I 

108TH CONGRESS 

1ST SESSION H. R. 285

To amend the Internal Revenue Code of 1986 to simplify certain rules 

relating to the taxation of United States businesses operating abroad, 

and for other purposes. 

IN THE HOUSE OF REPRESENTATIVES 

JANUARY 8, 2003

Mr. HOUGHTON (for himself, Mr. SAM JOHNSON of Texas, Mr. PORTMAN, and 

Mr. RAMSTAD) introduced the following bill; which was referred to the 

Committee on Ways and Means 

A BILL

To amend the Internal Revenue Code of 1986 to simplify 

certain rules relating to the taxation of United States 

businesses operating abroad, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; 

4 TABLE OF CONTENTS. 

5 (a) SHORT TITLE.—This Act may be cited as the 

6 ‘‘Fairness, Simplification and Competitiveness for Amer7 ican Business Act of 2003’’. 

8 (b) AMENDMENT OF 1986 CODE.—Except as other9 wise expressly provided, whenever in this Act an amend-
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1 ment or repeal is expressed in terms of an amendment 

2 to, or repeal of, a section or other provision, the reference 

3 shall be considered to be made to a section or other provi4 sion of the Internal Revenue Code of 1986. 

5 (c) TABLE OF CONTENTS.—The table of contents for 

6 this Act is as follows:

Sec. 1. Short title; amendment of 1986 Code; table of contents. 

TITLE I—TREATMENT OF CONTROLLED FOREIGN CORPORATIONS 

Sec. 101. Expansion of de minimis rule under subpart F. 

Sec. 102. Clarification of treatment of pipeline transportation income. 

Sec. 103. Look-through treatment for sales of partnership interests. 

Sec. 104. Repeal of foreign personal holding company rules and foreign investment company rules. 

Sec. 105. Determination of foreign personal holding company income with respect to transactions in commodities. 

Sec. 106. Repeal of CFC rules on foreign base company sales and services income. 

Sec. 107. Look-thru treatment of payments between related controlled foreign 

corporations under foreign personal holding company income 

rules. 

Sec. 108. Reduction to 3 foreign tax credit baskets. 

Sec. 109. Effective date. 

TITLE II—PROVISIONS RELATING TO FOREIGN TAX CREDIT 

Sec. 201. Recharacterization of overall domestic loss. 

Sec. 202. Special rules relating to financial services income. 

Sec. 203. Look-thru rules to apply to dividends from noncontrolled section 902 

corporations. 

Sec. 204. Application of look-thru rules to foreign tax credit. 

Sec. 205. 10-year foreign tax credit carryforward. 

Sec. 206. Repeal of limitation of foreign tax credit under alternative minimum 

tax. 

Sec. 207. Attribution of stock ownership through partnerships to apply in determining section 902 and 960 credits. 

Sec. 208. Repeal of special rules for applying foreign tax credit in case of foreign oil and gas income. 

TITLE III—OTHER PROVISIONS 

Sec. 301. Application of uniform capitalization rules to foreign persons. 

Sec. 302. United States property not to include certain assets acquired by dealers in ordinary course of trade or business. 

Sec. 303. Treatment of certain dividends of regulated investment companies. 

Sec. 304. Airline mileage awards to certain foreign persons. 

Sec. 305. Interest payments deductible where disqualified guarantee has economic effect. 
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Sec. 306. Modifications of reporting requirements for certain foreign-owned corporations. 

Sec. 307. Election not to use average exchange rate for foreign tax paid other 

than in functional currency. 

Sec. 308. Repeal of special capital gains tax on aliens present in the United 

States for 183 days or more. 

Sec. 309. Repeal of withholding tax on dividends from certain foreign corporations. 

Sec. 310. Interest expense allocation rules. 

Sec. 311. Permanent extension of Subpart F exemption for active financing.

1 TITLE I—TREATMENT OF CON2 TROLLED FOREIGN COR3 PORATIONS

4 SEC. 101. EXPANSION OF DE MINIMIS RULE UNDER SUB5 PART F. 

6 (a) IN GENERAL.—Clause (ii) of section 

7 954(b)(3)(A) (relating to de minimis, etc., rules) is 

8 amended by striking ‘‘$1,000,000’’ and inserting 

9 ‘‘$5,000,000’’. 

10 (b) TECHNICAL AMENDMENTS.—

11 (1) Clause (ii) of section 864(d)(5)(A) is 

12 amended by striking ‘‘$1,000,000’’ and inserting 

13 ‘‘$5,000,000’’. 

14 (2) Clause (i) of section 881(c)(5)(A) is amend15 ed by striking ‘‘$1,000,000’’ and inserting 

16 ‘‘$5,000,000’’. 

17 SEC. 102. CLARIFICATION OF TREATMENT OF PIPELINE 

18 TRANSPORTATION INCOME. 

19 Section 954(g)(1) (defining foreign base company oil 

20 related income) is amended by striking ‘‘or’’ at the end 
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1 of subparagraph (A), by striking the period at the end 

2 of subparagraph (B) and inserting ‘‘, or’’, and by inserting 

3 after subparagraph (B) the following new subparagraph: 

4 ‘‘(C) the pipeline transportation of oil or 

5 gas within such foreign country.’’

6 SEC. 103. LOOK-THROUGH TREATMENT FOR SALES OF 

7 PARTNERSHIP INTERESTS. 

8 (a) IN GENERAL.—Section 954(c) (defining foreign 

9 personal holding company income) is amended by adding 

10 at the end the following new paragraph: 

11 ‘‘(4) LOOK-THROUGH RULE FOR CERTAIN

12 PARTNERSHIP SALES.—

13 ‘‘(A) IN GENERAL.—In the case of any 

14 sale by a controlled foreign corporation of an 

15 interest in a partnership with respect to which 

16 such corporation is a 25-percent owner, such 

17 corporation shall be treated for purposes of this 

18 subsection as selling the proportionate share of

19 the assets of the partnership attributable to 

20 such interest. 

21 ‘‘(B) 25-PERCENT OWNER.—For purposes 

22 of this paragraph, the term ‘25-percent owner’ 

23 means a controlled foreign corporation which 

24 owns 25 percent or more of the capital or prof25 its interest in the partnership. The constructive 
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1 ownership rules of section 958(b) shall apply 

2 for purposes of the preceding sentence.’’

3 (b) CONFORMING AMENDMENT.—Section 

4 954(c)(1)(B)(ii) is amended by inserting ‘‘except as pro5 vided in paragraph (4),’’ before ‘‘which’’. 

6 SEC. 104. REPEAL OF FOREIGN PERSONAL HOLDING COM7 PANY RULES AND FOREIGN INVESTMENT 

8 COMPANY RULES. 

9 (a) GENERAL RULE.—The following provisions are 

10 hereby repealed: 

11 (1) Part III of subchapter G of chapter 1 (re12 lating to foreign personal holding companies). 

13 (2) Section 1246 (relating to gain on foreign in14 vestment company stock). 

15 (3) Section 1247 (relating to election by foreign 

16 investment companies to distribute income cur17 rently). 

18 (b) EXEMPTION OF FOREIGN CORPORATIONS FROM

19 PERSONAL HOLDING COMPANY RULES.—

20 (1) IN GENERAL.—Subsection (c) of section 

21 542 (relating to exceptions) is amended—

22 (A) by striking paragraph (5) and insert23 ing the following: 

24 ‘‘(5) a foreign corporation,’’, 
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1 (B) by striking paragraphs (7) and (10) 

2 and by redesignating paragraphs (8) and (9) as 

3 paragraphs (7) and (8), respectively, 

4 (C) by inserting ‘‘and’’ at the end of para5 graph (7) (as so redesignated), and 

6 (D) by striking ‘‘; and’’ at the end of para7 graph (8) (as so redesignated) and inserting a 

8 period. 

9 (2) TREATMENT OF INCOME FROM PERSONAL

10 SERVICE CONTRACTS.—Paragraph (1) of section 

11 954(c) is amended by adding at the end the fol12 lowing new subparagraph: 

13 ‘‘(H) PERSONAL SERVICE CONTRACTS.—

14 ‘‘(i) Amounts received under a con15 tract under which the corporation is to fur16 nish personal services; if some person other 

17 than the corporation has the right to des18 ignate (by name or by description) the in19 dividual who is to perform the services, or 

20 if the individual who is to perform the 

21 services is designated (by name or by de22 scription) in the contract; and 

23 ‘‘(ii) amounts received from the sale 

24 or other disposition of such a contract. 
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1 This subparagraph shall apply with respect to 

2 amounts received for services under a particular 

3 contract only if at some time during the taxable 

4 year 25 percent or more in value of the out5 standing stock of the corporation is owned, di6 rectly or indirectly, by or for the individual who 

7 has performed, is to perform, or may be des8 ignated (by name or by description) as the one 

9 to perform, such services.’’

10 (c) CONFORMING AMENDMENTS.—

11 (1) Paragraph (2) of section 171(c) is amend12 ed—

13 (A) by striking ‘‘, or by a foreign personal 

14 holding company, as defined in section 552’’, 

15 and 

16 (B) by striking ‘‘, or a foreign personal 

17 holding company’’. 

18 (2) Paragraph (2) of section 245(a) is amended 

19 by striking ‘‘foreign personal holding company or’’

20 (3) Section 312 is amended by striking sub21 section (j). 

22 (4) Subsection (m) of section 312 is amended 

23 by striking ‘‘, a foreign investment company (within 

24 the meaning of section 1246(b)), or a foreign per-
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1 sonal holding company (within the meaning of sec2 tion 552)’’. 

3 (5) Subsection (e) of section 443 is amended by 

4 striking paragraph (3) and by redesignating para5 graphs (4) and (5) as paragraphs (3) and (4), re6 spectively. 

7 (6) Subparagraph (B) of section 465(c)(7) is 

8 amended to by adding ‘‘or’’ at the end of clause (i), 

9 by striking clause (ii), and by redesignating clause 

10 (iii) as clause (ii). 

11 (7) Paragraph (1) of section 543(b) is amended 

12 by inserting ‘‘and’’ at the end of subparagraph (A), 

13 by striking ‘‘, and’’ at the end of subparagraph (B) 

14 and inserting a period, and by striking subparagraph 

15 (C). 

