S 1111 IS

110th CONGRESS

1st Session

S. 1111

To amend the Internal Revenue Code of 1986 to make the Federal income
tax system simpler, fairer, and more fiscally responsible, and for other
purposes.

IN THE SENATE OF THE UNITED STATES

April 16, 2007

Mr. WYDEN introduced the following bill; which was read twice and referred to
the Committee on Finance

A BILL

purposes.

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

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

(a) Short Title- This Act may be cited as the `Fair Flat Tax Act of
2007'.

(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; amendment of 1986 Code; table of contents.

Sec. 2. Purpose.

TITLE I--INDIVIDUAL INCOME TAX REFORMS

Sec. 101. 3 progressive individual income tax rates for all forms of
income.

Sec. 102. Health care standard deduction.

Sec. 103. Increase in basic standard deduction.

Sec. 104. Refundable credit for State and local income, sales, and real
and personal property taxes.

Sec. 105. Earned income child credit and earned income credit for
childless taxpayers.

Sec. 106. Repeal of individual alternative minimum tax.

Sec. 107. Termination of various exclusions, exemptions, deductions, and
credits.

TITLE II--CORPORATE AND BUSINESS INCOME TAX REFORMS

Sec. 201. Corporate flat tax.

Sec. 202. Treatment of travel on corporate aircraft.

Sec. 203. Termination of various preferential treatments.

Sec. 204. Elimination of tax expenditures that subsidize inefficiencies
in the health care system.

Sec. 205. Pass-through business entity transparency.

Sec. 206. Modification of effective date of leasing provisions of the
American Jobs Creation Act of 2004.

Sec. 207. Revaluation of LIFO inventories of large integrated oil
companies.

Sec. 208. Modifications of foreign tax credit rules applicable to large
integrated oil companies which are dual capacity taxpayers.

Sec. 209. Repeal of lower of cost or market value of inventory
rule.

Sec. 210. Reinstitution of per country foreign tax credit.

Sec. 211. Application of rules treating inverted corporations as
domestic corporations to certain transactions occurring after March 20,
2002.

TITLE III--OTHER PROVISIONS

Subtitle A--Improvements in Tax Compliance

Sec. 301. Information reporting on payments to corporations.

Sec. 302. Broker reporting of customer's basis in securities
transactions.

Sec. 303. Additional reporting requirements by regulation.

Sec. 304. Increase in information return penalties.

Sec. 305. E-filing requirement for certain large organizations.

Sec. 306. Implementation of standards clarifying when employee leasing
companies can be held liable for their clients' Federal employment
taxes.

Sec. 307. Modification of collection due process procedures for
employment tax liabilities.

Sec. 308. Expansion of IRS access to information in National Directory
of New Hires for tax administration purposes.

Sec. 309. Disclosure of prisoner return information to Federal Bureau of
Prisons.

Sec. 310. Modification of criminal penalties for willful failures
involving tax payments and filing requirements.

Sec. 311. Understatement of taxpayer liability by return
preparers.

Sec. 312. Penalties for failure to file certain returns
electronically.

Sec. 313. Penalty for filing erroneous refund claims.

Subtitle B--Requiring Economic Substance

Sec. 321. Clarification of economic substance doctrine.

Sec. 322. Penalty for understatements attributable to transactions
lacking economic substance, etc.

Sec. 323. Denial of deduction for interest on underpayments attributable
to noneconomic substance transactions.

Subtitle C--Miscellaneous

Sec. 331. Denial of deduction for punitive damages.

TITLE IV--TECHNICAL AND CONFORMING AMENDMENTS; SUNSET

Sec. 401. Technical and conforming amendments.

Sec. 402. Sunset.

SEC. 2. PURPOSE.

The purpose of this Act is to amend the Internal Revenue Code of 1986--

(1) to make the Federal individual income tax system simpler, fairer,
and more transparent by--

(A) recognizing the overall Federal, State, and local tax burden on
individual Americans, especially the regressive nature of State and local
taxes, and providing a Federal income tax credit for State and local
income, sales, and property taxes,

(B) providing for an earned income tax credit for childless taxpayers
and a new earned income child credit,

(C) repealing the individual alternative minimum tax,

(D) increasing the basic standard deduction and maintaining itemized
deductions for principal residence mortgage interest and charitable
contributions,

(E) reducing the number of exclusions, exemptions, deductions, and
credits, and

(F) treating all income equally,

(2) to make the Federal corporate income tax rate a flat 35 percent and
eliminate special tax preferences that favor particular types of businesses
or activities, and

(3) to partially offset the Federal budget deficit through the increased
fiscal responsibility resulting from these reforms.

TITLE I--INDIVIDUAL INCOME TAX REFORMS

SEC. 101. 3 PROGRESSIVE INDIVIDUAL INCOME TAX RATES FOR ALL FORMS OF
INCOME.

(a) Married Individuals Filing Joint Returns and Surviving Spouses- The
table contained in section 1(a) is amended to read as follows:

`If taxable income is:

The tax is:

Not over $30,000

15% of taxable income.

Over $30,000 but not over $120,000

$4,500, plus 25% of the excess over $30,000

Over $120,000

$27,000, plus 35% of the excess over $120,000'.

(b) Heads of Households- The table contained in section 1(b) is amended to
read as follows:

`If taxable income is:

The tax is:

Not over $16,000

15% of taxable income.

Over $16,000 but not over $105,000

$2,400, plus 25% of the excess over $16,000

Over $105,000

$24,650, plus 35% of the excess over $105,000'.

(c) Unmarried Individuals (Other Than Surviving Spouses and Heads of
Households)- The table contained in section 1(c) is amended to read as
follows:

`If taxable income is:

The tax is:

Not over $15,000

15% of taxable income.

Over $15,000 but not over $60,000

$2,250, plus 25% of the excess over $15,000

Over $60,000

$13,500, plus 35% of the excess over $60,000'.

(d) Married Individuals Filing Separate Returns- The table contained in
section 1(d) is amended to read as follows:

`If taxable income is:

The tax is:

Not over $15,000

15% of taxable income.

Over $15,000 but not over $60,000

$2,250, plus 25% of the excess over $15,000

Over $60,000

$13,500, plus 35% of the excess over $60,000'.

(e) Conforming Amendments to Inflation Adjustment- Section 1(f) is
amended--

(1) by striking `1993' in paragraph (1) and inserting `2008',

(2) by striking `except as provided in paragraph (8)' in paragraph
(2)(A),

(3) by striking `1992' in paragraph (3)(B) and inserting `2007',

(4) by striking paragraphs (7) and (8), and

(5) by striking `Phaseout of Marriage Penalty in 15-Percent Bracket;' in
the heading thereof.

(f) Repeal of Rate Differential for Capital Gains and Dividends-

(1) REPEAL OF 2003 RATE REDUCTION- Section 303 of the Jobs and Growth
Tax Relief Reconciliation Act of 2003 is amended by striking `December 3,
2008' and inserting `December 31, 2007'.

(2) TERMINATION OF PRE-2003 CAPITAL GAIN RATE DIFFERENTIAL- Section 1(h)
is amended (after the application of paragraph (1)) by adding at the end the
following new paragraph:

`(13) TERMINATION- This section shall not apply to taxable years
beginning after December 31, 2007.'.

(g) Additional Conforming Amendments-

(1) Section 1 is amended by striking subsection (i).

(2) The Internal Revenue Code of 1986 is amended by striking `calendar
year 1992' each place it appears and inserting `calendar year 2007'.

(3) Section 1445(e)(1) (after the application of subsection (g)(1)) is
amended by striking `(or, to the extent provided in regulations, 20
percent)'.

(h) Effective Date- The amendments made by this section shall apply to
taxable years beginning after December 31, 2007.

SEC. 102. HEALTH CARE STANDARD DEDUCTION.

(a) In General- Section 62(a) (defining adjusted gross income) is amended
by inserting after paragraph (21) the following new paragraph:

`(22) INDIVIDUAL SHARED RESPONSIBILITY PAYMENTS-

`(A) IN GENERAL- In the case of a taxpayer with gross income for the
taxable year exceeding 100 percent of the poverty line (adjusted for the
size of the family involved) for the calendar year in which such taxable
year begins and who is enrolled in a HAPI plan under the Healthy Americans
Act, the deduction allowable under section 213 by reason of subsection
(d)(1)(D) thereof (determined without regard to any income limitation
under subsection (a) thereof) in an amount equal to the applicable
fraction times, in the case of--

`(i) coverage of an individual, $6,025,

`(ii) coverage of a married couple or domestic partnership (as
determined by a State) without dependent children, $12,050,

`(iii) coverage of an unmarried individual with 1 or more dependent
children, $8,610, plus $2,000 for each dependent child, and

`(iv) coverage of a married couple or domestic partnership (as
determined by a State) with 1 or more dependent children, $15,210, plus
$2,000 for each dependent child.

