S. 506 - tax haven abuse proposal Hearings

S 506 is likely to become law. It increases liability for tax return preparers and sets new standards for attorneys like me who give written opinions on shelter transactions.

Focuses on International Tax - Stop Tax Haven Abuse Act

March 5, 2009

111th Congress111th CONGRESS

1st Session

S. 506

To restrict the use of offshore tax havens and abusive tax shelters to inappropriately avoid Federal taxation, and for other purposes.

IN THE SENATE OF THE UNITED STATES

March 2, 2009

Mr. LEVIN (for himself, Mr. WHITEHOUSE, Mrs. MCCASKILL, and Mr. NELSON of Florida) introduced the following bill; which was read twice and referred to the Committee on Finance

A BILL

To restrict the use of offshore tax havens and abusive tax shelters to inappropriately avoid Federal taxation, and for other purposes.

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



SECTION 1. SHORT TITLE; ETC.

(a) Short Title- This Act may be cited as the 'Stop Tax Haven Abuse 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.

(c) Table of Contents- The table of contents of this Act is as follows:

Sec. 1. Short title; etc.

TITLE I --DETERRING THE USE OF TAX HAVENS FOR TAX EVASION

Sec. 101. Establishing presumptions for entities and transactions involving offshore secrecy jurisdictions.

Sec. 102. Authorizing special measures against foreign jurisdictions, financial institutions, and others that impede United States tax enforcement.

Sec. 103. Treatment of foreign corporations managed and controlled in the United States as domestic corporations.

Sec. 104. Allowing more time for investigations involving offshore secrecy jurisdictions.

Sec. 105. Reporting United States beneficial owners of foreign owned financial accounts.

Sec. 106. Preventing misuse of foreign trusts for tax evasion.

Sec. 107. Limitation on legal opinion protection from penalties with respect to transactions involving offshore secrecy jurisdictions.

Sec. 108. Closing the offshore dividend tax loophole.

Sec. 109. Reporting of activities with respect to passive foreign investment companies.

TITLE II --OTHER MEASURES TO COMBAT TAX HAVEN AND TAX SHELTER ABUSES

Sec. 201. Penalty for failing to disclose offshore holdings.

Sec. 202. Deadline for anti-money laundering rule for hedge funds and private equity funds.

Sec. 203. Anti-money laundering requirements for formation agents.

Sec. 204. Strengthening summons in cases involving offshore secrecy jurisdictions.

Sec. 205. Improving enforcement of foreign financial account reporting.

TITLE III --COMBATING TAX SHELTER PROMOTERS

Sec. 301. Penalty for promoting abusive tax shelters.

Sec. 302. Penalty for aiding and abetting the understatement of tax liability.

Sec. 303. Tax planning inventions not patentable.

Sec. 304. Prohibited fee arrangement.

Sec. 305. Preventing tax shelter activities by financial institutions.

Sec. 306. Information sharing for enforcement purposes.

Sec. 307. Disclosure of information to Congress.

Sec. 308. Tax opinion standards for tax practitioners.

Sec. 309. Denial of deduction for certain fines, penalties, and other amounts.

TITLE IV --REQUIRING ECONOMIC SUBSTANCE

Sec. 401. Clarification of economic substance doctrine.

Sec. 402. Penalty for understatements attributable to transactions lacking economic substance, etc.

Sec. 403. Denial of deduction for interest on underpayments attributable to noneconomic substance transactions.

TITLE I --DETERRING THE USE OF TAX HAVENS FOR TAX EVASION



SEC. 101. ESTABLISHING PRESUMPTIONS FOR ENTITIES AND TRANSACTIONS INVOLVING OFFSHORE SECRECY JURISDICTIONS.

(a) Presumptions for Internal Revenue Code of 1986-

(1) IN GENERAL- Chapter 76 is amended by inserting after section 7491 the following new subchapter:

'Subchapter F --Presumptions for Certain Legal Proceedings

'Sec. 7492. Presumptions pertaining to entities and transactions involving offshore secrecy jurisdictions.



'SEC. 7492. PRESUMPTIONS PERTAINING TO ENTITIES AND TRANSACTIONS INVOLVING OFFSHORE SECRECY JURISDICTIONS.

'(a) Control- For purposes of any United States civil judicial or administrative proceeding to determine or collect tax, there shall be a rebuttable presumption that a United States person (other than an entity with shares regularly traded on an established securities market) who directly or indirectly formed, transferred assets to, was a beneficiary of, had a beneficial interest in, or received money or property or the use thereof from an entity, including a trust, corporation, limited liability company, partnership, or foundation (other than an entity with shares regularly traded on an established securities market), formed, domiciled, or operating in an offshore secrecy jurisdiction, exercised control over such entity. The presumption of control created by this subsection shall not be applied to prevent the Secretary from determining or arguing the absence of control.

'(b) Transfers of Income- For purposes of any United States civil judicial or administrative proceeding to determine or collect tax, there shall be a rebuttable presumption that any amount or thing of value received by a United States person (other than an entity with shares regularly traded on an established securities market) directly or indirectly from an account or entity (other than an entity with shares regularly traded on an established securities market) in an offshore secrecy jurisdiction, constitutes income of such person taxable in the year of receipt, and any amount or thing of value paid or transferred by or on behalf of a United States person (other than an entity with shares regularly traded on an established securities market) directly or indirectly to an account or entity (other than an entity with shares regularly traded on an established securities market) in any such jurisdiction represents previously unreported income of such person taxable in the year of the transfer.

'(c) Rebutting the Presumptions- The presumptions established in this section may be rebutted only by clear and convincing evidence, including detailed documentary, testimonial, and transactional evidence, establishing that --

'(1) in subsection (a), such taxpayer exercised no control, directly or indirectly, over such entity at the time in question, and

'(2) in subsection (b), such amounts or things of value did not represent income related to such United States person.

Any court having jurisdiction of a civil proceeding in which control of such an offshore entity or the income character of such receipts or amounts transferred is an issue shall prohibit the introduction by the taxpayer of any foreign based document that is not authenticated in open court by a person with knowledge of such document, or any other evidence supplied by a person outside the jurisdiction of a United States court, unless such person appears before the court.'.

(2) The table of subchapters for chapter 76 is amended by inserting after the item relating to subchapter E the following new item:

'subchapter f --presumptions for certain legal proceedings'.

(b) Definition of Offshore Secrecy Jurisdiction- Section 7701(a) is amended by adding at the end the following new paragraph:

'(50) OFFSHORE SECRECY JURISDICTION-

'(A) IN GENERAL- The term 'offshore secrecy jurisdiction' means any foreign jurisdiction which is listed by the Secretary as an offshore secrecy jurisdiction for purposes of this title.

'(B) DETERMINATION OF JURISDICTIONS ON LIST- A jurisdiction shall be listed under paragraph (A) if the Secretary determines that such jurisdiction has corporate, business, bank, or tax secrecy rules and practices which, in the judgment of the Secretary, unreasonably restrict the ability of the United States to obtain information relevant to the enforcement of this title, unless the Secretary also determines that such country has effective information exchange practices.

'(C) SECRECY OR CONFIDENTIALITY RULES AND PRACTICES- For purposes of subparagraph (B), corporate, business, bank, or tax secrecy or confidentiality rules and practices include both formal laws and regulations and informal government or business practices having the effect of inhibiting access of law enforcement and tax administration authorities to beneficial ownership and other financial information.

'(D) INEFFECTIVE INFORMATION EXCHANGE PRACTICES- For purposes of subparagraph (B), a jurisdiction shall be deemed to have ineffective information exchange practices unless the Secretary determines, on an annual basis, that --

'(i) such jurisdiction has in effect a treaty or other information exchange agreement with the United States that provides for the prompt, obligatory, and automatic exchange of such information as is forseeably relevant for carrying out the provisions of the treaty or agreement or the administration or enforcement of this title,

'(ii) during the 12-month period preceding the annual determination, the exchange of information between the United States and such jurisdiction was in practice adequate to prevent evasion or avoidance of United States income tax by United States persons and to enable the United States effectively to enforce this title, and

'(iii) during the 12-month period preceding the annual determination, such jurisdiction was not identified by an intergovernmental group or organization of which the United States is a member as uncooperative with international tax enforcement or information exchange and the United States concurs in such identification.

'(E) INITIAL LIST OF OFFSHORE SECRECY JURISDICTIONS- For purposes of this paragraph, each of the following foreign jurisdictions, which have been previously and publicly identified by the Internal Revenue Service as secrecy jurisdictions in Federal court proceedings, shall be deemed listed by the Secretary as an offshore secrecy jurisdiction unless delisted by the Secretary under subparagraph (F)(ii):

'(i) Anguilla.

'(ii) Antigua and Barbuda.

'(iii) Aruba.

'(iv) Bahamas.

'(v) Barbados.

'(vi) Belize.

'(vii) Bermuda.

'(viii) British Virgin Islands.

'(ix) Cayman Islands.

'(x) Cook Islands.

'(xi) Costa Rica.

'(xii) Cyprus.

'(xiii) Dominica.

'(xiv) Gibraltar.

'(xv) Grenada.

'(xvi) Guernsey/Sark/Alderney.

'(xvii) Hong Kong.

'(xviii) Isle of Man.

'(xix) Jersey.

'(xx) Latvia.

'(xxi) Liechtenstein.

'(xxii) Luxembourg.

'(xxiii) Malta.

'(xxiv) Nauru.

'(xxv) Netherlands Antilles.

'(xxvi) Panama.

'(xxvii) Samoa.

'(xxviii) St. Kitts and Nevis.

