nating paragraphs (5) and (6) as paragraphs (6) 
and (7), respectively, and by inserting after para-
graph (4) the following new paragraph: 
‘‘(5) ELECTION OF ALTERNATIVE SIMPLIFIED 
CREDIT.—
‘‘(A) IN GENERAL.—At the election of the 
taxpayer, the credit determined under sub-
section (a)(1) shall be equal to 12 percent of so 
much of the qualified research expenses for the 
taxable year as exceeds 60 percent of the aver-
age qualified research expenses for the base pe-
riod years. 
‘‘(B) SPECIAL
RULE
IN
CASE
OF
NO 
QUALIFIED RESEARCH EXPENSES IN AT LEAST 
1 BASE PERIOD YEAR.—
‘‘(i) TAXPAYERS TO WHICH SUBPARA-
GRAPH
APPLIES.—The credit under this 
paragraph shall be determined under this 
subparagraph if the taxpayer has no quali-
fied research expenses in any one of the 
base period years. 
‘‘(ii) CREDIT RATE.—The credit de-
termined under this subparagraph shall be 
equal to 6 percent of the qualified research 
expenses for the taxable year.
‘‘(C) BASE PERIOD YEARS.—The base pe-
riod years with respect to a taxable year for 
which the credit under this paragraph is being 
determined are the 3 taxable years—
‘‘(i) which are among the 5 most re-
cent taxable years ending before such tax-
able year, and 
‘‘(ii) which are determined by dis-
regarding—
‘‘(I) 1 taxable year for which the 
qualified research expenses are the 
largest, and 
‘‘(II) 1 taxable year for which 
such expenses are the smallest. 
Rules similar to the rules of subparagraphs (A) 
and (B) of section 41(f)(3) shall apply for pur-
poses of this subparagraph. 
‘‘(D) ELECTION.—An election under this 
paragraph shall apply to the taxable year for 
which made and all succeeding taxable years 
unless revoked with the consent of the Sec-
retary. An election under this paragraph may 
not be made for any taxable year to which an 
election under paragraph (4) applies.
‘‘(E) APPLICATION
OF
PARAGRAPH.—An 
election under this paragraph may be in effect 
only for taxable years beginning after June 30, 
2004, and before January 1, 2007.’’. 
(2) COORDINATION WITH ELECTION OF ALTER-
NATIVE INCREMENTAL CREDIT.—
(1) IN GENERAL.—Section 41(c)(4)(B) (relat-
ing to election) is amended by adding at the end the 
following: ‘‘An election under this paragraph may 
not be made for any taxable year to which an elec-
tion under paragraph (5) applies.’’. 
(2) TRANSITION RULE.—In the case of an elec-
tion under section 41(c)(4) of the Internal Revenue 
Code of 1986 which applies to the taxable year 
which includes the date of the enactment of this Act, 
such election shall be treated as revoked with the 
consent of the Secretary of the Treasury if the tax-
payer makes an election under section 41(c)(5) of 
such Code (as added by subsection (a)) for such 
year. 
(3) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to taxable years begin-
ning after June 30, 2004.
Subtitle C—Incentives to Reinvest 
Foreign Earnings in United States 
SEC. 1021. TEMPORARY DEDUCTION BY UNITED STATES 
SHAREHOLDERS FOR DIVIDENDS RECEIVED 
FROM 
CONTROLLED 
FOREIGN 
CORPORA-
TIONS. 
(a) IN GENERAL.—Subpart F of part III of sub-
chapter N of chapter 1 (relating to controlled foreign cor-
porations) is amended by adding at the end the following 
new section: 
‘‘SEC. 965. TEMPORARY DIVIDENDS RECEIVED DEDUCTION. 
‘‘(a) DEDUCTION.—
‘‘(1) IN GENERAL.—In the case of a corpora-
tion which is a United States shareholder, there 
shall be allowed as a deduction an amount equal to 
80 percent of the dividends—
‘‘(A) which are received by such share-
holder from controlled foreign corporations dur-
ing the election period, and 
‘‘(B) which are includible in gross income 
for the taxable year which includes such period. 
‘‘(2) DIVIDENDS PAID INDIRECTLY FROM CON-
TROLLED FOREIGN CORPORATIONS.—If, within the 
election period, a United States shareholder receives 
a dividend from a controlled foreign corporation
which is excluded from gross income under section 
959(a), such dividend shall be treated for purposes 
of this section as meeting the requirements of para-
graph (1)(B) to the extent of any amount included 
in income by such United States shareholder under 
section 951(a)(1)(A) as a result of any dividend paid 
during the election period to—
‘‘(A) such controlled foreign corporation 
from another controlled foreign corporation that 
is in a chain of ownership described in section 
958(a), or 
‘‘(B) any other controlled foreign corpora-
tion in such chain of ownership, but only to the 
extent of distributions described in section 
959(b) which are made during the election pe-
riod to the controlled foreign corporation from 
which such United States shareholder received 
such dividend. 
