Carl Levin

Mr. LEVIN

Mr. LEVIN. I wonder if I could be yielded 30 additional seconds.

Mr. LEVIN. The majority of the American people believe that a deeper military involvement in Iraq won't make success more likely. I believe a majority of Senators feel the same way. I hope the majority will be allowed to so vote. If we believe plunging into Baghdad neighborhoods with more American troops will not increase chances of success, we are dutybound to say so, and a minority of Senators should not thwart that expression. We owe that to the troops. We owe that to their families, and we owe that to the American people. I yield the floor.

Mr. LEVIN

Mr. LEVIN. Mr. President, offshore tax haven and tax shelter abuses are undermining the integrity of our tax system, robbing the Treasury of more than $100 billion each year, and shifting the tax burden from high income persons and companies onto the backs of middle income families. We can shut down a lot of these abuses if we have the political will. That's why I am introducing today, along with Senators Norm Coleman and Barack Obama, the Stop Tax Haven Abuse Act which offers powerful new tools to do just that. We all know there are billions of dollars in taxes that are owed but not paid each year. It's called the tax gap. The latest estimate is $345 billion in unpaid taxes each year owed by individuals, corporations, and other organizations willing to rob Uncle Sam and offload their tax burden onto the backs of honest taxpayers. We also estimate that, of that $345 billion annual tax gap, offshore tax haven abuses account for as much as $100 billion. Abusive tax shelters, both domestic and offshore, account for additional billions in unpaid taxes per year. To pay for critical needs, to avoid going even deeper into debt, and to protect honest taxpayers, we must shut these abuses down. The legislation we are introducing today is the product of years of work by the Permanent Subcommittee on Investigations. I serve as Chairman of that Subcommittee. Senator Coleman is the ranking Republican, and Senator Obama is a valued Subcommittee member. Through reports and hearings, the Subcommittee has worked for years to expose and combat abusive tax havens and tax shelters. In the last Congress, we confronted these twin threats to our treasury by introducing S. 1565, the Tax Shelter and Tax Haven Reform Act. Today's bill is an improved version of that legislation, reflecting not only the Subcommittee's additional investigative work but also innovative ideas to end the use of tax havens and to stop unethical tax advisers from aiding and abetting U.S. tax evasion. A tax haven is a foreign jurisdiction that maintains corporate, bank, and tax secrecy laws and industry practices that make it very difficult for other countries to find out whether their citizens are using the tax haven to cheat on their taxes. In effect, tax havens sell secrecy to attract clients to their shores. They peddle secrecy the way other countries advertise high quality services. That secrecy is used to cloak tax evasion and other misconduct, and it is that offshore secrecy that is targeted in our bill. Abusive tax shelters are another target. Abusive tax shelters are complicated transactions promoted to provide tax benefits unintended by the tax code. They are very different from legitimate tax shelters, such as deducting the interest paid on your home mortgage or Congressionally approved tax deductions for building affordable housing. Some abusive tax shelters involve complicated domestic transactions; others make use of offshore shenanigans. All abusive tax shelters are marked by one characteristic: there is no real economic or business rationale other than tax avoidance. As Judge Learned Hand wrote in Gregory v. Helvering, they are ``entered upon for no other motive but to escape taxation.'' Abusive tax shelters are usually tough to prosecute. Crimes such as terrorism, murder, and fraud produce instant recognition of the immorality involved. Abusive tax shelters, by contrast, are often ``MEGOs,'' meaning ``My Eyes Glaze Over.'' Those who cook up these concoctions count on their complexity to escape scrutiny and public ire. But regardless of how complicated or eye-glazing, the hawking of abusive tax shelters by tax professionals like accountants, bankers, investment advisers, and lawyers to thousands of people like late- night, cut-rate T.V. bargains is scandalous, and we need to stop it. Hiding tax schemes through offshore companies and bank accounts in tax havens with secrecy laws also needs to be stopped cold. It's up to Congress to do just that. Today, I would like to take some time to cut through the haze of these schemes to describe them for what they really are and explain what our bill would do to stop them. First, I will look at our investigation into offshore tax havens and discuss the provisions we have included in this bill to combat them. Then, I will turn to abusive tax shelters and our proposed remedies. For many years, the Permanent Subcommittee on Investigations has been looking at the problem of offshore corporate, bank, and tax secrecy laws and practices that help taxpayers dodge their U.S. tax obligations by preventing U.S. tax authorities from gaining access to key financial and beneficial ownership information. The Tax Justice Network, an international non-profit organization dedicated to fighting tax evasion, recently estimated that wealthy individuals worldwide have stashed $11.5 trillion of their assets in offshore tax havens. At one Subcommittee hearing, a former owner of an offshore bank in the Cayman Islands testified that he believed 100 percent of his former bank clients were engaged in tax evasion. He said that almost all were from the United States and had taken elaborate measures to avoid IRS detection of their money transfers. He also expressed confidence that the offshore government that licensed his bank would vigorously defend client secrecy in order to continue attracting business. In a hearing held in August 2006, the Subcommittee released a staff report with six case studies describing how U.S. individuals are using offshore tax havens to evade U.S. taxes. In one case, two brothers from Texas, Sam and Charles Wyly, established 58 offshore trusts and corporations, and operated them for more than 13 years without alerting U.S. authorities. To move funds abroad, the brothers transferred over $190 million in stock option compensation they had received from U.S. publicly traded companies to the offshore corporations. They claimed that they did not have to pay tax on this compensation, because, in exchange, the offshore corporations provided them with private annuities which would not begin to make payments to them until years later. In the meantime, the brothers directed the offshore corporations to cash in the stock options and start investing the money. The brothers failed to disclose these offshore stock transactions to the SEC despite their position as directors and major shareholders in the relevant companies. The Subcommittee was able to trace more than $700 million in stock option proceeds that the brothers invested in various ventures they controlled, including two hedge funds, an energy company, and an offshore insurance firm. They also used the offshore funds to purchase real estate, jewelry, and artwork for themselves and their family members, claiming they could use these offshore dollars to advance their personal and business interests without having to pay any taxes on the offshore income. The Wylys were able to carry on these tax maneuvers in large part because all of their activities were shrouded in offshore secrecy. In another of the case histories, six U.S. taxpayers relied on phantom stock trades between two offshore shell companies to generate fake stock losses which were then used to shelter billions in income. This offshore tax shelter scheme, known as the POINT Strategy, was devised by Quellos, a U.S. securities firm headquartered in Seattle; coordinated with a European financial firm known as Euram Advisers; and blessed by opinion letters issued by two prominent U.S. law firms, Cravath Swaine and Bryan Cave. The two offshore shell companies at the center of the strategy, known as Jackstones and Barneville, supposedly created a stock portfolio worth $9.6 billion. However, no cash or stock transfers ever took place. Moreover, the shell companies that conducted these phantom trades are so shrouded in offshore secrecy that no one will admit to knowing who owns them. One of the taxpayers, Haim Saban, used the scheme to shelter about $1.5 billion from U.S. taxes. Another, Robert Wood Johnson IV, sought to shelter about $145 million. Both have since agreed to settle with the IRS. The persons examined by the Subcommittee are far from the only U.S. taxpayers engaging in these types of offshore tax abuses. Recent estimates are that U.S. individuals are using offshore tax schemes to avoid payment of $40 to $70 billion in taxes each year. Corporations are also using tax havens to avoid payment of U.S. taxes. A recent IRS study estimates that U.S. corporations use offshore tax havens to avoid about $30 billion in U.S. taxes each year. A GAO report I released with Senator Dorgan in 2004 found that nearly two- thirds of the top 100 companies doing business with the United States government had one or more subsidiaries in a tax haven. One company, Tyco International, had 115. Enron, in its heyday, had over 400 Cayman subsidiaries. Data released by the Commerce Department further demonstrates the extent of U.S. corporate use of tax havens, indicating that, as of 200l, almost half of all foreign profits of U.S. corporations were in tax havens. A study released by the journal Tax Notes in September 2004 found that American companies were able to shift $149 billion of profits to 18 tax haven countries in 2002, up 68 percent from $88 billion in 1999. Here's just one simplified example of the gimmicks being used by corporations to transfer taxable income from the United States to tax havens to escape taxation. Suppose a profitable U.S. corporation establishes a shell corporation in a tax haven. The shell corporation has no office or employees, just a mailbox address. The U.S. parent transfers a valuable patent to the shell corporation. Then, the U.S. parent and all of its subsidiaries begin to pay a hefty fee to the shell corporation for use of the patent, reducing its U.S. income through deducting the patent fees and thus shifting taxable income out of the United States to the shell corporation. The shell corporation declares a portion of the fees as profit, but pays no U.S. tax since it is a tax haven resident. The icing on the cake is that the shell corporation can then ``lend'' the income it has accumulated from the fees back to the U.S. parent for its use. The parent, in turn, pays ``interest'' on the ``loans'' to the shell corporation, shifting still more taxable income out of the United States to the tax haven. This example highlights just a few of the tax haven ploys being used by some U.S. corporations to escape paying their fair share of taxes here at home. Our Subcommittee's most recent investigation into offshore abuses highlighted the extent to which offshore secrecy rules make it possible for taxpayers to participate in illicit activity with little fear of getting caught. Through a series of case studies, the Subcommittee showed how U.S. taxpayers, with the help of offshore service providers, financial institutions, and sometimes highly credentialed tax professionals, set up entities in such secrecy jurisdictions as the Isle of Man, the Cayman Islands, and the island of Nevis, claimed these offshore entities were independent but, in fact, controlled them through compliant offshore trustees, officers, directors, and corporate administrators. Because of the offshore secrecy laws and practices, these offshore service providers could and did go to extraordinary lengths to protect their U.S. clients' identities and financial information from U.S. tax and regulatory authorities, making it extremely difficult, if not impossible, for U.S. law enforcement authorities to get the information they need to enforce U.S. tax laws. The extent of the offshore tax abuses documented by the Subcommittee during this last year intensified our determination to find new ways to combat offshore secrecy and restore the ability of U.S. tax enforcement to pursue offshore tax cheats. I'd now like to describe the key measures in the Stop Tax Havens Act being introduced today, which includes the use of presumptions to overcome offshore secrecy barriers, special measures to combat persons who impede U.S. tax enforcement, and greater disclosure of offshore transactions. Our last Subcommittee staff report provided six case histories detailing how U.S. taxpayers are using offshore tax havens to avoid payment of the taxes they owe. These case histories examined an Internet based company that helps persons obtain offshore entities and accounts; U.S. promoters that designed complex offshore structures to hide client assets, even providing clients with a how-to manual for going offshore; U.S. taxpayers who diverted business income offshore through phony loans and invoices; a one-time tax dodge that deducted phantom offshore stock losses from real U.S. stock income to shelter that income from U.S. taxes; and the 13-year offshore empire built by Sam and Charles Wyly. Each of these case histories presented the same fact pattern in which the U.S. taxpayer, through lawyers, banks, or other representatives, set up offshore trusts, corporations, or other entities which had all the trappings of independence but, in fact, were controlled by the U.S. taxpayer whose directives were implemented by compliant offshore personnel acting as the trustees, officers, directors or nominee owners of the offshore entities. In the case of the Wylys, the brothers and their representatives communicated Wyly directives to a so-called trust protector who then relayed the directives to the offshore trustees. In the 13 years examined by the Subcommittee, the offshore trustees never once rejected a Wyly request and never once initiated an action without Wyly approval. They simply did what they were told. A U.S. taxpayer in another case history told the Subcommittee that the offshore personnel who nominally owned and controlled his offshore entities, in fact, always followed his directions, describing himself as the ``puppet master'' in charge of his offshore holdings. When the Subcommittee discussed these case histories with financial administrators from the Isle of Man, they explained that none of the offshore personnel were engaged in any wrongdoing, because their laws permit foreign clients to transmit detailed, daily instructions to offshore service providers on how to handle offshore assets, so long as it is the offshore trustee or corporate officer who gives the final order to buy or sell the assets. They explained that, under their law, an offshore entity is considered legally independent from the person directing its activities so long as that person follows the form of transmitting ``requests'' to the offshore personnel who retain the formal right to make the decisions, even though the offshore personnel always do as they are asked. The Subcommittee case histories illustrate what the tax literature and law enforcement experience have shown for years: that the business model followed in all offshore secrecy jurisdictions is for compliant trustees, corporate administrators, and financial institutions to provide a veneer of independence while ensuring that their U.S. clients retain complete and unfettered control over ``their'' offshore assets. That's the standard operating procedure offshore. Offshore service providers pretend to own or control the offshore trusts, corporations, and accounts they help establish, but what they really do is whatever their clients tell them to do. In truth, the independence of offshore entities is a legal fiction, and it is past time to pull back the curtain on the reality hiding behind the legal formalities. The reality behind these offshore practices makes a mockery of U.S. laws that normally view trusts and corporations as independent entities. They invite game-playing and tax evasion. To combat these offshore abuses, our bill takes them head on in a number of ways. The first section of our bill, Section 101, tackles this issue by creating several rebuttable evidentiary presumptions that would strip the veneer of independence from the U.S. person involved with offshore entities, transactions, and accounts, unless that U.S. person presents clear and convincing evidence to the contrary. These presumptions would apply only in civil judicial or administrative tax or securities enforcement proceedings examining transactions, entities, or accounts in offshore secrecy jurisdictions. These presumptions would put the burden of producing evidence from the offshore secrecy jurisdiction on the taxpayer who chose to do business there, and who has access to the information, rather than on the Federal Government which has little or no practical ability to get the information. The creation of these presumptions implements a bipartisan recommendation in the August 2006 Subcommittee report on tax haven abuses. The bill would establish three evidentiary presumptions that could be used in a civil tax enforcement proceeding: (1) a presumption that a U.S. taxpayer who ``formed, transferred assets to, was a beneficiary of, or received money or property'' from an offshore entity, such as a trust or corporation, is in control of that entity; (2) a presumption that funds or other property received from offshore are taxable income, and that funds or other property transferred offshore have not yet been taxed; and (3) a presumption that a financial account controlled by a U.S. taxpayer in a foreign country contains enough money--$10,000--to trigger an existing statutory reporting threshold and allow the IRS to assert the minimum penalty for nondisclosure of the account by the taxpayer. In addition, the bill would establish two evidentiary presumptions applicable to civil proceedings to enforce U.S. securities laws. One would specify that if a director, officer, or major shareholder of a U.S. publicly traded corporation were associated with an offshore entity, that person would be presumed to control that offshore entity. The second provides that securities nominally owned by an offshore entity are presumed to be beneficially owned by any U.S. person who controlled the offshore entity. These presumptions are rebuttable, which means that the U.S. person who is the subject of the proceeding could provide clear and convincing evidence to show that the presumptions were factually inaccurate. To rebut the presumptions, a taxpayer could establish, for example, that an offshore corporation really was controlled by an independent third party, or that money sent from an offshore account really represented a nontaxable gift instead of taxable income. If the taxpayer wished to introduce evidence from a foreign person, such as an offshore banker, corporate officer, or trust administrator, to establish those facts, that foreign person would have to actually appear in the proceeding in a manner that would permit cross examination in order for the taxpayer to rebut the presumption. A simple affidavit from an offshore resident who refused to submit to cross examination in the United States would be insufficient. There are several limitations on these presumptions to ensure their operation is fair and reasonable. First, the evidentiary rules in criminal cases would not be affected by this bill which would apply only to civil proceedings. Second, because the presumptions apply only in enforcement ``proceedings,'' they would not directly affect, for example, a person's reporting obligations on a tax return or SEC filing. The presumptions would come into play only if the IRS or SEC were to challenge a matter in a formal proceeding. Third, the bill does not apply the presumptions to situations where either the U.S. person or the offshore entity is a publicly traded company, because in those situations, even if a transaction were abusive, IRS and SEC officials are generally able to obtain access to necessary information. Fourth, the bill recognizes that certain classes of offshore transactions, such as corporate reorganizations, may not present a potential for abuse, and accordingly authorizes Treasury and the Securities and Exchange Commission to issue regulations or guidance identifying such classes of transactions, to which the presumptions would then not apply. An even more fundamental limitation on the presumptions is that they would apply only to transactions, accounts, or entities in offshore jurisdictions with secrecy laws or practices that unreasonably restrict the ability of the U.S. government to get needed information and which do not have effective information exchange programs with U.S. law enforcement. The bill requires the Secretary of the Treasury to identify those offshore secrecy jurisdictions, based upon the practical experience of the IRS in obtaining needed information from the relevant country. To provide a starting point for Treasury, the bill presents an initial list of 34 offshore secrecy jurisdictions. This list is taken from actual IRS court filings in numerous, recent court proceedings in which the IRS sought permission to obtain information about U.S. taxpayers active in the named jurisdictions. The bill thus identifies the same jurisdictions that the IRS has already named publicly as probable locations for U.S. tax evasion. Federal courts all over the country have consistently found, when presented with the IRS list and supporting evidence, that the IRS had a reasonable basis for concluding that U.S. taxpayers with financial accounts in those countries presented a risk of tax noncompliance. In every case, the courts allowed the IRS to collect information about accounts and transactions in the listed offshore jurisdictions. The bill also provides Treasury with the authority to add or remove jurisdictions from the initial list so that the list can change over time and reflect the actual record of experience of the United States in its dealings with specific jurisdictions around the world. The bill provides two tests for Treasury to use in determining whether a jurisdiction should be identified as an ``offshore secrecy jurisdiction'' triggering the evidentiary presumptions: (1) whether the jurisdiction's secrecy laws and practices unreasonably restrict U.S. access to information, and (2) whether the jurisdiction maintains a tax information exchange process with the United States that is effective in practice. If offshore jurisdictions make a decision to enact secrecy laws and support industry practices furthering corporate, financial, and tax secrecy, that's their business. But when U.S. taxpayers start using those offshore secrecy laws and practices to evade U.S. taxes to the tune of $100 billion per year, that's our business. We have a right to enforce our tax laws and to expect that other countries will not help U.S. tax cheats achieve their ends. The aim of the presumptions created by the bill is to eliminate the unfair advantage provided by offshore secrecy laws that for too long have enabled U.S. persons to conceal their misconduct offshore and game U.S. law enforcement. These presumptions would allow U.S. law enforcement to establish what we all know from experience is normally the case in an offshore jurisdiction--that a U.S. person associated with an offshore entity controls that entity; that money and property sent to or from an offshore entity involves taxable income; and that an offshore account that wasn't disclosed to U.S. authorities should have been. U.S. law enforcement can establish these facts presumptively, without having to pierce the secrecy veil. At the same time, U.S. persons who chose to transact their affairs through an offshore secrecy jurisdiction are given the opportunity to lift the veil of secrecy and demonstrate that the presumptions are factually wrong. We believe these evidentiary presumptions will provide U.S. tax and securities law enforcement with powerful new tools to shut down tax haven abuses. Section 102 of the bill is another innovative approach to combating tax haven abuses. This section would build upon existing Treasury authority to apply an array of sanctions to counter specific foreign money laundering threats by extending that same authority to counter specific foreign tax administration threats. In 2001, the PATRIOT Act gave Treasury the authority under 31 U.S.C. 5318A to require domestic financial institutions and agencies to take special measures with respect to foreign jurisdictions, financial institutions, or transactions found to be of ``primary money laundering concern.'' Once Treasury designates a foreign jurisdiction or financial institution to be of primary money laundering concern, Section 5318A allows Treasury to impose a range of requirements on U.S. financial institutions in their dealings with the designated entity--from requiring U.S. financial institutions, for example, to provide greater information than normal about transactions involving the designated entity, to prohibiting U.S. financial institutions from opening accounts for that foreign entity. This PATRIOT Act authority has been used sparingly, but to telling effect. In some instances Treasury has employed special measures against an entire country, such as Burma, to stop its financial institutions from laundering funds through the U.S. financial system. More often, however, Treasury has used the authority surgically, against a single problem financial institution, to stop laundered funds from entering the United States. The provision has clearly succeeded in giving Treasury a powerful tool to protect the U.S. financial system from money laundering abuses. The bill would authorize Treasury to use that same tool to require U.S. financial institutions to take the same special measures against foreign jurisdictions or financial institutions found by Treasury to be ``impeding U.S. tax enforcement.'' Treasury could, for example, in consultation with the IRS, Secretary of State, and the Attorney General, require U.S. financial institutions that have correspondent accounts for a designated foreign bank to produce information on all of that foreign bank's customers. Alternatively, Treasury could prohibit U.S. financial institutions from opening accounts for a designated foreign bank, thereby cutting off that foreign bank's access to the U.S. financial system. These types of sanctions could be as effective in ending the worst tax haven abuses as they have been in curbing money laundering. In addition to extending Treasury's ability to impose special measures against foreign entities impeding U.S. tax enforcement, the bill would add one new measure to the list of