II

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.

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

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

4 TABLE OF CONTENTS.

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

6 ‘‘International Tax Simplification for American Competi7 tiveness Act’’.
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1 (b) AMENDMENT OF 1986 CODE.—Except as other2 wise expressly provided, whenever in this Act an amend3 ment or repeal is expressed in terms of an amendment

4 to, or repeal of, a section or other provision, the reference

5 shall be considered to be made to a section or other provi6 sion of the Internal Revenue Code of 1986.

7 (c) TABLE OF CONTENTS.—The table of contents for

8 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.
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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.

1 TITLE I—TREATMENT OF PAS2 SIVE FOREIGN INVESTMENT

3 COMPANIES

4 SEC. 101. UNITED STATES SHAREHOLDERS OF CON5 TROLLED FOREIGN CORPORATIONS NOT

6 SUBJECT TO PFIC INCLUSION.

7 Section 1297, as redesignated by section 102, is

8 amended by adding at the end the following new sub9 section:

10 ‘‘(e) EXCEPTION FOR UNITED STATES SHAREHOLD11 ERS OF CONTROLLED FOREIGN CORPORATIONS.—

12 ‘‘(1) IN GENERAL.—For purposes of this part,

13 a corporation shall not be treated with respect to a

14 shareholder as a passive foreign investment company

15 during the qualified portion of such shareholder’s

16 holding period with respect to stock in such corpora17 tion.

18 ‘‘(2) QUALIFIED PORTION.—For purposes of

19 this subsection, the term ‘qualified portion’ means

20 the portion of the shareholder’s holding period—
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1 ‘‘(A) which is after December 31, 1996,

2 and

3 ‘‘(B) during which the shareholder is a

4 United States shareholder (as defined in section

5 951(b)) of the corporation and the corporation

6 is a controlled foreign corporation.

7 ‘‘(3) NEW HOLDING PERIOD IF QUALIFIED POR8 TION ENDS.—

9 ‘‘(A) IN GENERAL.—Except as provided in

10 subparagraph (B), if the qualified portion of a

11 shareholder’s holding period with respect to any

12 stock ends after December 31, 1996, solely for

13 purposes of this part, the shareholder’s holding

14 period with respect to such stock shall be treat15 ed as beginning as of the first day following

16 such period.

17 ‘‘(B) EXCEPTION.—Subparagraph (A)

18 shall not apply if such stock was, with respect

19 to such shareholder, stock in a passive foreign

20 investment company at any time before the

21 qualified portion of the shareholder’s holding

22 period with respect to such stock and no elec23 tion under section 1298(b)(1) is made.’’
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1 SEC. 102. ELECTION OF MARK TO MARKET FOR MARKET2 ABLE STOCK IN PASSIVE FOREIGN INVEST3 MENT COMPANY.

4 (a) IN GENERAL.—Part VI of subchapter P of chap5 ter 1 is amended by redesignating subpart C as subpart

6 D, by redesignating sections 1296 and 1297 as sections

7 1297 and 1298, respectively, and by inserting after sub8 part B the following new subpart:

9 ‘‘Subpart C—Election of Mark to Market for

10 Marketable Stock

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

11 ‘‘SEC. 1296. ELECTION OF MARK TO MARKET FOR MARKET12 ABLE STOCK.

13 ‘‘(a) GENERAL RULE.—In the case of marketable

14 stock in a passive foreign investment company which is

15 owned (or treated under subsection (g) as owned) by a

16 United States person at the close of any taxable year of

17 such person, at the election of such person—

18 ‘‘(1) If the fair market value of such stock as

19 of the close of such taxable year exceeds its adjusted

20 basis, such United States person shall include in

21 gross income for such taxable year an amount equal

22 to the amount of such excess.

23 ‘‘(2) If the adjusted basis of such stock exceeds

24 the fair market value of such stock as of the close
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1 of such taxable year, such United States person

2 shall be allowed a deduction for such taxable year

3 equal to the lesser of—

4 ‘‘(A) the amount of such excess, or

5 ‘‘(B) the unreversed inclusions with respect

6 to such stock.

7 ‘‘(b) BASIS ADJUSTMENTS.—

8 ‘‘(1) IN GENERAL.—The adjusted basis of stock

9 in a passive foreign investment company—

10 ‘‘(A) shall be increased by the amount in11 cluded in the gross income of the United States

12 person under subsection (a)(1) with respect to

13 such stock, and

14 ‘‘(B) shall be decreased by the amount al15 lowed as a deduction to the United States per16 son under subsection (a)(2) with respect to

17 such stock.

18 ‘‘(2) SPECIAL RULE FOR STOCK CONSTRUC19 TIVELY OWNED.—In the case of stock in a passive

20 foreign investment company which the United States

21 person is treated as owning under subsection (g)—

22 ‘‘(A) the adjustments under paragraph (1)

23 shall apply to such stock in the hands of the

24 person actually holding such stock but only for

25 purposes of determining the subsequent treat-
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1 ment under this chapter of the United States

2 person with respect to such stock, and

3 ‘‘(B) similar adjustments shall be made to

4 the adjusted basis of the property by reason of

5 which the United States person is treated as

6 owning such stock.

7 ‘‘(c) CHARACTER AND SOURCE RULES.—

8 ‘‘(1) ORDINARY TREATMENT.—

9 ‘‘(A) GAIN.—Any amount included in gross

10 income under subsection (a)(1), and any gain

11 on the sale or other disposition of marketable

12 stock in a passive foreign investment company

13 (with respect to which an election under this

14 section is in effect), shall be treated as ordinary

15 income.

16 ‘‘(B) LOSS.—Any—

17 ‘‘(i) amount allowed as a deduction

18 under subsection (a)(2), and

19 ‘‘(ii) loss on the sale or other disposi20 tion of marketable stock in a passive for21 eign investment company (with respect to

22 which an election under this section is in

23 effect) to the extent that the amount of

24 such loss does not exceed the unreversed

25 inclusions with respect to such stock,
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1 shall be treated as an ordinary loss. The

2 amount so treated shall be treated as a deduc3 tion allowable in computing adjusted gross in4 come.

5 ‘‘(2) SOURCE.—The source of any amount in6 cluded in gross income under subsection (a)(1) (or

7 allowed as a deduction under subsection (a)(2)) shall

8 be determined in the same manner as if such

9 amount were gain or loss (as the case may be) from

10 the sale of stock in the passive foreign investment

11 company.

12 ‘‘(d) UNREVERSED INCLUSIONS.—For purposes of

13 this section, the term ‘unreversed inclusions’ means, with

14 respect to any stock in a passive foreign investment com15 pany, the excess (if any) of—

16 ‘‘(1) the amount included in gross income of

17 the taxpayer under subsection (a)(1) with respect to

18 such stock for prior taxable years, over

19 ‘‘(2) the amount allowed as a deduction under

20 subsection (a)(2) with respect to such stock for prior

21 taxable years.

22 The amount referred to in paragraph (1) shall include any

23 amount which would have been included in gross income

24 under subsection (a)(1) with respect to such stock for any

25 prior taxable year but for section 1291.
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1 ‘‘(e) MARKETABLE STOCK.—For purposes of this

2 section—

3 ‘‘(1) IN GENERAL.—The term ‘marketable

4 stock’ means—

5 ‘‘(A) any stock which is regularly traded

6 on—

7 ‘‘(i) a national securities exchange

8 which is registered with the Securities and

9 Exchange Commission or the national mar10 ket system established pursuant to section

11 11A of the Securities and Exchange Act of

12 1934, or

13 ‘‘(ii) any exchange or other market

14 which the Secretary determines has rules

15 adequate to carry out the purposes of this

16 part,

17 ‘‘(B) to the extent provided in regulations,

18 stock in any foreign corporation which is com19 parable to a regulated investment company and

20 which offers for sale or has outstanding any

21 stock of which it is the issuer and which is re22 deemable at its net asset value, and

23 ‘‘(C) to the extent provided in regulations,

24 any option on stock described in subparagraph

25 (A) or (B).
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1 ‘‘(2) SPECIAL RULE FOR REGULATED INVEST2 MENT COMPANIES.—In the case of any regulated in3 vestment company which is offering for sale or has

4 outstanding any stock of which it is the issuer and

5 which is redeemable at its net asset value, all stock

6 in a passive foreign investment company which it

7 owns directly or indirectly shall be treated as mar8 ketable stock for purposes of this section. Except as

9 provided in regulations, similar treatment as mar10 ketable stock shall apply in the case of any other

11 regulated investment company which publishes net

12 asset valuations at least annually.

13 ‘‘(f) TREATMENT OF CONTROLLED FOREIGN COR14 PORATIONS WHICH ARE SHAREHOLDERS IN PASSIVE

15 FOREIGN INVESTMENT COMPANIES.—In the case of a for16 eign corporation which is a controlled foreign corporation

17 and which owns (or is treated under subsection (g) as own18 ing) stock in a passive foreign investment company—

19 ‘‘(1) this section (other than subsection (c)(2))

20 shall apply to such foreign corporation in the same

21 manner as if such corporation were a United States

22 person, and

23 ‘‘(2) for purposes of subpart F of part III of

24 subchapter N—
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1 ‘‘(A) any amount included in gross income

2 under subsection (a)(1) shall be treated as for3 eign personal holding company income de4 scribed in section 954(c)(1)(A), and

5 ‘‘(B) any amount allowed as a deduction

6 under subsection (a)(2) shall be treated as a de7 duction allocable to foreign personal holding

8 company income so described.

