II

107TH CONGRESS

1ST SESSION S. 1475

To amend the Internal Revenue Code of 1986 to provide an appropriate

and permanent tax structure for investments in the Commonwealth of

Puerto Rico and the possessions of the United States, and for other

purposes.

IN THE SENATE OF THE UNITED STATES

SEPTEMBER 26, 2001

Mr. BREAUX (for himself and Mr. HATCH) introduced the following bill; which

was read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to provide

an appropriate and permanent tax structure for investments in the Commonwealth of Puerto Rico and the

possessions of the United States, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

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

5 ‘‘Economic Revitalization Tax Act of 2001’’.

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment
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1 to, or repeal of, a section or other provision, the reference

2 shall be considered to be made to a section or other provi3 sion of the Internal Revenue Code of 1986.

4 SEC. 2. CERTAIN INVESTMENTS IN UNITED STATES PROP5 ERTY BY QUALIFIED POSSESSIONS CORPORA6 TIONS.

7 (a) IN GENERAL.—Section 956 (relating to invest8 ment of earnings in United States property) is amended

9 by redesignating subsection (e) as subsection (f) and in10 serting after subsection (d) the following:

11 ‘‘(e) SEPARATE APPLICATION OF SECTION TO QUALI12 FIED POSSESSIONS CORPORATIONS.—

13 ‘‘(1) IN GENERAL.—In the case of a qualified

14 possessions corporation, this section shall be applied

15 separately with respect to such corporation’s quali16 fied possessions income.

17 ‘‘(2) DEFINITIONS.—For purposes of this

18 section—

19 ‘‘(A) QUALIFIED POSSESSIONS CORPORA20 TION.—The term ‘qualified possessions corpora21 tion’ means any foreign corporation which is a

22 controlled foreign corporation and is created or

23 organized under the laws of the Commonwealth

24 of Puerto Rico or a possession of the United

25 States.
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1 ‘‘(B) QUALIFIED POSSESSIONS INCOME.—

2 The term ‘qualified possessions income’ means

3 income earned by a qualified possessions cor4 poration in taxable years beginning after De5 cember 31, 2001, from sources outside the

6 United States, from—

7 ‘‘(i) the active conduct of a trade or

8 business within the Commonwealth of

9 Puerto Rico or a possession of the United

10 States, or

11 ‘‘(ii) the sale or exchange of substan12 tially all of the assets used in the active

13 conduct of such a trade or business.

14 ‘‘(3) TAXABLE YEARS TO WHICH SUBSECTION

15 IS APPLICABLE.—This subsection shall be applicable

16 with respect to any taxable year of a qualified pos17 sessions corporation beginning after December 31,

18 2001, for which an election under section 245(d) is

19 not in effect.’’.

20 (b) CERTAIN INVESTMENTS IN UNITED STATES

21 PROPERTY.—Section 951(a) (relating to amounts in22 cluded in gross income of United States shareholders) is

23 amended by adding at the end the following:

24 ‘‘(4) CERTAIN INVESTMENTS IN UNITED

25 STATES PROPERTY.—
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1 ‘‘(A) IN GENERAL.—The amount deter2 mined under paragraph (1)(B) with respect to

3 a qualified possessions corporation (as defined

4 in section 956(e)(2)(A)) shall be reduced (but

5 not below zero) by the lesser of—

6 ‘‘(i) 90 percent of the amount deter7 mined under section 956(e) with respect to

8 such corporation for the taxable year, or

9 ‘‘(ii) 90 percent of such corporation’s

10 cumulative qualified possessions income (as

11 defined in section 956(e)(2)(B)), reduced

12 by amounts (if any) previously allowed as

13 a deduction under section 245(d).

14 ‘‘(B) SUCCEEDING TAXABLE YEARS.—In

15 applying this section and section 956 to any

16 taxable year, any amount not included in the

17 gross income of a United States shareholder of

18 a qualified possessions corporation in a prior

19 taxable year solely by reason of the application

20 of subparagraph (A) shall be treated as if it

21 had been so included in the gross income of the

22 United States shareholder in such prior taxable

23 year.’’.
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1 SEC. 3. DIVIDENDS RECEIVED DEDUCTION WITH RESPECT

2 TO CERTAIN DISTRIBUTIONS BY QUALIFIED

3 POSSESSIONS CORPORATIONS.

4 Section 245 (relating to dividends received from cer5 tain foreign corporations) is amended by adding at the end

6 the following:

7 ‘‘(d) DIVIDENDS FROM QUALIFIED POSSESSIONS

8 CORPORATIONS.—

9 ‘‘(1) GENERAL RULE.—In the case of a divi10 dend described in paragraph (2) received by a do11 mestic corporation from an electing qualified posses12 sions corporation (as defined in section

13 956(e)(2)(A)), there shall be allowed as a deduction

14 an amount equal to 85 percent of such dividend.

15 ‘‘(2) ELIGIBLE DIVIDENDS.—A dividend is de16 scribed in this paragraph if such dividend is paid out

17 of that portion of the earnings and profits of a

18 qualified possessions corporation which does not ex19 ceed such corporation’s accumulated qualified pos20 sessions income (as defined in section 956(e)(2)(B)).

