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.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Corporate Welfare
Reduction Act of 1997’’.
SEC. 2. FOREIGN OIL AND GAS INCOME.
(a) SPECIAL RULES
FOR FOREIGN TAX CREDIT
WITH RESPECT TO FOREIGN OIL AND GAS INCOME.—
(1) CERTAIN TAXES NOT CREDITABLE.—
(A) IN GENERAL.—Subsection (a) of sec-
tion 907 of the Internal Revenue Code of 1986
(relating to reduction in amount allowed as for-
eign tax under section 901) is amended to read
as follows:
‘‘(a) CERTAIN TAXES NOT CREDITABLE.—
‘‘(1) IN GENERAL.—For purposes of this sub-
title, the term ‘income, war profits, and excess prof-
its taxes’ shall not include—
‘‘(A) any taxes which are paid or accrued
to any foreign country with respect to foreign
oil and gas income and which are not imposed
under a generally applicable income tax law of
such country, and
‘‘(B) any taxes (not described in subpara-
graph (A)) which are paid or accrued to any
foreign country with respect to foreign oil and
gas income to the extent that the foreign law
imposing such amount of tax is structured, or
in fact operates, so that the amount of tax im-
posed with respect to foreign oil and gas income
will generally be materially greater, over a rea-
sonable period of time, than the amount gen-
erally imposed on income that is not foreign oil
and gas income.
In computing the amount not treated as tax under
subparagraph (B), such amount shall be treated as
a deduction under the foreign law.
‘‘(2) FOREIGN OIL AND GAS INCOME.—For pur-
poses of this paragraph, the term ‘foreign oil and
gas income’ means the amount of foreign oil and gas
extraction income and foreign oil related income.
‘‘(3) GENERALLY
APPLICABLE
INCOME
TAX
LAW.—For purposes of this paragraph, the term
‘generally applicable income tax law’ means any law
of a foreign country imposing an income tax if such
tax generally applies to all income from sources
within such foreign country—
‘‘(A) without regard to the residence or na-
tionality of the person earning such income,
and
‘‘(B) in the case of any income earned by
a corporation, partnership, or other entity,
without regard to—
‘‘(i) where such corporation, partner-
ship, or other entity is organized, and
‘‘(ii) the residence or nationality of
the persons owning interests in such cor-
poration, partnership, or entity.’’
(B) CONFORMING
AMENDMENT.—Section
907 of such Code is amended by striking sub-
sections (b), (c)(3), (c)(4), (c)(5), and (f).
(2) SEPARATE BASKETS FOR FOREIGN OIL AND
GAS EXTRACTION INCOME AND FOREIGN OIL RELAT-
ED INCOME.—
(A) IN GENERAL.—Paragraph (1) of sec-
tion 904(d) of such Code (relating to separate
application of section with respect to certain
categories of income) is amended by striking
‘‘and’’ at the end of subparagraph (H), by re-
designating subparagraph (I) as subparagraph
(K) and by inserting after subparagraph (H)
the following new subparagraphs:
‘‘(I) foreign oil and gas extraction income,
‘‘(J) foreign oil related income, and’’.
(B) DEFINITIONS.—Paragraph (2) of sec-
tion 904(d) of such Code is amended by redes-
ignating subparagraphs (H) and (I) as subpara-
graphs (J) and (K), respectively, and by insert-
ing after subparagraph (G) the following new
subparagraphs:
‘‘(H) FOREIGN OIL AND GAS EXTRACTION
INCOME.—The term ‘foreign oil and gas extrac-
tion income’ has the meaning given such term
(ii) In determining the amount of
taxes deemed to be paid in a taxable year
beginning after December 31, 1997, under
section 902 or 960 of such Code, section
907(a) of such Code (as amended by para-
graph (1)) shall apply to all taxes whether
paid or accrued before, on, or after Decem-
ber 31, 1997.
(C) LOSS
RULE.—Notwithstanding the
amendments made by paragraph (1)(B), section
907(c)(4) of such Code shall continue to apply
with respect to foreign oil and gas extraction
losses for taxable years beginning before Janu-
ary 1, 1998.