16 (8) Paragraph (1) of section 562(b) is amended 

17 by striking ‘‘or a foreign personal holding company 

18 described in section 552’’. 

19 (9) Section 563 is amended—

20 (A) by striking subsection (c), 

21 (B) by redesignating subsection (d) as sub22 section (c), and 

23 (C) by striking ‘‘subsection (a), (b), or (c)’’ 

24 in subsection (c) (as so redesignated) and in25 serting ‘‘subsection (a) or (b)’’. 
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1 (10) Subsection (d) of section 751 is amended 

2 by adding ‘‘and’’ at the end of paragraph (2), by 

3 striking paragraph (3), by redesignating paragraph 

4 (4) as paragraph (3), and by striking ‘‘paragraph 

5 (1), (2), or (3)’’ in paragraph (3) (as so redesig6 nated) and inserting paragraph (1) or (2)’’. 

7 (11) Paragraph (2) of section 864(d) is amend8 ed by striking subparagraph (A) and by redesig9 nating subparagraphs (B) and (C) as subparagraphs 

10 (A) and (B), respectively. 

11 (12)(A) Subparagraph (A) of section 898(b)(1) 

12 is amended to read as follows: 

13 ‘‘(A) which is treated as a controlled for14 eign corporation for any purpose under subpart 

15 F of part III of this subchapter, and’’. 

16 (B) Subparagraph (B) of section 898(b)(2) is 

17 amended by striking ‘‘and sections 551(f) and 554, 

18 whichever are applicable,’’. 

19 (C) Paragraph (3) of section 898(b) is amended 

20 to read as follows:

21 ‘‘(3) UNITED STATES SHAREHOLDER.—The 

22 term ‘United States shareholder’ has the meaning 

23 given to such term by section 951(b), except that, in 

24 the case of a foreign corporation having related per25 son insurance income (as defined in section 
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1 953(c)(2)), the Secretary may treat any person as a 

2 United States shareholder for purposes of this sec3 tion if such person is treated as a United States 

4 shareholder under section 953(c)(1).’’

5 (D) Subsection (c) of section 898 is amended to 

6 read as follows: 

7 ‘‘(c) DETERMINATION OF REQUIRED YEAR.—

8 ‘‘(1) IN GENERAL.—The required year is—

9 ‘‘(A) the majority U.S. shareholder year, 

10 or 

11 ‘‘(B) if there is no majority U.S. share12 holder year, the taxable year prescribed under 

13 regulations. 

14 ‘‘(2) 1-MONTH DEFERRAL ALLOWED.—A speci15 fied foreign corporation may elect, in lieu of the tax16 able year under paragraph (1)(A), a taxable year be17 ginning 1 month earlier than the majority U.S. 

18 shareholder year. 

19 ‘‘(3) MAJORITY U.S. SHAREHOLDER YEAR.—

20 ‘‘(A) IN GENERAL.—For purposes of this 

21 subsection, the term ‘majority U.S. shareholder 

22 year’ means the taxable year (if any) which, on 

23 each testing day, constituted the taxable year 

24 of—
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1 ‘‘(i) each United States shareholder 

2 described in subsection (b)(2)(A), and 

3 ‘‘(ii) each United States shareholder 

4 not described in clause (i) whose stock was 

5 treated as owned under subsection 

6 (b)(2)(B) by any shareholder described in 

7 such clause. 

8 ‘‘(B) TESTING DAY.—The testing days 

9 shall be—

10 ‘‘(i) the first day of the corporation’s 

11 taxable year (determined without regard to 

12 this section), or 

13 ‘‘(ii) the days during such representa14 tive period as the Secretary may pre15 scribe.’’

16 (13) Clause (ii) of section 904(d)(2) is amended 

17 to read as follows: 

18 ‘‘(ii) CERTAIN AMOUNTS INCLUDED.—

19 Except as provided in clause (iii), the term 

20 ‘passive income’ includes, except as pro21 vided in subparagraph (E)(iii) or para22 graph (3)(I), any amount includible in 

23 gross income under section 1293 (relating 

24 to certain passive foreign investment com25 panies).’’
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1 (14)(A) Subparagraph (A) of section 904(g)(1) 

2 is amended by adding ‘‘or’’ at the end of clause (i), 

3 by striking clause (ii), and by redesignating clause 

4 (iii) as clause (ii). 

5 (B) The paragraph heading of paragraph (2) of 

6 section 904(g) is amended by striking ‘‘FOREIGN

7 PERSONAL HOLDING OR’’. 

8 (15) Section 951 is amended by striking sub9 sections (c) and (d) and by redesignating subsections 

10 (e) and (f) as subsections (c) and (d), respectively. 

11 (16) Paragraph (3) of section 989(b) is amend12 ed by striking ‘‘, 551(a),’’. 

13 (17) Paragraph (5) of section 1014(b) is hereby 

14 repealed. 

15 (18) Subsection (a) of section 1016 is amended 

16 by striking paragraph (13) and by redesignating the 

17 following paragraphs accordingly. 

18 (19)(A) Paragraph (3) of section 1212(a) is 

19 amended to read as follows: 

20 ‘‘(3) SPECIAL RULES ON CARRYBACKS.—A net 

21 capital loss of a corporation shall not be carried 

22 back under paragraph (1)(A) to a taxable year—

23 ‘‘(A) for which it is a regulated investment 

24 company (as defined in section 851), or 
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1 ‘‘(B) for which it is a real estate invest2 ment trust (as defined in section 856).’’

3 (B) The amendment made by subparagraph (A) 

4 shall apply to taxable years beginning after Decem5 ber 31, 2004. 

6 (20) Section 1223 is amended by striking para7 graph (10) and by redesignating the following para8 graphs accordingly. 

9 (21) Subsection (d) of section 1248 is amended 

10 by striking paragraph (5) and by redesignating 

11 paragraphs (6) and (7) as paragraphs (5) and (6), 

12 respectively. 

13 (22) Paragraph (2) of section 1260(c) is 

14 amended by striking subparagraphs (H) and (I) and 

15 by redesignating subparagraph (J) as subparagraph 

16 (H). 

17 (23) Subparagraph (F) of section 1291(b)(3) is 

18 amended by striking ‘‘551(d), 959(a),’’ and inserting 

19 ‘‘959(a)’’. 

20 (24) Paragraph (2) of section 1294(a) is 

21 amended to read as follows: 

22 ‘‘(2) ELECTION NOT PERMITTED WHERE

23 AMOUNTS OTHERWISE INCLUDIBLE UNDER SECTION

24 951.—The taxpayer may not make an election under 

25 paragraph (1) with respect to the undistributed 
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1 PFIC earnings tax liability attributable to a quali2 fied electing fund for the taxable year if any amount 

3 is includible in the gross income of the taxpayer 

4 under section 951 with respect to such fund for such 

5 taxable year.’’

6 (25) Section 6035 is hereby repealed. 

7 (26) Subparagraph (D) of section 6103(e)(1) is 

8 amended by striking clause (iv) and redesignating 

9 clauses (v) and (vi) as clauses (iv) and (v), respec10 tively. 

11 (27) Subparagraph (B) of section 6501(e)(1) is 

12 amended to read as follows: 

13 ‘‘(B) CONSTRUCTIVE DIVIDENDS.—If the 

14 taxpayer omits from gross income an amount 

15 properly includible therein under section 

16 951(a), the tax may be assessed, or a pro17 ceeding in court for the collection of such tax 

18 may be done without assessing, at any time 

19 within 6 years after the return was filed.’’

20 (28) Subsection (a) of section 6679 is amend21 ed—

22 (A) by striking ‘‘6035, 6046, and 6046A’’ 

23 in paragraph (1) and inserting ‘‘6046 and 

24 6046A’’, and 

25 (B) by striking paragraph (3). 
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1 (29) Sections 170(f)(10)(A), 508(d), 4947 and 

2 section 4948(c)(4) are each amended by striking 

3 ‘‘556(b)(2),’’ each place it appears. 

4 (30) The table of parts for subchapter G of 

5 chapter 1 is amended by striking the item relating 

6 to part III. 

7 (31) The table of sections for part IV of sub8 chapter P of chapter 1 is amended by striking the 

9 items relating to sections 1246 and 1247. 

10 (32) The table of sections for subpart A of part 

11 III of subchapter A of chapter 61 of such Code is 

12 amended by striking the item relating to section 

13 6035.

14 SEC. 105. DETERMINATION OF FOREIGN PERSONAL HOLD15 ING COMPANY INCOME WITH RESPECT TO 

16 TRANSACTIONS IN COMMODITIES. 

17 (a) IN GENERAL.—Clauses (i) and (ii) of section 

18 954(c)(1)(C) (relating to commodity transactions) are 

19 amended to read as follows:

20 ‘‘(i) arise out of commodity hedging 

21 transactions (as defined in paragraph 

22 (5)(A)), 

23 ‘‘(ii) are active business gains or 

24 losses from the sale of commodities, but 

25 only if substantially all of the controlled 
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1 foreign corporation’s commodities are 

2 property described in paragraph (1), (2) or 

3 (8) of section 1221(a), or’’. 

4 (b) DEFINITION AND SPECIAL RULES.—Subsection 

5 (c) of section 954 is amended by adding after paragraph 

6 (4) the following new paragraph: 

7 ‘‘(5) DEFINITION AND SPECIAL RULES RELAT8 ING TO COMMODITY TRANSACTIONS.—

9 ‘‘(A) COMMODITY HEDGING TRANS10 ACTIONS.—For purposes of paragraph 

11 (1)(C)(i), the term ‘commodity hedging trans12 action’ means any transaction with respect to a 

13 commodity if such transaction—

14 ‘‘(i) is a hedging transaction as de15 fined in section 1221(b)(2), determined—

16 ‘‘(I) without regard to subpara17 graph (A)(ii) thereof, 

18 ‘‘(II) by applying subparagraph 

19 (A)(i) thereof by substituting ‘ordi20 nary property or property described in 

21 section 1231(b)’ for ‘ordinary prop22 erty’, and 

23 ‘‘(III) by substituting ‘controlled 

24 foreign corporation’ for ‘taxpayer’ 

25 each place it appears, and 
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1 ‘‘(ii) is clearly identified as such in ac2 cordance with section 1221(a)(7). 

