170
of any penalty, addition to tax, or additional amount which
relates to an adjustment to a partnership item)’’.
(b) CONFORMING AMENDMENTS.—
(1) Subsection (f) of section 6226 is amended—
(A) by striking ‘‘relates and’’ and inserting
‘‘relates,’’, and
(B) by inserting before the period ‘‘, and
the applicability of any penalty, addition to tax,
or additional amount which relates to an ad-
justment to a partnership item’’.
(2) Clause (i) of section 6230(a)(2)(A) is
amended to read as follows:
‘‘(i) affected items which require part-
ner level determinations (other than pen-
alties, additions to tax, and additional
amounts that relate to adjustments to
partnership items), or’’.
(3)(A) Subparagraph (A) of section 6230(a)(3),
as added by section 317, is amended by inserting
‘‘(including any liability for any penalty, addition to
tax, or additional amount relating to such adjust-
ment)’’ after ‘‘partnership item’’.
(B) Subparagraph (B) of such section is
amended by inserting ‘‘(and the applicability of any
171
penalties, additions to tax, or additional amounts)’’
after ‘‘partnership items’’.
(C) Subparagraph (A) of section 6230(c)(5), as
added by section 317, is amended by inserting before
the period ‘‘(including any liability for any penalties,
additions to tax, or additional amounts relating to
such adjustment)’’.
(D) Subparagraph (D) of section 6230(c)(5), as
added by section 317, is amended by inserting ‘‘(and
the applicability of any penalties, additions to tax, or
additional amounts)’’ after ‘‘partnership items’’.
(4) Paragraph (1) of section 6230(c) is amend-
ed by striking ‘‘or’’ at the end of subparagraph (A),
by striking the period at the end of subparagraph
(B) and inserting ‘‘, or’’, and by adding at the end
thereof the following new subparagraph:
‘‘(C) the Secretary erroneously imposed
any penalty, addition to tax, or additional
amount which relates to an adjustment to a
partnership item.’’
(5) So much of subparagraph (A) of section
6230(c)(2) as precedes ‘‘shall be filed’’ is amended
to read as follows:
172
‘‘(A) UNDER PARAGRAPH (1) (A) OR (C).—
Any claim under subparagraph (A) or (C) of
paragraph (1)’’.
(6) Paragraph (4) of section 6230(c) is amend-
ed by adding at the end thereof the following: ‘‘In
addition, the determination under the final partner-
ship administrative adjustment or under the decision
of the court (whichever is appropriate) concerning
the applicability of any penalty, addition to tax, or
additional amount which relates to an adjustment to
a partnership item shall also be conclusive.
Notwithstanding the preceding sentence, the partner
shall be allowed to assert any partner level defenses
that may apply or to challenge the amount of the
computational adjustment.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
SEC. 319. PROVISIONS RELATING TO COURT JURISDIC-
TION, ETC.
(a) TAX COURT JURISDICTION TO ENJOIN PRE-
MATURE ASSESSMENTS OF DEFICIENCIES ATTRIBUTABLE
TO PARTNERSHIP ITEMS.—Subsection (b) of section 6225
is amended by striking ‘‘the proper court.’’ and inserting
‘‘the proper court, including the Tax Court. The Tax
173
Court shall have no jurisdiction to enjoin any action or
proceeding under this subsection unless a timely petition
for a readjustment of the partnership items for the taxable
year has been filed and then only in respect of the adjust-
ments that are the subject of such petition.’’
(b) JURISDICTION TO CONSIDER STATUTE OF LIMI-
TATIONS WITH RESPECT TO PARTNERS.—Paragraph (1)
of section 6226(d) is amended by adding at the end there-
of the following new sentence:
‘‘Notwithstanding subparagraph (B), any person
treated under subsection (c) as a party to an action
shall be permitted to participate in such action (or
file a readjustment petition under subsection (b) or
paragraph (2) of this subsection) solely for the pur-
pose of asserting that the period of limitations for
assessing any tax attributable to partnership items
has expired with respect to such person, and the
court having jurisdiction of such action shall have
jurisdiction to consider such assertion.’’
