I

103D CONGRESS

2D SESSION H. R. 3933

To amend the Internal Revenue Code of 1986 to provide that distributions

from a controlled foreign corporation to a United States shareholder

shall be excluded from gross income if at least a portion of the distribution is invested in certain property located in the United States and

in the employment of new employees in the United States.

IN THE HOUSE OF REPRESENTATIVES

MARCH 1, 1994

Ms. SLAUGHTER introduced the following bill; which was referred to the

Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to provide

that distributions from a controlled foreign corporation

to a United States shareholder shall be excluded from

gross income if at least a portion of the distribution

is invested in certain property located in the United

States and in the employment of new employees in the

United States.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,
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1 SECTION 1. EXCLUSION FROM GROSS INCOME FOR DIS2 TRIBUTIONS FROM CONTROLLED FOREIGN

3 CORPORATIONS WHICH ARE INVESTED IN

4 CERTAIN PROPERTY LOCATED IN THE UNIT5 ED STATES OR USED TO HIRE NEW EMPLOY6 EES IN THE UNITED STATES.

7 (a) IN GENERAL.—Part III of subchapter B of chap8 ter 1 of the Internal Revenue Code of 1986 (relating to

9 items specifically excluded from gross income) is amended

10 by redesignating section 137 as section 138 and by insert11 ing after section 136 the following new section:

12 ‘‘SEC. 137. DISTRIBUTIONS FROM CONTROLLED FOREIGN

13 CORPORATIONS WHICH ARE INVESTED IN

14 CERTAIN UNITED STATES PROPERTY OR

15 WHICH ARE USED TO HIRE NEW EMPLOYEES

16 IN THE UNITED STATES.

17 ‘‘(a) EXCLUSION.—The gross income of a United

18 States shareholder of a controlled foreign corporation shall

19 not include the amount of any distribution received during

20 the taxable year by such shareholder from such corpora21 tion.

22 ‘‘(b) MAXIMUM EXCLUSION.—

23 ‘‘(1) IN GENERAL.—The amount distributed

24 from a controlled foreign corporation which is ex25 cluded from a shareholder’s gross income under sub-
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1 section (a) for any taxable year shall not exceed the

2 excess (if any) of—

3 ‘‘(A) the amount equal to such sharehold4 er’s ownership percentage of the excess passive

5 assets of such corporation for its base year,

6 over

7 ‘‘(B) the aggregate amount distributed

8 from such corporation which was excluded from

9 such shareholder’s gross income under sub10 section (a) for all prior taxable years of such

11 shareholder ending on or after the close of the

12 base year of such corporation.

13 ‘‘(2) SHAREHOLDER’S OWNERSHIP PERCENT14 AGE.—For purposes of paragraph (1), a sharehold15 er’s ownership percentage is the percentage of the

16 total combined voting power of all classes of stock

17 entitled to vote in the controlled foreign corporation

18 which the shareholder owns (within the meaning of

19 section 958(a)) or is considered as owning under

20 section 958(b). Such percentage shall be determined

21 as of the close of the base year.

22 ‘‘(3) BASE YEAR.—For purposes of this sub23 section, the base year is the controlled foreign cor24 poration’s first taxable year ending after December

25 31, 1992.
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1 ‘‘(4) LOWER LIMITATION IF REDUCTION IN EX2 CESS PASSIVE ASSETS.—If, for any taxable year of

3 the corporation after the base year, the excess pas4 sive assets of such corporation are less than such ex5 cess passive assets for the base year, then, for pur6 poses of applying this subsection to any taxable year

7 of a United States shareholder ending after the close

8 of such taxable year of the corporation, the limita9 tion under paragraph (1) shall be the lesser of—

10 ‘‘(A) such limitation (determined without

11 regard to this paragraph), or

12 ‘‘(B) such limitation determined as if such

13 taxable year of the corporation were the base

14 year of such corporation.

15 ‘‘(5) EXCESS PASSIVE ASSETS.—For purposes

16 of this subsection, the term ‘excess passive assets’

17 has the meaning given such term by section

18 956A(c).

19 ‘‘(6) PREDECESSORS.—Under regulations pre20 scribed by the Secretary, to the extent necessary to

21 carry out the purposes of this subsection, any ref22 erence to a shareholder shall be treated as including

23 a reference to any predecessor of such shareholder

24 and to any person from whom such shareholder ac-
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1 quired any portion of such shareholder’s stock in

2 such corporation.

