II

Calendar No. 817

106TH CONGRESS

2D SESSION H. R. 4986

[Report No. 106–416]

IN THE SENATE OF THE UNITED STATES

SEPEMBER 14, 2000

Received; read twice and referred to the Committee on Finance

SEPTEMBER 20, 2000

Reported by Mr. ROTH with amendments

[Omit the part struck through and insert the part printed in italic]

AN ACT

To amend the Internal Revenue Code of 1986 to repeal

the provisions relating to foreign sales corporations

(FSCs) and to exclude extraterritorial income from gross

income.

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.

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

5 ‘‘FSC Repeal and Extraterritorial Income Exclusion Act

6 of 2000’’.
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1 (b) AMENDMENT OF 1986 CODE.—Except as other2 wise expressly provided, whenever in this Act an amend3 ment or repeal is expressed in terms of an amendment

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

5 shall be considered to be made to a section or other provi6 sion of the Internal Revenue Code of 1986.

7 SEC. 2. REPEAL OF FOREIGN SALES CORPORATION RULES.

8 Subpart C of part III of subchapter N of chapter 1

9 (relating to taxation of foreign sales corporations) is here10 by repealed.

11 SEC. 3. TREATMENT OF EXTRATERRITORIAL INCOME.

12 (a) IN GENERAL.—Part III of subchapter B of chap13 ter 1 (relating to items specifically excluded from gross

14 income) is amended by inserting before section 115 the

15 following new section:

16 ‘‘SEC. 114. EXTRATERRITORIAL INCOME.

17 ‘‘(a) EXCLUSION.—Gross income does not include

18 extraterritorial income.

19 ‘‘(b) EXCEPTION.—Subsection (a) shall not apply to

20 extraterritorial income which is not qualifying foreign

21 trade income as determined under subpart E of part III

22 of subchapter N.

23 ‘‘(c) DISALLOWANCE OF DEDUCTIONS.—

24 ‘‘(1) IN GENERAL.—Any deduction of a tax25 payer allocated under paragraph (2) to
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1 extraterritorial income of the taxpayer excluded from

2 gross income under subsection (a) shall not be al3 lowed.

4 ‘‘(2) ALLOCATION.—Any deduction of the tax5 payer properly apportioned and allocated to the

6 extraterritorial income derived by the taxpayer from

7 any transaction shall be allocated on a proportionate

8 basis between—

9 ‘‘(A) the extraterritorial income derived

10 from such transaction which is excluded from

11 gross income under subsection (a), and

12 ‘‘(B) the extraterritorial income derived

13 from such transaction which is not so excluded.

14 ‘‘(d) DENIAL OF CREDITS FOR CERTAIN FOREIGN

15 TAXES.—Notwithstanding any other provision of this

16 chapter, no credit shall be allowed under this chapter for

17 any income, war profits, and excess profits taxes paid or

18 accrued to any foreign country or possession of the United

19 States with respect to extraterritorial income which is ex20 cluded from gross income under subsection (a).

21 ‘‘(e) EXTRATERRITORIAL INCOME.—For purposes of

22 this section, the term ‘extraterritorial income’ means the

23 gross income of the taxpayer attributable to foreign trad24 ing gross receipts (as defined in section 942) of the tax25 payer.’’.
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1 (b) QUALIFYING FOREIGN TRADE INCOME.—Part III

2 of subchapter N of chapter 1 is amended by inserting after

3 subpart D the following new subpart:

4 ‘‘Subpart E—Qualifying Foreign Trade Income

‘‘Sec. 941. Qualifying foreign trade income.

‘‘Sec. 942. Foreign trading gross receipts.

‘‘Sec. 943. Other definitions and special rules.

5 ‘‘SEC. 941. QUALIFYING FOREIGN TRADE INCOME.

6 ‘‘(a) QUALIFYING FOREIGN TRADE INCOME.—For

7 purposes of this subpart and section 114—

8 ‘‘(1) IN GENERAL.—The term ‘qualifying for9 eign trade income’ means, with respect to any trans10 action, the amount of gross income which, if ex11 cluded, will result in a reduction of the taxable in12 come of the taxpayer from such transaction equal to

13 the greatest of—

14 ‘‘(A) 30 percent of the foreign sale and

15 leasing income derived by the taxpayer from

16 such transaction,

17 ‘‘(B) 1.2 percent of the foreign trading

18 gross receipts derived by the taxpayer from the

19 transaction, or

20 ‘‘(C) 15 percent of the foreign trade in21 come derived by the taxpayer from the trans22 action.
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1 In no event shall the amount determined under sub2 paragraph (B) exceed 200 percent of the amount de3 termined under subparagraph (C).

