I

106TH CONGRESS

2D SESSION H. R. 4986

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.

IN THE HOUSE OF REPRESENTATIVES

JULY 27, 2000

Mr. ARCHER 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 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’’.

7 (b) AMENDMENT OF 1986 CODE.—Except as other8 wise expressly provided, whenever in this Act an amend-
2

•HR 4986 IH

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 SEC. 2. REPEAL OF FOREIGN SALES CORPORATION RULES.

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

7 (relating to taxation of foreign sales corporations) is here8 by repealed.

9 SEC. 3. TREATMENT OF EXTRATERRITORIAL INCOME.

10 (a) IN GENERAL.—Part III of subchapter B of chap11 ter 1 (relating to items specifically excluded from gross

12 income) is amended by inserting before section 115 the

13 following new section:

14 ‘‘SEC. 114. EXTRATERRITORIAL INCOME.

15 ‘‘(a) EXCLUSION.—Gross income shall not include

16 extraterritorial income.

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

18 extraterritorial income which is not qualifying foreign

19 trade income as determined under subpart E of part III

20 of subchapter N.

21 ‘‘(c) DISALLOWANCE OF DEDUCTIONS.—

22 ‘‘(1) IN GENERAL.—Any deduction of a tax23 payer allocated under paragraph (2) to

24 extraterritorial income of the taxpayer excluded from
3

•HR 4986 IH

1 gross income under subsection (a) shall not be al2 lowed.

3 ‘‘(2) ALLOCATION.—Any deduction of the tax4 payer properly apportioned and allocated to the

5 extraterritorial income derived by the taxpayer from

6 any transaction shall be allocated on a proportionate

7 basis between—

8 ‘‘(A) the extraterritorial income derived

9 from such transaction which is excluded from

10 gross income under subsection (a), and

11 ‘‘(B) the extraterritorial income derived

12 from such transaction which is not so excluded.

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

14 TAXES.—Notwithstanding any other provision of this

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

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

17 accrued with respect to extraterritorial income which is ex18 cluded from gross income under subsection (a).

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

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

21 gross income of the taxpayer attributable to foreign trad22 ing gross receipts (as defined in section 942) of the tax23 payer.’’
4

•HR 4986 IH

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.
5

•HR 4986 IH

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 any

14 related person with respect to any transaction in15 volving such property shall be zero.

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

17 Secretary shall prescribe regulations setting forth

18 rules for the allocation of expenditures in computing

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

20 those cases where a taxpayer is seeking to establish

21 or maintain a market for qualifying foreign trade

22 property.

23 ‘‘(5) PARTICIPATION IN INTERNATIONAL BOY24 COTTS, ETC.—Under regulations prescribed by the

25 Secretary, the qualifying foreign trade income of a
6

•HR 4986 IH

1 taxpayer for any taxable year shall be reduced (but

2 not below zero) by the sum of—

3 ‘‘(A) an amount equal to such income mul4 tiplied by the international boycott factor deter5 mined under section 999, and

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

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

8 paid by or on behalf of the taxpayer directly or

9 indirectly to an official, employee, or agent in

10 fact of a government.

11 ‘‘(b) FOREIGN TRADE INCOME.—

12 ‘‘(1) IN GENERAL.—For purposes of this sub13 part, the term ‘foreign trade income’ means the tax14 able income of the taxpayer attributable to foreign

15 trading gross receipts of the taxpayer.