9 ‘‘(g) STOCK OWNED THROUGH CERTAIN FOREIGN

10 ENTITIES.—Except as provided in regulations—

11 ‘‘(1) IN GENERAL.—For purposes of this sec12 tion, stock owned, directly or indirectly, by or for a

13 foreign partnership or foreign trust or foreign estate

14 shall be considered as being owned proportionately

15 by its partners or beneficiaries. Stock considered to

16 be owned by a person by reason of the application

17 of the preceding sentence shall, for purposes of ap18 plying such sentence, be treated as actually owned

19 by such person.

20 ‘‘(2) TREATMENT OF CERTAIN DISPOSITIONS.—

21 In any case in which a United States person is

22 treated as owning stock in a passive foreign invest23 ment company by reason of paragraph (1)—

24 ‘‘(A) any disposition by the United States

25 person or by any other person which results in
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1 the United States person being treated as no

2 longer owning such stock, and

3 ‘‘(B) any disposition by the person owning

4 such stock,

5 shall be treated as a disposition by the United

6 States person of the stock in the passive foreign in7 vestment company.

8 ‘‘(h) COORDINATION WITH SECTION 851(b).—For

9 purposes of paragraphs (2) and (3) of section 851(b), any

10 amount included in gross income under subsection (a)

11 shall be treated as a dividend.

12 ‘‘(i) STOCK ACQUIRED FROM A DECEDENT.—In the

13 case of stock of a passive foreign investment company

14 which is acquired by bequest, devise, or inheritance (or

15 by the decedent’s estate) and with respect to which an

16 election under this section was in effect as of the date of

17 the decedent’s death, notwithstanding section 1014, the

18 basis of such stock in the hands of the person so acquiring

19 it shall be the adjusted basis of such stock in the hands

20 of the decedent immediately before his death (or, if lesser,

21 the basis which would have been determined under section

22 1014 without regard to this subsection).

23 ‘‘(j) COORDINATION WITH SECTION 1291 FOR FIRST

24 YEAR OF ELECTION.—
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1 ‘‘(1) TAXPAYERS OTHER THAN REGULATED IN2 VESTMENT COMPANIES.—

3 ‘‘(A) IN GENERAL.—If the taxpayer elects

4 the application of this section with respect to

5 any marketable stock in a corporation after the

6 beginning of the taxpayer’s holding period in

7 such stock, and if the requirements of subpara8 graph (B) are not satisfied, section 1291 shall

9 apply to—

10 ‘‘(i) any distributions with respect to,

11 or disposition of, such stock in the first

12 taxable year of the taxpayer for which such

13 election is made, and

14 ‘‘(ii) any amount which, but for sec15 tion 1291, would have been included in

16 gross income under subsection (a) with re17 spect to such stock for such taxable year in

18 the same manner as if such amount were

19 gain on the disposition of such stock.

20 ‘‘(B) REQUIREMENTS.—The requirements

21 of this subparagraph are met if, with respect to

22 each of such corporation’s taxable years for

23 which such corporation was a passive foreign

24 investment company and which begin after De25 cember 31, 1986, and included any portion of
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1 the taxpayer’s holding period in such stock,

2 such corporation was treated as a qualified

3 electing fund under this part with respect to the

4 taxpayer.

5 ‘‘(2) SPECIAL RULES FOR REGULATED INVEST6 MENT COMPANIES.—

7 ‘‘(A) IN GENERAL.—If a regulated invest8 ment company elects the application of this sec9 tion with respect to any marketable stock in a

10 corporation after the beginning of the tax11 payer’s holding period in such stock, then, with

12 respect to such company’s first taxable year for

13 which such company elects the application of

14 this section with respect to such stock—

15 ‘‘(i) section 1291 shall not apply to

16 such stock with respect to any distribution

17 or disposition during, or amount included

18 in gross income under this section for,

19 such first taxable year, but

20 ‘‘(ii) such regulated investment com21 pany’s tax under this chapter for such first

22 taxable year shall be increased by the ag23 gregate amount of interest which would

24 have been determined under section
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1 1291(c)(3) if section 1291 were applied

2 without regard to this subparagraph.

3 Clause (ii) shall not apply if for the preceding

4 taxable year the company elected to mark to

5 market the stock held by such company as of

6 the last day of such preceding taxable year.

7 ‘‘(B) DISALLOWANCE OF DEDUCTION.—No

8 deduction shall be allowed to any regulated in9 vestment company for the increase in tax under

10 subparagraph (A)(ii).

11 ‘‘(k) ELECTION.—This section shall apply to market12 able stock in a passive foreign investment company which

13 is held by a United States person only if such person elects

14 to apply this section with respect to such stock. Such an

15 election shall apply to the taxable year for which made

16 and all subsequent taxable years unless—

17 ‘‘(1) such stock ceases to be marketable stock,

18 or

19 ‘‘(2) the Secretary consents to the revocation of

20 such election.

21 ‘‘(l) TRANSITION RULE FOR INDIVIDUALS BECOMING

22 SUBJECT TO UNITED STATES TAX.—If any individual be23 comes a United States person in a taxable year beginning

24 after December 31, 1996, solely for purposes of this sec25 tion, the adjusted basis (before adjustments under sub-
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1 section (b)) of any marketable stock in a passive foreign

2 investment company owned by such individual on the first

3 day of such taxable year shall be treated as being the

4 greater of its fair market value on such first day or its

5 adjusted basis on such first day.’’

6 (b) COORDINATION WITH INTEREST CHARGE,

7 ETC.—

8 (1) Paragraph (1) of section 1291(d) is amend9 ed by adding at the end the following new flush sen10 tence:

11 ‘‘Except as provided in section 1296(j), this section

12 also shall not apply if an election under section

13 1296(k) is in effect for the taxpayer’s taxable year.’’

14 (2) The subsection heading for subsection (d) of

15 section 1291 is amended by striking ‘‘SUBPART B’’

16 and inserting ‘‘SUBPARTS B AND C’’.

17 (3) Subparagraph (A) of section 1291(a)(3) is

18 amended to read as follows:

19 ‘‘(A) HOLDING PERIOD.—The taxpayer’s

20 holding period shall be determined under sec21 tion 1223; except that—

22 ‘‘(i) for purposes of applying this sec23 tion to an excess distribution, such holding

24 period shall be treated as ending on the

25 date of such distribution, and
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1 ‘‘(ii) if section 1296 applied to such

2 stock with respect to the taxpayer for any

3 prior taxable year, such holding period

4 shall be treated as beginning on the first

5 day of the first taxable year beginning

6 after the last taxable year for which sec7 tion 1296 so applied.’’

8 (c) TREATMENT OF MARK-TO-MARKET GAIN UNDER

9 SECTION 4982.—

10 (1) Subsection (e) of section 4982 is amended

11 by adding at the end the following new paragraph:

12 ‘‘(6) TREATMENT OF GAIN RECOGNIZED UNDER

13 SECTION 1296.—For purposes of determining a regu14 lated investment company’s ordinary income—

15 ‘‘(A) notwithstanding paragraph (1)(C),

16 section 1296 shall be applied as if such compa17 ny’s taxable year ended on October 31, and

18 ‘‘(B) any ordinary gain or loss from an ac19 tual disposition of stock in a passive foreign in20 vestment company during the portion of the

21 taxable year after October 31 shall be taken

22 into account in determining such company’s or23 dinary income for the following taxable year.

24 This paragraph shall not apply to a company mak25 ing an election under paragraph (4).’’
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1 (2) Subsection (b) of section 852 is amended by

2 adding at the end the following new paragraph:

3 ‘‘(10) SPECIAL RULE FOR CERTAIN LOSSES ON

4 STOCK IN PASSIVE FOREIGN INVESTMENT COMPA5 NIES.—To the extent provided in regulations, the

6 taxable income of a regulated investment company

7 (other than a company to which an election under

8 section 4982(e)(4) applies) shall be computed with9 out regard to any net reduction in the value of any

10 stock with respect to which an election under section

11 1296(k) is in effect occurring after October 31 of

12 the taxable year, and any such reduction shall be

13 treated as occurring on the first day of the following

14 taxable year.’’

15 (3) Subsection (c)(2) of section 852 is amended

16 by inserting after: ‘‘, without regard to any net re17 duction in the value of any stock of a passive foreign

18 investment company with respect to which an elec19 tion under section 1296(k) is in effect occurring

20 after October 31 of such year,’’ after ‘‘October 31

21 of such year’’.

22 (d) CONFORMING AMENDMENTS.—

23 (1) Sections 532(b)(4) and 542(c)(10) are each

24 amended by striking ‘‘section 1296’’ and inserting

25 ‘‘section 1297’’.
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1 (2) Subsection (f) of section 551 is amended by

2 striking ‘‘section 1297(b)(5)’’ and inserting ‘‘section

3 1298(b)(5)’’

4 (3) Subsections (a)(1) and (d) of section 1293

5 are each amended by striking ‘‘section 1297(a)’’ and

6 inserting ‘‘section 1298(a)’’.