3 ‘‘(B) REGULATIONS.—The Secretary shall 

4 prescribe such regulations as are appropriate to 

5 carry out the purposes of paragraph (1)(C) in 

6 the case of transactions involving related par7 ties.’’

8 (c) EFFECTIVE DATE.—The amendments made by 

9 this section shall apply to commodity hedging transactions 

10 entered into on or after the date of enactment of this Act. 

11 SEC. 106. REPEAL OF CFC RULES ON FOREIGN BASE COM12 PANY SALES AND SERVICES INCOME. 

13 (a) IN GENERAL.—Subsection (a) of section 954 (re14 lating to foreign base company income) is amended by 

15 striking paragraphs (2) and (3) and by redesignating 

16 paragraphs (4) and (5) as paragraphs (2) and (3), respec17 tively. 

18 (b) CERTAIN SALES.—Paragraph (1) of section 

19 954(c) is amended by adding at the end the following new 

20 subparagraph: 

21 ‘‘(H) CERTAIN SALES.—Income (whether 

22 in the form of profits, commissions, fees, or 

23 otherwise) derived in connection with the pur24 chase of personal property from a related per25 son and its sale to any person, the sale of per-
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1 sonal property to any person on behalf of a re2 lated person, the purchase of personal property 

3 from any person and its sale to a related per4 son, or the purchase of personal property from 

5 any person on behalf of a related person 

6 where—

7 ‘‘(i) the property which is purchased 

8 (or in the case of property sold on behalf 

9 of a related person, the property which is 

10 sold) is manufactured, produced, grown, or 

11 extracted in the United States, and 

12 ‘‘(ii) the property is sold for use, con13 sumption, or disposition in the United 

14 States, or, in the case of property pur15 chased on behalf of a related person, is 

16 purchased for use, consumption, or disposi17 tion in the United States.’’

18 (c) CONFORMING AMENDMENTS.—

19 (1) Clause (iii) of section 952(c)(1)(B) is 

20 amended by striking subclauses (III) and (IV) and 

21 by redesignating subclauses (V) and (VI) as sub22 clauses (III) and (IV), respectively. 

23 (2) Section 953(c)(6)(A) is amended by striking 

24 ‘‘section 954(d)(3)’’ and inserting ‘‘section 

25 954(b)(9)’’. 
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1 (3) Subsection (b) of section 954 is amended by 

2 adding at the end the following new paragraph: 

3 ‘‘(9) RELATED PERSON DEFINED.—For pur4 poses of this subsection, a person is a related person 

5 with respect to a controlled foreign corporation if—

6 ‘‘(A) such person is an individual, corpora7 tion, partnership, trust, or estate which con8 trols, or is controlled by, the controlled foreign 

9 corporation, or 

10 ‘‘(B) such person is a corporation, partner11 ship, trust, or estate which is controlled by the 

12 same person or persons which control the con13 trolled foreign corporation. 

14 For purposes of the preceding sentence, control 

15 means, with respect to a corporation, the ownership, 

16 directly or indirectly, of stock possessing more than 

17 50 percent of the total voting power of all classes of

18 stock entitled to vote or of the total value of stock 

19 of such corporation. In the case of a partnership, 

20 trust, or estate, control means the ownership, di21 rectly or indirectly, of more than 50 percent (by 

22 value) of the beneficial interests in such partnership, 

23 trust, or estate. For purposes of this paragraph, 

24 rules similar to the rules of section 958 shall apply.’’
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1 (4) Paragraph (5) of section 954(b) is amended 

2 by striking ‘‘the foreign base company sales income, 

3 the foreign base company services income,’’. 

4 (5) Section 954 is amended by striking sub5 sections (d) and (e). 

6 (6) Sections 552(c)(2), 861(c)(2)(B), 

7 904(d)(2)(H), 953(e), 955(b), 958(b), 971(f), 

8 988(e)(3)(C), 1297(b)(2), 1298(d)(3), and 

9 1298(e)(2)(B) are each amended by striking 

10 ‘‘954(d)(3)’’ each place it appears and inserting 

11 ‘‘954(b)(9)’’. 

12 SEC. 107. LOOK-THRU TREATMENT OF PAYMENTS BE13 TWEEN RELATED CONTROLLED FOREIGN 

14 CORPORATIONS UNDER FOREIGN PERSONAL 

15 HOLDING COMPANY INCOME RULES. 

16 Subsection (c) of section 954 is amended by adding 

17 after paragraph (3) the following new paragraph: 

18 ‘‘(4) LOOK-THRU IN THE CASE OF RELATED

19 CONTROLLED FOREIGN CORPORATIONS.—For pur20 poses of this subsection, dividends, interest, rents, 

21 and royalties received from a controlled foreign cor22 poration which is a related person (as defined in 

23 subsection (b)(9)) shall not be treated as foreign 

24 personal holding company income to the extent at25 tributable (determined under rules similar to the 
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1 rules of subparagraphs (C) and (D) of section 

2 904(d)(3)) to income of the related person which is 

3 not subpart F income (as defined in section 952).’’

4 SEC. 108. REDUCTION TO 3 FOREIGN TAX CREDIT BASKETS. 

5 (a) IN GENERAL.—Paragraph (1) of section 904(d) 

6 (relating to separate application of section with respect to 

7 certain categories of income) is amended to read as fol8 lows: 

9 ‘‘(1) IN GENERAL.—The provisions of sub10 sections (a), (b), and (c) and sections 902, 907, and 

11 960 shall be applied separately with respect to in12 come described in each of the following items of in13 come: 

14 ‘‘(A) passive income and other passive cat15 egory income, 

16 ‘‘(B) financial services income, and 

17 ‘‘(C) income other than income described 

18 in subparagraph (A) or (B).’’

19 (b) OTHER PASSIVE CATEGORY INCOME.—Subpara20 graph (A) of section 904(d)(2) is amended by adding at 

21 the end the following new clause: 

22 ‘‘(v) OTHER PASSIVE CATEGORY IN23 COME.—The term ‘other passive category 

24 income’ means—
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1 ‘‘(I) dividends from a DISC or 

2 former DISC (as defined in section 

3 992(a)) to the extent such dividends 

4 are treated as income from sources 

5 without the United States, 

6 ‘‘(II) taxable income attributable 

7 to foreign trade income (within the 

8 meaning of section 923(b)), and 

9 ‘‘(III) distributions from a FSC 

10 (or a former FSC) out of earnings 

11 and profits attributable to foreign 

12 trade income (within the meaning of 

13 section 923(b)) or interest or carrying 

14 charges (as defined in section 

15 927(d)(1)) derived from a transaction 

16 which results in foreign trade income 

17 (as defined in section 923(b)).’’

18 (c) CONFORMING AMENDMENTS.—

19 (1) Paragraph (2) of section 904(d) is amended 

20 by striking subparagraphs (B) and (D). 

21 (2)(A) Subclause (III) of section 

22 904(d)(2)(C)(i) is amended to read as follows: 

23 ‘‘(III) high-taxed export financ24 ing interest.’’
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1 (B) Subparagraph (C) of section 904(d)(2) is 

2 amended by adding at the end the following new 

3 clause: 

4 ‘‘(iv) HIGH-TAXED EXPORT FINANC5 ING INTEREST.—The term ‘high-taxed ex6 port financing interest’ means any interest 

7 if—

8 ‘‘(I) such interest is subject to a 

9 withholding tax of a foreign country 

10 or possession of the United States (or 

11 other tax determined on a gross 

12 basis), and 

13 ‘‘(II) the rate of such tax appli14 cable to such interest is at least 5 per15 cent. 

16 The Secretary may by regulations provide 

17 that export financing interest (not other18 wise high-taxed export financing interest) 

19 shall be treated as high-taxed export fi20 nancing interest where necessary to pre21 vent avoidance of the purposes of this sub22 paragraph, and a tax shall not be treated 

23 as a withholding tax or other tax imposed 

24 on a gross basis if such tax is in the na-
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1 ture of a prepayment of a tax imposed on 

2 a net basis.’’

3 (3) Clause (iii) of section 904(d)(2)(C) is 

4 amended to read as follows: 

5 ‘‘(iii) EXCEPTIONS.—The term ‘finan6 cial services income’ does not include—

7 ‘‘(I) in the case of a corporation, 

8 dividends from noncontrolled section 

9 902 corporations out of earnings and 

10 profits accumulated in taxable years 

11 beginning before January 1, 2003, 

12 and 

13 ‘‘(II) any export financing inter14 est which is not high-taxed export fi15 nancing interest.’’

16 (4) Subparagraph (E) of section 904(d)(2) is 

17 amended by striking clause (ii) and by redesignating 

18 clauses (iii) and (iv) as clauses (ii) and (iii), respec19 tively.

20 (5) Clause (i) of section 904(d)(3)(F) is amend21 ed to read as follows: 

22 ‘‘(i) IN GENERAL.—Except as pro23 vided in clause (ii), the separate categories 

24 are—
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1 ‘‘(I) passive income and other 

2 passive category income, and 

3 ‘‘(II) financial services income.’’

4 (6) Paragraph (3) of section 904(d) is amended 

5 by striking subparagraph (H) and by redesignating 

6 subparagraph (I) as subparagraph (H). 

7 (7) Paragraph (2) of section 904(d) is amended 

8 by adding at the end the following new subpara9 graph: 

10 ‘‘(I) TRANSITIONAL RULE FOR 2003

11 CHANGES.—For purposes of paragraph (1), 

12 taxes carried from any taxable year beginning 

13 before January 1, 2004, to any taxable year be14 ginning on or after such date, with respect to 

15 any item of income shall be treated as described 

16 in the subparagraph of paragraph (1) in which 

17 such income would be described were such taxes 

18 paid or accrued in a taxable year beginning on 

19 or after such date.’’

20 (d) EFFECTIVE DATE.—The amendments made by 

21 this section shall apply to taxable years beginning after 

22 December 31, 2003. 

23 SEC. 109. EFFECTIVE DATE. 

24 Except as otherwise provided in this title, the amend25 ments made by this title shall apply to taxable years of 
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1 foreign corporations beginning after December 31, 2003, 

2 and taxable years of United States persons owning stock 

3 in such corporations with or within which such corpora4 tions’ taxable years end. 

