H. R. 4986
One Hundred Sixth Congress
of the
United States of America
AT THE SECOND SESSION
Begun and held at the City of Washington on Monday,
the twenty-fourth day of January, two thousand
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 Representatives of
the United States of America in Congress assembled,
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 otherwise expressly
provided, whenever in this Act an amendment or repeal is expressed
in terms of an amendment to, or repeal of, a section or other
provision, the reference shall be considered to be made to a section
or other provision of the Internal Revenue Code of 1986.
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to taxation of foreign sales corporations) is hereby repealed.
SEC. 3. TREATMENT OF EXTRATERRITORIAL INCOME.
(a) IN GENERAL.—Part III of subchapter B of chapter 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.
‘‘(c) DISALLOWANCE OF DEDUCTIONS.—
‘‘(1) IN GENERAL.—Any deduction of a taxpayer allocated
under paragraph (2) to extraterritorial income of the taxpayer
excluded from gross income under subsection (a) shall not be
allowed.
‘‘(2) ALLOCATION.—Any deduction of the taxpayer 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.
H. R. 4986—2
‘‘(d) DENIAL OF CREDITS FOR CERTAIN FOREIGN TAXES.—Not-
withstanding 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 excluded from gross income under subsection (a).
‘‘(e) EXTRATERRITORIAL INCOME.—For purposes of this section,
the term ‘extraterritorial income’ means the gross income of the
taxpayer attributable to foreign trading gross receipts (as defined
in section 942) of the taxpayer.’’.
(b) QUALIFYING FOREIGN TRADE INCOME.—Part III of sub-
chapter 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 foreign trade
income’ means, with respect to any transaction, the amount
of gross income which, if excluded, will result in a reduction
of the taxable income 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
‘‘(C) 15 percent of the foreign trade income derived
by the taxpayer from the transaction.
In no event shall the amount determined under subparagraph
(B) exceed 200 percent of the amount determined 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 for-
eign trade income from any transaction 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 para-
graph (1)(C) in those cases where a taxpayer is seeking to
establish or maintain a market for qualifying foreign trade
property.
‘‘(5) PARTICIPATION
IN
INTERNATIONAL
BOYCOTTS, 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—
H. R. 4986—3
‘‘(A) an amount equal to such income multiplied by
the international boycott factor determined 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 income’ means
the taxable income of the taxpayer attributable 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 horti-
cultural products sells qualifying foreign trade property, in
computing the taxable income of such cooperative, there shall
not be taken into account any deduction allowable under sub-
section (b) or (c) of section 1382 (relating to patronage divi-
dends, per-unit retain allocations, and nonpatronage distribu-
tions).
‘‘(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 allocable 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 PROPERTY.—
‘‘(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.—Except 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 accord-
ance 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 paragraph with respect to
any transaction involving such property shall not exceed
the amount which would have been determined if the tax-
payer 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
H. R. 4986—4
to excluded property described in subparagraph (B) of sec-
tion 943(a)(3) (relating to intangibles).
‘‘(B) ONLY DIRECT EXPENSES TAKEN INTO ACCOUNT.—
For purposes of this subsection, any expense other than
a directly allocable 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 provided 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 disposition of
qualifying foreign trade property,
‘‘(B) from the lease or rental of qualifying foreign trade
property for use by the lessee outside the United States,
‘‘(C) for services which are related and subsidiary to—
‘‘(i) any sale, exchange, or other disposition of
qualifying foreign trade property by such taxpayer,
or
‘‘(ii) any lease or rental of qualifying foreign trade
property described in subparagraph (B) by such tax-
payer,
‘‘(D) for engineering or architectural services for
construction projects located (or proposed for location) out-
side the United States, or
‘‘(E) for the performance of managerial services for
a person other than a related person in furtherance of
the production of foreign trading gross receipts described
in subparagraph (A), (B), or (C).
Subparagraph (E) shall not apply to a taxpayer for any taxable
year unless at least 50 percent of its foreign trading gross
receipts (determined without regard to this sentence) for such
taxable year is derived from activities described in subpara-
graph (A), (B), or (C).
‘‘(2) CERTAIN RECEIPTS EXCLUDED ON BASIS OF USE; SUB-
SIDIZED RECEIPTS EXCLUDED.—The term ‘foreign trading gross
receipts’ shall not include receipts of a taxpayer from a trans-
action if—
‘‘(A) the qualifying foreign trade property or services—
‘‘(i) are for ultimate use in the United States,
or
‘‘(ii) are for use by the United States or any
instrumentality thereof and such use of qualifying for-
eign 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 instrumentality thereof )
of the country or possession in which the property is manu-
factured, produced, grown, or extracted.