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

17 any case in which an organization to which part I

18 of subchapter T applies which is engaged in the

19 marketing of agricultural or horticultural products

20 sells qualifying foreign trade property, in computing

21 the taxable income of such cooperative, there shall

22 not be taken into account any deduction allowable

23 under subsection (b) or (c) of section 1382 (relating

24 to patronage dividends, per-unit retain allocations,

25 and nonpatronage distributions).
7

•HR 4986 IH

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

2 purposes of this section, the term ‘foreign sale and leasing

3 income’ means, with respect to any transaction—

4 ‘‘(1) foreign trade income properly allocable to

5 activities—

6 ‘‘(A) which are described in paragraph

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

8 ‘‘(B) which are performed by the taxpayer

9 (or any person acting under a contract with

10 such taxpayer) outside the United States, and

11 ‘‘(2) foreign trade income derived by the tax12 payer from the lease or rental of qualifying foreign

13 trade property for use by the lessee outside the

14 United States.

15 Foreign sale and leasing income shall not include any in16 come properly allocable to excluded property described in

17 subparagraph (B) of section 943(a)(3) (relating to intan18 gibles).

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

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

21 ‘‘(1) IN GENERAL.—Except as otherwise pro22 vided in this section, for purposes of this subpart,

23 the term ‘foreign trading gross receipts’ means the

24 gross receipts of the taxpayer which are—
8

•HR 4986 IH

1 ‘‘(A) from the sale, exchange, or other dis2 position of qualifying foreign trade property,

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

4 foreign trade property for use by the lessee out5 side the United States,

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

7 subsidiary to—

8 ‘‘(i) any sale, exchange, or other dis9 position of qualifying foreign trade prop10 erty by such taxpayer, or

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

12 foreign trade property described in sub13 paragraph (B) by such taxpayer,

14 ‘‘(D) for engineering or architectural serv15 ices for construction projects located (or pro16 posed for location) outside the United States, or

17 ‘‘(E) for the performance of managerial

18 services for a person other than a related per19 son in furtherance of the production of foreign

20 trading gross receipts described in subpara21 graph (A), (B), or (C).

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

23 any taxable year unless at least 50 percent of its for24 eign trading gross receipts (determined without re25 gard to this sentence) for such taxable year is de-
9

•HR 4986 IH

1 rived from activities described in subparagraph (A),

2 (B), or (C).

3 ‘‘(2) CERTAIN RECEIPTS EXCLUDED ON BASIS

4 OF USE; SUBSIDIZED RECEIPTS EXCLUDED.—The

5 term ‘foreign trading gross receipts’ shall not in6 clude receipts of a taxpayer from a transaction if—

7 ‘‘(A) the qualifying foreign trade property

8 or services—

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

10 States, or

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

12 or any instrumentality thereof and such

13 use of qualifying foreign trade property or

14 services is required by law or regulation, or

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

16 subsidy granted by the United States or any in17 strumentality thereof.

18 ‘‘(3) ELECTION TO EXCLUDE CERTAIN RE19 CEIPTS.—The term ‘foreign trading gross receipts’

20 shall not include gross receipts of a taxpayer from

21 a transaction with respect to any property if the tax22 payer elects not to have such receipts taken into ac23 count for purposes of this subpart.

24 ‘‘(b) FOREIGN ECONOMIC PROCESS REQUIRE25 MENTS.—
10

•HR 4986 IH

1 ‘‘(1) IN GENERAL.—Except as provided in sub2 section (c), a taxpayer shall be treated as having for3 eign trading gross receipts from any transaction only

4 if economic processes with respect to such trans5 action take place outside the United States as re6 quired by paragraph (2).

7 ‘‘(2) REQUIREMENT.—

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

9 this paragraph are met with respect to the

10 gross receipts of a taxpayer derived from any

11 transaction if—

12 ‘‘(i) such taxpayer (or any person act13 ing under a contract with such taxpayer)

14 has participated outside the United States

15 in the solicitation (other than advertising),

16 the negotiation, or the making of the con17 tract relating to such transaction, and

18 ‘‘(ii) the foreign direct costs incurred

19 by the taxpayer attributable to the trans20 action equal or exceed 50 percent of the

21 total direct costs attributable to the trans22 action.

