I

105TH CONGRESS

1ST SESSION H. R. 599

To amend the Internal Revenue Code of 1986 to reduce tax benefits for

foreign corporations, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

FEBRUARY 5, 1997

Mr. EVANS (for himself, Mr. LIPINSKI, Mr. FRANK of Massachusetts, Mr.

SABO, Mr. DELLUMS, Mr. DEFAZIO, and Mr. SANDERS) introduced the

following bill; which was referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to reduce

tax benefits for foreign corporations, 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.

4 This Act may be cited as the ‘‘Corporate Welfare

5 Reduction Act of 1997’’.

6 SEC. 2. FOREIGN OIL AND GAS INCOME.

7 (a) SPECIAL RULES FOR FOREIGN TAX CREDIT

8 WITH RESPECT TO FOREIGN OIL AND GAS INCOME.—

9 (1) CERTAIN TAXES NOT CREDITABLE.—
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1 (A) IN GENERAL.—Subsection (a) of sec2 tion 907 of the Internal Revenue Code of 1986

3 (relating to reduction in amount allowed as for4 eign tax under section 901) is amended to read

5 as follows:

6 ‘‘(a) CERTAIN TAXES NOT CREDITABLE.—

7 ‘‘(1) IN GENERAL.—For purposes of this sub8 title, the term ‘income, war profits, and excess prof9 its taxes’ shall not include—

10 ‘‘(A) any taxes which are paid or accrued

11 to any foreign country with respect to foreign

12 oil and gas income and which are not imposed

13 under a generally applicable income tax law of

14 such country, and

15 ‘‘(B) any taxes (not described in subpara16 graph (A)) which are paid or accrued to any

17 foreign country with respect to foreign oil and

18 gas income to the extent that the foreign law

19 imposing such amount of tax is structured, or

20 in fact operates, so that the amount of tax im21 posed with respect to foreign oil and gas income

22 will generally be materially greater, over a rea23 sonable period of time, than the amount gen24 erally imposed on income that is not foreign oil

25 and gas income.
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1 In computing the amount not treated as tax under

2 subparagraph (B), such amount shall be treated as

3 a deduction under the foreign law.

4 ‘‘(2) FOREIGN OIL AND GAS INCOME.—For pur5 poses of this paragraph, the term ‘foreign oil and

6 gas income’ means the amount of foreign oil and gas

7 extraction income and foreign oil related income.

8 ‘‘(3) GENERALLY APPLICABLE INCOME TAX

9 LAW.—For purposes of this paragraph, the term

10 ‘generally applicable income tax law’ means any law

11 of a foreign country imposing an income tax if such

12 tax generally applies to all income from sources

13 within such foreign country—

14 ‘‘(A) without regard to the residence or na15 tionality of the person earning such income,

16 and

17 ‘‘(B) in the case of any income earned by

18 a corporation, partnership, or other entity,

19 without regard to—

20 ‘‘(i) where such corporation, partner21 ship, or other entity is organized, and

22 ‘‘(ii) the residence or nationality of

23 the persons owning interests in such cor24 poration, partnership, or entity.’’
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1 (B) CONFORMING AMENDMENT.—Section

2 907 of such Code is amended by striking sub3 sections (b), (c)(3), (c)(4), (c)(5), and (f).

4 (2) SEPARATE BASKETS FOR FOREIGN OIL AND

5 GAS EXTRACTION INCOME AND FOREIGN OIL RELAT6 ED INCOME.—

7 (A) IN GENERAL.—Paragraph (1) of sec8 tion 904(d) of such Code (relating to separate

9 application of section with respect to certain

10 categories of income) is amended by striking

11 ‘‘and’’ at the end of subparagraph (H), by re12 designating subparagraph (I) as subparagraph

13 (K) and by inserting after subparagraph (H)

14 the following new subparagraphs:

15 ‘‘(I) foreign oil and gas extraction income,

16 ‘‘(J) foreign oil related income, and’’.

17 (B) DEFINITIONS.—Paragraph (2) of sec18 tion 904(d) of such Code is amended by redes19 ignating subparagraphs (H) and (I) as subpara20 graphs (J) and (K), respectively, and by insert21 ing after subparagraph (G) the following new

22 subparagraphs:

23 ‘‘(H) FOREIGN OIL AND GAS EXTRACTION

24 INCOME.—The term ‘foreign oil and gas extrac25 tion income’ has the meaning given such term
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1 by section 907(c)(1). Such term shall not in2 clude any dividend from a noncontrolled section

3 902 corporation.

4 ‘‘(I) FOREIGN OIL RELATED INCOME.—

5 The term ‘foreign oil related income’ has the

6 meaning given such term by section 907(c)(2).