7 (4) Paragraph (3) of section 1297(b), as redes8 ignated by subsection (a), is hereby repealed.

9 (5) The table of sections for subpart D of part

10 VI of subchapter P of chapter 1, as redesignated by

11 subsection (a), is amended to read as follows:

‘‘Sec. 1297. Passive foreign investment company.

‘‘Sec. 1298. Special rules.’’

12 (6) The table of subparts for part VI of sub13 chapter P of chapter 1 is amended by striking the

14 last item and inserting the following new items:

‘‘Subpart C. Election of mark to market for marketable stock.

‘‘Subpart D. General provisions.’’

15 (e) CLARIFICATION OF GAIN RECOGNITION ELEC16 TION.—The last sentence of section 1298(b)(1), as so re17 designated, is amended by inserting ‘‘(determined without

18 regard to the preceding sentence)’’ after ‘‘investment com19 pany’’.

20 SEC. 103. MODIFICATION TO DEFINITION OF PASSIVE IN21 COME.

22 Paragraph (1) of section 1297(b) (defining passive

23 income), as redesignated by section 102, is amended by
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1 inserting before the period ‘‘without regard to paragraph

2 (3) thereof’’.

3 SEC. 104. MODIFICATIONS TO ASSET VALUATION TEST.

4 (a) IN GENERAL.—Section 1297(a), as redesignated

5 by section 102, is amended—

6 (1) by striking ‘‘(by value)’’ in paragraph (2),

7 and

8 (2) by striking the last two sentences and in9 serting:

10 ‘‘The determination under paragraph (2) shall be made

11 as provided under section 1298(f).’’

12 (b) METHODS FOR VALUING ASSETS.—Section 1298,

13 as so redesignated, is amended by redesignating sub14 section (f) as subsection (g) and by inserting after sub15 section (e) the following new subsection:

16 ‘‘(f) METHOD FOR VALUING ASSETS.—For purposes

17 of section 1297(a)(2)—

18 ‘‘(1) PUBLICLY TRADED CORPORATIONS.—In

19 the case of a foreign corporation the stock in which

20 is readily tradeable on an established securities mar21 ket, the value of its assets shall be treated as being

22 equal to the sum of—

23 ‘‘(A) the aggregate value of its outstanding

24 stock, plus

25 ‘‘(B) its liabilities.
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1 ‘‘(2) OTHER CORPORATIONS.—In the case of a

2 foreign corporation to which paragraph (1) does not

3 apply, the determination under subsection (a)(2)

4 shall be based on the adjusted bases (as determined

5 for purposes of computing earnings and profits) of

6 its assets.’’

7 SEC. 105. EFFECTIVE DATE.

8 The amendments made by this title shall apply to—

9 (1) taxable years of United States persons be10 ginning after December 31, 1996, and

11 (2) taxable years of foreign corporations ending

12 with or within such taxable years of United States

13 persons.

14 TITLE II—TREATMENT OF CON15 TROLLED FOREIGN COR16 PORATIONS

17 SEC. 201. GAIN ON CERTAIN STOCK SALES BY CONTROLLED

18 FOREIGN CORPORATIONS TREATED AS DIVI19 DENDS.

20 (a) GENERAL RULE.—Section 964 (relating to mis21 cellaneous provisions) is amended by adding at the end

22 the following new subsection:

23 ‘‘(e) GAIN ON CERTAIN STOCK SALES BY CON24 TROLLED FOREIGN CORPORATIONS TREATED AS DIVI25 DENDS.—
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1 ‘‘(1) IN GENERAL.—If a controlled foreign cor2 poration sells or exchanges stock in any other for3 eign corporation, gain recognized on such sale or ex4 change shall be included in the gross income of such

5 controlled foreign corporation as a dividend to the

6 same extent that it would have been so included

7 under section 1248(a) if such controlled foreign cor8 poration were a United States person. For purposes

9 of determining the amount which would have been so

10 includible, the determination of whether such other

11 foreign corporation was a controlled foreign corpora12 tion shall be made without regard to the preceding

13 sentence.

14 ‘‘(2) SAME COUNTRY EXCEPTION NOT APPLICA15 BLE.—Clause (i) of section 954(c)(3)(A) shall not

16 apply to any amount treated as a dividend by reason

17 of paragraph (1).

18 ‘‘(3) CLARIFICATION OF DEEMED SALES.—For

19 purposes of this subsection, a controlled foreign cor20 poration shall be treated as having sold or ex21 changed any stock if, under any provision of this

22 subtitle, such controlled foreign corporation is treat23 ed as having gain from the sale or exchange of such

24 stock.’’
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1 (b) AMENDMENT OF SECTION 904(d).—Clause (i) of

2 section 904(d)(2)(E) is amended by striking ‘‘and except

3 as provided in regulations, the taxpayer was a United

4 States shareholder in such corporation’’.

5 (c) EFFECTIVE DATES.—

6 (1) The amendment made by subsection (a)

7 shall apply to gain recognized on transactions occur8 ring after the date of the enactment of this Act.

9 (2) The amendment made by subsection (b)

10 shall apply to distributions after the date of the en11 actment of this Act.

12 SEC. 202. MISCELLANEOUS MODIFICATIONS TO SUBPART F.

13 (a) SECTION 1248 GAIN TAKEN INTO ACCOUNT IN

14 DETERMINING PRO RATA SHARE.—

15 (1) IN GENERAL.—Paragraph (2) of section

16 951(a) (defining pro rata share of subpart F in17 come) is amended by adding at the end the following

18 new sentence:

19 ‘‘For purposes of subparagraph (B), any gain in20 cluded in the gross income of any person as a divi21 dend under section 1248 shall be treated as a dis22 tribution received by such person with respect to the

23 stock involved.’’
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1 (2) EFFECTIVE DATE.—The amendment made

2 by paragraph (1) shall apply to dispositions after the

3 date of the enactment of this Act.

4 (b) BASIS ADJUSTMENTS IN STOCK HELD BY FOR5 EIGN CORPORATION.—

6 (1) IN GENERAL.—Section 961 (relating to ad7 justments to basis of stock in controlled foreign cor8 porations and of other property) is amended by add9 ing at the end the following new subsection:

10 ‘‘(c) BASIS ADJUSTMENTS IN STOCK HELD BY FOR11 EIGN CORPORATION.—Under regulations prescribed by

12 the Secretary, if a United States shareholder is treated

13 under section 958(a)(2) as owning any stock in a con14 trolled foreign corporation which is actually owned by an15 other controlled foreign corporation, adjustments similar

16 to the adjustments provided by subsections (a) and (b)

17 shall be made to the basis of such stock in the hands of

18 such other controlled foreign corporation, but only for the

19 purposes of determining the amount included under sec20 tion 951 in the gross income of such United States share21 holder (or any other United States shareholder who ac22 quires from any person any portion of the interest of such

23 United States shareholder by reason of which such share24 holder was treated as owning such stock, but only to the

25 extent of such portion, and subject to such proof of iden-
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1 tity of such interest as the Secretary may prescribe by reg2 ulations).’’

3 (2) EFFECTIVE DATE.—The amendment made

4 by paragraph (1) shall apply for purposes of deter5 mining inclusions for taxable years of United States

6 shareholders beginning after December 31, 1996.

7 (c) DETERMINATION OF PREVIOUSLY TAXED IN8 COME IN SECTION 304 DISTRIBUTIONS, ETC.—

9 (1) IN GENERAL.—Section 959 (relating to ex10 clusion from gross income of previously taxed earn11 ings and profits) is amended by adding at the end

12 the following new subsection:

13 ‘‘(g) ADJUSTMENTS FOR CERTAIN TRANSACTIONS.—

14 If, by reason of—

15 ‘‘(1) a transaction to which section 304 applies,

16 ‘‘(2) the structure of a United States sharehold17 er’s holdings in controlled foreign corporations, or

18 ‘‘(3) other circumstances,

19 there would be a multiple inclusion of any item in income

20 (or an inclusion or exclusion without an appropriate basis

21 adjustment) by reason of this subpart, the Secretary may

22 prescribe regulations providing such modifications in the

23 application of this subpart as may be necessary to elimi24 nate such multiple inclusion or provide such basis adjust25 ment, as the case may be.’’
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1 (2) EFFECTIVE DATE.—The amendment made

2 by paragraph (1) shall take effect on the date of the

3 enactment of this Act.

4 (d) CLARIFICATION OF TREATMENT OF BRANCH TAX

5 EXEMPTIONS OR REDUCTIONS.—

6 (1) IN GENERAL.—Subsection (b) of section

7 952 is amended by adding at the end the following

8 new sentence: ‘‘For purposes of this subsection, any

9 exemption (or reduction) with respect to the tax im10 posed by section 884 shall not be taken into ac11 count.’’

12 (2) EFFECTIVE DATE.—The amendment made

13 by paragraph (1) shall apply to taxable years begin14 ning after December 31, 1986.