`(B) APPLICABLE FRACTION- For purposes of subparagraph (A), the
applicable fraction is the fraction (not to exceed 1)--

`(i) the numerator of which is the gross income of the taxpayer for
the taxable year expressed as a percentage of the poverty line (adjusted
for the size of the family involved) minus such poverty line for the
calendar year in which such taxable year begins, and

`(ii) the denominator of which is 400 percent of the poverty line
(adjusted for the size of the family involved) minus such poverty
line.

`(C) PHASEOUT OF DEDUCTION AMOUNT-

`(i) IN GENERAL- The amount otherwise determined under subparagraph
(A) for any taxable year shall be reduced by the amount determined under
clause (ii).

`(ii) AMOUNT OF REDUCTION- The amount determined under this clause
shall be the amount which bears the same ratio to the amount determined
under subparagraph (A) as--

`(I) the excess of the taxpayer's modified adjusted gross income
for such taxable year, over $62,500 ($125,000 in the case of a joint
return), bears to

`(II) $62,500 ($125,000 in the case of a joint
return).

Any amount determined under this clause which is not a multiple of
$1,000 shall be rounded to the next lowest $1,000.

`(D) INFLATION ADJUSTMENT- In the case of any taxable year beginning
in a calendar year after 2009, each dollar amount contained in
subparagraph (A) and subparagraph (C)(ii)(I) shall be increased by an
amount equal to such dollar amount, multiplied by the cost-of-living
adjustment determined under section 1(f)(3) for the calendar year in which
the taxable year begins, determined by substituting `calendar year 2008'
for `calendar year 1992' in subparagraph (B) thereof. Any increase
determined under the preceding sentence shall be rounded to the nearest
multiple of $50 ($1,000 in the case of the dollar amount contained in
subparagraph (C)(ii)(I)).

`(E) DETERMINATION OF MODIFIED ADJUSTED GROSS INCOME-

`(i) IN GENERAL- For purposes of this paragraph, the term `modified
adjusted gross income' means adjusted gross income--

`(ii) determined without regard to this section and sections 86,
135, 137, 199, 221, 222, 911, 931, and 933, and

`(iii) increased by--

`(I) the amount of interest received or accrued during the taxable
year which is exempt from tax under this title, and

`(II) the amount of any social security benefits (as defined in
section 86(d)) received or accrued during the taxable
year.

`(F) POVERTY LINE- For purposes of this paragraph, the term `poverty
line' has the meaning given such term in section 673(2) of the Community
Health Services Block Grant Act (42 U.S.C. 9902(2)), including any
revision required by such section.'.

(b) Conforming Amendment- Section 213(d)(1)(D) is amended by inserting
`amounts paid under section 3421 and' after `including'.

(c) Effective Date- The amendments made by this section shall apply to
taxable years beginning after December 31, 2007.

SEC. 103. INCREASE IN BASIC STANDARD DEDUCTION.

(a) In General- Paragraph (2) of section 63(c) (defining standard
deduction) is amended to read as follows:

`(2) BASIC STANDARD DEDUCTION- For purposes of paragraph (1), the basic
standard deduction is--

`(A) 200 percent of the dollar amount in effect under subparagraph (C)
for the taxable year in the case of--

`(i) a joint return, or

`(ii) a surviving spouse (as defined in section 2(a)),

`(B) $26,250 in the case of a head of household (as defined in section
2(b)), reduced by any deduction allowed under section 62(a)(22) for such
taxable year, or

`(C) $15,000 in any other case, reduced by any deduction allowed under
section 62(a)(22) for such taxable year.'.

(b) Conforming Amendment to Inflation Adjustment- Section 63(c)(4)(B)(i)
is amended by striking `(2)(B), (2)(C), or'.

(c) Effective Date- The amendments made by this section shall apply to
taxable years beginning after December 31, 2007.

SEC. 104. REFUNDABLE CREDIT FOR STATE AND LOCAL INCOME, SALES, AND REAL AND
PERSONAL PROPERTY TAXES.

(a) General Rule- Subpart C of part IV of subchapter A of chapter 1
(relating to refundable credits) is amended by redesignating section 36 as
section 37 and by inserting after section 35 the following new section:

`SEC. 36. CREDIT FOR STATE AND LOCAL INCOME, SALES, AND REAL AND PERSONAL
PROPERTY TAXES.

`(a) Allowance of Credit- In the case of an individual, there shall be
allowed as a credit against the tax imposed by this subtitle for the taxable
year an amount equal to 10 percent of the qualified State and local taxes paid
by the taxpayer for such year.

`(b) Qualified State and Local Taxes- For purposes of this section, the
term `qualified State and local taxes' means--

`(1) State and local income taxes,

`(2) State and local general sales taxes,

`(3) State and local real property taxes, and

`(4) State and local personal property taxes.

`(c) Definitions and Special Rules- For purposes of this section--

`(1) STATE OR LOCAL TAXES- A State or local tax includes only a tax
imposed by a State, a possession of the United States, or a political
subdivision of any of the foregoing, or by the District of Columbia.

`(2) GENERAL SALES TAXES-

`(A) IN GENERAL- The term `general sales tax' means a tax imposed at
one rate with respect to the sale at retail of a broad range of classes of
items.

`(B) APPLICATION OF RULES- Rules similar to the rules under
subparagraphs (C), (D), (E), (F), (G), and (H) of section 164(b)(5) shall
apply.

`(3) PERSONAL PROPERTY TAXES- The term `personal property tax' means an
ad valorem tax which is imposed on an annual basis in respect of personal
property.

`(4) APPLICATION OF RULES TO PROPERTY TAXES- Rules similar to the rules
of subsections (c) and (d) of section 164 shall apply.

`(5) NO CREDIT FOR MARRIED INDIVIDUALS FILING SEPARATE RETURNS- If the
taxpayer is a married individual (within the meaning of section 7703), this
section shall apply only if the taxpayer and the taxpayer's spouse file a
joint return for the taxable year.

`(6) DENIAL OF CREDIT TO DEPENDENTS- No credit shall be allowed under
this section to any individual with respect to whom a deduction under
section 151 is allowable to another taxpayer for a taxable year beginning in
the calendar year in which such individual's taxable year begins.

`(7) DENIAL OF DOUBLE BENEFIT- Any amount taken into account in
determining the credit allowable under this section may not be taken into
account in determining any credit or deduction under any other provision of
this chapter.'.

(b) Technical Amendments-

(1) Paragraph (2) of section 1324(b) of title 31, United States Code, is
amended by inserting `or from section 36 of such Code' before the period at
the end.

(2) The table of sections for subpart C of part IV of subchapter A of
chapter 1 is amended by striking the item relating to section 36 and
inserting the following:

`Sec. 36. Credit for state and local income, sales, and real and
personal property taxes.

`Sec. 37. Overpayments of tax.'.

(c) Report Regarding Use of Credit by Renters- Not later than 180 days
after the date of the enactment of this Act, the Secretary of the Treasury
shall report to the Committee on Finance of the Senate and the Committee on
Ways and Means of the House of Representatives recommendations regarding the
treatment of a portion of rental payments in a manner similar to real property
taxes under section 36 of the Internal Revenue Code of 1986 (as added by this
section).

(d) Effective Date- The amendments made by this section shall apply to
taxable years beginning after December 31, 2007.

SEC. 105. EARNED INCOME CHILD CREDIT AND EARNED INCOME CREDIT FOR CHILDLESS
TAXPAYERS.

(a) In General- Subsection (a) of section 32 (relating to earned income)
is amended to read as follows:

`(a) Allowance of Earned Income Child Credit and Earned Income Credit-

`(1) IN GENERAL- There shall be allowed as a credit against the tax
imposed by this subtitle for the taxable year--

`(A) in the case of any eligible individual with 1 or more qualifying
children, an amount equal to the earned income child credit amount,
and

`(B) in the case of any eligible individual with no qualifying
children, an amount equal to the earned income credit amount.

`(2) EARNED INCOME CHILD CREDIT AMOUNT- For purposes of this section,
the earned income child credit amount is equal to the sum of--

`(A) the credit percentage of so much of the taxpayer's earned income
for the taxable year as does not exceed the earned income limit amount,
plus

`(B) the supplemental child credit amount determined under subsection
(n) for such taxable year.

`(3) EARNED INCOME CREDIT AMOUNT- For purposes of this section, the
earned income credit amount is equal to the credit percentage of so much of
the taxpayer's earned income for the taxable year as does not exceed the
earned income limit amount.

`(4) LIMITATION- The amount of the credit allowable to a taxpayer under
paragraph (2)(A) or (3) for any taxable year shall not exceed the excess (if
any) of--

`(A) the credit percentage of the earned income amount, over

`(B) the phaseout percentage of so much of the adjusted gross income
(or, if greater, the earned income) of the taxpayer for the taxable year
as exceeds the phaseout amount.'.

