ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS, OTHER REPORTABLE TRANSACTIONS HAVING A SIGNIFICANT TAX AVOIDANCE PURPOSE, ETC.

SEC. 812. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS, OTHER REPORTABLE TRANSACTIONS HAVING A SIGNIFICANT TAX AVOIDANCE PURPOSE, ETC.(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—118 STAT. 1578 “(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.—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.“(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 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.“(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.“(B) No double penalty.—This section shall not apply to any portion of an understatement on which a penalty is imposed under section 6663.“(C) Coordination with valuation penalties.—“(i) Section 6662(e).—Section 6662(e) shall not apply to any portion of an understatement on which a penalty is imposed under this section.“(ii) Section 6662(h).—This section shall not apply to any portion of an understatement on which a penalty is imposed under section 6662(h).“(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 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.”.(b) Determination of Other Understatements.—Subparagraph (A) of section 6662(d)(2) is amended by adding at the end the following flush sentence:118 STAT. 1579 “The excess under the preceding sentence shall be determined without regard to items to which section 6662A applies.”.(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)) and participates in the organization, management, promotion, or sale of the transaction or 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,118 STAT. 1580“(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 disqualifying 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 amendments.—(A) Paragraph (1) of section 6664(c) is amended by striking “this part” and inserting “section 6662 or 6663”.(B) The heading for subsection (c) of section 6664 is amended by inserting “for Underpayments” after “Exception”.(d) Reduction in Penalty for Substantial Understatement of Income Tax Not To Apply to Tax Shelters.—Subparagraph (C) of section 6662(d)(2) (relating to substantial understatement of income tax) is amended to read as follows:“(C) Reduction not to apply to tax shelters.—“(i) In general.—Subparagraph (B) shall not apply to any item attributable to a tax shelter.“(ii) Tax shelter.—For purposes of clause (i), 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.”.(e) Clerical Amendments.—(1) The heading for section 6662 is amended to read as follows:“SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERPAYMENTS.” .(2) 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.”. (f) Effective Date.—The amendments made by this section shall apply to taxable years ending after the date of the enactment of this Act.118 STAT. 1581