[Congressional Record Volume 153, Number 60 (Monday, April 16, 2007)]
[Senate]
[Pages S4480-S4490]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. WYDEN:
  S. 1111. A bill to amend the Internal Revenue Code of 1986 to make 
the Federal income tax system simpler, fairer, and more fiscally 
responsible, and for other purposes; to the Committee on Finance.
  Mr. WYDEN. Mr. President, I have come to the floor to talk a bit 
about taxes. Millions of Americans are scrambling today to file their 
taxes, trying to pull together their 1040 forms and ``schedule this'' 
and ``form that'' and are plowing through shoe boxes and filing 
cabinets trying to find the receipts they accumulated all through this 
year.
  Millions of our citizens have to calculate their taxes twice to find 
out the hard way that they have been ensnared in the alternative 
minimum tax and that they have to pay a much larger burden than they 
had expected. I believe there is a better way for our country to handle 
taxes, one where most Americans do not have to fear tax day, do not 
have to shell out billions of dollars in order to file their taxes, do 
not have to worry about getting crushed by the alternative minimum tax 
that years ago, when it was created, was not supposed to clobber 
middle-class folks in the Pacific Northwest and across the country.
  Today I am introducing the Fair Flat Tax Act, along with my colleague 
in the other body, Congressman Rahm Emanuel of Illinois. What we are 
doing in our fair flat tax legislation is offering the country a 
proposal that offers the administrative simplicity of a flat tax with 
the sense of fairness and progressivity that our country has always 
wanted in our tax system.
  The tax reform proposal we have developed is simpler because it is 
easier to understand and use. Our legislation will include a simplified 
1040 form, one page, 30 lines for every individual taxpayer.
  The folks at Money magazine, the financial publication, took this 
one-page 1040 form, and they were able to fill out their taxes in 15 
minutes.
  We also make the tax system flatter by collapsing the current system 
of six individual tax brackets down to three brackets of 15, 25 and 35 
percent. We create a flat corporate rate of 35 percent.
  The plan is fairer because we do more to make it possible for middle-
class folks to get ahead. We are able to give a tax cut to millions of 
middle-class families because we eliminate scores and scores of 
special-interest tax breaks, close those loopholes, that, in effect, 
drain the country of revenue and never find their way to helping the 
middle class.
  We make a radical statement about tax law in our legislation. We say 
something is out of whack when the cop who is walking the beat in this 
country pays a lot higher tax rate than the person who makes all their 
money in the stock market. I wish to make it clear: we want everybody 
to get ahead, we want everybody to do well, we never want to penalize 
success. But let's make it possible for all Americans to share the 
American dream and not just the fortunate few.
  Under the current Federal Tax Code, all income is not treated fairly. 
My colleague in the other body, Congressman Emanuel, and I would change 
that. We are not interested in soaking investors. We believe in 
markets. We believe in creating wealth. But we want everybody to be 
able to share in that wealth, and under the Fair Flat Tax, they would 
be able to do it.
  The Fair Flat Tax adopts the flat tax idea to provide real relief to 
the middle class through fewer exclusions, exemptions, deductions 
deferrals, credits and special rates for certain favored businesses, 
very often, breaks that have been added to the Tax Code because those 
powerful interests have lobbyists that the middle-class folks we 
represent do not.
  We triple the standard deduction for single filers from $5,000 to 
$15,000 and from $10,000 to $30,000 for married couples. As a result, 
the vast majority of Americans would be better off claiming the 
standard deduction than having to itemize their deductions, so their 
filing will be simplified. We do keep the key deductions most used by 
middle-income folks across the country. We keep the deduction for 
mortgage interest and charity. We keep the credits for children, for 
education, and earned income.
  Nobody would have to calculate their taxes twice under the Fair Flat 
Tax Act. Our proposal eliminates the individual alternative minimum tax 
which could ensnare as many as 100 million taxpayers by the end of the 
decade. We eliminate an estimated $20 billion each year in special 
breaks for special interests.
  Eliminating those breaks would sustain current benefits for our men 
and women in uniform, our veterans, our elderly, and our disabled, as 
well as those tax incentives that promote savings and help our families 
pay for medical care and for education.
  I think an especially important feature of the Fair Flat Tax Act is 
it corrects one of the most glaring inequities in the current tax 
system; and that is regressive State and local taxes. Under current 
law, low- and middle-income taxpayers get hit with a double whammy. 
Compared to wealthier folks, they pay more of their income in State and 
local taxes. Poor families pay more than 11 percent and middle-income 
families pay about 10 percent of their

[[Page S4481]]

income in State and local taxes, while the wealthier pay only about 5 
percent.
  Because many low- and middle-income taxpayers do not itemize, they 
get no credit on their Federal form for paying State and local taxes. 
In fact, two-thirds of the Federal tax deduction for State and local 
taxes goes to those with incomes above $100,000 a year. Under the Fair 
Flat Tax Act, for the first time, the Federal Code would look at the 
entire picture of one's taxes, at an individual's combined Federal, 
State, and local tax burden, and give a credit to low- and middle-
income individuals to correct for regressive State and local taxes.
  Repealing some individual tax credits, deductions, and exclusions 
from income--along with eliminating some of those special interest 
favors in the corporate Tax Code--enables larger standard deductions 
and broader middle-class tax relief.
  What this means is that, according to the Congressional Research 
Service, under our legislation, the vast majority of taxpayers would 
see their taxes go down. The Congressional Research Service has advised 
us that on average, middle-class families and individuals with wage and 
salary incomes up to $150,000 would see tax relief. Let me repeat that. 
We are talking about on average, tax relief for middle-class families 
and families with wage and salary incomes up to approximately $150,000. 
Middle-class folks in our country would get a tax break.
  The legislation also makes concrete progress toward deficit 
reduction. Certainly, there is a long way to go to stop the 
hemorrhaging in the Federal budget, but this legislation makes a decent 
start by allowing us to start lowering the Federal deficit in 2011. It 
is essentially a revenue-neutral kind of system. But certainly, as we 
look to the future, this is going to allow us to start lowering the 
Federal deficit.
  I also point out, by simplifying the Code, there are going to be 
other benefits. For example, we have heard a great deal about the tax 
gap in the Finance and Budget Committees. It is one of the most serious 
problems our country faces as it relates to finance in America. Upwards 
of $300 billion of money that is owed to our government is not 
collected. Given the fact we have a system today where people are able 
to flout the rules, change the system, why not go to a simpler system 
that makes it harder for individuals to cheat and easier for the IRS to 
catch those who do?
  If you look at what I have proposed, the Fair Flat Tax Act--a 1040 
form that is only 30 lines long--it is going to be a lot harder to 
cheat the system under a proposal such as this, and it is going to be a 
lot easier for the IRS to catch those who try to take advantage of 
something such as this.
  I believe the Fair Flat Tax Act can make a significant contribution 
in helping this country collect those taxes that are owed and raise a 
significant amount of revenue from a source that does not increase 
taxes. What we are proposing with our fair flat tax legislation is a 
win for everybody except those who would try to rip off the system.
  I am introducing the Fair Flat Tax Act of 2007 today to provide 
Americans a plan based on common sense principles that can make the Tax 
Code work better. We are going to have a system that is simpler and we 
are going to have a system that is fairer because it closes scores of 
those special interest loopholes. It gets rid of the despised 
alternative minimum tax, and it gives everybody a chance to get ahead 
in America.
  It is not about class warfare. It is not about pitting one group 
against another. It is about giving everybody the opportunity to be a 
winner and to get ahead to provide for their family and ensure that 
when they are successful, their success can allow them to do well 
financially.
  I do think it is important to make sure those who work for a wage get 
fair treatment. That has not been the case today. I want investors to 
do well. We all look to the stock market as a major barometer of 
economic prosperity in our country. But let's make sure everybody has 
an opportunity to get ahead. Something is seriously wrong when somebody 
who works for a wage gets hit with a lot higher tax rate than somebody 
who makes their money as an investor.
  I hope we can go forward in a bipartisan way on the issue of tax 
reform. I am extremely disappointed the Bush administration has not 
chosen to follow up on tax reform. I think it is especially 
unfortunate, given the fact the President had a commission that had a 
number of good ideas as it relates to tax reform. I certainly did not 
agree with all of them, but let me talk about one example of how the 
Congress could work with the Bush administration in a bipartisan way.
  I have shown this fair flat tax form I am proposing for a reason; and 
that is, because I think it is an ideal way for the administration and 
Democrats and Republicans to work together. My form is 30 lines long--
30 lines long--and you can fill it out in under an hour. The 
President's commission had a form that is maybe six, seven lines 
longer--just a handful of additional lines. For purposes of Government 
work, there is virtually no difference between the simplified form I am 
proposing and what the President's commission has called for. We could 
get Democrats and Republicans together to work on tax reform and come 
up with a simplified form in a matter of days.
  There is very little difference between what I am proposing and what 
came out of the President's commission.
  But what is going to be important is that the President reach out to 
Democrats and Republicans in the Congress and say: Look, I want to work 
with you on simplifying the Tax Code. I want to work with you to hold 
down rates for everybody by closing out some of those special interest 
breaks. I want to see everybody have an opportunity to get ahead.
  That certainly is what President Reagan did in 1986, when he worked 
with another tall fellow who served on the Senate Finance Committee, 
our former colleague Senator Bill Bradley. I went to school on a 
basketball scholarship. My jump shot is not quite as good as Bill 
Bradley's, but I sure know the value of bipartisan teamwork.
  So today, the day before taxes are owed, I want to renew my offer to 
the Bush administration to work with them on the issue of tax reform. 
It is a natural for bipartisan leadership. We have a model; and that 
is, the reform of 1986, where, again, they simplified the system. They 
cleaned out the clutter. They got rid of some of those special interest 
loopholes. They held down rates for everybody. It was good for our 
country. We can do that again.
  The fair flat tax legislation I am introducing today provides an 
opportunity for Democrats and Republicans to come together to fix the 
Tax Code in 2007, the way Democrats and Republicans did back in 1986, 
when the late President Reagan and Bill Bradley came together and led a 
bipartisan effort.
  I think it is time to do that again. Most people clean out their 
attic every 20 years or so. We ought to clean the Tax Code every 20 
years as well. I think we know how to proceed. The question is whether 
there is political will. I urge the Bush administration to work with 
Democrats and Republicans in the Congress because the current tax 
system, which has subjected our citizens to so much hassle and 
bureaucracy over the last few months, does not have to be that way. 
There is an alternative. I have presented one. The President's 
commission has presented one. Democrats and Republicans working 
together can do better.
  I urge the President to look to the Congress, leaders of both 
political parties, to move forward on tax reform in the days ahead.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                S. 1111

       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 ``Fair Flat 
     Tax Act of 2007''.
       (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.

[[Page S4482]]

       (c) Table of Contents.--The table of contents for this Act 
     is as follows:

Sec. 1. Short title; amendment of 1986 Code; table of contents.
Sec. 2. Purpose.

                 TITLE I--INDIVIDUAL INCOME TAX REFORMS

Sec. 101. 3 progressive individual income tax rates for all forms of 
              income.
Sec. 102. Health care standard deduction.
Sec. 103. Increase in basic standard deduction.
Sec. 104. Refundable credit for State and local income, sales, and real 
              and personal property taxes.
Sec. 105. Earned income child credit and earned income credit for 
              childless taxpayers.
Sec. 106. Repeal of individual alternative minimum tax.
Sec. 107. Termination of various exclusions, exemptions, deductions, 
              and credits.

