[Congressional Record Volume 148, Number 58 (Thursday, May 9, 2002)]
[Senate]
[Pages S4158-S4163]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BAUCUS (for himself and Mr. Grassley):
  S. 2498. A bill to amend the Internal Revenue Code of 1986 to require 
adequate disclosure of transactions which have a potential for tax 
avoidance or evasion, and for other purposes; to the Committee on 
Finance.
  Mr. BAUCUS. Mr. President, Garrison Keillor is quoted as saying, ``I 
believe in looking reality straight in the eye and denying it.'' That 
approach is perhaps what some would like us to do with respect to the 
increasing problem of the use of abusive tax shelters to avoid or evade 
taxes. But I do not agree.
  The Tax Shelter Transparency Act that I introduce today doesn't deny 
reality, rather, it shines some transparency on reality so that we have 
a better understanding of what is going on out there. Following Enron's 
bankruptcy, I think that all Americans have a greater appreciation for 
the need for greater transparency in complex tax transactions.
  The legislation is the product of over 2 years of review and public 
comment. The Tax Shelter Transparency Act also incorporates tax shelter 
proposals released by the Department of the Treasury the day before the 
Senate Finance Committee's March 21, 2002 hearing on the subject.
  As I stated at the hearing, ``the Finance Committee is committed to 
helping combat these carefully engineered transactions. These 
transactions have little or no economic substance, are designed to 
achieve unwarranted tax benefits rather than business profit, and place 
honest corporate competitors at a disadvantage.''
  The proliferation of tax shelters has been called ``the most 
significant compliance problem currently confronting our system of 
self-assessment.'' Less than 2 years ago, there was a more positive 
outlook regarding the Government's ability to curb the promotion and 
use of abusive tax shelters. The Department of the Treasury and the IRS

[[Page S4159]]

issued regulations requiring disclosure of certain transactions and 
requiring developers and promoters of tax-engineered transactions to 
maintain customer lists. Also, the IRS had prevailed in several court 
cases against the use of transactions lacking in economic substance.
  Unfortunately, the honesty and integrity of our tax system has 
suffered significant blows over the past 2 years. Court decisions have 
shifted from decisions tough on tax avoidance and evasion to court 
defeats for the IRS. Also, there appears to be a lack of compliance 
with the disclosure legislation passed in 1997 and the subsequent 
regulations.
  The corporate tax returns filed in 2001 are the first returns filed 
under the new tax shelter disclosure requirements. The administration 
provided the Finance Committee with the results of their analysis of 
the disclosure data, including their analysis of what was not 
disclosed.
  Only 272 transactions were disclosed by 99 corporate taxpayers. There 
are approximately 100,000 corporate taxpayers under the Large and 
Midsize Business Division at the IRS yet only 99 of them made a 
disclosure under the current regime. Based on the Finance Committee 
hearing, it is safe to say that the administration, as did Congress, 
thought the number of disclosures would be much greater.
  Clearly, the past method of reactive, ad-hoc closing down of abusive 
transactions does little to discourage the creation and exploitation of 
many shelters.
  These transactions may be good for a corporation's bottom line, but 
they are bad for the economy. Here's why: abusive corporate tax 
shelters create a tax benefit without any corresponding economic 
benefit. There's no new product. No technological innovation. Just a 
tax break.
  As with the Senate Finance Committee draft legislation released last 
August, the Tax Shelter Transparency Act emphasizes disclosure. 
Disclosure is critical to the Government's ability to identify and 
address abusive tax avoidance and evasion arrangements. Under the bill, 
if the taxpayer has entered into a questionable transaction and fails 
to disclose the transaction, then the taxpayer is subject to tough 
penalties for not disclosing and higher penalties if an understatement 
results.
  The legislation separates transactions into one of three types of 
transactions for purposes of disclosure and penalties: Reportable 
Listed Transactions, Reportable Avoidance Transactions, and a catch-all 
category for Other Transactions. The legislation also addresses the 
role of each of the players involved in abusive tax shelters: including 
the taxpayer who buys, the promoter who markets, and the tax advisor 
who provides an opinion ``endorsing'' the tax-engineered arrangement. 
The legislation focuses on each of these participants and contains 
proposals to discourage their participation in abusive tax 
transactions.
  Reportable Listed Transactions are transactions specifically 
identified by the Department of the Treasury as ``tax avoidance 
transactions.'' These are transactions specifically classified by 
Treasury as bad transactions, essentially the worst of the worst. 
Failure by the taxpayer to disclose the transaction results in a 
separate strict liability, nonwaivable flat dollar penalty of $200,000 
for large taxpayers and $100,000 for small taxpayers.
  Additionally, if the taxpayer is required to file with the Securities 
and Exchange Commission, the penalty must be reported to the SEC. If 
the taxpayer discloses the questionable transaction, they are not 
subject to the flat dollar penalty or the SEC reporting. The SEC 
reporting requirement is a critical element to improving the disclosure 
of transactions. The amount of tax penalty is relatively insignificant 
to the tax benefits generated by abusive tax shelter transactions. 
Corporations, however, have a strong incentive not to trigger a penalty 
that must be reported to the SEC.
  Failure to disclose a reportable listed transaction that results in a 
tax understatement will be subject to a higher, 30 percent, strict 
liability, nonwaivable accuracy-related penalty which must be reported 
to the SEC.
  Reportable Avoidance Transactions are transactions that fall into one 
of the several objective criteria established by the Department of the 
Treasury which have a potential for tax avoidance or evasion. Based on 
current regulations and the proposals put forward by the 
administration, we anticipate these transactions would include but 
would not be limited to: significant loss transactions; transactions 
with brief asset holding periods; transactions marketed under 
conditions of confidentiality; transactions subject to indemnification 
agreements; and transactions with a certain amount of book-tax 
difference.
  Failure by the taxpayer to disclose the questionable reportable 
avoidance transaction results in a separate strict liability, 
nonwaivable flat dollar penalty of $100,000 for large taxpayers and 
$50,000 for small taxpayers.
  Reportable Avoidance Transactions are then subject to a filter to 
determine whether there is a significant purpose of tax avoidance. 
Transactions entered into with a significant purpose of tax avoidance 
are subject to harsher treatment in the form of higher penalties.
  The legislation enhances the Government's ability to enjoin 
promoters. Most significantly, the legislation increases the penalty 
imposed on tax shelter promoters who refuse to maintain lists of their 
tax shelter investors. If a promoter fails to provide the IRS with a 
list of investors in a reportable transaction within 20 days after 
receipt of a written request by the IRS to provide such a list, the 
promoter would be subject to a penalty of $10,000 for each additional 
business day that the requested information is not provided.
  The legislation adds a provision authorizing the Treasury Department 
to censure tax advisors or impose monetary sanctions against tax 
advisors and firms that participate in tax shelter activities and 
practice before the IRS.
  I am pleased that this legislation is the product of working closely 
with my good friend, and the ranking member of the Finance Committee, 
Senator Grassley. I appreciate Senator Grassley's cosponsorship of the 
Tax Shelter Transparency Act and his commitment to work as a bipartisan 
front to shine some light on these abusive tax shelter transactions.
  I ask unanimous consent that the text of the bill be printed in the 
Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 2498