7 Such term shall not include any dividend from

8 a noncontrolled section 902 corporation and any

9 shipping income.’’

10 (C) CONFORMING AMENDMENT.—Clause

11 (i) of section 904(d)(3)(F) of such Code is

12 amended by striking ‘‘or (E)’’ and inserting

13 ‘‘(E), (I), or (J)’’.

14 (3) EFFECTIVE DATE.—

15 (A) IN GENERAL.—Except as otherwise

16 provided in this paragraph, the amendments

17 made by this subsection shall apply to taxable

18 years beginning after December 31, 1997.

19 (B) DISALLOWANCE RULE.—

20 (i) Section 907(a) of such Code (as

21 amended by paragraph (1)) shall apply to

22 taxes paid or accrued after December 31,

23 1997, in taxable years ending after such

24 date.
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1 (ii) In determining the amount of

2 taxes deemed to be paid in a taxable year

3 beginning after December 31, 1997, under

4 section 902 or 960 of such Code, section

5 907(a) of such Code (as amended by para6 graph (1)) shall apply to all taxes whether

7 paid or accrued before, on, or after Decem8 ber 31, 1997.

9 (C) LOSS RULE.—Notwithstanding the

10 amendments made by paragraph (1)(B), section

11 907(c)(4) of such Code shall continue to apply

12 with respect to foreign oil and gas extraction

13 losses for taxable years beginning before Janu14 ary 1, 1998.

15 (D) TRANSITIONAL RULES.—

16 (i) Any taxes paid or accrued in a tax17 able year beginning before January 1,

18 1998, with respect to income which was

19 described in subparagraph (I) of section

20 904(d)(1) of such Code (as in effect on the

21 day before the date of the enactment of

22 this Act) shall be treated as taxes paid or

23 accrued with respect to foreign oil and gas

24 extraction income or foreign oil related in25 come (as the case may be) to the extent
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1 such taxes were paid or accrued with re2 spect to such type of income.

3 (ii) Any unused oil and gas extraction

4 taxes which under section 907(f) of such

5 Code (as so in effect) would have been al6 lowed as a carryover to the taxpayer’s first

7 taxable year beginning after December 31,

8 1997 (determined without regard to the

9 limitation of paragraph (2) of such section

10 907(f) for such first taxable year), shall be

11 allowed as carryovers under section 904(c)

12 of such Code in the same manner as if

13 they were unused taxes under section

14 904(c) with respect to foreign oil and gas

15 extraction income.

16 (b) ELIMINATION OF DEFERRAL FOR FOREIGN OIL

17 AND GAS EXTRACTION INCOME.—

18 (1) GENERAL RULE.—Paragraph (1) of section

19 954(g) of the Internal Revenue Code of 1986 (defin20 ing foreign base company oil related income) is

21 amended to read as follows:

22 ‘‘(1) IN GENERAL.—Except as otherwise pro23 vided in this subsection, the term ‘foreign oil and

24 gas income’ means any income of a kind which
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1 would be taken into account in determining the

2 amount of—

3 ‘‘(A) foreign oil and gas extraction income

4 (as defined in section 907(c)(1)), or

5 ‘‘(B) foreign oil related income (as defined

6 in section 907(c)(2)).’’

7 (2) CONFORMING AMENDMENTS.—

8 (A)(i) Subsections (a)(5), (b)(5), and

9 (b)(8) of section 954 of such Code are each

10 amended by striking ‘‘base company oil related

11 income’’ each place it appears (including in the

12 heading of subsection (b)(8)) and inserting ‘‘oil

13 and gas income’’.

14 (ii) Subsection (b)(4) of section 954 of

15 such Code is amended by striking ‘‘base com16 pany oil-related income’’ and inserting ‘‘oil and

17 gas income’’.

18 (B) The subsection heading for subsection

19 (g) of section 954 of such Code is amended by

20 striking ‘‘FOREIGN BASE COMPANY OIL RE21 LATED INCOME’’ and inserting ‘‘FOREIGN OIL

22 AND GAS INCOME’’.

23 (C) Subparagraph (A) of section 954(g)(2)

24 of such Code is amended by striking ‘‘foreign
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1 base company oil related income’’ and inserting

2 ‘‘foreign oil and gas income’’.

3 (3) EFFECTIVE DATE.—The amendments made

4 by this subsection shall apply to taxable years of for5 eign corporations beginning after December 31,

6 1997, and to taxable years of United States share7 holders in which or with which such taxable years of

8 foreign corporations end.