'(xxix) St. Lucia.

'(xxx) St. Vincent and the Grenadines.

'(xxxi) Singapore.

'(xxxii) Switzerland.

'(xxxiii) Turks and Caicos.

'(xxxiv) Vanuatu.

'(F) MODIFICATIONS TO LIST- The Secretary --

'(i) shall add to the list under paragraph (A) jurisdictions which meet the requirements of paragraph (B), and

'(ii) may remove from such list only those jurisdictions which do not meet the requirements of paragraph (B).'.

(c) Presumptions for Securities Law Purposes- Section 21 of the Securities Exchange Act of 1934 (15 U.S.C. 78u) is amended by adding at the end the following the following new subsection:

'(j) Presumptions Pertaining to Control and Beneficial Ownership-

'(1) CONTROL- For purposes of any civil judicial or administrative proceeding under this title, there shall be a rebuttable presumption that a United States person (other than an entity with shares regularly traded on an established securities market) who directly or indirectly formed, transferred assets to, was a beneficiary of, had a beneficial interest in, or received money or property or the use thereof from an entity, including a trust, corporation, limited liability company, partnership, or foundation (other than an entity with shares regularly traded on an established securities market), formed, domiciled, or operating in an offshore secrecy jurisdiction (as defined in section 7701(a)(50) of the Internal Revenue Code of 1986), exercised control over such entity. The presumption of control created by this paragraph shall not be applied to prevent the Commission from determining or arguing the absence of control.

'(2) BENEFICIAL OWNERSHIP- For purposes of any civil judicial or administrative proceeding under this title, there shall be a rebuttable presumption that securities that are nominally owned by an entity, including a trust, corporation, limited liability company, partnership, or foundation (other than an entity with shares regularly traded on an established securities market), formed, domiciled, or operating in an offshore secrecy jurisdiction (as so defined), are beneficially owned by any United States person (other than an entity with shares regularly traded on an established securities market) who directly or indirectly exercised control over such entity. The presumption of beneficial ownership created by this paragraph shall not be applied to prevent the Commission from determining or arguing the absence of beneficial ownership.'.

(d) Presumption for Reporting Purposes Relating to Foreign Financial Accounts-Section 5314 of title 31, United States Code, is amended by adding at the end the following:

'(d) Rebuttable Presumption- For purposes of this section, there shall be a rebuttable presumption that any account with a financial institution formed, domiciled, or operating in an offshore secrecy jurisdiction (as defined in section 7701(a)(50) of the Internal Revenue Code of 1986) contains funds in an amount that is at least sufficient to require a report prescribed by regulations under this section.'.

(e) Regulatory Authority and Effective Date-

(1) REGULATORY AUTHORITY- Not later than 180 days after the date of the enactment of this Act, the Secretary of the Treasury and the Chairman of the Securities and Exchange Commission shall each adopt regulations or other guidance necessary to implement the amendments made by this section. The Secretary and the Chairman may by regulation or guidance provide that the presumption of control shall not extend to particular classes of transactions, such as corporate reorganizations or transactions below a specified dollar threshold, if either determines that applying such amendments to such transactions is not necessary to carry out the purposes of such amendments.

(2) EFFECTIVE DATE- The amendments made by this section shall take effect on the date of the enactment of this Act.



SEC. 102. AUTHORIZING SPECIAL MEASURES AGAINST FOREIGN JURISDICTIONS, FINANCIAL INSTITUTIONS, AND OTHERS THAT IMPEDE UNITED STATES TAX ENFORCEMENT.

Section 5318A of title 31, United States Code, is amended --

(1) by striking the section heading and inserting the following:

'Sec. 5318A. Special measures for jurisdictions, financial institutions, or international transactions that are of primary money laundering concern or impede United States tax enforcement';

(2) in subsection (a), by striking the subsection heading and inserting the following:

'(a) Special Measures To Counter Money Laundering and Efforts To Impede United States Tax Enforcement- ';

(3) in subsection (c), by striking the subsection heading and inserting the following:

'(c) Consultations and Information To Be Considered in Finding Jurisdictions, Institutions, Types of Accounts, or Transactions To Be of Primary Money Laundering Concern or To Be Impeding United States Tax Enforcement- ';

(4) in subsection (a)(1), by inserting 'or is impeding United States tax enforcement' after 'primary money laundering concern';

(5) in subsection (a)(4) --

(A) in subparagraph (A) --

(i) by inserting 'in matters involving money laundering,' before 'shall consult'; and

(ii) by striking 'and' at the end;

(B) by redesignating subparagraph (B) as subparagraph (C); and

(C) by inserting after subparagraph (A) the following:

'(B) in matters involving United States tax enforcement, shall consult with the Commissioner of the Internal Revenue Service, the Secretary of State, the Attorney General of the United States, and in the sole discretion of the Secretary, such other agencies and interested parties as the Secretary may find to be appropriate; and';

(6) in each of paragraphs (1)(A), (2), (3), and (4) of subsection (b), by inserting 'or to be impeding United States tax enforcement' after 'primary money laundering concern' each place that term appears;

(7) in subsection (b), by striking paragraph (5) and inserting the following:

'(5) PROHIBITIONS OR CONDITIONS ON OPENING OR MAINTAINING CERTAIN CORRESPONDENT OR PAYABLE-THROUGH ACCOUNTS OR AUTHORIZING CERTAIN PAYMENT CARDS- If the Secretary finds a jurisdiction outside of the United States, 1 or more financial institutions operating outside of the United States, or 1 or more classes of transactions within or involving a jurisdiction outside of the United States to be of primary money laundering concern or to be impeding United States tax enforcement, the Secretary, in consultation with the Secretary of State, the Attorney General of the United States, and the Chairman of the Board of Governors of the Federal Reserve System, may prohibit, or impose conditions upon --

'(A) the opening or maintaining in the United States of a correspondent account or payable-through account; or

'(B) the authorization, approval, or use in the United States of a credit card, charge card, debit card, or similar credit or debit financial instrument by any domestic financial institution, financial agency, or credit card company or association, for or on behalf of a foreign banking institution, if such correspondent account, payable-through account, credit card, charge card, debit card, or similar credit or debit financial instrument, involves any such jurisdiction or institution, or if any such transaction may be conducted through such correspondent account, payable-through account, credit card, charge card, debit card, or similar credit or debit financial instrument.'; and

(8) in subsection (c)(1), by inserting 'or is impeding United States tax enforcement' after 'primary money laundering concern';

(9) in subsection (c)(2)(A) --

(A) in clause (ii), by striking 'bank secrecy or special regulatory advantages' and inserting 'bank, tax, corporate, trust, or financial secrecy or regulatory advantages';

(B) in clause (iii), by striking 'supervisory and counter-money' and inserting 'supervisory, international tax enforcement, and counter-money';

(C) in clause (v), by striking 'banking or secrecy' and inserting 'banking, tax, or secrecy'; and

(D) in clause (vi), by inserting ', tax treaty, or tax information exchange agreement' after 'treaty';

(10) in subsection (c)(2)(B) --

(A) in clause (i), by inserting 'or tax evasion' after 'money laundering'; and

(B) in clause (iii), by inserting ', tax evasion,' after 'money laundering'; and

(11) in subsection (d), by inserting 'involving money laundering, and shall notify, in writing, the Committee on Finance of the Senate and the Committee on Ways and Means of the House of Representatives of any such action involving United States tax enforcement' after 'such action'.



SEC. 103. TREATMENT OF FOREIGN CORPORATIONS MANAGED AND CONTROLLED IN THE UNITED STATES AS DOMESTIC CORPORATIONS.

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

'(o) Certain Corporations Managed and Controlled in the United States Treated as Domestic for Income Tax-

'(1) IN GENERAL- Notwithstanding subsection (a)(4), in the case of a corporation described in paragraph (2) if --

'(A) the corporation would not otherwise be treated as a domestic corporation for purposes of this title, but

'(B) the management and control of the corporation occurs, directly or indirectly, primarily within the United States, then, solely for purposes of chapter 1 (and any other provision of this title relating to chapter 1), the corporation shall be treated as a domestic corporation.

'(2) CORPORATION DESCRIBED-

'(A) IN GENERAL- A corporation is described in this paragraph if --

'(i) the stock of such corporation is regularly traded on an established securities market, or

'(ii) the aggregate gross assets of such corporation (or any predecessor thereof), including assets under management for investors, whether held directly or indirectly, at any time during the taxable year or any preceding taxable year is $50,000,000 or more.

'(B) GENERAL EXCEPTION- A corporation shall not be treated as described in this paragraph if --

'(i) such corporation was treated as a corporation described in this paragraph in a preceding taxable year,

'(ii) such corporation --

'(I) is not regularly traded on an established securities market, and

'(II) has, and is reasonably expected to continue to have, aggregate gross assets (including assets under management for investors, whether held directly or indirectly) of less than $50,000,000, and

'(iii) the Secretary grants a waiver to such corporation under this subparagraph.

'(C) EXCEPTION FROM GROSS ASSETS TEST- Subparagraph (A)(ii) shall not apply to a corporation which is a controlled foreign corporation (as defined in section 957) and which is a member of an affiliated group (as defined section 1504, but determined without regard to section 1504(b)(3)) the common parent of which --

'(i) is a domestic corporation (determined without regard to this subsection), and

'(ii) has substantial assets (other than cash and cash equivalents and other than stock of foreign subsidiaries) held for use in the active conduct of a trade or business in the United States.

'(3) MANAGEMENT AND CONTROL-

'(A) IN GENERAL- The Secretary shall prescribe regulations for purposes of determining cases in which the management and control of a corporation is to be treated as occurring primarily within the United States.

