[House Report 108-158]
[From the U.S. Government Publishing Office]
108th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 108-158
======================================================================
PROVIDING FOR CONSIDERATION OF H.R. 1528, TAXPAYER PROTECTION AND IRS
ACCOUNTABILITY ACT OF 2003
_______
June 17, 2003.--Referred to the House Calendar and ordered to be
printed
_______
Mr. Hastings of Washington, from the Committee on Rules, submitted the
following
R E P O R T
[To accompany H. Res. 282]
The Committee on Rules, having had under consideration
House Resolution 282, by a nonrecord vote, report the same to
the House with the recommendation that the resolution be
adopted.
SUMMARY OF PROVISIONS OF THE RESOLUTION
The resolution provides for the consideration of H.R. 1528,
the Taxpayer Protection and IRS Accountability Act of 2003,
under a modified closed rule. The rule provides one hour of
debate in the House equally divided and controlled by the
chairman and ranking minority member of the Committee on Ways
and Means. The rule waives all points of order against
consideration of the bill.
The rule provides that the amendment in the nature of a
substitute recommended by the Committee on Ways and Means, as
modified by the amendment printed in Part A of the Rules
Committee report accompanying the resolution, shall be
considered as adopted. The rule waives all points of order
against the bill, as amended.
The rule provides for consideration of the amendment
printed in Part B of this report, if offered by Representative
Rangel or his designee, which shall be considered as read and
shall be separately debatable for one hour equally divided and
controlled by the proponent and an opponent. The rule waives
all points of order against the amendment printed in Part B of
this report.
Finally, provides one motion to recommit with or without
instructions.
COMMITTEE VOTES
Pursuant to clause 3(b) of House rule XIII the results of
each record vote on an amendment or motion to report, together
with the names of those voting for and against, are printed
below:
Rules Committee record vote No. 112
Date: June 17, 2003.
Measure: H.R. 1528--Taxpayer Protection and IRS
Accountability Act of 2003.
Motion by: Mrs. Slaughter.
Summary of motion: To make in order the amendment offered
by Representative Maloney which holds the IRS accountable for
the tax treatment of 9/11 CDBG relief grants for individuals
and businesses in lower Manhattan. Clarifies that the grants
should be exempt from federal tax. Refunds taxes already paid
on grants and makes future grants tax exempt.
Results: Defeated 4 to 8.
Vote by Members: Goss--Nay; Linder--Nay; Pryce--Nay;
Hastings (WA)--Nay; Myrick--Nay; Sessions--Nay; Reynolds--Nay;
Frost--Yea; Slaughter--Yea; McGovern--Yea; Hastings (FL)--Yea;
Dreier--Nay.
Rules Committee record vote No. 113
Date: June 17, 2003.
Measure: H.R. 1528--Taxpayer Protection and IRS
Accountability Act of 2003.
Motion by: Mr. Hastings of Florida.
Summary of motion: To report an open rule.
Results: Defeated 4 to 8.
Vote by Members: Goss--Nay; Linder--Nay; Pryce--Nay;
Hastings (WA)--Nay; Myrick--Nay; Sessions--Nay; Reynolds--Nay;
Frost--Yea; Slaughter--Yea; McGovern--Yea; Hastings (FL)--Yea;
Dreier--Nay.
Part A--Summary of amendment to be considered as adopted
Thomas: Sunsets the 15 day extension of tax filing date for
electronic filers in 3 years (rather than 5). Replaces the
Health Insurance Tax Credit Waiver language with modified
language that limits the availability of the waiver to
residents of States without an approved plan (currently
expected to be about 21 States) and only allows waiver of pre-
existing conditions exclusions and the guarantee requirement
and sunsets the waiver in December 31, 2004. Extends the joint
review of the IRS for 5 years.
Part B--Summary of amendment made in order
Rangel: Amendment in the Nature of a Substitute. Includes
numerous, noncontroversial taxpayer protection provisions of
H.R. 1528. Removes the Health Insurance Tax Credit Waiver. Adds
provisions to address abusive tax shelters, EITC
simplification, audit fairness for low-income taxpayers,
enhanced low-income taxpayer clinics, an EITC pre-certification
program only if authorized, and other provisions designed to
assist low and middle-income taxpayers in complying with the
tax laws. Includes the provisions of the Senate-passed child
tax credit expansion bill. Includes the provisions of the
Senate-passed military tax relief bill.
PART A--TEXT OF AMENDMENT TO BE CONSIDERED AS ADOPTED
Page 35, line 18, strike ``2007'' and insert ``2005''.
Page 39, strike line 14 and all that follows through line 11
on page 40 (all of section 309 of the bill) and insert the
following new section:
SEC. 309. HEALTH INSURANCE COSTS OF ELIGIBLE INDIVIDUALS.
(a) Consumer Options.--
(1) In general.--Paragraph (2) of section 35(e) is
amended by adding at the end the following new
subparagraphs:
``(C) Waiver by eligible individuals.--With
respect to any month, clauses (i) and (ii) of
subparagraph (A) shall not apply with respect
to any eligible individual and such
individual's qualifying family members if such
individual--
``(i) does not reside in a State
which the Secretary has identified by
regulation, guidance, or otherwise as a
State in which any coverage which--
``(I) is described in any of
subparagraphs (C) through (H)
of paragraph (1), and
``(II) meets the requirements
of subparagraphs (A) and (B) of
this paragraph,
is available to eligible individuals
(and their qualifying family members)
residing in the State, and
``(ii) elects to waive the
application of clauses (i) and (ii) of
subparagraph (A) of this paragraph.
``(D) Election.--Any election made under
subparagraph (C)(ii) shall be effective for the
month for which such election is made and for
all subsequent months.
``(E) Termination.--Subparagraphs (C) and (D)
shall not apply to any month beginning after
December 31, 2004.''.
(2) No Impact on State Consumer Protections.--Nothing
in the amendment made by paragraph (1) supercedes or
otherwise affects the application of State law relating
to consumer insurance protections (including State law
implementing the requirements of part B of title XXVII
of the Public Health Service Act).
(b) State-Based Continuation Coverage Not Subject to
Requirements.--Subparagraphs (A) and (B)(i) of section 35(e)(2)
are each amended by striking ``subparagraphs (B) through (H)''
and inserting ``subparagraphs (C) through (H)''.
(c) Effective Date.--
(1) Consumer options.--The amendment made by
subsection (a) shall apply to months beginning after
the date of the enactment of this Act.
(2) State-based continuation coverage.--The
amendments made by subsection (b) shall take effect as
if included in section 201(a) of the Trade Act of 2002.
Page 45, after line 3, insert the following new section (and
amend the table of contents accordingly):
SEC. 311. EXTENSION OF JOINT REVIEW OF STRATEGIC PLANS AND BUDGET FOR
THE INTERNAL REVENUE SERVICE.
(a) In General.--Paragraph (2) of section 8021(f) (relating
to joint reviews) is amended by striking ``2004'' and inserting
``2009''.
(b) Report.--Subparagraph (C) of section 8022(3) (regarding
reports) is amended--
(1) by striking ``2004'' and inserting ``2009'', and
(2) by striking ``with respect to--'' and all that
follows and inserting ``with respect to the matters
addressed in the joint review referred to in section
8021(f)(2).''.
PART B--TEXT OF AMENDMENT MADE IN ORDER
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE; REFERENCE; TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``Taxpayer and
Fairness Protection Act of 2003''.
(b) Amendment of 1986 Code.--Except as otherwise expressly
provided, whenever in this Act an amendment or repeal is
expressed in terms of an amendment to, or repeal of, a section
or other provision, the reference shall be considered to be
made to a section or other provision of the Internal Revenue
Code of 1986.
(c) Table of Contents.--The table of contents for this Act is
as follows:
Sec. 1. Short title; reference; table of contents.
TITLE I--ELIMINATION OF ABUSIVE TAX STRATEGIES
Sec. 101. Findings and purpose.
Subtitle A--Tax Shelters
Part I--Provisions Designed to Curtail Tax Shelters
Sec. 111. Clarification of economic substance doctrine.
Sec. 112. Penalty for failing to disclose reportable transaction.
Sec. 113. Accuracy-related penalty for listed transactions and other
reportable transactions having a significant tax avoidance
purpose.
Sec. 114. Penalty for understatements attributable to transactions
lacking economic substance, etc.
Sec. 115. Modifications of substantial understatement penalty for
nonreportable transactions.
Sec. 116. Tax shelter exception to confidentiality privileges relating
to taxpayer communications.
Sec. 117. Disclosure of reportable transactions.
Sec. 118. Modifications to penalty for failure to register tax shelters.
Sec. 119. Modification of penalty for failure to maintain lists of
investors.
Sec. 120. Modification of actions to enjoin certain conduct related to
tax shelters and reportable transactions.
Sec. 121. Understatement of taxpayer's liability by income tax return
preparer.
Sec. 122. Penalty on failure to report interests in foreign financial
accounts.
Sec. 123. Frivolous tax submissions.
Sec. 124. Regulation of individuals practicing before the Department of
Treasury.
Sec. 125. Penalty on promoters of tax shelters.
Sec. 126. Statute of limitations for taxable years for which listed
transactions not reported.
Sec. 127. Denial of deduction for interest on underpayments attributable
to nondisclosed reportable and noneconomic substance
transactions.
Part II--Other Provisions
Sec. 131. Limitation on transfer or importation of built-in losses.
Sec. 132. Disallowance of certain partnership loss transfers.
Sec. 133. No reduction of basis under section 734 in stock held by
partnership in corporate partner.
Sec. 134. Repeal of special rules for FASITS.
Sec. 135. Expanded disallowance of deduction for interest on convertible
debt.
Sec. 136. Expanded authority to disallow tax benefits under section 269.
Sec. 137. Modifications of certain rules relating to controlled foreign
corporations.
Sec. 138. Basis for determining loss always reduced by nontaxed portion
of dividends.
Sec. 139. Affirmation of consolidated return regulation authority.
Subtitle B--Prevention of corporate expatriation to avoid United States
income tax
Sec. 151. Prevention of corporate expatriation to avoid United States
income tax.
TITLE II--SIMPLIFICATION OF EARNED INCOME TAX CREDIT
Sec. 201. Simplification of earned income tax credit.
Sec. 202. Profiling of earned income tax credit beneficiaries.
TITLE III--TAXPAYER PROTECTIONS AND IRS ACCOUNTABILITY
Subtitle A--Penalty and Interest Reforms
Sec. 301. Failure to pay estimated tax penalty converted to interest
charge on accumulated unpaid balance.
Sec. 302. Abatement of interest.
Sec. 303. Deposits made to suspend running of interest on potential
underpayments.
Sec. 304. Expansion of interest netting for individuals.
Sec. 305. Waiver of certain penalties for first-time unintentional minor
errors.
Sec. 306. Frivolous tax submissions.
Sec. 307. Clarification of application of Federal tax deposit penalty.
Subtitle B--Fairness of Collection Procedures
Sec. 311. Partial payment of tax liability in installment agreements.
Sec. 312. Extension of time for return of property.
Sec. 313. Individuals held harmless on wrongful levy, etc., on
individual retirement plan.
Sec. 314. Seven-day threshold on tolling of statute of limitations
during tax review.
Sec. 315. Study of liens and levies.
Subtitle C--Tax Administration Reforms
Sec. 331. Revisions relating to termination of employment of Internal
Revenue Service employees for misconduct.
Sec. 332. Confirmation of authority of tax court to apply doctrine of
equitable recoupment.
Sec. 333. Jurisdiction of Tax Court over collection due process cases.
Sec. 334. Office of Chief Counsel review of offers in compromise.
Sec. 335. Access of National Taxpayer Advocate to independent legal
counsel.
Sec. 336. Payment of motor fuel excise tax refunds by direct deposit.
Sec. 337. Family business tax simplification.
Sec. 338. Suspension of tax-exempt status of terrorist organizations.
Sec. 339. Tax refund anticipation loans.
Sec. 340. Fairness in tax audit coverage.
Subtitle D--Confidentiality and Disclosure
Sec. 341. Collection activities with respect to joint return disclosable
to either spouse based on oral request.
Sec. 342. Taxpayer representatives not subject to examination on sole
basis of representation of taxpayers.
Sec. 343. Disclosure in judicial or administrative tax proceedings of
return and return information of persons who are not party to
such proceedings.
Sec. 344. Prohibition of disclosure of taxpayer identification
information with respect to disclosure of accepted offers-in-
compromise.
Sec. 345. Compliance by contractors with confidentiality safeguards.
Sec. 346. Higher standards for requests for and consents to disclosure.
Sec. 347. Notice to taxpayer concerning administrative determination of
browsing; annual report.
Sec. 348. Expanded disclosure in emergency circumstances.
Sec. 349. Disclosure of taxpayer identity for tax refund purposes.
Sec. 350. Disclosure to State officials of proposed actions related to
section 501(c)(3) organizations.
Sec. 351. Confidentiality of taxpayer communications with the Office of
the Taxpayer Advocate.
Subtitle E--Miscellaneous
Sec. 361. Clarification of definition of church tax inquiry.
Sec. 362. Expansion of declaratory judgment remedy to tax-exempt
organizations.
Sec. 363. Employee misconduct report to include summary of complaints by
category.
Sec. 364. Annual report on awards of costs and certain fees in
administrative and court proceedings.
Sec. 365. Annual report on abatement of penalties.
Sec. 366. Better means of communicating with taxpayers.
Sec. 367. Explanation of statute of limitations and consequences of
failure to file.
Sec. 368. Amendment to Treasury auction reforms.
Sec. 369. Enrolled agents.
Sec. 370. Financial management service fees.
Sec. 371. Extension of Internal Revenue Service user fees.
Subtitle F--Low-Income Taxpayer Clinics
Sec. 381. Low-income taxpayer clinics.
Sec. 382. Matching grants to low income return preparation clinics.
TITLE IV--CHILD TAX CREDIT
Sec. 401. Acceleration of increase in refundability of the child tax
credit.
Sec. 402. Reduction in marriage penalty in child tax credit.
Sec. 403. Application of EGTRRA sunset to this section.
TITLE V--UNIFORM DEFINITION OF CHILD
Sec. 501. Uniform definition of child, etc.
Sec. 502. Modifications of definition of head of household.
Sec. 503. Modifications of dependent care credit.
Sec. 504. Modifications of child tax credit.
Sec. 505. Modifications of earned income credit.
Sec. 506. Modifications of deduction for personal exemption for
dependents.
Sec. 507. Technical and conforming amendments.
Sec. 508. Effective date.
TITLE VI--IMPROVING TAX EQUITY FOR MILITARY PERSONNEL
Sec. 601. Exclusion of gain from sale of a principal residence by a
member of the Uniformed Services or the Foreign Service.
Sec. 602. Exclusion from gross income of certain death gratuity
payments.
Sec. 603. Exclusion for amounts received under Department of Defense
homeowners assistance program.
Sec. 604. Expansion of combat zone filing rules to contingency
operations.
Sec. 605. Modification of membership requirement for exemption from tax
for certain veterans' organizations.
Sec. 606. Clarification of the treatment of certain dependent care
assistance programs.
Sec. 607. Clarification relating to exception from additional tax on
certain distributions from qualified tuition programs, etc. on
account of attendance at military academy.
Sec. 608. Suspension of tax-exempt status of terrorist organizations.
Sec. 609. Above-the-line deduction for overnight travel expenses of
National Guard and Reserve members.
Sec. 610. Tax relief and assistance for families of Space Shuttle
Columbia heroes.
TITLE VII--OTHER PROVISIONS
Sec. 701. Revision of tax rules on expatriation.
Sec. 702. Extension of Customs user fees.
TITLE I--ELIMINATION OF ABUSIVE TAX STRATEGIES
SEC. 101. FINDINGS AND PURPOSE.
(a) Findings.--The Congress hereby finds that:
(1) Many corporate tax shelter transactions are
complicated ways of accomplishing nothing aside from
claimed tax benefits, and the legal opinions justifying
those transactions take an inappropriately narrow and
restrictive view of well-developed court doctrines
under which--
(A) the taxation of a transaction is
determined in accordance with its substance and
not merely its form,
(B) transactions which have no significant
effect on the taxpayer's economic or beneficial
interests except for tax benefits are treated
as sham transactions and disregarded,
(C) transactions involving multiple steps are
collapsed when those steps have no substantial
economic meaning and are merely designed to
create tax benefits,
(D) transactions with no business purpose are
not given effect, and
(E) in the absence of a specific
congressional authorization, it is presumed
that Congress did not intend a transaction to
result in a negative tax where the taxpayer's
economic position or rate of return is better
after tax than before tax.
(2) Permitting aggressive and abusive tax shelters
not only results in large revenue losses but also
undermines voluntary compliance with the Internal
Revenue Code of 1986.
(b) Purpose.--The purpose of this title is to eliminate
abusive tax shelters by denying tax attributes claimed to arise
from transactions that do not meet a heightened economic
substance requirement and by repealing the provision that
permits legal opinions to be used to avoid penalties on tax
underpayments resulting from transactions without significant
economic substance or business purpose.
Subtitle A--Tax Shelters
Part I--Provisions Designed to Curtail Tax Shelters
SEC. 111. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.
(a) In General.--Section 7701 is amended by redesignating
subsection (m) as subsection (n) and by inserting after
subsection (l) the following new subsection:
``(m) Clarification of Economic Substance Doctrine; etc.--
``(1) General rules.--
``(A) In general.--In applying the economic
substance doctrine, the determination of
whether a transaction has economic substance
shall be made as provided in this paragraph.
``(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 and, if
there is any Federal tax
effects, also apart from any
foreign, State, or local tax
effects) the taxpayer's
economic position, and
``(II) the taxpayer has a
substantial nontax purpose for
entering into such transaction
and the transaction is a
reasonable means of
accomplishing such purpose.
``(ii) Special rule where taxpayer
relies on profit potential.--A
transaction shall not be treated as
having economic substance by reason of
having a potential for profit unless--
``(I) the present value of
the reasonably expected pre-tax
profit from the transaction is
substantial in relation to the
present value of the expected
net tax benefits that would be
allowed if the transaction were
respected, and
``(II) the reasonably
expected pre-tax profit from
the transaction exceeds a risk-
free rate of return.
``(C) Treatment of fees and foreign taxes.--
Fees and other transaction expenses and foreign
taxes shall be taken into account as expenses
in determining pre-tax profit under
subparagraph (B)(ii).
``(2) Special rules for transactions with tax-
indifferent parties.--
``(A) Special rules for financing
transactions.--The form of a transaction which
is in substance the borrowing of money or the
acquisition of financial capital directly or
indirectly from a tax-indifferent party shall
not be respected if the present value of the
deductions to be claimed with respect to the
transaction is substantially in excess of the
present value of the anticipated economic
returns of the person lending the money or
providing the financial capital. A public
offering shall be treated as a borrowing, or an
acquisition of financial capital, from a tax-
indifferent party if it is reasonably expected
that at least 50 percent of the offering will
be placed with tax-indifferent parties.
``(B) Artificial income shifting and basis
adjustments.--The form of a transaction with a
tax-indifferent party shall not be respected
if--
``(i) it results in an allocation of
income or gain to the tax-indifferent
party in excess of such party's
economic income or gain, or
``(ii) it results in a basis
adjustment or shifting of basis on
account of overstating the income or
gain of the tax-indifferent party.
``(3) Definitions and special rules.--For purposes of
this subsection--
``(A) Economic substance doctrine.--The term
`economic substance doctrine' means the common
law doctrine under which tax benefits under
subtitle A with respect to a transaction are
not allowable if the transaction does not have
economic substance or lacks a business purpose.
``(B) Tax-indifferent party.--The term `tax-
indifferent party' means any person or entity
not subject to tax imposed by subtitle A. A
person shall be treated as a tax-indifferent
party with respect to a transaction if the
items taken into account with respect to the
transaction have no substantial impact on such
person's liability under subtitle A.
``(C) Substantial nontax purpose.--In
applying subclause (II) of paragraph (1)(B)(i),
a purpose of achieving a financial accounting
benefit shall not be taken into account in
determining whether a transaction has a
substantial nontax purpose if the origin of
such financial accounting benefit is a
reduction of income tax.
``(D) 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.
``(E) Treatment of lessors.--In applying
subclause (I) of paragraph (1)(B)(ii) to the
lessor of tangible property subject to a lease,
the expected net tax benefits shall not include
the benefits of depreciation, or any tax
credit, with respect to the leased property and
subclause (II) of paragraph (1)(B)(ii) shall be
disregarded in determining whether any of such
benefits are allowable.
``(4) Other common law doctrines not affected.--
Except as specifically provided in this subsection, the
provisions of this subsection shall not be construed as
altering or supplanting any other rule of law, and the
requirements of this subsection shall be construed as
being in addition to any such other rule of law.
``(5) Regulations.--The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this subsection. Such
regulations may include exemptions from the application
of this subsection.''
(b) Effective Date.--The amendments made by this section
shall apply to transactions entered into after February 13,
2003.
SEC. 112. PENALTY FOR FAILING TO DISCLOSE REPORTABLE TRANSACTION.
(a) In General.--Part I of subchapter B of chapter 68
(relating to assessable penalties) is amended by inserting
after section 6707 the following new section:
``SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORTABLE TRANSACTION
INFORMATION WITH RETURN OR STATEMENT.
``(a) Imposition of Penalty.--Any person who fails to include
on any return or statement any information with respect to a
reportable transaction which is required under section 6011 to
be included with such return or statement shall pay a penalty
in the amount determined under subsection (b).
``(b) Amount of Penalty.--
``(1) In general.--Except as provided in paragraphs
(2) and (3), the amount of the penalty under subsection
(a) shall be $50,000.
``(2) Listed transaction.--The amount of the penalty
under subsection (a) with respect to a listed
transaction shall be $100,000.
``(3) Increase in penalty for large entities and high
net worth individuals.--
``(A) In general.--In the case of a failure
under subsection (a) by--
``(i) a large entity, or
``(ii) a high net worth individual,
the penalty under paragraph (1) or (2) shall be
twice the amount determined without regard to
this paragraph.
``(B) Large entity.--For purposes of
subparagraph (A), the term `large entity'
means, with respect to any taxable year, a
person (other than a natural person) with gross
receipts in excess of $10,000,000 for the
taxable year in which the reportable
transaction occurs or the preceding taxable
year. Rules similar to the rules of paragraph
(2) and subparagraphs (B), (C), and (D) of
paragraph (3) of section 448(c) shall apply for
purposes of this subparagraph.
``(C) High net worth individual.--For
purposes of subparagraph (A), the term `high
net worth individual' means, with respect to a
reportable transaction, a natural person whose
net worth exceeds $2,000,000 immediately before
the transaction.
``(c) Definitions.--For purposes of this section--
``(1) Reportable transaction.--The term `reportable
transaction' means any transaction with respect to
which information is required to be included with a
return or statement because, as determined under
regulations prescribed under section 6011, such
transaction is of a type which the Secretary determines
as having a potential for tax avoidance or evasion.
``(2) Listed transaction.--Except as provided in
regulations, the term `listed transaction' means a
reportable transaction which is the same as, or
substantially similar to, a transaction specifically
identified by the Secretary as a tax avoidance
transaction for purposes of section 6011.
``(d) Authority To Rescind Penalty.--
``(1) In general.--The Commissioner of Internal
Revenue may rescind all or any portion of any penalty
imposed by this section with respect to any violation
if--
``(A) the violation is with respect to a
reportable transaction other than a listed
transaction,
``(B) the person on whom the penalty is
imposed has a history of complying with the
requirements of this title,
``(C) it is shown that the violation is due
to an unintentional mistake of fact;
``(D) imposing the penalty would be against
equity and good conscience, and
``(E) rescinding the penalty would promote
compliance with the requirements of this title
and effective tax administration.
``(2) Discretion.--The exercise of authority under
paragraph (1) shall be at the sole discretion of the
Commissioner and may be delegated only to the head of
the Office of Tax Shelter Analysis. The Commissioner,
in the Commissioner's sole discretion, may establish a
procedure to determine if a penalty should be referred
to the Commissioner or the head of such Office for a
determination under paragraph (1).
``(3) No appeal.--Notwithstanding any other provision
of law, any determination under this subsection may not
be reviewed in any administrative or judicial
proceeding.
``(4) Records.--If a penalty is rescinded under
paragraph (1), the Commissioner shall place in the file
in the Office of the Commissioner the opinion of the
Commissioner or the head of the Office of Tax Shelter
Analysis with respect to the determination, including--
``(A) the facts and circumstances of the
transaction,
``(B) the reasons for the rescission, and
``(C) the amount of the penalty rescinded.
``(5) Report.--The Commissioner shall each year
report to the Committee on Ways and Means of the House
of Representatives and the Committee on Finance of the
Senate--
``(A) a summary of the total number and
aggregate amount of penalties imposed, and
rescinded, under this section, and
``(B) a description of each penalty rescinded
under this subsection and the reasons therefor.
``(e) Penalty Reported to SEC.--In the case of a person--
``(1) which is required to file periodic reports
under section 13 or 15(d) of the Securities Exchange
Act of 1934 or is required to be consolidated with
another person for purposes of such reports, and
``(2) which--
``(A) is required to pay a penalty under this
section with respect to a listed transaction,
``(B) is required to pay a penalty under
section 6662A with respect to any reportable
transaction at a rate prescribed under section
6662A(c), or
``(C) is required to pay a penalty under
section 6662B with respect to any noneconomic
substance transaction,
the requirement to pay such penalty shall be disclosed in such
reports filed by such person for such periods as the Secretary
shall specify. Failure to make a disclosure in accordance with
the preceding sentence shall be treated as a failure to which
the penalty under subsection (b)(2) applies.
``(f) Coordination With Other Penalties.--The penalty imposed
by this section is in addition to any penalty imposed under
this title.''
(b) Conforming Amendment.--The table of sections for part I
of subchapter B of chapter 68 is amended by inserting after the
item relating to section 6707 the following:
``Sec. 6707A. Penalty for failure to include reportable
transaction information with return or statement.''
(c) Effective Date.--The amendments made by this section
shall apply to returns and statements the due date for which is
after the date of the enactment of this Act.
SEC. 113. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS AND OTHER
REPORTABLE TRANSACTIONS HAVING A SIGNIFICANT TAX
AVOIDANCE PURPOSE.
(a) In General.--Subchapter A of chapter 68 is amended by
inserting after section 6662 the following new section:
``SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERSTATEMENTS
WITH RESPECT TO REPORTABLE TRANSACTIONS.
``(a) Imposition of Penalty.--If a taxpayer has a reportable
transaction understatement for any taxable year, there shall be
added to the tax an amount equal to 20 percent of the amount of
such understatement.