9 SEC. 3. TRANSFER PRICING.

10 (a) AUTHORITY OF SECRETARY WHEN LEGAL LIM11 ITS ON TRANSFER BY TAXPAYER.—Section 482 of the In12 ternal Revenue Code of 1986 (relating to allocation of in13 come and deductions among taxpayers) is amended by

14 adding at the end the following: ‘‘The authority of the Sec15 retary under this section shall not be limited by any re16 striction (by any law or agreement) on the ability of such

17 interests, organizations, trades, or businesses to transfer

18 or receive money or other property.’’

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

20 this section shall apply to taxable years beginning after

21 December 31, 1997.
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1 SEC. 4. EXCLUSION OF FOREIGN EARNED INCOME USED

2 FOR FOREIGN TUITION COSTS IN LIEU OF

3 $70,000 EXCLUSION, OTHER THAN FOR EM4 PLOYEES OF CERTAIN TAX-EXEMPT ORGANI5 ZATIONS.

6 (a) IN GENERAL.—Paragraph (1) of section 911(a)

7 of the Internal Revenue Code of 1986 (relating to exclu8 sion from income) is amended by striking ‘‘foreign earned

9 income’’ and inserting ‘‘applicable foreign-earned

10 amount’’.

11 (b) TUITION EXCLUSION IN LIEU OF INCOME EX12 CLUSION.—Subsection (b) of section 911 of such Code is

13 amended—

14 (1) by redesignating paragraphs (1) and (2) as

15 paragraphs (2) and (3), respectively,

16 (2) by inserting after the heading the following

17 new paragraph:

18 ‘‘(1) APPLICABLE FOREIGN-EARNED

19 AMOUNT.—For purposes of this section, the term

20 ‘applicable foreign-earned amount’ means—

21 ‘‘(A) foreign earned income, in the case of

22 an individual who is an employee of an organi23 zation described in paragraph (3) or (4) of sec24 tion 501(c) and exempt from tax under section

25 501(a), and
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1 ‘‘(B) the foreign tuition amount, in the

2 case of an individual not described in subpara3 graph (A).’’, and

4 (3) by adding at the end the following new

5 paragraphs:

6 ‘‘(4) FOREIGN TUITION AMOUNT.—

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

8 section, the term ‘foreign tuition amount’

9 means so much of the foreign earned income of

10 the individual as does not exceed the tuition

11 paid by the individual during the taxable year

12 for the education of a dependent child—

13 ‘‘(i) in the country in which is located

14 the abode referred to in clause (i) or (ii) of

15 subsection (c)(2)(B),

16 ‘‘(ii) at an educational organization

17 described in section 170(b)(1)(A)(ii), and

18 ‘‘(iii) during the taxable year or dur19 ing the first 5 months of the next taxable

20 year.

21 For purposes of this subparagraph, the term

22 ‘education’ does not include education above the

23 secondary school level.

24 ‘‘(B) DEPENDENT CHILD.—For purposes

25 of subparagraph (A), the term ‘dependent child’
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1 means an individual who is a son or daughter

2 of the taxpayer and is a dependent of the tax3 payer (within the meaning of section 152).

4 Rules similar to the rules of section 152(b)(2)

5 shall apply for purposes of this subparagraph.

6 ‘‘(5) SPECIAL RULE IF EMPLOYED BY TAX-EX7 EMPT ORGANIZATION FOR PART OF YEAR.—For pur8 poses of this subsection, a qualified individual who

9 is an employee described in paragraph (1)(A) for

10 less than the entire taxable year shall be treated, for

11 the taxable year—

12 ‘‘(A) as being such an employee, if such in13 dividual was such an employee for at least a 6-

14 month period during the taxable year, and

15 ‘‘(B) as not being such an employee, if

16 such individual is not described in subpara17 graph (A).

18 An individual may elect to be treated as not de19 scribed in subparagraph (A) for the taxable year.’’

20 (b) CONFORMING AMENDMENTS.—

21 (1) Paragraph (4) of section 86(f) of such Code

22 is amended by striking ‘‘section 911(b)(1)’’ and in23 serting ‘‘section 911(b)(2)’’.

24 (2) Subsection (b) of section 911 of such Code

25 is amended in the heading by striking ‘‘FOREIGN
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1 EARNED INCOME’’ and inserting ‘‘APPLICABLE FOR2 EIGN-EARNED AMOUNT’’.

3 (3) Paragraph (2) of section 911(b) of such

4 Code (as redesignated by this section) is amended in

5 the heading by striking ‘‘DEFINITION’’ and inserting

6 ‘‘FOREIGN EARNED INCOME’’.

7 (4) Subparagraph (E) of section 911(c)(3) of

8 such Code is amended by striking ‘‘subsection

9 (b)(2)’’ and inserting ‘‘subsection (b)(3)’’.