'(B) EXECUTIVE OFFICERS AND SENIOR MANAGEMENT- Such regulations shall provide that --

'(i) the management and control of a corporation shall be treated as occurring primarily within the United States if substantially all of the executive officers and senior management of the corporation who exercise day-to-day responsibility for making decisions involving strategic, financial, and operational policies of the corporation are located primarily within the United States, and

'(ii) individuals who are not executive officers and senior management of the corporation (including individuals who are officers or employees of other corporations in the same chain of corporations as the corporation) shall be treated as executive officers and senior management if such individuals exercise the day-to day responsibilities of the corporation described in clause (i).

'(C) CORPORATIONS PRIMARILY HOLDING INVESTMENT ASSETS- Such regulations shall also provide that the management and control of a corporation shall be treated as occurring primarily within the United States if --

'(i) the assets of such corporation (directly or indirectly) consist primarily of assets being managed on behalf of investors, and

'(ii) decisions about how to invest the assets are made in the United States.'.

(b) Effective Date- The amendments made by this section shall apply to taxable years beginning on or after the date which is 2 years after the date of the enactment of this Act.



SEC. 104. ALLOWING MORE TIME FOR INVESTIGATIONS INVOLVING OFFSHORE SECRECY JURISDICTIONS.

(a) In General- Section 6501(c) is amended by adding at the end the following new paragraph:

'(11) RETURNS INVOLVING OFFSHORE SECRECY JURISDICTIONS- In the case of a return for a year in which the taxpayer directly or indirectly formed, owned, transferred assets to, was a beneficiary of, had a beneficial interest in, or received money or property or the use thereof from a financial account or an entity (other than an entity with shares regularly traded on an established securities market), including a trust, corporation, limited liability company, partnership, or foundation formed, located, domiciled or operating in an offshore secrecy jurisdiction, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 6 years after the return was filed.'.

(b) Effective Date- The amendment made by this section shall apply to --

(1) returns filed after the date of the enactment of this Act, and

(2) returns filed on or before such date if the period specified in section 6501 of the Internal Revenue Code of 1986 (determined without regard to the amendments made by subsection (a)) for assessment of such taxes has not expired as of such date.



SEC. 105. REPORTING UNITED STATES BENEFICIAL OWNERS OF FOREIGN OWNED FINANCIAL ACCOUNTS.

(a) In General- Subpart B of part III of subchapter A of chapter 61 is amended by inserting after section 6045B the following new sections:



'SEC. 6045C. RETURNS REGARDING UNITED STATES BENEFICIAL OWNERS OF FOREIGN OWNED FINANCIAL ACCOUNTS.

'(a) Requirement of Return- If --

'(1) any withholding agent under sections 1441 and 1442 has the control, receipt, custody, disposal, or payment of any amount constituting gross income from sources within the United States of any foreign entity, including a trust, corporation, limited liability company, partnership, or foundation (other than an entity with shares regularly traded on an established securities market), and

'(2) such withholding agent determines for purposes of titles 14, 18, or 31 of the United States Code that a United States person has any beneficial interest in the foreign entity or in the account in such entity's name (hereafter in this section referred to as 'United States beneficial owner'), then the withholding agent shall make a return according to the forms or regulations prescribed by the Secretary.

'(b) Required Information- For purposes of subsection (a) the information required to be included on the return shall include --

'(1) the name, address, and, if known, the taxpayer identification number of the United States beneficial owner,

'(2) the known facts pertaining to the relationship of such United States beneficial owner to the foreign entity and the account,

'(3) the gross amount of income from sources within the United States (including gross proceeds from brokerage transactions), and

'(4) such other information as the Secretary may by forms or regulations provide.

'(c) Statements To Be Furnished to Beneficial Owners With Respect to Whom Information Is Required To Be Reported- A withholding agent required to make a return under subsection (a) shall furnish to each United States beneficial owner whose name is required to be set forth in such return a statement showing --

'(1) the name, address, and telephone number of the information contact of the person required to make such return, and

'(2) the information required to be shown on such return with respect to such United States beneficial owner.

The written statement required under the preceding sentence shall be furnished to the United States beneficial owner on or before January 31 of the year following the calendar year for which the return under subsection (a) was required to be made. In the event the person filing such return does not have a current address for the United States beneficial owner, such written statement may be mailed to the address of the foreign entity.



'SEC. 6045D. RETURNS BY FINANCIAL INSTITUTIONS REGARDING ESTABLISHMENT OF ACCOUNTS AND CREATION OF ENTITIES IN OFFSHORE SECRECY JURISDICTIONS.

'(a) Requirement of Return- Any financial institution directly or indirectly --

'(1) opening a bank, brokerage, or other financial account, or

'(2) forming or acquiring an entity, including a trust, corporation, limited liability company, partnership, or foundation (other than an entity with shares regularly traded on an established securities market), in an offshore secrecy jurisdiction at the direction of, on behalf of, or for the benefit of a United States person shall make a return according to the forms or regulations prescribed by the Secretary.

'(b) Required Information- For purposes of subsection (a) the information required to be included on the return shall include --

'(1) the name, address, and taxpayer identification number of such United States person,

'(2) the name and address of the financial institution at which a financial account is opened, the type of account, the account number, the name under which the account was opened, and the amount of the initial deposit,

'(3) the name and address of an entity formed or acquired, the type of entity, and the name and address of any company formation agent or other professional employed to form or acquire the entity, and

'(4) such other information as the Secretary may by forms or regulations provide.

'(c) Statements To Be Furnished to United States Persons With Respect to Whom Information Is Required To Be Reported- A financial institution required to make a return under subsection (a) shall furnish to each United States person whose name is required to be set forth in such return a statement showing --

'(1) the name, address, and telephone number of the information contact of the person required to make such return, and

'(2) the information required to be shown on such return with respect to such United States person.

The written statement required under the preceding sentence shall be furnished to such United States person on or before January 31 of the year following the calendar year for which the return under subsection (a) was required to be made.

'(d) Exemption- The Secretary may by regulations exempt any class of United States persons or any class of accounts or entities from the requirements of this section if the Secretary determines that applying this section to such persons, accounts, or entities is not necessary to carry out the purposes of this section.'.

(b) Penalties-

(1) RETURNS- Section 6724(d)(1)(B) is amended by redesignating clauses (v) through (xxiii) as clauses (vii) through (xxv), respectively, and by inserting after clause (iv) the following new clauses:

'(v) section 6045C(a) (relating to returns regarding United States beneficial owners of foreign owned financial accounts),

'(vi) section 6045D(a) (relating to returns by financial institutions regarding establishment of accounts and creation of entities in offshore secrecy jurisdictions),'.

(2) PAYEE STATEMENTS- Section 6724(d)(2) is amended by redesignating subparagraphs (K) through (FF) as subparagraphs (M) through (HH), respectively, and by inserting after subparagraph (J) the following new subparagraphs:

'(K) section 6045C(c) (relating to returns regarding United States beneficial owners of foreign owned financial accounts),

'(L) section 6045D(c) (relating to returns by financial institutions regarding establishment of accounts and creation of entities in offshore secrecy jurisdictions),'.

(c) Clerical Amendment- The table of sections for such subpart is amended by inserting after the item relating to section 6045B the following new items:

'Sec. 6045C. Returns regarding United States beneficial owners of foreign owned financial accounts.

'Sec. 6045D. Returns by financial institutions regarding establishment of accounts and creation of entities in offshore secrecy jurisdictions.'.

(d) Additional Penalties-

(1) ADDITIONAL PENALTIES ON BANKS- Section 5239(b)(1) of the Revised Statutes (12 U.S.C. 93(b)(1)) is amended by inserting 'or any of the provisions of section 6045D of the Internal Revenue Code of 1986,' after 'any regulation issued pursuant to,'.

(2) ADDITIONAL PENALTIES ON SECURITIES FIRMS- Section 21(d)(3)(A) of the Securities Exchange Act of 1934 (15 U.S.C. 78u(d)(3)(A)) is amended by inserting 'any of the provisions of section 6045D of the Internal Revenue Code of 1986,' after 'the rules or regulations thereunder,'.

(e) Regulatory Authority and Effective Date-

(1) REGULATORY AUTHORITY- Not later than 180 days after the date of the enactment of this Act, the Secretary of the Treasury shall adopt regulations, forms, or other guidance necessary to implement this section.

(2) EFFECTIVE DATE- Section 6045C of the Internal Revenue Code of 1986 (as added by this section) and the amendment made by subsection (d)(1) shall take effect with respect to amounts paid into foreign owned accounts after December 31 of the year of the date of the enactment of this Act. Section 6045D of such Code (as so added) and the amendment made by subsection (d)(2) shall take effect with respect to accounts opened or entities formed or acquired after December 31 of the year of the date of the enactment of this Act.



SEC. 106. PREVENTING MISUSE OF FOREIGN TRUSTS FOR TAX EVASION.

(a) Attribution of Trust Protector Powers to Grantors- Section 672 is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection:

'(f) Grantor Treated as Holding Any Power or Interest of Trust Protector or Enforcer- For purposes of this subpart, a grantor shall be treated as holding any power or interest held by any trust protector or trust enforcer or similar person appointed to advise, influence, oversee, or veto the actions of the trustee.'.

(b) Treatment of United States Recipients of Foreign Trust Assets as Trust Beneficiaries- Section 679 is amended by redesignating subsections (c) and (d) as subsections (d) and (e), respectively, and by inserting after subsection (b) the following new subsection:

'(c) Certain United States Persons Treated as Beneficiaries- Any United States person receiving from a foreign trust cash or other property, or receiving the use thereof, shall be treated as a beneficiary of such trust regardless of whether such person is a named beneficiary, except to the extent that such person paid fair market value for the benefit received.'.