(b) Supplemental Child Credit Amount- Section 32 is amended by adding at
the end the following new subsection:

`(n) Supplemental Child Credit Amount-

`(1) IN GENERAL- For purposes of subsection (a)(2)(B), the supplemental
child credit amount for any taxable year is equal to the lesser of--

`(A) the credit which would be allowed under section 24 for such
taxable year without regard to the limitation under section 24(b)(3) with
respect to any qualifying child as defined under subsection (c)(3),
or

`(B) the amount by which the aggregate amount of credits allowed by
subpart A for such taxable year would increase if the limitation imposed
by section 24(b)(3) were increased by the excess (if any) of--

`(i) 15 percent of so much of the taxpayer's earned income which is
taken into account in computing taxable income for the taxable year as
exceeds $10,000, or

`(ii) in the case of a taxpayer with 3 or more qualifying children
(as so defined), the excess (if any) of--

`(I) the taxpayer's social security taxes for the taxable year,
over

`(II) the credit allowed under this section for the taxable
year.

The amount of the credit allowed under this subsection shall not be
treated as a credit allowed under subpart A and shall reduce the amount of
credit otherwise allowable under section 24(a) without regard to section
24(b)(3).

`(2) SOCIAL SECURITY TAXES- For purposes of paragraph (1)--

`(A) IN GENERAL- The term `social security taxes' means, with respect
to any taxpayer for any taxable year--

`(i) the amount of the taxes imposed by section 3101 and 3201(a) on
amounts received by the taxpayer during the calendar year in which the
taxable year begins,

`(ii) 50 percent of the taxes imposed by section 1401 on the
self-employment income of the taxpayer for the taxable year,
and

`(iii) 50 percent of the taxes imposed by section 3211(a)(1) on
amounts received by the taxpayer during the calendar year in which the
taxable year begins.

`(B) COORDINATION WITH SPECIAL REFUND OF SOCIAL SECURITY TAXES- The
term `social security taxes' shall not include any taxes to the extent the
taxpayer is entitled to a special refund of such taxes under section
6413(c).

`(C) SPECIAL RULE- Any amounts paid pursuant to an agreement under
section 3121(l) (relating to agreements entered into by American employers
with respect to foreign affiliates) which are equivalent to the taxes
referred to in subparagraph (A)(i) shall be treated as taxes referred to
in such paragraph.

`(3) INFLATION ADJUSTMENT- In the case of any taxable year beginning in
a calendar year after 2007, the $10,000 amount contained in paragraph (1)(B)
shall be increased by an amount equal to--

`(A) such dollar amount, multiplied by

`(B) the cost-of-living adjustment determined under section 1(f)(3)
for the calendar year in which the taxable year begins, determined by
substituting `calendar year 2000' for `calendar year 1992' in subparagraph
(B) thereof.

`Any increase determined under the preceding sentence shall be rounded
to the nearest multiple of $50.'.

(c) Conforming Amendment- Section 24(d) is amended by adding at the end
the following new paragraph:

`(4) TERMINATION- This subsection shall not apply with respect to any
taxable year beginning after December 31, 2007.'.

(d) Certain Treatment of Earned Income Made Permanent- Clause (vi) of
section 32(c)(2)(B) is amended to read as follows:

`(vi) a taxpayer may elect to treat amounts excluded from gross
income by reason of section 112 as earned income.'.

(e) Repeal of Disqualified Investment Income Test- Subsection (i) of
section 32 is repealed.

(f) Effective Date- The amendments made by this section shall apply to
taxable years beginning after December 31, 2007.

SEC. 106. REPEAL OF INDIVIDUAL ALTERNATIVE MINIMUM TAX.

(a) In General- Section 55(a) (relating to alternative minimum tax
imposed) is amended by adding at the end the following new flush sentence:

`For purposes of this title, the tentative minimum tax on any taxpayer
other than a corporation for any taxable year beginning after December 31,
2007, shall be zero.'.

(b) Modification of Limitation on Use of Credit for Prior Year Minimum Tax
Liability- Subsection (c) of section 53 (relating to credit for prior year
minimum tax liability) is amended to read as follows:

`(c) Limitation-

`(1) IN GENERAL- Except as provided in paragraph (2), the credit
allowable under subsection (a) for any taxable year shall not exceed the
excess (if any) of--

`(A) the regular tax liability of the taxpayer for such taxable year
reduced by the sum of the credits allowable under subparts A, B, D, E, and
F of this part, over

`(B) the tentative minimum tax for the taxable year.

`(2) TAXABLE YEARS BEGINNING AFTER 2007- In the case of any taxable year
beginning after 2007, the credit allowable under subsection (a) to a
taxpayer other than a corporation for any taxable year shall not exceed 90
percent of the regular tax liability of the taxpayer for such taxable year
reduced by the sum of the credits allowable under subparts A, B, D, E, and F
of this part.'.

(c) Effective Date- The amendments made by this section shall apply to
taxable years beginning after December 31, 2007.

SEC. 107. TERMINATION OF VARIOUS EXCLUSIONS, EXEMPTIONS, DEDUCTIONS, AND
CREDITS.

(a) In General- Subchapter C of chapter 90 (relating to provisions
affecting more than one subtitle) is amended by adding at the end the
following new section:

`SEC. 7875. TERMINATION OF CERTAIN PROVISIONS.

`The following provisions shall not apply to taxable years beginning after
December 31, 2007:

`(1) Section 67 (relating to 2-percent floor on miscellaneous itemized
deductions).

`(2) Section 74(c) (relating to exclusion of certain employee
achievement awards).

`(3) Section 79 (relating to exclusion of group-term life insurance
purchased for employees).

`(4) Section 119 (relating to exclusion of meals or lodging furnished
for the convenience of the employer).

`(5) Section 125 (relating to exclusion of cafeteria plan
benefits).

`(6) Section 132 (relating to certain fringe benefits), except with
respect to subsection (a)(5) thereof (relating to exclusion of qualified
transportation fringe).

`(7) Section 163(h)(4)(A)(i)(II) (relating to definition of qualified
residence).

`(8) Section 165(d) (relating to deduction for wagering losses).

`(9) Section 217 (relating to deduction for moving expenses).

`(10) Section 454 (relating to deferral of tax on obligations issued at
discount).

`(11) Section 501(c)(9) (relating to tax-exempt status of voluntary
employees' beneficiary associations).

`(12) Section 911 (relating to exclusion of earned income of citizens or
residents of the United States living abroad).

`(13) Section 912 (relating to exemption for certain
allowances).'.

(b) Conforming Amendment- The table of sections for subchapter C of
chapter 90 is amended by adding at the end the following new item:

`Sec. 7875. Termination of certain provisions.'.

TITLE II--CORPORATE AND BUSINESS INCOME TAX REFORMS

SEC. 201. CORPORATE FLAT TAX.

(a) In General- Subsection (b) of section 11 (relating to tax imposed) is
amended to read as follows:

`(b) Amount of Tax- The amount of tax imposed by subsection (a) shall be
equal to 35 percent of the taxable income.'.

(b) Conforming Amendments-

(1) Section 280C(c)(3)(B)(ii)(II) is amended by striking `maximum rate
of tax under section 11(b)(1)' and inserting `rate of tax under section
11(b)'.

(2) Sections 860E(e)(2)(B), 860E(e)(6)(A)(ii), 860K(d)(2)(A)(ii),
860K(e)(1)(B)(ii), 1446(b)(2)(B), and 7874(e)(1)(B) are each amended by
striking `highest rate of tax specified in section 11(b)(1)' and inserting
`rate of tax specified in section 11(b)'.

(3) Section 904(b)(3)(D)(ii) is amended by striking `(determined without
regard to the last sentence of section 11(b)(1))'.

(4) Section 962 is amended by striking subsection (c) and by
redesignating subsection (d) as subsection (c).

(5) Section 1201(a) is amended by striking `(determined without regard
to the last 2 sentences of section 11(b)(1))'.

(6) Section 1561(a) is amended--

(A) by striking paragraph (1) and by redesignating paragraphs (2),
(3), and (4) as paragraphs (1), (2), and (3), respectively,

(B) by striking `The amounts specified in paragraph (1), the' and
inserting `The',

(C) by striking `paragraph (2)' and inserting `paragraph
(1)',

(D) by striking `paragraph (3)' both places it appears and inserting
`paragraph (2)',

(E) by striking `paragraph (4)' and inserting `paragraph (3)',
and

(F) by striking the fourth sentence.

(7) Subsection (b) of section 1561 is amended to read as follows:

`(b) Certain Short Taxable Years- If a corporation has a short taxable
year which does not include a December 31 and is a component member of a
controlled group of corporations with respect to such taxable year, then for
purposes of this subtitle, the amount to be used in computing the accumulated
earnings credit under section 535(c)(2) and (3) of such corporation for such
taxable year shall be the amount specified in subsection (a)(1) divided by the
number of corporations which are component members of such group on the last
day of such taxable year. For purposes of the preceding sentence, section
1563(b) shall be applied as if such last day were substituted for December
31.'.

(c) Effective Date- The amendments made by this section shall apply to
taxable years beginning after December 31, 2007.

SEC. 202. TREATMENT OF TRAVEL ON CORPORATE AIRCRAFT.