(c) TAX
COURT
JURISDICTION
TO
DETERMINE
OVERPAYMENTS ATTRIBUTABLE TO AFFECTED ITEMS.—
(1) Paragraph (6) of section 6230(d) is amend-
ed by striking ‘‘(or an affected item)’’.
174
(2) Paragraph (3) of section 6512(b) is amend-
ed by adding at the end thereof the following new
sentence:
‘‘In the case of a credit or refund relating to an af-
fected 
item 
(within 
the 
meaning 
of 
section
6231(a)(5)), the preceding sentence shall be applied
by substituting the periods under sections 6229 and
6230(d) for the periods under section 6511(b) (2),
(c), and (d).’’
(d) VENUE ON APPEAL.—
(1) Paragraph (1) of section 7482(b) is amend-
ed by striking ‘‘or’’ at the end of subparagraph (D),
by striking the period at the end of subparagraph
(E) and inserting ‘‘, or’’, and by inserting after sub-
paragraph (E) the following new subparagraph:
‘‘(F) in the case of a petition under section
6234(c)—
‘‘(i) the legal residence of the peti-
tioner if the petitioner is not a corporation,
and
‘‘(ii) the place or office applicable
under subparagraph (B) if the petitioner is
a corporation.’’
176
‘‘(5) 
TREATMENT
OF
PREMATURE
PETI-
TIONS.—If—
‘‘(A) a petition for a readjustment of part-
nership items for the taxable year involved is
filed by a notice partner (or a 5-percent group)
during the 90-day period described in sub-
section (a), and
‘‘(B) no action is brought under paragraph
(1) during the 60-day period described therein
with respect to such taxable year which is not
dismissed,
such petition shall be treated for purposes of para-
graph (1) as filed on the last day of such 60-day pe-
riod.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to petitions filed after the date of
the enactment of this Act.
SEC. 321. BONDS IN CASE OF APPEALS FROM TEFRA PRO-
CEEDING.
(a) IN GENERAL.—Subsection (b) of section 7485
(relating to bonds to stay assessment of collection) is
amended—
(1) by inserting ‘‘penalties,’’ after ‘‘any inter-
est,’’, and
177
(2) by striking ‘‘aggregate of such deficiencies’’
and inserting ‘‘aggregate liability of the parties to
the action’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall take effect as if included in the amend-
ments made by section 402 of the Tax Equity and Fiscal
Responsibility Act of 1982.
SEC. 322. SUSPENSION OF INTEREST WHERE DELAY IN
COMPUTATIONAL ADJUSTMENT RESULTING
FROM TEFRA SETTLEMENTS.
(a) IN GENERAL.—Subsection (c) of section 6601
(relating to interest on underpayment, nonpayment, or ex-
tension of time for payment, of tax) is amended by adding
at the end thereof the following new sentence: ‘‘In the case
of a settlement under section 6224(c) which results in the
conversion of partnership items to nonpartnership items
pursuant to section 6231(b)(1)(C), the preceding sentence
shall apply to a computational adjustment resulting from
such settlement in the same manner as if such adjustment
were a deficiency and such settlement were a waiver re-
ferred to in the preceding sentence.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to adjustments with respect to
partnership taxable years beginning after the date of the
enactment of this Act.
178
SEC. 323. SPECIAL RULES FOR ADMINISTRATIVE ADJUST-
MENT REQUESTS WITH RESPECT TO BAD
DEBTS OR WORTHLESS SECURITIES.
(a) GENERAL RULE.—Section 6227 (relating to ad-
ministrative adjustment requests) is amended by adding
at the end thereof the following new subsection:
‘‘(d) REQUESTS WITH RESPECT TO BAD DEBTS OR
WORTHLESS SECURITIES.—In the case of that portion of
any request for an administrative adjustment which re-
lates to the deductibility by the partnership under section
166 of a debt as a debt which became worthless, or under
section 165(g) of a loss from worthlessness of a security,
the period prescribed in subsection (a)(1) shall be 7 years
from the last day for filing the partnership return for the
year with respect to which such request is made (deter-
mined without regard to extensions).’’
