[Congressional Record Volume 157, Number 103 (Tuesday, July 12, 2011)]
[Senate]
[Pages S4518-S4527]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. LEVIN (for himself, Mr. Conrad, Mr. Nelson of Florida, Mr. 
        Sanders, Mrs. Shaheen, and Mr. Whitehouse):
  S. 1346. A bill to restrict the use of offshore tax havens and 
abusive tax shelters to inappropriately avoid Federal taxation, and for 
other purposes; to the Committee on Finance.
  Mr. LEVIN. Mr. President, I am introducing today with my colleagues 
Senators Conrad, Bill Nelson, Sanders, Shaheen, and Whitehouse, the 
Stop Tax Haven Abuse Act, legislation which is geared to stop the $100 
billion yearly drain on the U.S. treasury caused by offshore tax 
abuses. Offshore tax abuses are not only undermining public confidence 
in our tax system, but widening the deficit and increasing the tax 
burden on middle America.
  People are sick and tired of tax dodgers using offshore trickery and 
abusive tax shelters to avoid paying their fair share. This bill offers 
powerful new tools to combat those offshore and tax shelter abuses, 
raise revenues, and eliminate incentives to send U.S. profits and jobs 
offshore. Its provisions will hopefully be part of any deficit 
reduction package this year, but should be adopted in any event.
  The bill is supported by a wide array of small business, labor, and 
public interest groups, including the Financial Accountability and 
Corporate Transparency, FACT, Coalition, American Sustainable Business 
Council, Business for Shared Prosperity, Main Street Alliance, AFL-CIO, 
SEIU, Citizens for Tax Justice, Tax Justice Network-USA, U.S. Public 
Interest Research Group, Global Financial Integrity, Global Witness, 
Jubilee USA, and Public Citizen.
  Frank Knapp, president and CEO of the South Carolina Small Business 
Chamber of Commerce, has explained small business support for the bill 
this way:

       Small businesses are the lifeblood of local economies. We 
     pay our fair share of taxes and generate most of the new 
     jobs. Why should we be subsidizing U.S. multinationals that 
     use offshore tax havens to avoid paying taxes? Big 
     corporations benefit immensely from all the advantages of 
     being headquartered in our country. It is time to end tax 
     haven abuse and level the playing field.

  The Stop Tax Haven Abuse Act is a product of the investigative work 
of the Permanent Subcommittee on Investigations which I chair. For more 
than 10 years, the Subcommittee has conducted inquiries into offshore 
abuses, including the use of offshore corporations and trusts to hide 
assets, the use of tax haven banks to set up secret accounts, and the 
use of U.S. bankers, lawyers, accountants and other professionals to 
devise and conduct abusive tax shelters. Over the years, we have 
learned a lot of the offshore tricks and have designed this bill to 
fight back by closing obnoxious offshore tax loopholes and 
strengthening offshore tax enforcement.
  The 112th Congress is the fifth Congress in which I have introduced a 
comprehensive bill to combat offshore and tax shelter abuses. A number 
of provisions from past bills have made it into law, such as measures 
to curb abusive foreign trusts, close offshore dividend tax loopholes, 
and strengthen penalties on tax shelter promoters, but much more needs 
to be done.
  The last Congress made significant progress in the offshore battle. 
We finally enacted into law the economic substance doctrine which 
authorizes courts to strike down phony business deals with no economic 
purpose other than to avoid the payment of tax. My past bills supported 
the economic substance doctrine, and its enactment into

[[Page S4519]]

law is a victory many years in the making.
  Last year also saw enactment of the Baucus-Rangel Foreign Account Tax 
Compliance Act or FATCA, which is a tough new law designed to flush out 
hidden offshore bank accounts. Foreign banks are currently engaged in a 
massive lobbying effort to weaken its disclosure requirements, but U.S. 
banks have had it with foreign banks using secrecy to attract U.S. 
clients and want those banks to have to meet the same disclosure 
requirements U.S. banks do. The Administration is so far resisting 
calls to water down the provisions.
  President Obama, who when in the Senate cosponsored my bills in 2005 
and 2007 to end tax haven abuses, is a longtime opponent of offshore 
tax evasion. He knows how fed up Americans are with tax dodgers who 
hide their money offshore, use complex tax shelters to thumb their nose 
at Uncle Sam, and offload their tax burden onto the backs of honest 
Americans.
  The bottom line is that each of us has a legal and civil obligation 
to pay taxes, and most Americans fulfill that obligation. It is time to 
force the tax scofflaws, the tax dodgers, and the tax cheats to do the 
same, and end their misuse of offshore tax havens.
  The bill I am introducing today is a stronger version of the Stop Tax 
Haven Abuse Act introduced in the last Congress. In addition to 
preserving the provisions from last year that have not yet been enacted 
into law, it contains several new measures to stop tax dodgers from 
taking advantage of middle Americans who play by the rules.
  Among the bill's provisions are special measures to combat persons 
who impede U.S. tax enforcement; establishment of legal presumptions to 
overcome secrecy barriers; the treatment of offshore corporations as 
domestic corporations for tax purposes when controlled by U.S. persons; 
closing a tax loophole benefiting credit default swaps that send money 
offshore; closing another loophole that allows corporate deposits of 
foreign funds in U.S. accounts to be treated as nontaxable, 
unrepatriated foreign income; disclosure requirements for basic 
information on country-by-country tax payments by multinationals; and 
stronger penalties against tax shelter promoters and aiders and 
abettors of tax evasion.
  Probably the biggest change in the bill from the last Congress is 
that it would no longer require Treasury to develop a list of offshore 
secrecy jurisdictions and then impose tougher requirements on U.S. 
taxpayers who use those jurisdictions. Instead, the bill would build on 
the Foreign Account Tax Compliance Act of 2010, by creating tougher 
disclosure, evidentiary, and enforcement consequences for U.S. persons 
who do business with foreign financial institutions that reject FATCA's 
call for disclosing accounts used by U.S. persons. By focusing on non-
FATCA financial institutions instead of offshore secrecy jurisdictions, 
the bill relieves Treasury of a difficult task, while providing 
additional incentives for foreign banks to adopt FATCA's disclosure 
requirements.
  Mr. President, I ask unanimous consent that a section by section 
analysis and a bill summary be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:
     Section 101--Special Measures Where U.S. Tax Enforcement Is 
         Impeded
       The first section of the bill, Section 101, which is 
     carried over from the last Congress, would allow the Treasury 
     Secretary to apply an array of sanctions against any foreign 
     jurisdiction or financial institution which the Secretary 
     determined was impeding U.S. tax enforcement.
       This provision has added significance now that Congress has 
     enacted the Foreign Account Tax Compliance Act requiring 
     foreign financial institutions with U.S. investments to 
     disclose all accounts opened by U.S. persons or pay a hefty 
     tax on their U.S. investment income. FATCA goes into effect 
     in 2013, but some foreign financial institutions are saying 
     that they will refuse to adopt FATCA's approach and will 
     instead stop holding any U.S. assets. While that is their 
     right, the question being raised by some foreign banks 
     planning to comply with FATCA is what happens to non-FATCA 
     institutions that take on U.S. clients and don't report the 
     accounts to the United States. Right now, the U.S. government 
     has no way to take effective action against foreign financial 
     institutions that open secret accounts for U.S. tax evaders. 
     Section 101 of our bill would change that by providing just 
     the powerful new tool needed to stop non-FATCA institutions 
     from facilitating U.S. tax evasion.
       Section 101 is designed to build upon existing Treasury 
     authority to take action against foreign financial 
     institutions that engage in money laundering by extending 
     that same authority to the tax area. In 2001, the Patriot Act 
     gave Treasury the authority under 31 U.S.C. 5318A to require 
     domestic financial institutions and agencies to take special 
     measures with respect to foreign jurisdictions, financial 
     institutions, or transactions found to be of ``primary money 
     laundering concern.'' Once Treasury designates a foreign 
     jurisdiction or financial institution to be of primary money 
     laundering concern, Section 5318A allows Treasury to impose a 
     range of requirements on U.S. financial institutions in their 
     dealings with the designated entity--from requiring U.S. 
     financial institutions, for example, to provide greater 
     information than normal about transactions involving the 
     designated entity, to prohibiting U.S. financial institutions 
     from opening accounts for that foreign entity.
       This Patriot Act authority has been used sparingly, but to 
     telling effect. In some instances Treasury has employed 
     special measures against an entire country, such as Burma, to 
     stop its financial institutions from laundering funds through 
     the U.S. financial system. More often, Treasury has used the 
     authority surgically, against a single problem financial 
     institution, to stop laundered funds from entering the United 
     States. The provision has clearly succeeded in giving 
     Treasury a powerful tool to protect the U.S. financial system 
     from money laundering abuses.
       The bill would authorize Treasury to use that same tool to 
     require U.S. financial institutions to take the same special 
     measures against foreign jurisdictions or financial 
     institutions found by Treasury to be ``impeding U.S. tax 
     enforcement.'' Treasury could, for example, in consultation 
     with the IRS, the Secretary of State, and the Attorney 
     General, require U.S. financial institutions that have 
     correspondent accounts for a designated foreign bank to 
     produce information on all of that foreign bank's customers. 
     Alternatively, Treasury could prohibit U.S. financial 
     institutions from opening accounts for a designated foreign 
     bank, thereby cutting off that foreign bank's access to the 
     U.S. financial system. These types of sanctions could be as 
     effective in ending the worst tax haven abuses as they have 
     been in curbing money laundering.
       In addition to extending Treasury's ability to impose 
     special measures against foreign entities impeding U.S. tax 
     enforcement, the bill would add one new measure to the list 
     of possible sanctions that could be applied: it would allow 
     Treasury to instruct U.S. financial institutions not to 
     authorize or accept credit card transactions involving a 
     designated foreign jurisdiction or financial institution. 
     Denying tax haven banks the ability to issue credit cards for 
     use in the United States, for example, offers an effective 
     new way to stop U.S. tax cheats from obtaining access to 
     funds hidden offshore.
     Section 102--Strengthening FATCA
       Section 102 of the bill is a new section that seeks to 
     clarify, build upon, and strengthen the Foreign Account Tax 
     Compliance Act or FATCA, to flush out hidden foreign accounts 
     and assets used by U.S. taxpayers to evade paying U.S. taxes. 
     When the law becomes effective in 2013, it will require 
     disclosure of account held by U.S. persons at foreign banks, 
     broker-dealers, investment advisers, hedge funds, private 
     equity funds, and other financial firms.
       Some foreign financial institutions are likely to choose to 
     forego all U.S. investments rather than comply with FATCA's 
     disclosure rules. If some foreign financial institutions 
     decide not to participate in the FATCA system, that's their 
     business. But if U.S. taxpayers start using those same 
     foreign financial institutions to hide assets and evade U.S. 
     taxes to the tune of $100 billion per year, that's our 
     business. The United States has a right to enforce our tax 
     laws and to expect that financial institutions will not 
     assist U.S. tax cheats.
       Section 101 of the bill would provide U.S. authorities with 
     a way to take direct action against foreign financial 
     institutions that decide to operate outside of the FATCA 
     system and allow U.S. clients to open hidden accounts. If the 
     U.S. Treasury determines that such a foreign financial 
     institution is impeding U.S. tax enforcement, Section 101 
     would give U.S. authorities a menu of special measures that 
     could be taken in response, including by prohibiting U.S. 
     banks from doing business with that institution.
       Section 102, in contrast, does not seek to take action 
     against a non-FATCA institution, but instead seeks to 
     strengthen tax enforcement efforts with respect to the U.S. 
     persons taking advantage of the non-disclosure practices at 
     non-FATCA institutions. Section 102 would also clarify when 
     foreign financial institutions are obligated to disclose 
     accounts to the United States under FATCA.
       Background. In 2006, the Permanent Subcommittee on 
     Investigations released a report with six case histories 
     detailing how U.S. taxpayers were using offshore tax havens 
     to avoid payment of the taxes they owed. These case histories 
     examined an Internet-based company that helped persons obtain 
     offshore entities and accounts; U.S. promoters that 
     designed complex offshore structures to hide client 
     assets, even providing clients with a how-to manual for