possible sanctions that could be applied to foreign entities: it would allow Treasury to instruct U.S. financial institutions not to authorize or accept credit card transactions involving the designated foreign jurisdiction or financial institution. Denying tax haven banks the ability to issue credit cards for use in the United States, for example, would be a powerful new way to stop U.S. tax cheats from obtaining access to funds hidden offshore. Section 103 of the bill addresses another problem faced by the IRS in cases involving offshore jurisdictions--completing audits in a timely fashion when the evidence needed is located in a jurisdiction with strict secrecy laws. Currently, in the absence of fraud or some other exception, the IRS has 3 years from the date a return is filed to complete an audit and assess any additional tax. Because offshore secrecy laws slow down, and sometimes impede, efforts by the United States to obtain offshore financial and beneficial ownership information, the bill gives the IRS an extra 3 years to complete an audit and assess a tax on transactions involving an offshore secrecy jurisdiction. Of course, in the event that a case turns out to involve actual fraud, this provision of the bill is not intended to limit the rule giving the IRS unlimited time to assess tax in such cases. Tax haven abuses are shrouded in secrecy. Section 104 attempts to pierce that secrecy by creating two new disclosure mechanisms requiring third parties to report on offshore transactions undertaken by U.S. persons. The first disclosure mechanism focuses on U.S. financial institutions that open a U.S. account in the name of an offshore entity, such as an offshore trust or corporation, and learn from an anti-money laundering due diligence review, that a U.S. person is the beneficial owner behind that offshore entity. In the Wyly case history examined by the Subcommittee, for example, three major U.S. financial institutions opened dozens of accounts for offshore trusts and corporations which they knew were associated with the Wyly family. Under current anti-money laundering law, all U.S. financial institutions are supposed to know who is behind an account opened in the name of, for example, an offshore shell corporation or trust. They are supposed to obtain this information to safeguard the U.S. financial system against misuse by terrorists, money launderers, and other criminals. Under current tax law, a bank or securities broker that opens an account for a U.S. person is also required to give the IRS a 1099 form reporting any capital gains earned on the account. However, the bank or securities broker need not file a 1099 form if the account is owned by a foreign entity not subject to U.S. tax law. Problems arise when an account is opened in the name of an offshore entity that the bank or broker knows, from its anti-money laundering review, is owned or controlled by a U.S. person. The U.S. person should be filing a tax return with the IRS reporting the income of the ``controlled foreign corporation.'' However, since he or she knows it is difficult for the IRS to connect an offshore accountholder to a particular taxpayer, he or she may feel safe in not reporting that income. That complacency might change, however, if the U.S. person knew that the bank or broker who opened the account and learned of the connection had a legal obligation to report any account income to the IRS. Under current law, the way the regulations are written and typically interpreted, the bank or broker can treat the foreign account holder as an independent entity separate from the U.S. person, even if it knows that the foreign corporation is merely holding title to the account for the U.S. person, who exercises complete authority over the corporation and benefits from any capital gains earned on the account. Current law thus arguably imposes no duty on the bank or broker to file a 1099 form disclosing the account to the IRS. The bill would strengthen current law by expressly requiring a bank or broker that knows, as a result of its anti-money laundering due diligence or otherwise, that a U.S. person is the beneficial owner of a foreign entity that opened the account, to disclose that account to the IRS by filing a 1099 form reporting account income. This reporting obligation would not require banks or brokers to gather any new information--financial institutions are already required to perform anti-money laundering due diligence for accounts opened by offshore shell entities. The bill would instead require U.S. financial institutions to act on what they already know by filing a 1099 form with the IRS. The second disclosure mechanism created by Section 104 targets U.S. financial institutions that open foreign bank accounts or set up offshore corporations, trusts, or other entities for their U.S. clients. Our investigations have shown that it is common for private bankers and brokers in the United States to provide these services to their wealthy clients, so that the clients do not even need to leave home to set up an offshore structure. The offshore entities can then open both offshore and U.S. accounts and supposedly be treated as foreign account holders for tax purposes. A Subcommittee investigation learned, for example, that Citibank Private Bank routinely offered to its clients private banking services which included establishing one or more offshore shell corporations-- which it called Private Investment Corporations or PICs--in jurisdictions like the Cayman Islands. The paperwork to form the PIC was typically completed by a Citibank affiliate located in the jurisdiction, such as Cititrust, which is a Cayman trust company. Cititrust could then help the PIC open offshore accounts, while Citibank could help the PIC open U.S. accounts. Section 104 would require any U.S. financial institution that directly or indirectly opens a foreign bank account or establishes a foreign corporation or other entity for a U.S. customer to report that action to the IRS. The bill authorizes the regulators of banks and securities firms, as well as the IRS, to enforce this filing requirement. Existing tax law already requires U.S. taxpayers that take such actions to report them to the IRS, but many fail to do so, secure in the knowledge that offshore secrecy laws limit the ability of the IRS to find out about the establishment of new offshore accounts and entities. That's why our bill turns to a third party--the financial institution--to disclose the information. Placing this third party reporting requirement on the private banks and brokers will make it more difficult for U.S. clients to hide these transactions. Section 105 of our bill strengthens the ability of the IRS to stop offshore trust abuses by making narrow but important changes to the Revenue Code provisions dealing with taxation of foreign trusts. The rules on foreign trust taxation have been significantly strengthened over the past 30 years to the point where they now appear adequate to prevent or punish many of the more serious abuses. However, the Subcommittee's 2006 investigation found a few loopholes that are still being exploited by tax cheats and that need to be shut down. The bill would make several changes to close these loopholes. First, our investigation showed that U.S. taxpayers exercising control over a supposedly independent foreign trust commonly used the services of a liaison, called a trust ``protector'' or ``enforcer,'' to convey their directives to the supposedly independent offshore trustees. A trust protector is typically authorized to replace a foreign trustee at will and to advise the trustees on a wide range of trust matters, including the handling of trust assets and the naming of trust beneficiaries. In cases examined by the Subcommittee, the trust protector was often a friend, business associate, or employee of the U.S. person exercising control over the foreign trust. Section 105 provides that, for tax purposes, any powers held by a trust protector shall be attributed to the trust grantor. A second problem addressed by our bill involves U.S. taxpayers who establish foreign trusts for the benefit of their families in an effort to escape U.S. tax on the accumulation of trust income. Foreign trusts can accumulate income tax free for many years. Previous amendments to the foreign trust rules have addressed the taxation problem by basically disregarding such trusts and taxing the trust income to the grantors as it is earned. However, as currently written, this taxation rule applies only to years in which the foreign trust has a named ``U.S. beneficiary.'' In response, to avoid the reach of the rule, some taxpayers have begun structuring their foreign trusts so that they operate with no named U.S. beneficiaries. For example, the Subcommittee's investigation into the Wyly trusts discovered that the foreign trust agreements had only two named beneficiaries, both of which were foreign charities, but also gave the offshore trustees ``discretion'' to name beneficiaries in the future. The offshore trustees had been informed in a letter of wishes from the Wyly brothers that the trust assets were to go to their children after death. The trustees also knew that the trust protector selected by the Wylys had the power to replace them if they did not comply with the Wylys' instructions. In addition, during the life of the Wyly brothers, and in accordance with instructions supplied by the trust protector, the offshore trustees authorized millions of dollars in trust income to be invested in Wyly business ventures and spent on real estate, jewelry, artwork, and other goods and services used by the Wylys and their families. The Wylys plainly thought they had found a legal loophole that would let them enjoy and direct the foreign trust assets without any obligation to pay taxes on the money they used. To stop such foreign trust abuses, the bill would make it impossible to pretend that this type of foreign trust has no U.S. beneficiaries. The bill would shut down the loophole by providing that: (1) any U.S. person actually benefiting from a foreign trust is treated as a trust beneficiary, even if they are not named in the trust instrument; (2) future or contingent U.S. beneficiaries are treated the same as current beneficiaries; and (3) loans of foreign trust assets or property such as real estate, jewelry and artwork (in addition to loans of cash or securities already covered by current law) are treated as trust distributions for tax purposes. Section 106 of the bill takes aim at legal opinions that are used to try to immunize taxpayers against penalties for tax shelter transactions with offshore elements. The Subcommittee investigations have found that tax practitioners sometimes tell potential clients that they can invest in an offshore tax scheme without fear of penalty, because they will be given a legal opinion that will shield the taxpayer from any imposition of the 20 percent accuracy related penalties in the tax code. Current law does, in fact, allow taxpayers to escape these penalties if they can produce a legal opinion letter stating that the tax arrangement in question is ``more likely than not'' to survive challenge by the IRS. The problem with such opinions where part of the transaction occurs in an offshore secrecy jurisdiction is that critical assumptions of the opinions are often based on offshore events, transactions and facts that are hidden and cannot be easily ascertained by the IRS. Legal opinions based on such assumptions should be understood by any reasonable person to be inherently unreliable. The bill therefore provides that, for any transaction involving an offshore secrecy jurisdiction, the taxpayer would need to have some other basis, independent of the legal opinion, to show that there was reasonable cause to claim the tax benefit. The ``more likely than not'' opinion would no longer be sufficient in and of itself to shield a taxpayer from all penalties if an offshore secrecy jurisdiction is involved. This provision, which is based upon a suggestion made by IRS Commissioner Mark Everson at our August hearing, is intended to force taxpayers to think twice about entering into an offshore scheme and to stop thinking that an opinion by a lawyer is all they need to escape any penalty for nonpayment of taxes owed. By making this change, we would also provide an incentive for taxpayers to understand and document the complete facts of the offshore aspects of a transaction before claiming favorable tax treatment. To ensure that this section does not impede legitimate business arrangements in offshore secrecy jurisdictions, the bill authorizes the Treasury Secretary to issue regulations exempting two types of legal opinions from the application of this section. First, the Treasury Secretary could exempt all legal opinions that have a confidence level substantially above the more-likely-than-not level, such as opinions which express confidence that a proposed tax arrangement ``should'' withstand an IRS challenge. ``More-likely-than-not'' opinion letters are normally viewed as expressing confidence that a tax arrangement has at least a 50 percent chance of surviving IRS review, while a ``should'' opinion is normally viewed as expressing a confidence level of 70 to 75 percent. This first exemption is intended to ensure that legal opinions on arrangements that are highly likely to survive IRS review would continue to shield taxpayers from the 20 percent penalty. Second, the Treasury Secretary could exempt legal opinions addressing classes of transactions, such as corporate reorganizations, that do not present the potential for abuse. These exemptions would ensure that taxpayers who obtain legal opinions for these classes of transactions would also be protected from tax code penalties. In addition to tax abuses, last year's Subcommittee investigation of the Wyly case history uncovered a host of troubling transactions involving U.S. securities held by the 58 offshore trusts and corporations associated with the two Wyly brothers. The offshore entities had obtained these securities by exercising about $190 million in stock options provided to them by the Wylys. The Wylys had obtained these stock options as compensation from three U.S. publicly traded corporations at which they were directors and major shareholders. The investigation found that the Wylys generally did not report the offshore entities' stock holdings or transactions in their SEC filings, on the ground that the 58 offshore trusts and corporations functioned as independent entities, even though the Wylys continued to direct the entities' investment activities. The public companies where the Wylys were corporate insiders also failed to include in their SEC filings information about the company shares held by the offshore entities, even though the companies knew of their close relationship to the Wylys, that the Wylys had provided the offshore entities with significant stock options, and that the offshore entities held large blocks of the company stock. On other occasions, the public companies and various financial institutions failed to treat the shares held by the offshore entities as affiliated stock, even though they were aware of the offshore entities' close association with the Wylys. The investigation also found that, because both the Wylys and the public companies had failed to disclose the holdings of the offshore entities, for l3 years federal regulators were unaware of those holdings and the relationships between the offshore entities and the Wyly brothers. Corporate insiders and public companies are already obligated by current law to disclose share holdings and transactions of offshore entities affiliated with a company director, officer, or major shareholder. Current penalties, however, appear insufficient to ensure compliance in light of the low likelihood that U.S. authorities will learn what went on in an offshore jurisdiction. To address this problem, our bill would establish a new monetary penalty of up to $1 million for persons who knowingly fail to disclose offshore holdings and transactions in violation of U.S. securities laws. The Subcommittee's August 2006 investigation showed that the Wyly brothers used two hedge funds and a private equity fund controlled by them to funnel millions of untaxed offshore dollars into U.S. investments. In addition, that and earlier investigations provide extensive evidence on the role played by U.S. company formation agents in assisting U.S. persons to set up offshore structures. Moreover, a Subcommittee hearing in November 2006 disclosed that U.S. company formation agents are forming U.S. shell companies for numerous unidentified foreign clients. Some of those U.S. shell companies were later used in illicit activities, including money laundering, terrorist financing, drug crimes, tax evasion, and other misconduct. Because hedge funds, private equity funds, and company formation agents are as vulnerable as other financial institutions to money launderers seeking entry into the U.S. financial system, the bill contains two provisions aimed at ensuring that these groups know their clients and do not accept or transmit suspect funds into the U.S. financial system. Currently, unregistered investment companies, such as hedge funds and private equity funds, are the only class of financial institutions under the Bank Secrecy Act that transmit substantial offshore funds into the United States, yet are not required by law to have anti-money laundering programs, including Know Your Customer, due diligence procedures. There is no reason why this growing sector of our financial services industry should continue to serve as a gateway into the U.S. financial system for monies of unknown origin. The Treasury Department proposed anti- money laundering regulations for these groups in 2002, but has not yet finalized them, even though the principal hedge fund trade association supports the issuance of federal anti-money laundering regulations. Our bill would require Treasury to issue final regulations within 180 days of the enactment of the bill. Treasury would be free to work from its existing proposal, but the bill would also require the final regulations to direct hedge funds and private equity funds to exercise due diligence before accepting offshore funds and to comply with the same procedures as other financial institutions if asked by federal regulators to produce records kept offshore. In addition, the bill would add company formation agents to the list of persons subject to the anti-money laundering obligations of the Bank Secrecy Act. For the first time, those engaged in the business of forming corporations and other entities, both offshore and in the 50 States, would be responsible for knowing the identity of the person for whom they are forming the entity. The bill also directs Treasury to develop anti-money laundering regulations for this group. Treasury's key anti-money laundering agency, the Financial Crimes Enforcement Network, testified before the Subcommittee that it was considering drafting such regulations. We expect and intend that, as in the case of all other entities covered by the Bank Secrecy Act, the regulations issued in response to this bill would instruct hedge funds, private equity funds, and company formation agents to adopt risk-based procedures that would concentrate their due diligence efforts on clients that pose the highest risk of money laundering. Section 204 of the bill focuses on one tool used by the IRS in recent years to uncover taxpayers involved in offshore tax schemes, known as John Doe summonses. The bill would make three technical changes to IRS rules governing the issuance of these summonses to make their use more effective in offshore and other complex investigations. A John Doe summons is an administrative IRS summons used to request information in cases where the identity of a taxpayer is unknown. In cases involving known taxpayers, the IRS may issue a summons to a third party to obtain information about a U.S. taxpayer, but must also notify the taxpayer who then has 20 days to petition a court to quash the summons to the third party. With a John Doe summons, however, IRS does not have the taxpayer's name and does not know where to send the taxpayer notice, so the statute substitutes a procedure in which the IRS must apply to a court for advance permission to serve the summons on the third party. To obtain approval of the summons, the IRS must show the court, in public filings to be resolved in open court, that: (1) the summons relates to a particular person or ascertainable class of persons, (2) there is a reasonable basis for concluding that there is a tax compliance issue involving that person or class of persons, and (3) the information sought is not readily available from other sources. In recent years, the IRS has used John Doe summonses to obtain information about taxpayers operating in offshore secrecy jurisdictions. For example, the IRS has obtained court approval to issue John Doe summonses to credit card associations, credit card processors, and credit card merchants, to obtain information about taxpayers using credit cards issued by offshore banks. This information has led to many successful cases in which the IRS identified funds hidden offshore and recovered unpaid taxes. Use of the John Doe summons process, however, has proved unnecessarily time consuming and expensive. For each John Doe summons involving an offshore secrecy jurisdiction, the IRS has had to establish in court that the involvement of accounts and transactions in offshore secrecy jurisdictions meant there was a significant likelihood of tax compliance problems. To relieve the IRS of the need to make this same proof over and over, the bill would provide that, in any John Doe summons proceeding involving a class defined in terms of accounts or transactions in an offshore secrecy jurisdiction, the court may presume that the case raises tax compliance issues. This presumption would then eliminate the need for the IRS to repeatedly establish in court the obvious fact that accounts, entities, and transactions involving offshore secrecy jurisdictions raise tax compliance issues. Second, for a smaller subset of John Doe cases, where the only records sought by the IRS are offshore bank account records held by a U.S. financial institution where the offshore bank has an account, the bill would relieve the IRS of the obligation to get prior court approval to serve the summons. Again, the justification is that offshore bank records are highly likely to involve accounts that raise tax compliance issues so no prior court approval should be required. Even in this instance, however, if a U.S. financial. institution were to decline to produce the requested records, the IRS would have to obtain a court order to enforce the summons. Finally, the bill would streamline the John Doe summons approval process in large ``project'' investigations where the IRS anticipates issuing multiple summonses to definable classes of third parties, such as banks or credit card associations, to obtain information related to particular taxpayers. Right now, for each summons issued in connection with a project, the IRS has to obtain the approval of a court, often having to repeatedly establish the same facts before multiple judges in multiple courts. This repetitive exercise wastes IRS, Justice Department, and court resources, and fragments oversight of the overall IRS investigative effort. To streamline this process and strengthen court oversight of IRS use of John Doe summons, the bill would authorize the IRS to present an investigative project, as a whole, to a single judge to obtain approval for issuing multiple summons related to that project. In such cases, the court would retain jurisdiction over the case after approval is granted, to exercise ongoing oversight of IRS issuance of summonses under the project. To further strengthen court oversight, the IRS would be required to file a publicly available report with the court on at least an annual basis describing the summonses issued under the project. The court would retain authority to restrict the use of further summonses at any point during the project. To evaluate the effectiveness of this approach, the bill would also direct the Government Accountability Office to report on the use of the provision after five years. Finally, Section 205 of the bill would make several changes to Title 31 of the U.S. Code needed to reflect the IRS's new responsibility for enforcing the Foreign Bank Account Report (FBAR) requirements and to clarify the right of access to Suspicious Activity Reports by IRS civil enforcement authorities. Under present law, a person controlling a foreign financial account with over $10,000 is required to check a box on his or her income tax return and, under Title 31, also file an FBAR form with the IRS. Treasury's Financial Crimes Enforcement Network (FinCEN), which normally enforces Title 31 provisions, recently delegated to the IRS the responsibility for investigating FBAR violations and assessing FBAR penalties. Because the FBAR enforcement jurisdiction derives from Title 31, however, and most of the information available to the IRS is tax return information, IRS routinely encounters difficulties in using available tax information to fulfill its new role as FBAR enforcer. The tax disclosure law permits the use of tax information only for the administration of the internal revenue laws or ``related statutes.'' This rule is presently understood to require the IRS to determine, at a managerial level and on a case by case basis, that the Title 31 FBAR law is a ``related statute.'' Not only does this necessitate repetitive determinations in every FBAR case investigated by the IRS before each agent can look at the potential non-filer's income tax return, but it prevents the use by IRS of bulk data on foreign accounts received from tax treaty partners to compare to FBAR filing records to find non-filers. One of the stated purposes for the FBAR filing requirement is that such reports ``have a high degree of usefulness in . . . tax . . . investigations or proceedings.'' 