```

[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[S. 2086 Introduced in Senate (IS)]

104th CONGRESS
  2d Session
                                S. 2086

 To amend the Internal Revenue Code of 1986 to simplify certain rules 
 relating to the taxation of United States business operating abroad, 
                        and for other purposes.

_______________________________________________________________________

                   IN THE SENATE OF THE UNITED STATES

                           September 17, 1996

    Mr. Pressler (for himself, Mr. Lott, Mr. Baucus, Mr. Hatch, Mr. 
  D'Amato, Mr. Nickles, Mr. Gorton, Mr. Hatfield, Mr. Burns, and Mrs. 
    Murray) 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 simplify certain rules 
 relating to the taxation of United States business operating abroad, 
                        and for other purposes.

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

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``International Tax 
Simplification for American Competitiveness Act''.
    (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.
    (c) Table of Contents.--The table of contents for this Act is as 
follows:

Sec. 1. Short title; amendment of 1986 Code; table of contents.
       TITLE I--TREATMENT OF PASSIVE FOREIGN INVESTMENT COMPANIES

Sec. 101. United States shareholders of controlled foreign corporations 
                            not subject to PFIC inclusion.
Sec. 102. Election of mark to market for marketable stock in passive 
                            foreign investment company.
Sec. 103. Modification to definition of passive income.
Sec. 104. Modifications to asset valuation test.
Sec. 105. Effective date.
         TITLE II--TREATMENT OF CONTROLLED FOREIGN CORPORATIONS

Sec. 201. Gain on certain stock sales by controlled foreign 
                            corporations treated as dividends.
Sec. 202. Miscellaneous modifications to subpart F.
Sec. 203. Indirect foreign tax credit allowed for certain lower tier 
                            companies.
Sec. 204. Exemption for active financing income.
Sec. 205. Repeal of separate foreign tax credit limitation for 
                            noncontrolled section 902 corporations.
Sec. 206. Countries in European Union treated as a single country under 
                            same country exceptions.
Sec. 207. Expansion of de minimis rule under subpart F.
Sec. 208. Subpart F earnings and profits determined under generally 
                            accepted accounting principles.
Sec. 209. Affiliated foreign insurance companies may offset losses.
                      TITLE III--OTHER PROVISIONS

Sec. 301. Exchange rate used in translating foreign taxes.
Sec. 302. Election to use simplified section 904 limitation for 
                            alternative minimum tax.
Sec. 303. Modification of section 1491.
Sec. 304. Modification of section 367(b).
Sec. 305. Increase in filing thresholds for returns as to organization 
                            of foreign corporations and acquisitions of 
                            stock in such corporations.
Sec. 306. Application of uniform capitalization rules to foreign 
                            persons.
Sec. 307. Extension of period to which excess foreign taxes may be 
                            carried.
Sec. 308. Recharacterization of overall domestic loss.
Sec. 309. Treatment of nonresident aliens engaged in international 
                            transportation services.
Sec. 310. Export property of FSC to include computer software.
Sec. 311. Special rules relating to financial services income.
Sec. 312. United States property not to include certain assets acquired 
                            by dealers in ordinary course of trade or 
                            business.

       TITLE I--TREATMENT OF PASSIVE FOREIGN INVESTMENT COMPANIES

SEC. 101. UNITED STATES SHAREHOLDERS OF CONTROLLED FOREIGN CORPORATIONS 
              NOT SUBJECT TO PFIC INCLUSION.

    Section 1297, as redesignated by section 102, is amended by adding 
at the end the following new subsection:
    ``(e) Exception for United States Shareholders of Controlled 
Foreign Corporations.--
            ``(1) In general.--For purposes of this part, a corporation 
        shall not be treated with respect to a shareholder as a passive 
        foreign investment company during the qualified portion of such 
        shareholder's holding period with respect to stock in such 
        corporation.
            ``(2) Qualified portion.--For purposes of this subsection, 
        the term `qualified portion' means the portion of the 
        shareholder's holding period--
                    ``(A) which is after December 31, 1996, and
                    ``(B) during which the shareholder is a United 
                States shareholder (as defined in section 951(b)) of 
                the corporation and the corporation is a controlled 
                foreign corporation.
            ``(3) New holding period if qualified portion ends.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), if the qualified portion of a 
                shareholder's holding period with respect to any stock 
                ends after December 31, 1996, solely for purposes of 
                this part, the shareholder's holding period with 
                respect to such stock shall be treated as beginning as 
                of the first day following such period.
                    ``(B) Exception.--Subparagraph (A) shall not apply 
                if such stock was, with respect to such shareholder, 
                stock in a passive foreign investment company at any 
                time before the qualified portion of the shareholder's 
                holding period with respect to such stock and no 
                election under section 1298(b)(1) is made.''

SEC. 102. ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK IN PASSIVE 
              FOREIGN INVESTMENT COMPANY.

    (a) In General.--Part VI of subchapter P of chapter 1 is amended by 
redesignating subpart C as subpart D, by redesignating sections 1296 
and 1297 as sections 1297 and 1298, respectively, and by inserting 
after subpart B the following new subpart:

      ``Subpart C--Election of Mark to Market for Marketable Stock

                              ``Sec. 1296. Election of mark to market 
                                        for marketable stock.

``SEC. 1296. ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK.

    ``(a) General Rule.--In the case of marketable stock in a passive 
foreign investment company which is owned (or treated under subsection 
(g) as owned) by a United States person at the close of any taxable 
year of such person, at the election of such person--
            ``(1) If the fair market value of such stock as of the 
        close of such taxable year exceeds its adjusted basis, such 
        United States person shall include in gross income for such 
        taxable year an amount equal to the amount of such excess.
            ``(2) If the adjusted basis of such stock exceeds the fair 
        market value of such stock as of the close of such taxable 
        year, such United States person shall be allowed a deduction 
        for such taxable year equal to the lesser of--
                    ``(A) the amount of such excess, or
                    ``(B) the unreversed inclusions with respect to 
                such stock.
    ``(b) Basis Adjustments.--
            ``(1) In general.--The adjusted basis of stock in a passive 
        foreign investment company--
                    ``(A) shall be increased by the amount included in 
                the gross income of the United States person under 
                subsection (a)(1) with respect to such stock, and
                    ``(B) shall be decreased by the amount allowed as a 
                deduction to the United States person under subsection 
                (a)(2) with respect to such stock.
            ``(2) Special rule for stock constructively owned.--In the 
        case of stock in a passive foreign investment company which the 
        United States person is treated as owning under subsection 
        (g)--
                    ``(A) the adjustments under paragraph (1) shall 
                apply to such stock in the hands of the person actually 
                holding such stock but only for purposes of determining 
                the subsequent treatment under this chapter of the 
                United States person with respect to such stock, and
                    ``(B) similar adjustments shall be made to the 
                adjusted basis of the property by reason of which the 
                United States person is treated as owning such stock.
    ``(c) Character and Source Rules.--
            ``(1) Ordinary treatment.--
                    ``(A) Gain.--Any amount included in gross income 
                under subsection (a)(1), and any gain on the sale or 
                other disposition of marketable stock in a passive 
                foreign investment company (with respect to which an 
                election under this section is in effect), shall be 
                treated as ordinary income.
                    ``(B) Loss.--Any--
                            ``(i) amount allowed as a deduction under 
                        subsection (a)(2), and
                            ``(ii) loss on the sale or other 
                        disposition of marketable stock in a passive 
                        foreign investment company (with respect to 
                        which an election under this section is in 
                        effect) to the extent that the amount of such 
                        loss does not exceed the unreversed inclusions 
                        with respect to such stock,
                shall be treated as an ordinary loss. The amount so 
                treated shall be treated as a deduction allowable in 
                computing adjusted gross income.
            ``(2) Source.--The source of any amount included in gross 
        income under subsection (a)(1) (or allowed as a deduction under 
        subsection (a)(2)) shall be determined in the same manner as if 
        such amount were gain or loss (as the case may be) from the 
        sale of stock in the passive foreign investment company.