[[Page S4520]]

     going offshore; U.S. taxpayers who diverted business 
     income offshore through phony loans and invoices; a one-
     time tax dodge that deducted phantom offshore stock losses 
     from real U.S. stock income to shelter that income from 
     U.S. taxes; and a 13-year offshore network of 58 offshore 
     trusts and corporations built by American brothers Sam and 
     Charles Wyly. Each of these case histories presented the 
     same fact pattern in which the U.S. taxpayer, through 
     lawyers, banks, or other representatives, set up offshore 
     trusts, corporations, or other entities which had all the 
     trappings of independence but, in fact, were controlled by 
     the U.S. taxpayer whose directives were implemented by 
     compliant offshore personnel acting as the trustees, 
     officers, directors or nominee owners of the offshore 
     entities.
       In the case of the Wylys, the brothers and their 
     representatives communicated Wyly directives to a so-called 
     trust protector who then relayed the directives to the 
     offshore trustees. In the 13 years examined by the 
     Subcommittee, the offshore trustees never once rejected a 
     Wyly request and never once initiated an action without Wyly 
     approval. They simply did what they were told. A U.S. 
     taxpayer in another case history told the Subcommittee that 
     the offshore personnel who nominally owned and controlled his 
     offshore entities, in fact, always followed his directions, 
     describing himself as the ``puppet master'' in charge of his 
     offshore holdings.
       When the Subcommittee discussed these case histories with 
     financial administrators from the Isle of Man, the regulators 
     explained that none of the offshore personnel were engaged in 
     any wrongdoing, because their laws permit foreign clients to 
     transmit detailed, daily instructions to offshore service 
     providers on how to handle offshore assets, so long as it is 
     the offshore trustee or corporate officer who gives the final 
     order to buy or sell the assets. They explained that, under 
     their law, an offshore entity is considered legally 
     independent from the person directing its activities so long 
     as that person follows the form of transmitting ``requests'' 
     to the offshore personnel who retain the formal right to make 
     the decisions, even though the offshore personnel always do 
     as they are asked.
       The Subcommittee case histories illustrate what the tax 
     literature and law enforcement experience have shown for 
     years: that the business model followed in all offshore 
     secrecy jurisdictions is for compliant trustees, corporate 
     administrators, and financial institutions to provide a 
     veneer of independence while ensuring that their U.S. clients 
     retain complete and unfettered control over ``their'' 
     offshore assets. That's the standard operating procedure 
     offshore. Offshore service providers pretend to own or 
     control the offshore trusts, corporations, and accounts they 
     help establish, but what they really do is whatever their 
     clients tell them to do.
       Rebuttable Evidentiary Presumptions. The reality behind 
     these offshore practices makes a mockery of U.S. laws that 
     normally view trusts and corporations as independent actors. 
     They invite game-playing and tax evasion. To combat these 
     abusive offshore practices, Section 102(g) of the bill would 
     implement a bipartisan recommendation in the 2006 report by 
     establishing several rebuttable evidentiary presumptions that 
     would presume U.S. taxpayer control of offshore entities that 
     they form or do business with, unless the U.S. taxpayer 
     presents clear and convincing evidence to the contrary.
       The presumptions would apply only in civil, judicial, or 
     administrative tax or securities enforcement proceedings 
     examining offshore entities or transactions. They would place 
     the burden of producing evidence from offshore jurisdiction 
     on the taxpayer who chose to do business in those 
     jurisdictions and who has access to the information, rather 
     than on the federal government which has little or no 
     practical ability to get the information.
       Section 102(g)(1) would establish three evidentiary 
     presumptions that could be used in a civil tax enforcement 
     proceeding. First is a presumption that a U.S. taxpayer who 
     ``formed, transferred assets to, was a beneficiary of, had a 
     beneficial interest in, or received money or property or the 
     use thereof'' from an offshore entity, such as a trust or 
     corporation, controls that entity. Second is a presumption 
     that funds or other property received from offshore are 
     taxable income, and that funds or other property transferred 
     offshore have not yet been taxed. Third is a presumption that 
     a financial account controlled by a U.S. taxpayer in a 
     foreign country contains enough money--$10,000--to trigger an 
     existing statutory reporting threshold and allow the IRS to 
     assert the minimum penalty for nondisclosure of the account 
     by the taxpayer.
       Section 102(g)(2) would establish two evidentiary 
     presumptions applicable to civil proceedings to enforce U.S. 
     securities laws. The first would specify that if a director, 
     officer, or major shareholder of a U.S. publicly traded 
     corporation were associated with an offshore entity, that 
     person would be presumed to control that offshore entity. The 
     second presumption would provide that securities nominally 
     owned by an offshore entity are presumed to be beneficially 
     owned by any U.S. person who controlled that offshore entity.
       All of these presumptions are rebuttable, which means that 
     the U.S. person who is the subject of the proceeding could 
     provide clear and convincing evidence to show that the 
     presumptions were factually inaccurate. To rebut the 
     presumptions, a taxpayer could establish, for example, that 
     an offshore corporation really was controlled by an 
     independent third party, or that money sent from an offshore 
     account really represented a nontaxable gift instead of 
     taxable income. If the taxpayer wished to introduce evidence 
     from a foreign person, such as an offshore banker, corporate 
     officer, or trust administrator, to establish those facts, 
     that foreign person would have to actually appear in the U.S. 
     proceeding in a manner that would permit cross examination.
       The bill also includes several limitations on the 
     presumptions to ensure their operation is fair and 
     reasonable. First, criminal cases would not be affected by 
     this bill which would apply only to civil proceedings. 
     Second, because the presumptions apply only in enforcement 
     ``proceedings,'' they would not directly affect, for example, 
     a person's reporting obligations on a tax return or SEC 
     filing. The presumptions would come into play only if the IRS 
     or SEC were to challenge a matter in a formal proceeding. 
     Third, the bill would not apply the presumptions to 
     situations where either the U.S. person or the offshore 
     entity is a publicly traded company, because in those 
     situations, even if a transaction were abusive, IRS and SEC 
     officials are generally able to obtain access to necessary 
     information. Fourth, the bill recognizes that certain classes 
     of offshore transactions, such as corporate reorganizations, 
     may not present a potential for abuse, and accordingly 
     authorizes Treasury and the SEC to issue regulations or 
     guidance identifying such classes of transactions, to which 
     the presumptions would not apply.
       An even more fundamental limitation on the presumptions is 
     that they would apply only to U.S. persons who directly or 
     through an offshore entity choose to do business with a 
     ``non-FATCA institution,'' meaning a foreign financial 
     institution which has not adopted the FATCA disclosure 
     requirements and instead takes advantage of banking, 
     corporate, and tax secrecy laws and practices that make it 
     very difficult for U.S. tax authorities to detect financial 
     accounts benefiting U.S. persons.
       FATCA's disclosure requirements were designed to combat 
     offshore secrecy and flush out hidden accounts being used by 
     U.S. persons to evade U.S. taxes. Section 102(g) would 
     continue the fight by allowing federal authorities to benefit 
     from rebuttable presumptions regarding the control, 
     ownership, and assets of offshore entities that open accounts 
     at financial institutions outside the FATCA disclosure 
     system. These presumptions would allow U.S. law enforcement 
     to establish what we all know from experience is normally the 
     case in an offshore jurisdiction--that a U.S. person 
     associated with an offshore entity controls that entity; that 
     money and property sent to or from an offshore entity 
     involves taxable income; and that an offshore account that 
     hasn't been disclosed to U.S. authorities should be made 
     subject to inspection. U.S. law enforcement can establish 
     those facts presumptively, without having to pierce the 
     secrecy veil. At the same time, U.S. persons who chose to 
     transact their affairs through accounts at a non-FACTA 
     institution are given the opportunity to lift the veil of 
     secrecy and demonstrate that the presumptions are factually 
     wrong. These rebuttable evidentiary presumptions will provide 
     U.S. tax and securities law enforcement with powerful new 
     tools to shut down tax haven abuses.
       FATCA Disclosure Obligations. In addition to establishing 
     presumptions, Section 102 would make several changes to 
     clarify and strengthen FATCA's disclosure obligations.
       Section 102(b) would amend 26 U.S.C. Section 1471 to make 
     it clear that the types of financial accounts that must be 
     disclosed by foreign financial institutions under FATCA 
     include not just savings, money market, or securities 
     accounts, but also transaction accounts that some banks might 
     claim are not depository accounts, such as checking accounts. 
     The section would also make it clear that financial 
     institutions could not omit from their disclosures client 
     assets in the form of derivatives, including swap agreements.
       Section 102(c) would amend 26 U.S.C. 1472 to clarify when a 
     withholding agent ``knows or has reason to know'' that an 
     account is directly or indirectly owned by a U.S. person and 
     must be disclosed to the United States. The bill provision 
     would make it clear that the withholding agent would have to 
     take into account information obtained as the result of ``any 
     customer identification, anti-money laundering, anti-
     corruption, or similar obligation to identify 
     accountholders.'' In other words, if a foreign bank knows, as 
     a result of due diligence inquiries made under its anti-money 
     laundering program, that an non-U.S. corporation was 
     beneficially owned by a U.S. person, the foreign bank would 
     have to report that account to the IRS--it could not treat 
     the offshore corporation as a non-U.S. customer. That 
     approach is already implied in the statutory language, but 
     this amendment would make it crystal clear.
       Section 102(c) would also amend the law to make it clear 
     that the Treasury Secretary, when exercising authority under 
     FATCA to waive disclosure or withholding requirements for 
     non-financial foreign entities, can waive those requirements 
     for only for a class of entities which the Secretary 
     identifies as ``posing a low risk of tax evasion.'' A variety 
     of foreign financial institutions are pressing Treasury to 
     issue waivers under Section 1472, and this amendment would 
     make it clear that such waivers are possible only when the 
     risk of tax evasion is minimal.