31 U. S. C 5311. If one of the reasons for requiring taxpayers to file FBARs is to use the information for tax purposes, and if IRS is to be charged with FBAR enforcement because of the FBARs' connection to taxes, common sense dictates that the FBAR statute should be considered a related statute for tax disclosure purposes, and the bill changes the related statute rule to say that. The second change made by Section 205 is a technical amendment to the wording of the penalty provision. Currently the penalty is determined in part by the balance in the foreign bank account at the time of the ``violation.'' The violation is interpreted to have occurred on the due date of the FBAR return, which is June 30 of the year following the year to which the report relates. The statute's use of this specific June 30th date can lead to strange results if money is withdrawn from the foreign account after the reporting period closed but before the return due date. To eliminate this unintended problem, the bill would instead gauge the penalty by using the highest balance in the account during the reporting period. The third part of section 205 relates to Suspicious Activity Reports, which financial institutions are required to file with FinCEN whenever they encounter suspicious transactions. FinCEN is required to share this information with law enforcement, but currently does not permit IRS civil investigators access to the information. However, if the information that is gathered and transmitted to Treasury by the financial institutions at great expense is to be effectively utilized, its use should not be limited to the relatively small number of criminal investigators, who can barely scratch the surface of the large number of reports. In addition, sharing the information with civil tax investigators would not increase the risk of disclosure, because they operate under the same tough disclosure rules as the criminal investigators. In some cases, IRS civil agents are now issuing an IRS summons to a financial institution to get access, for a production fee, to the very same information the financial institution has already filed with Treasury in a SAR. The bill changes those anomalous results by making it clear that ``law enforcement'' includes civil tax law enforcement. Overall, our bill includes a host of innovative measures to strengthen the ability of Federal regulators to combat offshore tax haven abuses. We believe these new tools merit Congressional attention and enactment this year if we are going to begin to make a serious dent in the $100 billion in annual lost tax revenue from offshore tax abuses that forces honest taxpayers to shoulder a greater tax burden than they would otherwise have to bear. Until now, I've been talking about what the bill would do to combat offshore tax abuses. Now I want to turn to what the bill would do to combat abusive tax shelters and their promoters who use both domestic and offshore means to achieve their ends. Most of these provisions appeared in the Levin-Coleman-Obama bill from the last Congress. Some provisions from that bill have been dropped or modified in light of those that were enacted into law. For five years, the Permanent Subcommittee on Investigations has been conducting investigations into the design, sale, and implementation of abusive tax shelters. Our first hearing on this topic in recent years was held in January 2002, when the Subcommittee examined an abusive tax shelter purchased by Enron. In November 2003, the Subcommittee held two days of hearings and released a staff report that pulled back the curtain on how even some respected accounting firms, banks, investment advisors, and law firms had become engines pushing the design and sale of abusive tax shelters to corporations and individuals across this country. In February 2005, the Subcommittee issued a bipartisan report that provided further details on the role these professional firms played in the proliferation of these abusive shelters. Our Subcommittee report was endorsed by the full Committee on Homeland Security and Governmental Affairs in April 2005. Most recently, a 2006 Subcommittee staff report entitled, ``Tax Haven Abuses: The Enablers, the Tools, and Secrecy,'' disclosed how financial and legal professionals designed and sold yet another abusive tax shelter known as the POINT Strategy, which depended on secrecy laws and practices in the Isle of Man to conceal the phantom nature of securities trades that lay at the center of this tax shelter transaction. The Subcommittee investigations have found that many abusive tax shelters are not dreamed up by the taxpayers who use them. Instead, most are devised by tax professionals, such as accountants, bankers, investment advisors, and lawyers, who then sell the tax shelter to clients for a fee. In fact, as our 2003 investigation widened, we found a large number of tax advisors cooking up one complex scheme after another, packaging them up as generic ``tax products'' with boiler- plate legal and tax opinion letters, and then undertaking elaborate marketing schemes to peddle these products to literally thousands of persons across the country. In return, these tax shelter promoters were getting hundreds of millions of dollars in fees, while diverting billions of dollars in tax revenues from the U.S. Treasury each year. For example, one shelter investigated by the Subcommittee and featured in the 2003 hearings has since become part of an IRS effort to settle cases involving a set of abusive tax shelters known as ``Son of Boss.'' Following our hearing, more than 1,200 taxpayers have admitted wrongdoing and agreed to pay back taxes, interest and penalties totaling more than $3.7 billion. That's billions of dollars the IRS has collected on just one type of tax shelter, demonstrating both the depth of the problem and the potential for progress. The POINT shelter featured in our 2006 hearing involved another $300 million in tax loss on transactions conducted by just six taxpayers. The bill we are introducing today contains a number of measures to curb abusive tax shelters. First, it would strengthen the penalties imposed on those who aid or abet tax evasion. Second, it would prohibit the issuance of tax shelter patents. Several provisions would deter bank participation in abusive tax shelter activities by requiring regulators to develop new examination procedures to detect and stop such activities. Others would end outdated communication barriers between the IRS and other enforcement agencies such as the SEC, bank regulators, and the Public Company Accounting Oversight Board, to allow the exchange of information relating to tax evasion cases. The bill also provides for increased disclosure of tax shelter information to Congress. In addition, the bill would simplify and clarify an existing prohibition on the payment of fees linked to tax benefits; and authorize Treasury to issue tougher standards for tax shelter opinion letters. Finally, the bill would codify and strengthen the economic substance doctrine, which eliminates tax benefits for transactions that have no real business purpose apart from avoiding taxes. Let me be more specific about these key provisions to curb abusive tax shelters. Title III of the bill strengthens two very important penalties that the IRS can use in its fight against the professionals who make complex abusive shelters possible. Three years ago, the penalty for promoting an abusive tax shelter, as set forth in Section 6700 of the tax code, was the lesser of $1,000 or 100 percent of the promoter's gross income derived from the prohibited activity. That meant in most cases the maximum fine was just $1,000. Many abusive tax shelters sell for $100,000 or $250,000 apiece. Our investigation uncovered some tax shelters that were sold for as much as $2 million or even $5 million apiece, as well as instances in which the same cookie-cutter tax opinion letter was sold to 100 or even 200 clients. There are huge profits to be made in this business, and a $1,000 fine is laughable. The Senate acknowledged that in 2004 when it adopted the Levin- Coleman amendment to the JOBS Act, S. 1637, raising the Section 6700 penalty on abusive tax shelter promoters to 100 percent of the fees earned by the promoter from the abusive shelter. A 100 percent penalty would have ensured that the abusive tax shelter hucksters would not get to keep a single penny of their ill-gotten gains. That figure, however, was cut in half in the conference report, setting the penalty at 50 percent of the fees earned and allowing the promoters of abusive shelters to keep half of their illicit profits. While a 50 percent penalty is an obvious improvement over $1000, this penalty still is inadequate and makes no sense. Why should anyone who pushes an illegal tax shelter that robs our Treasury of needed revenues get to keep half of his ill-gotten gains? What deterrent effect is created by a penalty that allows promoters to keep half of their fees if caught, and of course, all of their fees if they are not caught? Effective penalties should make sure that the peddler of an abusive tax shelter is deprived of every penny of profit earned from selling or implementing the shelter and then is fined on top of that. Section 301 of this bill would do just that by increasing the penalty on tax shelter promoters to an amount equal to up to 150 percent of the promoters' gross income from the prohibited activity. A second penalty provision in the bill addresses what our investigations have found to be a key problem: the knowing assistance of accounting firms, law firms, banks, and others to help taxpayers understate their taxes. In addition to those who meet the definition of ``promoters'' of abusive shelters, there are professional firms that aid and abet the use of abusive tax shelters and enable taxpayers to carry out the abusive tax schemes. For example, law firms are often asked to write ``opinion letters'' to help taxpayers head off IRS questioning and fines that they might otherwise confront for using an abusive shelter. Currently, under Section 6701 of the tax code, these aiders and abettors face a maximum penalty of only $1,000, or $10,000 if the offender is a corporation. This penalty, too, is a joke. When law firms are getting $50,000 for each of these cookie-cutter opinion letters, it provides no deterrent whatsoever. A $1,000 fine is like a jaywalking ticket for robbing a bank. Section 302 of the bill would strengthen Section 6701 significantly, subjecting aiders and abettors to a maximum fine up to 150 percent of the aider and abettor's gross income from the prohibited activity. This penalty would apply to all aiders and abettors, not just tax return preparers. Again, the Senate has recognized the need to toughen this critical penalty. In the 2004 JOBS Act, Sen. Coleman and I successfully increased this fine to 100 percent of the gross income derived from the prohibited activity. Unfortunately, the conference report completely omitted this change, allowing aiders and abettors to continue to profit without penalty from their wrongdoing. If further justification for toughening these penalties is needed, one document uncovered by our investigation shows the cold calculation engaged in by a tax advisor facing low fines. A senior tax professional at accounting giant KPMG compared possible tax shelter fees with possible tax shelter penalties if the firm were caught promoting an illegal tax shelter. This senior tax professional wrote the following: ``[O]ur average deal would result in KPMG fees of $360,000 with a maximum penalty exposure of only $31,000.'' He then recommended the obvious: going forward with sales of the abusive tax shelter on a cost- benefit basis. Section 303 of our bill addresses the growing problem of tax shelter patents, which has the potential for significantly increasing abusive tax shelter activities. In 1998, a Federal appeals court ruled for the first time that business methods can be patented and, since then, various tax practitioners have filed applications to patent a variety of tax strategies. The U.S. Patent Office has apparently issued 49 tax strategy patents to date, with more on the way. These patents were issued by patent officers who, by statute, have a background in science and technology, not tax law, and know little to nothing about abusive tax shelters. Issuing these types of patents raises multiple public policy concerns. Patents issued for aggressive tax strategies, for example, may enable unscrupulous promoters to claim the patent represents an official endorsement of the strategy and evidence that it would withstand IRS challenge. Patents could be issued for blatantly illegal tax shelters, yet remain in place for years, producing revenue for the wrongdoers while the IRS battles the promoters in court. Patents for tax shelters found to be illegal by a court would nevertheless remain in place, creating confusion among users and possibly producing illicit income for the patent holder. Another set of policy concerns relates to the patenting of more routine tax strategies. If a single tax practitioner is the first to discover an advantage granted by the law and secures a patent for it, that person could then effectively charge a toll for all other taxpayers to use the same strategy, even though as a matter of public policy all persons ought to be able to take advantage of the law to minimize their taxes. Companies could even patent a legal method to minimize their taxes and then refuse to license that patent to their competitors in order to prevent them from lowering their operating costs. Tax patents could be used to hinder productivity and competition rather than foster it. The primary rationale for granting patents is to encourage innovation, which is normally perceived to be a sufficient public benefit to justify granting a temporary monopoly to the patent holder. In the tax arena, however, there has historically been ample incentive for innovation in the form of the tax savings alone. The last thing we need is a further incentive for aggressive tax shelters. That's why Section 303 would prohibit the patenting of any ``invention designed to minimize, avoid, defer, or otherwise affect the liability for Federal, State, local, or foreign tax.'' Another finding of the Subcommittee investigations is that some tax practitioners are circumventing current state and federal constraints on charging tax service fees that are dependent on the amount of promised tax benefits. Traditionally, accounting firms charged flat fees or hourly fees for their tax services. In the 1990s, however, they began charging ``value added'' fees based on, in the words of one accounting firm's manual, ``the value of the services provided, as opposed to the time required to perform the services.'' In addition, some firms began charging ``contingent fees'' that were calculated according to the size of the paper ``loss'' that could be produced for a client and used to offset the client's other taxable income the greater the so-called loss, the greater the fee. In response, many states prohibited accounting firms from charging contingent fees for tax work to avoid creating incentives for these firms to devise ways to shelter substantial sums. The SEC and the American Institute of Certified Public Accountants also issued rules restricting contingent fees, allowing them in only limited circumstances. Recently, the Public Company Accounting Oversight Board issued a similar rule prohibiting public accounting firms from charging contingent fees for tax services provided to the public companies they audit. Each of these federal, state, and professional ethics rules seeks to limit the use of contingent fees under certain, limited circumstances. The Subcommittee investigation found that tax shelter fees, which are typically substantial and sometimes exceed $1 million, are often linked to the amount of a taxpayer's projected paper losses which can be used to shelter income from taxation. For example, in four tax shelters examined by the Subcommittee in 2003, documents show that the fees were equal to a percentage of the paper loss to be generated by the transaction. In one case, the fees were typically set at 7 percent of the transaction's generated ``tax loss'' that clients could use to reduce other taxable income. In another, the fee was only 3.5 percent of the loss, but the losses were large enough to generate a fee of over $53 million on a single transaction. In other words, the greater the loss that could be concocted for the taxpayer or ``investor,'' the greater the profit for the tax promoter. Think about that--greater the loss, the greater the profit. How's that for turning capitalism on its head! In addition, evidence indicated that, in at least one instance, a tax advisor was willing to deliberately manipulate the way it handled certain tax products to circumvent contingent fee prohibitions. An internal document at an accounting firm related to a specific tax shelter, for example, identified the states that prohibited contingent fees. Then, rather than prohibit the tax shelter transactions in those states or require an alternative fee structure, the memorandum directed the firm's tax professionals to make sure the engagement letter was signed, the engagement was managed, and the bulk of services was performed ``in a jurisdiction that does not prohibit contingency fees.'' Right now, the prohibitions on contingent fees are complex and must be evaluated in the context of a patchwork of federal, state, and professional ethics rules. Section 304 of the bill would establish a single enforceable rule, applicable nationwide, that would prohibit tax practitioners from charging fees calculated according to a projected or actual amount of tax savings or paper losses. The bill would also help fight abusive tax shelters that are disguised as complex investment opportunities and use financing or securities transactions provided by financial institutions. In reality, tax shelter schemes lack the economic risks and rewards associated with a true investment. These phony transactions instead often rely on the temporary use of significant amounts of money in low risk schemes mischaracterized as real investments. The financing or securities transactions called for by these schemes are often supplied by a bank, securities firm, or other financial institution. Currently the tax code prohibits financial institutions from providing products or services that aid or abet tax evasion or that promote or implement abusive tax shelters. The agencies that oversee these financial institutions on a daily basis, however, are experts in banking and securities law and generally lack the expertise to spot tax issues. Section 305 would crack down on financial institutions' illegal tax shelter activities by requiring federal bank regulators and the SEC to work with the IRS to develop examination techniques to detect such abusive activities and put an end to them. These examination techniques would be used regularly, preferably in combination with routine regulatory examinations, and the regulators would report potential violations to the IRS. The agencies would also be required to prepare joint reports to Congress in 2009 and 2012 on preventing the participation of financial institutions in tax evasion or tax shelter activities. During hearings before the Permanent Subcommittee on Investigations on tax shelters in November 2003, IRS Commissioner Everson testified that his agency was barred by Section 6103 of the tax code from communicating information to other federal agencies that would assist those agencies in their law enforcement duties. He pointed out that the IRS was barred from providing tax return information to the SEC, federal bank regulators, and the Public Company Accounting Oversight Board (PCAOB)--even, for example, when that information might assist the SEC in evaluating whether an abusive tax shelter resulted in deceptive accounting in a public company's financial statements, might help the Federal Reserve determine whether a bank selling tax products to its clients had violated the law against promoting abusive tax shelters, or help the PCAOB judge whether an accounting firm had impaired its independence by selling tax shelters to its audit clients. A recent example demonstrates how harmful these information barriers are to legitimate law enforcement efforts. In 2004, the IRS offered a settlement initiative to companies and corporate executives who participated in an abusive tax shelter involving the transfer of stock options to family-controlled entities. Over a hundred corporations and executives responded with admissions of wrongdoing. In addition to tax violations, their misconduct may be linked to securities law violations and improprieties by corporate auditors or banks, but the IRS has informed the Subcommittee that it is currently barred by law from sharing the names of the wrongdoers with the SEC, banking regulators, or PCAOB. These communication barriers are outdated, inefficient, and ill- suited to stopping the torrent of tax shelter abuses now affecting or being promoted by so many public companies, banks, and accounting firms. To address this problem, Section 306 of this bill would authorize the Treasury Secretary, with appropriate privacy safeguards, to disclose to the SEC, federal banking agencies, and the PCAOB, upon request, tax return information related to abusive tax shelters, inappropriate tax avoidance, or tax evasion. The agencies could then use this information only for law enforcement purposes, such as preventing accounting firms or banks from promoting abusive tax shelters, or detecting accounting fraud in the financial statements of public companies. The bill would also provide for increased disclosure of tax shelter information to Congress. Section 307 would make it clear that companies providing tax return preparation services to taxpayers cannot refuse to comply with a Congressional document subpoena by citing Section 7216, which prohibits tax return preparers from disclosing taxpayer information to third parties. Several accounting and law firms raised this claim in response to document subpoenas issued by the Permanent Subcommittee on Investigations, contending they were barred by the nondisclosure provision in Section 7216 from producing documents related to the sale of abusive tax shelters to clients for a fee. The accounting and law firms maintained this position despite an analysis provided by the Senate legal counsel showing that the nondisclosure provision was never intended to create a privilege or to override a Senate subpoena, as demonstrated in federal regulations interpreting the provision. This bill would codify the existing regulations interpreting Section 7216 and make it clear that Congressional document subpoenas must be honored. Section 307 would also ensure Congress has access to information about decisions by the Treasury related to an organization's tax exempt status. A 2003 decision by the D.C. Circuit Court of Appeals, Tax Analysts v. IRS, struck down certain IRS regulations and held that the IRS must disclose letters denying or revoking an organization's tax exempt status. The IRS has been reluctant to disclose such information, not only to the public, but also to Congress, including in response to requests by the Subcommittee. For example, in 2005, the IRS revoked the tax exempt status of four credit counseling firms, and, despite the Tax Analysts case, claimed that it could not disclose to the Subcommittee the names of the four firms or the reasons for revoking their tax exemption. Our bill would make it clear that, upon receipt of a request from a Congressional committee or subcommittee, the IRS must disclose documents, other than a tax return, related to the agency's determination to grant, deny, revoke or restore an organization's exemption from taxation. The Treasury Department recently issued new standards for tax practitioners issuing opinion letters on the tax implications of potential tax shelters as part of Circular 230. Section 308 of the bill would provide express statutory authority for these and even clearer regulations. The public has traditionally relied on tax opinion letters to obtain informed and trustworthy advice about whether a tax-motivated transaction meets the requirements of the law. The Permanent Subcommittee on Investigations has found that, in too many cases, tax opinion letters no longer contain disinterested and reliable tax advice, even when issued by supposedly reputable accounting or law firms. Instead, some tax opinion letters have become marketing tools used by tax shelter promoters and their allies to sell clients on their latest tax products. In many of these cases, financial interests and biases were concealed, unreasonable factual assumptions were used to justify dubious legal conclusions, and taxpayers were misled about the risk that the proposed transaction would later be designated an illegal tax shelter. Reforms are essential to address these abuses and restore the integrity of tax opinion letters. The Treasury Department recently adopted standards that address a number of the abuses affecting tax shelter opinion letters; however, the standards could be stronger yet. Our bill would authorize Treasury to issue standards addressing a wider spectrum of tax shelter opinion letter problems, including: preventing concealed collaboration among supposedly independent letter writers; avoiding conflicts of interest that would impair auditor independence; ensuring appropriate fee charges; preventing practitioners and firms from aiding and abetting the understatement of tax liability by clients; and banning the promotion of potentially abusive tax shelters. By addressing each of these areas, a beefed-up Circular 230 could help reduce the ongoing abusive practices related to tax shelter opinion letters. Finally, Title IV of the bill incorporates a Baucus-Grassley proposal which would strengthen legal prohibitions against abusive tax shelters by codifying in Federal tax statutes for the first time what is known as the economic substance doctrine. This anti-tax abuse doctrine was fashioned by federal courts evaluating transactions that appeared to have little or no business purpose or economic substance apart from tax avoidance. It has become a powerful analytical tool used by courts to invalidate abusive tax shelters. At the same time, because there is no statute underlying this doctrine and the courts have developed and applied it differently in different judicial districts, the existing case law has many ambiguities and conflicting interpretations. This language was developed under the leadership of Senators Baucus and Grassley, the Chairman and Ranking Member of the Finance Committee. The Senate has voted on multiple occasions to enact it into law, but House conferees have rejected it each time. Since no tax shelter legislation would be complete without addressing this issue, Title IV of this comprehensive bill proposes once more to include the economic substance doctrine in the tax code. The eyes of some people may glaze over when tax shelters and tax havens are discussed, but unscrupulous taxpayers and tax professionals clearly see illicit dollar signs. Our commitment to crack down on their tax abuses must be as strong as their determination to get away with ripping off America and American taxpayers. Our bill provides powerful new tools to end the tax haven and tax shelter abuses. Tax haven and tax shelter abuses contribute nearly $100 billion to the $345 billion annual tax gap, which represents taxes owed but not paid. It's long past time for taxes owing to the people's Treasury to be collected. And it's long past time for Congress to end the shifting of a disproportionate tax burden onto the shoulders of honest Americans.