(b) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendment made by
subsection (a) shall take effect as if included in the
amendments made by section 402 of the Tax Equity
and Fiscal Responsibility Act of 1982.
(2) TREATMENT OF REQUESTS FILED BEFORE
DATE OF ENACTMENT.—In the case of that portion
of any request (filed before the date of the enact-
ment of this Act) for an administrative adjustment
which relates to the deductibility of a debt as a debt
179
which became worthless or the deductibility of a loss
from the worthlessness of a security—
(A) paragraph (2) of section 6227(a) of
the Internal Revenue Code of 1986 shall not
apply,
(B) the period for filing a petition under
section 6228 of the Internal Revenue Code of
1986 with respect to such request shall not ex-
pire before the date 6 months after the date of
the enactment of this Act, and
(C) such a petition may be filed without
regard to whether there was a notice of the be-
ginning of an administrative proceeding or a
final partnership administrative adjustment.
TITLE IV—FOREIGN PROVISIONS
Subtitle A—Simplification of Treat-
ment of Passive Foreign Cor-
porations
SEC. 401. REPEAL OF FOREIGN PERSONAL HOLDING COM-
PANY RULES AND FOREIGN INVESTMENT
COMPANY RULES.
(a) GENERAL RULE.—The following provisions are
hereby repealed:
(1) Part III of subchapter G of chapter 1 (re-
lating to foreign personal holding companies).
180
(2) Section 1246 (relating to gain on foreign in-
vestment company stock).
(3) Section 1247 (relating to election by foreign
investment companies to distribute income cur-
rently).
(b) EXEMPTION OF FOREIGN CORPORATIONS FROM
ACCUMULATED EARNINGS TAX AND PERSONAL HOLDING
COMPANY RULES.—
(1) ACCUMULATED EARNINGS TAX.—Subsection
(b) of section 532 (relating to exceptions) is amend-
ed—
(A) by striking paragraph (2) and insert-
ing the following:
‘‘(2) a foreign corporation, or’’,
(B) by striking ‘‘, or’’ at the end of para-
graph (3) and inserting a period, and
(C) by striking paragraph (4).
(2) PERSONAL
HOLDING
COMPANY
RULES.—
Subsection (c) of section 542 (relating to exceptions)
is amended—
(A) by striking paragraph (5) and insert-
ing the following:
‘‘(5) a foreign corporation,’’,
181
(B) by striking paragraphs (7) and (10)
and by redesignating paragraphs (8) and (9) as
paragraphs (7) and (8), respectively,
(C) by inserting ‘‘and’’ at the end of para-
graph (7) (as so redesignated), and
(D) by striking ‘‘; and’’ at the end of para-
graph (8) (as so redesignated) and inserting a
period.
(c) TREATMENT OF CERTAIN SERVICE CONTRACTS
UNDER SUBPART F.—
(1) Paragraph (1) of section 954(c) (defining
foreign personal holding company income) is amend-
ed by adding at the end thereof the following new
subparagraph:
‘‘(F) PERSONAL SERVICE CONTRACTS.—
‘‘(i) Amounts received under a con-
tract under which the corporation is to fur-
nish personal services, if some person other
than the corporation has the right to des-
ignate (by name or by description) the in-
dividual who is to perform the services, or
if the individual who is to perform the
services is designated (by name or by de-
scription) in the contract.
182
‘‘(ii) Amounts received from the sale
or other disposition of such contract.
This subparagraph shall apply with respect to
amounts received for services under a particular
contract only if at some time during the taxable
year 25 percent or more in value of the out-
standing stock of the corporation is owned, di-
rectly or indirectly, by or for the individual who
has performed, is to perform, or may be des-
ignated (by name or by description) as the one
to perform, such services. For purposes of the
preceding sentence, the attribution rules of sec-
tion 544 shall apply, determined as if any ref-
erence to section 543(a)(7) were a reference to
this subparagraph.’’