[[Page S4521]]

       Section 102(d) would amend 26 U.S.C. 1473 to clarify that 
     the definition of ``substantial United States owner'' 
     includes U.S. persons who are beneficial owners of 
     corporations or the beneficial owner of an entity that is one 
     of the partners in a partnership. While the current statutory 
     language already implies that beneficial owners are included, 
     this amendment would leave no doubt.
       Section 102(e) would amend 26 U.S.C. 1474 to make two 
     exceptions to the statutory provision which makes account 
     information disclosed to the IRS by foreign financial 
     institutions under FATCA confidential tax return information. 
     The first exception would allow the IRS to disclose the 
     account information to federal law enforcement agencies, 
     including the SEC and bank regulators, investigating possible 
     violations of U.S. law. The second would allow the IRS to 
     disclose the name of any foreign financial institution whose 
     disclosure agreement under FATCA was terminated, either by 
     the institution, its government, or the IRS. Financial 
     institutions should not be able to portray themselves as 
     FATCA institutions if, in fact, they are not.
       Section 102(f) would amend 26 U.S.C. 6038D, which creates a 
     new tax return disclosure obligation for U.S. taxpayers with 
     interests in ``specified foreign financial assets,'' to 
     clarify that the disclosure requirement applies not only to 
     persons who have a direct or nominal ownership interest in 
     those foreign financial assets, but also to persons who have 
     a beneficial, meaning real, ownership interest in them. While 
     the existing statutory language implies this broad reporting 
     obligation, the amendment would make it clear.
       Finally, Section 102(a) would amend a new annual tax return 
     obligation established in 26 U.S.C. 1298(f) for passive 
     foreign investment companies (PFICs). PFICs are typically 
     used as holding companies for foreign assets held by U.S. 
     persons, and the intent of the new Section 1298(f) is to 
     require all PFICs to begin filing annual informational tax 
     returns with the IRS. The current statutory language, 
     however, limits the disclosure obligation to any U.S. person 
     who is a ``shareholder'' in a PFIC, and does not cover PFICs 
     whose shares may be nominally held by an offshore corporation 
     or trust, but beneficially owned by a U.S. person. The bill 
     provision would broaden the PFIC reporting requirement to 
     apply to any U.S. person who ``directly or indirectly, forms, 
     transfers assets to, is a beneficiary of, has a beneficial 
     interest in, or receives money or property or the use 
     thereof'' from a PFIC. That broader formulation of who should 
     file the new PFIC annual tax return would ensure that 
     virtually all PFICs associated with U.S. persons will begin 
     filing informational returns with the IRS.
     Section 103--Corporations Managed and Controlled in the 
         United States
       Section 103 of the bill focuses on corporations which claim 
     foreign status--often in a tax haven jurisdiction--in order 
     to avoid payment of U.S. taxes, but then operate right here 
     in the United States in direct competition with domestic 
     corporations that are paying their fair share.
       This offshore game is all too common. In 2008, the Senate 
     Finance Committee held a hearing describing a trip made by 
     GAO to the Cayman Islands to look at the infamous Ugland 
     House, a five-story building that is the official address for 
     over 18,800 registered companies. GAO found that about half 
     of the alleged Ugland House tenants--around 9,000 entities--
     had a billing address in the United States and were not 
     actual occupants of the building. In fact, GAO determined 
     that none of the companies registered at the Ugland House was 
     an actual occupant. GAO found that the only true occupant of 
     the building was a Cayman law firm, Maples and Calder.
       Here's what the GAO wrote:

       ``Very few Ugland House registered entities have a 
     significant physical presence in the Cayman Islands or carry 
     out business in the Cayman Islands. According to Maples and 
     Calder partners, the persons establishing these entities are 
     typically referred to Maples by counsel from outside the 
     Cayman Islands, fund managers, and investment banks. As of 
     March 2008 the Cayman Islands Registrar reported that 18,857 
     entities were registered at the Ugland House address. 
     Approximately 96 percent of these entities were classified as 
     exempted entities under Cayman Islands law, and were thus 
     generally prohibited from carrying out domestic business 
     within the Cayman Islands.''

       Section 103 of the bill is designed to address the Ugland 
     House problem. It focuses on the situation where a 
     corporation is incorporated in a tax haven as a mere shell 
     operation with little or no physical presence or employees in 
     the jurisdiction. The shell entity pretends it is operating 
     in the tax haven, even though its key personnel and 
     decisionmakers are in the United States. The objective of 
     this set up is to enable the owners of the shell entity to 
     take advantage of all of the benefits provided by U.S. legal, 
     educational, financial, and commercial systems, and at the 
     same time avoid paying U.S. taxes.
       My Subcommittee has seen numerous companies exploit this 
     situation, declaring themselves to be foreign corporations, 
     even though they really operate out of the United States. For 
     example, thousands of hedge funds whose financial experts 
     live in Connecticut, New York, Texas, or California play this 
     game to escape taxes and avoid regulation. In an October 2008 
     Subcommittee hearing, three sizeable hedge funds, Highbridge 
     Capital which is associated with JPMorgan Chase, Angelo 
     Gordon, and Maverick Capital, admitted that, although all 
     they claimed to be based in the Cayman Islands, none had an 
     office or a single full time employee in that jurisdiction. 
     Instead, their offices and key decisionmakers were located 
     and did business right here in the United States.
       According to a recent Wall Street Journal article, over 20 
     percent of the corporations that made initial public 
     offerings or IPOs in the United States in 2010 and so far in 
     2011, have been incorporated in Bermuda or the Cayman 
     Islands, but also described themselves to investors as based 
     in another country, including the United States. The article 
     also described how Samsonite, a Denver-based company, 
     reincorporated in Luxembourg before going public. Too many of 
     these tax-haven incorporations appear to be a deliberate 
     effort to take advantage of U.S. benefits, while dodging U.S. 
     taxation and undercutting U.S. competitors who pay their 
     taxes.
       Section 103 would put an end to such corporate fictions and 
     offshore tax dodging. It provides that if a corporation is 
     publicly traded or has aggregate gross assets of $50 million 
     or more, and its management and control occurs primarily in 
     the United States, that corporation will be treated as a U.S. 
     domestic corporation for income tax purposes.
       To implement this provision, Treasury is directed to issue 
     regulations to guide the determination of when management and 
     control occur primarily in the United States, looking at 
     whether ``substantially all of the executive officers and 
     senior management of the corporation who exercise day-to-day 
     responsibility for making decisions involving strategic, 
     financial, and operational policies of the corporation are 
     located primarily within the United States.''
       This new section relies on the same principles regarding 
     the true location of ownership and control of a company that 
     underlie the corporate inversion rules adopted in the 
     American Jobs Creation Act of 2005. Those inversion rules, 
     however, do not address the fact that some entities directly 
     incorporate in foreign countries and manage their businesses 
     activities from the United States. Section 103 would level 
     the playing field and ensure that entities which incorporate 
     directly in another country are subject to a similar 
     management and control test. Section 103 is also similar in 
     concept to the substantial presence test in the income tax 
     treaty between the United States and the Netherlands, which 
     looks to the primary place of management and control to 
     determine corporate residency.
       Section 103 would provide an exception for foreign 
     corporations with U.S. parents. This exception from the $50 
     million gross assets test recognizes that, within a 
     multinational operation, strategic, financial, and 
     operational decisions are often made from a global or 
     regional headquarters location and then implemented by 
     affiliated foreign corporations. Where such decisions are 
     undertaken by a parent corporation that is actively engaged 
     in a U.S. trade or business and is organized in the United 
     States--and is, therefore, already a domestic corporation--
     the bill generally would not override existing U.S. taxation 
     of international operations. At the same time, the exception 
     makes it clear that the mere existence of a U.S. parent 
     corporation is not sufficient to shield a foreign corporation 
     from also being treated as a domestic corporation under this 
     section. The section would also create an exception for 
     private companies that once met the section's test for 
     treatment as a domestic corporation but, during a later tax 
     year, fell below the $50 million gross assets test, do not 
     expect to exceed that threshold again, and are granted a 
     waiver by the Treasury Secretary.
       Section 103 contains specific language to stop the 
     outrageous tax dodging that now goes on by too many hedge 
     funds and investment management businesses that structure 
     themselves to appear to be foreign entities, even though 
     their key decisionmakers--the folks who exercise control of 
     the company, its assets, and investment decisions--live and 
     work in the United States. It is unacceptable that such 
     companies utilize U.S. offices, personnel, laws, and markets 
     to make their money, but then stiff Uncle Sam and offload 
     their tax burden onto competitors who play by the rules.
       To put an end to this charade, Section 103 specifically 
     directs Treasury regulations to specify that, when investment 
     decisions are being made in the United States, the 
     management and control of that corporation shall be 
     treated as occurring primarily in the United States, and 
     that corporation shall be subject to U.S. taxes in the 
     same manner as any other U.S. corporation.
       If enacted into law, Section 103 would put an end to the 
     unfair situation where some U.S.-based companies pay their 
     fair share of taxes, while others who set up a shell 
     corporation in a tax haven are able to defer or escape 
     taxation, despite the fact that their foreign status is 
     nothing more than a paper fiction.
     Section 104--Increased Disclosure of Offshore Accounts and 
         Entities
       Offshore tax abuses thrive in secrecy. Section 104(a) 
     attempts to pierce that secrecy by creating two new 
     disclosure mechanisms requiring third parties to report on 
     offshore