10 (5) Paragraph (4) of section 911(d) of such

11 Code is amended by striking ‘‘subsections (b)(2)(A)

12 and’’ and inserting ‘‘subsections (b)(3)(A) and’’.

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

14 this section shall apply to taxable years beginning after

15 the date of the enactment of this Act.

16 SEC. 5. DISPOSITION OF STOCK IN DOMESTIC CORPO17 RATIONS BY 10-PERCENT FOREIGN SHARE18 HOLDERS.

19 (a) GENERAL RULE.—Subpart D of part II of sub20 chapter N of chapter 1 of the Internal Revenue Code of

21 1986 (relating to miscellaneous provisions) is amended by

22 adding at the end the following new section:
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1 ‘‘SEC. 899. DISPOSITION OF STOCK IN DOMESTIC CORPO2 RATIONS BY 10-PERCENT FOREIGN SHARE3 HOLDERS.

4 ‘‘(a) GENERAL RULE.—

5 ‘‘(1) TREATMENT AS EFFECTIVELY CONNECTED

6 WITH UNITED STATES TRADE OR BUSINESS.—For

7 purposes of this title, if any nonresident alien indi8 vidual or foreign corporation is a 10-percent share9 holder in any domestic corporation, any gain or loss

10 of such individual or foreign corporation from the

11 disposition of any stock in such domestic corporation

12 shall be taken into account—

13 ‘‘(A) in the case of a nonresident alien in14 dividual, under section 871(b)(1), or

15 ‘‘(B) in the case of a foreign corporation,

16 under section 882(a)(1),

17 as if the taxpayer were engaged during the taxable

18 year in a trade or business within the United States

19 through a permanent establishment in the United

20 States and as if such gain or loss were effectively

21 connected with such trade or business and attrib22 utable to such permanent establishment. Notwith23 standing section 865, any such gain or loss shall be

24 treated as from sources in the United States.

25 ‘‘(2) 26-PERCENT MINIMUM TAX ON NON26 RESIDENT ALIEN INDIVIDUALS.—
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1 ‘‘(A) IN GENERAL.—In the case of any

2 nonresident alien individual, the amount deter3 mined under section 55(b)(1)(A) shall not be

4 less than 26 percent of the lesser of—

5 ‘‘(i) the individual’s alternative mini6 mum taxable income (as defined in section

7 55(b)(2)) for the taxable year, or

8 ‘‘(ii) the individual’s net taxable stock

9 gain for the taxable year.

10 ‘‘(B) NET TAXABLE STOCK GAIN.—For

11 purposes of subparagraph (A), the term ‘net

12 taxable stock gain’ means the excess of—

13 ‘‘(i) the aggregate gains for the tax14 able year from dispositions of stock in do15 mestic corporations with respect to which

16 such individual is a 10-percent share17 holder, over

18 ‘‘(ii) the aggregate of the losses for

19 the taxable year from dispositions of such

20 stock.

21 ‘‘(C) COORDINATION WITH SECTION

22 897(a)(2).—Section 897(a)(2)(A) shall not apply

23 to any nonresident alien individual for any tax24 able year for which such individual has a net

25 taxable stock gain, but the amount of such net
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1 taxable stock gain shall be increased by the

2 amount of such individual’s net United States

3 real property gain (as defined in section

4 897(a)(2)(B)) for such taxable year.

5 ‘‘(b) 10-PERCENT SHAREHOLDER.—

6 ‘‘(1) IN GENERAL.—For purposes of this sec7 tion, the term ‘10-percent shareholder’ means any

8 person who at any time during the shorter of—

9 ‘‘(A) the period beginning on January 1,

10 1997, and ending on the date of the disposition,

11 or

12 ‘‘(B) the 5-year period ending on the date

13 of the disposition,

14 owned 10 percent or more (by vote or value) of the

15 stock in the domestic corporation.

16 ‘‘(2) CONSTRUCTIVE OWNERSHIP.—

17 ‘‘(A) IN GENERAL.—Section 318(a) (relat18 ing to constructive ownership of stock) shall

19 apply for purposes of paragraph (1).

20 ‘‘(B) MODIFICATIONS.—For purposes of

21 subparagraph (A)—

22 ‘‘(i) paragraph (2)(C) of section

23 318(a) shall be applied by substituting ‘10

24 percent’ for ‘50 percent’, and
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1 ‘‘(ii) paragraph (3)(C) of section

2 318(a) shall be applied—

3 ‘‘(I) by substituting ‘10 percent’

4 for ‘50 percent’, and

5 ‘‘(II) in any case where such

6 paragraph would not apply but for

7 subclause (I), by considering a cor8 poration as owning the stock (other

9 than stock in such corporation) owned

10 by or for any shareholder of such cor11 poration in that proportion which the

12 value of the stock which such share13 holder owns in such corporation bears

14 to the value of all stock in such cor15 poration.

