IIB
106TH CONGRESS
2D SESSION
H. R. 4986
IN THE SENATE OF THE UNITED STATES
SEPTEMBER 14, 2000
Received; read twice and referred to the Committee on Finance
AN ACT
To amend the Internal Revenue Code of 1986 to repeal
the provisions relating to foreign sales corporations
(FSCs) and to exclude extraterritorial income from gross
income.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
HR 4986 RFS
SECTION 1. SHORT TITLE.
(a) SHORT TITLE.—This Act may be cited as the
‘‘FSC Repeal and Extraterritorial Income Exclusion Act
of 2000’’.
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
ment or repeal is expressed in terms of an amendment
to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986.
SEC. 2. REPEAL OF FOREIGN SALES CORPORATION RULES.
Subpart C of part III of subchapter N of chapter 1
(relating to taxation of foreign sales corporations) is here-
by repealed.
SEC. 3. TREATMENT OF EXTRATERRITORIAL INCOME.
(a) IN GENERAL.—Part III of subchapter B of chap-
ter 1 (relating to items specifically excluded from gross
income) is amended by inserting before section 115 the
following new section:
‘‘SEC. 114. EXTRATERRITORIAL INCOME.
‘‘(a) EXCLUSION.—Gross income does not include
extraterritorial income.
‘‘(b) EXCEPTION.—Subsection (a) shall not apply to
extraterritorial income which is not qualifying foreign
trade income as determined under subpart E of part III
of subchapter N.
HR 4986 RFS
‘‘(c) DISALLOWANCE OF DEDUCTIONS.—
‘‘(1) IN GENERAL.—Any deduction of a tax-
payer 
allocated 
under 
paragraph 
(2) 
to
extraterritorial income of the taxpayer excluded from
gross income under subsection (a) shall not be al-
lowed.
‘‘(2) ALLOCATION.—Any deduction of the tax-
payer properly apportioned and allocated to the
extraterritorial income derived by the taxpayer from
any transaction shall be allocated on a proportionate
basis between—
‘‘(A) the extraterritorial income derived
from such transaction which is excluded from
gross income under subsection (a), and
‘‘(B) the extraterritorial income derived
from such transaction which is not so excluded.
‘‘(d) DENIAL OF CREDITS FOR CERTAIN FOREIGN
TAXES.—Notwithstanding any other provision of this
chapter, no credit shall be allowed under this chapter for
any income, war profits, and excess profits taxes paid or
accrued to any foreign country or possession of the United
States with respect to extraterritorial income which is ex-
cluded from gross income under subsection (a).
‘‘(e) EXTRATERRITORIAL INCOME.—For purposes of
this section, the term ‘extraterritorial income’ means the
HR 4986 RFS
gross income of the taxpayer attributable to foreign trad-
ing gross receipts (as defined in section 942) of the tax-
payer.’’
(b) QUALIFYING FOREIGN TRADE INCOME.—Part III
of subchapter N of chapter 1 is amended by inserting after
subpart D the following new subpart:
‘‘Subpart E—Qualifying Foreign Trade Income
‘‘Sec. 941. Qualifying foreign trade income.
‘‘Sec. 942. Foreign trading gross receipts.
‘‘Sec. 943. Other definitions and special rules.
‘‘SEC. 941. QUALIFYING FOREIGN TRADE INCOME.
‘‘(a) QUALIFYING FOREIGN TRADE INCOME.—For
purposes of this subpart and section 114—
‘‘(1) IN GENERAL.—The term ‘qualifying for-
eign trade income’ means, with respect to any trans-
action, the amount of gross income which, if ex-
cluded, will result in a reduction of the taxable in-
come of the taxpayer from such transaction equal to
the greatest of—
‘‘(A) 30 percent of the foreign sale and
leasing income derived by the taxpayer from
such transaction,
‘‘(B) 1.2 percent of the foreign trading
gross receipts derived by the taxpayer from the
transaction, or
HR 4986 RFS
‘‘(C) 15 percent of the foreign trade in-
come derived by the taxpayer from the trans-
action.
In no event shall the amount determined under sub-
paragraph (B) exceed 200 percent of the amount de-
termined under subparagraph (C).
‘‘(2) ALTERNATIVE COMPUTATION.—A taxpayer
may compute its qualifying foreign trade income
under a subparagraph of paragraph (1) other than
the subparagraph which results in the greatest
amount of such income.
‘‘(3) LIMITATION ON USE OF FOREIGN TRADING
GROSS RECEIPTS METHOD.—If any person computes
its qualifying foreign trade income from any trans-
action with respect to any property under paragraph
(1)(B), the qualifying foreign trade income of such
person (or any related person) with respect to any
other transaction involving such property shall be
zero.