21 ‘‘(3) ELECTIONS.—

22 ‘‘(A) IN GENERAL.—An election under this

23 subsection shall be made by the qualified pos24 sessions corporation at such time and in such

25 manner as the Secretary shall prescribe.
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1 ‘‘(B) YEARS FOR WHICH ELECTION IS EF2 FECTIVE.—An election under this subsection

3 shall be effective for the taxable year of the

4 qualified possessions corporation beginning

5 after December 31, 2001, for which such elec6 tion is made and for all succeeding taxable

7 years of such corporation, unless—

8 ‘‘(i) the corporation ceases to be a

9 qualified possessions corporation, or

10 ‘‘(ii) the corporation revokes the elec11 tion.

12 ‘‘(C) NEW ELECTION BY QUALIFIED POS13 SESSIONS CORPORATION FOLLOWING TERMI14 NATION.—If a qualified possessions corporation

15 has made an election under this subsection and

16 if such election has been terminated under sub17 paragraph (B), such corporation (and any suc18 cessor qualified possessions corporation) shall

19 not be eligible to make an election under this

20 subsection for any taxable year before the 5th

21 taxable year which begins after the 1st taxable

22 year for which such termination is effective, un23 less the Secretary consents to such election.’’.
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1 SEC. 4. SAFE HARBOR RULE FOR CERTAIN TRANSFERS OR

2 LICENSES OF INTANGIBLE PROPERTY TO A

3 QUALIFIED POSSESSIONS CORPORATION.

4 Section 367 (relating to foreign corporations) is

5 amended by adding at the end the following:

6 ‘‘(g) SAFE HARBOR FOR CERTAIN TRANSFERS OR

7 LICENSES OF INTANGIBLE PROPERTY.—

8 ‘‘(1) GENERAL RULE.—If subsection

9 (d)(2)(A)(ii) or section 482 is otherwise applicable to

10 the transfer or license of qualified intangible prop11 erty to an electing qualified possessions corporation

12 (as defined in section 956(e)(2)(A)), the require13 ments of subsection (d)(2)(A)(ii) or section 482, as

14 the case may be, shall be treated as satisfied for all

15 purposes under this subtitle for any taxable year for

16 which the electing qualified possessions corporation

17 computes its qualified possessions income (as defined

18 in section 956(e)(2)(B)) with respect to its products

19 or services involving the use of the qualified intan20 gible property in accordance with the same method

21 specified in section 936(h) (as in effect on the date

22 of the enactment of this subsection) which was used

23 by the domestic corporation referred to in paragraph

24 (2)(A) for its last taxable year beginning before the

25 transfer or license to the qualified possessions cor26 poration.
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1 ‘‘(2) DEFINITIONS.—For purposes of this

2 subsection—

3 ‘‘(A) QUALIFIED INTANGIBLE PROP4 ERTY.—The term ‘qualified intangible property’

5 means any intangible property owned by a do6 mestic corporation on the date of the enactment

7 of this section, but only if such property was—

8 ‘‘(i) developed or purchased by the do9 mestic corporation, and

10 ‘‘(ii) used directly in the active con11 duct by the domestic corporation of a trade

12 or business for which credits were allowed

13 under either section 30A or 936 for the

14 taxable year within which the transfer or

15 license occurs.

16 ‘‘(B) INTANGIBLE PROPERTY.—The term

17 ‘intangible property’ means any intangible prop18 erty (within the meaning of subsection (d)) but

19 only if such property was used directly in con20 nection with a manufacturing or similar process

21 within the taxable year referred to in paragraph

22 (2)(A)(ii).

23 ‘‘(3) ELECTION.—

24 ‘‘(A) IN GENERAL.—An election under this

25 subsection shall be made by the qualified pos-
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1 sessions corporation, in such manner as the

2 Secretary may prescribe by regulations, prior to

3 the 15th day of the 3d month following the

4 close of the first taxable year of such corpora5 tion beginning after December 31, 2001.

6 ‘‘(B) YEARS FOR WHICH EFFECTIVE.—An

7 election under this subsection shall apply to the

8 taxable year for which made and all subsequent

9 years unless—

10 ‘‘(i) the foreign corporation which is

11 the transferee or licensee ceases to be a

12 qualified possessions corporation, or

13 ‘‘(ii) the Secretary consents to the

14 revocation of the election.’’.

15 SEC. 5. TECHNICAL AND CONFORMING CHANGES.

16 (a) IMPUTED INTEREST.—Notwithstanding any pro17 vision of the Internal Revenue Code of 1986, no interest

18 shall be imputed for any purpose under such Code with

19 respect to any obligation issued to a qualified possessions

20 corporation (as defined in section 956(e)(2)(A) of such

21 Code, as added by section 2(a)) as part of a transaction

22 to which section 956(e) of such Code (as so added) is ap23 plicable.

24 (b) CONSTRUCTIVE DIVIDENDS.—Notwithstanding

25 any provision of the Internal Revenue Code of 1986, no
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1 amount of United States property held by a qualified pos2 sessions corporation (as defined in such section 956(e))

3 pursuant to sections 951(a)(4) and 956(e) of such Code

4 shall be treated as a dividend for any purpose under such

5 Code.

6 SEC. 6. EFFECTIVE DATE.

7 The amendments made by this Act shall take effect

8 on the date of the enactment of this Act.

Æ