(c) Treatment of Foreign Trust Transfers of Real Estate, Artwork, or Jewelry Consistently With Transfers of Securities- Section 643(i)(1) is amended by striking 'or marketable securities' and inserting 'or other property, including real estate, marketable securities, artwork, jewelry, and other personal property,'.

(d) Treatment of Trusts With Future or Contingent United States Beneficiaries- Section 679(a)(1) is amended --

(1) by inserting 'or for any subsequent year' after 'such year', and

(2) by inserting '(including a contingent beneficiary)' after 'beneficiary'.



SEC. 107. LIMITATION ON LEGAL OPINION PROTECTION FROM PENALTIES WITH RESPECT TO TRANSACTIONS INVOLVING OFFSHORE SECRECY JURISDICTIONS.

(a) In General- Section 6664 is amended by adding at the end the following new subsection:

'(e) Certain Opinions May Not Be Relied Upon- For purposes of this part, an opinion of a tax advisor may not be relied upon to establish that there was reasonable cause for any portion of an underpayment, or that the taxpayer acted in good faith with respect to such portion, if such portion is attributable to a transaction any part of which involves an entity or financial account in an offshore secrecy jurisdiction.'.

(b) Regulatory Authority- The Secretary of the Treasury may by regulation or guidance provide that subsection (e) of section 6664 of the Internal Revenue Code of 1986, as added by subsection (a), does not apply to legal opinions that express a confidence level that substantially exceeds the 'more likely than not' confidence level; or that such subsection does not apply to classes of transactions, such as corporate reorganizations, where the Secretary determines that applying such subsection to such transactions is not necessary to carry out the purposes of such subsection.



SEC. 108. CLOSING THE OFFSHORE DIVIDEND TAX LOOPHOLE.

(a) In General- Section 871 is amended by redesignating subsection (l) as subsection (m) and by inserting after subsection (k) the following new subsection:

'(l) Treatment of Dividend Equivalents and Substitute Dividend Payments-

'(1) IN GENERAL- For purposes of this section and section 881 --

'(A) the term 'dividend' shall include dividend equivalents and substitute dividends,

'(B) a dividend equivalent with respect to the stock of one or more domestic corporations shall be treated as sourced within the United States, and

'(C) a substitute dividend payment shall be sourced in the same manner as a dividend distribution with respect to the transferred security to which the substitute dividend relates.

'(2) DIVIDEND EQUIVALENT- For purposes of this subsection --

'(A) IN GENERAL- The term 'dividend equivalent' includes any payment that is made pursuant to a notional principal contract and is contingent upon, or is referenced to, the payment of a dividend on stock or the payment of a dividend on property that is substantially similar or related to stock (determined in a manner similar to the manner under section 246(c)(4)(C)).

'(B) NOTIONAL PRINCIPAL CONTRACT- For purposes of subparagraph (A), the term 'notional principal contract' means a financial instrument that provides for the payment of amounts by 1 party to another at specified intervals calculated by reference to a specified index upon a notional principal amount in exchange for specified consideration or a promise to pay similar amounts.

'(3) SUBSTITUTE DIVIDEND- For purposes of this subsection --

'(A) IN GENERAL- The term 'substitute dividend' means a payment, made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction, of an amount equivalent to a dividend distribution which the owner of the transferred security is entitled to receive during the term of the transaction.

'(B) SECURITIES LENDING TRANSACTION- For purposes of subparagraph (A), the term 'securities lending transaction' means a transfer of 1 or more securities that is described in section 1058(a) or a substantially similar transaction.

'(C) SALE-REPURCHASE TRANSACTION- For purposes of subparagraph (A), the term 'sale-repurchase transaction' means an agreement under which a person transfers a security in exchange for cash and simultaneously agrees to receive substantially identical securities from the transferee in the future in exchange for cash.

'(4) COORDINATION WITH TAX TREATIES- The meaning of the term 'dividend' in any income tax convention shall be construed to include dividend equivalents and substitute dividends in accordance with this section.

'(5) PREVENTION OF OVER-WITHHOLDING- In the case of any dividend equivalent or substitute dividend that is subject to withholding under this section or section 881, the Secretary may by regulation reduce such withholding, but only to the extent that the taxpayer can establish that the dividend for which the payment to be withheld upon is a dividend equivalent or a substitute dividend that was previously withheld upon under this section or under section 881.'.

(b) Regulations-

(1) PROPOSED RULE- Not later than 90 days after the date of the enactment of this Act, the Secretary of the Treasury (or the Secretary's designee) shall issue proposed regulations relating to section 871(l) of the Internal Revenue Code of 1986 (as added by this section).

(2) FINAL RULE- Not later than 150 days after the date of the enactment of this Act, the Secretary of the Treasury (or the Secretary's designee) shall issue final regulations relating to such section.

(3) MATTERS INCLUDED- The regulations issued pursuant to this subsection shall require the imposition of withholding --

(A) in cases where dividend equivalent payments under notional principal contracts are netted with other payments under the same instrument,

(B) in cases where fees and other payments are netted to disguise the characterization of a payment as a substitute dividend, and

(C) in cases where option or forward contracts (or similar arrangements) achieve the same or substantially similar economic results as the notional principal contracts covered under section 871(l) of such Code.

(c) Qualified Intermediaries- The Secretary of the Treasury (or the Secretary's designee) shall ensure that any qualified intermediary withholding agreement that the United States enters into or renews after the date of the enactment of this Act with a foreign financial institution or foreign branch of a United States financial institution conforms with the amendments made by this section to ensure appropriate withholding related to dividend equivalents and substitute dividends.

(d) Effective Date- The amendments made by this section shall apply to payments made on or after the date that is 90 days after the date of the enactment of this Act.

(e) Rule of Construction- Nothing in this section or the amendments made by this section shall be construed to limit the authority of the Commissioner of the Internal Revenue Service to collect taxes, interest, and penalties on dividend equivalent or substitute dividend payments (as defined in section 871(l) of the Internal Revenue Code of 1986) made prior to the date of the enactment of this Act in connection with swap agreements, stock loan transactions, or other financial transactions involving nonresident aliens or foreign corporations.



SEC. 109. REPORTING OF ACTIVITIES WITH RESPECT TO PASSIVE FOREIGN INVESTMENT COMPANIES.

(a) In General- Section 1298 is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection:

'(f) Reporting Requirement- Each person who is a shareholder of, or who directly or indirectly forms, transfers assets to, is a beneficiary of, has a beneficial interest in, or receives money or property or the use thereof from, a passive foreign investment company shall file a report containing such information as the Secretary may require.'.

(b) Conforming Amendment- Subsection (e) of section 1291 is amended by striking ', (d), and (f)' and inserting 'and (d)'.

(c) Effective Date- The amendments made by this section take effect on the date of the enactment of this Act.



TITLE II --OTHER MEASURES TO COMBAT TAX HAVEN AND TAX SHELTER ABUSES



SEC. 201. PENALTY FOR FAILING TO DISCLOSE OFFSHORE HOLDINGS.

(a) Securities Exchange Act of 1934- Section 21(d)(3)(B) of the Securities Exchange Act of 1934 (15 U.S.C. 78u(d)(3)(B)) is amended by adding at the end the following:

'(iv) FOURTH TIER- Notwithstanding clauses (i), (ii), and (iii), the amount of the penalty for each such violation shall not exceed $1,000,000 for any person if the violation described in subparagraph (A) involved a knowing failure to disclose any holding or transaction involving equity or debt instruments of an issuer and known by such person to involve a foreign entity, including any trust, corporation, limited liability company, partnership, or foundation that is directly or indirectly controlled by such person, and which would have been otherwise subject to disclosure by such person under this title.'.

(b) Securities Act of 1933- Section 20(d)(2) of the Securities Act of 1933 (15 U.S.C. 77t(d)(2)) is amended by adding at the end the following:

'(D) FOURTH TIER- Notwithstanding subparagraphs (A), (B), and (C), the amount of penalty for each such violation shall not exceed $1,000,000 for any person, if the violation described in paragraph (1) involved a knowing failure to disclose any holding or transaction involving equity or debt instruments of an issuer and known by such person to involve a foreign entity, including any trust, corporation, limited liability company, partnership, or foundation, directly or indirectly controlled by such person, and which would have been otherwise subject to disclosure by such person under this title.'.

(c) Investment Company Act of 1940- Section 9(d)(2) of the Investment Company Act of 1940 (15 U.S.C. 80a-9(d)(2)) is amended by adding at the end the following:

'(D) FOURTH TIER- Notwithstanding subparagraphs (A), (B), and (C), the amount of penalty for each such violation shall not exceed $1,000,000 for any person, if the violation described in paragraph (1) involved a knowing failure to disclose any holding or transaction involving equity or debt instruments of an issuer and known by such person to involve a foreign entity, including any trust, corporation, limited liability company, partnership, or foundation, directly or indirectly controlled by such person, and which would have been otherwise subject to disclosure by such person under this title.'.

(d) Investment Advisers Act of 1940- Section 203(i)(2) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(i)(2)) is amended by adding at the end the following:

'(D) FOURTH TIER- Notwithstanding subparagraphs (A), (B), and (C), the amount of penalty for each such violation shall not exceed $1,000,000 for any person, if the violation described in paragraph (1) involved a knowing failure to disclose any holding or transaction involving equity or debt instruments of an issuer and known by such person to involve a foreign entity, including any trust, corporation, limited liability company, partnership, or foundation, directly or indirectly controlled by such person, and which would have been otherwise subject to disclosure by such person under this title.'.