(D) TRANSITIONAL RULES.—
(i) Any taxes paid or accrued in a tax-
able year beginning before January 1,
1998, with respect to income which was
described in subparagraph (I) of section
904(d)(1) of such Code (as in effect on the
day before the date of the enactment of
this Act) shall be treated as taxes paid or
accrued with respect to foreign oil and gas
extraction income or foreign oil related in-
come (as the case may be) to the extent
such taxes were paid or accrued with re-
spect to such type of income.
(ii) Any unused oil and gas extraction
taxes which under section 907(f) of such
Code (as so in effect) would have been al-
lowed as a carryover to the taxpayer’s first
taxable year beginning after December 31,
1997 (determined without regard to the
limitation of paragraph (2) of such section
907(f) for such first taxable year), shall be
allowed as carryovers under section 904(c)
of such Code in the same manner as if
they were unused taxes under section
904(c) with respect to foreign oil and gas
extraction income.
(b) ELIMINATION OF DEFERRAL FOR FOREIGN OIL
AND GAS EXTRACTION INCOME.—
(1) GENERAL RULE.—Paragraph (1) of section
954(g) of the Internal Revenue Code of 1986 (defin-
ing foreign base company oil related income) is
amended to read as follows:
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, the term ‘foreign oil and
gas income’ means any income of a kind which
would be taken into account in determining the
amount of—
‘‘(A) foreign oil and gas extraction income
(as defined in section 907(c)(1)), or
‘‘(B) foreign oil related income (as defined
in section 907(c)(2)).’’
(2) CONFORMING AMENDMENTS.—
(A)(i) Subsections (a)(5), (b)(5), and
(b)(8) of section 954 of such Code are each
amended by striking ‘‘base company oil related
income’’ each place it appears (including in the
heading of subsection (b)(8)) and inserting ‘‘oil
and gas income’’.
(ii) Subsection (b)(4) of section 954 of
such Code is amended by striking ‘‘base com-
pany oil-related income’’ and inserting ‘‘oil and
gas income’’.
(B) The subsection heading for subsection
(g) of section 954 of such Code is amended by
striking ‘‘FOREIGN BASE COMPANY OIL RE-
LATED INCOME’’ and inserting ‘‘FOREIGN OIL
AND GAS INCOME’’.
(C) Subparagraph (A) of section 954(g)(2)
of such Code is amended by striking ‘‘foreign
base company oil related income’’ and inserting
‘‘foreign oil and gas income’’.
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to taxable years of for-
eign corporations beginning after December 31,
1997, and to taxable years of United States share-
holders in which or with which such taxable years of
foreign corporations end.
SEC. 3. TRANSFER PRICING.
(a) AUTHORITY OF SECRETARY WHEN LEGAL LIM-
ITS ON TRANSFER BY TAXPAYER.—Section 482 of the In-
ternal Revenue Code of 1986 (relating to allocation of in-
come and deductions among taxpayers) is amended by
adding at the end the following: ‘‘The authority of the Sec-
retary under this section shall not be limited by any re-
striction (by any law or agreement) on the ability of such
interests, organizations, trades, or businesses to transfer
or receive money or other property.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 4. EXCLUSION OF FOREIGN EARNED INCOME USED
FOR FOREIGN TUITION COSTS IN LIEU OF
$70,000 EXCLUSION, OTHER THAN FOR EM-
PLOYEES OF CERTAIN TAX-EXEMPT ORGANI-
ZATIONS.
(a) IN GENERAL.—Paragraph (1) of section 911(a)
of the Internal Revenue Code of 1986 (relating to exclu-
sion from income) is amended by striking ‘‘foreign earned
income’’ 
and 
inserting 
‘‘applicable 
foreign-earned
amount’’.