    ``(d) Unreversed Inclusions.--For purposes of this section, the 
term `unreversed inclusions' means, with respect to any stock in a 
passive foreign investment company, the excess (if any) of--
            ``(1) the amount included in gross income of the taxpayer 
        under subsection (a)(1) with respect to such stock for prior 
        taxable years, over
            ``(2) the amount allowed as a deduction under subsection 
        (a)(2) with respect to such stock for prior taxable years.
The amount referred to in paragraph (1) shall include any amount which 
would have been included in gross income under subsection (a)(1) with 
respect to such stock for any prior taxable year but for section 1291.
    ``(e) Marketable Stock.--For purposes of this section--
            ``(1) In general.--The term `marketable stock' means--
                    ``(A) any stock which is regularly traded on--
                            ``(i) a national securities exchange which 
                        is registered with the Securities and Exchange 
                        Commission or the national market system 
                        established pursuant to section 11A of the 
                        Securities and Exchange Act of 1934, or
                            ``(ii) any exchange or other market which 
                        the Secretary determines has rules adequate to 
                        carry out the purposes of this part,
                    ``(B) to the extent provided in regulations, stock 
                in any foreign corporation which is comparable to a 
                regulated investment company and which offers for sale 
                or has outstanding any stock of which it is the issuer 
                and which is redeemable at its net asset value, and
                    ``(C) to the extent provided in regulations, any 
                option on stock described in subparagraph (A) or (B).
            ``(2) Special rule for regulated investment companies.--In 
        the case of any regulated investment company which is offering 
        for sale or has outstanding any stock of which it is the issuer 
        and which is redeemable at its net asset value, all stock in a 
        passive foreign investment company which it owns directly or 
        indirectly shall be treated as marketable stock for purposes of 
        this section. Except as provided in regulations, similar 
        treatment as marketable stock shall apply in the case of any 
        other regulated investment company which publishes net asset 
        valuations at least annually.
    ``(f) Treatment of Controlled Foreign Corporations Which Are 
Shareholders in Passive Foreign Investment Companies.--In the case of a 
foreign corporation which is a controlled foreign corporation and which 
owns (or is treated under subsection (g) as owning) stock in a passive 
foreign investment company--
            ``(1) this section (other than subsection (c)(2)) shall 
        apply to such foreign corporation in the same manner as if such 
        corporation were a United States person, and
            ``(2) for purposes of subpart F of part III of subchapter 
        N--
                    ``(A) any amount included in gross income under 
                subsection (a)(1) shall be treated as foreign personal 
                holding company income described in section 
                954(c)(1)(A), and
                    ``(B) any amount allowed as a deduction under 
                subsection (a)(2) shall be treated as a deduction 
                allocable to foreign personal holding company income so 
                described.
    ``(g) Stock Owned Through Certain Foreign Entities.--Except as 
provided in regulations--
            ``(1) In general.--For purposes of this section, stock 
        owned, directly or indirectly, by or for a foreign partnership 
        or foreign trust or foreign estate shall be considered as being 
        owned proportionately by its partners or beneficiaries. Stock 
        considered to be owned by a person by reason of the application 
        of the preceding sentence shall, for purposes of applying such 
        sentence, be treated as actually owned by such person.
            ``(2) Treatment of certain dispositions.--In any case in 
        which a United States person is treated as owning stock in a 
        passive foreign investment company by reason of paragraph (1)--
                    ``(A) any disposition by the United States person 
                or by any other person which results in the United 
                States person being treated as no longer owning such 
                stock, and
                    ``(B) any disposition by the person owning such 
                stock,
        shall be treated as a disposition by the United States person 
        of the stock in the passive foreign investment company.
    ``(h) Coordination With Section 851(b).--For purposes of paragraphs 
(2) and (3) of section 851(b), any amount included in gross income 
under subsection (a) shall be treated as a dividend.
    ``(i) Stock Acquired From a Decedent.--In the case of stock of a 
passive foreign investment company which is acquired by bequest, 
devise, or inheritance (or by the decedent's estate) and with respect 
to which an election under this section was in effect as of the date of 
the decedent's death, notwithstanding section 1014, the basis of such 
stock in the hands of the person so acquiring it shall be the adjusted 
basis of such stock in the hands of the decedent immediately before his 
death (or, if lesser, the basis which would have been determined under 
section 1014 without regard to this subsection).
    ``(j) Coordination With Section 1291 for First Year of Election.--
            ``(1) Taxpayers other than regulated investment 
        companies.--
                    ``(A) In general.--If the taxpayer elects the 
                application of this section with respect to any 
                marketable stock in a corporation after the beginning 
of the taxpayer's holding period in such stock, and if the requirements 
of subparagraph (B) are not satisfied, section 1291 shall apply to--
                            ``(i) any distributions with respect to, or 
                        disposition of, such stock in the first taxable 
                        year of the taxpayer for which such election is 
                        made, and
                            ``(ii) any amount which, but for section 
                        1291, would have been included in gross income 
                        under subsection (a) with respect to such stock 
                        for such taxable year in the same manner as if 
                        such amount were gain on the disposition of 
                        such stock.
                    ``(B) Requirements.--The requirements of this 
                subparagraph are met if, with respect to each of such 
                corporation's taxable years for which such corporation 
                was a passive foreign investment company and which 
                begin after December 31, 1986, and included any portion 
                of the taxpayer's holding period in such stock, such 
                corporation was treated as a qualified electing fund 
                under this part with respect to the taxpayer.
            ``(2) Special rules for regulated investment companies.--
                    ``(A) In general.--If a regulated investment 
                company elects the application of this section with 
                respect to any marketable stock in a corporation after 
                the beginning of the taxpayer's holding period in such 
                stock, then, with respect to such company's first 
                taxable year for which such company elects the 
                application of this section with respect to such 
                stock--
                            ``(i) section 1291 shall not apply to such 
                        stock with respect to any distribution or 
                        disposition during, or amount included in gross 
                        income under this section for, such first 
                        taxable year, but
                            ``(ii) such regulated investment company's 
                        tax under this chapter for such first taxable 
                        year shall be increased by the aggregate amount 
                        of interest which would have been determined 
                        under section 1291(c)(3) if section 1291 were 
                        applied without regard to this subparagraph.
                Clause (ii) shall not apply if for the preceding 
                taxable year the company elected to mark to market the 
                stock held by such company as of the last day of such 
                preceding taxable year.
                    ``(B) Disallowance of deduction.--No deduction 
                shall be allowed to any regulated investment company 
                for the increase in tax under subparagraph (A)(ii).
    ``(k) Election.--This section shall apply to marketable stock in a 
passive foreign investment company which is held by a United States 
person only if such person elects to apply this section with respect to 
such stock. Such an election shall apply to the taxable year for which 
made and all subsequent taxable years unless--
            ``(1) such stock ceases to be marketable stock, or
            ``(2) the Secretary consents to the revocation of such 
        election.
    ``(l) Transition Rule for Individuals Becoming Subject to United 
States Tax.--If any individual becomes a United States person in a 
taxable year beginning after December 31, 1996, solely for purposes of 
this section, the adjusted basis (before adjustments under subsection 
(b)) of any marketable stock in a passive foreign investment company 
owned by such individual on the first day of such taxable year shall be 
treated as being the greater of its fair market value on such first day 
or its adjusted basis on such first day.''
    (b) Coordination With Interest Charge, Etc.--
            (1) Paragraph (1) of section 1291(d) is amended by adding 
        at the end the following new flush sentence:
        ``Except as provided in section 1296(j), this section also 
        shall not apply if an election under section 1296(k) is in 
        effect for the taxpayer's taxable year.''
            (2) The subsection heading for subsection (d) of section 
        1291 is amended by striking ``Subpart B'' and inserting 
        ``Subparts B and C''.
            (3) Subparagraph (A) of section 1291(a)(3) is amended to 
        read as follows:
                    ``(A) Holding period.--The taxpayer's holding 
                period shall be determined under section 1223; except 
                that--
                            ``(i) for purposes of applying this section 
                        to an excess distribution, such holding period 
                        shall be treated as ending on the date of such 
                        distribution, and
                            ``(ii) if section 1296 applied to such 
                        stock with respect to the taxpayer for any 
                        prior taxable year, such holding period shall 
be treated as beginning on the first day of the first taxable year 
beginning after the last taxable year for which section 1296 so 
applied.''
