STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS
By Mr. BAUCUS (for himself, Mr. GRASSLEY, Mr. DASCHLE, Mr. CONRAD, and Mr. GRAHAM of Florida):
S. 1937. A bill to amend the Internal Revenue Code of 1986 to curtail the use of tax shelters, and for other purposes; to the Committee on Finance.
S. 1937
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 Transparency and Enforcement Act".
(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.
© TABLE OF CONTENTS.-The table of contents for this Act is as follows:
Sec. 1. Short title; amendment of 1986 Code; table of contents.
TITLE I-PROVISIONS DESIGNED TO CURTAIL TAX SHELTERS
Sec. 101. Clarification of economic substance doctrine.
Sec. 102. Penalty for failing to disclose reportable transaction.
Sec. 103. Accuracy-related penalty for listed transactions and other reportable transactions having a significant tax avoidance purpose.
Sec. 104. Penalty for understatements attributable to transactions lacking economic substance, etc.
Sec. 105. Modifications of substantial understatement penalty for nonreportable transactions.
Sec. 106. Tax shelter exception to confidentiality privileges relating to taxpayer communications.
Sec. 107. Disclosure of reportable transactions.
Sec. 108. Modifications to penalty for failure to register tax shelters.
Sec. 109. Modification of penalty for failure to maintain lists of investors.
Sec. 110. Modification of actions to enjoin certain conduct related to tax shelters and reportable transactions.
Sec. 111. Understatement of taxpayer's liability by income tax return preparer.
Sec. 112. Penalty on failure to report interests in foreign financial accounts.
Sec. 113. Frivolous tax submissions.
Sec. 114. Regulation of individuals practicing before the Department of Treasury.
Sec. 115. Penalty on promoters of tax shelters.
Sec. 116. Statute of limitations for taxable years for which required listed transactions not reported.
Sec. 117. Denial of deduction for interest on underpayments attributable to nondisclosed reportable and noneconomic substance transactions.
Sec. 118. Authorization of appropriations for tax law enforcement.
TITLE II-OTHER CORPORATE GOVERNANCE PROVISIONS
Sec. 201. Affirmation of consolidated return regulation authority.
Sec. 202. Signing of corporate tax returns by chief executive officer.
Sec. 203. Denial of deduction for certain fines, penalties, and other amounts.
Sec. 204. Disallowance of deduction for punitive damages.
Sec. 205. Increase in criminal monetary penalty limitation for the underpayment or overpayment of tax due to fraud.
TITLE III-ENRON-RELATED TAX SHELTER PROVISIONS
Sec. 301. Limitation on transfer or importation of built-in losses.
Sec. 302. No reduction of basis under section 734 in stock held by partnership in corporate partner.
Sec. 303. Repeal of special rules for FASITs.
Sec. 304. Expanded disallowance of deduction for interest on convertible debt.
Sec. 305. Expanded authority to disallow tax benefits under section 269.
Sec. 306. Modification of interaction between subpart F and passive foreign investment company rules.
TITLE I-PROVISIONS DESIGNED TO CURTAIL TAX SHELTERS
SEC. 101. 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.
"© 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.
"© 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. 102. 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 be $50,000.subsection (a) shall
"(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.
"© 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.
"© 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,
"© 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
"© 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
"© is required to pay a penalty under section 6662B with respect to any noneconomic substance transaction, the requirement to pay such penalty shall be disclosed in such reports filed by such person for such periods as the Secretary shall specify. Failure to make a disclosure in accordance with the preceding sentence shall be treated as a failure to which the penalty under subsection (b)(2) applies.
"(f) COORDINATION WITH OTHER PENALTIES.-The penalty imposed by this section is in addition to any penalty imposed under this title.".
(b) CONFORMING AMENDMENT.-The table of sections for part I of subchapter B of chapter 68 is amended by inserting after the item relating to section 6707 the following:
"Sec. 6707A. Penalty for failure to include reportable transaction information with return or statement.".
© 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.
BREAK IN TRANSCRIPT
Mr. GRASSLEY. Mr. President, I rise today to co-sponsor legislation, the "Tax Shelter Transparency and Enforcement Act"to address the continuing proliferation of tax shelters. This bill reflects tax shelter measures that have been passed by the Senate Finance Committee in the Jobs and Growth Tax Relief Act of 2003, the CARE Act, the JOBS Act, and the Energy bill. The full Senate has passed these shelters provisions twice this year.
