Tax Shelter and Tax Haven Reform Act of 2005 - Amends the Internal Revenue Code to increase penalties for: (1) promoting abusive tax shelters; and (2) aiding and abetting the understatement of tax liability. Imposes a penalty for making fee arrangements for tax services based upon projected or actual tax savings.
Requires federal banking agencies and the Securities and Exchange Commission (SEC) to develop examination techniques to detect abusive tax shelter activities by certain financial institutions.
Directs the Secretary of the Treasury to disclose tax return information requested by the SEC, federal banking agencies, or the Public Company Accounting Oversight Board to aid in the investigation of tax shelter activity.
Directs the Secretary to require tax practitioners to meet certain standards for the issuance of tax opinions.
Provides for awards to individuals (whistleblowers) who provide information about tax law violations to the Secretary. Establishes a Whistleblower Office in the Internal Revenue Service.
Denies a tax deduction for fines or penalties for violations of law, except for amounts constituting restitution.
Expresses the sense of the Senate with respect to IRS enforcement efforts against abusive tax shelter activities.
Sets forth rules for the application of the economic substance doctrine. Imposes additional penalties for understatements of tax resulting from transactions lacking economic substance.
Requires disclosure of payments of $10,000 or more to accounts or persons located in an uncooperative tax haven. Imposes enhanced penalties for underpayments of tax related to certain offshore financial arrangements.
[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[S. 1565 Introduced in Senate (IS)]
109th CONGRESS
1st Session
S. 1565
To restrict the use of abusive tax shelters and offshore tax havens to
inappropriately avoid Federal taxation, and for other purposes.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
July 29, 2005
Mr. Levin (for himself, Mr. Coleman, and Mr. Obama) introduced the
following bill; which was read twice and referred to the Committee on
Finance
_______________________________________________________________________
A BILL
To restrict the use of abusive tax shelters and offshore tax havens to
inappropriately avoid Federal taxation, 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 ``Tax Shelter and
Tax Haven Reform Act of 2005''.
(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--STRENGTHENING TAX SHELTER PENALTIES
Sec. 101. Penalty for promoting abusive tax shelters.
Sec. 102. Penalty for aiding and abetting the understatement of tax
liability.
TITLE II--PREVENTING ABUSIVE TAX SHELTERS
Sec. 201. Prohibited fee arrangement.
Sec. 202. Preventing tax shelter activities by financial institutions.
Sec. 203. Information sharing for enforcement purposes.
Sec. 204. Disclosure of information to Congress.
Sec. 205. Tax opinion standards for tax practitioners.
Sec. 206. Whistleblower reforms.
Sec. 207. Denial of deduction for certain fines, penalties, and other
amounts.
Sec. 208. Sense of the Senate on tax enforcement priorities.
TITLE III--REQUIRING ECONOMIC SUBSTANCE
Sec. 301. Clarification of economic substance doctrine.
Sec. 302. Penalty for understatements attributable to transactions
lacking economic substance, etc.
Sec. 303. Denial of deduction for interest on underpayments
attributable to noneconomic substance
transactions.
TITLE IV--DETERRING UNCOOPERATIVE TAX HAVENS
Sec. 401. Disclosing payments to persons in uncooperative tax havens.
Sec. 402. Deterring uncooperative tax havens by restricting allowable
tax benefits.
Sec. 403. Doubling of certain penalties, fines, and interest on
underpayments related to certain offshore
financial arrangements.
Sec. 404. Treasury regulations on foreign tax credit.
TITLE I--STRENGTHENING TAX SHELTER PENALTIES
SEC. 101. 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 the greater of--
``(A) 150 percent of the gross income derived (or
to be derived) from such activity by the person or
persons subject to such penalty, and
``(B) if readily subject to calculation, the total
amount of underpayment by the taxpayer (including
penalties, interest, and taxes) in connection with such
activity.
``(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 considered an ordinary and
necessary expense in carrying on a trade or business for purposes of
this title and shall not be deductible by the person who is subject to
such penalty or who makes such payment.''.
(b) Conforming Amendment.--Section 6700(a) is amended by striking
the last sentence.
(c) Effective Date.--The amendments made by this section shall
apply to activities after the date of the enactment of this Act.
SEC. 102. 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 the greater of--
``(A) 150 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, and
``(B) if readily subject to calculation, the total
amount of underpayment by the taxpayer (including
penalties, interest, and taxes) in connection with the
understatement of the liability for tax.
``(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 considered an ordinary and
necessary expense in carrying on a trade or business for purposes of
this title and 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.
TITLE II--PREVENTING ABUSIVE TAX SHELTERS
SEC. 201. PROHIBITED FEE ARRANGEMENT.