4 ‘‘(2) ALTERNATIVE COMPUTATION.—A taxpayer

5 may compute its qualifying foreign trade income

6 under a subparagraph of paragraph (1) other than

7 the subparagraph which results in the greatest

8 amount of such income.

9 ‘‘(3) LIMITATION ON USE OF FOREIGN TRADING

10 GROSS RECEIPTS METHOD.—If any person computes

11 its qualifying foreign trade income from any trans12 action with respect to any property under paragraph

13 (1)(B), the qualifying foreign trade income of such

14 person (or any related person) with respect to any

15 other transaction involving such property shall be

16 zero.

17 ‘‘(4) RULES FOR MARGINAL COSTING.—The

18 Secretary shall prescribe regulations setting forth

19 rules for the allocation of expenditures in computing

20 foreign trade income under paragraph (1)(C) in

21 those cases where a taxpayer is seeking to establish

22 or maintain a market for qualifying foreign trade

23 property.

24 ‘‘(5) PARTICIPATION IN INTERNATIONAL BOY25 COTTS, ETC.—Under regulations prescribed by the
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1 Secretary, the qualifying foreign trade income of a

2 taxpayer for any taxable year shall be reduced (but

3 not below zero) by the sum of—

4 ‘‘(A) an amount equal to such income mul5 tiplied by the international boycott factor deter6 mined under section 999, and

7 ‘‘(B) any illegal bribe, kickback, or other

8 payment (within the meaning of section 162(c))

9 paid by or on behalf of the taxpayer directly or

10 indirectly to an official, employee, or agent in

11 fact of a government.

12 ‘‘(b) FOREIGN TRADE INCOME.—For purposes of

13 this subpart—

14 ‘‘(1) IN GENERAL.—The term ‘foreign trade in15 come’ means the taxable income of the taxpayer at16 tributable to foreign trading gross receipts of the

17 taxpayer.

18 ‘‘(2) SPECIAL RULE FOR COOPERATIVES.—In

19 any case in which an organization to which part I

20 of subchapter T applies which is engaged in the

21 marketing of agricultural or horticultural products

22 sells qualifying foreign trade property, in computing

23 the taxable income of such cooperative, there shall

24 not be taken into account any deduction allowable

25 under subsection (b) or (c) of section 1382 (relating
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1 to patronage dividends, per-unit retain allocations,

2 and nonpatronage distributions).

3 ‘‘(c) FOREIGN SALE AND LEASING INCOME.—For

4 purposes of this section—

5 ‘‘(1) IN GENERAL.—The term ‘foreign sale and

6 leasing income’ means, with respect to any

7 transaction—

8 ‘‘(A) foreign trade income properly allo9 cable to activities which—

10 ‘‘(i) are described in paragraph

11 (2)(A)(i) or (3) of section 942(b), and

12 ‘‘(ii) are performed by the taxpayer

13 (or any person acting under a contract

14 with such taxpayer) outside the United

15 States, or

16 ‘‘(B) foreign trade income derived by the

17 taxpayer in connection with the lease or rental

18 of qualifying foreign trade property for use by

19 the lessee outside the United States.

20 ‘‘(2) SPECIAL RULES FOR LEASED PROP21 ERTY.—

22 ‘‘(A) SALES INCOME.—The term ‘foreign

23 sale and leasing income’ includes any foreign

24 trade income derived by the taxpayer from the

25 sale of property described in paragraph (1)(B).
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1 ‘‘(B) LIMITATION IN CERTAIN CASES.—Ex2 cept as provided in regulations, in the case of

3 property which—

4 ‘‘(i) was manufactured, produced,

5 grown, or extracted by the taxpayer, or

6 ‘‘(ii) was acquired by the taxpayer

7 from a related person for a price which

8 was not determined in accordance with the

9 rules of section 482,

10 the amount of foreign trade income which may be

11 treated as foreign sale and leasing income under

12 paragraph (1)(B) or subparagraph (A) of this para13 graph with respect to any transaction involving such

14 property shall not exceed the amount which would

15 have been determined if the taxpayer had acquired

16 such property for the price determined in accordance

17 with the rules of section 482.

18 ‘‘(3) SPECIAL RULES.—

19 ‘‘(A) EXCLUDED PROPERTY.—Foreign sale

20 and leasing income shall not include any income

21 properly allocable to excluded property de22 scribed in subparagraph (B) of section

23 943(a)(3) (relating to intangibles).