5 TITLE II—PROVISIONS RELAT6 ING TO FOREIGN TAX CREDIT 

7 SEC. 201. RECHARACTERIZATION OF OVERALL DOMESTIC 

8 LOSS. 

9 (a) GENERAL RULE.—Section 904 is amended by re10 designating subsections (g), (h), (i), (j), and (k) as sub11 sections (h), (i), (j), (k), and (l) respectively, and by in12 serting after subsection (f) the following new subsection:

13 ‘‘(g) RECHARACTERIZATION OF OVERALL DOMESTIC

14 LOSS.—

15 ‘‘(1) GENERAL RULE.—For purposes of this 

16 subpart, in the case of any taxpayer who sustains an 

17 overall domestic loss for any taxable year beginning 

18 after December 31, 2003, that portion of the tax19 payer’s taxable income from sources within the 

20 United States for each succeeding taxable year 

21 which is equal to the lesser of—

22 ‘‘(A) the amount of such loss (to the extent 

23 not used under this paragraph in prior taxable 

24 years), or 
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1 ‘‘(B) 50 percent of the taxpayer’s taxable 

2 income from sources within the United States 

3 for such succeeding taxable year, 

4 shall be treated as income from sources without the 

5 United States (and not as income from sources with6 in the United States). 

7 ‘‘(2) OVERALL DOMESTIC LOSS DEFINED.—For 

8 purposes of this subsection and section 936—

9 ‘‘(A) IN GENERAL.—The term ‘overall do10 mestic loss’ means any domestic loss to the ex11 tent such loss offsets taxable income from 

12 sources without the United States for the tax13 able year or for any preceding taxable year by 

14 reason of a carryback. For purposes of the pre15 ceding sentence, the term ‘domestic loss’ means 

16 the amount by which the gross income for the 

17 taxable year from sources within the United 

18 States is exceeded by the sum of the deductions 

19 properly apportioned or allocated thereto (deter20 mined without regard to any carryback from a 

21 subsequent taxable year). 

22 ‘‘(B) TAXPAYER MUST HAVE ELECTED

23 FOREIGN TAX CREDIT FOR YEAR OF LOSS.—

24 The term ‘overall domestic loss’ shall not in25 clude any loss for any taxable year unless the 
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1 taxpayer chose the benefits of this subpart for 

2 such taxable year. 

3 ‘‘(3) CHARACTERIZATION OF SUBSEQUENT IN4 COME.—

5 ‘‘(A) IN GENERAL.—Any income from 

6 sources within the United States that is treated 

7 as income from sources without the United 

8 States under paragraph (1) shall be allocated 

9 among and increase the income categories in 

10 proportion to the loss from sources within the 

11 United States previously allocated to those in12 come categories.

13 ‘‘(B) INCOME CATEGORY.—For purposes of 

14 this paragraph, the term ‘income category’ has 

15 the meaning given such term by subsection 

16 (f)(5)(E)(i). 

17 ‘‘(4) COORDINATION WITH SUBSECTION (f).—

18 The Secretary shall prescribe such regulations as 

19 may be necessary to coordinate the provisions of this 

20 subsection with the provisions of subsection (f).’’

21 (b) CONFORMING AMENDMENTS.—

22 (1) Section 535(d)(2) is amended by striking 

23 ‘‘section 904(g)(6)’’ and inserting ‘‘section 

24 904(h)(6)’’. 
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1 (2) Subparagraph (A) of section 936(a)(2) is 

2 amended by striking ‘‘section 904(f)’’ and inserting 

3 ‘‘subsections (f) and (g) of section 904’’. 

4 (c) EFFECTIVE DATE.—The amendments made by 

5 this section shall apply to losses for taxable years begin6 ning after December 31, 2003. 

7 SEC. 202. SPECIAL RULES RELATING TO FINANCIAL SERV8 ICES INCOME. 

9 (a) FINANCIAL SERVICES INCOME IN EXCESS OF 80 

10 PERCENT OF GROSS INCOME.—Section 904(d)(2)(C) (re11 lating to financial services income) is amended by adding 

12 at the end the following new clause: 

13 ‘‘(iv) INCOME EXCEEDING 80 PERCENT

14 OF GROSS INCOME.—If the financial serv15 ices income (as defined in clause (i)) of 

16 any person exceeds 80 percent of gross in17 come, the entire gross income for the tax18 able year shall be treated as financial serv19 ices income.’’

20 (b) EXCEPTION FOR INCOME ON DEALER PROP21 ERTY.—Subsection 904(g) (relating to source rules in case 

22 of United States-owned foreign corporations) is amended 

23 by redesignating paragraph (11) as paragraph (12) and 

24 by adding after paragraph (10) the following new para25 graph: 
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1 ‘‘(11) EXCEPTION FOR INCOME ON DEALER

2 PROPERTY.—Paragraph (1) shall not apply to any 

3 amount derived from a United States-owned foreign 

4 corporation that is derived from income on a secu5 rity (within the meaning of section 475(c)(2)) which 

6 is received or accrued by a person that holds the se7 curity in connection with the holder’s activities as a 

8 dealer in securities (within the meaning of section 

9 475(c)(1)).’’

10 (c) EFFECTIVE DATES.—

11 (1) IN GENERAL.—The amendments made by 

12 this section shall apply to taxable years beginning 

13 after December 31, 2003. 

14 (2) DEEMED PAID CREDITS.—In the case of 

15 any credit under section 901 of the Internal Revenue 

16 Code of 1986 by reason of section 902 or 960 of 

17 such Code, the amendments made by this section 

18 shall apply to taxable years of foreign corporations 

19 beginning after December 31, 2003, and to taxable 

20 years of United States shareholders in such corpora21 tions with or within which such taxable years of for22 eign corporations end.
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1 SEC. 203. LOOK-THRU RULES TO APPLY TO DIVIDENDS 

2 FROM NONCONTROLLED SECTION 902 COR3 PORATIONS. 

4 (a) IN GENERAL.—Section 904(d)(4) (relating to 

5 look-thru rules apply to dividends from noncontrolled sec6 tion 902 corporations) is amended to read as follows: 

7 ‘‘(4) LOOK-THRU APPLIES TO DIVIDENDS FROM

8 NONCONTROLLED SECTION 902 CORPORATIONS.—

9 ‘‘(A) IN GENERAL.—For purposes of this 

10 subsection, any dividend from a noncontrolled 

11 section 902 corporation with respect to the tax12 payer shall be treated as income in a separate 

13 category in proportion to the ratio of—

14 ‘‘(i) the portion of earnings and prof15 its attributable to income in such category, 

16 to 

17 ‘‘(ii) the total amount of earnings and 

18 profits. 

19 ‘‘(B) SPECIAL RULES.—For purposes of 

20 this paragraph—

21 ‘‘(i) IN GENERAL.—Rules similar to 

22 the rules of paragraph (3)(F) shall apply. 

23 ‘‘(ii) EARNINGS AND PROFITS.—

24 ‘‘(I) IN GENERAL.—The rules of 

25 section 316 shall apply. 
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1 ‘‘(II) REGULATIONS.—The Sec2 retary may prescribe regulations re3 garding the treatment of distributions 

4 out of earnings and profits for periods 

5 before the taxpayer’s acquisition of 

6 the stock to which the distributions 

7 relate. 

8 ‘‘(iii) DIVIDENDS NOT ALLOCABLE TO

9 SEPARATE CATEGORY.—The portion of any 

10 dividend from a noncontrolled section 902 

11 corporation which is not treated as income 

12 in a separate category under subparagraph 

13 (A) shall be treated as a dividend to which 

14 subparagraph (A) does not apply. 

15 ‘‘(iv) LOOK-THRU WITH RESPECT TO

16 CARRYFORWARDS OF CREDIT.—Rules simi17 lar to subparagraph (A) also shall apply to 

18 any carryforward under subsection (c) 

19 from a taxable year beginning before Janu20 ary 1, 2003, of tax allocable to a dividend 

21 from a noncontrolled section 902 corpora22 tion with respect to the taxpayer.’’. 

23 (b) CONFORMING AMENDMENTS.—

24 (1) Subparagraph (E) of section 904(d)(1), as 

25 in effect both before and after the amendments 
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1 made by section 1105 of the Taxpayer Relief Act of 

2 1997, is hereby repealed. 

3 (2) Section 904(d)(2)(C)(iii), as so in effect, is 

4 amended by striking subclause (II) and by redesig5 nating subclause (III) as subclause (II). 

6 (3) The last sentence of section 904(d)(2)(D), 

7 as so in effect, is amended to read as follows: ‘‘Such 

8 term does not include any financial services income.’’ 

9 (4) Section 904(d)(2)(E) is amended—

10 (A) by inserting ‘‘or (4)’’ after ‘‘paragraph 

11 (3)’’ in clause (i), and 

12 (B) by striking clauses (ii) and (iv) and by 

13 redesignating clause (iii) as clause (ii). 

14 (5) Section 904(d)(3)(F) is amended by strik15 ing ‘‘(D), or (E)’’ and inserting ‘‘or (D)’’. 

16 (6) Section 864(d)(5)(A)(i) is amended by 

17 striking ‘‘(C)(iii)(III)’’ and inserting ‘‘(C)(iii)(II)’’. 

18 (c) EFFECTIVE DATE.—The amendments made by 

19 this section shall apply to taxable years beginning after 

20 December 31, 2002. 

21 SEC. 204. APPLICATION OF LOOK-THRU RULES TO FOREIGN 

22 TAX CREDIT. 

23 (a) INTEREST, RENTS, AND ROYALTIES.—
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1 (1) NONCONTROLLED SECTION 902 CORPORA2 TION.—Section 904(d)(4)(A), as amended by section 

3 203, is amended to read as follows:

4 ‘‘(A) IN GENERAL.—For purposes of this 

5 subsection—

6 ‘‘(i) any applicable dividend shall be 

7 treated as income in a separate category in 

8 proportion to the ratio of—

9 ‘‘(I) the portion of the earnings 

10 and profits attributable to income in 

11 such category, to 

12 ‘‘(II) the total amount of earn13 ings and profits, and 

14 ‘‘(ii) any interest, rent, or royalty 

15 which is received or accrued from a non16 controlled section 902 corporation with re17 spect to the taxpayer shall be treated as 

18 income in a separate category to the extent 

19 it is properly allocable (under regulations 

20 prescribed by the Secretary) to income of 

21 such corporation in such category.’’

