In the Senate of the United States,

November 1 (legislative day, September 22), 2000.

Resolved, That the bill from the House of Representatives (H.R. 4986) entitled ‘‘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.’’, do pass with the following

AMENDMENT:

Strike out all after the enacting clause and insert:

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’’.
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1 (b) AMENDMENT OF 1986 CODE.—Except as otherwise

2 expressly provided, whenever in this Act an amendment or

3 repeal is expressed in terms of an amendment to, or repeal

4 of, a section or other provision, the reference shall be consid5 ered to be made to a section or other provision of the Inter6 nal 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 hereby

10 repealed.

11 SEC. 3. TREATMENT OF EXTRATERRITORIAL INCOME.

12 (a) IN GENERAL.—Part III of subchapter B of chapter

13 1 (relating to items specifically excluded from gross income)

14 is amended by inserting before section 115 the following new

15 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 taxpayer

25 allocated under paragraph (2) to extraterritorial in-
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1 come of the taxpayer excluded from gross income

2 under subsection (a) shall not be allowed.

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 chap15 ter, no credit shall be allowed under this chapter for any

16 income, war profits, and excess profits taxes paid or ac17 crued to any foreign country or possession of the United

18 States with respect to extraterritorial income which is ex19 cluded from gross income under subsection (a).

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

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

22 gross income of the taxpayer attributable to foreign trading

23 gross receipts (as defined in section 942) of the taxpayer.’’.
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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 pur7 poses of this subpart and section 114—

8 ‘‘(1) IN GENERAL.—The term ‘qualifying foreign

9 trade income’ means, with respect to any transaction,

10 the amount of gross income which, if excluded, will

11 result in a reduction of the taxable income of the tax12 payer from such transaction equal to the greatest of—

13 ‘‘(A) 30 percent of the foreign sale and leas14 ing income derived by the taxpayer from such

15 transaction,

16 ‘‘(B) 1.2 percent of the foreign trading gross

17 receipts derived by the taxpayer from the trans18 action, or

19 ‘‘(C) 15 percent of the foreign trade income

20 derived by the taxpayer from the transaction.

21 In no event shall the amount determined under sub22 paragraph (B) exceed 200 percent of the amount de23 termined under subparagraph (C).
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1 ‘‘(2) ALTERNATIVE COMPUTATION.—A taxpayer

2 may compute its qualifying foreign trade income

3 under a subparagraph of paragraph (1) other than

4 the subparagraph which results in the greatest

5 amount of such income.

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

7 GROSS RECEIPTS METHOD.—If any person computes

8 its qualifying foreign trade income from any trans9 action with respect to any property under paragraph

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

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

12 other transaction involving such property shall be

13 zero.

14 ‘‘(4) RULES FOR MARGINAL COSTING.—The Sec15 retary shall prescribe regulations setting forth rules

16 for the allocation of expenditures in computing for17 eign trade income under paragraph (1)(C) in those

18 cases where a taxpayer is seeking to establish or

19 maintain a market for qualifying foreign trade prop20 erty.

21 ‘‘(5) PARTICIPATION IN INTERNATIONAL BOY22 COTTS, ETC.—Under regulations prescribed by the

23 Secretary, the qualifying foreign trade income of a

24 taxpayer for any taxable year shall be reduced (but

25 not below zero) by the sum of—
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1 ‘‘(A) an amount equal to such income mul2 tiplied by the international boycott factor deter3 mined under section 999, and

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

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

6 paid by or on behalf of the taxpayer directly or

7 indirectly to an official, employee, or agent in

8 fact of a government.

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

10 subpart—

11 ‘‘(1) IN GENERAL.—The term ‘foreign trade in12 come’ means the taxable income of the taxpayer at13 tributable to foreign trading gross receipts of the tax14 payer.

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

16 any case in which an organization to which part I

17 of subchapter T applies which is engaged in the mar18 keting of agricultural or horticultural products sells

19 qualifying foreign trade property, in computing the

20 taxable income of such cooperative, there shall not be

21 taken into account any deduction allowable under

22 subsection (b) or (c) of section 1382 (relating to pa23 tronage dividends, per-unit retain allocations, and

24 nonpatronage distributions).
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1 ‘‘(c) FOREIGN SALE AND LEASING INCOME.—For pur2 poses of this section—

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

4 leasing income’ means, with respect to any

5 transaction—

6 ‘‘(A) foreign trade income properly allocable

7 to activities which—

8 ‘‘(i) are described in paragraph

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

10 ‘‘(ii) are performed by the taxpayer (or

11 any person acting under a contract with

12 such taxpayer) outside the United States, or

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

14 taxpayer in connection with the lease or rental

15 of qualifying foreign trade property for use by

16 the lessee outside the United States.