‘‘(3) ELECTION TO EXCLUDE CERTAIN RECEIPTS.—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
subpart.
‘‘(b) FOREIGN ECONOMIC PROCESS REQUIREMENTS.—
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‘‘(1) IN GENERAL.—Except as provided in subsection (c),
a taxpayer shall be treated as having foreign trading gross
receipts from any transaction only if economic processes with
respect to such transaction take place outside the United States
as required by paragraph (2).
‘‘(2) REQUIREMENT.—
‘‘(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 acting under
a contract with such taxpayer) has participated outside
the United States in the solicitation (other than adver-
tising), the negotiation, or the making of the contract
relating to such transaction, and
‘‘(ii) the foreign direct costs incurred by the tax-
payer attributable to the transaction equal or exceed
50 percent of the total direct costs attributable to the
transaction.
‘‘(B) ALTERNATIVE 85-PERCENT TEST.—A taxpayer shall
be treated as satisfying the requirements of subparagraph
(A)(ii) with respect to any transaction if, with respect to
each of at least two subparagraphs of paragraph (3), the
foreign direct costs incurred by such taxpayer attributable
to activities described in such subparagraph equal or exceed
85 percent of the total direct costs attributable to activities
described in such subparagraph.
‘‘(C) DEFINITIONS.—For purposes of this paragraph—
‘‘(i) TOTAL DIRECT COSTS.—The term ‘total direct
costs’ means, with respect to any transaction, the total
direct costs incurred by the taxpayer attributable to
activities described in paragraph (3) performed at any
location by the taxpayer or any person acting under
a contract with such taxpayer.
‘‘(ii) FOREIGN
DIRECT
COSTS.—The term ‘foreign
direct costs’ means, with respect to any transaction,
the portion of the total direct costs which are attrib-
utable to activities performed outside the United
States.
‘‘(3) ACTIVITIES RELATING TO QUALIFYING FOREIGN TRADE
PROPERTY.—The activities described in this paragraph are any
of the following with respect to qualifying foreign trade
property—
‘‘(A) advertising and sales promotion,
‘‘(B) the processing of customer orders and the
arranging for delivery,
‘‘(C) transportation outside the United States in
connection with delivery to the customer,
‘‘(D) the determination and transmittal of a final
invoice or statement of account or the receipt of payment,
and
‘‘(E) the assumption of credit risk.
‘‘(4) ECONOMIC
PROCESSES
PERFORMED
BY
RELATED
PER-
SONS.—A taxpayer shall be treated as meeting the requirements
of this subsection with respect to any sales transaction involving
any property if any related person has met such requirements
in such transaction or any other sales transaction involving
such property.
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‘‘(c) EXCEPTION FROM FOREIGN ECONOMIC PROCESS REQUIRE-
MENT.—
‘‘(1) IN GENERAL.—The requirements of subsection (b) shall
be treated as met for any taxable year if the foreign trading
gross receipts of the taxpayer for such year do not exceed
$5,000,000.
‘‘(2) RECEIPTS
OF
RELATED
PERSONS
AGGREGATED.—All
related persons shall be treated as one person for purposes
of paragraph (1), and the limitation under paragraph (1) shall
be allocated among such persons in a manner provided in
regulations prescribed by the Secretary.
‘‘(3) SPECIAL RULE FOR PASS-THRU ENTITIES.—In the case
of a partnership, S corporation, or other pass-thru entity, the
limitation under paragraph (1) shall apply with respect to the
partnership, S corporation, or entity and with respect to each
partner, shareholder, or other owner.
‘‘SEC. 943. OTHER DEFINITIONS AND SPECIAL RULES.
‘‘(a) QUALIFYING FOREIGN TRADE PROPERTY.—For purposes of
this subpart—
‘‘(1) IN GENERAL.—The term ‘qualifying foreign trade prop-
erty’ means property—
‘‘(A) manufactured, produced, grown, or extracted
within or outside the United States,
‘‘(B) held primarily for sale, lease, or rental, in the
ordinary course of trade or business for direct use,
consumption, or disposition outside the United States, and
‘‘(C) not more than 50 percent of the fair market value
of which is attributable to—
‘‘(i) articles manufactured, produced, grown, or
extracted outside the United States, and
‘‘(ii) direct costs for labor (determined under the
principles of section 263A) performed outside the
United States.