``(b) Reportable Transaction Understatement.--For purposes of
this section--
``(1) In general.--The term `reportable transaction
understatement' means the sum of--
``(A) the product of--
``(i) the amount of the increase (if
any) in taxable income which results
from a difference between the proper
tax treatment of an item to which this
section applies and the taxpayer's
treatment of such item (as shown on the
taxpayer's return of tax), and
``(ii) the highest rate of tax
imposed by section 1 (section 11 in the
case of a taxpayer which is a
corporation), and
``(B) the amount of the decrease (if any) in
the aggregate amount of credits determined
under subtitle A which results from a
difference between the taxpayer's treatment of
an item to which this section applies (as shown
on the taxpayer's return of tax) and the proper
tax treatment of such item.
For purposes of subparagraph (A), any reduction of the
excess of deductions allowed for the taxable year over
gross income for such year, and any reduction in the
amount of capital losses which would (without regard to
section 1211) be allowed for such year, shall be
treated as an increase in taxable income.
``(2) Items to which section applies.--This section
shall apply to any item which is attributable to--
``(A) any listed transaction, and
``(B) any reportable transaction (other than
a listed transaction) if a significant purpose
of such transaction is the avoidance or evasion
of Federal income tax.
``(c) Higher Penalty for Nondisclosed Listed and Other
Avoidance Transactions.--
``(1) In general.--Subsection (a) shall be applied by
substituting `30 percent' for `20 percent' with respect
to the portion of any reportable transaction
understatement with respect to which the requirement of
section 6664(d)(2)(A) is not met.
``(2) Rules applicable to compromise of penalty.--
``(A) In general.--If the 1st letter of
proposed deficiency which allows the taxpayer
an opportunity for administrative review in the
Internal Revenue Service Office of Appeals has
been sent with respect to a penalty to which
paragraph (1) applies, only the Commissioner of
Internal Revenue may compromise all or any
portion of such penalty.
``(B) Applicable rules.--The rules of
paragraphs (3), (4), and (5) of section
6707A(d) shall apply for purposes of
subparagraph (A).
``(d) Definitions of Reportable and Listed Transactions.--For
purposes of this section, the terms `reportable transaction'
and `listed transaction' have the respective meanings given to
such terms by section 6707A(c).
``(e) Special Rules.--
``(1) Coordination with penalties, etc., on other
understatements.--In the case of an understatement (as
defined in section 6662(d)(2))--
``(A) the amount of such understatement
(determined without regard to this paragraph)
shall be increased by the aggregate amount of
reportable transaction understatements and
noneconomic substance transaction
understatements for purposes of determining
whether such understatement is a substantial
understatement under section 6662(d)(1), and
``(B) the addition to tax under section
6662(a) shall apply only to the excess of the
amount of the substantial understatement (if
any) after the application of subparagraph (A)
over the aggregate amount of reportable
transaction understatements and noneconomic
substance transaction understatements.
``(2) Coordination with other penalties.--
``(A) Application of fraud penalty.--
References to an underpayment in section 6663
shall be treated as including references to a
reportable transaction understatement and a
noneconomic substance transaction
understatement.
``(B) No double penalty.--This section shall
not apply to any portion of an understatement
on which a penalty is imposed under section
6662B or 6663.
``(3) Special rule for amended returns.--Except as
provided in regulations, in no event shall any tax
treatment included with an amendment or supplement to a
return of tax be taken into account in determining the
amount of any reportable transaction understatement or
noneconomic substance transaction understatement if the
amendment or supplement is filed after the earlier of
the date the taxpayer is first contacted by the
Secretary regarding the examination of the return or
such other date as is specified by the Secretary.
``(4) Noneconomic substance transaction
understatement.--For purposes of this subsection, the
term `noneconomic substance transaction understatement'
has the meaning given such term by section 6662B(c).
``(5) Cross reference.--
``For reporting of section 6662A(c) penalty to the Securities
and Exchange Commission, see section 6707A(e).''
(b) Determination of Other Understatements.--Subparagraph (A)
of section 6662(d)(2) is amended by adding at the end the
following flush sentence:
``The excess under the preceding sentence shall
be determined without regard to items to which
section 6662A applies and without regard to
items with respect to which a penalty is
imposed by section 6662B.''
(c) Reasonable Cause Exception.--
(1) In general.--Section 6664 is amended by adding at
the end the following new subsection:
``(d) Reasonable Cause Exception for Reportable Transaction
Understatements.--
``(1) In general.--No penalty shall be imposed under
section 6662A with respect to any portion of a
reportable transaction understatement if it is shown
that there was a reasonable cause for such portion and
that the taxpayer acted in good faith with respect to
such portion.
``(2) Special rules.--Paragraph (1) shall not apply
to any reportable transaction understatement unless--
``(A) the relevant facts affecting the tax
treatment of the item are adequately disclosed
in accordance with the regulations prescribed
under section 6011,
``(B) there is or was substantial authority
for such treatment, and
``(C) the taxpayer reasonably believed that
such treatment was more likely than not the
proper treatment.
A taxpayer failing to adequately disclose in accordance
with section 6011 shall be treated as meeting the
requirements of subparagraph (A) if the penalty for
such failure was rescinded under section 6707A(d).
``(3) Rules relating to reasonable belief.--For
purposes of paragraph (2)(C)--
``(A) In general.--A taxpayer shall be
treated as having a reasonable belief with
respect to the tax treatment of an item only if
such belief--
``(i) is based on the facts and law
that exist at the time the return of
tax which includes such tax treatment
is filed, and
``(ii) relates solely to the
taxpayer's chances of success on the
merits of such treatment and does not
take into account the possibility that
a return will not be audited, such
treatment will not be raised on audit,
or such treatment will be resolved
through settlement if it is raised.
``(B) Certain opinions may not be relied
upon.--
``(i) In general.--An opinion of a
tax advisor may not be relied upon to
establish the reasonable belief of a
taxpayer if--
``(I) the tax advisor is
described in clause (ii), or
``(II) the opinion is
described in clause (iii).
``(ii) Disqualified tax advisors.--A
tax advisor is described in this clause
if the tax advisor--
``(I) is a material advisor
(within the meaning of section
6111(b)(1)) who participates in
the organization, management,
promotion, or sale of the
transaction or who is related
(within the meaning of section
267(b) or 707(b)(1)) to any
person who so participates,
``(II) is compensated
directly or indirectly by a
material advisor with respect
to the transaction,
``(III) has a fee arrangement
with respect to the transaction
which is contingent on all or
part of the intended tax
benefits from the transaction
being sustained, or
``(IV) as determined under
regulations prescribed by the
Secretary, has a continuing
financial interest with respect
to the transaction.
``(iii) Disqualified opinions.--For
purposes of clause (i), an opinion is
disqualified if the opinion--
``(I) is based on
unreasonable factual or legal
assumptions (including
assumptions as to future
events),
``(II) unreasonably relies on
representations, statements,
findings, or agreements of the
taxpayer or any other person,
``(III) does not identify and
consider all relevant facts, or
``(IV) fails to meet any
other requirement as the
Secretary may prescribe.''
(2) Conforming amendment.--The heading for subsection
(c) of section 6664 is amended by inserting ``for
Underpayments'' after ``Exception''.
(d) Conforming Amendments.--
(1) Subparagraph (C) of section 461(i)(3) is amended
by striking ``section 6662(d)(2)(C)(iii)'' and
inserting ``section 1274(b)(3)(C)''.
(2) Paragraph (3) of section 1274(b) is amended--
(A) by striking ``(as defined in section
6662(d)(2)(C)(iii))'' in subparagraph (B)(i),
and
(B) by adding at the end the following new
subparagraph:
``(C) Tax shelter.--For purposes of
subparagraph (B), the term `tax shelter'
means--
``(i) a partnership or other entity,
``(ii) any investment plan or
arrangement, or
``(iii) any other plan or
arrangement,
if a significant purpose of such partnership,
entity, plan, or arrangement is the avoidance
or evasion of Federal income tax.''
(3) Section 6662(d)(2) is amended by striking
subparagraphs (C) and (D).
(4) Section 6664(c)(1) is amended by striking ``this
part'' and inserting ``section 6662 or 6663''.
(5) Subsection (b) of section 7525 is amended by
striking ``section 6662(d)(2)(C)(iii)'' and inserting
``section 1274(b)(3)(C)''.
(6)(A) The heading for section 6662 is amended to
read as follows:
``SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERPAYMENTS.''
(B) The table of sections for part II of subchapter A
of chapter 68 is amended by striking the item relating
to section 6662 and inserting the following new items:
``Sec. 6662. Imposition of accuracy-related penalty on
underpayments.
``Sec. 6662A. Imposition of accuracy-related penalty on
understatements with respect to reportable
transactions.''
(e) Effective Date.--The amendments made by this section
shall apply to taxable years ending after the date of the
enactment of this Act.
SEC. 114. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS
LACKING ECONOMIC SUBSTANCE, ETC.
(a) In General.--Subchapter A of chapter 68 is amended by
inserting after section 6662A the following new section:
``SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS
LACKING ECONOMIC SUBSTANCE, ETC.
``(a) Imposition of Penalty.--If a taxpayer has an
noneconomic substance transaction understatement for any
taxable year, there shall be added to the tax an amount equal
to 40 percent of the amount of such understatement.
``(b) Reduction of Penalty for Disclosed Transactions.--
Subsection (a) shall be applied by substituting `20 percent'
for `40 percent' with respect to the portion of any noneconomic
substance transaction understatement with respect to which the
relevant facts affecting the tax treatment of the item are
adequately disclosed in the return or a statement attached to
the return.
``(c) Noneconomic Substance Transaction Understatement.--For
purposes of this section--
``(1) In general.--The term `noneconomic substance
transaction understatement' means any amount which
would be an understatement under section 6662A(b)(1) if
section 6662A were applied by taking into account items
attributable to noneconomic substance transactions
rather than items to which section 6662A would apply
without regard to this paragraph.
``(2) Noneconomic substance transaction.--The term
`noneconomic substance transaction' means any
transaction if--
``(A) there is a lack of economic substance
(within the meaning of section 7701(m)(1)) for
the transaction giving rise to the claimed tax
benefit or the transaction was not respected
under section 7701(m)(2), or
``(B) the transaction fails to meet the
requirements of any similar rule of law.
``(d) Rules Applicable To Compromise of Penalty.--
``(1) In general.--If the 1st letter of proposed
deficiency which allows the taxpayer an opportunity for
administrative review in the Internal Revenue Service
Office of Appeals has been sent with respect to a
penalty to which this section applies, only the
Commissioner of Internal Revenue may compromise all or
any portion of such penalty.
``(2) Applicable rules.--The rules of paragraphs (3),
(4), and (5) of section 6707A(d) shall apply for
purposes of paragraph (1).
``(e) Coordination With Other Penalties.--Except as otherwise
provided in this part, the penalty imposed by this section
shall be in addition to any other penalty imposed by this
title.
``(f) Cross References.--
``(1) For coordination of penalty with understatements under
section 6662 and other special rules, see section 6662A(e).
``(2) For reporting of penalty imposed under this section to
the Securities and Exchange Commission, see section 6707A(e).''
(b) Clerical Amendment.--The table of sections for part II of
subchapter A of chapter 68 is amended by inserting after the
item relating to section 6662A the following new item:
``Sec. 6662B. Penalty for understatements attributable to
transactions lacking economic substance, etc.''
(c) Effective Date.--The amendments made by this section
shall apply to transactions entered into after February 13,
2003.
SEC. 115. MODIFICATIONS OF SUBSTANTIAL UNDERSTATEMENT PENALTY FOR
NONREPORTABLE TRANSACTIONS.
(a) Substantial Understatement of Corporations.--Section
6662(d)(1)(B) (relating to special rule for corporations) is
amended to read as follows:
``(B) Special rule for corporations.--In the
case of a corporation other than an S
corporation or a personal holding company (as
defined in section 542), there is a substantial
understatement of income tax for any taxable
year if the amount of the understatement for
the taxable year exceeds the lesser of--
``(i) 10 percent of the tax required
to be shown on the return for the
taxable year (or, if greater, $10,000),
or
``(ii) $10,000,000.''
(b) Reduction for Understatement of Taxpayer Due to Position
of Taxpayer or Disclosed Item.--
(1) In general.--Section 6662(d)(2)(B)(i) (relating
to substantial authority) is amended to read as
follows:
``(i) the tax treatment of any item
by the taxpayer if the taxpayer had
reasonable belief that the tax
treatment was more likely than not the
proper treatment, or''.
(2) Conforming amendment.--Section 6662(d) is amended
by adding at the end the following new paragraph:
``(3) Secretarial list.--For purposes of this
subsection, section 6664(d)(2), and section 6694(a)(1),
the Secretary may prescribe a list of positions for
which the Secretary believes there is not substantial
authority or there is no reasonable belief that the tax
treatment is more likely than not the proper tax
treatment. Such list (and any revisions thereof) shall
be published in the Federal Register or the Internal
Revenue Bulletin.''
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after the date of the
enactment of this Act.
SEC. 116. TAX SHELTER EXCEPTION TO CONFIDENTIALITY PRIVILEGES RELATING
TO TAXPAYER COMMUNICATIONS.
(a) In General.--Section 7525(b) (relating to section not to
apply to communications regarding corporate tax shelters) is
amended to read as follows:
``(b) Section Not To Apply to Communications Regarding Tax
Shelters.--The privilege under subsection (a) shall not apply
to any written communication which is--
``(1) between a federally authorized tax practitioner
and--
``(A) any person,
``(B) any director, officer, employee, agent,
or representative of the person, or
``(C) any other person holding a capital or
profits interest in the person, and
``(2) in connection with the promotion of the direct
or indirect participation of the person in any tax
shelter (as defined in section 1274(b)(3)(C)).''
(b) Effective Date.--The amendment made by this section shall
apply to communications made on or after the date of the
enactment of this Act.
SEC. 117. DISCLOSURE OF REPORTABLE TRANSACTIONS.
(a) In General.--Section 6111 (relating to registration of
tax shelters) is amended to read as follows:
``SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS.
``(a) In General.--Each material advisor with respect to any
reportable transaction shall make a return (in such form as the
Secretary may prescribe) setting forth--
``(1) information identifying and describing the
transaction,
``(2) information describing any potential tax
benefits expected to result from the transaction, and
``(3) such other information as the Secretary may
prescribe.
Such return shall be filed not later than the date specified by
the Secretary.
``(b) Definitions.--For purposes of this section--
``(1) Material advisor.--
``(A) In general.--The term `material
advisor' means any person--
``(i) who provides any material aid,
assistance, or advice with respect to
organizing, promoting, selling,
implementing, or carrying out any
reportable transaction, and
``(ii) who directly or indirectly
derives gross income in excess of the
threshold amount for such aid,
assistance, or advice.
``(B) Threshold amount.--For purposes of
subparagraph (A), the threshold amount is--
``(i) $50,000 in the case of a
reportable transaction substantially
all of the tax benefits from which are
provided to natural persons, and
``(ii) $250,000 in any other case.
``(2) Reportable transaction.--The term `reportable
transaction' has the meaning given to such term by
section 6707A(c).
``(c) Regulations.--The Secretary may prescribe regulations
which provide--
``(1) that only 1 person shall be required to meet
the requirements of subsection (a) in cases in which 2
or more persons would otherwise be required to meet
such requirements,
``(2) exemptions from the requirements of this
section, and
``(3) such rules as may be necessary or appropriate
to carry out the purposes of this section.''
(b) Conforming Amendments.--
(1) The item relating to section 6111 in the table of
sections for subchapter B of chapter 61 is amended to
read as follows:
``Sec. 6111. Disclosure of reportable transactions.''
(2)(A) So much of section 6112 as precedes subsection
(c) thereof is amended to read as follows:
``SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANSACTIONS MUST KEEP
LISTS OF ADVISEES.
``(a) In General.--Each material advisor (as defined in
section 6111) with respect to any reportable transaction (as
defined in section 6707A(c)) shall maintain, in such manner as
the Secretary may by regulations prescribe, a list--
``(1) identifying each person with respect to whom
such advisor acted as such a material advisor with
respect to such transaction, and
``(2) containing such other information as the
Secretary may by regulations require.
This section shall apply without regard to whether a material
advisor is required to file a return under section 6111 with
respect to such transaction.''
(B) Section 6112 is amended by redesignating
subsection (c) as subsection (b).
(C) Section 6112(b), as redesignated by subparagraph
(B), is amended--
(i) by inserting ``written'' before
``request'' in paragraph (1)(A), and
(ii) by striking ``shall prescribe'' in
paragraph (2) and inserting ``may prescribe''.
(D) The item relating to section 6112 in the table of
sections for subchapter B of chapter 61 is amended to
read as follows:
``Sec. 6112. Material advisors of reportable transactions must
keep lists of advisees.''
(3)(A) The heading for section 6708 is amended to
read as follows:
``SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES WITH RESPECT TO
REPORTABLE TRANSACTIONS.''
(B) The item relating to section 6708 in the table of
sections for part I of subchapter B of chapter 68 is
amended to read as follows:
``Sec. 6708. Failure to maintain lists of advisees with respect
to reportable transactions.''
(c) Effective Date.--The amendments made by this section
shall apply to transactions with respect to which material aid,
assistance, or advice referred to in section 6111(b)(1)(A)(i)
of the Internal Revenue Code of 1986 (as added by this section)
is provided after the date of the enactment of this Act.
SEC. 118. MODIFICATIONS TO PENALTY FOR FAILURE TO REGISTER TAX
SHELTERS.
(a) In General.--Section 6707 (relating to failure to furnish
information regarding tax shelters) is amended to read as
follows:
``SEC. 6707. FAILURE TO FURNISH INFORMATION REGARDING REPORTABLE
TRANSACTIONS.
``(a) In General.--If a person who is required to file a
return under section 6111(a) with respect to any reportable
transaction--
``(1) fails to file such return on or before the date
prescribed therefor, or
``(2) files false or incomplete information with the
Secretary with respect to such transaction,
such person shall pay a penalty with respect to such return in
the amount determined under subsection (b).
``(b) Amount of Penalty.--
``(1) In general.--Except as provided in paragraph
(2), the penalty imposed under subsection (a) with
respect to any failure shall be $50,000.
``(2) Listed transactions.--The penalty imposed under
subsection (a) with respect to any listed transaction
shall be an amount equal to the greater of--
``(A) $200,000, or
``(B) 50 percent of the gross income derived
by such person with respect to aid, assistance,
or advice which is provided with respect to the
reportable transaction before the date the
return including the transaction is filed under
section 6111.
Subparagraph (B) shall be applied by substituting `75
percent' for `50 percent' in the case of an intentional
failure or act described in subsection (a).
``(c) Rescission Authority.--The provisions of section
6707A(d) (relating to authority of Commissioner to rescind
penalty) shall apply to any penalty imposed under this section.
``(d) Reportable and Listed Transactions.--The terms
`reportable transaction' and `listed transaction' have the
respective meanings given to such terms by section 6707A(c).''.
(b) Clerical Amendment.--The item relating to section 6707 in
the table of sections for part I of subchapter B of chapter 68
is amended by striking ``tax shelters'' and inserting
``reportable transactions''.
(c) Effective Date.--The amendments made by this section
shall apply to returns the due date for which is after the date
of the enactment of this Act.
SEC. 119. MODIFICATION OF PENALTY FOR FAILURE TO MAINTAIN LISTS OF
INVESTORS.
(a) In General.--Subsection (a) of section 6708 is amended to
read as follows:
``(a) Imposition of Penalty.--
``(1) In general.--If any person who is required to
maintain a list under section 6112(a) fails to make
such list available upon written request to the
Secretary in accordance with section 6112(b)(1)(A)
within 20 business days after the date of the
Secretary's request, such person shall pay a penalty of
$10,000 for each day of such failure after such 20th
day.
``(2) Reasonable cause exception.--No penalty shall
be imposed by paragraph (1) with respect to the failure
on any day if such failure is due to reasonable
cause.''
(b) Effective Date.--The amendment made by this section shall
apply to requests made after the date of the enactment of this
Act.
SEC. 120. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN CONDUCT RELATED TO
TAX SHELTERS AND REPORTABLE TRANSACTIONS.
(a) In General.--Section 7408 (relating to action to enjoin
promoters of abusive tax shelters, etc.) is amended by
redesignating subsection (c) as subsection (d) and by striking
subsections (a) and (b) and inserting the following new
subsections:
``(a) Authority To Seek Injunction.--A civil action in the
name of the United States to enjoin any person from further
engaging in specified conduct may be commenced at the request
of the Secretary. Any action under this section shall be
brought in the district court of the United States for the
district in which such person resides, has his principal place
of business, or has engaged in specified conduct. The court may
exercise its jurisdiction over such action (as provided in
section 7402(a)) separate and apart from any other action
brought by the United States against such person.
``(b) Adjudication and Decree.--In any action under
subsection (a), if the court finds--
``(1) that the person has engaged in any specified
conduct, and
``(2) that injunctive relief is appropriate to
prevent recurrence of such conduct,
the court may enjoin such person from engaging in such conduct
or in any other activity subject to penalty under this title.
``(c) Specified Conduct.--For purposes of this section, the
term `specified conduct' means any action, or failure to take
action, subject to penalty under section 6700, 6701, 6707, or
6708.''
(b) Conforming Amendments.--
(1) The heading for section 7408 is amended to read
as follows:
``SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RELATED TO TAX
SHELTERS AND REPORTABLE TRANSACTIONS.''
(2) The table of sections for subchapter A of chapter
67 is amended by striking the item relating to section
7408 and inserting the following new item:
``Sec. 7408. Actions to enjoin specified conduct related to tax
shelters and reportable transactions.''
(c) Effective Date.--The amendment made by this section shall
take effect on the day after the date of the enactment of this
Act.
SEC. 121. UNDERSTATEMENT OF TAXPAYER'S LIABILITY BY INCOME TAX RETURN
PREPARER.
(a) Standards Conformed to Taxpayer Standards.--Section
6694(a) (relating to understatements due to unrealistic
positions) is amended--
(1) by striking ``realistic possibility of being
sustained on its merits'' in paragraph (1) and
inserting ``reasonable belief that the tax treatment in
such position was more likely than not the proper
treatment'',
(2) by striking ``or was frivolous'' in paragraph (3)
and inserting ``or there was no reasonable basis for
the tax treatment of such position'', and
(3) by striking ``Unrealistic'' in the heading and
inserting ``Improper''.
(b) Amount of Penalty.--Section 6694 is amended--
(1) by striking ``$250'' in subsection (a) and
inserting ``$1,000'', and
(2) by striking ``$1,000'' in subsection (b) and
inserting ``$5,000''.
(c) Effective Date.--The amendments made by this section
shall apply to documents prepared after the date of the
enactment of this Act.
SEC. 122. PENALTY ON FAILURE TO REPORT INTERESTS IN FOREIGN FINANCIAL
ACCOUNTS.
(a) In General.--Section 5321(a)(5) of title 31, United
States Code, is amended to read as follows:
``(5) Foreign financial agency transaction
violation.--
``(A) Penalty authorized.--The Secretary of
the Treasury may impose a civil money penalty
on any person who violates, or causes any
violation of, any provision of section 5314.
``(B) Amount of penalty.--
``(i) In general.--Except as provided
in subparagraph (C), the amount of any
civil penalty imposed under
subparagraph (A) shall not exceed
$5,000.
``(ii) Reasonable cause exception.--
No penalty shall be imposed under
subparagraph (A) with respect to any
violation if--
``(I) such violation was due
to reasonable cause, and
``(II) the amount of the
transaction or the balance in
the account at the time of the
transaction was properly
reported.
``(C) Willful violations.--In the case of any
person willfully violating, or willfully
causing any violation of, any provision of
section 5314--
``(i) the maximum penalty under
subparagraph (B)(i) shall be increased
to the greater of--
``(I) $25,000, or
``(II) the amount (not
exceeding $100,000) determined
under subparagraph (D), and
``(ii) subparagraph (B)(ii) shall not
apply.
``(D) Amount.--The amount determined under
this subparagraph is--
``(i) in the case of a violation
involving a transaction, the amount of
the transaction, or
``(ii) in the case of a violation
involving a failure to report the
existence of an account or any
identifying information required to be
provided with respect to an account,
the balance in the account at the time
of the violation.''
(b) Effective Date.--The amendment made by this section shall
apply to violations occurring after the date of the enactment
of this Act.
SEC. 123. FRIVOLOUS TAX SUBMISSIONS.
(a) Civil Penalties.--Section 6702 is amended to read as
follows:
``SEC. 6702. FRIVOLOUS TAX SUBMISSIONS.
``(a) Civil Penalty for Frivolous Tax Returns.--A person
shall pay a penalty of $5,000 if--
``(1) such person files what purports to be a return
of a tax imposed by this title but which--
``(A) does not contain information on which
the substantial correctness of the self-
assessment may be judged, or
``(B) contains information that on its face
indicates that the self-assessment is
substantially incorrect; and
``(2) the conduct referred to in paragraph (1)--
``(A) is based on a position which the
Secretary has identified as frivolous under
subsection (c), or
``(B) reflects a desire to delay or impede
the administration of Federal tax laws.
``(b) Civil Penalty for Specified Frivolous Submissions.--
``(1) Imposition of penalty.--Except as provided in
paragraph (3), any person who submits a specified
frivolous submission shall pay a penalty of $5,000.
``(2) Specified frivolous submission.--For purposes
of this section--
``(A) Specified frivolous submission.--The
term `specified frivolous submission' means a
specified submission if any portion of such
submission--
``(i) is based on a position which
the Secretary has identified as
frivolous under subsection (c), or
``(ii) reflects a desire to delay or
impede the administration of Federal
tax laws.
``(B) Specified submission.--The term
`specified submission' means--
``(i) a request for a hearing under--
``(I) section 6320 (relating
to notice and opportunity for
hearing upon filing of notice
of lien), or
``(II) section 6330 (relating
to notice and opportunity for
hearing before levy), and
``(ii) an application under--
``(I) section 6159 (relating
to agreements for payment of
tax liability in installments),
``(II) section 7122 (relating
to compromises), or
``(III) section 7811
(relating to taxpayer
assistance orders).
``(3) Opportunity to withdraw submission.--If the
Secretary provides a person with notice that a
submission is a specified frivolous submission and such
person withdraws such submission within 30 days after
such notice, the penalty imposed under paragraph (1)
shall not apply with respect to such submission.
``(c) Listing of Frivolous Positions.--The Secretary shall
prescribe (and periodically revise) a list of positions which
the Secretary has identified as being frivolous for purposes of
this subsection. The Secretary shall not include in such list
any position that the Secretary determines meets the
requirement of section 6662(d)(2)(B)(ii)(II).
``(d) Reduction of Penalty.--The Secretary may reduce the
amount of any penalty imposed under this section if the
Secretary determines that such reduction would promote
compliance with and administration of the Federal tax laws.
``(e) Penalties in Addition to Other Penalties.--The
penalties imposed by this section shall be in addition to any
other penalty provided by law.''
