[House Report 108-158]
[From the U.S. Government Publishing Office]



108th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    108-158

======================================================================



 
 PROVIDING FOR CONSIDERATION OF H.R. 1528, TAXPAYER PROTECTION AND IRS 
                       ACCOUNTABILITY ACT OF 2003

                                _______
                                

   June 17, 2003.--Referred to the House Calendar and ordered to be 
                                printed

                                _______
                                

Mr. Hastings of Washington, from the Committee on Rules, submitted the 
                               following

                              R E P O R T

                       [To accompany H. Res. 282]

    The Committee on Rules, having had under consideration 
House Resolution 282, by a nonrecord vote, report the same to 
the House with the recommendation that the resolution be 
adopted.

                SUMMARY OF PROVISIONS OF THE RESOLUTION

    The resolution provides for the consideration of H.R. 1528, 
the Taxpayer Protection and IRS Accountability Act of 2003, 
under a modified closed rule. The rule provides one hour of 
debate in the House equally divided and controlled by the 
chairman and ranking minority member of the Committee on Ways 
and Means. The rule waives all points of order against 
consideration of the bill.
    The rule provides that the amendment in the nature of a 
substitute recommended by the Committee on Ways and Means, as 
modified by the amendment printed in Part A of the Rules 
Committee report accompanying the resolution, shall be 
considered as adopted. The rule waives all points of order 
against the bill, as amended.
    The rule provides for consideration of the amendment 
printed in Part B of this report, if offered by Representative 
Rangel or his designee, which shall be considered as read and 
shall be separately debatable for one hour equally divided and 
controlled by the proponent and an opponent. The rule waives 
all points of order against the amendment printed in Part B of 
this report.
    Finally, provides one motion to recommit with or without 
instructions.

                            COMMITTEE VOTES

    Pursuant to clause 3(b) of House rule XIII the results of 
each record vote on an amendment or motion to report, together 
with the names of those voting for and against, are printed 
below:

Rules Committee record vote No. 112

    Date: June 17, 2003.
    Measure: H.R. 1528--Taxpayer Protection and IRS 
Accountability Act of 2003.
    Motion by: Mrs. Slaughter.
    Summary of motion: To make in order the amendment offered 
by Representative Maloney which holds the IRS accountable for 
the tax treatment of 9/11 CDBG relief grants for individuals 
and businesses in lower Manhattan. Clarifies that the grants 
should be exempt from federal tax. Refunds taxes already paid 
on grants and makes future grants tax exempt.
    Results: Defeated 4 to 8.
    Vote by Members: Goss--Nay; Linder--Nay; Pryce--Nay; 
Hastings (WA)--Nay; Myrick--Nay; Sessions--Nay; Reynolds--Nay; 
Frost--Yea; Slaughter--Yea; McGovern--Yea; Hastings (FL)--Yea; 
Dreier--Nay.

Rules Committee record vote No. 113

    Date: June 17, 2003.
    Measure: H.R. 1528--Taxpayer Protection and IRS 
Accountability Act of 2003.
    Motion by: Mr. Hastings of Florida.
    Summary of motion: To report an open rule.
    Results: Defeated 4 to 8.
    Vote by Members: Goss--Nay; Linder--Nay; Pryce--Nay; 
Hastings (WA)--Nay; Myrick--Nay; Sessions--Nay; Reynolds--Nay; 
Frost--Yea; Slaughter--Yea; McGovern--Yea; Hastings (FL)--Yea; 
Dreier--Nay.

Part A--Summary of amendment to be considered as adopted

    Thomas: Sunsets the 15 day extension of tax filing date for 
electronic filers in 3 years (rather than 5). Replaces the 
Health Insurance Tax Credit Waiver language with modified 
language that limits the availability of the waiver to 
residents of States without an approved plan (currently 
expected to be about 21 States) and only allows waiver of pre-
existing conditions exclusions and the guarantee requirement 
and sunsets the waiver in December 31, 2004. Extends the joint 
review of the IRS for 5 years.

Part B--Summary of amendment made in order

    Rangel: Amendment in the Nature of a Substitute. Includes 
numerous, noncontroversial taxpayer protection provisions of 
H.R. 1528. Removes the Health Insurance Tax Credit Waiver. Adds 
provisions to address abusive tax shelters, EITC 
simplification, audit fairness for low-income taxpayers, 
enhanced low-income taxpayer clinics, an EITC pre-certification 
program only if authorized, and other provisions designed to 
assist low and middle-income taxpayers in complying with the 
tax laws. Includes the provisions of the Senate-passed child 
tax credit expansion bill. Includes the provisions of the 
Senate-passed military tax relief bill.

         PART A--TEXT OF AMENDMENT TO BE CONSIDERED AS ADOPTED

  Page 35, line 18, strike ``2007'' and insert ``2005''.
  Page 39, strike line 14 and all that follows through line 11 
on page 40 (all of section 309 of the bill) and insert the 
following new section:

SEC. 309. HEALTH INSURANCE COSTS OF ELIGIBLE INDIVIDUALS.

  (a) Consumer Options.--
          (1) In general.--Paragraph (2) of section 35(e) is 
        amended by adding at the end the following new 
        subparagraphs:
                  ``(C) Waiver by eligible individuals.--With 
                respect to any month, clauses (i) and (ii) of 
                subparagraph (A) shall not apply with respect 
                to any eligible individual and such 
                individual's qualifying family members if such 
                individual--
                          ``(i) does not reside in a State 
                        which the Secretary has identified by 
                        regulation, guidance, or otherwise as a 
                        State in which any coverage which--
                                  ``(I) is described in any of 
                                subparagraphs (C) through (H) 
                                of paragraph (1), and
                                  ``(II) meets the requirements 
                                of subparagraphs (A) and (B) of 
                                this paragraph,
                        is available to eligible individuals 
                        (and their qualifying family members) 
                        residing in the State, and
                          ``(ii) elects to waive the 
                        application of clauses (i) and (ii) of 
                        subparagraph (A) of this paragraph.
                  ``(D) Election.--Any election made under 
                subparagraph (C)(ii) shall be effective for the 
                month for which such election is made and for 
                all subsequent months.
                  ``(E) Termination.--Subparagraphs (C) and (D) 
                shall not apply to any month beginning after 
                December 31, 2004.''.
          (2) No Impact on State Consumer Protections.--Nothing 
        in the amendment made by paragraph (1) supercedes or 
        otherwise affects the application of State law relating 
        to consumer insurance protections (including State law 
        implementing the requirements of part B of title XXVII 
        of the Public Health Service Act).
  (b) State-Based Continuation Coverage Not Subject to 
Requirements.--Subparagraphs (A) and (B)(i) of section 35(e)(2) 
are each amended by striking ``subparagraphs (B) through (H)'' 
and inserting ``subparagraphs (C) through (H)''.
  (c) Effective Date.--
          (1) Consumer options.--The amendment made by 
        subsection (a) shall apply to months beginning after 
        the date of the enactment of this Act.
          (2) State-based continuation coverage.--The 
        amendments made by subsection (b) shall take effect as 
        if included in section 201(a) of the Trade Act of 2002.
  Page 45, after line 3, insert the following new section (and 
amend the table of contents accordingly):

SEC. 311. EXTENSION OF JOINT REVIEW OF STRATEGIC PLANS AND BUDGET FOR 
                    THE INTERNAL REVENUE SERVICE.

  (a) In General.--Paragraph (2) of section 8021(f) (relating 
to joint reviews) is amended by striking ``2004'' and inserting 
``2009''.
  (b) Report.--Subparagraph (C) of section 8022(3) (regarding 
reports) is amended--
          (1) by striking ``2004'' and inserting ``2009'', and
          (2) by striking ``with respect to--'' and all that 
        follows and inserting ``with respect to the matters 
        addressed in the joint review referred to in section 
        8021(f)(2).''.

                PART B--TEXT OF AMENDMENT MADE IN ORDER

  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE; REFERENCE; TABLE OF CONTENTS.

  (a) Short Title.--This Act may be cited as the ``Taxpayer and 
Fairness Protection Act of 2003''.
  (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is 
expressed in terms of an amendment to, or repeal of, a section 
or other provision, the reference shall be considered to be 
made to a section or other provision of the Internal Revenue 
Code of 1986.
  (c) Table of Contents.--The table of contents for this Act is 
as follows:

Sec. 1. Short title; reference; table of contents.

             TITLE I--ELIMINATION OF ABUSIVE TAX STRATEGIES

Sec. 101. Findings and purpose.

                        Subtitle A--Tax Shelters

           Part I--Provisions Designed to Curtail Tax Shelters

Sec. 111. Clarification of economic substance doctrine.
Sec. 112. Penalty for failing to disclose reportable transaction.
Sec. 113. Accuracy-related penalty for listed transactions and other 
          reportable transactions having a significant tax avoidance 
          purpose.
Sec. 114. Penalty for understatements attributable to transactions 
          lacking economic substance, etc.
Sec. 115. Modifications of substantial understatement penalty for 
          nonreportable transactions.
Sec. 116. Tax shelter exception to confidentiality privileges relating 
          to taxpayer communications.
Sec. 117. Disclosure of reportable transactions.
Sec. 118. Modifications to penalty for failure to register tax shelters.
Sec. 119. Modification of penalty for failure to maintain lists of 
          investors.
Sec. 120. Modification of actions to enjoin certain conduct related to 
          tax shelters and reportable transactions.
Sec. 121. Understatement of taxpayer's liability by income tax return 
          preparer.
Sec. 122. Penalty on failure to report interests in foreign financial 
          accounts.
Sec. 123. Frivolous tax submissions.
Sec. 124. Regulation of individuals practicing before the Department of 
          Treasury.
Sec. 125. Penalty on promoters of tax shelters.
Sec. 126. Statute of limitations for taxable years for which listed 
          transactions not reported.
Sec. 127. Denial of deduction for interest on underpayments attributable 
          to nondisclosed reportable and noneconomic substance 
          transactions.

                        Part II--Other Provisions

Sec. 131. Limitation on transfer or importation of built-in losses.
Sec. 132. Disallowance of certain partnership loss transfers.
Sec. 133. No reduction of basis under section 734 in stock held by 
          partnership in corporate partner.
Sec. 134. Repeal of special rules for FASITS.
Sec. 135. Expanded disallowance of deduction for interest on convertible 
          debt.
Sec. 136. Expanded authority to disallow tax benefits under section 269.
Sec. 137. Modifications of certain rules relating to controlled foreign 
          corporations.
Sec. 138. Basis for determining loss always reduced by nontaxed portion 
          of dividends.
Sec. 139. Affirmation of consolidated return regulation authority.

Subtitle B--Prevention of corporate expatriation to avoid United States 
                               income tax

Sec. 151. Prevention of corporate expatriation to avoid United States 
          income tax.

          TITLE II--SIMPLIFICATION OF EARNED INCOME TAX CREDIT

Sec. 201. Simplification of earned income tax credit.
Sec. 202. Profiling of earned income tax credit beneficiaries.

         TITLE III--TAXPAYER PROTECTIONS AND IRS ACCOUNTABILITY

                Subtitle A--Penalty and Interest Reforms

Sec. 301. Failure to pay estimated tax penalty converted to interest 
          charge on accumulated unpaid balance.
Sec. 302. Abatement of interest.
Sec. 303. Deposits made to suspend running of interest on potential 
          underpayments.
Sec. 304. Expansion of interest netting for individuals.
Sec. 305. Waiver of certain penalties for first-time unintentional minor 
          errors.
Sec. 306. Frivolous tax submissions.
Sec. 307. Clarification of application of Federal tax deposit penalty.

              Subtitle B--Fairness of Collection Procedures

Sec. 311. Partial payment of tax liability in installment agreements.
Sec. 312. Extension of time for return of property.
Sec. 313. Individuals held harmless on wrongful levy, etc., on 
          individual retirement plan.
Sec. 314. Seven-day threshold on tolling of statute of limitations 
          during tax review.
Sec. 315. Study of liens and levies.

                 Subtitle C--Tax Administration Reforms

Sec. 331. Revisions relating to termination of employment of Internal 
          Revenue Service employees for misconduct.
Sec. 332. Confirmation of authority of tax court to apply doctrine of 
          equitable recoupment.
Sec. 333. Jurisdiction of Tax Court over collection due process cases.
Sec. 334. Office of Chief Counsel review of offers in compromise.
Sec. 335. Access of National Taxpayer Advocate to independent legal 
          counsel.
Sec. 336. Payment of motor fuel excise tax refunds by direct deposit.
Sec. 337. Family business tax simplification.
Sec. 338. Suspension of tax-exempt status of terrorist organizations.
Sec. 339. Tax refund anticipation loans.
Sec. 340. Fairness in tax audit coverage.

               Subtitle D--Confidentiality and Disclosure

Sec. 341. Collection activities with respect to joint return disclosable 
          to either spouse based on oral request.
Sec. 342. Taxpayer representatives not subject to examination on sole 
          basis of representation of taxpayers.
Sec. 343. Disclosure in judicial or administrative tax proceedings of 
          return and return information of persons who are not party to 
          such proceedings.
Sec. 344. Prohibition of disclosure of taxpayer identification 
          information with respect to disclosure of accepted offers-in-
          compromise.
Sec. 345. Compliance by contractors with confidentiality safeguards.
Sec. 346. Higher standards for requests for and consents to disclosure.
Sec. 347. Notice to taxpayer concerning administrative determination of 
          browsing; annual report.
Sec. 348. Expanded disclosure in emergency circumstances.
Sec. 349. Disclosure of taxpayer identity for tax refund purposes.
Sec. 350. Disclosure to State officials of proposed actions related to 
          section 501(c)(3) organizations.
Sec. 351. Confidentiality of taxpayer communications with the Office of 
          the Taxpayer Advocate.

                        Subtitle E--Miscellaneous

Sec. 361. Clarification of definition of church tax inquiry.
Sec. 362. Expansion of declaratory judgment remedy to tax-exempt 
          organizations.
Sec. 363. Employee misconduct report to include summary of complaints by 
          category.
Sec. 364. Annual report on awards of costs and certain fees in 
          administrative and court proceedings.
Sec. 365. Annual report on abatement of penalties.
Sec. 366. Better means of communicating with taxpayers.
Sec. 367. Explanation of statute of limitations and consequences of 
          failure to file.
Sec. 368. Amendment to Treasury auction reforms.
Sec. 369. Enrolled agents.
Sec. 370. Financial management service fees.
Sec. 371. Extension of Internal Revenue Service user fees.

                 Subtitle F--Low-Income Taxpayer Clinics

Sec. 381. Low-income taxpayer clinics.
Sec. 382. Matching grants to low income return preparation clinics.

                       TITLE IV--CHILD TAX CREDIT

Sec. 401. Acceleration of increase in refundability of the child tax 
          credit.
Sec. 402. Reduction in marriage penalty in child tax credit.
Sec. 403. Application of EGTRRA sunset to this section.

                  TITLE V--UNIFORM DEFINITION OF CHILD

Sec. 501. Uniform definition of child, etc.
Sec. 502. Modifications of definition of head of household.
Sec. 503. Modifications of dependent care credit.
Sec. 504. Modifications of child tax credit.
Sec. 505. Modifications of earned income credit.
Sec. 506. Modifications of deduction for personal exemption for 
          dependents.
Sec. 507. Technical and conforming amendments.
Sec. 508. Effective date.

          TITLE VI--IMPROVING TAX EQUITY FOR MILITARY PERSONNEL

Sec. 601. Exclusion of gain from sale of a principal residence by a 
          member of the Uniformed Services or the Foreign Service.
Sec. 602. Exclusion from gross income of certain death gratuity 
          payments.
Sec. 603. Exclusion for amounts received under Department of Defense 
          homeowners assistance program.
Sec. 604. Expansion of combat zone filing rules to contingency 
          operations.
Sec. 605. Modification of membership requirement for exemption from tax 
          for certain veterans' organizations.
Sec. 606. Clarification of the treatment of certain dependent care 
          assistance programs.
Sec. 607. Clarification relating to exception from additional tax on 
          certain distributions from qualified tuition programs, etc. on 
          account of attendance at military academy.
Sec. 608. Suspension of tax-exempt status of terrorist organizations.
Sec. 609. Above-the-line deduction for overnight travel expenses of 
          National Guard and Reserve members.
Sec. 610. Tax relief and assistance for families of Space Shuttle 
          Columbia heroes.

                       TITLE VII--OTHER PROVISIONS

Sec. 701. Revision of tax rules on expatriation.
Sec. 702. Extension of Customs user fees.

             TITLE I--ELIMINATION OF ABUSIVE TAX STRATEGIES

SEC. 101. FINDINGS AND PURPOSE.

  (a) Findings.--The Congress hereby finds that:
          (1) Many corporate tax shelter transactions are 
        complicated ways of accomplishing nothing aside from 
        claimed tax benefits, and the legal opinions justifying 
        those transactions take an inappropriately narrow and 
        restrictive view of well-developed court doctrines 
        under which--
                  (A) the taxation of a transaction is 
                determined in accordance with its substance and 
                not merely its form,
                  (B) transactions which have no significant 
                effect on the taxpayer's economic or beneficial 
                interests except for tax benefits are treated 
                as sham transactions and disregarded,
                  (C) transactions involving multiple steps are 
                collapsed when those steps have no substantial 
                economic meaning and are merely designed to 
                create tax benefits,
                  (D) transactions with no business purpose are 
                not given effect, and
                  (E) in the absence of a specific 
                congressional authorization, it is presumed 
                that Congress did not intend a transaction to 
                result in a negative tax where the taxpayer's 
                economic position or rate of return is better 
                after tax than before tax.
          (2) Permitting aggressive and abusive tax shelters 
        not only results in large revenue losses but also 
        undermines voluntary compliance with the Internal 
        Revenue Code of 1986.
  (b) Purpose.--The purpose of this title is to eliminate 
abusive tax shelters by denying tax attributes claimed to arise 
from transactions that do not meet a heightened economic 
substance requirement and by repealing the provision that 
permits legal opinions to be used to avoid penalties on tax 
underpayments resulting from transactions without significant 
economic substance or business purpose.

                        Subtitle A--Tax Shelters

          Part I--Provisions Designed to Curtail Tax Shelters

SEC. 111. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

  (a) In General.--Section 7701 is amended by redesignating 
subsection (m) as subsection (n) and by inserting after 
subsection (l) the following new subsection:
  ``(m) Clarification of Economic Substance Doctrine; etc.--
          ``(1) General rules.--
                  ``(A) In general.--In applying the economic 
                substance doctrine, the determination of 
                whether a transaction has economic substance 
                shall be made as provided in this paragraph.
                  ``(B) Definition of economic substance.--For 
                purposes of subparagraph (A)--
                          ``(i) In general.--A transaction has 
                        economic substance only if--
                                  ``(I) the transaction changes 
                                in a meaningful way (apart from 
                                Federal tax effects and, if 
                                there is any Federal tax 
                                effects, also apart from any 
                                foreign, State, or local tax 
                                effects) the taxpayer's 
                                economic position, and
                                  ``(II) the taxpayer has a 
                                substantial nontax purpose for 
                                entering into such transaction 
                                and the transaction is a 
                                reasonable means of 
                                accomplishing such purpose.
                          ``(ii) Special rule where taxpayer 
                        relies on profit potential.--A 
                        transaction shall not be treated as 
                        having economic substance by reason of 
                        having a potential for profit unless--
                                  ``(I) the present value of 
                                the reasonably expected pre-tax 
                                profit from the transaction is 
                                substantial in relation to the 
                                present value of the expected 
                                net tax benefits that would be 
                                allowed if the transaction were 
                                respected, and
                                  ``(II) the reasonably 
                                expected pre-tax profit from 
                                the transaction exceeds a risk-
                                free rate of return.
                  ``(C) Treatment of fees and foreign taxes.--
                Fees and other transaction expenses and foreign 
                taxes shall be taken into account as expenses 
                in determining pre-tax profit under 
                subparagraph (B)(ii).
          ``(2) Special rules for transactions with tax-
        indifferent parties.--
                  ``(A) Special rules for financing 
                transactions.--The form of a transaction which 
                is in substance the borrowing of money or the 
                acquisition of financial capital directly or 
                indirectly from a tax-indifferent party shall 
                not be respected if the present value of the 
                deductions to be claimed with respect to the 
                transaction is substantially in excess of the 
                present value of the anticipated economic 
                returns of the person lending the money or 
                providing the financial capital. A public 
                offering shall be treated as a borrowing, or an 
                acquisition of financial capital, from a tax-
                indifferent party if it is reasonably expected 
                that at least 50 percent of the offering will 
                be placed with tax-indifferent parties.
                  ``(B) Artificial income shifting and basis 
                adjustments.--The form of a transaction with a 
                tax-indifferent party shall not be respected 
                if--
                          ``(i) it results in an allocation of 
                        income or gain to the tax-indifferent 
                        party in excess of such party's 
                        economic income or gain, or
                          ``(ii) it results in a basis 
                        adjustment or shifting of basis on 
                        account of overstating the income or 
                        gain of the tax-indifferent party.
          ``(3) Definitions and special rules.--For purposes of 
        this subsection--
                  ``(A) Economic substance doctrine.--The term 
                `economic substance doctrine' means the common 
                law doctrine under which tax benefits under 
                subtitle A with respect to a transaction are 
                not allowable if the transaction does not have 
                economic substance or lacks a business purpose.
                  ``(B) Tax-indifferent party.--The term `tax-
                indifferent party' means any person or entity 
                not subject to tax imposed by subtitle A. A 
                person shall be treated as a tax-indifferent 
                party with respect to a transaction if the 
                items taken into account with respect to the 
                transaction have no substantial impact on such 
                person's liability under subtitle A.
                  ``(C) Substantial nontax purpose.--In 
                applying subclause (II) of paragraph (1)(B)(i), 
                a purpose of achieving a financial accounting 
                benefit shall not be taken into account in 
                determining whether a transaction has a 
                substantial nontax purpose if the origin of 
                such financial accounting benefit is a 
                reduction of income tax.
                  ``(D) Exception for personal transactions of 
                individuals.--In the case of an individual, 
                this subsection shall apply only to 
                transactions entered into in connection with a 
                trade or business or an activity engaged in for 
                the production of income.
                  ``(E) Treatment of lessors.--In applying 
                subclause (I) of paragraph (1)(B)(ii) to the 
                lessor of tangible property subject to a lease, 
                the expected net tax benefits shall not include 
                the benefits of depreciation, or any tax 
                credit, with respect to the leased property and 
                subclause (II) of paragraph (1)(B)(ii) shall be 
                disregarded in determining whether any of such 
                benefits are allowable.
          ``(4) Other common law doctrines not affected.--
        Except as specifically provided in this subsection, the 
        provisions of this subsection shall not be construed as 
        altering or supplanting any other rule of law, and the 
        requirements of this subsection shall be construed as 
        being in addition to any such other rule of law.
          ``(5) Regulations.--The Secretary shall prescribe 
        such regulations as may be necessary or appropriate to 
        carry out the purposes of this subsection. Such 
        regulations may include exemptions from the application 
        of this subsection.''
  (b) Effective Date.--The amendments made by this section 
shall apply to transactions entered into after February 13, 
2003.

SEC. 112. PENALTY FOR FAILING TO DISCLOSE REPORTABLE TRANSACTION.

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

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

  ``(a) Imposition of Penalty.--Any person who fails to include 
on any return or statement any information with respect to a 
reportable transaction which is required under section 6011 to 
be included with such return or statement shall pay a penalty 
in the amount determined under subsection (b).
  ``(b) Amount of Penalty.--
          ``(1) In general.--Except as provided in paragraphs 
        (2) and (3), the amount of the penalty under subsection 
        (a) shall be $50,000.
          ``(2) Listed transaction.--The amount of the penalty 
        under subsection (a) with respect to a listed 
        transaction shall be $100,000.
          ``(3) Increase in penalty for large entities and high 
        net worth individuals.--
                  ``(A) In general.--In the case of a failure 
                under subsection (a) by--
                          ``(i) a large entity, or
                          ``(ii) a high net worth individual,
                the penalty under paragraph (1) or (2) shall be 
                twice the amount determined without regard to 
                this paragraph.
                  ``(B) Large entity.--For purposes of 
                subparagraph (A), the term `large entity' 
                means, with respect to any taxable year, a 
                person (other than a natural person) with gross 
                receipts in excess of $10,000,000 for the 
                taxable year in which the reportable 
                transaction occurs or the preceding taxable 
                year. Rules similar to the rules of paragraph 
                (2) and subparagraphs (B), (C), and (D) of 
                paragraph (3) of section 448(c) shall apply for 
                purposes of this subparagraph.
                  ``(C) High net worth individual.--For 
                purposes of subparagraph (A), the term `high 
                net worth individual' means, with respect to a 
                reportable transaction, a natural person whose 
                net worth exceeds $2,000,000 immediately before 
                the transaction.
  ``(c) Definitions.--For purposes of this section--
          ``(1) Reportable transaction.--The term `reportable 
        transaction' means any transaction with respect to 
        which information is required to be included with a 
        return or statement because, as determined under 
        regulations prescribed under section 6011, such 
        transaction is of a type which the Secretary determines 
        as having a potential for tax avoidance or evasion.
          ``(2) Listed transaction.--Except as provided in 
        regulations, the term `listed transaction' means a 
        reportable transaction which is the same as, or 
        substantially similar to, a transaction specifically 
        identified by the Secretary as a tax avoidance 
        transaction for purposes of section 6011.
  ``(d) Authority To Rescind Penalty.--
          ``(1) In general.--The Commissioner of Internal 
        Revenue may rescind all or any portion of any penalty 
        imposed by this section with respect to any violation 
        if--
                  ``(A) the violation is with respect to a 
                reportable transaction other than a listed 
                transaction,
                  ``(B) the person on whom the penalty is 
                imposed has a history of complying with the 
                requirements of this title,
                  ``(C) it is shown that the violation is due 
                to an unintentional mistake of fact;
                  ``(D) imposing the penalty would be against 
                equity and good conscience, and
                  ``(E) rescinding the penalty would promote 
                compliance with the requirements of this title 
                and effective tax administration.
          ``(2) Discretion.--The exercise of authority under 
        paragraph (1) shall be at the sole discretion of the 
        Commissioner and may be delegated only to the head of 
        the Office of Tax Shelter Analysis. The Commissioner, 
        in the Commissioner's sole discretion, may establish a 
        procedure to determine if a penalty should be referred 
        to the Commissioner or the head of such Office for a 
        determination under paragraph (1).
          ``(3) No appeal.--Notwithstanding any other provision 
        of law, any determination under this subsection may not 
        be reviewed in any administrative or judicial 
        proceeding.
          ``(4) Records.--If a penalty is rescinded under 
        paragraph (1), the Commissioner shall place in the file 
        in the Office of the Commissioner the opinion of the 
        Commissioner or the head of the Office of Tax Shelter 
        Analysis with respect to the determination, including--
                  ``(A) the facts and circumstances of the 
                transaction,
                  ``(B) the reasons for the rescission, and
                  ``(C) the amount of the penalty rescinded.
          ``(5) Report.--The Commissioner shall each year 
        report to the Committee on Ways and Means of the House 
        of Representatives and the Committee on Finance of the 
        Senate--
                  ``(A) a summary of the total number and 
                aggregate amount of penalties imposed, and 
                rescinded, under this section, and
                  ``(B) a description of each penalty rescinded 
                under this subsection and the reasons therefor.
  ``(e) Penalty Reported to SEC.--In the case of a person--
          ``(1) which is required to file periodic reports 
        under section 13 or 15(d) of the Securities Exchange 
        Act of 1934 or is required to be consolidated with 
        another person for purposes of such reports, and
          ``(2) which--
                  ``(A) is required to pay a penalty under this 
                section with respect to a listed transaction,
                  ``(B) is required to pay a penalty under 
                section 6662A with respect to any reportable 
                transaction at a rate prescribed under section 
                6662A(c), or
                  ``(C) is required to pay a penalty under 
                section 6662B with respect to any noneconomic 
                substance transaction,
the requirement to pay such penalty shall be disclosed in such 
reports filed by such person for such periods as the Secretary 
shall specify. Failure to make a disclosure in accordance with 
the preceding sentence shall be treated as a failure to which 
the penalty under subsection (b)(2) applies.
  ``(f) Coordination With Other Penalties.--The penalty imposed 
by this section is in addition to any penalty imposed under 
this title.''
  (b) Conforming Amendment.--The table of sections for part I 
of subchapter B of chapter 68 is amended by inserting after the 
item relating to section 6707 the following:

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

  (c) Effective Date.--The amendments made by this section 
shall apply to returns and statements the due date for which is 
after the date of the enactment of this Act.

SEC. 113. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS AND OTHER 
                    REPORTABLE TRANSACTIONS HAVING A SIGNIFICANT TAX 
                    AVOIDANCE PURPOSE.

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

``SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERSTATEMENTS 
                    WITH RESPECT TO REPORTABLE TRANSACTIONS.