       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; TABLE OF 
                   CONTENTS.

       (a) Short Title.--This Act may be cited as the ``Tax 
     Shelter Transparency 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.
       (c) Table of Contents.--

Sec. 1. Short title; amendment of 1986 code; table of contents.

                  TITLE I--TAXPAYER-RELATED PROVISIONS

Sec. 101. Penalty for failing to disclose reportable transaction.
Sec. 102. Increase in accuracy-related penalties for listed 
              transactions and other reportable transactions having a 
              tax avoidance purpose.
Sec. 103. Modifications of substantial understatement penalty for 
              nonreportable transactions.
Sec. 104. Tax shelter exception to confidentiality privileges relating 
              to taxpayer communications.

           TITLE II--PROMOTER AND PREPARER RELATED PROVISIONS

       Subtitle A--Provisions Relating To Reportable Transactions

Sec. 201. Disclosure of reportable transactions.
Sec. 202. Modifications to penalty for failure to register tax 
              shelters.
Sec. 203. Modification of penalty for failure to maintain lists of 
              investors.
Sec. 204. Modification of actions to enjoin specified conduct related 
              to tax shelters and reportable transactions.

                      Subtitle B--Other Provisions

Sec. 211. Understatement of taxpayer's liability by income tax return 
              preparer.
Sec. 212. Report on effectiveness of penalty on failure to report 
              interests in foreign financial accounts.
Sec. 213. Frivolous tax submissions.
Sec. 214. Regulation of individuals practicing before the Department of 
              Treasury.

[[Page S4160]]

Sec. 215. Penalty on promoters of tax shelters.

                  TITLE I--TAXPAYER-RELATED PROVISIONS

     SEC. 101. PENALTY FOR FAILING TO DISCLOSE REPORTABLE 
                   TRANSACTION.

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

     ``SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORTABLE 
                   TRANSACTION INFORMATION WITH RETURN OR 
                   STATEMENT.

       ``(a) Imposition of Penalty.--Any person who fails to 
     include with any return or statement any information required 
     to be included under subchapter A of chapter 61 with respect 
     to a reportable transaction shall pay a penalty in the amount 
     determined under subsection (b).
       ``(b) Amount of Penalty.--
       ``(1) In general.--Except as provided in paragraphs (2) and 
     (3), the amount of the penalty under subsection (a) shall be 
     $50,000.
       ``(2) Listed transaction.--The amount of the penalty under 
     subsection (a) with respect to a listed transaction shall be 
     $100,000.
       ``(3) Increase in penalty for large entities and high net 
     worth individuals.--
       ``(A) In general.--In the case of a failure under 
     subsection (a) by--
       ``(i) a large entity, or
       ``(ii) a high net worth individual,

     the penalty under paragraph (1) or (2) shall be twice the 
     amount determined without regard to this paragraph.
       ``(B) Large entity.--For purposes of subparagraph (A), the 
     term `large entity' means, with respect to any taxable year, 
     a person (other than a natural person) with gross receipts 
     for the taxable year or the preceding taxable year in excess 
     of $10,000,000. Rules similar to the rules of paragraph (2) 
     and subparagraphs (B), (C), and (D) of paragraph (3) of 
     section 448(c) shall apply for purposes of this subparagraph.
       ``(C) High net worth individual.--The term `high net worth 
     individual' means a natural person whose net worth exceeds 
     $2,000,000.
       ``(c) Definitions.--For purposes of this section--
       ``(1) Reportable transaction.--The term `reportable 
     transaction' means any transaction with respect to which 
     information is required under subchapter A of chapter 61 to 
     be included with a taxpayer's return or statement because, as 
     determined under regulations prescribed under section 6011, 
     such transaction is of a type which the Secretary determines 
     as having a potential for tax avoidance or evasion.
       ``(2) Listed transaction.--Except as provided in 
     regulations, the term `listed transaction' means a reportable 
     transaction--
       ``(A) which is the same as, or similar to, a transaction 
     specifically identified by the Secretary as a tax avoidance 
     transaction for purposes of section 6011, or
       ``(B) which is expected to produce a tax result which is 
     the same as, or similar to, the tax result in a transaction 
     which is so specified.
       ``(d) Penalty Reported to SEC.--In the case of a person--
       ``(1) which is required to file periodic reports under 
     section 13 or 15(d) of the Securities Exchange Act of 1934 or 
     is required to be consolidated with another person for 
     purposes of such reports, and
       ``(2) which--
       ``(A) is required to pay a penalty with respect to a listed 
     transaction under this section, or
       ``(B) is required to pay a penalty under section 6662(a)(2) 
     with respect to any reportable transaction at a rate 
     prescribed under section 6662(i)(3),