          TITLE II--CORPORATE AND BUSINESS INCOME TAX REFORMS

Sec. 201. Corporate flat tax.
Sec. 202. Treatment of travel on corporate aircraft.
Sec. 203. Termination of various preferential treatments.
Sec. 204. Elimination of tax expenditures that subsidize inefficiencies 
              in the health care system.
Sec. 205. Pass-through business entity transparency.
Sec. 206. Modification of effective date of leasing provisions of the 
              American Jobs Creation Act of 2004.
Sec. 207. Revaluation of LIFO inventories of large integrated oil 
              companies.
Sec. 208. Modifications of foreign tax credit rules applicable to large 
              integrated oil companies which are dual capacity 
              taxpayers.
Sec. 209. Repeal of lower of cost or market value of inventory rule.
Sec. 210. Reinstitution of per country foreign tax credit.
Sec. 211. Application of rules treating inverted corporations as 
              domestic corporations to certain transactions occurring 
              after March 20, 2002.

                      TITLE III--OTHER PROVISIONS

               Subtitle A--Improvements in Tax Compliance

Sec. 301. Information reporting on payments to corporations.
Sec. 302. Broker reporting of customer's basis in securities 
              transactions.
Sec. 303. Additional reporting requirements by regulation.
Sec. 304. Increase in information return penalties.
Sec. 305. E-filing requirement for certain large organizations.
Sec. 306. Implementation of standards clarifying when employee leasing 
              companies can be held liable for their clients' Federal 
              employment taxes.
Sec. 307. Modification of collection due process procedures for 
              employment tax liabilities.
Sec. 308. Expansion of IRS access to information in National Directory 
              of New Hires for tax administration purposes.
Sec. 309. Disclosure of prisoner return information to Federal Bureau 
              of Prisons.
Sec. 310. Modification of criminal penalties for willful failures 
              involving tax payments and filing requirements.
Sec. 311. Understatement of taxpayer liability by return preparers.
Sec. 312. Penalties for failure to file certain returns electronically.
Sec. 313. Penalty for filing erroneous refund claims.

                Subtitle B--Requiring Economic Substance

Sec. 321. Clarification of economic substance doctrine.
Sec. 322. Penalty for understatements attributable to transactions 
              lacking economic substance, etc.
Sec. 323. Denial of deduction for interest on underpayments 
              attributable to noneconomic substance transactions.

                       Subtitle C--Miscellaneous

Sec. 331. Denial of deduction for punitive damages.

         TITLE IV--TECHNICAL AND CONFORMING AMENDMENTS; SUNSET

Sec. 401. Technical and conforming amendments.
Sec. 402. Sunset.

     SEC. 2. PURPOSE.

       The purpose of this Act is to amend the Internal Revenue 
     Code of 1986--
       (1) to make the Federal individual income tax system 
     simpler, fairer, and more transparent by--
       (A) recognizing the overall Federal, State, and local tax 
     burden on individual Americans, especially the regressive 
     nature of State and local taxes, and providing a Federal 
     income tax credit for State and local income, sales, and 
     property taxes,
       (B) providing for an earned income tax credit for childless 
     taxpayers and a new earned income child credit,
       (C) repealing the individual alternative minimum tax,
       (D) increasing the basic standard deduction and maintaining 
     itemized deductions for principal residence mortgage interest 
     and charitable contributions,
       (E) reducing the number of exclusions, exemptions, 
     deductions, and credits, and
       (F) treating all income equally,
       (2) to make the Federal corporate income tax rate a flat 35 
     percent and eliminate special tax preferences that favor 
     particular types of businesses or activities, and
       (3) to partially offset the Federal budget deficit through 
     the increased fiscal responsibility resulting from these 
     reforms.

                 TITLE I--INDIVIDUAL INCOME TAX REFORMS

     SEC. 101. 3 PROGRESSIVE INDIVIDUAL INCOME TAX RATES FOR ALL 
                   FORMS OF INCOME.

       (a) Married Individuals Filing Joint Returns and Surviving 
     Spouses.--The table contained in section 1(a) is amended to 
     read as follows:
The tax is:e income is:
15% of taxable income. ................................................
Over $30,000 but not over $120,000.....................................

$4,500, plus 25% of the excess over $30,000 
$27,000, plus 35% of the excess over $120,000''........................
       (b) Heads of Households.--The table contained in section 
     1(b) is amended to read as follows:
The tax is:e income is:
15% of taxable income. ................................................
Over $16,000 but not over $105,000.....................................

$2,400, plus 25% of the excess over $16,000 
$24,650, plus 35% of the excess over $105,000''........................

       (c) Unmarried Individuals (Other Than Surviving Spouses and 
     Heads of Households).--The table contained in section 1(c) is 
     amended to read as follows:
The tax is:e income is:
15% of taxable income. ................................................
$2,250, plus 25% of the excess over $15,000 ...........................
$13,500, plus 35% of the excess over $60,000''.........................

       (d) Married Individuals Filing Separate Returns.--The table 
     contained in section 1(d) is amended to read as follows:
The tax is:e income is:
15% of taxable income. ................................................
$2,250, plus 25% of the excess over $15,000 ...........................
$13,500, plus 35% of the excess over $60,000''.........................

       (e) Conforming Amendments to Inflation Adjustment.--Section 
     1(f) is amended--
       (1) by striking ``1993''in paragraph (1) and inserting 
     ``2008'',
       (2) by striking ``except as provided in paragraph (8)'' in 
     paragraph (2)(A),
       (3) by striking ``1992'' in paragraph (3)(B) and inserting 
     ``2007'',
       (4) by striking paragraphs (7) and (8), and
       (5) by striking ``Phaseout of Marriage Penalty in 15-
     Percent Bracket;'' in the heading thereof.
       (f) Repeal of Rate Differential for Capital Gains and 
     Dividends.--
       (1) Repeal of 2003 rate reduction.--Section 303 of the Jobs 
     and Growth Tax Relief Reconciliation Act of 2003 is amended 
     by striking ``December 3, 2008'' and inserting ``December 31, 
     2007''.
       (2) Termination of pre-2003 capital gain rate 
     differential.--Section 1(h) is amended (after the application 
     of paragraph (1)) by adding at the end the following new 
     paragraph:
       ``(13) Termination.--This section shall not apply to 
     taxable years beginning after December 31, 2007.''.
       (g) Additional Conforming Amendments.--
       (1) Section 1 is amended by striking subsection (i).
       (2) The Internal Revenue Code of 1986 is amended by 
     striking ``calendar year 1992'' each place it appears and 
     inserting ``calendar year 2007''.
       (3) Section 1445(e)(1) (after the application of subsection 
     (g)(1)) is amended by striking ``(or, to the extent provided 
     in regulations, 20 percent)''.
       (h) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2007.

     SEC. 102. HEALTH CARE STANDARD DEDUCTION.

       (a) In General.--Section 62(a) (defining adjusted gross 
     income) is amended by inserting after paragraph (21) the 
     following new paragraph:
       ``(22) Individual shared responsibility payments.--
       ``(A) In general.--In the case of a taxpayer with gross 
     income for the taxable year exceeding 100 percent of the 
     poverty line (adjusted for the size of the family involved) 
     for the calendar year in which such taxable year begins and 
     who is enrolled in a HAPI plan under the Healthy Americans 
     Act, the deduction allowable under section 213 by reason of 
     subsection (d)(1)(D) thereof (determined without regard to 
     any income limitation under subsection (a) thereof) in an 
     amount equal to the applicable fraction times, in the case 
     of--
       ``(i) coverage of an individual, $6,025,
       ``(ii) coverage of a married couple or domestic partnership 
     (as determined by a State) without dependent children, 
     $12,050,
       ``(iii) coverage of an unmarried individual with 1 or more 
     dependent children, $8,610, plus $2,000 for each dependent 
     child, and
       ``(iv) coverage of a married couple or domestic partnership 
     (as determined by a State) with 1 or more dependent children, 
     $15,210, plus $2,000 for each dependent child.
       ``(B) Applicable fraction.--For purposes of subparagraph 
     (A), the applicable fraction is the fraction (not to exceed 
     1)--
       ``(i) the numerator of which is the gross income of the 
     taxpayer for the taxable year expressed as a percentage of 
     the poverty line

[[Page S4483]]

     (adjusted for the size of the family involved) minus such 
     poverty line for the calendar year in which such taxable year 
     begins, and
       ``(ii) the denominator of which is 400 percent of the 
     poverty line (adjusted for the size of the family involved) 
     minus such poverty line.
       ``(C) Phaseout of deduction amount.--
       ``(i) In general.--The amount otherwise determined under 
     subparagraph (A) for any taxable year shall be reduced by the 
     amount determined under clause (ii).
       ``(ii) Amount of reduction.--The amount determined under 
     this clause shall be the amount which bears the same ratio to 
     the amount determined under subparagraph (A) as--

       ``(I) the excess of the taxpayer's modified adjusted gross 
     income for such taxable year, over $62,500 ($125,000 in the 
     case of a joint return), bears to
       ``(II) $62,500 ($125,000 in the case of a joint return).

     Any amount determined under this clause which is not a 
     multiple of $1,000 shall be rounded to the next lowest 
     $1,000.
       ``(D) Inflation adjustment.--In the case of any taxable 
     year beginning in a calendar year after 2009, each dollar 
     amount contained in subparagraph (A) and subparagraph 
     (C)(ii)(I) shall be increased by an amount equal to such 
     dollar amount, multiplied by the cost-of-living adjustment 
     determined under section 1(f)(3) for the calendar year in 
     which the taxable year begins, determined by substituting 
     `calendar year 2008' for `calendar year 1992' in subparagraph 
     (B) thereof. Any increase determined under the preceding 
     sentence shall be rounded to the nearest multiple of $50 
     ($1,000 in the case of the dollar amount contained in 
     subparagraph (C)(ii)(I)).
       ``(E) Determination of modified adjusted gross income.--
       ``(i) In general.--For purposes of this paragraph, the term 
     `modified adjusted gross income' means adjusted gross 
     income--
       ``(ii) determined without regard to this section and 
     sections 86, 135, 137, 199, 221, 222, 911, 931, and 933, and
       ``(iii) increased by--

       ``(I) the amount of interest received or accrued during the 
     taxable year which is exempt from tax under this title, and
       ``(II) the amount of any social security benefits (as 
     defined in section 86(d)) received or accrued during the 
     taxable year.

       ``(F) Poverty line.--For purposes of this paragraph, the 
     term `poverty line' has the meaning given such term in 
     section 673(2) of the Community Health Services Block Grant 
     Act (42 U.S.C. 9902(2)), including any revision required by 
     such section.''.
       (b) Conforming Amendment.--Section 213(d)(1)(D) is amended 
     by inserting ``amounts paid under section 3421 and'' after 
     ``including''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2007.

     SEC. 103. INCREASE IN BASIC STANDARD DEDUCTION.

