[House Report 108-477]
[From the U.S. Government Publishing Office]


108th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
                                 SENATE
 2d Session                                                     108-477

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



 
TITLEPROVIDING FOR CONSIDERATION OF H.R. 4227, MIDDLE-CLASS ALTERNATIVE 
                     MINIMUM TAX RELIEF ACT OF 2004

                                _______
                                

  May 4, 2004.--Referred to the House Calendar and ordered to be 
                                printed

                                _______
                                

    Mr. Linder, from the Committee on Rules, submitted the following

                              R E P O R T

                           
                       [To accompany H. Res. 619]

    The Committee on Rules, having had under consideration 
House Resolution 619, by a record vote of 7 to 4, 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. 4227, 
the Middle-Class Alternative Minimum Tax Relief Act of 2004, 
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 provides for consideration of the amendment in the 
nature of a substitute printed in this report, if offered by 
Representative Rangel of New York 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 this report.
    Finally, the rule 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. 249

    Date: May 4, 2004.
    Measure: H.R. 4227, Middle-Class Alternative Minimum Tax 
Relief Act of 2004.
    Motion by: Mr. Frost.
    Summary of motion: To make in order and provide the 
appropriate waivers for the amendment offered by Representative 
Baird which adds a new section at the end of the bill that 
would allow taxpayers to deduct either their state and local 
income tax or their state and local sales tax for 2004 only. 
Gives a choice of deducting either sales or income tax. 
Budgetary score keeping is kept to a minimum. Directs the IRS 
to develop standard tables for taxpayers to use in determining 
their average sales tax deduction. Such tables, similar to 
those used by taxpayers prior to 1986, would include average 
calculations, based upon income and household size, for a 
taxpayer in a given state. The amendment does not restore the 
itemized deduction of individual purchases; it only allows 
taxpayers to deduct an averaged amount based on income level 
and family size.
    Results: Defeated 5 to 6.
    Vote by Members: Goss--Nay; Linder--Nay; Diaz-Balart--Nay; 
Hastings (WA)--Nay; Myrick--Nay; Sessions--Yea; Frost--Yea; 
Slaughter--Yea; McGovern--Yea; Hastings (FL)--Yea; Dreier--Nay.

Rules Committee record vote No. 250

    Date: May 4, 2004.
    Measure: H.R. 4227, Middle-Class Alternative Minimum Tax 
Relief Act of 2004.
    Motion by: Mr. Goss.
    Summary of motion: To report the resolution.
    Results: Agreed to 7 to 4.
    Vote by Members: Goss--Yea; Linder--Yea; Diaz-Balart--Yea; 
Hastings (WA)--Yea; Myrick--Yea; Sessions--Yea; Frost--Nay; 
Slaughter--Nay; McGovern--Nay; Hastings (FL)--Nay; Dreier--Yea.

                   SUMMARY OF AMENDMENT MADE IN ORDER

    (Summary derived from information provided by the amendment 
sponsor.)
    Rangel: Amendment in the Nature of a Substitute. Eliminates 
all liability for the individual minimum tax for taxpayers 
whose adjusted gross incomes are less than $250,000 ($125,000 
for single taxpayers). Above those income levels, AMT 
liabilities would be phased in over a $40,000 range ($20,000 
for single taxpayers). Requires the Treasury Department to 
submit recommendations to reform the minimum tax so that the 
number of individuals subject to the minimum tax would be less 
than one percent, the percentage that was in effect before the 
2001 tax cut. The Ways and Means Committee would be required to 
act on those recommendations. The cost of the amendment would 
be offset by restrictions on tax shelter transactions that have 
been approved by the Senate Finance Committee.

                    TEXT OF AMENDMENT MADE IN ORDER

  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF CONTENTS.

  (a) Short Title.--This Act may be cited as the ``AMT Reform 
Act of 2004''.
  (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is 
expressed in terms of an amendment to, or repeal of, a section 
or other provision, the reference shall be considered to be 
made to a section or other provision of the Internal Revenue 
Code of 1986.
  (c) Table of Contents.--

Sec. 1. Short title; amendment of 1986 Code; table of contents.
Sec. 2. Statement of Congressional findings and purposes.