15 SEC. 203. INDIRECT FOREIGN TAX CREDIT ALLOWED FOR

16 CERTAIN LOWER TIER COMPANIES.

17 (a) SECTION 902 CREDIT.—

18 (1) IN GENERAL.—Subsection (b) of section

19 902 (relating to deemed taxes increased in case of

20 certain 2nd and 3rd tier foreign corporations) is

21 amended to read as follows:

22 ‘‘(b) DEEMED TAXES INCREASED IN CASE OF CER23 TAIN LOWER TIER CORPORATIONS.—

24 ‘‘(1) IN GENERAL.—If—
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•S 2086 IS

1 ‘‘(A) any foreign corporation is a member

2 of a qualified group, and

3 ‘‘(B) such foreign corporation owns 10 per4 cent or more of the voting stock of another

5 member of such group from which it receives

6 dividends in any taxable year,

7 such foreign corporation shall be deemed to have

8 paid the same proportion of such other member’s

9 post-1986 foreign income taxes as would be deter10 mined under subsection (a) if such foreign corpora11 tion were a domestic corporation.

12 ‘‘(2) QUALIFIED GROUP.—For purposes of

13 paragraph (1), the term ‘qualified group’ means—

14 ‘‘(A) the foreign corporation described in

15 subsection (a), and

16 ‘‘(B) any other foreign corporation if—

17 ‘‘(i) the domestic corporation owns at

18 least 5 percent of the voting stock of such

19 other foreign corporation indirectly

20 through a chain of foreign corporations

21 connected through stock ownership of at

22 least 10 percent of their voting stock,

23 ‘‘(ii) the foreign corporation described

24 in subsection (a) is the first tier corpora25 tion in such chain, and
28

•S 2086 IS

1 ‘‘(iii) such other corporation is not

2 below the sixth tier in such chain.

3 The term ‘qualified group’ shall not include any for4 eign corporation below the third tier in the chain re5 ferred to in clause (i) unless such foreign corpora6 tion is a controlled foreign corporation (as defined in

7 section 957) and the domestic corporation is a Unit8 ed States shareholder (as defined in section 951(b))

9 in such foreign corporation. Paragraph (1) shall

10 apply to those taxes paid by a member of the quali11 fied group below the third tier only with respect to

12 periods during which it was a controlled foreign cor13 poration.’’

14 (2) CONFORMING AMENDMENTS.—

15 (A) Subparagraph (B) of section 902(c)(3)

16 is amended by adding ‘‘or’’ at the end of clause

17 (i) and by striking clauses (ii) and (iii) and in18 serting the following new clause:

19 ‘‘(ii) the requirements of subsection

20 (b)(2) are met with respect to such foreign

21 corporation.’’

22 (B) Subparagraph (B) of section 902(c)(4)

23 is amended by striking ‘‘3rd foreign corpora24 tion’’ and inserting ‘‘sixth tier foreign corpora25 tion’’.
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•S 2086 IS

1 (C) The heading for paragraph (3) of sec2 tion 902(c) is amended by striking ‘‘WHERE DO3 MESTIC CORPORATION ACQUIRES 10 PERCENT

4 OF FOREIGN CORPORATION’’ and inserting

5 ‘‘WHERE FOREIGN CORPORATION FIRST QUALI6 FIES’’.

7 (D) Paragraph (3) of section 902(c) is

8 amended by striking ‘‘ownership’’ each place it

9 appears.

10 (b) SECTION 960 CREDIT.—Paragraph (1) of section

11 960(a) (relating to special rules for foreign tax credits)

12 is amended to read as follows:

13 ‘‘(1) DEEMED PAID CREDIT.—For purposes of

14 subpart A of this part, if there is included under

15 section 951(a) in the gross income of a domestic cor16 poration any amount attributable to earnings and

17 profits of a foreign corporation which is a member

18 of a qualified group (as defined in section 902(b))

19 with respect to the domestic corporation, then, ex20 cept to the extent provided in regulations, section

21 902 shall be applied as if the amount so included

22 were a dividend paid by such foreign corporation

23 (determined by applying section 902(c) in accord24 ance with section 904(d)(3)(B)).’’

25 (c) EFFECTIVE DATE.—
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1 (1) IN GENERAL.—The amendments made by

2 this section shall apply to taxes of foreign corpora3 tions for taxable years of such corporations begin4 ning after the date of enactment of this Act.

5 (2) SPECIAL RULE.—In the case of any chain

6 of foreign corporations described in clauses (i) and

7 (ii) of section 902(b)(2)(B) of the Internal Revenue

8 Code of 1986 (as amended by this section), no liq9 uidation, reorganization, or similar transaction in a

10 taxable year beginning after the date of the enact11 ment of this Act shall have the effect of permitting

12 taxes to be taken into account under section 902 of

13 the Internal Revenue Code of 1986 which could not

14 have been taken into account under such section but

15 for such transaction.

16 SEC. 204. EXEMPTION FOR ACTIVE FINANCING INCOME.

17 (a) EXEMPTION FROM FOREIGN PERSONAL HOLD18 ING COMPANY INCOME.—Subsection (c) of section 954 is

19 amended by adding at the end the following new para20 graph:

21 ‘‘(4) CERTAIN INCOME DERIVED IN ACTIVE

22 CONDUCT OF TRADE OR BUSINESS.—

23 ‘‘(A) IN GENERAL.—For purposes of para24 graph (1), foreign personal holding company in25 come shall not include income which is—
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•S 2086 IS

1 ‘‘(i) derived in or incident to the ac2 tive conduct by a controlled foreign cor3 poration of a banking, financing, or similar

4 business, but only if the corporation is pre5 dominantly engaged in the active conduct

6 of such business,

7 ‘‘(ii) received from a person other

8 than a related person (within the meaning

9 of subsection (d)(3)) and derived from the

10 investments made by a qualifying insur11 ance company of its unearned premiums or

12 reserves ordinary and necessary for the

13 proper conduct of its insurance business,

14 or

15 ‘‘(iii) received from a person other

16 than a related person (within the meaning

17 of subsection (d)(3)) and derived from in18 vestments made by a qualifying insurance

19 company of an amount of its assets equal

20 to—

21 ‘‘(I) in the case of contracts reg22 ulated in the country in which sold as

23 property, casualty, or health insurance

24 contracts, one-third of its premiums

25 earned on insurance contracts during
32

•S 2086 IS

1 the taxable year (as defined in section

2 832(b)(4)), and

3 ‘‘(II) in the case of contracts reg4 ulated in the country in which sold as

5 life insurance or annuity contracts,

6 the greater of 10 percent of the re7 serves described in clause (ii) or

8 $10,000,000,

9 which are not directly or indirectly attrib10 utable to the insurance or reinsurance of

11 risks of persons who are related persons

12 (within the meaning of subsection (d)(3)).

13 ‘‘(B) APPLICABLE PRINCIPLES.—

14 ‘‘(i) BANKING, ETC. INCOME.—The

15 Secretary shall prescribe regulations which

16 interpret subparagraph (A)(i) in accord17 ance with the applicable principles of sec18 tion 904(d)(2)(C).

19 ‘‘(ii) LOOK-THRU RULES.—The Sec20 retary shall prescribe regulations consist21 ent with the principles of section 904(d)(3)

22 which provide that dividends, interest, in23 come equivalent to interest, rents, or royal24 ties received or accrued from a related per25 son (within the meaning of subsection
33

•S 2086 IS

1 (d)(3)) shall be subject to look-thru treat2 ment for purposes of this section.

3 ‘‘(iii) SPECIAL RULE FOR BANKING OR

4 SECURITIES BUSINESS.—In the case of a

5 corporation described in subparagraph

6 (C)(ii), the regulations under clauses (i)

7 and (ii) shall be consistent with the appli8 cable principles of section 1296(b) (as in

9 effect on the day before the enactment of

10 the International Tax Simplification for

11 American Competitiveness Act).

12 ‘‘(C) PREDOMINANTLY ENGAGED.—For

13 purposes of subparagraph (A)(i), a corporation

14 shall be deemed predominantly engaged in the

15 active conduct of a banking, financing or simi16 lar business only if—

17 ‘‘(i) more than 70 percent of its gross

18 income from such business is derived from

19 transactions with unrelated persons (as de20 fined in subsection (d)(3)), and more than

21 20 percent of its gross income from that

22 business is derived from transactions with

23 unrelated persons (as so defined) located

24 within the country under the laws of which
34

•S 2086 IS

1 the controlled foreign corporation is cre2 ated or organized, or

3 ‘‘(ii) the corporation is—

4 ‘‘(I) predominantly engaged in

5 the active conduct of a banking or se6 curities business (within the meaning

7 of section 1296(b), as in effect before

8 the enactment of the International

9 Tax Simplification for Competitive10 ness Act), or

11 ‘‘(II) a qualified bank affiliate or

12 a qualified securities affiliate for pur13 poses of section 1296(b) (as so in ef14 fect).

15 ‘‘(D) QUALIFYING INSURANCE COMPANY.—

16 For purposes of clauses (ii) and (iii) of sub17 paragraph (A), the term ‘qualifying insurance

18 company’ means any entity which is subject to

19 regulation as an insurance company under the

20 laws of its country of incorporation and which

21 realizes at least 50 percent of its gross income

22 (other than gross income derived from invest23 ments) from premiums written on risks situated

24 within its country of incorporation.’’
35

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1 (b) EXEMPTION FROM FOREIGN BASE COMPANY

2 SERVICES INCOME.—Paragraph (2) of section 954(e) is

3 amended by striking ‘‘or’’ at the end of subparagraph (A),

4 by striking the period at the end of subparagraph (B) and

5 inserting ‘‘, or’’, and by adding at the end the following:

6 ‘‘(C) the active conduct by a controlled for7 eign corporation of a banking, financing, insur8 ance, or similar business, but only if the cor9 poration is predominantly engaged in the active

10 conduct of that business (within the meaning of

11 subsection (c)(4)(C)).’’