SEC. 202. DEADLINE FOR ANTI-MONEY LAUNDERING RULE FOR HEDGE FUNDS AND PRIVATE EQUITY FUNDS.

(a) In General-

(1) PROPOSED RULE- Not later than 90 days after the date of the enactment of this Act, the Secretary of the Treasury, in consultation with the Chairman of the Securities and Exchange Commission and the Chairman of the Commodity Futures Trading Commission, shall publish a proposed rule in the Federal Register requiring unregistered investment companies, including hedge funds or private equity funds, to establish anti-money laundering programs and submit suspicious activity reports under subsections (g) and (h) of section 5318 of title 31, United States Code.

(2) FINAL RULE- Not later than 180 days after the date of the enactment of this Act, the Secretary of the Treasury shall publish a final rule in the Federal Register on the matter described in paragraph (1).

(b) Contents- The final rule published under this section --

(1) shall require, at a minimum, that to safeguard against terrorist financing and money laundering, all unregistered investment companies shall --

(A) use risk-based due diligence policies, procedures, and controls that are reasonably designed to ascertain the identity of any foreign person (including the nominal and beneficial owner or beneficiary of a foreign corporation, partnership, trust, or other foreign entity) planning to supply or supplying funds to be invested with the advice or assistance of that unregistered investment company; and

(B) be subject to section 5318(k)(2) of title 31, United States Code; and

(2) may incorporate aspects of the proposed rule for unregistered investment companies published in the Federal Register on September 26, 2002 (67 Fed. Reg. 60617) (relating to anti-money laundering programs).

(c) Definitions- In this section --

(1) the terms 'investment company' and 'issuer' have the same meanings as in section 2 of the Investment Company Act of 1940 (15 U.S.C. 80a-2); and

(2) the term 'unregistered investment company' means an issuer that would be an investment company, but for the exclusion under paragraph (1) or (7) of section 3(c) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)).



SEC. 203. ANTI-MONEY LAUNDERING REQUIREMENTS FOR FORMATION AGENTS.

(a) Anti-Money Laundering Obligations for Formation Agents- Section 5312(a)(2) of title 31, United States Code, is amended, by --

(1) in subparagraph (Y), by striking 'or' at the end;

(2) by redesignating subparagraph (Z) as subparagraph (AA); and

(3) by inserting after subparagraph (Y) the following:

'(Z) persons involved in forming new corporations, limited liability companies, partnerships, trusts, or other legal entities; or'.

(b) Deadline for Anti-Money Laundering Rule for Formation Agents- Not later than 90 days after the date of the enactment of this Act, after consulting with the Attorney General of the United States, the Commissioner of the Internal Revenue Service, and Chairman of the Securities and Exchange Commission, the Secretary of the Treasury shall publish a proposed rule in the Federal Register requiring persons described in section 5312(a)(2)(Z) of title 31, United States Code, as added by this section, to establish anti-money laundering programs under subsection (h) of section 5318 of that title. The Secretary shall publish such rule in final form in the Federal Register not later than 180 days after the date of the enactment of this Act.



SEC. 204. STRENGTHENING SUMMONS IN CASES INVOLVING OFFSHORE SECRECY JURISDICTIONS.

(a) In General- Subsection (f) of section 7609 is amended to read as follows:

'(f) Additional Requirement in the Case of a John Doe Summons-

'(1) GENERAL RULE- Any summons described in subsection (c)(1) which does not identify the person with respect to whose liability the summons is issued may be served only after a court proceeding in which the Secretary establishes that --

'(A) the summons relates to the investigation of a particular person or ascertainable group or class of persons,

'(B) there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law, and

'(C) the information sought to be obtained from the examination of the records or testimony (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources.

'(2) EXCEPTION- Paragraph (1) shall not apply to any summons which specifies that it is limited to information regarding a United States correspondent account (as defined in section 5318A(e)(1)(B) of title 31, United States Code) or a United States payable-through account (as defined in section 5318A(e)(1)(C) of such title) of a financial institution in an offshore secrecy jurisdiction.

'(3) PRESUMPTION IN CASES INVOLVING OFFSHORE SECRECY JURISDICTIONS- For purposes of this section, in any case in which the particular person or ascertainable group or class of persons have financial accounts in or transactions related to offshore secrecy jurisdictions, there shall be a presumption that there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with provisions of internal revenue law.

'(4) PROJECT JOHN DOE SUMMONSES-

'(A) IN GENERAL- Notwithstanding the requirements of paragraph (1), the Secretary may issue a summons described in paragraph (1) if the summons --

'(i) relates to a project which is approved under subparagraph (B),

'(ii) is issued to a person who is a member of the group or class established under subparagraph (B)(i), and

'(iii) is issued within 3 years of the date on which such project was approved under subparagraph (B).

'(B) APPROVAL OF PROJECTS- A project may only be approved under this subparagraph after a court proceeding in which the Secretary establishes that --

'(i) any summons issues with respect to the project will be issued to a member of an ascertainable group or class of persons, and

'(ii) any summons issued with respect to such project will meet the requirements of subparagraphs (A), (B), and (C) of paragraph (1).

'(C) EXTENSION- Upon application of the Secretary, the court may extend the time for issuing such summonses under subparagraph (A)(i) for additional 3-year periods, but only if the court continues to exercise oversight of such project under subparagraph (D).

'(D) ONGOING COURT OVERSIGHT- During any period in which the Secretary is authorized to issue summonses in relation to a project approved under subparagraph (B) (including during any extension under subparagraph (C)), the Secretary shall report annually to the court on the use of such authority, provide copies of all summonses with such report, and comply with the court's direction with respect to the issuance of any John Doe summons under such project.'.

(b) Jurisdiction of Court-

(1) IN GENERAL- Paragraph (1) of section 7609(h) is amended by inserting after the first sentence the following new sentence: 'Any United States district court in which a member of the group or class to which a summons may be issued resides or is found shall have jurisdiction to hear and determine the approval of a project under subsection (f)(4)(B).'.

(2) CONFORMING AMENDMENT- The first sentence of section 7609(h)(1) is amended by striking '(f)' and inserting '(f)(1)'.

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

(d) GAO Report- Not later than the date which is 5 years after the date of the enactment of this Act, the Comptroller General of the United States shall issue a report on the implementation of section 7609(f)(4) of the Internal Revenue Code of 1986, as added by this section.



SEC. 205. IMPROVING ENFORCEMENT OF FOREIGN FINANCIAL ACCOUNT REPORTING.

(a) Clarifying the Connection of Foreign Financial Account Reporting to Tax Administration- Paragraph (4) of section 6103(b) (relating to tax administration) is amended by adding at the end the following new sentence:

'For purposes of clause (i), section 5314 of title 31, United States Code, and sections 5321 and 5322 of such title (as such sections pertain to such section 5314), shall be considered to be an internal revenue law.'.

(b) Simplifying the Calculation of Foreign Financial Account Reporting Penalties- Section 5321(a)(5)(D)(ii) of title 31, United States Code, is amended by striking 'the balance in the account at the time of the violation' and inserting 'the highest balance in the account during the reporting period to which the violation relates'.

(c) Clarifying the Use of Suspicious Activity Reports Under the Bank Secrecy Act for Civil Tax Law Enforcement- Section 5319 of title 31, United States Code, is amended by inserting 'the civil and criminal enforcement divisions of the Internal Revenue Service,' after 'including'.



TITLE III --COMBATING TAX SHELTER PROMOTERS



SEC. 301. PENALTY FOR PROMOTING ABUSIVE TAX SHELTERS.

(a) Penalty for Promoting Abusive Tax Shelters- Section 6700 (relating to promoting abusive tax shelters, etc.) is amended --

(1) by redesignating subsections (b) and (c) as subsections (d) and (e), respectively,

(2) by striking 'a penalty' and all that follows through the period in the first sentence of subsection (a) and inserting 'a penalty determined under subsection (b)', and

(3) by inserting after subsection (a) the following new subsections:

'(b) Amount of Penalty; Calculation of Penalty; Liability for Penalty-

'(1) AMOUNT OF PENALTY- The amount of the penalty imposed by subsection (a) shall not exceed 150 percent of the gross income derived (or to be derived) from such activity by the person or persons subject to such penalty.

'(2) CALCULATION OF PENALTY- The penalty amount determined under paragraph (1) shall be calculated with respect to each instance of an activity described in subsection (a), each instance in which income was derived by the person or persons subject to such penalty, and each person who participated in such an activity.

'(3) LIABILITY FOR PENALTY- If more than 1 person is liable under subsection (a) with respect to such activity, all such persons shall be jointly and severally liable for the penalty under such subsection.

'(c) Penalty Not Deductible- The payment of any penalty imposed under this section or the payment of any amount to settle or avoid the imposition of such penalty shall not be considered an ordinary and necessary expense in carrying on a trade or business for purposes of this title and shall not be deductible by the person who is subject to such penalty or who makes such payment.'.

(b) Conforming Amendment- Section 6700(a) is amended by striking the last sentence.

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



SEC. 302. PENALTY FOR AIDING AND ABETTING THE UNDERSTATEMENT OF TAX LIABILITY.

(a) In General- Section 6701(a) (relating to imposition of penalty) is amended --

(1) by inserting 'the tax liability or' after 'respect to,' in paragraph (1),

(2) by inserting 'aid, assistance, procurement, or advice with respect to such' before 'portion' both places it appears in paragraphs (2) and (3), and

(3) by inserting 'instance of aid, assistance, procurement, or advice or each such' before 'document' in the matter following paragraph (3).