17 ‘‘(2) SPECIAL RULES FOR LEASED PROPERTY.—

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

19 sale and leasing income’ includes any foreign

20 trade income derived by the taxpayer from the

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

22 ‘‘(B) LIMITATION IN CERTAIN CASES.—Ex23 cept as provided in regulations, in the case of

24 property which—
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1 ‘‘(i) was manufactured, produced,

2 grown, or extracted by the taxpayer, or

3 ‘‘(ii) was acquired by the taxpayer

4 from a related person for a price which was

5 not determined in accordance with the rules

6 of section 482,

7 the amount of foreign trade income which may

8 be treated as foreign sale and leasing income

9 under paragraph (1)(B) or subparagraph (A) of

10 this paragraph with respect to any transaction

11 involving such property shall not exceed the

12 amount which would have been determined if the

13 taxpayer had acquired such property for the

14 price determined in accordance with the rules of

15 section 482.

16 ‘‘(3) SPECIAL RULES.—

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

18 and leasing income shall not include any income

19 properly allocable to excluded property described

20 in subparagraph (B) of section 943(a)(3) (relat21 ing to intangibles).

22 ‘‘(B) ONLY DIRECT EXPENSES TAKEN INTO

23 ACCOUNT.—For purposes of this subsection, any

24 expense other than a directly allocable expense
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1 shall not be taken into account in computing for2 eign trade income.

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

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

5 ‘‘(1) IN GENERAL.—Except as otherwise provided

6 in this section, for purposes of this subpart, the term

7 ‘foreign trading gross receipts’ means the gross re8 ceipts of the taxpayer which are—

9 ‘‘(A) from the sale, exchange, or other dis10 position of qualifying foreign trade property,

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

12 foreign trade property for use by the lessee out13 side the United States,

14 ‘‘(C) for services which are related and sub15 sidiary to—

16 ‘‘(i) any sale, exchange, or other dis17 position of qualifying foreign trade prop18 erty by such taxpayer, or

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

20 foreign trade property described in subpara21 graph (B) by such taxpayer,

22 ‘‘(D) for engineering or architectural serv23 ices for construction projects located (or proposed

24 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 person

3 in furtherance of the production of foreign trad4 ing gross receipts described in subparagraph (A),

5 (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 derived

10 from activities described in subparagraph (A), (B), or

11 (C).

12 ‘‘(2) CERTAIN RECEIPTS EXCLUDED ON BASIS OF

13 USE; SUBSIDIZED RECEIPTS EXCLUDED.—The term

14 ‘foreign trading gross receipts’ shall not include re15 ceipts 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 use

22 of qualifying foreign trade property or serv23 ices 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, pro3 duced, 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 a

7 transaction if the taxpayer elects not to have such re8 ceipts taken into account for purposes of this subpart.

9 ‘‘(b) FOREIGN ECONOMIC PROCESS REQUIREMENTS.—

10 ‘‘(1) IN GENERAL.—Except as provided in sub11 section (c), a taxpayer shall be treated as having for12 eign trading gross receipts from any transaction only

13 if economic processes with respect to such transaction

14 take place outside the United States as required by

15 paragraph (2).

16 ‘‘(2) REQUIREMENT.—

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

18 this paragraph are met with respect to the gross

19 receipts of a taxpayer derived from any trans20 action if—

21 ‘‘(i) such taxpayer (or any person act22 ing under a contract with such taxpayer)

23 has participated outside the United States

24 in the solicitation (other than advertising),
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1 the negotiation, or the making of the con2 tract relating to such transaction, and

3 ‘‘(ii) the foreign direct costs incurred

4 by the taxpayer attributable to the trans5 action equal or exceed 50 percent of the

6 total direct costs attributable to the trans7 action.

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

9 taxpayer shall be treated as satisfying the re10 quirements of subparagraph (A)(ii) with respect

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

12 least 2 subparagraphs of paragraph (3), the for13 eign direct costs incurred by such taxpayer at14 tributable to activities described in such sub15 paragraph equal or exceed 85 percent of the total

16 direct costs attributable to activities described in

17 such subparagraph.