For purposes of subparagraph (C), the fair market value of
any article imported into the United States shall be its
appraised value, as determined by the Secretary under section
402 of the Tariff Act of 1930 (19 U.S.C. 1401a) in connection
with its importation, and the direct costs for labor under clause
(ii) do not include costs that would be treated under the prin-
ciples of section 263A as direct labor costs attributable to arti-
cles described in clause (i).
‘‘(2) U.S. TAXATION TO ENSURE CONSISTENT TREATMENT.—
Property which (without regard to this paragraph) is qualifying
foreign trade property and which is manufactured, produced,
grown, or extracted outside the United States shall be treated
as qualifying foreign trade property only if it is manufactured,
produced, grown, or extracted by—
‘‘(A) a domestic corporation,
‘‘(B) an individual who is a citizen or resident of the
United States,
‘‘(C) a foreign corporation with respect to which an
election under subsection (e) (relating to foreign corpora-
tions electing to be subject to United States taxation) is
in effect, or
H. R. 4986—7
‘‘(D) a partnership or other pass-thru entity all of the
partners or owners of which are described in subparagraph
(A), (B), or (C).
Except as otherwise provided by the Secretary, tiered partner-
ships or pass-thru entities shall be treated as described in
subparagraph (D) if each of the partnerships or entities is
directly or indirectly wholly owned by persons described in
subparagraph (A), (B), or (C).
‘‘(3) EXCLUDED
PROPERTY.—The term ‘qualifying foreign
trade property’ shall not include—
‘‘(A) property leased or rented by the taxpayer for
use by any related person,
‘‘(B) patents, inventions, models, designs, formulas, or
processes whether or not patented, copyrights (other than
films, tapes, records, or similar reproductions, and other
than computer software (whether or not patented), for
commercial or home use), goodwill, trademarks, trade
brands, franchises, or other like property,
‘‘(C) oil or gas (or any primary product thereof ),
‘‘(D) products the transfer of which is prohibited or
curtailed to effectuate the policy set forth in paragraph
(2)(C) of section 3 of Public Law 96–72, or
‘‘(E) any unprocessed timber which is a softwood.
For purposes of subparagraph (E), the term ‘unprocessed
timber’ means any log, cant, or similar form of timber.
‘‘(4) PROPERTY IN SHORT SUPPLY.—If the President deter-
mines that the supply of any property described in paragraph
(1) is insufficient to meet the requirements of the domestic
economy, the President may by Executive order designate the
property as in short supply. Any property so designated shall
not be treated as qualifying foreign trade property during the
period beginning with the date specified in the Executive order
and ending with the date specified in an Executive order setting
forth the President’s determination that the property is no
longer in short supply.
‘‘(b) OTHER DEFINITIONS
AND RULES.—For purposes of this
subpart—
‘‘(1) TRANSACTION.—
‘‘(A) IN GENERAL.—The term ‘transaction’ means—
‘‘(i) any sale, exchange, or other disposition,
‘‘(ii) any lease or rental, and
‘‘(iii) any furnishing of services.
‘‘(B) GROUPING OF TRANSACTIONS.—To the extent pro-
vided in regulations, any provision of this subpart which,
but for this subparagraph, would be applied on a trans-
action-by-transaction basis may be applied by the taxpayer
on the basis of groups of transactions based on product
lines or recognized industry or trade usage. Such regula-
tions may permit different groupings for different purposes.
‘‘(2) UNITED STATES DEFINED.—The term ‘United States’
includes the Commonwealth of Puerto Rico. The preceding sen-
tence shall not apply for purposes of determining whether a
corporation is a domestic corporation.
‘‘(3) RELATED PERSON.—A person shall be related to another
person if such persons are treated as a single employer under
subsection (a) or (b) of section 52 or subsection (m) or (o)
of section 414, except that determinations under subsections
H. R. 4986—8
(a) and (b) of section 52 shall be made without regard to
section 1563(b).
‘‘(4) GROSS AND TAXABLE INCOME.—Section 114 shall not
be taken into account in determining the amount of gross
income or foreign trade income from any transaction.