22 (2) PARTNERSHIPS.—Section 904(d)(6)(C) (re23 lating to regulations) is amended—

24 (A) by inserting ‘‘or (4)(A)(ii)’’ after 

25 ‘‘paragraph (3)(C)’’, and 
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1 (B) by inserting ‘‘or noncontrolled section 

2 902 corporations, whichever is applicable’’ after 

3 ‘‘controlled foreign corporations’’. 

4 (3) CONFORMING AMENDMENT.—The heading 

5 for section 904(d)(4), as amended by section 203, is 

6 amended by inserting ‘‘, INTEREST, RENTS, OR ROY7 ALTIES’’ after ‘‘DIVIDENDS’’. 

8 (b) EFFECTIVE DATE.—The amendments made by 

9 this section shall apply to taxable years beginning after 

10 December 31, 2003. 

11 SEC. 205. 10-YEAR FOREIGN TAX CREDIT CARRYFORWARD. 

12 (a) GENERAL RULE.—Section 904(c) (relating to 

13 carryback and carryover of excess tax paid) is amended 

14 by striking ‘‘in the first, second, third, fourth, or fifth’’ 

15 and inserting ‘‘in any of the first 10’’. 

16 (b) EXCESS EXTRACTION TAXES.—Paragraph (1) of 

17 section 907(f) is amended by striking ‘‘in the first, second, 

18 third, fourth, or fifth’’ and inserting ‘‘in any of the first 

19 10’’. 

20 (c) EFFECTIVE DATE.—The amendments made by 

21 this section shall apply to excess foreign taxes which (with22 out regard to the amendments made by this section) may 

23 be carried to any taxable year beginning after December 

24 31, 2002. 
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1 SEC. 206. REPEAL OF LIMITATION OF FOREIGN TAX CREDIT 

2 UNDER ALTERNATIVE MINIMUM TAX. 

3 (a) IN GENERAL.—Section 59(a) (relating to alter4 native minimum tax foreign tax credit) is amended by 

5 striking paragraph (2) and by redesignating paragraphs 

6 (3) and (4) as paragraphs (2) and (3), respectively. 

7 (b) CONFORMING AMENDMENT.—Section 

8 53(d)(1)(B)(i)(II) is amended by striking ‘‘and if section 

9 59(a)(2) did not apply’’. 

10 (c) EFFECTIVE DATE.—The amendments made by 

11 this section shall apply to taxable years beginning after 

12 December 31, 2003.

13 SEC. 207. ATTRIBUTION OF STOCK OWNERSHIP THROUGH 

14 PARTNERSHIPS TO APPLY IN DETERMINING 

15 SECTION 902 AND 960 CREDITS. 

16 (a) IN GENERAL.—Subsection (c) of section 902 is 

17 amended by redesignating paragraph (7) as paragraph (8) 

18 and by inserting after paragraph (6) the following new 

19 paragraph: 

20 ‘‘(7) CONSTRUCTIVE OWNERSHIP THROUGH

21 PARTNERSHIPS.—Stock owned, directly or indirectly, 

22 by or for a partnership shall be considered as being 

23 owned proportionately by its partners. Stock consid24 ered to be owned by a person by reason of the pre25 ceding sentence shall, for purposes of applying such 

26 sentence, be treated as actually owned by such per-
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1 son. The Secretary may prescribe such regulations 

2 as may be necessary to carry out the purposes of 

3 this paragraph, including rules to account for special 

4 partnership allocations of dividends, credits, and 

5 other incidents of ownership of stock in determining 

6 proportionate ownership.’’

7 (b) EFFECTIVE DATE.—The amendment made by 

8 this section shall apply to taxes of foreign corporations 

9 for taxable years of such corporations beginning after De10 cember 31, 2003. 

11 SEC. 208. REPEAL OF SPECIAL RULES FOR APPLYING FOR12 EIGN TAX CREDIT IN CASE OF FOREIGN OIL 

13 AND GAS INCOME. 

14 (a) IN GENERAL.—Section 907 (relating to special 

15 rules in case of foreign oil and gas income) is repealed. 

16 (b) CONFORMING AMENDMENTS.—

17 (1) Each of the following provisions are amend18 ed by striking ‘‘907,’’: 

19 (A) Section 245(a)(10). 

20 (B) Section 865(h)(1)(B). 

21 (C) Section 904(d)(1). 

22 (D) Section 904(g)(10)(A). 

23 (2) Section 904(f)(5)(E)(iii) is amended by in24 serting ‘‘, as in effect before its repeal by the Fair25 ness, Simplification and Competitiveness for Amer-
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1 ican Business Act of 2003’’ after ‘‘section 

2 907(c)(4)(B)’’. 

3 (3) Section 954(g)(1) is amended by inserting 

4 ‘‘, as in effect before its repeal by the Fairness, Sim5 plification and Competitiveness for American Busi6 ness Act of 2003’’ after ‘‘907(c)’’. 

7 (4) Section 6501(i) is amended—

8 (A) by striking ‘‘, or under section 907(f) 

9 (relating to carryback and carryover of dis10 allowed oil and gas extraction taxes)’’, and 

11 (B) by striking ‘‘or 907(f)’’. 

12 (5) The table of sections for subpart A of part 

13 III of subchapter N of chapter 1 is amended by 

14 striking the item relating to section 907. 

15 (c) EFFECTIVE DATE.—The amendments made by 

16 this section shall apply to taxable years beginning after 

17 December 31, 2003. 

18 TITLE III—OTHER PROVISIONS 

19 SEC. 301. APPLICATION OF UNIFORM CAPITALIZATION 

20 RULES TO FOREIGN PERSONS. 

21 (a) IN GENERAL.—Section 263A(c) (relating to ex22 ceptions) is amended by adding at the end the following 

23 new paragraph: 

24 ‘‘(7) FOREIGN PERSONS.—Except for purposes 

25 of applying sections 871(b)(1) and 882(a)(1), this 
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1 section shall not apply to any taxpayer who is not 

2 a United States person if such taxpayer capitalizes 

3 costs of produced property or property acquired for 

4 resale by applying the method used to ascertain the 

5 income, profit, or loss for purposes of reports or 

6 statements to shareholders, partners, other propri7 etors, or beneficiaries, or for credit purposes.’’

8 (b) EFFECTIVE DATE.—The amendment made by 

9 subsection (a) shall apply to taxable years beginning after 

10 December 31, 2003. Section 481 of the Internal Revenue 

11 Code of 1986 shall not apply to any change in a method 

12 of accounting by reason of such amendment. 

13 SEC. 302. UNITED STATES PROPERTY NOT TO INCLUDE 

14 CERTAIN ASSETS ACQUIRED BY DEALERS IN 

15 ORDINARY COURSE OF TRADE OR BUSINESS. 

16 (a) IN GENERAL.—Section 956(c)(2) (relating to ex17 ceptions from property treated as United States property)

18 is amended by striking ‘‘and’’ at the end of subparagraph 

19 (J), by striking the period at the end of subparagraph (K) 

20 and inserting ‘‘; and’’, and by adding at the end the fol21 lowing new subparagraph: 

22 ‘‘(L) securities acquired and held by a con23 trolled foreign corporation in the ordinary 

24 course of its business as a dealer in securities 

25 if (i) the dealer accounts for the securities as 
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1 securities held primarily for sale to customers 

2 in the ordinary course of business, and (ii) the 

3 dealer disposes of the securities (or such securi4 ties mature while held by the dealer) within a 

5 period consistent with the holding of securities 

6 for sale to customers in the ordinary course of 

7 business.’’

8 (b) CONFORMING AMENDMENT.—Section 956(c)(2) 

9 is amended by striking ‘‘and (K)’’ in the last sentence and 

10 inserting ‘‘, (K), and (L)’’. 

11 (c) EFFECTIVE DATE.—The amendments made by 

12 this section shall apply to taxable years of foreign corpora13 tions beginning after December 31, 2003, and to taxable 

14 years of United States shareholders with or within which 

15 such taxable years of foreign corporations end. 

16 SEC. 303. TREATMENT OF CERTAIN DIVIDENDS OF REGU17 LATED INVESTMENT COMPANIES. 

18 (a) TREATMENT OF CERTAIN DIVIDENDS.—

19 (1) NONRESIDENT ALIEN INDIVIDUALS.—Sec20 tion 871 (relating to tax on nonresident alien indi21 viduals) is amended by redesignating subsection (k) 

22 as subsection (l) and by inserting after subsection (j) 

23 the following new subsection:

24 ‘‘(k) EXEMPTION FOR CERTAIN DIVIDENDS OF REG25 ULATED INVESTMENT COMPANIES.—
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1 ‘‘(1) INTEREST-RELATED DIVIDENDS.—

2 ‘‘(A) IN GENERAL.—Except as provided in 

3 subparagraph (B), no tax shall be imposed 

4 under paragraph (1)(A) of subsection (a) on 

5 any interest-related dividend received from a 

6 regulated investment company. 

7 ‘‘(B) EXCEPTIONS.—Subparagraph (A) 

8 shall not apply—

9 ‘‘(i) to any interest-related dividend 

10 received from a regulated investment com11 pany by a person to the extent such divi12 dend is attributable to interest (other than 

13 interest described in subparagraph (E) (i) 

14 or (iii)) received by such company on in15 debtedness issued by such person or by any 

16 corporation or partnership with respect to 

17 which such person is a 10-percent share18 holder, 

19 ‘‘(ii) to any interest-related dividend 

20 with respect to stock of a regulated invest21 ment company unless the person who 

22 would otherwise be required to deduct and 

23 withhold tax from such dividend under 

24 chapter 3 receives a statement (which 

25 meets requirements similar to the require-
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1 ments of subsection (h)(5)) that the bene2 ficial owner of such stock is not a United 

3 States person, and 

4 ‘‘(iii) to any interest-related dividend 

5 paid to any person within a foreign coun6 try (or any interest-related dividend pay7 ment addressed to, or for the account of, 

8 persons within such foreign country) dur9 ing any period described in subsection 

10 (h)(6) with respect to such country. 