     the requirement to pay such penalty shall be disclosed in 
     such reports filed by such person for such periods as the 
     Secretary shall specify. Failure to make a disclosure in 
     accordance with the preceding sentence shall be treated as a 
     failure to which the penalty under subsection (b)(2) applies.
       ``(e) 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 is amended by inserting after 
     the item relating to section 6707 the following:

``Sec. 6707A. Penalty for failure to include reportable transaction 
              information with return or statement.''

       (c) Effective Date.--The amendments made by this section 
     shall apply to transactions entered into after the date of 
     the enactment of this Act.

     SEC. 102. INCREASE IN ACCURACY-RELATED PENALTIES FOR LISTED 
                   TRANSACTIONS AND OTHER REPORTABLE TRANSACTIONS 
                   HAVING A TAX AVOIDANCE PURPOSE.

       (a) Increase in Penalty.--Subsection (a) of section 6662 
     (relating to imposition of penalty) is amended to read as 
     follows:
       ``(a) Imposition of Penalty.--
       ``(1) In general.--If this section applies to any portion 
     of an underpayment of tax required to be shown on a return, 
     there shall be added to the tax an amount equal to 20 percent 
     of the portion of the underpayment to which this section 
     applies.
       ``(2) Understatement of income tax attributable to listed 
     transactions or other reportable transactions having a 
     significant tax avoidance purpose.--If a taxpayer has a 
     reportable transaction income tax understatement (as defined 
     in subsection (i)) for any taxable year, there shall be added 
     to the tax an amount equal to 20 percent of the amount of the 
     understatement. Except as provided in subsection (i)(4)(B), 
     such understatement shall not be taken into account for 
     purposes of paragraph (1).''
       (b) Reportable Transaction Income Tax Understatement.--
     Section 6662 (relating to imposition of accuracy-related 
     penalty) is amended by adding at the end the following new 
     subsection:
       ``(i) Understatement of Income Tax Attributable to Listed 
     Transactions and Other Reportable Transactions Having a 
     Significant Tax Avoidance Purpose.--
       ``(1) Reportable transaction income tax understatement.--
     For purposes of subsection (a)(2), the term `reportable 
     transaction income tax understatement' means the sum of--
       ``(A) the product of--
       ``(i) the amount of the increase (if any) in taxable income 
     which results from a difference between the taxpayer's 
     treatment of items to which this subsection applies (as shown 
     on the taxpayer's return of tax) and the proper tax treatment 
     of such items, and
       ``(ii) the highest rate of tax imposed by section 1 
     (section 11 in the case of a taxpayer which is a 
     corporation), and
       ``(B) the amount of the decrease (if any) in the credits 
     allowed against the tax imposed by subtitle A which results 
     from a difference between the taxpayer's treatment of items 
     to which this subsection applies (as shown on the taxpayer's 
     return of tax) and the proper tax treatment of such items.

     For purposes of subparagraph (A), any reduction of the excess 
     of deductions allowed for the taxable year over gross income 
     for such year, and any reduction in the amount of capital 
     losses which would (without regard to section 1211) be 
     allowed for such year, shall be treated as an increase in 
     taxable income.
       ``(2) Items to which subsection applies.--This subsection 
     shall apply to any item which is attributable to--
       ``(A) any listed transaction, or
       ``(B) any reportable transaction (other than a listed 
     transaction) if a significant purpose of such transaction is 
     the avoidance or evasion of Federal income tax.
       ``(3) Higher penalty for nondisclosed listed and other 
     avoidance transactions.--In the case of any portion of a 
     reportable transaction income tax understatement attributable 
     to a transaction to which section 6664(c)(1) does not apply 
     by reason of section 6664(c)(2)(A), the rate of tax under 
     subsection (a)(2) shall be increased by 5 percent (10 percent 
     in the case of a listed transaction).
       ``(4) Definitions and special rules.--For purposes of this 
     subsection--
       ``(A) Reportable and listed transactions.--The terms 
     `reportable transaction' and `listed transaction' have the 
     respective meanings given to such terms by section 6707A(c).
       ``(B) Coordination with determinations of whether other 
     understatements are substantial.--Reportable transaction 
     income tax understatements shall be taken into account under 
     subsection (d)(1) in determining whether any understatement 
     (which is not a reportable transaction income tax 
     understatement) is a substantial understatement.
       ``(C) Special rule for amended returns.--Except as provided 
     in regulations, in no event shall any tax treatment included 
     with an amendment or supplement to a return of tax be taken 
     into account in determining the amount of any reportable 
     transaction income tax understatement if the amendment or 
     supplement is filed after the earlier of the date the 
     taxpayer is first contacted by the Secretary regarding the 
     examination of the return or such other date as is specified 
     by the Secretary.''
       (c) Reasonable Cause Exception.--Subsection (c) of section 
     6664 (relating to reasonable cause exception) is amended by 
     redesignating paragraphs (2) and (3) as paragraphs (4) and 
     (5), respectively, and by inserting after paragraph (1) the 
     following new paragraphs:
       ``(2) Special rules for understatements attributable to 
     listed and certain other tax avoidance transactions.--
     Paragraph (1) shall not apply to the portion of any 
     reportable transaction income tax understatement attributable 
     to an item referred to in section 6662(i)(2) unless--
       ``(A) the relevant facts affecting the tax treatment of 
     such item are adequately disclosed in accordance with the 
     regulations prescribed under section 6011,
       ``(B) there is or was substantial authority for such 
     treatment, and
       ``(C) the taxpayer reasonably believed that such treatment 
     was more likely than not the proper treatment.
       ``(3) Rules relating to reasonable belief.--For purposes of 
     paragraph (2)(C)--
       ``(A) In general.--A taxpayer shall be treated as having a 
     reasonable belief with respect to the tax treatment of an 
     item only if such belief--
       ``(i) is based on the facts and law that exist at the time 
     the return of tax which includes such tax treatment is filed, 
     and
       ``(ii) relates solely to the taxpayer's chances of success 
     on the merits of such treatment and does not take into 
     account the possibility that a return will not be audited, 
     such treatment will not be raised on

