Shipping Income Reform Act of 1997

Summary: Shipping Income Reform Act of 1997 - Amends the Internal Revenue Code to exclude from the definition of foreign base company income foreign base company shipping income:  (1) derived from a vessel registered in the Bahamas, Honduras, Liberia, Panama, the Marshall islands, or other countries certified by the Secretary of Transportation, if the vessel owner enters into an agreement to operate a U.S.-flag fleet for at least 320 days annually; or (2) the owner does not derive U.S.-source income and has not engaged in the carriage of any cargoes in the U.S. import or export trade for at least 320 days annually.

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``Shipping Income 
Reform Act of 1997''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or a repeal of, a section or other provision, 
the reference shall be considered to be made to a section of the 
Internal Revenue Code of 1986.

SEC. 2. ELIMINATION OF CERTAIN FOREIGN BASE COMPANY SHIPPING INCOME 
              FROM FOREIGN BASE COMPANY INCOME.

    Subsection 954(b) is amended by inserting the following paragraph 
(2):
            ``(2) Exclusion for certain shipping income.--
                    ``(A) Income of certain foreign corporations.--For 
                purposes of subsection (a), foreign base company income 
                does not include--
                            ``(i) income derived from the operation of 
                        a vessel registered in the Bahamas, Honduras, 
                        the Republic of Liberia, the Republic of 
                        Panama, the Republic of the Marshall Islands, 
                        or such other country as the Secretary of 
                        Transportation certifies, if the owner, 
                        operator, or a member of its controlled group, 
                        as defined in subparagraph (E)(iii), enters 
                        into an agreement with the Secretary of 
                        Transportation to own or operate a qualified 
                        U.S.-flag fleet for at least 320 days of the 
                        taxable year; or
                            ``(ii) the shipping income of a controlled 
                        foreign corporation that owns or operates 
                        vessels that do not derive U.S.-source income 
                        (other than dividend or interest income) in the 
                        taxable year and have not engaged in the 
                        carriage of any cargoes in the U.S. import or 
                        export trade in that period.
                For purposes of the preceding sentence, the term `U.S. 
                import or export trade' shall mean the carriage of 
                goods or other commodities to or from United States 
                ports whether or not via transshipment at a foreign 
                port; and a charter to a member of a controlled group 
                (as defined in subparagraph (E)(iii) shall not be 
                considered carriage in the U.S. import or export trade.
                    ``(B) Income of caribbean basin shipping 
                corporation.--For purposes of subsection (a), foreign 
                base company income does not include income derived 
                from the operation of a vessel owned by a Caribbean 
                Basin Shipping Corporation.
                    ``(C) Inapplicability to petroleum 
                transportation.--The exclusions set forth in 
                subparagraphs (A) and (B) shall not apply to foreign 
                base company shipping income properly allocable to any 
                vessel engaged in the carriage of petroleum or related 
                products or byproducts if the controlled group (as 
                defined in section 267(f)(1) without regard to section 
                1563(b)(2)(C)) of which the taxpayer is a member is 
                engaged principally in the trade or business of 
                exploring for, or extracting, refining or marketing of, 
                petroleum or related products or byproducts.
                    ``(D) Definition of caribbean basin shipping 
                corporation.--For purposes of this section--
                            ``(i) Caribbean basin shipping 
                        corporation.--The term `Caribbean Basin 
                        shipping corporation' means a corporation if, 
                        for the taxable year, at least 75 percent of 
                        its foreign base company shipping income 
                        (determined without regard to this paragraph 
                        (2)) is Caribbean Basin shipping income.
                            ``(ii) Caribbean basin shipping income.--
                        The term `Caribbean Basin shipping income' 
                        means foreign base company shipping income 
                        derived from or in connection with the 
                        operation of any non-passenger vessel in 
                        foreign commerce within any Caribbean Basin 
                        country, among Caribbean Basin countries, or 
                        between any Caribbean Basin country and the 
                        United States, including that portion of any 
                        transshipping originating or terminating in any 
                        non-Caribbean Basin country that otherwise 
                        satisfies these requirements.
                            ``(iii) Caribbean basin country.--The term 
                        `Caribbean Basin country' means any beneficiary 
                        country (as defined in section 212(a)(1)(A) of 
                        the Caribbean Basin Economic Recovery Act); 
                        except that such term shall also include 
                        Anguilla, Colombia, Mexico, the U.S. Virgin 
                        Islands and Venezuela.
                            ``(iv) Special rules.--For purposes of 
                        determining whether a controlled foreign 
                        corporation is a Caribbean Basin shipping 
                        corporation, all members of the same affiliated 
                        group (within the meaning of section 1504(a)) 
                        shall be treated as one corporation, except 
                        that--
                                    ``(I) section 1504(a)(2) shall be 
                                applied by substituting 50 percent for 
                                80 percent; and
                                    ``(II) section 1504(b)(3) shall not 
                                apply.
                    ``(E) Definition of qualified u.s.-flag fleet.--For 
                purposes of this section--
                            ``(i) Qualified u.s.-flag fleet.--The term 
                        `qualified U.S. flag fleet' means a fleet of 
                        four or more U.S.-flag cargo vessels or two or 
                        more U.S.-flag passenger vessels, each such 