 TITLE I--TEMPORARY RELIEF FROM THE ALTERNATIVE MINIMUM TAX; FRAMEWORK 
                               FOR REFORM

Sec. 101. Temporary relief from the alternative minimum tax.
Sec. 102. Framework for reform.

                 TITLE II--RESTRICTIONS ON TAX SHELTERS

         Subtitle A--Provisions Designed To Curtail Tax Shelters

Sec. 201. Clarification of economic substance doctrine.
Sec. 202. Penalty for failing to disclose reportable transaction.
Sec. 203. Accuracy-related penalty for listed transactions and other 
          reportable transactions having a significant tax avoidance 
          purpose.
Sec. 204. Penalty for understatements attributable to transactions 
          lacking economic substance, etc.
Sec. 205. Modifications of substantial understatement penalty for 
          nonreportable transactions.
Sec. 206. Tax shelter exception to confidentiality privileges relating 
          to taxpayer communications.
Sec. 207. Disclosure of reportable transactions.
Sec. 208. Modifications to penalty for failure to register tax shelters.
Sec. 209. Modification of penalty for failure to maintain lists of 
          investors.
Sec. 210. Penalty on promoters of tax shelters.
Sec. 211. Increases in penalties for aiding and abetting 
          understatements.

            Subtitle B--Enron-Related Tax Shelter Provisions

Sec. 221. Limitation on transfer or importation of built-in losses.
Sec. 222. No reduction of basis under section 734 in stock held by 
          partnership in corporate partner.
Sec. 223. Expanded disallowance of deduction for interest on convertible 
          debt.
Sec. 224. Expanded authority to disallow tax benefits under section 269.
Sec. 225. Modification of interaction between subpart F and passive 
          foreign investment company rules.

SEC. 2. STATEMENT OF CONGRESSIONAL FINDINGS AND PURPOSES.

  (a) Findings.--The Congress finds the following:
          (1) The current alternative minimum tax (hereinafter 
        referred to as the ``AMT'') was enacted in 1986 with 
        the stated purpose of ensuring that individuals with 
        relatively large incomes would pay some minimum amount 
        of Federal income tax, notwithstanding the fact that 
        the individuals could have used otherwise allowable tax 
        preferences to reduce their regular tax to zero.
          (2) The AMT, when enacted, affected a very small 
        percentage of individuals. Approximately 0.1 percent of 
        all individuals were subject to the AMT in 1987.
          (3) During the 1990's virtually all items that have 
        been traditionally considered to be tax preferences 
        were removed from the AMT.
          (4) As a result, virtually all AMT liability now is 
        attributable to 3 items that few people would consider 
        to be tax preferences: the deduction for personal 
        exemptions, the deduction for State and local taxes, 
        and miscellaneous itemized deductions.
          (5) In 1993, adjustments to minimum tax rates were 
        made to correspond to adjustments made in regular 
        income tax rates. The 1993 legislation also increased 
        the amount of the AMT exemption.
          (6) The percentage of individuals subject to the AMT 
        did not increase as a result of the 1993 changes. The 
        percentage in 1992 was 0.3 percent. It was 0.3 percent 
        in 1994.
          (7) The first significant increase in the percentage 
        of individuals paying the AMT occurred by reason of the 
        Taxpayer Relief Act of 1997. Some of the benefits of 
        the capital gains tax reduction provided in the 1997 
        Act were taken back by the AMT. As a result of the 1997 
        Act, the percentage of individuals paying the AMT 
        doubled in less than 2 years.
          (8) Even after the impact of the 1997 Act, the number 
        of individuals subject to the AMT was extremely small 
        until the enactment of the tax reductions by the 
        Economic Growth and Tax Relief Reconciliation Act of 
        2001. Less than 1 percent of individuals were subject 
        to the AMT before 2001.
          (9) The Economic Growth and Tax Relief Reconciliation 
        Act of 2001 contained reductions in the regular income 
        tax rates but not in the minimum tax rates. As a 
        result, the number of individuals subject to the AMT is 
        projected to skyrocket. In the future--
                  (A) 92 percent of all households with income 
                between $100,000 and $500,000 will be subject 
                to the minimum tax;
                  (B) 73 percent of households with income 
                between $75,000 and $100,000 will be subject to 
                the minimum tax; and
                  (C) 37 percent of households with income 
                between $50,000 and $75,000 will be subject to 
                the minimum tax.
          (10) The AMT has a substantial marriage penalty that 
        has never been addressed by recent ``marriage penalty 
        repeal'' legislation. Married couples are 20 times more 
        likely to be on the minimum tax than single 
        individuals.
          (11) More than one-half of the promised tax 
        reductions in the recent marriage penalty bill passed 
        by the House of Representatives will be taken back by 
        the AMT.
          (12) The AMT disproportionately applies to families 
        with children. Ninety-seven percent of families with 
        children and with incomes between $75,000 and $100,000 
        will be subject to the AMT.
          (13) The current AMT means that many of the tax 
        reductions enacted in 2001 and 2003 are essentially 
        temporary regardless of whether Congress makes them 
        permanent by repealing the sunset contained in the 2001 
        Act. On average, the AMT will take back--
                  (A) 15.3 percent of the benefits of the 
                recent tax cuts from families with incomes 
                between $50,000 and $70,000;
                  (B) 37.2 percent of the benefits from 
                families with incomes between $75,000 and 
                $100,000;
                  (C) 65 percent of the benefits from families 
                with incomes between $100,000 and $200,000; and
                  (D) 71.8 percent of the benefits from 
                families with incomes between $200,000 and 
                $500,000.
          (14) Only extremely wealthy taxpayers will retain 
        most of the benefits of the recent tax cuts. Taxpayers 
        making more than $1,000,000 will find only 8 percent of 
        their tax reductions taken back by the AMT.
          (15) The Bush Administration's Fiscal Year 2005 
        Budget recommends that the recent tax reductions be 
        made permanent. Accomplishing that goal requires a 
        total reform of the AMT.
  (b) Purpose.--It is the purpose of this Act to--
          (1) provide significant temporary relief from the 
        alternative minimum tax; and
          (2) to provide a framework for a total reform of the 
        alternative minimum tax.

