SEC. 453. PENALTIES FOR UNDERPAYMENTS.

[a] Penalty for Underpayments Attributable to Transactions Lacking Economic Substance-

[1] IN GENERAL- Subsection [b] of section 6662 of the Internal Revenue Code of 1986 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[o]] or failing to meet the requirements of any similar rule of law.'.

[2] INCREASED PENALTY FOR NONDISCLOSED TRANSACTIONS- Section- 6662 of such Code 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- In the case of any portion of an underpayment which 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] of such Code is amended--

[A] by striking 'section 6662[h]' and inserting 'subsections [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 or Publicly Traded Persons- Subsection [c] of section 6664 of such Code 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- Paragraph [1] shall not apply to--

'[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 person [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 of such Code 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 or Publicly Traded Persons-

[1] IN GENERAL- Paragraph [2] of section 6662[d] of such Code is amended by adding at the end the following new subparagraph:

'[D] SPECIAL REDUCTION RULE FOR CERTAIN LARGE OR PUBLICLY TRADED PERSONS-

'[i] IN GENERAL- In the case of any specified person--

'[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 PERSON- For purposes of this subparagraph, the term 'specified person' means--

'[I] any person required to file periodic or other reports under section 13 of the Securities Exchange Act of 1934, and

'[II] any corporation with gross receipts in excess of $100,000,000 for the taxable year involved.

All persons treated as a single employer under section 52[a] shall be treated as one person for purposes of subclause [II].'.

[2] CONFORMING AMENDMENT- Subparagraph [C] of section 6662[d][2] of such Code 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 transactions entered into after the date of the enactment of this Act.