  ``(a) Imposition of Penalty.--If a taxpayer has a reportable 
transaction understatement for any taxable year, there shall be 
added to the tax an amount equal to 20 percent of the amount of 
such understatement.
  ``(b) Reportable Transaction Understatement.--For purposes of 
this section--
          ``(1) In general.--The term `reportable transaction 
        understatement' means the sum of--
                  ``(A) the product of--
                          ``(i) the amount of the increase (if 
                        any) in taxable income which results 
                        from a difference between the proper 
                        tax treatment of an item to which this 
                        section applies and the taxpayer's 
                        treatment of such item (as shown on the 
                        taxpayer's return of tax), and
                          ``(ii) the highest rate of tax 
                        imposed by section 1 (section 11 in the 
                        case of a taxpayer which is a 
                        corporation), and
                  ``(B) the amount of the decrease (if any) in 
                the aggregate amount of credits determined 
                under subtitle A which results from a 
                difference between the taxpayer's treatment of 
                an item to which this section applies (as shown 
                on the taxpayer's return of tax) and the proper 
                tax treatment of such item.
        For purposes of subparagraph (A), any reduction of the 
        excess of deductions allowed for the taxable year over 
        gross income for such year, and any reduction in the 
        amount of capital losses which would (without regard to 
        section 1211) be allowed for such year, shall be 
        treated as an increase in taxable income.
          ``(2) Items to which section applies.--This section 
        shall apply to any item which is attributable to--
                  ``(A) any listed transaction, and
                  ``(B) any reportable transaction (other than 
                a listed transaction) if a significant purpose 
                of such transaction is the avoidance or evasion 
                of Federal income tax.
  ``(c) Higher Penalty for Nondisclosed Listed and Other 
Avoidance Transactions.--
          ``(1) In general.--Subsection (a) shall be applied by 
        substituting `30 percent' for `20 percent' with respect 
        to the portion of any reportable transaction 
        understatement with respect to which the requirement of 
        section 6664(d)(2)(A) is not met.
          ``(2) Rules applicable to compromise of penalty.--
                  ``(A) In general.--If the 1st letter of 
                proposed deficiency which allows the taxpayer 
                an opportunity for administrative review in the 
                Internal Revenue Service Office of Appeals has 
                been sent with respect to a penalty to which 
                paragraph (1) applies, only the Commissioner of 
                Internal Revenue may compromise all or any 
                portion of such penalty.
                  ``(B) Applicable rules.--The rules of 
                paragraphs (3), (4), and (5) of section 
                6707A(d) shall apply for purposes of 
                subparagraph (A).
  ``(d) Definitions of Reportable and Listed Transactions.--For 
purposes of this section, the terms `reportable transaction' 
and `listed transaction' have the respective meanings given to 
such terms by section 6707A(c).
  ``(e) Special Rules.--
          ``(1) Coordination with penalties, etc., on other 
        understatements.--In the case of an understatement (as 
        defined in section 6662(d)(2))--
                  ``(A) the amount of such understatement 
                (determined without regard to this paragraph) 
                shall be increased by the aggregate amount of 
                reportable transaction understatements and 
                noneconomic substance transaction 
                understatements for purposes of determining 
                whether such understatement is a substantial 
                understatement under section 6662(d)(1), and
                  ``(B) the addition to tax under section 
                6662(a) shall apply only to the excess of the 
                amount of the substantial understatement (if 
                any) after the application of subparagraph (A) 
                over the aggregate amount of reportable 
                transaction understatements and noneconomic 
                substance transaction understatements.
          ``(2) Coordination with other penalties.--
                  ``(A) Application of fraud penalty.--
                References to an underpayment in section 6663 
                shall be treated as including references to a 
                reportable transaction understatement and a 
                noneconomic substance transaction 
                understatement.
                  ``(B) No double penalty.--This section shall 
                not apply to any portion of an understatement 
                on which a penalty is imposed under section 
                6662B or 6663.
          ``(3) Special rule for amended returns.--Except as 
        provided in regulations, in no event shall any tax 
        treatment included with an amendment or supplement to a 
        return of tax be taken into account in determining the 
        amount of any reportable transaction understatement or 
        noneconomic substance transaction understatement if the 
        amendment or supplement is filed after the earlier of 
        the date the taxpayer is first contacted by the 
        Secretary regarding the examination of the return or 
        such other date as is specified by the Secretary.
          ``(4) Noneconomic substance transaction 
        understatement.--For purposes of this subsection, the 
        term `noneconomic substance transaction understatement' 
        has the meaning given such term by section 6662B(c).
          ``(5) Cross reference.--

          ``For reporting of section 6662A(c) penalty to the Securities 
        and Exchange Commission, see section 6707A(e).''

  (b) Determination of Other Understatements.--Subparagraph (A) 
of section 6662(d)(2) is amended by adding at the end the 
following flush sentence:
                ``The excess under the preceding sentence shall 
                be determined without regard to items to which 
                section 6662A applies and without regard to 
                items with respect to which a penalty is 
                imposed by section 6662B.''
  (c) Reasonable Cause Exception.--
          (1) In general.--Section 6664 is amended by adding at 
        the end the following new subsection:
  ``(d) Reasonable Cause Exception for Reportable Transaction 
Understatements.--
          ``(1) In general.--No penalty shall be imposed under 
        section 6662A with respect to any portion of a 
        reportable transaction understatement if it is shown 
        that there was a reasonable cause for such portion and 
        that the taxpayer acted in good faith with respect to 
        such portion.
          ``(2) Special rules.--Paragraph (1) shall not apply 
        to any reportable transaction understatement unless--
                  ``(A) the relevant facts affecting the tax 
                treatment of the item are adequately disclosed 
                in accordance with the regulations prescribed 
                under section 6011,
                  ``(B) there is or was substantial authority 
                for such treatment, and
                  ``(C) the taxpayer reasonably believed that 
                such treatment was more likely than not the 
                proper treatment.
        A taxpayer failing to adequately disclose in accordance 
        with section 6011 shall be treated as meeting the 
        requirements of subparagraph (A) if the penalty for 
        such failure was rescinded under section 6707A(d).
          ``(3) Rules relating to reasonable belief.--For 
        purposes of paragraph (2)(C)--
                  ``(A) In general.--A taxpayer shall be 
                treated as having a reasonable belief with 
                respect to the tax treatment of an item only if 
                such belief--
                          ``(i) is based on the facts and law 
                        that exist at the time the return of 
                        tax which includes such tax treatment 
                        is filed, and
                          ``(ii) relates solely to the 
                        taxpayer's chances of success on the 
                        merits of such treatment and does not 
                        take into account the possibility that 
                        a return will not be audited, such 
                        treatment will not be raised on audit, 
                        or such treatment will be resolved 
                        through settlement if it is raised.
                  ``(B) Certain opinions may not be relied 
                upon.--
                          ``(i) In general.--An opinion of a 
                        tax advisor may not be relied upon to 
                        establish the reasonable belief of a 
                        taxpayer if--
                                  ``(I) the tax advisor is 
                                described in clause (ii), or
                                  ``(II) the opinion is 
                                described in clause (iii).
                          ``(ii) Disqualified tax advisors.--A 
                        tax advisor is described in this clause 
                        if the tax advisor--
                                  ``(I) is a material advisor 
                                (within the meaning of section 
                                6111(b)(1)) who participates in 
                                the organization, management, 
                                promotion, or sale of the 
                                transaction or who is related 
                                (within the meaning of section 
                                267(b) or 707(b)(1)) to any 
                                person who so participates,
                                  ``(II) is compensated 
                                directly or indirectly by a 
                                material advisor with respect 
                                to the transaction,
                                  ``(III) has a fee arrangement 
                                with respect to the transaction 
                                which is contingent on all or 
                                part of the intended tax 
                                benefits from the transaction 
                                being sustained, or
                                  ``(IV) as determined under 
                                regulations prescribed by the 
                                Secretary, has a continuing 
                                financial interest with respect 
                                to the transaction.
                          ``(iii) Disqualified opinions.--For 
                        purposes of clause (i), an opinion is 
                        disqualified if the opinion--
                                  ``(I) is based on 
                                unreasonable factual or legal 
                                assumptions (including 
                                assumptions as to future 
                                events),
                                  ``(II) unreasonably relies on 
                                representations, statements, 
                                findings, or agreements of the 
                                taxpayer or any other person,
                                  ``(III) does not identify and 
                                consider all relevant facts, or
                                  ``(IV) fails to meet any 
                                other requirement as the 
                                Secretary may prescribe.''
          (2) Conforming amendment.--The heading for subsection 
        (c) of section 6664 is amended by inserting ``for 
        Underpayments'' after ``Exception''.
  (d) Conforming Amendments.--
          (1) Subparagraph (C) of section 461(i)(3) is amended 
        by striking ``section 6662(d)(2)(C)(iii)'' and 
        inserting ``section 1274(b)(3)(C)''.
          (2) Paragraph (3) of section 1274(b) is amended--
                  (A) by striking ``(as defined in section 
                6662(d)(2)(C)(iii))'' in subparagraph (B)(i), 
                and
                  (B) by adding at the end the following new 
                subparagraph:
                  ``(C) Tax shelter.--For purposes of 
                subparagraph (B), the term `tax shelter' 
                means--
                          ``(i) a partnership or other entity,
                          ``(ii) any investment plan or 
                        arrangement, or
                          ``(iii) any other plan or 
                        arrangement,
                if a significant purpose of such partnership, 
                entity, plan, or arrangement is the avoidance 
                or evasion of Federal income tax.''
          (3) Section 6662(d)(2) is amended by striking 
        subparagraphs (C) and (D).
          (4) Section 6664(c)(1) is amended by striking ``this 
        part'' and inserting ``section 6662 or 6663''.
          (5) Subsection (b) of section 7525 is amended by 
        striking ``section 6662(d)(2)(C)(iii)'' and inserting 
        ``section 1274(b)(3)(C)''.
          (6)(A) The heading for section 6662 is amended to 
        read as follows:

``SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERPAYMENTS.''

          (B) The table of sections for part II of subchapter A 
        of chapter 68 is amended by striking the item relating 
        to section 6662 and inserting the following new items:

        ``Sec. 6662. Imposition of accuracy-related penalty on 
                  underpayments.
        ``Sec. 6662A. Imposition of accuracy-related penalty on 
                  understatements with respect to reportable 
                  transactions.''

  (e) Effective Date.--The amendments made by this section 
shall apply to taxable years ending after the date of the 
enactment of this Act.

SEC. 114. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS 
                    LACKING ECONOMIC SUBSTANCE, ETC.

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

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

  ``(a) Imposition of Penalty.--If a taxpayer has an 
noneconomic substance transaction understatement for any 
taxable year, there shall be added to the tax an amount equal 
to 40 percent of the amount of such understatement.
  ``(b) Reduction of Penalty for Disclosed Transactions.--
Subsection (a) shall be applied by substituting `20 percent' 
for `40 percent' with respect to the portion of any noneconomic 
substance transaction understatement with respect to which the 
relevant facts affecting the tax treatment of the item are 
adequately disclosed in the return or a statement attached to 
the return.
  ``(c) Noneconomic Substance Transaction Understatement.--For 
purposes of this section--
          ``(1) In general.--The term `noneconomic substance 
        transaction understatement' means any amount which 
        would be an understatement under section 6662A(b)(1) if 
        section 6662A were applied by taking into account items 
        attributable to noneconomic substance transactions 
        rather than items to which section 6662A would apply 
        without regard to this paragraph.
          ``(2) Noneconomic substance transaction.--The term 
        `noneconomic substance transaction' means any 
        transaction if--
                  ``(A) there is a lack of economic substance 
                (within the meaning of section 7701(m)(1)) for 
                the transaction giving rise to the claimed tax 
                benefit or the transaction was not respected 
                under section 7701(m)(2), or
                  ``(B) the transaction fails to meet the 
                requirements of any similar rule of law.
  ``(d) Rules Applicable To Compromise of Penalty.--
          ``(1) In general.--If the 1st letter of proposed 
        deficiency which allows the taxpayer an opportunity for 
        administrative review in the Internal Revenue Service 
        Office of Appeals has been sent with respect to a 
        penalty to which this section applies, only the 
        Commissioner of Internal Revenue may compromise all or 
        any portion of such penalty.
          ``(2) Applicable rules.--The rules of paragraphs (3), 
        (4), and (5) of section 6707A(d) shall apply for 
        purposes of paragraph (1).
  ``(e) Coordination With Other Penalties.--Except as otherwise 
provided in this part, the penalty imposed by this section 
shall be in addition to any other penalty imposed by this 
title.
  ``(f) Cross References.--

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

  (b) Clerical Amendment.--The table of sections for part II of 
subchapter A of chapter 68 is amended by inserting after the 
item relating to section 6662A the following new item:

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

  (c) Effective Date.--The amendments made by this section 
shall apply to transactions entered into after February 13, 
2003.

SEC. 115. MODIFICATIONS OF SUBSTANTIAL UNDERSTATEMENT PENALTY FOR 
                    NONREPORTABLE TRANSACTIONS.

  (a) Substantial Understatement of Corporations.--Section 
6662(d)(1)(B) (relating to special rule for corporations) is 
amended to read as follows:
                  ``(B) Special rule for corporations.--In the 
                case of a corporation other than an S 
                corporation or a personal holding company (as 
                defined in section 542), there is a substantial 
                understatement of income tax for any taxable 
                year if the amount of the understatement for 
                the taxable year exceeds the lesser of--
                          ``(i) 10 percent of the tax required 
                        to be shown on the return for the 
                        taxable year (or, if greater, $10,000), 
                        or
                          ``(ii) $10,000,000.''
  (b) Reduction for Understatement of Taxpayer Due to Position 
of Taxpayer or Disclosed Item.--
          (1) In general.--Section 6662(d)(2)(B)(i) (relating 
        to substantial authority) is amended to read as 
        follows:
                          ``(i) the tax treatment of any item 
                        by the taxpayer if the taxpayer had 
                        reasonable belief that the tax 
                        treatment was more likely than not the 
                        proper treatment, or''.
          (2) Conforming amendment.--Section 6662(d) is amended 
        by adding at the end the following new paragraph:
          ``(3) Secretarial list.--For purposes of this 
        subsection, section 6664(d)(2), and section 6694(a)(1), 
        the Secretary may prescribe a list of positions for 
        which the Secretary believes there is not substantial 
        authority or there is no reasonable belief that the tax 
        treatment is more likely than not the proper tax 
        treatment. Such list (and any revisions thereof) shall 
        be published in the Federal Register or the Internal 
        Revenue Bulletin.''
  (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 116. TAX SHELTER EXCEPTION TO CONFIDENTIALITY PRIVILEGES RELATING 
                    TO TAXPAYER COMMUNICATIONS.

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

SEC. 117. DISCLOSURE OF REPORTABLE TRANSACTIONS.

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

``SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS.

  ``(a) In General.--Each material advisor with respect to any 
reportable transaction shall make a return (in such form as the 
Secretary may prescribe) setting forth--
          ``(1) information identifying and describing the 
        transaction,
          ``(2) information describing any potential tax 
        benefits expected to result from the transaction, and
          ``(3) such other information as the Secretary may 
        prescribe.
Such return shall be filed not later than the date specified by 
the Secretary.
  ``(b) Definitions.--For purposes of this section--
          ``(1) Material advisor.--
                  ``(A) In general.--The term `material 
                advisor' means any person--
                          ``(i) who provides any material aid, 
                        assistance, or advice with respect to 
                        organizing, promoting, selling, 
                        implementing, or carrying out any 
                        reportable transaction, and
                          ``(ii) who directly or indirectly 
                        derives gross income in excess of the 
                        threshold amount for such aid, 
                        assistance, or advice.
                  ``(B) Threshold amount.--For purposes of 
                subparagraph (A), the threshold amount is--
                          ``(i) $50,000 in the case of a 
                        reportable transaction substantially 
                        all of the tax benefits from which are 
                        provided to natural persons, and
                          ``(ii) $250,000 in any other case.
          ``(2) Reportable transaction.--The term `reportable 
        transaction' has the meaning given to such term by 
        section 6707A(c).
  ``(c) Regulations.--The Secretary may prescribe regulations 
which provide--
          ``(1) that only 1 person shall be required to meet 
        the requirements of subsection (a) in cases in which 2 
        or more persons would otherwise be required to meet 
        such requirements,
          ``(2) exemptions from the requirements of this 
        section, and
          ``(3) such rules as may be necessary or appropriate 
        to carry out the purposes of this section.''
  (b) Conforming Amendments.--
          (1) The item relating to section 6111 in the table of 
        sections for subchapter B of chapter 61 is amended to 
        read as follows:

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

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

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

  ``(a) In General.--Each material advisor (as defined in 
section 6111) with respect to any reportable transaction (as 
defined in section 6707A(c)) shall maintain, in such manner as 
the Secretary may by regulations prescribe, a list--
          ``(1) identifying each person with respect to whom 
        such advisor acted as such a material advisor with 
        respect to such transaction, and
          ``(2) containing such other information as the 
        Secretary may by regulations require.
This section shall apply without regard to whether a material 
advisor is required to file a return under section 6111 with 
respect to such transaction.''
          (B) Section 6112 is amended by redesignating 
        subsection (c) as subsection (b).
          (C) Section 6112(b), as redesignated by subparagraph 
        (B), is amended--
                  (i) by inserting ``written'' before 
                ``request'' in paragraph (1)(A), and
                  (ii) by striking ``shall prescribe'' in 
                paragraph (2) and inserting ``may prescribe''.
          (D) The item relating to section 6112 in the table of 
        sections for subchapter B of chapter 61 is amended to 
        read as follows:

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

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

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

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

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

  (c) Effective Date.--The amendments made by this section 
shall apply to transactions with respect to which material aid, 
assistance, or advice referred to in section 6111(b)(1)(A)(i) 
of the Internal Revenue Code of 1986 (as added by this section) 
is provided after the date of the enactment of this Act.

SEC. 118. MODIFICATIONS TO PENALTY FOR FAILURE TO REGISTER TAX 
                    SHELTERS.

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

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

  ``(a) In General.--If a person who is required to file a 
return under section 6111(a) with respect to any reportable 
transaction--
          ``(1) fails to file such return on or before the date 
        prescribed therefor, or
          ``(2) files false or incomplete information with the 
        Secretary with respect to such transaction,
such person shall pay a penalty with respect to such return in 
the amount determined under subsection (b).
  ``(b) Amount of Penalty.--
          ``(1) In general.--Except as provided in paragraph 
        (2), the penalty imposed under subsection (a) with 
        respect to any failure shall be $50,000.
          ``(2) Listed transactions.--The penalty imposed under 
        subsection (a) with respect to any listed transaction 
        shall be an amount equal to the greater of--
                  ``(A) $200,000, or
                  ``(B) 50 percent of the gross income derived 
                by such person with respect to aid, assistance, 
                or advice which is provided with respect to the 
                reportable transaction before the date the 
                return including the transaction is filed under 
                section 6111.
        Subparagraph (B) shall be applied by substituting `75 
        percent' for `50 percent' in the case of an intentional 
        failure or act described in subsection (a).
  ``(c) Rescission Authority.--The provisions of section 
6707A(d) (relating to authority of Commissioner to rescind 
penalty) shall apply to any penalty imposed under this section.
  ``(d) Reportable and Listed Transactions.--The terms 
`reportable transaction' and `listed transaction' have the 
respective meanings given to such terms by section 6707A(c).''.
  (b) Clerical Amendment.--The item relating to section 6707 in 
the table of sections for part I of subchapter B of chapter 68 
is amended by striking ``tax shelters'' and inserting 
``reportable transactions''.
  (c) Effective Date.--The amendments made by this section 
shall apply to returns the due date for which is after the date 
of the enactment of this Act.

SEC. 119. MODIFICATION OF PENALTY FOR FAILURE TO MAINTAIN LISTS OF 
                    INVESTORS.

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

SEC. 120. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN CONDUCT RELATED TO 
                    TAX SHELTERS AND REPORTABLE TRANSACTIONS.

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

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

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

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

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

SEC. 121. UNDERSTATEMENT OF TAXPAYER'S LIABILITY BY INCOME TAX RETURN 
                    PREPARER.

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

SEC. 122. PENALTY ON FAILURE TO REPORT INTERESTS IN FOREIGN FINANCIAL 
                    ACCOUNTS.

  (a) In General.--Section 5321(a)(5) of title 31, United 
States Code, is amended to read as follows:
          ``(5) Foreign financial agency transaction 
        violation.--
                  ``(A) Penalty authorized.--The Secretary of 
                the Treasury may impose a civil money penalty 
                on any person who violates, or causes any 
                violation of, any provision of section 5314.
                  ``(B) Amount of penalty.--
                          ``(i) In general.--Except as provided 
                        in subparagraph (C), the amount of any 
                        civil penalty imposed under 
                        subparagraph (A) shall not exceed 
                        $5,000.
                          ``(ii) Reasonable cause exception.--
                        No penalty shall be imposed under 
                        subparagraph (A) with respect to any 
                        violation if--
                                  ``(I) such violation was due 
                                to reasonable cause, and
                                  ``(II) the amount of the 
                                transaction or the balance in 
                                the account at the time of the 
                                transaction was properly 
                                reported.
                  ``(C) Willful violations.--In the case of any 
                person willfully violating, or willfully 
                causing any violation of, any provision of 
                section 5314--
                          ``(i) the maximum penalty under 
                        subparagraph (B)(i) shall be increased 
                        to the greater of--
                                  ``(I) $25,000, or
                                  ``(II) the amount (not 
                                exceeding $100,000) determined 
                                under subparagraph (D), and
                          ``(ii) subparagraph (B)(ii) shall not 
                        apply.
                  ``(D) Amount.--The amount determined under 
                this subparagraph is--
                          ``(i) in the case of a violation 
                        involving a transaction, the amount of 
                        the transaction, or
                          ``(ii) in the case of a violation 
                        involving a failure to report the 
                        existence of an account or any 
                        identifying information required to be 
                        provided with respect to an account, 
                        the balance in the account at the time 
                        of the violation.''
  (b) Effective Date.--The amendment made by this section shall 
apply to violations occurring after the date of the enactment 
of this Act.

SEC. 123. FRIVOLOUS TAX SUBMISSIONS.

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

``SEC. 6702. FRIVOLOUS TAX SUBMISSIONS.

  ``(a) Civil Penalty for Frivolous Tax Returns.--A person 
shall pay a penalty of $5,000 if--
          ``(1) such person files what purports to be a return 
        of a tax imposed by this title but which--
                  ``(A) does not contain information on which 
                the substantial correctness of the self-
                assessment may be judged, or
                  ``(B) contains information that on its face 
                indicates that the self-assessment is 
                substantially incorrect; and
          ``(2) the conduct referred to in paragraph (1)--
                  ``(A) is based on a position which the 
                Secretary has identified as frivolous under 
                subsection (c), or
                  ``(B) reflects a desire to delay or impede 
                the administration of Federal tax laws.
  ``(b) Civil Penalty for Specified Frivolous Submissions.--
          ``(1) Imposition of penalty.--Except as provided in 
        paragraph (3), any person who submits a specified 
        frivolous submission shall pay a penalty of $5,000.
          ``(2) Specified frivolous submission.--For purposes 
        of this section--
                  ``(A) Specified frivolous submission.--The 
                term `specified frivolous submission' means a 
                specified submission if any portion of such 
                submission--
                          ``(i) is based on a position which 
                        the Secretary has identified as 
                        frivolous under subsection (c), or
                          ``(ii) reflects a desire to delay or 
                        impede the administration of Federal 
                        tax laws.
                  ``(B) Specified submission.--The term 
                `specified submission' means--
                          ``(i) a request for a hearing under--
                                  ``(I) section 6320 (relating 
                                to notice and opportunity for 
                                hearing upon filing of notice 
                                of lien), or
                                  ``(II) section 6330 (relating 
                                to notice and opportunity for 
                                hearing before levy), and
                          ``(ii) an application under--
                                  ``(I) section 6159 (relating 
                                to agreements for payment of 
                                tax liability in installments),
                                  ``(II) section 7122 (relating 
                                to compromises), or
                                  ``(III) section 7811 
                                (relating to taxpayer 
                                assistance orders).
          ``(3) Opportunity to withdraw submission.--If the 
        Secretary provides a person with notice that a 
        submission is a specified frivolous submission and such 
        person withdraws such submission within 30 days after 
        such notice, the penalty imposed under paragraph (1) 
        shall not apply with respect to such submission.
  ``(c) Listing of Frivolous Positions.--The Secretary shall 
prescribe (and periodically revise) a list of positions which 
the Secretary has identified as being frivolous for purposes of 
this subsection. The Secretary shall not include in such list 
any position that the Secretary determines meets the 
requirement of section 6662(d)(2)(B)(ii)(II).
  ``(d) Reduction of Penalty.--The Secretary may reduce the 
amount of any penalty imposed under this section if the 
Secretary determines that such reduction would promote 
compliance with and administration of the Federal tax laws.
  ``(e) Penalties in Addition to Other Penalties.--The 
penalties imposed by this section shall be in addition to any 
other penalty provided by law.''
  (b) Treatment of Frivolous Requests for Hearings Before 
Levy.--
          (1) Frivolous requests disregarded.--Section 6330 
        (relating to notice and opportunity for hearing before 
        levy) is amended by adding at the end the following new 
        subsection:
  ``(g) Frivolous Requests for Hearing, etc.--Notwithstanding 
any other provision of this section, if the Secretary 
determines that any portion of a request for a hearing under 
this section or section 6320 meets the requirement of clause 
(i) or (ii) of section 6702(b)(2)(A), then the Secretary may 
treat such portion as if it were never submitted and such 
portion shall not be subject to any further administrative or 
judicial review.''
          (2) Preclusion from raising frivolous issues at 
        hearing.--Section 6330(c)(4) is amended--
                  (A) by striking ``(A)'' and inserting 
                ``(A)(i)'';
                  (B) by striking ``(B)'' and inserting 
                ``(ii)'';
                  (C) by striking the period at the end of the 
                first sentence and inserting ``; or''; and
                  (D) by inserting after subparagraph (A)(ii) 
                (as so redesignated) the following:
                  ``(B) the issue meets the requirement of 
                clause (i) or (ii) of section 6702(b)(2)(A).''
          (3) Statement of grounds.--Section 6330(b)(1) is 
        amended by striking ``under subsection (a)(3)(B)'' and 
        inserting ``in writing under subsection (a)(3)(B) and 
        states the grounds for the requested hearing''.
  (c) Treatment of Frivolous Requests for Hearings Upon Filing 
of Notice of Lien.--Section 6320 is amended--
          (1) in subsection (b)(1), by striking ``under 
        subsection (a)(3)(B)'' and inserting ``in writing under 
        subsection (a)(3)(B) and states the grounds for the 
        requested hearing'', and
          (2) in subsection (c), by striking ``and (e)'' and 
        inserting ``(e), and (g)''.
  (d) Treatment of Frivolous Applications for Offers-in-
Compromise and Installment Agreements.--Section 7122 is amended 
by adding at the end the following new subsection:
  ``(e) Frivolous Submissions, etc.--Notwithstanding any other 
provision of this section, if the Secretary determines that any 
portion of an application for an offer-in-compromise or 
installment agreement submitted under this section or section 
6159 meets the requirement of clause (i) or (ii) of section 
6702(b)(2)(A), then the Secretary may treat such portion as if 
it were never submitted and such portion shall not be subject 
to any further administrative or judicial review.''
  (e) Clerical Amendment.--The table of sections for part I of 
subchapter B of chapter 68 is amended by striking the item 
relating to section 6702 and inserting the following new item:

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

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

SEC. 124. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE DEPARTMENT OF 
                    TREASURY.

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

SEC. 125. PENALTY ON PROMOTERS OF TAX SHELTERS.

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

SEC. 126. STATUTE OF LIMITATIONS FOR TAXABLE YEARS FOR WHICH LISTED 
                    TRANSACTIONS NOT REPORTED.

  (a) In General.--Section 6501(e)(1) (relating to substantial 
omission of items for income taxes) is amended by adding at the 
end the following new subparagraph:
                  ``(C) Listed transactions.--If a taxpayer 
                fails to include on any return or statement for 
                any taxable year any information with respect 
                to a listed transaction (as defined in section 
                6707A(c)(2)) which is required under section 
                6011 to be included with such return or 
                statement, the tax for such taxable year may be 
                assessed, or a proceeding in court for 
                collection of such tax may be begun without 
                assessment, at any time within 6 years after 
                the time the return is filed. This subparagraph 
                shall not apply to any taxable year if the time 
                for assessment or beginning the proceeding in 
                court has expired before the time a transaction 
                is treated as a listed transaction under 
                section 6011.''
  (b) Effective Date.--The amendment made by this section shall 
apply to transactions after the date of the enactment of this 
Act in taxable years ending after such date.

SEC. 127. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS 
                    ATTRIBUTABLE TO NONDISCLOSED REPORTABLE AND 
                    NONECONOMIC SUBSTANCE TRANSACTIONS.

  (a) In General.--Section 163 (relating to deduction for 
interest) is amended by redesignating subsection (m) as 
subsection (n) and by inserting after subsection (l) the 
following new subsection:
  ``(m) Interest on Unpaid Taxes Attributable To Nondisclosed 
Reportable Transactions and Noneconomic Substance 
Transactions.--No deduction shall be allowed under this chapter 
for any interest paid or accrued under section 6601 on any 
underpayment of tax which is attributable to--
          ``(1) the portion of any reportable transaction 
        understatement (as defined in section 6662A(b)) with 
        respect to which the requirement of section 
        6664(d)(2)(A) is not met, or
          ``(2) any noneconomic substance transaction 
        understatement (as defined in section 6662B(c)).''
  (b) Effective Date.--The amendments made by this section 
shall apply to transactions after the date of the enactment of 
this Act in taxable years ending after such date.