(a) In General.--Section 6701, as amended by this Act, is amended--
(1) by redesignating subsections (f) and (g) as subsections
(g) and (h), respectively,
(2) by striking ``subsection (a).'' in paragraphs (2) and
(3) of subsection (g) (as redesignated by paragraph (1)) and
inserting ``subsection (a) or (f).'', and
(3) by inserting after subsection (e) the following new
subsection:
``(f) Prohibited Fee Arrangement.--
``(1) In general.--Any person who makes an agreement for,
charges, or collects a fee which is for services provided in
connection with the internal revenue laws, and the amount of
which is calculated according to, or is dependent upon, a
projected or actual amount of--
``(A) tax savings or benefits, or
``(B) losses which can be used to offset other
taxable income,
shall pay a penalty with respect to each such fee activity in
the amount determined under subsection (b).
``(2) Rules.--The Secretary may issue rules to carry out
the purposes of this subsection and may provide exceptions for
fee arrangements that are in the public interest.''.
(b) Effective Date.--The amendments made by this section shall
apply to fee agreements, charges, and collections made after the date
of the enactment of this Act.
SEC. 202. PREVENTING TAX SHELTER ACTIVITIES BY FINANCIAL INSTITUTIONS.
(a) Examinations.--
(1) Development of examination techniques.--Each of the
Federal banking agencies and the Commission shall, in
consultation with the Internal Revenue Service, develop
examination techniques to detect potential violations of
section 6700 or 6701 of the Internal Revenue Code of 1986, by
depository institutions, brokers, dealers, and investment
advisers, as appropriate.
(2) Frequency.--Not less frequently than once in each 2-
year period, each of the Federal banking agencies and the
Commission shall implement the examination techniques developed
under paragraph (1) with respect to each of the depository
institutions, brokers, dealers, or investment advisers subject
to their enforcement authority. Such examination shall, to the
extent possible, be combined with any examination by such
agency otherwise required or authorized by Federal law.
(b) Report to Internal Revenue Service.--In any case in which an
examination conducted under this section with respect to a financial
institution or other entity reveals a potential violation, such agency
shall promptly notify the Internal Revenue Service of such potential
violation for investigation and enforcement by the Internal Revenue
Service in accordance with applicable provisions of law.
(c) Report to Congress.--The Federal banking agencies and the
Commission shall submit a joint written report to Congress in 2007 and
2010 on their progress in preventing violations of sections 6700 and
6701 of the Internal Revenue Code of 1986, by depository institutions,
brokers, dealers, and investment advisers, as appropriate.
(d) Definitions.--For purposes of this section--
(1) the terms ``broker'', ``dealer'', and ``investment
adviser'' have the same meanings as in section 3 of the
Securities Exchange Act of 1934 (15 U.S.C. 78c);
(2) the term ``Commission'' means the Securities and
Exchange Commission;
(3) the term ``depository institution'' has the same
meaning as in section 3(c) of the Federal Deposit Insurance Act
(12 U.S.C. 1813(c));
(4) the term ``Federal banking agencies'' has the same
meaning as in section 3(q) of the Federal Deposit Insurance Act
(12 U.S.C. 1813(q)); and
(5) the term ``Secretary'' means the Secretary of the
Treasury.
SEC. 203. INFORMATION SHARING FOR ENFORCEMENT PURPOSES.
(a) Promotion of Prohibited Tax Shelters or Tax Avoidance
Schemes.--Section 6103(h) (relating to disclosure to certain Federal
officers and employees for purposes of tax administration, etc.) is
amended by adding at the end the following new paragraph:
``(7) Disclosure of returns and return information related
to promotion of prohibited tax shelters or tax avoidance
schemes.--
``(A) Written request.--Upon receipt by the
Secretary of a written request which meets the
requirements of subparagraph (B) from the head of the
United States Securities and Exchange Commission, an
appropriate Federal banking agency as defined under
section 1813(q) of title 12, United States Code, or the
Public Company Accounting Oversight Board, a return or
return information shall be disclosed to such
requestor's officers and employees who are personally
and directly engaged in an investigation, examination,
or proceeding by such requestor to evaluate, determine,
penalize, or deter conduct by a financial institution,
issuer, or public accounting firm, or associated
person, in connection with a potential or actual
violation of section 6700 (promotion of abusive tax
shelters), 6701 (aiding and abetting understatement of
tax liability), or activities related to promoting or
facilitating inappropriate tax avoidance or tax
evasion. Such disclosure shall be solely for use by
such officers and employees in such investigation,
examination, or proceeding.
