IIB

106TH CONGRESS

2D SESSION H. R. 4986

IN THE SENATE OF THE UNITED STATES

SEPTEMBER 14, 2000

Received; read twice and referred to the Committee on Finance

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,
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1 SECTION 1. SHORT TITLE.

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

3 ‘‘FSC Repeal and Extraterritorial Income Exclusion Act

4 of 2000’’.

5 (b) AMENDMENT OF 1986 CODE.—Except as other6 wise expressly provided, whenever in this Act an amend7 ment or repeal is expressed in terms of an amendment

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

9 shall be considered to be made to a section or other provi10 sion of the Internal Revenue Code of 1986.

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

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

13 (relating to taxation of foreign sales corporations) is here14 by repealed.

15 SEC. 3. TREATMENT OF EXTRATERRITORIAL INCOME.

16 (a) IN GENERAL.—Part III of subchapter B of chap17 ter 1 (relating to items specifically excluded from gross

18 income) is amended by inserting before section 115 the

19 following new section:

20 ‘‘SEC. 114. EXTRATERRITORIAL INCOME.

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

22 extraterritorial income.

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

24 extraterritorial income which is not qualifying foreign

25 trade income as determined under subpart E of part III

26 of subchapter N.
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1 ‘‘(c) DISALLOWANCE OF DEDUCTIONS.—

2 ‘‘(1) IN GENERAL.—Any deduction of a tax3 payer allocated under paragraph (2) to

4 extraterritorial income of the taxpayer excluded from

5 gross income under subsection (a) shall not be al6 lowed.

7 ‘‘(2) ALLOCATION.—Any deduction of the tax8 payer properly apportioned and allocated to the

9 extraterritorial income derived by the taxpayer from

10 any transaction shall be allocated on a proportionate

11 basis between—

12 ‘‘(A) the extraterritorial income derived

13 from such transaction which is excluded from

14 gross income under subsection (a), and

15 ‘‘(B) the extraterritorial income derived

16 from such transaction which is not so excluded.

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

18 TAXES.—Notwithstanding any other provision of this

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

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

21 accrued to any foreign country or possession of the United

22 States with respect to extraterritorial income which is ex23 cluded from gross income under subsection (a).

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

25 this section, the term ‘extraterritorial income’ means the
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1 gross income of the taxpayer attributable to foreign trad2 ing gross receipts (as defined in section 942) of the tax3 payer.’’

4 (b) QUALIFYING FOREIGN TRADE INCOME.—Part III

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

6 subpart D the following new subpart:

7 ‘‘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.

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

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

10 purposes of this subpart and section 114—

11 ‘‘(1) IN GENERAL.—The term ‘qualifying for12 eign trade income’ means, with respect to any trans13 action, the amount of gross income which, if ex14 cluded, will result in a reduction of the taxable in15 come of the taxpayer from such transaction equal to

16 the greatest of—

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

18 leasing income derived by the taxpayer from

19 such transaction,

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

21 gross receipts derived by the taxpayer from the

22 transaction, or
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1 ‘‘(C) 15 percent of the foreign trade in2 come derived by the taxpayer from the trans3 action.

4 In no event shall the amount determined under sub5 paragraph (B) exceed 200 percent of the amount de6 termined under subparagraph (C).

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

8 may compute its qualifying foreign trade income

9 under a subparagraph of paragraph (1) other than

10 the subparagraph which results in the greatest

11 amount of such income.

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

13 GROSS RECEIPTS METHOD.—If any person computes

14 its qualifying foreign trade income from any trans15 action with respect to any property under paragraph

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

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

18 other transaction involving such property shall be

19 zero.

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

21 Secretary shall prescribe regulations setting forth

22 rules for the allocation of expenditures in computing

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

24 those cases where a taxpayer is seeking to establish
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1 or maintain a market for qualifying foreign trade

2 property.

3 ‘‘(5) PARTICIPATION IN INTERNATIONAL BOY4 COTTS, ETC.—Under regulations prescribed by the

5 Secretary, the qualifying foreign trade income of a

6 taxpayer for any taxable year shall be reduced (but

7 not below zero) by the sum of—

8 ‘‘(A) an amount equal to such income mul9 tiplied by the international boycott factor deter10 mined under section 999, and

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

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

13 paid by or on behalf of the taxpayer directly or

14 indirectly to an official, employee, or agent in

15 fact of a government.