                       Part II--Other Provisions

SEC. 131. LIMITATION ON TRANSFER OR IMPORTATION OF BUILT-IN LOSSES.

  (a) In General.--Section 362 (relating to basis to 
corporations) is amended by adding at the end the following new 
subsection:
  ``(e) Limitations on Built-In Losses.--
          ``(1) Limitation on importation of built-in losses.--
                  ``(A) In general.--If in any transaction 
                described in subsection (a) or (b) there would 
                (but for this subsection) be an importation of 
                a net built-in loss, the basis of each property 
                described in subparagraph (B) which is acquired 
                in such transaction shall (notwithstanding 
                subsections (a) and (b)) be its fair market 
                value immediately after such transaction.
                  ``(B) Property described.--For purposes of 
                subparagraph (A), property is described in this 
                paragraph if--
                          ``(i) gain or loss with respect to 
                        such property is not subject to tax 
                        under this subtitle in the hands of the 
                        transferor immediately before the 
                        transfer, and
                          ``(ii) gain or loss with respect to 
                        such property is subject to such tax in 
                        the hands of the transferee immediately 
                        after such transfer.
                In any case in which the transferor is a 
                partnership, the preceding sentence shall be 
                applied by treating each partner in such 
                partnership as holding such partner's 
                proportionate share of the property of such 
                partnership.
                  ``(C) Importation of net built-in loss.--For 
                purposes of subparagraph (A), there is an 
                importation of a net built-in loss in a 
                transaction if the transferee's aggregate 
                adjusted bases of property described in 
                subparagraph (B) which is transferred in such 
                transaction would (but for this paragraph) 
                exceed the fair market value of such property 
                immediately after such transaction.''
          ``(2) Limitation on transfer of built-in losses in 
        section 351 transactions.--
                  ``(A) In general.--If--
                          ``(i) property is transferred in any 
                        transaction which is described in 
                        subsection (a) and which is not 
                        described in paragraph (1) of this 
                        subsection, and
                          ``(ii) the transferee's aggregate 
                        adjusted bases of the property so 
                        transferred would (but for this 
                        paragraph) exceed the fair market value 
                        of such property immediately after such 
                        transaction,
                then, notwithstanding subsection (a), the 
                transferee's aggregate adjusted bases of the 
                property so transferred shall not exceed the 
                fair market value of such property immediately 
                after such transaction.
                  ``(B) Allocation of basis reduction.--The 
                aggregate reduction in basis by reason of 
                subparagraph (A) shall be allocated among the 
                property so transferred in proportion to their 
                respective built-in losses immediately before 
                the transaction.
                  ``(C) Exception for transfers within 
                affiliated group.--Subparagraph (A) shall not 
                apply to any transaction if the transferor owns 
                stock in the transferee meeting the 
                requirements of section 1504(a)(2). In the case 
                of property to which subparagraph (A) does not 
                apply by reason of the preceding sentence, the 
                transferor's basis in the stock received for 
                such property shall not exceed its fair market 
                value immediately after the transfer.''
  (b) Comparable Treatment Where Liquidation.--Paragraph (1) of 
section 334(b) (relating to liquidation of subsidiary) is 
amended to read as follows:
          ``(1) In general.--If property is received by a 
        corporate distributee in a distribution in a complete 
        liquidation to which section 332 applies (or in a 
        transfer described in section 337(b)(1)), the basis of 
        such property in the hands of such distributee shall be 
        the same as it would be in the hands of the transferor; 
        except that the basis of such property in the hands of 
        such distributee shall be the fair market value of the 
        property at the time of the distribution--
                  ``(A) in any case in which gain or loss is 
                recognized by the liquidating corporation with 
                respect to such property, or
                  ``(B) in any case in which the liquidating 
                corporation is a foreign corporation, the 
                corporate distributee is a domestic 
                corporation, and the corporate distributee's 
                aggregate adjusted bases of property described 
                in section 362(e)(1)(B) which is distributed in 
                such liquidation would (but for this 
                subparagraph) exceed the fair market value of 
                such property immediately after such 
                liquidation.''
  (c) Effective Date.--The amendments made by this section 
shall apply to transactions after the date of the enactment of 
this Act.

SEC. 132. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS TRANSFERS.

  (a) Treatment of Contributed Property With Built-In Loss.--
Paragraph (1) of section 704(c) is amended by striking ``and'' 
at the end of subparagraph (A), by striking the period at the 
end of subparagraph (B) and inserting ``, and'', and by adding 
at the end the following:
                  ``(C) if any property so contributed has a 
                built-in loss--
                          ``(i) such built-in loss shall be 
                        taken into account only in determining 
                        the amount of items allocated to the 
                        contributing partner, and
                          ``(ii) except as provided in 
                        regulations, in determining the amount 
                        of items allocated to other partners, 
                        the basis of the contributed property 
                        in the hands of the partnership shall 
                        be treated as being equal to its fair 
                        market value immediately after the 
                        contribution.
        For purposes of subparagraph (C), the term `built-in 
        loss' means the excess of the adjusted basis of the 
        property (determined without regard to subparagraph 
        (C)(ii)) over its fair market value immediately after 
        the contribution.''
  (b) Adjustment to Basis of Partnership Property on Transfer 
of Partnership Interest if There Is Substantial Built-In 
Loss.--
          (1) Adjustment required.--Subsection (a) of section 
        743 (relating to optional adjustment to basis of 
        partnership property) is amended by inserting before 
        the period ``or unless the partnership has a 
        substantial built-in loss immediately after such 
        transfer''.
          (2) Adjustment.--Subsection (b) of section 743 is 
        amended by inserting ``or with respect to which there 
        is a substantial built-in loss immediately after such 
        transfer'' after ``section 754 is in effect''.
          (3) Substantial built-in loss.--Section 743 is 
        amended by adding at the end the following new 
        subsection:
  ``(d) Substantial Built-In Loss.--
          ``(1) In general.--For purposes of this section, a 
        partnership has a substantial built-in loss with 
        respect to a transfer of an interest in a partnership 
        if the transferee partner's proportionate share of the 
        adjusted basis of the partnership property exceeds by 
        more than $250,000 the basis of such partner's interest 
        in the partnership.
          ``(2) Regulations.--The Secretary shall prescribe 
        such regulations as may be appropriate to carry out the 
        purposes of paragraph (1) and section 734(d), including 
        regulations aggregating related partnerships and 
        disregarding property acquired by the partnership in an 
        attempt to avoid such purposes.''
          (4) Clerical amendments.--
                  (A) The section heading for section 743 is 
                amended to read as follows:

``SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROPERTY WHERE SECTION 
                    754 ELECTION OR SUBSTANTIAL BUILT-IN LOSS.''

                  (B) The table of sections for subpart C of 
                part II of subchapter K of chapter 1 is amended 
                by striking the item relating to section 743 
                and inserting the following new item:

        ``Sec. 743. Adjustment to basis of partnership property where 
                  section 754 election or substantial built-in loss.''

  (c) Adjustment to Basis of Undistributed Partnership Property 
if There Is Substantial Basis Reduction.--
          (1) Adjustment required.--Subsection (a) of section 
        734 (relating to optional adjustment to basis of 
        undistributed partnership property) is amended by 
        inserting before the period ``or unless there is a 
        substantial basis reduction''.
          (2) Adjustment.--Subsection (b) of section 734 is 
        amended by inserting ``or unless there is a substantial 
        basis reduction'' after ``section 754 is in effect''.
          (3) Substantial basis reduction.--Section 734 is 
        amended by adding at the end the following new 
        subsection:
  ``(d) Substantial Basis Reduction.--
          ``(1) In general.--For purposes of this section, 
        there is a substantial basis reduction with respect to 
        a distribution if the sum of the amounts described in 
        subparagraphs (A) and (B) of subsection (b)(2) exceeds 
        $250,000.
          ``(2) Regulations.--

          ``For regulations to carry out this subsection, see section 
        743(d)(2).''

          (4) Clerical amendments.--
                  (A) The section heading for section 734 is 
                amended to read as follows:

``SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED PARTNERSHIP PROPERTY 
                    WHERE SECTION 754 ELECTION OR SUBSTANTIAL BASIS 
                    REDUCTION.''

                  (B) The table of sections for subpart B of 
                part II of subchapter K of chapter 1 is amended 
                by striking the item relating to section 734 
                and inserting the following new item:

        ``Sec. 734. Adjustment to basis of undistributed partnership 
                  property where section 754 election or substantial 
                  basis reduction.''

  (d) Effective Dates.--
          (1) Subsection (a).--The amendment made by subsection 
        (a) shall apply to contributions made after the date of 
        the enactment of this Act.
          (2) Subsection (b).--The amendments made by 
        subsection (b) shall apply to transfers after the date 
        of the enactment of this Act.
          (3) Subsection (c).--The amendments made by 
        subsection (c) shall apply to distributions after the 
        date of the enactment of this Act.

SEC. 133. NO REDUCTION OF BASIS UNDER SECTION 734 IN STOCK HELD BY 
                    PARTNERSHIP IN CORPORATE PARTNER.

  (a) In General.--Section 755 is amended by adding at the end 
the following new subsection:
  ``(c) No Allocation of Basis Decrease to Stock of Corporate 
Partner.--In making an allocation under subsection (a) of any 
decrease in the adjusted basis of partnership property under 
section 734(b)--
          ``(1) no allocation may be made to stock in a 
        corporation which is a partner in the partnership, and
          ``(2) any amount not allocable to stock by reason of 
        paragraph (1) shall be allocated under subsection (a) 
        to other partnership property.
Gain shall be recognized to the partnership to the extent that 
the amount required to be allocated under paragraph (2) to 
other partnership property exceeds the aggregate adjusted basis 
of such other property immediately before the allocation 
required by paragraph (2).''
  (b) Effective Date.--The amendment made by this section shall 
apply to distributions after the date of the enactment of this 
Act.

SEC. 134. REPEAL OF SPECIAL RULES FOR FASITS.

  (a) In General.--Part V of subchapter M of chapter 1 
(relating to financial asset securitization investment trusts) 
is hereby repealed.
  (b) Conforming Amendments.--
          (1) Paragraph (6) of section 56(g) is amended by 
        striking ``REMIC, or FASIT'' and inserting ``or 
        REMIC''.
          (2) Clause (ii) of section 382(l)(4)(B) is amended by 
        striking ``a REMIC to which part IV of subchapter M 
        applies, or a FASIT to which part V of subchapter M 
        applies,'' and inserting ``or a REMIC to which part IV 
        of subchapter M applies,''.
          (3) Paragraph (1) of section 582(c) is amended by 
        striking ``, and any regular interest in a FASIT,''.
          (4) Subparagraph (E) of section 856(c)(5) is amended 
        by striking the last sentence.
          (5) Paragraph (5) of section 860G(a) is amended by 
        adding ``and'' at the end of subparagraph (B), by 
        striking ``, and'' at the end of subparagraph (C) and 
        inserting a period, and by striking subparagraph (D).
          (6) Subparagraph (C) of section 1202(e)(4) is amended 
        by striking ``REMIC, or FASIT'' and inserting ``or 
        REMIC''.
          (7) Subparagraph (C) of section 7701(a)(19) is 
        amended by adding ``and'' at the end of clause (ix), by 
        striking ``, and'' at the end of clause (x) and 
        inserting a period, and by striking clause (xi).
          (8) The table of parts for subchapter M of chapter 1 
        is amended by striking the item relating to part V.
  (c) Effective Date.--
          (1) In general.--Except as provided in paragraph (2), 
        the amendments made by this section shall apply to 
        taxable years beginning after December 31, 2003.
          (2) Exception for existing fasits.--
                  (A) In general.--Paragraph (1) shall not 
                apply to any FASIT in existence on the date of 
                the enactment of this Act.
                  (B) Transfer of additional assets not 
                permitted.--Except as provided in regulations 
                prescribed by the Secretary of the Treasury or 
                the Secretary's delegate, subparagraph (A) 
                shall cease to apply as of the earliest date 
                after the date of the enactment of this Act 
                that any property is transferred to the FASIT.

SEC. 135. EXPANDED DISALLOWANCE OF DEDUCTION FOR INTEREST ON 
                    CONVERTIBLE DEBT.

  (a) In General.--Paragraph (2) of section 163(l) is amended 
by striking ``or a related party'' and inserting ``or equity 
held by the issuer (or any related party) in any other 
person''.
  (b) Conforming Amendment.--Paragraph (3) of section 163(l) is 
amended by striking ``or a related party'' in the material 
preceding subparagraph (A) and inserting ``or any other 
person''.
  (c) Effective Date.--The amendments made by this section 
shall apply to debt instruments issued after the date of the 
enactment of this Act.

SEC. 136. EXPANDED AUTHORITY TO DISALLOW TAX BENEFITS UNDER SECTION 
                    269.

  (a) In General.--Subsection (a) of section 269 (relating to 
acquisitions made to evade or avoid income tax) is amended to 
read as follows:
  ``(a) In General.--If--
          ``(1)(A) any person acquires stock in a corporation, 
        or
          ``(B) any corporation acquires, directly or 
        indirectly, property of another corporation and the 
        basis of such property, in the hands of the acquiring 
        corporation, is determined by reference to the basis in 
        the hands of the transferor corporation, and
          ``(2) the principal purpose for which such 
        acquisition was made is evasion or avoidance of Federal 
        income tax by securing the benefit of a deduction, 
        credit, or other allowance,
then the Secretary may disallow such deduction, credit, or 
other allowance.''
  (b) Effective Date.--The amendment made by this section shall 
apply to stock and property acquired after February 13, 2003.

SEC. 137. MODIFICATIONS OF CERTAIN RULES RELATING TO CONTROLLED FOREIGN 
                    CORPORATIONS.

  (a) Limitation on Exception From PFIC Rules for United States 
Shareholders of Controlled Foreign Corporations.--Paragraph (2) 
of section 1297(e) (relating to passive investment company) is 
amended by adding at the end the following flush sentence:
        ``Such term shall not include any period if there is 
        only a remote likelihood of an inclusion in gross 
        income under section 951(a)(1)(A)(i) of subpart F 
        income of such corporation for such period.''
  (b) Determination of Pro Rata Share of Subpart F Income.--
Subsection (a) of section 951 (relating to amounts included in 
gross income of United States shareholders) is amended by 
adding at the end the following new paragraph:
          ``(4) Special rules for determining pro rata share of 
        subpart f income.--The pro rata share under paragraph 
        (2) shall be determined by disregarding--
                  ``(A) any rights lacking substantial economic 
                effect, and
                  ``(B) stock owned by a shareholder who is a 
                tax-indifferent party (as defined in section 
                7701(m)(3)) if the amount which would (but for 
                this paragraph) be allocated to such 
                shareholder does not reflect such shareholder's 
                economic share of the earnings and profits of 
                the corporation.''
  (c) Effective Date.--The amendments made by this section 
shall apply to taxable years on controlled foreign corporation 
beginning after February 13, 2003, and to taxable years of 
United States shareholder in which or with which such taxable 
years of controlled foreign corporations end.

SEC. 138. BASIS FOR DETERMINING LOSS ALWAYS REDUCED BY NONTAXED PORTION 
                    OF DIVIDENDS.

  (a) In General.--Section 1059 (relating to corporate 
shareholder's basis in stock reduced by nontaxed portion of 
extraordinary dividends) is amended by redesignating subsection 
(g) as subsection (h) and by inserting after subsection (f) the 
following new subsection:
  ``(g) Basis for Determining Loss Always Reduced by Nontaxed 
Portion of Dividends.--The basis of stock in a corporation (for 
purposes of determining loss) shall be reduced by the nontaxed 
portion of any dividend received with respect to such stock if 
this section does not otherwise apply to such dividend.''
  (b) Effective Date.--The amendment made by this section shall 
apply to dividends received after the date of the enactment of 
this Act.

SEC. 139. AFFIRMATION OF CONSOLIDATED RETURN REGULATION AUTHORITY.

  (a) In General.--Section 1502 (relating to consolidated 
return regulations) is amended by adding at the end the 
following new sentence: ``In prescribing such regulations, the 
Secretary may prescribe rules applicable to corporations filing 
consolidated returns under section 1501 that are different from 
other provisions of this title that would apply if such 
corporations filed separate returns.''
  (b) Result Not Overturned.--Notwithstanding subsection (a), 
the Internal Revenue Code of 1986 shall be construed by 
treating Treasury regulation Sec. 1.1502-20(c)(1)(iii) (as in 
effect on January 1, 2001) as being inapplicable to the type of 
factual situation in 255 F.3d 1357 (Fed. Cir. 2001).
  (c) Effective Date.--The provisions of this section shall 
apply to taxable years beginning before, on, or after the date 
of the enactment of this Act.

Subtitle B--Prevention of Corporate Expatriation to Avoid United States 
                               Income Tax

SEC. 151. PREVENTION OF CORPORATE EXPATRIATION TO AVOID UNITED STATES 
                    INCOME TAX.

  (a) In General.--Paragraph (4) of section 7701(a) (defining 
domestic) is amended to read as follows:
          ``(4) Domestic.--
                  ``(A) In general.--Except as provided in 
                subparagraph (B), the term `domestic' when 
                applied to a corporation or partnership means 
                created or organized in the United States or 
                under the law of the United States or of any 
                State unless, in the case of a partnership, the 
                Secretary provides otherwise by regulations.
                  ``(B) Certain corporations treated as 
                domestic.--
                          ``(i) In general.--The acquiring 
                        corporation in a corporate expatriation 
                        transaction shall be treated as a 
                        domestic corporation.
                          ``(ii) Corporate expatriation 
                        transaction.--For purposes of this 
                        subparagraph, the term `corporate 
                        expatriation transaction' means any 
                        transaction if--
                                  ``(I) a nominally foreign 
                                corporation (referred to in 
                                this subparagraph as the 
                                `acquiring corporation') 
                                acquires, as a result of such 
                                transaction, directly or 
                                indirectly substantially all of 
                                the properties held directly or 
                                indirectly by a domestic 
                                corporation, and
                                  ``(II) immediately after the 
                                transaction, more than 80 
                                percent of the stock (by vote 
                                or value) of the acquiring 
                                corporation is held by former 
                                shareholders of the domestic 
                                corporation by reason of 
                                holding stock in the domestic 
                                corporation.
                          ``(iii) Lower stock ownership 
                        requirement in certain cases.--
                        Subclause (II) of clause (ii) shall be 
                        applied by substituting `50 percent' 
                        for `80 percent' with respect to any 
                        nominally foreign corporation if--
                                  ``(I) such corporation does 
                                not have substantial business 
                                activities (when compared to 
                                the total business activities 
                                of the expanded affiliated 
                                group) in the foreign country 
                                in which or under the law of 
                                which the corporation is 
                                created or organized, and
                                  ``(II) the stock of the 
                                corporation is publicly traded 
                                and the principal market for 
                                the public trading of such 
                                stock is in the United States.
                          ``(iv) Partnership transactions.--The 
                        term `corporate expatriation 
                        transaction' includes any transaction 
                        if--
                                  ``(I) a nominally foreign 
                                corporation (referred to in 
                                this subparagraph as the 
                                `acquiring corporation') 
                                acquires, as a result of such 
                                transaction, directly or 
                                indirectly properties 
                                constituting a trade or 
                                business of a domestic 
                                partnership,
                                  ``(II) immediately after the 
                                transaction, more than 80 
                                percent of the stock (by vote 
                                or value) of the acquiring 
                                corporation is held by former 
                                partners of the domestic 
                                partnership or related foreign 
                                partnerships (determined 
                                without regard to stock of the 
                                acquiring corporation which is 
                                sold in a public offering 
                                related to the transaction), 
                                and
                                  ``(III) the acquiring 
                                corporation meets the 
                                requirements of subclauses (I) 
                                and (II) of clause (iii).
                          ``(v) Special rules.--For purposes of 
                        this subparagraph--
                                  ``(I) a series of related 
                                transactions shall be treated 
                                as 1 transaction, and
                                  ``(II) stock held by members 
                                of the expanded affiliated 
                                group which includes the 
                                acquiring corporation shall not 
                                be taken into account in 
                                determining ownership.
                          ``(vi) Other definitions.--For 
                        purposes of this subparagraph--
                                  ``(I) Nominally foreign 
                                corporation.--The term 
                                `nominally foreign corporation' 
                                means any corporation which 
                                would (but for this 
                                subparagraph) be treated as a 
                                foreign corporation.
                                  ``(II) Expanded affiliated 
                                group.--The term `expanded 
                                affiliated group' means an 
                                affiliated group (as defined in 
                                section 1504(a) without regard 
                                to section 1504(b)).
                                  ``(III) Related foreign 
                                partnership.--A foreign 
                                partnership is related to a 
                                domestic partnership if they 
                                are under common control 
                                (within the meaning of section 
                                482), or they shared the same 
                                trademark or tradename.''
  (b) Effective Dates.--
          (1) In general.--The amendment made by this section 
        shall apply to corporate expatriation transactions 
        completed after September 11, 2001.
          (2) Special rule.--The amendment made by this section 
        shall also apply to corporate expatriation transactions 
        completed on or before September 11, 2001, but only 
        with respect to taxable years of the acquiring 
        corporation beginning after December 31, 2003.

          TITLE II--SIMPLIFICATION OF EARNED INCOME TAX CREDIT

SEC. 201. SIMPLIFICATION OF EARNED INCOME TAX CREDIT.

  (a) Repeal of Denial of Credit Where Investment Income.--
Section 32 is amended by striking subsection (i).
  (b) Earned Income To Include Only Amounts Includible in Gross 
Income.--Section 32(c)(2)(B) is amended by striking ``and'' at 
the end of clause (iv), by striking the period at the end of 
clause (v) and inserting ``, and'', and by adding at the end 
the following new clause:
                        ``(vi) the requirement under 
                        subparagraph (A)(i) that an amount be 
                        includible in gross income shall not 
                        apply if such amount is exempt from tax 
                        under section 7873 or is derived 
                        directly from restricted and allotted 
                        land under the Act of February 8, 1887 
                        (commonly known as the Indian General 
                        Allotment Act) (25 U.S.C. 331 et seq.) 
                        or from land held under Acts or 
                        treaties containing an exception 
                        provision similar to the Indian General 
                        Allotment Act.''
  (c) Modification of Joint Return Requirement.--Subsection (d) 
of section 32 is amended to read as follows:
  ``(d) Married Individuals.--
          ``(1) In general.--If the taxpayer is married at the 
        close of the taxable year, the credit shall be allowed 
        under subsection (a) only if the taxpayer and his 
        spouse file a joint return for the taxable year.
          ``(2) Marital status.--For purposes of paragraph (1), 
        an individual legally separated from his spouse under a 
        decree of divorce or of separate maintenance shall not 
        be considered as married.
          ``(3) Certain married individuals living apart.--For 
        purposes of paragraph (1), if--
                  ``(A) an individual --
                          ``(i) is married and files a separate 
                        return, and
                          ``(ii) has a qualifying child who is 
                        a son, daughter, stepson, or 
                        stepdaughter of such individual, and
                  ``(B) during the last 6 months of such 
                taxable year, such individual and such 
                individual's spouse do not have the same 
                principal place of abode,
        such individual shall not be considered as married.''
  (d) Expansion of Mathematical Error Authority.--Paragraph (2) 
of section 6213(g) is amended by striking ``and'' at the end of 
subparagraph (K), by striking the period at the end of 
subparagraph (L) and inserting ``, and'', and by inserting 
after subparagraph (L) the following new subparagraph:
                  ``(M) the entry on the return claiming the 
                credit under section 32 with respect to a child 
                if, according to the Federal Case Registry of 
                Child Support Orders established under section 
                453(h) of the Social Security Act, the taxpayer 
                is a noncustodial parent of such child.''
  (e) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2003.

SEC. 202. PROFILING OF EARNED INCOME TAX CREDIT BENEFICIARIES.

  (a) Findings.--The Congress hereby finds that:
          (1) Current law authorizes the Internal Revenue 
        Service to impose additional earned income tax credit 
        eligibility requirements, such as the current 
        recertification program, only in cases in which a 
        taxpayer has made prior improper claims of the earned 
        income tax credit.
          (2) The Internal Revenue Service is planning to 
        implement an earned income tax credit precertification 
        program that differs from what is authorized under 
        current law in that it would apply to taxpayers who 
        fall within broad categories even though they made no 
        prior improper claims for the credit.
          (3) There is no precedent in the Internal Revenue 
        Code of 1986 for denying or delaying a tax refund that 
        is apparently properly claimed on a tax return merely 
        because the taxpayer meets a certain profile.
          (4) The proposed earned income tax credit 
        precertification program is an affront to our sense of 
        fairness because compliant taxpayers are treated 
        differently solely by reason of differing family 
        structures or relationships and solely by reason of the 
        fact that they are claiming a tax benefit designed to 
        assist the working poor.
          (5) No other family-related tax benefit, such as the 
        dependency exemption or child tax credit, is subject to 
        such a precertification requirement; and there is no 
        such precertification requirement for abusive tax 
        shelters purchased by corporations or for tax benefits 
        claimed by higher income individuals.
  (b) Proposed EITC Profiling Not Permitted.--The Internal 
Revenue Service shall not implement any system of 
precertification for the earned income tax credit that applies 
to taxpayers who have not made prior improper claims unless 
such a system is hereafter specifically authorized by law.

         TITLE III--TAXPAYER PROTECTIONS AND IRS ACCOUNTABILITY

                Subtitle A--Penalty and Interest Reforms

SEC. 301. FAILURE TO PAY ESTIMATED TAX PENALTY CONVERTED TO INTEREST 
                    CHARGE ON ACCUMULATED UNPAID BALANCE.

  (a) Penalty Moved to Interest Chapter of Code.--The Internal 
Revenue Code of 1986 is amended by redesignating section 6654 
as section 6641 and by moving section 6641 (as so redesignated) 
from part I of subchapter A of chapter 68 to the end of 
subchapter E of chapter 67 (as added by subsection (e)(1) of 
this section).
  (b) Penalty Converted to Interest Charge.--The heading and 
subsections (a) and (b) of section 6641 (as so redesignated) 
are amended to read as follows:

``SEC. 6641. INTEREST ON FAILURE BY INDIVIDUAL TO PAY ESTIMATED INCOME 
                    TAX.

  ``(a) In General.--Interest shall be paid on any underpayment 
of estimated tax by an individual for a taxable year for each 
day of such underpayment. The amount of such interest for any 
day shall be the product of the underpayment rate established 
under subsection (b)(2) multiplied by the amount of the 
underpayment.
  ``(b) Amount of Underpayment; Interest Rate.--For purposes of 
subsection (a)--
          ``(1) Amount.--The amount of the underpayment on any 
        day shall be the excess of--
                  ``(A) the sum of the required installments 
                for the taxable year the due dates for which 
                are on or before such day, over
                  ``(B) the sum of the amounts (if any) of 
                estimated tax payments made on or before such 
                day on such required installments.
          ``(2) Determination of interest rate.--
                  ``(A) In general.--The underpayment rate with 
                respect to any day in an installment 
                underpayment period shall be the underpayment 
                rate established under section 6621 for the 
                first day of the calendar quarter in which such 
                installment underpayment period begins.
                  ``(B) Installment underpayment period.--For 
                purposes of subparagraph (A), the term 
                `installment underpayment period' means the 
                period beginning on the day after the due date 
                for a required installment and ending on the 
                due date for the subsequent required 
                installment (or in the case of the 4th required 
                installment, the 15th day of the 4th month 
                following the close of a taxable year).
                  ``(C) Daily rate.--The rate determined under 
                subparagraph (A) shall be applied on a daily 
                basis and shall be based on the assumption of 
                365 days in a calendar year.
          ``(3) Termination of estimated tax interest.--No day 
        after the end of the installment underpayment period 
        for the 4th required installment specified in paragraph 
        (2)(B) for a taxable year shall be treated as a day of 
        underpayment with respect to such taxable year.''.
  (c) Increase in Safe Harbor Where Tax is Small.--
          (1) In general.--Clause (i) of section 6641(d)(1)(B) 
        (as so redesignated) is amended to read as follows:
                          ``(i) the lesser of--
                                  ``(I) 90 percent of the tax 
                                shown on the return for the 
                                taxable year (or, if no return 
                                is filed, 90 percent of the tax 
                                for such year), or
                                  ``(II) the tax shown on the 
                                return for the taxable year 
                                (or, if no return is filed, the 
                                tax for such year) reduced (but 
                                not below zero) by $1,600, 
                                or''.
          (2) Conforming amendment.--Subsection (e) of section 
        6641 (as so redesignated) is amended by striking 
        paragraph (1) and redesignating paragraphs (2) and (3) 
        as paragraphs (1) and (2), respectively.
  (d) Conforming Amendments.--
          (1) Paragraphs (1) and (2) of subsection (e) (as 
        redesignated by subsection (c)(2)) and subsection (h) 
        of section 6641 (as so designated) are each amended by 
        striking ``addition to tax'' each place it occurs and 
        inserting ``interest''.
          (2) Section 167(g)(5)(D) is amended by striking 
        ``6654'' and inserting ``6641''.
          (3) Section 460(b)(1) is amended by striking ``6654'' 
        and inserting ``6641''.
          (4) Section 3510(b) is amended--
                  (A) by striking ``section 6654'' in paragraph 
                (1) and inserting ``section 6641'';
                  (B) by amending paragraph (2)(B) to read as 
                follows:
                  ``(B) no interest would be required to be 
                paid (but for this section) under 6641 for such 
                taxable year by reason of the $1,600 amount 
                specified in section 6641(d)(1)(B)(i)(II).'';
                  (C) by striking ``section 6654(d)(2)'' in 
                paragraph (3) and inserting ``section 
                6641(d)(2)''; and
                  (D) by striking paragraph (4).
          (5) Section 6201(b)(1) is amended by striking 
        ``6654'' and inserting ``6641''.
          (6) Section 6601(h) is amended by striking ``6654'' 
        and inserting ``6641''.
          (7) Section 6621(b)(2)(B) is amended by striking 
        ``addition to tax under section 6654'' and inserting 
        ``interest required to be paid under section 6641''.
          (8) Section 6622(b) is amended--
                  (A) by striking ``Penalty for'' in the 
                heading; and
                  (B) by striking ``addition to tax under 
                section 6654 or 6655'' and inserting ``interest 
                required to be paid under section 6641 or 
                addition to tax under section 6655''.
          (9) Section 6658(a) is amended--
                  (A) by striking ``6654, or 6655'' and 
                inserting ``or 6655, and no interest shall be 
                required to be paid under section 6641,''; and
                  (B) by inserting ``or paying interest'' after 
                ``the tax'' in paragraph (2)(B)(ii).
          (10) Section 6665(b) is amended--
                  (A) in the matter preceding paragraph (1) by 
                striking ``, 6654,''; and
                  (B) in paragraph (2) by striking ``6654 or''.
          (11) Section 7203 is amended by striking ``section 
        6654 or 6655'' and inserting ``section 6655 or interest 
        required to be paid under section 6641''.
  (e) Clerical Amendments.--
          (1) Chapter 67 is amended by inserting after 
        subchapter D the following:

  ``Subchapter E--Interest on Failure by Individual to Pay Estimated 
                               Income Tax


        ``Sec. 6641. Interest on failure by individual to pay estimated 
                  income tax.''.