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

24 taxpayer shall be treated as satisfying the re25 quirements of subparagraph (A)(ii) with respect
11

•HR 4986 IH

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

2 least 2 subparagraphs of paragraph (3), the

3 foreign direct costs incurred by such taxpayer

4 attributable to activities described in such sub5 paragraph equal or exceed 85 percent of the

6 total direct costs attributable to activities de7 scribed in such subparagraph.

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

9 paragraph—

10 ‘‘(i) TOTAL DIRECT COSTS.—The term

11 ‘total direct costs’ means, with respect to

12 any transaction, the total direct costs in13 curred by the taxpayer attributable to ac14 tivities described in paragraph (3) per15 formed at any location by the taxpayer or

16 any person acting under a contract with

17 such taxpayer.

18 ‘‘(ii) FOREIGN DIRECT COSTS.—The

19 term ‘foreign direct costs’ means, with re20 spect to any transaction, the portion of the

21 total direct costs which are attributable to

22 activities performed outside the United

23 States.

24 ‘‘(3) ACTIVITIES RELATING TO QUALIFYING

25 FOREIGN TRADE PROPERTY.—The activities de-
12

•HR 4986 IH

1 scribed in this paragraph are any of the following

2 with respect to qualifying foreign trade property—

3 ‘‘(A) advertising and sales promotion,

4 ‘‘(B) the processing of customer orders

5 and the arranging for delivery,

6 ‘‘(C) transportation from the time of ac7 quisition by the taxpayer (or, in the case of a

8 commission relationship, from the beginning of

9 such relationship for such transaction) to the

10 delivery to the customer,

11 ‘‘(D) the determination and transmittal of

12 a final invoice or statement of account and the

13 receipt of payment, and

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

15 ‘‘(4) ECONOMIC PROCESSES PERFORMED BY

16 RELATED PERSONS.—A taxpayer shall be treated as

17 meeting the requirements of this subsection with re18 spect to any transaction involving any property if

19 any related person has met such requirements in

20 such transaction or any other transaction involving

21 such property.

22 ‘‘(c) EXCEPTION FROM FOREIGN ECONOMIC PROC23 ESS REQUIREMENT.—

24 ‘‘(1) IN GENERAL.—The requirements of sub25 section (b) shall be treated as met for any taxable
13

•HR 4986 IH

1 year if the foreign trading gross receipts of the tax2 payer for such year do not exceed $5,000,000.

3 ‘‘(2) RECEIPTS OF RELATED PERSONS AGGRE4 GATED.—All related persons shall be treated as one

5 person for purposes of paragraph (1), and the limi6 tation under paragraph (1) shall be allocated among

7 such persons in a manner provided in regulations

8 prescribed by the Secretary.

9 ‘‘(3) SPECIAL RULE FOR PASS-THRU ENTI10 TIES.—In the case of a partnership, S corporation,

11 or other pass-thru entity, the limitation under para12 graph (1) shall apply with respect to the partner13 ship, S corporation, or entity and with respect to

14 each partner, shareholder, or other owner.

15 ‘‘SEC. 943. OTHER DEFINITIONS AND SPECIAL RULES.

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

17 purposes of this subpart—

18 ‘‘(1) IN GENERAL.—The term ‘qualifying for19 eign trade property’ means property—

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

21 extracted within or outside the United States,

22 ‘‘(B) held primarily for sale, lease, or rent23 al, in the ordinary course of trade or business

24 for direct use, consumption, or disposition out25 side the United States, and
14

•HR 4986 IH

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

2 market value of which is attributable to articles

3 manufactured, produced, grown, or extracted

4 outside the United States or other value added

5 outside the United States.

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

7 value of any article imported into the United States

8 shall be its appraised value, as determined by the

9 Secretary under section 402 of the Tariff Act of

10 1930 (19 U.S.C. 1401a) in connection with its im11 portation.