                        vessel having a deadweight tonnage of not less 
                        than 10,000 deadweight tons and, in the case of 
                        a passenger vessel, having berth or stateroom 
                        accommodations for at least 275 passengers, for 
                        which a member of the controlled group of which 
                        the controlled foreign corporation is a member 
                        is the owner (or demise charterer) and which 
                        vessels have been placed in service and 
                        operated for at least 320 days in the preceding 
                        taxable year with days during which the vessel 
                        is drydocked or undergoing survey, inspection 
                        or repair considered to be days on which the 
                        vessel is operated;
                            ``(ii) U.S.-flag vessel.--The term `U.S.-
                        flag vessel' means any vessel which is 
                        documented under the laws of the United States 
                        and is subject to the provisions of section 
                        8103 of title 46, United States Code, relating 
                        to manning by citizens of the United States.
                            ``(iii) Controlled group.--The term 
                        `controlled group' has the meaning given such 
                        term by section 1563(a) except that--
                                    ``(I) section 1563(a) shall be 
                                applied by substituting 50 percent for 
                                80 percent; and
                                    ``(II) section 1563(b)(2)(C) shall 
                                not apply.
                            ``(iv) Special rules.--In determining the 
                        qualified U.S.-flag fleet of a controlled 
                        group--
                                    ``(I) if a U.S.-flag vessel which 
                                is part of a qualified U.S.-flag fleet 
                                is destroyed by casualty or purchased 
                                by requisition pursuant to section 1242 
                                of title 46, United States Code, it may 
                                continue to be included in such 
                                qualified U.S.-flag fleet during the 
                                replacement period, but only if a 
                                member of the controlled group is or 
                                becomes the owner (or demise charterer) 
                                of a replacement U.S.-flag vessel which 
                                is placed in service (and not retired 
                                from service) within the replacement 
                                period; and
                                    ``(II) If a member of the 
                                controlled group owns (directly or 
                                indirectly) at least 25 percent (by 
                                value) of the stock of another 
                                corporation, or at least 25 percent of 
                                the interest in the capital or profits 
                                of a partnership, such member shall be 
                                treated as if it were the owner (or 
                                demise charterer) of its proportionate 
                                share of the U.S. flag vessels of which 
                                such corporation or partnership is the 
                                owner (or demise charterer).
                            ``(v) Replacement period.--The term 
                        `replacement period' means the period beginning 
                        on the date on which the casualty or purchase 
                        by requisition occurs and ending on the earlier 
                        of the date--
                                    ``(I) on which a replacement U.S.-
                                flag vessel is placed in service, or
                                    ``(II) which is four years after 
                                the close of the taxable year in which 
                                the casualty or purchase by requisition 
                                occurs.
                            ``(v) Replacement u.s.-flag vessel.--The 
                        term `replacement U.S.-flag vessel' means a 
                        U.S. flag vessel for which a member of the 
                        controlled group has entered into a binding 
                        contract for the purchase or construction of 
                        such vessel during the period--
                                    ``(I) beginning on the day 
                                following the date on which there is a 
                                loss by casualty or purchase by 
                                requisition pursuant to section 1242 of 
                                title 46, United States Code, of a 
                                vessel included in such controlled 
                                group's qualified U.S.-flag fleet, and
                                    ``(II) ending on the date which is 
                                two years after the date of such 
                                casualty or such purchase, but only if 
                                such U.S.-flag vessel would be included 
                                in the controlled group's qualified 
                                U.S.-flag fleet when it is placed in 
                                service.''

SEC. 3. REINVESTMENT IN U.S.-FLAG SHIPS.

    (a) Reinvestment in U.S.-Flag Ships.--Subsection 956(c)(2) is 
amended by inserting at the end thereof the following:
                    ``(J) any amount of funds loaned to a United States 
                person for the acquisition, construction, or 
                reconstruction of a vessel documented under the laws of 
                the United States.
        Any interest payable on indebtedness described in (J) shall be 
        free from U.S. income tax withholding under sections 1441 and 
        1442 if such interest is paid to an individual resident in or 
        corporation or other entity organized under the laws of The 
        Bahamas, Honduras, the Republic of Liberia, the Republic of 
        Panama, the Republic of the Marshall Islands, or such other 
        country as the Secretary of Transportation certifies.''
    (b) Conforming Amendments.--
            (1) Section 956(c)(2)(H) is amended by deleting ``; and'' 
        and inserting in lieu thereof ``;''.
            (2) Section 956(c)(2)(I) is amended by deleting the period 
        at the end thereof and inserting ``; and'' in lieu thereof.

SEC. 4. EFFECTIVE DATE.

    The amendments made by this Act are effective for taxable years 
beginning after the date of enactment of this Act.