``(B) Requirements.--A request meets the
requirements of this subparagraph if it sets forth--
``(i) the nature of the investigation,
examination, or proceeding,
``(ii) the statutory authority under which
such investigation, examination, or proceeding
is being conducted,
``(iii) the name or names of the financial
institution, issuer, or public accounting firm
to which such return information relates,
``(iv) the taxable period or periods to
which such return information relates, and
``(v) the specific reason or reasons why
such disclosure is, or may be, relevant to such
investigation, examination or proceeding.
``(C) Financial institution.--For the purposes of
this paragraph, the term `financial institution' means
a depository institution, foreign bank, insured
institution, industrial loan company, broker, dealer,
investment company, investment advisor, or other entity
subject to regulation or oversight by the United States
Securities and Exchange Commission or an appropriate
Federal banking agency.''.
(b) Financial and Accounting Fraud Investigations.--Section 6103(i)
(relating to disclosure to Federal officers or employees for
administration of Federal laws not relating to tax administration) is
amended by adding at the end the following new paragraph:
``(9) Disclosure of returns and return information for use
in financial and accounting fraud investigations.--
``(A) Written request.--Upon receipt by the
Secretary of a written request which meets the
requirements of subparagraph (B) from the head of the
United States Securities and Exchange Commission or the
Public Company Accounting Oversight Board, a return or
return information shall be disclosed to such
requestor's officers and employees who are personally
and directly engaged in an investigation, examination,
or proceeding by such requester to evaluate the
accuracy of a financial statement or report or to
determine whether to require a restatement, penalize,
or deter conduct by an issuer, investment company, or
public accounting firm, or associated person, in
connection with a potential or actual violation of
auditing standards or prohibitions against false or
misleading statements or omissions in financial
statements or reports. Such disclosure shall be solely
for use by such officers and employees in such
investigation, examination, or proceeding.
``(B) Requirements.--A request meets the
requirements of this subparagraph if it sets forth--
``(i) the nature of the investigation,
examination, or proceeding,
``(ii) the statutory authority under which
such investigation, examination, or proceeding
is being conducted,
``(iii) the name or names of the issuer,
investment company, or public accounting firm
to which such return information relates,
``(iv) the taxable period or periods to
which such return information relates, and
``(v) the specific reason or reasons why
such disclosure is, or may be, relevant to such
investigation, examination or proceeding.''.
(c) Effective Date.--The amendments made by this section shall
apply to disclosures and to information and document requests made
after the date of the enactment of this Act.
SEC. 204. DISCLOSURE OF INFORMATION TO CONGRESS.
(a) Disclosure by Tax Return Preparer.--
(1) In general.--Subparagraph (B) of section 7216(b)(1)
(relating to disclosures) is amended to read as follows:
``(B) pursuant to any 1 of the following documents,
if clearly identified:
``(i) The order of any Federal, State, or
local court of record.
``(ii) A subpoena issued by a Federal or
State grand jury.
``(iii) An administrative order, summons,
or subpoena which is issued in the performance
of its duties by--
``(I) any Federal agency, including
Congress or any committee or
subcommittee thereof, or
``(II) any State agency, body, or
commission charged under the laws of
the State or a political subdivision of
the State with the licensing,
registration, or regulation of tax
return preparers.''.
(2) Effective date.--The amendment made by this subsection
shall apply to disclosures made after the date of the enactment
of this Act pursuant to any document in effect on or after such
date.
(b) Disclosure by Secretary.--Paragraph (2) of section 6104(a)
(relating to inspection of applications for tax exemption or notice of
status) is amended to read as follows:
``(2) Inspection by congress.--
``(A) In general.--Upon receipt of a written
request from a committee or subcommittee of Congress,
copies of documents related to a determination by the
Secretary to grant, deny, revoke, or restore an
organization's exemption from taxation under section
501 shall be provided to such committee or
subcommittee, including any application, notice of
status, or supporting information provided by such
organization to the Internal Revenue Service; any
letter, analysis, or other document produced by or for
the Internal Revenue Service evaluating, determining,
explaining, or relating to the tax exempt status of
such organization (other than returns, unless such
returns are available to the public under this section
or section 6103 or 6110); and any communication between
the Internal Revenue Service and any other party
relating to the tax exempt status of such organization.
``(B) Additional information.--Section 6103(f)
shall apply with respect to--
``(i) the application for exemption of any
organization described in subsection (c) or (d)
of section 501 which is exempt from taxation
under section 501(a) for any taxable year and
any application referred to in subparagraph (B)
of subsection (a)(1) of this section, and
``(ii) any other papers which are in the
possession of the Secretary and which relate to
such application,
as if such papers constituted returns.''.