‘‘(4) RULES
FOR
MARGINAL
COSTING.—The
Secretary shall prescribe regulations setting forth
rules for the allocation of expenditures in computing
foreign trade income under paragraph (1)(C) in
those cases where a taxpayer is seeking to establish
HR 4986 RFS
or maintain a market for qualifying foreign trade
property.
‘‘(5) PARTICIPATION IN INTERNATIONAL BOY-
COTTS, ETC.—Under regulations prescribed by the
Secretary, the qualifying foreign trade income of a
taxpayer for any taxable year shall be reduced (but
not below zero) by the sum of—
‘‘(A) an amount equal to such income mul-
tiplied by the international boycott factor deter-
mined under section 999, and
‘‘(B) any illegal bribe, kickback, or other
payment (within the meaning of section 162(c))
paid by or on behalf of the taxpayer directly or
indirectly to an official, employee, or agent in
fact of a government.
‘‘(b) FOREIGN TRADE INCOME.—For purposes of
this subpart—
‘‘(1) IN GENERAL.—The term ‘foreign trade in-
come’ means the taxable income of the taxpayer at-
tributable to foreign trading gross receipts of the
taxpayer.
‘‘(2) SPECIAL
RULE
FOR
COOPERATIVES.—In
any case in which an organization to which part I
of subchapter T applies which is engaged in the
marketing of agricultural or horticultural products
HR 4986 RFS
sells qualifying foreign trade property, in computing
the taxable income of such cooperative, there shall
not be taken into account any deduction allowable
under subsection (b) or (c) of section 1382 (relating
to patronage dividends, per-unit retain allocations,
and nonpatronage distributions).
‘‘(c) FOREIGN SALE AND LEASING INCOME.—For
purposes of this section—
‘‘(1) IN GENERAL.—The term ‘foreign sale and
leasing income’ means, with respect to any
transaction—
‘‘(A) foreign trade income properly allo-
cable to activities which—
‘‘(i) 
are 
described 
in 
paragraph
(2)(A)(i) or (3) of section 942(b), and
‘‘(ii) are performed by the taxpayer
(or any person acting under a contract
with such taxpayer) outside the United
States, or
‘‘(B) foreign trade income derived by the
taxpayer in connection with the lease or rental
of qualifying foreign trade property for use by
the lessee outside the United States.
‘‘(2) SPECIAL
RULES
FOR
LEASED
PROP-
ERTY.—
HR 4986 RFS
‘‘(A) SALES INCOME.—The term ‘foreign
sale and leasing income’ includes any foreign
trade income derived by the taxpayer from the
sale of property described in paragraph (1)(B).
‘‘(B) LIMITATION IN CERTAIN CASES.—Ex-
cept as provided in regulations, in the case of
property which—
‘‘(i) was manufactured, produced,
grown, or extracted by the taxpayer, or
‘‘(ii) was acquired by the taxpayer
from a related person for a price which
was not determined in accordance with the
rules of section 482,
the amount of foreign trade income which may be
treated as foreign sale and leasing income under
paragraph (1)(B) or subparagraph (A) of this para-
graph with respect to any transaction involving such
property shall not exceed the amount which would
have been determined if the taxpayer had acquired
such property for the price determined in accordance
with the rules of section 482.
‘‘(3) SPECIAL RULES.—
‘‘(A) EXCLUDED PROPERTY.—Foreign sale
and leasing income shall not include any income
properly allocable to excluded property de-
HR 4986 RFS
scribed 
in 
subparagraph 
(B) 
of 
section
943(a)(3) (relating to intangibles).
‘‘(B) ONLY
DIRECT
EXPENSES
TAKEN
INTO
ACCOUNT.—For purposes of this sub-
section, any expense other than a directly allo-
cable expense shall not be taken into account in
computing foreign trade income.
‘‘SEC. 942. FOREIGN TRADING GROSS RECEIPTS.
‘‘(a) FOREIGN TRADING GROSS RECEIPTS.—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this section, for purposes of this subpart,
the term ‘foreign trading gross receipts’ means the
gross receipts of the taxpayer which are—
‘‘(A) from the sale, exchange, or other dis-
position of qualifying foreign trade property,
‘‘(B) from the lease or rental of qualifying
foreign trade property for use by the lessee out-
side the United States,
‘‘(C) for services which are related and
subsidiary to—
‘‘(i) any sale, exchange, or other dis-
position of qualifying foreign trade prop-
erty by such taxpayer, or
HR 4986 RFS
‘‘(ii) any lease or rental of qualifying
foreign trade property described in sub-
paragraph (B) by such taxpayer,
‘‘(D) for engineering or architectural serv-
ices for construction projects located (or pro-
posed for location) outside the United States, or
‘‘(E) for the performance of managerial
services for a person other than a related per-
son in furtherance of the production of foreign
trading gross receipts described in subpara-
graph (A), (B), or (C).