[[Page S4522]]

     transactions undertaken by U.S. persons. The first disclosure 
     mechanism focuses on U.S. financial institutions that open a 
     U.S. account in the name of an offshore entity, such as an 
     offshore trust or corporation, and learn from an anti-money 
     laundering due diligence review, that a U.S. person is the 
     beneficial owner behind that offshore entity. In the Wyly 
     case history examined by the Subcommittee, for example, three 
     major U.S. financial institutions opened dozens of accounts 
     for offshore trusts and corporations which they knew were 
     associated with the Wyly family.
       Under current anti-money laundering law, all U.S. financial 
     institutions are supposed to know who is behind an account 
     opened in the name of, for example, an offshore shell 
     corporation or trust. They are supposed to obtain this 
     information to safeguard the U.S. financial system against 
     misuse by terrorists, money launderers, and other criminals.
       Under current tax law, a bank or securities broker that 
     opens an account for a U.S. person is also required to give 
     the IRS a 1099 form reporting any capital gains or other 
     reportable income earned on the account. However, the bank or 
     securities broker need not file a 1099 form if the account is 
     owned by a foreign entity not subject to U.S. tax law. 
     Problems arise when an account is opened in the name of an 
     offshore entity that is nominally not subject to tax, but 
     which the bank or broker knows, from its anti-money 
     laundering review, is owned or controlled by a U.S. person 
     who is subject to tax. The U.S. person should be filing a tax 
     return with the IRS reporting the income of the ``controlled 
     foreign corporation.'' However, since he or she knows it is 
     difficult for the IRS to connect an offshore accountholder to 
     a particular taxpayer, the U.S. person may feel safe in not 
     reporting that income. That complacency might change, 
     however, if the U.S. person knew that the bank or broker who 
     opened the account and learned of the connection had a legal 
     obligation to report any account income to the IRS.
       Under current law, the way the regulations are written and 
     typically interpreted, the bank or broker can treat an 
     account opened in the name of a foreign corporation as an 
     account that is held by an independent entity that is 
     separate from the U.S. person, even if it knows that the 
     foreign corporation is acting merely as a screen to hide the 
     identity of the U.S. person, who exercises complete authority 
     over the corporation and benefits from any income earned on 
     the account. Many banks and brokers contend that the current 
     regulations impose no duty on them to file a 1099 or other 
     form disclosing that type of account to the IRS.
       The bill would strengthen current law by expressly 
     requiring a bank or broker that knows, as a result of its 
     anti-money laundering due diligence or otherwise that a U.S. 
     person is the beneficial owner of a foreign entity that 
     opened an account, to disclose that account to the IRS by 
     filing a 1099 or equivalent form reporting the account 
     income. This reporting obligation would not require banks or 
     brokers to gather any new information--financial institutions 
     are already required to perform anti-money laundering due 
     diligence for accounts opened by offshore shell entities. The 
     bill would instead require U.S. financial institutions to act 
     on what they already know by filing the relevant form with 
     the IRS.
       This section would require such reports to the IRS from two 
     sets of financial institutions. The first set are financial 
     institutions which are located and do business in the United 
     States. The second set is foreign financial institutions 
     which are located and do business outside of the United 
     States, but are voluntary participants in either the FATCA or 
     Qualified Intermediary Program, and have agreed to provide 
     information to the IRS about certain accounts. Under this 
     section, if a foreign financial institution has an account 
     under the FATCA or QI Program, and the accountholder is a 
     non-U.S. entity that is controlled or beneficially owned by a 
     U.S. person, then that foreign financial institution would 
     have to report any reportable assets or income in that 
     account to the IRS.
       The second disclosure mechanism created by Section 104(a) 
     targets U.S. financial institutions that open foreign bank 
     accounts for U.S. clients at non-FATCA institutions, meaning 
     foreign financial institutions that have not agreed under 
     FATCA to disclose to the IRS the accounts they open for U.S. 
     persons. Past Subcommittee investigations have found that 
     some U.S. financial institutions help their U.S. clients both 
     to form offshore entities and to open foreign bank accounts 
     for those entities, so that their clients do not even need to 
     leave home to set up an offshore structure. Since non-FATCA 
     institutions, by definition, have no obligation to disclose 
     the accounts to U.S. authorities, Section 104(a) would 
     instead impose that disclosure obligation on the U.S. 
     financial institution that helped set up the account for its 
     U.S. client.
       Section 104(b) imposes the same penalties for the failure 
     to report such accounts as apply to the failure to meet other 
     reporting obligations of withholding agents.
     Section 105--CDS Loophole
       Section 105 of the bill targets a tax loophole benefiting 
     credit default swaps, which I call the CDS loophole.
       A CDS in simple terms is a financial bet about whether a 
     company, a loan, a bond, a mortgage backed security, or some 
     other financial instrument or arrangement will default or 
     experience some other defined ``credit event'' during a 
     specified period of time. The CDS buyer bets that the default 
     or other credit event will happen, while the CDS seller bets 
     it won't. The CDS buyer typically makes a series of payments 
     to the seller over a specified period of time in exchange for 
     a promise that, if a default or other credit event takes 
     place during the covered period, the seller will make a 
     bigger payoff to the buyer. In some cases, CDS buyers and 
     sellers also agree to make payments to each other over the 
     course of the covered period as the CDS rises or falls in 
     value according to whether a credit event looks more or less 
     likely.
       Five years ago, few people outside of financial circles had 
     ever heard of a credit default swap, but we all learned more 
     than we wanted to during the financial crisis when CDS 
     disasters brought down storied financial firms and almost 
     pushed the U.S. financial system over the cliff. We found out 
     there is now a $30 trillion CDS market worldwide, and that 
     virtually all U.S. financial players engage in CDS 
     transactions. And credit default swaps continue to play a 
     role in financial crises around the world, from Greece to 
     Ireland to Portugal.
       Well it turns out there's a tax angle which promotes not 
     only CDS gambling, but also offshore finagling. That's 
     because U.S. tax regulations currently allow CDS payments 
     that are sent from the United States to someone offshore to 
     be treated as non-taxable, non-U.S. source income. Let me 
     repeat that. CDS payments sent from the United States are now 
     deemed non-U.S. source income to the recipient for tax 
     purposes. That's because current regs deem the ``source'' of 
     the CDS payment to be where the payment ends up--exactly the 
     opposite of the normal definition of the word ``source.''
       Well, you can imagine the use that some hedge funds that 
     operate here in the United States, but are incorporated 
     offshore and maintain post office boxes and bank accounts in 
     tax havens, may be making of that tax loophole. They can tell 
     their CDS counterparties to send any CDS payments to their 
     offshore post box or bank account, tell Uncle Sam that those 
     payments are legally considered non-U.S. source income, and 
     bank the CDS payments as foreign income immune to U.S. tax. 
     Hedge funds are likely far from alone in sheltering their CDS 
     income from taxation by sending it offshore. Banks, 
     securities firms, other financial firms, and a lot of 
     commercial firms may be doing the same thing.
       Our bill would shut down that offshore game simply by 
     recognizing reality--that CDS payments sent from the United 
     States are U.S. source income subject to taxation.
     Section 106--Foreign Subsidiary Deposits Loophole
       Section 106 of the bill would take on another type of 
     offshore trickery, closing what I call the foreign subsidiary 
     deposits loophole.
       Right now, U.S. corporations report holding substantial 
     funds offshore, in the range of $1 trillion in accumulated 
     undistributed earnings. Some of that cash is the result of 
     legitimate foreign business operations, such as plants, 
     stores, or restaurant chains located in other countries. Some 
     of it is the result of transfer pricing arrangements that 
     moved the funds out of the United States with varying degrees 
     of legitimacy. But regardless of how or why the funds are 
     outside of the United States, U.S. corporations generally do 
     not pay taxes on them, invoking tax code provisions that 
     allow them to defer taxation of foreign income as long as 
     those funds are not brought back--repatriated--to the United 
     States.
       But we need to look closer at the corporations claiming 
     that their funds are offshore. In some cases, those so-called 
     offshore funds are apparently being held in U.S. dollars in 
     U.S. bank and securities accounts located right here in the 
     United States.
       One easy way for that to happen is for a U.S. corporation 
     to direct its foreign subsidiary to deposit its foreign 
     earnings at a foreign bank, let's say in the Cayman Islands, 
     and ask the Cayman bank to convert any foreign currency into 
     U.S. dollars. The Cayman bank typically complies by opening a 
     U.S. dollar account at a U.S. bank. When one bank opens an 
     account at another bank, the account is generally referred to 
     as a correspondent account.
       So the Cayman bank opens a correspondent account at a U.S. 
     bank, deposits the funds belonging to the foreign subsidiary 
     of the U.S. corporation, converts the funds into U.S. 
     dollars, and perhaps even invests those dollars in an 
     overnight or money market account or certificate of deposit 
     to earn interest on the money. The U.S. corporation or its 
     foreign subsidiary could even direct the Cayman bank to 
     invest the U.S. dollars in U.S. securities, which the Cayman 
     bank could do by opening a correspondent account at a U.S. 
     securities firm, depositing the corporate dollars, and 
     directing those dollars to be used to buy stocks or bonds. 
     Again, the correspondent account would be in the name of the 
     Cayman bank rather than in the name of the U.S. corporation 
     or its foreign subsidiary, although the funds involved are 
     beneficially owned by the corporate client.
       The end result is that the U.S. corporation's offshore 
     funds aren't really offshore at all. They are sitting in a 
     U.S. bank or securities firm right here in the United States. 
     The U.S. corporation is getting the benefit of using U.S. 
     dollars, the safest currency in the world. It is also getting 
     the benefit of using U.S. financial institutions, sending 
     funds