(c) Effective Date.--The amendments made by this section shall
apply to disclosures and to information and document requests made
after the date of the enactment of this Act.
SEC. 205. TAX OPINION STANDARDS FOR TAX PRACTITIONERS.
Section 330(d) of title 31, United States Code, is amended to read
as follows:
``(d) The Secretary of the Treasury shall impose standards
applicable to the rendering of written advice with respect to any
listed transaction or any entity, plan, arrangement, or other
transaction which has a potential for tax avoidance or evasion. Such
standards shall address, but not be limited to, the following issues:
``(1) Independence of the practitioner issuing such written
advice from persons promoting, marketing, or recommending the
subject of the advice.
``(2) Collaboration among practitioners, or between a
practitioner and other party, which could result in such
collaborating parties having a joint financial interest in the
subject of the advice.
``(3) Avoidance of conflicts of interest which would impair
auditor independence.
``(4) For written advice issued by a firm, standards for
reviewing the advice and ensuring the consensus support of the
firm for positions taken.
``(5) Reliance on reasonable factual representations by the
taxpayer and other parties.
``(6) Appropriateness of the fees charged by the
practitioner for the written advice.
``(7) Preventing practitioners and firms from aiding or
abetting the understatement of tax liability by clients.
``(8) Banning the promotion of potentially abusive or
illegal tax shelters.''.
SEC. 206. WHISTLEBLOWER REFORMS.
(a) In General.--Section 7623 (relating to expenses of detection of
underpayments and fraud, etc.) is amended--
(1) by striking ``The Secretary'' and inserting ``(a) In
General.--The Secretary'',
(2) by striking ``and'' at the end of paragraph (1) and
inserting ``or'',
(3) by striking ``(other than interest)'', and
(4) by adding at the end the following new subsections:
``(b) Awards to Whistleblowers.--
``(1) In general.--If the Secretary proceeds with any
administrative or judicial action described in subsection (a)
based on information brought to the Secretary's attention by an
individual, such individual shall, subject to paragraph (2),
receive as an award at least 15 percent but not more than 30
percent of the collected proceeds (including penalties,
interest, additions to tax, and additional amounts) resulting
from the action (including any related actions) or from any
settlement in response to such action. The determination of the
amount of such award by the Whistleblower Office shall depend
upon the extent to which the individual substantially
contributed to such action, and shall be determined at the sole
discretion of the Whistleblower Office.
``(2) Award in case of less substantial contribution.--
``(A) In general.--In the event the action
described in paragraph (1) is one which the
Whistleblower Office determines to be based principally
on disclosures of specific allegations (other than
information provided by the individual described in
paragraph (1)) resulting from a judicial or
administrative hearing, from a governmental report,
hearing, audit, or investigation, or from the news
media, the Whistleblower Office may award such sums as
it considers appropriate, but in no case more than 10
percent of the collected proceeds (including penalties,
interest, additions to tax, and additional amounts)
resulting from the action (including any related
actions) or from any settlement in response to such
action, taking into account the significance of the
individual's information and the role of such
individual and any legal representative of such
individual in contributing to such action.
``(B) Nonapplication of paragraph where individual
is original source of information.--Subparagraph (A)
shall not apply if the information resulting in the
initiation of the action described in paragraph (1) was
originally provided by the individual described in
paragraph (1).
``(3) Application of this subsection.--This subsection
shall apply with respect to any action--
``(A) against any taxpayer, but in the case of any
individual, only if such individual's gross income
exceeds $200,000 for any taxable year subject to such
action, and
``(B) if the tax, penalties, interest, additions to
tax, and additional amounts in dispute exceed $20,000.
``(4) Additional rules.--
``(A) No contract necessary.--No contract with the
Internal Revenue Service is necessary for any
individual to receive an award under this subsection.
``(B) Representation.--Any individual described in
paragraph (1) or (2) may be represented by counsel.
``(C) Award not subject to individual alternative
minimum tax.--No award received under this subsection
shall be included in gross income for purposes of
determining alternative minimum taxable income.
``(c) Whistleblower Office.--
``(1) In general.--There is established in the Internal
Revenue Service an office to be known as the `Whistleblower
Office' which--
``(A) shall analyze information received from any
individual described in subsection (b) and either
investigate the matter itself or assign it to the
appropriate Internal Revenue Service office,
``(B) shall monitor any action taken with respect
to such matter,
``(C) shall inform such individual that it has
accepted the individual's information for further
review,
``(D) may require such individual and any legal
representative of such individual to not disclose any
information so provided,
``(E) may ask for additional assistance from such
individual or any legal representative of such
individual, and
``(F) shall determine the amount to be awarded to
such individual under subsection (b).