Mr. LEVIN

Mr. LEVIN. Mr. President, offshore tax haven and tax shelter abuses are undermining the integrity of our tax system, robbing the Treasury of more than $100 billion each year, and shifting the tax burden from high income persons and companies onto the backs of middle income families. We can shut down a lot of these abuses if we have the political will. That's why I am introducing today, along with Senators Norm Coleman and Barack Obama, the Stop Tax Haven Abuse Act which offers powerful new tools to do just that. We all know there are billions of dollars in taxes that are owed but not paid each year. It's called the tax gap. The latest estimate is $345 billion in unpaid taxes each year owed by individuals, corporations, and other organizations willing to rob Uncle Sam and offload their tax burden onto the backs of honest taxpayers. We also estimate that, of that $345 billion annual tax gap, offshore tax haven abuses account for as much as $100 billion. Abusive tax shelters, both domestic and offshore, account for additional billions in unpaid taxes per year. To pay for critical needs, to avoid going even deeper into debt, and to protect honest taxpayers, we must shut these abuses down. The legislation we are introducing today is the product of years of work by the Permanent Subcommittee on Investigations. I serve as Chairman of that Subcommittee. Senator Coleman is the ranking Republican, and Senator Obama is a valued Subcommittee member. Through reports and hearings, the Subcommittee has worked for years to expose and combat abusive tax havens and tax shelters. In the last Congress, we confronted these twin threats to our treasury by introducing S. 1565, the Tax Shelter and Tax Haven Reform Act. Today's bill is an improved version of that legislation, reflecting not only the Subcommittee's additional investigative work but also innovative ideas to end the use of tax havens and to stop unethical tax advisers from aiding and abetting U.S. tax evasion. A tax haven is a foreign jurisdiction that maintains corporate, bank, and tax secrecy laws and industry practices that make it very difficult for other countries to find out whether their citizens are using the tax haven to cheat on their taxes. In effect, tax havens sell secrecy to attract clients to their shores. They peddle secrecy the way other countries advertise high quality services. That secrecy is used to cloak tax evasion and other misconduct, and it is that offshore secrecy that is targeted in our bill. Abusive tax shelters are another target. Abusive tax shelters are complicated transactions promoted to provide tax benefits unintended by the tax code. They are very different from legitimate tax shelters, such as deducting the interest paid on your home mortgage or Congressionally approved tax deductions for building affordable housing. Some abusive tax shelters involve complicated domestic transactions; others make use of offshore shenanigans. All abusive tax shelters are marked by one characteristic: there is no real economic or business rationale other than tax avoidance. As Judge Learned Hand wrote in Gregory v. Helvering, they are ``entered upon for no other motive but to escape taxation.'' Abusive tax shelters are usually tough to prosecute. Crimes such as terrorism, murder, and fraud produce instant recognition of the immorality involved. Abusive tax shelters, by contrast, are often ``MEGOs,'' meaning ``My Eyes Glaze Over.'' Those who cook up these concoctions count on their complexity to escape scrutiny and public ire. But regardless of how complicated or eye-glazing, the hawking of abusive tax shelters by tax professionals like accountants, bankers, investment advisers, and lawyers to thousands of people like late- night, cut-rate T.V. bargains is scandalous, and we need to stop it. Hiding tax schemes through offshore companies and bank accounts in tax havens with secrecy laws also needs to be stopped cold. It's up to Congress to do just that. Today, I would like to take some time to cut through the haze of these schemes to describe them for what they really are and explain what our bill would do to stop them. First, I will look at our investigation into offshore tax havens and discuss the provisions we have included in this bill to combat them. Then, I will turn to abusive tax shelters and our proposed remedies. For many years, the Permanent Subcommittee on Investigations has been looking at the problem of offshore corporate, bank, and tax secrecy laws and practices that help taxpayers dodge their U.S. tax obligations by preventing U.S. tax authorities from gaining access to key financial and beneficial ownership information. The Tax Justice Network, an international non-profit organization dedicated to fighting tax evasion, recently estimated that wealthy individuals worldwide have stashed $11.5 trillion of their assets in offshore tax havens. At one Subcommittee hearing, a former owner of an offshore bank in the Cayman Islands testified that he believed 100 percent of his former bank clients were engaged in tax evasion. He said that almost all were from the United States and had taken elaborate measures to avoid IRS detection of their money transfers. He also expressed confidence that the offshore government that licensed his bank would vigorously defend client secrecy in order to continue attracting business. In a hearing held in August 2006, the Subcommittee released a staff report with six case studies describing how U.S. individuals are using offshore tax havens to evade U.S. taxes. In one case, two brothers from Texas, Sam and Charles Wyly, established 58 offshore trusts and corporations, and operated them for more than 13 years without alerting U.S. authorities. To move funds abroad, the brothers transferred over $190 million in stock option compensation they had received from U.S. publicly traded companies to the offshore corporations. They claimed that they did not have to pay tax on this compensation, because, in exchange, the offshore corporations provided them with private annuities which would not begin to make payments to them until years later. In the meantime, the brothers directed the offshore corporations to cash in the stock options and start investing the money. The brothers failed to disclose these offshore stock transactions to the SEC despite their position as directors and major shareholders in the relevant companies. The Subcommittee was able to trace more than $700 million in stock option proceeds that the brothers invested in various ventures they controlled, including two hedge funds, an energy company, and an offshore insurance firm. They also used the offshore funds to purchase real estate, jewelry, and artwork for themselves and their family members, claiming they could use these offshore dollars to advance their personal and business interests without having to pay any taxes on the offshore income. The Wylys were able to carry on these tax maneuvers in large part because all of their activities were shrouded in offshore secrecy. In another of the case histories, six U.S. taxpayers relied on phantom stock trades between two offshore shell companies to generate fake stock losses which were then used to shelter billions in income. This offshore tax shelter scheme, known as the POINT Strategy, was devised by Quellos, a U.S. securities firm headquartered in Seattle; coordinated with a European financial firm known as Euram Advisers; and blessed by opinion letters issued by two prominent U.S. law firms, Cravath Swaine and Bryan Cave. The two offshore shell companies at the center of the strategy, known as Jackstones and Barneville, supposedly created a stock portfolio worth $9.6 billion. However, no cash or stock transfers ever took place. Moreover, the shell companies that conducted these phantom trades are so shrouded in offshore secrecy that no one will admit to knowing who owns them. One of the taxpayers, Haim Saban, used the scheme to shelter about $1.5 billion from U.S. taxes. Another, Robert Wood Johnson IV, sought to shelter about $145 million. Both have since agreed to settle with the IRS. The persons examined by the Subcommittee are far from the only U.S. taxpayers engaging in these types of offshore tax abuses. Recent estimates are that U.S. individuals are using offshore tax schemes to avoid payment of $40 to $70 billion in taxes each year. Corporations are also using tax havens to avoid payment of U.S. taxes. A recent IRS study estimates that U.S. corporations use offshore tax havens to avoid about $30 billion in U.S. taxes each year. A GAO report I released with Senator Dorgan in 2004 found that nearly two- thirds of the top 100 companies doing business with the United States government had one or more subsidiaries in a tax haven. One company, Tyco International, had 115. Enron, in its heyday, had over 400 Cayman subsidiaries. Data released by the Commerce Department further demonstrates the extent of U.S. corporate use of tax havens, indicating that, as of 200l, almost half of all foreign profits of U.S. corporations were in tax havens. A study released by the journal Tax Notes in September 2004 found that American companies were able to shift $149 billion of profits to 18 tax haven countries in 2002, up 68 percent from $88 billion in 1999. Here's just one simplified example of the gimmicks being used by corporations to transfer taxable income from the United States to tax havens to escape taxation. Suppose a profitable U.S. corporation establishes a shell corporation in a tax haven. The shell corporation has no office or employees, just a mailbox address. The U.S. parent transfers a valuable patent to the shell corporation. Then, the U.S. parent and all of its subsidiaries begin to pay a hefty fee to the shell corporation for use of the patent, reducing its U.S. income through deducting the patent fees and thus shifting taxable income out of the United States to the shell corporation. The shell corporation declares a portion of the fees as profit, but pays no U.S. tax since it is a tax haven resident. The icing on the cake is that the shell corporation can then ``lend'' the income it has accumulated from the fees back to the U.S. parent for its use. The parent, in turn, pays ``interest'' on the ``loans'' to the shell corporation, shifting still more taxable income out of the United States to the tax haven. This example highlights just a few of the tax haven ploys being used by some U.S. corporations to escape paying their fair share of taxes here at home. Our Subcommittee's most recent investigation into offshore abuses highlighted the extent to which offshore secrecy rules make it possible for taxpayers to participate in illicit activity with little fear of getting caught. Through a series of case studies, the Subcommittee showed how U.S. taxpayers, with the help of offshore service providers, financial institutions, and sometimes highly credentialed tax professionals, set up entities in such secrecy jurisdictions as the Isle of Man, the Cayman Islands, and the island of Nevis, claimed these offshore entities were independent but, in fact, controlled them through compliant offshore trustees, officers, directors, and corporate administrators. Because of the offshore secrecy laws and practices, these offshore service providers could and did go to extraordinary lengths to protect their U.S. clients' identities and financial information from U.S. tax and regulatory authorities, making it extremely difficult, if not impossible, for U.S. law enforcement authorities to get the information they need to enforce U.S. tax laws. The extent of the offshore tax abuses documented by the Subcommittee during this last year intensified our determination to find new ways to combat offshore secrecy and restore the ability of U.S. tax enforcement to pursue offshore tax cheats. I'd now like to describe the key measures in the Stop Tax Havens Act being introduced today, which includes the use of presumptions to overcome offshore secrecy barriers, special measures to combat persons who impede U.S. tax enforcement, and greater disclosure of offshore transactions. Our last Subcommittee staff report provided six case histories detailing how U.S. taxpayers are using offshore tax havens to avoid payment of the taxes they owe. These case histories examined an Internet based company that helps persons obtain offshore entities and accounts; U.S. promoters that designed complex offshore structures to hide client assets, even providing clients with a how-to manual for going offshore; U.S. taxpayers who diverted business income offshore through phony loans and invoices; a one-time tax dodge that deducted phantom offshore stock losses from real U.S. stock income to shelter that income from U.S. taxes; and the 13-year offshore empire built by Sam and Charles Wyly. Each of these case histories presented the same fact pattern in which the U.S. taxpayer, through lawyers, banks, or other representatives, set up offshore trusts, corporations, or other entities which had all the trappings of independence but, in fact, were controlled by the U.S. taxpayer whose directives were implemented by compliant offshore personnel acting as the trustees, officers, directors or nominee owners of the offshore entities. In the case of the Wylys, the brothers and their representatives communicated Wyly directives to a so-called trust protector who then relayed the directives to the offshore trustees. In the 13 years examined by the Subcommittee, the offshore trustees never once rejected a Wyly request and never once initiated an action without Wyly approval. They simply did what they were told. A U.S. taxpayer in another case history told the Subcommittee that the offshore personnel who nominally owned and controlled his offshore entities, in fact, always followed his directions, describing himself as the ``puppet master'' in charge of his offshore holdings. When the Subcommittee discussed these case histories with financial administrators from the Isle of Man, they explained that none of the offshore personnel were engaged in any wrongdoing, because their laws permit foreign clients to transmit detailed, daily instructions to offshore service providers on how to handle offshore assets, so long as it is the offshore trustee or corporate officer who gives the final order to buy or sell the assets. They explained that, under their law, an offshore entity is considered legally independent from the person directing its activities so long as that person follows the form of transmitting ``requests'' to the offshore personnel who retain the formal right to make the decisions, even though the offshore personnel always do as they are asked. The Subcommittee case histories illustrate what the tax literature and law enforcement experience have shown for years: that the business model followed in all offshore secrecy jurisdictions is for compliant trustees, corporate administrators, and financial institutions to provide a veneer of independence while ensuring that their U.S. clients retain complete and unfettered control over ``their'' offshore assets. That's the standard operating procedure offshore. Offshore service providers pretend to own or control the offshore trusts, corporations, and accounts they help establish, but what they really do is whatever their clients tell them to do. In truth, the independence of offshore entities is a legal fiction, and it is past time to pull back the curtain on the reality hiding behind the legal formalities. The reality behind these offshore practices makes a mockery of U.S. laws that normally view trusts and corporations as independent entities. They invite game-playing and tax evasion. To combat these offshore abuses, our bill takes them head on in a number of ways. The first section of our bill, Section 101, tackles this issue by creating several rebuttable evidentiary presumptions that would strip the veneer of independence from the U.S. person involved with offshore entities, transactions, and accounts, unless that U.S. person presents clear and convincing evidence to the contrary. These presumptions would apply only in civil judicial or administrative tax or securities enforcement proceedings examining transactions, entities, or accounts in offshore secrecy jurisdictions. These presumptions would put the burden of producing evidence from the offshore secrecy jurisdiction on the taxpayer who chose to do business there, and who has access to the information, rather than on the Federal Government which has little or no practical ability to get the information. The creation of these presumptions implements a bipartisan recommendation in the August 2006 Subcommittee report on tax haven abuses. The bill would establish three evidentiary presumptions that could be used in a civil tax enforcement proceeding: (1) a presumption that a U.S. taxpayer who ``formed, transferred assets to, was a beneficiary of, or received money or property'' from an offshore entity, such as a trust or corporation, is in control of that entity; (2) a presumption that funds or other property received from offshore are taxable income, and that funds or other property transferred offshore have not yet been taxed; and (3) a presumption that a financial account controlled by a U.S. taxpayer in a foreign country contains enough money--$10,000--to trigger an existing statutory reporting threshold and allow the IRS to assert the minimum penalty for nondisclosure of the account by the taxpayer. In addition, the bill would establish two evidentiary presumptions applicable to civil proceedings to enforce U.S. securities laws. One would specify that if a director, officer, or major shareholder of a U.S. publicly traded corporation were associated with an offshore entity, that person would be presumed to control that offshore entity. The second provides that securities nominally owned by an offshore entity are presumed to be beneficially owned by any U.S. person who controlled the offshore entity. These presumptions are rebuttable, which means that the U.S. person who is the subject of the proceeding could provide clear and convincing evidence to show that the presumptions were factually inaccurate. To rebut the presumptions, a taxpayer could establish, for example, that an offshore corporation really was controlled by an independent third party, or that money sent from an offshore account really represented a nontaxable gift instead of taxable income. If the taxpayer wished to introduce evidence from a foreign person, such as an offshore banker, corporate officer, or trust administrator, to establish those facts, that foreign person would have to actually appear in the proceeding in a manner that would permit cross examination in order for the taxpayer to rebut the presumption. A simple affidavit from an offshore resident who refused to submit to cross examination in the United States would be insufficient. There are several limitations on these presumptions to ensure their operation is fair and reasonable. First, the evidentiary rules in criminal cases would not be affected by this bill which would apply only to civil proceedings. Second, because the presumptions apply only in enforcement ``proceedings,'' they would not directly affect, for example, a person's reporting obligations on a tax return or SEC filing. The presumptions would come into play only if the IRS or SEC were to challenge a matter in a formal proceeding. Third, the bill does not apply the presumptions to situations where either the U.S. person or the offshore entity is a publicly traded company, because in those situations, even if a transaction were abusive, IRS and SEC officials are generally able to obtain access to necessary information. Fourth, the bill recognizes that certain classes of offshore transactions, such as corporate reorganizations, may not present a potential for abuse, and accordingly authorizes Treasury and the Securities and Exchange Commission to issue regulations or guidance identifying such classes of transactions, to which the presumptions would then not apply. An even more fundamental limitation on the presumptions is that they would apply only to transactions, accounts, or entities in offshore jurisdictions with secrecy laws or practices that unreasonably restrict the ability of the U.S. government to get needed information and which do not have effective information exchange programs with U.S. law enforcement. The bill requires the Secretary of the Treasury to identify those offshore secrecy jurisdictions, based upon the practical experience of the IRS in obtaining needed information from the relevant country. To provide a starting point for Treasury, the bill presents an initial list of 34 offshore secrecy jurisdictions. This list is taken from actual IRS court filings in numerous, recent court proceedings in which the IRS sought permission to obtain information about U.S. taxpayers active in the named jurisdictions. The bill thus identifies the same jurisdictions that the IRS has already named publicly as probable locations for U.S. tax evasion. Federal courts all over the country have consistently found, when presented with the IRS list and supporting evidence, that the IRS had a reasonable basis for concluding that U.S. taxpayers with financial accounts in those countries presented a risk of tax noncompliance. In every case, the courts allowed the IRS to collect information about accounts and transactions in the listed offshore jurisdictions. The bill also provides Treasury with the authority to add or remove jurisdictions from the initial list so that the list can change over time and reflect the actual record of experience of the United States in its dealings with specific jurisdictions around the world. The bill provides two tests for Treasury to use in determining whether a jurisdiction should be identified as an ``offshore secrecy jurisdiction'' triggering the evidentiary presumptions: (1) whether the jurisdiction's secrecy laws and practices unreasonably restrict U.S. access to information, and (2) whether the jurisdiction maintains a tax information exchange process with the United States that is effective in practice. If offshore jurisdictions make a decision to enact secrecy laws and support industry practices furthering corporate, financial, and tax secrecy, that's their business. But when U.S. taxpayers start using those offshore secrecy laws and practices to evade U.S. taxes to the tune of $100 billion per year, that's our business. We have a right to enforce our tax laws and to expect that other countries will not help U.S. tax cheats achieve their ends. The aim of the presumptions created by the bill is to eliminate the unfair advantage provided by offshore secrecy laws that for too long have enabled U.S. persons to conceal their misconduct offshore and game U.S. law enforcement. These presumptions would allow U.S. law enforcement to establish what we all know from experience is normally the case in an offshore jurisdiction--that a U.S. person associated with an offshore entity controls that entity; that money and property sent to or from an offshore entity involves taxable income; and that an offshore account that wasn't disclosed to U.S. authorities should have been. U.S. law enforcement can establish these facts presumptively, without having to pierce the secrecy veil. At the same time, U.S. persons who chose to transact their affairs through an offshore secrecy jurisdiction are given the opportunity to lift the veil of secrecy and demonstrate that the presumptions are factually wrong. We believe these evidentiary presumptions will provide U.S. tax and securities law enforcement with powerful new tools to shut down tax haven abuses. Section 102 of the bill is another innovative approach to combating tax haven abuses. This section would build upon existing Treasury authority to apply an array of sanctions to counter specific foreign money laundering threats by extending that same authority to counter specific foreign tax administration threats. In 2001, the PATRIOT Act gave Treasury the authority under 31 U.S.C. 5318A to require domestic financial institutions and agencies to take special measures with respect to foreign jurisdictions, financial institutions, or transactions found to be of ``primary money laundering concern.'' Once Treasury designates a foreign jurisdiction or financial institution to be of primary money laundering concern, Section 5318A allows Treasury to impose a range of requirements on U.S. financial institutions in their dealings with the designated entity--from requiring U.S. financial institutions, for example, to provide greater information than normal about transactions involving the designated entity, to prohibiting U.S. financial institutions from opening accounts for that foreign entity. This PATRIOT Act authority has been used sparingly, but to telling effect. In some instances Treasury has employed special measures against an entire country, such as Burma, to stop its financial institutions from laundering funds through the U.S. financial system. More often, however, Treasury has used the authority surgically, against a single problem financial institution, to stop laundered funds from entering the United States. The provision has clearly succeeded in giving Treasury a powerful tool to protect the U.S. financial system from money laundering abuses. The bill would authorize Treasury to use that same tool to require U.S. financial institutions to take the same special measures against foreign jurisdictions or financial institutions found by Treasury to be ``impeding U.S. tax enforcement.'' Treasury could, for example, in consultation with the IRS, Secretary of State, and the Attorney General, require U.S. financial institutions that have correspondent accounts for a designated foreign bank to produce information on all of that foreign bank's customers. Alternatively, Treasury could prohibit U.S. financial institutions from opening accounts for a designated foreign bank, thereby cutting off that foreign bank's access to the U.S. financial system. These types of sanctions could be as effective in ending the worst tax haven abuses as they have been in curbing money laundering. In addition to extending Treasury's ability to impose special measures against foreign entities impeding U.S. tax enforcement, the bill would add one new measure to the list of possible sanctions that could be applied to foreign entities: it would allow Treasury to instruct U.S. financial institutions not to authorize or accept credit card transactions involving the designated foreign jurisdiction or financial institution. Denying tax haven banks the ability to issue credit cards for use in the United States, for example, would be a powerful new way to stop U.S. tax cheats from obtaining access to funds hidden offshore. Section 103 of the bill addresses another problem faced by the IRS in cases involving offshore jurisdictions--completing audits in a timely fashion when the evidence needed is located in a jurisdiction with strict secrecy laws. Currently, in the absence of fraud or some other exception, the IRS has 3 years from the date a return is filed to complete an audit and assess any additional tax. Because offshore secrecy laws slow down, and sometimes impede, efforts by the United States to obtain offshore financial and beneficial ownership information, the bill gives the IRS an extra 3 years to complete an audit and assess a tax on transactions involving an offshore secrecy jurisdiction. Of course, in the event that a case turns out to involve actual fraud, this provision of the bill is not intended to limit the rule giving the IRS unlimited time to assess tax in such cases. Tax haven abuses are shrouded in secrecy. Section 104 attempts to pierce that secrecy by creating two new disclosure mechanisms requiring third parties to report on offshore transactions undertaken by U.S. persons. The first disclosure mechanism focuses on U.S. financial institutions that open a U.S. account in the name of an offshore entity, such as an offshore trust or corporation, and learn from an anti-money laundering due diligence review, that a U.S. person is the beneficial owner behind that offshore entity. In the Wyly case history examined by the Subcommittee, for example, three major U.S. financial institutions opened dozens of accounts for offshore trusts and corporations which they knew were associated with the Wyly family. Under current anti-money laundering law, all U.S. financial institutions are supposed to know who is behind an account opened in the name of, for example, an offshore shell corporation or trust. They are supposed to obtain this information to safeguard the U.S. financial system against misuse by terrorists, money launderers, and other criminals. Under current tax law, a bank or securities broker that opens an account for a U.S. person is also required to give the IRS a 1099 form reporting any capital gains earned on the account. However, the bank or securities broker need not file a 1099 form if the account is owned by a foreign entity not subject to U.S. tax law. Problems arise when an account is opened in the name of an offshore entity that the bank or broker knows, from its anti-money laundering review, is owned or controlled by a U.S. person. The U.S. person should be filing a tax return with the IRS reporting the income of the ``controlled foreign corporation.'' However, since he or she knows it is difficult for the IRS to connect an offshore accountholder to a particular taxpayer, he or she may feel safe in not reporting that income. That complacency might change, however, if the U.S. person knew that the bank or broker who opened the account and learned of the connection had a legal obligation to report any account income to the IRS. Under current law, the way the regulations are written and typically interpreted, the bank or broker can treat the foreign account holder as an independent entity separate from the U.S. person, even if it knows that the foreign corporation is merely holding title to the account for the U.S. person, who exercises complete authority over the corporation and benefits from any capital gains earned on the account. Current law thus arguably imposes no duty on the bank or broker to file a 1099 form disclosing the account to the IRS. The bill would strengthen current law by expressly requiring a bank or broker that knows, as a result of its anti-money laundering due diligence or otherwise, that a U.S. person is the beneficial owner of a foreign entity that opened the account, to disclose that account to the IRS by filing a 1099 form reporting account income. This reporting obligation would not require banks or brokers to gather any new information--financial institutions are already required to perform anti-money laundering due diligence for accounts opened by offshore shell entities. The bill would instead require U.S. financial institutions to act on what they already know by filing a 1099 form with the IRS. The second disclosure mechanism created by Section 104 targets U.S. financial institutions that open foreign bank accounts or set up offshore corporations, trusts, or other entities for their U.S. clients. Our investigations have shown that it is common for private bankers and brokers in the United States to provide these services to their wealthy clients, so that the clients do not even need to leave home to set up an offshore structure. The offshore entities can then open both offshore and U.S. accounts and supposedly be treated as foreign account holders for tax purposes. A Subcommittee investigation learned, for example, that Citibank Private Bank routinely offered to its clients private banking services which included establishing one or more offshore shell corporations-- which it called Private Investment Corporations or PICs--in jurisdictions like the Cayman Islands. The paperwork to form the PIC was typically completed by a Citibank affiliate located in the jurisdiction, such as Cititrust, which is a Cayman trust company. Cititrust could then help the PIC open offshore accounts, while Citibank could help the PIC open U.S. accounts. Section 104 would require any U.S. financial institution that directly or indirectly opens a foreign bank account or establishes a foreign corporation or other entity for a U.S. customer to report that action to the IRS. The bill authorizes the regulators of banks and securities firms, as well as the IRS, to enforce this filing requirement. Existing tax law already requires U.S. taxpayers that take such actions to report them to the IRS, but many fail to do so, secure in the knowledge that offshore secrecy laws limit the ability of the IRS to find out about the establishment of new offshore accounts and entities. That's why our bill turns to a third party--the financial institution--to disclose the information. Placing this third party reporting requirement on the private banks and brokers will make it more difficult for U.S. clients to hide these transactions. Section 105 of our bill strengthens the ability of the IRS to stop offshore trust abuses by making narrow but important changes to the Revenue Code provisions dealing with taxation of foreign trusts. The rules on foreign trust taxation have been significantly strengthened over the past 30 years to the point where they now appear adequate to prevent or punish many of the more serious abuses. However, the Subcommittee's 2006 investigation found a few loopholes that are still being exploited by tax cheats and that need to be shut down. The bill would make several changes to close these loopholes. First, our investigation showed that U.S. taxpayers exercising control over a supposedly independent foreign trust commonly used the services of a liaison, called a trust ``protector'' or ``enforcer,'' to convey their directives to the supposedly independent offshore trustees. A trust protector is typically authorized to replace a foreign trustee at will and to advise the trustees on a wide range of trust matters, including the handling of trust assets and the naming of trust beneficiaries. In cases examined by the Subcommittee, the trust protector was often a friend, business associate, or employee of the U.S. person exercising control over the foreign trust. Section 105 provides that, for tax purposes, any powers held by a trust protector shall be attributed to the trust grantor. A second problem addressed by our bill involves U.S. taxpayers who establish foreign trusts for the benefit of their families in an effort to escape U.S. tax on the accumulation of trust income. Foreign trusts can accumulate income tax free for many years. Previous amendments to the foreign trust rules have addressed the taxation problem by basically disregarding such trusts and taxing the trust income to the grantors as it is earned. However, as currently written, this taxation rule applies only to years in which the foreign trust has a named ``U.S. beneficiary.'' In response, to avoid the reach of the rule, some taxpayers have begun structuring their foreign trusts so that they operate with no named U.S. beneficiaries. For example, the Subcommittee's investigation into the Wyly trusts discovered that the foreign trust agreements had only two named beneficiaries, both of which were foreign charities, but also gave the offshore trustees ``discretion'' to name beneficiaries in the future. The offshore trustees had been informed in a letter of wishes from the Wyly brothers that the trust assets were to go to their children after death. The trustees also knew that the trust protector selected by the Wylys had the power to replace them if they did not comply with the Wylys' instructions. In addition, during the life of the Wyly brothers, and in accordance with instructions supplied by the trust protector, the offshore trustees authorized millions of dollars in trust income to be invested in Wyly business ventures and spent on real estate, jewelry, artwork, and other goods and services used by the Wylys and their families. The Wylys plainly thought they had found a legal loophole that would let them enjoy and direct the foreign trust assets without any obligation to pay taxes on the money they used. To stop such foreign trust abuses, the bill would make it impossible to pretend that this type of foreign trust has no U.S. beneficiaries. The bill would shut down the loophole by providing that: (1) any U.S. person actually benefiting from a foreign trust is treated as a trust beneficiary, even if they are not named in the trust instrument; (2) future or contingent U.S. beneficiaries are treated the same as current beneficiaries; and (3) loans of foreign trust assets or property such as real estate, jewelry and artwork (in addition to loans of cash or securities already covered by current law) are treated as trust distributions for tax purposes. Section 106 of the bill takes aim at legal opinions that are used to try to immunize taxpayers against penalties for tax shelter transactions with offshore elements. The Subcommittee investigations have found that tax practitioners sometimes tell potential clients that they can invest in an offshore tax scheme without fear of penalty, because they will be given a legal opinion that will shield the taxpayer from any imposition of the 20 percent accuracy related penalties in the tax code. Current law does, in fact, allow taxpayers to escape these penalties if they can produce a legal opinion letter stating that the tax arrangement in question is ``more likely than not'' to survive challenge by the IRS. The problem with such opinions where part of the transaction occurs in an offshore secrecy jurisdiction is that critical assumptions of the opinions are often based on offshore events, transactions and facts that are hidden and cannot be easily ascertained by the IRS. Legal opinions based on such assumptions should be understood by any reasonable person to be inherently unreliable. The bill therefore provides that, for any transaction involving an offshore secrecy jurisdiction, the taxpayer would need to have some other basis, independent of the legal opinion, to show that there was reasonable cause to claim the tax benefit. The ``more likely than not'' opinion would no longer be sufficient in and of itself to shield a taxpayer from all penalties if an offshore secrecy jurisdiction is involved. This provision, which is based upon a suggestion made by IRS Commissioner Mark Everson at our August hearing, is intended to force taxpayers to think twice about entering into an offshore scheme and to stop thinking that an opinion by a lawyer is all they need to escape any penalty for nonpayment of taxes owed. By making this change, we would also provide an incentive for taxpayers to understand and document the complete facts of the offshore aspects of a transaction before claiming favorable tax treatment. To ensure that this section does not impede legitimate business arrangements in offshore secrecy jurisdictions, the bill authorizes the Treasury Secretary to issue regulations exempting two types of legal opinions from the application of this section. First, the Treasury Secretary could exempt all legal opinions that have a confidence level substantially above the more-likely-than-not level, such as opinions which express confidence that a proposed tax arrangement ``should'' withstand an IRS challenge. ``More-likely-than-not'' opinion letters are normally viewed as expressing confidence that a tax arrangement has at least a 50 percent chance of surviving IRS review, while a ``should'' opinion is normally viewed as expressing a confidence level of 70 to 75 percent. This first exemption is intended to ensure that legal opinions on arrangements that are highly likely to survive IRS review would continue to shield taxpayers from the 20 percent penalty. Second, the Treasury Secretary could exempt legal opinions addressing classes of transactions, such as corporate reorganizations, that do not present the potential for abuse. These exemptions would ensure that taxpayers who obtain legal opinions for these classes of transactions would also be protected from tax code penalties. In addition to tax abuses, last year's