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[Congressional Bills 106th Congress]
[From the U.S. Government Publishing Office]
[H.R. 4986 Engrossed Amendment Senate (EAS)]

  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  

                  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:

SECTION 1. SHORT TITLE.

    (a) Short Title.--This Act may be cited as the ``FSC Repeal and 
Extraterritorial Income Exclusion Act of 2000''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.

SEC. 2. REPEAL OF FOREIGN SALES CORPORATION RULES.

    Subpart C of part III of subchapter N of chapter 1 (relating to 
taxation of foreign sales corporations) is hereby repealed.

SEC. 3. TREATMENT OF EXTRATERRITORIAL INCOME.

    (a) In General.--Part III of subchapter B of chapter 1 (relating to 
items specifically excluded from gross income) is amended by inserting 
before section 115 the following new section:

``SEC. 114. EXTRATERRITORIAL INCOME.

    ``(a) Exclusion.--Gross income does not include extraterritorial 
income.
    ``(b) Exception.--Subsection (a) shall not apply to 
extraterritorial income which is not qualifying foreign trade income as 
determined under subpart E of part III of subchapter N.
    ``(c) Disallowance of Deductions.--
            ``(1) In general.--Any deduction of a taxpayer allocated 
        under paragraph (2) to extraterritorial income of the taxpayer 
        excluded from gross income under subsection (a) shall not be 
        allowed.
            ``(2) Allocation.--Any deduction of the taxpayer properly 
        apportioned and allocated to the extraterritorial income 
        derived by the taxpayer from any transaction shall be allocated 
        on a proportionate basis between--
                    ``(A) the extraterritorial income derived from such 
                transaction which is excluded from gross income under 
                subsection (a), and
                    ``(B) the extraterritorial income derived from such 
                transaction which is not so excluded.
    ``(d) Denial of Credits for Certain Foreign Taxes.--Notwithstanding 
any other provision of this chapter, no credit shall be allowed under 
this chapter for any income, war profits, and excess profits taxes paid 
or accrued to any foreign country or possession of the United States 
with respect to extraterritorial income which is excluded from gross 
income under subsection (a).
    ``(e) Extraterritorial Income.--For purposes of this section, the 
term `extraterritorial income' means the gross income of the taxpayer 
attributable to foreign trading gross receipts (as defined in section 
942) of the taxpayer.''.
    (b) Qualifying Foreign Trade Income.--Part III of subchapter N of 
chapter 1 is amended by inserting after subpart D the following new 
subpart:

              ``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.

``SEC. 941. QUALIFYING FOREIGN TRADE INCOME.