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

17 this subpart—

18 ‘‘(1) IN GENERAL.—The term ‘foreign trade in19 come’ means the taxable income of the taxpayer at20 tributable to foreign trading gross receipts of the

21 taxpayer.

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

23 any case in which an organization to which part I

24 of subchapter T applies which is engaged in the

25 marketing of agricultural or horticultural products
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1 sells qualifying foreign trade property, in computing

2 the taxable income of such cooperative, there shall

3 not be taken into account any deduction allowable

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

5 to patronage dividends, per-unit retain allocations,

6 and nonpatronage distributions).

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

8 purposes of this section—

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

10 leasing income’ means, with respect to any

11 transaction—

12 ‘‘(A) foreign trade income properly allo13 cable to activities which—

14 ‘‘(i) are described in paragraph

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

16 ‘‘(ii) are performed by the taxpayer

17 (or any person acting under a contract

18 with such taxpayer) outside the United

19 States, or

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

21 taxpayer in connection with the lease or rental

22 of qualifying foreign trade property for use by

23 the lessee outside the United States.

24 ‘‘(2) SPECIAL RULES FOR LEASED PROP25 ERTY.—
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1 ‘‘(A) SALES INCOME.—The term ‘foreign

2 sale and leasing income’ includes any foreign

3 trade income derived by the taxpayer from the

4 sale of property described in paragraph (1)(B).

5 ‘‘(B) LIMITATION IN CERTAIN CASES.—Ex6 cept as provided in regulations, in the case of

7 property which—

8 ‘‘(i) was manufactured, produced,

9 grown, or extracted by the taxpayer, or

10 ‘‘(ii) was acquired by the taxpayer

11 from a related person for a price which

12 was not determined in accordance with the

13 rules of section 482,

14 the amount of foreign trade income which may be

15 treated as foreign sale and leasing income under

16 paragraph (1)(B) or subparagraph (A) of this para17 graph with respect to any transaction involving such

18 property shall not exceed the amount which would

19 have been determined if the taxpayer had acquired

20 such property for the price determined in accordance

21 with the rules of section 482.

22 ‘‘(3) SPECIAL RULES.—

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

24 and leasing income shall not include any income

25 properly allocable to excluded property de-
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1 scribed in subparagraph (B) of section

2 943(a)(3) (relating to intangibles).

3 ‘‘(B) ONLY DIRECT EXPENSES TAKEN

4 INTO ACCOUNT.—For purposes of this sub5 section, any expense other than a directly allo6 cable expense shall not be taken into account in

7 computing foreign trade income.

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

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

10 ‘‘(1) IN GENERAL.—Except as otherwise pro11 vided in this section, for purposes of this subpart,

12 the term ‘foreign trading gross receipts’ means the

13 gross receipts of the taxpayer which are—

14 ‘‘(A) from the sale, exchange, or other dis15 position of qualifying foreign trade property,

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

17 foreign trade property for use by the lessee out18 side the United States,

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

20 subsidiary to—

21 ‘‘(i) any sale, exchange, or other dis22 position of qualifying foreign trade prop23 erty by such taxpayer, or
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1 ‘‘(ii) any lease or rental of qualifying

2 foreign trade property described in sub3 paragraph (B) by such taxpayer,

4 ‘‘(D) for engineering or architectural serv5 ices for construction projects located (or pro6 posed for location) outside the United States, or

7 ‘‘(E) for the performance of managerial

8 services for a person other than a related per9 son in furtherance of the production of foreign

10 trading gross receipts described in subpara11 graph (A), (B), or (C).

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

13 any taxable year unless at least 50 percent of its for14 eign trading gross receipts (determined without re15 gard to this sentence) for such taxable year is de16 rived from activities described in subparagraph (A),

17 (B), or (C).