11 Clause (iii) shall not apply to any dividend with 

12 respect to any stock which was acquired on or 

13 before the date of the publication of the Sec14 retary’s determination under subsection (h)(6). 

15 ‘‘(C) INTEREST-RELATED DIVIDEND.—For 

16 purposes of this paragraph, an interest-related 

17 dividend is any dividend (or part thereof) which 

18 is designated by the regulated investment com19 pany as an interest-related dividend in a writ20 ten notice mailed to its shareholders not later 

21 than 60 days after the close of its taxable year. 

22 If the aggregate amount so designated with re23 spect to a taxable year of the company (includ24 ing amounts so designated with respect to divi25 dends paid after the close of the taxable year 
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1 described in section 855) is greater than the 

2 qualified net interest income of the company for 

3 such taxable year, the portion of each distribu4 tion which shall be an interest-related dividend 

5 shall be only that portion of the amounts so 

6 designated which such qualified net interest in7 come bears to the aggregate amount so des8 ignated. 

9 ‘‘(D) QUALIFIED NET INTEREST IN10 COME.—For purposes of subparagraph (C), the 

11 term ‘qualified net interest income’ means the 

12 qualified interest income of the regulated in13 vestment company reduced by the deductions 

14 properly allocable to such income. 

15 ‘‘(E) QUALIFIED INTEREST INCOME.—For 

16 purposes of subparagraph (D), the term ‘quali17 fied interest income’ means the sum of the fol18 lowing amounts derived by the regulated invest19 ment company from sources within the United 

20 States: 

21 ‘‘(i) Any amount includible in gross 

22 income as original issue discount (within 

23 the meaning of section 1273) on an obliga24 tion payable 183 days or less from the date 
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1 of original issue (without regard to the pe2 riod held by the company). 

3 ‘‘(ii) Any interest includible in gross 

4 income (including amounts recognized as 

5 ordinary income in respect of original issue 

6 discount or market discount or acquisition 

7 discount under part V of subchapter P and 

8 such other amounts as regulations may 

9 provide) on an obligation which is in reg10 istered form; except that this clause shall 

11 not apply to—

12 ‘‘(I) any interest on an obligation 

13 issued by a corporation or partnership 

14 if the regulated investment company 

15 is a 10-percent shareholder in such 

16 corporation or partnership, and

17 ‘‘(II) any interest which is treat18 ed as not being portfolio interest 

19 under the rules of subsection (h)(4). 

20 ‘‘(iii) Any interest referred to in sub21 section (i)(2)(A) (without regard to the 

22 trade or business of the regulated invest23 ment company).

24 ‘‘(iv) Any interest-related dividend in25 cludable in gross income with respect to 
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1 stock of another regulated investment com2 pany. 

3 ‘‘(F) 10-PERCENT SHAREHOLDER.—For 

4 purposes of this paragraph, the term ‘10-per5 cent shareholder’ has the meaning given such 

6 term by subsection (h)(3)(B).

7 ‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—

8 ‘‘(A) IN GENERAL.—Except as provided in 

9 subparagraph (B), no tax shall be imposed 

10 under paragraph (1)(A) of subsection (a) on 

11 any short-term capital gain dividend received 

12 from a regulated investment company. 

13 ‘‘(B) EXCEPTION FOR ALIENS TAXABLE

14 UNDER SUBSECTION (a)(2).—In the case of divi15 dends received from a regulated investment 

16 company before January 1, 2003, subparagraph 

17 (A) shall not apply in the case of any non18 resident alien individual subject to tax under 

19 subsection (a)(2).

20 ‘‘(C) SHORT-TERM CAPITAL GAIN DIVI21 DEND.—For purposes of this paragraph, a 

22 short-term capital gain dividend is any dividend 

23 (or part thereof) which is designated by the reg24 ulated investment company as a short-term cap25 ital gain dividend in a written notice mailed to 
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1 its shareholders not later than 60 days after the 

2 close of its taxable year. If the aggregate 

3 amount so designated with respect to a taxable 

4 year of the company (including amounts so des5 ignated with respect to dividends paid after the 

6 close of the taxable year described in section 

7 855) is greater than the qualified short-term 

8 gain of the company for such taxable year, the 

9 portion of each distribution which shall be a 

10 short-term capital gain dividend shall be only 

11 that portion of the amounts so designated 

12 which such qualified short-term gain bears to 

13 the aggregate amount so designated. 

14 ‘‘(D) QUALIFIED SHORT-TERM GAIN.—For 

15 purposes of subparagraph (C), the term ‘quali16 fied short-term gain’ means the excess of the 

17 net short-term capital gain of the regulated in18 vestment company for the taxable year over the 

19 net long-term capital loss (if any) of such com20 pany for such taxable year. For purposes of this 

21 subparagraph—

22 ‘‘(i) the net short-term capital gain of 

23 the regulated investment company shall be 

24 computed by treating any short-term cap25 ital gain dividend includible in gross in-
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1 come with respect to stock of another regu2 lated investment company as a short-term 

3 capital gain, and 

4 ‘‘(ii) the excess of the net short-term 

5 capital gain for a taxable year over the net 

6 long-term capital loss for a taxable year (to 

7 which an election under section 4982(e)(4) 

8 does not apply) shall be determined with9 out regard to any net capital loss or net 

10 short-term capital loss attributable to 

11 transactions after October 31 of such year, 

12 and any such net capital loss or net short13 term capital loss shall be treated as arising 

14 on the 1st day of the next taxable year. 

15 To the extent provided in regulations, clause 

16 (ii) shall apply also for purposes of computing 

17 the taxable income of the regulated investment 

18 company.’’

19 (2) FOREIGN CORPORATIONS.—Section 881 (re20 lating to tax on income of foreign corporations not 

21 connected with United States business) is amended 

22 by redesignating subsection (e) as subsection (f) and 

23 by inserting after subsection (d) the following new 

24 subsection: 
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1 ‘‘(e) TAX NOT TO APPLY TO CERTAIN DIVIDENDS

2 OF REGULATED INVESTMENT COMPANIES.—

3 ‘‘(1) INTEREST-RELATED DIVIDENDS.—

4 ‘‘(A) IN GENERAL.—Except as provided in 

5 subparagraph (B), no tax shall be imposed 

6 under paragraph (1) of subsection (a) on any 

7 interest-related dividend (as defined in section 

8 871(k)(1)) received from a regulated investment 

9 company. 

10 ‘‘(B) EXCEPTION.—Subparagraph (A) 

11 shall not apply—

12 ‘‘(i) to any dividend referred to in sec13 tion 871(k)(1)(B), and 

14 ‘‘(ii) to any interest-related dividend 

15 received by a controlled foreign corporation 

16 (within the meaning of section 957(a)) to 

17 the extent such dividend is attributable to 

18 interest received by the regulated invest19 ment company from a person who is a re20 lated person (within the meaning of section 

21 864(d)(4)) with respect to such controlled 

22 foreign corporation. 

23 ‘‘(C) TREATMENT OF DIVIDENDS RE24 CEIVED BY CONTROLLED FOREIGN CORPORA25 TIONS.—The rules of subsection (c)(5)(A) shall 
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1 apply to any interest-related dividend received 

2 by a controlled foreign corporation (within the 

3 meaning of section 957(a)) to the extent such 

4 dividend is attributable to interest received by 

5 the regulated investment company which is de6 scribed in clause (ii) of section 871(k)(1)(E) 

7 (and not described in clause (i) or (iii) of such 

8 section). 

9 ‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—

10 No tax shall be imposed under paragraph (1) of sub11 section (a) on any short-term capital gain dividend 

12 (as defined in section 871(k)(2)) received from a 

13 regulated investment company.’’

14 (3) WITHHOLDING TAXES.—

15 (A) Section 1441(c) (relating to excep16 tions) is amended by adding at the end the fol17 lowing new paragraph:

18 ‘‘(12) CERTAIN DIVIDENDS RECEIVED FROM

19 REGULATED INVESTMENT COMPANIES.—

20 ‘‘(A) IN GENERAL.—No tax shall be re21 quired to be deducted and withheld under sub22 section (a) from any amount exempt from the 

23 tax imposed by section 871(a)(1)(A) by reason 

24 of section 871(k). 
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1 ‘‘(B) SPECIAL RULE.—For purposes of 

2 subparagraph (A), clause (i) of section 

3 871(k)(1)(B) shall not apply to any dividend 

4 unless the regulated investment company knows 

5 that such dividend is a dividend referred to in 

6 such clause. A similar rule shall apply with re7 spect to the exception contained in section 

8 871(k)(2)(B).’’ 

9 (B) Section 1442(a) (relating to with10 holding of tax on foreign corporations) is 

11 amended—

12 (i) by striking ‘‘and the reference in 

13 section 1441(c)(10)’’ and inserting ‘‘the 

14 reference in section 1441(c)(10)’’, and

15 (ii) by inserting before the period at 

16 the end the following: ‘‘, and the references 

17 in section 1441(c)(12) to sections 871(a) 

18 and 871(k) shall be treated as referring to 

19 sections 881(a) and 881(e) (except that for 

20 purposes of applying subparagraph (A) of 

21 section 1441(c)(12), as so modified, clause 

22 (ii) of section 881(e)(1)(B) shall not apply 

23 to any dividend unless the regulated invest24 ment company knows that such dividend is 

25 a dividend referred to in such clause)’’. 
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1 (b) ESTATE TAX TREATMENT OF INTEREST IN CER2 TAIN REGULATED INVESTMENT COMPANIES.—Section 

3 2105 (relating to property without the United States for 

4 estate tax purposes) is amended by adding at the end the 

5 following new subsection: 

6 ‘‘(d) STOCK IN A RIC.—

7 ‘‘(1) IN GENERAL.—For purposes of this sub8 chapter, stock in a regulated investment company 

9 (as defined in section 851) owned by a nonresident 

10 not a citizen of the United States shall not be 

11 deemed property within the United States in the 

12 proportion that, at the end of the quarter of such in13 vestment company’s taxable year immediately pre14 ceding a decedent’s date of death (or at such other 

15 time as the Secretary may designate in regulations), 

16 the assets of the investment company that were 

17 qualifying assets with respect to the decedent bore 

18 to the total assets of the investment company. 