       (a) In General.--Paragraph (2) of section 63(c) (defining 
     standard deduction) is amended to read as follows:
       ``(2) Basic standard deduction.--For purposes of paragraph 
     (1), the basic standard deduction is--
       ``(A) 200 percent of the dollar amount in effect under 
     subparagraph (C) for the taxable year in the case of--
       ``(i) a joint return, or
       ``(ii) a surviving spouse (as defined in section 2(a)),
       ``(B) $26,250 in the case of a head of household (as 
     defined in section 2(b)), reduced by any deduction allowed 
     under section 62(a)(22) for such taxable year, or
       ``(C) $15,000 in any other case, reduced by any deduction 
     allowed under section 62(a)(22) for such taxable year.''.
       (b) Conforming Amendment to Inflation Adjustment.--Section 
     63(c)(4)(B)(i) is amended by striking ``(2)(B), (2)(C), or''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2007.

     SEC. 104. REFUNDABLE CREDIT FOR STATE AND LOCAL INCOME, 
                   SALES, AND REAL AND PERSONAL PROPERTY TAXES.

       (a) General Rule.--Subpart C of part IV of subchapter A of 
     chapter 1 (relating to refundable credits) is amended by 
     redesignating section 36 as section 37 and by inserting after 
     section 35 the following new section:

     ``SEC. 36. CREDIT FOR STATE AND LOCAL INCOME, SALES, AND REAL 
                   AND PERSONAL PROPERTY TAXES.

       ``(a) Allowance of Credit.--In the case of an individual, 
     there shall be allowed as a credit against the tax imposed by 
     this subtitle for the taxable year an amount equal to 10 
     percent of the qualified State and local taxes paid by the 
     taxpayer for such year.
       ``(b) Qualified State and Local Taxes.--For purposes of 
     this section, the term `qualified State and local taxes' 
     means--
       ``(1) State and local income taxes,
       ``(2) State and local general sales taxes,
       ``(3) State and local real property taxes, and
       ``(4) State and local personal property taxes.
       ``(c) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) State or local taxes.--A State or local tax includes 
     only a tax imposed by a State, a possession of the United 
     States, or a political subdivision of any of the foregoing, 
     or by the District of Columbia.
       ``(2) General sales taxes.--
       ``(A) In general.--The term `general sales tax' means a tax 
     imposed at one rate with respect to the sale at retail of a 
     broad range of classes of items.
       ``(B) Application of rules.--Rules similar to the rules 
     under subparagraphs (C), (D), (E), (F), (G), and (H) of 
     section 164(b)(5) shall apply.
       ``(3) Personal property taxes.--The term `personal property 
     tax' means an ad valorem tax which is imposed on an annual 
     basis in respect of personal property.
       ``(4) Application of rules to property taxes.--Rules 
     similar to the rules of subsections (c) and (d) of section 
     164 shall apply.
       ``(5) No credit for married individuals filing separate 
     returns.--If the taxpayer is a married individual (within the 
     meaning of section 7703), this section shall apply only if 
     the taxpayer and the taxpayer's spouse file a joint return 
     for the taxable year.
       ``(6) Denial of credit to dependents.--No credit shall be 
     allowed under this section to any individual with respect to 
     whom a deduction under section 151 is allowable to another 
     taxpayer for a taxable year beginning in the calendar year in 
     which such individual's taxable year begins.
       ``(7) Denial of double benefit.--Any amount taken into 
     account in determining the credit allowable under this 
     section may not be taken into account in determining any 
     credit or deduction under any other provision of this 
     chapter.''.
       (b) Technical Amendments.--
       (1) Paragraph (2) of section 1324(b) of title 31, United 
     States Code, is amended by inserting ``or from section 36 of 
     such Code'' before the period at the end.
       (2) The table of sections for subpart C of part IV of 
     subchapter A of chapter 1 is amended by striking the item 
     relating to section 36 and inserting the following:

``Sec. 36. Credit for state and local income, sales, and real and 
              personal property taxes
``Sec. 37. Overpayments of tax''.

       (c) Report Regarding Use of Credit by Renters.--Not later 
     than 180 days after the date of the enactment of this Act, 
     the Secretary of the Treasury shall report to the Committee 
     on Finance of the Senate and the Committee on Ways and Means 
     of the House of Representatives recommendations regarding the 
     treatment of a portion of rental payments in a manner similar 
     to real property taxes under section 36 of the Internal 
     Revenue Code of 1986 (as added by this section).
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2007.

     SEC. 105. EARNED INCOME CHILD CREDIT AND EARNED INCOME CREDIT 
                   FOR CHILDLESS TAXPAYERS.

       (a) In General.--Subsection (a) of section 32 (relating to 
     earned income) is amended to read as follows:
       ``(a) Allowance of Earned Income Child Credit and Earned 
     Income Credit.--
       ``(1) In general.--There shall be allowed as a credit 
     against the tax imposed by this subtitle for the taxable 
     year--
       ``(A) in the case of any eligible individual with 1 or more 
     qualifying children, an amount equal to the earned income 
     child credit amount, and
       ``(B) in the case of any eligible individual with no 
     qualifying children, an amount equal to the earned income 
     credit amount.
       ``(2) Earned income child credit amount.--For purposes of 
     this section, the earned income child credit amount is equal 
     to the sum of--
       ``(A) the credit percentage of so much of the taxpayer's 
     earned income for the taxable year as does not exceed the 
     earned income limit amount, plus
       ``(B) the supplemental child credit amount determined under 
     subsection (n) for such taxable year.
       ``(3) Earned income credit amount.--For purposes of this 
     section, the earned income credit amount is equal to the 
     credit percentage of so much of the taxpayer's earned income 
     for the taxable year as does not exceed the earned income 
     limit amount.
       ``(4) Limitation.--The amount of the credit allowable to a 
     taxpayer under paragraph (2)(A) or (3) for any taxable year 
     shall not exceed the excess (if any) of--
       ``(A) the credit percentage of the earned income amount, 
     over
       ``(B) the phaseout percentage of so much of the adjusted 
     gross income (or, if greater, the earned income) of the 
     taxpayer for the taxable year as exceeds the phaseout 
     amount.''.
       (b) Supplemental Child Credit Amount.--Section 32 is 
     amended by adding at the end the following new subsection:
       ``(n) Supplemental Child Credit Amount.--
       ``(1) In general.--For purposes of subsection (a)(2)(B), 
     the supplemental child credit amount for any taxable year is 
     equal to the lesser of--
       ``(A) the credit which would be allowed under section 24 
     for such taxable year without regard to the limitation under 
     section 24(b)(3) with respect to any qualifying child as 
     defined under subsection (c)(3), or
       ``(B) the amount by which the aggregate amount of credits 
     allowed by subpart A for such taxable year would increase if 
     the limitation imposed by section 24(b)(3) were increased by 
     the excess (if any) of--
       ``(i) 15 percent of so much of the taxpayer's earned income 
     which is taken into account in computing taxable income for 
     the taxable year as exceeds $10,000, or
       ``(ii) in the case of a taxpayer with 3 or more qualifying 
     children (as so defined), the excess (if any) of--

[[Page S4484]]

       ``(I) the taxpayer's social security taxes for the taxable 
     year, over
       ``(II) the credit allowed under this section for the 
     taxable year.

     The amount of the credit allowed under this subsection shall 
     not be treated as a credit allowed under subpart A and shall 
     reduce the amount of credit otherwise allowable under section 
     24(a) without regard to section 24(b)(3).
       ``(2) Social security taxes.--For purposes of paragraph 
     (1)--
       ``(A) In general.--The term `social security taxes' means, 
     with respect to any taxpayer for any taxable year--
       ``(i) the amount of the taxes imposed by section 3101 and 
     3201(a) on amounts received by the taxpayer during the 
     calendar year in which the taxable year begins,
       ``(ii) 50 percent of the taxes imposed by section 1401 on 
     the self-employment income of the taxpayer for the taxable 
     year, and
       ``(iii) 50 percent of the taxes imposed by section 
     3211(a)(1) on amounts received by the taxpayer during the 
     calendar year in which the taxable year begins.
       ``(B) Coordination with special refund of social security 
     taxes.--The term `social security taxes' shall not include 
     any taxes to the extent the taxpayer is entitled to a special 
     refund of such taxes under section 6413(c).
       ``(C) Special rule.--Any amounts paid pursuant to an 
     agreement under section 3121(l) (relating to agreements 
     entered into by American employers with respect to foreign 
     affiliates) which are equivalent to the taxes referred to in 
     subparagraph (A)(i) shall be treated as taxes referred to in 
     such paragraph.
       ``(3) Inflation adjustment.--In the case of any taxable 
     year beginning in a calendar year after 2007, the $10,000 
     amount contained in paragraph (1)(B) shall be increased by an 
     amount equal to--
       ``(A) such dollar amount, multiplied by
       ``(B) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `calendar year 2000' 
     for `calendar year 1992' in subparagraph (B) thereof.
       ``Any increase determined under the preceding sentence 
     shall be rounded to the nearest multiple of $50.''.
       (c) Conforming Amendment.--Section 24(d) is amended by 
     adding at the end the following new paragraph:
       ``(4) Termination.--This subsection shall not apply with 
     respect to any taxable year beginning after December 31, 
     2007.''.
       (d) Certain Treatment of Earned Income Made Permanent.--
     Clause (vi) of section 32(c)(2)(B) is amended to read as 
     follows:
       ``(vi) a taxpayer may elect to treat amounts excluded from 
     gross income by reason of section 112 as earned income.''.
       (e) Repeal of Disqualified Investment Income Test.--
     Subsection (i) of section 32 is repealed.
       (f) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2007.

     SEC. 106. REPEAL OF INDIVIDUAL ALTERNATIVE MINIMUM TAX.

       (a) In General.--Section 55(a) (relating to alternative 
     minimum tax imposed) is amended by adding at the end the 
     following new flush sentence:
       ``For purposes of this title, the tentative minimum tax on 
     any taxpayer other than a corporation for any taxable year 
     beginning after December 31, 2007, shall be zero.''.
       (b) Modification of Limitation on Use of Credit for Prior 
     Year Minimum Tax Liability.--Subsection (c) of section 53 
     (relating to credit for prior year minimum tax liability) is 
     amended to read as follows:
       ``(c) Limitation.--
       ``(1) In general.--Except as provided in paragraph (2), the 
     credit allowable under subsection (a) for any taxable year 
     shall not exceed the excess (if any) of--
       ``(A) the regular tax liability of the taxpayer for such 
     taxable year reduced by the sum of the credits allowable 
     under subparts A, B, D, E, and F of this part, over
       ``(B) the tentative minimum tax for the taxable year.
       ``(2) Taxable years beginning after 2007.--In the case of 
     any taxable year beginning after 2007, the credit allowable 
     under subsection (a) to a taxpayer other than a corporation 
     for any taxable year shall not exceed 90 percent of the 
     regular tax liability of the taxpayer for such taxable year 
     reduced by the sum of the credits allowable under subparts A, 
     B, D, E, and F of this part.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2007.

     SEC. 107. TERMINATION OF VARIOUS EXCLUSIONS, EXEMPTIONS, 
                   DEDUCTIONS, AND CREDITS.

       (a) In General.--Subchapter C of chapter 90 (relating to 
     provisions affecting more than one subtitle) is amended by 
     adding at the end the following new section:

     ``SEC. 7875. TERMINATION OF CERTAIN PROVISIONS.