(2) Clause (iii) of section 904(d)(2)(A) is
amended by striking ‘‘and’’ at the end of subclause
(III), by striking the period at the end of subclause
(IV) and inserting ‘‘, and’’, and by adding at the
end thereof the following new subclause:
‘‘(V) any income described in section
954(c)(1)(F) (relating to personal service con-
tracts).’’
183
SEC. 402. REPLACEMENT FOR PASSIVE FOREIGN INVEST-
MENT COMPANY RULES.
(a) GENERAL RULE.—Part VI of subchapter P of
chapter 1 (relating to treatment of certain passive foreign
investment companies) is amended to read as follows:
‘‘PART VI—TREATMENT OF PASSIVE FOREIGN
CORPORATIONS
‘‘Subpart A. Current taxation rules.
‘‘Subpart B. Interest on holdings to which subpart A does not apply.
‘‘Subpart C. General provisions.
‘‘Subpart A—Current Taxation Rules
‘‘Sec. 1291. Stock in certain passive foreign corporations marked to market.
‘‘Sec. 1292. Inclusion of income of certain passive foreign corporations.
‘‘SEC. 1291. STOCK IN CERTAIN PASSIVE FOREIGN COR-
PORATIONS MARKED TO MARKET.
‘‘(a) GENERAL RULE.—In the case of marketable
stock in a passive foreign corporation which is owned (or
treated under subsection (g) as owned) by a United States
person at the close of any taxable year of such person—
‘‘(1) If the fair market value of such stock as
of the close of such taxable year exceeds its adjusted
basis, such United States person shall include in
gross income for such taxable year an amount equal
to the amount of such excess.
‘‘(2) If the adjusted basis of such stock exceeds
the fair market value of such stock as of the close
184
of such taxable year, such United States person
shall be allowed a deduction for such taxable year
equal to the lesser of—
‘‘(A) the amount of such excess, or
‘‘(B) the unreversed inclusions with respect
to such stock.
‘‘(b) BASIS ADJUSTMENTS.—
‘‘(1) IN GENERAL.—The adjusted basis of stock
in a passive foreign corporation—
‘‘(A) shall be increased by the amount in-
cluded in the gross income of the United States
person under subsection (a)(1) with respect to
such stock, and
‘‘(B) shall be decreased by the amount al-
lowed as a deduction to the United States per-
son under subsection (a)(2) with respect to
such stock.
‘‘(2) SPECIAL
RULE
FOR
STOCK
CONSTRUC-
TIVELY OWNED.—In the case of stock in a passive
foreign corporation which the United States person
is treated as owning under subsection (g)—
‘‘(A) the adjustments under paragraph (1)
shall apply to such stock in the hands of the
person actually holding such stock but only for
purposes of determining the subsequent treat-
185
ment under this chapter of the United States
person with respect to such stock, and
‘‘(B) similar adjustments shall be made to
the adjusted basis of the property by reason of
which the United States person is treated as
owning such stock.
‘‘(c) CHARACTER AND SOURCE RULES.—
‘‘(1) ORDINARY TREATMENT.—
‘‘(A) GAIN.—Any amount included in gross
income under subsection (a)(1), and any gain
on the sale or other disposition of marketable
stock in a passive foreign corporation, shall be
treated as ordinary income.
‘‘(B) LOSS.—Any—
‘‘(i) amount allowed as a deduction
under subsection (a)(2), and
‘‘(ii) loss on the sale or other disposi-
tion of marketable stock in a passive for-
eign corporation to the extent that the
amount of such loss does not exceed the
unreversed inclusions with respect to such
stock,
shall be treated as an ordinary loss. The
amount so treated shall be treated as a deduc-
186
tion allowable in computing adjusted gross in-
come.