18 ‘‘(2) CERTAIN RECEIPTS EXCLUDED ON BASIS

19 OF USE; SUBSIDIZED RECEIPTS EXCLUDED.—The

20 term ‘foreign trading gross receipts’ shall not in21 clude receipts of a taxpayer from a transaction if—

22 ‘‘(A) the qualifying foreign trade property

23 or services—

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

25 States, or
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1 ‘‘(ii) are for use by the United States

2 or any instrumentality thereof and such

3 use of qualifying foreign trade property or

4 services is required by law or regulation, or

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

6 subsidy granted by the government (or any in7 strumentality thereof) of the country or posses8 sion in which the property is manufactured,

9 produced, grown, or extracted.

10 ‘‘(3) ELECTION TO EXCLUDE CERTAIN RE11 CEIPTS.—The term ‘foreign trading gross receipts’

12 shall not include gross receipts of a taxpayer from

13 a transaction if the taxpayer elects not to have such

14 receipts taken into account for purposes of this sub15 part.

16 ‘‘(b) FOREIGN ECONOMIC PROCESS REQUIRE17 MENTS.—

18 ‘‘(1) IN GENERAL.—Except as provided in sub19 section (c), a taxpayer shall be treated as having for20 eign trading gross receipts from any transaction only

21 if economic processes with respect to such trans22 action take place outside the United States as re23 quired by paragraph (2).

24 ‘‘(2) REQUIREMENT.—
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1 ‘‘(A) IN GENERAL.—The requirements of

2 this paragraph are met with respect to the

3 gross receipts of a taxpayer derived from any

4 transaction if—

5 ‘‘(i) such taxpayer (or any person act6 ing under a contract with such taxpayer)

7 has participated outside the United States

8 in the solicitation (other than advertising),

9 the negotiation, or the making of the con10 tract relating to such transaction, and

11 ‘‘(ii) the foreign direct costs incurred

12 by the taxpayer attributable to the trans13 action equal or exceed 50 percent of the

14 total direct costs attributable to the trans15 action.

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

17 taxpayer shall be treated as satisfying the re18 quirements of subparagraph (A)(ii) with respect

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

20 least 2 subparagraphs of paragraph (3), the

21 foreign direct costs incurred by such taxpayer

22 attributable to activities described in such sub23 paragraph equal or exceed 85 percent of the

24 total direct costs attributable to activities de25 scribed in such subparagraph.
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1 ‘‘(C) DEFINITIONS.—For purposes of this

2 paragraph—

3 ‘‘(i) TOTAL DIRECT COSTS.—The term

4 ‘total direct costs’ means, with respect to

5 any transaction, the total direct costs in6 curred by the taxpayer attributable to ac7 tivities described in paragraph (3) per8 formed at any location by the taxpayer or

9 any person acting under a contract with

10 such taxpayer.

11 ‘‘(ii) FOREIGN DIRECT COSTS.—The

12 term ‘foreign direct costs’ means, with re13 spect to any transaction, the portion of the

14 total direct costs which are attributable to

15 activities performed outside the United

16 States.

17 ‘‘(3) ACTIVITIES RELATING TO QUALIFYING

18 FOREIGN TRADE PROPERTY.—The activities de19 scribed in this paragraph are any of the following

20 with respect to qualifying foreign trade property—

21 ‘‘(A) advertising and sales promotion,

22 ‘‘(B) the processing of customer orders

23 and the arranging for delivery,
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1 ‘‘(C) transportation outside the United

2 States in connection with delivery to the cus3 tomer,

4 ‘‘(D) the determination and transmittal of

5 a final invoice or statement of account or the

6 receipt of payment, and

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

8 ‘‘(4) ECONOMIC PROCESSES PERFORMED BY

9 RELATED PERSONS.—A taxpayer shall be treated as

10 meeting the requirements of this subsection with re11 spect to any sales transaction involving any property

12 if any related person has met such requirements in

13 such transaction or any other sales transaction in14 volving such property.

15 ‘‘(c) EXCEPTION FROM FOREIGN ECONOMIC PROC16 ESS REQUIREMENT.—

17 ‘‘(1) IN GENERAL.—The requirements of sub18 section (b) shall be treated as met for any taxable

19 year if the foreign trading gross receipts of the tax20 payer for such year do not exceed $5,000,000.