Subcommittee investigation of the Wyly case history uncovered a host of troubling transactions involving U.S. securities held by the 58 offshore trusts and corporations associated with the two Wyly brothers. The offshore entities had obtained these securities by exercising about $190 million in stock options provided to them by the Wylys. The Wylys had obtained these stock options as compensation from three U.S. publicly traded corporations at which they were directors and major shareholders. The investigation found that the Wylys generally did not report the offshore entities' stock holdings or transactions in their SEC filings, on the ground that the 58 offshore trusts and corporations functioned as independent entities, even though the Wylys continued to direct the entities' investment activities. The public companies where the Wylys were corporate insiders also failed to include in their SEC filings information about the company shares held by the offshore entities, even though the companies knew of their close relationship to the Wylys, that the Wylys had provided the offshore entities with significant stock options, and that the offshore entities held large blocks of the company stock. On other occasions, the public companies and various financial institutions failed to treat the shares held by the offshore entities as affiliated stock, even though they were aware of the offshore entities' close association with the Wylys. The investigation also found that, because both the Wylys and the public companies had failed to disclose the holdings of the offshore entities, for l3 years federal regulators were unaware of those holdings and the relationships between the offshore entities and the Wyly brothers. Corporate insiders and public companies are already obligated by current law to disclose share holdings and transactions of offshore entities affiliated with a company director, officer, or major shareholder. Current penalties, however, appear insufficient to ensure compliance in light of the low likelihood that U.S. authorities will learn what went on in an offshore jurisdiction. To address this problem, our bill would establish a new monetary penalty of up to $1 million for persons who knowingly fail to disclose offshore holdings and transactions in violation of U.S. securities laws. The Subcommittee's August 2006 investigation showed that the Wyly brothers used two hedge funds and a private equity fund controlled by them to funnel millions of untaxed offshore dollars into U.S. investments. In addition, that and earlier investigations provide extensive evidence on the role played by U.S. company formation agents in assisting U.S. persons to set up offshore structures. Moreover, a Subcommittee hearing in November 2006 disclosed that U.S. company formation agents are forming U.S. shell companies for numerous unidentified foreign clients. Some of those U.S. shell companies were later used in illicit activities, including money laundering, terrorist financing, drug crimes, tax evasion, and other misconduct. Because hedge funds, private equity funds, and company formation agents are as vulnerable as other financial institutions to money launderers seeking entry into the U.S. financial system, the bill contains two provisions aimed at ensuring that these groups know their clients and do not accept or transmit suspect funds into the U.S. financial system. Currently, unregistered investment companies, such as hedge funds and private equity funds, are the only class of financial institutions under the Bank Secrecy Act that transmit substantial offshore funds into the United States, yet are not required by law to have anti-money laundering programs, including Know Your Customer, due diligence procedures. There is no reason why this growing sector of our financial services industry should continue to serve as a gateway into the U.S. financial system for monies of unknown origin. The Treasury Department proposed anti- money laundering regulations for these groups in 2002, but has not yet finalized them, even though the principal hedge fund trade association supports the issuance of federal anti-money laundering regulations. Our bill would require Treasury to issue final regulations within 180 days of the enactment of the bill. Treasury would be free to work from its existing proposal, but the bill would also require the final regulations to direct hedge funds and private equity funds to exercise due diligence before accepting offshore funds and to comply with the same procedures as other financial institutions if asked by federal regulators to produce records kept offshore. In addition, the bill would add company formation agents to the list of persons subject to the anti-money laundering obligations of the Bank Secrecy Act. For the first time, those engaged in the business of forming corporations and other entities, both offshore and in the 50 States, would be responsible for knowing the identity of the person for whom they are forming the entity. The bill also directs Treasury to develop anti-money laundering regulations for this group. Treasury's key anti-money laundering agency, the Financial Crimes Enforcement Network, testified before the Subcommittee that it was considering drafting such regulations. We expect and intend that, as in the case of all other entities covered by the Bank Secrecy Act, the regulations issued in response to this bill would instruct hedge funds, private equity funds, and company formation agents to adopt risk-based procedures that would concentrate their due diligence efforts on clients that pose the highest risk of money laundering. Section 204 of the bill focuses on one tool used by the IRS in recent years to uncover taxpayers involved in offshore tax schemes, known as John Doe summonses. The bill would make three technical changes to IRS rules governing the issuance of these summonses to make their use more effective in offshore and other complex investigations. A John Doe summons is an administrative IRS summons used to request information in cases where the identity of a taxpayer is unknown. In cases involving known taxpayers, the IRS may issue a summons to a third party to obtain information about a U.S. taxpayer, but must also notify the taxpayer who then has 20 days to petition a court to quash the summons to the third party. With a John Doe summons, however, IRS does not have the taxpayer's name and does not know where to send the taxpayer notice, so the statute substitutes a procedure in which the IRS must apply to a court for advance permission to serve the summons on the third party. To obtain approval of the summons, the IRS must show the court, in public filings to be resolved in open court, that: (1) the summons relates to a particular person or ascertainable class of persons, (2) there is a reasonable basis for concluding that there is a tax compliance issue involving that person or class of persons, and (3) the information sought is not readily available from other sources. In recent years, the IRS has used John Doe summonses to obtain information about taxpayers operating in offshore secrecy jurisdictions. For example, the IRS has obtained court approval to issue John Doe summonses to credit card associations, credit card processors, and credit card merchants, to obtain information about taxpayers using credit cards issued by offshore banks. This information has led to many successful cases in which the IRS identified funds hidden offshore and recovered unpaid taxes. Use of the John Doe summons process, however, has proved unnecessarily time consuming and expensive. For each John Doe summons involving an offshore secrecy jurisdiction, the IRS has had to establish in court that the involvement of accounts and transactions in offshore secrecy jurisdictions meant there was a significant likelihood of tax compliance problems. To relieve the IRS of the need to make this same proof over and over, the bill would provide that, in any John Doe summons proceeding involving a class defined in terms of accounts or transactions in an offshore secrecy jurisdiction, the court may presume that the case raises tax compliance issues. This presumption would then eliminate the need for the IRS to repeatedly establish in court the obvious fact that accounts, entities, and transactions involving offshore secrecy jurisdictions raise tax compliance issues. Second, for a smaller subset of John Doe cases, where the only records sought by the IRS are offshore bank account records held by a U.S. financial institution where the offshore bank has an account, the bill would relieve the IRS of the obligation to get prior court approval to serve the summons. Again, the justification is that offshore bank records are highly likely to involve accounts that raise tax compliance issues so no prior court approval should be required. Even in this instance, however, if a U.S. financial. institution were to decline to produce the requested records, the IRS would have to obtain a court order to enforce the summons. Finally, the bill would streamline the John Doe summons approval process in large ``project'' investigations where the IRS anticipates issuing multiple summonses to definable classes of third parties, such as banks or credit card associations, to obtain information related to particular taxpayers. Right now, for each summons issued in connection with a project, the IRS has to obtain the approval of a court, often having to repeatedly establish the same facts before multiple judges in multiple courts. This repetitive exercise wastes IRS, Justice Department, and court resources, and fragments oversight of the overall IRS investigative effort. To streamline this process and strengthen court oversight of IRS use of John Doe summons, the bill would authorize the IRS to present an investigative project, as a whole, to a single judge to obtain approval for issuing multiple summons related to that project. In such cases, the court would retain jurisdiction over the case after approval is granted, to exercise ongoing oversight of IRS issuance of summonses under the project. To further strengthen court oversight, the IRS would be required to file a publicly available report with the court on at least an annual basis describing the summonses issued under the project. The court would retain authority to restrict the use of further summonses at any point during the project. To evaluate the effectiveness of this approach, the bill would also direct the Government Accountability Office to report on the use of the provision after five years. Finally, Section 205 of the bill would make several changes to Title 31 of the U.S. Code needed to reflect the IRS's new responsibility for enforcing the Foreign Bank Account Report (FBAR) requirements and to clarify the right of access to Suspicious Activity Reports by IRS civil enforcement authorities. Under present law, a person controlling a foreign financial account with over $10,000 is required to check a box on his or her income tax return and, under Title 31, also file an FBAR form with the IRS. Treasury's Financial Crimes Enforcement Network (FinCEN), which normally enforces Title 31 provisions, recently delegated to the IRS the responsibility for investigating FBAR violations and assessing FBAR penalties. Because the FBAR enforcement jurisdiction derives from Title 31, however, and most of the information available to the IRS is tax return information, IRS routinely encounters difficulties in using available tax information to fulfill its new role as FBAR enforcer. The tax disclosure law permits the use of tax information only for the administration of the internal revenue laws or ``related statutes.'' This rule is presently understood to require the IRS to determine, at a managerial level and on a case by case basis, that the Title 31 FBAR law is a ``related statute.'' Not only does this necessitate repetitive determinations in every FBAR case investigated by the IRS before each agent can look at the potential non-filer's income tax return, but it prevents the use by IRS of bulk data on foreign accounts received from tax treaty partners to compare to FBAR filing records to find non-filers. One of the stated purposes for the FBAR filing requirement is that such reports ``have a high degree of usefulness in . . . tax . . . investigations or proceedings.'' 31 U. S. C 5311. If one of the reasons for requiring taxpayers to file FBARs is to use the information for tax purposes, and if IRS is to be charged with FBAR enforcement because of the FBARs' connection to taxes, common sense dictates that the FBAR statute should be considered a related statute for tax disclosure purposes, and the bill changes the related statute rule to say that. The second change made by Section 205 is a technical amendment to the wording of the penalty provision. Currently the penalty is determined in part by the balance in the foreign bank account at the time of the ``violation.'' The violation is interpreted to have occurred on the due date of the FBAR return, which is June 30 of the year following the year to which the report relates. The statute's use of this specific June 30th date can lead to strange results if money is withdrawn from the foreign account after the reporting period closed but before the return due date. To eliminate this unintended problem, the bill would instead gauge the penalty by using the highest balance in the account during the reporting period. The third part of section 205 relates to Suspicious Activity Reports, which financial institutions are required to file with FinCEN whenever they encounter suspicious transactions. FinCEN is required to share this information with law enforcement, but currently does not permit IRS civil investigators access to the information. However, if the information that is gathered and transmitted to Treasury by the financial institutions at great expense is to be effectively utilized, its use should not be limited to the relatively small number of criminal investigators, who can barely scratch the surface of the large number of reports. In addition, sharing the information with civil tax investigators would not increase the risk of disclosure, because they operate under the same tough disclosure rules as the criminal investigators. In some cases, IRS civil agents are now issuing an IRS summons to a financial institution to get access, for a production fee, to the very same information the financial institution has already filed with Treasury in a SAR. The bill changes those anomalous results by making it clear that ``law enforcement'' includes civil tax law enforcement. Overall, our bill includes a host of innovative measures to strengthen the ability of Federal regulators to combat offshore tax haven abuses. We believe these new tools merit Congressional attention and enactment this year if we are going to begin to make a serious dent in the $100 billion in annual lost tax revenue from offshore tax abuses that forces honest taxpayers to shoulder a greater tax burden than they would otherwise have to bear. Until now, I've been talking about what the bill would do to combat offshore tax abuses. Now I want to turn to what the bill would do to combat abusive tax shelters and their promoters who use both domestic and offshore means to achieve their ends. Most of these provisions appeared in the Levin-Coleman-Obama bill from the last Congress. Some provisions from that bill have been dropped or modified in light of those that were enacted into law. For five years, the Permanent Subcommittee on Investigations has been conducting investigations into the design, sale, and implementation of abusive tax shelters. Our first hearing on this topic in recent years was held in January 2002, when the Subcommittee examined an abusive tax shelter purchased by Enron. In November 2003, the Subcommittee held two days of hearings and released a staff report that pulled back the curtain on how even some respected accounting firms, banks, investment advisors, and law firms had become engines pushing the design and sale of abusive tax shelters to corporations and individuals across this country. In February 2005, the Subcommittee issued a bipartisan report that provided further details on the role these professional firms played in the proliferation of these abusive shelters. Our Subcommittee report was endorsed by the full Committee on Homeland Security and Governmental Affairs in April 2005. Most recently, a 2006 Subcommittee staff report entitled, ``Tax Haven Abuses: The Enablers, the Tools, and Secrecy,'' disclosed how financial and legal professionals designed and sold yet another abusive tax shelter known as the POINT Strategy, which depended on secrecy laws and practices in the Isle of Man to conceal the phantom nature of securities trades that lay at the center of this tax shelter transaction. The Subcommittee investigations have found that many abusive tax shelters are not dreamed up by the taxpayers who use them. Instead, most are devised by tax professionals, such as accountants, bankers, investment advisors, and lawyers, who then sell the tax shelter to clients for a fee. In fact, as our 2003 investigation widened, we found a large number of tax advisors cooking up one complex scheme after another, packaging them up as generic ``tax products'' with boiler- plate legal and tax opinion letters, and then undertaking elaborate marketing schemes to peddle these products to literally thousands of persons across the country. In return, these tax shelter promoters were getting hundreds of millions of dollars in fees, while diverting billions of dollars in tax revenues from the U.S. Treasury each year. For example, one shelter investigated by the Subcommittee and featured in the 2003 hearings has since become part of an IRS effort to settle cases involving a set of abusive tax shelters known as ``Son of Boss.'' Following our hearing, more than 1,200 taxpayers have admitted wrongdoing and agreed to pay back taxes, interest and penalties totaling more than $3.7 billion. That's billions of dollars the IRS has collected on just one type of tax shelter, demonstrating both the depth of the problem and the potential for progress. The POINT shelter featured in our 2006 hearing involved another $300 million in tax loss on transactions conducted by just six taxpayers. The bill we are introducing today contains a number of measures to curb abusive tax shelters. First, it would strengthen the penalties imposed on those who aid or abet tax evasion. Second, it would prohibit the issuance of tax shelter patents. Several provisions would deter bank participation in abusive tax shelter activities by requiring regulators to develop new examination procedures to detect and stop such activities. Others would end outdated communication barriers between the IRS and other enforcement agencies such as the SEC, bank regulators, and the Public Company Accounting Oversight Board, to allow the exchange of information relating to tax evasion cases. The bill also provides for increased disclosure of tax shelter information to Congress. In addition, the bill would simplify and clarify an existing prohibition on the payment of fees linked to tax benefits; and authorize Treasury to issue tougher standards for tax shelter opinion letters. Finally, the bill would codify and strengthen the economic substance doctrine, which eliminates tax benefits for transactions that have no real business purpose apart from avoiding taxes. Let me be more specific about these key provisions to curb abusive tax shelters. Title III of the bill strengthens two very important penalties that the IRS can use in its fight against the professionals who make complex abusive shelters possible. Three years ago, the penalty for promoting an abusive tax shelter, as set forth in Section 6700 of the tax code, was the lesser of $1,000 or 100 percent of the promoter's gross income derived from the prohibited activity. That meant in most cases the maximum fine was just $1,000. Many abusive tax shelters sell for $100,000 or $250,000 apiece. Our investigation uncovered some tax shelters that were sold for as much as $2 million or even $5 million apiece, as well as instances in which the same cookie-cutter tax opinion letter was sold to 100 or even 200 clients. There are huge profits to be made in this business, and a $1,000 fine is laughable. The Senate acknowledged that in 2004 when it adopted the Levin- Coleman amendment to the JOBS Act, S. 1637, raising the Section 6700 penalty on abusive tax shelter promoters to 100 percent of the fees earned by the promoter from the abusive shelter. A 100 percent penalty would have ensured that the abusive tax shelter hucksters would not get to keep a single penny of their ill-gotten gains. That figure, however, was cut in half in the conference report, setting the penalty at 50 percent of the fees earned and allowing the promoters of abusive shelters to keep half of their illicit profits. While a 50 percent penalty is an obvious improvement over $1000, this penalty still is inadequate and makes no sense. Why should anyone who pushes an illegal tax shelter that robs our Treasury of needed revenues get to keep half of his ill-gotten gains? What deterrent effect is created by a penalty that allows promoters to keep half of their fees if caught, and of course, all of their fees if they are not caught? Effective penalties should make sure that the peddler of an abusive tax shelter is deprived of every penny of profit earned from selling or implementing the shelter and then is fined on top of that. Section 301 of this bill would do just that by increasing the penalty on tax shelter promoters to an amount equal to up to 150 percent of the promoters' gross income from the prohibited activity. A second penalty provision in the bill addresses what our investigations have found to be a key problem: the knowing assistance of accounting firms, law firms, banks, and others to help taxpayers understate their taxes. In addition to those who meet the definition of ``promoters'' of abusive shelters, there are professional firms that aid and abet the use of abusive tax shelters and enable taxpayers to carry out the abusive tax schemes. For example, law firms are often asked to write ``opinion letters'' to help taxpayers head off IRS questioning and fines that they might otherwise confront for using an abusive shelter. Currently, under Section 6701 of the tax code, these aiders and abettors face a maximum penalty of only $1,000, or $10,000 if the offender is a corporation. This penalty, too, is a joke. When law firms are getting $50,000 for each of these cookie-cutter opinion letters, it provides no deterrent whatsoever. A $1,000 fine is like a jaywalking ticket for robbing a bank. Section 302 of the bill would strengthen Section 6701 significantly, subjecting aiders and abettors to a maximum fine up to 150 percent of the aider and abettor's gross income from the prohibited activity. This penalty would apply to all aiders and abettors, not just tax return preparers. Again, the Senate has recognized the need to toughen this critical penalty. In the 2004 JOBS Act, Sen. Coleman and I successfully increased this fine to 100 percent of the gross income derived from the prohibited activity. Unfortunately, the conference report completely omitted this change, allowing aiders and abettors to continue to profit without penalty from their wrongdoing. If further justification for toughening these penalties is needed, one document uncovered by our investigation shows the cold calculation engaged in by a tax advisor facing low fines. A senior tax professional at accounting giant KPMG compared possible tax shelter fees with possible tax shelter penalties if the firm were caught promoting an illegal tax shelter. This senior tax professional wrote the following: ``[O]ur average deal would result in KPMG fees of $360,000 with a maximum penalty exposure of only $31,000.'' He then recommended the obvious: going forward with sales of the abusive tax shelter on a cost- benefit basis. Section 303 of our bill addresses the growing problem of tax shelter patents, which has the potential for significantly increasing abusive tax shelter activities. In 1998, a Federal appeals court ruled for the first time that business methods can be patented and, since then, various tax practitioners have filed applications to patent a variety of tax strategies. The U.S. Patent Office has apparently issued 49 tax strategy patents to date, with more on the way. These patents were issued by patent officers who, by statute, have a background in science and technology, not tax law, and know little to nothing about abusive tax shelters. Issuing these types of patents raises multiple public policy concerns. Patents issued for aggressive tax strategies, for example, may enable unscrupulous promoters to claim the patent represents an official endorsement of the strategy and evidence that it would withstand IRS challenge. Patents could be issued for blatantly illegal tax shelters, yet remain in place for years, producing revenue for the wrongdoers while the IRS battles the promoters in court. Patents for tax shelters found to be illegal by a court would nevertheless remain in place, creating confusion among users and possibly producing illicit income for the patent holder. Another set of policy concerns relates to the patenting of more routine tax strategies. If a single tax practitioner is the first to discover an advantage granted by the law and secures a patent for it, that person could then effectively charge a toll for all other taxpayers to use the same strategy, even though as a matter of public policy all persons ought to be able to take advantage of the law to minimize their taxes. Companies could even patent a legal method to minimize their taxes and then refuse to license that patent to their competitors in order to prevent them from lowering their operating costs. Tax patents could be used to hinder productivity and competition rather than foster it. The primary rationale for granting patents is to encourage innovation, which is normally perceived to be a sufficient public benefit to justify granting a temporary monopoly to the patent holder. In the tax arena, however, there has historically been ample incentive for innovation in the form of the tax savings alone. The last thing we need is a further incentive for aggressive tax shelters. That's why Section 303 would prohibit the patenting of any ``invention designed to minimize, avoid, defer, or otherwise affect the liability for Federal, State, local, or foreign tax.'' Another finding of the Subcommittee investigations is that some tax practitioners are circumventing current state and federal constraints on charging tax service fees that are dependent on the amount of promised tax benefits. Traditionally, accounting firms charged flat fees or hourly fees for their tax services. In the 1990s, however, they began charging ``value added'' fees based on, in the words of one accounting firm's manual, ``the value of the services provided, as opposed to the time required to perform the services.'' In addition, some firms began charging ``contingent fees'' that were calculated according to the size of the paper ``loss'' that could be produced for a client and used to offset the client's other taxable income the greater the so-called loss, the greater the fee. In response, many states prohibited accounting firms from charging contingent fees for tax work to avoid creating incentives for these firms to devise ways to shelter substantial sums. The SEC and the American Institute of Certified Public Accountants also issued rules restricting contingent fees, allowing them in only limited circumstances. Recently, the Public Company Accounting Oversight Board issued a similar rule prohibiting public accounting firms from charging contingent fees for tax services provided to the public companies they audit. Each of these federal, state, and professional ethics rules seeks to limit the use of contingent fees under certain, limited circumstances. The Subcommittee investigation found that tax shelter fees, which are typically substantial and sometimes exceed $1 million, are often linked to the amount of a taxpayer's projected paper losses which can be used to shelter income from taxation. For example, in four tax shelters examined by the Subcommittee in 2003, documents show that the fees were equal to a percentage of the paper loss to be generated by the transaction. In one case, the fees were typically set at 7 percent of the transaction's generated ``tax loss'' that clients could use to reduce other taxable income. In another, the fee was only 3.5 percent of the loss, but the losses were large enough to generate a fee of over $53 million on a single transaction. In other words, the greater the loss that could be concocted for the taxpayer or ``investor,'' the greater the profit for the tax promoter. Think about that--greater the loss, the greater the profit. How's that for turning capitalism on its head! In addition, evidence indicated that, in at least one instance, a tax advisor was willing to deliberately manipulate the way it handled certain tax products to circumvent contingent fee prohibitions. An internal document at an accounting firm related to a specific tax shelter, for example, identified the states that prohibited contingent fees. Then, rather than prohibit the tax shelter transactions in those states or require an alternative fee structure, the memorandum directed the firm's tax professionals to make sure the engagement letter was signed, the engagement was managed, and the bulk of services was performed ``in a jurisdiction that does not prohibit contingency fees.'' Right now, the prohibitions on contingent fees are complex and must be evaluated in the context of a patchwork of federal, state, and professional ethics rules. Section 304 of the bill would establish a single enforceable rule, applicable nationwide, that would prohibit tax practitioners from charging fees calculated according to a projected or actual amount of tax savings or paper losses. The bill would also help fight abusive tax shelters that are disguised as complex investment opportunities and use financing or securities transactions provided by financial institutions. In reality, tax shelter schemes lack the economic risks and rewards associated with a true investment. These phony transactions instead often rely on the temporary use of significant amounts of money in low risk schemes mischaracterized as real investments. The financing or securities transactions called for by these schemes are often supplied by a bank, securities firm, or other financial institution. Currently the tax code prohibits financial institutions from providing products or services that aid or abet tax evasion or that promote or implement abusive tax shelters. The agencies that oversee these financial institutions on a daily basis, however, are experts in banking and securities law and generally lack the expertise to spot tax issues. Section 305 would crack down on financial institutions' illegal tax shelter activities by requiring federal bank regulators and the SEC to work with the IRS to develop examination techniques to detect such abusive activities and put an end to them. These examination techniques would be used regularly, preferably in combination with routine regulatory examinations, and the regulators would report potential violations to the IRS. The agencies would also be required to prepare joint reports to Congress in 2009 and 2012 on preventing the participation of financial institutions in tax evasion or tax shelter activities. During hearings before the Permanent Subcommittee on Investigations on tax shelters in November 2003, IRS Commissioner Everson testified that his agency was barred by Section 6103 of the tax code from communicating information to other federal agencies that would assist those agencies in their law enforcement duties. He pointed out that the IRS was barred from providing tax return information to the SEC, federal bank regulators, and the Public Company Accounting Oversight Board (PCAOB)--even, for example, when that information might assist the SEC in evaluating whether an abusive tax shelter resulted in deceptive accounting in a public company's financial statements, might help the Federal Reserve determine whether a bank selling tax products to its clients had violated the law against promoting abusive tax shelters, or help the PCAOB judge whether an accounting firm had impaired its independence by selling tax shelters to its audit clients. A recent example demonstrates how harmful these information barriers are to legitimate law enforcement efforts. In 2004, the IRS offered a settlement initiative to companies and corporate executives who participated in an abusive tax shelter involving the transfer of stock options to family-controlled entities. Over a hundred corporations and executives responded with admissions of wrongdoing. In addition to tax violations, their misconduct may be linked to securities law violations and improprieties by corporate auditors or banks, but the IRS has informed the Subcommittee that it is currently barred by law from sharing the names of the wrongdoers with the SEC, banking regulators, or PCAOB. These communication barriers are outdated, inefficient, and ill- suited to stopping the torrent of tax shelter abuses now affecting or being promoted by so many public companies, banks, and accounting firms. To address this problem, Section 306 of this bill would authorize the Treasury Secretary, with appropriate privacy safeguards, to disclose to the SEC, federal banking agencies, and the PCAOB, upon request, tax return information related to abusive tax shelters, inappropriate tax avoidance, or tax evasion. The agencies could then use this information only for law enforcement purposes, such as preventing accounting firms or banks from promoting abusive tax shelters, or detecting accounting fraud in the financial statements of public companies. The bill would also provide for increased disclosure of tax shelter information to Congress. Section 307 would make it clear that companies providing tax return preparation services to taxpayers cannot refuse to comply with a Congressional document subpoena by citing Section 7216, which prohibits tax return preparers from disclosing taxpayer information to third parties. Several accounting and law firms raised this claim in response to document subpoenas issued by the Permanent Subcommittee on Investigations, contending they were barred by the nondisclosure provision in Section 7216 from producing documents related to the sale of abusive tax shelters to clients for a fee. The accounting and law firms maintained this position despite an analysis provided by the Senate legal counsel showing that the nondisclosure provision was never intended to create a privilege or to override a Senate subpoena, as demonstrated in federal regulations interpreting the provision. This bill would codify the existing regulations interpreting Section 7216 and make it clear that Congressional document subpoenas must be honored. Section 307 would also ensure Congress has access to information about decisions by the Treasury related to an organization's tax exempt status. A 2003 decision by the D.C. Circuit Court of Appeals, Tax Analysts v. IRS, struck down certain IRS regulations and held that the IRS must disclose letters denying or revoking an organization's tax exempt status. The IRS has been reluctant to disclose such information, not only to the public, but also to Congress, including in response to requests by the Subcommittee. For example, in 2005, the IRS revoked the tax exempt status of four credit counseling firms, and, despite the Tax Analysts case, claimed that it could not disclose to the Subcommittee the names of the four firms or the reasons for revoking their tax exemption. Our bill would make it clear that, upon receipt of a request from a Congressional committee or subcommittee, the IRS must disclose documents, other than a tax return, related to the agency's determination to grant, deny, revoke or restore an organization's exemption from taxation. The Treasury Department recently issued new standards for tax practitioners issuing opinion letters on the tax implications of potential tax shelters as part of Circular 230. Section 308 of the bill would provide express statutory authority for these and even clearer regulations. The public has traditionally relied on tax opinion letters to obtain informed and trustworthy advice about whether a tax-motivated transaction meets the requirements of the law. The Permanent Subcommittee on Investigations has found that, in too many cases, tax opinion letters no longer contain disinterested and reliable tax advice, even when issued by supposedly reputable accounting or law firms. Instead, some tax opinion letters have become marketing tools used by tax shelter promoters and their allies to sell clients on their latest tax products. In many of these cases, financial interests and biases were concealed, unreasonable factual assumptions were used to justify dubious legal conclusions, and taxpayers were misled about the risk that the proposed transaction would later be designated an illegal tax shelter. Reforms are essential to address these abuses and restore the integrity of tax opinion letters. The Treasury Department recently adopted standards that address a number of the abuses affecting tax shelter opinion letters; however, the standards could be stronger yet. Our bill would authorize Treasury to issue standards addressing a wider spectrum of tax shelter opinion letter problems, including: preventing concealed collaboration among supposedly independent letter writers; avoiding conflicts of interest that would impair auditor independence; ensuring appropriate fee charges; preventing practitioners and firms from aiding and abetting the understatement of tax liability by clients; and banning the promotion of potentially abusive tax shelters. By addressing each of these areas, a beefed-up Circular 230 could help reduce the ongoing abusive practices related to tax shelter opinion letters. Finally, Title IV of the bill incorporates a Baucus-Grassley proposal which would strengthen legal prohibitions against abusive tax shelters by codifying in Federal tax statutes for the first time what is known as the economic substance doctrine. This anti-tax abuse doctrine was fashioned by federal courts evaluating transactions that appeared to have little or no business purpose or economic substance apart from tax avoidance. It has become a powerful analytical tool used by courts to invalidate abusive tax shelters. At the same time, because there is no statute underlying this doctrine and the courts have developed and applied it differently in different judicial districts, the existing case law has many ambiguities and conflicting interpretations. This language was developed under the leadership of Senators Baucus and Grassley, the Chairman and Ranking Member of the Finance Committee. The Senate has voted on multiple occasions to enact it into law, but House conferees have rejected it each time. Since no tax shelter legislation would be complete without addressing this issue, Title IV of this comprehensive bill proposes once more to include the economic substance doctrine in the tax code. The eyes of some people may glaze over when tax shelters and tax havens are discussed, but unscrupulous taxpayers and tax professionals clearly see illicit dollar signs. Our commitment to crack down on their tax abuses must be as strong as their determination to get away with ripping off America and American taxpayers. Our bill provides powerful new tools to end the tax haven and tax shelter abuses. Tax haven and tax shelter abuses contribute nearly $100 billion to the $345 billion annual tax gap, which represents taxes owed but not paid. It's long past time for taxes owing to the people's Treasury to be collected. And it's long past time for Congress to end the shifting of a disproportionate tax burden onto the shoulders of honest Americans.