‘‘(2) SOURCE.—The source of any amount in-
cluded in gross income under subsection (a)(1) (or
allowed as a deduction under subsection (a)(2)) shall
be determined in the same manner as if such
amount were gain or loss (as the case may be) from
the sale of stock in the passive foreign corporation.
‘‘(d) UNREVERSED INCLUSIONS.—For purposes of
this section, the term ‘unreversed inclusions’ means, with
respect to any stock in a passive foreign corporation, the
excess (if any) of—
‘‘(1) the amount included in gross income of
the taxpayer under subsection (a)(1) with respect to
such stock for prior taxable years, over
‘‘(2) the amount allowed as a deduction under
subsection (a)(2) with respect to such stock for prior
taxable years.
The amount referred to in paragraph (1) shall include any
amount which would have been included in gross income
under subsection (a)(1) with respect to such stock for any
prior taxable year but for section 1293.
‘‘(e) COORDINATION WITH SECTION 1292.—This
section shall not apply with respect to any stock in a pas-
sive foreign corporation—
187
‘‘(1) which is U.S. controlled,
‘‘(2) which is a qualified electing fund with re-
spect to the United States person for the taxable
year, or
‘‘(3) in which the United States person is a 25-
percent shareholder.
‘‘(f) TREATMENT OF CONTROLLED FOREIGN COR-
PORATIONS WHICH
ARE SHAREHOLDERS
IN PASSIVE
FOREIGN CORPORATIONS.—In the case of a foreign cor-
poration which is a controlled foreign corporation (or is
treated as a controlled foreign corporation under section
1292) and which owns (or is treated under subsection (g)
as owning) stock in a passive foreign corporation—
‘‘(1) this section (other than subsection (c)(2)
thereof) shall apply to such foreign corporation in
the same manner as if such corporation were a Unit-
ed States person, and
‘‘(2) for purposes of subpart F of part III of
subchapter N—
‘‘(A) any amount included in gross income
under subsection (a)(1) shall be treated as for-
eign personal holding company income de-
scribed in section 954(c)(1)(A), and
‘‘(B) any amount allowed as a deduction
under subsection (a)(2) shall be treated as a de-
188
duction allocable to foreign personal holding
company income so described.
‘‘(g) STOCK OWNED THROUGH CERTAIN FOREIGN
ENTITIES.—Except as provided in regulations—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, stock owned, directly or indirectly, by or for a
foreign partnership or foreign trust or foreign estate
shall be considered as being owned proportionately
by its partners or beneficiaries. Stock considered to
be owned by a person by reason of the application
of the preceding sentence shall, for purposes of ap-
plying such sentence, be treated as actually owned
by such person.
‘‘(2) TREATMENT OF CERTAIN DISPOSITIONS.—
In any case in which a United States person is
treated as owning stock in a passive foreign corpora-
tion by reason of paragraph (1)—
‘‘(A) any disposition by the United States
person or by any other person which results in
the United States person being treated as no
longer owning such stock, and
‘‘(B) any disposition by the person owning
such stock,
189
shall be treated as a disposition by the United
States person of the stock in the passive foreign cor-
poration.
‘‘(h) COORDINATION WITH SECTION 851(b).—For
purposes of paragraphs (2) and (3) of section 851(b), any
amount included in gross income under subsection (a)
shall be treated as a dividend.
‘‘(i) TRANSITION RULES.—
‘‘(1) INDIVIDUALS
BECOMING
SUBJECT
TO
UNITED STATES TAX.—If any individual becomes a
United States person in a taxable year beginning
after December 31, 1993, solely for purposes of this
section, the adjusted basis (before adjustments
under subsection (b)) of any marketable stock in a
passive foreign corporation owned (or treated as
owned under subsection (g)) by such individual on
the first day of such taxable year shall be treated as
being the greater of its fair market value on such
first day or its adjusted basis on such first day.
