Text: H.R.4997 — 108th Congress (2003-2004)All Bill Information (Except Text)

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[Congressional Bills 108th Congress]
[From the U.S. Government Printing Office]
[H.R. 4997 Introduced in House (IH)]







108th CONGRESS
  2d Session
                                H. R. 4997

 To amend the Internal Revenue Code of 1986 to provide tax relief for 
            middle income taxpayers, and for other purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             July 22, 2004

  Mr. Stenholm (for himself, Mr. Alexander, Mr. Baca, Mr. Berry, Mr. 
 Bishop of Georgia, Mr. Boswell, Mr. Boyd, Mr. Cardoza, Mr. Case, Mr. 
 Chandler, Mr. Cooper, Mr. Cramer, Mr. Davis of Tennessee, Ms. Harman, 
Ms. Herseth, Mr. Hill, Mr. Holden, Mr. Lucas of Kentucky, Mr. Michaud, 
   Mr. Moore, Mr. Peterson of Minnesota, Mr. Pomeroy, Mr. Ross, Mr. 
 Sandlin, Mr. Schiff, Mr. Scott of Georgia, Mr. Tanner, Mrs. Tauscher, 
 Mr. Taylor of Mississippi, Mr. Thompson of California, Mr. Turner of 
Texas, Ms. Loretta Sanchez of California, Mr. Israel, Mr. Ford, and Mr. 
  McIntyre) introduced the following bill; which was referred to the 
                      Committee on Ways and Means

_______________________________________________________________________

                                 A BILL


 
 To amend the Internal Revenue Code of 1986 to provide tax relief for 
            middle income taxpayers, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; ETC.

    (a) Short Title.--This Act may be cited as the ``Fiscally 
Responsible Family Tax Relief 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.--The table of contents for this Act is as 
follows:

Sec. 1. Short title; etc.
           TITLE I--EXTENSION OF CERTAIN EXPIRING PROVISIONS

Sec. 101. Extension of family tax provisions through 2005.
Sec. 102. Acceleration of increase in refundability of the child tax 
                            credit.
Sec. 103. Application of EGTRRA sunset to this title.
                 TITLE II--UNIFORM DEFINITION OF CHILD

Sec. 201. Uniform definition of child, etc.
Sec. 202. Modifications of definition of head of household.
Sec. 203. Modifications of dependent care credit.
Sec. 204. Modifications of child tax credit.
Sec. 205. Modifications of earned income credit.
Sec. 206. Modifications of deduction for personal exemption for 
                            dependents.
Sec. 207. Technical and conforming amendments.
Sec. 208. Effective date.
                     TITLE III--REVENUE PROVISIONS

        Subtitle A--Provisions Designed To Curtail Tax Shelters

Sec. 301. Clarification of economic substance doctrine.
Sec. 302. Penalty for failing to disclose reportable transaction.
Sec. 303. Accuracy-related penalty for listed transactions and other 
                            reportable transactions having a 
                            significant tax avoidance purpose.
Sec. 304. Penalty for understatements attributable to transactions 
                            lacking economic substance, etc.
Sec. 305. Modifications of substantial understatement penalty for 
                            nonreportable transactions.
Sec. 306. Tax shelter exception to confidentiality privileges relating 
                            to taxpayer communications.
Sec. 307. Disclosure of reportable transactions.
Sec. 308. Modifications to penalty for failure to register tax 
                            shelters.
Sec. 309. Modification of penalty for failure to maintain lists of 
                            investors.
Sec. 310. Modification of actions to enjoin certain conduct related to 
                            tax shelters and reportable transactions.
Sec. 311. Understatement of taxpayer's liability by income tax return 
                            preparer.
Sec. 312. Penalty on failure to report interests in foreign financial 
                            accounts.
Sec. 313. Frivolous tax submissions.
Sec. 314. Regulation of individuals practicing before the Department of 
                            Treasury.
Sec. 315. Penalty for promoting abusive tax shelters.
Sec. 316. Statute of limitations for taxable years for which required 
                            listed transactions not reported.
Sec. 317. Denial of deduction for interest on underpayments 
                            attributable to nondisclosed reportable and 
                            noneconomic substance transactions.
Sec. 318. Authorization of appropriations for tax law enforcement.
Sec. 319. Penalty for aiding and abetting the understatement of tax 
                            liability.
            Subtitle B--Enron-Related Tax Shelter Provisions

Sec. 321. Limitation on transfer or importation of built-in losses.
Sec. 322. No reduction of basis under section 734 in stock held by 
                            partnership in corporate partner.
Sec. 323. Repeal of special rules for FASITs.
Sec. 324. Expanded disallowance of deduction for interest on 
                            convertible debt.
Sec. 325. Expanded authority to disallow tax benefits under section 
                            269.
Sec. 326. Modification of interaction between subpart F and passive 
                            foreign investment company rules.
               Subtitle C--Extension of Customs User Fees

Sec. 331. Extension of customs user fees.