``(2) Funding for office.--From the amounts available for
expenditure under subsection (a), the Whistleblower Office
shall be credited with an amount equal to the awards made under
subsection (b). These funds shall be used to maintain the
Whistleblower Office and also to reimburse other Internal
Revenue Service offices for related costs, such as costs of
investigation and collection.
``(3) Request for assistance.--
``(A) In general.--Any assistance requested under
paragraph (1)(E) shall be under the direction and
control of the Whistleblower Office or the office
assigned to investigate the matter under subparagraph
(A). To the extent the disclosure of any returns or
return information to the individual or legal
representative is required for the performance of such
assistance, such disclosure shall be pursuant to a
contract entered into between the Secretary and the
recipients of such disclosure subject to section
6103(n).
``(B) Funding of assistance.--From the funds made
available to the Whistleblower Office under paragraph
(2), the Whistleblower Office may reimburse the costs
incurred by any legal representative in providing
assistance described in subparagraph (A).''.
(b) Effective Date.--The amendments made by this section shall
apply to information provided on or after the date of the enactment of
this Act.
SEC. 207. DENIAL OF DEDUCTION FOR CERTAIN FINES, PENALTIES, AND OTHER
AMOUNTS.
(a) In General.--Subsection (f) of section 162 (relating to trade
or business expenses) is amended to read as follows:
``(f) Fines, Penalties, and Other Amounts.--
``(1) In general.--Except as provided in paragraph (2), no
deduction otherwise allowable shall be allowed under this
chapter for any amount paid or incurred (whether by suit,
agreement, or otherwise) to, or at the direction of, a
government or entity described in paragraph (4) in relation to
the violation of any law or the investigation or inquiry by
such government or entity into the potential violation of any
law.
``(2) Exception for amounts constituting restitution.--
Paragraph (1) shall not apply to any amount which--
``(A) the taxpayer establishes constitutes
restitution (including remediation of property) for
damage or harm caused by or which may be caused by the
violation of any law or the potential violation of any
law, and
``(B) is identified as restitution in the court
order or settlement agreement.
Identification pursuant to subparagraph (B) alone shall not
satisfy the requirement under subparagraph (A). This paragraph
shall not apply to any amount paid or incurred as reimbursement
to the government or entity for the costs of any investigation
or litigation.
``(3) Exception for amounts paid or incurred as the result
of certain court orders.--Paragraph (1) shall not apply to any
amount paid or incurred by order of a court in a suit in which
no government or entity described in paragraph (4) is a party.
``(4) Certain nongovernmental regulatory entities.--An
entity is described in this paragraph if it is--
``(A) a nongovernmental entity which exercises
self-regulatory powers (including imposing sanctions)
in connection with a qualified board or exchange (as
defined in section 1256(g)(7)), or
``(B) to the extent provided in regulations, a
nongovernmental entity which exercises self-regulatory
powers (including imposing sanctions) as part of
performing an essential governmental function.
``(5) Exception for taxes due.--Paragraph (1) shall not
apply to any amount paid or incurred as taxes due.''.
(b) Effective Date.--The amendment made by this section shall apply
to amounts paid or incurred on or after the date of the enactment of
this Act, except that such amendment shall not apply to amounts paid or
incurred under any binding order or agreement entered into before such
date. Such exception shall not apply to an order or agreement requiring
court approval unless the approval was obtained before such date.
SEC. 208. SENSE OF THE SENATE ON TAX ENFORCEMENT PRIORITIES.
It is the sense of the Senate that additional funds should be
appropriated for Internal Revenue Service enforcement efforts and that
the Internal Revenue Service should devote proportionately more of its
enforcement funds--
(1) to combat the promotion of abusive tax shelters for
corporations and high net worth individuals and the aiding and
abetting of tax evasion,
(2) to stop accounting, law, and financial firms involved
in such promotion and aiding and abetting, and
(3) to combat the use of offshore financial accounts to
conceal taxable income.
TITLE III--REQUIRING ECONOMIC SUBSTANCE
SEC. 301. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.
(a) In General.--Section 7701 is amended by redesignating
subsection (o) as subsection (p) and by inserting after subsection (n)
the following new subsection:
``(o) 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 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(o)(1)) for the transaction
giving rise to the claimed benefit or the transaction
was not respected under section 7701(o)(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) and
(3) of section 6707A(d) shall apply for purposes of paragraph
(1).
``(e) Coordination With Other Penalties.--Except as otherwise
provided in this part, the penalty imposed by this section shall be in
addition to any other penalty imposed by this title.
``(f) Cross References.--
``(1) For coordination of penalty with
understatements under section 6662 and other
special rules, see section 6662A(e).