16 ‘‘(3) TREATMENT OF STOCK HELD BY CERTAIN

17 PARTNERSHIPS.—

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

19 section, if—

20 ‘‘(i) a partnership is a 10-percent

21 shareholder in any domestic corporation,

22 and

23 ‘‘(ii) 10 percent or more of the capital

24 or profits interests in such partnership is
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1 held (directly or indirectly) by nonresident

2 alien individuals or foreign corporations,

3 each partner in such partnership who is not

4 otherwise a 10-percent shareholder in such cor5 poration shall, with respect to the stock in such

6 corporation held by the partnership, be treated

7 as a 10-percent shareholder in such corpora8 tion.

9 ‘‘(B) EXCEPTION.—

10 ‘‘(i) IN GENERAL.—Subparagraph (A)

11 shall not apply with respect to stock in a

12 domestic corporation held by any partner13 ship if, at all times during the 5-year pe14 riod ending on the date of the disposition

15 involved—

16 ‘‘(I) the aggregate bases of the

17 stock and securities in such domestic

18 corporation held by such partnership

19 were less than 25 percent of the part20 nership’s net adjusted asset cost, and

21 ‘‘(II) the partnership did not own

22 50 percent or more (by vote or value)

23 of the stock in such domestic corpora24 tion.
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1 The Secretary may by regulations dis2 regard any failure to meet the require3 ments of subclause (I) where the partner4 ship normally met such requirements dur5 ing such 5-year period.

6 ‘‘(ii) NET ADJUSTED ASSET COST.—

7 For purposes of clause (i), the term ‘net

8 adjusted asset cost’ means—

9 ‘‘(I) the aggregate bases of all of

10 the assets of the partnership other

11 than cash and cash items, reduced by

12 ‘‘(II) the portion of the liabilities

13 of the partnership not allocable (on a

14 proportionate basis) to assets excluded

15 under subclause (I).

16 ‘‘(C) EXCEPTION NOT TO APPLY TO 50-

17 PERCENT PARTNERS.—Subparagraph (B) shall

18 not apply in the case of any partner owning (di19 rectly or indirectly) more than 50 percent of the

20 capital or profits interests in the partnership at

21 any time during the 5-year period ending on the

22 date of the disposition.

23 ‘‘(D) SPECIAL RULES.—For purposes of

24 subparagraphs (B) and (C)—
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1 ‘‘(i) TREATMENT OF PREDE2 CESSORS.—Any reference to a partnership

3 or corporation shall be treated as including

4 a reference to any predecessor thereof.

5 ‘‘(ii) PARTNERSHIP NOT IN EXIST6 ENCE.—If any partnership was not in ex7 istence throughout the entire 5-year period

8 ending on the date of the disposition, only

9 the portion of such period during which

10 the partnership (or any predecessor) was

11 in existence shall be taken into account.

12 ‘‘(E) OTHER PASS-THRU ENTITIES;

13 TIERED ENTITIES.—Rules similar to the rules

14 of the preceding provisions of this paragraph

15 shall also apply in the case of any pass-thru en16 tity other than a partnership and in the case of

17 tiered partnerships and other entities.

18 ‘‘(c) COORDINATION WITH NONRECOGNITION PROVI19 SIONS; ETC.—

20 ‘‘(1) COORDINATION WITH NONRECOGNITION

21 PROVISIONS.—

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

23 subparagraph (B), any nonrecognition provision

24 shall apply for purposes of this section to a

25 transaction only in the case of—
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1 ‘‘(i) an exchange of stock in a domes2 tic corporation for other property the sale

3 of which would be subject to taxation

4 under this chapter, or

5 ‘‘(ii) a distribution with respect to

6 which gain or loss would not be recognized

7 under section 336 if the sale of the distrib8 uted property by the distributee would be

9 subject to tax under this chapter.

10 ‘‘(B) REGULATIONS.—The Secretary shall

11 prescribe regulations (which are necessary or

12 appropriate to prevent the avoidance of Federal

13 income taxes) providing—

14 ‘‘(i) the extent to which nonrecogni15 tion provisions shall, and shall not, apply

16 for purposes of this section, and

17 ‘‘(ii) the extent to which—

18 ‘‘(I) transfers of property in a re19 organization, and

20 ‘‘(II) changes in interests in, or

21 distributions from, a partnership,

22 trust, or estate,

23 shall be treated as sales of property at fair

24 market value.
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1 ‘‘(C) NONRECOGNITION PROVISION.—For

2 purposes of this paragraph, the term ‘non3 recognition provision’ means any provision of

4 this title for not recognizing gain or loss.