          (2) The table of subchapters for chapter 67 is 
        amended by adding at the end the following new items:

        ``Subchapter D. Notice requirements.
        ``Subchapter E. Interest on failure by individual to pay 
                  estimated income tax.''.

          (3) The table of sections for part I of subchapter A 
        of chapter 68 is amended by striking the item relating 
        to section 6654.
  (f) Effective Date.--The amendments made by this section 
shall apply to installment payments for taxable years beginning 
after December 31, 2003.

SEC. 302. ABATEMENT OF INTEREST.

  (a) Abatement of Interest With Respect to Erroneous Refund 
Check Without Regard to Size of Refund.--Paragraph (2) of 
section 6404(e) is amended by striking ``unless--'' and all 
that follows and inserting ``unless the taxpayer (or a related 
party) has in any way caused such erroneous refund.''.
  (b) Abatement of Interest to Extent Interest is Attributable 
to Taxpayer Reliance on Written Statements of the IRS.--
Subsection (f) of section 6404 is amended--
          (1) in the subsection heading, by striking ``Penalty 
        or Addition'' and inserting ``Interest, Penalty, or 
        Addition''; and
          (2) in paragraph (1) and in subparagraph (B) of 
        paragraph (2), by striking ``penalty or addition'' and 
        inserting ``interest, penalty, or addition''.
  (c) Effective Date.--The amendments made by this section 
shall apply with respect to interest accruing on or after the 
date of the enactment of this Act.

SEC. 303. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON POTENTIAL 
                    UNDERPAYMENTS.

  (a) In General.--Subchapter A of chapter 67 (relating to 
interest on underpayments) is amended by adding at the end the 
following new section:

``SEC. 6603. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON POTENTIAL 
                    UNDERPAYMENTS, ETC.

  ``(a) Authority To Make Deposits Other Than As Payment of 
Tax.--A taxpayer may make a cash deposit with the Secretary 
which may be used by the Secretary to pay any tax imposed under 
subtitle A or B or chapter 41, 42, 43, or 44 which has not been 
assessed at the time of the deposit. Such a deposit shall be 
made in such manner as the Secretary shall prescribe.
  ``(b) No Interest Imposed.--To the extent that such deposit 
is used by the Secretary to pay tax, for purposes of section 
6601 (relating to interest on underpayments), the tax shall be 
treated as paid when the deposit is made.
  ``(c) Return of Deposit.--Except in a case where the 
Secretary determines that collection of tax is in jeopardy, the 
Secretary shall return to the taxpayer any amount of the 
deposit (to the extent not used for a payment of tax) which the 
taxpayer requests in writing.
  ``(d) Payment of Interest.--
          ``(1) In general.--For purposes of section 6611 
        (relating to interest on overpayments), a deposit which 
        is returned to a taxpayer shall be treated as a payment 
        of tax for any period to the extent (and only to the 
        extent) attributable to a disputable tax for such 
        period. Under regulations prescribed by the Secretary, 
        rules similar to the rules of section 6611(b)(2) shall 
        apply.
          ``(2) Disputable tax.--
                  ``(A) In general.--For purposes of this 
                section, the term `disputable tax' means the 
                amount of tax specified at the time of the 
                deposit as the taxpayer's reasonable estimate 
                of the maximum amount of any tax attributable 
                to disputable items.
                  ``(B) Safe harbor based on 30-day letter.--In 
                the case of a taxpayer who has been issued a 
                30-day letter, the maximum amount of tax under 
                subparagraph (A) shall not be less than the 
                amount of the proposed deficiency specified in 
                such letter.
          ``(3) Other definitions.--For purposes of paragraph 
        (2)--
                  ``(A) Disputable item.--The term `disputable 
                item' means any item of income, gain, loss, 
                deduction, or credit if the taxpayer--
                          ``(i) has a reasonable basis for its 
                        treatment of such item, and
                          ``(ii) reasonably believes that the 
                        Secretary also has a reasonable basis 
                        for disallowing the taxpayer's 
                        treatment of such item.
                  ``(B) 30-day letter.--The term `30-day 
                letter' means the first letter of proposed 
                deficiency which allows the taxpayer an 
                opportunity for administrative review in the 
                Internal Revenue Service Office of Appeals.
          ``(4) Rate of interest.--The rate of interest 
        allowable under this subsection shall be the Federal 
        short-term rate determined under section 6621(b), 
        compounded daily.
  ``(e) Use of Deposits.--
          ``(1) Payment of tax.--Except as otherwise provided 
        by the taxpayer, deposits shall be treated as used for 
        the payment of tax in the order deposited.
          ``(B) Returns of deposits.--Deposits shall be treated 
        as returned to the taxpayer on a last-in, first-out 
        basis.''.
  (b) Clerical Amendment.--The table of sections for subchapter 
A of chapter 67 is amended by adding at the end the following 
new item:

        ``Sec. 6603. Deposits made to suspend running of interest on 
                  potential underpayments, etc.''.

  (c) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to deposits made after the date of the 
        enactment of this Act.
          (2) Coordination with deposits made under revenue 
        procedure 84-58.--In the case of an amount held by the 
        Secretary of the Treasury or his delegate on the date 
        of the enactment of this Act as a deposit in the nature 
        of a cash bond deposit pursuant to Revenue Procedure 
        84-58, the date that the taxpayer identifies such 
        amount as a deposit made pursuant to section 6603 of 
        the Internal Revenue Code (as added by this Act) shall 
        be treated as the date such amount is deposited for 
        purposes of such section 6603.

SEC. 304. EXPANSION OF INTEREST NETTING FOR INDIVIDUALS.

  (a) In General.--Subsection (d) of section 6621 (relating to 
elimination of interest on overlapping periods of tax 
overpayments and underpayments) is amended by adding at the end 
the following: ``Solely for purposes of the preceding sentence, 
section 6611(e) shall not apply in the case of an 
individual.''.
  (b) Effective Date.--The amendment made by subsection (a) 
shall apply to interest accrued after December 31, 2003.

SEC. 305. WAIVER OF CERTAIN PENALTIES FOR FIRST-TIME UNINTENTIONAL 
                    MINOR ERRORS.

  (a) In General.--Section 6651 (relating to failure to file 
tax return or to pay tax) is amended by adding at the end the 
following new subsection:
  ``(i) Treatment of First-Time Unintentional Minor Errors.--
          ``(1) In general.--In the case of a return of tax 
        imposed by subtitle A filed by an individual, the 
        Secretary may waive an addition to tax under subsection 
        (a) if--
                  ``(A) the individual has a history of 
                compliance with the requirements of this title,
                  ``(B) it is shown that the failure is due to 
                an unintentional minor error,
                  ``(C) the penalty would be grossly 
                disproportionate to the action or expense that 
                would have been needed to avoid the error, and 
                imposing the penalty would be against equity 
                and good conscience,
                  ``(D) waiving the penalty would promote 
                compliance with the requirements of this title 
                and effective tax administration, and
                  ``(E) the taxpayer took all reasonable steps 
                to remedy the error promptly after discovering 
                it.
          ``(2) Exceptions.--Paragraph (1) shall not apply if--
                  ``(A) the Secretary has waived any addition 
                to tax under this subsection with respect to 
                any prior failure by such individual,
                  ``(B) the failure is a mathematical or 
                clerical error (as defined in section 
                6213(g)(2)), or
                  ``(C) the failure is the lack of a required 
                signature.''.
  (b) Effective Date.--The amendment made by this section shall 
take effect on January 1, 2004.

SEC. 306. FRIVOLOUS TAX SUBMISSIONS.

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

``SEC. 6702. FRIVOLOUS TAX SUBMISSIONS.

  ``(a) Civil Penalty for Frivolous Tax Returns.--A person 
shall pay a penalty of $5,000 if--
          ``(1) such person files what purports to be a return 
        of a tax imposed by this title but which--
                  ``(A) does not contain information on which 
                the substantial correctness of the self-
                assessment may be judged, or
                  ``(B) contains information that on its face 
                indicates that the self-assessment is 
                substantially incorrect; and
          ``(2) the conduct referred to in paragraph (1)--
                  ``(A) is based on a position which the 
                Secretary has identified as frivolous under 
                subsection (c), or
                  ``(B) reflects a desire to delay or impede 
                the administration of Federal tax laws.
  ``(b) Civil Penalty for Specified Frivolous Submissions.--
          ``(1) Imposition of Penalty.--Except as provided in 
        paragraph (3), any person who submits a specified 
        frivolous submission shall pay a penalty of $5,000.
          ``(2) Specified frivolous submission.--For purposes 
        of this section--
                  ``(A) Specified frivolous submission.--The 
                term `specified frivolous submission' means a 
                specified submission if any portion of such 
                submission is based on a position which the 
                Secretary has identified as frivolous under 
                subsection (c).
                  ``(B) Specified submission.--The term 
                `specified submission' means--
                          ``(i) a request for a hearing under--
                                  ``(I) section 6320 (relating 
                                to notice and opportunity for 
                                hearing upon filing of notice 
                                of lien), or
                                  ``(II) section 6330 (relating 
                                to notice and opportunity for 
                                hearing before levy), and
                          ``(ii) an application under--
                                  ``(I) section 7811 (relating 
                                to taxpayer assistance orders),
                                  ``(II) section 6159 (relating 
                                to agreements for payment of 
                                tax liability in installments), 
                                or
                                  ``(III) section 7122 
                                (relating to compromises).
          ``(3) Opportunity to withdraw submission.--If the 
        Secretary provides a person with notice that a 
        submission is a specified frivolous submission and such 
        person withdraws such submission within 30 days after 
        such notice, the penalty imposed under paragraph (1) 
        shall not apply with respect to such submission.
  ``(c) Listing of Frivolous Positions.--The Secretary shall 
prescribe (and periodically revise) a list of positions which 
the Secretary has identified as being frivolous for purposes of 
this subsection. The Secretary shall not include in such list 
any position that the Secretary determines meets the 
requirement of section 6662(d)(2)(B)(ii)(II).
  ``(d) Reduction of Penalty.--The Secretary may reduce the 
amount of any penalty imposed under this section if the 
Secretary determines that such reduction would promote 
compliance with and administration of the Federal tax laws.
  ``(e) Penalties in Addition to Other Penalties.--The 
penalties imposed by this section shall be in addition to any 
other penalty provided by law.''.
  (b) Clerical Amendment.--The table of sections for part I of 
subchapter B of chapter 68 is amended by striking the item 
relating to section 6702 and inserting the following new item:

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

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

SEC. 307. CLARIFICATION OF APPLICATION OF FEDERAL TAX DEPOSIT PENALTY.

  Nothing in section 6656 of the Internal Revenue Code of 1986 
shall be construed to permit the percentage specified in 
subsection (b)(1)(A)(iii) thereof to apply other than in a case 
where the failure is for more than 15 days.

             Subtitle B--Fairness of Collection Procedures

SEC. 311. PARTIAL PAYMENT OF TAX LIABILITY IN INSTALLMENT AGREEMENTS.

  (a) In General.--
          (1) Section 6159(a) (relating to authorization of 
        agreements) is amended--
                  (A) by striking ``satisfy liability for 
                payment of'' and inserting ``make payment on'', 
                and
                  (B) by inserting ``full or partial'' after 
                ``facilitate''.
          (2) Section 6159(c) (relating to Secretary required 
        to enter into installment agreements in certain cases) 
        is amended in the matter preceding paragraph (1) by 
        inserting ``full'' before ``payment''.
  (b) Requirement To Review Partial Payment Agreements Every 
Two Years.--Section 6159 is amended by redesignating 
subsections (d) and (e) as subsections (e) and (f), 
respectively, and inserting after subsection (c) the following 
new subsection:
  ``(d) Secretary Required To Review Installment Agreements for 
Partial Collection Every Two Years.--In the case of an 
agreement entered into by the Secretary under subsection (a) 
for partial collection of a tax liability, the Secretary shall 
review the agreement at least once every 2 years.''.
  (c) Effective Date.--The amendments made by this section 
shall apply to agreements entered into on or after the date of 
the enactment of this Act.

SEC. 312. EXTENSION OF TIME FOR RETURN OF PROPERTY.

  (a) Extension of Time for Return of Property Subject to 
Levy.--Subsection (b) of section 6343 (relating to return of 
property) is amended by striking ``9 months'' and inserting ``2 
years''.
  (b) Period of Limitation on Suits.--Subsection (c) of section 
6532 (relating to suits by persons other than taxpayers) is 
amended--
          (1) in paragraph (1) by striking ``9 months'' and 
        inserting ``2 years'', and
          (2) in paragraph (2) by striking ``9-month'' and 
        inserting ``2-year''.
  (c) Effective Date.--The amendments made by this section 
shall apply to--
          (1) levies made after the date of the enactment of 
        this Act, and
          (2) levies made on or before such date if the 9-month 
        period has not expired under section 6343(b) of the 
        Internal Revenue Code of 1986 (without regard to this 
        section) as of such date.

SEC. 313. INDIVIDUALS HELD HARMLESS ON WRONGFUL LEVY, ETC., ON 
                    INDIVIDUAL RETIREMENT PLAN.

  (a) In General.--Section 6343 (relating to authority to 
release levy and return property) is amended by adding at the 
end the following new subsection:
  ``(f) Individuals Held Harmless on Wrongful Levy, etc. on 
Individual Retirement Plan.--
          ``(1) In general.--If the Secretary determines that 
        an individual retirement plan has been levied upon in a 
        case to which subsection (b) or (d)(2)(A) applies, an 
        amount equal to the sum of--
                  ``(A) the amount of money returned by the 
                Secretary on account of such levy, and
                  ``(B) interest paid under subsection (c) on 
                such amount of money,
        may be deposited into an individual retirement plan 
        (other than an endowment contract) to which a rollover 
        from the plan levied upon is permitted.
          ``(2) Treatment as rollover.--The distribution on 
        account of the levy and any deposit under paragraph (1) 
        with respect to such distribution shall be treated for 
        purposes of this title as if such distribution and 
        deposit were part of a rollover described in section 
        408(d)(3)(A)(i); except that--
                  ``(A) interest paid under subsection (c) 
                shall be treated as part of such distribution 
                and as not includible in gross income,
                  ``(B) the 60-day requirement in such section 
                shall be treated as met if the deposit is made 
                not later than the 60th day after the day on 
                which the individual receives an amount under 
                paragraph (1) from the Secretary, and
                  ``(C) such deposit shall not be taken into 
                account under section 408(d)(3)(B).
          ``(3) Refund, etc., of income tax on levy.--If any 
        amount is includible in gross income for a taxable year 
        by reason of a levy referred to in paragraph (1) and 
        any portion of such amount is treated as a rollover 
        under paragraph (2), any tax imposed by chapter 1 on 
        such portion shall not be assessed, and if assessed 
        shall be abated, and if collected shall be credited or 
        refunded as an overpayment made on the due date for 
        filing the return of tax for such taxable year.
          ``(4) Interest.--Notwithstanding subsection (d), 
        interest shall be allowed under subsection (c) in a 
        case in which the Secretary makes a determination 
        described in subsection (d)(2)(A) with respect to a 
        levy upon an individual retirement plan.''.
  (b) Effective Date.--The amendment made by this section shall 
apply to amounts paid under subsections (b), (c), and (d)(2)(A) 
of section 6343 of the Internal Revenue Code of 1986 after 
December 31, 2003.

SEC. 314. SEVEN-DAY THRESHOLD ON TOLLING OF STATUTE OF LIMITATIONS 
                    DURING TAX REVIEW.

  (a) In General.--Section 7811(d)(1) (relating to suspension 
of running of period of limitation) is amended by inserting 
after ``application,'' the following: ``but only if the date of 
such decision is at least 7 days after the date of the 
taxpayer's application''.
  (b) Effective Date.--The amendment made by this section shall 
apply to applications filed after the date of the enactment of 
this Act.

SEC. 315. STUDY OF LIENS AND LEVIES.

  The Secretary of the Treasury, or the Secretary's delegate, 
shall conduct a study of the practices of the Internal Revenue 
Service concerning liens and levies. The study shall examine--
          (1) the declining use of liens and levies by the 
        Internal Revenue Service, and
          (2) the practicality of recording liens and 
        levying against property in cases in which the cost of 
        such actions exceeds the amount to be realized from 
        such property.
Not later than 1 year after the date of the enactment of this 
Act, the Secretary shall submit such study to the Committee on 
Ways and Means of the House of Representatives and the 
Committee on Finance of the Senate.

                 Subtitle C--Tax Administration Reforms

SEC. 331. REVISIONS RELATING TO TERMINATION OF EMPLOYMENT OF INTERNAL 
                    REVENUE SERVICE EMPLOYEES FOR MISCONDUCT.

  (a) In General.--Subchapter A of chapter 80 (relating to 
application of internal revenue laws) is amended by inserting 
after section 7804 the following new section:

``SEC. 7804A. DISCIPLINARY ACTIONS FOR MISCONDUCT.

  ``(a) Disciplinary Actions.--
          ``(1) In general.--Subject to subsection (c), the 
        Commissioner shall take an action in accordance with 
        the guidelines established under paragraph (2) against 
        any employee of the Internal Revenue Service if there 
        is a final administrative or judicial determination 
        that such employee committed any act or omission 
        described under subsection (b) in the performance of 
        the employee's official duties or where a nexus to the 
        employee's position exists.
          ``(2) Guidelines.--The Commissioner shall issue 
        guidelines for determining the appropriate level of 
        discipline, up to and including termination of 
        employment, for committing any act or omission 
        described under subsection (b).
  ``(b) Acts or Omissions.--The acts or omissions described 
under this subsection are--
          ``(1) willful failure to obtain the required approval 
        signatures on documents authorizing the seizure of a 
        taxpayer's home, personal belongings, or business 
        assets;
          ``(2) willfully providing a false statement under 
        oath with respect to a material matter involving a 
        taxpayer or taxpayer representative;
          ``(3) with respect to a taxpayer or taxpayer 
        representative, the willful violation of--
                  ``(A) any right under the Constitution of the 
                United States;
                  ``(B) any civil right established under--
                          ``(i) title VI or VII of the Civil 
                        Rights Act of 1964;
                          ``(ii) title IX of the Education 
                        Amendments of 1972;
                          ``(iii) the Age Discrimination in 
                        Employment Act of 1967;
                          ``(iv) the Age Discrimination Act of 
                        1975;
                          ``(v) section 501 or 504 of the 
                        Rehabilitation Act of 1973; or
                          ``(vi) title I of the Americans with 
                        Disabilities Act of 1990; or
                  ``(C) the Internal Revenue Service policy on 
                unauthorized inspection of returns or return 
                information;
          ``(4) willfully falsifying or destroying documents to 
        conceal mistakes made by any employee with respect to a 
        matter involving a taxpayer or taxpayer representative;
          ``(5) assault or battery on a taxpayer or taxpayer 
        representative, but only if there is a criminal 
        conviction, or a final adverse judgment by a court in a 
        civil case, with respect to the assault or battery;
          ``(6) willful violations of this title, Department of 
        the Treasury regulations, or policies of the Internal 
        Revenue Service (including the Internal Revenue Manual) 
        for the purpose of retaliating against, or harassing, a 
        taxpayer or taxpayer representative;
          ``(7) willful misuse of the provisions of section 
        6103 for the purpose of concealing information from a 
        congressional inquiry;
          ``(8) willful failure to file any return of tax 
        required under this title on or before the date 
        prescribed therefor (including any extensions) when a 
        tax is due and owing, unless such failure is due to 
        reasonable cause and not due to willful neglect;
          ``(9) willful understatement of Federal tax 
        liability, unless such understatement is due to 
        reasonable cause and not due to willful neglect; and
          ``(10) threatening to audit a taxpayer, or to take 
        other action under this title, for the purpose of 
        extracting personal gain or benefit.
  ``(c) Determinations of Commissioner.--
          ``(1) In general.--The Commissioner may take a 
        personnel action other than a disciplinary action 
        provided for in the guidelines under subsection (a)(2) 
        for an act or omission described under subsection (b).
          ``(2) Discretion.--The exercise of authority under 
        paragraph (1) shall be at the sole discretion of the 
        Commissioner and may not be delegated to any other 
        officer. The Commissioner, in his sole discretion, may 
        establish a procedure to determine if an individual 
        should be referred to the Commissioner for a 
        determination by the Commissioner under paragraph (1).
          ``(3) No appeal.--Notwithstanding any other provision 
        of law, any determination of the Commissioner under 
        this subsection may not be reviewed in any 
        administrative or judicial proceeding. A finding that 
        an act or omission described under subsection (b) 
        occurred may be reviewed.
  ``(d) Definition.--For the purposes of the provisions 
described in clauses (i), (ii), and (iv) of subsection 
(b)(3)(B), references to a program or activity regarding 
Federal financial assistance or an education program or 
activity receiving Federal financial assistance shall include 
any program or activity conducted by the Internal Revenue 
Service for a taxpayer.
  ``(e) Annual Report.--The Commissioner shall submit to 
Congress annually a report on disciplinary actions under this 
section.''.
  (b) Clerical Amendment.--The table of sections for chapter 80 
is amended by inserting after the item relating to section 7804 
the following new item:

        ``Sec. 7804A. Disciplinary actions for misconduct.''.

  (c) Repeal of Superseded Section.--Section 1203 of the 
Internal Revenue Service Restructuring and Reform Act of 1998 
(Public Law 105-206; 112 Stat. 720) is repealed.
  (d) Effective Date.--The amendments made by this section 
shall take effect on the date of the enactment of this Act.

SEC. 332. CONFIRMATION OF AUTHORITY OF TAX COURT TO APPLY DOCTRINE OF 
                    EQUITABLE RECOUPMENT.

  (a) Confirmation of Authority of Tax Court To Apply Doctrine 
of Equitable Recoupment.--Subsection (b) of section 6214 
(relating to jurisdiction over other years and quarters) is 
amended by adding at the end the following new sentence: 
``Notwithstanding the preceding sentence, the Tax Court may 
apply the doctrine of equitable recoupment to the same extent 
that it is available in civil tax cases before the district 
courts of the United States and the United States Court of 
Federal Claims.''.
  (b) Effective Date.--The amendments made by this section 
shall apply to any action or proceeding in the Tax Court with 
respect to which a decision has not become final (as determined 
under section 7481 of the Internal Revenue Code of 1986) as of 
the date of the enactment of this Act.

SEC. 333. JURISDICTION OF TAX COURT OVER COLLECTION DUE PROCESS CASES.

  (a) In General.--Section 6330(d)(1) (relating to judicial 
review of determination) is amended to read as follows:
          ``(1) Judicial review of determination.--The person 
        may, within 30 days of a determination under this 
        section, appeal such determination to the Tax Court 
        (and the Tax Court shall have jurisdiction with respect 
        to such matter).''.
  (b) Effective Date.--The amendment made by subsection (a) 
shall apply to judicial appeals filed after the date of the 
enactment of this Act.

SEC. 334. OFFICE OF CHIEF COUNSEL REVIEW OF OFFERS IN COMPROMISE.

  (a) In General.--Section 7122(b) (relating to record) is 
amended by striking ``Whenever a compromise'' and all that 
follows through ``his delegate'' and inserting ``If the 
Secretary determines that an opinion of the General Counsel for 
the Department of the Treasury, or the Counsel's delegate, is 
required with respect to a compromise, there shall be placed on 
file in the office of the Secretary such opinion''.
  (b) Conforming Amendments.--Section 7122(b) is amended by 
striking the second and third sentences.
  (c) Effective Date.--The amendments made by this section 
shall apply to offers-in-compromise submitted or pending on or 
after the date of the enactment of this Act.

SEC. 335. ACCESS OF NATIONAL TAXPAYER ADVOCATE TO INDEPENDENT LEGAL 
                    COUNSEL.

  Clause (i) of section 7803(c)(2)(D) (relating to personnel 
actions) is amended by striking ``and'' at the end of subclause 
(I), by striking the period at the end of subclause (II) and 
inserting ``, and'', and by adding at the end the following new 
subclause:
                                  ``(III) appoint a counsel in 
                                the Office of the Taxpayer 
                                Advocate to report solely to 
                                the National Taxpayer 
                                Advocate.''.

SEC. 336. PAYMENT OF MOTOR FUEL EXCISE TAX REFUNDS BY DIRECT DEPOSIT.

  (a) In General.--Subchapter II of chapter 33 of title 31, 
United States Code, is amended by adding at the end the 
following new section:

``Sec. 3337. Payment of motor fuel excise tax refunds by direct deposit

  ``The Secretary of the Treasury shall make payments under 
sections 6420, 6421, and 6427 of the Internal Revenue Code of 
1986 by electronic funds transfer (as defined in section 
3332(j)(1)) if the person who is entitled to the payment--
          ``(1) elects to receive the payment by electronic 
        funds transfer; and
          ``(2) satisfies the requirements of section 3332(g) 
        with respect to such payment at such time and in such 
        manner as the Secretary may require.''.
  (b) Clerical Amendment.--The table of sections for subchapter 
II of chapter 33 of title 31, United States Code, is amended by 
adding at the end the following new item:

``3337. Payment of motor fuel excise tax refunds by direct deposit.''.

SEC. 337. FAMILY BUSINESS TAX SIMPLIFICATION.

  (a) In General.--Section 761 (defining terms for purposes of 
partnerships) is amended by redesignating subsection (f) as 
subsection (g) and by inserting after subsection (e) the 
following new subsection:
  ``(f) Qualified Joint Venture.--
          ``(1) In general.--In the case of a qualified joint 
        venture conducted by a husband and wife who file a 
        joint return for the taxable year, for purposes of this 
        title--
                  ``(A) such joint venture shall not be treated 
                as a partnership,
                  ``(B) all items of income, gain, loss, 
                deduction, and credit shall be divided between 
                the spouses in accordance with their respective 
                interests in the venture, and
                  ``(C) each spouse shall take into account 
                such spouse's respective share of such items as 
                if they were attributable to a trade or 
                business conducted by such spouse as a sole 
                proprietor.
          ``(2) Qualified joint venture.--For purposes of 
        paragraph (1), the term `qualified joint venture' means 
        any joint venture involving the conduct of a trade or 
        business if--
                  ``(A) the only members of such joint venture 
                are a husband and wife,
                  ``(B) both spouses materially participate 
                (within the meaning of section 469(h) without 
                regard to paragraph (5) thereof) in such trade 
                or business, and
                  ``(C) both spouses elect the application of 
                this subsection.''.
  (b) Net Earnings From Self-Employment.--
          (1) Subsection (a) of section 1402 (defining net 
        earnings from self-employment) is amended by striking 
        ``and'' at the end of paragraph (14), by striking the 
        period at the end of paragraph (15) and inserting ``; 
        and'', and by inserting after paragraph (15) the 
        following new paragraph:
          ``(16) notwithstanding the preceding provisions of 
        this subsection, each spouse's share of income or loss 
        from a qualified joint venture shall be taken into 
        account as provided in section 761(f) in determining 
        net earnings from self-employment of such spouse.''.
          (2) Subsection (a) of section 211 of the Social 
        Security Act (defining net earnings from self-
        employment) is amended by striking ``and'' at the end 
        of paragraph (14), by striking the period at the end of 
        paragraph (15) and inserting ``; and'', and by 
        inserting after paragraph (15) the following new 
        paragraph:
          ``(16) Notwithstanding the preceding provisions of 
        this subsection, each spouse's share of income or loss 
        from a qualified joint venture shall be taken into 
        account as provided in section 761(f) of the Internal 
        Revenue Code of 1986 in determining net earnings from 
        self-employment of such spouse.''.
  (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2002.