           TITLE I--EXTENSION OF CERTAIN EXPIRING PROVISIONS

SEC. 101. EXTENSION OF FAMILY TAX PROVISIONS THROUGH 2005.

    (a) Child Credit.--The table contained in section 24(a)(2) 
(relating to per child amount) is amended--
            (1) by striking ``2005,'' in the second item, and
            (2) by striking ``or 2004'' in the first item and inserting 
        ``, 2004, or 2005''.
    (b) Marriage Penalty Relief in Standard Deduction.--Paragraph (7) 
of section 63(c) (relating to applicable percentage) is amended by 
striking ``174'' and inserting ``200''.
    (c) Marriage Penalty Relief in 15-Percent Income Tax Bracket.--
Subparagraph (B) of section 1(f)(8) (relating to applicable percentage) 
is amended by striking ``180'' and inserting ``200''.
    (d) 10-Percent Rate Bracket.--Paragraph (1) of section 1(i) 
(relating to rate reductions after 2000) is amended--
            (1) by striking ``2004'' in subparagraph (B)(i) and 
        inserting ``2005'', and
            (2) by inserting ``and 2005'' after ``2004'' in 
        subparagraph (C)(ii).
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2004.

SEC. 102. ACCELERATION OF INCREASE IN REFUNDABILITY OF THE CHILD TAX 
              CREDIT.

    (a) Acceleration of Refundability.--Section 24(d)(1)(B)(i) 
(relating to portion of credit refundable) is amended by striking ``(10 
percent in the case of taxable years beginning before January 1, 
2005)''.
    (b) Earned Income Includes Combat Pay.--Section 24(d)(1) 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.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 103. APPLICATION OF EGTRRA SUNSET TO THIS TITLE.

    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 II--UNIFORM DEFINITION OF CHILD

SEC. 201. UNIFORM DEFINITION OF CHILD, ETC.

    Section 152 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 has the same principal place of abode 
                        as the taxpayer and is a member of the 
                        taxpayer's household, 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.--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 the same principal place of abode as 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 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, and
                    ``(B) 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 one-half 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, or
                    ``(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.
        For purposes of subparagraph (B), amounts expended for the 
        support of a child or children shall be treated as received 
        from the noncustodial parent to the extent that such parent 
        provided amounts for such support.
            ``(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 lawfully placed 
                with the taxpayer for legal 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) Determination of household status.--An individual 
        shall not be treated as a member of the taxpayer's household if 
        at any time during the taxable year of the taxpayer the 
        relationship between such 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) Special support test in case of students.--For 
        purposes of subsections (c)(1)(D) and (d)(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.
            ``(6) 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 child 
                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).
            ``(7) 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. 202. MODIFICATIONS OF DEFINITION OF HEAD OF HOUSEHOLD.

    (a) Head of Household.--Clause (i) of section 2(b)(1)(A) 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) 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) are amended 
        to read as follows:
                            ``(i) subparagraph (H) of section 
                        152(d)(2), or
                            ``(ii) paragraph (3) of section 152(d).''.

SEC. 203. MODIFICATIONS OF DEPENDENT CARE CREDIT.

    (a) In General.--Section 21(a)(1) 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) 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) 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. 204. MODIFICATIONS OF CHILD TAX CREDIT.

    (a) In General.--Paragraph (1) of section 24(c) 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) is amended by striking 
``the first sentence of section 152(b)(3)'' and inserting 
``subparagraph (A) of section 152(b)(3)''.

SEC. 205. MODIFICATIONS OF EARNED INCOME CREDIT.

    (a) Qualifying Child.--Paragraph (3) of section 32(c) 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) 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) is amended by striking ``(3)(E)'' and 
        inserting ``(3)(C)''.
            (3) Section 32(m) is amended by striking ``subsections 
        (c)(1)(F)'' and inserting ``subsections (c)(1)(E)''.