12 (c) EFFECTIVE DATE.—The amendments made by

13 this section shall apply to taxable years of foreign corpora14 tions beginning after December 31, 1996, and to taxable

15 years of United States shareholders with or within which

16 such taxable years of foreign corporations end.

17 SEC. 205. REPEAL OF SEPARATE FOREIGN TAX CREDIT LIM18 ITATION FOR NONCONTROLLED SECTION 902

19 CORPORATIONS.

20 (a) REPEAL OF SEPARATE BASKET.—

21 (1) IN GENERAL.—Subparagraph (E) of section

22 904(d)(1) is amended to read as follows:

23 ‘‘(E) in the case of a corporation, divi24 dends from noncontrolled section 902 corpora25 tions out of earnings and profits accumulated in
36

•S 2086 IS

1 taxable years beginning before January 1,

2 1997,’’.

3 (2) CONFORMING AMENDMENTS.—

4 (A) Subparagraph (E) of section 904(d)(2)

5 is repealed.

6 (B) Section 904(d)(2)(A)(ii) is amended by

7 striking ‘‘subparagraph (E)(iii) or’’.

8 (C) Section 904(d)(2)(C)(iii)(II) is amend9 ed by inserting ‘‘out of earnings and profits ac10 cumulated in taxable years beginning before

11 January 1, 1997’’ after ‘‘corporation’’.

12 (b) APPLICATION OF LOOK-THRU RULES TO NON13 CONTROLLED SECTION 902 CORPORATIONS.—

14 (1) IN GENERAL.—Section 904(d)(3) is amend15 ed by adding at the end the following new subpara16 graph:

17 ‘‘(J) LOOK-THRU APPLIES TO NONCON18 TROLLED SECTION 902 CORPORATIONS.—

19 ‘‘(i) IN GENERAL.—For purposes of

20 this paragraph (other than subparagraph

21 (E) thereof)—

22 ‘‘(I) any foreign corporation

23 which is a noncontrolled section 902

24 corporation with respect to the tax25 payer shall be treated as a controlled
37

•S 2086 IS

1 foreign corporation with respect to the

2 taxpayer, and

3 ‘‘(II) the taxpayer shall be treat4 ed as a United States shareholder in

5 such corporation.

6 ‘‘(ii) NONCONTROLLED SECTION 902

7 CORPORATION.—For purposes of this sub8 section, the term ‘noncontrolled section

9 902 corporation’ means, with respect to

10 any taxpayer, any foreign corporation with

11 respect to which the taxpayer meets the

12 stock ownership requirements of subsection

13 (a) or (b) of section 902 and which is not

14 otherwise a controlled foreign corporation.’’

15 (2) CONFORMING AMENDMENTS.—

16 (A) Section 904(d)(5)(C) is amended by

17 inserting ‘‘or noncontrolled section 902 corpora18 tions’’ after ‘‘controlled foreign corporations’’.

19 (B) The heading for section 904(d)(3) is

20 amended by inserting ‘‘AND CERTAIN OTHER

21 CORPORATIONS’’ after ‘‘CORPORATIONS’’.

22 (c) EFFECTIVE DATES.—

23 (1) IN GENERAL.—The amendments made by

24 this section shall apply to taxable years of foreign

25 corporations beginning after December 31, 1996,
38

•S 2086 IS

1 and to taxable years of United States shareholders

2 with or within which such taxable years of foreign

3 corporations end.

4 (2) DIVIDENDS.—The amendments made by

5 this section shall apply to dividends paid out of

6 earnings and profits accumulated during taxable

7 years of foreign corporations beginning after Decem8 ber 31, 1996. For purposes of the preceding sen9 tence, the rules of section 316 of the Internal Reve10 nue Code of 1986 shall apply.

11 SEC. 206. COUNTRIES IN EUROPEAN UNION TREATED AS A

12 SINGLE COUNTRY UNDER SAME COUNTRY

13 EXCEPTIONS.

14 (a) IN GENERAL.—Subsection (d) of section 954 is

15 amended by adding at the end the following new para16 graph:

17 ‘‘(5) COUNTRIES IN EUROPEAN UNION TREAT18 ED AS 1 COUNTRY.—

19 ‘‘(A) IN GENERAL.—For purposes of this

20 subsection, subsections (c), (e), and (g), and

21 section 953(a)(1), in the case of a controlled

22 foreign corporation which is created or orga23 nized under the laws of a country included in

24 the European Union, all countries included in

25 such Union shall be considered 1 country.
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•S 2086 IS

1 ‘‘(B) EXCEPTION WHERE NO SUBSTANTIAL

2 EFFECTIVE RATE OF TAX.—Subparagraph (A)

3 shall not apply to a controlled foreign corpora4 tion unless such corporation is subject to a sub5 stantial effective rate of foreign tax on income

6 described in such subsection.’’

7 (b) EFFECTIVE DATE.—The amendment made by

8 this section shall apply to taxable years of foreign corpora9 tions beginning after December 31, 1996, and to taxable

10 years of United States shareholders with or within which

11 such taxable years of foreign corporations end.

12 SEC. 207. EXPANSION OF DE MINIMIS RULE UNDER SUB13 PART F.

14 (a) IN GENERAL.—Subparagraph (A) of section

15 954(b)(3) (relating to de minimis, etc., rules) is amended

16 to read as follows:

17 ‘‘(A) DE MINIMIS RULE.—If the sum of

18 foreign base company income (determined with19 out regard to paragraph (5)) and the gross in20 surance income for the taxable year is less than

21 10 percent of gross income, no part of the gross

22 income for the taxable year shall be treated as

23 foreign base company income or insurance in24 come.’’

25 (b) TECHNICAL AMENDMENTS.—
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•S 2086 IS

1 (1) Clause (ii) of section 864(d)(5)(A) is

2 amended by striking ‘‘5 percent or $1,000,000’’ and

3 inserting ‘‘10 percent’’.

4 (2) Clause (i) of section 881(c)(5)(A) is amend5 ed by striking ‘‘5 percent or $1,000,000’’ and insert6 ing ‘‘10 percent’’.

7 (c) EFFECTIVE DATE.—The amendments made by

8 this section shall apply to taxable years beginning after

9 December 31, 1996.

10 SEC. 208. SUBPART F EARNINGS AND PROFITS DETER11 MINED UNDER GENERALLY ACCEPTED AC12 COUNTING PRINCIPLES.

13 (a) IN GENERAL.—Subsection (a) of section 964 (re14 lating to miscellaneous provisions) is amended by striking

15 ‘‘rules substantially similar to those applicable to domestic

16 corporations, under regulations prescribed by the Sec17 retary’’ and inserting ‘‘generally accepted accounting prin18 ciples in the United States’’.

19 (b) EFFECTIVE DATE.—The amendment made by

20 subsection (a) shall apply to distributions during, and the

21 determination of the inclusion under section 951 of the

22 Internal Revenue Code of 1986 with respect to, taxable

23 years of foreign corporations beginning after December

24 31, 1996.
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•S 2086 IS

1 SEC. 209. AFFILIATED FOREIGN INSURANCE COMPANIES

2 MAY OFFSET LOSSES.

3 (a) IN GENERAL.—Section 953(d)(3) is amended by

4 adding at the end the following new subparagraph:

5 ‘‘(B) SPECIAL RULE WHERE 2 OR MORE

6 ELECTING COMPANIES ARE AFFILIATED.—If 2

7 or more corporations treated as domestic cor8 porations under this subsection—

9 ‘‘(i) were created or organized under

10 the laws of the same foreign country,

11 ‘‘(ii) are treated as members of the

12 same affiliated group for purposes of chap13 ter 6, and

14 ‘‘(iii) elect the application of this sub15 paragraph,

16 such corporations shall be treated as 1 corpora17 tion for purposes of subparagraph (A).’’

18 (b) CONFORMING AMENDMENT.—Section 953(d)(3)

19 is amended by striking ‘‘If’’ and inserting: ‘‘(A) IN GEN20 ERAL.—If’’.

21 (c) EFFECTIVE DATE.—The amendments made by

22 this section shall apply to taxable years beginning after

23 December 31, 1996.
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1 TITLE III—OTHER PROVISIONS

2 SEC. 301. EXCHANGE RATE USED IN TRANSLATING FOR3 EIGN TAXES.

4 (a) ACCRUED TAXES TRANSLATED BY USING AVER5 AGE RATE FOR YEAR TO WHICH TAXES RELATE.—

6 (1) IN GENERAL.—Subsection (a) of section

7 986 (relating to translation of foreign taxes) is

8 amended to read as follows:

9 ‘‘(a) FOREIGN INCOME TAXES.—

10 ‘‘(1) TRANSLATION OF ACCRUED TAXES.—

11 ‘‘(A) IN GENERAL.—For purposes of deter12 mining the amount of the foreign tax credit, in

13 the case of a taxpayer who takes foreign income

14 taxes into account when accrued, the amount of

15 any foreign income taxes (and any adjustment

16 thereto) shall be translated into dollars by using

17 the average exchange rate for the taxable year

18 to which such taxes relate.