(b) Amount of Penalty- Subsection (b) of section 6701 (relating to penalties for aiding and abetting understatement of tax liability) is amended to read as follows:

'(b) Amount of Penalty; Calculation of Penalty; Liability for Penalty-

'(1) AMOUNT OF PENALTY- The amount of the penalty imposed by subsection (a) shall not exceed 150 percent of the gross income derived (or to be derived) from such aid, assistance, procurement, or advice provided by the person or persons subject to such penalty.

'(2) CALCULATION OF PENALTY- The penalty amount determined under paragraph (1) shall be calculated with respect to each instance of aid, assistance, procurement, or advice described in subsection (a), each instance in which income was derived by the person or persons subject to such penalty, and each person who made such an understatement of the liability for tax.

'(3) LIABILITY FOR PENALTY- If more than 1 person is liable under subsection (a) with respect to providing such aid, assistance, procurement, or advice, all such persons shall be jointly and severally liable for the penalty under such subsection.'.

(c) Penalty Not Deductible- Section 6701 is amended by adding at the end the following new subsection:

'(g) Penalty Not Deductible- The payment of any penalty imposed under this section or the payment of any amount to settle or avoid the imposition of such penalty shall not be considered an ordinary and necessary expense in carrying on a trade or business for purposes of this title and shall not be deductible by the person who is subject to such penalty or who makes such payment.'.

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



SEC. 303. TAX PLANNING INVENTIONS NOT PATENTABLE.

(a) In General- Section 101 of title 35, United States Code, is amended --

(1) by striking 'Whoever' and inserting '(a) Patentable Inventions-Whoever', and

(2) by adding at the end the following:

'(b) Tax Planning Inventions-

'(1) UNPATENTABLE SUBJECT MATTER- A patent may not be obtained for a tax planning invention.

'(2) DEFINITIONS- For purposes of paragraph (1) --

'(A) the term 'tax planning invention' means a plan, strategy, technique, scheme, process, or system that is designed to reduce, minimize, determine, avoid, or defer, or has, when implemented, the effect of reducing, minimizing, determining, avoiding, or deferring, a taxpayer's tax liability or is designed to facilitate compliance with tax laws, but does not include tax preparation software and other tools or systems used solely to prepare tax or information returns,

'(B) the term 'taxpayer' means an individual, entity, or other person (as defined in section 7701 of the Internal Revenue Code of 1986),

'(C) the terms 'tax', 'tax laws', 'tax liability', and 'taxation' refer to any Federal, State, county, city, municipality, foreign, or other governmental levy, assessment, or imposition, whether measured by income, value, or otherwise, and

'(D) the term 'State' means each of the several States, the District of Columbia, and any commonwealth, territory, or possession of the United States.'.

(b) Applicability- The amendments made by this section --

(1) shall take effect on the date of the enactment of this Act,

(2) shall apply to any application for patent or application for a reissue patent that is --

(A) filed on or after the date of the enactment of this Act, or

(B) filed before that date if a patent or reissue patent has not been issued pursuant to the application as of that date, and

(3) shall not be construed as validating any patent issued before the date of the enactment of this Act for an invention described in section 101(b) of title 35, United States Code, as added by this section.



SEC. 304. PROHIBITED FEE ARRANGEMENT.

(a) In General- Section 6701, as amended by this Act, is amended --

(1) by redesignating subsections (f) and (g) as subsections (g) and (h), respectively,

(2) by striking 'subsection (a).' in paragraphs (2) and (3) of subsection (g) (as redesignated by paragraph (1)) and inserting 'subsection (a) or (f).', and

(3) by inserting after subsection (e) the following new subsection:

'(f) Prohibited Fee Arrangement-

'(1) IN GENERAL- Any person who makes an agreement for, charges, or collects a fee which is for services provided in connection with the internal revenue laws, and the amount of which is calculated according to, or is dependent upon, a projected or actual amount of --

'(A) tax savings or benefits, or

'(B) losses which can be used to offset other taxable income, shall pay a penalty with respect to each such fee activity in the amount determined under subsection (b).

'(2) RULES- The Secretary may issue rules to carry out the purposes of this subsection and may provide exceptions for fee arrangements that are in the public interest.'.

(b) Effective Date- The amendments made by this section shall apply to fee agreements, charges, and collections made after the date of the enactment of this Act.



SEC. 305. PREVENTING TAX SHELTER ACTIVITIES BY FINANCIAL INSTITUTIONS.

(a) Examinations-

(1) DEVELOPMENT OF EXAMINATION TECHNIQUES- Each of the Federal banking agencies and the Commission shall, in consultation with the Internal Revenue Service, develop examination techniques to detect potential violations of section 6700 or 6701 of the Internal Revenue Code of 1986, by depository institutions, brokers, dealers, and investment advisers, as appropriate.

(2) IMPLEMENTATION- Each of the Federal banking agencies and the Commission shall implement the examination techniques developed under paragraph (1) with respect to each of the depository institutions, brokers, dealers, or investment advisers subject to their enforcement authority. Such examination shall, to the extent possible, be combined with any examination by such agency otherwise required or authorized by Federal law.

(b) Report to Internal Revenue Service- In any case in which an examination conducted under this section with respect to a financial institution or other entity reveals a potential violation, such agency shall promptly notify the Internal Revenue Service of such potential violation for investigation and enforcement by the Internal Revenue Service, in accordance with applicable provisions of law.

(c) Report to Congress- The Federal banking agencies and the Commission shall submit a joint written report to Congress in 2010 and 2013 on their progress in preventing violations of sections 6700 and 6701 of the Internal Revenue Code of 1986, by depository institutions, brokers, dealers, and investment advisers, as appropriate.

(d) Definitions- For purposes of this section --

(1) the terms 'broker', 'dealer', and 'investment adviser' have the same meanings as in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c);

(2) the term 'Commission' means the Securities and Exchange Commission;

(3) the term 'depository institution' has the same meaning as in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c));

(4) the term 'Federal banking agencies' has the same meaning as in section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. 1813(q)); and

(5) the term 'Secretary' means the Secretary of the Treasury.



SEC. 306. INFORMATION SHARING FOR ENFORCEMENT PURPOSES.

(a) Promotion of Prohibited Tax Shelters or Tax Avoidance Schemes- Section 6103(h) (relating to disclosure to certain Federal officers and employees for purposes of tax administration, etc.) is amended by adding at the end the following new paragraph:

'(7) DISCLOSURE OF RETURNS AND RETURN INFORMATION RELATED TO PROMOTION OF PROHIBITED TAX SHELTERS OR TAX AVOIDANCE SCHEMES-

'(A) WRITTEN REQUEST- Upon receipt by the Secretary of a written request which meets the requirements of subparagraph (B) from the head of the United States Securities and Exchange Commission, an appropriate Federal banking agency as defined under section 1813(q) of title 12, United States Code, or the Public Company Accounting Oversight Board, a return or return information shall be disclosed to such requestor's officers and employees who are personally and directly engaged in an investigation, examination, or proceeding by such requestor to evaluate, determine, penalize, or deter conduct by a financial institution, issuer, or public accounting firm, or associated person, in connection with a potential or actual violation of section 6700 (promotion of abusive tax shelters), 6701 (aiding and abetting understatement of tax liability), or activities related to promoting or facilitating inappropriate tax avoidance or tax evasion. Such disclosure shall be solely for use by such officers and employees in such investigation, examination, or proceeding. In the discretion of the Secretary, such disclosure may take the form of the participation of Internal Revenue Service employees in a joint investigation, examination, or proceeding with the Securities Exchange Commission, Federal banking agency, or Public Company Accounting Oversight Board.

'(B) REQUIREMENTS- A request meets the requirements of this subparagraph if it sets forth --

'(i) the nature of the investigation, examination, or proceeding,

'(ii) the statutory authority under which such investigation, examination, or proceeding is being conducted,

'(iii) the name or names of the financial institution, issuer, or public accounting firm to which such return information relates,

'(iv) the taxable period or periods to which such return information relates, and

'(v) the specific reason or reasons why such disclosure is, or may be, relevant to such investigation, examination or proceeding.

'(C) FINANCIAL INSTITUTION- For the purposes of this paragraph, the term 'financial institution' means a depository institution, foreign bank, insured institution, industrial loan company, broker, dealer, investment company, investment advisor, or other entity subject to regulation or oversight by the United States Securities and Exchange Commission or an appropriate Federal banking agency.'.

(b) Financial and Accounting Fraud Investigations- Section 6103(i) (relating to disclosure to Federal officers or employees for administration of Federal laws not relating to tax administration) is amended by adding at the end the following new paragraph:

'(9) DISCLOSURE OF RETURNS AND RETURN INFORMATION FOR USE IN FINANCIAL AND ACCOUNTING FRAUD INVESTIGATIONS-

'(A) WRITTEN REQUEST- Upon receipt by the Secretary of a written request which meets the requirements of subparagraph (B) from the head of the United States Securities and Exchange Commission or the Public Company Accounting Oversight Board, a return or return information shall be disclosed to such requestor's officers and employees who are personally and directly engaged in an investigation, examination, or proceeding by such requester to evaluate the accuracy of a financial statement or report, or to determine whether to require a restatement, penalize, or deter conduct by an issuer, investment company, or public accounting firm, or associated person, in connection with a potential or actual violation of auditing standards or prohibitions against false or misleading statements or omissions in financial statements or reports. Such disclosure shall be solely for use by such officers and employees in such investigation, examination, or proceeding.

