Abusive 
     Tax Shelters. The Act would penalize the lawyers who write 
     ``penalty insurance'' opinions that any reasonable person 
     would know are unjustified. The Act would impose a penalty on 
     those involved in a disallowed tax shelter if: (1) the person 
     advises that the taxpayer's transaction would more likely 
     than not prevail or not give rise to a penalty, and (2) the 
     advice is unreasonable. An opinion would be considered 
     unreasonable if a reasonably prudent and careful person under 
     similar circumstances would not have offered such an opinion. 
     The amount of the penalty is 100 percent of the gross 
     proceeds derived by the person from the transaction.
     Tighten Tax Shelter Disclosure Requirements
       Failure to Maintain Lists. Under current law, any person 
     who organizes a potentially abusive tax shelter must maintain 
     a list that identifies each person who purchased an interest 
     in the shelter. The penalty for failure to meet these 
     requirements is $50 for each person, up to a maximum of 
     $50,000. The Act increases the penalty to 50 percent of the 
     gross proceeds derived from each person.
       Failure to Disclose Reportable Transactions. Regulations 
     require corporate taxpayers to include in their tax return 
     information with respect to certain large transactions with 
     characteristics that may be indicative of tax shelter 
     activity. The Act imposes a penalty for failing to disclose 
     the required information with respect to a reportable 
     transactions. The penalty is equal to the greater of 5% of 
     the increase in tax liability resulting from a correction or 
     $100,000.
       Registration of Shelters Offered to Non-Corporate 
     Participants. A promoter of a confidential corporate tax 
     shelter is required to register the tax shelter with the IRS. 
     The penalty for failing to timely register a confidential 
     corporate tax shelter is the greater of $10,000 or 50% of the 
     fees payable to any promoter. The Act deletes the requirement 
     that a direct or indirect participant must be a corporation.


       III. Combating Illegal Tax Evasion in Overseas Tax Havens

       The legislation concentrates on two major problems inherent 
     in tax haven jurisdictions: (1) confidentiality rules and 
     practices which prevent the effective administration and 
     enforcement of U.S. and foreign tax laws, and (2) lack of 
     effective bilateral information exchange in civil and 
     criminal tax matters. By imposing real consequences for 
     jurisdictions which are identified as uncooperative tax 
     havens, the legislation provides meaningful incentives for 
     these nations to reform tax practices which impede the 
     ability of the United States to enforce its laws. In 
     addition, the legislation imposes consequences on U.S. 
     taxpayers who hide income offshore and fail to report assets 
     held in foreign accounts and mandates a thorough review of 
     the problem of offshore tax evasion, including the economic 
     and revenue implications of tax avoidance activity.
       Reduction in Foreign Tax Credits and Other Tax Benefits. 
     The Act denies foreign tax credits for taxes paid to 
     jurisdictions that have been identified in a list of 
     uncooperative tax havens to be published by the Treasury 
     Secretary. A jurisdiction would be considered a tax haven and 
     included in the list if the jurisdiction both (1) imposes no 
     or nominal taxation either generally or on specified classes 
     of income, and (2) has strict confidentiality rules and 
     practices or has ineffective information exchange practices. 
     In addition, the proposal would reduce a taxpayer's (1) 
     otherwise allowable foreign tax credit attributable to income 
     from an identified tax haven, and (2) income, attributable to 
     an identified tax haven, that is otherwise eligible for 
     deferral.
       Reporting of Payments to Identified Tax Havens. The Act 
     requires that all payments to entities, accounts, or 
     individuals that are resident or located in identified 
     uncooperative tax havens be reported on the taxpayer's income 
     tax return. Exceptions would apply for payments less than 
     $10,000 or if the recipient certifies to the payor that the 
     information regarding the transaction will be provided to the 
     IRS upon request. Related payments would be required to be 
     aggregated for purposes of determining whether this threshold 
     is exceeded. Failure to report a payment on a tax return that 
     was required to be reported would result in the imposition of 
     a penalty on the payor equal to 20% of the gross payment.
       Reporting of Interest in a Foreign Financial Account. 
     Recent evidence obtained in summons of offshore credit card 
     records suggests that a significant number U.S. taxpayers are 
     using offshore banks to illegally hide income and assets from 
     taxation. In addition to existing criminal penalties, the 
     legislation imposes a civil penalty of 45,000 for the failure 
     to comply with the rules and regulations requiring the 
     reporting of information requested on the ``Report of Foreign 
     Bank and Financial Accounts.'' The IRS would have the 
     authority to waive the penalty, in whole or in part, if the 
     taxpayer paid all U.S. tax due with respect to the taxpayer's 
     foreign accounts and the taxpayer demonstrates that the 
     failure to file this form was due to reasonable cause.
       Offshore Tax Avoidance and Evasion Study. The full extent 
     of the problem of offshore tax evasion is only beginning to 
     come to light. The legislation mandates the Joint Committee 
     on Taxation to conduct a study examining the use of offshore 
     tax havens by U.S. taxpayers to evade and avoid federal 
     income taxes. The study will review: (1) mechanisms used by 
     U.S. taxpayers to illegally hide income and assets from 
     detection, (2) the extent to which foreign tax, banking, and 
     financial practices encourage noncompliance with U.S. tax 
     laws, (3) the status and effectiveness of the United States' 
     information exchange agreements with tax haven jurisdictions, 
     (4) the status and effectiveness of efforts by the 
     Organization for Economic Cooperation and Development (OECD) 
     to identify and eliminate harmful tax practices in tax haven 
     jurisdictions, (5) IRS efforts to identify sources of illegal 
     offshore activity, and federal civil and criminal penalties 
     designed to deter offshore tax evasion, and (6) the economic 
     and revenue implications of offshore tax avoidance activity. 
     Most importantly, the study will include recommendations for 
     ways to curb the spread of offshore tax avoidance and 
     evasion.
                                 ______