Mr. LEVIN

Mr. LEVIN. Mr. President, today I rise, as many do this month, to join in the nationwide recognition of African- American history. Every February, the Nation joins in the celebration of the sacrifice, perseverance, and advancement of African Americans. The idea of an African-American history month was proposed by Dr. Carter G. Woodson, a son of former slaves. Dr. Woodson, who became a prominent scholar in African-American studies, worked tirelessly to ensure that the contribution of African Americans would not be forgotten. In an article written for Johnson's Publications, Lerone Bennett tells us that one of the most inspiring and instructive stories in African-American history is the story of Woodson's struggle and rise from the coal mines of West Virginia to the summit of academic achievement: ``At 17, the young man who was called by history to reveal Black history was an untutored coal miner. At 19, after teaching himself the fundamentals of English and arithmetic, he entered high school and mastered the four-year curriculum in less than two years. At 22, after two-thirds of a year at Berea College [in Kentucky], he returned to the coal mines and studied Latin and Greek between trips to the mine shafts. He then went on to the University of Chicago, where he received bachelor's and master's degrees, and Harvard University, where he became the second Black to receive a doctorate in history. The rest is history--Black history.'' It is important to honor the legacy of Dr. Woodson and other African- American pioneers who led the advancement of African Americans in a nation once lacking in humanity towards them. In the spirit of honoring those legacies, I pay homage to two women, claimed by my home State of Michigan, who played pivotal roles in the struggle for civil rights and human rights. Sojourner Truth and Rosa Parks were women of different times, yet similar courage, and effectively raised awareness for the inequality and injustice of their eras. Both have been recently honored by Congress. It was my privilege to cosponsor legislation, enacted on December 20, 2006, authorizing a bust of Sojourner Truth to be prominently displayed in the United States Capitol, and it was also my privilege to cosponsor legislation, signed into law on December 1, 2005, which directs the Architect of the Capitol to place a statue of Rosa Parks in National Statuary Hall of the U.S. Capitol. Sojourner Truth and Rosa Parks will become the first African-American women to be represented in this place of honor of notable people of History. These are truly two phenomenal women, not just in African-American history, but in American History. Sojourner Truth, although unable to read and write, was widely accepted as one of the most effective spokespersons of her time. She spoke eloquently and energetically about the inhumanity and immorality of slavery. Truth also worked toward other social goals, especially women's rights. In 1851, she delivered her famous ``Ain't I a Woman?'' speech at the historic Women's Convention in Akron, OH. Sojourner Truth attacked both racist and sexist notions during her speech when she said, ``Then that little man in back there, he says women can't have as much rights as men, 'cause Christ wasn't a woman? Where did your Christ come from? From God and a woman! Man had nothing to do with Him.'' Sojourner Truth settled in Battle Creek, MI, during the mid-1850s. She traveled throughout the State during the Civil War to collect food and clothing for African-American volunteer units. Truth also traveled to Washington, DC, in 1864 to meet with President Abraham Lincoln. Truth became a close advisor to the President on assisting freed slaves. While in Washington, Truth also appeared at women's suffrage gatherings. As a result of illness, Sojourner Truth returned to Battle Creek in 1875. Born Isabella Baumfree in 1797, she died Sojourner Truth in 1883. Although she was born in chains, her legacy lives in fame. Michigan honored Sojourner Truth and her extraordinary legacy with the dedication of the Sojourner Truth Memorial Monument. Located in Battle Creek, MI, this monument was unveiled on September 25, 1999. On November 2, 2005, I joined over 4,000 mourners at Greater Grace Temple to celebrate the life of Rosa Parks at her funeral in Detroit, MI. Just a few days earlier, Rosa Parks became the first woman in the history of the United States to lie in honor in the Capitol Rotunda. And, a few years earlier on June 15, 1999, Rosa Parks was presented with the highest honor of Congress, the Congressional Gold Medal. The actions of Rosa Parks merit such honor, as her silent resistance to the humiliation and demoralization of racial segregation sparked the civil rights movement. Over 51 years ago in Montgomery, AL, she refused to give up her seat and move to the back of the bus. The strength and spirit of this courageous woman and her act of peaceful rebellion captured the conscience of the American people and the world. For Rosa Parks, this was but a small part of a lifetime of struggle for equality and justice. In fact, 12 years earlier, Rosa Parks had been arrested for violating another segregation law, which required African Americans to pay their fares at the front of the bus, then exit and reenter at the rear door. The driver of that bus was the same driver that would order Rosa Parks to the back of the bus in December of 1955. The boycott of the bus system in Montgomery was a direct result of Rosa Parks' actions, which sparked a movement that called attention to the plight of African Americans nationwide and introduced the world to the civil rights movement and its young leader, who would one day have a national holiday declared in his honor, Rev. Martin Luther King Jr. Mr. President, we have come a long way toward achieving justice and equality for all. But we still have work to do. We must rededicate ourselves to continuing the struggle for civil rights and human rights.