3 ‘‘(c) REINVESTMENT REQUIREMENTS.—

4 ‘‘(1) IN GENERAL.—If, as of the close of the re5 investment period with respect to any distribution,

6 the taxpayer fails to meet—

7 ‘‘(A) the investment in property require8 ment of subsection (d), or

9 ‘‘(B) the job creation requirement of sub10 section (e),

11 then the taxpayer’s tax imposed by this chapter for

12 the taxable year in which such reinvestment period

13 ends shall be increased by an amount equal to the

14 recapture amount with respect to such distribution.

15 ‘‘(2) RECAPTURE AMOUNT.—For purposes of

16 paragraph (1), the term ‘recapture amount’ means

17 an amount equal to the sum of—

18 ‘‘(A) the shortfall percentage of the reduc19 tion in the taxpayer’s liability for tax under this

20 chapter which resulted from excluding such dis21 tribution from gross income under subsection

22 (a), plus

23 ‘‘(B) the aggregate amount of interest (de24 termined in the manner provided in subsection
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1 (f)(3)) on the amount determined under sub2 paragraph (A).

3 ‘‘(3) SHORTFALL PERCENTAGE.—For purposes

4 of paragraph (2), the term ‘shortfall percentage’

5 means the greater of—

6 ‘‘(A) the investment in property shortfall

7 percentage, or

8 ‘‘(B) the job creation shortfall percentage.

9 ‘‘(4) INVESTMENT IN PROPERTY SHORTFALL

10 PERCENTAGE.—For purposes of paragraph (3), the

11 term ‘investment in property shortfall percentage’

12 means the percentage which—

13 ‘‘(A) the excess (if any) of—

14 ‘‘(i) an amount equal to 50 percent of

15 the distribution involved, over

16 ‘‘(ii) the amount of qualified invest17 ment made during the reinvestment period

18 which allocable to such distribution, bears

19 to

20 ‘‘(B) the amount described in subpara21 graph (A)(i).

22 ‘‘(5) JOB CREATION SHORTFALL PERCENT23 AGE.—For purposes of paragraph (3), the term ‘job

24 creation shortfall percentage’ means the percentage

25 which—
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1 ‘‘(A) the excess (if any) of—

2 ‘‘(i) an amount equal to 12.5 percent

3 of the distribution involved, over

4 ‘‘(ii) the amount of new employee

5 wages paid during the last taxable year of

6 the reinvestment period allocable to such

7 distribution, bears to

8 ‘‘(B) the amount described in subpara9 graph (A)(i).

10 ‘‘(d) INVESTMENT IN PROPERTY REQUIREMENT.—

11 For purposes of this section—

12 ‘‘(1) REQUIREMENT.—A taxpayer meets the in13 vestment in property requirement of this subsection

14 if the qualified investment of the taxpayer during

15 the reinvestment period (to the extent not taken into

16 account under this paragraph with respect to any

17 prior distribution) is not less than 50 percent of the

18 amount of the distribution.

19 ‘‘(2) QUALIFIED INVESTMENT.—The term

20 ‘qualified investment’ means the sum of—

21 ‘‘(A) the aggregate bases of new qualified

22 property placed in service by the taxpayer, and

23 ‘‘(B) the aggregate cost of used qualified

24 property placed in service by the taxpayer.
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1 Rules similar to the rules of subsections (b) and (c)

2 of section 48 (as in effect on the day before the date

3 of the enactment of the Revenue Reconciliation Act

4 of 1990) shall apply for purposes of this paragraph.

5 ‘‘(3) QUALIFIED PROPERTY.—For purposes of

6 paragraph (2), the term ‘qualified property’

7 means—

8 ‘‘(A) section 38 property (as defined by

9 section 48(a) as in effect on the day before the

10 date of the enactment of the Omnibus Budget

11 Reconciliation Act of 1990), and

12 ‘‘(B) real property (not described in sub13 paragraph (A)) used as an integral part of

14 manufacturing facility (as defined in section

15 144(a)(12)(C)).

16 The term ‘qualified property’ shall not include any

17 property if the taxpayer is the lessor of the property.