[[Page S4523]]

     through U.S. wire transfer networks, and investing in U.S. 
     financial markets, all without paying a dime of income taxes.
       Our bill would put an end to the fiction that corporate 
     funds deposited in U.S. financial accounts somehow still 
     qualify as offshore funds that have not been repatriated to 
     the United States. Instead, the bill would recognize the 
     reality that the funds are in the United States and are no 
     longer immune to taxation. It would do so by treating any 
     funds that have been deposited by or on behalf of a foreign 
     subsidiary in an account physically located in the United 
     States as a taxable distribution by that foreign subsidiary 
     to its U.S. parent.
       If U.S. corporations want to defer U.S. taxation on their 
     foreign income by keeping that income offshore, then they 
     should have to actually keep those funds outside of the 
     United States. If they bring that income here to the United 
     States to seek the protections and benefits of having it 
     deposited in U.S. currency at U.S. financial institutions, 
     then those deposits should be treated as repatriated and 
     subject to the same taxes that other domestic corporations 
     pay.
     Section 201--Country-by-Country Reporting
       Section 201 of the bill would tackle the problem of 
     offshore secrecy that currently surrounds most multinational 
     corporations by requiring them to provide basic information 
     on a country-by-country basis to the investing public and 
     government authorities.
       Many multinationals today are complex businesses with 
     sprawling operations that cross multiple international 
     boundaries. In many cases, no one outside of the corporations 
     themselves knows much about what a particular corporation is 
     doing on a per country basis or how its country-specific 
     activities fit into the corporation's overall performance, 
     planning, and operations.
       The lack of country-specific information deprives investors 
     of key data to analyze a multinational's financial health, 
     exposure to individual countries' problems, and worldwide 
     operations. There is also a lack of information to evaluate 
     tax revenues on a country-specific basis to combat tax 
     evasion, financial fraud, and corruption by government 
     officials.
       The lack of country-specific information also impedes 
     efficient tax administration, leaving tax authorities unable 
     to effectively analyze transfer pricing arrangements, foreign 
     tax credits, business arrangements that attempt to play one 
     country off another to avoid taxation, and illicit tactics to 
     move profits to tax havens.
       The bill would assist investors and tax administrators by 
     requiring corporations that are registered with the 
     Securities and Exchange Commission to provide basic 
     information concerning their operations on a country-by-
     country basis. This basic information would be the 
     approximate number of their employees per country, total 
     amount of sales and purchases involving related and third 
     parties, total amount of financing arrangements with related 
     and third parties; and the total amount of tax obligations 
     and actual tax payments made on a per country basis. This 
     information would have to be furnished to the SEC as part of 
     the corporation's existing SEC filings.
       The bill requires disclosure of basic data that most 
     multinational corporations would already have. The data 
     wouldn't be burdensome to collect; it's just information that 
     isn't routinely released by many multinationals. It's time to 
     end the secrecy that now enables too many multinationals to 
     run circles around tax administrators.
       In the case of the United States, the value of country-by-
     country data becomes apparent after reading a recent article 
     by Professor Kimberly Clausing who estimated that, in 2008 
     alone, ``the income shifting of multinational firms reduced 
     U.S. government corporate tax revenue by about $90 billion,'' 
     which was ``approximately 30 percent of corporate tax 
     revenues.'' Think about that. Incoming shifting--in which 
     multinationals use various tactics to shift income to tax 
     havens to escape U.S. taxes--is responsible for $90 billion 
     in unpaid taxes in a single year. Over ten years, that 
     translates into $900 billion--nearly a trillion dollars. It 
     is unacceptable to allow that magnitude of nonpayment of 
     corporate taxes to continue year after year in light of the 
     mounting deficits facing this country.
       IRS data shows that the overall share of federal taxes paid 
     by U.S. corporations has fallen dramatically, from 32% in 
     1952, to about 9% in 2009, the last year in which data is 
     available. A 2008 report by the Government Accountability 
     Office found that, over an eight-year period, about 1.2 
     million U.S. controlled corporations, or 67% of the corporate 
     tax returns filed, paid no federal corporate income tax at 
     all, despite total gross receipts of $2.1 trillion. At the 
     same time corporations are dodging payment of U.S. taxes, 
     corporate misconduct is continuing to drain the U.S. treasury 
     of billions upon billions of taxpayer dollars to combat 
     mortgage fraud, oil spills, bank bailouts, and more.
       Corporate nonpayment of tax involves a host of issues, but 
     transfer pricing and offshore tax dodging by multinationals 
     is a big part of the problem. Section 201 of the bill would 
     take the necessary first step to stop multinational 
     corporations from continuing to dodge payment of U.S. taxes 
     through offshore trickery by requiring them to disclose basic 
     corporate data on a country-by-country basis.
     Section 202--$1 Million Penalty for Hiding Offshore Stock 
         Holdings
       In addition to tax abuses, the 2006 Subcommittee 
     investigation into the Wyly case history uncovered a host of 
     troubling transactions involving U.S. securities held by the 
     58 offshore trusts and corporations associated with the two 
     Wyly brothers. Over the course of a number of years, the 
     Wylys had obtained about $190 million in stock options as 
     compensation from three U.S. publicly traded corporations at 
     which they were directors and major shareholders. Over time, 
     the Wylys transferred these stock options to the network of 
     offshore entities they had established.
       The investigation found that, for years, the Wylys had 
     generally failed to report the offshore entities' stock 
     holdings or transactions in their filings with the Securities 
     and Exchange Commission (SEC). They did not report these 
     stock holdings on the ground that the 58 offshore trusts and 
     corporations functioned as independent entities, even though 
     the Wylys continued to direct the entities' investment 
     activities. The public companies where the Wylys were 
     corporate insiders also failed to include in their SEC 
     filings information about the company shares held by the 
     offshore entities, even though the companies knew of their 
     close relationship to the Wylys, that the Wylys had provided 
     the offshore entities with significant stock options, and 
     that the offshore entities held large blocks of the company 
     stock. On other occasions, the public companies and various 
     financial institutions failed to treat the shares held by the 
     offshore entities as affiliated stock, even though they were 
     aware of the offshore entities' close association with the 
     Wylys. The investigation found that, because both the Wylys 
     and the public companies had failed to disclose the holdings 
     of the offshore entities, for 13 years federal regulators had 
     been unaware of those stock holdings and the relationships 
     between the offshore entities and the Wyly brothers.
       Corporate insiders and public companies are already 
     obligated by current law to disclose stock holdings and 
     transactions of offshore entities affiliated with a company 
     director, officer, or major shareholder. In fact, in 2010, 
     the SEC filed a civil complaint against the Wylys in 
     connection with their hidden offshore holdings and alleged 
     insider trading. Current penalties, however, appear 
     insufficient to ensure compliance in light of the low 
     likelihood that U.S. authorities will learn of transactions 
     that take place in an offshore jurisdiction. To address this 
     problem, Section 202 of the bill would establish a new 
     monetary penalty of up to $1 million for persons who 
     knowingly fail to disclose offshore stock holdings and 
     transactions in violation of U.S. securities laws.
     Sections 203 and 204--Anti-Money Laundering Programs
       The Subcommittee's 2006 investigation showed that the Wyly 
     brothers used two hedge funds and a private equity fund 
     controlled by them to funnel millions of untaxed offshore 
     dollars into U.S. investments. Other Subcommittee 
     investigations provide extensive evidence of the role played 
     by U.S. formation agents in assisting U.S. persons to set 
     up offshore structures as well as U.S. shell companies 
     later used in illicit activities, including money 
     laundering, terrorism, tax evasion, and other misconduct. 
     Because hedge funds, private equity funds, and formation 
     agents are as vulnerable as other financial institutions 
     to money launderers seeking entry into the U.S. financial 
     system, the bill contains two provisions aimed at ensuring 
     that these groups know their clients and do not accept or 
     transmit suspect funds into the U.S. financial system.
       Currently, many unregistered investment companies, such as 
     hedge funds and private equity funds, transmit substantial 
     offshore funds into the United States, yet are not required 
     by law to have anti-money laundering programs, including 
     Know-Your-Customer due diligence procedures and procedures to 
     file suspicious activity reports. There is no reason why this 
     sector of our financial services industry should continue to 
     serve as a gateway into the U.S. financial system for 
     substantial funds that could be connected to tax evasion, 
     terrorist financing, money laundering, or other misconduct.
       Nine years ago, in 2002, the Treasury Department proposed 
     anti-money laundering regulations for these companies, but 
     never finalized them. In 2008, the Department withdrew them 
     with no explanation. Section 203 of the bill would require 
     Treasury to issue final anti-money laundering regulations for 
     unregistered investment companies within 180 days of the 
     enactment of the bill. Treasury would be free to draw upon 
     its 2002 proposal, but the bill would also require the final 
     regulations to direct hedge funds and private equity funds to 
     exercise due diligence before accepting offshore funds and to 
     comply with the same procedures as other financial 
     institutions if asked by federal regulators to produce 
     records kept offshore.
       In addition, Section 204 of the bill would add formation 
     agents to the list of persons with anti-money laundering 
     obligations. For the first time, those engaged in the 
     business of forming corporations and other entities, both 
     offshore and in the 50 States, would be responsible for 
     knowing who their clients were and avoiding suspect funds. 
     The bill also directs Treasury to develop anti-money 
     laundering regulations for this group. Treasury's key anti-
     money laundering agency, the Financial Crimes Enforcement 
     Network, testified before the Subcommittee in 2006, that it 
     was considering drafting such regulations

[[Page S4524]]