(b) TUITION EXCLUSION IN LIEU OF INCOME EX-
CLUSION.—Subsection (b) of section 911 of such Code is
amended—
(1) by redesignating paragraphs (1) and (2) as
paragraphs (2) and (3), respectively,
(2) by inserting after the heading the following
new paragraph:
‘‘(1) 
APPLICABLE
FOREIGN-EARNED
AMOUNT.—For purposes of this section, the term
‘applicable foreign-earned amount’ means—
‘‘(A) foreign earned income, in the case of
an individual who is an employee of an organi-
zation described in paragraph (3) or (4) of sec-
tion 501(c) and exempt from tax under section
501(a), and
‘‘(B) the foreign tuition amount, in the
case of an individual not described in subpara-
graph (A).’’, and
(3) by adding at the end the following new
paragraphs:
‘‘(4) FOREIGN TUITION AMOUNT.—
‘‘(A) IN GENERAL.—For purposes of this
section, the term ‘foreign tuition amount’
means so much of the foreign earned income of
the individual as does not exceed the tuition
paid by the individual during the taxable year
for the education of a dependent child—
‘‘(i) in the country in which is located
the abode referred to in clause (i) or (ii) of
subsection (c)(2)(B),
‘‘(ii) at an educational organization
described in section 170(b)(1)(A)(ii), and
‘‘(iii) during the taxable year or dur-
ing the first 5 months of the next taxable
year.
For purposes of this subparagraph, the term
‘education’ does not include education above the
secondary school level.
‘‘(B) DEPENDENT CHILD.—For purposes
of subparagraph (A), the term ‘dependent child’
means an individual who is a son or daughter
of the taxpayer and is a dependent of the tax-
payer (within the meaning of section 152).
Rules similar to the rules of section 152(b)(2)
shall apply for purposes of this subparagraph.
‘‘(5) SPECIAL RULE IF EMPLOYED BY TAX-EX-
EMPT ORGANIZATION FOR PART OF YEAR.—For pur-
poses of this subsection, a qualified individual who
is an employee described in paragraph (1)(A) for
less than the entire taxable year shall be treated, for
the taxable year—
‘‘(A) as being such an employee, if such in-
dividual was such an employee for at least a 6-
month period during the taxable year, and
‘‘(B) as not being such an employee, if
such individual is not described in subpara-
graph (A).
An individual may elect to be treated as not de-
scribed in subparagraph (A) for the taxable year.’’
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (4) of section 86(f) of such Code
is amended by striking ‘‘section 911(b)(1)’’ and in-
serting ‘‘section 911(b)(2)’’.
(2) Subsection (b) of section 911 of such Code
is amended in the heading by striking ‘‘FOREIGN
EARNED INCOME’’ and inserting ‘‘APPLICABLE FOR-
EIGN-EARNED AMOUNT’’.
(3) Paragraph (2) of section 911(b) of such
Code (as redesignated by this section) is amended in
the heading by striking ‘‘DEFINITION’’ and inserting
‘‘FOREIGN EARNED INCOME’’.
(4) Subparagraph (E) of section 911(c)(3) of
such Code is amended by striking ‘‘subsection
(b)(2)’’ and inserting ‘‘subsection (b)(3)’’.
(5) Paragraph (4) of section 911(d) of such
Code is amended by striking ‘‘subsections (b)(2)(A)
and’’ and inserting ‘‘subsections (b)(3)(A) and’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
the date of the enactment of this Act.
SEC. 5. DISPOSITION OF STOCK IN DOMESTIC CORPO-
RATIONS BY 10-PERCENT FOREIGN SHARE-
HOLDERS.
(a) GENERAL RULE.—Subpart D of part II of sub-
chapter N of chapter 1 of the Internal Revenue Code of
1986 (relating to miscellaneous provisions) is amended by
adding at the end the following new section:
‘‘SEC. 899. DISPOSITION OF STOCK IN DOMESTIC CORPO-
RATIONS BY 10-PERCENT FOREIGN SHARE-
HOLDERS.