``(2) For reporting of penalty imposed under
this section to the Securities and Exchange
Commission, see section 6707A(e).''.
(b) Coordination With Other Understatements and Penalties.--
(1) The second sentence of section 6662(d)(2)(A) is amended
by inserting ``and without regard to items with respect to
which a penalty is imposed by section 6662B'' before the period
at the end.
(2) Subsection (e) of section 6662A is amended--
(A) in paragraph (1), by inserting ``and
noneconomic substance transaction understatements''
after ``reportable transaction understatements'' both
places it appears,
(B) in paragraph (2)(A), by inserting ``and a
noneconomic substance transaction understatement''
after ``reportable transaction understatement'',
(C) in paragraph (2)(B), by inserting ``6662B or''
before ``6663'',
(D) in paragraph (2)(C)(i), by inserting ``or
section 6662B'' before the period at the end,
(E) in paragraph (2)(C)(ii), by inserting ``and
section 6662B'' after ``This section'',
(F) in paragraph (3), by inserting ``or noneconomic
substance transaction understatement'' after
``reportable transaction understatement'', and
(G) by adding at the end the following new
paragraph:
``(4) Noneconomic substance transaction understatement.--
For purposes of this subsection, the term `noneconomic
substance transaction understatement' has the meaning given
such term by section 6662B(c).''.
(3) Subsection (e) of section 6707A is amended--
(A) by striking ``or'' at the end of subparagraph
(B), and
(B) by striking subparagraph (C) and inserting the
following new subparagraphs:
``(C) is required to pay a penalty under section
6662B with respect to any noneconomic substance
transaction, or
``(D) is required to pay a penalty under section
6662(h) with respect to any transaction and would (but
for section 6662A(e)(2)(C)) have been subject to
penalty under section 6662A at a rate prescribed under
section 6662A(c) or under section 6662B,''.
(c) Clerical Amendment.--The table of sections for part II of
subchapter A of chapter 68 is amended by inserting after the item
relating to section 6662A the following new item:
``Sec. 6662B. Penalty for understatements attributable to transactions
lacking economic substance, etc.''.
(d) Effective Date.--The amendments made by this section shall
apply to transactions entered into after the date of the enactment of
this Act.
SEC. 303. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS
ATTRIBUTABLE TO NONECONOMIC SUBSTANCE TRANSACTIONS.
(a) In General.--Section 163(m) (relating to interest on unpaid
taxes attributable to nondisclosed reportable transactions) is
amended--
(1) by striking ``attributable'' and all that follows and
inserting the following: ``attributable to--
``(1) the portion of any reportable transaction
understatement (as defined in section 6662A(b)) with respect to
which the requirement of section 6664(d)(2)(A) is not met, or
``(2) any noneconomic substance transaction understatement
(as defined in section 6662B(c)).'', and
(2) by inserting ``and noneconomic substance transactions''
after ``transactions''.
(b) Effective Date.--The amendments made by this section shall
apply to transactions after the date of the enactment of this Act in
taxable years ending after such date.
TITLE IV--DETERRING UNCOOPERATIVE TAX HAVENS
SEC. 401. DISCLOSING PAYMENTS TO PERSONS IN UNCOOPERATIVE TAX HAVENS.
(a) In General.--Subpart A of part III of subchapter A of chapter
61 is amended by inserting after section 6038C the following new
section:
``SEC. 6038D. DETERRING UNCOOPERATIVE TAX HAVENS THROUGH LISTING AND
REPORTING REQUIREMENTS.
``(a) In General.--Each United States person who transfers money or
other property directly or indirectly to any uncooperative tax haven,
to any financial institution licensed by or operating in any
uncooperative tax haven, or to any person who is a resident of any
uncooperative tax haven shall furnish to the Secretary, at such time
and in such manner as the Secretary shall by regulation prescribe, such
information with respect to such transfer as the Secretary may require.
``(b) Exceptions.--Subsection (a) shall not apply to a transfer by
a United States person if the amount of money (and the fair market
value of property) transferred is less than $10,000. Related transfers
shall be treated as 1 transfer for purposes of this subsection.
``(c) Uncooperative Tax Haven.--For purposes of this section--
``(1) In general.--The term `uncooperative tax haven' means
any foreign jurisdiction which is identified on a list
maintained by the Secretary under paragraph (2) as being a
jurisdiction--
``(A) which imposes no or nominal taxation either
generally or on specified classes of income, and
``(B) has corporate, business, bank, or tax secrecy
or confidentiality rules and practices, or has
ineffective information exchange practices which, in
the judgment of the Secretary, effectively limit or
restrict the ability of the United States to obtain
information relevant to the enforcement of this title.