       ``The following provisions shall not apply to taxable years 
     beginning after December 31, 2007:
       ``(1) Section 67 (relating to 2-percent floor on 
     miscellaneous itemized deductions).
       ``(2) Section 74(c) (relating to exclusion of certain 
     employee achievement awards).
       ``(3) Section 79 (relating to exclusion of group-term life 
     insurance purchased for employees).
       ``(4) Section 119 (relating to exclusion of meals or 
     lodging furnished for the convenience of the employer).
       ``(5) Section 125 (relating to exclusion of cafeteria plan 
     benefits).
       ``(6) Section 132 (relating to certain fringe benefits), 
     except with respect to subsection (a)(5) thereof (relating to 
     exclusion of qualified transportation fringe).
       ``(7) Section 163(h)(4)(A)(i)(II) (relating to definition 
     of qualified residence).
       ``(8) Section 165(d) (relating to deduction for wagering 
     losses).
       ``(9) Section 217 (relating to deduction for moving 
     expenses).
       ``(10) Section 454 (relating to deferral of tax on 
     obligations issued at discount).
       ``(11) Section 501(c)(9) (relating to tax-exempt status of 
     voluntary employees' beneficiary associations).
       ``(12) Section 911 (relating to exclusion of earned income 
     of citizens or residents of the United States living abroad).
       ``(13) Section 912 (relating to exemption for certain 
     allowances).''.
       (b) Conforming Amendment.--The table of sections for 
     subchapter C of chapter 90 is amended by adding at the end 
     the following new item:

``Sec. 7875. Termination of certain provisions''.

          TITLE II--CORPORATE AND BUSINESS INCOME TAX REFORMS

     SEC. 201. CORPORATE FLAT TAX.

       (a) In General.--Subsection (b) of section 11 (relating to 
     tax imposed) is amended to read as follows:
       ``(b) Amount of Tax.--The amount of tax imposed by 
     subsection (a) shall be equal to 35 percent of the taxable 
     income.''.
       (b) Conforming Amendments.--
       (1) Section 280C(c)(3)(B)(ii)(II) is amended by striking 
     ``maximum rate of tax under section 11(b)(1)'' and inserting 
     ``rate of tax under section 11(b)''.
       (2) Sections 860E(e)(2)(B), 860E(e)(6)(A)(ii), 
     860K(d)(2)(A)(ii), 860K(e)(1)(B)(ii), 1446(b)(2)(B), and 
     7874(e)(1)(B) are each amended by striking ``highest rate of 
     tax specified in section 11(b)(1)'' and inserting ``rate of 
     tax specified in section 11(b)''.
       (3) Section 904(b)(3)(D)(ii) is amended by striking 
     ``(determined without regard to the last sentence of section 
     11(b)(1))''.
       (4) Section 962 is amended by striking subsection (c) and 
     by redesignating subsection (d) as subsection (c).
       (5) Section 1201(a) is amended by striking ``(determined 
     without regard to the last 2 sentences of section 
     11(b)(1))''.
       (6) Section 1561(a) is amended--
       (A) by striking paragraph (1) and by redesignating 
     paragraphs (2), (3), and (4) as paragraphs (1), (2), and (3), 
     respectively,
       (B) by striking ``The amounts specified in paragraph (1), 
     the'' and inserting ``The'',
       (C) by striking ``paragraph (2)'' and inserting ``paragraph 
     (1)'',
       (D) by striking ``paragraph (3)'' both places it appears 
     and inserting ``paragraph (2)'',
       (E) by striking ``paragraph (4)'' and inserting ``paragraph 
     (3)'', and
       (F) by striking the fourth sentence.
       (7) Subsection (b) of section 1561 is amended to read as 
     follows:
       ``(b) Certain Short Taxable Years.--If a corporation has a 
     short taxable year which does not include a December 31 and 
     is a component member of a controlled group of corporations 
     with respect to such taxable year, then for purposes of this 
     subtitle, the amount to be used in computing the accumulated 
     earnings credit under section 535(c)(2) and (3) of such 
     corporation for such taxable year shall be the amount 
     specified in subsection (a)(1) divided by the number of 
     corporations which are component members of such group on the 
     last day of such taxable year. For purposes of the preceding 
     sentence, section 1563(b) shall be applied as if such last 
     day were substituted for December 31.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2007.

     SEC. 202. TREATMENT OF TRAVEL ON CORPORATE AIRCRAFT.

       (a) In General.--Section 162 (relating to trade or business 
     expenses) is amended by redesignating subsection (q) as 
     subsection (r) and by inserting after subsection (p) the 
     following new subsection:
       ``(q) Treatment of Travel on Corporate Aircraft.--The rate 
     at which an amount allowable as a deduction under this 
     chapter for the use of an aircraft owned by the taxpayer is 
     determined shall not exceed the rate at which an amount paid 
     or included in income by an employee of such taxpayer for the 
     personal use of such aircraft is determined.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2007.

     SEC. 203. TERMINATION OF VARIOUS PREFERENTIAL TREATMENTS.

       (a) In General.--Section 7875, as added by section 107, is 
     amended--
       (1) by inserting ``(or transactions in the case of sections 
     referred to in paragraphs (21), (22), (23), (24), and (27))'' 
     after ``taxable years beginning'', and
       (2) by adding at the end the following new paragraphs:
       ``(14) Section 43 (relating to enhanced oil recovery 
     credit).
       ``(15) Section 263(c) (relating to intangible drilling and 
     development costs in the case of oil and gas wells and 
     geothermal wells).
       ``(16) Section 382(l)(5) (relating to exception from net 
     operating loss limitations for corporations in bankruptcy 
     proceeding).
       ``(17) Section 451(i) (relating to special rules for sales 
     or dispositions to implement

[[Page S4485]]

     Federal Energy Regulatory Commission or State electric 
     restructuring policy).
       ``(18) Section 453A (relating to special rules for 
     nondealers), but only with respect to the dollar limitation 
     under subsection (b)(1) thereof and subsection (b)(3) thereof 
     (relating to exception for personal use and farm property).
       ``(19) Section 460(e)(1) (relating to special rules for 
     long-term home construction contracts or other short-term 
     construction contracts).
       ``(20) Section 613A (relating to percentage depletion in 
     case of oil and gas wells).
       ``(21) Section 616 (relating to development costs).
       ``(22) Sections 861(a)(6), 862(a)(6), 863(b)(2), 863(b)(3), 
     and 865(b) (relating to inventory property sales source rule 
     exception).''.
       (b) Full Tax Rate on Nuclear Decommissioning Reserve 
     Fund.--Subparagraph (B) of section 468A(e)(2) is amended to 
     read as follows:
       ``(B) Rate of tax.--For purposes of subparagraph (A), the 
     rate set forth in this subparagraph is 35 percent.''.
       (c) Deferral of Active Income of Controlled Foreign 
     Corporations.--Section 952 (relating to subpart F income 
     defined) is amended by adding at the end the following new 
     subsection:
       ``(e) Special Application of Subpart.--
       ``(1) In general.--For taxable years beginning after 
     December 31, 2007, notwithstanding any other provision of 
     this subpart, the term `subpart F income' means, in the case 
     of any controlled foreign corporation, the income of such 
     corporation derived from any foreign country.
       ``(2) Applicable rules.--Rules similar to the rules under 
     the last sentence of subsection (a) and subsection (d) shall 
     apply to this subsection.''.
       (d) Deferral of Active Financing Income.--Section 
     953(e)(10) is amended--
       (1) by striking ``January 1, 2009'' and inserting ``January 
     1, 2008'', and
       (2) by striking ``December 31, 2008'' and inserting 
     ``December 31, 2007''.
       (e) Depreciation on Equipment in Excess of Alternative 
     Depreciation System.--Section 168(g)(1) (relating to 
     alternative depreciation system) is amended by striking 
     ``and'' at the end of subparagraph (D), by adding ``and'' at 
     the end of subparagraph (E), and by inserting after 
     subparagraph (E) the following new subparagraph:
       ``(F) notwithstanding subsection (a), any tangible property 
     placed in service after December 31, 2007,''.
       (f) Effective Date.--The amendments made by subsections 
     (b), (c), and (d) shall apply to taxable years beginning 
     after December 31, 2007.

     SEC. 204. ELIMINATION OF TAX EXPENDITURES THAT SUBSIDIZE 
                   INEFFICIENCIES IN THE HEALTH CARE SYSTEM.

       Not later than 180 days after the date of the enactment of 
     this Act, the Secretary of the Treasury shall report to the 
     Committee on Finance of the Senate and the Committee on Ways 
     and Means of the House of Representatives recommendations 
     regarding the elimination of Federal tax incentives which 
     subsidize inefficiencies in the health care system and if 
     eliminated would result in Federal budget savings of not less 
     than $10,000,000,000 annually.

     SEC. 205. PASS-THROUGH BUSINESS ENTITY TRANSPARENCY.

       Not later than 90 days after the date of the enactment of 
     this Act, the Secretary of the Treasury shall report to the 
     Committee on Finance of the Senate and the Committee on Ways 
     and Means of the House of Representatives regarding the 
     implementation of additional reporting requirements with 
     respect to any pass-through entity with the goal of the 
     reduction of tax avoidance through the use of such entities, 
     In addition, the Secretary shall develop procedures to share 
     such report data with State revenue agencies under the 
     disclosure requirements of section 6103(d) of the Internal 
     Revenue Code of 1986.

     SEC. 206. MODIFICATION OF EFFECTIVE DATE OF LEASING 
                   PROVISIONS OF THE AMERICAN JOBS CREATION ACT OF 
                   2004.

       (a) Leases to Foreign Entities.--Section 849(b) of the 
     American Jobs Creation Act of 2004 is amended by adding at 
     the end the following new paragraph:
       ``(5) Leases to foreign entities.--In the case of tax-
     exempt use property leased to a tax-exempt entity which is a 
     foreign person or entity, the amendments made by this part 
     shall apply to taxable years beginning after December 31, 
     2006, with respect to leases entered into on or before March 
     12, 2004.''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect as if included in the enactment of the 
     American Jobs Creation Act of 2004.

     SEC. 207. REVALUATION OF LIFO INVENTORIES OF LARGE INTEGRATED 
                   OIL COMPANIES.

       (a) General Rule.--Notwithstanding any other provision of 
     law, if a taxpayer is an applicable integrated oil company 
     for its last taxable year ending in calendar year 2006, the 
     taxpayer shall--
       (1) increase, effective as of the close of such taxable 
     year, the value of each historic LIFO layer of inventories of 
     crude oil, natural gas, or any other petroleum product 
     (within the meaning of section 4611) by the layer adjustment 
     amount, and
       (2) decrease its cost of goods sold for such taxable year 
     by the aggregate amount of the increases under paragraph (1).