[[Page S4161]]

     audit, or such treatment will be resolved through settlement 
     if it is raised.
       ``(B) Certain opinions may not be relied upon.--
       ``(i) In general.--An opinion of a tax advisor may not be 
     relied upon to establish the reasonable belief of a taxpayer 
     if--

       ``(I) the tax advisor is described in clause (ii), or
       ``(II) the opinion is described in clause (iii).

       ``(ii) Disqualified tax advisors.--A tax advisor is 
     described in this clause if the tax advisor is a material 
     advisor (within the meaning of section 6111(b)(1)) who--

       ``(I) is compensated directly or indirectly by another 
     material advisor with respect to the transaction,
       ``(II) has a contingent fee arrangement with respect to the 
     transaction,
       ``(III) has any type of referral agreement or other similar 
     agreement or understanding with another material advisor 
     which relates to the transaction, or
       ``(IV) has any other characteristic which, as determined 
     under regulations prescribed by the Secretary, is indicative 
     of a potential conflict of interest or compromise of 
     independence.

       ``(iii) Disqualified opinions.--An opinion is described in 
     this clause if the opinion--

       ``(I) is based on unreasonable factual or legal assumptions 
     (including assumptions as to future events),
       ``(II) unreasonably relies on representations, statements, 
     findings, or agreements of the taxpayer or any other person,
       ``(III) does not identify and consider all relevant facts, 
     or
       ``(IV) fails to meet any other requirement as the Secretary 
     may prescribe.''

       (d) Conforming Amendments.--
       (1) Subparagraph (C) of section 461(i)(3) is amended by 
     striking ``section 6662(d)(2)(C)(iii)'' and inserting 
     ``section 1274(b)(3)(C)''.
       (2) Paragraph (3) of section 1274(b) is amended--
       (A) by striking ``(as defined in section 
     6662(d)(2)(C)(iii))'' in subparagraph (B)(i), and
       (B) by adding at the end the following new subparagraph:
       ``(C) Tax shelter.--For purposes of subparagraph (B), the 
     term `tax shelter' means--
       ``(i) a partnership or other entity,
       ``(ii) any investment plan or arrangement, or
       ``(iii) any other plan or arrangement,

     if a significant purpose of such partnership, entity, plan, 
     or arrangement is the avoidance or evasion of Federal income 
     tax.''
       (3) Section 6662(d)(2) is amended by striking subparagraphs 
     (C) and (D).
       (4) Subsection (b) of section 7525 is amended by striking 
     ``section 6662(d)(2)(C)(iii)'' and inserting ``section 
     1274(b)(3)(C)''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years ending after the date of the 
     enactment of this Act.

     SEC. 103. MODIFICATIONS OF SUBSTANTIAL UNDERSTATEMENT PENALTY 
                   FOR NONREPORTABLE TRANSACTIONS.

       (a) Substantial Understatement of Corporations.--Section 
     6662(d)(1)(B) (relating to special rule for corporations) is 
     amended to read as follows:
       ``(B) Special rule for corporations.--In the case of a 
     corporation other than an S corporation or a personal holding 
     company (as defined in section 542), 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) 10 percent of the tax required to be shown on the 
     return for the taxable year, or
       ``(ii) $10,000,000.''
       (b) Reduction for Understatement of Taxpayer Due to 
     Position of Taxpayer or Disclosed Item.--
       (1) In general.--Section 6662(d)(2)(B)(i) (relating to 
     substantial authority) is amended to read as follows:
       ``(i) the tax treatment of any item by the taxpayer if the 
     taxpayer had reasonable belief that the tax treatment was 
     more likely than not the proper treatment, or''.
       (2) Conforming amendment.--Section 6662(d) is amended by 
     adding at the end the following new paragraph:
       ``(3) Secretarial list.--For purposes of this subsection, 
     section 6664(c)(2), and section 6694(a)(1), the Secretary may 
     prescribe a list of positions--
       ``(A) for which the Secretary believes there is not 
     substantial authority or there is no reasonable belief that 
     the tax treatment is more likely than not the proper tax 
     treatment, and
       ``(B) which affect a significant number of taxpayers.