    (c) Treatment of Mark-To-Market Gain Under Section 4982.--
            (1) Subsection (e) of section 4982 is amended by adding at 
        the end the following new paragraph:
            ``(6) Treatment of gain recognized under section 1296.--For 
        purposes of determining a regulated investment company's 
        ordinary income--
                    ``(A) notwithstanding paragraph (1)(C), section 
                1296 shall be applied as if such company's taxable year 
                ended on October 31, and
                    ``(B) any ordinary gain or loss from an actual 
                disposition of stock in a passive foreign investment 
                company during the portion of the taxable year after 
                October 31 shall be taken into account in determining 
                such company's ordinary income for the following 
                taxable year.
        This paragraph shall not apply to a company making an election 
        under paragraph (4).''
            (2) Subsection (b) of section 852 is amended by adding at 
        the end the following new paragraph:
            ``(10) Special rule for certain losses on stock in passive 
        foreign investment companies.--To the extent provided in 
        regulations, the taxable income of a regulated investment 
        company (other than a company to which an election under 
        section 4982(e)(4) applies) shall be computed without regard to 
        any net reduction in the value of any stock with respect to 
        which an election under section 1296(k) is in effect occurring 
        after October 31 of the taxable year, and any such reduction 
        shall be treated as occurring on the first day of the following 
        taxable year.''
            (3) Subsection (c)(2) of section 852 is amended by 
        inserting after: ``, without regard to any net reduction in the 
        value of any stock of a passive foreign investment company with 
        respect to which an election under section 1296(k) is in effect 
        occurring after October 31 of such year,'' after ``October 31 
        of such year''.
    (d) Conforming Amendments.--
            (1) Sections 532(b)(4) and 542(c)(10) are each amended by 
        striking ``section 1296'' and inserting ``section 1297''.
            (2) Subsection (f) of section 551 is amended by striking 
        ``section 1297(b)(5)'' and inserting ``section 1298(b)(5)''
            (3) Subsections (a)(1) and (d) of section 1293 are each 
        amended by striking ``section 1297(a)'' and inserting ``section 
        1298(a)''.
            (4) Paragraph (3) of section 1297(b), as redesignated by 
        subsection (a), is hereby repealed.
            (5) The table of sections for subpart D of part VI of 
        subchapter P of chapter 1, as redesignated by subsection (a), 
        is amended to read as follows:

                              ``Sec. 1297. Passive foreign investment 
                                        company.
                              ``Sec. 1298. Special rules.''
            (6) The table of subparts for part VI of subchapter P of 
        chapter 1 is amended by striking the last item and inserting 
        the following new items:

                              ``Subpart C. Election of mark to market 
                                        for marketable stock.
                              ``Subpart D. General provisions.''
    (e) Clarification of Gain Recognition Election.--The last sentence 
of section 1298(b)(1), as so redesignated, is amended by inserting 
``(determined without regard to the preceding sentence)'' after 
``investment company''.

SEC. 103. MODIFICATION TO DEFINITION OF PASSIVE INCOME.

    Paragraph (1) of section 1297(b) (defining passive income), as 
redesignated by section 102, is amended by inserting before the period 
``without regard to paragraph (3) thereof''.

SEC. 104. MODIFICATIONS TO ASSET VALUATION TEST.

    (a) In General.--Section 1297(a), as redesignated by section 102, 
is amended--
            (1) by striking ``(by value)'' in paragraph (2), and
            (2) by striking the last two sentences and inserting:
``The determination under paragraph (2) shall be made as provided under 
section 1298(f).''
    (b) Methods for Valuing Assets.--Section 1298, as so redesignated, 
is amended by redesignating subsection (f) as subsection (g) and by 
inserting after subsection (e) the following new subsection:
    ``(f) Method for Valuing Assets.--For purposes of section 
1297(a)(2)--
            ``(1) Publicly traded corporations.--In the case of a 
        foreign corporation the stock in which is readily tradeable on 
        an established securities market, the value of its assets shall 
        be treated as being equal to the sum of--
                    ``(A) the aggregate value of its outstanding stock, 
                plus
                    ``(B) its liabilities.
            ``(2) Other corporations.--In the case of a foreign 
        corporation to which paragraph (1) does not apply, the 
        determination under subsection (a)(2) shall be based on the 
        adjusted bases (as determined for purposes of computing 
        earnings and profits) of its assets.''

SEC. 105. EFFECTIVE DATE.

    The amendments made by this title shall apply to--
            (1) taxable years of United States persons beginning after 
        December 31, 1996, and
            (2) taxable years of foreign corporations ending with or 
        within such taxable years of United States persons.

         TITLE II--TREATMENT OF CONTROLLED FOREIGN CORPORATIONS

SEC. 201. GAIN ON CERTAIN STOCK SALES BY CONTROLLED FOREIGN 
              CORPORATIONS TREATED AS DIVIDENDS.

    (a) General Rule.--Section 964 (relating to miscellaneous 
provisions) is amended by adding at the end the following new 
subsection:
    ``(e) Gain on Certain Stock Sales by Controlled Foreign 
Corporations Treated as Dividends.--
            ``(1) In general.--If a controlled foreign corporation 
        sells or exchanges stock in any other foreign corporation, gain 
        recognized on such sale or exchange shall be included in the 
        gross income of such controlled foreign corporation as a 
        dividend to the same extent that it would have been so included 
        under section 1248(a) if such controlled foreign corporation 
        were a United States person. For purposes of determining the 
        amount which would have been so includible, the determination 
        of whether such other foreign corporation was a controlled 
        foreign corporation shall be made without regard to the 
        preceding sentence.
            ``(2) Same country exception not applicable.--Clause (i) of 
        section 954(c)(3)(A) shall not apply to any amount treated as a 
        dividend by reason of paragraph (1).
            ``(3) Clarification of deemed sales.--For purposes of this 
        subsection, a controlled foreign corporation shall be treated 
        as having sold or exchanged any stock if, under any provision 
        of this subtitle, such controlled foreign corporation is 
        treated as having gain from the sale or exchange of such 
        stock.''
    (b) Amendment of Section 904(d).--Clause (i) of section 
904(d)(2)(E) is amended by striking ``and except as provided in 
regulations, the taxpayer was a United States shareholder in such 
corporation''.
    (c) Effective Dates.--
            (1) The amendment made by subsection (a) shall apply to 
        gain recognized on transactions occurring after the date of the 
        enactment of this Act.
            (2) The amendment made by subsection (b) shall apply to 
        distributions after the date of the enactment of this Act.

SEC. 202. MISCELLANEOUS MODIFICATIONS TO SUBPART F.

    (a) Section 1248 Gain Taken Into Account in Determining Pro Rata 
Share.--
            (1) In general.--Paragraph (2) of section 951(a) (defining 
        pro rata share of subpart F income) is amended by adding at the 
        end the following new sentence:
        ``For purposes of subparagraph (B), any gain included in the 
        gross income of any person as a dividend under section 1248 
        shall be treated as a distribution received by such person with 
        respect to the stock involved.''
            (2) Effective date.--The amendment made by paragraph (1) 
        shall apply to dispositions after the date of the enactment of 
        this Act.
    (b) Basis Adjustments in Stock Held by Foreign Corporation.--
            (1) In general.--Section 961 (relating to adjustments to 
        basis of stock in controlled foreign corporations and of other 
        property) is amended by adding at the end the following new 
        subsection:
    ``(c) Basis Adjustments in Stock Held by Foreign Corporation.--
Under regulations prescribed by the Secretary, if a United States 
shareholder is treated under section 958(a)(2) as owning any stock in a 
controlled foreign corporation which is actually owned by another 
controlled foreign corporation, adjustments similar to the adjustments 
provided by subsections (a) and (b) shall be made to the basis of such 
stock in the hands of such other controlled foreign corporation, but 
only for the purposes of determining the amount included under section 
951 in the gross income of such United States shareholder (or any other 
United States shareholder who acquires from any person any portion of 
the interest of such United States shareholder by reason of which such 
shareholder was treated as owning such stock, but only to the extent of 
such portion, and subject to such proof of identity of such interest as 
the Secretary may prescribe by regulations).''