    ``(a) Qualifying Foreign Trade Income.--For purposes of this 
subpart and section 114--
            ``(1) In general.--The term `qualifying foreign trade 
        income' means, with respect to any transaction, the amount of 
        gross income which, if excluded, will result in a reduction of 
        the taxable income of the taxpayer from such transaction equal 
        to the greatest of--
                    ``(A) 30 percent of the foreign sale and leasing 
                income derived by the taxpayer from such transaction,
                    ``(B) 1.2 percent of the foreign trading gross 
                receipts derived by the taxpayer from the transaction, 
                or
                    ``(C) 15 percent of the foreign trade income 
                derived by the taxpayer from the transaction.
        In no event shall the amount determined under subparagraph (B) 
        exceed 200 percent of the amount determined under subparagraph 
        (C).
            ``(2) Alternative computation.--A taxpayer may compute its 
        qualifying foreign trade income under a subparagraph of 
        paragraph (1) other than the subparagraph which results in the 
        greatest amount of such income.
            ``(3) Limitation on use of foreign trading gross receipts 
        method.--If any person computes its qualifying foreign trade 
        income from any transaction with respect to any property under 
        paragraph (1)(B), the qualifying foreign trade income of such 
        person (or any related person) with respect to any other 
        transaction involving such property shall be zero.
            ``(4) Rules for marginal costing.--The Secretary shall 
        prescribe regulations setting forth rules for the allocation of 
        expenditures in computing foreign trade income under paragraph 
        (1)(C) in those cases where a taxpayer is seeking to establish 
        or maintain a market for qualifying foreign trade property.
            ``(5) Participation in international boycotts, etc.--Under 
        regulations prescribed by the Secretary, the qualifying foreign 
        trade income of a taxpayer for any taxable year shall be 
        reduced (but not below zero) by the sum of--
                    ``(A) an amount equal to such income multiplied by 
                the international boycott factor determined under 
                section 999, and
                    ``(B) any illegal bribe, kickback, or other payment 
                (within the meaning of section 162(c)) paid by or on 
                behalf of the taxpayer directly or indirectly to an 
                official, employee, or agent in fact of a government.
    ``(b) Foreign Trade Income.--For purposes of this subpart--
            ``(1) In general.--The term `foreign trade income' means 
        the taxable income of the taxpayer attributable to foreign 
        trading gross receipts of the taxpayer.
            ``(2) Special rule for cooperatives.--In any case in which 
        an organization to which part I of subchapter T applies which 
        is engaged in the marketing of agricultural or horticultural 
        products sells qualifying foreign trade property, in computing 
        the taxable income of such cooperative, there shall not be 
        taken into account any deduction allowable under subsection (b) 
        or (c) of section 1382 (relating to patronage dividends, per-
        unit retain allocations, and nonpatronage distributions).
    ``(c) Foreign Sale and Leasing Income.--For purposes of this 
section--
            ``(1) In general.--The term `foreign sale and leasing 
        income' means, with respect to any transaction--
                    ``(A) foreign trade income properly allocable to 
                activities which--
                            ``(i) are described in paragraph (2)(A)(i) 
                        or (3) of section 942(b), and
                            ``(ii) are performed by the taxpayer (or 
                        any person acting under a contract with such 
                        taxpayer) outside the United States, or
                    ``(B) foreign trade income derived by the taxpayer 
                in connection with the lease or rental of qualifying 
                foreign trade property for use by the lessee outside 
                the United States.
            ``(2) Special rules for leased property.--
                    ``(A) Sales income.--The term `foreign sale and 
                leasing income' includes any foreign trade income 
                derived by the taxpayer from the sale of property 
                described in paragraph (1)(B).
                    ``(B) Limitation in certain cases.--Except as 
                provided in regulations, in the case of property 
                which--
                            ``(i) was manufactured, produced, grown, or 
                        extracted by the taxpayer, or
                            ``(ii) was acquired by the taxpayer from a 
                        related person for a price which was not 
                        determined in accordance with the rules of 
                        section 482,
                the amount of foreign trade income which may be treated 
                as foreign sale and leasing income under paragraph 
                (1)(B) or subparagraph (A) of this paragraph with 
                respect to any transaction involving such property 
                shall not exceed the amount which would have been 
                determined if the taxpayer had acquired such property 
                for the price determined in accordance with the rules 
                of section 482.
            ``(3) Special rules.--
                    ``(A) Excluded property.--Foreign sale and leasing 
                income shall not include any income properly allocable 
                to excluded property described in subparagraph (B) of 
                section 943(a)(3) (relating to intangibles).
                    ``(B) Only direct expenses taken into account.--For 
                purposes of this subsection, any expense other than a 
                directly allocable expense shall not be taken into 
                account in computing foreign trade income.

``SEC. 942. FOREIGN TRADING GROSS RECEIPTS.