     If the aggregate amount of the increases under paragraph (1) 
     exceed the taxpayer's cost of goods sold for such taxable 
     year, the taxpayer's gross income for such taxable year shall 
     be increased by the amount of such excess.
       (b) Layer Adjustment Amount.--For purposes of this 
     section--
       (1) In general.--The term ``layer adjustment amount'' 
     means, with respect to any historic LIFO layer, the product 
     of--
       (A) $18.75, and
       (B) the number of barrels of crude oil (or in the case of 
     natural gas or other petroleum products, the number of 
     barrel-of-oil equivalents) represented by the layer.
       (2) Barrel-of-oil equivalent.--The term ``barrel-of-oil 
     equivalent'' has the meaning given such term by section 
     29(d)(5) (as in effect before its redesignation by the Energy 
     Tax Incentives Act of 2005).
       (c) Application of Requirement.--
       (1) No change in method of accounting.--Any adjustment 
     required by this section shall not be treated as a change in 
     method of accounting.
       (2) Underpayments of estimated tax.--No addition to the tax 
     shall be made under section 6655 of the Internal Revenue Code 
     of 1986 (relating to failure by corporation to pay estimated 
     tax) with respect to any underpayment of an installment 
     required to be paid with respect to the taxable year 
     described in subsection (a) to the extent such underpayment 
     was created or increased by this section.
       (d) Applicable Integrated Oil Company.--For purposes of 
     this section, the term ``applicable integrated oil company'' 
     means an integrated oil company (as defined in section 
     291(b)(4) of the Internal Revenue Code of 1986) which has an 
     average daily worldwide production of crude oil of at least 
     500,000 barrels for the taxable year and which had gross 
     receipts in excess of $1,000,000,000 for its last taxable 
     year ending during calendar year 2006. For purposes of this 
     subsection all persons treated as a single employer under 
     subsections (a) and (b) of section 52 of the Internal Revenue 
     Code of 1986 shall be treated as 1 person and, in the case of 
     a short taxable year, the rule under section 448(c)(3)(B) 
     shall apply.

     SEC. 208. MODIFICATIONS OF FOREIGN TAX CREDIT RULES 
                   APPLICABLE TO LARGE INTEGRATED OIL COMPANIES 
                   WHICH ARE DUAL CAPACITY TAXPAYERS.

       (a) In General.--Section 901 (relating to credit for taxes 
     of foreign countries and of possessions of the United States) 
     is amended by redesignating subsection (n) as subsection (o) 
     and by inserting after subsection (l) the following new 
     subsection:
       ``(m) Special Rules Relating to Large Integrated Oil 
     Companies Which Are Dual Capacity Taxpayers.--
       ``(1) General rule.--Notwithstanding any other provision of 
     this chapter, any amount paid or accrued by a dual capacity 
     taxpayer which is a large integrated oil company to a foreign 
     country or possession of the United States for any period 
     shall not be considered a tax--
       ``(A) if, for such period, the foreign country or 
     possession does not impose a generally applicable income tax, 
     or
       ``(B) to the extent such amount exceeds the amount 
     (determined in accordance with regulations) which--
       ``(i) is paid by such dual capacity taxpayer pursuant to 
     the generally applicable income tax imposed by the country or 
     possession, or
       ``(ii) would be paid if the generally applicable income tax 
     imposed by the country or possession were applicable to such 
     dual capacity taxpayer.

     Nothing in this paragraph shall be construed to imply the 
     proper treatment of any such amount not in excess of the 
     amount determined under subparagraph (B).
       ``(2) Dual capacity taxpayer.--For purposes of this 
     subsection, the term `dual capacity taxpayer' means, with 
     respect to any foreign country or possession of the United 
     States, a person who--
       ``(A) is subject to a levy of such country or possession, 
     and
       ``(B) receives (or will receive) directly or indirectly a 
     specific economic benefit (as determined in accordance with 
     regulations) from such country or possession.
       ``(3) Generally applicable income tax.--For purposes of 
     this subsection--
       ``(A) In general.--The term `generally applicable income 
     tax' means an income tax (or a series of income taxes) which 
     is generally imposed under the laws of a foreign country or 
     possession on income derived from the conduct of a trade or 
     business within such country or possession.
       ``(B) Exceptions.--Such term shall not include a tax unless 
     it has substantial application, by its terms and in practice, 
     to--
       ``(i) persons who are not dual capacity taxpayers, and
       ``(ii) persons who are citizens or residents of the foreign 
     country or possession.
       ``(4) Large integrated oil company.--For purposes of this 
     subsection, the term `large integrated oil company' means, 
     with respect to any taxable year, an integrated oil company 
     (as defined in section 291(b)(4)) which--
       ``(A) had gross receipts in excess of $1,000,000,000 for 
     such taxable year, and
       ``(B) has an average daily worldwide production of crude 
     oil of at least 500,000 barrels for such taxable year.''
       (b) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to taxes paid or accrued in taxable years beginning 
     after the date of the enactment of this Act.

[[Page S4486]]

       (2) Contrary treaty obligations upheld.--The amendments 
     made by this section shall not apply to the extent contrary 
     to any treaty obligation of the United States.

     SEC. 209. REPEAL OF LOWER OF COST OR MARKET VALUE OF 
                   INVENTORY RULE.

       (a) In General.--Subsection (a) of section 471 (relating to 
     general rules for inventories) is amended to read as follows:
       ``(a) General Rule.--Whenever in the opinion of the 
     Secretary the use of inventories is necessary in order 
     clearly to determine the income of the taxpayer, inventories 
     shall be valued at cost.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 210. REINSTITUTION OF PER COUNTRY FOREIGN TAX CREDIT.

       (a) In General.--Subsection (a) of section 904 (relating to 
     limitation on credit) is amended to read as follows:
       ``(a) Limitation.--The amount of the credit in respect of 
     the tax paid or accrued to any foreign country or possession 
     of the United States shall not exceed the same proportion of 
     the tax against which such credit is taken which the 
     taxpayer's taxable income from sources within such country or 
     possession (but not in excess of the taxpayer's entire 
     taxable income) bears to such taxpayer's entire taxable 
     income for the same taxable year.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2007.

     SEC. 211. APPLICATION OF RULES TREATING INVERTED CORPORATIONS 
                   AS DOMESTIC CORPORATIONS TO CERTAIN 
                   TRANSACTIONS OCCURRING AFTER MARCH 20, 2002.

       (a) In General.--Section 7874(b) (relating to inverted 
     corporations treated as domestic corporations) is amended to 
     read as follows:
       ``(b) Inverted Corporations Treated as Domestic 
     Corporations.--
       ``(1) In general.--Notwithstanding section 7701(a)(4), a 
     foreign corporation shall be treated for purposes of this 
     title as a domestic corporation if such corporation would be 
     a surrogate foreign corporation if subsection (a)(2) were 
     applied by substituting `80 percent' for `60 percent'.
       ``(2) Special rule for certain transactions occurring after 
     march 20, 2002.--
       ``(A) In general.--If--
       ``(i) paragraph (1) does not apply to a foreign 
     corporation, but
       ``(ii) paragraph (1) would apply to such corporation if, in 
     addition to the substitution under paragraph (1), subsection 
     (a)(2) were applied by substituting `March 20, 2002' for 
     `March 4, 2003' each place it appears,

     then paragraph (1) shall apply to such corporation but only 
     with respect to taxable years of such corporation beginning 
     after December 31, 2006.
       ``(B) Special rules.--Subject to such rules as the 
     Secretary may prescribe, in the case of a corporation to 
     which paragraph (1) applies by reason of this paragraph--
       ``(i) the corporation shall be treated, as of the close of 
     its last taxable year beginning before January 1, 2007, as 
     having transferred all of its assets, liabilities, and 
     earnings and profits to a domestic corporation in a 
     transaction with respect to which no tax is imposed under 
     this title,
       ``(ii) the bases of the assets transferred in the 
     transaction to the domestic corporation shall be the same as 
     the bases of the assets in the hands of the foreign 
     corporation, subject to any adjustments under this title for 
     built-in losses,
       ``(iii) the basis of the stock of any shareholder in the 
     domestic corporation shall be the same as the basis of the 
     stock of the shareholder in the foreign corporation for which 
     it is treated as exchanged, and
       ``(iv) the transfer of any earnings and profits by reason 
     of clause (i) shall be disregarded in determining any deemed 
     dividend or foreign tax creditable to the domestic 
     corporation with respect to such transfer.
       ``(C) Regulations.--The Secretary may prescribe such 
     regulations as may be necessary or appropriate to carry out 
     this paragraph, including regulations to prevent the 
     avoidance of the purposes of this paragraph.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2006.

                      TITLE III--OTHER PROVISIONS

               Subtitle A--Improvements in Tax Compliance

     SEC. 301. INFORMATION REPORTING ON PAYMENTS TO CORPORATIONS.

       (a) In General.--Section 6041(a) (relating to payments of 
     $600 or more) is amended by inserting ``(including any 
     corporation other than a corporation exempt from taxation)'' 
     after ``another person''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to payments made after December 31, 2007.

     SEC. 302. BROKER REPORTING OF CUSTOMER'S BASIS IN SECURITIES 
                   TRANSACTIONS.

       (a) In General.--Section 6045 (relating to returns of 
     brokers) is amended by adding at the end the following new 
     subsection:
       ``(g) Additional Information Required in the Case of 
     Securities Transactions.--
       ``(1) In general.--If a broker is otherwise required to 
     make a return under subsection (a) with respect to any 
     applicable security, the broker shall include in such return 
     the information described in paragraph (2).
       ``(2) Additional information required.--
       ``(A) In general.--The information required under paragraph 
     (1) to be shown on a return with respect to an applicable 
     security of a customer shall include for each reported 
     applicable security the customer's adjusted basis in such 
     security.
       ``(B) Exemption from requirement.--The Secretary shall 
     issue such regulations or guidance as necessary concerning 
     the application of the requirement under subparagraph (A) in 
     cases in which a broker in making a return does not have 
     sufficient information to meet such requirement with respect 
     to the reported applicable security. Such regulations or 
     guidance may--
       ``(i) require such other information related to such 
     adjusted basis as the Secretary may prescribe, and
       ``(ii) exempt classes of cases in which the broker does not 
     have sufficient information to meet either the requirement 
     under subparagraph (A) or the requirement under clause (i).
       ``(3) Information transfers.--To the extent provided in 
     regulations, there shall be such exchanges of information 
     between brokers as such regulations may require for purposes 
     of enabling such brokers to meet the requirements of this 
     subsection.
       ``(4) Definitions.--For purposes of this subsection, the 
     term `applicable security' means any--
       ``(A) security described in subparagraph (A) or (C) of 
     section 475(c)(2),
       ``(B) interest in a regulated investment company (as 
     defined in section 851), or
       ``(C) other financial instrument designated in regulations 
     prescribed by the Secretary.''.
       (b) Determination of Basis of Certain Securities by FIFO 
     Method.--Section 1012 (relating to basis of property--cost) 
     is amended by adding at the end the following new sentence: 
     ``Except to the extent provided in regulations, the basis of 
     any applicable security reportable under section 6045 (by 
     reason of subsection (g) thereof) shall be determined on a 
     first-in, first-out method.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to sales and transfers occurring after December 
     31, 2007, with respect to securities acquired before, on, or 
     after such date.

     SEC. 303. ADDITIONAL REPORTING REQUIREMENTS BY REGULATION.

       The Secretary of the Treasury is authorized to issue 
     regulations under which with respect to payments made after 
     December 31, 2007--
       (1) any merchant acquiring bank is required to annually 
     report to the Secretary the gross reimbursement payments made 
     to merchants in a calendar year, unless the benefit of such 
     reporting does not justify the cost of compliance, as 
     determined by the Secretary,
       (2) any contractor receiving payments of $600 or more in a 
     calendar year from a particular business is required to 
     furnish such business the contractor's certified taxpayer 
     identification number or be subject to withholding on such 
     payments at a flat rate percentage selected by the 
     contractor, and
       (3) any Federal, State, or local government is required to 
     report to the Secretary any non-wage payment to procure 
     property and services, other than payments of interest, 
     payments for real property, payments to tax-exempt entities 
     or foreign governments, intergovernmental payments, and 
     payments made pursuant to a classified or confidential 
     contract.