SEC. 338. SUSPENSION OF TAX-EXEMPT STATUS OF TERRORIST ORGANIZATIONS.

  (a) In General.--Section 501 (relating to exemption from tax 
on corporations, certain trusts, etc.) is amended by 
redesignating subsection (p) as subsection (q) and by inserting 
after subsection (o) the following new subsection:
  ``(p) Suspension of Tax-Exempt Status of Terrorist 
Organizations.--
          ``(1) In general.--The exemption from tax under 
        subsection (a) with respect to any organization 
        described in paragraph (2), and the eligibility of any 
        organization described in paragraph (2) to apply for 
        recognition of exemption under subsection (a), shall be 
        suspended during the period described in paragraph (3).
          ``(2) Terrorist organizations.--An organization is 
        described in this paragraph if such organization is 
        designated or otherwise individually identified--
                  ``(A) under section 212(a)(3)(B)(vi)(II) or 
                219 of the Immigration and Nationality Act as a 
                terrorist organization or foreign terrorist 
                organization,
                  ``(B) in or pursuant to an Executive order 
                which is related to terrorism and issued under 
                the authority of the International Emergency 
                Economic Powers Act or section 5 of the United 
                Nations Participation Act of 1945 for the 
                purpose of imposing on such organization an 
                economic or other sanction, or
                  ``(C) in or pursuant to an Executive order 
                issued under the authority of any Federal law 
                if--
                          ``(i) the organization is designated 
                        or otherwise individually identified in 
                        or pursuant to such Executive order as 
                        supporting or engaging in terrorist 
                        activity (as defined in section 
                        212(a)(3)(B) of the Immigration and 
                        Nationality Act) or supporting 
                        terrorism (as defined in section 
                        140(d)(2) of the Foreign Relations 
                        Authorization Act, Fiscal Years 1988 
                        and 1989); and
                          ``(ii) such Executive order refers to 
                        this subsection.
          ``(3) Period of suspension.--With respect to any 
        organization described in paragraph (2), the period of 
        suspension--
                  ``(A) begins on the later of--
                          ``(i) the date of the first 
                        publication of a designation or 
                        identification described in paragraph 
                        (2) with respect to such organization, 
                        or
                          ``(ii) the date of the enactment of 
                        this subsection, and
                  ``(B) ends on the first date that all 
                designations and identifications described in 
                paragraph (2) with respect to such organization 
                are rescinded pursuant to the law or Executive 
                order under which such designation or 
                identification was made.
          ``(4) Denial of deduction.--No deduction shall be 
        allowed under section 170, 545(b)(2), 556(b)(2), 
        642(c), 2055, 2106(a)(2), or 2522 for any contribution 
        to an organization described in paragraph (2) during 
        the period described in paragraph (3).
          ``(5) Denial of administrative or judicial challenge 
        of suspension or denial of deduction.--Notwithstanding 
        section 7428 or any other provision of law, no 
        organization or other person may challenge a suspension 
        under paragraph (1), a designation or identification 
        described in paragraph (2), the period of suspension 
        described in paragraph (3), or a denial of a deduction 
        under paragraph (4) in any administrative or judicial 
        proceeding relating to the Federal tax liability of 
        such organization or other person.
          ``(6) Erroneous designation.--
                  ``(A) In general.--If--
                          ``(i) the tax exemption of any 
                        organization described in paragraph (2) 
                        is suspended under paragraph (1),
                          ``(ii) each designation and 
                        identification described in paragraph 
                        (2) which has been made with respect to 
                        such organization is determined to be 
                        erroneous pursuant to the law or 
                        Executive order under which such 
                        designation or identification was made, 
                        and
                          ``(iii) the erroneous designations 
                        and identifications result in an 
                        overpayment of income tax for any 
                        taxable year by such organization,
                credit or refund (with interest) with respect 
                to such overpayment shall be made.
                  ``(B) Waiver of limitations.--If the credit 
                or refund of any overpayment of tax described 
                in subparagraph (A)(iii) is prevented at any 
                time by the operation of any law or rule of law 
                (including res judicata), such credit or refund 
                may nevertheless be allowed or made if the 
                claim therefor is filed before the close of the 
                1-year period beginning on the date of the last 
                determination described in subparagraph 
                (A)(ii).
          ``(7) Notice of suspensions.--If the tax exemption of 
        any organization is suspended under this subsection, 
        the Internal Revenue Service shall update the listings 
        of tax-exempt organizations and shall publish 
        appropriate notice to taxpayers of such suspension and 
        of the fact that contributions to such organization are 
        not deductible during the period of such suspension.''.
  (b) Effective Date.--The amendments made by this section 
shall apply to designations made before, on, or after the date 
of the enactment of this Act.

SEC. 339. TAX REFUND ANTICIPATION LOANS.

  The Secretary of the Treasury may not provide any direct 
deposit indicator with respect to a taxpayer to any tax return 
preparer, financial institution, or other person that charges 
taxpayers interest rates (including fees) on refund 
anticipation loans in excess of the consumer loan usury rate 
limit of the State in which the taxpayer is domiciled.

SEC. 340. FAIRNESS IN TAX AUDIT COVERAGE.

  (a) Mandatory Audits of High Risk Taxpayers.--The Secretary 
of the Treasury shall conduct audits of all taxpayers whom the 
Secretary determines are likely to have--
          (1) an unpaid Federal income tax liability of more 
        than $1,000,000, or
          (2) to have unreported income or structured 
        transactions which are considered by the Secretary to 
        be high risk.
  (b) Rate of Audits.--The Secretary of the Treasury shall 
conduct audits of high income taxpayers likely to owe taxes at 
a rate which is not less than the rate at which the Secretary 
conducts audits of low income taxpayers likely to owe taxes.

               Subtitle D--Confidentiality and Disclosure

SEC. 341. COLLECTION ACTIVITIES WITH RESPECT TO JOINT RETURN 
                    DISCLOSABLE TO EITHER SPOUSE BASED ON ORAL REQUEST.

  (a) In General.--Paragraph (8) of section 6103(e) (relating 
to disclosure of collection activities with respect to joint 
return) is amended by striking ``in writing'' the first place 
it appears.
  (b) Effective Date.--The amendment made by this section shall 
apply to requests made after the date of the enactment of this 
Act.

SEC. 342. TAXPAYER REPRESENTATIVES NOT SUBJECT TO EXAMINATION ON SOLE 
                    BASIS OF REPRESENTATION OF TAXPAYERS.

  (a) In General.--Paragraph (1) of section 6103(h) (relating 
to disclosure to certain Federal officers and employees for 
purposes of tax administration, etc.) is amended--
          (1) by striking ``Returns'' and inserting the 
        following:
                  ``(A) In general.--Returns'', and
          (2) by adding at the end the following new 
        subparagraph:
                  ``(B) Taxpayer representatives.--
                Notwithstanding subparagraph (A), the return of 
                the representative of a taxpayer whose return 
                is being examined by an officer or employee of 
                the Department of the Treasury shall not be 
                open to inspection by such officer or employee 
                on the sole basis of the representative's 
                relationship to the taxpayer unless a 
                supervisor of such officer or employee has 
                approved the inspection of the return of such 
                representative on a basis other than by reason 
                of such relationship.''.
  (b) Effective Date.--The amendment made by this section shall 
take effect on the date which is 180 days after the date of the 
enactment of this Act.

SEC. 343. DISCLOSURE IN JUDICIAL OR ADMINISTRATIVE TAX PROCEEDINGS OF 
                    RETURN AND RETURN INFORMATION OF PERSONS WHO ARE 
                    NOT PARTY TO SUCH PROCEEDINGS.

  (a) In General.--Paragraph (4) of section 6103(h) (relating 
to disclosure to certain Federal officers and employees for 
purposes of tax administration, etc.) is amended by adding at 
the end the following new subparagraph:
                  ``(B) Disclosure in judicial or 
                administrative tax proceedings of return and 
                return information of persons not party to such 
                proceedings.--
                          ``(i) Notice.--Return or return 
                        information of any person who is not a 
                        party to a judicial or administrative 
                        proceeding described in this paragraph 
                        shall not be disclosed under clause 
                        (ii) or (iii) of subparagraph (A) until 
                        after the Secretary makes a reasonable 
                        effort to give notice to such person 
                        and an opportunity for such person to 
                        request the deletion of matter from 
                        such return or return information, 
                        including any of the items referred to 
                        in paragraphs (1) through (7) of 
                        section 6110(c). Such notice shall 
                        include a statement of the issue or 
                        issues the resolution of which is the 
                        reason such return or return 
                        information is sought. In the case of S 
                        corporations, partnerships, estates, 
                        and trusts, such notice shall be made 
                        at the entity level.
                          ``(ii) Disclosure limited to 
                        pertinent portion.--The only portion of 
                        a return or return information 
                        described in clause (i) which may be 
                        disclosed under subparagraph (A) is 
                        that portion of such return or return 
                        information that directly relates to 
                        the resolution of an issue in such 
                        proceeding.
                          ``(iii) Exceptions.--Clause (i) shall 
                        not apply--
                                  ``(I) to any civil action 
                                under section 7407, 7408, or 
                                7409,
                                  ``(II) to any ex parte 
                                proceeding for obtaining a 
                                search warrant, order for entry 
                                on premises or safe deposit 
                                boxes, or similar ex parte 
                                proceeding,
                                  ``(III) to disclosure of 
                                third party return information 
                                by indictment or criminal 
                                information, or
                                  ``(IV) if the Attorney 
                                General or the Attorney 
                                General's delegate determines 
                                that the application of such 
                                clause would seriously impair a 
                                criminal tax investigation or 
                                proceeding.''.
  (b) Conforming Amendments.--Paragraph (4) of section 6103(h) 
is amended by--
          (1) by striking ``proceedings.--A return'' and 
        inserting ``proceedings.--
                  ``(A) In general.--Except as provided in 
                subparagraph (B), a return'';
          (2) by redesignating subparagraphs (A), (B), (C), and 
        (D) as clauses (i), (ii), (iii), and (iv), 
        respectively; and
          (3) in the matter following clause (iv) (as so 
        redesignated), by striking ``subparagraph (A), (B), or 
        (C)'' and inserting ``clause (i), (ii), or (iii)'' and 
        by moving such matter 2 ems to the right.
  (c) Effective Date.--The amendments made by this section 
shall apply to proceedings commenced after the date of the 
enactment of this Act.

SEC. 344. PROHIBITION OF DISCLOSURE OF TAXPAYER IDENTIFICATION 
                    INFORMATION WITH RESPECT TO DISCLOSURE OF ACCEPTED 
                    OFFERS-IN-COMPROMISE.

  (a)  General.--Paragraph (1) of section 6103(k) (relating to 
disclosure of certain returns and return information for tax 
administrative purposes) is amended by inserting ``(other than 
the taxpayer's address and TIN)'' after ``Return information''.
  (b) Effective Date.--The amendment made by this section shall 
apply to disclosures made after the date of the enactment of 
this Act.

SEC. 345. COMPLIANCE BY CONTRACTORS WITH CONFIDENTIALITY SAFEGUARDS.

  (a) In General.--Section 6103(p) (relating to State law 
requirements) is amended by adding at the end the following new 
paragraph:
          ``(9) Disclosure to contractors and other agents.--
        Notwithstanding any other provision of this section, no 
        return or return information shall be disclosed to any 
        contractor or other agent of a Federal, State, or local 
        agency unless such agency, to the satisfaction of the 
        Secretary--
                  ``(A) has requirements in effect which 
                require each such contractor or other agent 
                which would have access to returns or return 
                information to provide safeguards (within the 
                meaning of paragraph (4)) to protect the 
                confidentiality of such returns or return 
                information,
                  ``(B) agrees to conduct an annual, on-site 
                review (mid-point review in the case of 
                contracts of less than 1 year in duration) of 
                each such contractor or other agent to 
                determine compliance with such requirements,
                  ``(C) submits the findings of the most recent 
                review conducted under subparagraph (B) to the 
                Secretary as part of the report required by 
                paragraph (4)(E), and
                  ``(D) certifies to the Secretary for the most 
                recent annual period that each such contractor 
                or other agent is in compliance with all such 
                requirements.
        The certification required by subparagraph (D) shall 
        include the name and address of each contractor and 
        other agent, a description of the contract of the 
        contractor or other agent with the agency, and the 
        duration of such contract.''.
  (b) Conforming Amendment.--Subparagraph (B) of section 
6103(p)(8) is amended by inserting ``or paragraph (9)'' after 
``subparagraph (A)''.
  (c) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to disclosures made after December 31, 
        2003.
          (2) Certifications.--The first certification under 
        section 6103(p)(9)(D) of the Internal Revenue Code of 
        1986, as added by subsection (a), shall be made with 
        respect to calendar year 2004.

SEC. 346. HIGHER STANDARDS FOR REQUESTS FOR AND CONSENTS TO DISCLOSURE.

  (a) In General.--Subsection (c) of section 6103 (relating to 
disclosure of returns and return information to designee of 
taxpayer) is amended by adding at the end the following new 
paragraphs:
          ``(2) Requirements for valid requests and consents.--
        A request for or consent to disclosure under paragraph 
        (1) shall only be valid for purposes of this section, 
        sections 7213, 7213A, and 7431 if--
                  ``(A) at the time of execution, such request 
                or consent designates a recipient of such 
                disclosure and is dated, and
                  ``(B) at the time such request or consent is 
                submitted to the Secretary, the submitter of 
                such request or consent certifies, under 
                penalty of perjury, that such request or 
                consent complied with subparagraph (A).
          ``(3) Restrictions on persons obtaining 
        information.--Any person shall, as a condition for 
        receiving return or return information under paragraph 
        (1)--
                  ``(A) ensure that such return and return 
                information is kept confidential,
                  ``(B) use such return and return information 
                only for the purpose for which it was 
                requested, and
                  ``(C) not disclose such return and return 
                information except to accomplish the purpose 
                for which it was requested, unless a separate 
                consent from the taxpayer is obtained.
          ``(4) Requirements for form prescribed by 
        secretary.--For purposes of this subsection, the 
        Secretary shall prescribe a form for requests and 
        consents which shall--
                  ``(A) contain a warning, prominently 
                displayed, informing the taxpayer that the form 
                should not be signed unless it is completed,
                  ``(B) state that if the taxpayer believes 
                there is an attempt to coerce him to sign an 
                incomplete or blank form, the taxpayer should 
                report the matter to the Treasury Inspector 
                General for Tax Administration, and
                  ``(C) contain the address and telephone 
                number of the Treasury Inspector General for 
                Tax Administration.''.
  (b) Report.--Not later than 18 months after the date of the 
enactment of this Act, the Treasury Inspector General for Tax 
Administration shall submit a report to the Congress on 
compliance with the designation and certification requirements 
applicable to requests for or consent to disclosure of returns 
and return information under section 6103(c) of the Internal 
Revenue Code of 1986, as amended by subsection (a). Such report 
shall--
          (1) evaluate (on the basis of random sampling) 
        whether--
                  (A) the amendment made by subsection (a) is 
                achieving the purposes of this section;
                  (B) requesters and submitters for such 
                disclosure are continuing to evade the purposes 
                of this section and, if so, how; and
                  (C) the sanctions for violations of such 
                requirements are adequate; and
          (2) include such recommendations that the Treasury 
        Inspector General for Tax Administration considers 
        necessary or appropriate to better achieve the purposes 
        of this section.
  (c) Conforming Amendments.--
          (1) Section 6103(c) is amended by striking 
        ``Taxpayer.--The Secretary'' and inserting 
        ``Taxpayer.--
          ``(1) In General.--The Secretary''.
          (2) Section 7213(a)(1) is amended by striking 
        ``section 6103(n)'' and inserting ``subsections (c) and 
        (n) of section 6103''.
          (3) Section 7213A(a)(1)(B) is amended by striking 
        ``subsection (l)(18) or (n) of section 6103'' and 
        inserting ``subsection (c), (l)(18), or (n) of section 
        6103''.
  (d) Effective Date.--The amendments made by this section 
shall apply to requests and consents made after 3 months after 
the date of the enactment of this Act.

SEC. 347. NOTICE TO TAXPAYER CONCERNING ADMINISTRATIVE DETERMINATION OF 
                    BROWSING; ANNUAL REPORT.

  (a) Notice to Taxpayer.--Subsection (e) of section 7431 
(relating to notification of unlawful inspection and 
disclosure) is amended by adding at the end the following: 
``The Secretary shall also notify such taxpayer if the Treasury 
Inspector General for Tax Administration substantiates that 
such taxpayer's return or return information was inspected or 
disclosed in violation of any of the provisions specified in 
paragraph (1), (2), or (3).''.
  (b) Reports.--Subsection (p) of section 6103 (relating to 
procedure and recordkeeping), is amended by adding at the end 
the following new paragraph:
          ``(10) Report on unauthorized disclosure and 
        inspection.--As part of the report required by 
        paragraph (3)(C) for each calendar year, the Secretary 
        shall furnish information regarding the unauthorized 
        disclosure and inspection of returns and return 
        information, including the number, status, and results 
        of--
                  ``(A) administrative investigations,
                  ``(B) civil lawsuits brought under section 
                7431 (including the amounts for which such 
                lawsuits were settled and the amounts of 
                damages awarded), and
                  ``(C) criminal prosecutions.''.
  (c) Effective Date.--
          (1) Notice.--The amendment made by subsection (a) 
        shall apply to determinations made after the date of 
        the enactment of this Act.
          (2) Reports.--The amendment made by subsection (b) 
        shall apply to calendar years ending after the date of 
        the enactment of this Act.

SEC. 348. EXPANDED DISCLOSURE IN EMERGENCY CIRCUMSTANCES.

  (a) In General.--Section 6103(i)(3)(B) (relating to danger of 
death or physical injury) is amended by striking ``or State'' 
and inserting ``, State, or local''.
  (b) Effective Date.--The amendment made by this section shall 
take effect on the date of the enactment of this Act.

SEC. 349. DISCLOSURE OF TAXPAYER IDENTITY FOR TAX REFUND PURPOSES.

  (a) In General.--Paragraph (1) of section 6103(m) (relating 
to disclosure of taxpayer identity information) is amended by 
striking ``and other media'' and by inserting ``, other media, 
and through any other means of mass communication,''.
  (b) Effective Date.--The amendments made by this section 
shall take effect on the date of the enactment of this Act.

SEC. 350. DISCLOSURE TO STATE OFFICIALS OF PROPOSED ACTIONS RELATED TO 
                    SECTION 501(C)(3) ORGANIZATIONS.

  (a) In General.--Subsection (c) of section 6104 is amended by 
striking paragraph (2) and inserting the following new 
paragraphs:
          ``(2) Disclosure of proposed actions.--
                  ``(A) Specific notifications.--In the case of 
                an organization to which paragraph (1) applies, 
                the Secretary may disclose to the appropriate 
                State officer--
                          ``(i) a notice of proposed refusal to 
                        recognize such organization as an 
                        organization described in section 
                        501(c)(3) or a notice of proposed 
                        revocation of such organization's 
                        recognition as an organization exempt 
                        from taxation,
                          ``(ii) the issuance of a letter of 
                        proposed deficiency of tax imposed 
                        under section 507 or chapter 41 or 42, 
                        and
                          ``(iii) the names, addresses, and 
                        taxpayer identification numbers of 
                        organizations that have applied for 
                        recognition as organizations described 
                        in section 501(c)(3).
                  ``(B) Additional disclosures.--Returns and 
                return information of organizations with 
                respect to which information is disclosed under 
                subparagraph (A) may be made available for 
                inspection by or disclosed to an appropriate 
                State officer.
                  ``(C) Procedures for disclosure.--Information 
                may be inspected or disclosed under 
                subparagraph (A) or (B) only--
                          ``(i) upon written request by an 
                        appropriate State officer, and
                          ``(ii) for the purpose of, and only 
                        to the extent necessary in, the 
                        administration of State laws regulating 
                        such organizations.
                Such information may only be inspected by or 
                disclosed to a person other than the 
                appropriate State officer if such person is an 
                officer or employee of the State and is 
                designated by the appropriate State officer to 
                receive the returns or return information under 
                this paragraph on behalf of the appropriate 
                State officer.
                  ``(D) Disclosures other than by request.--The 
                Secretary may make available for inspection or 
                disclose returns and return information of an 
                organization to which paragraph (1) applies to 
                an appropriate State officer of any State if 
                the Secretary determines that such inspection 
                or disclosure may facilitate the resolution of 
                State or Federal issues relating to the tax-
                exempt status of such organization.
          ``(3) Use in administrative and judicial civil 
        proceedings.--Returns and return information disclosed 
        pursuant to this subsection may be disclosed in 
        administrative and judicial civil proceedings 
        pertaining to the enforcement of State laws regulating 
        such organizations in a manner prescribed by the 
        Secretary similar to that for tax administration 
        proceedings under section 6103(h)(4).
          ``(4) No disclosure if impairment.--Returns and 
        return information shall not be disclosed under this 
        subsection, or in any proceeding described in paragraph 
        (3), to the extent that the Secretary determines that 
        such disclosure would seriously impair Federal tax 
        administration.
          ``(5) Definitions.--For purposes of this subsection--
                  ``(A) Return and return information.--The 
                terms `return' and `return information' have 
                the respective meanings given to such terms by 
                section 6103(b).
                  ``(B) Appropriate state officer.--The term 
                `appropriate State officer' means--
                          ``(i) the State attorney general, or
                          ``(ii) any other State official 
                        charged with overseeing organizations 
                        of the type described in section 
                        501(c)(3).''.
  (b) Conforming Amendments.--
          (1) Subparagraph (A) of section 6103(p)(3) is amended 
        by inserting ``and section 6104(c)'' after ``section'' 
        in the first sentence.
          (2) Paragraph (4) of section 6103(p) is amended--
                  (A) in the matter preceding subparagraph (A), 
                by inserting ``, or any appropriate State 
                officer (as defined in section 6104(c)),'' 
                before ``or any other person'',
                  (B) in subparagraph (F)(i), by inserting ``or 
                any appropriate State officer (as defined in 
                section 6104(c)),'' before ``or any other 
                person'', and
                  (C) in the matter following subparagraph (F), 
                by inserting ``, an appropriate State officer 
                (as defined in section 6104(c)),'' after 
                ``including an agency'' each place it appears.
          (3) Paragraph (2) of section 7213(a) is amended by 
        inserting ``or under section 6104(c)'' after ``6103''.
          (4) Paragraph (2) of section 7213A(a) is amended by 
        inserting ``or 6104(c)'' after ``6103''.
          (5) Paragraph (2) of section 7431(a) is amended by 
        inserting ``(including any disclosure in violation of 
        section 6104(c))'' after ``6103''.
  (c) Effective Date.--The amendments made by this section 
shall take effect on the date of the enactment of this Act but 
shall not apply to requests made before such date.

SEC. 351. CONFIDENTIALITY OF TAXPAYER COMMUNICATIONS WITH THE OFFICE OF 
                    THE TAXPAYER ADVOCATE.

  (a) In General.--Subsection (c) of section 7803 is amended by 
adding at the end the following new paragraph:
          ``(5) Confidentiality of taxpayer information.--
                  ``(A) In general.--To the extent authorized 
                by the National Taxpayer Advocate or pursuant 
                to guidance issued under subparagraph (B), any 
                officer or employee of the Office of the 
                Taxpayer Advocate may withhold from the 
                Internal Revenue Service and the Department of 
                Justice any information provided by, or 
                regarding contact with, any taxpayer.
                  ``(B) Issuance of guidance.--In consultation 
                with the Chief Counsel for the Internal Revenue 
                Service and subject to the approval of the 
                Commissioner of Internal Revenue, the National 
                Taxpayer Advocate may issue guidance regarding 
                the circumstances (including with respect to 
                litigation) under which, and the persons to 
                whom, employees of the Office of the Taxpayer 
                Advocate shall not disclose information 
                obtained from a taxpayer. To the extent to 
                which any provision of the Internal Revenue 
                Manual would require greater disclosure by 
                employees of the Office of the Taxpayer 
                Advocate than the disclosure required under 
                such guidance, such provision shall not apply.
                  ``(C) Employee protection.--Section 
                7214(a)(8) shall not apply to any failure to 
                report knowledge or information if--
                          ``(i) such failure to report is 
                        authorized under subparagraph (A), and
                          ``(ii) such knowledge or information 
                        is not of fraud committed by a person 
                        against the United States under any 
                        revenue law.''.
  (b) Conforming Amendment.--Subparagraph (A) of section 
7803(c)(4) is amended by inserting ``and'' at the end of clause 
(ii), by striking ``; and'' at the end of clause (iii) and 
inserting a period, and by striking clause (iv).

                       Subtitle E--Miscellaneous

SEC. 361. CLARIFICATION OF DEFINITION OF CHURCH TAX INQUIRY.

  Subsection (i) of section 7611 (relating to section not to 
apply to criminal investigations, etc.) is amended by striking 
``or'' at the end of paragraph (4), by striking the period at 
the end of paragraph (5) and inserting ``, or'', and by 
inserting after paragraph (5) the following:
          ``(6) information provided by the Secretary related 
        to the standards for exemption from tax under this 
        title and the requirements under this title relating to 
        unrelated business taxable income.''.

SEC. 362. EXPANSION OF DECLARATORY JUDGMENT REMEDY TO TAX-EXEMPT 
                    ORGANIZATIONS.

  (a) In General.--Paragraph (1) of section 7428(a) (relating 
to creation of remedy) is amended--
          (1) in subparagraph (B) by inserting after 
        ``509(a))'' the following: ``or as a private operating 
        foundation (as defined in section 4942(j)(3))''; and
          (2) by amending subparagraph (C) to read as follows:
                  ``(C) with respect to the initial 
                qualification or continuing qualification of an 
                organization as an organization described in 
                subsection (c) (other than paragraph (3)) or 
                (d) of section 501 which is exempt from tax 
                under section 501(a), or''.
  (b) Court Jurisdiction.--Subsection (a) of section 7428 is 
amended in the material following paragraph (2) by striking 
``United States Tax Court, the United States Claims Court, or 
the district court of the United States for the District of 
Columbia'' and inserting the following: ``United States Tax 
Court (in the case of any such determination or failure) or the 
United States Claims Court or the district court of the United 
States for the District of Columbia (in the case of a 
determination or failure with respect to an issue referred to 
in subparagraph (A) or (B) of paragraph (1)),''.
  (c) Effective Date.--The amendments made by this section 
shall apply to pleadings filed with respect to determinations 
(or requests for determinations) made after the date of the 
enactment of this Act.

SEC. 363. EMPLOYEE MISCONDUCT REPORT TO INCLUDE SUMMARY OF COMPLAINTS 
                    BY CATEGORY.

  (a) In General.--Clause (ii) of section 7803(d)(2)(A) is 
amended by inserting before the semicolon at the end the 
following: ``, including a summary (by category) of the 10 most 
common complaints made and the number of such common 
complaints''.
  (b) Effective Date.--The amendment made by subsection (a) 
shall apply with respect to reporting periods ending after the 
date of the enactment of this Act.

SEC. 364. ANNUAL REPORT ON AWARDS OF COSTS AND CERTAIN FEES IN 
                    ADMINISTRATIVE AND COURT PROCEEDINGS.

  Not later than 3 months after the close of each Federal 
fiscal year after fiscal year 2003, the Treasury Inspector 
General for Tax Administration shall submit a report to 
Congress which specifies for such year--
          (1) the number of payments made by the United States 
        pursuant to section 7430 of the Internal Revenue Code 
        of 1986 (relating to awarding of costs and certain 
        fees);
          (2) the amount of each such payment;
          (3) an analysis of any administrative issue giving 
        rise to such payments; and
          (4) changes (if any) which will be implemented as a 
        result of such analysis and other changes (if any) 
        recommended by the Treasury Inspector General for Tax 
        Administration as a result of such analysis.

SEC. 365. ANNUAL REPORT ON ABATEMENT OF PENALTIES.

  Not later than 6 months after the close of each Federal 
fiscal year after fiscal year 2003, the Treasury Inspector 
General for Tax Administration shall submit a report to 
Congress on abatements of penalties under the Internal Revenue 
Code of 1986 during such year, including information on the 
reasons and criteria for such abatements.

SEC. 366. BETTER MEANS OF COMMUNICATING WITH TAXPAYERS.

  Not later than 18 months after the date of the enactment of 
this Act, the Treasury Inspector General for Tax Administration 
shall submit a report to Congress evaluating whether 
technological advances, such as e-mail and facsimile 
transmission, permit the use of alternative means for the 
Internal Revenue Service to communicate with taxpayers.

SEC. 367. EXPLANATION OF STATUTE OF LIMITATIONS AND CONSEQUENCES OF 
                    FAILURE TO FILE.