    ``(a) Foreign Trading Gross Receipts.--
            ``(1) In general.--Except as otherwise provided in this 
        section, for purposes of this subpart, the term `foreign 
        trading gross receipts' means the gross receipts of the 
        taxpayer which are--
                    ``(A) from the sale, exchange, or other disposition 
                of qualifying foreign trade property,
                    ``(B) from the lease or rental of qualifying 
                foreign trade property for use by the lessee outside 
                the United States,
                    ``(C) for services which are related and subsidiary 
                to--
                            ``(i) any sale, exchange, or other 
                        disposition of qualifying foreign trade 
                        property by such taxpayer, or
                            ``(ii) any lease or rental of qualifying 
                        foreign trade property described in 
                        subparagraph (B) by such taxpayer,
                    ``(D) for engineering or architectural services for 
                construction projects located (or proposed for 
                location) outside the United States, or
                    ``(E) for the performance of managerial services 
                for a person other than a related person in furtherance 
                of the production of foreign trading gross receipts 
                described in subparagraph (A), (B), or (C).
        Subparagraph (E) shall not apply to a taxpayer for any taxable 
        year unless at least 50 percent of its foreign trading gross 
        receipts (determined without regard to this sentence) for such 
        taxable year is derived from activities described in 
        subparagraph (A), (B), or (C).
            ``(2) Certain receipts excluded on basis of use; subsidized 
        receipts excluded.--The term `foreign trading gross receipts' 
        shall not include receipts of a taxpayer from a transaction 
        if--
                    ``(A) the qualifying foreign trade property or 
                services--
                            ``(i) are for ultimate use in the United 
                        States, or
                            ``(ii) are for use by the United States or 
                        any instrumentality thereof and such use of 
                        qualifying foreign trade property or services 
                        is required by law or regulation, or
                    ``(B) such transaction is accomplished by a subsidy 
                granted by the government (or any instrumentality 
                thereof) of the country or possession in which the 
                property is manufactured, produced, grown, or 
                extracted.
            ``(3) Election to exclude certain receipts.--The term 
        `foreign trading gross receipts' shall not include gross 
        receipts of a taxpayer from a transaction if the taxpayer 
        elects not to have such receipts taken into account for 
        purposes of this subpart.
    ``(b) Foreign Economic Process Requirements.--
            ``(1) In general.--Except as provided in subsection (c), a 
        taxpayer shall be treated as having foreign trading gross 
        receipts from any transaction only if economic processes with 
        respect to such transaction take place outside the United 
        States as required by paragraph (2).
            ``(2) Requirement.--
                    ``(A) In general.--The requirements of this 
                paragraph are met with respect to the gross receipts of 
                a taxpayer derived from any transaction if--
                            ``(i) such taxpayer (or any person acting 
                        under a contract with such taxpayer) has 
                        participated outside the United States in the 
                        solicitation (other than advertising), the 
                        negotiation, or the making of the contract 
                        relating to such transaction, and
                            ``(ii) the foreign direct costs incurred by 
                        the taxpayer attributable to the transaction 
                        equal or exceed 50 percent of the total direct 
                        costs attributable to the transaction.
                    ``(B) Alternative 85-percent test.--A taxpayer 
                shall be treated as satisfying the requirements of 
                subparagraph (A)(ii) with respect to any transaction 
                if, with respect to each of at least 2 subparagraphs of 
                paragraph (3), the foreign direct costs incurred by 
                such taxpayer attributable to activities described in 
                such subparagraph equal or exceed 85 percent of the 
                total direct costs attributable to activities described 
                in such subparagraph.
                    ``(C) Definitions.--For purposes of this 
                paragraph--
                            ``(i) Total direct costs.--The term `total 
                        direct costs' means, with respect to any 
                        transaction, the total direct costs incurred by 
                        the taxpayer attributable to activities 
                        described in paragraph (3) performed at any 
                        location by the taxpayer or any person acting 
                        under a contract with such taxpayer.
                            ``(ii) Foreign direct costs.--The term 
                        `foreign direct costs' means, with respect to 
                        any transaction, the portion of the total 
                        direct costs which are attributable to 
                        activities performed outside the United States.
            ``(3) Activities relating to qualifying foreign trade 
        property.--The activities described in this paragraph are any 
        of the following with respect to qualifying foreign trade 
        property--
                    ``(A) advertising and sales promotion,
                    ``(B) the processing of customer orders and the 
                arranging for delivery,
                    ``(C) transportation outside the United States in 
                connection with delivery to the customer,
                    ``(D) the determination and transmittal of a final 
                invoice or statement of account or the receipt of 
                payment, and
                    ``(E) the assumption of credit risk.
            ``(4) Economic processes performed by related persons.--A 
        taxpayer shall be treated as meeting the requirements of this 
        subsection with respect to any sales transaction involving any 
        property if any related person has met such requirements in 
        such transaction or any other sales transaction involving such 
        property.
    ``(c) Exception From Foreign Economic Process Requirement.--
            ``(1) In general.--The requirements of subsection (b) shall 
        be treated as met for any taxable year if the foreign trading 
        gross receipts of the taxpayer for such year do not exceed 
        $5,000,000.
            ``(2) Receipts of related persons aggregated.--All related 
        persons shall be treated as one person for purposes of 
        paragraph (1), and the limitation under paragraph (1) shall be 
        allocated among such persons in a manner provided in 
        regulations prescribed by the Secretary.
            ``(3) Special rule for pass-thru entities.--In the case of 
        a partnership, S corporation, or other pass-thru entity, the 
        limitation under paragraph (1) shall apply with respect to the 
        partnership, S corporation, or entity and with respect to each 
        partner, shareholder, or other owner.