‘‘(a) GENERAL RULE.—
‘‘(1) TREATMENT AS EFFECTIVELY CONNECTED
WITH UNITED STATES TRADE OR BUSINESS.—For
purposes of this title, if any nonresident alien indi-
vidual or foreign corporation is a 10-percent share-
holder in any domestic corporation, any gain or loss
of such individual or foreign corporation from the
disposition of any stock in such domestic corporation
shall be taken into account—
‘‘(A) in the case of a nonresident alien in-
dividual, under section 871(b)(1), or
‘‘(B) in the case of a foreign corporation,
under section 882(a)(1),
as if the taxpayer were engaged during the taxable
year in a trade or business within the United States
through a permanent establishment in the United
States and as if such gain or loss were effectively
connected with such trade or business and attrib-
utable to such permanent establishment. Notwith-
standing section 865, any such gain or loss shall be
treated as from sources in the United States.
‘‘(2) 26-PERCENT
MINIMUM
TAX
ON
NON-
RESIDENT ALIEN INDIVIDUALS.—
‘‘(A) IN
GENERAL.—In the case of any
nonresident alien individual, the amount deter-
mined under section 55(b)(1)(A) shall not be
less than 26 percent of the lesser of—
‘‘(i) the individual’s alternative mini-
mum taxable income (as defined in section
55(b)(2)) for the taxable year, or
‘‘(ii) the individual’s net taxable stock
gain for the taxable year.
‘‘(B) NET
TAXABLE
STOCK
GAIN.—For
purposes of subparagraph (A), the term ‘net
taxable stock gain’ means the excess of—
‘‘(i) the aggregate gains for the tax-
able year from dispositions of stock in do-
mestic corporations with respect to which
such individual is a 10-percent share-
holder, over
‘‘(ii) the aggregate of the losses for
the taxable year from dispositions of such
stock.
‘‘(C) 
COORDINATION
WITH
SECTION
897(a)(2).—Section 897(a)(2)(A) shall not apply
to any nonresident alien individual for any tax-
able year for which such individual has a net
taxable stock gain, but the amount of such net
taxable stock gain shall be increased by the
amount of such individual’s net United States
real property gain (as defined in section
897(a)(2)(B)) for such taxable year.
‘‘(b) 10-PERCENT SHAREHOLDER.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘10-percent shareholder’ means any
person who at any time during the shorter of—
‘‘(A) the period beginning on January 1,
1997, and ending on the date of the disposition,
or
‘‘(B) the 5-year period ending on the date
of the disposition,
owned 10 percent or more (by vote or value) of the
stock in the domestic corporation.
‘‘(2) CONSTRUCTIVE OWNERSHIP.—
‘‘(A) IN GENERAL.—Section 318(a) (relat-
ing to constructive ownership of stock) shall
apply for purposes of paragraph (1).
‘‘(B) MODIFICATIONS.—For purposes of
subparagraph (A)—
‘‘(i) paragraph (2)(C) of section
318(a) shall be applied by substituting ‘10
percent’ for ‘50 percent’, and
‘‘(ii) paragraph (3)(C) of section
318(a) shall be applied—
‘‘(I) by substituting ‘10 percent’
for ‘50 percent’, and
‘‘(II) in any case where such
paragraph would not apply but for
subclause (I), by considering a cor-
poration as owning the stock (other
than stock in such corporation) owned
by or for any shareholder of such cor-
poration in that proportion which the
value of the stock which such share-
holder owns in such corporation bears
to the value of all stock in such cor-
poration.
‘‘(3) TREATMENT OF STOCK HELD BY CERTAIN
PARTNERSHIPS.—
‘‘(A) IN GENERAL.—For purposes of this
section, if—
‘‘(i) a partnership is a 10-percent
shareholder in any domestic corporation,
and
‘‘(ii) 10 percent or more of the capital
or profits interests in such partnership is
held (directly or indirectly) by nonresident
alien individuals or foreign corporations,
each partner in such partnership who is not
otherwise a 10-percent shareholder in such cor-
poration shall, with respect to the stock in such
corporation held by the partnership, be treated
as a 10-percent shareholder in such corpora-
tion.