(a) In General- Section 162 (relating to trade or business expenses) is
amended by redesignating subsection (q) as subsection (r) and by inserting
after subsection (p) the following new subsection:

`(q) Treatment of Travel on Corporate Aircraft- The rate at which an
amount allowable as a deduction under this chapter for the use of an aircraft
owned by the taxpayer is determined shall not exceed the rate at which an
amount paid or included in income by an employee of such taxpayer for the
personal use of such aircraft is determined.'.

(b) Effective Date- The amendments made by this section shall apply to
taxable years beginning after December 31, 2007.

SEC. 203. TERMINATION OF VARIOUS PREFERENTIAL TREATMENTS.

(a) In General- Section 7875, as added by section 107, is amended--

(1) by inserting `(or transactions in the case of sections referred to
in paragraphs (21), (22), (23), (24), and (27))' after `taxable years
beginning', and

(2) by adding at the end the following new paragraphs:

`(14) Section 43 (relating to enhanced oil recovery credit).

`(15) Section 263(c) (relating to intangible drilling and development
costs in the case of oil and gas wells and geothermal wells).

`(16) Section 382(l)(5) (relating to exception from net operating loss
limitations for corporations in bankruptcy proceeding).

`(17) Section 451(i) (relating to special rules for sales or
dispositions to implement Federal Energy Regulatory Commission or State
electric restructuring policy).

`(18) Section 453A (relating to special rules for nondealers), but only
with respect to the dollar limitation under subsection (b)(1) thereof and
subsection (b)(3) thereof (relating to exception for personal use and farm
property).

`(19) Section 460(e)(1) (relating to special rules for long-term home
construction contracts or other short-term construction contracts).

`(20) Section 613A (relating to percentage depletion in case of oil and
gas wells).

`(21) Section 616 (relating to development costs).

`(22) Sections 861(a)(6), 862(a)(6), 863(b)(2), 863(b)(3), and 865(b)
(relating to inventory property sales source rule exception).'.

(b) Full Tax Rate on Nuclear Decommissioning Reserve Fund- Subparagraph
(B) of section 468A(e)(2) is amended to read as follows:

`(B) RATE OF TAX- For purposes of subparagraph (A), the rate set forth
in this subparagraph is 35 percent.'.

(c) Deferral of Active Income of Controlled Foreign Corporations- Section
952 (relating to subpart F income defined) is amended by adding at the end the
following new subsection:

`(e) Special Application of Subpart-

`(1) IN GENERAL- For taxable years beginning after December 31, 2007,
notwithstanding any other provision of this subpart, the term `subpart F
income' means, in the case of any controlled foreign corporation, the income
of such corporation derived from any foreign country.

`(2) APPLICABLE RULES- Rules similar to the rules under the last
sentence of subsection (a) and subsection (d) shall apply to this
subsection.'.

(d) Deferral of Active Financing Income- Section 953(e)(10) is
amended--

(1) by striking `January 1, 2009' and inserting `January 1, 2008',
and

(2) by striking `December 31, 2008' and inserting `December 31,
2007'.

(e) Depreciation on Equipment in Excess of Alternative Depreciation
System- Section 168(g)(1) (relating to alternative depreciation system) is
amended by striking `and' at the end of subparagraph (D), by adding `and' at
the end of subparagraph (E), and by inserting after subparagraph (E) the
following new subparagraph:

`(F) notwithstanding subsection (a), any tangible property placed in
service after December 31, 2007,'.

(f) Effective Date- The amendments made by subsections (b), (c), and (d)
shall apply to taxable years beginning after December 31, 2007.

SEC. 204. ELIMINATION OF TAX EXPENDITURES THAT SUBSIDIZE INEFFICIENCIES IN
THE HEALTH CARE SYSTEM.

Not later than 180 days after the date of the enactment of this Act, the
Secretary of the Treasury shall report to the Committee on Finance of the
Senate and the Committee on Ways and Means of the House of Representatives
recommendations regarding the elimination of Federal tax incentives which
subsidize inefficiencies in the health care system and if eliminated would
result in Federal budget savings of not less than $10,000,000,000 annually.

SEC. 205. PASS-THROUGH BUSINESS ENTITY TRANSPARENCY.

Not later than 90 days after the date of the enactment of this Act, the
Secretary of the Treasury shall report to the Committee on Finance of the
Senate and the Committee on Ways and Means of the House of Representatives
regarding the implementation of additional reporting requirements with respect
to any pass-through entity with the goal of the reduction of tax avoidance
through the use of such entities. In addition, the Secretary shall develop
procedures to share such report data with State revenue agencies under the
disclosure requirements of section 6103(d) of the Internal Revenue Code of
1986.

SEC. 206. MODIFICATION OF EFFECTIVE DATE OF LEASING PROVISIONS OF THE
AMERICAN JOBS CREATION ACT OF 2004.

(a) Leases to Foreign Entities- Section 849(b) of the American Jobs
Creation Act of 2004 is amended by adding at the end the following new
paragraph:

`(5) LEASES TO FOREIGN ENTITIES- In the case of tax-exempt use property
leased to a tax-exempt entity which is a foreign person or entity, the
amendments made by this part shall apply to taxable years beginning after
December 31, 2006, with respect to leases entered into on or before March
12, 2004.'.

(b) Effective Date- The amendment made by this section shall take effect
as if included in the enactment of the American Jobs Creation Act of 2004.

SEC. 207. REVALUATION OF LIFO INVENTORIES OF LARGE INTEGRATED OIL
COMPANIES.

(a) General Rule- Notwithstanding any other provision of law, if a
taxpayer is an applicable integrated oil company for its last taxable year
ending in calendar year 2006, the taxpayer shall--

(1) increase, effective as of the close of such taxable year, the value
of each historic LIFO layer of inventories of crude oil, natural gas, or any
other petroleum product (within the meaning of section 4611) by the layer
adjustment amount, and

(2) decrease its cost of goods sold for such taxable year by the
aggregate amount of the increases under paragraph (1).

If the aggregate amount of the increases under paragraph (1) exceed the
taxpayer's cost of goods sold for such taxable year, the taxpayer's gross
income for such taxable year shall be increased by the amount of such
excess.

(b) Layer Adjustment Amount- For purposes of this section--

(1) IN GENERAL- The term `layer adjustment amount' means, with respect
to any historic LIFO layer, the product of--

(A) $18.75, and

(B) the number of barrels of crude oil (or in the case of natural gas
or other petroleum products, the number of barrel-of-oil equivalents)
represented by the layer.

(2) BARREL-OF-OIL EQUIVALENT- The term `barrel-of-oil equivalent' has
the meaning given such term by section 29(d)(5) (as in effect before its
redesignation by the Energy Tax Incentives Act of 2005).

(c) Application of Requirement-

(1) NO CHANGE IN METHOD OF ACCOUNTING- Any adjustment required by this
section shall not be treated as a change in method of accounting.

(2) UNDERPAYMENTS OF ESTIMATED TAX- No addition to the tax shall be made
under section 6655 of the Internal Revenue Code of 1986 (relating to failure
by corporation to pay estimated tax) with respect to any underpayment of an
installment required to be paid with respect to the taxable year described
in subsection (a) to the extent such underpayment was created or increased
by this section.

(d) Applicable Integrated Oil Company- For purposes of this section, the
term `applicable integrated oil company' means an integrated oil company (as
defined in section 291(b)(4) of the Internal Revenue Code of 1986) which has
an average daily worldwide production of crude oil of at least 500,000 barrels
for the taxable year and which had gross receipts in excess of $1,000,000,000
for its last taxable year ending during calendar year 2006. For purposes of
this subsection all persons treated as a single employer under subsections (a)
and (b) of section 52 of the Internal Revenue Code of 1986 shall be treated as
1 person and, in the case of a short taxable year, the rule under section
448(c)(3)(B) shall apply.

SEC. 208. MODIFICATIONS OF FOREIGN TAX CREDIT RULES APPLICABLE TO LARGE
INTEGRATED OIL COMPANIES WHICH ARE DUAL CAPACITY TAXPAYERS.

(a) In General- Section 901 (relating to credit for taxes of foreign
countries and of possessions of the United States) is amended by redesignating
subsection (n) as subsection (o) and by inserting after subsection (l) the
following new subsection:

`(m) Special Rules Relating to Large Integrated Oil Companies Which Are
Dual Capacity Taxpayers-

`(1) GENERAL RULE- Notwithstanding any other provision of this chapter,
any amount paid or accrued by a dual capacity taxpayer which is a large
integrated oil company to a foreign country or possession of the United
States for any period shall not be considered a tax--

`(A) if, for such period, the foreign country or possession does not
impose a generally applicable income tax, or

`(B) to the extent such amount exceeds the amount (determined in
accordance with regulations) which--

`(i) is paid by such dual capacity taxpayer pursuant to the
generally applicable income tax imposed by the country or possession,
or

`(ii) would be paid if the generally applicable income tax imposed
by the country or possession were applicable to such dual capacity
taxpayer.

Nothing in this paragraph shall be construed to imply the proper
treatment of any such amount not in excess of the amount determined under
subparagraph (B).