``SEC. 943. OTHER DEFINITIONS AND SPECIAL RULES.

    ``(a) Qualifying Foreign Trade Property.--For purposes of this 
subpart--
            ``(1) In general.--The term `qualifying foreign trade 
        property' means property--
                    ``(A) manufactured, produced, grown, or extracted 
                within or outside the United States,
                    ``(B) held primarily for sale, lease, or rental, in 
                the ordinary course of trade or business for direct 
                use, consumption, or disposition outside the United 
                States, and
                    ``(C) not more than 50 percent of the fair market 
                value of which is attributable to--
                            ``(i) articles manufactured, produced, 
                        grown, or extracted outside the United States, 
                        and
                            ``(ii) direct costs for labor (determined 
                        under the principles of section 263A) performed 
                        outside the United States.
        For purposes of subparagraph (C), the fair market value of any 
        article imported into the United States shall be its appraised 
        value, as determined by the Secretary under section 402 of the 
        Tariff Act of 1930 (19 U.S.C. 1401a) in connection with its 
        importation, and the direct costs for labor under clause (ii) 
        do not include costs that would be treated under the principles 
        of section 263A as direct labor costs attributable to articles 
        described in clause (i).
            ``(2) U.S. taxation to ensure consistent treatment.--
        Property which (without regard to this paragraph) is qualifying 
        foreign trade property and which is manufactured, produced, 
        grown, or extracted outside the United States shall be treated 
        as qualifying foreign trade property only if it is 
        manufactured, produced, grown, or extracted by--
                    ``(A) a domestic corporation,
                    ``(B) an individual who is a citizen or resident of 
                the United States,
                    ``(C) a foreign corporation with respect to which 
                an election under subsection (e) (relating to foreign 
                corporations electing to be subject to United States 
                taxation) is in effect, or
                    ``(D) a partnership or other pass-thru entity all 
                of the partners or owners of which are described in 
                subparagraph (A), (B), or (C).
        Except as otherwise provided by the Secretary, tiered 
        partnerships or pass-thru entities shall be treated as 
        described in subparagraph (D) if each of the partnerships or 
        entities is directly or indirectly wholly owned by persons 
        described in subparagraph (A), (B), or (C).
            ``(3) Excluded property.--The term `qualifying foreign 
        trade property' shall not include--
                    ``(A) property leased or rented by the taxpayer for 
                use by any related person,
                    ``(B) patents, inventions, models, designs, 
                formulas, or processes whether or not patented, 
                copyrights (other than films, tapes, records, or 
                similar reproductions, and other than computer software 
                (whether or not patented), for commercial or home use), 
                goodwill, trademarks, trade brands, franchises, or 
                other like property,
                    ``(C) oil or gas (or any primary product thereof),
                    ``(D) products the transfer of which is prohibited 
                or curtailed to effectuate the policy set forth in 
                paragraph (2)(C) of section 3 of Public Law 96-72, or
                    ``(E) any unprocessed timber which is a softwood.
        For purposes of subparagraph (E), the term `unprocessed timber' 
        means any log, cant, or similar form of timber.
            ``(4) Property in short supply.--If the President 
        determines that the supply of any property described in 
        paragraph (1) is insufficient to meet the requirements of the 
        domestic economy, the President may by Executive order 
        designate the property as in short supply. Any property so 
        designated shall not be treated as qualifying foreign trade 
        property during the period beginning with the date specified in 
        the Executive order and ending with the date specified in an 
        Executive order setting forth the President's determination 
        that the property is no longer in short supply.
    ``(b) Other Definitions and Rules.--For purposes of this subpart--
            ``(1) Transaction.--
                    ``(A) In general.--The term `transaction' means--
                            ``(i) any sale, exchange, or other 
                        disposition,
                            ``(ii) any lease or rental, and
                            ``(iii) any furnishing of services.
                    ``(B) Grouping of transactions.--To the extent 