21 ‘‘(2) RECEIPTS OF RELATED PERSONS AGGRE22 GATED.—All related persons shall be treated as one

23 person for purposes of paragraph (1), and the limi24 tation under paragraph (1) shall be allocated among
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1 such persons in a manner provided in regulations

2 prescribed by the Secretary.

3 ‘‘(3) SPECIAL RULE FOR PASS-THRU ENTI4 TIES.—In the case of a partnership, S corporation,

5 or other pass-thru entity, the limitation under para6 graph (1) shall apply with respect to the partner7 ship, S corporation, or entity and with respect to

8 each partner, shareholder, or other owner.

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

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

11 purposes of this subpart—

12 ‘‘(1) IN GENERAL.—The term ‘qualifying for13 eign trade property’ means property—

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

15 extracted within or outside the United States,

16 ‘‘(B) held primarily for sale, lease, or rent17 al, in the ordinary course of trade or business

18 for direct use, consumption, or disposition out19 side the United States, and

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

21 market value of which is attributable to—

22 ‘‘(i) articles manufactured, produced,

23 grown, or extracted outside the United

24 States, and
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1 ‘‘(ii) direct costs for labor (determined

2 under the principles of section 263A) per3 formed outside the United States.

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

5 value of any article imported into the United States

6 shall be its appraised value, as determined by the

7 Secretary under section 402 of the Tariff Act of

8 1930 (19 U.S.C. 1401a) in connection with its im9 portation, and the direct costs for labor under clause

10 (ii) do not include costs that would be treated under

11 the principles of section 263A as direct labor costs

12 attributable to articles described in clause (i).

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

14 TREATMENT.—Property which (without regard to

15 this paragraph) is qualifying foreign trade property

16 and which is manufactured, produced, grown, or ex17 tracted outside the United States shall be treated as

18 qualifying foreign trade property only if it is manu19 factured, produced, grown, or extracted by—

20 ‘‘(A) a domestic corporation,

21 ‘‘(B) an individual who is a citizen or resi22 dent of the United States,

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

24 which an election under subsection (e) (relating
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1 to foreign corporations electing to be subject to

2 United States taxation) is in effect, or

3 ‘‘(D) a partnership or other pass-thru enti4 ty all of the partners or owners of which are de5 scribed in subparagraph (A), (B), or (C).

6 Except as otherwise provided by the Secretary,

7 tiered partnerships or pass-thru entities shall be

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

9 the partnerships or entities is directly or indirectly

10 wholly owned by persons described in subparagraph

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

12 ‘‘(3) EXCLUDED PROPERTY.—The term ‘quali13 fying foreign trade property’ shall not include—

14 ‘‘(A) property leased or rented by the tax15 payer for use by any related person,

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

17 formulas, or processes whether or not patented,

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

19 similar reproductions, and other than computer

20 software (whether or not patented), for com21 mercial or home use), goodwill, trademarks,

22 trade brands, franchises, or other like property,

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

24 thereof),
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1 ‘‘(D) products the transfer of which is pro2 hibited or curtailed to effectuate the policy set

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

4 Law 96–72, or

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

6 softwood.

7 For purposes of subparagraph (E), the term ‘un8 processed timber’ means any log, cant, or similar

9 form of timber.

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

11 President determines that the supply of any prop12 erty described in paragraph (1) is insufficient to

13 meet the requirements of the domestic economy, the

14 President may by Executive order designate the

15 property as in short supply. Any property so des16 ignated shall not be treated as qualifying foreign

17 trade property during the period beginning with the

18 date specified in the Executive order and ending

19 with the date specified in an Executive order setting

20 forth the President’s determination that the prop21 erty is no longer in short supply.

22 ‘‘(b) OTHER DEFINITIONS AND RULES.—For pur23 poses of this subpart—

24 ‘‘(1) TRANSACTION.—
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1 ‘‘(A) IN GENERAL.—The term ‘transaction’

2 means—

3 ‘‘(i) any sale, exchange, or other dis4 position,

5 ‘‘(ii) any lease or rental, and

6 ‘‘(iii) any furnishing of services.