  The Secretary of the Treasury or the Secretary's delegate 
shall, as soon as practicable but not later than 180 days after 
the date of the enactment of this Act, revise the statement 
required by section 6227 of the Omnibus Taxpayer Bill of Rights 
(Internal Revenue Service Publication No. 1), and any 
instructions booklet accompanying a general income tax return 
form for taxable years beginning after 2002 (including forms 
1040, 1040A, 1040EZ, and any similar or successor forms 
relating thereto), to provide for an explanation of--
          (1) the limitations imposed by section 6511 of the 
        Internal Revenue Code of 1986 on credits and refunds; 
        and
          (2) the consequences under such section 6511 of the 
        failure to file a return of tax.

SEC. 368. AMENDMENT TO TREASURY AUCTION REFORMS.

  (a) In General.--Clause (i) of section 202(c)(4)(B) of the 
Government Securities Act Amendments of 1993 (31 U.S.C. 3121 
note) is amended by inserting before the semicolon ``(or, if 
earlier, at the time the Secretary releases the minutes of the 
meeting in accordance with paragraph (2))''.
  (b) Effective Date.--The amendment made by subsection (a) 
shall apply to meetings held after the date of the enactment of 
this Act.

SEC. 369. ENROLLED AGENTS.

  (a) In General.--Chapter 77 (relating to miscellaneous 
provisions) is amended by adding at the end the following new 
section:

``SEC. 7528. ENROLLED AGENTS.

  ``(a) In General.--The Secretary may prescribe such 
regulations as may be necessary to regulate the conduct of 
enrolled agents in regards to their practice before the 
Internal Revenue Service.
  ``(b) Use of Credentials.--Any enrolled agents properly 
licensed to practice as required under rules promulgated under 
section (a) herein shall be allowed to use the credentials or 
designation as `enrolled agent', `EA', or `E.A.'.''.
  (b) Clerical Amendment.--The table of sections for chapter 77 
is amended by adding at the end the following new item:

        ``Sec. 7528. Enrolled agents.''.

  (c) Prior Regulations.--Nothing in the amendments made by 
this section shall be construed to have any effect on part 10 
of title 31, Code of Federal Regulations, or any other Federal 
rule or regulation issued before the date of the enactment of 
this Act.

SEC. 370. FINANCIAL MANAGEMENT SERVICE FEES.

  Notwithstanding any other provision of law, the Financial 
Management Service may charge the Internal Revenue Service, and 
the Internal Revenue Service may pay the Financial Management 
Service, a fee sufficient to cover the full cost of 
implementing a continuous levy program under subsection (h) of 
section 6331 of the Internal Revenue Code of 1986. Any such fee 
shall be based on actual levies made and shall be collected by 
the Financial Management Service by the retention of a portion 
of amounts collected by levy pursuant to that subsection. 
Amounts received by the Financial Management Service as fees 
under that subsection shall be deposited into the account of 
the Department of the Treasury under section 3711(g)(7) of 
title 31, United States Code, and shall be collected and 
accounted for in accordance with the provisions of that 
section. The amount credited against the taxpayer's liability 
on account of the continuous levy shall be the amount levied, 
without reduction for the amount paid to the Financial 
Management Service as a fee.

SEC. 371. EXTENSION OF INTERNAL REVENUE SERVICE USER FEES.

  (a) In General.--Chapter 77 (relating to miscellaneous 
provisions) is amended by adding at the end the following new 
section:

``SEC. 7529. INTERNAL REVENUE SERVICE USER FEES.

  ``(a) General Rule.--The Secretary shall establish a program 
requiring the payment of user fees for--
          ``(1) requests to the Internal Revenue Service for 
        ruling letters, opinion letters, and determination 
        letters, and
          ``(2) other similar requests.
  ``(b) Program Criteria.--
          ``(1) In general.--The fees charged under the program 
        required by subsection (a)--
                  ``(A) shall vary according to categories (or 
                subcategories) established by the Secretary,
                  ``(B) shall be determined after taking into 
                account the average time for (and difficulty 
                of) complying with requests in each category 
                (and subcategory), and
                  ``(C) shall be payable in advance.
          ``(2) Exemptions, etc.--
                  ``(A) In general.--The Secretary shall 
                provide for such exemptions (and reduced fees) 
                under such program as the Secretary determines 
                to be appropriate.
                  ``(B) Exemption for certain requests 
                regarding pension plans.--The Secretary shall 
                not require payment of user fees under such 
                program for requests for determination letters 
                with respect to the qualified status of a 
                pension benefit plan maintained solely by 1 or 
                more eligible employers or any trust which is 
                part of the plan. The preceding sentence shall 
                not apply to any request--
                          ``(i) made after the later of--
                                  ``(I) the fifth plan year the 
                                pension benefit plan is in 
                                existence, or
                                  ``(II) the end of any 
                                remedial amendment period with 
                                respect to the plan beginning 
                                within the first 5 plan years, 
                                or
                          ``(ii) made by the sponsor of any 
                        prototype or similar plan which the 
                        sponsor intends to market to 
                        participating employers.
                  ``(C) Definitions and special rules.--For 
                purposes of subparagraph (B)--
                          ``(i) Pension benefit plan.--The term 
                        `pension benefit plan' means a pension, 
                        profit-sharing, stock bonus, annuity, 
                        or employee stock ownership plan.
                          ``(ii) Eligible employer.--The term 
                        `eligible employer' means an eligible 
                        employer (as defined in section 
                        408(p)(2)(C)(i)(I)) which has at least 
                        1 employee who is not a highly 
                        compensated employee (as defined in 
                        section 414(q)) and is participating in 
                        the plan. The determination of whether 
                        an employer is an eligible employer 
                        under subparagraph (B) shall be made as 
                        of the date of the request described in 
                        such subparagraph.
                          ``(iii) Determination of average fees 
                        charged.--For purposes of any 
                        determination of average fees charged, 
                        any request to which subparagraph (B) 
                        applies shall not be taken into 
                        account.
          ``(3) Average fee requirement.--The average fee 
        charged under the program required by subsection (a) 
        shall not be less than the amount determined under the 
        following table:

                                                                 Average
``Category                                                           Fee
    Employee plan ruling and opinion..........................     $250 
    Exempt organization ruling................................     $350 
    Employee plan determination...............................     $300 
    Exempt organization determination.........................     $275 
    Chief counsel ruling......................................     $200.

  ``(c) Termination.--No fee shall be imposed under this 
section with respect to requests made after September 30, 
2013.''.
  (b) Conforming Amendments.--
          (1) The table of sections for chapter 77 is amended 
        by adding at the end the following new item:

        ``Sec. 7529. Internal Revenue Service user fees.''.

          (2) Section 10511 of the Revenue Act of 1987 is 
        repealed.
          (3) Section 620 of the Economic Growth and Tax Relief 
        Reconciliation Act of 2001 is repealed.
  (c) Limitations.--Notwithstanding any other provision of law, 
any fees collected pursuant to section 7527 of the Internal 
Revenue Code of 1986, as added by subsection (a), shall not be 
expended by the Internal Revenue Service unless provided by an 
appropriations Act.
  (d) Effective Date.--The amendments made by this section 
shall apply to requests made after the date of the enactment of 
this Act.

                Subtitle F--Low-Income Taxpayer Clinics

SEC. 381. LOW-INCOME TAXPAYER CLINICS.

  (a) Limitation on Amount of Grants.--Paragraph (1) of section 
7526(c) (relating to special rules and limitations) is amended 
by striking ``$6,000,000 per year'' and inserting ``$9,000,000 
for 2004, $12,000,000 for 2005, and $15,000,000 for each year 
thereafter''.
  (b) Promotion of Clinics.--Section 7526(c) is amended by 
adding at the end the following new paragraph:
          ``(6) Promotion of clinics.--The Secretary is 
        authorized to promote the benefits of and encourage the 
        use of low-income taxpayer clinics through the use of 
        mass communications, referrals, and other means.''.
  (c) Use of Grants for Overhead Expenses Prohibited.--Section 
7526(c), as amended by subsection (b), is further amended by 
adding at the end the following new paragraph:
          ``(7) Use of grants for overhead expenses 
        prohibited.--No grant made under this section may be 
        used for the general overhead expenses of any 
        institution sponsoring a qualified low-income taxpayer 
        clinic.''.
  (d) Eligible Clinics.--
          (1) In general.--Paragraph (2) of section 7526(b) is 
        amended to read as follows:
          ``(2) Eligible clinic.--The term `eligible clinic' 
        means--
                  ``(A) any clinical program at an accredited 
                law, business, or accounting school in which 
                students represent low-income taxpayers in 
                controversies arising under this title; and
                  ``(B) any organization described in section 
                501(c) and exempt from tax under section 501(a) 
                which satisfies the requirements of paragraph 
                (1) through representation of taxpayers or 
                referral of taxpayers to qualified 
                representatives.''.
          (2) Conforming amendment.--Subparagraph (A) of 
        section 7526(b)(1) is amended by striking ``means a 
        clinic'' and inserting ``means an eligible clinic''.

SEC. 382. MATCHING GRANTS TO LOW INCOME RETURN PREPARATION CLINICS.

  (a) In General.--Chapter 77 (relating to miscellaneous 
provisions) is amended by inserting after section 7526 the 
following new section:

``SEC. 7526A. LOW INCOME RETURN PREPARATION CLINICS.

  ``(a) In General.--The Secretary may, subject to the 
availability of appropriated funds, make grants to provide 
matching funds for the development, expansion, or continuation 
of qualified return preparation clinics.
  ``(b) Definitions.--For purposes of this section--
          ``(1) Qualified return preparation clinic.--
                  ``(A) In general.--The term `qualified return 
                preparation clinic' means an eligible clinic 
                which--
                          ``(i) does not charge more than a 
                        nominal fee for its services (except 
                        for reimbursement of actual costs 
                        incurred), and
                          ``(ii) operates programs which assist 
                        low-income taxpayers in preparing and 
                        filing their Federal income tax 
                        returns, including schedules reporting 
                        sole proprietorship or farm income.
                  ``(B) Assistance to low-income taxpayers.--A 
                clinic is treated as assisting low-income 
                taxpayers under subparagraph (A)(ii) if at 
                least 90 percent of the taxpayers assisted by 
                the clinic have incomes which do not exceed 250 
                percent of the poverty level, as determined in 
                accordance with criteria established by the 
                Director of the Office of Management and 
                Budget.
          ``(2) Eligible clinic.--The term `eligible clinic' 
        includes--
                  ``(A) a clinical program at an eligible 
                educational institution (as defined in section 
                529(e)(5)) which satisfies the requirements of 
                paragraph (1) through student assistance of 
                taxpayers in return preparation and filing, and
                  ``(B) an organization described in section 
                501(c) and exempt from tax under section 501(a) 
                which satisfies the requirements of paragraph 
                (1).
  ``(c) Special Rules and Limitations.--
          ``(1) Aggregate limitation.--Unless otherwise 
        provided by specific appropriation, the Secretary shall 
        not allocate more than $10,000,000 per year (exclusive 
        of costs of administering the program) to grants under 
        this section.
          ``(2) Other applicable rules.--Rules similar to the 
        rules under paragraphs (2) through (7) of section 
        7526(c) shall apply with respect to the awarding of 
        grants to qualified return preparation clinics.''.
  (b) Clerical Amendment.--The table of sections for chapter 77 
is amended by inserting after the item relating to section 7526 
the following new item:

        ``Sec. 7526A. Low income return preparation clinics.''.

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

                       TITLE IV--CHILD TAX CREDIT

SEC. 401. ACCELERATION OF INCREASE IN REFUNDABILITY OF THE CHILD TAX 
                    CREDIT.

  (a) Acceleration of Refundability.--
          (1) In general.--Section 24(d)(1)(B)(i) of the 
        Internal Revenue Code of 1986 (relating to portion of 
        credit refundable) is amended by striking ``(10 percent 
        in the case of taxable years beginning before January 
        1, 2005)''.
          (2) Advance payment.--Subsection (b) of section 6429 
        of such Code (relating to advance payment of portion of 
        increased child credit for 2003) is amended by striking 
        ``and'' at the end of paragraph (2), by striking the 
        period at the end of paragraph (3) and inserting ``, 
        and'', and by adding at the end the following new 
        paragraph:
          ``(4) section 24(d)(1)(B)(i) applied without regard 
        to the first parenthetical therein.''.
          (3) Earned income includes combat pay.--Section 
        24(d)(1) of such Code is amended by adding at the end 
        the following new sentence: ``For purposes of 
        subparagraph (B), any amount excluded from gross income 
        by reason of section 112 shall be treated as earned 
        income which is taken into account in computing taxable 
        income for the taxable year.''.
  (b) Effective Dates.--
          (1) Subsections (a)(1) and (a)(3).--The amendments 
        made by subsections (a)(1) and (a)(3) shall apply to 
        taxable years beginning after December 31, 2002.
          (2) Subsection (a)(2).--The amendments made by 
        subsection (a)(2) shall take effect as if included in 
        the amendments made by section 101(b) of the Jobs and 
        Growth Tax Relief Reconciliation Act of 2003.

SEC. 402. REDUCTION IN MARRIAGE PENALTY IN CHILD TAX CREDIT.

  (a) In General.--Section 24(b)(2) of the Internal Revenue 
Code of 1986 (defining threshold amount) is amended--
          (1) by inserting ``($115,000 for taxable years 
        beginning in 2008 or 2009, and $150,000 for taxable 
        years beginning in 2010)'' after ``$110,000'', and
          (2) by striking ``$55,000'' in subparagraph (C) and 
        inserting ``\1/2\ of the amount in effect under 
        subparagraph (A)''.
  (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2002.

SEC. 403. APPLICATION OF EGTRRA SUNSET TO THIS SECTION.

  Each amendment made by this title shall be subject to title 
IX of the Economic Growth and Tax Relief Reconciliation Act of 
2001 to the same extent and in the same manner as the provision 
of such Act to which such amendment relates.

                  TITLE V--UNIFORM DEFINITION OF CHILD

SEC. 501. UNIFORM DEFINITION OF CHILD, ETC.

  Section 152 of the Internal Revenue Code of 1986 is amended 
to read as follows:

``SEC. 152. DEPENDENT DEFINED.

  ``(a) In General.--For purposes of this subtitle, the term 
`dependent' means--
          ``(1) a qualifying child, or
          ``(2) a qualifying relative.
  ``(b) Exceptions.--For purposes of this section--
          ``(1) Dependents ineligible.--If an individual is a 
        dependent of a taxpayer for any taxable year of such 
        taxpayer beginning in a calendar year, such individual 
        shall be treated as having no dependents for any 
        taxable year of such individual beginning in such 
        calendar year.
          ``(2) Married dependents.--An individual shall not be 
        treated as a dependent of a taxpayer under subsection 
        (a) if such individual has made a joint return with the 
        individual's spouse under section 6013 for the taxable 
        year beginning in the calendar year in which the 
        taxable year of the taxpayer begins.
          ``(3) Citizens or nationals of other countries.--
                  ``(A) In general.--The term `dependent' does 
                not include an individual who is not a citizen 
                or national of the United States unless such 
                individual is a resident of the United States 
                or a country contiguous to the United States.
                  ``(B) Exception for adopted child.--
                Subparagraph (A) shall not exclude any child of 
                a taxpayer (within the meaning of subsection 
                (f)(1)(B)) from the definition of `dependent' 
                if--
                          ``(i) for the taxable year of the 
                        taxpayer, the child's principal place 
                        of abode is the home of the taxpayer, 
                        and
                          ``(ii) the taxpayer is a citizen or 
                        national of the United States.
  ``(c) Qualifying Child.--For purposes of this section--
          ``(1) In general.--The term `qualifying child' means, 
        with respect to any taxpayer for any taxable year, an 
        individual--
                  ``(A) who bears a relationship to the 
                taxpayer described in paragraph (2),
                  ``(B) who has the same principal place of 
                abode as the taxpayer for more than one-half of 
                such taxable year,
                  ``(C) who meets the age requirements of 
                paragraph (3), and
                  ``(D) who has not provided over one-half of 
                such individual's own support for the calendar 
                year in which the taxable year of the taxpayer 
                begins.
          ``(2) Relationship test.--For purposes of paragraph 
        (1)(A), an individual bears a relationship to the 
        taxpayer described in this paragraph if such individual 
        is--
                  ``(A) a child of the taxpayer or a descendant 
                of such a child, or
                  ``(B) a brother, sister, stepbrother, or 
                stepsister of the taxpayer or a descendant of 
                any such relative.
          ``(3) Age requirements.--
                  ``(A) In general.--For purposes of paragraph 
                (1)(C), an individual meets the requirements of 
                this paragraph if such individual--
                          ``(i) has not attained the age of 19 
                        as of the close of the calendar year in 
                        which the taxable year of the taxpayer 
                        begins, or
                          ``(ii) is a student who has not 
                        attained the age of 24 as of the close 
                        of such calendar year.
                  ``(B) Special rule for disabled.--In the case 
                of an individual who is permanently and totally 
                disabled (as defined in section 22(e)(3)) at 
                any time during such calendar year, the 
                requirements of subparagraph (A) shall be 
                treated as met with respect to such individual.
          ``(4) Special rule relating to 2 or more claiming 
        qualifying child.--
                  ``(A) In general.--Except as provided in 
                subparagraph (B) and subsection (e), if (but 
                for this paragraph) an individual may be and is 
                claimed as a qualifying child by 2 or more 
                taxpayers for a taxable year beginning in the 
                same calendar year, such individual shall be 
                treated as the qualifying child of the taxpayer 
                who is--
                          ``(i) a parent of the individual, or
                          ``(ii) if clause (i) does not apply, 
                        the taxpayer with the highest adjusted 
                        gross income for such taxable year.
                  ``(B) More than 1 parent claiming qualifying 
                child.--If the parents claiming any qualifying 
                child do not file a joint return together, such 
                child shall be treated as the qualifying child 
                of--
                          ``(i) the parent with whom the child 
                        resided for the longest period of time 
                        during the taxable year, or
                          ``(ii) if the child resides with both 
                        parents for the same amount of time 
                        during such taxable year, the parent 
                        with the highest adjusted gross income.
  ``(d) Qualifying Relative.--For purposes of this section--
          ``(1) In general.--The term `qualifying relative' 
        means, with respect to any taxpayer for any taxable 
        year, an individual--
                  ``(A) who bears a relationship to the 
                taxpayer described in paragraph (2),
                  ``(B) whose gross income for the calendar 
                year in which such taxable year begins is less 
                than the exemption amount (as defined in 
                section 151(d)),
                  ``(C) with respect to whom the taxpayer 
                provides over one-half of the individual's 
                support for the calendar year in which such 
                taxable year begins, and
                  ``(D) who is not a qualifying child of such 
                taxpayer or of any other taxpayer for any 
                taxable year beginning in the calendar year in 
                which such taxable year begins.
          ``(2) Relationship.--For purposes of paragraph 
        (1)(A), an individual bears a relationship to the 
        taxpayer described in this paragraph if the individual 
        is any of the following with respect to the taxpayer:
                  ``(A) A child or a descendant of a child.
                  ``(B) A brother, sister, stepbrother, or 
                stepsister.
                  ``(C) The father or mother, or an ancestor of 
                either.
                  ``(D) A stepfather or stepmother.
                  ``(E) A son or daughter of a brother or 
                sister of the taxpayer.
                  ``(F) A brother or sister of the father or 
                mother of the taxpayer.
                  ``(G) A son-in-law, daughter-in-law, father-
                in-law, mother-in-law, brother-in-law, or 
                sister-in-law.
                  ``(H) An individual (other than an individual 
                who at any time during the taxable year was the 
                spouse, determined without regard to section 
                7703, of the taxpayer) who, for the taxable 
                year of the taxpayer, has as such individual's 
                principal place of abode the home of the 
                taxpayer and is a member of the taxpayer's 
                household.
          ``(3) Special rule relating to multiple support 
        agreements.--For purposes of paragraph (1)(C), over 
        one-half of the support of an individual for a calendar 
        year shall be treated as received from the taxpayer 
        if--
                  ``(A) no one person contributed over one-half 
                of such support,
                  ``(B) over one-half of such support was 
                received from 2 or more persons each of whom, 
                but for the fact that any such person alone did 
                not contribute over one-half of such support, 
                would have been entitled to claim such 
                individual as a dependent for a taxable year 
                beginning in such calendar year,
                  ``(C) the taxpayer contributed over 10 
                percent of such support, and
                  ``(D) each person described in subparagraph 
                (B) (other than the taxpayer) who contributed 
                over 10 percent of such support files a written 
                declaration (in such manner and form as the 
                Secretary may by regulations prescribe) that 
                such person will not claim such individual as a 
                dependent for any taxable year beginning in 
                such calendar year.
          ``(4) Special rule relating to income of handicapped 
        dependents.--
                  ``(A) In general.--For purposes of paragraph 
                (1)(B), the gross income of an individual who 
                is permanently and totally disabled (as defined 
                in section 22(e)(3)) at any time during the 
                taxable year shall not include income 
                attributable to services performed by the 
                individual at a sheltered workshop if--
                          ``(i) the availability of medical 
                        care at such workshop is the principal 
                        reason for the individual's presence 
                        there, and
                          ``(ii) the income arises solely from 
                        activities at such workshop which are 
                        incident to such medical care.
                  ``(B) Sheltered workshop defined.--For 
                purposes of subparagraph (A), the term 
                `sheltered workshop' means a school--
                          ``(i) which provides special 
                        instruction or training designed to 
                        alleviate the disability of the 
                        individual, and
                          ``(ii) which is operated by an 
                        organization described in section 
                        501(c)(3) and exempt from tax under 
                        section 501(a), or by a State, a 
                        possession of the United States, any 
                        political subdivision of any of the 
                        foregoing, the United States, or the 
                        District of Columbia.
          ``(5) Special support test in case of students.--For 
        purposes of paragraph (1)(C), in the case of an 
        individual who is--
                  ``(A) a child of the taxpayer, and
                  ``(B) a student,
        amounts received as scholarships for study at an 
        educational organization described in section 
        170(b)(1)(A)(ii) shall not be taken into account in 
        determining whether such individual received more than 
        one-half of such individual's support from the 
        taxpayer.
          ``(6) Special rules for support.--For purposes of 
        this subsection--
                  ``(A) payments to a spouse which are 
                includible in the gross income of such spouse 
                under section 71 or 682 shall not be treated as 
                a payment by the payor spouse for the support 
                of any dependent,
                  ``(B) amounts expended for the support of a 
                child or children shall be treated as received 
                from the noncustodial parent (as defined in 
                subsection (e)(3)(B)) to the extent that such 
                parent provided amounts for such support, and
                  ``(C) in the case of the remarriage of a 
                parent, support of a child received from the 
                parent's spouse shall be treated as received 
                from the parent.
  ``(e) Special Rule for Divorced Parents.--
          ``(1) In general.--Notwithstanding subsection (c)(4) 
        or (d)(1)(C), if--
                  ``(A) a child receives over one-half of the 
                child's support during the calendar year from 
                the child's parents--
                          ``(i) who are divorced or legally 
                        separated under a decree of divorce or 
                        separate maintenance,
                          ``(ii) who are separated under a 
                        written separation agreement, or
                          ``(iii) who live apart at all times 
                        during the last 6 months of the 
                        calendar year, and
                  ``(B) such child is in the custody of 1 or 
                both of the child's parents for more than \1/2\ 
                of the calendar year,
        such child shall be treated as being the qualifying 
        child or qualifying relative of the noncustodial parent 
        for a calendar year if the requirements described in 
        paragraph (2) are met.
          ``(2) Requirements.--For purposes of paragraph (1), 
        the requirements described in this paragraph are met 
        if--
                  ``(A) a decree of divorce or separate 
                maintenance or written separation agreement 
                between the parents applicable to the taxable 
                year beginning in such calendar year provides 
                that--
                          ``(i) the noncustodial parent shall 
                        be entitled to any deduction allowable 
                        under section 151 for such child, or
                          ``(ii) the custodial parent will sign 
                        a written declaration (in such manner 
                        and form as the Secretary may 
                        prescribe) that such parent will not 
                        claim such child as a dependent for 
                        such taxable year, and
                  ``(B) in the case of such an agreement 
                executed before January 1, 1985, the 
                noncustodial parent provides at least $600 for 
                the support of such child during such calendar 
                year.
          ``(3) Custodial parent and noncustodial parent.--For 
        purposes of this subsection--
                  ``(A) Custodial parent.--The term `custodial 
                parent' means the parent with whom a child 
                shared the same principal place of abode for 
                the greater portion of the calendar year.
                  ``(B) Noncustodial parent.--The term 
                `noncustodial parent' means the parent who is 
                not the custodial parent.
          ``(4) Exception for multiple-support agreements.--
        This subsection shall not apply in any case where over 
        one-half of the support of the child is treated as 
        having been received from a taxpayer under the 
        provision of subsection (d)(3).
  ``(f) Other Definitions and Rules.--For purposes of this 
section--
          ``(1) Child defined.--
                  ``(A) In general.--The term `child' means an 
                individual who is--
                          ``(i) a son, daughter, stepson, or 
                        stepdaughter of the taxpayer, or
                          ``(ii) an eligible foster child of 
                        the taxpayer.
                  ``(B) Adopted child.--In determining whether 
                any of the relationships specified in 
                subparagraph (A)(i) or paragraph (4) exists, a 
                legally adopted individual of the taxpayer, or 
                an individual who is placed with the taxpayer 
                by an authorized placement agency for adoption 
                by the taxpayer, shall be treated as a child of 
                such individual by blood.
                  ``(C) Eligible foster child.--For purposes of 
                subparagraph (A)(ii), the term `eligible foster 
                child' means an individual who is placed with 
                the taxpayer by an authorized placement agency 
                or by judgment, decree, or other order of any 
                court of competent jurisdiction.
          ``(2) Student defined.--The term `student' means an 
        individual who during each of 5 calendar months during 
        the calendar year in which the taxable year of the 
        taxpayer begins--
                  ``(A) is a full-time student at an 
                educational organization described in section 
                170(b)(1)(A)(ii), or
                  ``(B) is pursuing a full-time course of 
                institutional on-farm training under the 
                supervision of an accredited agent of an 
                educational organization described in section 
                170(b)(1)(A)(ii) or of a State or political 
                subdivision of a State.
          ``(3) Place of abode.--An individual shall not be 
        treated as having the same principal place of abode of 
        the taxpayer if at any time during the taxable year of 
        the taxpayer the relationship between the individual 
        and the taxpayer is in violation of local law.
          ``(4) Brother and sister.--The terms `brother' and 
        `sister' include a brother or sister by the half blood.
          ``(5) Treatment of missing children.--
                  ``(A) In general.--Solely for the purposes 
                referred to in subparagraph (B), a child of the 
                taxpayer--
                          ``(i) who is presumed by law 
                        enforcement authorities to have been 
                        kidnapped by someone who is not a 
                        member of the family of such child or 
                        the taxpayer, and
                          ``(ii) who had, for the taxable year 
                        in which the kidnapping occurred, the 
                        same principal place of abode as the 
                        taxpayer for more than one-half of the 
                        portion of such year before the date of 
                        the kidnapping,
                shall be treated as meeting the requirement of 
                subsection (c)(1)(B) with respect to a taxpayer 
                for all taxable years ending during the period 
                that the individual is kidnapped.
                  ``(B) Purposes.--Subparagraph (A) shall apply 
                solely for purposes of determining--
                          ``(i) the deduction under section 
                        151(c),
                          ``(ii) the credit under section 24 
                        (relating to child tax credit),
                          ``(iii) whether an individual is a 
                        surviving spouse or a head of a 
                        household (as such terms are defined in 
                        section 2), and
                          ``(iv) the earned income credit under 
                        section 32.
                  ``(C) Comparable treatment of certain 
                qualifying relatives.--For purposes of this 
                section, a child of the taxpayer--
                          ``(i) who is presumed by law 
                        enforcement authorities to have been 
                        kidnapped by someone who is not a 
                        member of the family of such child or 
                        the taxpayer, and
                          ``(ii) who was (without regard to 
                        this paragraph) a qualifying relative 
                        of the taxpayer for the portion of the 
                        taxable year before the date of the 
                        kidnapping,
                shall be treated as a qualifying relative of 
                the taxpayer for all taxable years ending 
                during the period that the child is kidnapped.
                  ``(D) Termination of treatment.--
                Subparagraphs (A) and (C) shall cease to apply 
                as of the first taxable year of the taxpayer 
                beginning after the calendar year in which 
                there is a determination that the child is dead 
                (or, if earlier, in which the child would have 
                attained age 18).
          ``(6) Cross references.--

        ``For provision treating child as dependent of both parents for 
        purposes of certain provisions, see sections 105(b), 
        132(h)(2)(B), and 213(d)(5).''.

SEC. 502. MODIFICATIONS OF DEFINITION OF HEAD OF HOUSEHOLD.