     Such list (and any revisions thereof) shall be published in 
     the Federal Register or the Internal Revenue Bulletin.''
       (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. 104. TAX SHELTER EXCEPTION TO CONFIDENTIALITY PRIVILEGES 
                   RELATING TO TAXPAYER COMMUNICATIONS.

       (a) In General.--Section 7525(b) (relating to section not 
     to apply to communications regarding corporate tax shelters) 
     is amended to read as follows:
       ``(b) Section Not To Apply To Communications Regarding Tax 
     Shelters.--The privilege under subsection (a) shall not apply 
     to any written communication which is--
       ``(1) between a federally authorized tax practitioner and--
       ``(A) any person,
       ``(B) any director, officer, employee, agent, or 
     representative of the person, or
       ``(C) any other person holding a capital or profits 
     interest in the person, and
       ``(2) in connection with the promotion of the direct or 
     indirect participation of the person in any tax shelter (as 
     defined in section 1274(b)(3)(C)).''
       (b) Effective Date.--The amendment made by this section 
     shall apply to communications made on or after the date of 
     the enactment of this Act.

           TITLE II--PROMOTER AND PREPARER RELATED PROVISIONS

       Subtitle A--Provisions Relating To Reportable Transactions

     SEC. 201. DISCLOSURE OF REPORTABLE TRANSACTIONS.

       (a) In General.--Section 6111 (relating to registration of 
     tax shelters) is amended to read as follows:

     ``SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS.

       ``(a) In General.--Each material advisor with respect to 
     any reportable transaction shall make a return (in such form 
     as the Secretary may prescribe) setting forth--
       ``(1) information identifying and describing the 
     transaction,
       ``(2) information describing the advice provided by such 
     advisor, including any potential tax benefits represented to 
     result from the transaction, and
       ``(3) such other information as the Secretary may 
     prescribe.

     Such return shall be filed on the first business day 
     following the earliest date on which such advisor provides 
     any material aid, assistance, or advice with respect to 
     organizing, promoting, selling, implementing, or carrying out 
     the transaction (or such later date as the Secretary may 
     prescribe).
       ``(b) Definitions.--For purposes of this section--
       ``(1) Material advisor.--The term `material advisor' means 
     any person--
       ``(A) who provides any material aid, assistance, or advice 
     with respect to organizing, promoting, selling, implementing, 
     or carrying out any reportable transaction, and
       ``(B) who directly or indirectly derives gross income from 
     such advice or assistance.
       ``(2) Reportable transaction.--The term `reportable 
     transaction' has the meaning given to such term by section 
     6707A(c).
       ``(c) Regulations.--The Secretary may prescribe regulations 
     which provide--
       ``(1) that only 1 person shall be required to meet the 
     requirements of subsection (a) in cases in which 2 or more 
     persons would otherwise be required to meet such 
     requirements,
       ``(2) exemptions from the requirements of this section, and
       ``(3) such rules as may be necessary or appropriate to 
     carry out the purposes of this section.''
       (b) Conforming Amendments.--
       (1) The item relating to section 6111 in the table of 
     sections for subchapter B of chapter 61 is amended to read as 
     follows:

``Sec. 6111. Disclosure of reportable transactions.''

       (2)(A) So much of section 6112 as precedes subsection (c) 
     thereof is amended to read as follows:

     ``SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANSACTIONS 
                   MUST KEEP LISTS OF ADVISEES.

       ``(a) In General.--Each material advisor (as defined in 
     section 6111) with respect to any reportable transaction (as 
     defined in section 6707A(c)) shall maintain (in such manner 
     as the Secretary may by regulations prescribe) a list--
       ``(1) identifying each person with respect to whom such 
     advisor acted as such a material advisor with respect to such 
     transaction, and
       ``(2) containing such other information as the Secretary 
     may by regulations require.''
       (B) Section 6112 is amended by redesignating subsection (c) 
     as subsection (b).
       (C) Section 6112(b)(1)(A), as redesignated by subparagraph 
     (B), is amending by inserting ``written'' before ``request''.
       (D) The item relating to section 6112 in the table of 
     sections for subchapter B of chapter 61 is amended to read as 
     follows:

``Sec. 6112. Material advisors of reportable transactions must keep 
              lists of advisees.''

       (3)(A) The heading for section 6708 is amended to read as 
     follows:

     ``SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES WITH 
                   RESPECT TO REPORTABLE TRANSACTIONS.''

       (B) The item relating to section 6708 in the table of 
     sections for part I of subchapter B of chapter 68 is amended 
     to read as follows:

``Sec. 6708. Failure to maintain lists of advisees with respect to 
              reportable transactions.''

       (c) 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. MODIFICATIONS TO PENALTY FOR FAILURE TO REGISTER 
                   TAX SHELTERS.

       (a) In General.--Section 6707 (relating to failure to 
     furnish information regarding tax shelters) is amended to 
     read as follows:

[[Page S4162]]

     ``SEC. 6707. FAILURE TO FURNISH INFORMATION REGARDING 
                   REPORTABLE TRANSACTIONS.