     but five years later has yet to do so. Section 204 also 
     creates an exemption for government personnel and for 
     attorneys who use paid formation agents when forming entities 
     for their clients. Since paid formation agents would already 
     be subject to anti-money laundering obligations under the 
     bill, there would be no reason to simultaneously subject 
     attorneys using their services to the same anti-money 
     laundering requirements.
       We expect and intend that, as in the case of all other 
     entities required to institute anti-money laundering 
     programs, the regulations issued in response to this bill 
     would instruct hedge funds, private equity funds, and 
     formation agents to adopt risk-based procedures that would 
     concentrate their due diligence efforts on clients that pose 
     the highest risk of money laundering.
     Section 205--IRS John Doe Summons
       Section 205 of the bill focuses on an important tool used 
     by the IRS in recent years to uncover taxpayers involved in 
     offshore tax schemes, known as John Doe summons. Section 205 
     would make three technical changes to make the use of John 
     Doe summons more effective in offshore and other complex 
     investigations.
       A John Doe summons is an administrative IRS summons used to 
     request information in cases where the identity of a taxpayer 
     is unknown. In cases involving a known taxpayer, the IRS may 
     issue a summons to a third party to obtain information about 
     the U.S. taxpayer, but must also notify the taxpayer who then 
     has 20 days to petition a court to quash the summons to the 
     third party. With a John Doe summons, however, IRS does not 
     have the taxpayer's name and does not know where to send the 
     taxpayer notice, so the statute substitutes a procedure in 
     which the IRS must instead apply to a court for advance 
     permission to serve the summons on the third party. To obtain 
     approval of the summons, the IRS must show the court, in 
     public filings to be resolved in open court, that: (1) the 
     summons relates to a particular person or ascertainable class 
     of persons, (2) there is a reasonable basis for concluding 
     that there is a tax compliance issue involving that person or 
     class of persons, and (3) the information sought is not 
     readily available from other sources.
       In recent years, the IRS has used John Doe summonses to try 
     to obtain information about taxpayers operating in offshore 
     secrecy jurisdictions. For example, the IRS obtained court 
     approval to serve a John Doe summons on a Swiss bank, UBS AG, 
     to obtain the names of tens of thousands of U.S. clients who 
     opened UBS accounts in Switzerland without disclosing those 
     accounts to the IRS. This landmark effort to overcome Swiss 
     secrecy laws not only led to the bank's turning over 
     thousands of U.S. client names to the United States, but also 
     to abandon the country's longtime stance of using its secrecy 
     rules to protect U.S. tax evaders. In earlier years, the IRS 
     obtained court approval to issue John Doe summonses to credit 
     card associations, credit card processors, and credit card 
     merchants, to collect information about taxpayers using 
     credit cards issued by offshore banks. This information led 
     to many successful cases in which the IRS identified funds 
     hidden offshore and recovered unpaid taxes.
       Currently, however, use of the John Doe summons process is 
     time consuming and expensive. For each John Doe summons 
     involving an offshore secrecy jurisdiction, the IRS has had 
     to establish in court that the involvement of accounts and 
     transactions in offshore secrecy jurisdictions meant there 
     was a significant likelihood of tax compliance problems. To 
     relieve the IRS of the need to make this same proof over and 
     over in court after court, the bill would provide that, in 
     any John Doe summons proceeding involving a class defined in 
     terms of a correspondent or payable through account at a non-
     FATCA institution, the court may presume that the case raises 
     tax compliance issues. This presumption would then eliminate 
     the need for the IRS to repeatedly establish in court the 
     obvious fact that accounts at non-FATCA institutions raise 
     tax compliance issues.
       Finally, the bill would streamline the John Doe summons 
     approval process in large ``project'' investigations where 
     the IRS anticipates issuing multiple summonses to definable 
     classes of third parties, such as banks or credit card 
     associations, to obtain information related to particular 
     taxpayers. Right now, for each summons issued in connection 
     with a project, the IRS has to obtain the approval of a 
     court, often having to repeatedly establish the same facts 
     before multiple judges in multiple courts. This repetitive 
     exercise wastes IRS, Justice Department, and court resources, 
     and fragments oversight of the overall IRS investigative 
     effort.
       To streamline this process and strengthen court oversight 
     of IRS use of John Doe summons, the bill would authorize the 
     IRS to present an investigative project, as a whole, to a 
     single judge to obtain approval for issuing multiple 
     summonses related to that project. In such cases, the court 
     would retain jurisdiction over the case after approval is 
     granted, to exercise ongoing oversight of IRS issuance of 
     summonses under the project. To further strengthen court 
     oversight, the IRS would be required to file a publicly 
     available report with the court on at least an annual basis 
     describing the summonses issued under the project. The court 
     would retain authority to restrict the use of further 
     summonses at any point during the project. To evaluate the 
     effectiveness of this approach, the bill would also direct 
     the Government Accountability Office to report on the use of 
     the provision after five years.
     Section 206--FBAR Investigations and Suspicious Activity 
         Reports
       Section 206 of the bill would make several amendments to 
     strengthen the ability of the IRS to enforce the Foreign Bank 
     Account Report (FBAR) requirements and clarify the right of 
     access by IRS civil enforcement authorities to Suspicious 
     Activity Reports.
       Under present law, a person controlling a foreign financial 
     account with over $10,000 is required to check a box on his 
     or her income tax return and, under Title 31, also file an 
     FBAR form with the IRS. Treasury has delegated to the IRS 
     responsibility for investigating FBAR violations and 
     assessing FBAR penalties. Because the FBAR enforcement 
     jurisdiction derives from Title 31, however, the IRS has set 
     up a complex process for when its personnel may use tax 
     return information when acting in its role as FBAR enforcer. 
     The tax disclosure law, in Section 6103(b)(4) of the tax 
     code, permits the use of tax information only for the 
     administration of the internal revenue laws or ``related 
     statutes.'' To implement this statutory requirement, the IRS 
     currently requires its personnel to determine, at a 
     managerial level and on a case by case basis, that the Title 
     31 FBAR law is a ``related statute.'' Not only does this 
     necessitate a repetitive determination in every FBAR case 
     before an IRS agent can look at the potential non-filer's 
     income tax return to determine if filer checked the FBAR box, 
     but it also prevents the IRS from comparing FBAR filing 
     records to bulk data on foreign accounts received from tax 
     treaty partners to find non-filers.
       One of the stated purposes for the FBAR filing requirement 
     is that such reports ``have a high degree of usefulness in . 
     . . tax . . . investigations or proceedings.'' 31 U.S.C. 
     5311. If one of the reasons for requiring taxpayers to file 
     FBARs is to use the information for tax purposes, and if the 
     IRS has been charged with FBAR enforcement because of the 
     FBARs' close connection to tax administration, common sense 
     dictates that the FBAR statute should be viewed as a 
     ``related statute'' as for tax disclosure purposes. Section 
     206(a) of the bill would make that clear by adding a 
     provision to Section 6103(b) of the tax code deeming FBAR-
     related statutes to be ``related statutes,'' thereby allowing 
     IRS personnel to make routine use of tax return information 
     when working on FBAR matters.
       The second change that would be made by Section 206 is an 
     amendment to simplify the calculation of FBAR penalties. 
     Currently the penalty is determined in part by the balance in 
     the foreign bank account at the time of the ``violation.'' 
     The violation has been interpreted to have occurred on the 
     due date of the FBAR return, which is June 30 of the year 
     following the year to which the report relates. The statute's 
     use of this specific June 30th date can lead to strange 
     results if money is withdrawn from the foreign account after 
     the reporting period closed but before the return due date. 
     To eliminate this unintended problem, Section 206(b) of the 
     bill would instead calculate the penalty using the highest 
     balance in the account during the covered reporting period.
       The third part of section 206 relates to Suspicious 
     Activity Reports or SARs, which financial institutions are 
     required to file with the Financial Crimes Enforcement Center 
     (FinCEN) of the Treasury Department when they encounter 
     suspicious transactions. FinCEN is required to share this 
     information with law enforcement, but currently does not 
     permit IRS civil investigators access to the information, 
     even though IRS civil investigators are federal law 
     enforcement officials. Sharing SAR information with civil IRS 
     investigators would likely prove very useful in tax 
     investigations and would not increase the risk of disclosure 
     of SAR information, since IRS civil personnel operate under 
     the same tough disclosure rules as IRS criminal 
     investigators. In some cases, IRS civil agents are now 
     issuing an IRS summons to a financial institution to get 
     access, for a production fee, to the very same information 
     the financial institution has already filed with Treasury in 
     a SAR. Section 206(c) of the bill would end that inefficient 
     and costly practice by making it clear that ``law 
     enforcement'' includes civil tax law enforcement.
     Title III on Abusive Tax Shelters
       Until now, I've been talking about what the bill would do 
     to combat offshore tax abuses. Now I want to turn to the 
     final title of the bill which offers measures to do combat 
     abusive tax shelters and their promoters who use both 
     domestic and offshore means to achieve their ends.
       Abusive tax shelters are complicated transactions promoted 
     to provide tax benefits unintended by the tax code. They are 
     very different from legitimate tax shelters, such as 
     deducting the interest paid on a home mortgage or 
     Congressionally approved tax deductions for building 
     affordable housing. Some abusive tax shelters involve 
     complicated domestic transactions; others make use of 
     offshore shenanigans. All abusive tax shelters are marked by 
     one characteristic: there is no real economic or business 
     rationale other than tax avoidance. As Judge Learned Hand 
     wrote in Gregory v. Helvering, they are ``entered upon for no 
     other motive but to escape taxation.''
       Abusive tax shelters are usually tough to prosecute. Crimes 
     such as terrorism and

[[Page S4525]]