     SEC. 304. INCREASE IN INFORMATION RETURN PENALTIES.

       (a) Failure to File Correct Information Returns.--
       (1) In general.--Section 6721(a)(1) is amended--
       (A) by striking ``$50'' and inserting ``$250'', and
       (B) by striking ``$250,000'' and inserting ``$3,000,000''.
       (2) Reduction where correction in specified period.--
       (A) Correction within 30 days.--Section 6721(b)(1) is 
     amended--
       (i) by striking ``$15'' and inserting ``$50'',
       (ii) by striking ``$50'' and inserting ``$250'', and
       (iii) by striking ``$75,000'' and inserting ``$500,000''.
       (B) Failures corrected on or before august 1.--Section 
     6721(b)(2) is amended--
       (i) by striking ``$30'' and inserting ``$100'',
       (ii) by striking ``$50'' and inserting ``$250'', and
       (iii) by striking ``$150,000'' and inserting 
     ``$1,500,000''.
       (3) Lower limitation for persons with gross receipts of not 
     more than $5,000,000.--Section 6721(d)(1) is amended--
       (A) in subparagraph (A)--
       (i) by striking ``$100,000'' and inserting ``$1,000,000'', 
     and
       (ii) by striking ``$250,000'' and inserting ``$3,000,000'',
       (B) in subparagraph (B)--
       (i) by striking ``$25,000'' and inserting ``$175,000'', and
       (ii) by striking ``$75,000'' and inserting ``$500,000'', 
     and
       (C) in subparagraph (C)--
       (i) by striking ``$50,000'' and inserting ``$500,000'', and
       (ii) by striking ``$150,000'' and inserting ``$1,500,000''.
       (4) Penalty in case of intentional disregard.--Section 
     6721(e) is amended--
       (A) by striking ``$100'' in paragraph (2) and inserting 
     ``$500'',
       (B) by striking ``$250,000'' in paragraph (3)(A) and 
     inserting ``$3,000,000''.

[[Page S4487]]

       (b) Failure to Furnish Correct Payee Statements.--
       (1) In general.--Section 6722(a) is amended--
       (A) by striking ``$50'' and inserting ``$250'', and
       (B) by striking ``$100,000'' and inserting ``$1,000,000''.
       (2) Penalty in case of intentional disregard.--Section 
     6722(c) is amended--
       (A) by striking ``$100'' in paragraph (1) and inserting 
     ``$500'', and
       (B) by striking ``$100,000'' in paragraph (2)(A) and 
     inserting ``$1,000,000''.
       (c) Failure to Comply With Other Information Reporting 
     Requirements.--Section 6723 is amended--
       (1) by striking ``$50'' and inserting ``$250'', and
       (2) by striking ``$100,000'' and inserting ``$1,000,000''.
       (d) Effective Date.--The amendments made by this section 
     shall apply with respect to information returns required to 
     be filed on or after January 1, 2008.

     SEC. 305. E-FILING REQUIREMENT FOR CERTAIN LARGE 
                   ORGANIZATIONS.

       (a) In General.--The first sentence of section 6011(e)(2) 
     is amended to read as follows: ``In prescribing regulations 
     under paragraph (1), the Secretary shall take into account 
     (among other relevant factors) the ability of the taxpayer to 
     comply at reasonable cost with the requirements of such 
     regulations.''.
       (b) Conforming Amendment.--Section 6724 is amended by 
     striking subsection (c).
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years ending on or after December 31, 
     2008.

     SEC. 306. IMPLEMENTATION OF STANDARDS CLARIFYING WHEN 
                   EMPLOYEE LEASING COMPANIES CAN BE HELD LIABLE 
                   FOR THEIR CLIENTS' FEDERAL EMPLOYMENT TAXES.

       With respect to employment tax returns required to be filed 
     with respect to wages paid on or after January 1, 2008, the 
     Secretary of the Treasury shall issue regulations 
     establishing--
       (1) standards for holding employee leasing companies 
     jointly and severally liable with their clients for Federal 
     employment taxes under chapters 21, 22, 23, and 24 of the 
     Internal Revenue Code of 1986, and
       (2) standards for holding such companies solely liable for 
     such taxes.

     SEC. 307. MODIFICATION OF COLLECTION DUE PROCESS PROCEDURES 
                   FOR EMPLOYMENT TAX LIABILITIES.

       (a) In General.--Section 6330(f) (relating to jeopardy and 
     State refund collection) is amended--
       (1) by striking ``; or'' at the end of paragraph (1) and 
     inserting a comma,
       (2) by adding ``or'' at the end of paragraph (2), and
       (3) by inserting after paragraph (2) the following new 
     paragraph:
       ``(3) the Secretary has served a disqualified employment 
     tax levy,''.
       (b) Disqualified Employment Tax Levy.--Section 6330 
     (relating to notice and opportunity for hearing before levy) 
     is amended by adding at the end the following new subsection:
       ``(h) Disqualified Employment Tax Levy.--For purposes of 
     subsection (f), a disqualified employment tax levy is any 
     levy in connection with the collection of employment taxes 
     for any taxable period if the person subject to the levy (or 
     any predecessor thereof) requested a hearing under this 
     section with respect to unpaid employment taxes arising in 
     the most recent 2-year period before the beginning of the 
     taxable period with respect to which the levy is served. For 
     purposes of the preceding sentence, the term `employment 
     taxes' means any taxes under chapter 21, 22, 23, or 24.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to levies served on or after January 1, 2008.

     SEC. 308. EXPANSION OF IRS ACCESS TO INFORMATION IN NATIONAL 
                   DIRECTORY OF NEW HIRES FOR TAX ADMINISTRATION 
                   PURPOSES.

       (a) In General.--Paragraph (3) of section 453(j) of the 
     Social Security Act (42 U.S.C. 653(j)) is amended to read as 
     follows:
       ``(3) Administration of federal tax laws.--The Secretary of 
     the Treasury shall have access to the information in the 
     National Directory of New Hires for purposes of administering 
     the Internal Revenue Code of 1986.''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 309. DISCLOSURE OF PRISONER RETURN INFORMATION TO 
                   FEDERAL BUREAU OF PRISONS.

       (a) Disclosure.--
       (1) In general.--Subsection (l) of section 6103 (relating 
     to disclosure of returns and return information for purposes 
     other than tax administration) is amended by adding at the 
     end the following new paragraph:
       ``(22) Disclosure of return information of prisoners to 
     federal bureau of prisons.--
       ``(A) In general.--Under such procedures as the Secretary 
     may prescribe, the Secretary may disclose return information 
     with respect to persons incarcerated in Federal prisons whom 
     the Secretary believes filed or facilitated the filing of 
     false or fraudulent returns to the head of the Federal Bureau 
     of Prisons if the Secretary determines that such disclosure 
     is necessary to permit effective tax administration.
       ``(B) Disclosure by agency to employees.--The head of the 
     Federal Bureau of Prisons may redisclose information received 
     under subparagraph (A)--
       ``(i) only to those officers and employees of the Bureau 
     who are personally and directly engaged in taking 
     administrative actions to address violations of 
     administrative rules and regulations of the prison facility, 
     and
       ``(ii) solely for the purposes described in subparagraph 
     (C).
       ``(C) Restriction on use of disclosed information.--Return 
     information disclosed under this paragraph may be used only 
     for the purposes of--
       ``(i) preventing the filing of false or fraudulent returns; 
     and
       ``(ii) taking administrative actions against individuals 
     who have filed or attempted to file false or fraudulent 
     returns.''.
       (2) Procedures and record keeping related to disclosure.--
     Subsection (p)(4) of section 6103 is amended--
       (A) by striking ``(14), or (17)'' in the matter before 
     subparagraph (A) and inserting ``(14), (17), or (22)'', and
       (B) by striking ``(9), or (16)'' in subparagraph (F)(i) and 
     inserting ``(9), (16), or (22)''.
       (3) Evaluation by treasury inspector general for tax 
     administration.--Paragraph (3) of section 7803(d) is amended 
     by striking ``and'' at the end of subparagraph (A), by 
     striking the period at the end of subparagraph (B) and 
     inserting ``; and'', and by adding at the end the following 
     new subparagraph:
       ``(C) not later than 3 years after the date of the 
     enactment of section 6103(l)(22), submit a written report to 
     Congress on the implementation of such section.''.
       (b) Annual Reports.--
       (1) In general.--The Secretary of the Treasury shall submit 
     to Congress and make publicly available an annual report on 
     the filing of false and fraudulent returns by individuals 
     incarcerated in Federal and State prisons.
       (2) Contents of report.--The report submitted under 
     paragraph (1) shall contain statistics on the number of false 
     or fraudulent returns associated with each Federal and State 
     prison and such other information that the Secretary 
     determines is appropriate.
       (3) Exchange of information.--For the purpose of gathering 
     information necessary for the reports required under 
     paragraph (1), the Secretary of the Treasury shall enter into 
     agreements with the head of the Federal Bureau of Prisons and 
     the heads of State agencies charged with responsibility for 
     administration of State prisons under which the head of the 
     Bureau or Agency provides to the Secretary not less 
     frequently than annually the names and other identifying 
     information of prisoners incarcerated at each facility 
     administered by the Bureau or Agency.
       (c) Effective Date.--The amendments made by this section 
     shall apply to disclosures on or after January 1, 2008.

     SEC. 310. MODIFICATION OF CRIMINAL PENALTIES FOR WILLFUL 
                   FAILURES INVOLVING TAX PAYMENTS AND FILING 
                   REQUIREMENTS.

       (a) Increase in Penalty for Attempt to Evade or Defeat 
     Tax.--Section 7201 (relating to attempt to evade or defeat 
     tax) is amended--
       (1) by striking ``$100,000'' and inserting ``$500,000'',
       (2) by striking ``$500,000'' and inserting ``$1,000,000'', 
     and
       (3) by striking ``5 years'' and inserting ``10 years''.
       (b) Modification of Penalties for Willful Failure to File 
     Return, Supply Information, or Pay Tax.--
       (1) In general.--Section 7203 (relating to willful failure 
     to file return, supply information, or pay tax) is amended--
       (A) in the first sentence--
       (i) by striking ``Any person'' and inserting the following:
       ``(a) In General.--Any person'', and
       (ii) by striking ``$25,000'' and inserting ``$50,000'',
       (B) in the third sentence, by striking ``section'' and 
     inserting ``subsection'', and
       (C) by adding at the end the following new subsection:
       ``(b) Aggravated Failure to File.--
       ``(1) In general.--In the case of any failure described in 
     paragraph (2), the first sentence of subsection (a) shall be 
     applied by substituting--
       ``(A) `felony' for `misdemeanor',
       ``(B) `$250,000 ($500,000' for `$50,000 ($100,000', and
       ``(C) `5 years' for `1 year'.
       ``(2) Failure described.--A failure described in this 
     paragraph is--
       ``(A) a failure to make a return described in subsection 
     (a) for any 3 taxable years occurring during any period of 5 
     consecutive taxable years if the aggregate tax liability for 
     such period is not less than $50,000, or
       ``(B) a failure to make a return if the tax liability 
     giving rise to the requirement to make such return is 
     attributable to an activity which is a felony under any State 
     or Federal law.''.
       (2) Penalty may be applied in addition to other 
     penalties.--Section 7204 (relating to fraudulent statement or 
     failure to make statement to employees) is amended by 
     striking ``the penalty provided in section 6674'' and 
     inserting ``the penalties provided in sections 6674 and 
     7203(b)''.
       (c) Fraud and False Statements.--Section 7206 (relating to 
     fraud and false statements) is amended--
       (1) by striking ``$100,000'' and inserting ``$500,000'',
       (2) by striking ``$500,000'' and inserting ``$1,000,000'', 
     and
       (3) by striking ``3 years'' and inserting ``5 years''.