       ``(a) In General.--If a person who is required to file a 
     return under section 6111(a) with respect to any reportable 
     transaction--
       ``(1) fails to file such return on or before the date 
     prescribed therefor, or
       ``(2) files false or incomplete information with the 
     Secretary with respect to such transaction,
     such person shall pay a penalty with respect to such return 
     in the amount determined under subsection (b).
       ``(b) Amount of Penalty.--
       ``(1) In general.--Except as provided in paragraph (2), the 
     penalty imposed under subsection (a) with respect to any 
     failure shall be $50,000.
       ``(2) Listed transactions.--The penalty imposed under 
     subsection (a) with respect to any listed transaction shall 
     be an amount equal to the greater of--
       ``(A) $200,000, or
       ``(B) 50 percent of the fees paid to such person with 
     respect to aid, assistance, or advice which is provided with 
     respect to the reportable transaction before the date the 
     return is filed under section 6111.

     Subparagraph (B) shall be applied by substituting `75 
     percent' for `50 percent' in the case of an intentional 
     failure or act described in subsection (a).
       ``(c) Reportable and Listed Transactions.--The terms 
     `reportable transaction' and `listed transaction' have the 
     respective meanings given to such terms by section 
     6707A(c).''
       (b) Clerical Amendment.--The item relating to section 6707 
     in the table of sections for part I of subchapter B of 
     chapter 68 is amended by striking ``tax shelters'' and 
     inserting ``reportable transactions''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to failures occurring after the date of the 
     enactment of this Act.

     SEC. 203. MODIFICATION OF PENALTY FOR FAILURE TO MAINTAIN 
                   LISTS OF INVESTORS.

       (a) In General.--Subsection (a) of section 6708 is amended 
     to read as follows:
       ``(a) Imposition of Penalty.--
       ``(1) In general.--If any person who is required to 
     maintain a list under section 6112(a) fails to make such list 
     available to the Secretary in accordance with section 
     6112(b)(1)(A) within 20 days after the date of the 
     Secretary's request, such person shall pay a penalty of 
     $10,000 for each day of such failure after such 20th day.
       ``(2) Reasonable cause exception.--No penalty shall be 
     imposed by paragraph (1) with respect to the failure on any 
     day if such failure is due to reasonable cause.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to failures occurring after the date of the 
     enactment of this Act.

     SEC. 204. MODIFICATION OF ACTIONS TO ENJOIN SPECIFIED CONDUCT 
                   RELATED TO TAX SHELTERS AND REPORTABLE 
                   TRANSACTIONS.

       (a) In General.--Section 7408 (relating to action to enjoin 
     promoters of abusive tax shelters, etc.) is amended by 
     redesignating subsection (c) as subsection (d) and by 
     striking subsections (a) and (b) and inserting the following 
     new subsections:
       ``(a) Authority To Seek Injunction.--A civil action in the 
     name of the United States to enjoin any person from further 
     engaging in specified conduct may be commenced at the request 
     of the Secretary. Any action under this section shall be 
     brought in the district court of the United States for the 
     district in which such person resides, has his principal 
     place of business, or has engaged in specified conduct. The 
     court may exercise its jurisdiction over such action (as 
     provided in section 7402(a)) separate and apart from any 
     other action brought by the United States against such 
     person.
       ``(b) Adjudication and Decree.--In any action under 
     subsection (a), if the court finds--
       ``(1) that the person has engaged in any specified conduct, 
     and
       ``(2) that injunctive relief is appropriate to prevent 
     recurrence of such conduct,
     the court may enjoin such person from engaging in such 
     conduct or in any other activity subject to penalty under 
     this title.
       ``(c) Specified Conduct.--For purposes of this section, the 
     term `specified conduct' means any action, or failure to take 
     action, subject to penalty under section 6700, 6701, 6707, or 
     6708.''
       (b) Conforming Amendments.--
       (1) The heading for section 7408 is amended to read as 
     follows:

     ``SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RELATED TO 
                   TAX SHELTERS AND REPORTABLE TRANSACTIONS.''

       (2) The table of sections for subchapter A of chapter 67 is 
     amended by striking the item relating to section 7408 and 
     inserting the following new item:

``Sec. 7408. Actions to enjoin specified conduct related to tax 
              shelters and reportable transactions.''

       (c) Effective Date.--The amendment made by this section 
     shall take effect on the day after the date of the enactment 
     of this Act.

                      Subtitle B--Other Provisions

     SEC. 211. UNDERSTATEMENT OF TAXPAYER'S LIABILITY BY INCOME 
                   TAX RETURN PREPARER.

       (a) Standards Conformed to Taxpayer Standards.--Section 
     6694(a) (relating to understatements due to unrealistic 
     positions) is amended--
       (1) by striking ``realistic possibility of being sustained 
     on its merits'' in paragraph (1) and inserting ``reasonable 
     belief that the tax treatment in such position was more 
     likely than not the proper treatment'',
       (2) by striking ``or was frivolous'' in paragraph (3) and 
     inserting ``or there was no reasonable basis for the tax 
     treatment of such position'', and
       (3) by striking ``Unrealistic'' in the heading and 
     inserting ``Improper''.
       (b) Amount of Penalty.--Section 6694 is amended--
       (1) by striking ``$250'' in subsection (a) and inserting 
     ``$1,000'', and
       (2) by striking ``$1,000'' in subsection (b) and inserting 
     ``$5,000''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to documents prepared after the date of the 
     enactment of this Act.

     SEC. 212. REPORT ON EFFECTIVENESS OF PENALTY ON FAILURE TO 
                   REPORT INTERESTS IN FOREIGN FINANCIAL ACCOUNTS.

       The Secretary of the Treasury or his delegate shall report 
     each year to the Committee on Ways and Means of the House of 
     Representatives and the Committee on Finance of the Senate 
     on--
       (1) the number of civil and criminal penalties imposed on 
     failures to meet the reporting and recordkeeping requirements 
     of section 5314 of title 31, United States Code, with respect 
     to interests held in foreign financial accounts, and
       (2) the average amount of monetary penalties so imposed.