19 ‘‘(2) QUALIFYING ASSETS.—For purposes of 

20 this subsection, qualifying assets with respect to a 

21 decedent are assets that, if owned directly by the de22 cedent, would have been—

23 ‘‘(A) amounts, deposits, or debt obligations 

24 described in subsection (b) of this section, 
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1 ‘‘(B) debt obligations described in the last 

2 sentence of section 2104(c), or 

3 ‘‘(C) other property not within the United 

4 States.’’

5 (c) TREATMENT OF REGULATED INVESTMENT COM6 PANIES UNDER SECTION 897.—

7 (1) Paragraph (1) of section 897(h) is amended 

8 by striking ‘‘REIT’’ each place it appears and in9 serting ‘‘qualified investment entity’’. 

10 (2) Paragraphs (2) and (3) of section 897(h) 

11 are amended to read as follows:

12 ‘‘(2) SALE OF STOCK IN DOMESTICALLY CON13 TROLLED ENTITY NOT TAXED.—The term ‘United 

14 States real property interest’ does not include any 

15 interest in a domestically controlled qualified invest16 ment entity. 

17 ‘‘(3) DISTRIBUTIONS BY DOMESTICALLY CON18 TROLLED QUALIFIED INVESTMENT ENTITIES.—In 

19 the case of a domestically controlled qualified invest20 ment entity, rules similar to the rules of subsection 

21 (d) shall apply to the foreign ownership percentage 

22 of any gain.’’

23 (3) Subparagraphs (A) and (B) of section 

24 897(h)(4) are amended to read as follows: 
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1 ‘‘(A) QUALIFIED INVESTMENT ENTITY.—

2 The term ‘qualified investment entity’ means 

3 any real estate investment trust and any regu4 lated investment company. 

5 ‘‘(B) DOMESTICALLY CONTROLLED.—The 

6 term ‘domestically controlled qualified invest7 ment entity’ means any qualified investment en8 tity in which at all times during the testing pe9 riod less than 50 percent in value of the stock 

10 was held directly or indirectly by foreign per11 sons.’’

12 (4) Subparagraphs (C) and (D) of section 

13 897(h)(4) are each amended by striking ‘‘REIT’’ 

14 and inserting ‘‘qualified investment entity’’. 

15 (5) The subsection heading for subsection (h) of 

16 section 897 is amended by striking ‘‘REITS’’ and 

17 inserting ‘‘CERTAIN INVESTMENT ENTITIES’’. 

18 (d) EFFECTIVE DATE.—

19 (1) IN GENERAL.—Except as otherwise pro20 vided in this subsection, the amendments made by 

21 this section shall apply to dividends with respect to 

22 taxable years of regulated investment companies be23 ginning after the date of the enactment of this Act. 

24 (2) ESTATE TAX TREATMENT.—The amend25 ment made by subsection (b) shall apply to estates 
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1 of decedents dying after the date of the enactment 

2 of this Act. 

3 (3) CERTAIN OTHER PROVISIONS.—The amend4 ments made by subsection (c) (other than paragraph 

5 (1) thereof) shall take effect on the date of the en6 actment of this Act. 

7 SEC. 304. AIRLINE MILEAGE AWARDS TO CERTAIN FOREIGN 

8 PERSONS. 

9 (a) IN GENERAL.—The last sentence of section 

10 4261(e)(3)(C) (relating to regulations) is amended by in11 serting ‘‘and mileage awards which are issued to individ12 uals whose mailing addresses on record with the person 

13 providing the right to air transportation are outside the 

14 United States’’ before the period at the end thereof. 

15 (b) EFFECTIVE DATE.—The amendment made by 

16 this section shall apply to amounts paid, and benefits pro17 vided, after December 31, 2003.

18 SEC. 305. INTEREST PAYMENTS DEDUCTIBLE WHERE DIS19 QUALIFIED GUARANTEE HAS ECONOMIC EF20 FECT. 

21 (a) IN GENERAL.—Section 163(j)(6)(D)(ii) (relating 

22 to exceptions to disqualified guarantee) is amended—

23 (1) by striking ‘‘or’’ at the end of subclause (I), 

24 (2) by striking the period at the end of sub25 clause (II) and inserting ‘‘, or’’, 
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1 (3) by inserting after subclause (II) the fol2 lowing new subclause: 

3 ‘‘(III) if, in the case of a guar4 antee by a foreign person, the tax5 payer establishes to the satisfaction of 

6 the Secretary that the taxpayer could 

7 have borrowed substantially the same 

8 principal amount from an unrelated 

9 person without the guarantee.’’, and 

10 (4) by adding at the end the following new sen11 tence: ‘‘For purposes of subclause (III), to the ex12 tent provided in regulations, the Secretary may re13 ject a showing that a taxpayer could have borrowed 

14 substantially the same principal amount if such bor15 rowing is on terms substantially dissimilar to those 

16 of the actual loan.’’

17 (b) EFFECTIVE DATE.—The amendments made by 

18 this section shall apply to guarantees issued on and after 

19 the date of the enactment of this Act. 

20 SEC. 306. MODIFICATIONS OF REPORTING REQUIREMENTS 

21 FOR CERTAIN FOREIGN-OWNED CORPORA22 TIONS. 

23 (a) DE MINIMIS EXCEPTION.—Section 6038A(b) (re24 lating to required information) is amended by adding at 

25 the end the following new flush sentence: 
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1 ‘‘The Secretary shall not require the reporting corporation 

2 to report any information with respect to any foreign per3 son which is a related person if the aggregate value of 

4 the transactions between the corporation and the related 

5 person (and any person related to such person) during the 

6 taxable year does not exceed $5,000,000.’’

7 (b) TIME FOR PROVIDING TRANSLATIONS OF SPE8 CIFIC DOCUMENTS.—Notwithstanding Internal Revenue 

9 Service Regulation § 1.6038A–3(f)(2), a taxpayer shall 

10 have at least 60 days to provide translations of specific 

11 documents it is requested to translate. Nothing in this 

12 subsection shall limit the right of a taxpayer to file a writ13 ten request for an extension of time to comply with the 

14 request. 

15 (c) EFFECTIVE DATES.—

16 (1) EXCEPTION.—The amendment made by 

17 subsection (a) shall apply to taxable years beginning 

18 after December 31, 2003. 

19 (2) TRANSLATIONS.—Subsection (b) shall apply 

20 to requests made by the Internal Revenue Service 

21 after December 31, 2003. 
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1 SEC. 307. ELECTION NOT TO USE AVERAGE EXCHANGE 

2 RATE FOR FOREIGN TAX PAID OTHER THAN 

3 IN FUNCTIONAL CURRENCY. 

4 (a) IN GENERAL.—Paragraph (1) of section 986(a) 

5 (relating to determination of foreign taxes and foreign cor6 poration’s earnings and profits) is amended by redesig7 nating subparagraph (D) as subparagraph (E) and by in8 serting after subparagraph (C) the following new subpara9 graph: 

10 ‘‘(D) ELECTIVE EXCEPTION FOR TAXES

11 PAID OTHER THAN IN FUNCTIONAL CUR12 RENCY.—

13 ‘‘(i) IN GENERAL.—At the election of 

14 the taxpayer, subparagraph (A) shall not 

15 apply to any foreign income taxes the li16 ability for which is denominated in any 

17 currency other than in the taxpayer’s func18 tional currency. 

19 ‘‘(ii) APPLICATION TO QUALIFIED

20 BUSINESS UNITS.—An election under this 

21 subparagraph may apply to foreign income 

22 taxes attributable to a qualified business 

23 unit in accordance with regulations pre24 scribed by the Secretary. 

25 ‘‘(iii) ELECTION.—Any such election 

26 shall apply to the taxable year for which 
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1 made and all subsequent taxable years un2 less revoked with the consent of the Sec3 retary.’’

4 (b) EFFECTIVE DATE.—The amendment made by 

5 this section shall apply to taxable years beginning after 

6 December 31, 2003. 

7 SEC. 308. REPEAL OF SPECIAL CAPITAL GAINS TAX ON 

8 ALIENS PRESENT IN THE UNITED STATES 

9 FOR 183 DAYS OR MORE. 

10 (a) IN GENERAL.—Subsection (a) of section 871 is 

11 amended by striking paragraph (2) and by redesignating 

12 paragraph (3) as paragraph (2).

13 (b) EFFECTIVE DATE.—The amendment made by 

14 this section shall apply to taxable years beginning after 

15 December 31, 2003. 

16 SEC. 309. REPEAL OF WITHHOLDING TAX ON DIVIDENDS 

17 FROM CERTAIN FOREIGN CORPORATIONS. 

18 (a) IN GENERAL.—Paragraph (2) of section 871(i) 

19 (relating to tax not to apply to certain interest and divi20 dends) is amended by adding at the end the following new 

21 subparagraph: 

22 ‘‘(D) Dividends paid by a foreign corpora23 tion.’’. 
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1 (b) EFFECTIVE DATE.—The amendment made by 

2 this section shall apply to payments made after December 

3 31, 2003. 

4 SEC. 310. INTEREST EXPENSE ALLOCATION RULES. 

5 (a) ELECTION TO ALLOCATE ON WORLDWIDE

6 BASIS.— Section 864 is amended by redesignating sub7 section (f) as subsection (g) and by inserting after sub8 section (e) the following new subsection: 

9 ‘‘(f) ELECTION TO ALLOCATE INTEREST, ETC. ON

10 WORLDWIDE BASIS.—For purposes of this subchapter, at 

11 the election of the worldwide affiliated group—

12 ‘‘(1) ALLOCATION AND APPORTIONMENT OF IN13 TEREST EXPENSE.—

14 ‘‘(A) IN GENERAL.—The taxable income of 

15 each domestic corporation which is a member of 

16 a worldwide affiliated group shall be determined 

17 by allocating and apportioning interest expense

18 of each member as if all members of such group 

19 were a single corporation. 