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

13 TREATMENT.—Property which (without regard to

14 this paragraph) is qualifying foreign trade property

15 and which is manufactured, produced, grown, or ex16 tracted outside the United States shall be treated as

17 qualifying foreign trade property only if it is manu18 factured, produced, grown, or extracted by—

19 ‘‘(A) a domestic corporation,

20 ‘‘(B) an individual who is a citizen or resi21 dent of the United States,

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

23 which an election under subsection (e) (relating

24 to foreign corporations electing to be subject to

25 United States taxation) is in effect, or
15

•HR 4986 IH

1 ‘‘(D) a partnership or other pass-thru enti2 ty all of the partners or owners of which are de3 scribed in subparagraph (A), (B), or (C).

4 Except as otherwise provided by the Secretary,

5 tiered partnerships or pass-thru entities shall be

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

7 the partnerships or entities is directly or indirectly

8 wholly owned by persons described in subparagraph

9 (A), (B), or (C).

10 ‘‘(3) EXCLUDED PROPERTY.—The term ‘quali11 fying foreign trade property’ shall not include—

12 ‘‘(A) property leased or rented by the tax13 payer for use by any related person,

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

15 formulas, or processes whether or not patented,

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

17 similar reproductions, and other than computer

18 software (whether or not patented), for com19 mercial or home use), goodwill, trademarks,

20 trade brands, franchises, or other like property,

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

22 thereof),

23 ‘‘(D) products the transfer of which is pro24 hibited or curtailed to effectuate the policy set
16

•HR 4986 IH

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

2 Law 96–72, or

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

4 softwood.

5 For purposes of subparagraph (E), the term ‘un6 processed timber’ means any log, cant, or similar

7 form of timber.

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

9 President determines that the supply of any prop10 erty described in paragraph (1) is insufficient to

11 meet the requirements of the domestic economy, the

12 President may by Executive order designate the

13 property as in short supply. Any property so des14 ignated shall not be treated as qualifying foreign

15 trade property during the period beginning with the

16 date specified in the Executive order and ending

17 with the date specified in an Executive order setting

18 forth the President’s determination that the prop19 erty is no longer in short supply.

20 ‘‘(b) OTHER DEFINITIONS AND RULES.—For pur21 poses of this subpart—

22 ‘‘(1) TRANSACTION.—

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

24 means—
17

•HR 4986 IH

1 ‘‘(i) any sale, exchange, or other dis2 position,

3 ‘‘(ii) any lease or rental, and

4 ‘‘(iii) any furnishing of services.

5 ‘‘(B) GROUPING OF TRANSACTIONS.—To

6 the extent provided in regulations, any provision

7 of this subpart which, but for this subpara8 graph, would be applied on a transaction-by9 transaction basis may be applied by the tax10 payer on the basis of groups of transactions

11 based on product lines or recognized industry or

12 trade usage. Such regulations may permit dif13 ferent groupings for different purposes.

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

15 ‘United States’ includes the Commonwealth of Puer16 to Rico. The preceding sentence shall not apply for

17 purposes of determining whether a corporation is a

18 domestic corporation.

19 ‘‘(3) RELATED PERSON.—A person shall be re20 lated to another person if such persons are treated

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

22 section 52 or subsection (m) or (o) of section 414.

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

24 114 shall not be taken into account in determining
18

•HR 4986 IH

1 the amount of gross income or foreign trade income

2 from any transaction.

3 ‘‘(c) SOURCE RULE.—Under regulations, the foreign

4 trade income of a taxpayer from any transaction which

5 is treated as from sources without the United States shall

6 not exceed—

7 ‘‘(1) in the case of a taxpayer computing its

8 qualifying foreign trade income under section

9 941(a)(1)(B), the amount of the taxpayer’s foreign

10 trade income which would (but for this subsection)

11 be treated as from sources without the United

12 States if the foreign trade income were reduced by

13 an amount equal to 4 percent of the foreign trading

14 gross receipts with respect to the transaction, and

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

16 qualifying foreign trade income under section

17 941(a)(1)(C), 50 percent of the amount of the tax18 payer’s foreign trade income which would (but for

19 this subsection) be treated as from sources without

20 the United States.