‘‘(b) LIMITATIONS.—
‘‘(1) LIMITATION
TO
EARNINGS
OTHERWISE 
PERMANENTLY REINVESTED OUTSIDE THE UNITED 
STATES.—The amount of dividends taken into ac-
count under subsection (a) shall not exceed the 
amount shown on the applicable financial statement 
as earnings permanently reinvested outside the
United States. If there is no such statement or such 
statement fails to show a specific amount of such 
earnings, such amount shall be treated as being 
zero. 
‘‘(2) DIVIDENDS MUST BE EXTRAORDINARY.—
The amount of dividends taken into account under 
subsection (a) shall not exceed the excess (if any) 
of—
‘‘(A) the dividends received during the tax-
able year by such shareholder from controlled 
foreign corporations, over 
‘‘(B) the annual average for the base pe-
riod years of—
‘‘(i) the dividends received during 
each base period year by such shareholder 
from such corporations, and 
‘‘(ii) the amounts includible in such 
shareholder’s gross income for each base 
period year under section 951(a)(1)(B) (or 
which would have been included but for 
section 959(a)(2)) with respect to such 
corporations. 
The amount taken into account under clause (i) 
for any base period year shall not include any 
dividend which is not includible in gross income
by reason of an amount described in clause (ii) 
with respect to a prior taxable year. 
‘‘(3) REQUIREMENT
TO
INVEST
IN
UNITED 
STATES.—Subsection (a) shall not apply to any divi-
dend received by a United States shareholder unless 
the amount of the dividend is invested in the United 
States pursuant to a plan describing the expendi-
tures to be made with such amount—
‘‘(A) which, before the dividend is received, 
is approved by the president or chief executive 
officer of such shareholder, and 
‘‘(B) which is approved by the Board of 
Directors (or management committee) of such 
shareholder no later than its first meeting on or 
after the date the dividend is received. 
‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) ELECTION
PERIOD.—The term ‘election 
period’ means—
‘‘(A) if this section applies to the tax-
payer’s last taxable year beginning before the 
date of the enactment of this section, any 6-
month or shorter period during such year which 
is after the date of the enactment of this sec-
tion and which is selected by the taxpayer, and
‘‘(B) if this section applies to the tax-
payer’s first taxable year beginning on or after 
such date, the 1st 6 months of such taxable 
year. 
‘‘(2) APPLICABLE
FINANCIAL
STATEMENT.—
The term ‘applicable financial statement’ means the 
most recently audited financial statement (including 
notes and other documents which accompany such 
statement)—
‘‘(A) which is certified on or before March 
31, 2003, as being prepared in accordance with 
generally accepted accounting principles, and 
‘‘(B) which is used for the purposes of a 
statement or report—
‘‘(i) to creditors, 
‘‘(ii) to shareholders, or 
‘‘(iii) for any other substantial nontax 
purpose. 
In the case of a corporation required to file a finan-
cial statement with the Securities and Exchange 
Commission, such term means the most recent such 
statement filed on or before March 31, 2003. 
‘‘(3) BASE
PERIOD
YEARS.—The base period 
years are the 3 taxable years—
‘‘(A) which are among the 5 most recent 
taxable years ending on or before March 31, 
2003, and 
‘‘(B) 
which 
are 
determined 
by 
dis-
regarding—
‘‘(i) 1 taxable year for which the sum 
of the amounts described in clauses (i) and 
(ii) of subsection (b)(2)(B) is the largest, 
and 
‘‘(ii) 1 taxable year for which such 
sum is the smallest. 
Rules similar to the rules of subparagraphs (A) and 
(B) of section 41(f)(3) shall apply for purposes of 
this paragraph. 
‘‘(d) DENIAL OF FOREIGN TAX CREDIT.—
‘‘(1) IN GENERAL.—No credit shall be allowed 
under section 901 for any taxes paid or accrued (or 
treated as paid or accrued) with respect to the de-
ductible portion of any dividend received during the 
election period or of any amount described in sub-
section (a)(2). No deduction shall be allowed under 
this chapter for any tax for which credit is not al-
lowable by reason of the preceding sentence. 
‘‘(2) DEDUCTIBLE PORTION.—For purposes of 
paragraph (1), unless the taxpayer otherwise speci-
fies, the deductible portion of any dividend is the 
amount which bears the same ratio to the amount 
of such dividend as the amount allowed as a deduc-
tion under subsection (a) for the taxable year bears 
to the amount described in subsection (b)(2)(A) for 
such year. 
‘‘(e) INCREASE IN TAX ON INCLUDED AMOUNTS NOT 
REDUCED BY CREDITS, ETC.—
‘‘(1) IN GENERAL.—Any tax under this chapter 
by reason of nondeductible CFC dividends shall not 
be treated as tax imposed by this chapter for pur-
poses of determining—
‘‘(A) the amount of any credit allowable 
under this chapter, or 
‘‘(B) the amount of the tax imposed by 
section 55. 
Subparagraph (A) shall not apply to the credit 
under section 53 or to the credit under section 27(a) 
with respect to taxes attributable to such dividends. 
‘‘(2) INCLUSIONS MAY NOT BE OFFSET BY NET 
OPERATING LOSSES.—
‘‘(A) IN GENERAL.—The taxable income of 
any United States shareholder for any taxable 
year shall in no event be less than the amount