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

19 paragraph—

20 ‘‘(i) TOTAL DIRECT COSTS.—The term

21 ‘total direct costs’ means, with respect to

22 any transaction, the total direct costs in23 curred by the taxpayer attributable to ac24 tivities described in paragraph (3) per25 formed at any location by the taxpayer or
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1 any person acting under a contract with

2 such taxpayer.

3 ‘‘(ii) FOREIGN DIRECT COSTS.—The

4 term ‘foreign direct costs’ means, with re5 spect to any transaction, the portion of the

6 total direct costs which are attributable to

7 activities performed outside the United

8 States.

9 ‘‘(3) ACTIVITIES RELATING TO QUALIFYING FOR10 EIGN TRADE PROPERTY.—The activities described in

11 this paragraph are any of the following with respect

12 to qualifying foreign trade property—

13 ‘‘(A) advertising and sales promotion,

14 ‘‘(B) the processing of customer orders and

15 the arranging for delivery,

16 ‘‘(C) transportation outside the United

17 States in connection with delivery to the cus18 tomer,

19 ‘‘(D) the determination and transmittal of

20 a final invoice or statement of account or the re21 ceipt of payment, and

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

23 ‘‘(4) ECONOMIC PROCESSES PERFORMED BY RE24 LATED PERSONS.—A taxpayer shall be treated as

25 meeting the requirements of this subsection with re-
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1 spect to any sales transaction involving any property

2 if any related person has met such requirements in

3 such transaction or any other sales transaction in4 volving such property.

5 ‘‘(c) EXCEPTION FROM FOREIGN ECONOMIC PROCESS

6 REQUIREMENT.—

7 ‘‘(1) IN GENERAL.—The requirements of sub8 section (b) shall be treated as met for any taxable

9 year if the foreign trading gross receipts of the tax10 payer for such year do not exceed $5,000,000.

11 ‘‘(2) RECEIPTS OF RELATED PERSONS AGGRE12 GATED.—All related persons shall be treated as one

13 person for purposes of paragraph (1), and the limita14 tion under paragraph (1) shall be allocated among

15 such persons in a manner provided in regulations

16 prescribed by the Secretary.

17 ‘‘(3) SPECIAL RULE FOR PASS-THRU ENTITIES.—

18 In the case of a partnership, S corporation, or other

19 pass-thru entity, the limitation under paragraph (1)

20 shall apply with respect to the partnership, S cor21 poration, or entity and with respect to each partner,

22 shareholder, or other owner.

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

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

25 purposes of this subpart—
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1 ‘‘(1) IN GENERAL.—The term ‘qualifying foreign

2 trade property’ means property—

3 ‘‘(A) manufactured, produced, grown, or ex4 tracted within or outside the United States,

5 ‘‘(B) held primarily for sale, lease, or rent6 al, in the ordinary course of trade or business for

7 direct use, consumption, or disposition outside

8 the United States, and

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

10 market value of which is attributable to—

11 ‘‘(i) articles manufactured, produced,

12 grown, or extracted outside the United

13 States, and

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

15 under the principles of section 263A) per16 formed outside the United States.

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

18 value of any article imported into the United States

19 shall be its appraised value, as determined by the Sec20 retary under section 402 of the Tariff Act of 1930 (19

21 U.S.C. 1401a) in connection with its importation,

22 and the direct costs for labor under clause (ii) do not

23 include costs that would be treated under the prin24 ciples of section 263A as direct labor costs attrib25 utable to articles described in clause (i).
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1 ‘‘(2) U.S. TAXATION TO ENSURE CONSISTENT

2 TREATMENT.—Property which (without regard to this

3 paragraph) is qualifying foreign trade property and

4 which is manufactured, produced, grown, or extracted

5 outside the United States shall be treated as quali6 fying foreign trade property only if it is manufac7 tured, produced, grown, or extracted by—

8 ‘‘(A) a domestic corporation,

9 ‘‘(B) an individual who is a citizen or resi10 dent of the United States,

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

12 which an election under subsection (e) (relating

13 to foreign corporations electing to be subject to

14 United States taxation) is in effect, or

15 ‘‘(D) a partnership or other pass-thru enti16 ty all of the partners or owners of which are de17 scribed in subparagraph (A), (B), or (C).