[[Page S4488]]

       (d) Increase in Monetary Limitation for Underpayment or 
     Overpayment of Tax Due to Fraud.--Section 7206 (relating to 
     fraud and false statements), as amended by subsection (a)(3), 
     is amended--
       (1) by striking ``Any person who--'' and inserting ``(a) In 
     General.--Any person who--'', and
       (2) by adding at the end the following new subsection:
       ``(b) Increase in Monetary Limitation for Underpayment or 
     Overpayment of Tax Due to Fraud.--If any portion of any 
     underpayment (as defined in section 6664(a)) or overpayment 
     (as defined in section 6401(a)) of tax required to be shown 
     on a return is attributable to fraudulent action described in 
     subsection (a), the applicable dollar amount under subsection 
     (a) shall in no event be less than an amount equal to such 
     portion. A rule similar to the rule under section 6663(b) 
     shall apply for purposes of determining the portion so 
     attributable.''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to actions, and failures to act, occurring after 
     the date of the enactment of this Act.

     SEC. 311. UNDERSTATEMENT OF TAXPAYER LIABILITY BY RETURN 
                   PREPARERS.

       (a) Application of Return Preparer Penalties to All Tax 
     Returns.--
       (1) Definition of tax return preparer.--Paragraph (36) of 
     section 7701(a) (relating to income tax preparer) is 
     amended--
       (A) by striking ``income'' each place it appears in the 
     heading and the text, and
       (B) in subparagraph (A), by striking ``subtitle A'' each 
     place it appears and inserting ``this title''.
       (2) Conforming amendments.--
       (A)(i) Section 6060 is amended by striking ``INCOME TAX 
     RETURN PREPARERS'' in the heading and inserting ``TAX RETURN 
     PREPARERS''.
       (ii) Section 6060(a) is amended--
       (I) by striking ``an income tax return preparer'' each 
     place it appears and inserting ``a tax return preparer'',
       (II) by striking ``each income tax return preparer'' and 
     inserting ``each tax return preparer'', and
       (III) by striking ``another income tax return preparer'' 
     and inserting ``another tax return preparer''.
       (iii) The item relating to section 6060 in the table of 
     sections for subpart F of part III of subchapter A of chapter 
     61 is amended by striking ``income tax return preparers'' and 
     inserting ``tax return preparers''.
       (iv) Subpart F of part III of subchapter A of chapter 61 is 
     amended by striking ``Income Tax Return Preparers'' in the 
     heading and inserting ``Tax Return Preparers''.
       (v) The item relating to subpart F in the table of subparts 
     for part III of subchapter A of chapter 61 is amended by 
     striking ``income tax return preparers'' and inserting ``tax 
     return preparers''.
       (B) Section 6103(k)(5) is amended--
       (i) by striking ``income tax return preparer'' each place 
     it appears and inserting ``tax return preparer'', and
       (ii) by striking ``income tax return preparers'' each place 
     it appears and inserting ``tax return preparers''.
       (C)(i) Section 6107 is amended--
       (I) by striking ``INCOME TAX RETURN PREPARER'' in the 
     heading and inserting ``TAX RETURN PREPARER'',
       (II) by striking ``an income tax return preparer'' each 
     place it appears in subsections (a) and (b) and inserting ``a 
     tax return preparer'',
       (III) by striking ``Income Tax Return Preparer'' in the 
     heading for subsection (b) and inserting ``Tax Return 
     Preparer'', and
       (IV) in subsection (c), by striking ``income tax return 
     preparers'' and inserting ``tax return preparers''.
       (ii) The item relating to section 6107 in the table of 
     sections for subchapter B of chapter 61 is amended by 
     striking ``Income tax return preparer'' and inserting ``Tax 
     return preparer''.
       (D) Section 6109(a)(4) is amended--
       (i) by striking ``an income tax return preparer'' and 
     inserting ``a tax return preparer'', and
       (ii) by striking ``income return preparer'' in the heading 
     and inserting ``tax return preparer''.
       (E) Section 6503(k)(4) is amended by striking ``Income tax 
     return preparers'' and inserting ``Tax return preparers''.
       (F)(i) Section 6694 is amended--
       (I) by striking ``INCOME TAX RETURN PREPARER'' in the 
     heading and inserting ``TAX RETURN PREPARER'',
       (II) by striking ``an income tax return preparer'' each 
     place it appears and inserting ``a tax return preparer'',
       (III) in subsection (c)(2), by striking ``the income tax 
     return preparer'' and inserting ``the tax return preparer'',
       (IV) in subsection (e), by striking ``subtitle A'' and 
     inserting ``this title'', and
       (V) in subsection (f), by striking ``income tax return 
     preparer'' and inserting ``tax return preparer''.
       (ii) The item relating to section 6694 in the table of 
     sections for part I of subchapter B of chapter 68 is amended 
     by striking ``income tax return preparer'' and inserting 
     ``tax return preparer''.
       (G)(i) Section 6695 is amended--
       (I) by striking ``INCOME'' in the heading, and
       (II) by striking ``an income tax return preparer'' each 
     place it appears and inserting ``a tax return preparer''.
       (ii) Section 6695(f) is amended--
       (I) by striking ``subtitle A'' and inserting ``this 
     title'', and
       (II) by striking ``the income tax return preparer'' and 
     inserting ``the tax return preparer''.
       (iii) The item relating to section 6695 in the table of 
     sections for part I of subchapter B of chapter 68 is amended 
     by striking ``income''.
       (H) Section 6696(e) is amended by striking ``subtitle A'' 
     each place it appears and inserting ``this title''.
       (I)(i) Section 7407 is amended--
       (I) by striking ``INCOME TAX RETURN PREPARERS'' in the 
     heading and inserting ``TAX RETURN PREPARERS'',
       (II) by striking ``an income tax return preparer'' each 
     place it appears and inserting ``a tax return preparer'',
       (III) by striking ``income tax preparer'' both places it 
     appears in subsection (a) and inserting ``tax return 
     preparer'', and
       (IV) by striking ``income tax return'' in subsection (a) 
     and inserting ``tax return''.
       (ii) The item relating to section 7407 in the table of 
     sections for subchapter A of chapter 76 is amended by 
     striking ``income tax return preparers'' and inserting ``tax 
     return preparers''.
       (J)(i) Section 7427 is amended--
       (I) by striking ``INCOME TAX RETURN PREPARERS'' in the 
     heading and inserting ``TAX RETURN PREPARERS'', and
       (II) by striking ``an income tax return preparer'' and 
     inserting ``a tax return preparer''.
       (ii) The item relating to section 7427 in the table of 
     sections for subchapter B of chapter 76 is amended to read as 
     follows:

``Sec. 7427. Tax return preparers.''.

       (b) Modification of Penalty for Understatement of 
     Taxpayer's Liability by Tax Return Preparer.--Subsections (a) 
     and (b) of section 6694 are amended to read as follows:
       ``(a) Understatement Due to Unreasonable Positions.--
       ``(1) In general.--Any tax return preparer who prepares any 
     return or claim for refund with respect to which any part of 
     an understatement of liability is due to a position described 
     in paragraph (2) shall pay a penalty with respect to each 
     such return or claim in an amount equal to the greater of--
       ``(A) $1,000, or
       ``(B) 50 percent of the income derived (or to be derived) 
     by the tax return preparer with respect to the return or 
     claim.
       ``(2) Unreasonable position.--A position is described in 
     this paragraph if--
       ``(A) the tax return preparer knew (or reasonably should 
     have known) of the position,
       ``(B) there was not a reasonable belief that the position 
     would more likely than not be sustained on its merits, and
       ``(C)(i) the position was not disclosed as provided in 
     section 6662(d)(2)(B)(ii), or
       ``(ii) there was no reasonable basis for the position.
       ``(3) Reasonable cause exception.--No penalty shall be 
     imposed under this subsection if it is shown that there is 
     reasonable cause for the understatement and the tax return 
     preparer acted in good faith.
       ``(b) Understatement Due to Willful or Reckless Conduct.--
       ``(1) In general.--Any tax return preparer who prepares any 
     return or claim for refund with respect to which any part of 
     an understatement of liability is due to a conduct described 
     in paragraph (2) shall pay a penalty with respect to each 
     such return or claim in an amount equal to the greater of--
       ``(A) $5,000, or
       ``(B) 50 percent of the income derived (or to be derived) 
     by the tax return preparer with respect to the return or 
     claim.
       ``(2) Willful or reckless conduct.--Conduct described in 
     this paragraph is conduct by the tax return preparer which 
     is--
       ``(A) a willful attempt in any manner to understate the 
     liability for tax on the return or claim, or
       ``(B) a reckless or intentional disregard of rules or 
     regulations.
       ``(3) Reduction in penalty.--The amount of any penalty 
     payable by any person by reason of this subsection for any 
     return or claim for refund shall be reduced by the amount of 
     the penalty paid by such person by reason of subsection 
     (a).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to returns prepared after the date of the 
     enactment of this Act.

     SEC. 312. PENALTIES FOR FAILURE TO FILE CERTAIN RETURNS 
                   ELECTRONICALLY.

       (a) In General.--Part I of subchapter A of chapter 68 
     (relating to additions to the tax, additional amounts, and 
     assessable penalties) is amended by inserting after section 
     6652 the following new section:

     ``SEC. 6652A. FAILURE TO FILE CERTAIN RETURNS ELECTRONICALLY.