‘‘(c) SOURCE RULE.—Under regulations, in the case of qualifying
foreign trade property manufactured, produced, grown, or extracted
within the United States, the amount of income of a taxpayer
from any sales transaction with respect to such property which
is treated as from sources without the United States shall not
exceed—
‘‘(1) in the case of a taxpayer computing its qualifying
foreign trade income under section 941(a)(1)(B), the amount
of the taxpayer’s foreign trade income which would (but for
this subsection) be treated as from sources without the United
States if the foreign trade income were reduced by an amount
equal to 4 percent of the foreign trading gross receipts with
respect to the transaction, and
‘‘(2) in the case of a taxpayer computing its qualifying
foreign trade income under section 941(a)(1)(C), 50 percent
of the amount of the taxpayer’s foreign trade income which
would (but for this subsection) be treated as from sources
without the United States.
‘‘(d) TREATMENT OF WITHHOLDING TAXES.—
‘‘(1) IN GENERAL.—For purposes of section 114(d), any with-
holding tax shall not be treated as paid or accrued with respect
to extraterritorial income which is excluded from gross income
under section 114(a). For purposes of this paragraph, the term
‘withholding tax’ means any tax which is imposed on a basis
other than residence and for which credit is allowable under
section 901 or 903.
‘‘(2) EXCEPTION.—Paragraph (1) shall not apply to any tax-
payer with respect to extraterritorial income from any trans-
action if the taxpayer computes its qualifying foreign trade
income with respect to the transaction under section
941(a)(1)(A).
‘‘(e) ELECTION TO BE TREATED AS DOMESTIC CORPORATION.—
‘‘(1) IN GENERAL.—An applicable foreign corporation may
elect to be treated as a domestic corporation for all purposes
of this title if such corporation waives all benefits to such
corporation granted by the United States under any treaty.
No election under section 1362(a) may be made with respect
to such corporation.
‘‘(2) APPLICABLE FOREIGN CORPORATION.—For purposes of
paragraph (1), the term ‘applicable foreign corporation’ means
any foreign corporation if—
‘‘(A) such corporation manufactures, produces, grows,
or extracts property in the ordinary course of such corpora-
tion’s trade or business, or
‘‘(B) substantially all of the gross receipts of such cor-
poration are foreign trading gross receipts.
‘‘(3) PERIOD OF ELECTION.—
‘‘(A) IN
GENERAL.—Except as otherwise provided in
this paragraph, an election under paragraph (1) shall apply
to the taxable year for which made and all subsequent
H. R. 4986—9
taxable years unless revoked by the taxpayer. Any revoca-
tion of such election shall apply to taxable years beginning
after such revocation.
‘‘(B) TERMINATION.—If a corporation which made an
election under paragraph (1) for any taxable year fails
to meet the requirements of subparagraph (A) or (B) of
paragraph (2) for any subsequent taxable year, such elec-
tion shall not apply to any taxable year beginning after
such subsequent taxable year.
‘‘(C) EFFECT
OF
REVOCATION
OR
TERMINATION.—If a
corporation which made an election under paragraph (1)
revokes such election or such election is terminated under
subparagraph (B), such corporation (and any successor cor-
poration) may not make such election for any of the 5
taxable years beginning with the first taxable year for
which such election is not in effect as a result of such
revocation or termination.
‘‘(4) SPECIAL RULES.—
‘‘(A) REQUIREMENTS.—This subsection shall not apply
to an applicable foreign corporation if such corporation
fails to meet the requirements (if any) which the Secretary
may prescribe to ensure that the taxes imposed by this
chapter on such corporation are paid.
‘‘(B) EFFECT
OF
ELECTION, REVOCATION, AND
TERMI-
NATION.—
‘‘(i) ELECTION.—For purposes of section 367, a for-
eign corporation making an election under this sub-
section shall be treated as transferring (as of the first
day of the first taxable year to which the election
applies) all of its assets to a domestic corporation in
connection with an exchange to which section 354
applies.
‘‘(ii) REVOCATION AND TERMINATION.—For purposes
of section 367, if—
‘‘(I) an election is made by a corporation under
paragraph (1) for any taxable year, and
‘‘(II) such election ceases to apply for any sub-
sequent taxable year,
such corporation shall be treated as a domestic corporation
transferring (as of the 1st day of the first such subsequent
taxable year to which such election ceases to apply) all
of its property to a foreign corporation in connection with
an exchange to which section 354 applies.
‘‘(C) ELIGIBILITY FOR ELECTION.—The Secretary may
by regulation designate one or more classes of corporations
which may not make the election under this subsection.