7 ‘‘(B) GROUPING OF TRANSACTIONS.—To

8 the extent provided in regulations, any provision

9 of this subpart which, but for this subpara10 graph, would be applied on a transaction-by11 transaction basis may be applied by the tax12 payer on the basis of groups of transactions

13 based on product lines or recognized industry or

14 trade usage. Such regulations may permit dif15 ferent groupings for different purposes.

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

17 ‘United States’ includes the Commonwealth of Puer18 to Rico. The preceding sentence shall not apply for

19 purposes of determining whether a corporation is a

20 domestic corporation.

21 ‘‘(3) RELATED PERSON.—A person shall be re22 lated to another person if such persons are treated

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

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

25 except that determinations under subsections (a)
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1 and (b) of section 52 shall be made without regard

2 to section 1563(b).

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

4 114 shall not be taken into account in determining

5 the amount of gross income or foreign trade income

6 from any transaction.

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

8 of qualifying foreign trade property manufactured, pro9 duced, grown, or extracted within the United States, the

10 amount of income of a taxpayer from any sales transaction

11 with respect to such property which is treated as from

12 sources without the United States shall not exceed—

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

14 qualifying foreign trade income under section

15 941(a)(1)(B), the amount of the taxpayer’s foreign

16 trade income which would (but for this subsection)

17 be treated as from sources without the United

18 States if the foreign trade income were reduced by

19 an amount equal to 4 percent of the foreign trading

20 gross receipts with respect to the transaction, and

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

22 qualifying foreign trade income under section

23 941(a)(1)(C), 50 percent of the amount of the tax24 payer’s foreign trade income which would (but for
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1 this subsection) be treated as from sources without

2 the United States.

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

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

5 114(d), any withholding tax shall not be treated as

6 paid or accrued with respect to extraterritorial in7 come which is excluded from gross income under

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

9 term ‘withholding tax’ means any tax which is im10 posed on a basis other than residence and for which

11 credit is allowable under section 901 or 903.

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

13 apply to any taxpayer with respect to extraterritorial

14 income from any transaction if the taxpayer com15 putes its qualifying foreign trade income with re16 spect to the transaction under section 941(a)(1)(A).

17 ‘‘(e) ELECTION TO BE TREATED AS DOMESTIC COR18 PORATION.—

19 ‘‘(1) IN GENERAL.—An applicable foreign cor20 poration may elect to be treated as a domestic cor21 poration for all purposes of this title if such corpora22 tion waives all benefits to such corporation granted

23 by the United States under any treaty. No election

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

25 such corporation.
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1 ‘‘(2) APPLICABLE FOREIGN CORPORATION.—

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

3 foreign corporation’ means any foreign corporation

4 if—

5 ‘‘(A) such corporation manufactures, pro6 duces, grows, or extracts property in the ordi7 nary course of such corporation’s trade or busi8 ness, or

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

10 of such corporation may reasonably be expected

11 to be foreign trading gross receipts.

12 ‘‘(3) PERIOD OF ELECTION.—

13 ‘‘(A) IN GENERAL.—Except as otherwise

14 provided in this paragraph, an election under

15 paragraph (1) shall apply to the taxable year

16 for which made and all subsequent taxable

17 years unless revoked by the taxpayer. Any rev18 ocation of such election shall apply to taxable

19 years beginning after such revocation.

20 ‘‘(B) TERMINATION.—If a corporation

21 which made an election under paragraph (1) for

22 any taxable year fails to meet the requirements

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

24 for any subsequent taxable year, such election
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1 shall not apply to any taxable year beginning

2 after such subsequent taxable year.

3 ‘‘(C) EFFECT OF REVOCATION OR TERMI4 NATION.—If a corporation which made an elec5 tion under paragraph (1) revokes such election

6 or such election is terminated under subpara7 graph (B), such corporation (and any successor

8 corporation) may not make such election for

9 any of the 5 taxable years beginning with the

10 first taxable year for which such election is not

11 in effect as a result of such revocation or termi12 nation.