       ``(a) In General.--If a person fails to file a return 
     described in section 6651 or 6652(c)(1) in electronic form as 
     required under section 6011(e)--
       ``(1) such failure shall be treated as a failure to file 
     such return (even if filed in a form other than electronic 
     form), and
       ``(2) the penalty imposed under section 6651 or 6652(c), 
     whichever is appropriate, shall be equal to the greater of--
       ``(A) the amount of the penalty under such section, 
     determined without regard to this section, or
       ``(B) the amount determined under subsection (b).
       ``(b) Amount of Penalty.--

[[Page S4489]]

       ``(1) In general.--Except as provided in paragraphs (2) and 
     (3), the penalty determined under this subsection is equal to 
     $40 for each day during which a failure described under 
     subsection (a) continues. The maximum penalty under this 
     paragraph on failures with respect to any 1 return shall not 
     exceed the lesser of $20,000 or 10 percent of the gross 
     receipts of the taxpayer for the year.
       ``(2) Increased penalties for taxpayers with gross receipts 
     between $1,000,000 and $100,000,000.--
       ``(A) Taxpayers with gross receipts between $1,000,000 and 
     $25,000,000.--In the case of a taxpayer having gross receipts 
     exceeding $1,000,000 but not exceeding $25,000,000 for any 
     year--
       ``(i) the first sentence of paragraph (1) shall be applied 
     by substituting `$200' for `$40', and
       ``(ii) in lieu of applying the second sentence of paragraph 
     (1), the maximum penalty under paragraph (1) shall not exceed 
     $100,000.
       ``(B) Taxpayers with gross receipts over $25,000,000.--
     Except as provided in paragraph (3), in the case of a 
     taxpayer having gross receipts exceeding $25,000,000 for any 
     year--
       ``(i) the first sentence of paragraph (1) shall be applied 
     by substituting `$500' for `$40', and
       ``(ii) in lieu of applying the second sentence of paragraph 
     (1), the maximum penalty under paragraph (1) shall not exceed 
     $250,000.
       ``(3) Increased penalties for certain taxpayers with gross 
     receipts exceeding $100,000,000.--In the case of a return 
     described in section 6651--
       ``(A) Taxpayers with gross receipts between $100,000,000 
     and $250,000,000.--In the case of a taxpayer having gross 
     receipts exceeding $100,000,000 but not exceeding 
     $250,000,000 for any year--
       ``(i) the amount of the penalty determined under this 
     subsection shall equal the sum of--

       ``(I) $50,000, plus
       ``(II) $1,000 for each day during which such failure 
     continues (twice such amount for each day such failure 
     continues after the first such 60 days), and

       ``(ii) the maximum amount under clause (i)(II) on failures 
     with respect to any 1 return shall not exceed $200,000.
       ``(B) Taxpayers with gross receipts over $250,000,000.--In 
     the case of a taxpayer having gross receipts exceeding 
     $250,000,000 for any year--
       ``(i) the amount of the penalty determined under this 
     subsection shall equal the sum of--

       ``(I) $250,000, plus
       ``(II) $2,500 for each day during which such failure 
     continues (twice such amount for each day such failure 
     continues after the first such 60 days), and

       ``(ii) the maximum amount under clause (i)(II) on failures 
     with respect to any 1 return shall not exceed $250,000.
       ``(C) Exception for certain returns.--Subparagraphs (A) and 
     (B) shall not apply to any return of tax imposed under 
     section 511.''.
       (b) Clerical Amendment.--The table of sections for part I 
     of subchapter A of chapter 68 is amended by inserting after 
     the item relating to section 6652 the following new item:

``Sec. 6652A. Failure to file certain returns electronically.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to returns required to be filed on or after 
     January 1, 2008.

     SEC. 313. PENALTY FOR FILING ERRONEOUS REFUND CLAIMS.

       (a) In General.--Part I of subchapter B of chapter 68 
     (relating to assessable penalties) is amended by inserting 
     after section 6675 the following new section:

     ``SEC. 6676. ERRONEOUS CLAIM FOR REFUND OR CREDIT.

       ``(a) Civil Penalty.--If a claim for refund or credit with 
     respect to income tax (other than a claim for a refund or 
     credit relating to the earned income credit under section 32) 
     is made for an excessive amount, unless it is shown that the 
     claim for such excessive amount has a reasonable basis, the 
     person making such claim shall be liable for a penalty in an 
     amount equal to 20 percent of the excessive amount.
       ``(b) Excessive Amount.--For purposes of this section, the 
     term `excessive amount' means in the case of any person the 
     amount by which the amount of the claim for refund or credit 
     for any taxable year exceeds the amount of such claim 
     allowable under this title for such taxable year.
       ``(c) Coordination With Other Penalties.--This section 
     shall not apply to any portion of the excessive amount of a 
     claim for refund or credit on which a penalty is imposed 
     under part II of subchapter A of chapter 68.''.
       (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 6675 the following new item:

``Sec. 6676. Erroneous claim for refund or credit.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to any claim--
       (1) filed or submitted after the date of the enactment of 
     this Act, or
       (2) filed or submitted prior to such date but not withdrawn 
     before the date which is 30 days after such date of 
     enactment.

                Subtitle B--Requiring Economic Substance

     SEC. 321. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

       (a) In General.--Section 7701 is amended by redesignating 
     subsection (p) as subsection (q) and by inserting after 
     subsection (o) the following new subsection:
       ``(p) Clarification of Economic Substance Doctrine; etc.--
       ``(1) General rules.--
       ``(A) In general.--In any case in which a court determines 
     that the economic substance doctrine is relevant for purposes 
     of this title to a transaction (or series of transactions), 
     such transaction (or series of transactions) shall have 
     economic substance only if the requirements of this paragraph 
     are met.
       ``(B) Definition of economic substance.--For purposes of 
     subparagraph (A)--
       ``(i) In general.--A transaction has economic substance 
     only if--

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

     In applying subclause (II), a purpose of achieving a 
     financial accounting benefit shall not be taken into account 
     in determining whether a transaction has a substantial nontax 
     purpose if the origin of such financial accounting benefit is 
     a reduction of income tax.
       ``(ii) Special rule where taxpayer relies on profit 
     potential.--A transaction shall not be treated as having 
     economic substance by reason of having a potential for profit 
     unless--

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

       ``(C) Treatment of fees and foreign taxes.--Fees and other 
     transaction expenses and foreign taxes shall be taken into 
     account as expenses in determining pre-tax profit under 
     subparagraph (B)(ii).
       ``(2) Special rules for transactions with tax-indifferent 
     parties.--
       ``(A) Special rules for financing transactions.--The form 
     of a transaction which is in substance the borrowing of money 
     or the acquisition of financial capital directly or 
     indirectly from a tax-indifferent party shall not be 
     respected if the present value of the deductions to be 
     claimed with respect to the transaction is substantially in 
     excess of the present value of the anticipated economic 
     returns of the person lending the money or providing the 
     financial capital. A public offering shall be treated as a 
     borrowing, or an acquisition of financial capital, from a 
     tax-indifferent party if it is reasonably expected that at 
     least 50 percent of the offering will be placed with tax-
     indifferent parties.
       ``(B) Artificial income shifting and basis adjustments.--
     The form of a transaction with a tax-indifferent party shall 
     not be respected if--
       ``(i) it results in an allocation of income or gain to the 
     tax-indifferent party in excess of such party's economic 
     income or gain, or
       ``(ii) it results in a basis adjustment or shifting of 
     basis on account of overstating the income or gain of the 
     tax-indifferent party.
       ``(3) Definitions and special rules.--For purposes of this 
     subsection--
       ``(A) Economic substance doctrine.--The term `economic 
     substance doctrine' means the common law doctrine under which 
     tax benefits under subtitle A with respect to a transaction 
     are not allowable if the transaction does not have economic 
     substance or lacks a business purpose.
       ``(B) Tax-indifferent party.--The term `tax-indifferent 
     party' means any person or entity not subject to tax imposed 
     by subtitle A. A person shall be treated as a tax-indifferent 
     party with respect to a transaction if the items taken into 
     account with respect to the transaction have no substantial 
     impact on such person's liability under subtitle A.
       ``(C) Exception for personal transactions of individuals.--
     In the case of an individual, this subsection shall apply 
     only to transactions entered into in connection with a trade 
     or business or an activity engaged in for the production of 
     income.
       ``(D) Treatment of lessors.--In applying paragraph 
     (1)(B)(ii) to the lessor of tangible property subject to a 
     lease--
       ``(i) the expected net tax benefits with respect to the 
     leased property shall not include the benefits of--

       ``(I) depreciation,
       ``(II) any tax credit, or
       ``(III) any other deduction as provided in guidance by the 
     Secretary, and

       ``(ii) subclause (II) of paragraph (1)(B)(ii) shall be 
     disregarded in determining whether any of such benefits are 
     allowable.
       ``(4) Other common law doctrines not affected.--Except as 
     specifically provided in this subsection, the provisions of 
     this subsection shall not be construed as altering or 
     supplanting any other rule of law, and the requirements of 
     this subsection shall be construed as being in addition to 
     any such other rule of law.
       ``(5) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this subsection. Such regulations may include 
     exemptions from the application of this subsection.''.

[[Page S4490]]

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

     SEC. 322. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO 
                   TRANSACTIONS LACKING ECONOMIC SUBSTANCE, ETC.

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

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

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

  ``(1) For coordination of penalty with understatements under section 
              6662 and other special rules, see section 6662A(e).
  ``(2) For reporting of penalty imposed under this section to the 
              Securities and Exchange Commission, see section 
              6707A(e).''.

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

``Sec. 6662B. Penalty for understatements attributable to transactions 
              lacking economic substance, etc.''.

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

     SEC. 323. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS 
                   ATTRIBUTABLE TO NONECONOMIC SUBSTANCE 
                   TRANSACTIONS.

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

                       Subtitle C--Miscellaneous

     SEC. 331. DENIAL OF DEDUCTION FOR PUNITIVE DAMAGES.

       (a) Disallowance of Deduction.--
       (1) In general.--Section 162(g) (relating to treble damage 
     payments under the antitrust laws) is amended--
       (A) by redesignating paragraphs (1) and (2) as 
     subparagraphs (A) and (B), respectively,
       (B) by striking ``If'' and inserting:
       ``(1) Treble damages.--If'', and
       (C) by adding at the end the following new paragraph:
       ``(2) Punitive damages.--No deduction shall be allowed 
     under this chapter for any amount paid or incurred for 
     punitive damages in connection with any judgment in, or 
     settlement of, any action. This paragraph shall not apply to 
     punitive damages described in section 104(c).''.
       (2) Conforming amendment.--The heading for section 162(g) 
     is amended by inserting ``Or Punitive Damages'' after 
     ``Laws''.
       (b) Inclusion in Income of Punitive Damages Paid by Insurer 
     or Otherwise.--
       (1) In general.--Part II of subchapter B of chapter 1 
     (relating to items specifically included in gross income) is 
     amended by adding at the end the following new section:

     ``SEC. 91. PUNITIVE DAMAGES COMPENSATED BY INSURANCE OR 
                   OTHERWISE.

       ``Gross income shall include any amount paid to or on 
     behalf of a taxpayer as insurance or otherwise by reason of 
     the taxpayer's liability (or agreement) to pay punitive 
     damages.''.
       (2) Reporting requirements.--Section 6041 (relating to 
     information at source) is amended by adding at the end the 
     following new subsection:
       ``(h) Section To Apply to Punitive Damages Compensation.--
     This section shall apply to payments by a person to or on 
     behalf of another person as insurance or otherwise by reason 
     of the other person's liability (or agreement) to pay 
     punitive damages.''.
       (3) Conforming amendment.--The table of sections for part 
     II of subchapter B of chapter 1 is amended by adding at the 
     end the following new item:

``Sec. 91. Punitive damages compensated by insurance or otherwise''.

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

         TITLE IV--TECHNICAL AND CONFORMING AMENDMENTS; SUNSET

     SEC. 401. TECHNICAL AND CONFORMING AMENDMENTS.

       The Secretary of the Treasury or the Secretary's delegate 
     shall not later than 90 days after the date of the enactment 
     of this Act, submit to the Committee on Ways and Means of the 
     House of Representatives and the Committee on Finance of the 
     Senate a draft of any technical and conforming changes in the 
     Internal Revenue Code of 1986 which are necessary to reflect 
     throughout such Code the purposes of the provisions of, and 
     amendments made by, this Act.

     SEC. 402. SUNSET.

       (a) In General.--All provisions of, and amendments made by, 
     this Act shall not apply to taxable years beginning after 
     December 31, 2012.
       (b) Application of Code.--The Internal Revenue Code of 1986 
     shall be applied and administered to taxable years described 
     in subsection (a) as if the provisions of, and amendments 
     made by, this Act had never been enacted.
                                 ______