18 Except as otherwise provided by the Secretary, tiered

19 partnerships or pass-thru entities shall be treated as

20 described in subparagraph (D) if each of the partner21 ships or entities is directly or indirectly wholly owned

22 by persons described in subparagraph (A), (B), or

23 (C).

24 ‘‘(3) EXCLUDED PROPERTY.—The term ‘quali25 fying foreign trade property’ shall not include—
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1 ‘‘(A) property leased or rented by the tax2 payer for use by any related person,

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

4 formulas, or processes whether or not patented,

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

6 similar reproductions, and other than computer

7 software (whether or not patented), for commer8 cial or home use), goodwill, trademarks, trade

9 brands, franchises, or other like property,

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

11 thereof),

12 ‘‘(D) products the transfer of which is pro13 hibited or curtailed to effectuate the policy set

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

15 Law 96–72, or

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

17 softwood.

18 For purposes of subparagraph (E), the term ‘unproc19 essed timber’ means any log, cant, or similar form of

20 timber.

21 ‘‘(4) PROPERTY IN SHORT SUPPLY.—If the Presi22 dent determines that the supply of any property de23 scribed in paragraph (1) is insufficient to meet the

24 requirements of the domestic economy, the President

25 may by Executive order designate the property as in
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1 short supply. Any property so designated shall not be

2 treated as qualifying foreign trade property during

3 the period beginning with the date specified in the

4 Executive order and ending with the date specified in

5 an Executive order setting forth the President’s deter6 mination that the property is no longer in short sup7 ply.

8 ‘‘(b) OTHER DEFINITIONS AND RULES.—For purposes

9 of this subpart—

10 ‘‘(1) TRANSACTION.—

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

12 means—

13 ‘‘(i) any sale, exchange, or other dis14 position,

15 ‘‘(ii) any lease or rental, and

16 ‘‘(iii) any furnishing of services.

17 ‘‘(B) GROUPING OF TRANSACTIONS.—To the

18 extent provided in regulations, any provision of

19 this subpart which, but for this subparagraph,

20 would be applied on a transaction-by-trans21 action basis may be applied by the taxpayer on

22 the basis of groups of transactions based on

23 product lines or recognized industry or trade

24 usage. Such regulations may permit different

25 groupings for different purposes.
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1 ‘‘(2) UNITED STATES DEFINED.—The term

2 ‘United States’ includes the Commonwealth of Puerto

3 Rico. The preceding sentence shall not apply for pur4 poses of determining whether a corporation is a do5 mestic corporation.

6 ‘‘(3) RELATED PERSON.—A person shall be re7 lated to another person if such persons are treated as

8 a single employer under subsection (a) or (b) of sec9 tion 52 or subsection (m) or (o) of section 414, except

10 that determinations under subsections (a) and (b) of

11 section 52 shall be made without regard to section

12 1563(b).

13 ‘‘(4) GROSS AND TAXABLE INCOME.—Section 114

14 shall not be taken into account in determining the

15 amount of gross income or foreign trade income from

16 any transaction.

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

18 of qualifying foreign trade property manufactured, pro19 duced, grown, or extracted within the United States, the

20 amount of income of a taxpayer from any sales transaction

21 with respect to such property which is treated as from

22 sources without the United States shall not exceed—

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

24 qualifying foreign trade income under section

25 941(a)(1)(B), the amount of the taxpayer’s foreign
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1 trade income which would (but for this subsection) be

2 treated as from sources without the United States if

3 the foreign trade income were reduced by an amount

4 equal to 4 percent of the foreign trading gross receipts

5 with respect to the transaction, and

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

7 qualifying foreign trade income under section

8 941(a)(1)(C), 50 percent of the amount of the tax9 payer’s foreign trade income which would (but for

10 this subsection) be treated as from sources without the

11 United States.

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

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

14 114(d), any withholding tax shall not be treated as

15 paid or accrued with respect to extraterritorial in16 come which is excluded from gross income under sec17 tion 114(a). For purposes of this paragraph, the term

18 ‘withholding tax’ means any tax which is imposed on

19 a basis other than residence and for which credit is

20 allowable under section 901 or 903.