‘‘(B) EXCEPTION.—
‘‘(i) IN GENERAL.—Subparagraph (A)
shall not apply with respect to stock in a
domestic corporation held by any partner-
ship if, at all times during the 5-year pe-
riod ending on the date of the disposition
involved—
‘‘(I) the aggregate bases of the
stock and securities in such domestic
corporation held by such partnership
were less than 25 percent of the part-
nership’s net adjusted asset cost, and
‘‘(II) the partnership did not own
50 percent or more (by vote or value)
of the stock in such domestic corpora-
tion.
The Secretary may by regulations dis-
regard any failure to meet the require-
ments of subclause (I) where the partner-
ship normally met such requirements dur-
ing such 5-year period.
‘‘(ii) NET ADJUSTED ASSET COST.—
For purposes of clause (i), the term ‘net
adjusted asset cost’ means—
‘‘(I) the aggregate bases of all of
the assets of the partnership other
than cash and cash items, reduced by
‘‘(II) the portion of the liabilities
of the partnership not allocable (on a
proportionate basis) to assets excluded
under subclause (I).
‘‘(C) EXCEPTION NOT TO APPLY TO 50-
PERCENT PARTNERS.—Subparagraph (B) shall
not apply in the case of any partner owning (di-
rectly or indirectly) more than 50 percent of the
capital or profits interests in the partnership at
any time during the 5-year period ending on the
date of the disposition.
‘‘(D) SPECIAL
RULES.—For purposes of
subparagraphs (B) and (C)—
‘‘(i) 
TREATMENT
OF
PREDE-
CESSORS.—Any reference to a partnership
or corporation shall be treated as including
a reference to any predecessor thereof.
‘‘(ii) PARTNERSHIP
NOT
IN
EXIST-
ENCE.—If any partnership was not in ex-
istence throughout the entire 5-year period
ending on the date of the disposition, only
the portion of such period during which
the partnership (or any predecessor) was
in existence shall be taken into account.
‘‘(E) 
OTHER
PASS-THRU
ENTITIES;
TIERED ENTITIES.—Rules similar to the rules
of the preceding provisions of this paragraph
shall also apply in the case of any pass-thru en-
tity other than a partnership and in the case of
tiered partnerships and other entities.
‘‘(c) COORDINATION WITH NONRECOGNITION PROVI-
SIONS; ETC.—
‘‘(1) COORDINATION
WITH
NONRECOGNITION
PROVISIONS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), any nonrecognition provision
shall apply for purposes of this section to a
transaction only in the case of—
‘‘(i) an exchange of stock in a domes-
tic corporation for other property the sale
of which would be subject to taxation
under this chapter, or
‘‘(ii) a distribution with respect to
which gain or loss would not be recognized
under section 336 if the sale of the distrib-
uted property by the distributee would be
subject to tax under this chapter.
‘‘(B) REGULATIONS.—The Secretary shall
prescribe regulations (which are necessary or
appropriate to prevent the avoidance of Federal
income taxes) providing—
‘‘(i) the extent to which nonrecogni-
tion provisions shall, and shall not, apply
for purposes of this section, and
‘‘(ii) the extent to which—
‘‘(I) transfers of property in a re-
organization, and
‘‘(II) changes in interests in, or
distributions from, a partnership,
trust, or estate,
shall be treated as sales of property at fair
market value.
‘‘(C) NONRECOGNITION
PROVISION.—For
purposes of this paragraph, the term ‘non-
recognition provision’ means any provision of
this title for not recognizing gain or loss.
‘‘(2) CERTAIN OTHER RULES MADE APPLICA-
BLE.—For purposes of this section, rules similar to
the rules of subsections (g) and (j) of section 897
shall apply.
‘‘(d) CERTAIN INTEREST TREATED AS STOCK.—For
purposes of this section—
‘‘(1) any option or other right to acquire stock
in a domestic corporation,
‘‘(2) the conversion feature of any debt instru-
ment issued by a domestic corporation, and
‘‘(3) to the extent provided in regulations, any
other interest in a domestic corporation other than
an interest solely as creditor,
shall be treated as stock in such corporation.