‘‘(2) MARKETABLE STOCK HELD BEFORE EF-
FECTIVE DATE.—
‘‘(A) IN
GENERAL.—If any marketable
stock in a passive foreign corporation is owned
(or treated under subsection (g) as owned) by
a United States person on the first day of such
190
person’s first taxable year, beginning after De-
cember 31, 1993—
‘‘(i) paragraph (2) of section 1294(a)
shall apply to such stock as if it became
marketable during such first taxable year;
except that—
‘‘(I) section 1293 shall not apply
to the amount included in gross in-
come under subsection (a) to the ex-
tent such amount is attributable to in-
creases in fair market value during
such first taxable year, and
‘‘(II) the taxpayer’s holding pe-
riod shall be treated as having ended
on the last day of the preceding tax-
able year for purposes of allocating
amounts under section 1293(a)(1)(A),
and
‘‘(ii) such person may elect to extend
the time for the payment of the applicable
section 1293 deferred tax as provided in
subparagraph (B).
‘‘(B) ELECTION
TO
EXTEND
TIME
FOR
PAYMENT.—
191
‘‘(i) IN GENERAL.—At the election of
the taxpayer, the time for the payment of
the applicable section 1293 deferred tax
shall be extended to the extent and subject
to the limitations provided in this subpara-
graph.
‘‘(ii) TERMINATION OF EXTENSION.—
‘‘(I) 
DISTRIBUTIONS.—If 
any
distribution is received with respect to
any stock to which an extension under
clause (i) relates and such distribution
would be an excess distribution within
the meaning of section 1293 if such
section applied to such stock, then the
extension under clause (i) for the ap-
propriate 
portion 
(as 
determined
under regulations) of the applicable
section 1293 deferred tax shall expire
on the last day prescribed by law (de-
termined without regard to exten-
sions) for filing the return of tax for
the taxable year in which the distribu-
tion is received.
‘‘(II) 
REVERSAL
OF
INCLU-
SION.—If an amount is allowable as a
192
deduction under subsection (a)(2)
with respect to any stock to which an
extension under clause (i) relates and
the amount so allowable is allocable to
the amount which gave rise to the ap-
plicable section 1293 deferred tax,
then the extension under clause (i) for
the appropriate portion (as deter-
mined under regulations) of the appli-
cable section 1293 deferred tax shall
expire on the last day prescribed by
law (determined without regard to ex-
tensions) for filing the return of the
tax for the taxable year for which
such deduction is allowed.
‘‘(III) DISPOSITIONS, 
ETC.—If
stock in a passive foreign corporation
is disposed of during the taxable year,
all extensions under clause (i) for pay-
ment of the applicable section 1293
deferred tax attributable to such stock
which have not expired before the date
of such disposition shall expire on the
last date prescribed by law (deter-
mined without regard to extensions)
193
for filing the return of tax for the tax-
able year in which such disposition oc-
curs. To the extent provided in regu-
lations, the preceding sentence shall
not apply in the case of a disposition
in a transaction with respect to which
gain or loss is not recognized (in
whole or in part), and the person ac-
quiring such stock in such transaction
shall succeed to the treatment under
this section of the person making such
disposition.
‘‘(iii) OTHER RULES.—
‘‘(I) 
ELECTION.—The 
election
under clause (i) shall be made not
later than the time prescribed by law
(including extensions) for filing the
return of tax imposed by this chapter
for the first taxable year referred to
in subparagraph (A).
‘‘(II) TREATMENT OF LOANS TO
SHAREHOLDER.—For purposes of this
subparagraph, any loan by a passive
foreign corporation (directly or indi-
rectly) to a shareholder of such cor-
194
poration shall be treated as a distribu-
tion to such shareholder.
‘‘(C) CROSS REFERENCE.—
‘‘For provisions providing for interest for the pe-
riod of the extension under this paragraph, see sec-
tion 6601.