  (a) Head of Household.--Clause (i) of section 2(b)(1)(A) of 
the Internal Revenue Code of 1986 is amended to read as 
follows:
                          ``(i) a qualifying child of the 
                        individual (as defined in section 
                        152(c), determined without regard to 
                        section 152(e)), but not if such 
                        child--
                                  ``(I) is married at the close 
                                of the taxpayer's taxable year, 
                                and
                                  ``(II) is not a dependent of 
                                such individual by reason of 
                                section 152(b)(2) or 152(b)3), 
                                or both, or''.
  (b) Conforming Amendments.--
          (1) Section 2(b)(2) of the Internal Revenue Code of 
        1986 is amended by striking subparagraph (A) and by 
        redesignating subparagraphs (B), (C), and (D) as 
        subparagraphs (A), (B), and (C), respectively.
          (2) Clauses (i) and (ii) of section 2(b)(3)(B) of 
        such Code are amended to read as follows:
                          ``(i) subparagraph (H) of section 
                        152(d)(2), or
                          ``(ii) paragraph (3) of section 
                        152(d).''.

SEC. 503. MODIFICATIONS OF DEPENDENT CARE CREDIT.

  (a) In General.--Section 21(a)(1) of the Internal Revenue 
Code of 1986 is amended by striking ``In the case of an 
individual who maintains a household which includes as a member 
one or more qualifying individuals (as defined in subsection 
(b)(1))'' and inserting ``In the case of an individual for 
which there are 1 or more qualifying individuals (as defined in 
subsection (b)(1)) with respect to such individual''.
  (b) Qualifying Individual.--Paragraph (1) of section 21(b) of 
the Internal Revenue Code of 1986 is amended to read as 
follows:
          ``(1) Qualifying individual.--The term `qualifying 
        individual' means--
                  ``(A) a dependent of the taxpayer (as defined 
                in section 152(a)(1)) who has not attained age 
                13,
                  ``(B) a dependent of the taxpayer who is 
                physically or mentally incapable of caring for 
                himself or herself and who has the same 
                principal place of abode as the taxpayer for 
                more than one-half of such taxable year, or
                  ``(C) the spouse of the taxpayer, if the 
                spouse is physically or mentally incapable of 
                caring for himself or herself and who has the 
                same principal place of abode as the taxpayer 
                for more than one-half of such taxable year.''.
  (c) Conforming Amendment.--Paragraph (1) of section 21(e) of 
the Internal Revenue Code of 1986 is amended to read as 
follows:
          ``(1) Place of abode.--An individual shall not be 
        treated as having the same principal place of abode of 
        the taxpayer if at any time during the taxable year of 
        the taxpayer the relationship between the individual 
        and the taxpayer is in violation of local law.''.

SEC. 504. MODIFICATIONS OF CHILD TAX CREDIT.

  (a) In General.--Paragraph (1) of section 24(c) of the 
Internal Revenue Code of 1986 is amended to read as follows:
          ``(1) In general.--The term `qualifying child' means 
        a qualifying child of the taxpayer (as defined in 
        section 152(c)) who has not attained age 17.''.
  (b) Conforming Amendment.--Section 24(c)(2) of the Internal 
Revenue Code of 1986 is amended by striking ``the first 
sentence of section 152(b)(3)'' and inserting ``subparagraph 
(A) of section 152(b)(3)''.

SEC. 505. MODIFICATIONS OF EARNED INCOME CREDIT.

  (a) Qualifying Child.--Paragraph (3) of section 32(c) of the 
Internal Revenue Code of 1986 is amended to read as follows:
          ``(3) Qualifying child.--
                  ``(A) In general.--The term `qualifying 
                child' means a qualifying child of the taxpayer 
                (as defined in section 152(c), determined 
                without regard to paragraph (1)(D) thereof and 
                section 152(e)).
                  ``(B) Married individual.--The term 
                `qualifying child' shall not include an 
                individual who is married as of the close of 
                the taxpayer's taxable year unless the taxpayer 
                is entitled to a deduction under section 151 
                for such taxable year with respect to such 
                individual (or would be so entitled but for 
                section 152(e)).
                  ``(C) Place of abode.--For purposes of 
                subparagraph (A), the requirements of section 
                152(c)(1)(B) shall be met only if the principal 
                place of abode is in the United States.
                  ``(D) Identification requirements.--
                          ``(i) In general.--A qualifying child 
                        shall not be taken into account under 
                        subsection (b) unless the taxpayer 
                        includes the name, age, and TIN of the 
                        qualifying child on the return of tax 
                        for the taxable year.
                          ``(ii) Other methods.--The Secretary 
                        may prescribe other methods for 
                        providing the information described in 
                        clause (i).''.
  (b) Conforming Amendments.--
          (1) Section 32(c)(1) of the Internal Revenue Code of 
        1986 is amended by striking subparagraph (C) and by 
        redesignating subparagraphs (D), (E), (F), and (G) as 
        subparagraphs (C), (D), (E), and (F), respectively.
          (2) Section 32(c)(4) of such Code is amended by 
        striking ``(3)(E)'' and inserting ``(3)(C)''.
          (3) Section 32(m) of such Code is amended by striking 
        ``subsections (c)(1)(F)'' and inserting ``subsections 
        (c)(1)(E)''.

SEC. 506. MODIFICATIONS OF DEDUCTION FOR PERSONAL EXEMPTION FOR 
                    DEPENDENTS.

  Subsection (c) of section 151 of the Internal Revenue Code of 
1986 is amended to read as follows:
  ``(c) Additional Exemption for Dependents.--An exemption of 
the exemption amount for each individual who is a dependent (as 
defined in section 152) of the taxpayer for the taxable 
year.''.

SEC. 507. TECHNICAL AND CONFORMING AMENDMENTS.

          (1) Section 2(a)(1)(B)(i) of such Code is amended by 
        inserting ``, determined without regard to subsections 
        (b)(1), (b)(2), and (d)(1)(B) thereof'' after ``section 
        152''.
          (2) Section 21(e)(5) of the Internal Revenue Code of 
        1986 is amended--
                  (A) by striking ``paragraph (2) or (4) of'' 
                in subparagraph (A), and
                  (B) by striking ``within the meaning of 
                section 152(e)(1)'' and inserting ``as defined 
                in section 152(e)(3)(A)''.
          (3) Section 21(e)(6)(B) of such Code is amended by 
        striking ``section 151(c)(3)'' and inserting ``section 
        152(f)(1)''.
          (4) Section 25B(c)(2)(B) of such Code is amended by 
        striking ``151(c)(4)'' and inserting ``152(f)(2)''.
          (5)(A) Subparagraphs (A) and (B) of section 51(i)(1) 
        of such Code are each amended by striking ``paragraphs 
        (1) through (8) of section 152(a)'' both places it 
        appears and inserting ``subparagraphs (A) through (G) 
        of section 152(d)(2)''.
          (B) Section 51(i)(1)(C) of such Code is amended by 
        striking ``152(a)(9)'' and inserting ``152(d)(2)(H)''.
          (6) Section 72(t)(2)(D)(i)(III) of such Code is 
        amended by inserting ``, determined without regard to 
        subsections (b)(1), (b)(2), and (d)(1)(B) thereof'' 
        after ``section 152''.
          (7) Section 72(t)(7)(A)(iii) of such Code is amended 
        by striking ``151(c)(3)'' and inserting ``152(f)(1)''.
          (8) Section 42(i)(3)(D)(ii)(I) of such Code is 
        amended by inserting ``, determined without regard to 
        subsections (b)(1), (b)(2), and (d)(1)(B) thereof'' 
        after ``section 152''.
          (9) Subsections (b) and (c)(1) of section 105 of such 
        Code are amended by inserting ``, determined without 
        regard to subsections (b)(1), (b)(2), and (d)(1)(B) 
        thereof'' after ``section 152''.
          (10) Section 120(d)(4) of such Code is amended by 
        inserting ``(determined without regard to subsections 
        (b)(1), (b)(2), and (d)(1)(B) thereof)'' after 
        ``section 152''.
          (11) Section 125(e)(1)(D) of such Code is amended by 
        inserting ``, determined without regard to subsections 
        (b)(1), (b)(2), and (d)(1)(B) thereof'' after ``section 
        152''.
          (12) Section 129(c)(2) of such Code is amended by 
        striking ``151(c)(3)'' and inserting ``152(f)(1)''.
          (13) The first sentence of section 132(h)(2)(B) of 
        such Code is amended by striking ``151(c)(3)'' and 
        inserting ``152(f)(1)''.
          (14) Section 153 of such Code is amended by striking 
        paragraph (1) and by redesignating paragraphs (2), (3), 
        and (4) as paragraphs (1), (2), and (3), respectively.
          (15) Section 170(g)(1) of such Code is amended by 
        inserting ``(determined without regard to subsections 
        (b)(1), (b)(2), and (d)(1)(B) thereof)'' after 
        ``section 152''.
          (16) Section 170(g)(3) of such Code is amended by 
        striking ``paragraphs (1) through (8) of section 
        152(a)'' and inserting ``subparagraphs (A) through (G) 
        of section 152(d)(2)''.
          (17) Section 213(a) of such Code is amended by 
        inserting ``, determined without regard to subsections 
        (b)(1), (b)(2), and (d)(1)(B) thereof'' after ``section 
        152''.
          (18) The second sentence of section 213(d)(11) of 
        such Code is amended by striking ``paragraphs (1) 
        through (8) of section 152(a)'' and inserting 
        ``subparagraphs (A) through (G) of section 152(d)(2)''.
          (19) Section 220(d)(2)(A) of such Code is amended by 
        inserting ``, determined without regard to subsections 
        (b)(1), (b)(2), and (d)(1)(B) thereof'' after ``section 
        152''.
          (20) Section 221(d)(4) of such Code is amended by 
        inserting ``(determined without regard to subsections 
        (b)(1), (b)(2), and (d)(1)(B) thereof)'' after 
        ``section 152''.
          (21) Section 529(e)(2)(B) of such Code is amended by 
        striking ``paragraphs (1) through (8) of section 
        152(a)'' and inserting ``subparagraphs (A) through (G) 
        of section 152(d)(2)''.
          (22) Section 2032A(c)(7)(D) of such Code is amended 
        by striking ``section 151(c)(4)'' and inserting 
        ``section 152(f)(2)''.
          (23) Section 2057(d)(2)(B) of such Code is amended by 
        inserting ``, determined without regard to subsections 
        (b)(1), (b)(2), and (d)(1)(B) thereof'' after ``section 
        152''.
          (24) Section 7701(a)(17) of such Code is amended by 
        striking ``152(b)(4), 682,'' and inserting ``682''.
          (25) Section 7702B(f)(2)(C)(iii) of such Code is 
        amended by striking ``paragraphs (1) through (8) of 
        section 152(a)'' and inserting ``subparagraphs (A) 
        through (G) of section 152(d)(2)''.
          (26) Section 7703(b)(1) of such Code is amended--
                  (A) by striking ``151(c)(3)'' and inserting 
                ``152(f)(1)'', and
                  (B) by striking ``paragraph (2) or (4) of''.

SEC. 508. EFFECTIVE DATE.

  The amendments made by this title shall apply to taxable 
years beginning after December 31, 2003.

         TITLE VI--IMPROVING TAX EQUITY FOR MILITARY PERSONNEL

SEC. 601. EXCLUSION OF GAIN FROM SALE OF A PRINCIPAL RESIDENCE BY A 
                    MEMBER OF THE UNIFORMED SERVICES OR THE FOREIGN 
                    SERVICE.

  (a) In General.--Subsection (d) of section 121 (relating to 
exclusion of gain from sale of principal residence) is amended 
by redesignating paragraph (9) as paragraph (10) and by 
inserting after paragraph (8) the following new paragraph:
          ``(9) Members of uniformed services and foreign 
        service.--
                  ``(A) In general.--At the election of an 
                individual with respect to a property, the 
                running of the 5-year period described in 
                subsections (a) and (c)(1)(B) and paragraph (7) 
                of this subsection with respect to such 
                property shall be suspended during any period 
                that such individual or such individual's 
                spouse is serving on qualified official 
                extended duty as a member of the uniformed 
                services or of the Foreign Service of the 
                United States.
                  ``(B) Maximum period of suspension.--The 5-
                year period described in subsection (a) shall 
                not be extended more than 10 years by reason of 
                subparagraph (A).
                  ``(C) Qualified official extended duty.--For 
                purposes of this paragraph--
                          ``(i) In general.--The term 
                        `qualified official extended duty' 
                        means any extended duty while serving 
                        at a duty station which is at least 50 
                        miles from such property or while 
                        residing under Government orders in 
                        Government quarters.
                          ``(ii) Uniformed services.--The term 
                        `uniformed services' has the meaning 
                        given such term by section 101(a)(5) of 
                        title 10, United States Code, as in 
                        effect on the date of the enactment of 
                        this paragraph.
                          ``(iii) Foreign service of the united 
                        states.--The term `member of the 
                        Foreign Service of the United States' 
                        has the meaning given the term `member 
                        of the Service' by paragraph (1), (2), 
                        (3), (4), or (5) of section 103 of the 
                        Foreign Service Act of 1980, as in 
                        effect on the date of the enactment of 
                        this paragraph.
                          ``(iv) Extended duty.--The term 
                        `extended duty' means any period of 
                        active duty pursuant to a call or order 
                        to such duty for a period in excess of 
                        90 days or for an indefinite period.
                  ``(D) Special rules relating to election.--
                          ``(i) Election limited to 1 property 
                        at a time.--An election under 
                        subparagraph (A) with respect to any 
                        property may not be made if such an 
                        election is in effect with respect to 
                        any other property.
                          ``(ii) Revocation of election.--An 
                        election under subparagraph (A) may be 
                        revoked at any time.''.
  (b) Effective Date; Special Rule.--
          (1) Effective date.--The amendments made by this 
        section shall take effect as if included in the 
        amendments made by section 312 of the Taxpayer Relief 
        Act of 1997.
          (2) Waiver of limitations.--If refund or credit of 
        any overpayment of tax resulting from the amendments 
        made by this section is prevented at any time before 
        the close of the 1-year period beginning on the date of 
        the enactment of this Act by the operation of any law 
        or rule of law (including res judicata), such refund or 
        credit may nevertheless be made or allowed if claim 
        therefor is filed before the close of such period.

SEC. 602. EXCLUSION FROM GROSS INCOME OF CERTAIN DEATH GRATUITY 
                    PAYMENTS.

  (a) In General.--Subsection (b)(3) of section 134 (relating 
to certain military benefits) is amended by adding at the end 
the following new subparagraph:
                  ``(C) Exception for death gratuity 
                adjustments made by law.--Subparagraph (A) 
                shall not apply to any adjustment to the amount 
                of death gratuity payable under chapter 75 of 
                title 10, United States Code, which is pursuant 
                to a provision of law enacted after September 
                9, 1986.''.
  (b) Conforming Amendment.--Subparagraph (A) of section 
134(b)(3) is amended by striking ``subparagraph (B)'' and 
inserting ``subparagraphs (B) and (C)''.
  (c) Effective Date.--The amendments made by this section 
shall apply with respect to deaths occurring after September 
10, 2001.

SEC. 603. EXCLUSION FOR AMOUNTS RECEIVED UNDER DEPARTMENT OF DEFENSE 
                    HOMEOWNERS ASSISTANCE PROGRAM.

  (a) In General.--Section 132(a) (relating to the exclusion 
from gross income of certain fringe benefits) is amended by 
striking ``or'' at the end of paragraph (6), by striking the 
period at the end of paragraph (7) and inserting ``, or'', and 
by adding at the end the following new paragraph:
          ``(8) qualified military base realignment and closure 
        fringe.''.
  (b) Qualified Military Base Realignment and Closure Fringe.--
Section 132 is amended by redesignating subsection (n) as 
subsection (o) and by inserting after subsection (m) the 
following new subsection:
  ``(n) Qualified Military Base Realignment and Closure 
Fringe.--For purposes of this section--
          ``(1) In general.--The term `qualified military base 
        realignment and closure fringe' means 1 or more 
        payments under the authority of section 1013 of the 
        Demonstration Cities and Metropolitan Development Act 
        of 1966 (42 U.S.C. 3374) (as in effect on the date of 
        the enactment of this subsection) to offset the adverse 
        effects on housing values as a result of a military 
        base realignment or closure.
          ``(2) Limitation.--With respect to any property, such 
        term shall not include any payment referred to in 
        paragraph (1) to the extent that the sum of all of such 
        payments related to such property exceeds the maximum 
        amount described in clause (1) of subsection (c) of 
        such section (as in effect on such date).''.
  (c) Effective Date.--The amendments made by this section 
shall apply to payments made after the date of the enactment of 
this Act.

SEC. 604. EXPANSION OF COMBAT ZONE FILING RULES TO CONTINGENCY 
                    OPERATIONS.

  (a) In General.--Section 7508(a) (relating to time for 
performing certain acts postponed by reason of service in 
combat zone) is amended--
          (1) by inserting ``, or when deployed outside the 
        United States away from the individual's permanent duty 
        station while participating in an operation designated 
        by the Secretary of Defense as a contingency operation 
        (as defined in section 101(a)(13) of title 10, United 
        States Code) or which became such a contingency 
        operation by operation of law'' after ``section 112'',
          (2) by inserting in the first sentence ``or at any 
        time during the period of such contingency operation'' 
        after ``for purposes of such section'',
          (3) by inserting ``or operation'' after ``such an 
        area'', and
          (4) by inserting ``or operation'' after ``such 
        area''.
  (b) Conforming Amendments.--
          (1) Section 7508(d) is amended by inserting ``or 
        contingency operation'' after ``area''.
          (2) The heading for section 7508 is amended by 
        inserting ``OR CONTINGENCY OPERATION'' after ``COMBAT 
        ZONE''.
          (3) The item relating to section 7508 in the table of 
        sections for chapter 77 is amended by inserting ``or 
        contingency operation'' after ``combat zone''.
  (c) Effective Date.--The amendments made by this section 
shall apply to any period for performing an act which has not 
expired before the date of the enactment of this Act.

SEC. 605. MODIFICATION OF MEMBERSHIP REQUIREMENT FOR EXEMPTION FROM TAX 
                    FOR CERTAIN VETERANS' ORGANIZATIONS.

  (a) In General.--Subparagraph (B) of section 501(c)(19) 
(relating to list of exempt organizations) is amended by 
striking ``or widowers'' and inserting ``, widowers, ancestors, 
or lineal descendants''.
  (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 606. CLARIFICATION OF THE TREATMENT OF CERTAIN DEPENDENT CARE 
                    ASSISTANCE PROGRAMS.

  (a) In General.--Section 134(b) (defining qualified military 
benefit) is amended by adding at the end the following new 
paragraph:
          ``(4) Clarification of certain benefits.--For 
        purposes of paragraph (1), such term includes any 
        dependent care assistance program (as in effect on the 
        date of the enactment of this paragraph) for any 
        individual described in paragraph (1)(A).''.
  (b) Conforming Amendments.--
          (1) Section 134(b)(3)(A), as amended by section 602, 
        is amended by inserting ``and paragraph (4)'' after 
        ``subparagraphs (B) and (C)''.
          (2) Section 3121(a)(18) is amended by striking ``or 
        129'' and inserting ``, 129, or 134(b)(4)''.
          (3) Section 3306(b)(13) is amended by striking ``or 
        129'' and inserting ``, 129, or 134(b)(4)''.
          (4) Section 3401(a)(18) is amended by striking ``or 
        129'' and inserting ``, 129, or 134(b)(4)''.
  (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2002.
  (d) No Inference.--No inference may be drawn from the 
amendments made by this section with respect to the tax 
treatment of any amounts under the program described in section 
134(b)(4) of the Internal Revenue Code of 1986 (as added by 
this section) for any taxable year beginning before January 1, 
2003.

SEC. 607. CLARIFICATION RELATING TO EXCEPTION FROM ADDITIONAL TAX ON 
                    CERTAIN DISTRIBUTIONS FROM QUALIFIED TUITION 
                    PROGRAMS, ETC. ON ACCOUNT OF ATTENDANCE AT MILITARY 
                    ACADEMY.

  (a) In General.--Subparagraph (B) of section 530(d)(4) 
(relating to exceptions from additional tax for distributions 
not used for educational purposes) is amended by striking 
``or'' at the end of clause (iii), by redesignating clause (iv) 
as clause (v), and by inserting after clause (iii) the 
following new clause:
                          ``(iv) made on account of the 
                        attendance of the designated 
                        beneficiary at the United States 
                        Military Academy, the United States 
                        Naval Academy, the United States Air 
                        Force Academy, the United States Coast 
                        Guard Academy, or the United States 
                        Merchant Marine Academy, to the extent 
                        that the amount of the payment or 
                        distribution does not exceed the costs 
                        of advanced education (as defined by 
                        section 2005(e)(3) of title 10, United 
                        States Code, as in effect on the date 
                        of the enactment of this section) 
                        attributable to such attendance, or''.
  (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2002.

SEC. 608. SUSPENSION OF TAX-EXEMPT STATUS OF TERRORIST ORGANIZATIONS.

  (a) In General.--Section 501 (relating to exemption from tax 
on corporations, certain trusts, etc.) is amended by 
redesignating subsection (p) as subsection (q) and by inserting 
after subsection (o) the following new subsection:
  ``(p) Suspension of Tax-Exempt Status of Terrorist 
Organizations.--
          ``(1) In general.--The exemption from tax under 
        subsection (a) with respect to any organization 
        described in paragraph (2), and the eligibility of any 
        organization described in paragraph (2) to apply for 
        recognition of exemption under subsection (a), shall be 
        suspended during the period described in paragraph (3).
          ``(2) Terrorist organizations.--An organization is 
        described in this paragraph if such organization is 
        designated or otherwise individually identified--
                  ``(A) under section 212(a)(3)(B)(vi)(II) or 
                219 of the Immigration and Nationality Act as a 
                terrorist organization or foreign terrorist 
                organization,
                  ``(B) in or pursuant to an Executive order 
                which is related to terrorism and issued under 
                the authority of the International Emergency 
                Economic Powers Act or section 5 of the United 
                Nations Participation Act of 1945 for the 
                purpose of imposing on such organization an 
                economic or other sanction, or
                  ``(C) in or pursuant to an Executive order 
                issued under the authority of any Federal law 
                if--
                          ``(i) the organization is designated 
                        or otherwise individually identified in 
                        or pursuant to such Executive order as 
                        supporting or engaging in terrorist 
                        activity (as defined in section 
                        212(a)(3)(B) of the Immigration and 
                        Nationality Act) or supporting 
                        terrorism (as defined in section 
                        140(d)(2) of the Foreign Relations 
                        Authorization Act, Fiscal Years 1988 
                        and 1989); and
                          ``(ii) such Executive order refers to 
                        this subsection.
          ``(3) Period of suspension.--With respect to any 
        organization described in paragraph (2), the period of 
        suspension--
                  ``(A) begins on the later of--
                          ``(i) the date of the first 
                        publication of a designation or 
                        identification described in paragraph 
                        (2) with respect to such organization, 
                        or
                          ``(ii) the date of the enactment of 
                        this subsection, and
                  ``(B) ends on the first date that all 
                designations and identifications described in 
                paragraph (2) with respect to such organization 
                are rescinded pursuant to the law or Executive 
                order under which such designation or 
                identification was made.
          ``(4) Denial of deduction.--No deduction shall be 
        allowed under any provision of this title, including 
        sections 170, 545(b)(2), 556(b)(2), 642(c), 2055, 
        2106(a)(2), and 2522, with respect to any contribution 
        to an organization described in paragraph (2) during 
        the period described in paragraph (3).
          ``(5) Denial of administrative or judicial challenge 
        of suspension or denial of deduction.--Notwithstanding 
        section 7428 or any other provision of law, no 
        organization or other person may challenge a suspension 
        under paragraph (1), a designation or identification 
        described in paragraph (2), the period of suspension 
        described in paragraph (3), or a denial of a deduction 
        under paragraph (4) in any administrative or judicial 
        proceeding relating to the Federal tax liability of 
        such organization or other person.
          ``(6) Erroneous designation.--
                  ``(A) In general.--If--
                          ``(i) the tax exemption of any 
                        organization described in paragraph (2) 
                        is suspended under paragraph (1),
                          ``(ii) each designation and 
                        identification described in paragraph 
                        (2) which has been made with respect to 
                        such organization is determined to be 
                        erroneous pursuant to the law or 
                        Executive order under which such 
                        designation or identification was made, 
                        and
                          ``(iii) the erroneous designations 
                        and identifications result in an 
                        overpayment of income tax for any 
                        taxable year by such organization,
                credit or refund (with interest) with respect 
                to such overpayment shall be made.
                  ``(B) Waiver of limitations.--If the credit 
                or refund of any overpayment of tax described 
                in subparagraph (A)(iii) is prevented at any 
                time by the operation of any law or rule of law 
                (including res judicata), such credit or refund 
                may nevertheless be allowed or made if the 
                claim therefor is filed before the close of the 
                1-year period beginning on the date of the last 
                determination described in subparagraph 
                (A)(ii).
          ``(7) Notice of Suspensions.--If the tax exemption of 
        any organization is suspended under this subsection, 
        the Internal Revenue Service shall update the listings 
        of tax-exempt organizations and shall publish 
        appropriate notice to taxpayers of such suspension and 
        of the fact that contributions to such organization are 
        not deductible during the period of such suspension.''.
  (b) Effective Date.--The amendments made by this section 
shall apply to designations made before, on, or after the date 
of the enactment of this Act.

SEC. 609. ABOVE-THE-LINE DEDUCTION FOR OVERNIGHT TRAVEL EXPENSES OF 
                    NATIONAL GUARD AND RESERVE MEMBERS.

  (a) Deduction Allowed.--Section 162 (relating to certain 
trade or business expenses) is amended by redesignating 
subsection (p) as subsection (q) and inserting after subsection 
(o) the following new subsection:
  ``(p) Treatment of Expenses of Members of Reserve Component 
of Armed Forces of the United States.--For purposes of 
subsection (a)(2), in the case of an individual who performs 
services as a member of a reserve component of the Armed Forces 
of the United States at any time during the taxable year, such 
individual shall be deemed to be away from home in the pursuit 
of a trade or business for any period during which such 
individual is away from home in connection with such 
service.''.
  (b) Deduction Allowed Whether or Not Taxpayer Elects To 
Itemize.--Section 62(a)(2) (relating to certain trade and 
business deductions of employees) is amended by adding at the 
end the following new subparagraph:
                  ``(E) Certain expenses of members of reserve 
                components of the armed forces of the united 
                states.--The deductions allowed by section 162 
                which consist of expenses, determined at a rate 
                not in excess of the rates for travel expenses 
                (including per diem in lieu of subsistence) 
                authorized for employees of agencies under 
                subchapter I of chapter 57 of title 5, United 
                States Code, paid or incurred by the taxpayer 
                in connection with the performance of services 
                by such taxpayer as a member of a reserve 
                component of the Armed Forces of the United 
                States for any period during which such 
                individual is more than 100 miles away from 
                home in connection with such services.''.
  (c) Effective Date.--The amendments made by this section 
shall apply to amounts paid or incurred in taxable years 
beginning after December 31, 2002.

SEC. 610. TAX RELIEF AND ASSISTANCE FOR FAMILIES OF SPACE SHUTTLE 
                    COLUMBIA HEROES.

  (a) Income Tax Relief.--
          (1) In general.--Subsection (d) of section 692 
        (relating to income taxes of members of Armed Forces 
        and victims of certain terrorist attacks on death) is 
        amended by adding at the end the following new 
        paragraph:
          ``(5) Relief with respect to astronauts.--The 
        provisions of this subsection shall apply to any 
        astronaut whose death occurs in the line of duty, 
        except that paragraph (3)(B) shall be applied by using 
        the date of the death of the astronaut rather than 
        September 11, 2001.''.
          (2) Conforming amendments.--
                  (A) Section 5(b)(1) is amended by inserting 
                ``, astronauts,'' after ``Forces''.
                  (B) Section 6013(f)(2)(B) is amended by 
                inserting ``, astronauts,'' after ``Forces''.
          (3) Clerical amendments.--
                  (A) The heading of section 692 is amended by 
                inserting ``, ASTRONAUTS,'' after ``FORCES''.
                  (B) The item relating to section 692 in the 
                table of sections for part II of subchapter J 
                of chapter 1 is amended by inserting ``, 
                astronauts,'' after ``Forces''.
          (4) Effective date.--The amendments made by this 
        subsection shall apply with respect to any astronaut 
        whose death occurs after December 31, 2002.
  (b) Death Benefit Relief.--
          (1) In general.--Subsection (i) of section 101 
        (relating to certain death benefits) is amended by 
        adding at the end the following new paragraph:
          ``(4) Relief with respect to astronauts.--The 
        provisions of this subsection shall apply to any 
        astronaut whose death occurs in the line of duty.''.
          (2) Clerical amendment.--The heading for subsection 
        (i) of section 101 is amended by inserting ``or 
        Astronauts'' after ``Victims''.
          (3) Effective date.--The amendments made by this 
        subsection shall apply to amounts paid after December 
        31, 2002, with respect to deaths occurring after such 
        date.
  (c) Estate Tax Relief.--
          (1) In general.--Section 2201(b) (defining qualified 
        decedent) is amended by striking ``and'' at the end of 
        paragraph (1)(B), by striking the period at the end of 
        paragraph (2) and inserting ``, and'', and by adding at 
        the end the following new paragraph:
          ``(3) any astronaut whose death occurs in the line of 
        duty.''.
          (2) Clerical amendments.--
                  (A) The heading of section 2201 is amended by 
                inserting ``, DEATHS OF ASTRONAUTS,'' after 
                ``FORCES''.
                  (B) The item relating to section 2201 in the 
                table of sections for subchapter C of chapter 
                11 is amended by inserting ``, deaths of 
                astronauts,'' after ``Forces''.
          (3) Effective date.--The amendments made by this 
        subsection shall apply to estates of decedents dying 
        after December 31, 2002.