13 ‘‘(4) SPECIAL RULES.—

14 ‘‘(A) REQUIREMENTS.—This subsection

15 shall not apply to an applicable foreign corpora16 tion if such corporation fails to meet the re17 quirements (if any) which the Secretary may

18 prescribe to ensure that the taxes imposed by

19 this chapter on such corporation are paid.

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

21 AND TERMINATION.—

22 ‘‘(i) ELECTION.—For purposes of sec23 tion 367, a foreign corporation making an

24 election under this subsection shall be

25 treated as transferring (as of the first day
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1 of the first taxable year to which the elec2 tion applies) all of its assets to a domestic

3 corporation in connection with an exchange

4 to which section 354 applies.

5 ‘‘(ii) REVOCATION AND TERMI6 NATION.—For purposes of section 367,

7 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 the first such subsequent taxable year to which

16 such election ceases to apply) all of its property

17 to a foreign corporation in connection with an

18 exchange to which section 354 applies.

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

20 Secretary may by regulation designate one or

21 more classes of corporations which may not

22 make the election under this subsection.

23 ‘‘(f) RULES RELATING TO ALLOCATIONS OF QUALI24 FYING FOREIGN TRADE INCOME FROM SHARED PART25 NERSHIPS.—
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1 ‘‘(1) IN GENERAL.—If—

2 ‘‘(A) a partnership maintains a separate

3 account for transactions (to which this subpart

4 applies) with each partner,

5 ‘‘(B) distributions to each partner with re6 spect to such transactions are based on the

7 amounts in the separate account maintained

8 with respect to such partner, and

9 ‘‘(C) such partnership meets such other re10 quirements as the Secretary may by regulations

11 prescribe,

12 then such partnership shall allocate to each partner

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

14 qualifying foreign trade income) from any trans15 action to which this subpart applies on the basis of

16 such separate account.

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

18 subpart, in the case of a partnership to which para19 graph (1) applies—

20 ‘‘(A) any partner’s interest in the partner21 ship shall not be taken into account in deter22 mining whether such partner is a related person

23 with respect to any other partner, and

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

25 shall be made separately by each partner with
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1 respect to any transaction for which the part2 nership maintains separate accounts for each

3 partner.

4 ‘‘(g) EXCLUSION FOR PATRONS OF AGRICULTURAL

5 AND HORTICULTURAL COOPERATIVES.—Any amount de6 scribed in paragraph (1) or (3) of section 1385(a)—

7 ‘‘(1) which is received by a person from an or8 ganization to which part I of subchapter T applies

9 which is engaged in the marketing of agricultural or

10 horticultural products, and

11 ‘‘(2) which is designated by the organization as

12 allocable to qualifying foreign trade income in a

13 written notice mailed to its patrons during the pay14 ment period described in section 1382(d),

15 shall be treated as qualifying foreign trade income of such

16 person for purposes of section 114. The taxable income

17 of the organization shall not be reduced under section

18 1382 by reason of any amount to which the preceding sen19 tence applies.’’.

20 SEC. 4. TECHNICAL AND CONFORMING AMENDMENTS.

21 (1) The second sentence of section

22 56(g)(4)(B)(i) is amended by inserting before the

23 period ‘‘or under section 114’’.

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

25 end the following new subsection:
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1 ‘‘(d) CERTAIN DIVIDENDS ALLOCABLE TO QUALI2 FYING FOREIGN TRADE INCOME.—In the case of a domes3 tic corporation which is a United States shareholder (as

4 defined in section 951(b)) of a controlled foreign corpora5 tion (as defined in section 957), there shall be allowed as

6 a deduction an amount equal to 100 percent of any divi7 dend received from such controlled foreign corporation

8 which is distributed out of earnings and profits attrib9 utable to qualifying foreign trade income (as defined in

10 section 941(a)).’’.

11 (3) Section 275(a) is amended—

12 (A) by striking ‘‘or’’ at the end of para13 graph (4)(A), by striking the period at the end

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

15 by adding at the end of paragraph (4) the fol16 lowing new subparagraph:

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

18 respect to qualifying foreign trade income (as

19 defined in section 941).’’; and

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

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

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

23 of paragraph (4)(C).’’.