24 ‘‘(B) ONLY DIRECT EXPENSES TAKEN

25 INTO ACCOUNT.—For purposes of this sub-
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1 section, any expense other than a directly allo2 cable expense shall not be taken into account in

3 computing foreign trade income.

4 ‘‘SEC. 942. FOREIGN TRADING GROSS RECEIPTS.

5 ‘‘(a) FOREIGN TRADING GROSS RECEIPTS.—

6 ‘‘(1) IN GENERAL.—Except as otherwise pro7 vided in this section, for purposes of this subpart,

8 the term ‘foreign trading gross receipts’ means the

9 gross receipts of the taxpayer which are—

10 ‘‘(A) from the sale, exchange, or other dis11 position of qualifying foreign trade property,

12 ‘‘(B) from the lease or rental of qualifying

13 foreign trade property for use by the lessee out14 side the United States,

15 ‘‘(C) for services which are related and

16 subsidiary to—

17 ‘‘(i) any sale, exchange, or other dis18 position of qualifying foreign trade prop19 erty by such taxpayer, or

20 ‘‘(ii) any lease or rental of qualifying

21 foreign trade property described in sub22 paragraph (B) by such taxpayer,

23 ‘‘(D) for engineering or architectural serv24 ices for construction projects located (or pro25 posed for location) outside the United States, or
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1 ‘‘(E) for the performance of managerial

2 services for a person other than a related per3 son in furtherance of the production of foreign

4 trading gross receipts described in subpara5 graph (A), (B), or (C).

6 Subparagraph (E) shall not apply to a taxpayer for

7 any taxable year unless at least 50 percent of its for8 eign trading gross receipts (determined without re9 gard to this sentence) for such taxable year is de10 rived from activities described in subparagraph (A),

11 (B), or (C).

12 ‘‘(2) CERTAIN RECEIPTS EXCLUDED ON BASIS

13 OF USE; SUBSIDIZED RECEIPTS EXCLUDED.—The

14 term ‘foreign trading gross receipts’ shall not in15 clude receipts of a taxpayer from a transaction if—

16 ‘‘(A) the qualifying foreign trade property

17 or services—

18 ‘‘(i) are for ultimate use in the United

19 States, or

20 ‘‘(ii) are for use by the United States

21 or any instrumentality thereof and such

22 use of qualifying foreign trade property or

23 services is required by law or regulation, or

24 ‘‘(B) such transaction is accomplished by a

25 subsidy granted by the government (or any in-
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1 strumentality thereof) of the country or posses2 sion in which the property is manufactured,

3 produced, grown, or extracted.

4 ‘‘(3) ELECTION TO EXCLUDE CERTAIN RE5 CEIPTS.—The term ‘foreign trading gross receipts’

6 shall not include gross receipts of a taxpayer from

7 a transaction if the taxpayer elects not to have such

8 receipts taken into account for purposes of this sub9 part.

10 ‘‘(b) FOREIGN ECONOMIC PROCESS REQUIRE11 MENTS.—

12 ‘‘(1) IN GENERAL.—Except as provided in sub13 section (c), a taxpayer shall be treated as having for14 eign trading gross receipts from any transaction only

15 if economic processes with respect to such trans16 action take place outside the United States as re17 quired by paragraph (2).

18 ‘‘(2) REQUIREMENT.—

19 ‘‘(A) IN GENERAL.—The requirements of

20 this paragraph are met with respect to the

21 gross receipts of a taxpayer derived from any

22 transaction if—

23 ‘‘(i) such taxpayer (or any person act24 ing under a contract with such taxpayer)

25 has participated outside the United States
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1 in the solicitation (other than advertising),

2 the negotiation, or the making of the con3 tract relating to such transaction, and

4 ‘‘(ii) the foreign direct costs incurred

5 by the taxpayer attributable to the trans6 action equal or exceed 50 percent of the

7 total direct costs attributable to the trans8 action.

9 ‘‘(B) ALTERNATIVE 85-PERCENT TEST.—A

10 taxpayer shall be treated as satisfying the re11 quirements of subparagraph (A)(ii) with respect

12 to any transaction if, with respect to each of at

13 least 2 subparagraphs of paragraph (3), the

14 foreign direct costs incurred by such taxpayer

15 attributable to activities described in such sub16 paragraph equal or exceed 85 percent of the

17 total direct costs attributable to activities de18 scribed in such subparagraph.