(b) Treatment of Frivolous Requests for Hearings Before
Levy.--
(1) Frivolous requests disregarded.--Section 6330
(relating to notice and opportunity for hearing before
levy) is amended by adding at the end the following new
subsection:
``(g) Frivolous Requests for Hearing, etc.--Notwithstanding
any other provision of this section, if the Secretary
determines that any portion of a request for a hearing under
this section or section 6320 meets the requirement of clause
(i) or (ii) of section 6702(b)(2)(A), then the Secretary may
treat such portion as if it were never submitted and such
portion shall not be subject to any further administrative or
judicial review.''
(2) Preclusion from raising frivolous issues at
hearing.--Section 6330(c)(4) is amended--
(A) by striking ``(A)'' and inserting
``(A)(i)'';
(B) by striking ``(B)'' and inserting
``(ii)'';
(C) by striking the period at the end of the
first sentence and inserting ``; or''; and
(D) by inserting after subparagraph (A)(ii)
(as so redesignated) the following:
``(B) the issue meets the requirement of
clause (i) or (ii) of section 6702(b)(2)(A).''
(3) Statement of grounds.--Section 6330(b)(1) is
amended by striking ``under subsection (a)(3)(B)'' and
inserting ``in writing under subsection (a)(3)(B) and
states the grounds for the requested hearing''.
(c) Treatment of Frivolous Requests for Hearings Upon Filing
of Notice of Lien.--Section 6320 is amended--
(1) in subsection (b)(1), by striking ``under
subsection (a)(3)(B)'' and inserting ``in writing under
subsection (a)(3)(B) and states the grounds for the
requested hearing'', and
(2) in subsection (c), by striking ``and (e)'' and
inserting ``(e), and (g)''.
(d) Treatment of Frivolous Applications for Offers-in-
Compromise and Installment Agreements.--Section 7122 is amended
by adding at the end the following new subsection:
``(e) Frivolous Submissions, etc.--Notwithstanding any other
provision of this section, if the Secretary determines that any
portion of an application for an offer-in-compromise or
installment agreement submitted under this section or section
6159 meets the requirement of clause (i) or (ii) of section
6702(b)(2)(A), then the Secretary may treat such portion as if
it were never submitted and such portion shall not be subject
to any further administrative or judicial review.''
(e) Clerical Amendment.--The table of sections for part I of
subchapter B of chapter 68 is amended by striking the item
relating to section 6702 and inserting the following new item:
``Sec. 6702. Frivolous tax submissions.''
(f) Effective Date.--The amendments made by this section
shall apply to submissions made and issues raised after the
date on which the Secretary first prescribes a list under
section 6702(c) of the Internal Revenue Code of 1986, as
amended by subsection (a).
SEC. 124. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE DEPARTMENT OF
TREASURY.
(a) Censure; Imposition of Penalty.--
(1) In general.--Section 330(b) of title 31, United
States Code, is amended--
(A) by inserting ``, or censure,'' after
``Department'', and
(B) by adding at the end the following new
flush sentence:
``The Secretary may impose a monetary penalty on any
representative described in the preceding sentence. If the
representative was acting on behalf of an employer or any firm
or other entity in connection with the conduct giving rise to
such penalty, the Secretary may impose a monetary penalty on
such employer, firm, or entity if it knew, or reasonably should
have known, of such conduct. Such penalty shall not exceed the
gross income derived (or to be derived) from the conduct giving
rise to the penalty and may be in addition to, or in lieu of,
any suspension, disbarment, or censure.''
(2) Effective date.--The amendments made by this
subsection shall apply to actions taken after the date
of the enactment of this Act.
(b) Tax Shelter Opinions, etc.--Section 330 of such title 31
is amended by adding at the end the following new subsection:
``(d) Nothing in this section or in any other provision of
law shall be construed to limit the authority of the Secretary
of the Treasury to impose standards applicable to the rendering
of written advice with respect to any entity, transaction plan
or arrangement, or other plan or arrangement, which is of a
type which the Secretary determines as having a potential for
tax avoidance or evasion.''
SEC. 125. PENALTY ON PROMOTERS OF TAX SHELTERS.
(a) Penalty on Promoting Abusive Tax Shelters.--Section
6700(a) is amended by adding at the end the following new
sentence: ``Notwithstanding the first sentence, if an activity
with respect to which a penalty imposed under this subsection
involves a statement described in paragraph (2)(A), the amount
of the penalty shall be equal to 50 percent of the gross income
derived (or to be derived) from such activity by the person on
which the penalty is imposed.''
(b) Effective Date.--The amendment made by this section shall
apply to activities after the date of the enactment of this
Act.
SEC. 126. STATUTE OF LIMITATIONS FOR TAXABLE YEARS FOR WHICH LISTED
TRANSACTIONS NOT REPORTED.
(a) In General.--Section 6501(e)(1) (relating to substantial
omission of items for income taxes) is amended by adding at the
end the following new subparagraph:
``(C) Listed transactions.--If a taxpayer
fails to include on any return or statement for
any taxable year any information with respect
to a listed transaction (as defined in section
6707A(c)(2)) which is required under section
6011 to be included with such return or
statement, the tax for such taxable year may be
assessed, or a proceeding in court for
collection of such tax may be begun without
assessment, at any time within 6 years after
the time the return is filed. This subparagraph
shall not apply to any taxable year if the time
for assessment or beginning the proceeding in
court has expired before the time a transaction
is treated as a listed transaction under
section 6011.''
(b) Effective Date.--The amendment made by this section shall
apply to transactions after the date of the enactment of this
Act in taxable years ending after such date.
SEC. 127. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS
ATTRIBUTABLE TO NONDISCLOSED REPORTABLE AND
NONECONOMIC SUBSTANCE TRANSACTIONS.
(a) In General.--Section 163 (relating to deduction for
interest) is amended by redesignating subsection (m) as
subsection (n) and by inserting after subsection (l) the
following new subsection:
``(m) Interest on Unpaid Taxes Attributable To Nondisclosed
Reportable Transactions and Noneconomic Substance
Transactions.--No deduction shall be allowed under this chapter
for any interest paid or accrued under section 6601 on any
underpayment of tax which is attributable to--
``(1) the portion of any reportable transaction
understatement (as defined in section 6662A(b)) with
respect to which the requirement of section
6664(d)(2)(A) is not met, or
``(2) any noneconomic substance transaction
understatement (as defined in section 6662B(c)).''
(b) Effective Date.--The amendments made by this section
shall apply to transactions after the date of the enactment of
this Act in taxable years ending after such date.
Part II--Other Provisions
SEC. 131. LIMITATION ON TRANSFER OR IMPORTATION OF BUILT-IN LOSSES.
(a) In General.--Section 362 (relating to basis to
corporations) is amended by adding at the end the following new
subsection:
``(e) Limitations on Built-In Losses.--
``(1) Limitation on importation of built-in losses.--
``(A) In general.--If in any transaction
described in subsection (a) or (b) there would
(but for this subsection) be an importation of
a net built-in loss, the basis of each property
described in subparagraph (B) which is acquired
in such transaction shall (notwithstanding
subsections (a) and (b)) be its fair market
value immediately after such transaction.
``(B) Property described.--For purposes of
subparagraph (A), property is described in this
paragraph if--
``(i) gain or loss with respect to
such property is not subject to tax
under this subtitle in the hands of the
transferor immediately before the
transfer, and
``(ii) gain or loss with respect to
such property is subject to such tax in
the hands of the transferee immediately
after such transfer.
In any case in which the transferor is a
partnership, the preceding sentence shall be
applied by treating each partner in such
partnership as holding such partner's
proportionate share of the property of such
partnership.
``(C) Importation of net built-in loss.--For
purposes of subparagraph (A), there is an
importation of a net built-in loss in a
transaction if the transferee's aggregate
adjusted bases of property described in
subparagraph (B) which is transferred in such
transaction would (but for this paragraph)
exceed the fair market value of such property
immediately after such transaction.''
``(2) Limitation on transfer of built-in losses in
section 351 transactions.--
``(A) In general.--If--
``(i) property is transferred in any
transaction which is described in
subsection (a) and which is not
described in paragraph (1) of this
subsection, and
``(ii) the transferee's aggregate
adjusted bases of the property so
transferred would (but for this
paragraph) exceed the fair market value
of such property immediately after such
transaction,
then, notwithstanding subsection (a), the
transferee's aggregate adjusted bases of the
property so transferred shall not exceed the
fair market value of such property immediately
after such transaction.
``(B) Allocation of basis reduction.--The
aggregate reduction in basis by reason of
subparagraph (A) shall be allocated among the
property so transferred in proportion to their
respective built-in losses immediately before
the transaction.
``(C) Exception for transfers within
affiliated group.--Subparagraph (A) shall not
apply to any transaction if the transferor owns
stock in the transferee meeting the
requirements of section 1504(a)(2). In the case
of property to which subparagraph (A) does not
apply by reason of the preceding sentence, the
transferor's basis in the stock received for
such property shall not exceed its fair market
value immediately after the transfer.''
(b) Comparable Treatment Where Liquidation.--Paragraph (1) of
section 334(b) (relating to liquidation of subsidiary) is
amended to read as follows:
``(1) In general.--If property is received by a
corporate distributee in a distribution in a complete
liquidation to which section 332 applies (or in a
transfer described in section 337(b)(1)), the basis of
such property in the hands of such distributee shall be
the same as it would be in the hands of the transferor;
except that the basis of such property in the hands of
such distributee shall be the fair market value of the
property at the time of the distribution--
``(A) in any case in which gain or loss is
recognized by the liquidating corporation with
respect to such property, or
``(B) in any case in which the liquidating
corporation is a foreign corporation, the
corporate distributee is a domestic
corporation, and the corporate distributee's
aggregate adjusted bases of property described
in section 362(e)(1)(B) which is distributed in
such liquidation would (but for this
subparagraph) exceed the fair market value of
such property immediately after such
liquidation.''
(c) Effective Date.--The amendments made by this section
shall apply to transactions after the date of the enactment of
this Act.
SEC. 132. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS TRANSFERS.
(a) Treatment of Contributed Property With Built-In Loss.--
Paragraph (1) of section 704(c) is amended by striking ``and''
at the end of subparagraph (A), by striking the period at the
end of subparagraph (B) and inserting ``, and'', and by adding
at the end the following:
``(C) if any property so contributed has a
built-in loss--
``(i) such built-in loss shall be
taken into account only in determining
the amount of items allocated to the
contributing partner, and
``(ii) except as provided in
regulations, in determining the amount
of items allocated to other partners,
the basis of the contributed property
in the hands of the partnership shall
be treated as being equal to its fair
market value immediately after the
contribution.
For purposes of subparagraph (C), the term `built-in
loss' means the excess of the adjusted basis of the
property (determined without regard to subparagraph
(C)(ii)) over its fair market value immediately after
the contribution.''
(b) Adjustment to Basis of Partnership Property on Transfer
of Partnership Interest if There Is Substantial Built-In
Loss.--
(1) Adjustment required.--Subsection (a) of section
743 (relating to optional adjustment to basis of
partnership property) is amended by inserting before
the period ``or unless the partnership has a
substantial built-in loss immediately after such
transfer''.
(2) Adjustment.--Subsection (b) of section 743 is
amended by inserting ``or with respect to which there
is a substantial built-in loss immediately after such
transfer'' after ``section 754 is in effect''.
(3) Substantial built-in loss.--Section 743 is
amended by adding at the end the following new
subsection:
``(d) Substantial Built-In Loss.--
``(1) In general.--For purposes of this section, a
partnership has a substantial built-in loss with
respect to a transfer of an interest in a partnership
if the transferee partner's proportionate share of the
adjusted basis of the partnership property exceeds by
more than $250,000 the basis of such partner's interest
in the partnership.
``(2) Regulations.--The Secretary shall prescribe
such regulations as may be appropriate to carry out the
purposes of paragraph (1) and section 734(d), including
regulations aggregating related partnerships and
disregarding property acquired by the partnership in an
attempt to avoid such purposes.''
(4) Clerical amendments.--
(A) The section heading for section 743 is
amended to read as follows:
``SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROPERTY WHERE SECTION
754 ELECTION OR SUBSTANTIAL BUILT-IN LOSS.''
(B) The table of sections for subpart C of
part II of subchapter K of chapter 1 is amended
by striking the item relating to section 743
and inserting the following new item:
``Sec. 743. Adjustment to basis of partnership property where
section 754 election or substantial built-in loss.''
(c) Adjustment to Basis of Undistributed Partnership Property
if There Is Substantial Basis Reduction.--
(1) Adjustment required.--Subsection (a) of section
734 (relating to optional adjustment to basis of
undistributed partnership property) is amended by
inserting before the period ``or unless there is a
substantial basis reduction''.
(2) Adjustment.--Subsection (b) of section 734 is
amended by inserting ``or unless there is a substantial
basis reduction'' after ``section 754 is in effect''.
(3) Substantial basis reduction.--Section 734 is
amended by adding at the end the following new
subsection:
``(d) Substantial Basis Reduction.--
``(1) In general.--For purposes of this section,
there is a substantial basis reduction with respect to
a distribution if the sum of the amounts described in
subparagraphs (A) and (B) of subsection (b)(2) exceeds
$250,000.
``(2) Regulations.--
``For regulations to carry out this subsection, see section
743(d)(2).''
(4) Clerical amendments.--
(A) The section heading for section 734 is
amended to read as follows:
``SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED PARTNERSHIP PROPERTY
WHERE SECTION 754 ELECTION OR SUBSTANTIAL BASIS
REDUCTION.''
(B) The table of sections for subpart B of
part II of subchapter K of chapter 1 is amended
by striking the item relating to section 734
and inserting the following new item:
``Sec. 734. Adjustment to basis of undistributed partnership
property where section 754 election or substantial
basis reduction.''
(d) Effective Dates.--
(1) Subsection (a).--The amendment made by subsection
(a) shall apply to contributions made after the date of
the enactment of this Act.
(2) Subsection (b).--The amendments made by
subsection (b) shall apply to transfers after the date
of the enactment of this Act.
(3) Subsection (c).--The amendments made by
subsection (c) shall apply to distributions after the
date of the enactment of this Act.
SEC. 133. NO REDUCTION OF BASIS UNDER SECTION 734 IN STOCK HELD BY
PARTNERSHIP IN CORPORATE PARTNER.
(a) In General.--Section 755 is amended by adding at the end
the following new subsection:
``(c) No Allocation of Basis Decrease to Stock of Corporate
Partner.--In making an allocation under subsection (a) of any
decrease in the adjusted basis of partnership property under
section 734(b)--
``(1) no allocation may be made to stock in a
corporation which is a partner in the partnership, and
``(2) any amount not allocable to stock by reason of
paragraph (1) shall be allocated under subsection (a)
to other partnership property.
Gain shall be recognized to the partnership to the extent that
the amount required to be allocated under paragraph (2) to
other partnership property exceeds the aggregate adjusted basis
of such other property immediately before the allocation
required by paragraph (2).''
(b) Effective Date.--The amendment made by this section shall
apply to distributions after the date of the enactment of this
Act.
SEC. 134. REPEAL OF SPECIAL RULES FOR FASITS.
(a) In General.--Part V of subchapter M of chapter 1
(relating to financial asset securitization investment trusts)
is hereby repealed.
(b) Conforming Amendments.--
(1) Paragraph (6) of section 56(g) is amended by
striking ``REMIC, or FASIT'' and inserting ``or
REMIC''.
(2) Clause (ii) of section 382(l)(4)(B) is amended by
striking ``a REMIC to which part IV of subchapter M
applies, or a FASIT to which part V of subchapter M
applies,'' and inserting ``or a REMIC to which part IV
of subchapter M applies,''.
(3) Paragraph (1) of section 582(c) is amended by
striking ``, and any regular interest in a FASIT,''.
(4) Subparagraph (E) of section 856(c)(5) is amended
by striking the last sentence.
(5) Paragraph (5) of section 860G(a) is amended by
adding ``and'' at the end of subparagraph (B), by
striking ``, and'' at the end of subparagraph (C) and
inserting a period, and by striking subparagraph (D).
(6) Subparagraph (C) of section 1202(e)(4) is amended
by striking ``REMIC, or FASIT'' and inserting ``or
REMIC''.
(7) Subparagraph (C) of section 7701(a)(19) is
amended by adding ``and'' at the end of clause (ix), by
striking ``, and'' at the end of clause (x) and
inserting a period, and by striking clause (xi).
(8) The table of parts for subchapter M of chapter 1
is amended by striking the item relating to part V.
(c) Effective Date.--
(1) In general.--Except as provided in paragraph (2),
the amendments made by this section shall apply to
taxable years beginning after December 31, 2003.
(2) Exception for existing fasits.--
(A) In general.--Paragraph (1) shall not
apply to any FASIT in existence on the date of
the enactment of this Act.
(B) Transfer of additional assets not
permitted.--Except as provided in regulations
prescribed by the Secretary of the Treasury or
the Secretary's delegate, subparagraph (A)
shall cease to apply as of the earliest date
after the date of the enactment of this Act
that any property is transferred to the FASIT.
SEC. 135. EXPANDED DISALLOWANCE OF DEDUCTION FOR INTEREST ON
CONVERTIBLE DEBT.
(a) In General.--Paragraph (2) of section 163(l) is amended
by striking ``or a related party'' and inserting ``or equity
held by the issuer (or any related party) in any other
person''.
(b) Conforming Amendment.--Paragraph (3) of section 163(l) is
amended by striking ``or a related party'' in the material
preceding subparagraph (A) and inserting ``or any other
person''.
(c) Effective Date.--The amendments made by this section
shall apply to debt instruments issued after the date of the
enactment of this Act.
SEC. 136. EXPANDED AUTHORITY TO DISALLOW TAX BENEFITS UNDER SECTION
269.
(a) In General.--Subsection (a) of section 269 (relating to
acquisitions made to evade or avoid income tax) is amended to
read as follows:
``(a) In General.--If--
``(1)(A) any person acquires stock in a corporation,
or
``(B) any corporation acquires, directly or
indirectly, property of another corporation and the
basis of such property, in the hands of the acquiring
corporation, is determined by reference to the basis in
the hands of the transferor corporation, and
``(2) the principal purpose for which such
acquisition was made is evasion or avoidance of Federal
income tax by securing the benefit of a deduction,
credit, or other allowance,
then the Secretary may disallow such deduction, credit, or
other allowance.''
(b) Effective Date.--The amendment made by this section shall
apply to stock and property acquired after February 13, 2003.
SEC. 137. MODIFICATIONS OF CERTAIN RULES RELATING TO CONTROLLED FOREIGN
CORPORATIONS.
(a) Limitation on Exception From PFIC Rules for United States
Shareholders of Controlled Foreign Corporations.--Paragraph (2)
of section 1297(e) (relating to passive investment company) is
amended by adding at the end the following flush sentence:
``Such term shall not include any period if there is
only a remote likelihood of an inclusion in gross
income under section 951(a)(1)(A)(i) of subpart F
income of such corporation for such period.''
(b) Determination of Pro Rata Share of Subpart F Income.--
Subsection (a) of section 951 (relating to amounts included in
gross income of United States shareholders) is amended by
adding at the end the following new paragraph:
``(4) Special rules for determining pro rata share of
subpart f income.--The pro rata share under paragraph
(2) shall be determined by disregarding--
``(A) any rights lacking substantial economic
effect, and
``(B) stock owned by a shareholder who is a
tax-indifferent party (as defined in section
7701(m)(3)) if the amount which would (but for
this paragraph) be allocated to such
shareholder does not reflect such shareholder's
economic share of the earnings and profits of
the corporation.''
(c) Effective Date.--The amendments made by this section
shall apply to taxable years on controlled foreign corporation
beginning after February 13, 2003, and to taxable years of
United States shareholder in which or with which such taxable
years of controlled foreign corporations end.
SEC. 138. BASIS FOR DETERMINING LOSS ALWAYS REDUCED BY NONTAXED PORTION
OF DIVIDENDS.
(a) In General.--Section 1059 (relating to corporate
shareholder's basis in stock reduced by nontaxed portion of
extraordinary dividends) is amended by redesignating subsection
(g) as subsection (h) and by inserting after subsection (f) the
following new subsection:
``(g) Basis for Determining Loss Always Reduced by Nontaxed
Portion of Dividends.--The basis of stock in a corporation (for
purposes of determining loss) shall be reduced by the nontaxed
portion of any dividend received with respect to such stock if
this section does not otherwise apply to such dividend.''
(b) Effective Date.--The amendment made by this section shall
apply to dividends received after the date of the enactment of
this Act.
SEC. 139. AFFIRMATION OF CONSOLIDATED RETURN REGULATION AUTHORITY.
(a) In General.--Section 1502 (relating to consolidated
return regulations) is amended by adding at the end the
following new sentence: ``In prescribing such regulations, the
Secretary may prescribe rules applicable to corporations filing
consolidated returns under section 1501 that are different from
other provisions of this title that would apply if such
corporations filed separate returns.''
(b) Result Not Overturned.--Notwithstanding subsection (a),
the Internal Revenue Code of 1986 shall be construed by
treating Treasury regulation Sec. 1.1502-20(c)(1)(iii) (as in
effect on January 1, 2001) as being inapplicable to the type of
factual situation in 255 F.3d 1357 (Fed. Cir. 2001).
(c) Effective Date.--The provisions of this section shall
apply to taxable years beginning before, on, or after the date
of the enactment of this Act.
Subtitle B--Prevention of Corporate Expatriation to Avoid United States
Income Tax
SEC. 151. PREVENTION OF CORPORATE EXPATRIATION TO AVOID UNITED STATES
INCOME TAX.
(a) In General.--Paragraph (4) of section 7701(a) (defining
domestic) is amended to read as follows:
``(4) Domestic.--
``(A) In general.--Except as provided in
subparagraph (B), the term `domestic' when
applied to a corporation or partnership means
created or organized in the United States or
under the law of the United States or of any
State unless, in the case of a partnership, the
Secretary provides otherwise by regulations.
``(B) Certain corporations treated as
domestic.--
``(i) In general.--The acquiring
corporation in a corporate expatriation
transaction shall be treated as a
domestic corporation.
``(ii) Corporate expatriation
transaction.--For purposes of this
subparagraph, the term `corporate
expatriation transaction' means any
transaction if--
``(I) a nominally foreign
corporation (referred to in
this subparagraph as the
`acquiring corporation')
acquires, as a result of such
transaction, directly or
indirectly substantially all of
the properties held directly or
indirectly by a domestic
corporation, and
``(II) immediately after the
transaction, more than 80
percent of the stock (by vote
or value) of the acquiring
corporation is held by former
shareholders of the domestic
corporation by reason of
holding stock in the domestic
corporation.
``(iii) Lower stock ownership
requirement in certain cases.--
Subclause (II) of clause (ii) shall be
applied by substituting `50 percent'
for `80 percent' with respect to any
nominally foreign corporation if--
``(I) such corporation does
not have substantial business
activities (when compared to
the total business activities
of the expanded affiliated
group) in the foreign country
in which or under the law of
which the corporation is
created or organized, and
``(II) the stock of the
corporation is publicly traded
and the principal market for
the public trading of such
stock is in the United States.
``(iv) Partnership transactions.--The
term `corporate expatriation
transaction' includes any transaction
if--
``(I) a nominally foreign
corporation (referred to in
this subparagraph as the
`acquiring corporation')
acquires, as a result of such
transaction, directly or
indirectly properties
constituting a trade or
business of a domestic
partnership,
``(II) immediately after the
transaction, more than 80
percent of the stock (by vote
or value) of the acquiring
corporation is held by former
partners of the domestic
partnership or related foreign
partnerships (determined
without regard to stock of the
acquiring corporation which is
sold in a public offering
related to the transaction),
and
``(III) the acquiring
corporation meets the
requirements of subclauses (I)
and (II) of clause (iii).
``(v) Special rules.--For purposes of
this subparagraph--
``(I) a series of related
transactions shall be treated
as 1 transaction, and
``(II) stock held by members
of the expanded affiliated
group which includes the
acquiring corporation shall not
be taken into account in
determining ownership.
``(vi) Other definitions.--For
purposes of this subparagraph--
``(I) Nominally foreign
corporation.--The term
`nominally foreign corporation'
means any corporation which
would (but for this
subparagraph) be treated as a
foreign corporation.
``(II) Expanded affiliated
group.--The term `expanded
affiliated group' means an
affiliated group (as defined in
section 1504(a) without regard
to section 1504(b)).
``(III) Related foreign
partnership.--A foreign
partnership is related to a
domestic partnership if they
are under common control
(within the meaning of section
482), or they shared the same
trademark or tradename.''
(b) Effective Dates.--
(1) In general.--The amendment made by this section
shall apply to corporate expatriation transactions
completed after September 11, 2001.
(2) Special rule.--The amendment made by this section
shall also apply to corporate expatriation transactions
completed on or before September 11, 2001, but only
with respect to taxable years of the acquiring
corporation beginning after December 31, 2003.
TITLE II--SIMPLIFICATION OF EARNED INCOME TAX CREDIT
SEC. 201. SIMPLIFICATION OF EARNED INCOME TAX CREDIT.
(a) Repeal of Denial of Credit Where Investment Income.--
Section 32 is amended by striking subsection (i).
(b) Earned Income To Include Only Amounts Includible in Gross
Income.--Section 32(c)(2)(B) is amended by striking ``and'' at
the end of clause (iv), by striking the period at the end of
clause (v) and inserting ``, and'', and by adding at the end
the following new clause:
``(vi) the requirement under
subparagraph (A)(i) that an amount be
includible in gross income shall not
apply if such amount is exempt from tax
under section 7873 or is derived
directly from restricted and allotted
land under the Act of February 8, 1887
(commonly known as the Indian General
Allotment Act) (25 U.S.C. 331 et seq.)
or from land held under Acts or
treaties containing an exception
provision similar to the Indian General
Allotment Act.''
(c) Modification of Joint Return Requirement.--Subsection (d)
of section 32 is amended to read as follows:
``(d) Married Individuals.--
``(1) In general.--If the taxpayer is married at the
close of the taxable year, the credit shall be allowed
under subsection (a) only if the taxpayer and his
spouse file a joint return for the taxable year.
``(2) Marital status.--For purposes of paragraph (1),
an individual legally separated from his spouse under a
decree of divorce or of separate maintenance shall not
be considered as married.
``(3) Certain married individuals living apart.--For
purposes of paragraph (1), if--
``(A) an individual --
``(i) is married and files a separate
return, and
``(ii) has a qualifying child who is
a son, daughter, stepson, or
stepdaughter of such individual, and
``(B) during the last 6 months of such
taxable year, such individual and such
individual's spouse do not have the same
principal place of abode,
such individual shall not be considered as married.''
(d) Expansion of Mathematical Error Authority.--Paragraph (2)
of section 6213(g) is amended by striking ``and'' at the end of
subparagraph (K), by striking the period at the end of
subparagraph (L) and inserting ``, and'', and by inserting
after subparagraph (L) the following new subparagraph:
``(M) the entry on the return claiming the
credit under section 32 with respect to a child
if, according to the Federal Case Registry of
Child Support Orders established under section
453(h) of the Social Security Act, the taxpayer
is a noncustodial parent of such child.''