            (2) Effective date.--The amendment made by paragraph (1) 
        shall apply for purposes of determining inclusions for taxable 
        years of United States shareholders beginning after December 
        31, 1996.
    (c) Determination of Previously Taxed Income in Section 304 
Distributions, Etc.--
            (1) In general.--Section 959 (relating to exclusion from 
        gross income of previously taxed earnings and profits) is 
        amended by adding at the end the following new subsection:
    ``(g) Adjustments for Certain Transactions.--If, by reason of--
            ``(1) a transaction to which section 304 applies,
            ``(2) the structure of a United States shareholder's 
        holdings in controlled foreign corporations, or
            ``(3) other circumstances,
there would be a multiple inclusion of any item in income (or an 
inclusion or exclusion without an appropriate basis adjustment) by 
reason of this subpart, the Secretary may prescribe regulations 
providing such modifications in the application of this subpart as may 
be necessary to eliminate such multiple inclusion or provide such basis 
adjustment, as the case may be.''
            (2) Effective date.--The amendment made by paragraph (1) 
        shall take effect on the date of the enactment of this Act.
    (d) Clarification of Treatment of Branch Tax Exemptions or 
Reductions.--
            (1) In general.--Subsection (b) of section 952 is amended 
        by adding at the end the following new sentence: ``For purposes 
        of this subsection, any exemption (or reduction) with respect 
        to the tax imposed by section 884 shall not be taken into 
        account.''
            (2) Effective date.--The amendment made by paragraph (1) 
        shall apply to taxable years beginning after December 31, 1986.

SEC. 203. INDIRECT FOREIGN TAX CREDIT ALLOWED FOR CERTAIN LOWER TIER 
              COMPANIES.

    (a) Section 902 Credit.--
            (1) In general.--Subsection (b) of section 902 (relating to 
        deemed taxes increased in case of certain 2nd and 3rd tier 
        foreign corporations) is amended to read as follows:
    ``(b) Deemed Taxes Increased in Case of Certain Lower Tier 
Corporations.--
            ``(1) In general.--If--
                    ``(A) any foreign corporation is a member of a 
                qualified group, and
                    ``(B) such foreign corporation owns 10 percent or 
                more of the voting stock of another member of such 
                group from which it receives dividends in any taxable 
                year,
        such foreign corporation shall be deemed to have paid the same 
        proportion of such other member's post-1986 foreign income 
        taxes as would be determined under subsection (a) if such 
        foreign corporation were a domestic corporation.
            ``(2) Qualified group.--For purposes of paragraph (1), the 
        term `qualified group' means--
                    ``(A) the foreign corporation described in 
                subsection (a), and
                    ``(B) any other foreign corporation if--
                            ``(i) the domestic corporation owns at 
                        least 5 percent of the voting stock of such 
                        other foreign corporation indirectly through a 
                        chain of foreign corporations connected through 
                        stock ownership of at least 10 percent of their 
                        voting stock,
                            ``(ii) the foreign corporation described in 
                        subsection (a) is the first tier corporation in 
                        such chain, and
                            ``(iii) such other corporation is not below 
                        the sixth tier in such chain.
        The term `qualified group' shall not include any foreign 
        corporation below the third tier in the chain referred to in 
        clause (i) unless such foreign corporation is a controlled 
        foreign corporation (as defined in section 957) and the 
        domestic corporation is a United States shareholder (as defined 
        in section 951(b)) in such foreign corporation. Paragraph (1) 
        shall apply to those taxes paid by a member of the qualified 
        group below the third tier only with respect to periods during 
        which it was a controlled foreign corporation.''
            (2) Conforming amendments.--
                    (A) Subparagraph (B) of section 902(c)(3) is 
                amended by adding ``or'' at the end of clause (i) and 
                by striking clauses (ii) and (iii) and inserting the 
                following new clause:
                            ``(ii) the requirements of subsection 
                        (b)(2) are met with respect to such foreign 
                        corporation.''
                    (B) Subparagraph (B) of section 902(c)(4) is 
                amended by striking ``3rd foreign corporation'' and 
                inserting ``sixth tier foreign corporation''.
                    (C) The heading for paragraph (3) of section 902(c) 
                is amended by striking ``where domestic corporation 
                acquires 10 percent of foreign corporation'' and 
                inserting ``where foreign corporation first 
                qualifies''.
                    (D) Paragraph (3) of section 902(c) is amended by 
                striking ``ownership'' each place it appears.
    (b) Section 960 Credit.--Paragraph (1) of section 960(a) (relating 
to special rules for foreign tax credits) is amended to read as 
follows:
            ``(1) Deemed paid credit.--For purposes of subpart A of 
        this part, if there is included under section 951(a) in the 
        gross income of a domestic corporation any amount attributable 
        to earnings and profits of a foreign corporation which is a 
        member of a qualified group (as defined in section 902(b)) with 
        respect to the domestic corporation, then, except to the extent 
        provided in regulations, section 902 shall be applied as if the 
        amount so included were a dividend paid by such foreign 
        corporation (determined by applying section 902(c) in 
        accordance with section 904(d)(3)(B)).''
    (c) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to taxes of foreign corporations for taxable years of 
        such corporations beginning after the date of enactment of this 
        Act.
            (2) Special rule.--In the case of any chain of foreign 
        corporations described in clauses (i) and (ii) of section 
        902(b)(2)(B) of the Internal Revenue Code of 1986 (as amended 
        by this section), no liquidation, reorganization, or similar 
        transaction in a taxable year beginning after the date of the 
        enactment of this Act shall have the effect of permitting taxes 
        to be taken into account under section 902 of the Internal 
        Revenue Code of 1986 which could not have been taken into 
        account under such section but for such transaction.

SEC. 204. EXEMPTION FOR ACTIVE FINANCING INCOME.

    (a) Exemption From Foreign Personal Holding Company Income.--
Subsection (c) of section 954 is amended by adding at the end the 
following new paragraph:
            ``(4) Certain income derived in active conduct of trade or 
        business.--
                    ``(A) In general.--For purposes of paragraph (1), 
                foreign personal holding company income shall not 
                include income which is--
                            ``(i) derived in or incident to the active 
                        conduct by a controlled foreign corporation of 
                        a banking, financing, or similar business, but 
                        only if the corporation is predominantly 
                        engaged in the active conduct of such business,
                            ``(ii) received from a person other than a 
                        related person (within the meaning of 
                        subsection (d)(3)) and derived from the 
                        investments made by a qualifying insurance 
                        company of its unearned premiums or reserves 
                        ordinary and necessary for the proper conduct 
                        of its insurance business, or
                            ``(iii) received from a person other than a 
                        related person (within the meaning of 
                        subsection (d)(3)) and derived from investments 
                        made by a qualifying insurance company of an 
                        amount of its assets equal to--
                                    ``(I) in the case of contracts 
                                regulated in the country in which sold 
                                as property, casualty, or health 
                                insurance contracts, one-third of its 
                                premiums earned on insurance contracts 
                                during the taxable year (as defined in 
                                section 832(b)(4)), and
                                    ``(II) in the case of contracts 
                                regulated in the country in which sold 
                                as life insurance or annuity contracts, 
                                the greater of 10 percent of the 
                                reserves described in clause (ii) or 
                                $10,000,000,
                        which are not directly or indirectly 
                        attributable to the insurance or reinsurance of 
                        risks of persons who are related persons 
                        (within the meaning of subsection (d)(3)).
                    ``(B) Applicable principles.--
                            ``(i) Banking, etc. income.--The Secretary 
                        shall prescribe regulations which interpret 
                        subparagraph (A)(i) in accordance with the 
                        applicable principles of section 904(d)(2)(C).
                            ``(ii) Look-thru rules.--The Secretary 
                        shall prescribe regulations consistent with the 
                        principles of section 904(d)(3) which provide 
                        that dividends, interest, income equivalent to 
                        interest, rents, or royalties received or 
                        accrued from a related person (within the 
                        meaning of subsection (d)(3)) shall be subject 
to look-thru treatment for purposes of this section.
                            ``(iii) Special rule for banking or 
                        securities business.--In the case of a 
                        corporation described in subparagraph (C)(ii), 
                        the regulations under clauses (i) and (ii) 
                        shall be consistent with the applicable 
                        principles of section 1296(b) (as in effect on 
                        the day before the enactment of the 
                        International Tax Simplification for American 
                        Competitiveness Act).