     murder produce instant recognition of the immorality 
     involved. Abusive tax shelters, by contrast, are often 
     ``MEGOs,'' meaning ``My Eyes Glaze Over.'' Those who cook up 
     these concoctions count on their complexity to escape 
     scrutiny and public ire. But regardless of how complicated or 
     eye-glazing, the hawking of abusive tax shelters by tax 
     professionals like accountants, bankers, investment advisers, 
     and lawyers to thousands of people like late-night, cut-rate 
     T.V. bargains is scandalous, and we need to stop it.
       My Subcommittee has spent years examining the design, sale, 
     and implementation of abusive tax shelters. Our first hearing 
     on this topic in recent years was held in January 2002, when 
     the Subcommittee examined an abusive tax shelter purchased by 
     Enron. In November  2003, the Subcommittee held two days of 
     hearings and released a staff report that pulled back the 
     curtain on how even some respected accounting firms, 
     banks, investment advisors, and law firms had become 
     engines pushing the design and sale of abusive tax 
     shelters to corporations and individuals across this 
     country. In February 2005, the Subcommittee issued a 
     bipartisan report that provided further details on the 
     role these professional firms played in the proliferation 
     of these abusive shelters. Our Subcommittee report was 
     endorsed by the full Committee on Homeland Security and 
     Governmental Affairs in April 2005.
       In 2006, the Subcommittee released a report and held a 
     hearing showing how financial and legal professionals 
     designed and sold an abusive tax shelter known as the POINT 
     Strategy, which depended upon secrecy laws and practices in 
     the Isle of Man to conceal the phony nature of securities 
     trades that lay at the center of this tax shelter 
     transaction. In 2008, the Subcommittee released a staff 
     report and held a hearing on how financial firms have 
     designed and sold so-called dividend enhancement transactions 
     to help offshore hedge funds and others escape payment of 
     U.S. taxes on U.S. stock dividends.
       The Subcommittee investigations have found that many 
     abusive tax shelters are not dreamed up by the taxpayers who 
     use them. Instead, they are devised by tax professionals who 
     then sell the tax shelter to clients for a fee. In fact, over 
     the years we've found U.S. tax advisors cooking up one 
     complex scheme after another, packaging them up as generic 
     ``tax products'' with boiler-plate legal and tax opinion 
     letters, and then undertaking elaborate marketing schemes to 
     peddle these products to literally thousands of persons 
     across the country. In return, these tax shelter promoters 
     were getting hundreds of millions of dollars in fees, while 
     diverting billions of dollars in tax revenues from the U.S. 
     Treasury each year.
       For example, one shelter investigated by the Subcommittee 
     and featured in the 2003 hearings became part of an IRS 
     settlement effort involving a set of abusive tax shelters 
     known as ``Son of Boss.'' Following our hearing, more than 
     1,200 taxpayers admitted wrongdoing and agreed to pay back 
     taxes, interest and penalties totaling more than $3.7 
     billion. That's billions of dollars the IRS collected on just 
     one type of tax shelter, demonstrating both the depth of the 
     problem and the potential for progress. The POINT shelter 
     featured in our 2006 hearing involved another $300 million in 
     tax loss on transactions conducted by just six taxpayers. The 
     offshore dividend tax scams we examined in 2008 meant 
     additional billions of dollars in unpaid taxes over a ten 
     year period.
       Title III of the bill contains a number of measures to curb 
     abusive tax shelters. It would strengthen the penalties 
     imposed on those who aid or abet tax evasion. Several 
     provisions would deter bank participation in abusive tax 
     shelter activities by requiring regulators to develop new 
     examination procedures to detect and stop such activities. 
     Others would end outdated communication barriers between the 
     IRS and other federal enforcement agencies such as the SEC, 
     bank regulators, and the Public Company Accounting Oversight 
     Board, to allow the exchange of information relating to tax 
     evasion cases. The bill also provides for increased 
     disclosure of tax shelter information to Congress. In 
     addition, the bill would simplify and clarify an existing 
     prohibition on the payment of fees linked to tax benefits; 
     and authorize Treasury to issue tougher standards for tax 
     shelter opinion letters.
       Let me be more specific about these key provisions to curb 
     abusive tax shelters.
     Sections 301 and 302--Strengthening Tax Shelter Penalties
       Sections 301 and 302 of the bill would strengthen two very 
     important penalties that the IRS can use in its fight against 
     the professionals who make complex abusive shelters possible. 
     When we started investigating abusive tax shelters, the 
     penalty for promoting these scams, as set forth in Section 
     6700 of the tax code, was the lesser of $1,000 or 100 percent 
     of the promoter's gross income derived from the prohibited 
     activity. That meant in most cases the maximum fine was just 
     $1,000.
       We've investigated abusive tax shelters that sold for 
     $100,000 or $250,000 apiece, and some that sold for as much 
     as $5 million apiece. We also saw instances in which the same 
     cookie-cutter tax opinion letter was sold to 100 or even 200 
     clients. Given the huge profits, the $1,000 fine was 
     laughable.
       The Senate acknowledged that in 2004, when it adopted the 
     Levin-Coleman amendment to the JOBS Act, S. 1637, raising the 
     Section 6700 penalty on abusive tax shelter promoters to 100 
     percent of the fees earned by the promoter from the abusive 
     shelter. A 100 percent penalty would have ensured that the 
     abusive tax shelter hucksters would not get to keep a single 
     penny of their ill-gotten gains. That figure, however, was 
     cut in half during the conference on the JOBS Act, with the 
     result being that the current Section 6700 penalty can now 
     reach, but not exceed, 50 percent of the fees earned by a 
     promoter of an abusive tax shelter.
       While a 50 percent penalty is an obvious improvement over 
     $1,000, this penalty still is inadequate and makes no sense. 
     Why should anyone who pushes an illegal tax shelter that robs 
     our Treasury of needed revenues get to keep half of their 
     ill-gotten gains? What deterrent effect is created by a 
     penalty that allows promoters to keep half of their fees if 
     caught, and all of their fees if they are not caught?
       Effective penalties should make sure that the peddler of an 
     abusive tax shelter is deprived of every penny of profit 
     earned from selling or implementing the shelter and then is 
     fined on top of that. Section 301 of this bill would do just 
     that by increasing the penalty on tax shelter promoters to an 
     amount equal to up to 150 percent of the promoters' gross 
     income from the prohibited activity.
       Section 302 of the bill would address a second weak tax 
     code penalty which currently is supposed to deter and punish 
     those who knowingly help taxpayers understate their taxes to 
     the IRS. Aside from tax shelter ``promoters,'' there are many 
     other types of professional firms that aid and abet tax 
     evasion by helping taxpayers carry out abusive tax schemes. 
     For example, law firms are often asked to write ``opinion 
     letters'' to help taxpayers head off IRS inquiries and fines 
     that might otherwise apply to their use of an abusive 
     shelter. Currently, under Section 6701 of the tax code, these 
     aiders and abettors face a maximum penalty of only $1,000, or 
     $10,000 if the offender is a corporation. When law firms are 
     getting $50,000 for issuing cookie-cutter opinion letters, a 
     $1,000 fine provides no deterrent effect whatsoever. A $1,000 
     fine is like getting a jaywalking ticket for robbing a bank.
       Section 302 of the bill would strengthen Section 6701 of 
     the tax code by subjecting aiders and abettors to a maximum 
     fine of up to 150 percent of the aider and abettor's gross 
     income from the prohibited activity. This penalty would apply 
     to all aiders and abettors, not just tax return preparers.
       Again, the Senate has recognized the need to toughen this 
     critical penalty. In the 2004 JOBS Act, Senator Coleman and I 
     successfully increased this fine to 100 percent of the gross 
     income derived from the prohibited activity. Unfortunately, 
     the conference report completely omitted this change, 
     allowing many aiders and abettors to continue to profit 
     without penalty from their wrongdoing.
       If further justification for toughening these penalties is 
     needed, one document uncovered by our investigation shows the 
     cold calculation engaged in by a tax advisor facing low 
     fines. A senior tax professional at accounting giant KPMG 
     compared possible tax shelter fees with possible tax shelter 
     penalties if the firm were caught promoting an illegal tax 
     shelter. This senior tax professional wrote to his colleagues 
     the following: ``[O]ur average deal would result in KPMG fees 
     of $360,000 with a maximum penalty exposure of only 
     $31,000.'' He then recommended the obvious: going forward 
     with sales of the abusive tax shelter on a cost-benefit 
     basis.
     Section 303--Fees Contingent upon Obtaining Tax Benefits
       Another finding of the Subcommittee investigations is that 
     some tax practitioners are circumventing current state and 
     federal constraints on charging tax service fees that are 
     dependent on the amount of promised tax benefits. 
     Traditionally, accounting firms charged flat fees or hourly 
     fees for their tax services. In the 1990s, however, they 
     began charging ``value added'' fees based on, in the words of 
     one accounting firm's manual, ``the value of the services 
     provided, as opposed to the time required to perform the 
     services.'' In addition, some firms began charging 
     ``contingent fees'' that were calculated according to the 
     size of the paper ``loss'' that could be produced for a 
     client and used to offset the client's taxable income--the 
     greater the so-called loss, the greater the fee.
       In response, many states prohibited accounting firms from 
     charging contingent fees for tax work to avoid creating 
     incentives for these firms to devise ways to shelter 
     substantial sums. The SEC and the American Institute of 
     Certified Public Accountants also issued rules restricting 
     contingent fees, allowing them in only limited circumstances. 
     The Public Company Accounting Oversight Board issued a 
     similar rule prohibiting public accounting firms from 
     charging contingent fees for tax services provided to the 
     public companies they audit. Each of these federal, state, 
     and professional ethics rules seeks to limit the use of 
     contingent fees under certain, limited circumstances.
       The Subcommittee investigation found several instances of 
     tax shelter fees that were linked to the amount of a 
     taxpayer's projected paper losses which could be used to 
     shelter income from taxation. For example, in four tax 
     shelters examined by the Subcommittee in 2003, documents 
     showed that the fees were equal to a percentage of the paper 
     loss to be generated by the transaction. In one case, the 
     fees were typically set at 7 percent of the transaction's 
     generated ``tax loss'' that clients could use to

[[Page S4526]]