 TITLE I--TEMPORARY RELIEF FROM THE ALTERNATIVE MINIMUM TAX; FRAMEWORK 
                               FOR REFORM

SEC. 101. TEMPORARY RELIEF FROM THE ALTERNATIVE MINIMUM TAX.

  (a) In General.--Section 55 (relating to alternative minimum 
tax imposed) is amended by adding at the end the following new 
subsection:
  ``(f) Exemption for Individuals for Taxable Years Beginning 
in 2005.--For any taxable year beginning in 2005, in the case 
of an individual--
          ``(1) In general.--The tentative minimum tax of the 
        taxpayer shall be zero if the adjusted gross income of 
        the taxpayer (as determined for purposes of the regular 
        tax) is equal to or less than the threshold amount.
          ``(2) Phasein of liability above exemption level.--In 
        the case of a taxpayer whose adjusted gross income 
        exceeds the threshold amount but does not exceed 
        $145,000 ($290,000 in the case of a joint return), the 
        tax imposed by subsection (a) shall be the amount which 
        bears the same ratio to such tax (determined without 
        regard to this subsection) as--
                  ``(A) the excess of--
                          ``(i) the adjusted gross income of 
                        the taxpayer (as determined for 
                        purposes of the regular tax), over
                          ``(ii) the threshold amount, bears to
                  ``(B) $20,000 ($40,000 in the case of a joint 
                return).
          ``(3) Threshold amount.--For purposes of this 
        paragraph, the term `threshold amount' means $125,000 
        ($250,000 in the case of a joint return).
          ``(4) Estates and trusts.--This subsection shall not 
        apply to any estate or trust.''.
  (b) Effective Date.--The amendment made by this section shall 
apply to taxable years beginning after December 31, 2004.

SEC. 102. FRAMEWORK FOR REFORM.