                    ``(C) Predominantly engaged.--For purposes of 
                subparagraph (A)(i), a corporation shall be deemed 
                predominantly engaged in the active conduct of a 
                banking, financing or similar business only if--
                            ``(i) more than 70 percent of its gross 
                        income from such business is derived from 
                        transactions with unrelated persons (as defined 
                        in subsection (d)(3)), and more than 20 percent 
                        of its gross income from that business is 
                        derived from transactions with unrelated 
                        persons (as so defined) located within the 
                        country under the laws of which the controlled 
                        foreign corporation is created or organized, or
                            ``(ii) the corporation is--
                                    ``(I) predominantly engaged in the 
                                active conduct of a banking or 
                                securities business (within the meaning 
                                of section 1296(b), as in effect before 
                                the enactment of the International Tax 
                                Simplification for Competitiveness 
                                Act), or
                                    ``(II) a qualified bank affiliate 
                                or a qualified securities affiliate for 
                                purposes of section 1296(b) (as so in 
                                effect).
                    ``(D) Qualifying insurance company.--For purposes 
                of clauses (ii) and (iii) of subparagraph (A), the term 
                `qualifying insurance company' means any entity which 
                is subject to regulation as an insurance company under 
                the laws of its country of incorporation and which 
                realizes at least 50 percent of its gross income (other 
                than gross income derived from investments) from 
                premiums written on risks situated within its country 
                of incorporation.''
    (b) Exemption From Foreign Base Company Services Income.--Paragraph 
(2) of section 954(e) is amended by striking ``or'' at the end of 
subparagraph (A), by striking the period at the end of subparagraph (B) 
and inserting ``, or'', and by adding at the end the following:
                    ``(C) the active conduct by a controlled foreign 
                corporation of a banking, financing, insurance, or 
                similar business, but only if the corporation is 
                predominantly engaged in the active conduct of that 
                business (within the meaning of subsection 
                (c)(4)(C)).''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years of foreign corporations beginning after December 
31, 1996, and to taxable years of United States shareholders with or 
within which such taxable years of foreign corporations end.

SEC. 205. REPEAL OF SEPARATE FOREIGN TAX CREDIT LIMITATION FOR 
              NONCONTROLLED SECTION 902 CORPORATIONS.

    (a) Repeal of Separate Basket.--
            (1) In general.--Subparagraph (E) of section 904(d)(1) is 
        amended to read as follows:
                    ``(E) in the case of a corporation, dividends from 
                noncontrolled section 902 corporations out of earnings 
                and profits accumulated in taxable years beginning 
                before January 1, 1997,''.
            (2) Conforming amendments.--
                    (A) Subparagraph (E) of section 904(d)(2) is 
                repealed.
                    (B) Section 904(d)(2)(A)(ii) is amended by striking 
                ``subparagraph (E)(iii) or''.
                    (C) Section 904(d)(2)(C)(iii)(II) is amended by 
                inserting ``out of earnings and profits accumulated in 
                taxable years beginning before January 1, 1997'' after 
                ``corporation''.
    (b) Application of Look-Thru Rules to Noncontrolled Section 902 
Corporations.--
            (1) In general.--Section 904(d)(3) is amended by adding at 
        the end the following new subparagraph:
                    ``(J) Look-thru applies to noncontrolled section 
                902 corporations.--
                            ``(i) In general.--For purposes of this 
                        paragraph (other than subparagraph (E) 
                        thereof)--
                                    ``(I) any foreign corporation which 
                                is a noncontrolled section 902 
                                corporation with respect to the 
                                taxpayer shall be treated as a 
                                controlled foreign corporation with 
respect to the taxpayer, and
                                    ``(II) the taxpayer shall be 
                                treated as a United States shareholder 
                                in such corporation.
                            ``(ii) Noncontrolled section 902 
                        corporation.--For purposes of this subsection, 
                        the term `noncontrolled section 902 
                        corporation' means, with respect to any 
                        taxpayer, any foreign corporation with respect 
                        to which the taxpayer meets the stock ownership 
                        requirements of subsection (a) or (b) of 
                        section 902 and which is not otherwise a 
                        controlled foreign corporation.''
            (2) Conforming amendments.--
                    (A) Section 904(d)(5)(C) is amended by inserting 
                ``or noncontrolled section 902 corporations'' after 
                ``controlled foreign corporations''.
                    (B) The heading for section 904(d)(3) is amended by 
                inserting ``and certain other corporations'' after 
                ``corporations''.
    (c) Effective Dates.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years of foreign corporations beginning after 
        December 31, 1996, and to taxable years of United States 
        shareholders with or within which such taxable years of foreign 
        corporations end.
            (2) Dividends.--The amendments made by this section shall 
        apply to dividends paid out of earnings and profits accumulated 
        during taxable years of foreign corporations beginning after 
        December 31, 1996. For purposes of the preceding sentence, the 
        rules of section 316 of the Internal Revenue Code of 1986 shall 
        apply.

SEC. 206. COUNTRIES IN EUROPEAN UNION TREATED AS A SINGLE COUNTRY UNDER 
              SAME COUNTRY EXCEPTIONS.

    (a) In General.--Subsection (d) of section 954 is amended by adding 
at the end the following new paragraph:
            ``(5) Countries in european union treated as 1 country.--
                    ``(A) In general.--For purposes of this subsection, 
                subsections (c), (e), and (g), and section 953(a)(1), 
                in the case of a controlled foreign corporation which 
                is created or organized under the laws of a country 
                included in the European Union, all countries included 
                in such Union shall be considered 1 country.
                    ``(B) Exception where no substantial effective rate 
                of tax.--Subparagraph (A) shall not apply to a 
                controlled foreign corporation unless such corporation 
                is subject to a substantial effective rate of foreign 
                tax on income described in such subsection.''
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years of foreign corporations beginning after December 31, 
1996, and to taxable years of United States shareholders with or within 
which such taxable years of foreign corporations end.

SEC. 207. EXPANSION OF DE MINIMIS RULE UNDER SUBPART F.

    (a) In General.--Subparagraph (A) of section 954(b)(3) (relating to 
de minimis, etc., rules) is amended to read as follows:
                    ``(A) De minimis rule.--If the sum of foreign base 
                company income (determined without regard to paragraph 
                (5)) and the gross insurance income for the taxable 
                year is less than 10 percent of gross income, no part 
                of the gross income for the taxable year shall be 
                treated as foreign base company income or insurance 
                income.''
    (b) Technical Amendments.--
            (1) Clause (ii) of section 864(d)(5)(A) is amended by 
        striking ``5 percent or $1,000,000'' and inserting ``10 
        percent''.
            (2) Clause (i) of section 881(c)(5)(A) is amended by 
        striking ``5 percent or $1,000,000'' and inserting ``10 
        percent''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1996.

SEC. 208. SUBPART F EARNINGS AND PROFITS DETERMINED UNDER GENERALLY 
              ACCEPTED ACCOUNTING PRINCIPLES.

    (a) In General.--Subsection (a) of section 964 (relating to 
miscellaneous provisions) is amended by striking ``rules substantially 
similar to those applicable to domestic corporations, under regulations 
prescribed by the Secretary'' and inserting ``generally accepted 
accounting principles in the United States''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to distributions during, and the determination of the inclusion 
under section 951 of the Internal Revenue Code of 1986 with respect to, 
taxable years of foreign corporations beginning after December 31, 
1996.

SEC. 209. AFFILIATED FOREIGN INSURANCE COMPANIES MAY OFFSET LOSSES.

    (a) In General.--Section 953(d)(3) is amended by adding at the end 
the following new subparagraph:
                    ``(B) Special rule where 2 or more electing 
                companies are affiliated.--If 2 or more corporations 
                treated as domestic corporations under this 
                subsection--
                            ``(i) were created or organized under the 
                        laws of the same foreign country,
                            ``(ii) are treated as members of the same 
                        affiliated group for purposes of chapter 6, and
                            ``(iii) elect the application of this 
                        subparagraph,
                such corporations shall be treated as 1 corporation for 
                purposes of subparagraph (A).''