SEC. 206. MODIFICATIONS OF DEDUCTION FOR PERSONAL EXEMPTION FOR 
              DEPENDENTS.

    Subsection (c) of section 151 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. 207. TECHNICAL AND CONFORMING AMENDMENTS.

            (1) Section 2(a)(1)(B)(i) 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) 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) is amended by striking ``section 
        151(c)(3)'' and inserting ``section 152(f)(1)''.
            (4) Section 25B(c)(2)(B) is amended by striking 
        ``151(c)(4)'' and inserting ``152(f)(2)''.
            (5)(A) Subparagraphs (A) and (B) of section 51(i)(1) 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) is amended by striking 
        ``152(a)(9)'' and inserting ``152(d)(2)(H)''.
            (6) Section 72(t)(2)(D)(i)(III) 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) is amended by striking 
        ``151(c)(3)'' and inserting ``152(f)(1)''.
            (8) Section 42(i)(3)(D)(ii)(I) 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 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) 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) 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) is amended by striking ``151(c)(3)'' 
        and inserting ``152(f)(1)''.
            (13) The first sentence of section 132(h)(2)(B) is amended 
        by striking ``151(c)(3)'' and inserting ``152(f)(1)''.
            (14) Section 153 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) 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) 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) 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) 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) 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) 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) 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) is amended by striking 
        ``section 151(c)(4)'' and inserting ``section 152(f)(2)''.
            (23) Section 2057(d)(2)(B) 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) is amended by striking 
        ``152(b)(4), 682,'' and inserting ``682''.
            (25) Section 7702B(f)(2)(C)(iii) 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) is amended--
                    (A) by striking ``151(c)(3)'' and inserting 
                ``152(f)(1)'', and
                    (B) by striking ``paragraph (2) or (4) of''.

SEC. 208. EFFECTIVE DATE.

    The amendments made by this title shall apply to taxable years 
beginning after December 31, 2004.

                     TITLE III--REVENUE PROVISIONS

        Subtitle A--Provisions Designed To Curtail Tax Shelters

SEC. 301. 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. 302. 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) Disclosure by Secretary.--
            (1) In general.--Section 6103 is amended by redesignating 
        subsection (q) as subsection (r) and by inserting after 
        subsection (p) the following new subsection:
    ``(q) Disclosure Relating to Payments of Certain Penalties.--
Notwithstanding any other provision of this section, the Secretary 
shall make public the name of any person required to pay a penalty 
described in section 6707A(e)(2) and the amount of the penalty.''.
            (2) Records.--Section 6103(p)(3)(A) is amended by striking 
        ``or (n)'' and inserting ``(n), or (q)''.
    (c) 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.''.
    (d) 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. 303. 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. 304. 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. 305. 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. 306. 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. 307. 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, insuring, 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.--
            (1) In general.--Except as provided in paragraph (2), 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.
            (2) No claim of confidentiality against disclosure.--The 
        amendment made by subsection (c) shall take effect as if 
        included in the amendments made by section 142 of the Deficit 
        Reduction Act of 1984.

SEC. 308. 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. 309. 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. 310. 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, which 
is--
            ``(1) subject to penalty under section 6700, 6701, 6707, or 
        6708, or
            ``(2) in violation of any requirement under regulations 
        issued under section 320 of title 31, United States Code.''.
    (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. 311. 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. 312. 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 $10,000.
                            ``(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) $100,000, or
                                    ``(II) 50 percent of the amount 
                                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. 313. 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. 314. 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 of the representative.''.
            (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. 315. PENALTY FOR PROMOTING ABUSIVE TAX SHELTERS.