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

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

23 114(d), any withholding tax (as defined in section

24 901(k)(1)(B)) shall not be treated as paid or ac-
19

•HR 4986 IH

1 crued with respect to extraterritorial income which is

2 excluded from gross income under section 114(a).

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

4 apply to any taxpayer with respect to extraterritorial

5 income from any transaction if the taxpayer com6 putes its qualifying foreign trade income with re7 spect to the transaction under section 941(a)(1)(A).

8 ‘‘(e) ELECTION TO BE TREATED AS DOMESTIC COR9 PORATION.—

10 ‘‘(1) IN GENERAL.—An applicable foreign cor11 poration may elect to be treated as a domestic cor12 poration for all purposes of this title if such corpora13 tion waives all benefits to such corporation granted

14 by the United States under any treaty.

15 ‘‘(2) APPLICABLE FOREIGN CORPORATION.—

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

17 foreign corporation’ means any foreign corporation

18 if, at the time of the election—

19 ‘‘(A) such corporation manufactures, pro20 duces, grows, or extracts property in the ordi21 nary course of such corporation’s trade or busi22 ness, or

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

24 of such corporation may reasonably be expected

25 to be foreign trading gross receipts.
20

•HR 4986 IH

1 ‘‘(3) PERIOD OF ELECTION.—

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

3 subparagraph (B), an election under paragraph

4 (1) shall apply to the taxable year for which

5 made and all subsequent taxable years unless

6 revoked.

7 ‘‘(B) TERMINATION.—If a corporation

8 which made an election under paragraph (1) for

9 any taxable year fails to meet the requirements

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

11 for any subsequent taxable year, such election

12 shall not apply to any taxable year beginning

13 after such subsequent taxable year.

14 ‘‘(4) SPECIAL RULES.—

15 ‘‘(A) REQUIREMENTS.—This subsection

16 shall not apply to an applicable foreign corpora17 tion unless such corporation meets such re18 quirements as the Secretary shall prescribe to

19 ensure that the taxes imposed by this chapter

20 on such corporation are paid.

21 ‘‘(B) EFFECT OF ELECTION OR TERMI22 NATION.—

23 ‘‘(i) ELECTION.—For purposes of sec24 tion 367, a foreign corporation making an

25 election under this subsection shall be
21

•HR 4986 IH

1 treated as transferring (as of the first day

2 of the first taxable year to which the elec3 tion applies) all of its assets to a domestic

4 corporation in connection with an exchange

5 to which section 354 applies.

6 ‘‘(ii) TERMINATION.—For purposes of

7 section 367, if—

8 ‘‘(I) an election is made by a cor9 poration under paragraph (1) for any

10 taxable year, and

11 ‘‘(II) such election ceases to

12 apply for any subsequent taxable year,

13 such corporation shall be treated as a domestic

14 corporation transferring (as of the 1st day of

15 such subsequent taxable year) all of its property

16 to a foreign corporation in connection with an

17 exchange to which section 354 applies.

18 ‘‘(C) ELIGIBILITY FOR ELECTION.—The

19 Secretary may by regulation designate one or

20 more classes of corporations which may not

21 make the election under this subsection.

22 ‘‘(f) RULES RELATING TO ALLOCATIONS OF QUALI23 FYING FOREIGN TRADE INCOME FROM SHARED PART24 NERSHIPS.—If—
22

•HR 4986 IH

1 ‘‘(1) a partnership maintains a separate ac2 count for transactions (to which this subpart ap3 plies) with each partner,

4 ‘‘(2) distributions to each partner with respect

5 to such transactions are based on the amounts in

6 the separate account maintained with respect to

7 such partner, and

8 ‘‘(3) such partnership meets such other require9 ments as the Secretary may by regulations prescribe,

10 then such partnership shall allocate to each partner items

11 of income, gain, loss, and deduction (including qualifying

12 foreign trade income) from any transaction to which this

13 subpart applies on the basis of such separate account.’’