     The Secretary shall include with such report an analysis of 
     the effectiveness of such reporting and recordkeeping 
     requirements in preventing the avoidance or evasion of 
     Federal income taxes and any recommendations to improve such 
     requirements and the enforcement of such requirements.

     SEC. 213. FRIVOLOUS TAX SUBMISSIONS.

       (a) Civil Penalties.--Section 6702 is amended to read as 
     follows:

     ``SEC. 6702. FRIVOLOUS TAX SUBMISSIONS.

       ``(a) Civil Penalty for Frivolous Tax Returns.--A person 
     shall pay a penalty of $5,000 if--
       ``(1) such person files what purports to be a return of a 
     tax imposed by this title but which--
       ``(A) does not contain information on which the substantial 
     correctness of the self-assessment may be judged, or
       ``(B) contains information that on its face indicates that 
     the self-assessment is substantially incorrect; and
       ``(2) the conduct referred to in paragraph (1)--
       ``(A) is based on a position which the Secretary has 
     identified as frivolous under subsection (c), or
       ``(B) reflects a desire to delay or impede the 
     administration of Federal tax laws.
       ``(b) Civil Penalty for Specified Frivolous Submissions.--
       ``(1) Imposition of Penalty.--Except as provided in 
     paragraph (3), any person who submits a specified frivolous 
     submission shall pay a penalty of $5,000.
       ``(2) Specified frivolous submission.--For purposes of this 
     section--
       ``(A) Specified frivolous submission.--The term `specified 
     frivolous submission' means a specified submission if any 
     portion of such submission--
       ``(i) is based on a position which the Secretary has 
     identified as frivolous under subsection (c), or
       ``(ii) reflects a desire to delay or impede the 
     administration of Federal tax laws.
       ``(B) Specified submission.--The term `specified 
     submission' means--
       ``(i) a request for a hearing under--

       ``(I) section 6320 (relating to notice and opportunity for 
     hearing upon filing of notice of lien), or
       ``(II) section 6330 (relating to notice and opportunity for 
     hearing before levy), and

       ``(ii) an application under--

       ``(I) section 7811 (relating to taxpayer assistance 
     orders),
       ``(II) section 6159 (relating to agreements for payment of 
     tax liability in installments), or
       ``(III) section 7122 (relating to compromises).

       ``(3) Opportunity to withdraw submission.--If the Secretary 
     provides a person with notice that a submission is a 
     specified frivolous submission and such person withdraws such 
     submission promptly after such notice, the penalty imposed 
     under paragraph (1) shall not apply with respect to such 
     submission.
       ``(c) Listing of Frivolous Positions.--The Secretary shall 
     prescribe (and periodically revise) a list of positions which 
     the Secretary has identified as being frivolous for purposes 
     of this subsection. The Secretary shall not include in such 
     list any position that the Secretary determines meets the 
     requirement of section 6662(d)(2)(B)(ii)(II).
       ``(d) Reduction of Penalty.--The Secretary may reduce the 
     amount of any penalty imposed under this section if the 
     Secretary determines that such reduction would promote 
     compliance with and administration of the Federal tax laws.
       ``(e) Penalties in Addition to Other Penalties.--The 
     penalties imposed by this section shall be in addition to any 
     other penalty provided by law.''
       (b) Treatment of Frivolous Requests for Hearings Before 
     Levy.--

[[Page S4163]]

       (1) Frivolous requests disregarded.--Section 6330 (relating 
     to notice and opportunity for hearing before levy) is amended 
     by adding at the end the following new subsection:
       ``(g) Frivolous Requests for Hearing, Etc.--Notwithstanding 
     any other provision of this section, if the Secretary 
     determines that any portion of a request for a hearing under 
     this section or section 6320 meets the requirement of clause 
     (i) or (ii) of section 6702(b)(2)(A), then the Secretary may 
     treat such portion as if it were never submitted and such 
     portion shall not be subject to any further administrative or 
     judicial review.''
       (2) Preclusion from raising frivolous issues at hearing.--
     Section 6330(c)(4) is amended--
       (A) by striking ``(A)'' and inserting ``(A)(i)'';
       (B) by striking ``(B)'' and inserting ``(ii)'';
       (C) by striking the period at the end of the first sentence 
     and inserting ``; or''; and
       (D) by inserting after subparagraph (A)(ii) (as so 
     redesignated) the following:
       ``(B) the issue meets the requirement of clause (i) or (ii) 
     of section 6702(b)(2)(A).''
       (3) Statement of grounds.--Section 6330(b)(1) is amended by 
     striking ``under subsection (a)(3)(B)'' and inserting ``in 
     writing under subsection (a)(3)(B) and states the grounds for 
     the requested hearing''.
       (c) Treatment of Frivolous Requests for Hearings Upon 
     Filing of Notice of Lien.--Section 6320 is amended--
       (1) in subsection (b)(1), by striking ``under subsection 
     (a)(3)(B)'' and inserting ``in writing under subsection 
     (a)(3)(B) and states the grounds for the requested hearing'', 
     and
       (2) in subsection (c), by striking ``and (e)'' and 
     inserting ``(e), and (g)''.
       (d) Treatment of Frivolous Applications for Offers-in-
     Compromise and Installment Agreements.--Section 7122 is 
     amended by adding at the end the following new subsection:
       ``(e) Frivolous Submissions, Etc.--Notwithstanding any 
     other provision of this section, if the Secretary determines 
     that any portion of an application for an offer-in-compromise 
     or installment agreement submitted under this section or 
     section 6159 meets the requirement of clause (i) or (ii) of 
     section 6702(b)(2)(A), then the Secretary may treat such 
     portion as if it were never submitted and such portion shall 
     not be subject to any further administrative or judicial 
     review.''
       (e) Clerical Amendment.--The table of sections for part I 
     of subchapter B of chapter 68 is amended by striking the item 
     relating to section 6702 and inserting the following new 
     item:

``Sec. 6702. Frivolous tax submissions.''