19 ‘‘(B) EXCEPTION FOR TAXES NOT PAID

20 WITHIN FOLLOWING 2 YEARS.—

21 ‘‘(i) Subparagraph (A) shall not apply

22 to any foreign income taxes paid after the

23 date 2 years after the close of the taxable

24 year to which such taxes relate.
43

•S 2086 IS

1 ‘‘(ii) Subparagraph (A) shall not

2 apply to taxes paid before the beginning of

3 the taxable year to which such taxes relate.

4 ‘‘(C) EXCEPTION FOR INFLATIONARY CUR5 RENCIES.—Subparagraph (A) shall not apply to

6 any foreign income taxes the liability for which

7 is denominated in any currency determined to

8 be an inflationary currency under regulations

9 prescribed by the Secretary.

10 ‘‘(D) CROSS REFERENCE.—

‘‘For adjustments where tax is not paid within 2

years, see section 905(c).

11 ‘‘(2) TRANSLATION OF TAXES TO WHICH PARA12 GRAPH (1) DOES NOT APPLY.—For purposes of de13 termining the amount of the foreign tax credit, in

14 the case of any foreign income taxes to which sub15 paragraph (A) of paragraph (1) does not apply—

16 ‘‘(A) such taxes shall be translated into

17 dollars using the exchange rates as of the time

18 such taxes were paid to the foreign country or

19 possession of the United States, and

20 ‘‘(B) any adjustment to the amount of

21 such taxes shall be translated into dollars

22 using—

23 ‘‘(i) except as provided in clause (ii),

24 the exchange rate as of the time when such
44

•S 2086 IS

1 adjustment is paid to the foreign country

2 or possession, or

3 ‘‘(ii) in the case of any refund or cred4 it of foreign income taxes, using the ex5 change rate as of the time of the original

6 payment of such foreign income taxes.

7 ‘‘(3) FOREIGN INCOME TAXES.—For purposes

8 of this subsection, the term ‘foreign income taxes’

9 means any income, war profits, or excess profits

10 taxes paid or accrued to any foreign country or to

11 any possession of the United States.’’

12 (2) ADJUSTMENT WHEN NOT PAID WITHIN 2

13 YEARS AFTER YEAR TO WHICH TAXES RELATE.—

14 Subsection (c) of section 905 is amended to read as

15 follows:

16 ‘‘(c) ADJUSTMENTS TO ACCRUED TAXES.—

17 ‘‘(1) IN GENERAL.—If—

18 ‘‘(A) accrued taxes when paid differ from

19 the amounts claimed as credits by the taxpayer,

20 ‘‘(B) accrued taxes are not paid before the

21 date 2 years after the close of the taxable year

22 to which such taxes relate, or

23 ‘‘(C) any tax paid is refunded in whole or

24 in part,
45

•S 2086 IS

1 the taxpayer shall notify the Secretary, who shall re2 determine the amount of the tax for the year or

3 years affected.

4 ‘‘(2) SPECIAL RULE FOR TAXES NOT PAID

5 WITHIN 2 YEARS.—In making the redetermination

6 under paragraph (1), no credit shall be allowed for

7 accrued taxes not paid before the date referred to in

8 subparagraph (B) of paragraph (1). Any such taxes

9 subsequently paid shall be taken into account for the

10 taxable year to which they relate and a redetermina11 tion under this section shall be made on account of

12 such payment.

13 ‘‘(3) ADJUSTMENTS.—The amount of tax due

14 on any redetermination under paragraph (1) (if any)

15 shall be paid by the taxpayer on notice and demand

16 by the Secretary, and the amount of tax overpaid (if

17 any) shall be credited or refunded to the taxpayer in

18 accordance with subchapter B of chapter 66 (section

19 6511 et seq.).

20 ‘‘(4) BOND REQUIREMENTS.—In the case of

21 any tax accrued but not paid, the Secretary, as a

22 condition precedent to the allowance of the credit

23 provided in this subpart, may require the taxpayer

24 to give a bond, with sureties satisfactory to and ap25 proved by the Secretary, in such sum as the Sec-
46

•S 2086 IS

1 retary may require, conditioned on the payment by

2 the taxpayer of any amount of tax found due on any

3 such redetermination. Any such bond shall contain

4 such further conditions as the Secretary may re5 quire.

6 ‘‘(5) OTHER SPECIAL RULES.—In any redeter7 mination under paragraph (1) by the Secretary of

8 the amount of tax due from the taxpayer for the

9 year or years affected by a refund, the amount of

10 the taxes refunded for which credit has been allowed

11 under this section shall be reduced by the amount of

12 any tax described in section 901 imposed by the for13 eign country or possession of the United States with

14 respect to such refund; but no credit under this sub15 part, or deduction under section 164, shall be al16 lowed for any taxable year with respect to any such

17 tax imposed on the refund. No interest shall be as18 sessed or collected on any amount of tax due on any

19 redetermination by the Secretary, resulting from a

20 refund to the taxpayer, for any period before the re21 ceipt of such refund, except to the extent interest

22 was paid by the foreign country or possession of the

23 United States on such refund for such period.’’

24 (b) AUTHORITY TO USE AVERAGE RATES.—
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1 (1) IN GENERAL.—Subsection (a) of section

2 986 (as amended by subsection (a)) is amended by

3 redesignating paragraph (3) as paragraph (4) and

4 inserting after paragraph (2) the following new

5 paragraph:

6 ‘‘(3) AUTHORITY TO PERMIT USE OF AVERAGE

7 RATES.—To the extent prescribed in regulations, the

8 average exchange rate for the period (specified in

9 such regulations) during which the taxes or adjust10 ment is paid may be used instead of the exchange

11 rate as of the time of such payment.’’

12 (2) DETERMINATION OF AVERAGE RATES.—

13 Subsection (c) of section 989 is amended by striking

14 ‘‘and’’ at the end of paragraph (4), by striking the

15 period at the end of paragraph (5) and inserting ‘‘,

16 and’’, and by adding at the end the following new

17 paragraph:

18 ‘‘(6) setting forth procedures for determining

19 the average exchange rate for any period.’’

20 (3) CONFORMING AMENDMENTS.—Subsection

21 (b) of section 989 is amended by striking ‘‘weight22 ed’’ each place it appears.

23 (c) EFFECTIVE DATES.—

24 (1) IN GENERAL.—The amendments made by

25 subsections (a)(1) and (b) shall apply to taxes paid
48

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1 or accrued in taxable years beginning after Decem2 ber 31, 1996.

3 (2) SUBSECTION (a)(2).—The amendment made

4 by subsection (a)(2) shall apply to taxes which relate

5 to taxable years beginning after December 31, 1996.

6 SEC. 302. ELECTION TO USE SIMPLIFIED SECTION 904 LIMI7 TATION FOR ALTERNATIVE MINIMUM TAX.

8 (a) GENERAL RULE.—Subsection (a) of section 59

9 (relating to alternative minimum tax foreign tax credit)

10 is amended by adding at the end the following new para11 graph:

12 ‘‘(4) ELECTION TO USE SIMPLIFIED SECTION

13 904 LIMITATION.—

14 ‘‘(A) IN GENERAL.—In determining the al15 ternative minimum tax foreign tax credit for

16 any taxable year to which an election under this

17 paragraph applies—

18 ‘‘(i) subparagraph (B) of paragraph

19 (1) shall not apply, and

20 ‘‘(ii) the limitation of section 904

21 shall be based on the proportion which—

22 ‘‘(I) the taxpayer’s taxable in23 come (as determined for purposes of

24 the regular tax) from sources without

25 the United States (but not in excess
49

•S 2086 IS

1 of the taxpayer’s entire alternative

2 minimum taxable income), bears to

3 ‘‘(II) the taxpayer’s entire alter4 native minimum taxable income for

5 the taxable year.

6 ‘‘(B) ELECTION.—

7 ‘‘(i) IN GENERAL.—An election under

8 this paragraph may be made only for the

9 taxpayer’s first taxable year which begins

10 after December 31, 1996, and for which

11 the taxpayer claims an alternative mini12 mum tax foreign tax credit.

13 ‘‘(ii) ELECTION REVOCABLE ONLY

14 WITH CONSENT.—An election under this

15 paragraph, once made, shall apply to the

16 taxable year for which made and all subse17 quent taxable years unless revoked with

18 the consent of the Secretary.’’

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

20 this section shall apply to taxable years beginning after

21 December 31, 1996.

22 SEC. 303. MODIFICATION OF SECTION 1491.

23 (a) GENERAL RULE.—So much of chapter 5 (relating

24 to tax on transfers to avoid income tax) as precedes sec25 tion 1492 is amended to read as follows:
50

•S 2086 IS

1 ‘‘CHAPTER 5—TREATMENT OF TRANSFERS

2 TO AVOID INCOME TAX

‘‘Sec. 1491. Recognition of gain.

‘‘Sec. 1492. Exceptions.

3 ‘‘SEC. 1491. RECOGNITION OF GAIN.