20 ‘‘(B) TREATMENT OF WORLDWIDE AFFILI21 ATED GROUP.—The taxable income of the do22 mestic members of a worldwide affiliated group 

23 from sources outside the United States shall be 

24 determined by allocating and apportioning the 

25 interest expense of such domestic members to 
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1 such income in an amount equal to the excess 

2 (if any) of—

3 ‘‘(i) the total interest expense of the 

4 worldwide affiliated group multiplied by 

5 the ratio which the foreign assets of the 

6 worldwide affiliated group bears to all the 

7 assets of the worldwide affiliated group, 

8 over 

9 ‘‘(ii) the interest expense of all foreign 

10 corporations which are members of the 

11 worldwide affiliated group to the extent 

12 such interest expense of such foreign cor13 porations would have been allocated and 

14 apportioned to foreign source income if 

15 this subsection were applied to a group 

16 consisting of all the foreign corporations in 

17 such worldwide affiliated group. 

18 ‘‘(C) WORLDWIDE AFFILIATED GROUP.—

19 For purposes of this paragraph, the term 

20 ‘worldwide affiliated group’ means an affiliated 

21 group as defined in section 1504(a), determined 

22 without regard to paragraphs (2), (3), and (4) 

23 of section 1504(b). 

24 ‘‘(2) ALLOCATION AND APPORTIONMENT OF

25 OTHER EXPENSES.—Expenses other than interest 
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1 which are not directly allocable or apportioned to 

2 any specific income producing activity shall be allo3 cated and apportioned as if all members of the affili4 ated group were a single corporation. For purposes 

5 of the preceding sentence, the term ‘affiliated group’ 

6 has the meaning given such term by section 1504 

7 (determined without regard to paragraph (4) of sec8 tion 1504(b)). 

9 ‘‘(3) TREATMENT OF TAX-EXEMPT ASSETS; 

10 BASIS OF STOCK IN NONAFFILIATED 10-PERCENT

11 OWNED CORPORATIONS.—The rules of paragraphs 

12 (3) and (4) of subsection (e) shall apply for purposes 

13 of this subsection; except that paragraph (3) shall be 

14 applied on worldwide affiliated group basis. 

15 ‘‘(4) TREATMENT OF CERTAIN FINANCIAL IN16 STITUTIONS.—

17 ‘‘(A) IN GENERAL.—For purposes of para18 graph (1), any corporation described in sub19 paragraph (B) shall be treated as an includible 

20 corporation for purposes of section 1504 only 

21 for purposes of applying this subsection sepa22 rately to corporations so described. 

23 ‘‘(B) DESCRIPTION.—A corporation is de24 scribed in this subparagraph if—
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1 ‘‘(i) such corporation is a financial in2 stitution described in section 581 or 591, 

3 ‘‘(ii) the business of such financial in4 stitution is predominantly with persons 

5 other than related persons (within the 

6 meaning of subsection (d)(4)) or their cus7 tomers, and 

8 ‘‘(iii) such financial institution is re9 quired by State or Federal law to be oper10 ated separately from any other entity 

11 which is not such an institution. 

12 ‘‘(C) TREATMENT OF BANK HOLDING COM13 PANIES.—To the extent provided in regula14 tions—

15 ‘‘(i) a bank holding company (within 

16 the meaning of section 2(a) of the Bank 

17 Holding Company Act of 1956), and 

18 ‘‘(ii) any subsidiary of a financial in19 stitution described in section 581 or 591 or 

20 of any bank holding company if such sub21 sidiary is predominantly engaged (directly 

22 or indirectly) in the active conduct of a 

23 banking, financing, or similar business, 

24 shall be treated as a corporation described in 

25 subparagraph (B). 
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1 ‘‘(5) ELECTION TO EXPAND FINANCIAL INSTI2 TUTION GROUP OF WORLDWIDE GROUP.—

3 ‘‘(A) IN GENERAL.—If a worldwide affili4 ated group elects the application of this sub5 section, all financial corporations which—

6 ‘‘(i) are members of such worldwide 

7 affiliated group, but 

8 ‘‘(ii) are not corporations described in 

9 paragraph (4)(B), 

10 shall be treated as described in paragraph 

11 (4)(B) for purposes of applying paragraph 

12 (4)(A). This subsection (other than this para13 graph) shall apply to any such group in the 

14 same manner as this subsection (other than this 

15 paragraph) applies to the pre-election worldwide 

16 affiliated group of which such group is a part. 

17 ‘‘(B) FINANCIAL CORPORATION.—For pur18 poses of this paragraph, the term ‘financial cor19 poration’ means any corporation if at least 80 

20 percent of its gross income is income described 

21 in section 904(d)(2)(C)(ii) and the regulations 

22 thereunder which is derived from transactions 

23 with persons who are not related (within the 

24 meaning of section 267(b) or 707(b)(1)) to the 

25 corporation. For purposes of the preceding sen-
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1 tence, there shall be disregarded any item of in2 come or gain from a transaction or series of 

3 transactions a principal purpose of which is the 

4 qualification of any corporation as a financial 

5 corporation. 

6 ‘‘(C) ANTIABUSE RULES.—In the case of a 

7 corporation which is a member of an electing fi8 nancial institution group, to the extent that 

9 such corporation—

10 ‘‘(i) distributes dividends or makes 

11 other distributions with respect to its stock 

12 after the date of the enactment of this 

13 paragraph to any member of the pre-elec14 tion worldwide affiliated group (other than 

15 to a member of the electing financial insti16 tution group) in excess of the greater of—

17 ‘‘(I) its average annual dividend 

18 (expressed as a percentage of current 

19 earnings and profits) during the 5-

20 taxable-year period ending with the 

21 taxable year preceding the taxable 

22 year, or 

23 ‘‘(II) 25 percent of its average 

24 annual earnings and profits for such 

25 5-taxable-year period, or 
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1 ‘‘(ii) deals with any person in any 

2 manner not clearly reflecting the income of 

3 the corporation (as determined under prin4 ciples similar to the principles of section 

5 482), 

6 an amount of indebtedness of the electing fi7 nancial institution group equal to the excess 

8 distribution or the understatement or overstate9 ment of income, as the case may be, shall be re10 characterized (for the taxable year and subse11 quent taxable years) for purposes of this para12 graph as indebtedness of the worldwide affili13 ated group (excluding the electing financial in14 stitution group). If a corporation has not been 

15 in existence for 5 taxable years, this subpara16 graph shall be applied with respect to the pe17 riod it was in existence. 

18 ‘‘(D) ELECTION.—An election under this 

19 paragraph with respect to any financial institu20 tion group may be made only by the common 

21 parent of the pre-election worldwide affiliated 

22 group and may be made only for the first tax23 able year beginning after December 31, 2002, 

24 in which such affiliated group includes 1 or 

25 more financial corporations. Such an election, 
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1 once made, shall apply to all financial corpora2 tions which are members of the electing finan3 cial institution group for such taxable year and 

4 all subsequent years unless revoked with the 

5 consent of the Secretary. 

6 ‘‘(E) DEFINITIONS RELATING TO

7 GROUPS.—For purposes of this paragraph—

8 ‘‘(i) PRE-ELECTION WORLDWIDE AF9 FILIATED GROUP.—The term ‘pre-election 

10 worldwide affiliated group’ means, with re11 spect to a corporation, the worldwide affili12 ated group of which such corporation 

13 would (but for an election under this para14 graph) be a member for purposes of apply15 ing paragraph (1). 

16 ‘‘(ii) ELECTING FINANCIAL INSTITU17 TION GROUP.—The term ‘electing financial 

18 institution group’ means the group of cor19 porations to which this subsection applies 

20 separately by reason of the application of 

21 paragraph (5)(A) and which includes fi22 nancial corporations by reason of an elec23 tion under subparagraph (A). 

24 ‘‘(F) REGULATIONS.—The Secretary shall 

25 prescribe such regulations as may be appro-
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1 priate to carry out this subsection, including 

2 regulations—

3 ‘‘(i) providing for the direct allocation 

4 of interest expense in other circumstances 

5 where such allocation would be appropriate 

6 to carry out the purposes of this sub7 section, 

8 ‘‘(ii) preventing assets or interest ex9 pense from being taken into account more 

10 than once, and 

11 ‘‘(iii) dealing with changes in mem12 bers of any group (through acquisitions or 

13 otherwise) treated under this paragraph as 

14 an affiliated group for purposes of this 

15 subsection. 

16 ‘‘(6) ELECTION.—An election to have this sub17 section apply with respect to any worldwide affiliated 

18 group may be made only by the common parent of 

19 the domestic affiliated group referred to in para20 graph (1)(C) and may be made only for the first 

21 taxable year beginning after December 31, 2002, in 

22 which a worldwide affiliated group exists which in23 cludes such affiliated group and at least one foreign 

24 corporation. Such an election, once made, shall apply 

25 to such common parent and all other corporations 
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1 which are members of such worldwide affiliated 

2 group for such taxable year and all subsequent years 

3 unless revoked with the consent of the Secretary.’’. 

4 (b) EXPANSION OF REGULATORY AUTHORITY.—

5 Paragraph (7) of section 864(e) is amended—

6 (1) by inserting before the comma at the end of 

7 subparagraph (B) ‘‘and in other circumstances 

8 where such allocation would be appropriate to carry 

9 out the purposes of this subsection’’, and 

10 (2) by striking ‘‘and’’ at the end of subpara11 graph (E), by redesignating subparagraph (F) as 

12 subparagraph (G), and by inserting after subpara13 graph (E) the following new subparagraph: 

14 ‘‘(F) preventing assets or interest expense 

15 from being taken into account more than once, 

16 and’’. 

17 (c) EFFECTIVE DATE.—The amendments made by 

18 this section shall apply to taxable years beginning after 

19 December 31, 2003. 

20 SEC. 311. PERMANENT EXTENSION OF SUBPART F EXEMP21 TION FOR ACTIVE FINANCING. 

22 (a) IN GENERAL.—

23 (1) Section 953(e)(10) is amended—

24 (A) by striking ‘‘, and before January 1, 

25 2007,’’, and 
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1 (B) by striking the second sentence. 

2 (2) Section 954(h)(9) is amended by striking ‘‘, 

3 and before January 1, 2007,’’. 

4 (b) EFFECTIVE DATE.—The amendments made by 

5 subsection (a) shall apply to taxable years beginning after 

6 December 31, 2003.

Æ