Mr. LEVIN

Mr. LEVIN. Mr. President, the demand for firearms by criminals and other prohibited purchasers is high. Unfortunately, there are also some dealers willing to supply those firearms. The simple fact is that criminals would not be able to so readily acquire weapons without gun dealers who are willing to bypass gun sales laws. This willingness by some licensed gun dealers to supply gun traffickers with firearms provides a steady flow of guns into the illegal market. Multiple sales of the same model of gun to an individual are considered by the Bureau of Alcohol, Tobacco, Firearms and Explosives, ATF, to be among the prime indicators that gun trafficking is occurring from a gun shop. Gun collectors generally do not collect duplicates of the same firearm. The attempt to make multiple purchases of the same weapon should raise a red flag for the dealer to the possibility of trafficking, and reports of multiple sales to the ATF by responsible gun dealers provide a significant percentage of leads for gun trafficking investigations. According to ATF reports, handguns sold as part of multiple sales comprised nearly a quarter of all guns sold in 1999 that were traced to crime that same year. Moreover, guns with obliterated serial numbers, a clear sign of trafficking, are substantially more likely to have been part of a multiple sale. Dealers are responsible for the products they sell, and they must be held accountable to inquire about the purpose the buyer declares for purchasing multiple handguns at one time and report such suspicious behavior to the ATF. One step several States have taken in order to address the issue of multiple purchases is instituting a one-handgun- per-month purchasing restriction. Another common tool traffickers use to acquire firearms from licensed dealers is to avoid multiple sale reporting requirements by waiting short periods of time between handgun purchases. During a police operation in Chicago, some dealers suggested to undercover officers that they space out their purchases in order to avoid detection by law enforcement. Under Federal law, dealers are required to report only sales of two or more handguns within a 5 day period to the ATF. By encouraging purchasers to stagger their purchases every 6 days, a dealer would be able to circumvent reporting potential trafficking to law enforcement. Using in-store accomplices to fill out the required Federal paperwork is also a common method gun traffickers employ. The most obvious sign of this occurs when the person who fills out the Federal purchasing forms is not the person looking at, handling, or selecting the gun to be purchased or paying for the weapon. Even if the purchaser is buying only a single handgun, this type of sale should not be permitted by a licensed gun dealer. These types of illegal transactions likely occur every day in some licensed gun dealerships across the country. We must make it harder for criminals to get guns to decrease the number of gun violence victims. Those gun dealers who willingly aid gun traffickers must be held accountable for their actions.

Mr. LEVIN

Mr. LEVIN. Mr. President, Senator McCain and I are today introducing, by request, the administration's proposed National Defense Authorization Act for Fiscal Year 2008. As is the case with any bill that is introduced by request, we introduce this bill for the purpose of placing the administration's proposals before Congress and the public without expressing our own views on the substance of these proposals. As chairman and ranking member of the Armed Services Committee, we look forward to giving the administration's requested legislation our most careful review and thoughtful consideration.

Mr. LEVIN

Mr. LEVIN. Mr. President, again, it is extraordinarily ironic that my good friend from Arizona says there is no one in a high position in this Government who thinks we are succeeding, when the President, just 2 or 3 months ago, said we are absolutely winning in Iraq. That is the Commander in Chief--a pretty high position of responsibility. The Vice President, just last year, said that the insurgency is in its last throes, when it was not. So it was clear to everybody, and apparently to my good friend from Arizona because he says he had seen this for years--failure after failure in Iraq--identified by the highest levels and the highest level of this administration as being a success. Year after year, we were told this is a successful strategy. Now all of a sudden, a general who was assigned to carry out that strategy and did the best he could, acknowledging some mistakes in implementation, is going to be held accountable by some who will vote against his nomination for the massive failures at the highest levels of civilian authority. The strategy was wrong going into Iraq; it was poorly implemented. The Iraqi Army was disbanded. That was not General Casey; that was before he came. The people who made those decisions were given awards and medals by the administration. George Tenet was given a medal for his work. He said the intelligence was a slam-dunk, that there were weapons of mass destruction. Medal after medal was given to the civilian leaders. A Medal of Freedom was awarded to George Tenet. Ambassador Bremer was given a medal. He just disbanded the Iraqi Army and had a debaathification program, which was a complete failure because of its excess. He was given a Medal of Freedom. William Haynes, General Counsel of the Department of Defense--his dubious legal judgment contributed to the interrogation abuses of detainees that led to the horrors of Abu Ghraib. He was given the Department of Defense medal for distinguished public service. Under Secretary of Defense Doug Feith, who hyped false intelligence used to justify the war in Iraq, was given a medal. Now you have a general who was given a strategy and was told to implement the strategy. Yes, he was optimistic that it could work. He is in charge of the morale of his troops. Now, suddenly, some say he should be, in effect, punished. He should carry the burdens that properly should be carried by the top civilian leaders of this Nation. It is not appropriate. It is not fair that General Casey be held responsible for massive failures that were caused by the wrong policies, the deceptions, the ignorance, the arrogance, and the cockiness of civilian leaders in this administration. It is just plain wrong that this all be heaped onto his back. What do we know about General Casey? By the way, we know he is forthright and acknowledges his mistakes. There is not a commander I know of who does not acknowledge his mistakes. Every commander worth his or her salt acknowledges mistakes, and General Casey has done that. In fact, he has given us a list of mistakes. We asked him what went wrong that you contributed to, and he gave us a list very openly. But you cannot lay the chaos and the violence in Iraq on General Casey's doorstep. This belongs on the doorstep of the top civilian leaders of this country who went into Iraq the way they did, who didn't plan for an aftermath, who disbanded the Iraqi army, and who perpetrated some of the other mistakes that have put us in some of the positions that we are in, in Iraq. General Casey is a long and distinguished servant in the military, including the position of Vice Chief of Staff of the Army. This was preceded by assignments on the joint staff and a career commanding Infantry units at all levels, up to and including Division Command. He knows Iraq, he knows the challenges the Army faces in Iraq, he knows the Pentagon, and he knows the challenges he will be facing in the Pentagon if we confirm him. He has the knowledge and skills to carry out his primary responsibility as Chief of Staff, which is the training and equipping of soldiers, caring for them and their families. I want to discuss two issues that have been raised. One is the general's decision to support an increase in U.S. forces in Iraq after previously opposing such an increase, and also the proposition that General Casey somehow or other should be denied this position because of mistakes that he may have made in Iraq. First, the issue of additional troops. I pressed General Casey about this issue at his nomination hearing before the Armed Services Committee. He said his general view was that he agreed with General Abizaid's view that more American forces prevent the Iraqis from doing more, from taking more responsibility for their own future. That is something, it seems to me, that is key to those of us who oppose this surge. That goes to the heart of our argument--the fact that General Casey believed more American forces prevent the Iraqis from doing more, from taking more responsibility for their own future. So how is it that now General Casey supports the surge? That is the question I asked him: Senator Levin: We asked General Abizaid back in November when he appeared before this committee whether we needed more troops or he supported more troops going to Iraq. And this is just last November. And this is what he said. He said that he met with every divisional commander, General Casey, the Corps commander, General Dempsey. ``We all talked together, and I said, `In your professional opinion, if you were to bring in more American troops now, does it add considerably to our ability to achieve success in Iraq?' And they all said no. And the reason is because we want Iraqis to do more. It's easy for the Iraqis to rely upon us to do this work. I believe that more American forces prevent the Iraqis from doing more, from taking more responsibility for their own future.'' I asked General Casey: Now, General Abizaid said that he spoke to you and that his opinion reflected your opinion and all the other commanders. Was that true when he said that? General Casey: I'm not exactly sure when in November it was, but it was. Senator Levin: So you've changed your view since November? General Casey: As I described in my opening testimony, Senator, in mid-November was when the reevaluation of the plan was taking place. So I suspect John and I talked before that. And that does reflect my general view on additional U.S. forces in Iraq. Senator Levin: It reflects a general view, but then there was some kind of reevaluation which took place in mid- November. General Casey: That's right, Senator. We're constantly reevaluating how we're doing and what we need. Senator Levin: But that position that General Abizaid stated was your position when you spoke to him in early November presumably still remains your general view. General Casey: That's correct. Senator Levin: Well, if that's your general view, what is the change? Why are you modifying your general view for this surge? General Casey: What has changed, Senator, are several things. One, the development of a plan, a new plan that was conceived by the Iraqis and worked in concert with us; so there is a plan that laid out requirements for those forces. So just to say do you need more forces is one thing; to say do you need more forces to execute this plan is quite another. And we do need an additional two brigades to implement that plan. Now, there is a new plan, a plan that I very strongly disagree with, the surge plan of the President. It is a new plan given to the commanders, and they are now told, with this new plan, to insert troops into neighborhoods of Iraq, hold that territory, and have more American troops--many more--embedded with Iraqi forces. That is the plan. That is the Commander in Chief's decision. Will that require more troops? And now General Casey gives his honest answer that it will require, in his judgment, two additional brigades. General Abizaid says it will require more brigades, but General Casey said two. I give him credit for giving his honest opinion. So what has changed? He still believes in general that putting more troops in there takes the Iraqis off the hook, but if you change your plan, you change your mission and you say, as the Commander in Chief has, that is now our mission, that is what we are going to do, it is obviously up to the commanders to say how many additional troops it would take to carry out that mission. That is an honest response, and that is the response we expect of our leaders. But his general view has been correct, and so has General Abizaid's. More American troops is a mistake. It takes the Iraqis off the hook. It lessens the responsibility on them to do what only they can do with their military and with their political leaders. People who have visited General Casey in Iraq--colleagues--have always found him to be honest about the situation in Iraq and true to the pledge that he would give Congress his personal views, even if those views differ from the administration in power. And he did this again at his nomination hearing when he disagreed with the Commander in Chief's sudden epiphany that things are not going well in Iraq. All of a sudden, now the Commander in Chief says we are on the road to slow failure. That is a new revelation. Until a few months ago, the Commander in Chief was telling the American people we are absolutely winning in Iraq. So now I pressed General Casey about that: Do you agree with the President that now the situation in Iraq is maybe a slow failure? He said: I actually don't see it as a slow failure. I actually see it as slow progress. Do I agree with his assessment? I do not. I have seen chaos in Iraq-- consistent chaos, growing chaos. But do I admire an honest answer even when it disagrees with the Commander in Chief? I do. Even though I disagree with that answer, I think it was an honest answer that he gave to the committee. What about denying him confirmation as Chief of Staff because of the mistakes he may have made? Again, I think this is an ironic argument given the fact that the architects of these policies, the architects of the major failures which led to the mess General Casey was assigned to clean up, are given medals--Medals of Freedom, medals by the Defense Department. They are given the medals, and now some will want to lay on General Casey's doorstep the mess that was not created by his policies but by the policies of others. I want to read for the Record a statement of Senator Jim Webb on the Casey nomination. He is tied up in a hearing, and so I will read this very brief statement into the Record for Senator Webb: Mr. President, I rise today to speak in support of GEN George Casey, Jr.'s, nomination as the Chief of Staff of the U.S. Army. General Casey's service to the Nation during a long career and his experiences in Iraq qualify him well to address the formidable challenges facing the U.S. Army today. Questions have been raised regarding General Casey's tenure as commander of the Multinational Force-Iraq. The national strategy in Iraq was flawed even before the invasion, and attacks on General Casey's performance only divert attention from the true architects of that strategy. The situation faced by General Casey in Iraq represents the classic conundrum of military service at the highest level of command. In this administration, it has not been unheard of for some officers who spoke too loudly, very often, to have lost their jobs. At the same time, to speak too softly often causes the military leader, rather than the civilian boss, to be blamed when things go wrong. While I believe strongly that military leaders should be held accountable, General Casey performed as well as one could expect given the strategy for the war's direction that he inherited when he reported to Baghdad. I wonder, Mr. President, if there is any time remaining.

Mr. LEVIN. I thank the Presiding Officer. This is the conclusion of Senator Webb's statement: The consequences of a failed U.S. national strategy should be raised at a far higher level than General Casey's in Iraq. Mr. President, I urge my esteemed colleagues to support General Casey's nomination to be the next Chief of Staff of the U.S. Army.

Mr. LEVIN. I thank the Chair.

Mr. LEVIN. Reserving the right to object, and I obviously will not object, I apologize to the Senator from Virginia. I didn't realize he was here to speak on the nomination. If he is speaking in favor, I would have reserved some time for him.

Mr. LEVIN

Mr. LEVIN. Mr. President, on January 23, over 50 members of Mayors Against Illegal Guns met in Washington, DC, for the coalition's 2007 National Summit. Mayors from 27 States and the District of Columbia shared practices and strategies, discussed the importance of forging alliances with gun owners, and united in opposition to laws that restrict cities' access to, and use of, gun trace data. They also heard the results of a bipartisan national poll which shows strong support for tougher enforcement of existing gun laws and common sense provisions to prevent and solve crimes. The original group of 15 mayors first met in April 2006 in New York City, where they pledged to seek the involvement of up to 50 mayors from around the country. By early June 2006, 52 mayors had joined the coalition. Within a few days following the conclusion of the 2007 summit, 31 additional mayors from across the Nation joined the coalition. The coalition currently includes 154 mayors from 44 States and the District of Columbia. As cochair of the coalition, New York City Mayor Michael Bloomberg described this growth by saying: Our coalition is growing because--as the national summit showed--mayors of both parties are committed to doing more to keep illegal guns off the street, which threaten the safety of our citizens, especially our police officers. The 31 new mayors joining the ranks of our coalition demonstrate that momentum is building for our effort to crack down on illegal guns and convince state legislatures and Congress to take ideology out of law enforcement. The coalition's basic principle is that keeping illegal guns off the street is not an issue of ideology but of law enforcement. It, therefore, is united in taking a commonsense approach to fighting illegal guns at the local, State and Federal levels. The vast majority of guns used in crimes are purchased and possessed illegally. Most gun dealers, however, are honest business people that carefully follow the law. According to gun crime trace data, 85 percent of dealers do not sell any guns used in crimes. It is only a small number of irresponsible dealers that cause the vast majority of problems. In fact, it is only about 1 percent of gun sellers who account for 60 percent of all guns used in crimes. According to a national survey conducted by Greenberg Quinian Rosner Research and the Terrance Group on behalf of Mayors Against Illegal Guns, 84 percent of Americans say they are concerned about gun violence. This concern crosses partisan lines, and spans big cities and small rural areas alike. Eighty-two percent of Americans favor either tougher enforcement of existing laws or tough new laws. This strong public support for common-sense measures serves to reinforce what we should already know. I would like to urge this Congress to follow the example of these mayors and work in a bipartisan manner to promote and pass sensible gun safety legislation.

Mr. LEVIN

Mr. LEVIN. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.