We have known for many years that abusive tax shelters, which are structured to exploit unintended consequences of our complicated Federal income tax system, erode the federal tax base and the public's confidence in the tax system. Such transactions are patently unfair to the vast majority of taxpayers who do their best to comply with the letter and spirit of the tax law. The Finance Committee produced its first draft of tax shelter legislation in 1999, and has produced several subsequent bills, each of which were enhanced to attack new developments in abusive tax shelters. The most recent Finance Committee bill was the Tax Shelter Transparency Act in May 2002. Today's bill builds on that 2002 legislation by adding certain corporate governance provisions, the recommendations from the Finance Committee's tax shelter investigation of Enron, and a proposal to clarify the judicial economic substance doctrine.
The Finance Committee has worked exceedingly hard over many several years to develop a legislative response to tax shelters, and the bill we offer today may not be the final word in that response. Thoughtful and well-considered comments on the provisions in this bill have been greatly appreciated by the staff and members of the Finance Committee, and will be considered in further refining today's bill, particularly with respect to clarification of the economic substance doctrine.
In our ongoing efforts to end tax shelters, we have attacked the issue on several fronts. We have introduced numerous measures to end specific shelter abuses as they are discovered. We have offered legislation attacking corporate inversions, individual expatiations, and corporate deductions for phony leases of tax-payer funded subways, bridges, and water lines. I have pursued public disclosure of the differences in the income on financial statements reported by public companies to their shareholders, and the income the company reports to the IRS on its tax return. I have written to the President, Treasury and SEC to encourage them to consider this idea.
During the Senate's 2002 deliberation of the Sarbanes-Oxley bill, I attempted to add an amendment that would have prohibited auditors from opining on the financial statement results of tax shelters that they had sold to an audit client. I was blocked in my attempt to offer that amendment, with several members expressing skepticism about the need for such a measure. I suspect that today, however, few members would have such reservations.
On October 21st, 2003, the Senate Finance Committee conducted a hearing to determine if tax shelters were a continuing problem. Not only are they continuing, they are now expanding to mid-level companies and wealthy individuals, many of whom have been duped into engaging in shelter transactions. During our hearing, we heard testimony from taxpayers who relied on reputable tax professionals and accounting firms for sound tax advice, but unknowingly purchased tax shelters that were peddled by those trusted professionals through a web of collusion and deception. We also heard from employees of large accounting firms and major corporations who testified regarding the pressure exerted on them to bless transactions that, in their professional opinions, would constitute abusive tax shelters. The price for their integrity was the loss of their jobs and the ruin of their career. Tax shelter abuse must be stopped for the sake of fairness, the integrity of our tax system, and the protection of honest tax professionals.
Our years of work on this issue was recently reaffirmed in a hearing before the Permanent Subcommittee on Investigations, which explored abusive shelters that were promoted by purportedly reputable tax lawyers and accounting firms. Following that hearing, there has been considerable discussion of promoting an amendment similar to the one I offered in 2002 during the Sarbanes-Oxley debate, and I am appreciative of that effort. I hope we are able to construct a measure that can be readily enforced by the Public Accounting Oversight Board and the SEC, even though that agency lacks expertise in, or jurisdiction over, federal tax matters.
At its core, however, the problem is not an SEC matter, but is a problem of ongoing abuse of the tax code by very smart people doing some very ugly business. The only way to end this problem is to put it out in the open. Even the most cynical tax advisor does not want their dirty laundry in the public eye, particularly if that public includes the IRS. That is why disclosure of abusive or potentially abusive transactions is so important in solving this problem.
The Tax Shelter Transparency and Enforcement Act requires taxpayer disclosure of potentially abusive tax avoidance transactions. It is surprising and unfortunate that taxpayers, though required to disclose tax shelter transactions under present law, have refused to comply. The Tax Shelter Transparency and Enforcement Act will curb non-compliance by providing clearer and more objective rules for the reporting of potential tax shelters and by providing strong penalties for anyone who refuses to comply with the revised disclosure requirements.
The legislation has been carefully structured to reward those who are forthcoming with disclosure. I wholeheartedly agree with the remarks offered by a former Treasury Assistant Secretary for Tax Policy, that "if a taxpayer is comfortable entering into a transaction, a promoter is comfortable selling it, and an advisor is comfortable blessing it, they all should be comfortable disclosing it to the IRS." Transparency is essential to an evaluation by the IRS and ultimately by the Congress of the United States as to whether the tax benefits generated by complex business transactions are appropriate interpretations of existing tax law.
It is time to get this bill done. The Finance Committee has worked on rooting out tax shelters for nearly five years, and we have debated the issue long enough. The time to act is now. I will vigorously pursue enactment of an anti-tax shelters bill in the upcoming year. I think we can all take pride in the Senate's consistent action of passing the measures in today's bill. We must press forward to put a final end to the seemingly endless abuse of tax shelters.