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

22 apply to any taxpayer with respect to extraterritorial

23 income from any transaction if the taxpayer com24 putes its qualifying foreign trade income with respect

25 to the transaction under section 941(a)(1)(A).
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1 ‘‘(e) ELECTION TO BE TREATED AS DOMESTIC COR2 PORATION.—

3 ‘‘(1) IN GENERAL.—An applicable foreign cor4 poration may elect to be treated as a domestic cor5 poration for all purposes of this title if such corpora6 tion waives all benefits to such corporation granted

7 by the United States under any treaty. No election

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

9 such corporation.

10 ‘‘(2) APPLICABLE FOREIGN CORPORATION.—For

11 purposes of paragraph (1), the term ‘applicable for12 eign corporation’ means any foreign corporation if—

13 ‘‘(A) such corporation manufactures, pro14 duces, grows, or extracts property in the ordi15 nary course of such corporation’s trade or busi16 ness, or

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

18 such corporation are foreign trading gross re19 ceipts.

20 ‘‘(3) PERIOD OF ELECTION.—

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

22 provided in this paragraph, an election under

23 paragraph (1) shall apply to the taxable year for

24 which made and all subsequent taxable years un25 less revoked by the taxpayer. Any revocation of
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1 such election shall apply to taxable years begin2 ning after such revocation.

3 ‘‘(B) TERMINATION.—If a corporation

4 which made an election under paragraph (1) for

5 any taxable year fails to meet the requirements

6 of subparagraph (A) or (B) of paragraph (2) for

7 any subsequent taxable year, such election shall

8 not apply to any taxable year beginning after

9 such subsequent taxable year.

10 ‘‘(C) EFFECT OF REVOCATION OR TERMI11 NATION.—If a corporation which made an elec12 tion under paragraph (1) revokes such election

13 or such election is terminated under subpara14 graph (B), such corporation (and any successor

15 corporation) may not make such election for any

16 of the 5 taxable years beginning with the first

17 taxable year for which such election is not in ef18 fect as a result of such revocation or termination.

19 ‘‘(4) SPECIAL RULES.—

20 ‘‘(A) REQUIREMENTS.—This subsection

21 shall not apply to an applicable foreign corpora22 tion if such corporation fails to meet the require23 ments (if any) which the Secretary may pre24 scribe to ensure that the taxes imposed by this

25 chapter on such corporation are paid.
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1 ‘‘(B) EFFECT OF ELECTION, REVOCATION,

2 AND TERMINATION.—

3 ‘‘(i) ELECTION.—For purposes of sec4 tion 367, a foreign corporation making an

5 election under this subsection shall be treat6 ed as transferring (as of the first day of the

7 first taxable year to which the election ap8 plies) all of its assets to a domestic corpora9 tion in connection with an exchange to

10 which section 354 applies.

11 ‘‘(ii) REVOCATION AND TERMI12 NATION.—For purposes of section 367, if—

13 ‘‘(I) an election is made by a cor14 poration under paragraph (1) for any

15 taxable year, and

16 ‘‘(II) such election ceases to apply

17 for any subsequent taxable year,

18 such corporation shall be treated as a domestic

19 corporation transferring (as of the 1st day of the

20 first such subsequent taxable year to which such

21 election ceases to apply) all of its property to a

22 foreign corporation in connection with an ex23 change to which section 354 applies.

24 ‘‘(C) ELIGIBILITY FOR ELECTION.—The Sec25 retary may by regulation designate one or more
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1 classes of corporations which may not make the

2 election under this subsection.

3 ‘‘(f) RULES RELATING TO ALLOCATIONS OF QUALI4 FYING FOREIGN TRADE INCOME FROM SHARED PARTNER5 SHIPS.—

6 ‘‘(1) IN GENERAL.—If—

7 ‘‘(A) a partnership maintains a separate

8 account for transactions (to which this subpart

9 applies) with each partner,

10 ‘‘(B) distributions to each partner with re11 spect to such transactions are based on the

12 amounts in the separate account maintained

13 with respect to such partner, and

14 ‘‘(C) such partnership meets such other re15 quirements as the Secretary may by regulations

16 prescribe,

17 then such partnership shall allocate to each partner

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

19 qualifying foreign trade income) from any trans20 action to which this subpart applies on the basis of

21 such separate account.

22 ‘‘(2) SPECIAL RULES.—For purposes of this sub23 part, in the case of a partnership to which paragraph

24 (1) applies—
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1 ‘‘(A) any partner’s interest in the partner2 ship shall not be taken into account in deter3 mining whether such partner is a related person

4 with respect to any other partner, and

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

6 shall be made separately by each partner with

7 respect to any transaction for which the partner8 ship maintains separate accounts for each part9 ner.