‘‘(e) TREATMENT
OF CERTAIN GAIN
AS
A DIVI-
DEND.—In the case of any gain which would be subject
to tax by reason of this section but for a treaty and which
results from any distribution in liquidation or redemption,
for purposes of this subtitle, such gain shall be treated
as a dividend to the extent of the earnings and profits
of the domestic corporation attributable to the stock.
Rules similar to the rules of section 1248(c) (determined
without regard to paragraph (2)(D) thereof) shall apply
for purposes of the preceding sentence.
‘‘(f) REGULATIONS.—The Secretary shall prescribe
such regulations as may be appropriate to carry out the
purposes of this section, including—
‘‘(1) regulations coordinating the provisions of
this section with the provisions of section 897, and
‘‘(2) regulations aggregating stock held by a
group of persons acting together.’’
(b) WITHHOLDING OF TAX.—Subchapter A of chap-
ter 3 of such Code is amended by adding at the end the
following new section:
‘‘SEC. 1447. WITHHOLDING OF TAX ON CERTAIN STOCK
DISPOSITIONS.
‘‘(a) GENERAL RULE.—Except as otherwise provided
in this section, in the case of any disposition of stock in
a domestic corporation by a foreign person who is a 10-
percent shareholder in such corporation, the withholding
agent shall deduct and withhold a tax equal to 10 percent
of the amount realized on the disposition.
‘‘(b) EXCEPTIONS.—
‘‘(1) STOCK WHICH IS NOT REGULARLY TRAD-
ED.—In the case of a disposition of stock which is
not regularly traded, a withholding agent shall not
be required to deduct and withhold any amount
under subsection (a) if—
‘‘(A) the transferor furnishes to such with-
holding agent an affidavit by such transferor
stating, under penalty of perjury, that section
899 does not apply to such disposition be-
cause—
‘‘(i) the transferor is not a foreign
person, or
‘‘(ii) the transferor is not a 10-percent
shareholder, and
‘‘(B) such withholding agent does not
know (or have reason to know) that such affida-
vit is not correct.
‘‘(2) STOCK WHICH IS REGULARLY TRADED.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), a withholding agent shall
not be required to deduct and withhold any
amount under subsection (a) with respect to
any disposition of regularly traded stock if such
withholding agent does not know (or have rea-
son to know) that section 899 applies to such
disposition.
‘‘(B) SPECIAL RULE WHERE SUBSTANTIAL
DISPOSITION.—If—
‘‘(i) there is a disposition of regularly
traded stock in a corporation, and
‘‘(ii) the amount of stock involved in
such disposition constitutes 1 percent or
more (by vote or value) of the stock in
such corporation,
subparagraph (A) shall not apply but para-
graph (1) shall apply as if the disposition in-
volved stock which was not regularly traded.
‘‘(C) NOTIFICATION
BY
FOREIGN
PER-
SON.—If section 899 applies to any disposition
by a foreign person of regularly traded stock,
such foreign person shall notify the withholding
agent that section 899 applies to such disposi-
tion.
‘‘(3) 
NONRECOGNITION
TRANSACTIONS.—A
withholding agent shall not be required to deduct
and withhold any amount under subsection (a) in
any case where gain or loss is not recognized by rea-
son of section 899(c) (or the regulations prescribed
under such section).
‘‘(c) SPECIAL RULE WHERE NO WITHHOLDING.—
If—
‘‘(1) there is no amount deducted and withheld
under this section with respect to any disposition to
which section 899 applies, and
‘‘(2) the foreign person does not pay the tax
imposed by this subtitle to the extent attributable to
such disposition on the date prescribed therefor,
for purposes of determining the amount of such tax, the
foreign person’s basis in the stock disposed of shall be
treated as zero or such other amount as the Secretary may
determine (and, for purposes of section 6501, the under-
payment of such tax shall be treated as due to a willful
attempt to evade such tax).