(e) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2003.
SEC. 202. PROFILING OF EARNED INCOME TAX CREDIT BENEFICIARIES.
(a) Findings.--The Congress hereby finds that:
(1) Current law authorizes the Internal Revenue
Service to impose additional earned income tax credit
eligibility requirements, such as the current
recertification program, only in cases in which a
taxpayer has made prior improper claims of the earned
income tax credit.
(2) The Internal Revenue Service is planning to
implement an earned income tax credit precertification
program that differs from what is authorized under
current law in that it would apply to taxpayers who
fall within broad categories even though they made no
prior improper claims for the credit.
(3) There is no precedent in the Internal Revenue
Code of 1986 for denying or delaying a tax refund that
is apparently properly claimed on a tax return merely
because the taxpayer meets a certain profile.
(4) The proposed earned income tax credit
precertification program is an affront to our sense of
fairness because compliant taxpayers are treated
differently solely by reason of differing family
structures or relationships and solely by reason of the
fact that they are claiming a tax benefit designed to
assist the working poor.
(5) No other family-related tax benefit, such as the
dependency exemption or child tax credit, is subject to
such a precertification requirement; and there is no
such precertification requirement for abusive tax
shelters purchased by corporations or for tax benefits
claimed by higher income individuals.
(b) Proposed EITC Profiling Not Permitted.--The Internal
Revenue Service shall not implement any system of
precertification for the earned income tax credit that applies
to taxpayers who have not made prior improper claims unless
such a system is hereafter specifically authorized by law.
TITLE III--TAXPAYER PROTECTIONS AND IRS ACCOUNTABILITY
Subtitle A--Penalty and Interest Reforms
SEC. 301. FAILURE TO PAY ESTIMATED TAX PENALTY CONVERTED TO INTEREST
CHARGE ON ACCUMULATED UNPAID BALANCE.
(a) Penalty Moved to Interest Chapter of Code.--The Internal
Revenue Code of 1986 is amended by redesignating section 6654
as section 6641 and by moving section 6641 (as so redesignated)
from part I of subchapter A of chapter 68 to the end of
subchapter E of chapter 67 (as added by subsection (e)(1) of
this section).
(b) Penalty Converted to Interest Charge.--The heading and
subsections (a) and (b) of section 6641 (as so redesignated)
are amended to read as follows:
``SEC. 6641. INTEREST ON FAILURE BY INDIVIDUAL TO PAY ESTIMATED INCOME
TAX.
``(a) In General.--Interest shall be paid on any underpayment
of estimated tax by an individual for a taxable year for each
day of such underpayment. The amount of such interest for any
day shall be the product of the underpayment rate established
under subsection (b)(2) multiplied by the amount of the
underpayment.
``(b) Amount of Underpayment; Interest Rate.--For purposes of
subsection (a)--
``(1) Amount.--The amount of the underpayment on any
day shall be the excess of--
``(A) the sum of the required installments
for the taxable year the due dates for which
are on or before such day, over
``(B) the sum of the amounts (if any) of
estimated tax payments made on or before such
day on such required installments.
``(2) Determination of interest rate.--
``(A) In general.--The underpayment rate with
respect to any day in an installment
underpayment period shall be the underpayment
rate established under section 6621 for the
first day of the calendar quarter in which such
installment underpayment period begins.
``(B) Installment underpayment period.--For
purposes of subparagraph (A), the term
`installment underpayment period' means the
period beginning on the day after the due date
for a required installment and ending on the
due date for the subsequent required
installment (or in the case of the 4th required
installment, the 15th day of the 4th month
following the close of a taxable year).
``(C) Daily rate.--The rate determined under
subparagraph (A) shall be applied on a daily
basis and shall be based on the assumption of
365 days in a calendar year.
``(3) Termination of estimated tax interest.--No day
after the end of the installment underpayment period
for the 4th required installment specified in paragraph
(2)(B) for a taxable year shall be treated as a day of
underpayment with respect to such taxable year.''.
(c) Increase in Safe Harbor Where Tax is Small.--
(1) In general.--Clause (i) of section 6641(d)(1)(B)
(as so redesignated) is amended to read as follows:
``(i) the lesser of--
``(I) 90 percent of the tax
shown on the return for the
taxable year (or, if no return
is filed, 90 percent of the tax
for such year), or
``(II) the tax shown on the
return for the taxable year
(or, if no return is filed, the
tax for such year) reduced (but
not below zero) by $1,600,
or''.
(2) Conforming amendment.--Subsection (e) of section
6641 (as so redesignated) is amended by striking
paragraph (1) and redesignating paragraphs (2) and (3)
as paragraphs (1) and (2), respectively.
(d) Conforming Amendments.--
(1) Paragraphs (1) and (2) of subsection (e) (as
redesignated by subsection (c)(2)) and subsection (h)
of section 6641 (as so designated) are each amended by
striking ``addition to tax'' each place it occurs and
inserting ``interest''.
(2) Section 167(g)(5)(D) is amended by striking
``6654'' and inserting ``6641''.
(3) Section 460(b)(1) is amended by striking ``6654''
and inserting ``6641''.
(4) Section 3510(b) is amended--
(A) by striking ``section 6654'' in paragraph
(1) and inserting ``section 6641'';
(B) by amending paragraph (2)(B) to read as
follows:
``(B) no interest would be required to be
paid (but for this section) under 6641 for such
taxable year by reason of the $1,600 amount
specified in section 6641(d)(1)(B)(i)(II).'';
(C) by striking ``section 6654(d)(2)'' in
paragraph (3) and inserting ``section
6641(d)(2)''; and
(D) by striking paragraph (4).
(5) Section 6201(b)(1) is amended by striking
``6654'' and inserting ``6641''.
(6) Section 6601(h) is amended by striking ``6654''
and inserting ``6641''.
(7) Section 6621(b)(2)(B) is amended by striking
``addition to tax under section 6654'' and inserting
``interest required to be paid under section 6641''.
(8) Section 6622(b) is amended--
(A) by striking ``Penalty for'' in the
heading; and
(B) by striking ``addition to tax under
section 6654 or 6655'' and inserting ``interest
required to be paid under section 6641 or
addition to tax under section 6655''.
(9) Section 6658(a) is amended--
(A) by striking ``6654, or 6655'' and
inserting ``or 6655, and no interest shall be
required to be paid under section 6641,''; and
(B) by inserting ``or paying interest'' after
``the tax'' in paragraph (2)(B)(ii).
(10) Section 6665(b) is amended--
(A) in the matter preceding paragraph (1) by
striking ``, 6654,''; and
(B) in paragraph (2) by striking ``6654 or''.
(11) Section 7203 is amended by striking ``section
6654 or 6655'' and inserting ``section 6655 or interest
required to be paid under section 6641''.
(e) Clerical Amendments.--
(1) Chapter 67 is amended by inserting after
subchapter D the following:
``Subchapter E--Interest on Failure by Individual to Pay Estimated
Income Tax
``Sec. 6641. Interest on failure by individual to pay estimated
income tax.''.
(2) The table of subchapters for chapter 67 is
amended by adding at the end the following new items:
``Subchapter D. Notice requirements.
``Subchapter E. Interest on failure by individual to pay
estimated income tax.''.
(3) The table of sections for part I of subchapter A
of chapter 68 is amended by striking the item relating
to section 6654.
(f) Effective Date.--The amendments made by this section
shall apply to installment payments for taxable years beginning
after December 31, 2003.
SEC. 302. ABATEMENT OF INTEREST.
(a) Abatement of Interest With Respect to Erroneous Refund
Check Without Regard to Size of Refund.--Paragraph (2) of
section 6404(e) is amended by striking ``unless--'' and all
that follows and inserting ``unless the taxpayer (or a related
party) has in any way caused such erroneous refund.''.
(b) Abatement of Interest to Extent Interest is Attributable
to Taxpayer Reliance on Written Statements of the IRS.--
Subsection (f) of section 6404 is amended--
(1) in the subsection heading, by striking ``Penalty
or Addition'' and inserting ``Interest, Penalty, or
Addition''; and
(2) in paragraph (1) and in subparagraph (B) of
paragraph (2), by striking ``penalty or addition'' and
inserting ``interest, penalty, or addition''.
(c) Effective Date.--The amendments made by this section
shall apply with respect to interest accruing on or after the
date of the enactment of this Act.
SEC. 303. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON POTENTIAL
UNDERPAYMENTS.
(a) In General.--Subchapter A of chapter 67 (relating to
interest on underpayments) is amended by adding at the end the
following new section:
``SEC. 6603. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON POTENTIAL
UNDERPAYMENTS, ETC.
``(a) Authority To Make Deposits Other Than As Payment of
Tax.--A taxpayer may make a cash deposit with the Secretary
which may be used by the Secretary to pay any tax imposed under
subtitle A or B or chapter 41, 42, 43, or 44 which has not been
assessed at the time of the deposit. Such a deposit shall be
made in such manner as the Secretary shall prescribe.
``(b) No Interest Imposed.--To the extent that such deposit
is used by the Secretary to pay tax, for purposes of section
6601 (relating to interest on underpayments), the tax shall be
treated as paid when the deposit is made.
``(c) Return of Deposit.--Except in a case where the
Secretary determines that collection of tax is in jeopardy, the
Secretary shall return to the taxpayer any amount of the
deposit (to the extent not used for a payment of tax) which the
taxpayer requests in writing.
``(d) Payment of Interest.--
``(1) In general.--For purposes of section 6611
(relating to interest on overpayments), a deposit which
is returned to a taxpayer shall be treated as a payment
of tax for any period to the extent (and only to the
extent) attributable to a disputable tax for such
period. Under regulations prescribed by the Secretary,
rules similar to the rules of section 6611(b)(2) shall
apply.
``(2) Disputable tax.--
``(A) In general.--For purposes of this
section, the term `disputable tax' means the
amount of tax specified at the time of the
deposit as the taxpayer's reasonable estimate
of the maximum amount of any tax attributable
to disputable items.
``(B) Safe harbor based on 30-day letter.--In
the case of a taxpayer who has been issued a
30-day letter, the maximum amount of tax under
subparagraph (A) shall not be less than the
amount of the proposed deficiency specified in
such letter.
``(3) Other definitions.--For purposes of paragraph
(2)--
``(A) Disputable item.--The term `disputable
item' means any item of income, gain, loss,
deduction, or credit if the taxpayer--
``(i) has a reasonable basis for its
treatment of such item, and
``(ii) reasonably believes that the
Secretary also has a reasonable basis
for disallowing the taxpayer's
treatment of such item.
``(B) 30-day letter.--The term `30-day
letter' means the first letter of proposed
deficiency which allows the taxpayer an
opportunity for administrative review in the
Internal Revenue Service Office of Appeals.
``(4) Rate of interest.--The rate of interest
allowable under this subsection shall be the Federal
short-term rate determined under section 6621(b),
compounded daily.
``(e) Use of Deposits.--
``(1) Payment of tax.--Except as otherwise provided
by the taxpayer, deposits shall be treated as used for
the payment of tax in the order deposited.
``(B) Returns of deposits.--Deposits shall be treated
as returned to the taxpayer on a last-in, first-out
basis.''.
(b) Clerical Amendment.--The table of sections for subchapter
A of chapter 67 is amended by adding at the end the following
new item:
``Sec. 6603. Deposits made to suspend running of interest on
potential underpayments, etc.''.
(c) Effective Date.--
(1) In general.--The amendments made by this section
shall apply to deposits made after the date of the
enactment of this Act.
(2) Coordination with deposits made under revenue
procedure 84-58.--In the case of an amount held by the
Secretary of the Treasury or his delegate on the date
of the enactment of this Act as a deposit in the nature
of a cash bond deposit pursuant to Revenue Procedure
84-58, the date that the taxpayer identifies such
amount as a deposit made pursuant to section 6603 of
the Internal Revenue Code (as added by this Act) shall
be treated as the date such amount is deposited for
purposes of such section 6603.
SEC. 304. EXPANSION OF INTEREST NETTING FOR INDIVIDUALS.
(a) In General.--Subsection (d) of section 6621 (relating to
elimination of interest on overlapping periods of tax
overpayments and underpayments) is amended by adding at the end
the following: ``Solely for purposes of the preceding sentence,
section 6611(e) shall not apply in the case of an
individual.''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to interest accrued after December 31, 2003.
SEC. 305. WAIVER OF CERTAIN PENALTIES FOR FIRST-TIME UNINTENTIONAL
MINOR ERRORS.
(a) In General.--Section 6651 (relating to failure to file
tax return or to pay tax) is amended by adding at the end the
following new subsection:
``(i) Treatment of First-Time Unintentional Minor Errors.--
``(1) In general.--In the case of a return of tax
imposed by subtitle A filed by an individual, the
Secretary may waive an addition to tax under subsection
(a) if--
``(A) the individual has a history of
compliance with the requirements of this title,
``(B) it is shown that the failure is due to
an unintentional minor error,
``(C) the penalty would be grossly
disproportionate to the action or expense that
would have been needed to avoid the error, and
imposing the penalty would be against equity
and good conscience,
``(D) waiving the penalty would promote
compliance with the requirements of this title
and effective tax administration, and
``(E) the taxpayer took all reasonable steps
to remedy the error promptly after discovering
it.
``(2) Exceptions.--Paragraph (1) shall not apply if--
``(A) the Secretary has waived any addition
to tax under this subsection with respect to
any prior failure by such individual,
``(B) the failure is a mathematical or
clerical error (as defined in section
6213(g)(2)), or
``(C) the failure is the lack of a required
signature.''.
(b) Effective Date.--The amendment made by this section shall
take effect on January 1, 2004.
SEC. 306. FRIVOLOUS TAX SUBMISSIONS.
(a) Civil Penalties.--Section 6702 is amended to read as
follows:
``SEC. 6702. FRIVOLOUS TAX SUBMISSIONS.
``(a) Civil Penalty for Frivolous Tax Returns.--A person
shall pay a penalty of $5,000 if--
``(1) such person files what purports to be a return
of a tax imposed by this title but which--
``(A) does not contain information on which
the substantial correctness of the self-
assessment may be judged, or
``(B) contains information that on its face
indicates that the self-assessment is
substantially incorrect; and
``(2) the conduct referred to in paragraph (1)--
``(A) is based on a position which the
Secretary has identified as frivolous under
subsection (c), or
``(B) reflects a desire to delay or impede
the administration of Federal tax laws.
``(b) Civil Penalty for Specified Frivolous Submissions.--
``(1) Imposition of Penalty.--Except as provided in
paragraph (3), any person who submits a specified
frivolous submission shall pay a penalty of $5,000.
``(2) Specified frivolous submission.--For purposes
of this section--
``(A) Specified frivolous submission.--The
term `specified frivolous submission' means a
specified submission if any portion of such
submission is based on a position which the
Secretary has identified as frivolous under
subsection (c).
``(B) Specified submission.--The term
`specified submission' means--
``(i) a request for a hearing under--
``(I) section 6320 (relating
to notice and opportunity for
hearing upon filing of notice
of lien), or
``(II) section 6330 (relating
to notice and opportunity for
hearing before levy), and
``(ii) an application under--
``(I) section 7811 (relating
to taxpayer assistance orders),
``(II) section 6159 (relating
to agreements for payment of
tax liability in installments),
or
``(III) section 7122
(relating to compromises).
``(3) Opportunity to withdraw submission.--If the
Secretary provides a person with notice that a
submission is a specified frivolous submission and such
person withdraws such submission within 30 days after
such notice, the penalty imposed under paragraph (1)
shall not apply with respect to such submission.
``(c) Listing of Frivolous Positions.--The Secretary shall
prescribe (and periodically revise) a list of positions which
the Secretary has identified as being frivolous for purposes of
this subsection. The Secretary shall not include in such list
any position that the Secretary determines meets the
requirement of section 6662(d)(2)(B)(ii)(II).
``(d) Reduction of Penalty.--The Secretary may reduce the
amount of any penalty imposed under this section if the
Secretary determines that such reduction would promote
compliance with and administration of the Federal tax laws.
``(e) Penalties in Addition to Other Penalties.--The
penalties imposed by this section shall be in addition to any
other penalty provided by law.''.
(b) Clerical Amendment.--The table of sections for part I of
subchapter B of chapter 68 is amended by striking the item
relating to section 6702 and inserting the following new item:
``Sec. 6702. Frivolous tax submissions.''.
(c) Effective Date.--The amendments made by this section
shall apply to submissions made and issues raised after the
date on which the Secretary first prescribes a list under
section 6702(c) of the Internal Revenue Code of 1986, as
amended by subsection (a).
SEC. 307. CLARIFICATION OF APPLICATION OF FEDERAL TAX DEPOSIT PENALTY.
Nothing in section 6656 of the Internal Revenue Code of 1986
shall be construed to permit the percentage specified in
subsection (b)(1)(A)(iii) thereof to apply other than in a case
where the failure is for more than 15 days.
Subtitle B--Fairness of Collection Procedures
SEC. 311. PARTIAL PAYMENT OF TAX LIABILITY IN INSTALLMENT AGREEMENTS.
(a) In General.--
(1) Section 6159(a) (relating to authorization of
agreements) is amended--
(A) by striking ``satisfy liability for
payment of'' and inserting ``make payment on'',
and
(B) by inserting ``full or partial'' after
``facilitate''.
(2) Section 6159(c) (relating to Secretary required
to enter into installment agreements in certain cases)
is amended in the matter preceding paragraph (1) by
inserting ``full'' before ``payment''.
(b) Requirement To Review Partial Payment Agreements Every
Two Years.--Section 6159 is amended by redesignating
subsections (d) and (e) as subsections (e) and (f),
respectively, and inserting after subsection (c) the following
new subsection:
``(d) Secretary Required To Review Installment Agreements for
Partial Collection Every Two Years.--In the case of an
agreement entered into by the Secretary under subsection (a)
for partial collection of a tax liability, the Secretary shall
review the agreement at least once every 2 years.''.
(c) Effective Date.--The amendments made by this section
shall apply to agreements entered into on or after the date of
the enactment of this Act.
SEC. 312. EXTENSION OF TIME FOR RETURN OF PROPERTY.
(a) Extension of Time for Return of Property Subject to
Levy.--Subsection (b) of section 6343 (relating to return of
property) is amended by striking ``9 months'' and inserting ``2
years''.
(b) Period of Limitation on Suits.--Subsection (c) of section
6532 (relating to suits by persons other than taxpayers) is
amended--
(1) in paragraph (1) by striking ``9 months'' and
inserting ``2 years'', and
(2) in paragraph (2) by striking ``9-month'' and
inserting ``2-year''.
(c) Effective Date.--The amendments made by this section
shall apply to--
(1) levies made after the date of the enactment of
this Act, and
(2) levies made on or before such date if the 9-month
period has not expired under section 6343(b) of the
Internal Revenue Code of 1986 (without regard to this
section) as of such date.
SEC. 313. INDIVIDUALS HELD HARMLESS ON WRONGFUL LEVY, ETC., ON
INDIVIDUAL RETIREMENT PLAN.
(a) In General.--Section 6343 (relating to authority to
release levy and return property) is amended by adding at the
end the following new subsection:
``(f) Individuals Held Harmless on Wrongful Levy, etc. on
Individual Retirement Plan.--
``(1) In general.--If the Secretary determines that
an individual retirement plan has been levied upon in a
case to which subsection (b) or (d)(2)(A) applies, an
amount equal to the sum of--
``(A) the amount of money returned by the
Secretary on account of such levy, and
``(B) interest paid under subsection (c) on
such amount of money,
may be deposited into an individual retirement plan
(other than an endowment contract) to which a rollover
from the plan levied upon is permitted.
``(2) Treatment as rollover.--The distribution on
account of the levy and any deposit under paragraph (1)
with respect to such distribution shall be treated for
purposes of this title as if such distribution and
deposit were part of a rollover described in section
408(d)(3)(A)(i); except that--
``(A) interest paid under subsection (c)
shall be treated as part of such distribution
and as not includible in gross income,
``(B) the 60-day requirement in such section
shall be treated as met if the deposit is made
not later than the 60th day after the day on
which the individual receives an amount under
paragraph (1) from the Secretary, and
``(C) such deposit shall not be taken into
account under section 408(d)(3)(B).
``(3) Refund, etc., of income tax on levy.--If any
amount is includible in gross income for a taxable year
by reason of a levy referred to in paragraph (1) and
any portion of such amount is treated as a rollover
under paragraph (2), any tax imposed by chapter 1 on
such portion shall not be assessed, and if assessed
shall be abated, and if collected shall be credited or
refunded as an overpayment made on the due date for
filing the return of tax for such taxable year.
``(4) Interest.--Notwithstanding subsection (d),
interest shall be allowed under subsection (c) in a
case in which the Secretary makes a determination
described in subsection (d)(2)(A) with respect to a
levy upon an individual retirement plan.''.
(b) Effective Date.--The amendment made by this section shall
apply to amounts paid under subsections (b), (c), and (d)(2)(A)
of section 6343 of the Internal Revenue Code of 1986 after
December 31, 2003.
SEC. 314. SEVEN-DAY THRESHOLD ON TOLLING OF STATUTE OF LIMITATIONS
DURING TAX REVIEW.
(a) In General.--Section 7811(d)(1) (relating to suspension
of running of period of limitation) is amended by inserting
after ``application,'' the following: ``but only if the date of
such decision is at least 7 days after the date of the
taxpayer's application''.
(b) Effective Date.--The amendment made by this section shall
apply to applications filed after the date of the enactment of
this Act.
SEC. 315. STUDY OF LIENS AND LEVIES.
The Secretary of the Treasury, or the Secretary's delegate,
shall conduct a study of the practices of the Internal Revenue
Service concerning liens and levies. The study shall examine--
(1) the declining use of liens and levies by the
Internal Revenue Service, and
(2) the practicality of recording liens and
levying against property in cases in which the cost of
such actions exceeds the amount to be realized from
such property.
Not later than 1 year after the date of the enactment of this
Act, the Secretary shall submit such study to the Committee on
Ways and Means of the House of Representatives and the
Committee on Finance of the Senate.
Subtitle C--Tax Administration Reforms
SEC. 331. REVISIONS RELATING TO TERMINATION OF EMPLOYMENT OF INTERNAL
REVENUE SERVICE EMPLOYEES FOR MISCONDUCT.
(a) In General.--Subchapter A of chapter 80 (relating to
application of internal revenue laws) is amended by inserting
after section 7804 the following new section:
``SEC. 7804A. DISCIPLINARY ACTIONS FOR MISCONDUCT.
``(a) Disciplinary Actions.--
``(1) In general.--Subject to subsection (c), the
Commissioner shall take an action in accordance with
the guidelines established under paragraph (2) against
any employee of the Internal Revenue Service if there
is a final administrative or judicial determination
that such employee committed any act or omission
described under subsection (b) in the performance of
the employee's official duties or where a nexus to the
employee's position exists.
``(2) Guidelines.--The Commissioner shall issue
guidelines for determining the appropriate level of
discipline, up to and including termination of
employment, for committing any act or omission
described under subsection (b).
``(b) Acts or Omissions.--The acts or omissions described
under this subsection are--
``(1) willful failure to obtain the required approval
signatures on documents authorizing the seizure of a
taxpayer's home, personal belongings, or business
assets;
``(2) willfully providing a false statement under
oath with respect to a material matter involving a
taxpayer or taxpayer representative;
``(3) with respect to a taxpayer or taxpayer
representative, the willful violation of--
``(A) any right under the Constitution of the
United States;
``(B) any civil right established under--
``(i) title VI or VII of the Civil
Rights Act of 1964;
``(ii) title IX of the Education
Amendments of 1972;
``(iii) the Age Discrimination in
Employment Act of 1967;
``(iv) the Age Discrimination Act of
1975;
``(v) section 501 or 504 of the
Rehabilitation Act of 1973; or
``(vi) title I of the Americans with
Disabilities Act of 1990; or
``(C) the Internal Revenue Service policy on
unauthorized inspection of returns or return
information;
``(4) willfully falsifying or destroying documents to
conceal mistakes made by any employee with respect to a
matter involving a taxpayer or taxpayer representative;
``(5) assault or battery on a taxpayer or taxpayer
representative, but only if there is a criminal
conviction, or a final adverse judgment by a court in a
civil case, with respect to the assault or battery;
``(6) willful violations of this title, Department of
the Treasury regulations, or policies of the Internal
Revenue Service (including the Internal Revenue Manual)
for the purpose of retaliating against, or harassing, a
taxpayer or taxpayer representative;
``(7) willful misuse of the provisions of section
6103 for the purpose of concealing information from a
congressional inquiry;
``(8) willful failure to file any return of tax
required under this title on or before the date
prescribed therefor (including any extensions) when a
tax is due and owing, unless such failure is due to
reasonable cause and not due to willful neglect;
``(9) willful understatement of Federal tax
liability, unless such understatement is due to
reasonable cause and not due to willful neglect; and
``(10) threatening to audit a taxpayer, or to take
other action under this title, for the purpose of
extracting personal gain or benefit.
``(c) Determinations of Commissioner.--
``(1) In general.--The Commissioner may take a
personnel action other than a disciplinary action
provided for in the guidelines under subsection (a)(2)
for an act or omission described under subsection (b).
``(2) Discretion.--The exercise of authority under
paragraph (1) shall be at the sole discretion of the
Commissioner and may not be delegated to any other
officer. The Commissioner, in his sole discretion, may
establish a procedure to determine if an individual
should be referred to the Commissioner for a
determination by the Commissioner under paragraph (1).
``(3) No appeal.--Notwithstanding any other provision
of law, any determination of the Commissioner under
this subsection may not be reviewed in any
administrative or judicial proceeding. A finding that
an act or omission described under subsection (b)
occurred may be reviewed.
``(d) Definition.--For the purposes of the provisions
described in clauses (i), (ii), and (iv) of subsection
(b)(3)(B), references to a program or activity regarding
Federal financial assistance or an education program or
activity receiving Federal financial assistance shall include
any program or activity conducted by the Internal Revenue
Service for a taxpayer.
``(e) Annual Report.--The Commissioner shall submit to
Congress annually a report on disciplinary actions under this
section.''.
(b) Clerical Amendment.--The table of sections for chapter 80
is amended by inserting after the item relating to section 7804
the following new item:
``Sec. 7804A. Disciplinary actions for misconduct.''.
(c) Repeal of Superseded Section.--Section 1203 of the
Internal Revenue Service Restructuring and Reform Act of 1998
(Public Law 105-206; 112 Stat. 720) is repealed.
(d) Effective Date.--The amendments made by this section
shall take effect on the date of the enactment of this Act.
SEC. 332. CONFIRMATION OF AUTHORITY OF TAX COURT TO APPLY DOCTRINE OF
EQUITABLE RECOUPMENT.