``(2) Maintenance of list.--Not later than November 1 of
each calendar year, the Secretary shall issue a list of foreign
jurisdictions which the Secretary determines qualify as
uncooperative tax havens under paragraph (1).
``(3) Ineffective information exchange practices.--For
purposes of paragraph (1), a jurisdiction shall be deemed to
have ineffective information exchange practices if the
Secretary determines that during any taxable year ending in the
12-month period preceding the issuance of the list under
paragraph (2)--
``(A) the exchange of information between the
United States and such jurisdiction was inadequate to
prevent evasion or avoidance of United States income
tax by United States persons or to enable the United
States effectively to enforce this title, or
``(B) such jurisdiction was identified by an
intergovernmental group or organization of which the
United States is a member as uncooperative with
international tax enforcement or information exchange
and the United States concurs in the determination.
``(d) Penalty for Failure to File Information.--If a United States
person fails to furnish the information required by subsection (a) with
respect to any transfer within the time prescribed therefor (including
extensions), such United States person shall pay (upon notice and
demand by the Secretary and in the same manner as tax) an amount equal
to 20 percent of the amount of such transfer.
``(e) Simplified Reporting.--The Secretary may by regulations
provide for simplified reporting under this section for United States
persons making large volumes of similar payments.
``(f) Regulations.--The Secretary shall prescribe such regulations
as may be necessary or appropriate to carry out the purposes of this
section.''.
(b) Clerical Amendment.--The table of sections for such subpart A
is amended by inserting after the item relating to section 6038C the
following new item:
``Sec. 6038D. Deterring uncooperative tax havens through listing and
reporting requirements.''.
(c) Effective Date.--The amendments made by this section shall
apply to transfers after the date which is 180 days after the date of
the enactment of this Act.
SEC. 402. DETERRING UNCOOPERATIVE TAX HAVENS BY RESTRICTING ALLOWABLE
TAX BENEFITS.
(a) Limitation on Deferral.--
(1) In general.--Subsection (a) of section 952 (defining
subpart F income) is amended by striking ``and'' at the end of
paragraph (4), by striking the period at the end of paragraph
(5) and inserting ``, and'', and by inserting after paragraph
(5) the following new paragraph:
``(6) an amount equal to the applicable fraction (as
defined in subsection (e)) of the income of such corporation
other than income which--
``(A) is attributable to earnings and profits of
the foreign corporation included in the gross income of
a United States person under section 951 (other than by
reason of this paragraph or paragraph (3)(A)(i)), or
``(B) is described in subsection (b).''.
(2) Applicable fraction.--Section 952 is amended by adding
at the end the following new subsection:
``(e) Identified Tax Haven Income Which Is Subpart F Income.--
``(1) In general.--For purposes of subsection (a)(6), the
term `applicable fraction' means the fraction--
``(A) the numerator of which is the aggregate
identified tax haven income for the taxable year, and
``(B) the denominator of which is the aggregate
income for the taxable year which is from sources
outside the United States.
``(2) Identified tax haven income.--For purposes of
paragraph (1), the term `identified tax haven income' means
income for the taxable year which is attributable to a foreign
jurisdiction for any period during which such jurisdiction has
been identified as an uncooperative tax haven under section
6038D(c).
``(3) Regulations.--The Secretary shall prescribe
regulations similar to the regulations issued under section
999(c) to carry out the purposes of this subsection.''.
(b) Denial of Foreign Tax Credit.--Section 901 (relating to taxes
of foreign countries and of possessions of United States) is amended by
redesignating subsection (m) as subsection (n) and by inserting after
subsection (l) the following new subsection:
``(m) Reduction of Foreign Tax Credit, etc., for Identified Tax
Haven Income.--
``(1) In general.--Notwithstanding any other provision of
this part--
``(A) no credit shall be allowed under subsection
(a) for any income, war profits, or excess profits
taxes paid or accrued (or deemed paid under section 902
or 960) to any foreign jurisdiction if such taxes are
with respect to income attributable to a period during
which such jurisdiction has been identified as an
uncooperative tax haven under section 6038D(c), and
``(B) subsections (a), (b), (c), and (d) of section
904 and sections 902 and 960 shall be applied
separately with respect to all income of a taxpayer
attributable to periods described in subparagraph (A)
with respect to all such jurisdictions.
``(2) Taxes allowed as a deduction, etc.--Sections 275 and
78 shall not apply to any tax which is not allowable as a
credit under subsection (a) by reason of this subsection.
``(3) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this subsection, including regulations which treat
income paid through 1 or more entities as derived from a
foreign jurisdiction to which this subsection applies if such
income was, without regard to such entities, derived from such
jurisdiction.''.