'(B) REQUIREMENTS- A request meets the requirements of this subparagraph if it sets forth --

'(i) the nature of the investigation, examination, or proceeding,

'(ii) the statutory authority under which such investigation, examination, or proceeding is being conducted,

'(iii) the name or names of the issuer, investment company, or public accounting firm to which such return information relates,

'(iv) the taxable period or periods to which such return information relates, and

'(v) the specific reason or reasons why such disclosure is, or may be, relevant to such investigation, examination or proceeding.'.

(c) Effective Date- The amendments made by this section shall apply to disclosures and to information and document requests made after the date of the enactment of this Act.



SEC. 307. DISCLOSURE OF INFORMATION TO CONGRESS.

(a) Disclosure by Tax Return Preparer-

(1) IN GENERAL- Subparagraph (B) of section 7216(b)(1) (relating to disclosures) is amended to read as follows:

'(B) pursuant to any 1 of the following documents, if clearly identified:

'(i) The order of any Federal, State, or local court of record.

'(ii) A subpoena issued by a Federal or State grand jury.

'(iii) An administrative order, summons, or subpoena which is issued in the performance of its duties by --

'(I) any Federal agency, including Congress or any committee or subcommittee thereof, or

'(II) any State agency, body, or commission charged under the laws of the State or a political subdivision of the State with the licensing, registration, or regulation of tax return preparers.'.

(2) EFFECTIVE DATE- The amendment made by this subsection shall apply to disclosures made after the date of the enactment of this Act pursuant to any document in effect on or after such date.

(b) Disclosure by Secretary- Paragraph (2) of section 6104(a) (relating to inspection of applications for tax exemption or notice of status) is amended to read as follows:

'(2) INSPECTION BY CONGRESS-

'(A) IN GENERAL- Upon receipt of a written request from a committee or subcommittee of Congress, copies of documents related to a determination by the Secretary to grant, deny, revoke, or restore an organization's exemption from taxation under section 501 shall be provided to such committee or subcommittee, including any application, notice of status, or supporting information provided by such organization to the Internal Revenue Service; any letter, analysis, or other document produced by or for the Internal Revenue Service evaluating, determining, explaining, or relating to the tax exempt status of such organization (other than returns, unless such returns are available to the public under this section or section 6103 or 6110); and any communication between the Internal Revenue Service and any other party relating to the tax exempt status of such organization.

'(B) ADDITIONAL INFORMATION- Section 6103(f) shall apply with respect to --

'(i) the application for exemption of any organization described in subsection (c) or (d) of section 501 which is exempt from taxation under section 501(a) for any taxable year and any application referred to in subparagraph (B) of subsection (a)(1) of this section, and

'(ii) any other papers which are in the possession of the Secretary and which relate to such application, as if such papers constituted returns.'.

(c) Effective Date- The amendments made by this section shall apply to disclosures and to information and document requests made after the date of the enactment of this Act.



SEC. 308. TAX OPINION STANDARDS FOR TAX PRACTITIONERS.

Section 330(d) of title 31, United States Code, is amended to read as follows:

'(d) The Secretary of the Treasury shall impose standards applicable to the rendering of written advice with respect to any listed transaction or any entity, plan, arrangement, or other transaction which has a potential for tax avoidance or evasion. Such standards shall address, but not be limited to, the following issues:

'(1) Independence of the practitioner issuing such written advice from persons promoting, marketing, or recommending the subject of the advice.

'(2) Collaboration among practitioners, or between a practitioner and other party, which could result in such collaborating parties having a joint financial interest in the subject of the advice.

'(3) Avoidance of conflicts of interest which would impair auditor independence.

'(4) For written advice issued by a firm, standards for reviewing the advice and ensuring the consensus support of the firm for positions taken.

'(5) Reliance on reasonable factual representations by the taxpayer and other parties.

'(6) Appropriateness of the fees charged by the practitioner for the written advice.

'(7) Preventing practitioners and firms from aiding or abetting the understatement of tax liability by clients.

'(8) Banning the promotion of potentially abusive or illegal tax shelters.'.



SEC. 309. DENIAL OF DEDUCTION FOR CERTAIN FINES, PENALTIES, AND OTHER AMOUNTS.

(a) In General- Subsection (f) of section 162 (relating to trade or business expenses) is amended to read as follows:

'(f) Fines, Penalties, and Other Amounts-

'(1) IN GENERAL- Except as provided in paragraph (2), no deduction otherwise allowable shall be allowed under this chapter for any amount paid or incurred (whether by suit, agreement, or otherwise) to, or at the direction of, a government or entity described in paragraph (4) in relation to the violation of any law or the investigation or inquiry by such government or entity into the potential violation of any law.

'(2) EXCEPTION FOR AMOUNTS CONSTITUTING RESTITUTION- Paragraph (1) shall not apply to any amount which --

'(A) the taxpayer establishes constitutes restitution (including remediation of property) for damage or harm caused by or which may be caused by the violation of any law or the potential violation of any law, and

'(B) is identified as restitution in the court order or settlement agreement.

Identification pursuant to subparagraph (B) alone shall not satisfy the requirement under subparagraph (A). This paragraph shall not apply to any amount paid or incurred as reimbursement to the government or entity for the costs of any investigation or litigation.

'(3) EXCEPTION FOR AMOUNTS PAID OR INCURRED AS THE RESULT OF CERTAIN COURT ORDERS- Paragraph (1) shall not apply to any amount paid or incurred by order of a court in a suit in which no government or entity described in paragraph (4) is a party.

'(4) CERTAIN NONGOVERNMENTAL REGULATORY ENTITIES- An entity is described in this paragraph if it is --

'(A) a nongovernmental entity which exercises self-regulatory powers (including imposing sanctions) in connection with a qualified board or exchange (as defined in section 1256(g)(7)), or

'(B) to the extent provided in regulations, a nongovernmental entity which exercises self-regulatory powers (including imposing sanctions) as part of performing an essential governmental function.

'(5) EXCEPTION FOR TAXES DUE- Paragraph (1) shall not apply to any amount paid or incurred as taxes due.'.

(b) Effective Date- The amendment made by this section shall apply to amounts paid or incurred on or after the date of the enactment of this Act, except that such amendment shall not apply to amounts paid or incurred under any binding order or agreement entered into before such date. Such exception shall not apply to an order or agreement requiring court approval unless the approval was obtained before such date.



TITLE IV --REQUIRING ECONOMIC SUBSTANCE



SEC. 401. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

(a) In General- Section 7701, as amended by section 103, 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) subject to clause (iii), the taxpayer has a substantial purpose (other than a Federal tax purpose) for entering into such transaction.

'(ii) SPECIAL RULE WHERE TAXPAYER RELIES ON PROFIT POTENTIAL- A transaction shall not be treated as having economic substance solely by reason of having a potential for profit unless the present value of the reasonably expected pre-Federal tax profit from the transaction is substantial in relation to the present value of the expected net Federal tax benefits that would be allowed if the transaction were respected. In determining pre-Federal tax profit, there shall be taken into account fees and other transaction expenses and to the extent provided by the Secretary, foreign taxes.

'(iii) SPECIAL RULES FOR DETERMINING WHETHER NON-FEDERAL TAX PURPOSE-For purposes of clause (i)(II) --

'(I) a purpose of achieving a financial accounting benefit shall not be taken into account in determining whether a transaction has a substantial purpose (other than a Federal tax purpose) if the origin of such financial accounting benefit is a reduction of Federal tax, and

'(II) the taxpayer shall not be treated as having a substantial purpose (other than a Federal tax purpose) with respect to a transaction if the only such purpose is the reduction of non-Federal taxes and the transaction will result in a reduction of Federal taxes substantially equal to, or greater than, the reduction in non-Federal taxes because of similarities between the laws imposing the taxes.

'(2) 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) 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.

'(3) OTHER PROVISIONS 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 or provision of this title, and the requirements of this subsection shall be construed as being in addition to any such other rule of law or provision of this title.

'(4) 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. 402. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS LACKING ECONOMIC SUBSTANCE, ETC.

(a) In General- Subchapter A of chapter 68 is amended by inserting after section 6662A the following new section:



'SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS LACKING ECONOMIC SUBSTANCE, ETC.

'(a) Imposition of Penalty- If a taxpayer has an noneconomic substance transaction understatement for any taxable year, there shall be added to the tax an amount equal to 30 percent of the amount of such understatement.

'(b) Reduction of Penalty for Disclosed Transactions- Subsection (a) shall be applied by substituting '20 percent' for '30 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 there is a lack of economic substance (within the meaning of section 7701(p)(1)(B)) for the transaction giving rise to the claimed benefit.

'(d) Rules Applicable to Assertion, Compromise, and Collection of Penalty-

'(1) IN GENERAL- Only the Chief Counsel for the Internal Revenue Service may assert a penalty imposed under this section or may compromise all or any portion of such penalty. The Chief Counsel may delegate the authority under this paragraph only to an individual holding the position of chief of a branch within the Office of the Chief Counsel for the Internal Revenue Service.

'(2) SPECIFIC REQUIREMENTS-

'(A) ASSERTION OF PENALTY- The Chief Counsel for the Internal Revenue Service (or the Chief Counsel's delegate under paragraph (1)) shall not assert a penalty imposed under this section unless, before the assertion of the penalty, the taxpayer is provided --

'(i) a notice of intent to assert the penalty, and

'(ii) an opportunity to provide to the Commissioner (or the Chief Counsel's delegate under paragraph (1)) a written response to the proposed penalty within a reasonable period of time after such notice.