Subparagraph (E) shall not apply to a taxpayer for
any taxable year unless at least 50 percent of its for-
eign trading gross receipts (determined without re-
gard to this sentence) for such taxable year is de-
rived from activities described in subparagraph (A),
(B), or (C).
‘‘(2) CERTAIN RECEIPTS EXCLUDED ON BASIS
OF
USE; SUBSIDIZED
RECEIPTS
EXCLUDED.—The
term ‘foreign trading gross receipts’ shall not in-
clude receipts of a taxpayer from a transaction if—
‘‘(A) the qualifying foreign trade property
or services—
‘‘(i) are for ultimate use in the United
States, or
HR 4986 RFS
‘‘(ii) are for use by the United States
or any instrumentality thereof and such
use of qualifying foreign trade property or
services is required by law or regulation, or
‘‘(B) such transaction is accomplished by a
subsidy granted by the government (or any in-
strumentality thereof) of the country or posses-
sion in which the property is manufactured,
produced, grown, or extracted.
‘‘(3) ELECTION
TO
EXCLUDE
CERTAIN
RE-
CEIPTS.—The term ‘foreign trading gross receipts’
shall not include gross receipts of a taxpayer from
a transaction if the taxpayer elects not to have such
receipts taken into account for purposes of this sub-
part.
‘‘(b) FOREIGN
ECONOMIC
PROCESS
REQUIRE-
MENTS.—
‘‘(1) IN GENERAL.—Except as provided in sub-
section (c), a taxpayer shall be treated as having for-
eign trading gross receipts from any transaction only
if economic processes with respect to such trans-
action take place outside the United States as re-
quired by paragraph (2).
‘‘(2) REQUIREMENT.—
HR 4986 RFS
‘‘(A) IN GENERAL.—The requirements of
this paragraph are met with respect to the
gross receipts of a taxpayer derived from any
transaction if—
‘‘(i) such taxpayer (or any person act-
ing under a contract with such taxpayer)
has participated outside the United States
in the solicitation (other than advertising),
the negotiation, or the making of the con-
tract relating to such transaction, and
‘‘(ii) the foreign direct costs incurred
by the taxpayer attributable to the trans-
action equal or exceed 50 percent of the
total direct costs attributable to the trans-
action.
‘‘(B) ALTERNATIVE 85-PERCENT TEST.—A
taxpayer shall be treated as satisfying the re-
quirements of subparagraph (A)(ii) with respect
to any transaction if, with respect to each of at
least 2 subparagraphs of paragraph (3), the
foreign direct costs incurred by such taxpayer
attributable to activities described in such sub-
paragraph equal or exceed 85 percent of the
total direct costs attributable to activities de-
scribed in such subparagraph.
HR 4986 RFS
item relating to subpart E and inserting the fol-
lowing new item:
‘‘Subpart E. Qualifying foreign trade income.’’.
(9) The table of subparts for part III of sub-
chapter N of chapter 1 is amended by striking the
item relating to subpart C.
SEC. 5. EFFECTIVE DATE.
(a) IN GENERAL.—The amendments made by this
Act shall apply to transactions after September 30, 2000.
(b) NO NEW FSCS; TERMINATION
OF INACTIVE
FSCS.—
(1) NO NEW FSCS.—No corporation may elect
after September 30, 2000, to be a FSC (as defined
in section 922 of the Internal Revenue Code of
1986, as in effect before the amendments made by
this Act).
(2) TERMINATION
OF
INACTIVE
FSCS.—If a
FSC has no foreign trade income (as defined in sec-
tion 923(b) of such Code, as so in effect) for any pe-
riod of 5 consecutive taxable years beginning after
December 31, 2001, such FSC shall cease to be
treated as a FSC for purposes of such Code for any
taxable year beginning after such period.
(c) TRANSITION PERIOD FOR EXISTING FOREIGN
SALES CORPORATIONS.—
HR 4986 RFS
(1) IN GENERAL.—In the case of a FSC (as so
defined) in existence on September 30, 2000, and at
all times thereafter, the amendments made by this
Act shall not apply to any transaction in the ordi-
nary course of trade or business involving a FSC
which occurs—
(A) before January 1, 2002; or
(B) after December 31, 2001, pursuant to
a binding contract—
(i) which is between the FSC (or any
related person) and any person which is
not a related person; and
(ii) which is in effect on September
30, 2000, and at all times thereafter.
For purposes of this paragraph, a binding contract
shall include a purchase option, renewal option, or
replacement option which is included in such con-
tract and which is enforceable against the seller or
lessor.
(2) ELECTION TO HAVE AMENDMENTS APPLY
EARLIER.—A taxpayer may elect to have the amend-
ments made by this Act apply to any transaction by
a FSC or any related person to which such amend-
ments would apply but for the application of para-
graph (1). Such election shall be effective for the