`(2) DUAL CAPACITY TAXPAYER- For purposes of this subsection, the term
`dual capacity taxpayer' means, with respect to any foreign country or
possession of the United States, a person who--

`(A) is subject to a levy of such country or possession, and

`(B) receives (or will receive) directly or indirectly a specific
economic benefit (as determined in accordance with regulations) from such
country or possession.

`(3) GENERALLY APPLICABLE INCOME TAX- For purposes of this
subsection--

`(A) IN GENERAL- The term `generally applicable income tax' means an
income tax (or a series of income taxes) which is generally imposed under
the laws of a foreign country or possession on income derived from the
conduct of a trade or business within such country or possession.

`(B) EXCEPTIONS- Such term shall not include a tax unless it has
substantial application, by its terms and in practice, to--

`(i) persons who are not dual capacity taxpayers, and

`(ii) persons who are citizens or residents of the foreign country
or possession.

`(4) LARGE INTEGRATED OIL COMPANY- For purposes of this subsection, the
term `large integrated oil company' means, with respect to any taxable year,
an integrated oil company (as defined in section 291(b)(4)) which--

`(A) had gross receipts in excess of $1,000,000,000 for such taxable
year, and

`(B) has an average daily worldwide production of crude oil of at
least 500,000 barrels for such taxable year.'

(b) Effective Date-

(1) IN GENERAL- The amendments made by this section shall apply to taxes
paid or accrued in taxable years beginning after the date of the enactment
of this Act.

(2) CONTRARY TREATY OBLIGATIONS UPHELD- The amendments made by this
section shall not apply to the extent contrary to any treaty obligation of
the United States.

SEC. 209. REPEAL OF LOWER OF COST OR MARKET VALUE OF INVENTORY RULE.

(a) In General- Subsection (a) of section 471 (relating to general rules
for inventories) is amended to read as follows:

`(a) General Rule- Whenever in the opinion of the Secretary the use of
inventories is necessary in order clearly to determine the income of the
taxpayer, inventories shall be valued at cost.'.

(b) Effective Date- The amendment made by this section shall apply to
taxable years beginning after the date of the enactment of this Act.

SEC. 210. REINSTITUTION OF PER COUNTRY FOREIGN TAX CREDIT.

(a) In General- Subsection (a) of section 904 (relating to limitation on
credit) is amended to read as follows:

`(a) Limitation- The amount of the credit in respect of the tax paid or
accrued to any foreign country or possession of the United States shall not
exceed the same proportion of the tax against which such credit is taken which
the taxpayer's taxable income from sources within such country or possession
(but not in excess of the taxpayer's entire taxable income) bears to such
taxpayer's entire taxable income for the same taxable year.'.

(b) Effective Date- The amendment made by this section shall apply to
taxable years beginning after December 31, 2007.

SEC. 211. APPLICATION OF RULES TREATING INVERTED CORPORATIONS AS DOMESTIC
CORPORATIONS TO CERTAIN TRANSACTIONS OCCURRING AFTER MARCH 20, 2002.

(a) In General- Section 7874(b) (relating to inverted corporations treated
as domestic corporations) is amended to read as follows:

`(b) Inverted Corporations Treated as Domestic Corporations-

`(1) IN GENERAL- Notwithstanding section 7701(a)(4), a foreign
corporation shall be treated for purposes of this title as a domestic
corporation if such corporation would be a surrogate foreign corporation if
subsection (a)(2) were applied by substituting `80 percent' for `60
percent'.

`(2) SPECIAL RULE FOR CERTAIN TRANSACTIONS OCCURRING AFTER MARCH 20,
2002-

`(A) IN GENERAL- If--

`(i) paragraph (1) does not apply to a foreign corporation,
but

`(ii) paragraph (1) would apply to such corporation if, in addition
to the substitution under paragraph (1), subsection (a)(2) were applied
by substituting `March 20, 2002' for `March 4, 2003' each place it
appears,

then paragraph (1) shall apply to such corporation but only with
respect to taxable years of such corporation beginning after December 31,
2006.

`(B) SPECIAL RULES- Subject to such rules as the Secretary may
prescribe, in the case of a corporation to which paragraph (1) applies by
reason of this paragraph--

`(i) the corporation shall be treated, as of the close of its last
taxable year beginning before January 1, 2007, as having transferred all
of its assets, liabilities, and earnings and profits to a domestic
corporation in a transaction with respect to which no tax is imposed
under this title,

`(ii) the bases of the assets transferred in the transaction to the
domestic corporation shall be the same as the bases of the assets in the
hands of the foreign corporation, subject to any adjustments under this
title for built-in losses,

`(iii) the basis of the stock of any shareholder in the domestic
corporation shall be the same as the basis of the stock of the
shareholder in the foreign corporation for which it is treated as
exchanged, and

`(iv) the transfer of any earnings and profits by reason of clause
(i) shall be disregarded in determining any deemed dividend or foreign
tax creditable to the domestic corporation with respect to such
transfer.

`(C) REGULATIONS- The Secretary may prescribe such regulations as may
be necessary or appropriate to carry out this paragraph, including
regulations to prevent the avoidance of the purposes of this
paragraph.'.

(b) Effective Date- The amendment made by this section shall apply to
taxable years beginning after December 31, 2006.

TITLE III--OTHER PROVISIONS

Subtitle A--Improvements in Tax Compliance

SEC. 301. INFORMATION REPORTING ON PAYMENTS TO CORPORATIONS.

(a) In General- Section 6041(a) (relating to payments of $600 or more) is
amended by inserting `(including any corporation other than a corporation
exempt from taxation)' after `another person'.

(b) Effective Date- The amendment made by this section shall apply to
payments made after December 31, 2007.

SEC. 302. BROKER REPORTING OF CUSTOMER'S BASIS IN SECURITIES
TRANSACTIONS.

(a) In General- Section 6045 (relating to returns of brokers) is amended
by adding at the end the following new subsection:

`(g) Additional Information Required in the Case of Securities
Transactions-

`(1) IN GENERAL- If a broker is otherwise required to make a return
under subsection (a) with respect to any applicable security, the broker
shall include in such return the information described in paragraph
(2).

`(2) ADDITIONAL INFORMATION REQUIRED-

`(A) IN GENERAL- The information required under paragraph (1) to be
shown on a return with respect to an applicable security of a customer
shall include for each reported applicable security the customer's
adjusted basis in such security.

`(B) EXEMPTION FROM REQUIREMENT- The Secretary shall issue such
regulations or guidance as necessary concerning the application of the
requirement under subparagraph (A) in cases in which a broker in making a
return does not have sufficient information to meet such requirement with
respect to the reported applicable security. Such regulations or guidance
may--

`(i) require such other information related to such adjusted basis
as the Secretary may prescribe, and

`(ii) exempt classes of cases in which the broker does not have
sufficient information to meet either the requirement under subparagraph
(A) or the requirement under clause (i).

`(3) INFORMATION TRANSFERS- To the extent provided in regulations, there
shall be such exchanges of information between brokers as such regulations
may require for purposes of enabling such brokers to meet the requirements
of this subsection.

`(4) DEFINITIONS- For purposes of this subsection, the term `applicable
security' means any--

`(A) security described in subparagraph (A) or (C) of section
475(c)(2),

`(B) interest in a regulated investment company (as defined in section
851), or

`(C) other financial instrument designated in regulations prescribed
by the Secretary.'.

(b) Determination of Basis of Certain Securities by FIFO Method- Section
1012 (relating to basis of property--cost) is amended by adding at the end the
following new sentence: `Except to the extent provided in regulations, the
basis of any applicable security reportable under section 6045 (by reason of
subsection (g) thereof) shall be determined on a first-in, first-out
method.'.

(c) Effective Date- The amendments made by this section shall apply to
sales and transfers occurring after December 31, 2007, with respect to
securities acquired before, on, or after such date.

SEC. 303. ADDITIONAL REPORTING REQUIREMENTS BY REGULATION.

The Secretary of the Treasury is authorized to issue regulations under
which with respect to payments made after December 31, 2007--

(1) any merchant acquiring bank is required to annually report to the
Secretary the gross reimbursement payments made to merchants in a calendar
year, unless the benefit of such reporting does not justify the cost of
compliance, as determined by the Secretary,

(2) any contractor receiving payments of $600 or more in a calendar year
from a particular business is required to furnish such business the
contractor's certified taxpayer identification number or be subject to
withholding on such payments at a flat rate percentage selected by the
contractor, and

(3) any Federal, State, or local government is required to report to the
Secretary any non-wage payment to procure property and services, other than
payments of interest, payments for real property, payments to tax-exempt
entities or foreign governments, intergovernmental payments, and payments
made pursuant to a classified or confidential contract.

SEC. 304. INCREASE IN INFORMATION RETURN PENALTIES.

(a) Failure To File Correct Information Returns-

(1) IN GENERAL- Section 6721(a)(1) is amended--

(A) by striking `$50' and inserting `$250', and

(B) by striking `$250,000' and inserting `$3,000,000'.