19 ‘‘(C) DEFINITIONS.—For purposes of this

20 paragraph—

21 ‘‘(i) TOTAL DIRECT COSTS.—The term

22 ‘total direct costs’ means, with respect to

23 any transaction, the total direct costs in24 curred by the taxpayer attributable to ac25 tivities described in paragraph (3) per-
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1 formed at any location by the taxpayer or

2 any person acting under a contract with

3 such taxpayer.

4 ‘‘(ii) FOREIGN DIRECT COSTS.—The

5 term ‘foreign direct costs’ means, with re6 spect to any transaction, the portion of the

7 total direct costs which are attributable to

8 activities performed outside the United

9 States.

10 ‘‘(3) ACTIVITIES RELATING TO QUALIFYING

11 FOREIGN TRADE PROPERTY.—The activities de12 scribed in this paragraph are any of the following

13 with respect to qualifying foreign trade property—

14 ‘‘(A) advertising and sales promotion,

15 ‘‘(B) the processing of customer orders

16 and the arranging for delivery,

17 ‘‘(C) transportation outside the United

18 States in connection with delivery to the cus19 tomer,

20 ‘‘(D) the determination and transmittal of

21 a final invoice or statement of account or the

22 receipt of payment, and

23 ‘‘(E) the assumption of credit risk.

24 ‘‘(4) ECONOMIC PROCESSES PERFORMED BY

25 RELATED PERSONS.—A taxpayer shall be treated as
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1 meeting the requirements of this subsection with re2 spect to any sales transaction involving any property

3 if any related person has met such requirements in

4 such transaction or any other sales transaction in5 volving such property.

6 ‘‘(c) EXCEPTION FROM FOREIGN ECONOMIC PROC7 ESS REQUIREMENT.—

8 ‘‘(1) IN GENERAL.—The requirements of sub9 section (b) shall be treated as met for any taxable

10 year if the foreign trading gross receipts of the tax11 payer for such year do not exceed $5,000,000.

12 ‘‘(2) RECEIPTS OF RELATED PERSONS AGGRE13 GATED.—All related persons shall be treated as one

14 person for purposes of paragraph (1), and the limi15 tation under paragraph (1) shall be allocated among

16 such persons in a manner provided in regulations

17 prescribed by the Secretary.

18 ‘‘(3) SPECIAL RULE FOR PASS-THRU ENTI19 TIES.—In the case of a partnership, S corporation,

20 or other pass-thru entity, the limitation under para21 graph (1) shall apply with respect to the partner22 ship, S corporation, or entity and with respect to

23 each partner, shareholder, or other owner.
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1 ‘‘SEC. 943. OTHER DEFINITIONS AND SPECIAL RULES.

2 ‘‘(a) QUALIFYING FOREIGN TRADE PROPERTY.—For

3 purposes of this subpart—

4 ‘‘(1) IN GENERAL.—The term ‘qualifying for5 eign trade property’ means property—

6 ‘‘(A) manufactured, produced, grown, or

7 extracted within or outside the United States,

8 ‘‘(B) held primarily for sale, lease, or rent9 al, in the ordinary course of trade or business

10 for direct use, consumption, or disposition out11 side the United States, and

12 ‘‘(C) not more than 50 percent of the fair

13 market value of which is attributable to—

14 ‘‘(i) articles manufactured, produced,

15 grown, or extracted outside the United

16 States, and

17 ‘‘(ii) direct costs for labor (determined

18 under the principles of section 263A) per19 formed outside the United States.

20 For purposes of subparagraph (C), the fair market

21 value of any article imported into the United States

22 shall be its appraised value, as determined by the

23 Secretary under section 402 of the Tariff Act of

24 1930 (19 U.S.C. 1401a) in connection with its im25 portation, and the direct costs for labor under clause

26 (ii) do not include costs that would be treated under
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1 the principles of section 263A as direct labor costs

2 attributable to articles described in clause (i).

3 ‘‘(2) U.S. TAXATION TO ENSURE CONSISTENT

4 TREATMENT.—Property which (without regard to

5 this paragraph) is qualifying foreign trade property

6 and which is manufactured, produced, grown, or ex7 tracted outside the United States shall be treated as

8 qualifying foreign trade property only if it is manu9 factured, produced, grown, or extracted by—

10 ‘‘(A) a domestic corporation,

11 ‘‘(B) an individual who is a citizen or resi12 dent of the United States,

13 ‘‘(C) a foreign corporation with respect to

14 which an election under subsection (e) (relating

15 to foreign corporations electing to be subject to

16 United States taxation) is in effect, or

17 ‘‘(D) a partnership or other pass-thru enti18 ty all of the partners or owners of which are de19 scribed in subparagraph (A), (B), or (C).