(a) Confirmation of Authority of Tax Court To Apply Doctrine
of Equitable Recoupment.--Subsection (b) of section 6214
(relating to jurisdiction over other years and quarters) is
amended by adding at the end the following new sentence:
``Notwithstanding the preceding sentence, the Tax Court may
apply the doctrine of equitable recoupment to the same extent
that it is available in civil tax cases before the district
courts of the United States and the United States Court of
Federal Claims.''.
(b) Effective Date.--The amendments made by this section
shall apply to any action or proceeding in the Tax Court with
respect to which a decision has not become final (as determined
under section 7481 of the Internal Revenue Code of 1986) as of
the date of the enactment of this Act.
SEC. 333. JURISDICTION OF TAX COURT OVER COLLECTION DUE PROCESS CASES.
(a) In General.--Section 6330(d)(1) (relating to judicial
review of determination) is amended to read as follows:
``(1) Judicial review of determination.--The person
may, within 30 days of a determination under this
section, appeal such determination to the Tax Court
(and the Tax Court shall have jurisdiction with respect
to such matter).''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to judicial appeals filed after the date of the
enactment of this Act.
SEC. 334. OFFICE OF CHIEF COUNSEL REVIEW OF OFFERS IN COMPROMISE.
(a) In General.--Section 7122(b) (relating to record) is
amended by striking ``Whenever a compromise'' and all that
follows through ``his delegate'' and inserting ``If the
Secretary determines that an opinion of the General Counsel for
the Department of the Treasury, or the Counsel's delegate, is
required with respect to a compromise, there shall be placed on
file in the office of the Secretary such opinion''.
(b) Conforming Amendments.--Section 7122(b) is amended by
striking the second and third sentences.
(c) Effective Date.--The amendments made by this section
shall apply to offers-in-compromise submitted or pending on or
after the date of the enactment of this Act.
SEC. 335. ACCESS OF NATIONAL TAXPAYER ADVOCATE TO INDEPENDENT LEGAL
COUNSEL.
Clause (i) of section 7803(c)(2)(D) (relating to personnel
actions) is amended by striking ``and'' at the end of subclause
(I), by striking the period at the end of subclause (II) and
inserting ``, and'', and by adding at the end the following new
subclause:
``(III) appoint a counsel in
the Office of the Taxpayer
Advocate to report solely to
the National Taxpayer
Advocate.''.
SEC. 336. PAYMENT OF MOTOR FUEL EXCISE TAX REFUNDS BY DIRECT DEPOSIT.
(a) In General.--Subchapter II of chapter 33 of title 31,
United States Code, is amended by adding at the end the
following new section:
``Sec. 3337. Payment of motor fuel excise tax refunds by direct deposit
``The Secretary of the Treasury shall make payments under
sections 6420, 6421, and 6427 of the Internal Revenue Code of
1986 by electronic funds transfer (as defined in section
3332(j)(1)) if the person who is entitled to the payment--
``(1) elects to receive the payment by electronic
funds transfer; and
``(2) satisfies the requirements of section 3332(g)
with respect to such payment at such time and in such
manner as the Secretary may require.''.
(b) Clerical Amendment.--The table of sections for subchapter
II of chapter 33 of title 31, United States Code, is amended by
adding at the end the following new item:
``3337. Payment of motor fuel excise tax refunds by direct deposit.''.
SEC. 337. FAMILY BUSINESS TAX SIMPLIFICATION.
(a) In General.--Section 761 (defining terms for purposes of
partnerships) is amended by redesignating subsection (f) as
subsection (g) and by inserting after subsection (e) the
following new subsection:
``(f) Qualified Joint Venture.--
``(1) In general.--In the case of a qualified joint
venture conducted by a husband and wife who file a
joint return for the taxable year, for purposes of this
title--
``(A) such joint venture shall not be treated
as a partnership,
``(B) all items of income, gain, loss,
deduction, and credit shall be divided between
the spouses in accordance with their respective
interests in the venture, and
``(C) each spouse shall take into account
such spouse's respective share of such items as
if they were attributable to a trade or
business conducted by such spouse as a sole
proprietor.
``(2) Qualified joint venture.--For purposes of
paragraph (1), the term `qualified joint venture' means
any joint venture involving the conduct of a trade or
business if--
``(A) the only members of such joint venture
are a husband and wife,
``(B) both spouses materially participate
(within the meaning of section 469(h) without
regard to paragraph (5) thereof) in such trade
or business, and
``(C) both spouses elect the application of
this subsection.''.
(b) Net Earnings From Self-Employment.--
(1) Subsection (a) of section 1402 (defining net
earnings from self-employment) is amended by striking
``and'' at the end of paragraph (14), by striking the
period at the end of paragraph (15) and inserting ``;
and'', and by inserting after paragraph (15) the
following new paragraph:
``(16) notwithstanding the preceding provisions of
this subsection, each spouse's share of income or loss
from a qualified joint venture shall be taken into
account as provided in section 761(f) in determining
net earnings from self-employment of such spouse.''.
(2) Subsection (a) of section 211 of the Social
Security Act (defining net earnings from self-
employment) is amended by striking ``and'' at the end
of paragraph (14), by striking the period at the end of
paragraph (15) and inserting ``; and'', and by
inserting after paragraph (15) the following new
paragraph:
``(16) Notwithstanding the preceding provisions of
this subsection, each spouse's share of income or loss
from a qualified joint venture shall be taken into
account as provided in section 761(f) of the Internal
Revenue Code of 1986 in determining net earnings from
self-employment of such spouse.''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2002.
SEC. 338. SUSPENSION OF TAX-EXEMPT STATUS OF TERRORIST ORGANIZATIONS.
(a) In General.--Section 501 (relating to exemption from tax
on corporations, certain trusts, etc.) is amended by
redesignating subsection (p) as subsection (q) and by inserting
after subsection (o) the following new subsection:
``(p) Suspension of Tax-Exempt Status of Terrorist
Organizations.--
``(1) In general.--The exemption from tax under
subsection (a) with respect to any organization
described in paragraph (2), and the eligibility of any
organization described in paragraph (2) to apply for
recognition of exemption under subsection (a), shall be
suspended during the period described in paragraph (3).
``(2) Terrorist organizations.--An organization is
described in this paragraph if such organization is
designated or otherwise individually identified--
``(A) under section 212(a)(3)(B)(vi)(II) or
219 of the Immigration and Nationality Act as a
terrorist organization or foreign terrorist
organization,
``(B) in or pursuant to an Executive order
which is related to terrorism and issued under
the authority of the International Emergency
Economic Powers Act or section 5 of the United
Nations Participation Act of 1945 for the
purpose of imposing on such organization an
economic or other sanction, or
``(C) in or pursuant to an Executive order
issued under the authority of any Federal law
if--
``(i) the organization is designated
or otherwise individually identified in
or pursuant to such Executive order as
supporting or engaging in terrorist
activity (as defined in section
212(a)(3)(B) of the Immigration and
Nationality Act) or supporting
terrorism (as defined in section
140(d)(2) of the Foreign Relations
Authorization Act, Fiscal Years 1988
and 1989); and
``(ii) such Executive order refers to
this subsection.
``(3) Period of suspension.--With respect to any
organization described in paragraph (2), the period of
suspension--
``(A) begins on the later of--
``(i) the date of the first
publication of a designation or
identification described in paragraph
(2) with respect to such organization,
or
``(ii) the date of the enactment of
this subsection, and
``(B) ends on the first date that all
designations and identifications described in
paragraph (2) with respect to such organization
are rescinded pursuant to the law or Executive
order under which such designation or
identification was made.
``(4) Denial of deduction.--No deduction shall be
allowed under section 170, 545(b)(2), 556(b)(2),
642(c), 2055, 2106(a)(2), or 2522 for any contribution
to an organization described in paragraph (2) during
the period described in paragraph (3).
``(5) Denial of administrative or judicial challenge
of suspension or denial of deduction.--Notwithstanding
section 7428 or any other provision of law, no
organization or other person may challenge a suspension
under paragraph (1), a designation or identification
described in paragraph (2), the period of suspension
described in paragraph (3), or a denial of a deduction
under paragraph (4) in any administrative or judicial
proceeding relating to the Federal tax liability of
such organization or other person.
``(6) Erroneous designation.--
``(A) In general.--If--
``(i) the tax exemption of any
organization described in paragraph (2)
is suspended under paragraph (1),
``(ii) each designation and
identification described in paragraph
(2) which has been made with respect to
such organization is determined to be
erroneous pursuant to the law or
Executive order under which such
designation or identification was made,
and
``(iii) the erroneous designations
and identifications result in an
overpayment of income tax for any
taxable year by such organization,
credit or refund (with interest) with respect
to such overpayment shall be made.
``(B) Waiver of limitations.--If the credit
or refund of any overpayment of tax described
in subparagraph (A)(iii) is prevented at any
time by the operation of any law or rule of law
(including res judicata), such credit or refund
may nevertheless be allowed or made if the
claim therefor is filed before the close of the
1-year period beginning on the date of the last
determination described in subparagraph
(A)(ii).
``(7) Notice of suspensions.--If the tax exemption of
any organization is suspended under this subsection,
the Internal Revenue Service shall update the listings
of tax-exempt organizations and shall publish
appropriate notice to taxpayers of such suspension and
of the fact that contributions to such organization are
not deductible during the period of such suspension.''.
(b) Effective Date.--The amendments made by this section
shall apply to designations made before, on, or after the date
of the enactment of this Act.
SEC. 339. TAX REFUND ANTICIPATION LOANS.
The Secretary of the Treasury may not provide any direct
deposit indicator with respect to a taxpayer to any tax return
preparer, financial institution, or other person that charges
taxpayers interest rates (including fees) on refund
anticipation loans in excess of the consumer loan usury rate
limit of the State in which the taxpayer is domiciled.
SEC. 340. FAIRNESS IN TAX AUDIT COVERAGE.
(a) Mandatory Audits of High Risk Taxpayers.--The Secretary
of the Treasury shall conduct audits of all taxpayers whom the
Secretary determines are likely to have--
(1) an unpaid Federal income tax liability of more
than $1,000,000, or
(2) to have unreported income or structured
transactions which are considered by the Secretary to
be high risk.
(b) Rate of Audits.--The Secretary of the Treasury shall
conduct audits of high income taxpayers likely to owe taxes at
a rate which is not less than the rate at which the Secretary
conducts audits of low income taxpayers likely to owe taxes.
Subtitle D--Confidentiality and Disclosure
SEC. 341. COLLECTION ACTIVITIES WITH RESPECT TO JOINT RETURN
DISCLOSABLE TO EITHER SPOUSE BASED ON ORAL REQUEST.
(a) In General.--Paragraph (8) of section 6103(e) (relating
to disclosure of collection activities with respect to joint
return) is amended by striking ``in writing'' the first place
it appears.
(b) Effective Date.--The amendment made by this section shall
apply to requests made after the date of the enactment of this
Act.
SEC. 342. TAXPAYER REPRESENTATIVES NOT SUBJECT TO EXAMINATION ON SOLE
BASIS OF REPRESENTATION OF TAXPAYERS.
(a) In General.--Paragraph (1) of section 6103(h) (relating
to disclosure to certain Federal officers and employees for
purposes of tax administration, etc.) is amended--
(1) by striking ``Returns'' and inserting the
following:
``(A) In general.--Returns'', and
(2) by adding at the end the following new
subparagraph:
``(B) Taxpayer representatives.--
Notwithstanding subparagraph (A), the return of
the representative of a taxpayer whose return
is being examined by an officer or employee of
the Department of the Treasury shall not be
open to inspection by such officer or employee
on the sole basis of the representative's
relationship to the taxpayer unless a
supervisor of such officer or employee has
approved the inspection of the return of such
representative on a basis other than by reason
of such relationship.''.
(b) Effective Date.--The amendment made by this section shall
take effect on the date which is 180 days after the date of the
enactment of this Act.
SEC. 343. DISCLOSURE IN JUDICIAL OR ADMINISTRATIVE TAX PROCEEDINGS OF
RETURN AND RETURN INFORMATION OF PERSONS WHO ARE
NOT PARTY TO SUCH PROCEEDINGS.
(a) In General.--Paragraph (4) of 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 subparagraph:
``(B) Disclosure in judicial or
administrative tax proceedings of return and
return information of persons not party to such
proceedings.--
``(i) Notice.--Return or return
information of any person who is not a
party to a judicial or administrative
proceeding described in this paragraph
shall not be disclosed under clause
(ii) or (iii) of subparagraph (A) until
after the Secretary makes a reasonable
effort to give notice to such person
and an opportunity for such person to
request the deletion of matter from
such return or return information,
including any of the items referred to
in paragraphs (1) through (7) of
section 6110(c). Such notice shall
include a statement of the issue or
issues the resolution of which is the
reason such return or return
information is sought. In the case of S
corporations, partnerships, estates,
and trusts, such notice shall be made
at the entity level.
``(ii) Disclosure limited to
pertinent portion.--The only portion of
a return or return information
described in clause (i) which may be
disclosed under subparagraph (A) is
that portion of such return or return
information that directly relates to
the resolution of an issue in such
proceeding.
``(iii) Exceptions.--Clause (i) shall
not apply--
``(I) to any civil action
under section 7407, 7408, or
7409,
``(II) to any ex parte
proceeding for obtaining a
search warrant, order for entry
on premises or safe deposit
boxes, or similar ex parte
proceeding,
``(III) to disclosure of
third party return information
by indictment or criminal
information, or
``(IV) if the Attorney
General or the Attorney
General's delegate determines
that the application of such
clause would seriously impair a
criminal tax investigation or
proceeding.''.
(b) Conforming Amendments.--Paragraph (4) of section 6103(h)
is amended by--
(1) by striking ``proceedings.--A return'' and
inserting ``proceedings.--
``(A) In general.--Except as provided in
subparagraph (B), a return'';
(2) by redesignating subparagraphs (A), (B), (C), and
(D) as clauses (i), (ii), (iii), and (iv),
respectively; and
(3) in the matter following clause (iv) (as so
redesignated), by striking ``subparagraph (A), (B), or
(C)'' and inserting ``clause (i), (ii), or (iii)'' and
by moving such matter 2 ems to the right.
(c) Effective Date.--The amendments made by this section
shall apply to proceedings commenced after the date of the
enactment of this Act.
SEC. 344. PROHIBITION OF DISCLOSURE OF TAXPAYER IDENTIFICATION
INFORMATION WITH RESPECT TO DISCLOSURE OF ACCEPTED
OFFERS-IN-COMPROMISE.
(a) General.--Paragraph (1) of section 6103(k) (relating to
disclosure of certain returns and return information for tax
administrative purposes) is amended by inserting ``(other than
the taxpayer's address and TIN)'' after ``Return information''.
(b) Effective Date.--The amendment made by this section shall
apply to disclosures made after the date of the enactment of
this Act.
SEC. 345. COMPLIANCE BY CONTRACTORS WITH CONFIDENTIALITY SAFEGUARDS.
(a) In General.--Section 6103(p) (relating to State law
requirements) is amended by adding at the end the following new
paragraph:
``(9) Disclosure to contractors and other agents.--
Notwithstanding any other provision of this section, no
return or return information shall be disclosed to any
contractor or other agent of a Federal, State, or local
agency unless such agency, to the satisfaction of the
Secretary--
``(A) has requirements in effect which
require each such contractor or other agent
which would have access to returns or return
information to provide safeguards (within the
meaning of paragraph (4)) to protect the
confidentiality of such returns or return
information,
``(B) agrees to conduct an annual, on-site
review (mid-point review in the case of
contracts of less than 1 year in duration) of
each such contractor or other agent to
determine compliance with such requirements,
``(C) submits the findings of the most recent
review conducted under subparagraph (B) to the
Secretary as part of the report required by
paragraph (4)(E), and
``(D) certifies to the Secretary for the most
recent annual period that each such contractor
or other agent is in compliance with all such
requirements.
The certification required by subparagraph (D) shall
include the name and address of each contractor and
other agent, a description of the contract of the
contractor or other agent with the agency, and the
duration of such contract.''.
(b) Conforming Amendment.--Subparagraph (B) of section
6103(p)(8) is amended by inserting ``or paragraph (9)'' after
``subparagraph (A)''.
(c) Effective Date.--
(1) In general.--The amendments made by this section
shall apply to disclosures made after December 31,
2003.
(2) Certifications.--The first certification under
section 6103(p)(9)(D) of the Internal Revenue Code of
1986, as added by subsection (a), shall be made with
respect to calendar year 2004.
SEC. 346. HIGHER STANDARDS FOR REQUESTS FOR AND CONSENTS TO DISCLOSURE.
(a) In General.--Subsection (c) of section 6103 (relating to
disclosure of returns and return information to designee of
taxpayer) is amended by adding at the end the following new
paragraphs:
``(2) Requirements for valid requests and consents.--
A request for or consent to disclosure under paragraph
(1) shall only be valid for purposes of this section,
sections 7213, 7213A, and 7431 if--
``(A) at the time of execution, such request
or consent designates a recipient of such
disclosure and is dated, and
``(B) at the time such request or consent is
submitted to the Secretary, the submitter of
such request or consent certifies, under
penalty of perjury, that such request or
consent complied with subparagraph (A).
``(3) Restrictions on persons obtaining
information.--Any person shall, as a condition for
receiving return or return information under paragraph
(1)--
``(A) ensure that such return and return
information is kept confidential,
``(B) use such return and return information
only for the purpose for which it was
requested, and
``(C) not disclose such return and return
information except to accomplish the purpose
for which it was requested, unless a separate
consent from the taxpayer is obtained.
``(4) Requirements for form prescribed by
secretary.--For purposes of this subsection, the
Secretary shall prescribe a form for requests and
consents which shall--
``(A) contain a warning, prominently
displayed, informing the taxpayer that the form
should not be signed unless it is completed,
``(B) state that if the taxpayer believes
there is an attempt to coerce him to sign an
incomplete or blank form, the taxpayer should
report the matter to the Treasury Inspector
General for Tax Administration, and
``(C) contain the address and telephone
number of the Treasury Inspector General for
Tax Administration.''.
(b) Report.--Not later than 18 months after the date of the
enactment of this Act, the Treasury Inspector General for Tax
Administration shall submit a report to the Congress on
compliance with the designation and certification requirements
applicable to requests for or consent to disclosure of returns
and return information under section 6103(c) of the Internal
Revenue Code of 1986, as amended by subsection (a). Such report
shall--
(1) evaluate (on the basis of random sampling)
whether--
(A) the amendment made by subsection (a) is
achieving the purposes of this section;
(B) requesters and submitters for such
disclosure are continuing to evade the purposes
of this section and, if so, how; and
(C) the sanctions for violations of such
requirements are adequate; and
(2) include such recommendations that the Treasury
Inspector General for Tax Administration considers
necessary or appropriate to better achieve the purposes
of this section.
(c) Conforming Amendments.--
(1) Section 6103(c) is amended by striking
``Taxpayer.--The Secretary'' and inserting
``Taxpayer.--
``(1) In General.--The Secretary''.
(2) Section 7213(a)(1) is amended by striking
``section 6103(n)'' and inserting ``subsections (c) and
(n) of section 6103''.
(3) Section 7213A(a)(1)(B) is amended by striking
``subsection (l)(18) or (n) of section 6103'' and
inserting ``subsection (c), (l)(18), or (n) of section
6103''.
(d) Effective Date.--The amendments made by this section
shall apply to requests and consents made after 3 months after
the date of the enactment of this Act.
SEC. 347. NOTICE TO TAXPAYER CONCERNING ADMINISTRATIVE DETERMINATION OF
BROWSING; ANNUAL REPORT.
(a) Notice to Taxpayer.--Subsection (e) of section 7431
(relating to notification of unlawful inspection and
disclosure) is amended by adding at the end the following:
``The Secretary shall also notify such taxpayer if the Treasury
Inspector General for Tax Administration substantiates that
such taxpayer's return or return information was inspected or
disclosed in violation of any of the provisions specified in
paragraph (1), (2), or (3).''.
(b) Reports.--Subsection (p) of section 6103 (relating to
procedure and recordkeeping), is amended by adding at the end
the following new paragraph:
``(10) Report on unauthorized disclosure and
inspection.--As part of the report required by
paragraph (3)(C) for each calendar year, the Secretary
shall furnish information regarding the unauthorized
disclosure and inspection of returns and return
information, including the number, status, and results
of--
``(A) administrative investigations,
``(B) civil lawsuits brought under section
7431 (including the amounts for which such
lawsuits were settled and the amounts of
damages awarded), and
``(C) criminal prosecutions.''.
(c) Effective Date.--
(1) Notice.--The amendment made by subsection (a)
shall apply to determinations made after the date of
the enactment of this Act.
(2) Reports.--The amendment made by subsection (b)
shall apply to calendar years ending after the date of
the enactment of this Act.
SEC. 348. EXPANDED DISCLOSURE IN EMERGENCY CIRCUMSTANCES.
(a) In General.--Section 6103(i)(3)(B) (relating to danger of
death or physical injury) is amended by striking ``or State''
and inserting ``, State, or local''.
(b) Effective Date.--The amendment made by this section shall
take effect on the date of the enactment of this Act.
SEC. 349. DISCLOSURE OF TAXPAYER IDENTITY FOR TAX REFUND PURPOSES.
(a) In General.--Paragraph (1) of section 6103(m) (relating
to disclosure of taxpayer identity information) is amended by
striking ``and other media'' and by inserting ``, other media,
and through any other means of mass communication,''.
(b) Effective Date.--The amendments made by this section
shall take effect on the date of the enactment of this Act.
SEC. 350. DISCLOSURE TO STATE OFFICIALS OF PROPOSED ACTIONS RELATED TO
SECTION 501(C)(3) ORGANIZATIONS.
(a) In General.--Subsection (c) of section 6104 is amended by
striking paragraph (2) and inserting the following new
paragraphs:
``(2) Disclosure of proposed actions.--
``(A) Specific notifications.--In the case of
an organization to which paragraph (1) applies,
the Secretary may disclose to the appropriate
State officer--
``(i) a notice of proposed refusal to
recognize such organization as an
organization described in section
501(c)(3) or a notice of proposed
revocation of such organization's
recognition as an organization exempt
from taxation,
``(ii) the issuance of a letter of
proposed deficiency of tax imposed
under section 507 or chapter 41 or 42,
and
``(iii) the names, addresses, and
taxpayer identification numbers of
organizations that have applied for
recognition as organizations described
in section 501(c)(3).
``(B) Additional disclosures.--Returns and
return information of organizations with
respect to which information is disclosed under
subparagraph (A) may be made available for
inspection by or disclosed to an appropriate
State officer.
``(C) Procedures for disclosure.--Information
may be inspected or disclosed under
subparagraph (A) or (B) only--
``(i) upon written request by an
appropriate State officer, and
``(ii) for the purpose of, and only
to the extent necessary in, the
administration of State laws regulating
such organizations.
Such information may only be inspected by or
disclosed to a person other than the
appropriate State officer if such person is an
officer or employee of the State and is
designated by the appropriate State officer to
receive the returns or return information under
this paragraph on behalf of the appropriate
State officer.
``(D) Disclosures other than by request.--The
Secretary may make available for inspection or
disclose returns and return information of an
organization to which paragraph (1) applies to
an appropriate State officer of any State if
the Secretary determines that such inspection
or disclosure may facilitate the resolution of
State or Federal issues relating to the tax-
exempt status of such organization.
``(3) Use in administrative and judicial civil
proceedings.--Returns and return information disclosed
pursuant to this subsection may be disclosed in
administrative and judicial civil proceedings
pertaining to the enforcement of State laws regulating
such organizations in a manner prescribed by the
Secretary similar to that for tax administration
proceedings under section 6103(h)(4).
``(4) No disclosure if impairment.--Returns and
return information shall not be disclosed under this
subsection, or in any proceeding described in paragraph
(3), to the extent that the Secretary determines that
such disclosure would seriously impair Federal tax
administration.
``(5) Definitions.--For purposes of this subsection--
``(A) Return and return information.--The
terms `return' and `return information' have
the respective meanings given to such terms by
section 6103(b).
``(B) Appropriate state officer.--The term
`appropriate State officer' means--
``(i) the State attorney general, or
``(ii) any other State official
charged with overseeing organizations
of the type described in section
501(c)(3).''.
(b) Conforming Amendments.--
(1) Subparagraph (A) of section 6103(p)(3) is amended
by inserting ``and section 6104(c)'' after ``section''
in the first sentence.
(2) Paragraph (4) of section 6103(p) is amended--
(A) in the matter preceding subparagraph (A),
by inserting ``, or any appropriate State
officer (as defined in section 6104(c)),''
before ``or any other person'',
(B) in subparagraph (F)(i), by inserting ``or
any appropriate State officer (as defined in
section 6104(c)),'' before ``or any other
person'', and
(C) in the matter following subparagraph (F),
by inserting ``, an appropriate State officer
(as defined in section 6104(c)),'' after
``including an agency'' each place it appears.
(3) Paragraph (2) of section 7213(a) is amended by
inserting ``or under section 6104(c)'' after ``6103''.
(4) Paragraph (2) of section 7213A(a) is amended by
inserting ``or 6104(c)'' after ``6103''.
(5) Paragraph (2) of section 7431(a) is amended by
inserting ``(including any disclosure in violation of
section 6104(c))'' after ``6103''.
(c) Effective Date.--The amendments made by this section
shall take effect on the date of the enactment of this Act but
shall not apply to requests made before such date.
SEC. 351. CONFIDENTIALITY OF TAXPAYER COMMUNICATIONS WITH THE OFFICE OF
THE TAXPAYER ADVOCATE.
(a) In General.--Subsection (c) of section 7803 is amended by
adding at the end the following new paragraph:
``(5) Confidentiality of taxpayer information.--
``(A) In general.--To the extent authorized
by the National Taxpayer Advocate or pursuant
to guidance issued under subparagraph (B), any
officer or employee of the Office of the
Taxpayer Advocate may withhold from the
Internal Revenue Service and the Department of
Justice any information provided by, or
regarding contact with, any taxpayer.
``(B) Issuance of guidance.--In consultation
with the Chief Counsel for the Internal Revenue
Service and subject to the approval of the
Commissioner of Internal Revenue, the National
Taxpayer Advocate may issue guidance regarding
the circumstances (including with respect to
litigation) under which, and the persons to
whom, employees of the Office of the Taxpayer
Advocate shall not disclose information
obtained from a taxpayer. To the extent to
which any provision of the Internal Revenue
Manual would require greater disclosure by
employees of the Office of the Taxpayer
Advocate than the disclosure required under
such guidance, such provision shall not apply.
``(C) Employee protection.--Section
7214(a)(8) shall not apply to any failure to
report knowledge or information if--
``(i) such failure to report is
authorized under subparagraph (A), and
``(ii) such knowledge or information
is not of fraud committed by a person
against the United States under any
revenue law.''.
(b) Conforming Amendment.--Subparagraph (A) of section
7803(c)(4) is amended by inserting ``and'' at the end of clause
(ii), by striking ``; and'' at the end of clause (iii) and
inserting a period, and by striking clause (iv).