                provided in regulations, any provision of this subpart 
                which, but for this subparagraph, would be applied on a 
                transaction-by-transaction basis may be applied by the 
                taxpayer on the basis of groups of transactions based 
                on product lines or recognized industry or trade usage. 
                Such regulations may permit different groupings for 
                different purposes.
            ``(2) United states defined.--The term `United States' 
        includes the Commonwealth of Puerto Rico. The preceding 
        sentence shall not apply for purposes of determining whether a 
        corporation is a domestic corporation.
            ``(3) Related person.--A person shall be related to another 
        person if such persons are treated as a single employer under 
        subsection (a) or (b) of section 52 or subsection (m) or (o) of 
        section 414, except that determinations under subsections (a) 
        and (b) of section 52 shall be made without regard to section 
        1563(b).
            ``(4) Gross and taxable income.--Section 114 shall not be 
        taken into account in determining the amount of gross income or 
        foreign trade income from any transaction.
    ``(c) Source Rule.--Under regulations, in the case of qualifying 
foreign trade property manufactured, produced, grown, or extracted 
within the United States, the amount of income of a taxpayer from any 
sales transaction with respect to such property which is treated as 
from sources without the United States shall not exceed--
            ``(1) in the case of a taxpayer computing its qualifying 
        foreign trade income under section 941(a)(1)(B), the amount of 
        the taxpayer's foreign trade income which would (but for this 
        subsection) be treated as from sources without the United 
        States if the foreign trade income were reduced by an amount 
        equal to 4 percent of the foreign trading gross receipts with 
        respect to the transaction, and
            ``(2) in the case of a taxpayer computing its qualifying 
        foreign trade income under section 941(a)(1)(C), 50 percent of 
        the amount of the taxpayer's foreign trade income which would 
        (but for this subsection) be treated as from sources without 
        the United States.
    ``(d) Treatment of Withholding Taxes.--
            ``(1) In general.--For purposes of section 114(d), any 
        withholding tax shall not be treated as paid or accrued with 
        respect to extraterritorial income which is excluded from gross 
        income under section 114(a). For purposes of this paragraph, 
        the term `withholding tax' means any tax which is imposed on a 
        basis other than residence and for which credit is allowable 
        under section 901 or 903.
            ``(2) Exception.--Paragraph (1) shall not apply to any 
        taxpayer with respect to extraterritorial income from any 
        transaction if the taxpayer computes its qualifying foreign 
        trade income with respect to the transaction under section 
        941(a)(1)(A).
    ``(e) Election To Be Treated as Domestic Corporation.--
            ``(1) In general.--An applicable foreign corporation may 
        elect to be treated as a domestic corporation for all purposes 
        of this title if such corporation waives all benefits to such 
        corporation granted by the United States under any treaty. No 
        election under section 1362(a) may be made with respect to such 
        corporation.
            ``(2) Applicable foreign corporation.--For purposes of 
        paragraph (1), the term `applicable foreign corporation' means 
        any foreign corporation if--
                    ``(A) such corporation manufactures, produces, 
                grows, or extracts property in the ordinary course of 
                such corporation's trade or business, or
                    ``(B) substantially all of the gross receipts of 
                such corporation are foreign trading gross receipts.
            ``(3) Period of election.--
                    ``(A) In general.--Except as otherwise provided in 
                this paragraph, an election under paragraph (1) shall 
                apply to the taxable year for which made and all 
                subsequent taxable years unless revoked by the 
                taxpayer. Any revocation of such election shall apply 
                to taxable years beginning after such revocation.
                    ``(B) Termination.--If a corporation which made an 
                election under paragraph (1) for any taxable year fails 
                to meet the requirements of subparagraph (A) or (B) of 
                paragraph (2) for any subsequent taxable year, such 
                election shall not apply to any taxable year beginning 
                after such subsequent taxable year.
                    ``(C) Effect of revocation or termination.--If a 
                corporation which made an election under paragraph (1) 
                revokes such election or such election is terminated 