‘‘(D) APPLICABLE
SECTION
1293
DE-
FERRED TAX.—For purposes of this paragraph,
the term ‘applicable section 1293 deferred tax’
means the deferred tax amount determined
under section 1293 with respect to the amount
which, but for section 1293, would have been
included in gross income for the first taxable
year referred to in subparagraph (A). Such
term also includes the tax imposed by this
chapter for such first taxable year to the extent
attributable to the amounts allocated under sec-
tion 1293(a)(1)(A) to a period described in sec-
tion 1293(a)(1)(B)(ii).
‘‘(3) SPECIAL RULES FOR REGULATED INVEST-
MENT COMPANIES.—
‘‘(A) IN
GENERAL.—If any marketable
stock in a passive foreign corporation is owned
(or treated under subsection (g) as owned) by
a regulated investment company on the first
day of such company’s first taxable year begin-
ning after December 31, 1993—
195
‘‘(i) section 1293 shall not apply to
such stock with respect to any distribution
or disposition during, or amount included
in gross income under this section for,
such first taxable year, but
‘‘(ii) such company’s tax under this
chapter for such first taxable year shall be
increased by the aggregate amount of in-
terest which would have been determined
under section 1293(c)(3) if section 1293
were applied without regard to this sub-
paragraph.
‘‘(B) DISALLOWANCE OF DEDUCTION.—No
deduction shall be allowed to any regulated in-
vestment company for the increase in tax under
subparagraph (A)(ii).
SEC. 1292. CURRENT INCLUSION OF INCOME OF CERTAIN
PASSIVE FOREIGN CORPORATIONS.
‘‘(a) PASSIVE FOREIGN CORPORATIONS WHICH ARE
UNITED STATES CONTROLLED.—
‘‘(1) TREATMENT UNDER SUBPART F.—
‘‘(A) IN GENERAL.—If a passive foreign
corporation is United States controlled, then for
purposes of subpart F of part III of subchapter
N—
196
‘‘(i) such corporation, if not otherwise
a controlled foreign corporation, shall be
treated as a controlled foreign corporation,
‘‘(ii) the term ‘United States share-
holder’ means, with respect to such cor-
poration, any United States person who
owns (within the meaning of section
958(a)) any stock in such corporation,
‘‘(iii) the entire gross income of such
corporation shall, after being reduced
under the principles of paragraph (5) of
section 954(b), be treated as foreign base
company income, and
‘‘(iv) sections 970 and 971 shall not
apply.
Except as provided in regulations, the preceding
sentence shall also apply for purposes of section
904(d).
‘‘(B) SPECIAL RULES.—If any taxpayer is
treated as being a United States shareholder in
a controlled foreign corporation solely by reason
of this section—
‘‘(i) section 954(b)(4) (relating to ex-
ception for certain income subject to high
foreign taxes) shall not apply for purposes
197
of determining the amount included in the
gross income of such taxpayer under sec-
tion 951 by reason of being so treated with
respect to such corporation, and
‘‘(ii) the amount so included in the
gross income of such taxpayer under sec-
tion 951 with respect to such corporation
shall be treated as long-term capital gain
to the extent attributable to the net capital
gain of such corporation.
‘‘(2) U.S. CONTROLLED.—For purposes of this
subpart, a passive foreign corporation is United
States controlled if—
‘‘(A) such corporation is a controlled for-
eign corporation determined without regard to
this subsection, or
‘‘(B) at any time during the taxable year
more than 50 percent of—
‘‘(i) the total combined voting power
of all classes of stock of such corporation
entitled to vote, or
‘‘(ii) the total value of the stock of
such corporation,
is owned directly or indirectly by 5 or fewer
United States persons.
