To amend the Internal Revenue Code of 1986 to curb tax abuses by disallowing tax benefits claimed to arise from transactions without substantial economic substance, and for other purposes.

July 17, 2001

Mr. DOGGETT (for himself, Mr. RANGEL, Mr. STARK, Mr. MATSUI, Mr. COYNE, Mr. LEVIN, Mr. MCDERMOTT, Mr. KLECZKA, Mr. LEWIS of Georgia, Mr. NEAL of Massachusetts, Mr. MCNULTY, Mr. JEFFERSON, Mr. BECERRA, Mrs. THURMAN, Mr. ALLEN, Mr. BONIOR, Mr. HINCHEY, Mr. MCGOVERN, Mr. GEORGE MILLER of California, Ms. SANCHEZ, Ms. SCHAKOWSKY, Mr. TIERNEY, and Mrs. JONES of Ohio) introduced the following bill; which was referred to the Committee on Ways and Means

To amend the Internal Revenue Code of 1986 to curb tax abuses by disallowing tax benefits claimed to arise from transactions without substantial economic substance, and for other purposes.

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

SECTION 1. SHORT TITLE.

This Act may be cited as the `Abusive Tax Shelter Shutdown Act of 2001'.

SEC. 2. 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 Act 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.

TITLE I--CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE

SEC. 101. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

(a) IN GENERAL- Section 7701 of the Internal Revenue Code of 1986 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 income 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 are substantially in excess of the present value of the anticipated economic returns of the person lending the money or providing the financial capital. A public offering shall be treated as a borrowing, or an acquisition of financial capital, from a tax-indifferent party if it is reasonably expected that at least 50 percent of the offering will be placed with tax-indifferent parties.

`(B) ARTIFICIAL INCOME SHIFTING AND BASIS ADJUSTMENTS- The form of a transaction with a tax-indifferent party shall not be respected if--

`(i) it results in an allocation of income or gain to the tax-indifferent party in excess of such party's economic income or gain, or

`(ii) it results in a basis adjustment or shifting of basis on account of overstating the income or gain of the tax-indifferent party.

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

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

`(B) TAX-INDIFFERENT PARTY- The term `tax-indifferent party' means any person or entity not subject to tax imposed by subtitle A. A person shall be treated as a tax-indifferent party with respect to a transaction if the items taken into account with respect to the transaction have no substantial impact on such person's liability under subtitle A.

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

`(D) TREATMENT OF LESSORS- In applying 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 referred to in section 6662(i)(2), and the requirements of this subsection shall be construed as being in addition to any such other rule of law.'

(b) EFFECTIVE DATE- The amendments made by this section shall apply to transactions after the date of the enactment of this Act.

TITLE II--PENALTIES

SEC. 201. INCREASE IN PENALTY ON UNDERPAYMENTS RESULTING FROM FAILURE TO SATISFY CERTAIN COMMON LAW RULES.

(a) IN GENERAL- Section 6662 of the Internal Revenue Code of 1986 (relating to imposition of accuracy-related penalty) is amended by adding at the end the following new subsection:

`(i) INCREASE IN PENALTY IN CASE OF FAILURE TO SATISFY CERTAIN COMMON LAW RULES-

`(1) IN GENERAL- To the extent that an underpayment is attributable to a disallowance described in paragraph (2)--

`(A) subsection (a) shall be applied with respect to such portion by substituting `40 percent' for `20 percent', and

`(B) subsection (d)(2)(B) and section 6664(c) shall not apply.

`(2) DISALLOWANCES DESCRIBED- A disallowance is described in this subsection if such disallowance is on account of--

`(A) a lack of economic substance (within the meaning of section 7701(m)(1)) for the transaction giving rise to the claimed benefit or the transaction was not respected under section 7701(m)(2),

`(B) a lack of business purpose for such transaction or because the form of the transaction does not reflect its substance, or

`(C) a failure to meet the requirements of any other similar rule of law.

`(3) INCREASE IN PENALTY NOT TO APPLY IF COMPLIANCE WITH DISCLOSURE REQUIREMENTS- Paragraph (1)(A) shall not apply if the taxpayer discloses to the Secretary (as such time and in such manner as the Secretary shall prescribe) such information as the Secretary shall prescribe with respect to such transaction.'.

(b) MODIFICATIONS TO PENALTY ON SUBSTANTIAL UNDERSTATEMENT OF INCOME TAX-

(1) MODIFICATION OF THRESHOLD- Subparagraph (A) of section 6662(d)(1) of such Code is amended to read as follows:

`(A) IN GENERAL- For purposes of this section, 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) $500,000, or

`(ii) the greater of 10 percent of the tax required to be shown on the return for the taxable year or $5,000.'