  (a) Recommendations by the Secretary of the Treasury.--Not 
later than 30 days after the enactment of this Act, the 
Secretary of the Treasury shall submit to the Committee on Ways 
and Means of the House of Representatives and to the Committee 
on Finance of the Senate detailed legislative recommendations 
designed to reform the alternative minimum tax. Unless the 
Secretary determines that it is not feasible, such 
recommendations shall include changes designed to ensure that 
the percentage of individuals paying the minimum tax would be 
reduced to the level in effect before the enactment of the 
Economic Growth and Tax Relief Reconciliation Act of 2001 
(which is less than 1 percent). The Secretary shall include 
with such recommendations estimates of their revenue cost.
  (b) Action by Committee on Ways and Means.--Not later than 
August 1, 2004, the Committee on Ways and Means of the House of 
Representatives shall report legislation providing permanent 
reform of the alternative minimum tax. Such legislation shall 
be designed so that the percentage of individuals subject to 
the minimum tax will be restored to the level in effect before 
the enactment of the Economic Growth and Tax Relief 
Reconciliation Act of 2001 (which is less than 1 percent).

                 TITLE II--RESTRICTIONS ON TAX SHELTERS

        Subtitle A--Provisions Designed To Curtail Tax Shelters

SEC. 201. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

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

SEC. 202. 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. 203. 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 assertion and compromise of 
        penalty.--
                  ``(A) In general.--Only upon the approval by 
                the Chief Counsel for the Internal Revenue 
                Service or the Chief Counsel's delegate at the 
                national office of the Internal Revenue Service 
                may a penalty to which paragraph (1) applies be 
                included in a 1st letter of proposed deficiency 
                which allows the taxpayer an opportunity for 
                administrative review in the Internal Revenue 
                Service Office of Appeals. If such a letter is 
                provided to the taxpayer, only the Commissioner 
                of Internal Revenue may compromise all or any 
                portion of such penalty.
                  ``(B) Applicable rules.--The rules of 
                paragraphs (2), (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,
                                  ``(IV) has an arrangement 
                                with respect to the transaction 
                                which provides that contractual 
                                disputes between the taxpayer 
                                and the advisor are to be 
                                settled by arbitration or which 
                                limits damages by reference to 
                                fees paid to the advisor for 
                                such transaction, or
                                  ``(V) as determined under 
                                regulations prescribed by the 
                                Secretary, has a disqualifying 
                                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,
                                  ``(IV) is not signed by all 
                                individuals who are principal 
                                authors of the opinion, or
                                  ``(V) 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. 204. 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(n)(1)) for 
                the transaction giving rise to the claimed 
                benefit or the transaction was not respected 
                under section 7701(n)(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 (2), 
        (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 the date of the 
enactment of this Act.

SEC. 205. 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. 206. 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. 207. 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, managing, 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) Required Disclosure Not Subject to Claim of 
Confidentiality.--Subparagraph (A) of section 6112(b)(1), as 
redesignated by subsection (b)(2)(B), is amended by adding at 
the end the following new flush sentence:
        ``For purposes of this section, the identity of any 
        person on such list shall not be privileged.''.
  (d) 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. 208. 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 
                listed 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) Certain Rules To Apply.--The provisions of section 
6707A(d) 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. 209. 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. 210. 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. 211. INCREASES IN PENALTIES FOR AIDING AND ABETTING 
                    UNDERSTATEMENTS.

  (a) In General.--Section 6701(b) is amended to read as 
follows:
  ``(b) Amount of Penalty.--
          ``(1) In general.--The amount of the penalty imposed 
        by subsection (a) shall be the greater of--
                  ``(A) $2,000, or
                  ``(B) 50 percent of the gross income derived 
                (or to be derived) from the activity giving 
                rise to the penalty.
          ``(2) Corporations.--If the return, affidavit, claim, 
        or other document relates to the tax liability of a 
        corporation, paragraph (1)(A) shall be applied by 
        substituting `$20,000' for `$2,000'.''
  (b) Effective Date.--The amendment made by this section shall 
apply to activities after the date of the enactment of this 
Act.