14 SEC. 4. TECHNICAL AND CONFORMING AMENDMENTS.

15 (1) The second sentence of section

16 56(g)(4)(B)(i) is amended by inserting before the

17 period ‘‘or under section 114’’.

18 (2) Section 275(a) is amended—

19 (A) by striking ‘‘or’’ at the end of para20 graph (4)(A), by striking the period at the end

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

22 by adding at the end of paragraph (4) the fol23 lowing new subparagraph:
23

•HR 4986 IH

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

2 respect to qualifying foreign trade income (as

3 defined in section 941).’’, and

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

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

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

7 of paragraph (4)(C).’’

8 (3) Paragraph (3) of section 864(e) is

9 amended—

10 (A) by striking ‘‘For purposes of’’ and in11 serting:

12 ‘‘(A) IN GENERAL.—For purposes of’’, and

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

14 subparagraph:

15 ‘‘(B) ASSETS PRODUCING EXEMPT

16 EXTRATERRITORIAL INCOME.—For purposes of

17 allocating and apportioning any interest ex18 pense, there shall not be taken into account any

19 qualifying foreign trade property (as defined in

20 section 943(a)) which is located outside the

21 United States (as defined in section 943(b)(2))

22 and which is held by the taxpayer for lease or

23 rental in the ordinary course of trade or busi24 ness for use by the lessee outside the United

25 States (as so defined).’’
24

•HR 4986 IH

1 (4) Section 999(c)(1) is amended by inserting

2 ‘‘941(a)(5),’’ after ‘‘908(a),’’.

3 (5) The table of sections for part III of sub4 chapter B of chapter 1 is amended by inserting be5 fore the item relating to section 115 the following

6 new item:

‘‘Sec. 114. Extraterritorial income.’’

7 (6) The table of subparts for part III of sub8 chapter N of chapter 1 is amended by striking the

9 item relating to subpart E and inserting the fol10 lowing new item:

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

11 SEC. 5. EFFECTIVE DATE.

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

13 Act shall apply to transactions after September 30, 2000.

14 (b) NO NEW FSCS.—No corporation may elect after

15 September 30, 2000, to be a FSC (as defined in section

16 922 of the Internal Revenue Code of 1986, as in effect

17 before the amendments made by this Act).

18 (c) TRANSITION PERIOD FOR EXISTING FOREIGN

19 SALES CORPORATIONS.—Except as provided in subsection

20 (d)—

21 (1) IN GENERAL.—In the case of any trans22 action in the ordinary course of trade or business in23 volving a FSC (as so defined) in existence on Sep-
25

•HR 4986 IH

1 tember 30, 2000, and at all times thereafter, the

2 amendments made by this Act shall not apply to—

3 (A) transactions by the FSC before Janu4 ary 1, 2002, and

5 (B) transactions by the FSC after Decem6 ber 31, 2001, pursuant to a binding contract

7 (by the FSC) in effect on September 30, 2000,

8 and at all times thereafter.

9 (2) ELECTION TO HAVE AMENDMENTS APPLY

10 EARLIER.—A taxpayer may elect to have the amend11 ments made by this Act apply to any transaction by

12 a FSC to which such amendments would apply but

13 for the application of paragraph (1). Such election

14 shall be effective for the taxable year for which made

15 and all subsequent taxable years, and, once made,

16 may be revoked only with the consent of the Sec17 retary of the Treasury.

18 (d) CONSISTENT TREATMENT REQUIRED.—If, but

19 for this subsection, the amendments made by this Act

20 would apply to some but not all of the transactions in the

21 ordinary course of trade or business by related parties in22 volving the same property, such parties shall elect, at such

23 time and in such manner as the Secretary of the Treasury
26

•HR 4986 IH

1 shall prescribe, whether to have such amendments apply

2 to all or none of such transactions.

Æ