Subtitle E--Miscellaneous
SEC. 361. CLARIFICATION OF DEFINITION OF CHURCH TAX INQUIRY.
Subsection (i) of section 7611 (relating to section not to
apply to criminal investigations, etc.) is amended by striking
``or'' at the end of paragraph (4), by striking the period at
the end of paragraph (5) and inserting ``, or'', and by
inserting after paragraph (5) the following:
``(6) information provided by the Secretary related
to the standards for exemption from tax under this
title and the requirements under this title relating to
unrelated business taxable income.''.
SEC. 362. EXPANSION OF DECLARATORY JUDGMENT REMEDY TO TAX-EXEMPT
ORGANIZATIONS.
(a) In General.--Paragraph (1) of section 7428(a) (relating
to creation of remedy) is amended--
(1) in subparagraph (B) by inserting after
``509(a))'' the following: ``or as a private operating
foundation (as defined in section 4942(j)(3))''; and
(2) by amending subparagraph (C) to read as follows:
``(C) with respect to the initial
qualification or continuing qualification of an
organization as an organization described in
subsection (c) (other than paragraph (3)) or
(d) of section 501 which is exempt from tax
under section 501(a), or''.
(b) Court Jurisdiction.--Subsection (a) of section 7428 is
amended in the material following paragraph (2) by striking
``United States Tax Court, the United States Claims Court, or
the district court of the United States for the District of
Columbia'' and inserting the following: ``United States Tax
Court (in the case of any such determination or failure) or the
United States Claims Court or the district court of the United
States for the District of Columbia (in the case of a
determination or failure with respect to an issue referred to
in subparagraph (A) or (B) of paragraph (1)),''.
(c) Effective Date.--The amendments made by this section
shall apply to pleadings filed with respect to determinations
(or requests for determinations) made after the date of the
enactment of this Act.
SEC. 363. EMPLOYEE MISCONDUCT REPORT TO INCLUDE SUMMARY OF COMPLAINTS
BY CATEGORY.
(a) In General.--Clause (ii) of section 7803(d)(2)(A) is
amended by inserting before the semicolon at the end the
following: ``, including a summary (by category) of the 10 most
common complaints made and the number of such common
complaints''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply with respect to reporting periods ending after the
date of the enactment of this Act.
SEC. 364. ANNUAL REPORT ON AWARDS OF COSTS AND CERTAIN FEES IN
ADMINISTRATIVE AND COURT PROCEEDINGS.
Not later than 3 months after the close of each Federal
fiscal year after fiscal year 2003, the Treasury Inspector
General for Tax Administration shall submit a report to
Congress which specifies for such year--
(1) the number of payments made by the United States
pursuant to section 7430 of the Internal Revenue Code
of 1986 (relating to awarding of costs and certain
fees);
(2) the amount of each such payment;
(3) an analysis of any administrative issue giving
rise to such payments; and
(4) changes (if any) which will be implemented as a
result of such analysis and other changes (if any)
recommended by the Treasury Inspector General for Tax
Administration as a result of such analysis.
SEC. 365. ANNUAL REPORT ON ABATEMENT OF PENALTIES.
Not later than 6 months after the close of each Federal
fiscal year after fiscal year 2003, the Treasury Inspector
General for Tax Administration shall submit a report to
Congress on abatements of penalties under the Internal Revenue
Code of 1986 during such year, including information on the
reasons and criteria for such abatements.
SEC. 366. BETTER MEANS OF COMMUNICATING WITH TAXPAYERS.
Not later than 18 months after the date of the enactment of
this Act, the Treasury Inspector General for Tax Administration
shall submit a report to Congress evaluating whether
technological advances, such as e-mail and facsimile
transmission, permit the use of alternative means for the
Internal Revenue Service to communicate with taxpayers.
SEC. 367. EXPLANATION OF STATUTE OF LIMITATIONS AND CONSEQUENCES OF
FAILURE TO FILE.
The Secretary of the Treasury or the Secretary's delegate
shall, as soon as practicable but not later than 180 days after
the date of the enactment of this Act, revise the statement
required by section 6227 of the Omnibus Taxpayer Bill of Rights
(Internal Revenue Service Publication No. 1), and any
instructions booklet accompanying a general income tax return
form for taxable years beginning after 2002 (including forms
1040, 1040A, 1040EZ, and any similar or successor forms
relating thereto), to provide for an explanation of--
(1) the limitations imposed by section 6511 of the
Internal Revenue Code of 1986 on credits and refunds;
and
(2) the consequences under such section 6511 of the
failure to file a return of tax.
SEC. 368. AMENDMENT TO TREASURY AUCTION REFORMS.
(a) In General.--Clause (i) of section 202(c)(4)(B) of the
Government Securities Act Amendments of 1993 (31 U.S.C. 3121
note) is amended by inserting before the semicolon ``(or, if
earlier, at the time the Secretary releases the minutes of the
meeting in accordance with paragraph (2))''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to meetings held after the date of the enactment of
this Act.
SEC. 369. ENROLLED AGENTS.
(a) In General.--Chapter 77 (relating to miscellaneous
provisions) is amended by adding at the end the following new
section:
``SEC. 7528. ENROLLED AGENTS.
``(a) In General.--The Secretary may prescribe such
regulations as may be necessary to regulate the conduct of
enrolled agents in regards to their practice before the
Internal Revenue Service.
``(b) Use of Credentials.--Any enrolled agents properly
licensed to practice as required under rules promulgated under
section (a) herein shall be allowed to use the credentials or
designation as `enrolled agent', `EA', or `E.A.'.''.
(b) Clerical Amendment.--The table of sections for chapter 77
is amended by adding at the end the following new item:
``Sec. 7528. Enrolled agents.''.
(c) Prior Regulations.--Nothing in the amendments made by
this section shall be construed to have any effect on part 10
of title 31, Code of Federal Regulations, or any other Federal
rule or regulation issued before the date of the enactment of
this Act.
SEC. 370. FINANCIAL MANAGEMENT SERVICE FEES.
Notwithstanding any other provision of law, the Financial
Management Service may charge the Internal Revenue Service, and
the Internal Revenue Service may pay the Financial Management
Service, a fee sufficient to cover the full cost of
implementing a continuous levy program under subsection (h) of
section 6331 of the Internal Revenue Code of 1986. Any such fee
shall be based on actual levies made and shall be collected by
the Financial Management Service by the retention of a portion
of amounts collected by levy pursuant to that subsection.
Amounts received by the Financial Management Service as fees
under that subsection shall be deposited into the account of
the Department of the Treasury under section 3711(g)(7) of
title 31, United States Code, and shall be collected and
accounted for in accordance with the provisions of that
section. The amount credited against the taxpayer's liability
on account of the continuous levy shall be the amount levied,
without reduction for the amount paid to the Financial
Management Service as a fee.
SEC. 371. EXTENSION OF INTERNAL REVENUE SERVICE USER FEES.
(a) In General.--Chapter 77 (relating to miscellaneous
provisions) is amended by adding at the end the following new
section:
``SEC. 7529. INTERNAL REVENUE SERVICE USER FEES.
``(a) General Rule.--The Secretary shall establish a program
requiring the payment of user fees for--
``(1) requests to the Internal Revenue Service for
ruling letters, opinion letters, and determination
letters, and
``(2) other similar requests.
``(b) Program Criteria.--
``(1) In general.--The fees charged under the program
required by subsection (a)--
``(A) shall vary according to categories (or
subcategories) established by the Secretary,
``(B) shall be determined after taking into
account the average time for (and difficulty
of) complying with requests in each category
(and subcategory), and
``(C) shall be payable in advance.
``(2) Exemptions, etc.--
``(A) In general.--The Secretary shall
provide for such exemptions (and reduced fees)
under such program as the Secretary determines
to be appropriate.
``(B) Exemption for certain requests
regarding pension plans.--The Secretary shall
not require payment of user fees under such
program for requests for determination letters
with respect to the qualified status of a
pension benefit plan maintained solely by 1 or
more eligible employers or any trust which is
part of the plan. The preceding sentence shall
not apply to any request--
``(i) made after the later of--
``(I) the fifth plan year the
pension benefit plan is in
existence, or
``(II) the end of any
remedial amendment period with
respect to the plan beginning
within the first 5 plan years,
or
``(ii) made by the sponsor of any
prototype or similar plan which the
sponsor intends to market to
participating employers.
``(C) Definitions and special rules.--For
purposes of subparagraph (B)--
``(i) Pension benefit plan.--The term
`pension benefit plan' means a pension,
profit-sharing, stock bonus, annuity,
or employee stock ownership plan.
``(ii) Eligible employer.--The term
`eligible employer' means an eligible
employer (as defined in section
408(p)(2)(C)(i)(I)) which has at least
1 employee who is not a highly
compensated employee (as defined in
section 414(q)) and is participating in
the plan. The determination of whether
an employer is an eligible employer
under subparagraph (B) shall be made as
of the date of the request described in
such subparagraph.
``(iii) Determination of average fees
charged.--For purposes of any
determination of average fees charged,
any request to which subparagraph (B)
applies shall not be taken into
account.
``(3) Average fee requirement.--The average fee
charged under the program required by subsection (a)
shall not be less than the amount determined under the
following table:
Average
``Category Fee
Employee plan ruling and opinion.......................... $250
Exempt organization ruling................................ $350
Employee plan determination............................... $300
Exempt organization determination......................... $275
Chief counsel ruling...................................... $200.
``(c) Termination.--No fee shall be imposed under this
section with respect to requests made after September 30,
2013.''.
(b) Conforming Amendments.--
(1) The table of sections for chapter 77 is amended
by adding at the end the following new item:
``Sec. 7529. Internal Revenue Service user fees.''.
(2) Section 10511 of the Revenue Act of 1987 is
repealed.
(3) Section 620 of the Economic Growth and Tax Relief
Reconciliation Act of 2001 is repealed.
(c) Limitations.--Notwithstanding any other provision of law,
any fees collected pursuant to section 7527 of the Internal
Revenue Code of 1986, as added by subsection (a), shall not be
expended by the Internal Revenue Service unless provided by an
appropriations Act.
(d) Effective Date.--The amendments made by this section
shall apply to requests made after the date of the enactment of
this Act.
Subtitle F--Low-Income Taxpayer Clinics
SEC. 381. LOW-INCOME TAXPAYER CLINICS.
(a) Limitation on Amount of Grants.--Paragraph (1) of section
7526(c) (relating to special rules and limitations) is amended
by striking ``$6,000,000 per year'' and inserting ``$9,000,000
for 2004, $12,000,000 for 2005, and $15,000,000 for each year
thereafter''.
(b) Promotion of Clinics.--Section 7526(c) is amended by
adding at the end the following new paragraph:
``(6) Promotion of clinics.--The Secretary is
authorized to promote the benefits of and encourage the
use of low-income taxpayer clinics through the use of
mass communications, referrals, and other means.''.
(c) Use of Grants for Overhead Expenses Prohibited.--Section
7526(c), as amended by subsection (b), is further amended by
adding at the end the following new paragraph:
``(7) Use of grants for overhead expenses
prohibited.--No grant made under this section may be
used for the general overhead expenses of any
institution sponsoring a qualified low-income taxpayer
clinic.''.
(d) Eligible Clinics.--
(1) In general.--Paragraph (2) of section 7526(b) is
amended to read as follows:
``(2) Eligible clinic.--The term `eligible clinic'
means--
``(A) any clinical program at an accredited
law, business, or accounting school in which
students represent low-income taxpayers in
controversies arising under this title; and
``(B) any organization described in section
501(c) and exempt from tax under section 501(a)
which satisfies the requirements of paragraph
(1) through representation of taxpayers or
referral of taxpayers to qualified
representatives.''.
(2) Conforming amendment.--Subparagraph (A) of
section 7526(b)(1) is amended by striking ``means a
clinic'' and inserting ``means an eligible clinic''.
SEC. 382. MATCHING GRANTS TO LOW INCOME RETURN PREPARATION CLINICS.
(a) In General.--Chapter 77 (relating to miscellaneous
provisions) is amended by inserting after section 7526 the
following new section:
``SEC. 7526A. LOW INCOME RETURN PREPARATION CLINICS.
``(a) In General.--The Secretary may, subject to the
availability of appropriated funds, make grants to provide
matching funds for the development, expansion, or continuation
of qualified return preparation clinics.
``(b) Definitions.--For purposes of this section--
``(1) Qualified return preparation clinic.--
``(A) In general.--The term `qualified return
preparation clinic' means an eligible clinic
which--
``(i) does not charge more than a
nominal fee for its services (except
for reimbursement of actual costs
incurred), and
``(ii) operates programs which assist
low-income taxpayers in preparing and
filing their Federal income tax
returns, including schedules reporting
sole proprietorship or farm income.
``(B) Assistance to low-income taxpayers.--A
clinic is treated as assisting low-income
taxpayers under subparagraph (A)(ii) if at
least 90 percent of the taxpayers assisted by
the clinic have incomes which do not exceed 250
percent of the poverty level, as determined in
accordance with criteria established by the
Director of the Office of Management and
Budget.
``(2) Eligible clinic.--The term `eligible clinic'
includes--
``(A) a clinical program at an eligible
educational institution (as defined in section
529(e)(5)) which satisfies the requirements of
paragraph (1) through student assistance of
taxpayers in return preparation and filing, and
``(B) an organization described in section
501(c) and exempt from tax under section 501(a)
which satisfies the requirements of paragraph
(1).
``(c) Special Rules and Limitations.--
``(1) Aggregate limitation.--Unless otherwise
provided by specific appropriation, the Secretary shall
not allocate more than $10,000,000 per year (exclusive
of costs of administering the program) to grants under
this section.
``(2) Other applicable rules.--Rules similar to the
rules under paragraphs (2) through (7) of section
7526(c) shall apply with respect to the awarding of
grants to qualified return preparation clinics.''.
(b) Clerical Amendment.--The table of sections for chapter 77
is amended by inserting after the item relating to section 7526
the following new item:
``Sec. 7526A. Low income return preparation clinics.''.
(c) Effective Date.--The amendments made by this section
shall apply to grants made after the date of the enactment of
this Act.
TITLE IV--CHILD TAX CREDIT
SEC. 401. ACCELERATION OF INCREASE IN REFUNDABILITY OF THE CHILD TAX
CREDIT.
(a) Acceleration of Refundability.--
(1) In general.--Section 24(d)(1)(B)(i) of the
Internal Revenue Code of 1986 (relating to portion of
credit refundable) is amended by striking ``(10 percent
in the case of taxable years beginning before January
1, 2005)''.
(2) Advance payment.--Subsection (b) of section 6429
of such Code (relating to advance payment of portion of
increased child credit for 2003) is amended by striking
``and'' at the end of paragraph (2), by striking the
period at the end of paragraph (3) and inserting ``,
and'', and by adding at the end the following new
paragraph:
``(4) section 24(d)(1)(B)(i) applied without regard
to the first parenthetical therein.''.
(3) Earned income includes combat pay.--Section
24(d)(1) of such Code is amended by adding at the end
the following new sentence: ``For purposes of
subparagraph (B), any amount excluded from gross income
by reason of section 112 shall be treated as earned
income which is taken into account in computing taxable
income for the taxable year.''.
(b) Effective Dates.--
(1) Subsections (a)(1) and (a)(3).--The amendments
made by subsections (a)(1) and (a)(3) shall apply to
taxable years beginning after December 31, 2002.
(2) Subsection (a)(2).--The amendments made by
subsection (a)(2) shall take effect as if included in
the amendments made by section 101(b) of the Jobs and
Growth Tax Relief Reconciliation Act of 2003.
SEC. 402. REDUCTION IN MARRIAGE PENALTY IN CHILD TAX CREDIT.
(a) In General.--Section 24(b)(2) of the Internal Revenue
Code of 1986 (defining threshold amount) is amended--
(1) by inserting ``($115,000 for taxable years
beginning in 2008 or 2009, and $150,000 for taxable
years beginning in 2010)'' after ``$110,000'', and
(2) by striking ``$55,000'' in subparagraph (C) and
inserting ``\1/2\ of the amount in effect under
subparagraph (A)''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2002.
SEC. 403. APPLICATION OF EGTRRA SUNSET TO THIS SECTION.
Each amendment made by this title shall be subject to title
IX of the Economic Growth and Tax Relief Reconciliation Act of
2001 to the same extent and in the same manner as the provision
of such Act to which such amendment relates.
TITLE V--UNIFORM DEFINITION OF CHILD
SEC. 501. UNIFORM DEFINITION OF CHILD, ETC.
Section 152 of the Internal Revenue Code of 1986 is amended
to read as follows:
``SEC. 152. DEPENDENT DEFINED.
``(a) In General.--For purposes of this subtitle, the term
`dependent' means--
``(1) a qualifying child, or
``(2) a qualifying relative.
``(b) Exceptions.--For purposes of this section--
``(1) Dependents ineligible.--If an individual is a
dependent of a taxpayer for any taxable year of such
taxpayer beginning in a calendar year, such individual
shall be treated as having no dependents for any
taxable year of such individual beginning in such
calendar year.
``(2) Married dependents.--An individual shall not be
treated as a dependent of a taxpayer under subsection
(a) if such individual has made a joint return with the
individual's spouse under section 6013 for the taxable
year beginning in the calendar year in which the
taxable year of the taxpayer begins.
``(3) Citizens or nationals of other countries.--
``(A) In general.--The term `dependent' does
not include an individual who is not a citizen
or national of the United States unless such
individual is a resident of the United States
or a country contiguous to the United States.
``(B) Exception for adopted child.--
Subparagraph (A) shall not exclude any child of
a taxpayer (within the meaning of subsection
(f)(1)(B)) from the definition of `dependent'
if--
``(i) for the taxable year of the
taxpayer, the child's principal place
of abode is the home of the taxpayer,
and
``(ii) the taxpayer is a citizen or
national of the United States.
``(c) Qualifying Child.--For purposes of this section--
``(1) In general.--The term `qualifying child' means,
with respect to any taxpayer for any taxable year, an
individual--
``(A) who bears a relationship to the
taxpayer described in paragraph (2),
``(B) who has the same principal place of
abode as the taxpayer for more than one-half of
such taxable year,
``(C) who meets the age requirements of
paragraph (3), and
``(D) who has not provided over one-half of
such individual's own support for the calendar
year in which the taxable year of the taxpayer
begins.
``(2) Relationship test.--For purposes of paragraph
(1)(A), an individual bears a relationship to the
taxpayer described in this paragraph if such individual
is--
``(A) a child of the taxpayer or a descendant
of such a child, or
``(B) a brother, sister, stepbrother, or
stepsister of the taxpayer or a descendant of
any such relative.
``(3) Age requirements.--
``(A) In general.--For purposes of paragraph
(1)(C), an individual meets the requirements of
this paragraph if such individual--
``(i) has not attained the age of 19
as of the close of the calendar year in
which the taxable year of the taxpayer
begins, or
``(ii) is a student who has not
attained the age of 24 as of the close
of such calendar year.
``(B) Special rule for disabled.--In the case
of an individual who is permanently and totally
disabled (as defined in section 22(e)(3)) at
any time during such calendar year, the
requirements of subparagraph (A) shall be
treated as met with respect to such individual.
``(4) Special rule relating to 2 or more claiming
qualifying child.--
``(A) In general.--Except as provided in
subparagraph (B) and subsection (e), if (but
for this paragraph) an individual may be and is
claimed as a qualifying child by 2 or more
taxpayers for a taxable year beginning in the
same calendar year, such individual shall be
treated as the qualifying child of the taxpayer
who is--
``(i) a parent of the individual, or
``(ii) if clause (i) does not apply,
the taxpayer with the highest adjusted
gross income for such taxable year.
``(B) More than 1 parent claiming qualifying
child.--If the parents claiming any qualifying
child do not file a joint return together, such
child shall be treated as the qualifying child
of--
``(i) the parent with whom the child
resided for the longest period of time
during the taxable year, or
``(ii) if the child resides with both
parents for the same amount of time
during such taxable year, the parent
with the highest adjusted gross income.
``(d) Qualifying Relative.--For purposes of this section--
``(1) In general.--The term `qualifying relative'
means, with respect to any taxpayer for any taxable
year, an individual--
``(A) who bears a relationship to the
taxpayer described in paragraph (2),
``(B) whose gross income for the calendar
year in which such taxable year begins is less
than the exemption amount (as defined in
section 151(d)),
``(C) with respect to whom the taxpayer
provides over one-half of the individual's
support for the calendar year in which such
taxable year begins, and
``(D) who is not a qualifying child of such
taxpayer or of any other taxpayer for any
taxable year beginning in the calendar year in
which such taxable year begins.
``(2) Relationship.--For purposes of paragraph
(1)(A), an individual bears a relationship to the
taxpayer described in this paragraph if the individual
is any of the following with respect to the taxpayer:
``(A) A child or a descendant of a child.
``(B) A brother, sister, stepbrother, or
stepsister.
``(C) The father or mother, or an ancestor of
either.
``(D) A stepfather or stepmother.
``(E) A son or daughter of a brother or
sister of the taxpayer.
``(F) A brother or sister of the father or
mother of the taxpayer.
``(G) A son-in-law, daughter-in-law, father-
in-law, mother-in-law, brother-in-law, or
sister-in-law.
``(H) An individual (other than an individual
who at any time during the taxable year was the
spouse, determined without regard to section
7703, of the taxpayer) who, for the taxable
year of the taxpayer, has as such individual's
principal place of abode the home of the
taxpayer and is a member of the taxpayer's
household.
``(3) Special rule relating to multiple support
agreements.--For purposes of paragraph (1)(C), over
one-half of the support of an individual for a calendar
year shall be treated as received from the taxpayer
if--
``(A) no one person contributed over one-half
of such support,
``(B) over one-half of such support was
received from 2 or more persons each of whom,
but for the fact that any such person alone did
not contribute over one-half of such support,
would have been entitled to claim such
individual as a dependent for a taxable year
beginning in such calendar year,
``(C) the taxpayer contributed over 10
percent of such support, and
``(D) each person described in subparagraph
(B) (other than the taxpayer) who contributed
over 10 percent of such support files a written
declaration (in such manner and form as the
Secretary may by regulations prescribe) that
such person will not claim such individual as a
dependent for any taxable year beginning in
such calendar year.
``(4) Special rule relating to income of handicapped
dependents.--
``(A) In general.--For purposes of paragraph
(1)(B), the gross income of an individual who
is permanently and totally disabled (as defined
in section 22(e)(3)) at any time during the
taxable year shall not include income
attributable to services performed by the
individual at a sheltered workshop if--
``(i) the availability of medical
care at such workshop is the principal
reason for the individual's presence
there, and
``(ii) the income arises solely from
activities at such workshop which are
incident to such medical care.
``(B) Sheltered workshop defined.--For
purposes of subparagraph (A), the term
`sheltered workshop' means a school--
``(i) which provides special
instruction or training designed to
alleviate the disability of the
individual, and
``(ii) which is operated by an
organization described in section
501(c)(3) and exempt from tax under
section 501(a), or by a State, a
possession of the United States, any
political subdivision of any of the
foregoing, the United States, or the
District of Columbia.
``(5) Special support test in case of students.--For
purposes of paragraph (1)(C), in the case of an
individual who is--
``(A) a child of the taxpayer, and
``(B) a student,
amounts received as scholarships for study at an
educational organization described in section
170(b)(1)(A)(ii) shall not be taken into account in
determining whether such individual received more than
one-half of such individual's support from the
taxpayer.
``(6) Special rules for support.--For purposes of
this subsection--
``(A) payments to a spouse which are
includible in the gross income of such spouse
under section 71 or 682 shall not be treated as
a payment by the payor spouse for the support
of any dependent,
``(B) amounts expended for the support of a
child or children shall be treated as received
from the noncustodial parent (as defined in
subsection (e)(3)(B)) to the extent that such
parent provided amounts for such support, and
``(C) in the case of the remarriage of a
parent, support of a child received from the
parent's spouse shall be treated as received
from the parent.
``(e) Special Rule for Divorced Parents.--
``(1) In general.--Notwithstanding subsection (c)(4)
or (d)(1)(C), if--
``(A) a child receives over one-half of the
child's support during the calendar year from
the child's parents--
``(i) who are divorced or legally
separated under a decree of divorce or
separate maintenance,
``(ii) who are separated under a
written separation agreement, or
``(iii) who live apart at all times
during the last 6 months of the
calendar year, and
``(B) such child is in the custody of 1 or
both of the child's parents for more than \1/2\
of the calendar year,
such child shall be treated as being the qualifying
child or qualifying relative of the noncustodial parent
for a calendar year if the requirements described in
paragraph (2) are met.
``(2) Requirements.--For purposes of paragraph (1),
the requirements described in this paragraph are met
if--
``(A) a decree of divorce or separate
maintenance or written separation agreement
between the parents applicable to the taxable
year beginning in such calendar year provides
that--
``(i) the noncustodial parent shall
be entitled to any deduction allowable
under section 151 for such child, or
``(ii) the custodial parent will sign
a written declaration (in such manner
and form as the Secretary may
prescribe) that such parent will not
claim such child as a dependent for
such taxable year, and
``(B) in the case of such an agreement
executed before January 1, 1985, the
noncustodial parent provides at least $600 for
the support of such child during such calendar
year.
``(3) Custodial parent and noncustodial parent.--For
purposes of this subsection--
``(A) Custodial parent.--The term `custodial
parent' means the parent with whom a child
shared the same principal place of abode for
the greater portion of the calendar year.
``(B) Noncustodial parent.--The term
`noncustodial parent' means the parent who is
not the custodial parent.
``(4) Exception for multiple-support agreements.--
This subsection shall not apply in any case where over
one-half of the support of the child is treated as
having been received from a taxpayer under the
provision of subsection (d)(3).
``(f) Other Definitions and Rules.--For purposes of this
section--
``(1) Child defined.--
``(A) In general.--The term `child' means an
individual who is--
``(i) a son, daughter, stepson, or
stepdaughter of the taxpayer, or
``(ii) an eligible foster child of
the taxpayer.
``(B) Adopted child.--In determining whether
any of the relationships specified in
subparagraph (A)(i) or paragraph (4) exists, a
legally adopted individual of the taxpayer, or
an individual who is placed with the taxpayer
by an authorized placement agency for adoption
by the taxpayer, shall be treated as a child of
such individual by blood.
``(C) Eligible foster child.--For purposes of
subparagraph (A)(ii), the term `eligible foster
child' means an individual who is placed with
the taxpayer by an authorized placement agency
or by judgment, decree, or other order of any
court of competent jurisdiction.
``(2) Student defined.--The term `student' means an
individual who during each of 5 calendar months during
the calendar year in which the taxable year of the
taxpayer begins--
``(A) is a full-time student at an
educational organization described in section
170(b)(1)(A)(ii), or
``(B) is pursuing a full-time course of
institutional on-farm training under the
supervision of an accredited agent of an
educational organization described in section
170(b)(1)(A)(ii) or of a State or political
subdivision of a State.
