PUBLIC LAW 106–519—NOV. 15, 2000 114 STAT. 2423

Public Law 106–519

106th Congress

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.

Be it enacted by the Senate and House of Representatives of

the United States of America in Congress assembled,

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to taxation of foreign sales corporations) is hereby repealed.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.

26 USC 921–927.

26 USC 1 note.

FSC Repeal and

Extraterritorial

Income Exclusion

Act of 2000.

Nov. 15, 2000

[H.R. 4986]

114 STAT. 2424 PUBLIC LAW 106–519—NOV. 15, 2000

‘‘(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—

Regulations.

PUBLIC LAW 106–519—NOV. 15, 2000 114 STAT. 2425

‘‘(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

114 STAT. 2426 PUBLIC LAW 106–519—NOV. 15, 2000

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.—

PUBLIC LAW 106–519—NOV. 15, 2000 114 STAT. 2427

‘‘(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 two 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.

114 STAT. 2428 PUBLIC LAW 106–519—NOV. 15, 2000

‘‘(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

Applicability.

Regulations.

PUBLIC LAW 106–519—NOV. 15, 2000 114 STAT. 2429

‘‘(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

114 STAT. 2430 PUBLIC LAW 106–519—NOV. 15, 2000

(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

Applicability.

PUBLIC LAW 106–519—NOV. 15, 2000 114 STAT. 2431

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,

114 STAT. 2432 PUBLIC LAW 106–519—NOV. 15, 2000

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 HORTI- CULTURAL 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

26 USC 864.

26 USC 275.

26 USC 56.

PUBLIC LAW 106–519—NOV. 15, 2000 114 STAT. 2433

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

Applicability.

26 USC 941 note.

26 USC 999.

26 USC 903.

114 STAT. 2434 PUBLIC LAW 106–519—NOV. 15, 2000

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

Applicability.

Applicability.

PUBLIC LAW 106–519—NOV. 15, 2000 114 STAT. 2435

LEGISLATIVE HISTORY—H.R. 4986:

HOUSE REPORTS: No. 106–845 (Comm. on Ways and Means).

SENATE REPORTS: No. 106–416 (Comm. on Finance).

CONGRESSIONAL RECORD, Vol. 146 (2000):

Sept. 12, 13, considered and passed House.

Nov. 1, considered and passed Senate, amended.

Nov. 14, House concurred in Senate amendment.

WEEKLY COMPILATION OF PRESIDENTIAL DOCUMENTS, Vol. 36 (2000):

Nov. 15, Presidential statement.

Æ

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.

Approved November 15, 2000.