20 Except as otherwise provided by the Secretary,

21 tiered partnerships or pass-thru entities shall be

22 treated as described in subparagraph (D) if each of

23 the partnerships or entities is directly or indirectly

24 wholly owned by persons described in subparagraph

25 (A), (B), or (C).
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1 ‘‘(3) EXCLUDED PROPERTY.—The term ‘quali2 fying foreign trade property’ shall not include—

3 ‘‘(A) property leased or rented by the tax4 payer for use by any related person,

5 ‘‘(B) patents, inventions, models, designs,

6 formulas, or processes whether or not patented,

7 copyrights (other than films, tapes, records, or

8 similar reproductions, and other than computer

9 software (whether or not patented), for com10 mercial or home use), goodwill, trademarks,

11 trade brands, franchises, or other like property,

12 ‘‘(C) oil or gas (or any primary product

13 thereof),

14 ‘‘(D) products the transfer of which is pro15 hibited or curtailed to effectuate the policy set

16 forth in paragraph (2)(C) of section 3 of Public

17 Law 96–72, or

18 ‘‘(E) any unprocessed timber which is a

19 softwood.

20 For purposes of subparagraph (E), the term ‘un21 processed timber’ means any log, cant, or similar

22 form of timber.

23 ‘‘(4) PROPERTY IN SHORT SUPPLY.—If the

24 President determines that the supply of any prop25 erty described in paragraph (1) is insufficient to
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1 meet the requirements of the domestic economy, the

2 President may by Executive order designate the

3 property as in short supply. Any property so des4 ignated shall not be treated as qualifying foreign

5 trade property during the period beginning with the

6 date specified in the Executive order and ending

7 with the date specified in an Executive order setting

8 forth the President’s determination that the prop9 erty is no longer in short supply.

10 ‘‘(b) OTHER DEFINITIONS AND RULES.—For pur11 poses of this subpart—

12 ‘‘(1) TRANSACTION.—

13 ‘‘(A) IN GENERAL.—The term ‘transaction’

14 means—

15 ‘‘(i) any sale, exchange, or other dis16 position,

17 ‘‘(ii) any lease or rental, and

18 ‘‘(iii) any furnishing of services.

19 ‘‘(B) GROUPING OF TRANSACTIONS.—To

20 the extent provided in regulations, any provision

21 of this subpart which, but for this subpara22 graph, would be applied on a transaction-by23 transaction basis may be applied by the tax24 payer on the basis of groups of transactions

25 based on product lines or recognized industry or
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1 trade usage. Such regulations may permit dif2 ferent groupings for different purposes.

3 ‘‘(2) UNITED STATES DEFINED.—The term

4 ‘United States’ includes the Commonwealth of Puer5 to Rico. The preceding sentence shall not apply for

6 purposes of determining whether a corporation is a

7 domestic corporation.

8 ‘‘(3) RELATED PERSON.—A person shall be re9 lated to another person if such persons are treated

10 as a single employer under subsection (a) or (b) of

11 section 52 or subsection (m) or (o) of section 414,

12 except that determinations under subsections (a)

13 and (b) of section 52 shall be made without regard

14 to section 1563(b).

15 ‘‘(4) GROSS AND TAXABLE INCOME.—Section

16 114 shall not be taken into account in determining

17 the amount of gross income or foreign trade income

18 from any transaction.

19 ‘‘(c) SOURCE RULE.—Under regulations, in the case

20 of qualifying foreign trade property manufactured, pro21 duced, grown, or extracted within the United States, the

22 amount of income of a taxpayer from any sales transaction

23 with respect to such property which is treated as from

24 sources without the United States shall not exceed—
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1 ‘‘(1) in the case of a taxpayer computing its

2 qualifying foreign trade income under section

3 941(a)(1)(B), the amount of the taxpayer’s foreign

4 trade income which would (but for this subsection)

5 be treated as from sources without the United

6 States if the foreign trade income were reduced by

7 an amount equal to 4 percent of the foreign trading

8 gross receipts with respect to the transaction, and

9 ‘‘(2) in the case of a taxpayer computing its

10 qualifying foreign trade income under section

11 941(a)(1)(C), 50 percent of the amount of the tax12 payer’s foreign trade income which would (but for

13 this subsection) be treated as from sources without

14 the United States.