(2) REDUCTION WHERE CORRECTION IN SPECIFIED PERIOD-

(A) CORRECTION WITHIN 30 DAYS- Section 6721(b)(1) is
amended--

(i) by striking `$15' and inserting `$50',

(ii) by striking `$50' and inserting `$250', and

(iii) by striking `$75,000' and inserting `$500,000'.

(B) FAILURES CORRECTED ON OR BEFORE AUGUST 1- Section 6721(b)(2) is
amended--

(i) by striking `$30' and inserting `$100',

(ii) by striking `$50' and inserting `$250', and

(iii) by striking `$150,000' and inserting `$1,500,000'.

(3) LOWER LIMITATION FOR PERSONS WITH GROSS RECEIPTS OF NOT MORE THAN
$5,000,000- Section 6721(d)(1) is amended--

(A) in subparagraph (A)--

(i) by striking `$100,000' and inserting `$1,000,000',
and

(ii) by striking `$250,000' and inserting `$3,000,000',

(B) in subparagraph (B)--

(i) by striking `$25,000' and inserting `$175,000', and

(ii) by striking `$75,000' and inserting `$500,000', and

(C) in subparagraph (C)--

(i) by striking `$50,000' and inserting `$500,000', and

(ii) by striking `$150,000' and inserting `$1,500,000'.

(4) PENALTY IN CASE OF INTENTIONAL DISREGARD- Section 6721(e) is
amended--

(A) by striking `$100' in paragraph (2) and inserting `$500',

(B) by striking `$250,000' in paragraph (3)(A) and inserting
`$3,000,000'.

(b) Failure To Furnish Correct Payee Statements-

(1) IN GENERAL- Section 6722(a) is amended--

(A) by striking `$50' and inserting `$250', and

(B) by striking `$100,000' and inserting `$1,000,000'.

(2) PENALTY IN CASE OF INTENTIONAL DISREGARD- Section 6722(c) is
amended--

(A) by striking `$100' in paragraph (1) and inserting `$500',
and

(B) by striking `$100,000' in paragraph (2)(A) and inserting
`$1,000,000'.

(c) Failure To Comply With Other Information Reporting Requirements-
Section 6723 is amended--

(1) by striking `$50' and inserting `$250', and

(2) by striking `$100,000' and inserting `$1,000,000'.

(d) Effective Date- The amendments made by this section shall apply with
respect to information returns required to be filed on or after January 1,
2008.

SEC. 305. E-FILING REQUIREMENT FOR CERTAIN LARGE ORGANIZATIONS.

(a) In General- The first sentence of section 6011(e)(2) is amended to
read as follows: `In prescribing regulations under paragraph (1), the
Secretary shall take into account (among other relevant factors) the ability
of the taxpayer to comply at reasonable cost with the requirements of such
regulations.'.

(b) Conforming Amendment- Section 6724 is amended by striking subsection
(c).

(c) Effective Date- The amendments made by this section shall apply to
taxable years ending on or after December 31, 2008.

SEC. 306. IMPLEMENTATION OF STANDARDS CLARIFYING WHEN EMPLOYEE LEASING
COMPANIES CAN BE HELD LIABLE FOR THEIR CLIENTS' FEDERAL EMPLOYMENT TAXES.

With respect to employment tax returns required to be filed with respect
to wages paid on or after January 1, 2008, the Secretary of the Treasury shall
issue regulations establishing--

(1) standards for holding employee leasing companies jointly and
severally liable with their clients for Federal employment taxes under
chapters 21, 22, 23, and 24 of the Internal Revenue Code of 1986, and

(2) standards for holding such companies solely liable for such
taxes.

SEC. 307. MODIFICATION OF COLLECTION DUE PROCESS PROCEDURES FOR EMPLOYMENT
TAX LIABILITIES.

(a) In General- Section 6330(f) (relating to jeopardy and State refund
collection) is amended--

(1) by striking `; or' at the end of paragraph (1) and inserting a
comma,

(2) by adding `or' at the end of paragraph (2), and

(3) by inserting after paragraph (2) the following new paragraph:

`(3) the Secretary has served a disqualified employment tax
levy,'.

(b) Disqualified Employment Tax Levy- Section 6330 (relating to notice and
opportunity for hearing before levy) is amended by adding at the end the
following new subsection:

`(h) Disqualified Employment Tax Levy- For purposes of subsection (f), a
disqualified employment tax levy is any levy in connection with the collection
of employment taxes for any taxable period if the person subject to the levy
(or any predecessor thereof) requested a hearing under this section with
respect to unpaid employment taxes arising in the most recent 2-year period
before the beginning of the taxable period with respect to which the levy is
served. For purposes of the preceding sentence, the term `employment taxes'
means any taxes under chapter 21, 22, 23, or 24.'.

(c) Effective Date- The amendments made by this section shall apply to
levies served on or after January 1, 2008.

SEC. 308. EXPANSION OF IRS ACCESS TO INFORMATION IN NATIONAL DIRECTORY OF
NEW HIRES FOR TAX ADMINISTRATION PURPOSES.

(a) In General- Paragraph (3) of section 453(j) of the Social Security Act
(42 U.S.C. 653(j)) is amended to read as follows:

`(3) ADMINISTRATION OF FEDERAL TAX LAWS- The Secretary of the Treasury
shall have access to the information in the National Directory of New Hires
for purposes of administering the Internal Revenue Code of 1986.'.

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

SEC. 309. DISCLOSURE OF PRISONER RETURN INFORMATION TO FEDERAL BUREAU OF
PRISONS.

(a) Disclosure-

(1) IN GENERAL- Subsection (l) of section 6103 (relating to disclosure
of returns and return information for purposes other than tax
administration) is amended by adding at the end the following new
paragraph:

`(22) DISCLOSURE OF RETURN INFORMATION OF PRISONERS TO FEDERAL BUREAU OF
PRISONS-

`(A) IN GENERAL- Under such procedures as the Secretary may prescribe,
the Secretary may disclose return information with respect to persons
incarcerated in Federal prisons whom the Secretary believes filed or
facilitated the filing of false or fraudulent returns to the head of the
Federal Bureau of Prisons if the Secretary determines that such disclosure
is necessary to permit effective tax administration.

`(B) DISCLOSURE BY AGENCY TO EMPLOYEES- The head of the Federal Bureau
of Prisons may redisclose information received under subparagraph
(A)--

`(i) only to those officers and employees of the Bureau who are
personally and directly engaged in taking administrative actions to
address violations of administrative rules and regulations of the prison
facility, and

`(ii) solely for the purposes described in subparagraph
(C).

`(C) RESTRICTION ON USE OF DISCLOSED INFORMATION- Return information
disclosed under this paragraph may be used only for the purposes
of--

`(i) preventing the filing of false or fraudulent returns;
and

`(ii) taking administrative actions against individuals who have
filed or attempted to file false or fraudulent returns.'.

(2) PROCEDURES AND RECORD KEEPING RELATED TO DISCLOSURE- Subsection
(p)(4) of section 6103 is amended--

(A) by striking `(14), or (17)' in the matter before subparagraph (A)
and inserting `(14), (17), or (22)', and

(B) by striking `(9), or (16)' in subparagraph (F)(i) and inserting
`(9), (16), or (22)'.

(3) EVALUATION BY TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION-
Paragraph (3) of section 7803(d) is amended by striking `and' at the end of
subparagraph (A), by striking the period at the end of subparagraph (B) and
inserting `; and', and by adding at the end the following new
subparagraph:

`(C) not later than 3 years after the date of the enactment of section
6103(l)(22), submit a written report to Congress on the implementation of
such section.'.

(b) Annual Reports-

(1) IN GENERAL- The Secretary of the Treasury shall submit to Congress
and make publicly available an annual report on the filing of false and
fraudulent returns by individuals incarcerated in Federal and State
prisons.

(2) CONTENTS OF REPORT- The report submitted under paragraph (1) shall
contain statistics on the number of false or fraudulent returns associated
with each Federal and State prison and such other information that the
Secretary determines is appropriate.

(3) EXCHANGE OF INFORMATION- For the purpose of gathering information
necessary for the reports required under paragraph (1), the Secretary of the
Treasury shall enter into agreements with the head of the Federal Bureau of
Prisons and the heads of State agencies charged with responsibility for
administration of State prisons under which the head of the Bureau or Agency
provides to the Secretary not less frequently than annually the names and
other identifying information of prisoners incarcerated at each facility
administered by the Bureau or Agency.

(c) Effective Date- The amendments made by this section shall apply to
disclosures on or after January 1, 2008.

SEC. 310. MODIFICATION OF CRIMINAL PENALTIES FOR WILLFUL FAILURES INVOLVING
TAX PAYMENTS AND FILING REQUIREMENTS.

(a) Increase in Penalty for Attempt To Evade or Defeat Tax- Section 7201
(relating to attempt to evade or defeat tax) is amended--

(1) by striking `$100,000' and inserting `$500,000',

(2) by striking `$500,000' and inserting `$1,000,000', and

(3) by striking `5 years' and inserting `10 years'.