‘‘(f ) RULES RELATING TO ALLOCATIONS OF QUALIFYING FOREIGN
TRADE INCOME FROM SHARED PARTNERSHIPS.—
‘‘(1) IN GENERAL.—If—
‘‘(A) a partnership maintains a separate account for
transactions (to which this subpart applies) with each
partner,
‘‘(B) distributions to each partner with respect to such
transactions are based on the amounts in the separate
account maintained with respect to such partner, and
‘‘(C) such partnership meets such other requirements
as the Secretary may by regulations prescribe,
H. R. 4986—10
then such partnership shall allocate to each partner items
of income, gain, loss, and deduction (including qualifying foreign
trade income) from any transaction to which this subpart
applies on the basis of such separate account.
‘‘(2) SPECIAL RULES.—For purposes of this subpart, in the
case of a partnership to which paragraph (1) applies—
‘‘(A) any partner’s interest in the partnership shall
not be taken into account in determining whether such
partner is a related person with respect to any other
partner, and
‘‘(B) the election under section 942(a)(3) shall be made
separately by each partner with respect to any transaction
for which the partnership maintains separate accounts for
each partner.
‘‘(g) EXCLUSION FOR PATRONS OF AGRICULTURAL AND HORTI-
CULTURAL COOPERATIVES.—Any amount described in paragraph (1)
or (3) of section 1385(a)—
‘‘(1) which is received by a person from an organization
to which part I of subchapter T applies which is engaged
in the marketing of agricultural or horticultural products, and
‘‘(2) which is allocable to qualifying foreign trade income
and designated as such by the organization in a written notice
mailed to its patrons during the payment period described
in section 1382(d),
shall be treated as qualifying foreign trade income of such person
for purposes of section 114. The taxable income of the organization
shall not be reduced under section 1382 by reason of any amount
to which the preceding sentence applies.
‘‘(h) SPECIAL RULE FOR DISCS.—Section 114 shall not apply
to any taxpayer for any taxable year if, at any time during the
taxable year, the taxpayer is a member of any controlled group
of corporations (as defined in section 927(d)(4), as in effect before
the date of the enactment of this subsection) of which a DISC
is a member.’’.
SEC. 4. TECHNICAL AND CONFORMING AMENDMENTS.
(1) The second sentence of section 56(g)(4)(B)(i) is amended
by inserting before the period ‘‘or under section 114’’.
(2) Section 275(a) is amended—
(A) by striking ‘‘or’’ at the end of paragraph (4)(A),
by striking the period at the end of paragraph (4)(B) and
inserting ‘‘, or’’, and by adding at the end of paragraph
(4) the following new subparagraph:
‘‘(C) such taxes are paid or accrued with respect to
qualifying foreign trade income (as defined in section 941).’’;
and
(B) by adding at the end the following the following
new sentence: ‘‘A rule similar to the rule of section 943(d)
shall apply for purposes of paragraph (4)(C).’’.
(3) Paragraph (3) of section 864(e) is amended—
(A) by striking ‘‘For purposes of’’ and inserting:
‘‘(A) IN GENERAL.—For purposes of’’; and
(B) by adding at the end the following new subpara-
graph:
‘‘(B) ASSETS
PRODUCING
EXEMPT
EXTRATERRITORIAL
INCOME.—For purposes of allocating and apportioning any
interest expense, there shall not be taken into account
H. R. 4986—11
any qualifying foreign trade property (as defined in section
943(a)) which is held by the taxpayer for lease or rental
in the ordinary course of trade or business for use by
the lessee outside the United States (as defined in section
943(b)(2)).’’.
(4) Section 903 is amended by striking ‘‘164(a)’’ and
inserting ‘‘114, 164(a),’’.
(5) Section 999(c)(1) is amended by inserting ‘‘941(a)(5),’’
after ‘‘908(a),’’.
(6) The table of sections for part III of subchapter B of
chapter 1 is amended by inserting before the item relating
to section 115 the following new item:
‘‘Sec. 114. Extraterritorial income.’’.
(7) The table of subparts for part III of subchapter N
of chapter 1 is amended by striking the item relating to subpart
E and inserting the following new item:
‘‘Subpart E. Qualifying foreign trade income.’’.
(8) The table of subparts for part III of subchapter 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 Sep-
tember 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 for-
eign trade income (as defined in section 923(b) of such Code,
as so in effect) for any period 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 CORPORA-
TIONS.—
(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 ordinary 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 per-
son) 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 contract and which is enforceable against
the seller or lessor.