15 ‘‘(d) TREATMENT OF WITHHOLDING TAXES.—

16 ‘‘(1) IN GENERAL.—For purposes of section

17 114(d), any withholding tax shall not be treated as

18 paid or accrued with respect to extraterritorial in19 come which is excluded from gross income under

20 section 114(a). For purposes of this paragraph, the

21 term ‘withholding tax’ means any tax which is im22 posed on a basis other than residence and for which

23 credit is allowable under section 901 or 903.

24 ‘‘(2) EXCEPTION.—Paragraph (1) shall not

25 apply to any taxpayer with respect to extraterritorial
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1 income from any transaction if the taxpayer com2 putes its qualifying foreign trade income with re3 spect to the transaction under section 941(a)(1)(A).

4 ‘‘(e) ELECTION TO BE TREATED AS DOMESTIC COR5 PORATION.—

6 ‘‘(1) IN GENERAL.—An applicable foreign cor7 poration may elect to be treated as a domestic cor8 poration for all purposes of this title if such corpora9 tion waives all benefits to such corporation granted

10 by the United States under any treaty. No election

11 under section 1362(a) may be made with respect to

12 such corporation.

13 ‘‘(2) APPLICABLE FOREIGN CORPORATION.—

14 For purposes of paragraph (1), the term ‘applicable

15 foreign corporation’ means any foreign corporation

16 if—

17 ‘‘(A) such corporation manufactures, pro18 duces, grows, or extracts property in the ordi19 nary course of such corporation’s trade or busi20 ness, or

21 ‘‘(B) substantially all of the gross receipts

22 of such corporation may reasonably be expected

23 to be foreign trading gross receipts.

24 ‘‘(3) PERIOD OF ELECTION.—
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1 ‘‘(A) IN GENERAL.—Except as otherwise

2 provided in this paragraph, an election under

3 paragraph (1) shall apply to the taxable year

4 for which made and all subsequent taxable

5 years unless revoked by the taxpayer. Any rev6 ocation of such election shall apply to taxable

7 years beginning after such revocation.

8 ‘‘(B) TERMINATION.—If a corporation

9 which made an election under paragraph (1) for

10 any taxable year fails to meet the requirements

11 of subparagraph (A) or (B) of paragraph (2)

12 for any subsequent taxable year, such election

13 shall not apply to any taxable year beginning

14 after such subsequent taxable year.

15 ‘‘(C) EFFECT OF REVOCATION OR TERMI16 NATION.—If a corporation which made an elec17 tion under paragraph (1) revokes such election

18 or such election is terminated under subpara19 graph (B), such corporation (and any successor

20 corporation) may not make such election for

21 any of the 5 taxable years beginning with the

22 first taxable year for which such election is not

23 in effect as a result of such revocation or termi24 nation.

25 ‘‘(4) SPECIAL RULES.—
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1 ‘‘(A) REQUIREMENTS.—This subsection

2 shall not apply to an applicable foreign corpora3 tion if such corporation fails to meet the re4 quirements (if any) which the Secretary may

5 prescribe to ensure that the taxes imposed by

6 this chapter on such corporation are paid.

7 ‘‘(B) EFFECT OF ELECTION, REVOCATION,

8 AND TERMINATION.—

9 ‘‘(i) ELECTION.—For purposes of sec10 tion 367, a foreign corporation making an

11 election under this subsection shall be

12 treated as transferring (as of the first day

13 of the first taxable year to which the elec14 tion applies) all of its assets to a domestic

15 corporation in connection with an exchange

16 to which section 354 applies.

17 ‘‘(ii) REVOCATION AND TERMI18 NATION.—For purposes of section 367,

19 if—

20 ‘‘(I) an election is made by a cor21 poration under paragraph (1) for any

22 taxable year, and

23 ‘‘(II) such election ceases to

24 apply for any subsequent taxable year,
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1 such corporation shall be treated as a domestic

2 corporation transferring (as of the 1st day of

3 the first such subsequent taxable year to which

4 such election ceases to apply) all of its property

5 to a foreign corporation in connection with an

6 exchange to which section 354 applies.

7 ‘‘(C) ELIGIBILITY FOR ELECTION.—The

8 Secretary may by regulation designate one or

9 more classes of corporations which may not

10 make the election under this subsection.