    (a) Penalty for Promoting Abusive Tax Shelters.--Section 6700 
(relating to promoting abusive tax shelters, etc.) is amended--
            (1) by redesignating subsections (b) and (c) as subsections 
        (d) and (e), respectively,
            (2) by striking ``a penalty'' and all that follows through 
        the period in the first sentence of subsection (a) and 
        inserting ``a penalty determined under subsection (b)'', and
            (3) by inserting after subsection (a) the following new 
        subsections:
    ``(b) Amount of Penalty; Calculation of Penalty; Liability for 
Penalty.--
            ``(1) Amount of penalty.--The amount of the penalty imposed 
        by subsection (a) shall not exceed 100 percent of the gross 
        income derived (or to be derived) from such activity by the 
        person or persons subject to such penalty.
            ``(2) Calculation of penalty.--The penalty amount 
        determined under paragraph (1) shall be calculated with respect 
        to each instance of an activity described in subsection (a), 
        each instance in which income was derived by the person or 
        persons subject to such penalty, and each person who 
        participated in such an activity.
            ``(3) Liability for penalty.--If more than 1 person is 
        liable under subsection (a) with respect to such activity, all 
        such persons shall be jointly and severally liable for the 
        penalty under such subsection.
    ``(c) Penalty Not Deductible.--The payment of any penalty imposed 
under this section or the payment of any amount to settle or avoid the 
imposition of such penalty shall not be deductible by the person who is 
subject to such penalty or who makes such payment.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to activities after the date of the enactment of this Act.

SEC. 316. STATUTE OF LIMITATIONS FOR TAXABLE YEARS FOR WHICH REQUIRED 
              LISTED TRANSACTIONS NOT REPORTED.

    (a) In General.--Section 6501(c) (relating to exceptions) is 
amended by adding at the end the following new paragraph:
            ``(10) 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 time for assessment of any tax imposed by 
this title with respect to such transaction shall not expire before the 
date which is 1 year after the earlier of--
                    ``(A) the date on which the Secretary is furnished 
                the information so required; or
                    ``(B) the date that a material advisor (as defined 
                in section 6111) meets the requirements of section 6112 
                with respect to a request by the Secretary under 
                section 6112(b) relating to such transaction with 
                respect to such taxpayer.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years with respect to which the period for assessing a 
deficiency did not expire before the date of the enactment of this Act.

SEC. 317. 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 in taxable years beginning after the date of the 
enactment of this Act.

SEC. 318. AUTHORIZATION OF APPROPRIATIONS FOR TAX LAW ENFORCEMENT.

    There is authorized to be appropriated $300,000,000 for each fiscal 
year beginning after September 30, 2003, for the purpose of carrying 
out tax law enforcement to combat tax avoidance transactions and other 
tax shelters, including the use of offshore financial accounts to 
conceal taxable income.

SEC. 319. PENALTY FOR AIDING AND ABETTING THE UNDERSTATEMENT OF TAX 
              LIABILITY.

    (a) In General.--Section 6701(a) (relating to imposition of 
penalty) is amended--
            (1) by inserting ``the tax liability or'' after ``respect 
        to,'' in paragraph (1),
            (2) by inserting ``aid, assistance, procurement, or advice 
        with respect to such'' before ``portion'' both places it 
        appears in paragraphs (2) and (3), and
            (3) by inserting ``instance of aid, assistance, 
        procurement, or advice or each such'' before ``document'' in 
        the matter following paragraph (3).
    (b) Amount of Penalty.--Subsection (b) of section 6701 (relating to 
penalties for aiding and abetting understatement of tax liability) is 
amended to read as follows:
    ``(b) Amount of Penalty; Calculation of Penalty; Liability for 
Penalty.--
            ``(1) Amount of penalty.--The amount of the penalty imposed 
        by subsection (a) shall not exceed 100 percent of the gross 
        income derived (or to be derived) from such aid, assistance, 
        procurement, or advice provided by the person or persons 
        subject to such penalty.
            ``(2) Calculation of penalty.--The penalty amount 
        determined under paragraph (1) shall be calculated with respect 
        to each instance of aid, assistance, procurement, or advice 
        described in subsection (a), each instance in which income was 
        derived by the person or persons subject to such penalty, and 
        each person who made such an understatement of the liability 
        for tax.
            ``(3) Liability for penalty.--If more than 1 person is 
        liable under subsection (a) with respect to providing such aid, 
        assistance, procurement, or advice, all such persons shall be 
        jointly and severally liable for the penalty under such 
        subsection.''.
    (c) Penalty Not Deductible.--Section 6701 is amended by adding at 
the end the following new subsection:
    ``(g) Penalty Not Deductible.--The payment of any penalty imposed 
under this section or the payment of any amount to settle or avoid the 
imposition of such penalty shall not be deductible by the person who is 
subject to such penalty or who makes such payment.''.
    (d) Effective Date.--The amendments 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. 321. 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 December 31, 2003.
            (2) Liquidations.--The amendment made by subsection (b) 
        shall apply to liquidations after December 31, 2003.

SEC. 322. 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 February 13, 2003.