    (b) Conforming Amendment.--Section 953(d)(3) is amended by striking 
``If'' and inserting: ``(A) In general.--If''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1996.

                      TITLE III--OTHER PROVISIONS

SEC. 301. EXCHANGE RATE USED IN TRANSLATING FOREIGN TAXES.

    (a) Accrued Taxes Translated by Using Average Rate for Year to 
Which Taxes Relate.--
            (1) In general.--Subsection (a) of section 986 (relating to 
        translation of foreign taxes) is amended to read as follows:
    ``(a) Foreign Income Taxes.--
            ``(1) Translation of accrued taxes.--
                    ``(A) In general.--For purposes of determining the 
                amount of the foreign tax credit, in the case of a 
                taxpayer who takes foreign income taxes into account 
                when accrued, the amount of any foreign income taxes 
                (and any adjustment thereto) shall be translated into 
                dollars by using the average exchange rate for the 
                taxable year to which such taxes relate.
                    ``(B) Exception for taxes not paid within following 
                2 years.--
                            ``(i) Subparagraph (A) shall not apply to 
                        any foreign income taxes paid after the date 2 
                        years after the close of the taxable year to 
                        which such taxes relate.
                            ``(ii) Subparagraph (A) shall not apply to 
                        taxes paid before the beginning of the taxable 
                        year to which such taxes relate.
                    ``(C) Exception for inflationary currencies.--
                Subparagraph (A) shall not apply to any foreign income 
                taxes the liability for which is denominated in any 
                currency determined to be an inflationary currency 
                under regulations prescribed by the Secretary.
                    ``(D) Cross reference.--

                                ``For adjustments where tax is not paid 
within 2 years, see section 905(c).
            ``(2) Translation of taxes to which paragraph (1) does not 
        apply.--For purposes of determining the amount of the foreign 
        tax credit, in the case of any foreign income taxes to which 
        subparagraph (A) of paragraph (1) does not apply--
                    ``(A) such taxes shall be translated into dollars 
                using the exchange rates as of the time such taxes were 
                paid to the foreign country or possession of the United 
                States, and
                    ``(B) any adjustment to the amount of such taxes 
                shall be translated into dollars using--
                            ``(i) except as provided in clause (ii), 
                        the exchange rate as of the time when such 
                        adjustment is paid to the foreign country or 
                        possession, or
                            ``(ii) in the case of any refund or credit 
                        of foreign income taxes, using the exchange 
                        rate as of the time of the original payment of 
                        such foreign income taxes.
            ``(3) Foreign income taxes.--For purposes of this 
        subsection, the term `foreign income taxes' means any income, 
        war profits, or excess profits taxes paid or accrued to any 
        foreign country or to any possession of the United States.''
            (2) Adjustment when not paid within 2 years after year to 
        which taxes relate.--Subsection (c) of section 905 is amended 
        to read as follows:
    ``(c) Adjustments to Accrued Taxes.--
            ``(1) In general.--If--
                    ``(A) accrued taxes when paid differ from the 
                amounts claimed as credits by the taxpayer,
                    ``(B) accrued taxes are not paid before the date 2 
                years after the close of the taxable year to which such 
                taxes relate, or
                    ``(C) any tax paid is refunded in whole or in part,
        the taxpayer shall notify the Secretary, who shall redetermine 
        the amount of the tax for the year or years affected.
            ``(2) Special rule for taxes not paid within 2 years.--In 
        making the redetermination under paragraph (1), no credit shall 
        be allowed for accrued taxes not paid before the date referred 
        to in subparagraph (B) of paragraph (1). Any such taxes 
        subsequently paid shall be taken into account for the taxable 
        year to which they relate and a redetermination under this 
        section shall be made on account of such payment.
            ``(3) Adjustments.--The amount of tax due on any 
        redetermination under paragraph (1) (if any) shall be paid by 
        the taxpayer on notice and demand by the Secretary, and the 
        amount of tax overpaid (if any) shall be credited or refunded 
        to the taxpayer in accordance with subchapter B of chapter 66 
        (section 6511 et seq.).
            ``(4) Bond requirements.--In the case of any tax accrued 
        but not paid, the Secretary, as a condition precedent to the 
        allowance of the credit provided in this subpart, may require 
        the taxpayer to give a bond, with sureties satisfactory to and 
        approved by the Secretary, in such sum as the Secretary may 
        require, conditioned on the payment by the taxpayer of any 
        amount of tax found due on any such redetermination. Any such 
        bond shall contain such further conditions as the Secretary may 
        require.
            ``(5) Other special rules.--In any redetermination under 
        paragraph (1) by the Secretary of the amount of tax due from 
        the taxpayer for the year or years affected by a refund, the 
        amount of the taxes refunded for which credit has been allowed 
        under this section shall be reduced by the amount of any tax 
        described in section 901 imposed by the foreign country or 
        possession of the United States with respect to such refund; 
        but no credit under this subpart, or deduction under section 
        164, shall be allowed for any taxable year with respect to any 
        such tax imposed on the refund. No interest shall be assessed 
        or collected on any amount of tax due on any redetermination by 
        the Secretary, resulting from a refund to the taxpayer, for any 
        period before the receipt of such refund, except to the extent 
        interest was paid by the foreign country or possession of the 
        United States on such refund for such period.''
    (b) Authority To Use Average Rates.--
            (1) In general.--Subsection (a) of section 986 (as amended 
        by subsection (a)) is amended by redesignating paragraph (3) as 
        paragraph (4) and inserting after paragraph (2) the following 
        new paragraph:
            ``(3) Authority to permit use of average rates.--To the 
        extent prescribed in regulations, the average exchange rate for 
        the period (specified in such regulations) during which the 
        taxes or adjustment is paid may be used instead of the exchange 
        rate as of the time of such payment.''
            (2) Determination of average rates.--Subsection (c) of 
        section 989 is amended by striking ``and'' at the end of 
        paragraph (4), by striking the period at the end of paragraph 
        (5) and inserting ``, and'', and by adding at the end the 
        following new paragraph:
            ``(6) setting forth procedures for determining the average 
        exchange rate for any period.''
            (3) Conforming amendments.--Subsection (b) of section 989 
        is amended by striking ``weighted'' each place it appears.
    (c) Effective Dates.--
            (1) In general.--The amendments made by subsections (a)(1) 
        and (b) shall apply to taxes paid or accrued in taxable years 
        beginning after December 31, 1996.
            (2) Subsection (a)(2).--The amendment made by subsection 
        (a)(2) shall apply to taxes which relate to taxable years 
        beginning after December 31, 1996.

SEC. 302. ELECTION TO USE SIMPLIFIED SECTION 904 LIMITATION FOR 
              ALTERNATIVE MINIMUM TAX.

    (a) General Rule.--Subsection (a) of section 59 (relating to 
alternative minimum tax foreign tax credit) is amended by adding at the 
end the following new paragraph:
            ``(4) Election to use simplified section 904 limitation.--
                    ``(A) In general.--In determining the alternative 
                minimum tax foreign tax credit for any taxable year to 
                which an election under this paragraph applies--
                            ``(i) subparagraph (B) of paragraph (1) 
                        shall not apply, and
                            ``(ii) the limitation of section 904 shall 
                        be based on the proportion which--
                                    ``(I) the taxpayer's taxable income 
                                (as determined for purposes of the 
                                regular tax) from sources without the 
                                United States (but not in excess of the 
taxpayer's entire alternative minimum taxable income), bears to
                                    ``(II) the taxpayer's entire 
                                alternative minimum taxable income for 
                                the taxable year.
                    ``(B) Election.--
                            ``(i) In general.--An election under this 
                        paragraph may be made only for the taxpayer's 
                        first taxable year which begins after December 
                        31, 1996, and for which the taxpayer claims an 
                        alternative minimum tax foreign tax credit.
                            ``(ii) Election revocable only with 
                        consent.--An election under this paragraph, 
                        once made, shall apply to the taxable year for 
                        which made and all subsequent taxable years 
                        unless revoked with the consent of the 
                        Secretary.''
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1996.

SEC. 303. MODIFICATION OF SECTION 1491.