18 ‘‘(4) RECAPTURE IF PROPERTY DISPOSED OF,

19 ETC.—

20 ‘‘(A) IN GENERAL.—If any qualified prop21 erty is disposed of, or otherwise ceases to be

22 qualified property with respect to the taxpayer,

23 before the close of the recapture period, then

24 the taxpayer’s tax imposed by this chapter for

25 the taxable year in which such disposition or
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1 cessation occurs shall be increased by the sum

2 of—

3 ‘‘(i) the recapture percentage of such

4 property’s share of the tax benefit under

5 this section, plus

6 ‘‘(ii) the aggregate amount of interest

7 (determined in the manner provided in

8 subsection (f)(3)) on the amount deter9 mined under subparagraph (A).

10 ‘‘(B) DEFINITIONS.—For purposes of this

11 paragraph—

12 ‘‘(i) RECAPTURE PERIOD.—The term

13 ‘recapture period’ means, with respect to

14 any property, the period consisting of the

15 first full year after the property is placed

16 in service and—

17 ‘‘(I) the 2 succeeding full years

18 in the case of 3-year property (within

19 the meaning of section 168),

20 ‘‘(II) the 4 succeeding full years

21 in the case of section 38 property

22 other than 3-year property, and

23 ‘‘(III) the 9 succeeding full years

24 in the case of property referred to in

25 paragraph (2)(B).
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1 ‘‘(ii) RECAPTURE PERCENTAGE.—The

2 term ‘recapture percentage’ means the per3 centage determined under section

4 50(a)(1)(B); except that—

5 ‘‘(I) in the case of 3-year prop6 erty, the percentage set forth in

7 clause (ii) of the table contained in

8 paragraph (1)(B) shall be 66 percent,

9 the percentage set forth in clause (iii)

10 of such table shall be 33 percent, and

11 clauses (iv) and (v) of such table shall

12 not apply, and

13 ‘‘(II) in the case of property re14 ferred to in paragraph (2)(B), the

15 percentage shall be 100 percent for

16 the first full year of the recapture pe17 riod and, for each full year thereafter,

18 shall be 10 percentage points less

19 than the recapture percentage for the

20 prior year.

21 ‘‘(C) PROPERTY’S SHARE OF TAX BENE22 FIT.—A property’s share of the tax benefit

23 under this section shall be—

24 ‘‘(i) an amount which bears the same

25 ratio to the reduction in the taxpayer’s li-
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1 ability for tax under this chapter which re2 sulted from excluding the distribution in3 volved from gross income under subsection

4 (a), as

5 ‘‘(ii) the unadjusted basis of such

6 property bears to the aggregate unadjusted

7 bases of all qualified property placed in

8 service during the reinvestment period with

9 respect to such distribution.

10 ‘‘(e) JOB CREATION REQUIREMENT.—For purposes

11 of this section—

12 ‘‘(1) REQUIREMENT.—A taxpayer meets the job

13 creation requirement of this subsection if the new

14 employee wages paid by the taxpayer during the last

15 taxable year of the reinvestment period (to the ex16 tent not taken into account under this paragraph

17 with respect to any prior distribution) is not less

18 than 12.5 percent of the amount of the distribution.

19 ‘‘(2) NEW EMPLOYEE WAGES.—The term ‘new

20 employee wages’ means, with respect to any distribu21 tion, wages paid to employees—

22 ‘‘(A) who are first hired after the date of

23 such distribution, and
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1 ‘‘(B) whose employment represents an in2 crease in the aggregate number of employees of

3 the taxpayer in the United States.

4 ‘‘(3) WAGES.—The term ‘wages’ has the same

5 meaning as when used in section 51.

6 ‘‘(4) INCREASED EMPLOYMENT MUST BE MAIN7 TAINED FOR 4 YEARS.—

8 ‘‘(A) IN GENERAL.—If for any taxable year

9 in the employment maintenance period (here10 after in this paragraph referred to as the ‘rede11 termination year’) the new employee wages with

12 respect to any distribution are less than the

13 new employee wages for the last taxable year of

14 the reinvestment period with respect to such

15 distribution, the taxpayer’s tax imposed by this

16 chapter for the redetermination year shall be

17 increased by an amount equal to the adjusted

18 recapture amount with respect to such distribu19 tion.

20 ‘‘(B) ADJUSTED RECAPTURE AMOUNT.—

21 For purposes of subparagraph (A), the term

22 ‘adjusted recapture amount’ means an amount

23 equal to the sum of—

24 ‘‘(i) the excess (if any) of—
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1 ‘‘(I) the job creation shortfall

2 percentage of the reduction in the tax3 payer’s liability for tax under this

4 chapter which resulted from excluding

5 such distribution from gross income

6 under subsection (a) (determined for

7 the redetermination year), over

8 ‘‘(II) the amount determined

9 under subsection (c)(2)(A) (increased

10 by any prior increase in tax under this

11 paragraph with respect to such dis12 tribution), plus

13 ‘‘(ii) the aggregate amount of interest

14 (determined in the manner provided in

15 subsection (f)(3)) on the excess determined

16 under clause (i).