                under subparagraph (B), such corporation (and any 
                successor corporation) may not make such election for 
                any of the 5 taxable years beginning with the first 
                taxable year for which such election is not in effect 
                as a result of such revocation or termination.
            ``(4) Special rules.--
                    ``(A) Requirements.--This subsection shall not 
                apply to an applicable foreign corporation if such 
                corporation fails to meet the requirements (if any) 
                which the Secretary may prescribe to ensure that the 
                taxes imposed by this chapter on such corporation are 
                paid.
                    ``(B) Effect of election, revocation, and 
                termination.--
                            ``(i) Election.--For purposes of section 
                        367, a foreign corporation making an election 
                        under this subsection shall be treated as 
                        transferring (as of the first day of the first 
                        taxable year to which the election applies) all 
                        of its assets to a domestic corporation in 
                        connection with an exchange to which section 
                        354 applies.
                            ``(ii) Revocation and termination.--For 
                        purposes of section 367, if--
                                    ``(I) an election is made by a 
                                corporation under paragraph (1) for any 
                                taxable year, and
                                    ``(II) such election ceases to 
                                apply for any subsequent taxable year,
                such corporation shall be treated as a domestic 
                corporation transferring (as of the 1st day of the 
                first such subsequent taxable year to which such 
                election ceases to apply) all of its property to a 
                foreign corporation in connection with an exchange to 
                which section 354 applies.
                    ``(C) Eligibility for election.--The Secretary may 
                by regulation designate one or more classes of 
                corporations which may not make the election under this 
                subsection.
    ``(f) Rules Relating to Allocations of Qualifying Foreign Trade 
Income From Shared Partnerships.--
            ``(1) In general.--If--
                    ``(A) a partnership maintains a separate account 
                for transactions (to which this subpart applies) with 
                each partner,
                    ``(B) distributions to each partner with respect to 
                such transactions are based on the amounts in the 
                separate account maintained with respect to such 
                partner, and
                    ``(C) such partnership meets such other 
                requirements as the Secretary may by regulations 
                prescribe,
        then such partnership shall allocate to each partner items of 
        income, gain, loss, and deduction (including qualifying foreign 
        trade income) from any transaction to which this subpart 
        applies on the basis of such separate account.
            ``(2) Special rules.--For purposes of this subpart, in the 
        case of a partnership to which paragraph (1) applies--
                    ``(A) any partner's interest in the partnership 
                shall not be taken into account in determining whether 
                such partner is a related person with respect to any 
                other partner, and
                    ``(B) the election under section 942(a)(3) shall be 
                made separately by each partner with respect to any 
                transaction for which the partnership maintains 
                separate accounts for each partner.
    ``(g) Exclusion for Patrons of Agricultural and Horticultural 
Cooperatives.--Any amount described in paragraph (1) or (3) of section 
1385(a)--
            ``(1) which is received by a person from an organization to 
        which part I of subchapter T applies which is engaged in the 
        marketing of agricultural or horticultural products, and
            ``(2) which is allocable to qualifying foreign trade income 
        and designated as such by the organization in a written notice 
        mailed to its patrons during the payment period described in 
        section 1382(d),
shall be treated as qualifying foreign trade income of such person for 
purposes of section 114. The taxable income of the organization shall 
not be reduced under section 1382 by reason of any amount to which the 
preceding sentence applies.
    ``(h) Special Rule for DISCs.--Section 114 shall not apply to any 
taxpayer for any taxable year if, at any time during the taxable year, 
the taxpayer is a member of any controlled group of corporations (as 
defined in section 927(d)(4), as in effect before the date of the 
enactment of this subsection) of which a DISC is a member.''