    (a) General Rule.--So much of chapter 5 (relating to tax on 
transfers to avoid income tax) as precedes section 1492 is amended to 
read as follows:

        ``CHAPTER 5--TREATMENT OF TRANSFERS TO AVOID INCOME TAX

                              ``Sec. 1491. Recognition of gain.
                              ``Sec. 1492. Exceptions.

``SEC. 1491. RECOGNITION OF GAIN.

    ``In the case of any transfer of property by a United States person 
to a foreign corporation as paid-in surplus or as a contribution to 
capital, to a foreign estate or trust, or to a foreign partnership, for 
purposes of this subtitle (other than for purposes of section 679), 
such transfer shall be treated as a sale or exchange for an amount 
equal to the fair market value of the property transferred, and the 
transferor shall recognize as gain the excess of--
            ``(1) the fair market value of the property so transferred, 
        over
            ``(2) the adjusted basis (for purposes of determining gain) 
        of such property in the hands of the transferor.
If a trust which is not a foreign trust becomes a foreign trust, such 
trust shall be treated for purposes of this section as having 
transferred, immediately before becoming a foreign trust, all of its 
assets to a foreign trust.''
    (b) Conforming Amendments.--
            (1) Section 1057 is hereby repealed.
            (2) Section 1492 is amended to read as follows:

``SEC. 1492. EXCEPTIONS.

    ``The provisions of section 1491 shall not apply--
            ``(1) if the transferee is an organization exempt from 
        income tax under part I of subchapter F of chapter 1 (other 
        than an organization described in section 401(a)),
            ``(2) to a transfer described in section 367, or
            ``(3) to any other transfer, to the extent provided in 
        regulations in accordance with principles similar to the 
        principles of section 367 or otherwise consistent with the 
        purpose of section 1491.''
            (3) Section 1494 is hereby repealed.
            (4) Paragraph (8) of section 6501(c) is amended by 
        inserting ``or on any transfer by reason of section 1491'' 
        after ``section 367''.
            (5) Subsection (a) of section 6038B is amended by striking 
        ``or'' at the end of paragraph (1), by adding ``or'' at the end 
        of paragraph (2), and by inserting after paragraph (2) the 
        following new paragraph:
            ``(3) makes any transfer described in section 1491,''.
            (6) The table of sections for part IV of subchapter O of 
        chapter 1 is amended by striking the item relating to section 
        1057.
            (7) The table of chapters for subtitle A is amended by 
        striking ``Tax on'' in the item relating to chapter 5 and 
        inserting ``Treatment of''.
    (c) Effective Date.--The amendments made by this section shall 
apply to transfers after December 31, 1996.

SEC. 304. MODIFICATION OF SECTION 367(b).

    (a) General Rule.--Paragraph (1) of section 367(b) is amended to 
read as follows:
            ``(1) In general.--In the case of any transaction described 
        in section 332, 351, 354, 355, 356, or 361 in which the status 
        of a foreign corporation as a corporation is a general 
        condition for nonrecognition by 1 or more of the parties to the 
        transaction, income shall be required to be recognized to the 
        extent provided in regulations prescribed by the Secretary 
        which are necessary or appropriate to prevent the avoidance of 
        Federal income taxes. This subsection shall not apply to a 
        transaction in which the foreign corporation is not treated as 
        a corporation under subsection (a)(1).''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to transfers after December 31, 1996.

SEC. 305. INCREASE IN FILING THRESHOLDS FOR RETURNS AS TO ORGANIZATION 
              OF FOREIGN CORPORATIONS AND ACQUISITIONS OF STOCK IN SUCH 
              CORPORATIONS.

    (a) In General.--Subsection (a) of section 6046 (relating to 
returns as to organization or reorganization of foreign corporations 
and as to acquisitions of their stock) is amended to read as follows:
    ``(a) Requirement of Return.--
            ``(1) In general.--A return complying with the requirements 
        of subsection (b) shall be made by--
                    ``(A) each United States citizen or resident who 
                becomes an officer or director of a foreign corporation 
                if a United States person (as defined in section 
                7701(a)(30)) meets the stock ownership requirements of 
                paragraph (2) with respect to such corporation,
                    ``(B) each United States person--
                            ``(i) who acquires stock which, when added 
                        to any stock owned on the date of such 
                        acquisition, meets the stock ownership 
                        requirements of paragraph (2) with respect to a 
                        foreign corporation, or
                            ``(ii) who acquires stock which, without 
                        regard to stock owned on the date of such 
                        acquisition, meets the stock ownership 
                        requirements of paragraph (2) with respect to a 
                        foreign corporation,
                    ``(C) each person (not described in subparagraph 
                (B)) who is treated as a United States shareholder 
                under section 953(c) with respect to a foreign 
                corporation, and
                    ``(D) each person who becomes a United States 
                person while meeting the stock ownership requirements 
                of paragraph (2) with respect to stock of a foreign 
                corporation.
        In the case of a foreign corporation with respect to which any 
        person is treated as a United States shareholder under section 
        953(c), subparagraph (A) shall be treated as including a 
        reference to each United States person who is an officer or 
        director of such corporation.
            ``(2) Stock ownership requirements.--A person meets the 
        stock ownership requirements of this paragraph with respect to 
        any corporation if such person owns 10 percent or more of--
                    ``(A) the total combined voting power of all 
                classes of stock of such corporation entitled to vote, 
                or
                    ``(B) the total value of the stock of such 
                corporation.''
    (b) Effective Date.--The amendment made by this section shall take 
effect on January 1, 1997.

SEC. 306. APPLICATION OF UNIFORM CAPITALIZATION RULES TO FOREIGN 
              PERSONS.

    (a) In General.--Section 263A(c) (relating to exceptions) is 
amended by adding at the end the following new paragraph:
            ``(7) Foreign persons.--This section shall apply to any 
        taxpayer who is not a United States person only for purposes of 
        tax liability with respect to income which is effectively 
        connected with the conduct of a trade or business in the United 
        States.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 1996. Section 481 
of the Internal Revenue Code of 1986 shall not apply to any change in a 
method of accounting by reason of such amendment.

SEC. 307. EXTENSION OF PERIOD TO WHICH EXCESS FOREIGN TAXES MAY BE 
              CARRIED.

    (a) General Rule.--Subsection (c) of section 904 (relating to 
carryback and carryover of excess tax paid) is amended--
            (1) by inserting ``in the third preceding taxable year,'' 
        before ``in the second preceding taxable year'', and
            (2) by striking ``in the first, second, third, fourth, or 
        fifth'' and inserting ``in any of the first 15''.
    (b) Excess Extraction Taxes.--Paragraph (1) of section 907(f) is 
amended--
            (1) by inserting ``in the third preceding taxable year,'' 
        before ``in the second preceding taxable year'', and
            (2) by striking ``in the first, second, third, fourth, or 
        fifth'' and inserting ``in any of the first 15''.
    (c) Effective Date.--The amendments made by this section shall 
apply to excess foreign taxes for taxable years beginning after 
December 31, 1996.

SEC. 308. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.

    (a) General Rule.--Section 904 is amended by redesignating 
subsections (g), (h), (i), and (j) as subsections (h), (i), (j), and 
(k), respectively, and by inserting after subsection (f) the following 
new subsection:
    ``(g) Recharacterization of Overall Domestic Loss.--
            ``(1) General rule.--For purposes of this subpart, in the 
        case of any taxpayer who sustains an overall domestic loss for 
        any taxable year beginning after December 31, 1996, that 
        portion of the taxpayer's taxable income from sources within 
        the United States for each succeeding taxable year which is 
        equal to the lesser of--
                    ``(A) the amount of such loss (to the extent not 
                used under this paragraph in prior taxable years), or
                    ``(B) 50 percent of the taxpayer's taxable income 
                from sources within the United States for such 
                succeeding taxable year,
        shall be treated as income from sources without the United 
        States (and not as income from sources within the United 
        States).
            ``(2) Overall domestic loss defined.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `overall domestic loss' 
                means any domestic loss to the extent such loss offsets 
                taxable income from sources without the United States 
                for the taxable year or for any preceding taxable year 
                by reason of a carryback. For purposes of the preceding 
                sentence, the term `domestic loss' means the amount by 
                which the gross income for the taxable year from 
                sources within the United States is exceeded by the sum 
                of the deductions properly apportioned or allocated 
                thereto (determined without regard to any carryback 
                from a subsequent taxable year).