17 ‘‘(C) EMPLOYMENT MAINTENANCE PE18 RIOD.—For purposes of this paragraph, the

19 term ‘employment maintenance period’ means

20 any period of 4 consecutive taxable years se21 lected by the taxpayer so long as at least 1 of

22 such taxable years is during the reinvestment

23 period.

24 ‘‘(f) OTHER DEFINITIONS AND SPECIAL RULES.—

25 For purposes of this section—
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1 ‘‘(1) REINVESTMENT PERIOD.—The term ‘rein2 vestment period’ means, with respect to any dis3 tribution received during a taxable year, such tax4 able year and the 4 succeeding taxable years.

5 ‘‘(2) UNITED STATES SHAREHOLDER; CON6 TROLLED FOREIGN CORPORATION.—The terms

7 ‘United States shareholder’ and ‘controlled foreign

8 corporation’ have the respective meanings given such

9 terms by sections 951 and 957.

10 ‘‘(3) RULES RELATING TO DETERMINATION OF

11 INTEREST.—

12 ‘‘(A) IN GENERAL.—The amount of inter13 est referred to in subsections (c)(2), (d)(4), and

14 (e)(3) for any taxable year shall be determined

15 for the period—

16 ‘‘(i) beginning on the due date for

17 taxable year during which the distribution

18 involved was made, and

19 ‘‘(ii) ending on the due date for the

20 taxable year for which the increase in tax

21 is being determined,

22 by using the rates and method applicable under

23 section 6621 for underpayment of tax for such

24 period.
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1 ‘‘(B) DUE DATE.—For purposes of sub2 paragraph (A), the term ‘due date’ means the

3 date prescribed by law (determined without re4 gard to extensions) for filing the return of the

5 tax imposed by this chapter for the taxable

6 year.

7 ‘‘(C) TREATMENT OF INCREASE IN TAX

8 ATTRIBUTABLE TO INTEREST AS INTEREST.—

9 Any increase in tax imposed by this chapter for

10 a taxable year by reason of this section to the

11 extent attributable to an amount referred to in

12 subsection (c)(2)(B), (d)(4)(A)(ii), or (e)(3)(B)

13 shall be treated as interest paid under section

14 6601 on the due date for such taxable year.

15 ‘‘(4) CONTROLLED GROUPS.—All taxpayers

16 treated as a single employer under subsection (a) or

17 (b) of section 52 shall be treated as a single tax18 payer.

19 ‘‘(g) BASIS ADJUSTMENT.—

20 ‘‘(1) IN GENERAL.—For purposes of this sub21 title, the basis of any qualified property placed in

22 service during any taxable year for which an amount

23 was excluded from gross income under this section

24 shall be reduced by an amount equal to such prop-
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1 erty’s share of such exclusion (determined under

2 subsection (d)(4)).

3 ‘‘(2) CERTAIN DISPOSITIONS.—If there is an in4 crease in tax by reason of this section for any tax5 able year, proper adjustments shall be made under

6 regulations prescribed by the Secretary with respect

7 to any property the basis of which was reduced

8 under paragraph (1).’’

9 (b) TECHNICAL AMENDMENT.—Subsection (a) of

10 section 1016 of such Code is amended by striking ‘‘and’’

11 at the end of paragraph (24), by striking the period at

12 the end of paragraph (25) and inserting ‘‘, and’’, and by

13 adding at the end thereof the following new paragraph:

14 ‘‘(26) to the extent provided in section 137(g).’’

15 (c) CLERICAL AMENDMENT.—The table of sections

16 for part III of subchapter B of chapter 1 of such Code

17 is amended by striking the last item and inserting the fol18 lowing new items:

‘‘Sec. 137. Distributions from controlled foreign corporations

which are invested in certain United States property or which are used to hire new employees in the

United States.

‘‘Sec. 138. Cross references to other Acts.’’

19 (d) EFFECTIVE DATE.—The amendments made by

20 this section shall apply to distributions received after the

21 date of the enactment of this Act in taxable years ending

22 after such date.
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