11 ‘‘(f) RULES RELATING TO ALLOCATIONS OF QUALI12 FYING FOREIGN TRADE INCOME FROM SHARED PART13 NERSHIPS.—

14 ‘‘(1) IN GENERAL.—If—

15 ‘‘(A) a partnership maintains a separate

16 account for transactions (to which this subpart

17 applies) with each partner,

18 ‘‘(B) distributions to each partner with re19 spect to such transactions are based on the

20 amounts in the separate account maintained

21 with respect to such partner, and

22 ‘‘(C) such partnership meets such other re23 quirements as the Secretary may by regulations

24 prescribe,
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1 then such partnership shall allocate to each partner

2 items of income, gain, loss, and deduction (including

3 qualifying foreign trade income) from any trans4 action to which this subpart applies on the basis of

5 such separate account.

6 ‘‘(2) SPECIAL RULES.—For purposes of this

7 subpart, in the case of a partnership to which para8 graph (1) applies—

9 ‘‘(A) any partner’s interest in the partner10 ship shall not be taken into account in deter11 mining whether such partner is a related person

12 with respect to any other partner, and

13 ‘‘(B) the election under section 942(a)(3)

14 shall be made separately by each partner with

15 respect to any transaction for which the part16 nership maintains separate accounts for each

17 partner.

18 ‘‘(g) EXCLUSION FOR PATRONS OF AGRICULTURAL

19 AND HORTICULTURAL COOPERATIVES.—Any amount de20 scribed in paragraph (1) or (3) of section 1385(a)—

21 ‘‘(1) which is received by a person from an or22 ganization to which part I of subchapter T applies

23 which is engaged in the marketing of agricultural or

24 horticultural products, and
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1 ‘‘(2) which is designated by the organization as

2 allocable to qualifying foreign trade income in a

3 written notice mailed to its patrons during the pay4 ment period described in section 1382(d),

5 shall be treated as qualifying foreign trade income of such

6 person for purposes of section 114. The taxable income

7 of the organization shall not be reduced under section

8 1382 by reason of any amount to which the preceding sen9 tence applies.’’.

10 SEC. 4. TECHNICAL AND CONFORMING AMENDMENTS.

11 (1) The second sentence of section

12 56(g)(4)(B)(i) is amended by inserting before the

13 period ‘‘or under section 114’’.

14 (2) Section 245 is amended by adding at the

15 end the following new subsection:

16 ‘‘(d) CERTAIN DIVIDENDS ALLOCABLE TO QUALI17 FYING FOREIGN TRADE INCOME.—In the case of a domes18 tic corporation which is a United States shareholder (as

19 defined in section 951(b)) of a controlled foreign corpora20 tion (as defined in section 957), there shall be allowed as

21 a deduction an amount equal to 100 percent of any divi22 dend received from such controlled foreign corporation

23 which is distributed out of earnings and profits attrib24 utable to qualifying foreign trade income (as defined in

25 section 941(a)).’’.
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•HR 4986 RS

1 (3) (2) Section 275(a) is amended—

2 (A) by striking ‘‘or’’ at the end of para3 graph (4)(A), by striking the period at the end

4 of paragraph (4)(B) and inserting ‘‘, or’’, and

5 by adding at the end of paragraph (4) the fol6 lowing new subparagraph:

7 ‘‘(C) such taxes are paid or accrued with

8 respect to qualifying foreign trade income (as

9 defined in section 941).’’; and

10 (B) by adding at the end the following the

11 following new sentence: ‘‘A rule similar to the

12 rule of section 943(d) shall apply for purposes

13 of paragraph (4)(C).’’.

14 (4) (3) Paragraph (3) of section 864(e) is

15 amended—

16 (A) by striking ‘‘For purposes of’’ and in17 serting:

18 ‘‘(A) IN GENERAL.—For purposes of’’; and

19 (B) by adding at the end the following new

20 subparagraph:

21 ‘‘(B) ASSETS PRODUCING EXEMPT

22 EXTRATERRITORIAL INCOME.—For purposes of

23 allocating and apportioning any interest ex24 pense, there shall not be taken into account any

25 qualifying foreign trade property (as defined in
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•HR 4986 RS

1 section 943(a)) which is held by the taxpayer

2 for lease or rental in the ordinary course of

3 trade or business for use by the lessee outside

4 the United States (as defined in section

5 943(b)(2)).’’.

6 (5) (4) Section 903 is amended by striking

7 ‘‘164(a)’’ and inserting ‘‘114, 164(a),’’.

8 (6) (5) Section 999(c)(1) is amended by insert9 ing ‘‘941(a)(5),’’ after ‘‘908(a),’’.