       (f) Effective Date.--The amendments made by this section 
     shall apply to submissions made and issues raised after the 
     date on which the Secretary first prescribes a list under 
     section 6702(c) of the Internal Revenue Code of 1986, as 
     amended by subsection (a).

     SEC. 214. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE 
                   DEPARTMENT OF TREASURY.

       (a) Censure; Imposition of Penalty.--
       (1) In general.--Section 330(b) of title 31, United States 
     Code, is amended--
       (A) by inserting ``, or censure,'' after ``Department'', 
     and
       (B) by adding at the end the following new flush sentence:

     ``The Secretary may impose a monetary penalty on any 
     representative described in the preceding sentence. If the 
     representative was acting on behalf of an employer or any 
     firm or other entity in connection with the conduct giving 
     rise to such penalty, the Secretary may impose a monetary 
     penalty on such employer, firm, or entity if it knew, or 
     reasonably should have known, of such conduct. Such penalty 
     shall not exceed the gross income derived (or to be derived) 
     from the conduct giving rise to the penalty and may be in 
     addition to, or in lieu of, any suspension, disbarment, or 
     censure.''
       (2) Effective date.--The amendments made by this subsection 
     shall apply to actions taken after the date of the enactment 
     of this Act.
       (b) Tax Shelter Opinions, Etc.--Section 330 of such title 
     31 is amended by adding at the end the following new 
     subsection:
       ``(d) Nothing in this section or in any other provision of 
     law shall be construed to limit the authority of the 
     Secretary of the Treasury to impose standards applicable to 
     the rendering of written advice with respect to any entity, 
     transaction plan or arrangement, or other plan or 
     arrangement, which is of a type which the Secretary 
     determines as having a potential for tax avoidance or 
     evasion.''

     SEC. 215. PENALTY ON PROMOTERS OF TAX SHELTERS.

       (a) Penalty on Promoting Abusive Tax Shelters.--Section 
     6700(a) is amended by adding at the end the following new 
     sentence: ``Notwithstanding the first sentence, if an 
     activity with respect to which a penalty imposed under this 
     subsection involves a statement described in paragraph 
     (2)(A), the amount of the penalty shall be equal to 50 
     percent of the gross income derived (or to be derived) from 
     such activity by the person on which the penalty is 
     imposed.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to activities after the date of the enactment of 
     this Act.

  Mr. GRASSLEY. Mr. President, I rise today to co-sponsor legislation, 
the ``Tax Shelter Transparency Act'' which will arrest the 
proliferation of tax shelters.
  We have known for many years that abusive tax shelters, which are 
structured to exploit unintended consequences of our complicated 
Federal income tax system, erode the Federal tax base and the public's 
confidence in the tax system. Such transactions are patently unfair to 
the vast majority of taxpayers who do their best to comply with the 
letter and spirit of the tax law. As a result, the Finance Committee 
has worked exceedingly hard over the past several years to develop 
three legislative discussion drafts for public review and comment. 
Thoughtful and well-considered comments on these drafts have been 
greatly appreciated by the staff and members of the Finance Committee. 
The collaborative efforts of those involved in the discussion drafts 
combined with the recent request for legislative assistance from the 
Treasury Department and IRS produced today's revised approach for 
dealing with abusive tax avoidance transactions.
  Above all, the Tax Shelter Transparency Act encourages taxpayer 
disclosure of potentially abusive tax avoidance transactions. It is 
surprising and unfortunate that taxpayers, though required to disclose 
tax shelter transactions under present law, have refused to comply. The 
Treasury Department and IRS report that the 2001 tax filing season 
produced a mere 272 tax shelter return disclosures from only 99 
corporate taxpayers, a fraction of transactions requiring such 
disclosure. The Tax Shelter Transparency Act will curb non-compliance 
by providing clearer and more objective rules for the reporting of 
potential tax shelters and by providing strong penalties for anyone who 
refuses to comply with the revised disclosure requirements.
  The legislation has been carefully structured to reward those who are 
forthcoming with disclosure. I wholeheartedly agree with the remarks 
offered by the recent Treasury Assistant Secretary for Tax Policy, that 
``if a taxpayer is comfortable entering into a transaction, a promoter 
is comfortable selling it, and an advisor is comfortable blessing it, 
they all should be comfortable disclosing it to the IRS.'' Transparency 
is essential to an evaluation by the IRS and ultimately by the Congress 
of the United States as to whether the tax benefits generated by 
complex business transactions are appropriate interpretations of 
existing tax law. To the extent such interpretations were unintended, 
the bill allows Congress to amend or clarify existing tax law. To the 
extent such interpretations are appropriate, all taxpayers, from the 
largest U.S. multinational conglomerate to the smallest local feedstore 
owner in Iowa, will benefit when transactions are publicly sanctioned 
in the form of an ``angel list'' of good transactions. This legislation 
accomplishes both of these objectives.
                                 ______