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

25 amended—
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1 (A) by striking ‘‘For purposes of’’ and in2 serting:

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

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

5 subparagraph:

6 ‘‘(B) ASSETS PRODUCING EXEMPT

7 EXTRATERRITORIAL INCOME.—For purposes of

8 allocating and apportioning any interest ex9 pense, there shall not be taken into account any

10 qualifying foreign trade property (as defined in

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

12 for lease or rental in the ordinary course of

13 trade or business for use by the lessee outside

14 the United States (as defined in section

15 943(b)(2)).’’.

16 (5) Section 903 is amended by striking

17 ‘‘164(a)’’ and inserting ‘‘114, 164(a),’’.

18 (6) Section 999(c)(1) is amended by inserting

19 ‘‘941(a)(5),’’ after ‘‘908(a),’’.

20 (7) The table of sections for part III of sub21 chapter B of chapter 1 is amended by inserting be22 fore the item relating to section 115 the following

23 new item:

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

24 (8) The table of subparts for part III of sub25 chapter N of chapter 1 is amended by striking the
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1 item relating to subpart E and inserting the fol2 lowing new item:

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

3 (9) The table of subparts for part III of sub4 chapter N of chapter 1 is amended by striking the

5 item relating to subpart C.

6 SEC. 5. EFFECTIVE DATE.

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

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

9 (b) NO NEW FSCS; TERMINATION OF INACTIVE

10 FSCS.—

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

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

13 in section 922 of the Internal Revenue Code of

14 1986, as in effect before the amendments made by

15 this Act).

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

17 FSC has no foreign trade income (as defined in sec18 tion 923(b) of such Code, as so in effect) for any pe19 riod of 5 consecutive taxable years beginning after

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

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

22 taxable year beginning after such period.

23 (c) TRANSITION PERIOD FOR EXISTING FOREIGN

24 SALES CORPORATIONS.—
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1 (1) IN GENERAL.—In the case of a FSC (as so

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

3 all times thereafter, the amendments made by this

4 Act shall not apply to any transaction in the ordi5 nary course of trade or business involving a FSC

6 which occurs—

7 (A) before January 1, 2002; or

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

9 a binding contract—

10 (i) which is between the FSC (or any

11 related person) and any person which is

12 not a related person; and

13 (ii) which is in effect on September

14 30, 2000, and at all times thereafter.

15 For purposes of this paragraph, a binding contract

16 shall include a purchase option, renewal option, or

17 replacement option which is included in such con18 tract and which is enforceable against the seller or

19 lessor.

20 (2) ELECTION TO HAVE AMENDMENTS APPLY

21 EARLIER.—A taxpayer may elect to have the amend22 ments made by this Act apply to any transaction by

23 a FSC or any related person to which such amend24 ments would apply but for the application of para25 graph (1). Such election shall be effective for the
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1 taxable year for which made and all subsequent tax2 able years, and, once made, may be revoked only

3 with the consent of the Secretary of the Treasury.

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

5 subsection, the term ‘‘related person’’ has the mean6 ing given to such term by section 943(b)(3) of such

7 Code, as added by this Act.

8 (d) SPECIAL RULES RELATING TO LEASING TRANS9 ACTIONS.—

10 (1) SALES INCOME.—If foreign trade income in

11 connection with the lease or rental of property de12 scribed in section 927(a)(1)(B) of such Code (as in

13 effect before the amendments made by this Act) is

14 treated as exempt foreign trade income for purposes

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

16 property shall be treated as property described in

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

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

19 such Code (as so added) to any subsequent trans20 action involving such property to which the amend21 ments made by this Act apply.

22 (2) LIMITATION ON USE OF GROSS RECEIPTS

23 METHOD.—If any person computed its foreign trade

24 income from any transaction with respect to any

25 property on the basis of a transfer price determined
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1 under the method described in section 925(a)(1) of

2 such Code (as in effect before the amendments made

3 by this Act), then the qualifying foreign trade in4 come (as defined in section 941(a) of such Code, as

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

6 any related person) with respect to any other trans7 action involving such property (and to which the

8 amendments made by this Act apply) shall be zero.

Passed the House of Representatives September 13,

2000.

Attest: JEFF TRANDAHL,

Clerk.