                      TITLE VII--OTHER PROVISIONS

SEC. 701. REVISION OF TAX RULES ON EXPATRIATION.

  (a) In General.--Subpart A of part II of subchapter N of 
chapter 1 is amended by inserting after section 877 the 
following new section:

``SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.

  ``(a) General Rules.--For purposes of this subtitle--
          ``(1) Mark to market.--Except as provided in 
        subsections (d) and (f), all property of a covered 
        expatriate to whom this section applies shall be 
        treated as sold on the day before the expatriation date 
        for its fair market value.
          ``(2) Recognition of gain or loss.--In the case of 
        any sale under paragraph (1)--
                  ``(A) notwithstanding any other provision of 
                this title, any gain arising from such sale 
                shall be taken into account for the taxable 
                year of the sale, and
                  ``(B) any loss arising from such sale shall 
                be taken into account for the taxable year of 
                the sale to the extent otherwise provided by 
                this title, except that section 1091 shall not 
                apply to any such loss.
        Proper adjustment shall be made in the amount of any 
        gain or loss subsequently realized for gain or loss 
        taken into account under the preceding sentence.
          ``(3) Exclusion for certain gain.--
                  ``(A) In general.--The amount which, but for 
                this paragraph, would be includible in the 
                gross income of any individual by reason of 
                this section shall be reduced (but not below 
                zero) by $600,000. For purposes of this 
                paragraph, allocable expatriation gain taken 
                into account under subsection (f)(2) shall be 
                treated in the same manner as an amount 
                required to be includible in gross income.
                  ``(B) Cost-of-living adjustment.--
                          ``(i) In general.--In the case of an 
                        expatriation date occurring in any 
                        calendar year after 2003, the $600,000 
                        amount under subparagraph (A) shall be 
                        increased by an amount equal to--
                                  ``(I) such dollar amount, 
                                multiplied by
                                  ``(II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for such 
                                calendar year, determined by 
                                substituting `calendar year 
                                2002' for `calendar year 1992' 
                                in subparagraph (B) thereof.
                          ``(ii) Rounding rules.--If any amount 
                        after adjustment under clause (i) is 
                        not a multiple of $1,000, such amount 
                        shall be rounded to the next lower 
                        multiple of $1,000.
          ``(4) Election to continue to be taxed as united 
        states citizen.--
                  ``(A) In general.--If a covered expatriate 
                elects the application of this paragraph--
                          ``(i) this section (other than this 
                        paragraph and subsection (i)) shall not 
                        apply to the expatriate, but
                          ``(ii) in the case of property to 
                        which this section would apply but for 
                        such election, the expatriate shall be 
                        subject to tax under this title in the 
                        same manner as if the individual were a 
                        United States citizen.
                  ``(B) Requirements.--Subparagraph (A) shall 
                not apply to an individual unless the 
                individual--
                          ``(i) provides security for payment 
                        of tax in such form and manner, and in 
                        such amount, as the Secretary may 
                        require,
                          ``(ii) consents to the waiver of any 
                        right of the individual under any 
                        treaty of the United States which would 
                        preclude assessment or collection of 
                        any tax which may be imposed by reason 
                        of this paragraph, and
                          ``(iii) complies with such other 
                        requirements as the Secretary may 
                        prescribe.
                  ``(C) Election.--An election under 
                subparagraph (A) shall apply to all property to 
                which this section would apply but for the 
                election and, once made, shall be irrevocable. 
                Such election shall also apply to property the 
                basis of which is determined in whole or in 
                part by reference to the property with respect 
                to which the election was made.
  ``(b) Election To Defer Tax.--
          ``(1) In general.--If the taxpayer elects the 
        application of this subsection with respect to any 
        property treated as sold by reason of subsection (a), 
        the payment of the additional tax attributable to such 
        property shall be postponed until the due date of the 
        return for the taxable year in which such property is 
        disposed of (or, in the case of property disposed of in 
        a transaction in which gain is not recognized in whole 
        or in part, until such other date as the Secretary may 
        prescribe).
          ``(2) Determination of tax with respect to 
        property.--For purposes of paragraph (1), the 
        additional tax attributable to any property is an 
        amount which bears the same ratio to the additional tax 
        imposed by this chapter for the taxable year solely by 
        reason of subsection (a) as the gain taken into account 
        under subsection (a) with respect to such property 
        bears to the total gain taken into account under 
        subsection (a) with respect to all property to which 
        subsection (a) applies.
          ``(3) Termination of postponement.--No tax may be 
        postponed under this subsection later than the due date 
        for the return of tax imposed by this chapter for the 
        taxable year which includes the date of death of the 
        expatriate (or, if earlier, the time that the security 
        provided with respect to the property fails to meet the 
        requirements of paragraph (4), unless the taxpayer 
        corrects such failure within the time specified by the 
        Secretary).
          ``(4) Security.--
                  ``(A) In general.--No election may be made 
                under paragraph (1) with respect to any 
                property unless adequate security is provided 
                to the Secretary with respect to such property.
                  ``(B) Adequate security.--For purposes of 
                subparagraph (A), security with respect to any 
                property shall be treated as adequate security 
                if--
                          ``(i) it is a bond in an amount equal 
                        to the deferred tax amount under 
                        paragraph (2) for the property, or
                          ``(ii) the taxpayer otherwise 
                        establishes to the satisfaction of the 
                        Secretary that the security is 
                        adequate.
          ``(5) Waiver of certain rights.--No election may be 
        made under paragraph (1) unless the taxpayer consents 
        to the waiver of any right under any treaty of the 
        United States which would preclude assessment or 
        collection of any tax imposed by reason of this 
        section.
          ``(6) Elections.--An election under paragraph (1) 
        shall only apply to property described in the election 
        and, once made, is irrevocable. An election may be made 
        under paragraph (1) with respect to an interest in a 
        trust with respect to which gain is required to be 
        recognized under subsection (f)(1).
          ``(7) Interest.--For purposes of section 6601--
                  ``(A) the last date for the payment of tax 
                shall be determined without regard to the 
                election under this subsection, and
                  ``(B) section 6621(a)(2) shall be applied by 
                substituting `5 percentage points' for `3 
                percentage points' in subparagraph (B) thereof.
  ``(c) Covered Expatriate.--For purposes of this section--
          ``(1) In general.--Except as provided in paragraph 
        (2), the term `covered expatriate' means an expatriate.
          ``(2) Exceptions.--An individual shall not be treated 
        as a covered expatriate if--
                  ``(A) the individual--
                          ``(i) became at birth a citizen of 
                        the United States and a citizen of 
                        another country and, as of the 
                        expatriation date, continues to be a 
                        citizen of, and is taxed as a resident 
                        of, such other country, and
                          ``(ii) has not been a resident of the 
                        United States (as defined in section 
                        7701(b)(1)(A)(ii)) during the 5 taxable 
                        years ending with the taxable year 
                        during which the expatriation date 
                        occurs, or
                  ``(B)(i) the individual's relinquishment of 
                United States citizenship occurs before such 
                individual attains age 18\1/2\, and
                  ``(ii) the individual has been a resident of 
                the United States (as so defined) for not more 
                than 5 taxable years before the date of 
                relinquishment.
  ``(d) Exempt Property; Special Rules for Pension Plans.--
          ``(1) Exempt property.--This section shall not apply 
        to the following:
                  ``(A) United states real property 
                interests.--Any United States real property 
                interest (as defined in section 897(c)(1)), 
                other than stock of a United States real 
                property holding corporation which does not, on 
                the day before the expatriation date, meet the 
                requirements of section 897(c)(2).
                  ``(B) Specified property.--Any property or 
                interest in property not described in 
                subparagraph (A) which the Secretary specifies 
                in regulations.
          ``(2) Special rules for certain retirement plans.--
                  ``(A) In general.--If a covered expatriate 
                holds on the day before the expatriation date 
                any interest in a retirement plan to which this 
                paragraph applies--
                          ``(i) such interest shall not be 
                        treated as sold for purposes of 
                        subsection (a)(1), but
                          ``(ii) an amount equal to the present 
                        value of the expatriate's 
                        nonforfeitable accrued benefit shall be 
                        treated as having been received by such 
                        individual on such date as a 
                        distribution under the plan.
                  ``(B) Treatment of subsequent 
                distributions.--In the case of any distribution 
                on or after the expatriation date to or on 
                behalf of the covered expatriate from a plan 
                from which the expatriate was treated as 
                receiving a distribution under subparagraph 
                (A), the amount otherwise includible in gross 
                income by reason of the subsequent distribution 
                shall be reduced by the excess of the amount 
                includible in gross income under subparagraph 
                (A) over any portion of such amount to which 
                this subparagraph previously applied.
                  ``(C) Treatment of subsequent distributions 
                by plan.--For purposes of this title, a 
                retirement plan to which this paragraph 
                applies, and any person acting on the plan's 
                behalf, shall treat any subsequent distribution 
                described in subparagraph (B) in the same 
                manner as such distribution would be treated 
                without regard to this paragraph.
                  ``(D) Applicable plans.--This paragraph shall 
                apply to--
                          ``(i) any qualified retirement plan 
                        (as defined in section 4974(c)),
                          ``(ii) an eligible deferred 
                        compensation plan (as defined in 
                        section 457(b)) of an eligible employer 
                        described in section 457(e)(1)(A), and
                          ``(iii) to the extent provided in 
                        regulations, any foreign pension plan 
                        or similar retirement arrangements or 
                        programs.
  ``(e) Definitions.--For purposes of this section--
          ``(1) Expatriate.--The term `expatriate' means--
                  ``(A) any United States citizen who 
                relinquishes citizenship, and
                  ``(B) any long-term resident of the United 
                States who--
                          ``(i) ceases to be a lawful permanent 
                        resident of the United States (within 
                        the meaning of section 7701(b)(6)), or
                          ``(ii) commences to be treated as a 
                        resident of a foreign country under the 
                        provisions of a tax treaty between the 
                        United States and the foreign country 
                        and who does not waive the benefits of 
                        such treaty applicable to residents of 
                        the foreign country.
          ``(2) Expatriation date.--The term `expatriation 
        date' means--
                  ``(A) the date an individual relinquishes 
                United States citizenship, or
                  ``(B) in the case of a long-term resident of 
                the United States, the date of the event 
                described in clause (i) or (ii) of paragraph 
                (1)(B).
          ``(3) Relinquishment of citizenship.--A citizen shall 
        be treated as relinquishing United States citizenship 
        on the earliest of--
                  ``(A) the date the individual renounces such 
                individual's United States nationality before a 
                diplomatic or consular officer of the United 
                States pursuant to paragraph (5) of section 
                349(a) of the Immigration and Nationality Act 
                (8 U.S.C. 1481(a)(5)),
                  ``(B) the date the individual furnishes to 
                the United States Department of State a signed 
                statement of voluntary relinquishment of United 
                States nationality confirming the performance 
                of an act of expatriation specified in 
                paragraph (1), (2), (3), or (4) of section 
                349(a) of the Immigration and Nationality Act 
                (8 U.S.C. 1481(a)(1)-(4)),
                  ``(C) the date the United States Department 
                of State issues to the individual a certificate 
                of loss of nationality, or
                  ``(D) the date a court of the United States 
                cancels a naturalized citizen's certificate of 
                naturalization.
        Subparagraph (A) or (B) shall not apply to any 
        individual unless the renunciation or voluntary 
        relinquishment is subsequently approved by the issuance 
        to the individual of a certificate of loss of 
        nationality by the United States Department of State.
          ``(4) Long-term resident.--The term `long-term 
        resident' has the meaning given to such term by section 
        877(e)(2).
  ``(f) Special Rules Applicable to Beneficiaries' Interests in 
Trust.--
          ``(1) In general.--Except as provided in paragraph 
        (2), if an individual is determined under paragraph (3) 
        to hold an interest in a trust on the day before the 
        expatriation date--
                  ``(A) the individual shall not be treated as 
                having sold such interest,
                  ``(B) such interest shall be treated as a 
                separate share in the trust, and
                  ``(C)(i) such separate share shall be treated 
                as a separate trust consisting of the assets 
                allocable to such share,
                  ``(ii) the separate trust shall be treated as 
                having sold its assets on the day before the 
                expatriation date for their fair market value 
                and as having distributed all of its assets to 
                the individual as of such time, and
                  ``(iii) the individual shall be treated as 
                having recontributed the assets to the separate 
                trust.
        Subsection (a)(2) shall apply to any income, gain, or 
        loss of the individual arising from a distribution 
        described in subparagraph (C)(ii). In determining the 
        amount of such distribution, proper adjustments shall 
        be made for liabilities of the trust allocable to an 
        individual's share in the trust.
          ``(2) Special rules for interests in qualified 
        trusts.--
                  ``(A) In general.--If the trust interest 
                described in paragraph (1) is an interest in a 
                qualified trust--
                          ``(i) paragraph (1) and subsection 
                        (a) shall not apply, and
                          ``(ii) in addition to any other tax 
                        imposed by this title, there is hereby 
                        imposed on each distribution with 
                        respect to such interest a tax in the 
                        amount determined under subparagraph 
                        (B).
                  ``(B) Amount of tax.--The amount of tax under 
                subparagraph (A)(ii) shall be equal to the 
                lesser of--
                          ``(i) the highest rate of tax imposed 
                        by section 1(e) for the taxable year 
                        which includes the day before the 
                        expatriation date, multiplied by the 
                        amount of the distribution, or
                          ``(ii) the balance in the deferred 
                        tax account immediately before the 
                        distribution determined without regard 
                        to any increases under subparagraph 
                        (C)(ii) after the 30th day preceding 
                        the distribution.
                  ``(C) Deferred tax account.--For purposes of 
                subparagraph (B)(ii)--
                          ``(i) Opening balance.--The opening 
                        balance in a deferred tax account with 
                        respect to any trust interest is an 
                        amount equal to the tax which would 
                        have been imposed on the allocable 
                        expatriation gain with respect to the 
                        trust interest if such gain had been 
                        included in gross income under 
                        subsection (a).
                          ``(ii) Increase for interest.--The 
                        balance in the deferred tax account 
                        shall be increased by the amount of 
                        interest determined (on the balance in 
                        the account at the time the interest 
                        accrues), for periods after the 90th 
                        day after the expatriation date, by 
                        using the rates and method applicable 
                        under section 6621 for underpayments of 
                        tax for such periods, except that 
                        section 6621(a)(2) shall be applied by 
                        substituting `5 percentage points' for 
                        `3 percentage points' in subparagraph 
                        (B) thereof.
                          ``(iii) Decrease for taxes previously 
                        paid.--The balance in the tax deferred 
                        account shall be reduced--
                                  ``(I) by the amount of taxes 
                                imposed by subparagraph (A) on 
                                any distribution to the person 
                                holding the trust interest, and
                                  ``(II) in the case of a 
                                person holding a nonvested 
                                interest, to the extent 
                                provided in regulations, by the 
                                amount of taxes imposed by 
                                subparagraph (A) on 
                                distributions from the trust 
                                with respect to nonvested 
                                interests not held by such 
                                person.
                  ``(D) Allocable expatriation gain.--For 
                purposes of this paragraph, the allocable 
                expatriation gain with respect to any 
                beneficiary's interest in a trust is the amount 
                of gain which would be allocable to such 
                beneficiary's vested and nonvested interests in 
                the trust if the beneficiary held directly all 
                assets allocable to such interests.
                  ``(E) Tax deducted and withheld.--
                          ``(i) In general.--The tax imposed by 
                        subparagraph (A)(ii) shall be deducted 
                        and withheld by the trustees from the 
                        distribution to which it relates.
                          ``(ii) Exception where failure to 
                        waive treaty rights.--If an amount may 
                        not be deducted and withheld under 
                        clause (i) by reason of the distributee 
                        failing to waive any treaty right with 
                        respect to such distribution--
                                  ``(I) the tax imposed by 
                                subparagraph (A)(ii) shall be 
                                imposed on the trust and each 
                                trustee shall be personally 
                                liable for the amount of such 
                                tax, and
                                  ``(II) any other beneficiary 
                                of the trust shall be entitled 
                                to recover from the distributee 
                                the amount of such tax imposed 
                                on the other beneficiary.
                  ``(F) Disposition.--If a trust ceases to be a 
                qualified trust at any time, a covered 
                expatriate disposes of an interest in a 
                qualified trust, or a covered expatriate 
                holding an interest in a qualified trust dies, 
                then, in lieu of the tax imposed by 
                subparagraph (A)(ii), there is hereby imposed a 
                tax equal to the lesser of--
                          ``(i) the tax determined under 
                        paragraph (1) as if the day before the 
                        expatriation date were the date of such 
                        cessation, disposition, or death, 
                        whichever is applicable, or
                          ``(ii) the balance in the tax 
                        deferred account immediately before 
                        such date.
                Such tax shall be imposed on the trust and each 
                trustee shall be personally liable for the 
                amount of such tax and any other beneficiary of 
                the trust shall be entitled to recover from the 
                covered expatriate or the estate the amount of 
                such tax imposed on the other beneficiary.
                  ``(G) Definitions and special rules.--For 
                purposes of this paragraph--
                          ``(i) Qualified trust.--The term 
                        `qualified trust' means a trust which 
                        is described in section 7701(a)(30)(E).
                          ``(ii) Vested interest.--The term 
                        `vested interest' means any interest 
                        which, as of the day before the 
                        expatriation date, is vested in the 
                        beneficiary.
                          ``(iii) Nonvested interest.--The term 
                        `nonvested interest' means, with 
                        respect to any beneficiary, any 
                        interest in a trust which is not a 
                        vested interest. Such interest shall be 
                        determined by assuming the maximum 
                        exercise of discretion in favor of the 
                        beneficiary and the occurrence of all 
                        contingencies in favor of the 
                        beneficiary.
                          ``(iv) Adjustments.--The Secretary 
                        may provide for such adjustments to the 
                        bases of assets in a trust or a 
                        deferred tax account, and the timing of 
                        such adjustments, in order to ensure 
                        that gain is taxed only once.
                          ``(v) Coordination with retirement 
                        plan rules.--This subsection shall not 
                        apply to an interest in a trust which 
                        is part of a retirement plan to which 
                        subsection (d)(2) applies.
          ``(3) Determination of beneficiaries' interest in 
        trust.--
                  ``(A) Determinations under paragraph (1).--
                For purposes of paragraph (1), a beneficiary's 
                interest in a trust shall be based upon all 
                relevant facts and circumstances, including the 
                terms of the trust instrument and any letter of 
                wishes or similar document, historical patterns 
                of trust distributions, and the existence of 
                and functions performed by a trust protector or 
                any similar adviser.
                  ``(B) Other determinations.--For purposes of 
                this section--
                          ``(i) Constructive ownership.--If a 
                        beneficiary of a trust is a 
                        corporation, partnership, trust, or 
                        estate, the shareholders, partners, or 
                        beneficiaries shall be deemed to be the 
                        trust beneficiaries for purposes of 
                        this section.
                          ``(ii) Taxpayer return position.--A 
                        taxpayer shall clearly indicate on its 
                        income tax return--
                                  ``(I) the methodology used to 
                                determine that taxpayer's trust 
                                interest under this section, 
                                and
                                  ``(II) if the taxpayer knows 
                                (or has reason to know) that 
                                any other beneficiary of such 
                                trust is using a different 
                                methodology to determine such 
                                beneficiary's trust interest 
                                under this section.
  ``(g) Termination of Deferrals, etc.--In the case of any 
covered expatriate, notwithstanding any other provision of this 
title--
          ``(1) any period during which recognition of income 
        or gain is deferred shall terminate on the day before 
        the expatriation date, and
          ``(2) any extension of time for payment of tax shall 
        cease to apply on the day before the expatriation date 
        and the unpaid portion of such tax shall be due and 
        payable at the time and in the manner prescribed by the 
        Secretary.
  ``(h) Imposition of Tentative Tax.--
          ``(1) In general.--If an individual is required to 
        include any amount in gross income under subsection (a) 
        for any taxable year, there is hereby imposed, 
        immediately before the expatriation date, a tax in an 
        amount equal to the amount of tax which would be 
        imposed if the taxable year were a short taxable year 
        ending on the expatriation date.
          ``(2) Due date.--The due date for any tax imposed by 
        paragraph (1) shall be the 90th day after the 
        expatriation date.
          ``(3) Treatment of tax.--Any tax paid under paragraph 
        (1) shall be treated as a payment of the tax imposed by 
        this chapter for the taxable year to which subsection 
        (a) applies.
          ``(4) Deferral of tax.--The provisions of subsection 
        (b) shall apply to the tax imposed by this subsection 
        to the extent attributable to gain includible in gross 
        income by reason of this section.
  ``(i) Special Liens for Deferred Tax Amounts.--
          ``(1) Imposition of lien.--
                  ``(A) In general.--If a covered expatriate 
                makes an election under subsection (a)(4) or 
                (b) which results in the deferral of any tax 
                imposed by reason of subsection (a), the 
                deferred amount (including any interest, 
                additional amount, addition to tax, assessable 
                penalty, and costs attributable to the deferred 
                amount) shall be a lien in favor of the United 
                States on all property of the expatriate 
                located in the United States (without regard to 
                whether this section applies to the property).
                  ``(B) Deferred amount.--For purposes of this 
                subsection, the deferred amount is the amount 
                of the increase in the covered expatriate's 
                income tax which, but for the election under 
                subsection (a)(4) or (b), would have occurred 
                by reason of this section for the taxable year 
                including the expatriation date.
          ``(2) Period of lien.--The lien imposed by this 
        subsection shall arise on the expatriation date and 
        continue until--
                  ``(A) the liability for tax by reason of this 
                section is satisfied or has become 
                unenforceable by reason of lapse of time, or
                  ``(B) it is established to the satisfaction 
                of the Secretary that no further tax liability 
                may arise by reason of this section.
          ``(3) Certain rules apply.--The rules set forth in 
        paragraphs (1), (3), and (4) of section 6324A(d) shall 
        apply with respect to the lien imposed by this 
        subsection as if it were a lien imposed by section 
        6324A.
  ``(j) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section.''.
  (b) Inclusion in Income of Gifts and Bequests Received by 
United States Citizens and Residents From Expatriates.--Section 
102 (relating to gifts, etc. not included in gross income) is 
amended by adding at the end the following new subsection:
  ``(d) Gifts and Inheritances From Covered Expatriates.--
          ``(1) In general.--Subsection (a) shall not exclude 
        from gross income the value of any property acquired by 
        gift, bequest, devise, or inheritance from a covered 
        expatriate after the expatriation date. For purposes of 
        this subsection, any term used in this subsection which 
        is also used in section 877A shall have the same 
        meaning as when used in section 877A.
          ``(2) Exceptions for transfers otherwise subject to 
        estate or gift tax.--Paragraph (1) shall not apply to 
        any property if either--
                  ``(A) the gift, bequest, devise, or 
                inheritance is--
                          ``(i) shown on a timely filed return 
                        of tax imposed by chapter 12 as a 
                        taxable gift by the covered expatriate, 
                        or
                          ``(ii) included in the gross estate 
                        of the covered expatriate for purposes 
                        of chapter 11 and shown on a timely 
                        filed return of tax imposed by chapter 
                        11 of the estate of the covered 
                        expatriate, or
                  ``(B) no such return was timely filed but no 
                such return would have been required to be 
                filed even if the covered expatriate were a 
                citizen or long-term resident of the United 
                States.''.
  (c) Definition of Termination of United States Citizenship.--
Section 7701(a) is amended by adding at the end the following 
new paragraph:
          ``(48) Termination of united states citizenship.--
                  ``(A) In general.--An individual shall not 
                cease to be treated as a United States citizen 
                before the date on which the individual's 
                citizenship is treated as relinquished under 
                section 877A(e)(3).
                  ``(B) Dual citizens.--Under regulations 
                prescribed by the Secretary, subparagraph (A) 
                shall not apply to an individual who became at 
                birth a citizen of the United States and a 
                citizen of another country.''.
  (d) Ineligibility for Visa or Admission to United States.--
          (1) In general.--Section 212(a)(10)(E) of the 
        Immigration and Nationality Act (8 U.S.C. 
        1182(a)(10)(E)) is amended to read as follows:
                  ``(E) Former citizens not in compliance with 
                expatriation revenue provisions.--Any alien who 
                is a former citizen of the United States who 
                relinquishes United States citizenship (within 
                the meaning of section 877A(e)(3) of the 
                Internal Revenue Code of 1986) and who is not 
                in compliance with section 877A of such Code 
                (relating to expatriation).''.
          (2) Availability of information.--
                  (A) In general.--Section 6103(l) (relating to 
                disclosure of returns and return information 
                for purposes other than tax administration) is 
                amended by adding at the end the following new 
                paragraph:
          ``(19) Disclosure to deny visa or admission to 
        certain expatriates.--Upon written request of the 
        Attorney General or the Attorney General's delegate, 
        the Secretary shall disclose whether an individual is 
        in compliance with section 877A (and if not in 
        compliance, any items of noncompliance) to officers and 
        employees of the Federal agency responsible for 
        administering section 212(a)(10)(E) of the Immigration 
        and Nationality Act solely for the purpose of, and to 
        the extent necessary in, administering such section 
        212(a)(10)(E).''.
                  (B) Safeguards.--
                          (i) Technical amendments.--Paragraph 
                        (4) of section 6103(p) of the Internal 
                        Revenue Code of 1986, as amended by 
                        section 202(b)(2)(B) of the Trade Act 
                        of 2002 (Public Law 107-210; 116 Stat. 
                        961), is amended by striking ``or 
                        (17)'' after ``any other person 
                        described in subsection (l)(16)'' each 
                        place it appears and inserting ``or 
                        (18)''.
                          (ii) Conforming amendments.--Section 
                        6103(p)(4) (relating to safeguards), as 
                        amended by clause (i), is amended by 
                        striking ``or (18)'' after ``any other 
                        person described in subsection 
                        (l)(16)'' each place it appears and 
                        inserting ``(18), or (19)''.
          (3) Effective dates.--
                  (A) In general.--Except as provided in 
                subparagraph (B), the amendments made by this 
                subsection shall apply to individuals who 
                relinquish United States citizenship on or 
                after the date of the enactment of this Act.
                  (B) Technical amendments.--The amendments 
                made by paragraph (2)(B)(i) shall take effect 
                as if included in the amendments made by 
                section 202(b)(2)(B) of the Trade Act of 2002 
                (Public Law 107-210; 116 Stat. 961).
  (e) Conforming Amendments.--
          (1) Section 877 is amended by adding at the end the 
        following new subsection:
  ``(g) Application.--This section shall not apply to an 
expatriate (as defined in section 877A(e)) whose expatriation 
date (as so defined) occurs on or after February 5, 2003.''.
          (2) Section 2107 is amended by adding at the end the 
        following new subsection:
  ``(f) Application.--This section shall not apply to any 
expatriate subject to section 877A.''.
          (3) Section 2501(a)(3) is amended by adding at the 
        end the following new subparagraph:
                  ``(F) Application.--This paragraph shall not 
                apply to any expatriate subject to section 
                877A.''.
          (4)(A) Paragraph (1) of section 6039G(d) is amended 
        by inserting ``or 877A'' after ``section 877''.
          (B) The second sentence of section 6039G(e) is 
        amended by inserting ``or who relinquishes United 
        States citizenship (within the meaning of section 
        877A(e)(3))'' after ``877(a))''.
          (C) Section 6039G(f) is amended by inserting ``or 
        877A(e)(2)(B)'' after ``877(e)(1)''.
  (f) Clerical Amendment.--The table of sections for subpart A 
of part II of subchapter N of chapter 1 is amended by inserting 
after the item relating to section 877 the following new item:

        ``Sec. 877A. Tax responsibilities of expatriation.''.

  (g) Effective Date.--
          (1) In general.--Except as provided in this 
        subsection, the amendments made by this section shall 
        apply to expatriates (within the meaning of section 
        877A(e) of the Internal Revenue Code of 1986, as added 
        by this section) whose expatriation date (as so 
        defined) occurs on or after February 5, 2003.
          (2) Gifts and bequests.--Section 102(d) of the 
        Internal Revenue Code of 1986 (as added by subsection 
        (b)) shall apply to gifts and bequests received on or 
        after February 5, 2003, from an individual or the 
        estate of an individual whose expatriation date (as so 
        defined) occurs after such date.
          (3) Due date for tentative tax.--The due date under 
        section 877A(h)(2) of the Internal Revenue Code of 
        1986, as added by this section, shall in no event occur 
        before the 90th day after the date of the enactment of 
        this Act.

SEC. 702. EXTENSION OF CUSTOMS USER FEES.

  Section 13031(j)(3) of the Consolidated Omnibus Budget 
Reconciliation Act of 1985 (19 U.S.C. 58c(j)(3)) is amended by 
striking ``September 30, 2003'' and inserting ``March 31, 
2010''.

                                
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