5 ‘‘(2) CERTAIN OTHER RULES MADE APPLICA6 BLE.—For purposes of this section, rules similar to

7 the rules of subsections (g) and (j) of section 897

8 shall apply.

9 ‘‘(d) CERTAIN INTEREST TREATED AS STOCK.—For

10 purposes of this section—

11 ‘‘(1) any option or other right to acquire stock

12 in a domestic corporation,

13 ‘‘(2) the conversion feature of any debt instru14 ment issued by a domestic corporation, and

15 ‘‘(3) to the extent provided in regulations, any

16 other interest in a domestic corporation other than

17 an interest solely as creditor,

18 shall be treated as stock in such corporation.

19 ‘‘(e) TREATMENT OF CERTAIN GAIN AS A DIVI20 DEND.—In the case of any gain which would be subject

21 to tax by reason of this section but for a treaty and which

22 results from any distribution in liquidation or redemption,

23 for purposes of this subtitle, such gain shall be treated

24 as a dividend to the extent of the earnings and profits

25 of the domestic corporation attributable to the stock.
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1 Rules similar to the rules of section 1248(c) (determined

2 without regard to paragraph (2)(D) thereof) shall apply

3 for purposes of the preceding sentence.

4 ‘‘(f) REGULATIONS.—The Secretary shall prescribe

5 such regulations as may be appropriate to carry out the

6 purposes of this section, including—

7 ‘‘(1) regulations coordinating the provisions of

8 this section with the provisions of section 897, and

9 ‘‘(2) regulations aggregating stock held by a

10 group of persons acting together.’’

11 (b) WITHHOLDING OF TAX.—Subchapter A of chap12 ter 3 of such Code is amended by adding at the end the

13 following new section:

14 ‘‘SEC. 1447. WITHHOLDING OF TAX ON CERTAIN STOCK

15 DISPOSITIONS.

16 ‘‘(a) GENERAL RULE.—Except as otherwise provided

17 in this section, in the case of any disposition of stock in

18 a domestic corporation by a foreign person who is a 10-

19 percent shareholder in such corporation, the withholding

20 agent shall deduct and withhold a tax equal to 10 percent

21 of the amount realized on the disposition.

22 ‘‘(b) EXCEPTIONS.—

23 ‘‘(1) STOCK WHICH IS NOT REGULARLY TRAD24 ED.—In the case of a disposition of stock which is

25 not regularly traded, a withholding agent shall not
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1 be required to deduct and withhold any amount

2 under subsection (a) if—

3 ‘‘(A) the transferor furnishes to such with4 holding agent an affidavit by such transferor

5 stating, under penalty of perjury, that section

6 899 does not apply to such disposition be7 cause—

8 ‘‘(i) the transferor is not a foreign

9 person, or

10 ‘‘(ii) the transferor is not a 10-percent

11 shareholder, and

12 ‘‘(B) such withholding agent does not

13 know (or have reason to know) that such affida14 vit is not correct.

15 ‘‘(2) STOCK WHICH IS REGULARLY TRADED.—

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

17 subparagraph (B), a withholding agent shall

18 not be required to deduct and withhold any

19 amount under subsection (a) with respect to

20 any disposition of regularly traded stock if such

21 withholding agent does not know (or have rea22 son to know) that section 899 applies to such

23 disposition.

24 ‘‘(B) SPECIAL RULE WHERE SUBSTANTIAL

25 DISPOSITION.—If—
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1 ‘‘(i) there is a disposition of regularly

2 traded stock in a corporation, and

3 ‘‘(ii) the amount of stock involved in

4 such disposition constitutes 1 percent or

5 more (by vote or value) of the stock in

6 such corporation,

7 subparagraph (A) shall not apply but para8 graph (1) shall apply as if the disposition in9 volved stock which was not regularly traded.

10 ‘‘(C) NOTIFICATION BY FOREIGN PER11 SON.—If section 899 applies to any disposition

12 by a foreign person of regularly traded stock,

13 such foreign person shall notify the withholding

14 agent that section 899 applies to such disposi15 tion.

16 ‘‘(3) NONRECOGNITION TRANSACTIONS.—A

17 withholding agent shall not be required to deduct

18 and withhold any amount under subsection (a) in

19 any case where gain or loss is not recognized by rea20 son of section 899(c) (or the regulations prescribed

21 under such section).

22 ‘‘(c) SPECIAL RULE WHERE NO WITHHOLDING.—

23 If—
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1 ‘‘(1) there is no amount deducted and withheld

2 under this section with respect to any disposition to

3 which section 899 applies, and

4 ‘‘(2) the foreign person does not pay the tax

5 imposed by this subtitle to the extent attributable to

6 such disposition on the date prescribed therefor,

7 for purposes of determining the amount of such tax, the

8 foreign person’s basis in the stock disposed of shall be

9 treated as zero or such other amount as the Secretary may

10 determine (and, for purposes of section 6501, the under11 payment of such tax shall be treated as due to a willful

12 attempt to evade such tax).