(2) MODIFICATION OF PENALTY ON TAX SHELTERS, ETC- Clauses (i) and (ii) of section 6662(d)(2)(C) of such Code are amended to read as follows:

`(i) IN GENERAL- Subparagraph (B) shall not apply to any item attributable to a tax shelter.'

`(ii) DETERMINATION OF UNDERSTATEMENTS WITH RESPECT TO TAX SHELTERS, ETC- In any case in which there are one or more items attributable to a tax shelter, the amount of the understatement under subparagraph (A) shall in no event be less than the amount of understatement which would be determined for the taxable year if all items shown on the return which are not attributable to any tax shelter were treated as being correct. A similar rule shall apply in cases to which subsection (i) applies, whether or not the items are attributable to a tax shelter.'

(c) TREATMENT OF AMENDED RETURNS- Subsection (a) of section 6664 of such Code is amended by adding at the end the following new sentence: `For purposes of this subsection, an amended return shall be disregarded if such return is filed on or after the date the taxpayer is first contacted by the Secretary regarding the examination of the return.'

SEC. 202. PENALTY ON PROMOTERS OF TAX AVOIDANCE STRATEGIES WHICH HAVE NO ECONOMIC SUBSTANCE, ETC.

(a) PENALTY-

(1) IN GENERAL- Section 6700 of the Internal Revenue Code of 1986 (relating to promoting abusive tax shelters, etc.) is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection:

`(c) PENALTY ON SUBSTANTIAL PROMOTERS FOR PROMOTING TAX AVOIDANCE STRATEGIES WHICH HAVE NO ECONOMIC SUBSTANCE, ETC-

`(1) IMPOSITION OF PENALTY- Any substantial promoter of a tax avoidance strategy shall pay a penalty in the amount determined under paragraph (2) with respect to such strategy if such strategy (or any similar strategy promoted by such promoter) fails to meet the requirements of any rule of law referred to in section 6662(i)(2).

`(2) AMOUNT OF PENALTY- The penalty under paragraph (1) with respect to a promoter of a tax avoidance strategy is an amount equal to 100 percent of the gross income derived (or to be derived) by such promoter from such strategy.

`(3) TAX AVOIDANCE STRATEGY- For purposes of this subsection, the term `tax avoidance strategy' means any entity, plan, arrangement, or transaction a significant purpose of the structure of which is the avoidance or evasion of Federal income tax.

`(4) SUBSTANTIAL PROMOTER- For purposes of this subsection--

`(A) IN GENERAL- The term `substantial promoter' means, with respect to any tax avoidance strategy, any promoter if--

`(i) such promoter offers such strategy to more than 1 potential participant, and

`(ii) such promoter may receive fees in excess of $500,000 in the aggregate with respect to such strategy.

`(B) AGGREGATION RULES- For purposes of this paragraph--

`(i) RELATED PERSONS- A promoter and all persons related to such promoter shall be treated as 1 person who is a promoter.

`(ii) SIMILAR STRATEGIES- All similar tax avoidance strategies of a promoter shall be treated as 1 tax avoidance strategy.

`(C) PROMOTER- The term `promoter' means any person who participates in the promotion, offering, or sale of the tax avoidance strategy.

`(D) RELATED PERSON- Persons are related if they bear a relationship to each other which is described in section 267(b) or 707(b).

`(4) COORDINATION WITH SUBSECTION (a)- No penalty shall be imposed by this subsection on any promoter with respect to a tax avoidance strategy if a penalty is imposed under subsection (a) on such promoter with respect to such strategy.'

(2) CONFORMING AMENDMENT- Subsection (d) of section 6700 of such Code is amended--

(A) by striking `PENALTY' and inserting `PENALTIES', and

(B) by striking `penalty' the first place it appears in the text and inserting `penalties'.

(b) INCREASE IN PENALTY ON PROMOTING ABUSIVE TAX SHELTERS- The first sentence of section 6700(a) of such Code is amended by striking `a penalty equal to' and all that follows and inserting `a penalty equal to the greater of $1,000 or 100 percent of the gross income derived (or to be derived) by such person from such activity.'

SEC. 203. MODIFICATIONS OF PENALTIES FOR AIDING AND ABETTING UNDERSTATEMENT OF TAX LIABILITY INVOLVING TAX SHELTERS.