(2) ELECTION
TO
HAVE
AMENDMENTS
APPLY
EARLIER.—A
taxpayer may elect to have the amendments made by this
Act apply to any transaction by a FSC or any related person
H. R. 4986—12
to which such amendments would apply but for the application
of paragraph (1). Such election shall be effective for the taxable
year for which made and all subsequent taxable years, and,
once made, may be revoked only with the consent of the Sec-
retary of the Treasury.
(3) EXCEPTION FOR OLD EARNINGS AND PROFITS OF CERTAIN
CORPORATIONS.—
(A) IN GENERAL.—In the case of a foreign corporation
to which this paragraph applies—
(i) earnings and profits of such corporation
accumulated in taxable years ending before October
1, 2000, shall not be included in the gross income
of the persons holding stock in such corporation by
reason of section 943(e)(4)(B)(i); and
(ii) rules similar to the rules of clauses (ii), (iii),
and (iv) of section 953(d)(4)(B) shall apply with respect
to such earnings and profits.
The preceding sentence shall not apply to earnings and
profits acquired in a transaction after September 30, 2000,
to which section 381 applies unless the distributor or trans-
feror corporation was immediately before the transaction
a foreign corporation to which this paragraph applies.
(B) EXISTING FSCS.—This paragraph shall apply to any
controlled foreign corporation (as defined in section 957)
if—
(i) such corporation is a FSC (as so defined) in
existence on September 30, 2000;
(ii) such corporation is eligible to make the election
under section 943(e) by reason of being described in
paragraph (2)(B) of such section; and
(iii) such corporation makes such election not later
than for its first taxable year beginning after December
31, 2001.
(C) OTHER CORPORATIONS.—This paragraph shall apply
to any controlled foreign corporation (as defined in section
957), and such corporation shall (notwithstanding any
provision of section 943(e)) be treated as an applicable
foreign corporation for purposes of section 943(e), if—
(i) such corporation is in existence on September
30, 2000;
(ii) as of such date, such corporation is wholly
owned (directly or indirectly) by a domestic corporation
(determined without regard to any election under sec-
tion 943(e));
(iii) for each of the 3 taxable years preceding the
first taxable year to which the election under section
943(e) by such controlled foreign corporation applies—
(I) all of the gross income of such corporation
is subpart F income (as defined in section 952),
including by reason of section 954(b)(3)(B); and
(II) in the ordinary course of such corporation’s
trade or business, such corporation regularly sold
(or paid commissions) to a FSC which on Sep-
tember 30, 2000, was a related person to such
corporation;
(iv) such corporation has never made an election
under section 922(a)(2) (as in effect before the date
H. R. 4986—13
of the enactment of this paragraph) to be treated as
a FSC; and
(v) such corporation makes the election under sec-
tion 943(e) not later than for its first taxable year
beginning after December 31, 2001.
The preceding sentence shall cease to apply as of the date
that the domestic corporation referred to in clause (ii)
ceases to wholly own (directly or indirectly) such controlled
foreign corporation.
(4) RELATED PERSON.—For purposes of this subsection, the
term ‘‘related person’’ has the meaning given to such term
by section 943(b)(3).
(5) SECTION REFERENCES.—Except as otherwise expressly
provided, any reference in this subsection to a section or other
provision shall be considered to be a reference to a section
or other provision of the Internal Revenue Code of 1986, as
amended by this Act.
(d) SPECIAL RULES RELATING TO LEASING TRANSACTIONS.—
(1) SALES INCOME.—If foreign trade income in connection
with the lease or rental of property described in section
927(a)(1)(B) of such Code (as in effect before the amendments
made by this Act) is treated as exempt foreign trade income
for purposes of section 921(a) of such Code (as so in effect),
such property shall be treated as property described in section
941(c)(1)(B) of such Code (as added by this Act) for purposes
of applying section 941(c)(2) of such Code (as so added) to
any subsequent transaction involving such property to which
the amendments made by this Act apply.
(2) LIMITATION ON USE OF GROSS RECEIPTS METHOD.—If
any person computed its foreign trade income from any trans-
action with respect to any property on the basis of a transfer
price determined under the method described in section
925(a)(1) of such Code (as in effect before the amendments
made by this Act), then the qualifying foreign trade income
(as defined in section 941(a) of such Code, as in effect after
such amendment) of such person (or any related person) with
respect to any other transaction involving such property (and
to which the amendments made by this Act apply) shall be
zero.
Speaker of the House of Representatives.
Vice President of the United States and
President of the Senate.