SEC. 323. 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)(A) Section 860G(a)(1) is amended by adding at the end 
        the following new sentence: ``An interest shall not fail to 
        qualify as a regular interest solely because the specified 
        principal amount of the regular interest (or the amount of 
        interest accrued on the regular interest) can be reduced as a 
        result of the nonoccurrence of 1 or more contingent payments 
        with respect to any reverse mortgage loan held by the REMIC if, 
        on the startup day for the REMIC, the sponsor reasonably 
        believes that all principal and interest due under the regular 
        interest will be paid at or prior to the liquidation of the 
        REMIC.''.
            (B) The last sentence of section 860G(a)(3) is amended by 
        inserting ``, and any reverse mortgage loan (and each balance 
        increase on such loan meeting the requirements of subparagraph 
        (A)(iii)) shall be treated as an obligation secured by an 
        interest in real property'' before the period at the end.
            (6) Paragraph (3) 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).
            (7) Section 860G(a)(3), as amended by paragraph (6), is 
        amended by adding at the end the following new sentence: ``For 
        purposes of subparagraph (A), if more than 50 percent of the 
        obligations transferred to, or purchased by, the REMIC are 
        originated by the United States or any State (or any political 
        subdivision, agency, or instrumentality of the United States or 
        any State) and are principally secured by an interest in real 
        property, then each obligation transferred to, or purchased by, 
        the REMIC shall be treated as secured by an interest in real 
        property.''.
            (8)(A) Section 860G(a)(3)(A) is amended by striking ``or'' 
        at the end of clause (i), by inserting ``or'' at the end of 
        clause (ii), and by inserting after clause (ii) the following 
        new clause:
                            ``(iii) represents an increase in the 
                        principal amount under the original terms of an 
                        obligation described in clause (i) or (ii) if 
                        such increase--
                                    ``(I) is attributable to an advance 
                                made to the obligor pursuant to the 
                                original terms of the obligation,
                                    ``(II) occurs after the startup 
                                day, and
                                    ``(III) is purchased by the REMIC 
                                pursuant to a fixed price contract in 
                                effect on the startup day.''.
            (B) Section 860G(a)(7)(B) is amended to read as follows:
                    ``(B) Qualified reserve fund.--For purposes of 
                subparagraph (A), the term `qualified reserve fund' 
                means any reasonably required reserve to--
                            ``(i) provide for full payment of expenses 
                        of the REMIC or amounts due on regular 
                        interests in the event of defaults on qualified 
                        mortgages or lower than expected returns on 
                        cash flow investments, or
                            ``(ii) provide a source of funds for the 
                        purchase of obligations described in clause 
                        (ii) or (iii) of paragraph (3)(A).
                The aggregate fair market value of the assets held in 
                any such reserve shall not exceed 50 percent of the 
                aggregate fair market value of all of the assets of the 
                REMIC on the startup day, and the amount of any such 
                reserve shall be promptly and appropriately reduced to 
                the extent the amount held in such reserve is no longer 
                reasonably required for purposes specified in clause 
                (i) or (ii) of this subparagraph.''.
            (9) Subparagraph (C) of section 1202(e)(4) is amended by 
        striking ``REMIC, or FASIT'' and inserting ``or REMIC''.
            (10) Clause (xi) of section 7701(a)(19)(C) is amended--
                    (A) by striking ``and any regular interest in a 
                FASIT,'', and
                    (B) by striking ``or FASIT'' each place it appears.
            (11) Subparagraph (A) of section 7701(i)(2) is amended by 
        striking ``or a FASIT''.
            (12) 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 take effect on February 
        14, 2003.
            (2) Exception for existing fasits.--Paragraph (1) shall not 
        apply to any FASIT in existence on the date of the enactment of 
        this Act to the extent that regular interests issued by the 
        FASIT before such date continue to remain outstanding in 
        accordance with the original terms of issuance.

SEC. 324. 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.''.
    (d) 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.
    (e) Effective Date.--The amendments made by this section shall 
apply to debt instruments issued after February 13, 2003.

SEC. 325. 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 February 13, 2003.

SEC. 326. 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 
February 13, 2003, and to taxable years of United States shareholders 
with or within which such taxable years of controlled foreign 
corporations end.

               Subtitle C--Extension of Customs User Fees

SEC. 331. 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 
``March 1, 2005'' and inserting ``September 30, 2013''.
                                 <all>