Mr. LEVIN

Mr. LEVIN. Mr. President, I support GEN George Casey's confirmation to be the next Chief of Staff of the United States Army. His nomination was approved by the Armed Services Committee by a vote of 19 to 6. Through a long and distinguished career, he has held positions of increasing responsibility, culminating in that of Commanding General of multinational forces in Iraq, in which capacity he served for over 2\1/ 2\ years. Prior to that command, he was Vice Chief of Staff of the Army, which was preceded by an assignment as Director of the Joint Staff, and before that as Director of Strategy, Plans, and Policy, J-5, on the Joint Staff. General Casey is an infantryman, having commanded at all levels up to and including division command. As an assistant division commander, he served in Bosnia, and earlier in his career he served in Cairo as a U.N. military observer with the U.N. Truce Supervision Organization. He also served a tour of duty as a congressional liaison officer. General Casey knows Iraq and the challenges the Army faces there. He also knows the Pentagon and the challenges he will face there. General Casey has the knowledge to perform his primary responsibilities as Chief of Staff, which is the training and equipping of soldiers and caring for them and their families. There is some opposition to General Casey's nomination because he is identified with the administration's failed Iraq strategy, and I agree that strategy has not been successful. As a matter of fact, I have argued as forcefully as I know how that strategy has not been successful and that we need to change course in Iraq. It is appropriate to hold military leaders responsible for their own failures, but the principal failures that have led to the chaos in Iraq were decisions of the civilian leaders. General Casey had to deal with the consequences of a myriad of flawed policies, including having insufficient forces at the outset of the operation, failing to properly plan for postwar stability operations, disbanding the Iraqi Army, then trying to build a new army, initially using civilian contractors, and an overly extensive debaathification program, to name but a few. All of these critical mistakes, which fueled the insurgency and civil disorder, are attributed to the civilian leadership in the White House, in the Department of Defense, and in the Coalition Provisional Authority. Compounding those mistakes was the effect of detainee abuse at Abu Ghraib attributed, in part, to ambiguities in what was considered permissible in the interrogation of prisoners fostered by that very same civilian leadership in the administration, the White House, and the Pentagon, where the advice of uniformed military lawyers was overruled. Those critical mistakes were made in the year before General Casey took command and had severe adverse consequences which he inherited. General Casey's focus in Iraq was on training and equipping Iraqi security forces to bring them as quickly as possible to a level where they could relieve American forces from the burden of providing the security that Iraqis should be providing for themselves. He was not alone in seeing this was a priority. It was also the focus of his boss, the Central Command commander, General Abizaid, and his subordinates, the Corps commander, Lieutenant General Chiarelli, and the commanders of that training effort, Generals Petraeus and later Dempsey. General Casey put it this way: The longer we in the United States forces continue to bear the main burden of Iraq's security, it lengthens the time that the Government of Iraq has to take the hard decisions about reconciliation and dealing with the militias. And the other thing is that they can continue to blame us for all of Iraq's problems, which are at base their problems. Those are wise words. General Casey recognized there is no military solution to the situation in Iraq, that only a political solution enabled by Iraqi politicians making the essential political compromises can save the Iraqis from themselves. General Casey is not alone. There actually seems to be an agreement among most observers that an Iraqi political settlement is a key to ending the violence in Iraq. The difference of opinion exists on whether Iraqi politicians need breathing space, as President Bush has said, to reach required political compromises or whether, as many of us believe, Iraqi politicians need to be pressured to make those compromises and that the addition of 21,000 more troops doesn't make a political compromise more likely, it just gets us in deeper into a civil conflict. It has been said that General Casey was too optimistic about the possibility of troops being reduced, having predicted in the spring and summer of 2006 and then subsequently predicting that reduction toward the end of 2006 and into 2007 was possible. He did make those predictions, and I think he was clearly overly optimistic. He has made a number of mistakes, but the key fundamental flaws were the mistakes made, the wrong judgments of the civilian leadership of this country, not the uniformed military leaders of this country. Was he too optimistic? Yes. Is he still too optimistic? I believe he is. When asked about whether he agreed with what the President finally said the other day, that we are on a road to slow failure--the President finally stepping up to acknowledging the reality in Iraq-- General Casey said he believed we are still on a road to slow success. That is how optimistic he is. I am not going to hold that against him. I think he is wrong in that excessive optimism, but we expect our military leaders to be enthusiastic and positive about the missions they are assigned--the missions that they are assigned--by their civilian leaders. We expect them to be confident and to inspire their soldiers with the importance of those missions, to keep their morale high, and General Casey did that. He has also increased and decreased troops--both--depending on the missions assigned to him by the civilian leaders. As he testified, he requested additional troops on six occasions for specific missions, such as to provide security for the elections or otherwise deal with spikes of violence. However, mindful of the stress on soldiers and their families and on the deteriorating readiness of the nondeployed units in the Army and the Marine Corps, he also sought opportunities for reductions--both directions. One of the real questions I had to face in addressing this nomination was whether General Casey changed his tune when it came to this surge of additional troops that is being requested or being sent by the President. I pressed him on this issue at his nomination hearing before the Armed Services Committee. I want to read the exchange between General Casey and myself at his hearing within the last week. I asked General Casey the following: We asked General Abizaid back in November when he appeared before this committee whether he needed more troops or whether he supported more troops going to Iraq. And this is just last November. And this is what he said. He said that he met with every divisional commander, General Casey, the Corps commander, General Dempsey. ``We all talked together. And I said, in your professional opinion, if you were to bring in more American troops now, does it add considerably to our ability to achieve success in Iraq? And they all said no. And the reason is because we want Iraqis to do more. It's easy for the Iraqis to rely upon us to do this work. I believe-- This is General Abizaid speaking-- that more American forces prevent the Iraqis from doing more, from taking more responsibility for their own future.'' I continued in my questioning of General Casey: Now, General Abizaid said that he spoke to you and that his opinion reflected your opinion and all the other commanders. Was that true when he said it? General Casey: I'm not exactly sure when in November it was, but it was. Senator Levin: So you've changed your view since November? General Casey: As I described in my opening testimony, Senator, in mid November was when the reevaluation of the plan was taking place. So I suspect John and I talked before that. And that does reflect my general view on additional U.S. forces in Iraq. Senator Levin: It reflects a general view, but then there was some kind of a reevaluation which took place in mid November. General Casey: That's right, Senator. We're constantly reevaluating how we're doing and what we need. Senator Levin: But that position that General Abizaid stated was your position when you spoke to him in early November presumably still remains your general view. General Casey: That's correct. Senator Levin: Well, if that's your general view, what is the change? Why are you modifying your general view for this surge? General Casey: What has changed, Senator, are several things: One, the development of a plan, a new plan that was conceived by the Iraqis and worked in concert with us; so there is a plan that laid out requirement for those forces. So just to say do you need more forces is one thing; to say do you need more forces to execute this plan is quite another. And we do need an additional two brigades to implement that plan. I think he is giving us a straightforward answer to that question. His general view is, and was before the new plan was adopted, that we did not need more forces in Iraq; that it took the Iraqis off the hook. There was a new plan which was adopted by the administration, by the Commander in Chief, by the civilian leadership of this country. That plan requires that we not just clear neighborhoods but that we then remain in neighborhoods in Baghdad. Do I think that is a wise plan? I do not. I am going to vote against the surge. I think it gets us in deeper militarily. This is a military officer who has been given a new plan and has been asked what are the requirements for that new plan which has been adopted by the civilian leaders of this country. And when given a new plan by the Commander in Chief, he very properly said that is going to require some additional troops. Again, we are going to debate the plan, the wisdom of it, I hope one of these days. We are going to debate the wisdom of whether this surge makes sense. But given a new plan, given that decision, what General Casey is saying is that his general view about the lack of the wisdom of increasing the military presence in Iraq has to be modified when there is a new requirement, a new plan which requires us to be present in the neighborhoods of Baghdad. Once again, although I disagree with the plan, I view that as a satisfactory explanation for why he now supports the additional troops. Not to the same extent that the President has proposed or decided upon, but to the extent of two brigades. He said the additional brigades will give additional flexibility. He doesn't have any problem with that, but he testified that was not what his recommendation was. So his emphasis on building up Iraqi security forces to relieve Americans of the tasks that Iraqis should be doing for themselves is a critical part of any strategy in Iraq that has a chance of success, and it is key to the ultimate U.S. military disengagement. The real key to a stable and secure Iraq and a viable Iraq is a political solution that can only be reached by the leaders in Iraq, the politicians. And what American political leaders need to do, in my judgment, is to pressure those politicians to make that happen. That was never General Casey's responsibility. General Casey never had the responsibility of doing what is critically essential politically, which is to put pressure on the Iraqi politicians to reach a political settlement. He is a military man. He is a military man who, by his own acknowledgment, has made a number of mistakes. Indeed, he listed a number of mistakes for us that he has made and that he takes responsibility for. But the fundamental mistakes which have led to the chaos in Iraq, which did not allow us to help to create in Iraq a stable and viable country, which is the goal of all of us, those fundamental mistakes were the mistakes made by the civilian leaders of this country. To hold him accountable or responsible, and to vote against him because of the major mistakes which led to this chaos through not the uniformed leaders' mistakes but through our civilian leaders' mistakes, it seems to me, is inappropriate and unfair, and I will vote for his confirmation. Mr. President, I yield the floor.

Mr. LEVIN. Mr. President, a couple of quick comments on my good friend's statement. First, no one suggests that the commanders be absolved from any responsibility. In fact, when we asked General Casey what mistakes had been made, he listed a number of mistakes in his own answers, including: We underestimated the ability of al-Qaida, the Sunni insurgents, to provoke sectarian conflict and failed to preempt the attack against the Golden Mosque in Samarra; we thought that as more security forces were trained and equipped we would be able to gradually shift ever increasing security responsibilities to them and thus reduce our forces proportionately. This is occurring slower than we originally projected. We were slow to anticipate the extent of the radical Shia death squads. He has acknowledged mistakes have been made. But the fundamental mistakes which have been made which caused us to be in the situation we are in were not George Casey's. Every commander makes mistakes. There is no commander I know of who would say he or she did not make mistakes. No one is absolving General Casey of the mistakes, which he is the first to acknowledge. The question is whether he is going to be held accountable--not for his mistakes but for the fundamental mistakes which were made by the civilian leadership of this Nation. That is the question. When my friend says General Casey must be the only one in America who doesn't think this policy is a failure, let me give you a couple of other Americans who seem to think the same way. Let's start with the President of the United States, last October, when he said: ``We are absolutely winning in Iraq.'' That is the Commander in Chief. ``We are absolutely winning in Iraq.'' How about another person, the Vice President of the United States, within the last year? ``The insurgency is in its last throes.'' To say that General Casey is the only person in America who has made statements that are overly optimistic, to put it mildly, in terms of what is going on in Iraq, when he is trying to carry out the policies of the administration, keep the morale of his troops, and now, after November the President now says we are on a road to slow failure, after the American public told the President of the United States that we are on a road to slow failure, now what we are saying is: OK, the President acknowledges we are on a road to slow failure unless we adopt his policy of a surge. What General Casey is saying, honestly, when I pressed him--he doesn't frame it that way. He believes we are on a slow progress road. Are we going to say he is not qualified to be Chief of Staff of the United States Army, when he has been Vice Chief, he has been a Commander, he has been a three star general--because he believes it is slow progress instead of slow failure, when we have a Commander in Chief who just a few months ago said we are absolutely winning in Iraq, absolutely winning? And George Casey, now it is all piled on him. He is the only one in America who seems to think we are winning in Iraq. Well, he doesn't think we are winning in Iraq; he thinks we are slowly making progress in Iraq, to use his words. Do I agree with him? No. I think this policy has been a failure right from the beginning. Going in was a mistake. It was a mistake that was based on arrogance, it was based on a misunderstanding of history, it was based on a misreading of what the threat was, it was based on a lot of mistakes. Disbanding the Iraqi Army? Look what it has led to. Not having a plan for the aftermath? Look what it has led to. These are the fundamentals. These are the transcendent mistakes which have created the chaos in Iraq, and George Casey inherits that. He makes his own mistakes at a totally different level, degree, than these fundamental mistakes. Suddenly we say he is not qualified to be a chief of staff of the Army because he was a commander who inherited that mess and made his own mistakes of a much lower degree, obviously. Much too optimistic. He is a commander of troops, trying to keep morale up. So he is optimistic, I believe he is overly optimistic, history has proven he is overly optimistic. But to say we are trying to absolve him of mistakes when he acknowledges his own mistakes as any good commander will, learning from mistakes--he listed his mistakes; it is his list-- no one is absolving him. We are simply saying he should not be carrying the load of the mistakes the civilian leadership of this country has made, which has helped to create such chaos in Iraq. I yield the floor.

Mr. LEVIN. Mr. President, I have no objection at all. I am just curious as to about how long. I am not in any way trying to influence the length of time.

Mr. LEVIN. I thank my colleague.

Mr. LEVIN. Reserving the right to object, of course, I will not--did I understand the Senator to say 10 minutes? We don't have any shortage of time, so I am not trying to restrict the Senator in any way. I just want to plan.

Mr. LEVIN. No objection.

Mr. LEVIN

Mr. LEVIN. Mr. President, for the Committee on Armed Services I report favorably the following nomination lists which were printed in the Records on the dates indicated, and ask unanimous consent, to save the expense of reprinting on the Executive Calendar that these nominations lie at the Secretary's desk for the information of Senators.

Mr. LEVIN

Mr. LEVIN. Madam President, I yield to the Senator from Virginia 1 minute to ask a question of the Senator from Connecticut.

Mr. LEVIN. Madam President, I hope the Senate will be allowed to debate our policy in Iraq by proceeding to this legislation this afternoon. Iraq is the single most important policy issue facing our country. It was a major issue in the November elections last fall. The American people have strong opinions about what is happening in Iraq. They want their elected officials to debate this issue, and we should do it. The debate should go forward. A filibuster is out of place on war and peace issues, on something of this magnitude. The debate is not about whether we want the United States to act to maximize chances of success in Iraq. We all want to maximize chances of success in Iraq. We all want to see a stable Iraq which enhances our own national security. But the President's course of action, which he has been on for 3\1/2\ years and which he has now proposed to continue on to deepen our involvement in Iraq, does not enhance our security. It does not maximize chances of success in Iraq. The debate is about the best way to maximize chances of success in Iraq. Is the new strategy of the President, which puts over 21,000 more American troops in the middle of an Iraqi civil war, the best way to bring that about? That is what this debate is about. There actually seems to be an agreement among most observers that an Iraqi political settlement is the key to ending the violence in Iraq. The difference of opinion exists on whether Iraqi politicians need breathing space, as President Bush has said, to reach required political compromises or whether, as many of us believe, Iraqi politicians need to be pressured to make those compromises and that the addition of 21,000 more troops doesn't make a political compromise more likely; it just gets us in deeper in the middle of a civil conflict. The bill we are hoping to proceed to today incorporates the modified Warner resolution verbatim, except for a minor change in order to make it a bill instead of a resolution. The reason for making it a bill instead of a resolution is simply to make it more amendable. Unlike a resolution, which is clumsy to amend, there is no intent to put this modified Warner language in the form of a bill for any other purpose. As a matter of fact, the majority leader has asked for unanimous consent to treat a resolution with Senator Warner's language as amendable, as though it were a bill, to achieve the goal we are trying to achieve. This unanimous consent was objected to by the Republican leader. The majority leader, Senator Reid, has also told Senator McConnell that we are more than willing to transform this bill into a resolution prior to final passage, if we can get to final passage, if a filibuster does not thwart our getting to final passage. What does the modified Warner language do which is incorporated into this bill? It makes it clear the Congress disagrees with the President's plan to increase force levels and urges the President instead to consider all options and alternatives. This bill makes it clear that we will fund troops in the field. There is no difference between these two documents in that regard. Both our bill and the McCain resolution make it clear we want to fund the troops in the field. Our bill makes it clear that the responsibility for Iraq's internal security and for halting sectarian violence must rest primarily with the Government of Iraq and Iraqi security forces. It makes it clear that Iraqis must reach political settlements in order to achieve reconciliation, and the failure of the Iraqis to reach such settlements to create a truly unified government contributes to increasing violence in Iraq. Our bill makes it clear that the primary objective of the overall United States strategy in Iraq should be to encourage Iraqi leaders to make political compromises that will foster reconciliation and establish a true unity government, ultimately leading to improvements in the security situation. Adding American troops does not increase the probability of achieving the primary objective. Listen to what GEN John Abizaid said when he testified to Congress in November of last year: I met with every divisional commander, General Casey, the Corps Commander, [and] General Dempsey. We all talked together. And I said to them, in your professional opinion, if we were to bring in more American troops now, does it add considerably to our ability to achieve success in Iraq? And they all said no. And the reason is, because we want the Iraqis to do more. It's easy for the Iraqis to rely upon us to do this work. Finally, General Abizaid said: I believe that more American forces prevent the Iraqis from doing more, [prevent the Iraqis] from taking more responsibility for their own future. Besides making it less likely that the Iraqis will take more responsibility for their own future, adding more American troops is an attempt to reach a military solution to an inherently political problem. The Prime Minister of Iraq himself stated last November: The crisis is political, and the ones who can stop the cycle of aggravation and bloodletting of innocents are the [Iraqi] politicians. Adding more American troops does not pressure Iraqi politicians to be Iraqi leaders and to make the political compromises essential for a political solution; it only allows them to continue what in the words of the National Intelligence Estimate is the ``current winner-take-all attitude and sectarian animosities infecting the political scene.'' The administration says this bill emboldens the enemy. Congressional debate over Iraq policy doesn't embolden the enemy. The enemy is already emboldened. What emboldens the enemy is the almost 4 years' presence of Western troops in the middle of a Muslim country's capital, which causes over 70 percent of the residents of that country to oppose our presence. What emboldens the enemy is the open-ended presence of Western troops, which serves as a magnet for extremists and gives a propaganda club to our enemies. What emboldens the enemy is invading Iraq without the support of the international community. What emboldens the enemy is lawlessness and looters ransacking public buildings and institutions in Iraq. What emboldens the enemy is invading Iraq without a plan for the aftermath of the invasion. What emboldens the enemy is increasing the number of American troops, which results in Iraqis taking less responsibility for providing security for all the citizens of Iraq. What emboldens the enemy is the creation of Green Zones protecting Iraqi political leaders, in which they pursue a winner-take-all political approach. Madam President, how much time do I have?

Mr. LEVIN. Madam President, we owe our troops everything. We owe them the best equipment we can provide. We owe them the best training. We owe their families the best support we can give them. We also owe them our best thinking. I think it is an insult to the intelligence of our troops to suggest that debating the wisdom of deepening the military presence in Iraq somehow or other emboldens the enemy. Our troops depend upon us to give them what they deserve: support. And part of that support in a democracy is debating the policy which not only brought them there but which keeps them there and, if many of us are correct, will keep them there longer and with greater casualties. The best way to change course in Iraq is to adopt the modified Warner language. It has been said that this is not as strong as withholding funds. We don't want to withhold funds from troops in the field. We want to change this policy. If you want to change the policy this administration is following, which relies on a military solution, a deepening military presence in Iraq, we hope you will vote for cloture on this bill. I yield the floor.

Mr. LEVIN

Mr. LEVIN. Mr. President, I would like to take this opportunity to honor the life of Mr. Herman Coleman. Herman was an outstanding and dedicated public servant whose influence, knowledge and achievements were widely known and highly regarded. Over the course of more than 30 years, Herman held several important positions within the State of Michigan, on the national level and in the private sector. His efforts have made a broad impact. Herman began his career with the Michigan Education Association, where he would ultimately become the Association's first African- American executive director/ chief administrator. Among other achievements, Herman was an integral part of statewide deliberations regarding the desegregation of Michigan's school districts. His successful tenure with the MEA led to his appointment as Assistant to the Secretary of the U.S. Department of Education. As Assistant Secretary, Herman drafted Executive Order No. 12232, which provided the framework for increased Federal assistance to historically Black colleges and universities. This order remains in effect today. Herman would continue his efforts to improve and reform education policy after leaving the U.S. Department of Education. In 1985, Herman was appointed by Governor Blanchard as the first African-American chief executive officer of the State of Michigan Insurance Department. After a successful tenure with the department, Herman sought to make his mark in the private sector as vice president of corporate relations for AAA Michigan, where he oversaw AAA's community relations and governmental affairs departments. Herman then moved to the health care arena as a consultant for the Potomac Group Consultants, and, in 1994, began service as both partner/marketing director and managing partner of the Insured Vehicle Identification Network, IVIN. Herman Coleman's strong leadership and pioneering efforts throughout his lifetime are evidenced by his many achievements and by the many awards and honors bestowed upon him. His legacy will reverberate for many years. I know my colleagues in the Senate join me in honoring the life of Mr. Herman Coleman and in offering the most sincere condolences to his daughters, Hope and Heather, the rest of his family and to his many colleagues and friends. He will truly be missed.

Mr. LEVIN

Mr. LEVIN. Madam President, I have long supported an increase in the minimum wage. I am pleased that, with the leadership of the new majority in Congress, this minimum wage increase will be passed by a bipartisan majority. In 1996 Congress raised the minimum wage by 90 cents an hour in two steps to $5.15 an hour. That increase was enacted more than 10 years ago. Since then, the real value of that wage has eroded by 21 percent and the nearly 5.5 million workers earning the minimum wage have already lost all of the gains from the 1996-1997 increase. Since then, Gallup polls have shown that 86 percent of small business owners do not think that the minimum wage affects their business, and nearly half of small business owners think that the minimum wage should be increased. Since then, 29 States, including Michigan, as well as the District of Columbia have recognized the importance of keeping our working families out of poverty by increasing State minimum wages. Unfortunately, since the 1970s, poverty has increased by 50 percent among full-time, year-round workers. Currently, 37 million Americans, including 13 million children, live in poverty. As the most prosperous nation in the world, our minimum wage should be a living wage, and it is not. When a father or mother works full time, 40 hours a week, year- round, they should be able to lift their family out of poverty. A full- time minimum wage laborer working 40 hours a week for 52 weeks earns $10,700 per year--more than $6,000 below the Federal poverty guidelines for a family of three. I believe that a full-time minimum wage job should provide a minimum standard of living in addition to giving workers the dignity that comes with a paycheck. These lower paid workers, many of whom have entered the workforce due to the welfare reform, should be rewarded for entering the workforce, not penalized by a poverty wage. A higher minimum wage has the potential to ensure that lower paid workers will be protected from falling into poverty and possibly back on the welfare rolls. The minimum wage increase during the recession in 1991 provided much needed income to poor people and helped to increase spending in the economy. 58 percent of the benefit of the 1996 increase went to families in the bottom 40 percent of income groups. Over one-third of the benefit went to the poorest families--those in the bottom 20 percent of income groups. Today the real value of the minimum wage is $4.00 below what it was in 1968. To have the purchasing power it had in 1968, the minimum wage would have to be at least $9.37 an hour today, not $5.15. According to the United States Department of Labor, over 60 percent of minimum wage earners are women; almost 40 percent are minorities, and nearly 80 percent are adults. These hardworking Americans deserve a fair deal. In addition to the long overdue minimum wage provision, this bill contains a package of tax provisions. I am pleased that these include a number of measures to crack down on abusive tax dodges, including an improvement to current law to end the tax benefits received by companies that reincorporate and set up shell headquarters in offshore tax havens. I am also pleased that the bill extends the work opportunity tax credit, which allows employers credit against wages for hiring workers from targeted groups such as recipients of public assistance, qualified veterans, and ``high risk'' youth. I have heard from a number of Michigan companies that the WOTC program is important to them in their hiring members of these targeted groups, and I am pleased that this provision will be extended through the end of 2012. I am also pleased that the tax provisions would put in place a limit on the amount that corporate executives and other highly paid employees can place tax-free into deferred compensation plans. Under current law, public companies cannot deduct more than $1 million per year for compensation paid to their top officers. However, compensation that is ``deferred,'' meaning the employee doesn't have immediate access to it, is not subject to this $1 million limit; so deferred compensation packages have become a main way that company executives can get multi- million dollar compensation packages while their companies continue to take a tax write-off. We have seen these excessive packages time and again in recent stories about runaway executive compensation totaling tens of millions of dollars. Tens and even hundreds of millions of dollars have been salted away in this fashion for corporate executives, and companies have simply found another way to game the system by excluding this ``deferred compensation'' from those individuals' income for the year. It is more than time for Congress to put an end to this game which has fueled excessive executive pay. This bill would set a limit on the amount of compensation that could receive tax deferral at the lower of $1 million annually or the average of the previous 5 years compensation. The ability of corporate executives to defer tax on up to $1 million in compensation is still a significant benefit that stands in stark contrast to the minimum wage we are attempting to raise for those at the lowest end of the pay scale. It is only right that those who are at the low end of the pay scale who work hard should receive a fair wage and be able to support their families. These people do not always have the leverage to negotiate a fair salary. This bill to increase the minimum wage will help to move them to a more livable wage.