SEC. 4. TECHNICAL AND CONFORMING AMENDMENTS.

            (1) The second sentence of section 56(g)(4)(B)(i) is 
        amended by inserting before the period ``or under section 
        114''.
            (2) Section 275(a) is amended--
                    (A) by striking ``or'' at the end of paragraph 
                (4)(A), by striking the period at the end of paragraph 
                (4)(B) and inserting ``, or'', and by adding at the end 
                of paragraph (4) the following new subparagraph:
                    ``(C) such taxes are paid or accrued with respect 
                to qualifying foreign trade income (as defined in 
                section 941).''; and
                    (B) by adding at the end the following the 
                following new sentence: ``A rule similar to the rule of 
                section 943(d) shall apply for purposes of paragraph 
                (4)(C).''.
            (3) Paragraph (3) of section 864(e) is amended--
                    (A) by striking ``For purposes of'' and inserting:
                    ``(A) In general.--For purposes of''; and
                    (B) by adding at the end the following new 
                subparagraph:
                    ``(B) Assets producing exempt extraterritorial 
                income.--For purposes of allocating and apportioning 
                any interest expense, there shall not be taken into 
                account any qualifying foreign trade property (as 
                defined in section 943(a)) which is held by the 
                taxpayer for lease or rental in the ordinary course of 
                trade or business for use by the lessee outside the 
                United States (as defined in section 943(b)(2)).''.
            (4) Section 903 is amended by striking ``164(a)'' and 
        inserting ``114, 164(a),''.
            (5) Section 999(c)(1) is amended by inserting 
        ``941(a)(5),'' after ``908(a),''.
            (6) The table of sections for part III of subchapter B of 
        chapter 1 is amended by inserting before the item relating to 
        section 115 the following new item:

                              ``Sec. 114. Extraterritorial income.''.
            (7) The table of subparts for part III of subchapter N of 
        chapter 1 is amended by striking the item relating to subpart E 
        and inserting the following new item:

                              ``Subpart E. Qualifying foreign trade 
                                        income.''.
            (8) The table of subparts for part III of subchapter N of 
        chapter 1 is amended by striking the item relating to subpart 
        C.

SEC. 5. EFFECTIVE DATE.