10 (7) (6) The table of sections for part III of sub11 chapter B of chapter 1 is amended by inserting be12 fore the item relating to section 115 the following

13 new item:

‘‘Sec. 114. Extraterritorial income.’’.

14 (8) (7) The table of subparts for part III of

15 subchapter N of chapter 1 is amended by striking

16 the item relating to subpart E and inserting the fol17 lowing new item:

‘‘Subpart E. Qualifying foreign trade income.’’.

18 (9) (8) The table of subparts for part III of

19 subchapter N of chapter 1 is amended by striking

20 the item relating to subpart C.

21 SEC. 5. EFFECTIVE DATE.

22 (a) IN GENERAL.—The amendments made by this

23 Act shall apply to transactions after September 30, 2000.
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•HR 4986 RS

1 (b) NO NEW FSCS; TERMINATION OF INACTIVE

2 FSCS.—

3 (1) NO NEW FSCS.—No corporation may elect

4 after September 30, 2000, to be a FSC (as defined

5 in section 922 of the Internal Revenue Code of

6 1986, as in effect before the amendments made by

7 this Act).

8 (2) TERMINATION OF INACTIVE FSCS.—If a

9 FSC has no foreign trade income (as defined in sec10 tion 923(b) of such Code, as so in effect) for any pe11 riod of 5 consecutive taxable years beginning after

12 December 31, 2001, such FSC shall cease to be

13 treated as a FSC for purposes of such Code for any

14 taxable year beginning after such period.

15 (c) TRANSITION PERIOD FOR EXISTING FOREIGN

16 SALES CORPORATIONS.—

17 (1) IN GENERAL.—In the case of a FSC (as so

18 defined) in existence on September 30, 2000, and at

19 all times thereafter, the amendments made by this

20 Act shall not apply to any transaction in the ordi21 nary course of trade or business involving a FSC

22 which occurs—

23 (A) before January 1, 2002; or

24 (B) after December 31, 2001, pursuant to

25 a binding contract—
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1 (i) which is between the FSC (or any

2 related person) and any person which is

3 not a related person; and

4 (ii) which is in effect on September

5 30, 2000, and at all times thereafter.

6 For purposes of this paragraph, a binding contract

7 shall include a purchase option, renewal option, or

8 replacement option which is included in such con9 tract and which is enforceable against the seller or

10 lessor.

11 (2) ELECTION TO HAVE AMENDMENTS APPLY

12 EARLIER.—A taxpayer may elect to have the amend13 ments made by this Act apply to any transaction by

14 a FSC or any related person to which such amend15 ments would apply but for the application of para16 graph (1). Such election shall be effective for the

17 taxable year for which made and all subsequent tax18 able years, and, once made, may be revoked only

19 with the consent of the Secretary of the Treasury.

20 (3) RELATED PERSON.—For purposes of this

21 subsection, the term ‘‘related person’’ has the mean22 ing given to such term by section 943(b)(3) of such

23 Code, as added by this Act.

24 (d) SPECIAL RULES RELATING TO LEASING TRANS25 ACTIONS.—
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1 (1) SALES INCOME.—If foreign trade income in

2 connection with the lease or rental of property de3 scribed in section 927(a)(1)(B) of such Code (as in

4 effect before the amendments made by this Act) is

5 treated as exempt foreign trade income for purposes

6 of section 921(a) of such Code (as so in effect), such

7 property shall be treated as property described in

8 section 941(c)(1)(B) of such Code (as added by this

9 Act) for purposes of applying section 941(c)(2) of

10 such Code (as so added) to any subsequent trans11 action involving such property to which the amend12 ments made by this Act apply.

13 (2) LIMITATION ON USE OF GROSS RECEIPTS

14 METHOD.—If any person computed its foreign trade

15 income from any transaction with respect to any

16 property on the basis of a transfer price determined

17 under the method described in section 925(a)(1) of

18 such Code (as in effect before the amendments made

19 by this Act), then the qualifying foreign trade in20 come (as defined in section 941(a) of such Code, as

21 in effect after such amendment) of such person (or

22 any related person) with respect to any other trans23 action involving such property (and to which the

24 amendments made by this Act apply) shall be zero.
Calendar No. 817

106TH CONGRESS

2D SESSION H. R. 4986

[Report No. 106–416]

AN ACT

To amend the Internal Revenue Code of 1986 to

repeal the provisions relating to foreign sales corporations (FSCs) and to exclude extraterritorialincome from gross income.

SEPTEMBER 20, 2000

Reported with amendments