(a) IMPOSITION OF PENALTY- Section 6701(a) of the Internal Revenue Code of 1986 (relating to imposition of penalty) is amended to read as follows:

`(a) IMPOSITION OF PENALTIES-

`(1) IN GENERAL- Any person--

`(A) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document,

`(B) who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and

`(C) who knows that such portion (if so used) would result in an understatement of the liability for tax of another person,

shall pay a penalty with respect to each such document in the amount determined under subsection (b).

`(2) CERTAIN TAX SHELTERS- If--

`(A) any person--

`(i) aids or assists in, procures, or advises with respect to the creation, organization, sale, implementation, management, or reporting of a tax shelter (as defined in section 6662(d)(2)(C)(iii)) or of any entity, plan, arrangement, or transaction that fails to meet the requirements of any rule of law referred to in section 6662(i)(2), and

`(ii) opines, advises, represents, or otherwise indicates (directly or indirectly) that the taxpayer's tax treatment of items attributable to such tax shelter or such entity, plan, arrangement, or transaction and giving rise to an understatement of tax liability would more likely than not prevail or not give rise to a penalty,

`(B) such opinion, advice, representation, or indication is unreasonable,

then such person shall pay a penalty in the amount determined under subsection (b). If a standard higher than the more likely than not standard was used in any such opinion, advice, representation, or indication, then subparagraph (A)(ii) shall be applied as if such standard were substituted for the more likely than not standard.'

(b) AMOUNT OF PENALTY- Section 6701(b) of such Code (relating to amount of penalty) is amended--

(1) by inserting `or (3)' after `paragraph (2)' in paragraph (1),

(2) by striking `subsection (a)' each place it appears and inserting `subsection (a)(1)', and

(3) by redesignating paragraph (3) as paragraph (4) and by adding after paragraph (2) the following:

`(3) TAX SHELTERS- In the case of--

`(A) a penalty imposed by subsection (a)(1) which involves a return, affidavit, claim, or other document relating to a tax shelter or an entity, plan, arrangement, or transaction that fails to meet the requirements of any rule of law referred to in section 6662(i)(2), and

`(B) any penalty imposed by subsection (a)(2),

the amount of the penalty shall be equal to 100 percent of the gross proceeds derived (or to be derived) by the person in connection with the tax shelter or entity, plan, arrangement, or transaction.'

(c) REFERRAL AND PUBLICATION- If a penalty is imposed under section 6701(a)(2) of such Code (as added by subsection (a)) on any person, the Secretary of the Treasury shall--

(1) notify the Director of Practice of the Internal Revenue Service and any appropriate State licensing authority of the penalty and the circumstances under which it was imposed, and

(2) publish the identity of the person and the fact the penalty was imposed on the person.

(d) CONFORMING AMENDMENTS-

(1) Section 6701(d) of such Code is amended by striking `Subsection (a)' and inserting `Subsection (a)(1)'.

(2) Section 6701(e) of such Code is amended by striking `subsection (a)(1)' and inserting `subsection (a)(1)(A)'.

(3) Section 6701(f) of such Code is amended by inserting `, tax shelter, or entity, plan, arrangement, or transaction' after `document' each place it appears.

SEC. 204. FAILURE TO MAINTAIN LISTS.

Section 6708(a) of the Internal Revenue Code of 1986 (relating to failure to maintain lists of investors in potentially abusive tax shelters) is amended by adding at the end the following: `In the case of a tax shelter (as defined in section 6662(d)(2)(C)(iii)) or entity, plan, arrangement, or transaction that fails to meet the requirements of any rule of law referred to in section 6662(i)(2), the penalty shall be equal to 50 percent of the gross proceeds derived (or to be derived) from each person with respect to which there was a failure and the limitation of the preceding sentence shall not apply.'

SEC. 205. PENALTY FOR FAILING TO DISCLOSE REPORTABLE TRANSACTION.

(a) IN GENERAL- Part I of subchapter B of chapter 68 of the Internal Revenue Code of 1986 (relating to assessable penalties) is amended by inserting after section 6707 the following new section:

`SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE TAX SHELTER INFORMATION WITH RETURN.

`(a) IMPOSITION OF PENALTY- Any person who fails to include with its return of Federal income tax any information required to be included under section 6011 with respect to a reportable transaction shall pay a penalty in the amount determined under subsection (b). No penalty shall be imposed on any such failure if it is shown that such failure is due to reasonable cause.

`(b) AMOUNT OF PENALTY-

`(1) IN GENERAL- The amount of the penalty under subsection (a) shall be equal to the greater of--

`(A) 5 percent of any increase in Federal tax which results from a difference between the taxpayer's treatment (as shown on its return) of items attributable to the reportable transaction to which the failure relates and the proper tax treatment of such items, or

`(B) $100,000.