4 ‘‘In the case of any transfer of property by a United

5 States person to a foreign corporation as paid-in surplus

6 or as a contribution to capital, to a foreign estate or trust,

7 or to a foreign partnership, for purposes of this subtitle

8 (other than for purposes of section 679), such transfer

9 shall be treated as a sale or exchange for an amount equal

10 to the fair market value of the property transferred, and

11 the transferor shall recognize as gain the excess of—

12 ‘‘(1) the fair market value of the property so

13 transferred, over

14 ‘‘(2) the adjusted basis (for purposes of deter15 mining gain) of such property in the hands of the

16 transferor.

17 If a trust which is not a foreign trust becomes a foreign

18 trust, such trust shall be treated for purposes of this sec19 tion as having transferred, immediately before becoming

20 a foreign trust, all of its assets to a foreign trust.’’

21 (b) CONFORMING AMENDMENTS.—

22 (1) Section 1057 is hereby repealed.

23 (2) Section 1492 is amended to read as follows:
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1 ‘‘SEC. 1492. EXCEPTIONS.

2 ‘‘The provisions of section 1491 shall not apply—

3 ‘‘(1) if the transferee is an organization exempt

4 from income tax under part I of subchapter F of

5 chapter 1 (other than an organization described in

6 section 401(a)),

7 ‘‘(2) to a transfer described in section 367, or

8 ‘‘(3) to any other transfer, to the extent pro9 vided in regulations in accordance with principles

10 similar to the principles of section 367 or otherwise

11 consistent with the purpose of section 1491.’’

12 (3) Section 1494 is hereby repealed.

13 (4) Paragraph (8) of section 6501(c) is amend14 ed by inserting ‘‘or on any transfer by reason of sec15 tion 1491’’ after ‘‘section 367’’.

16 (5) Subsection (a) of section 6038B is amended

17 by striking ‘‘or’’ at the end of paragraph (1), by

18 adding ‘‘or’’ at the end of paragraph (2), and by in19 serting after paragraph (2) the following new para20 graph:

21 ‘‘(3) makes any transfer described in section

22 1491,’’.

23 (6) The table of sections for part IV of sub24 chapter O of chapter 1 is amended by striking the

25 item relating to section 1057.
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1 (7) The table of chapters for subtitle A is

2 amended by striking ‘‘Tax on’’ in the item relating

3 to chapter 5 and inserting ‘‘Treatment of’’.

4 (c) EFFECTIVE DATE.—The amendments made by

5 this section shall apply to transfers after December 31,

6 1996.

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

8 (a) GENERAL RULE.—Paragraph (1) of section

9 367(b) is amended to read as follows:

10 ‘‘(1) IN GENERAL.—In the case of any trans11 action described in section 332, 351, 354, 355, 356,

12 or 361 in which the status of a foreign corporation

13 as a corporation is a general condition for non14 recognition by 1 or more of the parties to the trans15 action, income shall be required to be recognized to

16 the extent provided in regulations prescribed by the

17 Secretary which are necessary or appropriate to pre18 vent the avoidance of Federal income taxes. This

19 subsection shall not apply to a transaction in which

20 the foreign corporation is not treated as a corpora21 tion under subsection (a)(1).’’

22 (b) EFFECTIVE DATE.—The amendment made by

23 subsection (a) shall apply to transfers after December 31,

24 1996.
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1 SEC. 305. INCREASE IN FILING THRESHOLDS FOR RETURNS

2 AS TO ORGANIZATION OF FOREIGN COR3 PORATIONS AND ACQUISITIONS OF STOCK IN

4 SUCH CORPORATIONS.

5 (a) IN GENERAL.—Subsection (a) of section 6046

6 (relating to returns as to organization or reorganization

7 of foreign corporations and as to acquisitions of their

8 stock) is amended to read as follows:

9 ‘‘(a) REQUIREMENT OF RETURN.—

10 ‘‘(1) IN GENERAL.—A return complying with

11 the requirements of subsection (b) shall be made

12 by—

13 ‘‘(A) each United States citizen or resident

14 who becomes an officer or director of a foreign

15 corporation if a United States person (as de16 fined in section 7701(a)(30)) meets the stock

17 ownership requirements of paragraph (2) with

18 respect to such corporation,

19 ‘‘(B) each United States person—

20 ‘‘(i) who acquires stock which, when

21 added to any stock owned on the date of

22 such acquisition, meets the stock owner23 ship requirements of paragraph (2) with

24 respect to a foreign corporation, or

25 ‘‘(ii) who acquires stock which, with26 out regard to stock owned on the date of
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1 such acquisition, meets the stock owner2 ship requirements of paragraph (2) with

3 respect to a foreign corporation,

4 ‘‘(C) each person (not described in sub5 paragraph (B)) who is treated as a United

6 States shareholder under section 953(c) with

7 respect to a foreign corporation, and

8 ‘‘(D) each person who becomes a United

9 States person while meeting the stock owner10 ship requirements of paragraph (2) with respect

11 to stock of a foreign corporation.

12 In the case of a foreign corporation with respect to

13 which any person is treated as a United States

14 shareholder under section 953(c), subparagraph (A)

15 shall be treated as including a reference to each

16 United States person who is an officer or director of

17 such corporation.

18 ‘‘(2) STOCK OWNERSHIP REQUIREMENTS.—A

19 person meets the stock ownership requirements of

20 this paragraph with respect to any corporation if

21 such person owns 10 percent or more of—

22 ‘‘(A) the total combined voting power of all

23 classes of stock of such corporation entitled to

24 vote, or
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1 ‘‘(B) the total value of the stock of such

2 corporation.’’

3 (b) EFFECTIVE DATE.—The amendment made by

4 this section shall take effect on January 1, 1997.

5 SEC. 306. APPLICATION OF UNIFORM CAPITALIZATION

6 RULES TO FOREIGN PERSONS.

7 (a) IN GENERAL.—Section 263A(c) (relating to ex8 ceptions) is amended by adding at the end the following

9 new paragraph:

10 ‘‘(7) FOREIGN PERSONS.—This section shall

11 apply to any taxpayer who is not a United States

12 person only for purposes of tax liability with respect

13 to income which is effectively connected with the

14 conduct of a trade or business in the United

15 States.’’

16 (b) EFFECTIVE DATE.—The amendment made by

17 subsection (a) shall apply to taxable years beginning after

18 December 31, 1996. Section 481 of the Internal Revenue

19 Code of 1986 shall not apply to any change in a method

20 of accounting by reason of such amendment.

21 SEC. 307. EXTENSION OF PERIOD TO WHICH EXCESS FOR22 EIGN TAXES MAY BE CARRIED.

23 (a) GENERAL RULE.—Subsection (c) of section 904

24 (relating to carryback and carryover of excess tax paid)

25 is amended—
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1 (1) by inserting ‘‘in the third preceding taxable

2 year,’’ before ‘‘in the second preceding taxable

3 year’’, and

4 (2) by striking ‘‘in the first, second, third,

5 fourth, or fifth’’ and inserting ‘‘in any of the first

6 15’’.

7 (b) EXCESS EXTRACTION TAXES.—Paragraph (1) of

8 section 907(f) is amended—

9 (1) by inserting ‘‘in the third preceding taxable

10 year,’’ before ‘‘in the second preceding taxable

11 year’’, and

12 (2) by striking ‘‘in the first, second, third,

13 fourth, or fifth’’ and inserting ‘‘in any of the first

14 15’’.

15 (c) EFFECTIVE DATE.—The amendments made by

16 this section shall apply to excess foreign taxes for taxable

17 years beginning after December 31, 1996.

18 SEC. 308. RECHARACTERIZATION OF OVERALL DOMESTIC

19 LOSS.

20 (a) GENERAL RULE.—Section 904 is amended by re21 designating subsections (g), (h), (i), and (j) as subsections

22 (h), (i), (j), and (k), respectively, and by inserting after

23 subsection (f) the following new subsection:

24 ‘‘(g) RECHARACTERIZATION OF OVERALL DOMESTIC

25 LOSS.—
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1 ‘‘(1) GENERAL RULE.—For purposes of this

2 subpart, in the case of any taxpayer who sustains an

3 overall domestic loss for any taxable year beginning

4 after December 31, 1996, that portion of the tax5 payer’s taxable income from sources within the Unit6 ed States for each succeeding taxable year which is

7 equal to the lesser of—

8 ‘‘(A) the amount of such loss (to the extent

9 not used under this paragraph in prior taxable

10 years), or

11 ‘‘(B) 50 percent of the taxpayer’s taxable

12 income from sources within the United States

13 for such succeeding taxable year,

14 shall be treated as income from sources without the

15 United States (and not as income from sources with16 in the United States).

17 ‘‘(2) OVERALL DOMESTIC LOSS DEFINED.—For

18 purposes of this subsection—

19 ‘‘(A) IN GENERAL.—The term ‘overall do20 mestic loss’ means any domestic loss to the ex21 tent such loss offsets taxable income from

22 sources without the United States for the tax23 able year or for any preceding taxable year by

24 reason of a carryback. For purposes of the pre25 ceding sentence, the term ‘domestic loss’ means
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1 the amount by which the gross income for the

2 taxable year from sources within the United

3 States is exceeded by the sum of the deductions

4 properly apportioned or allocated thereto (deter5 mined without regard to any carryback from a

6 subsequent taxable year).

7 ‘‘(B) TAXPAYER MUST HAVE ELECTED

8 FOREIGN TAX CREDIT FOR YEAR OF LOSS.—

9 The term ‘overall domestic loss’ shall not in10 clude any loss for any taxable year unless the

11 taxpayer chose the benefits of this subpart for

12 such taxable year.