    (a) In General.--The amendments made by this Act shall apply to 
transactions after September 30, 2000.
    (b) No New FSCs; Termination of Inactive FSCs.--
            (1) No new fscs.--No corporation may elect after September 
        30, 2000, to be a FSC (as defined in section 922 of the 
        Internal Revenue Code of 1986, as in effect before the 
        amendments made by this Act).
            (2) Termination of inactive fscs.--If a FSC has no foreign 
        trade income (as defined in section 923(b) of such Code, as so 
        in effect) for any period of 5 consecutive taxable years 
        beginning after December 31, 2001, such FSC shall cease to be 
        treated as a FSC for purposes of such Code for any taxable year 
        beginning after such period.
    (c) Transition Period for Existing Foreign Sales Corporations.--
            (1) In general.--In the case of a FSC (as so defined) in 
        existence on September 30, 2000, and at all times thereafter, 
        the amendments made by this Act shall not apply to any 
        transaction in the ordinary course of trade or business 
        involving a FSC which occurs--
                    (A) before January 1, 2002; or
                    (B) after December 31, 2001, pursuant to a binding 
                contract--
                            (i) which is between the FSC (or any 
                        related person) and any person which is not a 
                        related person; and
                            (ii) which is in effect on September 30, 
                        2000, and at all times thereafter.
        For purposes of this paragraph, a binding contract shall 
        include a purchase option, renewal option, or replacement 
        option which is included in such contract and which is 
        enforceable against the seller or lessor.
            (2) Election to have amendments apply earlier.--A taxpayer 
        may elect to have the amendments made by this Act apply to any 
        transaction by a FSC or any related person to which such 
        amendments would apply but for the application of paragraph 
        (1). Such election shall be effective for the taxable year for 
        which made and all subsequent taxable years, and, once made, 
        may be revoked only with the consent of the Secretary of the 
        Treasury.
            (3) Exception for old earnings and profits of certain 
        corporations.--
                    (A) In general.--In the case of a foreign 
                corporation to which this paragraph applies--
                            (i) earnings and profits of such 
                        corporation accumulated in taxable years ending 
                        before October 1, 2000, shall not be included 
                        in the gross income of the persons holding 
                        stock in such corporation by reason of section 
                        943(e)(4)(B)(i), and
                            (ii) rules similar to the rules of clauses 
                        (ii), (iii), and (iv) of section 953(d)(4)(B) 
                        shall apply with respect to such earnings and 
                        profits.
                The preceding sentence shall not apply to earnings and 
                profits acquired in a transaction after September 30, 
                2000, to which section 381 applies unless the 
                distributor or transferor corporation was immediately 
                before the transaction a foreign corporation to which 
                this paragraph applies.
                    (B) Existing fscs.--This paragraph shall apply to 
                any controlled foreign corporation (as defined in 
                section 957) if--
                            (i) such corporation is a FSC (as so 
                        defined) in existence on September 30, 2000,
                            (ii) such corporation is eligible to make 
                        the election under section 943(e) by reason of 
                        being described in paragraph (2)(B) of such 
                        section, and
                            (iii) such corporation makes such election 
                        not later than for its first taxable year 
                        beginning after December 31, 2001.
                    (C) Other corporations.--This paragraph shall apply 
                to any controlled foreign corporation (as defined in 
                section 957), and such corporation shall 
                (notwithstanding any provision of section 943(e)) be 
                treated as an applicable foreign corporation for 
                purposes of section 943(e), if--
                            (i) such corporation is in existence on 
                        September 30, 2000,
                            (ii) as of such date, such corporation is 
                        wholly owned (directly or indirectly) by a 
                        domestic corporation (determined without regard 
                        to any election under section 943(e)),
                            (iii) for each of the 3 taxable years 
                        preceding the first taxable year to which the 
                        election under section 943(e) by such 
                        controlled foreign corporation applies--
                                    (I) all of the gross income of such 
                                corporation is subpart F income (as 
                                defined in section 952), including by 
                                reason of section 954(b)(3)(B), and
                                    (II) in the ordinary course of such 
                                corporation's trade or business, such 
                                corporation regularly sold (or paid 
                                commissions) to a FSC which on 
                                September 30, 2000, was a related 
                                person to such corporation,
                            (iv) such corporation has never made an 
                        election under section 922(a)(2) (as in effect 
                        before the date of the enactment of this 
                        paragraph) to be treated as a FSC, and
                            (v) such corporation makes the election 
                        under section 943(e) not later than for its 
                        first taxable year beginning after December 31, 
                        2001.
                The preceding sentence shall cease to apply as of the 
                date that the domestic corporation referred to in 
                clause (ii) ceases to wholly own (directly or 
                indirectly) such controlled foreign corporation.
            (4) Related person.--For purposes of this subsection, the 
        term ``related person'' has the meaning given to such term by 
        section 943(b)(3).
            (5) Section references.--Except as otherwise expressly 
        provided, any reference in this subsection to a section or 
        other provision shall be considered to be a reference to a 
        section or other provision of the Internal Revenue Code of 
        1986, as amended by this Act.
    (d) Special Rules Relating to Leasing Transactions.--
            (1) Sales income.--If foreign trade income in connection 
        with the lease or rental of property described in section 
        927(a)(1)(B) of such Code (as in effect before the amendments 
        made by this Act) is treated as exempt foreign trade income for 
        purposes of section 921(a) of such Code (as so in effect), such 
        property shall be treated as property described in section 
        941(c)(1)(B) of such Code (as added by this Act) for purposes 
        of applying section 941(c)(2) of such Code (as so added) to any 
        subsequent transaction involving such property to which the 
        amendments made by this Act apply.
            (2) Limitation on use of gross receipts method.--If any 
        person computed its foreign trade income from any transaction 
        with respect to any property on the basis of a transfer price 
        determined under the method described in section 925(a)(1) of 
        such Code (as in effect before the amendments made by this 
        Act), then the qualifying foreign trade income (as defined in 
        section 941(a) of such Code, as in effect after such amendment) 
        of such person (or any related person) with respect to any 
        other transaction involving such property (and to which the 
        amendments made by this Act apply) shall be zero.

            Attest:

                                                             Secretary.
106th CONGRESS

  2d Session

                               H. R. 4986

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                               AMENDMENT

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