10 ‘‘(g) EXCLUSION FOR PATRONS OF AGRICULTURAL

11 AND HORTICULTURAL COOPERATIVES.—Any amount de12 scribed in paragraph (1) or (3) of section 1385(a)—

13 ‘‘(1) which is received by a person from an orga14 nization to which part I of subchapter T applies

15 which is engaged in the marketing of agricultural or

16 horticultural products, and

17 ‘‘(2) which is allocable to qualifying foreign

18 trade income and designated as such by the organiza19 tion in a written notice mailed to its patrons during

20 the payment period described in section 1382(d),

21 shall be treated as qualifying foreign trade income of such

22 person for purposes of section 114. The taxable income of

23 the organization shall not be reduced under section 1382

24 by reason of any amount to which the preceding sentence

25 applies.
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1 ‘‘(h) SPECIAL RULE FOR DISCS.—Section 114 shall

2 not apply to any taxpayer for any taxable year if, at any

3 time during the taxable year, the taxpayer is a member of

4 any controlled group of corporations (as defined in section

5 927(d)(4), as in effect before the date of the enactment of

6 this subsection) of which a DISC is a member.’’

7 SEC. 4. TECHNICAL AND CONFORMING AMENDMENTS.

8 (1) The second sentence of section 56(g)(4)(B)(i)

9 is amended by inserting before the period ‘‘or under

10 section 114’’.

11 (2) 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 by

15 adding at the end of paragraph (4) the following

16 new subparagraph:

17 ‘‘(C) such taxes are paid or accrued with re18 spect to qualifying foreign trade income (as de19 fined 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 of

23 paragraph (4)(C).’’.

24 (3) 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 for

12 lease or rental in the ordinary course of trade or

13 business for use by the lessee outside the United

14 States (as defined in section 943(b)(2)).’’.

15 (4) Section 903 is amended by striking ‘‘164(a)’’

16 and inserting ‘‘114, 164(a),’’.

17 (5) Section 999(c)(1) is amended by inserting

18 ‘‘941(a)(5),’’ after ‘‘908(a),’’.

19 (6) The table of sections for part III of sub20 chapter B of chapter 1 is amended by inserting before

21 the item relating to section 115 the following new

22 item:

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

23 (7) The table of subparts for part III of sub24 chapter N of chapter 1 is amended by striking the
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1 item relating to subpart E and inserting the following

2 new item:

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

3 (8) 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 Act

8 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 in

13 section 922 of the Internal Revenue Code of 1986, as

14 in effect before the amendments made by this Act).

15 (2) TERMINATION OF INACTIVE FSCS.—If a FSC

16 has no foreign trade income (as defined in section

17 923(b) of such Code, as so in effect) for any period

18 of 5 consecutive taxable years beginning after Decem19 ber 31, 2001, such FSC shall cease to be treated as

20 a FSC for purposes of such Code for any taxable year

21 beginning after such period.

22 (c) TRANSITION PERIOD FOR EXISTING FOREIGN

23 SALES CORPORATIONS.—

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

25 defined) in existence on September 30, 2000, and at
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1 all times thereafter, the amendments made by this Act

2 shall not apply to any transaction in the ordinary

3 course of trade or business involving a FSC which

4 occurs—

5 (A) before January 1, 2002; or

6 (B) after December 31, 2001, pursuant to a

7 binding contract—

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

9 related person) and any person which is not

10 a related person; and

11 (ii) which is in effect on September 30,

12 2000, and at all times thereafter.

13 For purposes of this paragraph, a binding contract

14 shall include a purchase option, renewal option, or

15 replacement option which is included in such contract

16 and which is enforceable against the seller or lessor.

17 (2) ELECTION TO HAVE AMENDMENTS APPLY

18 EARLIER.—A taxpayer may elect to have the amend19 ments made by this Act apply to any transaction by

20 a FSC or any related person to which such amend21 ments would apply but for the application of para22 graph (1). Such election shall be effective for the tax23 able year for which made and all subsequent taxable

24 years, and, once made, may be revoked only with the

25 consent of the Secretary of the Treasury.
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1 (3) EXCEPTION FOR OLD EARNINGS AND PROFITS

2 OF CERTAIN CORPORATIONS.—

3 (A) IN GENERAL.—In the case of a foreign

4 corporation to which this paragraph applies—

5 (i) earnings and profits of such cor6 poration accumulated in taxable years end7 ing before October 1, 2000, shall not be in8 cluded in the gross income of the persons

9 holding stock in such corporation by reason

10 of section 943(e)(4)(B)(i), and

11 (ii) rules similar to the rules of clauses

12 (ii), (iii), and (iv) of section 953(d)(4)(B)

13 shall apply with respect to such earnings

14 and profits.