            Subtitle B--Enron-Related Tax Shelter Provisions

SEC. 221. 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 
                subparagraph 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 by a 
                        transferor 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 such 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 Dates.--
          (1) In general.--The amendment made by subsection (a) 
        shall apply to transactions after the date of the 
        enactment of this Act.
          (2) Liquidations.--The amendment made by subsection 
        (b) shall apply to liquidations after the date of the 
        enactment of this Act.

SEC. 222. 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 (or any person which is related (within the 
        meaning of section 267(b) or 707(b)(1)) to such 
        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 in such manner as the 
        Secretary may prescribe.
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. 223. EXPANDED DISALLOWANCE OF DEDUCTION FOR INTEREST ON 
                    CONVERTIBLE DEBT.

  (a) In General.--Paragraph (2) of section 163(l) is amended 
by inserting ``or equity held by the issuer (or any related 
party) in any other person'' after ``or a related party''.
  (b) Capitalization Allowed With Respect to Equity of Persons 
Other Than Issuer and Related Parties.--Section 163(l) is 
amended by redesignating paragraphs (4) and (5) as paragraphs 
(5) and (6) and by inserting after paragraph (3) the following 
new paragraph:
          ``(4) Capitalization allowed with respect to equity 
        of persons other than issuer and related parties.--If 
        the disqualified debt instrument of a corporation is 
        payable in equity held by the issuer (or any related 
        party) in any other person (other than a related 
        party), the basis of such equity shall be increased by 
        the amount not allowed as a deduction by reason of 
        paragraph (1) with respect to the instrument.''.
  (c) Exception for Certain Instruments Issued by Dealers in 
Securities.--Section 163(l), as amended by subsection (b), is 
amended by redesignating paragraphs (5) and (6) as paragraphs 
(6) and (7) and by inserting after paragraph (4) the following 
new paragraph:
          ``(5) Exception for certain instruments issued by 
        dealers in securities.--For purposes of this 
        subsection, the term `disqualified debt instrument' 
        does not include indebtedness issued by a dealer in 
        securities (or a related party) which is payable in, or 
        by reference to, equity (other than equity of the 
        issuer or a related party) held by such dealer in its 
        capacity as a dealer in securities. For purposes of 
        this paragraph, the term `dealer in securities' has the 
        meaning given such term by section 475.''.
  (c) Conforming Amendments.--Paragraph (3) of section 163(l) 
is amended--
          (1) by striking ``or a related party'' in the 
        material preceding subparagraph (A) and inserting ``or 
        any other person'', and
          (2) by striking ``or interest'' each place it 
        appears.
  (d) Effective Date.--The amendments made by this section 
shall apply to debt instruments issued after the date of the 
enactment of this Act.

SEC. 224. 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 or persons acquire, directly or 
        indirectly, control of 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,
then the Secretary may disallow such deduction, credit, or 
other allowance. For purposes of paragraph (1)(A), control 
means the ownership of stock possessing at least 50 percent of 
the total combined voting power of all classes of stock 
entitled to vote or at least 50 percent of the total value of 
all shares of all classes of stock of the corporation.''.
  (b) Effective Date.--The amendment made by this section shall 
apply to stock and property acquired after the date of the 
enactment of this Act.

SEC. 225. MODIFICATION OF INTERACTION BETWEEN SUBPART F AND PASSIVE 
                    FOREIGN INVESTMENT COMPANY RULES.

  (a) Limitation on Exception From PFIC Rules for United States 
Shareholders of Controlled Foreign Corporations.--Paragraph (2) 
of section 1297(e) (relating to passive foreign investment 
company) is amended by adding at the end the following flush 
sentence:
                ``Such term shall not include any period if the 
                earning of subpart F income by such corporation 
                during such period would result in only a 
                remote likelihood of an inclusion in gross 
                income under section 951(a)(1)(A)(i).''.
  (b) Effective Date.--The amendment made by this section shall 
apply to taxable years of controlled foreign corporations 
beginning after the date of the enactment of this Act, and to 
taxable years of United States shareholders with or within 
which such taxable years of controlled foreign corporations 
end.

      Amend the title so as to read: ``A bill to provide for 
significant temporary relief from the alternative minimum tax 
and for a framework for a total reform of the alternative 
minimum tax.''.

                                  
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