``(3) Place of abode.--An individual shall not be
treated as having the same principal place of abode of
the taxpayer if at any time during the taxable year of
the taxpayer the relationship between the individual
and the taxpayer is in violation of local law.
``(4) Brother and sister.--The terms `brother' and
`sister' include a brother or sister by the half blood.
``(5) Treatment of missing children.--
``(A) In general.--Solely for the purposes
referred to in subparagraph (B), a child of the
taxpayer--
``(i) who is presumed by law
enforcement authorities to have been
kidnapped by someone who is not a
member of the family of such child or
the taxpayer, and
``(ii) who had, for the taxable year
in which the kidnapping occurred, the
same principal place of abode as the
taxpayer for more than one-half of the
portion of such year before the date of
the kidnapping,
shall be treated as meeting the requirement of
subsection (c)(1)(B) with respect to a taxpayer
for all taxable years ending during the period
that the individual is kidnapped.
``(B) Purposes.--Subparagraph (A) shall apply
solely for purposes of determining--
``(i) the deduction under section
151(c),
``(ii) the credit under section 24
(relating to child tax credit),
``(iii) whether an individual is a
surviving spouse or a head of a
household (as such terms are defined in
section 2), and
``(iv) the earned income credit under
section 32.
``(C) Comparable treatment of certain
qualifying relatives.--For purposes of this
section, a child of the taxpayer--
``(i) who is presumed by law
enforcement authorities to have been
kidnapped by someone who is not a
member of the family of such child or
the taxpayer, and
``(ii) who was (without regard to
this paragraph) a qualifying relative
of the taxpayer for the portion of the
taxable year before the date of the
kidnapping,
shall be treated as a qualifying relative of
the taxpayer for all taxable years ending
during the period that the child is kidnapped.
``(D) Termination of treatment.--
Subparagraphs (A) and (C) shall cease to apply
as of the first taxable year of the taxpayer
beginning after the calendar year in which
there is a determination that the child is dead
(or, if earlier, in which the child would have
attained age 18).
``(6) Cross references.--
``For provision treating child as dependent of both parents for
purposes of certain provisions, see sections 105(b),
132(h)(2)(B), and 213(d)(5).''.
SEC. 502. MODIFICATIONS OF DEFINITION OF HEAD OF HOUSEHOLD.
(a) Head of Household.--Clause (i) of section 2(b)(1)(A) of
the Internal Revenue Code of 1986 is amended to read as
follows:
``(i) a qualifying child of the
individual (as defined in section
152(c), determined without regard to
section 152(e)), but not if such
child--
``(I) is married at the close
of the taxpayer's taxable year,
and
``(II) is not a dependent of
such individual by reason of
section 152(b)(2) or 152(b)3),
or both, or''.
(b) Conforming Amendments.--
(1) Section 2(b)(2) of the Internal Revenue Code of
1986 is amended by striking subparagraph (A) and by
redesignating subparagraphs (B), (C), and (D) as
subparagraphs (A), (B), and (C), respectively.
(2) Clauses (i) and (ii) of section 2(b)(3)(B) of
such Code are amended to read as follows:
``(i) subparagraph (H) of section
152(d)(2), or
``(ii) paragraph (3) of section
152(d).''.
SEC. 503. MODIFICATIONS OF DEPENDENT CARE CREDIT.
(a) In General.--Section 21(a)(1) of the Internal Revenue
Code of 1986 is amended by striking ``In the case of an
individual who maintains a household which includes as a member
one or more qualifying individuals (as defined in subsection
(b)(1))'' and inserting ``In the case of an individual for
which there are 1 or more qualifying individuals (as defined in
subsection (b)(1)) with respect to such individual''.
(b) Qualifying Individual.--Paragraph (1) of section 21(b) of
the Internal Revenue Code of 1986 is amended to read as
follows:
``(1) Qualifying individual.--The term `qualifying
individual' means--
``(A) a dependent of the taxpayer (as defined
in section 152(a)(1)) who has not attained age
13,
``(B) a dependent of the taxpayer who is
physically or mentally incapable of caring for
himself or herself and who has the same
principal place of abode as the taxpayer for
more than one-half of such taxable year, or
``(C) the spouse of the taxpayer, if the
spouse is physically or mentally incapable of
caring for himself or herself and who has the
same principal place of abode as the taxpayer
for more than one-half of such taxable year.''.
(c) Conforming Amendment.--Paragraph (1) of section 21(e) of
the Internal Revenue Code of 1986 is amended to read as
follows:
``(1) Place of abode.--An individual shall not be
treated as having the same principal place of abode of
the taxpayer if at any time during the taxable year of
the taxpayer the relationship between the individual
and the taxpayer is in violation of local law.''.
SEC. 504. MODIFICATIONS OF CHILD TAX CREDIT.
(a) In General.--Paragraph (1) of section 24(c) of the
Internal Revenue Code of 1986 is amended to read as follows:
``(1) In general.--The term `qualifying child' means
a qualifying child of the taxpayer (as defined in
section 152(c)) who has not attained age 17.''.
(b) Conforming Amendment.--Section 24(c)(2) of the Internal
Revenue Code of 1986 is amended by striking ``the first
sentence of section 152(b)(3)'' and inserting ``subparagraph
(A) of section 152(b)(3)''.
SEC. 505. MODIFICATIONS OF EARNED INCOME CREDIT.
(a) Qualifying Child.--Paragraph (3) of section 32(c) of the
Internal Revenue Code of 1986 is amended to read as follows:
``(3) Qualifying child.--
``(A) In general.--The term `qualifying
child' means a qualifying child of the taxpayer
(as defined in section 152(c), determined
without regard to paragraph (1)(D) thereof and
section 152(e)).
``(B) Married individual.--The term
`qualifying child' shall not include an
individual who is married as of the close of
the taxpayer's taxable year unless the taxpayer
is entitled to a deduction under section 151
for such taxable year with respect to such
individual (or would be so entitled but for
section 152(e)).
``(C) Place of abode.--For purposes of
subparagraph (A), the requirements of section
152(c)(1)(B) shall be met only if the principal
place of abode is in the United States.
``(D) Identification requirements.--
``(i) In general.--A qualifying child
shall not be taken into account under
subsection (b) unless the taxpayer
includes the name, age, and TIN of the
qualifying child on the return of tax
for the taxable year.
``(ii) Other methods.--The Secretary
may prescribe other methods for
providing the information described in
clause (i).''.
(b) Conforming Amendments.--
(1) Section 32(c)(1) of the Internal Revenue Code of
1986 is amended by striking subparagraph (C) and by
redesignating subparagraphs (D), (E), (F), and (G) as
subparagraphs (C), (D), (E), and (F), respectively.
(2) Section 32(c)(4) of such Code is amended by
striking ``(3)(E)'' and inserting ``(3)(C)''.
(3) Section 32(m) of such Code is amended by striking
``subsections (c)(1)(F)'' and inserting ``subsections
(c)(1)(E)''.
SEC. 506. MODIFICATIONS OF DEDUCTION FOR PERSONAL EXEMPTION FOR
DEPENDENTS.
Subsection (c) of section 151 of the Internal Revenue Code of
1986 is amended to read as follows:
``(c) Additional Exemption for Dependents.--An exemption of
the exemption amount for each individual who is a dependent (as
defined in section 152) of the taxpayer for the taxable
year.''.
SEC. 507. TECHNICAL AND CONFORMING AMENDMENTS.
(1) Section 2(a)(1)(B)(i) of such Code is amended by
inserting ``, determined without regard to subsections
(b)(1), (b)(2), and (d)(1)(B) thereof'' after ``section
152''.
(2) Section 21(e)(5) of the Internal Revenue Code of
1986 is amended--
(A) by striking ``paragraph (2) or (4) of''
in subparagraph (A), and
(B) by striking ``within the meaning of
section 152(e)(1)'' and inserting ``as defined
in section 152(e)(3)(A)''.
(3) Section 21(e)(6)(B) of such Code is amended by
striking ``section 151(c)(3)'' and inserting ``section
152(f)(1)''.
(4) Section 25B(c)(2)(B) of such Code is amended by
striking ``151(c)(4)'' and inserting ``152(f)(2)''.
(5)(A) Subparagraphs (A) and (B) of section 51(i)(1)
of such Code are each amended by striking ``paragraphs
(1) through (8) of section 152(a)'' both places it
appears and inserting ``subparagraphs (A) through (G)
of section 152(d)(2)''.
(B) Section 51(i)(1)(C) of such Code is amended by
striking ``152(a)(9)'' and inserting ``152(d)(2)(H)''.
(6) Section 72(t)(2)(D)(i)(III) of such Code is
amended by inserting ``, determined without regard to
subsections (b)(1), (b)(2), and (d)(1)(B) thereof''
after ``section 152''.
(7) Section 72(t)(7)(A)(iii) of such Code is amended
by striking ``151(c)(3)'' and inserting ``152(f)(1)''.
(8) Section 42(i)(3)(D)(ii)(I) of such Code is
amended by inserting ``, determined without regard to
subsections (b)(1), (b)(2), and (d)(1)(B) thereof''
after ``section 152''.
(9) Subsections (b) and (c)(1) of section 105 of such
Code are amended by inserting ``, determined without
regard to subsections (b)(1), (b)(2), and (d)(1)(B)
thereof'' after ``section 152''.
(10) Section 120(d)(4) of such Code is amended by
inserting ``(determined without regard to subsections
(b)(1), (b)(2), and (d)(1)(B) thereof)'' after
``section 152''.
(11) Section 125(e)(1)(D) of such Code is amended by
inserting ``, determined without regard to subsections
(b)(1), (b)(2), and (d)(1)(B) thereof'' after ``section
152''.
(12) Section 129(c)(2) of such Code is amended by
striking ``151(c)(3)'' and inserting ``152(f)(1)''.
(13) The first sentence of section 132(h)(2)(B) of
such Code is amended by striking ``151(c)(3)'' and
inserting ``152(f)(1)''.
(14) Section 153 of such Code is amended by striking
paragraph (1) and by redesignating paragraphs (2), (3),
and (4) as paragraphs (1), (2), and (3), respectively.
(15) Section 170(g)(1) of such Code is amended by
inserting ``(determined without regard to subsections
(b)(1), (b)(2), and (d)(1)(B) thereof)'' after
``section 152''.
(16) Section 170(g)(3) of such Code is amended by
striking ``paragraphs (1) through (8) of section
152(a)'' and inserting ``subparagraphs (A) through (G)
of section 152(d)(2)''.
(17) Section 213(a) of such Code is amended by
inserting ``, determined without regard to subsections
(b)(1), (b)(2), and (d)(1)(B) thereof'' after ``section
152''.
(18) The second sentence of section 213(d)(11) of
such Code is amended by striking ``paragraphs (1)
through (8) of section 152(a)'' and inserting
``subparagraphs (A) through (G) of section 152(d)(2)''.
(19) Section 220(d)(2)(A) of such Code is amended by
inserting ``, determined without regard to subsections
(b)(1), (b)(2), and (d)(1)(B) thereof'' after ``section
152''.
(20) Section 221(d)(4) of such Code is amended by
inserting ``(determined without regard to subsections
(b)(1), (b)(2), and (d)(1)(B) thereof)'' after
``section 152''.
(21) Section 529(e)(2)(B) of such Code is amended by
striking ``paragraphs (1) through (8) of section
152(a)'' and inserting ``subparagraphs (A) through (G)
of section 152(d)(2)''.
(22) Section 2032A(c)(7)(D) of such Code is amended
by striking ``section 151(c)(4)'' and inserting
``section 152(f)(2)''.
(23) Section 2057(d)(2)(B) of such Code is amended by
inserting ``, determined without regard to subsections
(b)(1), (b)(2), and (d)(1)(B) thereof'' after ``section
152''.
(24) Section 7701(a)(17) of such Code is amended by
striking ``152(b)(4), 682,'' and inserting ``682''.
(25) Section 7702B(f)(2)(C)(iii) of such Code is
amended by striking ``paragraphs (1) through (8) of
section 152(a)'' and inserting ``subparagraphs (A)
through (G) of section 152(d)(2)''.
(26) Section 7703(b)(1) of such Code is amended--
(A) by striking ``151(c)(3)'' and inserting
``152(f)(1)'', and
(B) by striking ``paragraph (2) or (4) of''.
SEC. 508. EFFECTIVE DATE.
The amendments made by this title shall apply to taxable
years beginning after December 31, 2003.
TITLE VI--IMPROVING TAX EQUITY FOR MILITARY PERSONNEL
SEC. 601. EXCLUSION OF GAIN FROM SALE OF A PRINCIPAL RESIDENCE BY A
MEMBER OF THE UNIFORMED SERVICES OR THE FOREIGN
SERVICE.
(a) In General.--Subsection (d) of section 121 (relating to
exclusion of gain from sale of principal residence) is amended
by redesignating paragraph (9) as paragraph (10) and by
inserting after paragraph (8) the following new paragraph:
``(9) Members of uniformed services and foreign
service.--
``(A) In general.--At the election of an
individual with respect to a property, the
running of the 5-year period described in
subsections (a) and (c)(1)(B) and paragraph (7)
of this subsection with respect to such
property shall be suspended during any period
that such individual or such individual's
spouse is serving on qualified official
extended duty as a member of the uniformed
services or of the Foreign Service of the
United States.
``(B) Maximum period of suspension.--The 5-
year period described in subsection (a) shall
not be extended more than 10 years by reason of
subparagraph (A).
``(C) Qualified official extended duty.--For
purposes of this paragraph--
``(i) In general.--The term
`qualified official extended duty'
means any extended duty while serving
at a duty station which is at least 50
miles from such property or while
residing under Government orders in
Government quarters.
``(ii) Uniformed services.--The term
`uniformed services' has the meaning
given such term by section 101(a)(5) of
title 10, United States Code, as in
effect on the date of the enactment of
this paragraph.
``(iii) Foreign service of the united
states.--The term `member of the
Foreign Service of the United States'
has the meaning given the term `member
of the Service' by paragraph (1), (2),
(3), (4), or (5) of section 103 of the
Foreign Service Act of 1980, as in
effect on the date of the enactment of
this paragraph.
``(iv) Extended duty.--The term
`extended duty' means any period of
active duty pursuant to a call or order
to such duty for a period in excess of
90 days or for an indefinite period.
``(D) Special rules relating to election.--
``(i) Election limited to 1 property
at a time.--An election under
subparagraph (A) with respect to any
property may not be made if such an
election is in effect with respect to
any other property.
``(ii) Revocation of election.--An
election under subparagraph (A) may be
revoked at any time.''.
(b) Effective Date; Special Rule.--
(1) Effective date.--The amendments made by this
section shall take effect as if included in the
amendments made by section 312 of the Taxpayer Relief
Act of 1997.
(2) Waiver of limitations.--If refund or credit of
any overpayment of tax resulting from the amendments
made by this section is prevented at any time before
the close of the 1-year period beginning on the date of
the enactment of this Act by the operation of any law
or rule of law (including res judicata), such refund or
credit may nevertheless be made or allowed if claim
therefor is filed before the close of such period.
SEC. 602. EXCLUSION FROM GROSS INCOME OF CERTAIN DEATH GRATUITY
PAYMENTS.
(a) In General.--Subsection (b)(3) of section 134 (relating
to certain military benefits) is amended by adding at the end
the following new subparagraph:
``(C) Exception for death gratuity
adjustments made by law.--Subparagraph (A)
shall not apply to any adjustment to the amount
of death gratuity payable under chapter 75 of
title 10, United States Code, which is pursuant
to a provision of law enacted after September
9, 1986.''.
(b) Conforming Amendment.--Subparagraph (A) of section
134(b)(3) is amended by striking ``subparagraph (B)'' and
inserting ``subparagraphs (B) and (C)''.
(c) Effective Date.--The amendments made by this section
shall apply with respect to deaths occurring after September
10, 2001.
SEC. 603. EXCLUSION FOR AMOUNTS RECEIVED UNDER DEPARTMENT OF DEFENSE
HOMEOWNERS ASSISTANCE PROGRAM.
(a) In General.--Section 132(a) (relating to the exclusion
from gross income of certain fringe benefits) is amended by
striking ``or'' at the end of paragraph (6), by striking the
period at the end of paragraph (7) and inserting ``, or'', and
by adding at the end the following new paragraph:
``(8) qualified military base realignment and closure
fringe.''.
(b) Qualified Military Base Realignment and Closure Fringe.--
Section 132 is amended by redesignating subsection (n) as
subsection (o) and by inserting after subsection (m) the
following new subsection:
``(n) Qualified Military Base Realignment and Closure
Fringe.--For purposes of this section--
``(1) In general.--The term `qualified military base
realignment and closure fringe' means 1 or more
payments under the authority of section 1013 of the
Demonstration Cities and Metropolitan Development Act
of 1966 (42 U.S.C. 3374) (as in effect on the date of
the enactment of this subsection) to offset the adverse
effects on housing values as a result of a military
base realignment or closure.
``(2) Limitation.--With respect to any property, such
term shall not include any payment referred to in
paragraph (1) to the extent that the sum of all of such
payments related to such property exceeds the maximum
amount described in clause (1) of subsection (c) of
such section (as in effect on such date).''.
(c) Effective Date.--The amendments made by this section
shall apply to payments made after the date of the enactment of
this Act.
SEC. 604. EXPANSION OF COMBAT ZONE FILING RULES TO CONTINGENCY
OPERATIONS.
(a) In General.--Section 7508(a) (relating to time for
performing certain acts postponed by reason of service in
combat zone) is amended--
(1) by inserting ``, or when deployed outside the
United States away from the individual's permanent duty
station while participating in an operation designated
by the Secretary of Defense as a contingency operation
(as defined in section 101(a)(13) of title 10, United
States Code) or which became such a contingency
operation by operation of law'' after ``section 112'',
(2) by inserting in the first sentence ``or at any
time during the period of such contingency operation''
after ``for purposes of such section'',
(3) by inserting ``or operation'' after ``such an
area'', and
(4) by inserting ``or operation'' after ``such
area''.
(b) Conforming Amendments.--
(1) Section 7508(d) is amended by inserting ``or
contingency operation'' after ``area''.
(2) The heading for section 7508 is amended by
inserting ``OR CONTINGENCY OPERATION'' after ``COMBAT
ZONE''.
(3) The item relating to section 7508 in the table of
sections for chapter 77 is amended by inserting ``or
contingency operation'' after ``combat zone''.
(c) Effective Date.--The amendments made by this section
shall apply to any period for performing an act which has not
expired before the date of the enactment of this Act.
SEC. 605. MODIFICATION OF MEMBERSHIP REQUIREMENT FOR EXEMPTION FROM TAX
FOR CERTAIN VETERANS' ORGANIZATIONS.
(a) In General.--Subparagraph (B) of section 501(c)(19)
(relating to list of exempt organizations) is amended by
striking ``or widowers'' and inserting ``, widowers, ancestors,
or lineal descendants''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after the date of the
enactment of this Act.
SEC. 606. CLARIFICATION OF THE TREATMENT OF CERTAIN DEPENDENT CARE
ASSISTANCE PROGRAMS.
(a) In General.--Section 134(b) (defining qualified military
benefit) is amended by adding at the end the following new
paragraph:
``(4) Clarification of certain benefits.--For
purposes of paragraph (1), such term includes any
dependent care assistance program (as in effect on the
date of the enactment of this paragraph) for any
individual described in paragraph (1)(A).''.
(b) Conforming Amendments.--
(1) Section 134(b)(3)(A), as amended by section 602,
is amended by inserting ``and paragraph (4)'' after
``subparagraphs (B) and (C)''.
(2) Section 3121(a)(18) is amended by striking ``or
129'' and inserting ``, 129, or 134(b)(4)''.
(3) Section 3306(b)(13) is amended by striking ``or
129'' and inserting ``, 129, or 134(b)(4)''.
(4) Section 3401(a)(18) is amended by striking ``or
129'' and inserting ``, 129, or 134(b)(4)''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2002.
(d) No Inference.--No inference may be drawn from the
amendments made by this section with respect to the tax
treatment of any amounts under the program described in section
134(b)(4) of the Internal Revenue Code of 1986 (as added by
this section) for any taxable year beginning before January 1,
2003.
SEC. 607. CLARIFICATION RELATING TO EXCEPTION FROM ADDITIONAL TAX ON
CERTAIN DISTRIBUTIONS FROM QUALIFIED TUITION
PROGRAMS, ETC. ON ACCOUNT OF ATTENDANCE AT MILITARY
ACADEMY.
(a) In General.--Subparagraph (B) of section 530(d)(4)
(relating to exceptions from additional tax for distributions
not used for educational purposes) is amended by striking
``or'' at the end of clause (iii), by redesignating clause (iv)
as clause (v), and by inserting after clause (iii) the
following new clause:
``(iv) made on account of the
attendance of the designated
beneficiary at the United States
Military Academy, the United States
Naval Academy, the United States Air
Force Academy, the United States Coast
Guard Academy, or the United States
Merchant Marine Academy, to the extent
that the amount of the payment or
distribution does not exceed the costs
of advanced education (as defined by
section 2005(e)(3) of title 10, United
States Code, as in effect on the date
of the enactment of this section)
attributable to such attendance, or''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2002.
SEC. 608. SUSPENSION OF TAX-EXEMPT STATUS OF TERRORIST ORGANIZATIONS.
(a) In General.--Section 501 (relating to exemption from tax
on corporations, certain trusts, etc.) is amended by
redesignating subsection (p) as subsection (q) and by inserting
after subsection (o) the following new subsection:
``(p) Suspension of Tax-Exempt Status of Terrorist
Organizations.--
``(1) In general.--The exemption from tax under
subsection (a) with respect to any organization
described in paragraph (2), and the eligibility of any
organization described in paragraph (2) to apply for
recognition of exemption under subsection (a), shall be
suspended during the period described in paragraph (3).
``(2) Terrorist organizations.--An organization is
described in this paragraph if such organization is
designated or otherwise individually identified--
``(A) under section 212(a)(3)(B)(vi)(II) or
219 of the Immigration and Nationality Act as a
terrorist organization or foreign terrorist
organization,
``(B) in or pursuant to an Executive order
which is related to terrorism and issued under
the authority of the International Emergency
Economic Powers Act or section 5 of the United
Nations Participation Act of 1945 for the
purpose of imposing on such organization an
economic or other sanction, or
``(C) in or pursuant to an Executive order
issued under the authority of any Federal law
if--
``(i) the organization is designated
or otherwise individually identified in
or pursuant to such Executive order as
supporting or engaging in terrorist
activity (as defined in section
212(a)(3)(B) of the Immigration and
Nationality Act) or supporting
terrorism (as defined in section
140(d)(2) of the Foreign Relations
Authorization Act, Fiscal Years 1988
and 1989); and
``(ii) such Executive order refers to
this subsection.
``(3) Period of suspension.--With respect to any
organization described in paragraph (2), the period of
suspension--
``(A) begins on the later of--
``(i) the date of the first
publication of a designation or
identification described in paragraph
(2) with respect to such organization,
or
``(ii) the date of the enactment of
this subsection, and
``(B) ends on the first date that all
designations and identifications described in
paragraph (2) with respect to such organization
are rescinded pursuant to the law or Executive
order under which such designation or
identification was made.
``(4) Denial of deduction.--No deduction shall be
allowed under any provision of this title, including
sections 170, 545(b)(2), 556(b)(2), 642(c), 2055,
2106(a)(2), and 2522, with respect to any contribution
to an organization described in paragraph (2) during
the period described in paragraph (3).
``(5) Denial of administrative or judicial challenge
of suspension or denial of deduction.--Notwithstanding
section 7428 or any other provision of law, no
organization or other person may challenge a suspension
under paragraph (1), a designation or identification
described in paragraph (2), the period of suspension
described in paragraph (3), or a denial of a deduction
under paragraph (4) in any administrative or judicial
proceeding relating to the Federal tax liability of
such organization or other person.
``(6) Erroneous designation.--
``(A) In general.--If--
``(i) the tax exemption of any
organization described in paragraph (2)
is suspended under paragraph (1),
``(ii) each designation and
identification described in paragraph
(2) which has been made with respect to
such organization is determined to be
erroneous pursuant to the law or
Executive order under which such
designation or identification was made,
and
``(iii) the erroneous designations
and identifications result in an
overpayment of income tax for any
taxable year by such organization,
credit or refund (with interest) with respect
to such overpayment shall be made.
``(B) Waiver of limitations.--If the credit
or refund of any overpayment of tax described
in subparagraph (A)(iii) is prevented at any
time by the operation of any law or rule of law
(including res judicata), such credit or refund
may nevertheless be allowed or made if the
claim therefor is filed before the close of the
1-year period beginning on the date of the last
determination described in subparagraph
(A)(ii).
``(7) Notice of Suspensions.--If the tax exemption of
any organization is suspended under this subsection,
the Internal Revenue Service shall update the listings
of tax-exempt organizations and shall publish
appropriate notice to taxpayers of such suspension and
of the fact that contributions to such organization are
not deductible during the period of such suspension.''.
(b) Effective Date.--The amendments made by this section
shall apply to designations made before, on, or after the date
of the enactment of this Act.
SEC. 609. ABOVE-THE-LINE DEDUCTION FOR OVERNIGHT TRAVEL EXPENSES OF
NATIONAL GUARD AND RESERVE MEMBERS.
(a) Deduction Allowed.--Section 162 (relating to certain
trade or business expenses) is amended by redesignating
subsection (p) as subsection (q) and inserting after subsection
(o) the following new subsection:
``(p) Treatment of Expenses of Members of Reserve Component
of Armed Forces of the United States.--For purposes of
subsection (a)(2), in the case of an individual who performs
services as a member of a reserve component of the Armed Forces
of the United States at any time during the taxable year, such
individual shall be deemed to be away from home in the pursuit
of a trade or business for any period during which such
individual is away from home in connection with such
service.''.
(b) Deduction Allowed Whether or Not Taxpayer Elects To
Itemize.--Section 62(a)(2) (relating to certain trade and
business deductions of employees) is amended by adding at the
end the following new subparagraph:
``(E) Certain expenses of members of reserve
components of the armed forces of the united
states.--The deductions allowed by section 162
which consist of expenses, determined at a rate
not in excess of the rates for travel expenses
(including per diem in lieu of subsistence)
authorized for employees of agencies under
subchapter I of chapter 57 of title 5, United
States Code, paid or incurred by the taxpayer
in connection with the performance of services
by such taxpayer as a member of a reserve
component of the Armed Forces of the United
States for any period during which such
individual is more than 100 miles away from
home in connection with such services.''.
(c) Effective Date.--The amendments made by this section
shall apply to amounts paid or incurred in taxable years
beginning after December 31, 2002.
SEC. 610. TAX RELIEF AND ASSISTANCE FOR FAMILIES OF SPACE SHUTTLE
COLUMBIA HEROES.