(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. 403. DOUBLING OF CERTAIN PENALTIES, FINES, AND INTEREST ON
UNDERPAYMENTS RELATED TO CERTAIN OFFSHORE FINANCIAL
ARRANGEMENTS.
(a) Determination of Penalty.--
(1) In general.--Notwithstanding any other provision of
law, in the case of an applicable taxpayer--
(A) the determination as to whether any interest or
applicable penalty is to be imposed with respect to any
arrangement described in paragraph (2), or to any
underpayment of Federal income tax attributable to
items arising in connection with any such arrangement,
shall be made without regard to the rules of
subsections (b), (c), and (d) of section 6664 of the
Internal Revenue Code of 1986, and
(B) if any such interest or applicable penalty is
imposed, the amount of such interest or penalty shall
be equal to twice that determined without regard to
this section.
(2) Applicable taxpayer.--For purposes of this subsection--
(A) In general.--The term ``applicable taxpayer''
means a taxpayer which--
(i) has underreported its United States
income tax liability with respect to any item
which directly or indirectly involves--
(I) any financial arrangement which
in any manner relies on the use of an
offshore payment mechanism (including
credit, debit, or charge cards) issued
by a bank or other entity in a foreign
jurisdiction, or
(II) any offshore financial
arrangement (including any arrangement
with foreign banks, financial
institutions, corporations,
partnerships, trusts, or other
entities), and
(ii) has not signed a closing agreement
pursuant to the Voluntary Offshore Compliance
Initiative established by the Department of the
Treasury under Revenue Procedure 2003-11 or
voluntarily disclosed its participation in such
arrangement by notifying the Internal Revenue
Service of such arrangement prior to the issue
being raised by the Internal Revenue Service
during an examination.
(B) Authority to waive.--The Secretary of the
Treasury or the Secretary's delegate may waive the
application of paragraph (1) for any taxpayer if the
Secretary or the Secretary's delegate determines that--
(i) the use of such offshore payment
mechanism or financial arrangement was
incidental to the transaction,
(ii) in the case of a trade or business,
such use took place in the ordinary course of
the trade or business of the taxpayer, and
(iii) such waiver would serve the public
interest.
(C) Issues raised.--For purposes of subparagraph
(A)(ii), an item shall be treated as an issue raised
during an examination if the individual examining the
return--
(i) communicates to the taxpayer knowledge
about the specific item, or
(ii) has made a request to the taxpayer for
information and the taxpayer could not make a
complete response to that request without
giving the examiner knowledge of the specific
item.
(b) Definitions and Rules.--For purposes of this section--
(1) Applicable penalty.--The term ``applicable penalty''
means any penalty, addition to tax, or fine imposed under
chapter 68 of the Internal Revenue Code of 1986.
(2) Fees and expenses.--The Secretary of the Treasury may
retain and use an amount not in excess of 25 percent of all
additional interest, penalties, additions to tax, and fines
collected under this section to be used for enforcement and
collection activities of the Internal Revenue Service. The
Secretary shall keep adequate records regarding amounts so
retained and used. The amount credited as paid by any taxpayer
shall be determined without regard to this paragraph.
(c) Report by Secretary.--The Secretary shall each year conduct a
study and report to Congress on the implementation of this section
during the preceding year, including statistics on the number of
taxpayers affected by such implementation and the amount of interest
and applicable penalties asserted, waived, and assessed during such
preceding year.
(d) Effective Date.--The provisions of this section shall apply to
interest, penalties, additions to tax, and fines with respect to any
taxable year if, as of the date of the enactment of this Act, the
assessment of any tax, penalty, or interest with respect to such
taxable year is not prevented by the operation of any law or rule of
law.
SEC. 404. TREASURY REGULATIONS ON FOREIGN TAX CREDIT.
(a) In General.--Section 901 (relating to taxes of foreign
countries and of possessions of United States), as amended by section
402, is amended by redesignating subsection (n) as subsection (o) and
by inserting after subsection (m) the following new subsection:
``(n) Regulations.--The Secretary may prescribe regulations
disallowing a credit under subsection (a) for all or a portion of any
foreign tax, or allocating a foreign tax among 2 or more persons, in
cases where the foreign tax is imposed on any person in respect of
income of another person or in other cases involving the inappropriate
separation of the foreign tax from the related foreign income.''.
(b) Effective Date.--The amendments made by this section shall
apply to transactions entered into after the date of the enactment of
this Act.
<all>
Introduced in Senate
Sponsor introductory remarks on measure. (CR S9481-9486)
Read twice and referred to the Committee on Finance. (text of measure as introduced: CR S9486-9491)
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