For purposes of subparagraph (A), the last sentence of section 6664(a) shall apply.

`(2) LISTED TRANSACTION- If the failure under subsection (a) relates to 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, paragraph (1)(A) shall be applied by substituting `10 percent' for `5 percent'.

`(c) REPORTABLE TRANSACTION- For purposes of this section, the term `reportable transaction' means any transaction with respect to which information is required under section 6011 to be included with a taxpayer's return of tax because, as determined under regulations prescribed under section 6011, such transaction has characteristics which may be indicative of a tax avoidance transaction.

`(d) COORDINATION WITH OTHER PENALTIES- The penalty imposed by this section is in addition to any penalty imposed under section 6662.'

(b) CONFORMING AMENDMENT- The table of sections for part I of subchapter B of chapter 68 of such Code is amended by inserting after the item relating to section 6707 the following:

`Sec. 6707A. Penalty for failure to include tax shelter information on return.'

SEC. 206. REGISTRATION OF CERTAIN TAX SHELTERS WITHOUT CORPORATE PARTICIPANTS.

Section 6111(d)(1)(A) of the Internal Revenue Code of 1986 (relating to certain confidential arrangements treated as tax shelters) is amended by striking `for a direct or indirect participant which is a corporation'.

SEC. 207. EFFECTIVE DATES.

(a) IN GENERAL- Except as provided in subsections (b) and (c), the amendments made by this title shall apply to transactions after the date of the enactment of this Act.

(b) SECTION 201- The amendments made by subsections (b) and (c) of section 201 shall apply to taxable years ending after the date of the enactment of this Act.

(c) SECTION 202- The amendments made by subsection (a) of section 202 shall apply to any tax avoidance strategy (as defined in section 6700(c) of the Internal Revenue Code of 1986, as amended by this title) interests in which are offered to potential participants after the date of the enactment of this Act.

(d) SECTION 206- The amendment made by section 206 shall apply to any tax shelter interest which is offered to potential participants after the date of the enactment of this Act.

TITLE III--LIMITATIONS ON IMPORTATION OR TRANSFER OF BUILT-IN LOSSES

SEC. 301. LIMITATION ON IMPORTATION OF BUILT-IN LOSSES.

(a) IN GENERAL- Section 362 of the Internal Revenue Code of 1986 (relating to basis to corporations) is amended by adding at the end the following new subsection:

`(e) LIMITATION ON IMPORTATION OF BUILT-IN LOSSES-

`(1) 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 paragraph (2) which is acquired in such transaction shall (notwithstanding subsections (a) and (b)) be its fair market value immediately after such transaction.

`(2) PROPERTY DESCRIBED- For purposes of paragraph (1), property is described in this paragraph if--

`(A) 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

`(B) 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.

`(3) IMPORTATION OF NET BUILT-IN LOSS- For purposes of paragraph (1), there is an importation of a net built-in loss in a transaction if the transferee's aggregate adjusted bases of property described in paragraph (2) which is transferred in such transaction would (but for this subsection) exceed the fair market value of such property immediately after such transaction.'

(b) COMPARABLE TREATMENT WHERE LIQUIDATION- Paragraph (1) of section 334(b) of such Code (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)(2) 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. 302. DISALLOWANCE OF PARTNERSHIP LOSS TRANSFERS.

(a) TREATMENT OF CONTRIBUTED PROPERTY WITH BUILT-IN LOSS- Paragraph (1) of section 704(c) of the Internal Revenue Code of 1986 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 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 of such Code (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 of such Code 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 of such Code is amended by adding at the end the following new subsection:

`(d) SUBSTANTIAL BUILT-IN LOSS- 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 110 percent of the basis of such partner's interest in the partnership.'

(4) CLERICAL AMENDMENTS-

(A) The section heading for section 743 of such Code 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 of such Code 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 of such Code (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 of such Code is amended by inserting `or unless there is a substantial basis reduction' after `section 754 is in effect'.

(3) SUBSTANTIAL BASIS REDUCTION- Section 734 of such Code is amended by adding at the end the following new subsection:

`(d) SUBSTANTIAL BASIS REDUCTION- 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 10 percent of the aggregate adjusted basis of partnership property immediately after the distribution.'

(4) CLERICAL AMENDMENTS-

(A) The section heading for section 734 of such Code 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 of such Code 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 (a) shall apply to transfers after the date of the enactment of this Act.

(3) SUBSECTION (c)- The amendments made by subsection (a) shall apply to distributions after the date of the enactment of this Act.

END