13 ‘‘(d) DEFINITIONS AND SPECIAL RULES.—For pur14 poses of this section—

15 ‘‘(1) WITHHOLDING AGENT.—The term ‘with16 holding agent’ means—

17 ‘‘(A) the last United States person to have

18 the control, receipt, custody, disposal, or pay19 ment of the amount realized on the disposition,

20 or

21 ‘‘(B) if there is no such United States per22 son, the person prescribed in regulations.

23 ‘‘(2) FOREIGN PERSON.—The term ‘foreign per24 son’ means any person other than a United States

25 person.
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1 ‘‘(3) REGULARLY TRADED STOCK.—The term

2 ‘regularly traded stock’ means any stock of a class

3 which is regularly traded on an established securities

4 market.

5 ‘‘(4) AUTHORITY TO PRESCRIBE REDUCED

6 AMOUNT.—At the request of the person making the

7 disposition or the withholding agent, the Secretary

8 may prescribe a reduced amount to be withheld

9 under this section if the Secretary determines that

10 to substitute such reduced amount will not jeopard11 ize the collection of the tax imposed by section

12 871(b)(1) or 882(a)(1).

13 ‘‘(5) OTHER TERMS.—Except as provided in

14 this section, terms used in this section shall have the

15 same respective meanings as when used in section

16 899.

17 ‘‘(6) CERTAIN RULES MADE APPLICABLE.—

18 Rules similar to the rules of section 1445(e) shall

19 apply for purposes of this section.

20 ‘‘(e) REGULATIONS.—The Secretary shall prescribe

21 such regulations as may be appropriate to carry out the

22 purposes of this section, including regulations coordinat23 ing the provisions of this section with the provisions of

24 sections 1445 and 1446.’’
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1 (c) EXCEPTION FROM BRANCH PROFITS TAX.—Sub2 paragraph (C) of section 884(d)(2) of such Code is amend3 ed to read as follows:

4 ‘‘(C) gain treated as effectively connected

5 with the conduct of a trade or business within

6 the United States under—

7 ‘‘(i) section 897 in the case of the

8 disposition of a United States real property

9 interest described in section

10 897(c)(1)(A)(ii), or

11 ‘‘(ii) section 899,’’.

12 (d) REPORTS WITH RESPECT TO CERTAIN DIS13 TRIBUTIONS.—Paragraph (2) of section 6038B(a) of such

14 Code (relating to notice of certain transfers to foreign per15 sons) is amended by striking ‘‘section 336’’ and inserting

16 ‘‘section 302, 331, or 336’’.

17 (e) CLERICAL AMENDMENTS.—

18 (1) The table of sections for subpart D of part

19 II of subchapter N of chapter 1 of such Code is

20 amended by adding at the end the following new

21 item:

‘‘Sec. 899. Dispositions of stock in domestic corporations by 10-

percent foreign shareholders.’’
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1 (2) The table of sections for subchapter A of

2 chapter 3 of such Code is amended by adding at the

3 end the following new item:

‘‘Sec. 1447. Withholding of tax on certain stock dispositions.’’

4 (f) EFFECTIVE DATE.—

5 (1) IN GENERAL.—Except as otherwise pro6 vided in this subsection, the amendments made by

7 this section shall apply to dispositions after the date

8 of the enactment of this Act, except that section

9 1447 of such Code (as added by this section) shall

10 not apply to any disposition before the date 6

11 months after the date of the enactment of this Act.

12 (2) COORDINATION WITH TREATIES.—

13 (A) IN GENERAL.—Sections 899 (other

14 than subsection (e) thereof) and 1447 of such

15 Code (as added by this section) shall not apply

16 to any disposition if such disposition is by a

17 qualified resident of a foreign country and the

18 application of such sections to such disposition

19 would be contrary to any treaty between the

20 United States and such foreign country which

21 is in effect on the date of the enactment of this

22 Act and at the time of such disposition.

23 (B) QUALIFIED RESIDENT.—For purposes

24 of subparagraph (A), the term ‘‘qualified resi25 dent’’ means any resident of the foreign country
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1 entitled to the benefits of the treaty referred to

2 in subparagraph (A); except that such term

3 shall not include a corporation unless such cor4 poration is a qualified resident of such country

5 (as defined in section 884(e)(4) of such Code).