(b) Modification of Penalties for Willful Failure To File Return, Supply
Information, or Pay Tax-

(1) IN GENERAL- Section 7203 (relating to willful failure to file
return, supply information, or pay tax) is amended--

(A) in the first sentence--

(i) by striking `Any person' and inserting the
following:

`(a) In General- Any person', and

(ii) by striking `$25,000' and inserting `$50,000',

(B) in the third sentence, by striking `section' and inserting
`subsection', and

(C) by adding at the end the following new subsection:

`(b) Aggravated Failure To File-

`(1) IN GENERAL- In the case of any failure described in paragraph (2),
the first sentence of subsection (a) shall be applied by
substituting--

`(A) `felony' for `misdemeanor',

`(B) `$250,000 ($500,000' for `$50,000 ($100,000', and

`(C) `5 years' for `1 year'.

`(2) FAILURE DESCRIBED- A failure described in this paragraph is--

`(A) a failure to make a return described in subsection (a) for any 3
taxable years occurring during any period of 5 consecutive taxable years
if the aggregate tax liability for such period is not less than $50,000,
or

`(B) a failure to make a return if the tax liability giving rise to
the requirement to make such return is attributable to an activity which
is a felony under any State or Federal law.'.

(2) PENALTY MAY BE APPLIED IN ADDITION TO OTHER PENALTIES- Section 7204
(relating to fraudulent statement or failure to make statement to employees)
is amended by striking `the penalty provided in section 6674' and inserting
`the penalties provided in sections 6674 and 7203(b)'.

(c) Fraud and False Statements- Section 7206 (relating to fraud and false
statements) is amended--

(1) by striking `$100,000' and inserting `$500,000',

(2) by striking `$500,000' and inserting `$1,000,000', and

(3) by striking `3 years' and inserting `5 years'.

(d) Increase in Monetary Limitation for Underpayment or Overpayment of Tax
Due to Fraud- Section 7206 (relating to fraud and false statements), as
amended by subsection (a)(3), is amended--

(1) by striking `Any person who--' and inserting `(a) In General- Any
person who--', and

(2) by adding at the end the following new subsection:

`(b) Increase in Monetary Limitation for Underpayment or Overpayment of
Tax Due to Fraud- If any portion of any underpayment (as defined in section
6664(a)) or overpayment (as defined in section 6401(a)) of tax required to be
shown on a return is attributable to fraudulent action described in subsection
(a), the applicable dollar amount under subsection (a) shall in no event be
less than an amount equal to such portion. A rule similar to the rule under
section 6663(b) shall apply for purposes of determining the portion so
attributable.'.

(e) Effective Date- The amendments made by this section shall apply to
actions, and failures to act, occurring after the date of the enactment of
this Act.

SEC. 311. UNDERSTATEMENT OF TAXPAYER LIABILITY BY RETURN PREPARERS.

(a) Application of Return Preparer Penalties to All Tax Returns-

(1) DEFINITION OF TAX RETURN PREPARER- Paragraph (36) of section 7701(a)
(relating to income tax preparer) is amended--

(A) by striking `income' each place it appears in the heading and the
text, and

(B) in subparagraph (A), by striking `subtitle A' each place it
appears and inserting `this title'.

(2) CONFORMING AMENDMENTS-

(A)(i) Section 6060 is amended by striking `income tax return
preparers' in the heading and inserting `tax return preparers'.

(ii) Section 6060(a) is amended--

(I) by striking `an income tax return preparer' each place it
appears and inserting `a tax return preparer',

(II) by striking `each income tax return preparer' and inserting
`each tax return preparer', and

(III) by striking `another income tax return preparer' and inserting
`another tax return preparer'.

(iii) The item relating to section 6060 in the table of sections for
subpart F of part III of subchapter A of chapter 61 is amended by striking
`income tax return preparers' and inserting `tax return
preparers'.

(iv) Subpart F of part III of subchapter A of chapter 61 is amended by
striking `Income Tax Return Preparers' in the heading and inserting
`Tax Return Preparers'.

(v) The item relating to subpart F in the table of subparts for part
III of subchapter A of chapter 61 is amended by striking `income tax
return preparers' and inserting `tax return preparers'.

(B) Section 6103(k)(5) is amended--

(i) by striking `income tax return preparer' each place it appears
and inserting `tax return preparer', and

(ii) by striking `income tax return preparers' each place it appears
and inserting `tax return preparers'.

(C)(i) Section 6107 is amended--

(I) by striking `income tax return preparer' in the heading and
inserting `tax return preparer',

(II) by striking `an income tax return preparer' each place it
appears in subsections (a) and (b) and inserting `a tax return
preparer',

(III) by striking `Income Tax Return Preparer' in the heading for
subsection (b) and inserting `Tax Return Preparer', and

(IV) in subsection (c), by striking `income tax return preparers'
and inserting `tax return preparers'.

(ii) The item relating to section 6107 in the table of sections for
subchapter B of chapter 61 is amended by striking `Income tax return
preparer' and inserting `Tax return preparer'.

(D) Section 6109(a)(4) is amended--

(i) by striking `an income tax return preparer' and inserting `a tax
return preparer', and

(ii) by striking `INCOME RETURN PREPARER' in the heading and
inserting `TAX RETURN PREPARER'.

(E) Section 6503(k)(4) is amended by striking `Income tax return
preparers' and inserting `Tax return preparers'.

(F)(i) Section 6694 is amended--

(I) by striking `income tax return preparer' in the heading and
inserting `tax return preparer',

(II) by striking `an income tax return preparer' each place it
appears and inserting `a tax return preparer',

(III) in subsection (c)(2), by striking `the income tax return
preparer' and inserting `the tax return preparer',

(IV) in subsection (e), by striking `subtitle A' and inserting `this
title', and

(V) in subsection (f), by striking `income tax return preparer' and
inserting `tax return preparer'.

(ii) The item relating to section 6694 in the table of sections for
part I of subchapter B of chapter 68 is amended by striking `income tax
return preparer' and inserting `tax return preparer'.

(G)(i) Section 6695 is amended--

(I) by striking `income' in the heading, and

(II) by striking `an income tax return preparer' each place it
appears and inserting `a tax return preparer'.

(ii) Section 6695(f) is amended--

(I) by striking `subtitle A' and inserting `this title',
and

(II) by striking `the income tax return preparer' and inserting `the
tax return preparer'.

(iii) The item relating to section 6695 in the table of sections for
part I of subchapter B of chapter 68 is amended by striking
`income'.

(H) Section 6696(e) is amended by striking `subtitle A' each place it
appears and inserting `this title'.

(I)(i) Section 7407 is amended--

(I) by striking `income tax return preparers' in the heading and
inserting `tax return preparers',

(II) by striking `an income tax return preparer' each place it
appears and inserting `a tax return preparer',

(III) by striking `income tax preparer' both places it appears in
subsection (a) and inserting `tax return preparer', and

(IV) by striking `income tax return' in subsection (a) and inserting
`tax return'.

(ii) The item relating to section 7407 in the table of sections for
subchapter A of chapter 76 is amended by striking `income tax return
preparers' and inserting `tax return preparers'.

(J)(i) Section 7427 is amended--

(I) by striking `income tax return preparers' in the heading and
inserting `tax return preparers', and

(II) by striking `an income tax return preparer' and inserting `a
tax return preparer'.

(ii) The item relating to section 7427 in the table of sections for
subchapter B of chapter 76 is amended to read as follows:

`Sec. 7427. Tax return preparers.'.

(b) Modification of Penalty for Understatement of Taxpayer's Liability by
Tax Return Preparer- Subsections (a) and (b) of section 6694 are amended to
read as follows:

`(a) Understatement Due to Unreasonable Positions-

`(1) IN GENERAL- Any tax return preparer who prepares any return or
claim for refund with respect to which any part of an understatement of
liability is due to a position described in paragraph (2) shall pay a
penalty with respect to each such return or claim in an amount equal to the
greater of--

`(A) $1,000, or

`(B) 50 percent of the income derived (or to be derived) by the tax
return preparer with respect to the return or claim.

`(2) UNREASONABLE POSITION- A position is described in this paragraph
if--

`(A) the tax return preparer knew (or reasonably should have known) of
the position,

`(B) there was not a reasonable belief that the position would more
likely than not be sustained on its merits, and

`(C)(i) the position was not disclosed as provided in section
6662(d)(2)(B)(ii), or

`(ii) there was no reasonable basis for the position.

`(3) REASONABLE CAUSE EXCEPTION- No penalty shall be imposed under this
subsection if it is shown that there is reasonable cause for the
understatement and the tax return preparer acted in good faith.

`(b) Understatement Due to Willful or Reckless Conduct-

`(1) IN GENERAL- Any tax return preparer who prepares any return or
claim for refund with respect to which any part of an understatement of
liability is due to a conduct described in paragraph (2) shall pay a penalty
with respect to each such return or claim in an amount equal to the greater
of--

`(A) $5,000, or

`(B) 50 percent of the income derived (or to be derived) by the tax
return preparer with respect to the return or claim.

`(2) WILLFUL OR RECKLESS CONDUCT- Conduct described in this paragraph is
conduct by the tax return preparer which is--

`(A) a willful attempt in any manner to understate the liability for
tax on the return or claim, or

`(B) a reckless or intentional disregard of rules or
regulations.