(a) Income Tax Relief.--
(1) In general.--Subsection (d) of section 692
(relating to income taxes of members of Armed Forces
and victims of certain terrorist attacks on death) is
amended by adding at the end the following new
paragraph:
``(5) Relief with respect to astronauts.--The
provisions of this subsection shall apply to any
astronaut whose death occurs in the line of duty,
except that paragraph (3)(B) shall be applied by using
the date of the death of the astronaut rather than
September 11, 2001.''.
(2) Conforming amendments.--
(A) Section 5(b)(1) is amended by inserting
``, astronauts,'' after ``Forces''.
(B) Section 6013(f)(2)(B) is amended by
inserting ``, astronauts,'' after ``Forces''.
(3) Clerical amendments.--
(A) The heading of section 692 is amended by
inserting ``, ASTRONAUTS,'' after ``FORCES''.
(B) The item relating to section 692 in the
table of sections for part II of subchapter J
of chapter 1 is amended by inserting ``,
astronauts,'' after ``Forces''.
(4) Effective date.--The amendments made by this
subsection shall apply with respect to any astronaut
whose death occurs after December 31, 2002.
(b) Death Benefit Relief.--
(1) In general.--Subsection (i) of section 101
(relating to certain death benefits) is amended by
adding at the end the following new paragraph:
``(4) Relief with respect to astronauts.--The
provisions of this subsection shall apply to any
astronaut whose death occurs in the line of duty.''.
(2) Clerical amendment.--The heading for subsection
(i) of section 101 is amended by inserting ``or
Astronauts'' after ``Victims''.
(3) Effective date.--The amendments made by this
subsection shall apply to amounts paid after December
31, 2002, with respect to deaths occurring after such
date.
(c) Estate Tax Relief.--
(1) In general.--Section 2201(b) (defining qualified
decedent) is amended by striking ``and'' at the end of
paragraph (1)(B), by striking the period at the end of
paragraph (2) and inserting ``, and'', and by adding at
the end the following new paragraph:
``(3) any astronaut whose death occurs in the line of
duty.''.
(2) Clerical amendments.--
(A) The heading of section 2201 is amended by
inserting ``, DEATHS OF ASTRONAUTS,'' after
``FORCES''.
(B) The item relating to section 2201 in the
table of sections for subchapter C of chapter
11 is amended by inserting ``, deaths of
astronauts,'' after ``Forces''.
(3) Effective date.--The amendments made by this
subsection shall apply to estates of decedents dying
after December 31, 2002.
TITLE VII--OTHER PROVISIONS
SEC. 701. REVISION OF TAX RULES ON EXPATRIATION.
(a) In General.--Subpart A of part II of subchapter N of
chapter 1 is amended by inserting after section 877 the
following new section:
``SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.
``(a) General Rules.--For purposes of this subtitle--
``(1) Mark to market.--Except as provided in
subsections (d) and (f), all property of a covered
expatriate to whom this section applies shall be
treated as sold on the day before the expatriation date
for its fair market value.
``(2) Recognition of gain or loss.--In the case of
any sale under paragraph (1)--
``(A) notwithstanding any other provision of
this title, any gain arising from such sale
shall be taken into account for the taxable
year of the sale, and
``(B) any loss arising from such sale shall
be taken into account for the taxable year of
the sale to the extent otherwise provided by
this title, except that section 1091 shall not
apply to any such loss.
Proper adjustment shall be made in the amount of any
gain or loss subsequently realized for gain or loss
taken into account under the preceding sentence.
``(3) Exclusion for certain gain.--
``(A) In general.--The amount which, but for
this paragraph, would be includible in the
gross income of any individual by reason of
this section shall be reduced (but not below
zero) by $600,000. For purposes of this
paragraph, allocable expatriation gain taken
into account under subsection (f)(2) shall be
treated in the same manner as an amount
required to be includible in gross income.
``(B) Cost-of-living adjustment.--
``(i) In general.--In the case of an
expatriation date occurring in any
calendar year after 2003, the $600,000
amount under subparagraph (A) shall be
increased by an amount equal to--
``(I) such dollar amount,
multiplied by
``(II) the cost-of-living
adjustment determined under
section 1(f)(3) for such
calendar year, determined by
substituting `calendar year
2002' for `calendar year 1992'
in subparagraph (B) thereof.
``(ii) Rounding rules.--If any amount
after adjustment under clause (i) is
not a multiple of $1,000, such amount
shall be rounded to the next lower
multiple of $1,000.
``(4) Election to continue to be taxed as united
states citizen.--
``(A) In general.--If a covered expatriate
elects the application of this paragraph--
``(i) this section (other than this
paragraph and subsection (i)) shall not
apply to the expatriate, but
``(ii) in the case of property to
which this section would apply but for
such election, the expatriate shall be
subject to tax under this title in the
same manner as if the individual were a
United States citizen.
``(B) Requirements.--Subparagraph (A) shall
not apply to an individual unless the
individual--
``(i) provides security for payment
of tax in such form and manner, and in
such amount, as the Secretary may
require,
``(ii) consents to the waiver of any
right of the individual under any
treaty of the United States which would
preclude assessment or collection of
any tax which may be imposed by reason
of this paragraph, and
``(iii) complies with such other
requirements as the Secretary may
prescribe.
``(C) Election.--An election under
subparagraph (A) shall apply to all property to
which this section would apply but for the
election and, once made, shall be irrevocable.
Such election shall also apply to property the
basis of which is determined in whole or in
part by reference to the property with respect
to which the election was made.
``(b) Election To Defer Tax.--
``(1) In general.--If the taxpayer elects the
application of this subsection with respect to any
property treated as sold by reason of subsection (a),
the payment of the additional tax attributable to such
property shall be postponed until the due date of the
return for the taxable year in which such property is
disposed of (or, in the case of property disposed of in
a transaction in which gain is not recognized in whole
or in part, until such other date as the Secretary may
prescribe).
``(2) Determination of tax with respect to
property.--For purposes of paragraph (1), the
additional tax attributable to any property is an
amount which bears the same ratio to the additional tax
imposed by this chapter for the taxable year solely by
reason of subsection (a) as the gain taken into account
under subsection (a) with respect to such property
bears to the total gain taken into account under
subsection (a) with respect to all property to which
subsection (a) applies.
``(3) Termination of postponement.--No tax may be
postponed under this subsection later than the due date
for the return of tax imposed by this chapter for the
taxable year which includes the date of death of the
expatriate (or, if earlier, the time that the security
provided with respect to the property fails to meet the
requirements of paragraph (4), unless the taxpayer
corrects such failure within the time specified by the
Secretary).
``(4) Security.--
``(A) In general.--No election may be made
under paragraph (1) with respect to any
property unless adequate security is provided
to the Secretary with respect to such property.
``(B) Adequate security.--For purposes of
subparagraph (A), security with respect to any
property shall be treated as adequate security
if--
``(i) it is a bond in an amount equal
to the deferred tax amount under
paragraph (2) for the property, or
``(ii) the taxpayer otherwise
establishes to the satisfaction of the
Secretary that the security is
adequate.
``(5) Waiver of certain rights.--No election may be
made under paragraph (1) unless the taxpayer consents
to the waiver of any right under any treaty of the
United States which would preclude assessment or
collection of any tax imposed by reason of this
section.
``(6) Elections.--An election under paragraph (1)
shall only apply to property described in the election
and, once made, is irrevocable. An election may be made
under paragraph (1) with respect to an interest in a
trust with respect to which gain is required to be
recognized under subsection (f)(1).
``(7) Interest.--For purposes of section 6601--
``(A) the last date for the payment of tax
shall be determined without regard to the
election under this subsection, and
``(B) section 6621(a)(2) shall be applied by
substituting `5 percentage points' for `3
percentage points' in subparagraph (B) thereof.
``(c) Covered Expatriate.--For purposes of this section--
``(1) In general.--Except as provided in paragraph
(2), the term `covered expatriate' means an expatriate.
``(2) Exceptions.--An individual shall not be treated
as a covered expatriate if--
``(A) the individual--
``(i) became at birth a citizen of
the United States and a citizen of
another country and, as of the
expatriation date, continues to be a
citizen of, and is taxed as a resident
of, such other country, and
``(ii) has not been a resident of the
United States (as defined in section
7701(b)(1)(A)(ii)) during the 5 taxable
years ending with the taxable year
during which the expatriation date
occurs, or
``(B)(i) the individual's relinquishment of
United States citizenship occurs before such
individual attains age 18\1/2\, and
``(ii) the individual has been a resident of
the United States (as so defined) for not more
than 5 taxable years before the date of
relinquishment.
``(d) Exempt Property; Special Rules for Pension Plans.--
``(1) Exempt property.--This section shall not apply
to the following:
``(A) United states real property
interests.--Any United States real property
interest (as defined in section 897(c)(1)),
other than stock of a United States real
property holding corporation which does not, on
the day before the expatriation date, meet the
requirements of section 897(c)(2).
``(B) Specified property.--Any property or
interest in property not described in
subparagraph (A) which the Secretary specifies
in regulations.
``(2) Special rules for certain retirement plans.--
``(A) In general.--If a covered expatriate
holds on the day before the expatriation date
any interest in a retirement plan to which this
paragraph applies--
``(i) such interest shall not be
treated as sold for purposes of
subsection (a)(1), but
``(ii) an amount equal to the present
value of the expatriate's
nonforfeitable accrued benefit shall be
treated as having been received by such
individual on such date as a
distribution under the plan.
``(B) Treatment of subsequent
distributions.--In the case of any distribution
on or after the expatriation date to or on
behalf of the covered expatriate from a plan
from which the expatriate was treated as
receiving a distribution under subparagraph
(A), the amount otherwise includible in gross
income by reason of the subsequent distribution
shall be reduced by the excess of the amount
includible in gross income under subparagraph
(A) over any portion of such amount to which
this subparagraph previously applied.
``(C) Treatment of subsequent distributions
by plan.--For purposes of this title, a
retirement plan to which this paragraph
applies, and any person acting on the plan's
behalf, shall treat any subsequent distribution
described in subparagraph (B) in the same
manner as such distribution would be treated
without regard to this paragraph.
``(D) Applicable plans.--This paragraph shall
apply to--
``(i) any qualified retirement plan
(as defined in section 4974(c)),
``(ii) an eligible deferred
compensation plan (as defined in
section 457(b)) of an eligible employer
described in section 457(e)(1)(A), and
``(iii) to the extent provided in
regulations, any foreign pension plan
or similar retirement arrangements or
programs.
``(e) Definitions.--For purposes of this section--
``(1) Expatriate.--The term `expatriate' means--
``(A) any United States citizen who
relinquishes citizenship, and
``(B) any long-term resident of the United
States who--
``(i) ceases to be a lawful permanent
resident of the United States (within
the meaning of section 7701(b)(6)), or
``(ii) commences to be treated as a
resident of a foreign country under the
provisions of a tax treaty between the
United States and the foreign country
and who does not waive the benefits of
such treaty applicable to residents of
the foreign country.
``(2) Expatriation date.--The term `expatriation
date' means--
``(A) the date an individual relinquishes
United States citizenship, or
``(B) in the case of a long-term resident of
the United States, the date of the event
described in clause (i) or (ii) of paragraph
(1)(B).
``(3) Relinquishment of citizenship.--A citizen shall
be treated as relinquishing United States citizenship
on the earliest of--
``(A) the date the individual renounces such
individual's United States nationality before a
diplomatic or consular officer of the United
States pursuant to paragraph (5) of section
349(a) of the Immigration and Nationality Act
(8 U.S.C. 1481(a)(5)),
``(B) the date the individual furnishes to
the United States Department of State a signed
statement of voluntary relinquishment of United
States nationality confirming the performance
of an act of expatriation specified in
paragraph (1), (2), (3), or (4) of section
349(a) of the Immigration and Nationality Act
(8 U.S.C. 1481(a)(1)-(4)),
``(C) the date the United States Department
of State issues to the individual a certificate
of loss of nationality, or
``(D) the date a court of the United States
cancels a naturalized citizen's certificate of
naturalization.
Subparagraph (A) or (B) shall not apply to any
individual unless the renunciation or voluntary
relinquishment is subsequently approved by the issuance
to the individual of a certificate of loss of
nationality by the United States Department of State.
``(4) Long-term resident.--The term `long-term
resident' has the meaning given to such term by section
877(e)(2).
``(f) Special Rules Applicable to Beneficiaries' Interests in
Trust.--
``(1) In general.--Except as provided in paragraph
(2), if an individual is determined under paragraph (3)
to hold an interest in a trust on the day before the
expatriation date--
``(A) the individual shall not be treated as
having sold such interest,
``(B) such interest shall be treated as a
separate share in the trust, and
``(C)(i) such separate share shall be treated
as a separate trust consisting of the assets
allocable to such share,
``(ii) the separate trust shall be treated as
having sold its assets on the day before the
expatriation date for their fair market value
and as having distributed all of its assets to
the individual as of such time, and
``(iii) the individual shall be treated as
having recontributed the assets to the separate
trust.
Subsection (a)(2) shall apply to any income, gain, or
loss of the individual arising from a distribution
described in subparagraph (C)(ii). In determining the
amount of such distribution, proper adjustments shall
be made for liabilities of the trust allocable to an
individual's share in the trust.
``(2) Special rules for interests in qualified
trusts.--
``(A) In general.--If the trust interest
described in paragraph (1) is an interest in a
qualified trust--
``(i) paragraph (1) and subsection
(a) shall not apply, and
``(ii) in addition to any other tax
imposed by this title, there is hereby
imposed on each distribution with
respect to such interest a tax in the
amount determined under subparagraph
(B).
``(B) Amount of tax.--The amount of tax under
subparagraph (A)(ii) shall be equal to the
lesser of--
``(i) the highest rate of tax imposed
by section 1(e) for the taxable year
which includes the day before the
expatriation date, multiplied by the
amount of the distribution, or
``(ii) the balance in the deferred
tax account immediately before the
distribution determined without regard
to any increases under subparagraph
(C)(ii) after the 30th day preceding
the distribution.
``(C) Deferred tax account.--For purposes of
subparagraph (B)(ii)--
``(i) Opening balance.--The opening
balance in a deferred tax account with
respect to any trust interest is an
amount equal to the tax which would
have been imposed on the allocable
expatriation gain with respect to the
trust interest if such gain had been
included in gross income under
subsection (a).
``(ii) Increase for interest.--The
balance in the deferred tax account
shall be increased by the amount of
interest determined (on the balance in
the account at the time the interest
accrues), for periods after the 90th
day after the expatriation date, by
using the rates and method applicable
under section 6621 for underpayments of
tax for such periods, except that
section 6621(a)(2) shall be applied by
substituting `5 percentage points' for
`3 percentage points' in subparagraph
(B) thereof.
``(iii) Decrease for taxes previously
paid.--The balance in the tax deferred
account shall be reduced--
``(I) by the amount of taxes
imposed by subparagraph (A) on
any distribution to the person
holding the trust interest, and
``(II) in the case of a
person holding a nonvested
interest, to the extent
provided in regulations, by the
amount of taxes imposed by
subparagraph (A) on
distributions from the trust
with respect to nonvested
interests not held by such
person.
``(D) Allocable expatriation gain.--For
purposes of this paragraph, the allocable
expatriation gain with respect to any
beneficiary's interest in a trust is the amount
of gain which would be allocable to such
beneficiary's vested and nonvested interests in
the trust if the beneficiary held directly all
assets allocable to such interests.
``(E) Tax deducted and withheld.--
``(i) In general.--The tax imposed by
subparagraph (A)(ii) shall be deducted
and withheld by the trustees from the
distribution to which it relates.
``(ii) Exception where failure to
waive treaty rights.--If an amount may
not be deducted and withheld under
clause (i) by reason of the distributee
failing to waive any treaty right with
respect to such distribution--
``(I) the tax imposed by
subparagraph (A)(ii) shall be
imposed on the trust and each
trustee shall be personally
liable for the amount of such
tax, and
``(II) any other beneficiary
of the trust shall be entitled
to recover from the distributee
the amount of such tax imposed
on the other beneficiary.
``(F) Disposition.--If a trust ceases to be a
qualified trust at any time, a covered
expatriate disposes of an interest in a
qualified trust, or a covered expatriate
holding an interest in a qualified trust dies,
then, in lieu of the tax imposed by
subparagraph (A)(ii), there is hereby imposed a
tax equal to the lesser of--
``(i) the tax determined under
paragraph (1) as if the day before the
expatriation date were the date of such
cessation, disposition, or death,
whichever is applicable, or
``(ii) the balance in the tax
deferred account immediately before
such date.
Such tax shall be imposed on the trust and each
trustee shall be personally liable for the
amount of such tax and any other beneficiary of
the trust shall be entitled to recover from the
covered expatriate or the estate the amount of
such tax imposed on the other beneficiary.
``(G) Definitions and special rules.--For
purposes of this paragraph--
``(i) Qualified trust.--The term
`qualified trust' means a trust which
is described in section 7701(a)(30)(E).
``(ii) Vested interest.--The term
`vested interest' means any interest
which, as of the day before the
expatriation date, is vested in the
beneficiary.
``(iii) Nonvested interest.--The term
`nonvested interest' means, with
respect to any beneficiary, any
interest in a trust which is not a
vested interest. Such interest shall be
determined by assuming the maximum
exercise of discretion in favor of the
beneficiary and the occurrence of all
contingencies in favor of the
beneficiary.
``(iv) Adjustments.--The Secretary
may provide for such adjustments to the
bases of assets in a trust or a
deferred tax account, and the timing of
such adjustments, in order to ensure
that gain is taxed only once.
``(v) Coordination with retirement
plan rules.--This subsection shall not
apply to an interest in a trust which
is part of a retirement plan to which
subsection (d)(2) applies.
``(3) Determination of beneficiaries' interest in
trust.--
``(A) Determinations under paragraph (1).--
For purposes of paragraph (1), a beneficiary's
interest in a trust shall be based upon all
relevant facts and circumstances, including the
terms of the trust instrument and any letter of
wishes or similar document, historical patterns
of trust distributions, and the existence of
and functions performed by a trust protector or
any similar adviser.
``(B) Other determinations.--For purposes of
this section--
``(i) Constructive ownership.--If a
beneficiary of a trust is a
corporation, partnership, trust, or
estate, the shareholders, partners, or
beneficiaries shall be deemed to be the
trust beneficiaries for purposes of
this section.
``(ii) Taxpayer return position.--A
taxpayer shall clearly indicate on its
income tax return--
``(I) the methodology used to
determine that taxpayer's trust
interest under this section,
and
``(II) if the taxpayer knows
(or has reason to know) that
any other beneficiary of such
trust is using a different
methodology to determine such
beneficiary's trust interest
under this section.
``(g) Termination of Deferrals, etc.--In the case of any
covered expatriate, notwithstanding any other provision of this
title--
``(1) any period during which recognition of income
or gain is deferred shall terminate on the day before
the expatriation date, and
``(2) any extension of time for payment of tax shall
cease to apply on the day before the expatriation date
and the unpaid portion of such tax shall be due and
payable at the time and in the manner prescribed by the
Secretary.
``(h) Imposition of Tentative Tax.--
``(1) In general.--If an individual is required to
include any amount in gross income under subsection (a)
for any taxable year, there is hereby imposed,
immediately before the expatriation date, a tax in an
amount equal to the amount of tax which would be
imposed if the taxable year were a short taxable year
ending on the expatriation date.
``(2) Due date.--The due date for any tax imposed by
paragraph (1) shall be the 90th day after the
expatriation date.
``(3) Treatment of tax.--Any tax paid under paragraph
(1) shall be treated as a payment of the tax imposed by
this chapter for the taxable year to which subsection
(a) applies.
``(4) Deferral of tax.--The provisions of subsection
(b) shall apply to the tax imposed by this subsection
to the extent attributable to gain includible in gross
income by reason of this section.
``(i) Special Liens for Deferred Tax Amounts.--
``(1) Imposition of lien.--
``(A) In general.--If a covered expatriate
makes an election under subsection (a)(4) or
(b) which results in the deferral of any tax
imposed by reason of subsection (a), the
deferred amount (including any interest,
additional amount, addition to tax, assessable
penalty, and costs attributable to the deferred
amount) shall be a lien in favor of the United
States on all property of the expatriate
located in the United States (without regard to
whether this section applies to the property).
``(B) Deferred amount.--For purposes of this
subsection, the deferred amount is the amount
of the increase in the covered expatriate's
income tax which, but for the election under
subsection (a)(4) or (b), would have occurred
by reason of this section for the taxable year
including the expatriation date.
``(2) Period of lien.--The lien imposed by this
subsection shall arise on the expatriation date and
continue until--
``(A) the liability for tax by reason of this
section is satisfied or has become
unenforceable by reason of lapse of time, or
``(B) it is established to the satisfaction
of the Secretary that no further tax liability
may arise by reason of this section.
``(3) Certain rules apply.--The rules set forth in
paragraphs (1), (3), and (4) of section 6324A(d) shall
apply with respect to the lien imposed by this
subsection as if it were a lien imposed by section
6324A.
``(j) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this section.''.
(b) Inclusion in Income of Gifts and Bequests Received by
United States Citizens and Residents From Expatriates.--Section
102 (relating to gifts, etc. not included in gross income) is
amended by adding at the end the following new subsection:
``(d) Gifts and Inheritances From Covered Expatriates.--
``(1) In general.--Subsection (a) shall not exclude
from gross income the value of any property acquired by
gift, bequest, devise, or inheritance from a covered
expatriate after the expatriation date. For purposes of
this subsection, any term used in this subsection which
is also used in section 877A shall have the same
meaning as when used in section 877A.
``(2) Exceptions for transfers otherwise subject to
estate or gift tax.--Paragraph (1) shall not apply to
any property if either--
``(A) the gift, bequest, devise, or
inheritance is--
``(i) shown on a timely filed return
of tax imposed by chapter 12 as a
taxable gift by the covered expatriate,
or
``(ii) included in the gross estate
of the covered expatriate for purposes
of chapter 11 and shown on a timely
filed return of tax imposed by chapter
11 of the estate of the covered
expatriate, or
``(B) no such return was timely filed but no
such return would have been required to be
filed even if the covered expatriate were a
citizen or long-term resident of the United
States.''.
(c) Definition of Termination of United States Citizenship.--
Section 7701(a) is amended by adding at the end the following
new paragraph:
``(48) Termination of united states citizenship.--
``(A) In general.--An individual shall not
cease to be treated as a United States citizen
before the date on which the individual's
citizenship is treated as relinquished under
section 877A(e)(3).
``(B) Dual citizens.--Under regulations
prescribed by the Secretary, subparagraph (A)
shall not apply to an individual who became at
birth a citizen of the United States and a
citizen of another country.''.
(d) Ineligibility for Visa or Admission to United States.--
(1) In general.--Section 212(a)(10)(E) of the
Immigration and Nationality Act (8 U.S.C.
1182(a)(10)(E)) is amended to read as follows:
``(E) Former citizens not in compliance with
expatriation revenue provisions.--Any alien who
is a former citizen of the United States who
relinquishes United States citizenship (within
the meaning of section 877A(e)(3) of the
Internal Revenue Code of 1986) and who is not
in compliance with section 877A of such Code
(relating to expatriation).''.
(2) Availability of information.--
(A) In general.--Section 6103(l) (relating to
disclosure of returns and return information
for purposes other than tax administration) is
amended by adding at the end the following new
paragraph:
``(19) Disclosure to deny visa or admission to
certain expatriates.--Upon written request of the
Attorney General or the Attorney General's delegate,
the Secretary shall disclose whether an individual is
in compliance with section 877A (and if not in
compliance, any items of noncompliance) to officers and
employees of the Federal agency responsible for
administering section 212(a)(10)(E) of the Immigration
and Nationality Act solely for the purpose of, and to
the extent necessary in, administering such section
212(a)(10)(E).''.
(B) Safeguards.--
(i) Technical amendments.--Paragraph
(4) of section 6103(p) of the Internal
Revenue Code of 1986, as amended by
section 202(b)(2)(B) of the Trade Act
of 2002 (Public Law 107-210; 116 Stat.
961), is amended by striking ``or
(17)'' after ``any other person
described in subsection (l)(16)'' each
place it appears and inserting ``or
(18)''.
(ii) Conforming amendments.--Section
6103(p)(4) (relating to safeguards), as
amended by clause (i), is amended by
striking ``or (18)'' after ``any other
person described in subsection
(l)(16)'' each place it appears and
inserting ``(18), or (19)''.
(3) Effective dates.--
(A) In general.--Except as provided in
subparagraph (B), the amendments made by this
subsection shall apply to individuals who
relinquish United States citizenship on or
after the date of the enactment of this Act.
(B) Technical amendments.--The amendments
made by paragraph (2)(B)(i) shall take effect
as if included in the amendments made by
section 202(b)(2)(B) of the Trade Act of 2002
(Public Law 107-210; 116 Stat. 961).
(e) Conforming Amendments.--
(1) Section 877 is amended by adding at the end the
following new subsection:
``(g) Application.--This section shall not apply to an
expatriate (as defined in section 877A(e)) whose expatriation
date (as so defined) occurs on or after February 5, 2003.''.
(2) Section 2107 is amended by adding at the end the
following new subsection:
``(f) Application.--This section shall not apply to any
expatriate subject to section 877A.''.
(3) Section 2501(a)(3) is amended by adding at the
end the following new subparagraph:
``(F) Application.--This paragraph shall not
apply to any expatriate subject to section
877A.''.
(4)(A) Paragraph (1) of section 6039G(d) is amended
by inserting ``or 877A'' after ``section 877''.
(B) The second sentence of section 6039G(e) is
amended by inserting ``or who relinquishes United
States citizenship (within the meaning of section
877A(e)(3))'' after ``877(a))''.
(C) Section 6039G(f) is amended by inserting ``or
877A(e)(2)(B)'' after ``877(e)(1)''.
(f) Clerical Amendment.--The table of sections for subpart A
of part II of subchapter N of chapter 1 is amended by inserting
after the item relating to section 877 the following new item:
``Sec. 877A. Tax responsibilities of expatriation.''.
(g) Effective Date.--
(1) In general.--Except as provided in this
subsection, the amendments made by this section shall
apply to expatriates (within the meaning of section
877A(e) of the Internal Revenue Code of 1986, as added
by this section) whose expatriation date (as so
defined) occurs on or after February 5, 2003.
(2) Gifts and bequests.--Section 102(d) of the
Internal Revenue Code of 1986 (as added by subsection
(b)) shall apply to gifts and bequests received on or
after February 5, 2003, from an individual or the
estate of an individual whose expatriation date (as so
defined) occurs after such date.
(3) Due date for tentative tax.--The due date under
section 877A(h)(2) of the Internal Revenue Code of
1986, as added by this section, shall in no event occur
before the 90th day after the date of the enactment of
this Act.
SEC. 702. EXTENSION OF CUSTOMS USER FEES.
Section 13031(j)(3) of the Consolidated Omnibus Budget
Reconciliation Act of 1985 (19 U.S.C. 58c(j)(3)) is amended by
striking ``September 30, 2003'' and inserting ``March 31,
2010''.