‘‘(d) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) WITHHOLDING AGENT.—The term ‘with-
holding agent’ means—
‘‘(A) the last United States person to have
the control, receipt, custody, disposal, or pay-
ment of the amount realized on the disposition,
or
‘‘(B) if there is no such United States per-
son, the person prescribed in regulations.
‘‘(2) FOREIGN PERSON.—The term ‘foreign per-
son’ means any person other than a United States
person.
‘‘(3) REGULARLY TRADED STOCK.—The term
‘regularly traded stock’ means any stock of a class
which is regularly traded on an established securities
market.
‘‘(4) AUTHORITY
TO
PRESCRIBE
REDUCED
AMOUNT.—At the request of the person making the
disposition or the withholding agent, the Secretary
may prescribe a reduced amount to be withheld
under this section if the Secretary determines that
to substitute such reduced amount will not jeopard-
ize the collection of the tax imposed by section
871(b)(1) or 882(a)(1).
‘‘(5) OTHER
TERMS.—Except as provided in
this section, terms used in this section shall have the
same respective meanings as when used in section
899.
‘‘(6) CERTAIN
RULES
MADE
APPLICABLE.—
Rules similar to the rules of section 1445(e) shall
apply for purposes of this section.
‘‘(e) REGULATIONS.—The Secretary shall prescribe
such regulations as may be appropriate to carry out the
purposes of this section, including regulations coordinat-
ing the provisions of this section with the provisions of
sections 1445 and 1446.’’
(c) EXCEPTION FROM BRANCH PROFITS TAX.—Sub-
paragraph (C) of section 884(d)(2) of such Code is amend-
ed to read as follows:
‘‘(C) gain treated as effectively connected
with the conduct of a trade or business within
the United States under—
‘‘(i) section 897 in the case of the
disposition of a United States real property
interest 
described 
in 
section
897(c)(1)(A)(ii), or
‘‘(ii) section 899,’’.
(d) REPORTS WITH RESPECT
TO CERTAIN DIS-
TRIBUTIONS.—Paragraph (2) of section 6038B(a) of such
Code (relating to notice of certain transfers to foreign per-
sons) is amended by striking ‘‘section 336’’ and inserting
‘‘section 302, 331, or 336’’.
(e) CLERICAL AMENDMENTS.—
(1) The table of sections for subpart D of part
II of subchapter N of chapter 1 of such Code is
amended by adding at the end the following new
item:
‘‘Sec. 899. Dispositions of stock in domestic corporations by 10-
percent foreign shareholders.’’
(2) The table of sections for subchapter A of
chapter 3 of such Code is amended by adding at the
end the following new item:
‘‘Sec. 1447. Withholding of tax on certain stock dispositions.’’
(f) EFFECTIVE DATE.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by
this section shall apply to dispositions after the date
of the enactment of this Act, except that section
1447 of such Code (as added by this section) shall
not apply to any disposition before the date 6
months after the date of the enactment of this Act.
(2) COORDINATION WITH TREATIES.—
(A) IN
GENERAL.—Sections 899 (other
than subsection (e) thereof) and 1447 of such
Code (as added by this section) shall not apply
to any disposition if such disposition is by a
qualified resident of a foreign country and the
application of such sections to such disposition
would be contrary to any treaty between the
United States and such foreign country which
is in effect on the date of the enactment of this
Act and at the time of such disposition.
(B) QUALIFIED RESIDENT.—For purposes
of subparagraph (A), the term ‘‘qualified resi-
dent’’ means any resident of the foreign country
entitled to the benefits of the treaty referred to
in subparagraph (A); except that such term
shall not include a corporation unless such cor-
poration is a qualified resident of such country
(as defined in section 884(e)(4) of such Code).
SEC. 6. PORTFOLIO DEBT.
(a) IN GENERAL.—Section 871(h)(3) of the Internal
Revenue Code of 1986 is amended to read as follows:
‘‘(3) PORTFOLIO INTEREST TO INCLUDE ONLY
INTEREST
ON
GOVERNMENT
OBLIGATIONS.—The
term ‘portfolio interest’ shall include only interest
paid on an obligation issued by a governmental en-
tity.’’