                    ``(B) Taxpayer must have elected foreign tax credit 
                for year of loss.--The term `overall domestic loss' 
                shall not include any loss for any taxable year unless 
                the taxpayer chose the benefits of this subpart for 
                such taxable year.
            ``(3) Characterization of subsequent income.--
                    ``(A) In general.--Any income from sources within 
                the United States that is treated as income from 
                sources without the United States under paragraph (1) 
                shall be allocated among and increase the income 
                categories in proportion to the loss from sources 
                within the United States previously allocated to those 
                income categories.
                    ``(B) Income category.--For purposes of this 
                paragraph, the term `income category' has the meaning 
                given to such term by subsection (f)(5)(E)(i).
            ``(4) Coordination with subsection (f).--The Secretary 
        shall prescribe such regulations as may be necessary to 
        coordinate the provisions of this subsection with the 
        provisions of subsection (f).''
    (b) Conforming Amendment.--Subparagraph (A) of section 936(a)(2) is 
amended by striking ``section 904(f)'' and inserting ``subsections (f) 
and (g) of section 904''.
    (c) Effective Date.--The amendments made by this section shall 
apply to losses for taxable years beginning after December 31, 1996.

SEC. 309. TREATMENT OF NONRESIDENT ALIENS ENGAGED IN INTERNATIONAL 
              TRANSPORTATION SERVICES.

    (a) Sourcing Rules.--
            (1) In general.--Section 861(a)(3) is amended by adding at 
        the end the following new flush sentence:
        ``In addition, compensation for labor or services performed in 
        the United States shall not be deemed to be income from sources 
        within the United States if the labor or services are performed 
        by a nonresident alien individual in connection with the 
        individual's temporary presence in the United States as a 
        member of the crew of a foreign aircraft or vessel engaged in 
        transportation between the United States and a foreign country 
        or a possession of the United States.''
            (2) Transportation income.--Subparagraph (B) of section 
        863(c)(2) is amended by inserting ``the taxpayer is a citizen 
        or resident alien and'' after ``unless''.
    (b) Exclusion From Income.--Section 872(b) is amended by 
redesignating paragraphs (6) and (7) as paragraphs (7) and (8), 
respectively, and by inserting after paragraph (5) the following new 
paragraph:
            ``(6) Personal services of crew members.--Income derived by 
        an individual resident of a foreign country from personal 
        services as an individual crew member on board a vessel or 
        aircraft to which paragraph (1) or (2) applies.''
    (c) Presence in United States.--
            (1) In general.--Paragraph (7) of section 7701(b) is 
        amended by adding at the end the following new subparagraph:
                    ``(D) Crew members temporarily present.--If an 
                individual is temporarily present in the United States 
                as a member of the crew of a foreign aircraft or vessel 
engaged in transportation between the United States and a foreign 
country or a possession of the United States, such individual shall not 
be treated as present in the United States on any such day.''
            (2) Conforming amendment.--Subparagraph (A) of section 
        7701(b)(7) is amended by striking ``or (C)'' and inserting ``, 
        (C), or (D)''.
    (d) Effective Dates.--
            (1) In general.--The amendments made by this section shall 
        apply to remuneration for services performed after the date of 
        the enactment of this Act.
            (2) Presence.--The amendment made by subsection (c) shall 
        apply to taxable years beginning after December 31, 1996.

SEC. 310. EXPORT PROPERTY OF FSC TO INCLUDE COMPUTER SOFTWARE.

    (a) In General.--Section 927(a)(2) is amended by adding at the end 
the following new sentence: ``Computer software (whether or not 
patented) shall not be treated as described in subparagraph (B).''
    (b) Effective Date.--The amendment made by this section shall apply 
to sales, exchanges, or other dispositions after the date of the 
enactment of this Act.

SEC. 311. SPECIAL RULES RELATING TO FINANCIAL SERVICES INCOME.

    (a) Exception for Interest on Certain Securities.--Subparagraph (B) 
of section 904(d)(2) (relating to high withholding tax interest) is 
amended by redesignating clause (iii) as clause (iv) and by inserting 
after clause (ii) the following new clause:
                            ``(iii) Exception for interest on dealer 
                        property.--The term `high withholding tax 
                        interest' shall not include any interest on a 
                        security (within the meaning of section 
                        475(c)(2)) which is received or accrued by a 
                        person that holds the security in connection 
                        with the holder's activities as a dealer in 
                        securities (within the meaning of section 
                        475(c)(1)).''
    (b) De Minimis Rule.--Subparagraph (C) of section 904(d)(2) 
(relating to financial services income) is amended by adding at the end 
the following new clause:
                            ``(iv) De minimis rule.--If the financial 
                        services income (as defined by clause (i)) of 
                        any person exceeds 80 percent of gross income, 
                        the entire gross income for the taxable year 
                        shall be treated as financial services 
                        income.''
    (c) Exception for Income on Dealer Property.--Subsection 904(g) is 
amended by redesignating paragraph (11) as paragraph (12) and by adding 
after paragraph (10) the following new paragraph:
            ``(11) Exception for income on dealer property.--Paragraph 
        (1) shall not apply to any amount derived from a United States-
        owned foreign corporation that is derived from income on a 
        security (within the meaning of section 475(c)(2)) which is 
        received or accrued by a person that holds the security in 
        connection with the holder's activities as a dealer in 
        securities (within the meaning of section 475(c)(1)).''
    (d) Effective Dates.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after December 31, 1996.
            (2) Deemed paid credits.--In the case of any credit under 
        section 901 of the Internal Revenue Code of 1986 by reason of 
        section 902 or 960 of such Code, the amendments made by this 
        section shall apply to taxable years of foreign corporations 
        beginning after December 31, 1996, and to taxable years of 
        United States shareholders in such corporations with or within 
        which such taxable years of foreign corporations end.

SEC. 312. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN ASSETS ACQUIRED 
              BY DEALERS IN ORDINARY COURSE OF TRADE OR BUSINESS.

    (a) In General.--Section 956(c)(2) is amended by striking ``and'' 
at the end of subparagraph (H), by striking the period at the end of 
subparagraph (I) and inserting a semicolon, and by adding at the end 
the following new subparagraphs:
                    ``(J) deposits of cash or securities made or 
                received on commercial terms in the ordinary course of 
                a United States or foreign person's business as a 
                dealer in securities or in commodities, but only to the 
                extent such deposits are made or received as collateral 
                or margin for (i) a securities loan, notional principal 
                contract, options contract, forward contract, or 
                futures contract, or (ii) any other financial 
                transaction in which the Secretary determines that it 
                is customary to post collateral or margin;
                    ``(K) an obligation of a United States person to 
                the extent the principal amount of the obligation does 
                not exceed the fair market value of readily marketable 
                securities sold or purchased pursuant to a sale and 
                repurchase agreement or otherwise posted or received as 
                collateral for the obligation in the ordinary course of 
                its business by a United States or foreign person which 
                is a dealer in securities or commodities; and
                    ``(L) securities acquired and held by a controlled 
                foreign corporation in the ordinary course of its 
                business as a dealer in securities if (i) the dealer 
                accounts for the securities as securities held 
                primarily for sale to customers in the ordinary course 
                of business, and (ii) the dealer disposes of the 
                securities (or they mature while held by the dealer) 
                within a period consistent with the holding of 
                securities for sale to customers in the ordinary course 
                of business.
        For purposes of subparagraphs (J), (K), and (L), the term 
        `dealer in securities' has the meaning given such term by 
        section 475(c)(1), and the term `dealer in commodities' means a 
        futures commission merchant or any person which would be a 
        dealer in securities if securities under section 475(c)(2) 
        included commodities, evidences of an interest in commodities, 
        and derivative instruments in respect of commodities (other 
        than any activity gain or loss from which is described in 
        section 1256(a)(3)).''
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years of foreign corporations beginning after December 
31, 1996, and to taxable years of United States shareholders or with or 
within which such taxable years of foreign corporations end.
                                 <all>
```