`(3) REDUCTION IN PENALTY- The amount of any penalty payable by any
person by reason of this subsection for any return or claim for refund shall
be reduced by the amount of the penalty paid by such person by reason of
subsection (a).'.

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

SEC. 312. PENALTIES FOR FAILURE TO FILE CERTAIN RETURNS ELECTRONICALLY.

(a) In General- Part I of subchapter A of chapter 68 (relating to
additions to the tax, additional amounts, and assessable penalties) is amended
by inserting after section 6652 the following new section:

`SEC. 6652A. FAILURE TO FILE CERTAIN RETURNS ELECTRONICALLY.

`(a) In General- If a person fails to file a return described in section
6651 or 6652(c)(1) in electronic form as required under section 6011(e)--

`(1) such failure shall be treated as a failure to file such return
(even if filed in a form other than electronic form), and

`(2) the penalty imposed under section 6651 or 6652(c), whichever is
appropriate, shall be equal to the greater of--

`(A) the amount of the penalty under such section, determined without
regard to this section, or

`(B) the amount determined under subsection (b).

`(b) Amount of Penalty-

`(1) IN GENERAL- Except as provided in paragraphs (2) and (3), the
penalty determined under this subsection is equal to $40 for each day during
which a failure described under subsection (a) continues. The maximum
penalty under this paragraph on failures with respect to any 1 return shall
not exceed the lesser of $20,000 or 10 percent of the gross receipts of the
taxpayer for the year.

`(2) INCREASED PENALTIES FOR TAXPAYERS WITH GROSS RECEIPTS BETWEEN
$1,000,000 AND $100,000,000-

`(A) TAXPAYERS WITH GROSS RECEIPTS BETWEEN $1,000,000 AND $25,000,000-
In the case of a taxpayer having gross receipts exceeding $1,000,000 but
not exceeding $25,000,000 for any year--

`(i) the first sentence of paragraph (1) shall be applied by
substituting `$200' for `$40', and

`(ii) in lieu of applying the second sentence of paragraph (1), the
maximum penalty under paragraph (1) shall not exceed
$100,000.

`(B) TAXPAYERS WITH GROSS RECEIPTS OVER $25,000,000- Except as
provided in paragraph (3), in the case of a taxpayer having gross receipts
exceeding $25,000,000 for any year--

`(i) the first sentence of paragraph (1) shall be applied by
substituting `$500' for `$40', and

`(ii) in lieu of applying the second sentence of paragraph (1), the
maximum penalty under paragraph (1) shall not exceed
$250,000.

`(3) INCREASED PENALTIES FOR CERTAIN TAXPAYERS WITH GROSS RECEIPTS
EXCEEDING $100,000,000- In the case of a return described in section
6651--

`(A) TAXPAYERS WITH GROSS RECEIPTS BETWEEN $100,000,000 AND
$250,000,000- In the case of a taxpayer having gross receipts exceeding
$100,000,000 but not exceeding $250,000,000 for any year--

`(i) the amount of the penalty determined under this subsection
shall equal the sum of--

`(I) $50,000, plus

`(II) $1,000 for each day during which such failure continues
(twice such amount for each day such failure continues after the first
such 60 days), and

`(ii) the maximum amount under clause (i)(II) on failures with
respect to any 1 return shall not exceed $200,000.

`(B) TAXPAYERS WITH GROSS RECEIPTS OVER $250,000,000- In the case of a
taxpayer having gross receipts exceeding $250,000,000 for any
year--

`(i) the amount of the penalty determined under this subsection
shall equal the sum of--

`(I) $250,000, plus

`(II) $2,500 for each day during which such failure continues
(twice such amount for each day such failure continues after the first
such 60 days), and

`(ii) the maximum amount under clause (i)(II) on failures with
respect to any 1 return shall not exceed $250,000.

`(C) EXCEPTION FOR CERTAIN RETURNS- Subparagraphs (A) and (B) shall
not apply to any return of tax imposed under section 511.'.

(b) Clerical Amendment- The table of sections for part I of subchapter A
of chapter 68 is amended by inserting after the item relating to section 6652
the following new item:

`Sec. 6652A. Failure to file certain returns electronically.'.

(c) Effective Date- The amendments made by this section shall apply to
returns required to be filed on or after January 1, 2008.

SEC. 313. PENALTY FOR FILING ERRONEOUS REFUND CLAIMS.

(a) In General- Part I of subchapter B of chapter 68 (relating to
assessable penalties) is amended by inserting after section 6675 the following
new section:

`SEC. 6676. ERRONEOUS CLAIM FOR REFUND OR CREDIT.

`(a) Civil Penalty- If a claim for refund or credit with respect to income
tax (other than a claim for a refund or credit relating to the earned income
credit under section 32) is made for an excessive amount, unless it is shown
that the claim for such excessive amount has a reasonable basis, the person
making such claim shall be liable for a penalty in an amount equal to 20
percent of the excessive amount.

`(b) Excessive Amount- For purposes of this section, the term `excessive
amount' means in the case of any person the amount by which the amount of the
claim for refund or credit for any taxable year exceeds the amount of such
claim allowable under this title for such taxable year.

`(c) Coordination With Other Penalties- This section shall not apply to
any portion of the excessive amount of a claim for refund or credit on which a
penalty is imposed under part II of subchapter A of chapter 68.'.

(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 6675
the following new item:

`Sec. 6676. Erroneous claim for refund or credit.'.

(c) Effective Date- The amendments made by this section shall apply to any
claim--

(1) filed or submitted after the date of the enactment of this Act,
or

(2) filed or submitted prior to such date but not withdrawn before the
date which is 30 days after such date of enactment.

Subtitle B--Requiring Economic Substance

SEC. 321. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

(a) In General- Section 7701 is amended by redesignating subsection (p) as
subsection (q) and by inserting after subsection (o) the following new
subsection:

`(p) 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. 322. 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 a 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(p)(1)) for the transaction giving rise to the claimed benefit
or the transaction was not respected under section 7701(p)(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 first 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. 323. 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.

Subtitle C--Miscellaneous

SEC. 331. DENIAL OF DEDUCTION FOR PUNITIVE DAMAGES.

(a) Disallowance of Deduction-

(1) IN GENERAL- Section 162(g) (relating to treble damage payments under
the antitrust laws) is amended--

(A) by redesignating paragraphs (1) and (2) as subparagraphs (A) and
(B), respectively,

(B) by striking `If' and inserting:

`(1) TREBLE DAMAGES- If', and

(C) by adding at the end the following new paragraph:

`(2) PUNITIVE DAMAGES- No deduction shall be allowed under this chapter
for any amount paid or incurred for punitive damages in connection with any
judgment in, or settlement of, any action. This paragraph shall not apply to
punitive damages described in section 104(c).'.

(2) CONFORMING AMENDMENT- The heading for section 162(g) is amended by
inserting `Or Punitive Damages' after `Laws'.

(b) Inclusion in Income of Punitive Damages Paid by Insurer or
Otherwise-

(1) IN GENERAL- Part II of subchapter B of chapter 1 (relating to items
specifically included in gross income) is amended by adding at the end the
following new section:

`SEC. 91. PUNITIVE DAMAGES COMPENSATED BY INSURANCE OR OTHERWISE.

`Gross income shall include any amount paid to or on behalf of a taxpayer
as insurance or otherwise by reason of the taxpayer's liability (or agreement)
to pay punitive damages.'.

(2) REPORTING REQUIREMENTS- Section 6041 (relating to information at
source) is amended by adding at the end the following new subsection:

`(h) Section To Apply to Punitive Damages Compensation- This section shall
apply to payments by a person to or on behalf of another person as insurance
or otherwise by reason of the other person's liability (or agreement) to pay
punitive damages.'.

(3) CONFORMING AMENDMENT- The table of sections for part II of
subchapter B of chapter 1 is amended by adding at the end the following new
item:

`Sec. 91. Punitive damages compensated by insurance or
otherwise.'.

(c) Effective Date- The amendments made by this section shall apply to
damages paid or incurred on or after the date of the enactment of this Act.

TITLE IV--TECHNICAL AND CONFORMING AMENDMENTS; SUNSET

SEC. 401. TECHNICAL AND CONFORMING AMENDMENTS.

The Secretary of the Treasury or the Secretary's delegate shall not later
than 90 days after the date of the enactment of this Act, submit to the
Committee on Ways and Means of the House of Representatives and the Committee
on Finance of the Senate a draft of any technical and conforming changes in
the Internal Revenue Code of 1986 which are necessary to reflect throughout
such Code the purposes of the provisions of, and amendments made by, this
Act.

SEC. 402. SUNSET.

(a) In General- All provisions of, and amendments made by, this Act shall
not apply to taxable years beginning after December 31, 2012.

(b) Application of Code- The Internal Revenue Code of 1986 shall be
applied and administered to taxable years described in subsection (a) as if
the provisions of, and amendments made by, this Act had never been enacted.

END

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