(b) CONFORMING AMENDMENTS.—
(1) Section 881(c)(3) of such Code is amend-
ed—
(A) in subparagraph (A), by adding ‘‘or’’
at the end, and
(B) by striking subparagraph (B) and re-
designating subparagraph (C) as subparagraph
(B).
(2) Section 881(c)(4) of such Code is amend-
ed—
(A) by striking ‘‘section 871(h)(4)’’ and in-
serting ‘‘section 871(h)(3) or (4)’’, and
(B) in the heading, by inserting ‘‘INTER-
EST ON NON-GOVERNMENT OBLIGATIONS OR’’
after ‘‘INCLUDE’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to interest received after December
31, 1997, with respect to obligations issued after such
date.
SEC. 7. SOURCE OF INCOME FROM CERTAIN SALES OF IN-
VENTORY PROPERTY.
(a) GENERAL RULE.—Subsection (b) of section 865
of the Internal Revenue Code of 1986 (relating to excep-
tion for inventory property) is amended to read as follows:
‘‘(b) INVENTORY PROPERTY.—
‘‘(1) INCOME ATTRIBUTABLE TO PRODUCTION
ACTIVITY.—In the case of income from the sale of
inventory property produced (in whole or in part) by
the taxpayer—
‘‘(A) a portion (determined under regula-
tions) of such income shall be allocated to pro-
duction activity (and sourced in the United
States or outside the United States depending
on where such activity occurs), and
‘‘(B) the remaining portion of such income
shall be sourced under the other provisions of
this section.
The regulations prescribed under subparagraph (A)
shall provide that at least 50 percent of such income
shall be allocated to production activities.
‘‘(2) SALES INCOME.—
‘‘(A) UNITED
STATES
RESIDENTS.—In-
come from the sale of inventory property by a
United States resident shall be sourced outside
the United States if—
‘‘(i) the property is sold for use, con-
sumption, or disposition outside the United
States and an office or another fixed place
of business of the taxpayer outside the
United States participated materially in
the sale, and
‘‘(ii) such sale is not (directly or indi-
rectly) to an affiliate of the taxpayer.
‘‘(B) NONRESIDENT.—Income from the
sale of inventory property by a nonresident
shall be sourced in the United States if—
‘‘(i) the taxpayer has an office or
other fixed place of business in the United
States, and
‘‘(ii) such sale is through such office
or other fixed place of business.
This subparagraph shall not apply if the require-
ments of clauses (i) and (ii) of subparagraph (A) are
met with respect to such sale.
‘‘(3) COORDINATION
WITH
TREATIES.—For
purposes of paragraph (2)(A)(i), a United States
resident shall not be treated as having an office or
fixed place of business in a foreign country if a trea-
ty prevents such country from imposing an income
tax on the income.’’
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to income from sales occurring
after December 31, 1997.
SEC. 8. ENHANCEMENT OF BENEFITS FOR FOREIGN SALES
CORPORATIONS.
(a) IN GENERAL.—Subsection (a) of section 923 of
the Internal Revenue Code of 1986 is amended—
(1) in paragraph (2), by striking ‘‘32 percent’’
and inserting ‘‘34 percent’’, and
(2) in paragraph (3), by striking ‘‘16⁄23’’ and in-
serting ‘‘17⁄23’’.
(b) SPECIAL
RULES
RELATING
TO
CORPORATE
PREFERENCE ITEMS.—Paragraph (4) of section 291(a) of
such Code is amended—
(1) in subparagraph (A), by striking ‘‘ ‘30 per-
cent’ for ‘32 percent’ ’’ and inserting ‘‘ ‘32 percent’
for ‘34 percent’ ’’, and
(2) in subparagraph (B), by striking ‘‘ ‘15⁄23’ for
‘16⁄23’ ’’ and inserting ‘‘ ‘16⁄23’ for ‘17⁄23’ ’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
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