6 SEC. 6. PORTFOLIO DEBT.

7 (a) IN GENERAL.—Section 871(h)(3) of the Internal

8 Revenue Code of 1986 is amended to read as follows:

9 ‘‘(3) PORTFOLIO INTEREST TO INCLUDE ONLY

10 INTEREST ON GOVERNMENT OBLIGATIONS.—The

11 term ‘portfolio interest’ shall include only interest

12 paid on an obligation issued by a governmental en13 tity.’’

14 (b) CONFORMING AMENDMENTS.—

15 (1) Section 881(c)(3) of such Code is amend16 ed—

17 (A) in subparagraph (A), by adding ‘‘or’’

18 at the end, and

19 (B) by striking subparagraph (B) and re20 designating subparagraph (C) as subparagraph

21 (B).

22 (2) Section 881(c)(4) of such Code is amend23 ed—

24 (A) by striking ‘‘section 871(h)(4)’’ and in25 serting ‘‘section 871(h)(3) or (4)’’, and
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1 (B) in the heading, by inserting ‘‘INTER2 EST ON NON-GOVERNMENT OBLIGATIONS OR’’

3 after ‘‘INCLUDE’’.

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

5 this section shall apply to interest received after December

6 31, 1997, with respect to obligations issued after such

7 date.

8 SEC. 7. SOURCE OF INCOME FROM CERTAIN SALES OF IN9 VENTORY PROPERTY.

10 (a) GENERAL RULE.—Subsection (b) of section 865

11 of the Internal Revenue Code of 1986 (relating to excep12 tion for inventory property) is amended to read as follows:

13 ‘‘(b) INVENTORY PROPERTY.—

14 ‘‘(1) INCOME ATTRIBUTABLE TO PRODUCTION

15 ACTIVITY.—In the case of income from the sale of

16 inventory property produced (in whole or in part) by

17 the taxpayer—

18 ‘‘(A) a portion (determined under regula19 tions) of such income shall be allocated to pro20 duction activity (and sourced in the United

21 States or outside the United States depending

22 on where such activity occurs), and

23 ‘‘(B) the remaining portion of such income

24 shall be sourced under the other provisions of

25 this section.
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1 The regulations prescribed under subparagraph (A)

2 shall provide that at least 50 percent of such income

3 shall be allocated to production activities.

4 ‘‘(2) SALES INCOME.—

5 ‘‘(A) UNITED STATES RESIDENTS.—In6 come from the sale of inventory property by a

7 United States resident shall be sourced outside

8 the United States if—

9 ‘‘(i) the property is sold for use, con10 sumption, or disposition outside the United

11 States and an office or another fixed place

12 of business of the taxpayer outside the

13 United States participated materially in

14 the sale, and

15 ‘‘(ii) such sale is not (directly or indi16 rectly) to an affiliate of the taxpayer.

17 ‘‘(B) NONRESIDENT.—Income from the

18 sale of inventory property by a nonresident

19 shall be sourced in the United States if—

20 ‘‘(i) the taxpayer has an office or

21 other fixed place of business in the United

22 States, and

23 ‘‘(ii) such sale is through such office

24 or other fixed place of business.
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1 This subparagraph shall not apply if the require2 ments of clauses (i) and (ii) of subparagraph (A) are

3 met with respect to such sale.

4 ‘‘(3) COORDINATION WITH TREATIES.—For

5 purposes of paragraph (2)(A)(i), a United States

6 resident shall not be treated as having an office or

7 fixed place of business in a foreign country if a trea8 ty prevents such country from imposing an income

9 tax on the income.’’

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

11 this section shall apply to income from sales occurring

12 after December 31, 1997.

13 SEC. 8. ENHANCEMENT OF BENEFITS FOR FOREIGN SALES

14 CORPORATIONS.

15 (a) IN GENERAL.—Subsection (a) of section 923 of

16 the Internal Revenue Code of 1986 is amended—

17 (1) in paragraph (2), by striking ‘‘32 percent’’

18 and inserting ‘‘34 percent’’, and

(2) in paragraph (3), by striking ‘‘16 19 ⁄23’’ and inserting ‘‘17 20 ⁄23’’.

21 (b) SPECIAL RULES RELATING TO CORPORATE

22 PREFERENCE ITEMS.—Paragraph (4) of section 291(a) of

23 such Code is amended—
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1 (1) in subparagraph (A), by striking ‘‘ ‘30 per2 cent’ for ‘32 percent’ ’’ and inserting ‘‘ ‘32 percent’

3 for ‘34 percent’ ’’, and

(2) in subparagraph (B), by striking ‘‘ ‘15 4 ⁄23’ for

‘16⁄23’ ’’ and inserting ‘‘ ‘16⁄23’ for ‘17 5 ⁄23’ ’’.

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

7 this section shall apply to taxable years beginning after

8 December 31, 1997.

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