     reduce other taxable income. In another, the fee was only 3.5 
     percent of the loss, but the losses were large enough to 
     generate a fee of over $53 million on a single transaction. 
     In other words, the greater the loss that could be concocted 
     for the taxpayer or ``investor,'' the greater the profit for 
     the tax promoter. Think about that--greater the loss, the 
     greater the fee. How's that for turning capitalism on its 
     head?
       In addition, evidence indicated that, in at least one 
     instance, a tax advisor was willing to deliberately 
     manipulate the way it handled certain tax products to 
     circumvent contingent fee prohibitions. An internal document 
     at an accounting firm related to a specific tax shelter, for 
     example, identified the states that prohibited contingent 
     fees. Then, rather than prohibit the tax shelter transactions 
     in those states or require an alternative fee structure, the 
     memorandum directed the firm's tax professionals to make sure 
     the engagement letter was signed, the engagement was managed, 
     and the bulk of services was performed ``in a jurisdiction 
     that does not prohibit contingency fees.''
       Right now, the prohibitions on contingent fees are complex 
     and must be evaluated in the context of a patchwork of 
     federal, state, and professional ethics rules. Section 303 of 
     the bill would establish a single enforceable rule, 
     applicable nationwide, that would prohibit tax practitioners 
     from charging fees calculated according to a projected or 
     actual amount of tax savings or paper losses.
     Section 304--Deterring Participation in Abusive Tax Shelter 
         Activities
       Section 304 of the bill targets financial institutions that 
     offer financing or securities transactions to advance abusive 
     tax shelters disguised as investment opportunities. Tax 
     shelter schemes lack the economic risks and rewards 
     associated with true investments. But to make these phony 
     transactions look legitimate, some abusive tax shelters make 
     use of significant amounts of money in low risk schemes 
     mischaracterized as real investments. The financing or 
     securities transactions called for by these schemes are often 
     supplied by a bank, securities firm, or other financial 
     institution and used to generate paper losses that the 
     taxpayer can then use to shelter income from taxation.
       Currently the tax code prohibits financial institutions 
     from providing products or services that aid or abet tax 
     evasion or that promote or implement abusive tax shelters. 
     The agencies that oversee these financial institutions on a 
     daily basis, however, are experts in banking and securities 
     law and generally lack the expertise to spot abusive tax 
     shelter activity. Section 304 would crack down on financial 
     institutions' illegal tax shelter activities by requiring 
     federal bank regulators and the SEC to work with the IRS to 
     develop examination techniques to detect such abusive 
     activities and put an end to them.
       These examination techniques are intended to be part of 
     routine regulatory examinations, with regulators reporting 
     suspect activity or potential violations to the IRS. The 
     agencies would also be required to prepare a joint report to 
     Congress in 2013 on preventing the participation of financial 
     institutions in tax evasion or tax shelter activities.
     Section 305--Ending Communication Barriers between 
         Enforcement Agencies
       During hearings before the Permanent Subcommittee on 
     Investigations on tax shelters in November 2003, IRS 
     Commissioner Mark Everson testified that his agency was 
     barred by Section 6103 of the tax code from communicating 
     information to other federal agencies that would assist those 
     agencies in their law enforcement duties. He pointed out that 
     the IRS was barred from providing tax return information to 
     the SEC, federal bank regulators, and the Public Company 
     Accounting Oversight Board (PCAOB)--even, for example, when 
     that information might assist the SEC in evaluating whether 
     an abusive tax shelter resulted in deceptive accounting in a 
     public company's financial statements, might help the Federal 
     Reserve determine whether a bank selling tax products to its 
     clients had violated the law against promoting abusive tax 
     shelters, or help the PCAOB judge whether an accounting firm 
     had impaired its independence by selling tax shelters to its 
     audit clients.
       Another example demonstrates how harmful these information 
     barriers are to legitimate law enforcement efforts. In 2004, 
     the IRS offered a settlement initiative to companies and 
     corporate executives who participated in an abusive tax 
     shelter involving the transfer of stock options to family-
     controlled entities. Over a hundred corporations and 
     executives responded with admissions of wrongdoing. In 
     addition to tax violations, their misconduct may be linked to 
     securities law violations and improprieties by corporate 
     auditors or banks, but the IRS told the Subcommittee that it 
     was barred by law from sharing the names of the wrongdoers 
     with the SEC, banking regulators, or PCAOB. The same is true 
     for the offshore dividend tax shelters exposed in the 
     Subcommittee's 2008 hearing. The IRS knows who the offending 
     banks and investment firms are that designed and sold 
     questionable dividend enhancement transactions to offshore 
     hedge funds and others, but it is barred by Section 6103 of 
     the tax code from providing detailed information or documents 
     to the SEC or banking regulators who oversee the relevant 
     financial institutions.
       These communication barriers are outdated, inefficient, and 
     ill-suited to stopping the tax schemes now affecting public 
     companies, banks, investment firms, and accounting firms. To 
     address this problem, Section 305 of this bill would 
     authorize the Treasury Secretary, with appropriate privacy 
     safeguards, to disclose to the SEC, federal banking agencies, 
     and the PCAOB, upon request, tax return information related 
     to abusive tax shelters, inappropriate tax avoidance, or tax 
     evasion. The agencies could then use this information only 
     for law enforcement purposes, such as preventing accounting 
     firms, investment firms, or banks from promoting abusive tax 
     shelters, or detecting accounting fraud in the financial 
     statements of public companies.
     Section 306--Increased Disclosure of Tax Shelter Information 
         to Congress
       The bill would also provide for increased disclosure of tax 
     shelter information to Congress. Section 306 would make it 
     clear that companies providing tax return preparation 
     services to taxpayers cannot refuse to comply with a 
     Congressional document subpoena by citing Section 7216, which 
     prohibits tax return preparers from disclosing taxpayer 
     information to third parties. Several accounting and law 
     firms raised this claim in response to document subpoenas 
     issued by the Permanent Subcommittee on Investigations, 
     contending they were barred by the nondisclosure provision in 
     Section 7216 from producing documents related to the sale of 
     abusive tax shelters to clients.
       The accounting and law firms maintained this position 
     despite an analysis provided by the Senate legal counsel 
     showing that the nondisclosure provision was never intended 
     to create a privilege or to override a Senate subpoena, as 
     demonstrated in federal regulations interpreting the 
     provision. This bill would codify the existing regulations 
     interpreting Section 7216 and make it clear that 
     Congressional document subpoenas must be honored.
       Section 306 would also ensure Congress has access to 
     information about decisions by Treasury related to an 
     organization's tax exempt status. A 2003 decision by the D.C. 
     Circuit Court of Appeals, Tax Analysts v. IRS, struck down 
     certain IRS regulations and held that the IRS must disclose 
     letters denying or revoking an organization's tax exempt 
     status. Despite this court decision, the IRS has been 
     reluctant to disclose such information, not only to the 
     public, but also to Congress, including in response to 
     requests by the Subcommittee.
       For example, in 2005, the IRS revoked the tax exempt status 
     of four credit counseling firms, and, despite the Tax 
     Analysts case, claimed that it could not disclose to the 
     Subcommittee the names of the four firms or the reasons for 
     revoking their tax exemption. Section 306 would make it clear 
     that, upon receipt of a request from a Congressional 
     committee or subcommittee, the IRS must disclose documents, 
     other than a tax return, related to the agency's 
     determination to grant, deny, revoke or restore an 
     organization's exemption from taxation.
     Section 307--Tax Shelter Opinion Letters
       The final provision in the bill would address issues 
     related to opinion letters issued by law firms and others in 
     support of complex tax schemes. The Treasury Department has 
     already issued a set of standards for tax practitioners who 
     provide opinion letters on the tax implications of potential 
     tax shelters under Circular 230. Section 308 of the bill 
     would not only provide the express statutory authority which 
     is currently lacking for these standards, but also strengthen 
     them.
       The public has traditionally relied on tax opinion letters 
     to obtain informed and trustworthy advice about whether a 
     tax-motivated transaction meets the requirements of the law. 
     The Permanent Subcommittee on Investigations has found that, 
     in too many cases, tax opinion letters no longer contain 
     disinterested and reliable tax advice, even when issued by 
     supposedly reputable accounting or law firms. Instead, some 
     tax opinion letters have become marketing tools used by tax 
     shelter promoters and their allies to sell clients on their 
     latest tax products. In many of these cases, financial 
     interests and biases were concealed, unreasonable factual 
     assumptions were used to justify dubious legal conclusions, 
     and taxpayers were misled about the risk that the proposed 
     transaction would later be designated an illegal tax shelter. 
     Reforms are essential to address these abuses and restore the 
     integrity of tax opinion letters.
       The Circular 230 standards should be strengthened by 
     addressing a wider spectrum of tax shelter opinion letter 
     problems, including preventing concealed collaboration among 
     supposedly independent letter writers; avoiding conflicts of 
     interest that would impair auditor independence; ensuring 
     appropriate fee charges; preventing practitioners and firms 
     from aiding and abetting the understatement of tax liability 
     by clients; and banning the promotion of potentially abusive 
     tax shelters. By authorizing Treasury to address each of 
     these areas, a beefed-up Circular 230 could help reduce the 
     ongoing abusive practices related to tax shelter opinion 
     letters.
       Conclusion. Tax evasion eats at the fabric of society, not 
     only by widening deficits and starving health care, 
     education, and other needed government services of resources, 
     but also by undermining public trust--making honest folks 
     feel like they are being taken advantage of when they pay 
     their fair share. While the eyes of some people may glaze 
     over when tax havens and tax shelters are discussed, 
     unscrupulous taxpayers and tax professionals see illicit 
     dollar signs. Our

[[Page S4527]]

     commitment to crack down on their abuses must be as strong as 
     their determination to get away with ripping off Uncle Sam 
     and honest American taxpayers.
       We can fight back against offshore tax abuses and abusive 
     tax shelters if we summon the political will. The Stop Tax 
     Haven Abuse Act, which is the product of years of work, 
     offers the tools needed to tear down tax haven secrecy walls 
     in favour of transparency, cooperation, and tax compliance. I 
     urge my colleagues to include its provisions in any deficit 
     reduction or budget package this year or, if not, to adopt it 
     by separate action.
       I ask unanimous consent that following my remarks that a 
     summary of the bill be reprinted in the record.
                                  ____


                        Stop Tax Haven Abuse Act

       Targeting $100 billion in lost revenue each year from 
     offshore tax dodges, the bill would:
       Authorize Special Measures To Stop Offshore Tax Abuse 
     (Sec. 101) by allowing Treasury to take specified steps 
     against foreign jurisdictions or financial institutions that 
     impede U.S. tax enforcement.
       Strengthen FATCA (Sec. 102) by clarifying under the Foreign 
     Account Tax Compliance Act when foreign financial 
     institutions and U.S. persons must report foreign financial 
     accounts to the IRS.
       Establish Rebuttable Presumptions To Combat Offshore 
     Secrecy (Sec. 102) in U.S. tax and securities law enforcement 
     proceedings by treating non-publicly traded offshore entities 
     as controlled by the U.S. taxpayer who formed them, sent them 
     assets, received assets from them, or benefited from them 
     when those entities have accounts or assets in non-FATCA 
     institutions, unless the taxpayer proves otherwise.
       Stop Companies Run From the United States Claiming Foreign 
     Status (Sec. 103) by treating foreign corporations that are 
     publicly traded or have gross assets of $50 million or more 
     and whose management and control occur primarily in the 
     United States as U.S. domestic corporations for income tax 
     purposes.
       Strengthen Detection of Offshore Activities (Sec. 104) by 
     requiring U.S. financial institutions that open accounts for 
     foreign entities controlled by U.S. clients or open foreign 
     accounts in non-FATCA institutions for U.S. clients to report 
     the accounts to the IRS.
       Close Credit Default Swap (CDS) Loophole (Sec. 105) by 
     treating CDS payments sent offshore from the United States as 
     taxable U.S. source income.
       Close Foreign Subsidiary Deposits Loophole (Sec. 106) by 
     treating deposits made by a controlled foreign corporation 
     (CFC) to a financial account located in the United States, 
     including a correspondent account of a foreign bank, as a 
     taxable constructive distribution by the CFC to its U.S. 
     parent.
       Require Annual Country-by-Country Reporting (Sec. 201) by 
     SEC-registered corporations on employees, sales, financing, 
     tax obligations, and tax payments.
       Establish a Penalty for Corporate Insiders Who Hide 
     Offshore Holdings (Sec. 202) by authorizing a fine of up to 
     $1 million per violation of securities laws.
       Require Anti-Money Laundering Programs (Sec. Sec. 203-204) 
     for hedge funds, private equity funds, and formation agents 
     to ensure they screen clients and offshore funds.
       Strenghthen John Doe Summons (Sec. 205) by allowing the IRS 
     to issue summons to a class of persons that relate to a long-
     term project approved and overseen by a court.
       Combat Hidden Foreign Financial Accounts (Sec. 206) by 
     allowing IRS use of tax return information to evaluate 
     foreign financial account reports, simplifying penalty 
     calculations for unreported foreign accounts, and 
     facilitating use of suspicious activity reports in civil tax 
     enforcement.
       Strengthen Penalties (Sec. Sec. 301-302) on tax shelter 
     promoters and those who aid and abet tax evasion by 
     increasing the maximum fine to 150 percent of any ill-gotten 
     gains.
       Prohibit Fee Arrangements (Sec. 303) in which a tax advisor 
     is paid a fee based upon the amount of paper losses generated 
     to shelter income or taxes not paid by a client.
       Require Bank Examination Techniques (Sec. 304) to detect 
     and prevent abusive tax shelter activities or the aiding and 
     abetting of tax evasion by financial institutions.
       Allow Sharing of Tax Information (Sec. 305) upon request by 
     a federal financial regulator engaged in a law enforcement 
     effort.
       Require Disclosure of Information to Congress (Sec. 306) 
     related to an IRS determination of whether to exempt an 
     organization from taxation.
       Direct the Establishment of Standards for Tax Opinions 
     (Sec. 307) rendering advice on transactions with a potential 
     for tax avoidance or evasion.
                                 ______