15 The preceding sentence shall not apply to earn16 ings and profits acquired in a transaction after

17 September 30, 2000, to which section 381 applies

18 unless the distributor or transferor corporation

19 was immediately before the transaction a foreign

20 corporation to which this paragraph applies.

21 (B) EXISTING FSCS.—This paragraph shall

22 apply to any controlled foreign corporation (as

23 defined in section 957) if—

24 (i) such corporation is a FSC (as so

25 defined) in existence on September 30, 2000,
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1 (ii) such corporation is eligible to

2 make the election under section 943(e) by

3 reason of being described in paragraph

4 (2)(B) of such section, and

5 (iii) such corporation makes such elec6 tion not later than for its first taxable year

7 beginning after December 31, 2001.

8 (C) OTHER CORPORATIONS.—This para9 graph shall apply to any controlled foreign cor10 poration (as defined in section 957), and such

11 corporation shall (notwithstanding any provi12 sion of section 943(e)) be treated as an applica13 ble foreign corporation for purposes of section

14 943(e), if—

15 (i) such corporation is in existence on

16 September 30, 2000,

17 (ii) as of such date, such corporation is

18 wholly owned (directly or indirectly) by a

19 domestic corporation (determined without

20 regard to any election under section 943(e)),

21 (iii) for each of the 3 taxable years

22 preceding the first taxable year to which the

23 election under section 943(e) by such con24 trolled foreign corporation applies—
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1 (I) all of the gross income of such

2 corporation is subpart F income (as

3 defined in section 952), including by

4 reason of section 954(b)(3)(B), and

5 (II) in the ordinary course of such

6 corporation’s trade or business, such

7 corporation regularly sold (or paid

8 commissions) to a FSC which on Sep9 tember 30, 2000, was a related person

10 to such corporation,

11 (iv) such corporation has never made

12 an election under section 922(a)(2) (as in

13 effect before the date of the enactment of this

14 paragraph) to be treated as a FSC, and

15 (v) such corporation makes the election

16 under section 943(e) not later than for its

17 first taxable year beginning after December

18 31, 2001.

19 The preceding sentence shall cease to apply as of

20 the date that the domestic corporation referred to

21 in clause (ii) ceases to wholly own (directly or

22 indirectly) such controlled foreign corporation.

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

24 subsection, the term ‘‘related person’’ has the meaning

25 given to such term by section 943(b)(3).
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1 (5) SECTION REFERENCES.—Except as otherwise

2 expressly provided, any reference in this subsection to

3 a section or other provision shall be considered to be

4 a reference to a section or other provision of the Inter5 nal Revenue Code of 1986, as amended by this Act.

6 (d) SPECIAL RULES RELATING TO LEASING TRANS7 ACTIONS.—

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

9 connection with the lease or rental of property de10 scribed in section 927(a)(1)(B) of such Code (as in ef11 fect before the amendments made by this Act) is treat12 ed as exempt foreign trade income for purposes of sec13 tion 921(a) of such Code (as so in effect), such prop14 erty shall be treated as property described in section

15 941(c)(1)(B) of such Code (as added by this Act) for

16 purposes of applying section 941(c)(2) of such Code

17 (as so added) to any subsequent transaction involving

18 such property to which the amendments made by this

19 Act apply.

20 (2) LIMITATION ON USE OF GROSS RECEIPTS

21 METHOD.—If any person computed its foreign trade

22 income from any transaction with respect to any

23 property on the basis of a transfer price determined

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

25 such Code (as in effect before the amendments made
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1 by this Act), then the qualifying foreign trade income

2 (as defined in section 941(a) of such Code, as in effect

3 after such amendment) of such person (or any related

4 person) with respect to any other transaction involv5 ing such property (and to which the amendments

6 made by this Act apply) shall be zero.

Attest:

Secretary.
106TH CONGRESS

2D SESSION H. R. 4986

AMENDMENT
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