'(B) COMPROMISE OF PENALTY- A compromise shall not result in a reduction in the penalty imposed by this section in an amount greater than the amount which bears the same ratio to the amount of the penalty determined without regard to the compromise as --

'(i) the reduction under the compromise in the noneconomic substance transaction understatement to which the penalty relates, bears to

'(ii) the amount of the noneconomic substance transaction understatement determined without regard to the compromise.

'(3) RULES RELATING TO RELEVANCY REQUIREMENT-

'(A) DETERMINATION OF RELEVANCE BY CHIEF COUNSEL- The Chief Counsel for the Internal Revenue Service (or the Chief Counsel's delegate under paragraph (1)) may assert, compromise, or collect a penalty imposed by this section with respect to a noneconomic substance transaction even if there has not been a court determination that the economic substance doctrine was relevant for purposes of this title to the transaction if the Chief Counsel (or delegate) determines that either was so relevant.

'(B) FINAL ORDER OF COURT- If there is a final order of a court that determines that the economic substance doctrine was not relevant for purposes of this title to a transaction (or series of transactions), any penalty imposed under this section with respect to the transaction (or series of transactions) shall be rescinded.

'(4) APPLICABLE RULES- The rules of paragraphs (2) and (3) of section 6707A(d) shall apply to a compromise under 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) --

(i) by inserting '6662B or' before '6663' in the text, and

(ii) by striking 'penalty' in the heading and inserting 'and economic substance penalties',

(C) in paragraph (2)(B) --

(i) by inserting 'and section 6662B' after 'This section', and

(ii) by striking 'penalty' in the heading and inserting 'and economic substance penalties',

(D) in paragraph (3), by inserting 'or noneconomic substance transaction understatement' after 'reportable transaction understatement', and

(E) 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)(B)) have been subject to penalty under section 6662A at a rate prescribed under section 6662A(c) or to penalty 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. 403. 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' in the heading thereof 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.
Edward Kleinbard, chief of staff, Joint Committee on Taxation, told tax practitioners that the limits on the current tax withholding system make it difficult to enforce international tax compliance. Kleinbard spoke at the Tax Executive Institute's 59th Midyear Conference in Washington, D.C., on March 31.

With respect to international tax enforcement, Kleinbard commented that "the global recession and the UBS scandal have created a Katrina-type moment. There is a push to improve tax enforcement and deter tax havens." Kleinbard emphasized that, for the first time, international tax enforcement is an agenda item at the G-20 summit.

Potential Solutions
Kleinbard stated that international tax enforcement requires a "coordinated global effort." Countries should collect all income information within their jurisdiction. In the alternative, Kleinbard suggested the withholding of U.S. tax from all investment income, with the investor seeking resolution if the income was wrongfully withheld.

Kleinbard admitted that both suggestions are "distasteful, intrusive and impose burdens." However, he added that taking such steps may be unavoidable in order to address the fundamental concerns of all countries.

Congressional Initiatives
Kleinbard described congressional action to combat offshore tax havens, including the Stop Tax Haven Abuse Act (Sen 506). The bill would blacklist 34 countries and impose new reporting obligations on banks when a U.S. customer establishes a foreign bank account.

In addition, the Senate Finance Committee has prepared a discussion draft of a tax compliance bill. According to Kleinbard, the draft bill includes new due diligence requirements for tax return preparers. The bill also would include the Report of Foreign Bank and Financial Accounts (FBAR) rules in the tax code, Kleinbard explained.

Treasury/IRS Actions
The Treasury has entered into a new information exchange agreement with Belgium that would require Belgium to abandon its bank secrecy laws, Kleinbard remarked. Treasury has also given Liechtenstein a year to change its bank secrecy laws under an information exchange agreement, he added.

Kleinbard observed that the IRS has announced an "amnesty program" for people with offshore banks accounts (TAXDAY, 2009/03/27, I.3). Kleinbard further mentioned that the IRS is revising the qualified intermediary program to include reporting of all income of U.S. customers, not just U.S. source income.
IRS Announces New Voluntary Disclosure Terms for Offshore Account Holders, Sets Six-Month Deadlines
The IRS has announced new steps to coax U.S. taxpayers with undisclosed foreign bank accounts to come forward. In return for paying back taxes for the past six years, plus interest and a set of stiff penalties, the IRS will promise not to bring criminal charges or the 75-percent fraud penalty. IRS Commissioner Douglas H. Shulman announced this policy shift and clarification at a press briefing from his Washington, D.C. offices on March 26, at which he also released internal IRS documents that put the plan into motion.

"We believe the guidance represents a firm, but fair, resolution of these cases and will provide consistent treatment for taxpayers," Shulman explained. "The goal is to have a predictable set of outcomes to encourage people to come forward and take advantage of our voluntary disclosure practice while they still can." He set a deadline of six months for disclosures under the terms of the guidance, at which time the program will be re-evaluated.

The IRS has issued a series of three memoranda, and has revised the Internal Revenue Manual (IRM), to reflect updated policies concerning voluntary disclosure, primarily in connection with offshore transactions. Voluntary disclosure occurs when a taxpayer timely discloses information necessary to determine or correct the taxpayer's liability. The IRM continues to provide that its voluntary disclosure practices do not create any substantive or procedural rights for taxpayers, but are a matter of internal IRS practice.

Voluntary Disclosure Terms
Shulman emphasized that the terms being offered for the disclosure of offshore accounts are an outgrowth of current policy and carry penalties at a level consistent with voluntary disclosure programs in the past. Within this framework, Shulman enumerated the amounts that would need to be paid by taxpayers with heretofore undisclosed offshore accounts who "come clean" under the program:

--Back taxes due on newly disclosed assets for the last six years;

--Interest due on these back taxes for the last six years;

--A 20-percent accuracy-related under Code Sec. 6662 or a 25-percent delinquency penalty under Code Sec. 6651 for each tax year at issue; and

Looking to the past six years, a 20-percent penalty on the total balance of all the taxpayer's foreign bank accounts or assets during the year among the past six in which the accounts had their highest aggregate value.

CCH Comment. This latter penalty is reduced to 5 percent for passive investors in certain transactions.

While Shulman observed that the penalties demanded under the program are not insubstantial, he pointed to several advantages to participating taxpayers regarding what the IRS will not do:

--The IRS will not pursue charges of criminal tax evasion against taxpayers who voluntarily disclose their offshore assets under this new policy; and

--The IRS will not pursue other penalties against participating taxpayers, such as the Code Sec. 6663 fraud penalties (75-percent of the unpaid tax) or the statutory penalty for willful failure to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or 50-percent of the foreign account balance) that both annually apply to undisclosed accounts and assets during the relevant tax years.

Shulman also touted the advantage to offshore account holders of "getting the matter behind them" and giving them certainty as to their tax liability.

In a follow-up comment, an IRS spokesman emphasized that "it is too late for any taxpayer who is under criminal investigation to make a voluntary disclosure. The IRS cannot discuss specific situations, but the voluntary disclosure process does not apply when the IRS has information related to a specific taxpayer from a criminal enforcement action."

CCH Comment. The issue apparently remains unclear as to whether taxpayers recently disclosed by the Swiss Bank, UBS, as holding undisclosed bank accounts in Switzerland may successfully participate in this initiative. The IRS provided reporters during the March 26 briefing a copy of Section 9.5.11.9 of the Internal Revenue Manual that holds taxpayers to have timely participated in the voluntary disclosure program if they disclose before the IRS has initiated a civil or criminal examination or notified the taxpayer of such an investigation. Their failure to disclose their accounts/assets before the IRS received notice under the UBS deferred prosecution agreement may, therefore, be irrelevant.

Other Documents Provided
In addition to the announcement of its penalty framework for voluntary disclosures of offshore accounts, the IRS also provided reporters with the following documents:

Offshore Case Development. An SBSE memorandum provides that field personnel should give priority treatment to offshore transactions and entities during examinations, with a special emphasis on detecting unreported income. Examiners are instructed to use all tools, including interviewing taxpayers, making third party contacts, and timely issuing summonses in order to gather information and make determinations about applicable penalties. Managers are asked to ensure that income and penalty considerations are fully developed and documented. The memorandum also advises that as of March 23, 2009, taxpayers will no longer be permitted to minimize penalties through the Last Chance Compliance Initiative (LCCI). Relevant portions of the IRM addressing the LCCI are in the process of being obsoleted. Taxpayers in open examinations where LCCI terms have been offered will be able to resolve their cases under LCCI if they respond to the examiner within 15 days of their prior notification.

Voluntary Disclosure. Another SBSE memorandum addresses a change in the processing of voluntary disclosure requests containing offshore issues. Such requests will continue to be initially screened by Criminal Investigation (CI) to determine eligibility for voluntary disclosure and, if involving only domestic issues, will be forwarded to Area Planning and Special Programs for civil processing. Voluntary disclosure eligibility for offshore issues, including those in current inventory, will be initially screened by CI, and forwarded to the Philadelphia Offshore Identification Unit (POIU) for processing.

For submitted, but as yet unresolved, disclosure requests forwarded to the POIU, an internal LMSB memorandum sets forth a liability and penalty framework to be used for processing such cases during the next six months. POIU is authorized to assess all taxes and interest going back six years, or the period of existence of an account/entity if shorter, require the taxpayer to file or amend all returns, and impose an applicable penalty as set forth in the memorandum.

Finally, the Internal Revenue Manual (IRM) has been updated to reflect the initial evaluation of voluntary disclosure requests by CI. Minor revisions to the examples of what constitutes voluntary and not voluntary disclosures have also been made.