TAX ATTORNEY- PLANNING WARNING - A proposal to codify the economic substance doctrine is contained in the recent H.R. 4351 House-passed AMT Relief Bill of 2007. The House Ways and Means Committee explained in a statement that the economic substance doctrine would be satisfied only if:

(1) The transaction changes in a meaningful way (apart from federal income tax consequences) the taxpayer's economic position; and

(2) The taxpayer has a substantial non-federal tax purpose for entering into such transaction.

HR 4351 would also impose a 20-percent penalty on understatements attributable to a transaction lacking economic substance. The penalty would jump to 40 percent for transactions for which the relevant facts affecting the tax treatment of the transaction are not adequately disclosed.


AMT Relief Act of 2007, as Passed by the House on December 12, 2007

December 14, 2007

110th Congress

HR 4351 EH



110th CONGRESS



1st Session



,

SECTION 1. SHORT TITLE, ETC.

(a) Short Title- This Act may be cited as the `AMT Relief Act of 2007'.

TITLE II --REVENUE PROVISIONS


Subtitle B --Codification of Economic Substance Doctrine

Sec. 211. Codification of economic substance doctrine.

Sec. 212. Penalties for underpayments.



TITLE I --INDIVIDUAL TAX RELIEF


SEC. 211. CODIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

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

`(p) Clarification of Economic Substance Doctrine-

`(1) APPLICATION OF DOCTRINE- In the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if --

`(A) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer's economic position, and

`(B) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.

`(2) SPECIAL RULE WHERE TAXPAYER RELIES ON PROFIT POTENTIAL-

`(A) IN GENERAL- The potential for profit of a transaction shall be taken into account in determining whether the requirements of subparagraphs (A) and (B) of paragraph (1) are met with respect to the transaction only if 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.

`(B) 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 (A).

`(3) STATE AND LOCAL TAX BENEFITS- For purposes of paragraph (1), any State or local income tax effect which is related to a Federal income tax effect shall be treated in the same manner as a Federal income tax effect.

`(4) FINANCIAL ACCOUNTING BENEFITS- For purposes of paragraph (1)(B), achieving a financial accounting benefit shall not be taken into account as a purpose for entering into a transaction if such transaction results in a Federal income tax benefit.

`(5) DEFINITIONS AND SPECIAL RULES- For purposes of this subsection --

`(A) ECONOMIC SUBSTANCE DOCTRINE- The term `economic substance doctrine' means the common law doctrine under which tax benefits under subtitle A with respect to a transaction are not allowable if the transaction does not have economic substance or lacks a business purpose.

`(B) EXCEPTION FOR PERSONAL TRANSACTIONS OF INDIVIDUALS- In the case of an individual, paragraph (1) shall apply only to transactions entered into in connection with a trade or business or an activity engaged in for the production of income.

`(C) 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.

`(D) DETERMINATION OF APPLICATION OF DOCTRINE NOT AFFECTED- The determination of whether the economic substance doctrine is relevant to a transaction shall be made in the same manner as if this subsection had never been enacted.

`(6) REGULATIONS- The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection. Such regulations may include exemptions from the application of this subsection.'.

(b) Effective Date- The amendments made by this section shall apply to transactions entered into after the date of the enactment of this Act.

SEC. 212. PENALTIES FOR UNDERPAYMENTS.

(a) Penalty for Underpayments Attributable to Transactions Lacking Economic Substance-

(1) IN GENERAL- Subsection (b) of section 6662 is amended by inserting after paragraph (5) the following new paragraph:

`(6) Any disallowance of claimed tax benefits by reason of a transaction lacking economic substance (within the meaning of section 7701(p)) or failing to meet the requirements of any similar rule of law.'.

(2) INCREASED PENALTY FOR NONDISCLOSED TRANSACTIONS- Section 6662 is amended by adding at the end the following new subsection:

`(i) Increase in Penalty in Case of Nondisclosed Noneconomic Substance Transactions-

`(1) IN GENERAL- To the extent that a portion of the underpayment to which this section applies is attributable to one or more nondisclosed noneconomic substance transactions, subsection (a) shall be applied with respect to such portion by substituting `40 percent' for `20 percent'.

`(2) NONDISCLOSED NONECONOMIC SUBSTANCE TRANSACTIONS- For purposes of this subsection, the term `nondisclosed noneconomic substance transaction' means any portion of a transaction described in subsection (b)(6) with respect to which the relevant facts affecting the tax treatment are not adequately disclosed in the return nor in a statement attached to the return.

`(3) SPECIAL RULE FOR AMENDED RETURNS- Except as provided in regulations, in no event shall any amendment or supplement to a return of tax be taken into account for purposes of this subsection 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.'.

(3) CONFORMING AMENDMENT- Subparagraph (B) of section 6662A(e)(2) is amended --

(A) by striking `section 6662(h)' and inserting `subsection (h) or (i) of section 6662', and

(B) by striking `GROSS VALUATION MISSTATEMENT PENALTY' in the heading and inserting `CERTAIN INCREASED UNDERPAYMENT PENALTIES'.

(b) Reasonable Cause Exception Not Applicable to Noneconomic Substance Transactions, Tax Shelters, and Certain Large Corporations- Subsection (c) of section 6664 is amended --

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

(2) by striking `paragraph (2)' in paragraph (4), as so redesignated, and inserting `paragraph (3)', and

(3) by inserting after paragraph (1) the following new paragraph:

`(2) EXCEPTION FOR NONECONOMIC SUBSTANCE TRANSACTIONS, TAX SHELTERS, AND CERTAIN LARGE CORPORATIONS- Paragraph (1) shall not apply --

`(A) to any portion of an underpayment which is attributable to one or more tax shelters (as defined in section 6662(d)(2)(C)) or transactions described in section 6662(b)(6), and

`(B) to any taxpayer if such taxpayer is a specified large corporation (as defined in section 6662(d)(2)(D)(ii)).'.

(c) Application of Penalty for Erroneous Claim for Refund or Credit to Noneconomic Substance Transactions- Section 6676 is amended by redesignating subsection (c) as subsection (d) and inserting after subsection (b) the following new subsection:

`(c) Noneconomic Substance Transactions Treated as Lacking Reasonable Basis- For purposes of this section, any excessive amount which is attributable to any transaction described in section 6662(b)(6) shall not be treated as having a reasonable basis.'.

(d) Special Understatement Reduction Rule for Certain Large Corporations-

(1) IN GENERAL- Paragraph (2) of section 6662(d) is amended by adding at the end the following new subparagraph:

`(D) SPECIAL REDUCTION RULE FOR CERTAIN LARGE CORPORATIONS-

`(i) IN GENERAL- In the case of any specified large corporation --

`(I) subparagraph (B) shall not apply, and

`(II) the amount of the understatement under subparagraph (A) shall be reduced by that portion of the understatement which is attributable to any item with respect to which the taxpayer has a reasonable belief that the tax treatment of such item by the taxpayer is more likely than not the proper tax treatment of such item.

`(ii) SPECIFIED LARGE CORPORATION-

`(I) IN GENERAL- For purposes of this subparagraph, the term `specified large corporation' means any corporation with gross receipts in excess of $100,000,000 for the taxable year involved.

`(II) AGGREGATION RULE- All persons treated as a single employer under section 52(a) shall be treated as one person for purposes of subclause (I).'.

(2) CONFORMING AMENDMENT- Subparagraph (C) of section 6662(d)(2) is amended by striking `Subparagraph (B)' and inserting `Subparagraphs (B) and (D)(i)(II)'.

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

Subtitle C --Other Provisions