13 ‘‘(3) CHARACTERIZATION OF SUBSEQUENT IN14 COME.—

15 ‘‘(A) IN GENERAL.—Any income from

16 sources within the United States that is treated

17 as income from sources without the United

18 States under paragraph (1) shall be allocated

19 among and increase the income categories in

20 proportion to the loss from sources within the

21 United States previously allocated to those in22 come categories.

23 ‘‘(B) INCOME CATEGORY.—For purposes of

24 this paragraph, the term ‘income category’ has
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1 the meaning given to such term by subsection

2 (f)(5)(E)(i).

3 ‘‘(4) COORDINATION WITH SUBSECTION (f).—

4 The Secretary shall prescribe such regulations as

5 may be necessary to coordinate the provisions of this

6 subsection with the provisions of subsection (f).’’

7 (b) CONFORMING AMENDMENT.—Subparagraph (A)

8 of section 936(a)(2) is amended by striking ‘‘section

9 904(f)’’ and inserting ‘‘subsections (f) and (g) of section

10 904’’.

11 (c) EFFECTIVE DATE.—The amendments made by

12 this section shall apply to losses for taxable years begin13 ning after December 31, 1996.

14 SEC. 309. TREATMENT OF NONRESIDENT ALIENS ENGAGED

15 IN INTERNATIONAL TRANSPORTATION SERV16 ICES.

17 (a) SOURCING RULES.—

18 (1) IN GENERAL.—Section 861(a)(3) is amend19 ed by adding at the end the following new flush sen20 tence:

21 ‘‘In addition, compensation for labor or services per22 formed in the United States shall not be deemed to

23 be income from sources within the United States if

24 the labor or services are performed by a nonresident

25 alien individual in connection with the individual’s
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1 temporary presence in the United States as a mem2 ber of the crew of a foreign aircraft or vessel en3 gaged in transportation between the United States

4 and a foreign country or a possession of the United

5 States.’’

6 (2) TRANSPORTATION INCOME.—Subparagraph

7 (B) of section 863(c)(2) is amended by inserting

8 ‘‘the taxpayer is a citizen or resident alien and’’

9 after ‘‘unless’’.

10 (b) EXCLUSION FROM INCOME.—Section 872(b) is

11 amended by redesignating paragraphs (6) and (7) as para12 graphs (7) and (8), respectively, and by inserting after

13 paragraph (5) the following new paragraph:

14 ‘‘(6) PERSONAL SERVICES OF CREW MEM15 BERS.—Income derived by an individual resident of

16 a foreign country from personal services as an indi17 vidual crew member on board a vessel or aircraft to

18 which paragraph (1) or (2) applies.’’

19 (c) PRESENCE IN UNITED STATES.—

20 (1) IN GENERAL.—Paragraph (7) of section

21 7701(b) is amended by adding at the end the follow22 ing new subparagraph:

23 ‘‘(D) CREW MEMBERS TEMPORARILY

24 PRESENT.—If an individual is temporarily

25 present in the United States as a member of
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1 the crew of a foreign aircraft or vessel engaged

2 in transportation between the United States

3 and a foreign country or a possession of the

4 United States, such individual shall not be

5 treated as present in the United States on any

6 such day.’’

7 (2) CONFORMING AMENDMENT.—Subparagraph

8 (A) of section 7701(b)(7) is amended by striking ‘‘or

9 (C)’’ and inserting ‘‘, (C), or (D)’’.

10 (d) EFFECTIVE DATES.—

11 (1) IN GENERAL.—The amendments made by

12 this section shall apply to remuneration for services

13 performed after the date of the enactment of this

14 Act.

15 (2) PRESENCE.—The amendment made by sub16 section (c) shall apply to taxable years beginning

17 after December 31, 1996.

18 SEC. 310. EXPORT PROPERTY OF FSC TO INCLUDE COM19 PUTER SOFTWARE.

20 (a) IN GENERAL.—Section 927(a)(2) is amended by

21 adding at the end the following new sentence: ‘‘Computer

22 software (whether or not patented) shall not be treated

23 as described in subparagraph (B).’’
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1 (b) EFFECTIVE DATE.—The amendment made by

2 this section shall apply to sales, exchanges, or other dis3 positions after the date of the enactment of this Act.

4 SEC. 311. SPECIAL RULES RELATING TO FINANCIAL SERV5 ICES INCOME.

6 (a) EXCEPTION FOR INTEREST ON CERTAIN SECURI7 TIES.—Subparagraph (B) of section 904(d)(2) (relating to

8 high withholding tax interest) is amended by redesignating

9 clause (iii) as clause (iv) and by inserting after clause (ii)

10 the following new clause:

11 ‘‘(iii) EXCEPTION FOR INTEREST ON

12 DEALER PROPERTY.—The term ‘high with13 holding tax interest’ shall not include any

14 interest on a security (within the meaning

15 of section 475(c)(2)) which is received or

16 accrued by a person that holds the security

17 in connection with the holder’s activities as

18 a dealer in securities (within the meaning

19 of section 475(c)(1)).’’

20 (b) DE MINIMIS RULE.—Subparagraph (C) of sec21 tion 904(d)(2) (relating to financial services income) is

22 amended by adding at the end the following new clause:

23 ‘‘(iv) DE MINIMIS RULE.—If the fi24 nancial services income (as defined by

25 clause (i)) of any person exceeds 80 per-
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1 cent of gross income, the entire gross in2 come for the taxable year shall be treated

3 as financial services income.’’

4 (c) EXCEPTION FOR INCOME ON DEALER PROP5 ERTY.—Subsection 904(g) is amended by redesignating

6 paragraph (11) as paragraph (12) and by adding after

7 paragraph (10) the following new paragraph:

8 ‘‘(11) EXCEPTION FOR INCOME ON DEALER

9 PROPERTY.—Paragraph (1) shall not apply to any

10 amount derived from a United States-owned foreign

11 corporation that is derived from income on a secu12 rity (within the meaning of section 475(c)(2)) which

13 is received or accrued by a person that holds the se14 curity in connection with the holder’s activities as a

15 dealer in securities (within the meaning of section

16 475(c)(1)).’’

17 (d) EFFECTIVE DATES.—

18 (1) IN GENERAL.—The amendments made by

19 this section shall apply to taxable years beginning

20 after December 31, 1996.

21 (2) DEEMED PAID CREDITS.—In the case of

22 any credit under section 901 of the Internal Revenue

23 Code of 1986 by reason of section 902 or 960 of

24 such Code, the amendments made by this section

25 shall apply to taxable years of foreign corporations
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1 beginning after December 31, 1996, and to taxable

2 years of United States shareholders in such corpora3 tions with or within which such taxable years of for4 eign corporations end.

5 SEC. 312. UNITED STATES PROPERTY NOT TO INCLUDE

6 CERTAIN ASSETS ACQUIRED BY DEALERS IN

7 ORDINARY COURSE OF TRADE OR BUSINESS.

8 (a) IN GENERAL.—Section 956(c)(2) is amended by

9 striking ‘‘and’’ at the end of subparagraph (H), by strik10 ing the period at the end of subparagraph (I) and insert11 ing a semicolon, and by adding at the end the following

12 new subparagraphs:

13 ‘‘(J) deposits of cash or securities made or

14 received on commercial terms in the ordinary

15 course of a United States or foreign person’s

16 business as a dealer in securities or in commod17 ities, but only to the extent such deposits are

18 made or received as collateral or margin for (i)

19 a securities loan, notional principal contract,

20 options contract, forward contract, or futures

21 contract, or (ii) any other financial transaction

22 in which the Secretary determines that it is cus23 tomary to post collateral or margin;

24 ‘‘(K) an obligation of a United States per25 son to the extent the principal amount of the
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1 obligation does not exceed the fair market value

2 of readily marketable securities sold or pur3 chased pursuant to a sale and repurchase

4 agreement or otherwise posted or received as

5 collateral for the obligation in the ordinary

6 course of its business by a United States or for7 eign person which is a dealer in securities or

8 commodities; and

9 ‘‘(L) securities acquired and held by a con10 trolled foreign corporation in the ordinary

11 course of its business as a dealer in securities

12 if (i) the dealer accounts for the securities as

13 securities held primarily for sale to customers

14 in the ordinary course of business, and (ii) the

15 dealer disposes of the securities (or they mature

16 while held by the dealer) within a period con17 sistent with the holding of securities for sale to

18 customers in the ordinary course of business.

19 For purposes of subparagraphs (J), (K), and (L),

20 the term ‘dealer in securities’ has the meaning given

21 such term by section 475(c)(1), and the term ‘dealer

22 in commodities’ means a futures commission mer23 chant or any person which would be a dealer in se24 curities if securities under section 475(c)(2) included

25 commodities, evidences of an interest in commod-
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1 ities, and derivative instruments in respect of com2 modities (other than any activity gain or loss from

3 which is described in section 1256(a)(3)).’’

4 (b) EFFECTIVE DATE.—The amendments made by

5 this section shall apply to taxable years of foreign corpora6 tions beginning after December 31, 1996, and to taxable

7 years of United States shareholders or with or within

8 which such taxable years of foreign corporations end.

Æ