198
‘‘(3) CONSTRUCTIVE
OWNERSHIP
RULES
FOR
PURPOSES OF PARAGRAPH (2)(B).—For purposes of
paragraph (2)(B), the attribution rules provided in
section 544 shall apply, determined as if any ref-
erence to a personal holding company were a ref-
erence to a corporation described in paragraph
(2)(B) (and any reference to the stock ownership re-
quirement provided in section 542(a)(2) were a ref-
erence to the requirement of paragraph (2)(B)); ex-
cept that—
‘‘(A) subsection (a)(4) of such section shall
be applied by substituting ‘Paragraphs (1), (2),
and (3)’ for ‘Paragraphs (2) and (3)’,
‘‘(B) stock owned by a nonresident alien
individual shall not be considered by reason of
attribution through family membership as
owned by a citizen or resident alien individual
who is not the spouse of the nonresident alien
individual and who does not otherwise own
stock in the foreign corporation (determined
after the application of such attribution rules
other than attribution through family member-
ship), and
‘‘(C) stock of a corporation owned by any
foreign person shall not be considered by reason
199
of attribution through partners as owned by a
citizen or resident of the United States who
does not otherwise own stock in the foreign cor-
poration (determined after the application of
such attribution rules and subparagraph (A),
other than attribution through partners).
‘‘(b) TAXPAYERS ELECTING CURRENT INCLUSION
AND 25-PERCENT SHAREHOLDERS.—
‘‘(1) IN GENERAL.—If a passive foreign cor-
poration which is not United States controlled is a
qualified electing fund with respect to any taxpayer
or the taxpayer is a 25-percent shareholder in such
corporation, then for purposes of subpart F of part
III of subchapter N—
‘‘(A) such passive foreign corporation shall
be treated as a controlled foreign corporation
with respect to such taxpayer,
‘‘(B) such taxpayer shall be treated as a
United States shareholder in such corporation,
and
‘‘(C) the modifications of clauses (iii) and
(iv) of subsection (a)(1)(A) and of subpara-
graph (B) of subsection (a)(1) shall apply in
determining the amount included under such
200
subpart F in the gross income of such taxpayer
(and the character of the amount so included).
For purposes of section 904(d), any amount in-
cluded in the gross income of the taxpayer under the
preceding sentence shall be treated as a dividend
from a foreign corporation which is not a controlled
foreign corporation.
‘‘(2) QUALIFIED
ELECTING
FUND.—For pur-
poses of this subpart, the term ‘qualified electing
fund’ means any passive foreign corporation if—
‘‘(A) an election by the taxpayer under
paragraph (3) applies to such corporation for
the taxable year of the taxpayer, and
‘‘(B) such corporation complies with such
requirements as the Secretary may prescribe for
purposes of carrying out the purposes of this
subpart.
‘‘(3) ELECTION.—
‘‘(A) IN GENERAL.—A taxpayer may make
an election under this paragraph with respect to
any passive foreign corporation for any taxable
year of the taxpayer. Such an election, once
made with respect to any corporation, shall
apply to all subsequent taxable years of the tax-
payer with respect to such corporation unless
201
revoked by the taxpayer with the consent of the
Secretary.
‘‘(B) WHEN
MADE.—An election under
this subsection may be made for any taxable
year of the taxpayer at any time on or before
the due date (determined with regard to exten-
sions) for filing the return of the tax imposed
by this chapter for such taxable year. To the
extent provided in regulations, such an election
may be made later than as required in the pre-
ceding sentence where the taxpayer fails to
make a timely election because the taxpayer
reasonably believes that the corporation was not
a passive foreign corporation.
‘‘(4) 25-PERCENT
SHAREHOLDER.—For pur-
poses of this subpart, the term ‘25-percent share-
holder’ means, with respect to any passive foreign
corporation, any United States person who owns
(within the meaning of section 958(a)), or is consid-
ered as owning by applying the rules of section
958(b), 25 percent or more (by vote or value) of the
stock of such corporation.
‘‘Subpart B—Interest on Holdings To Which Subpart
A Does Not Apply
‘‘Sec. 1293. Interest on tax deferral.
‘‘Sec. 1294. Definitions and special rules.
202
‘‘SEC. 1293. INTEREST ON TAX DEFERRAL.
‘‘(a) TREATMENT OF DISTRIBUTIONS AND STOCK
DISPOSITIONS.—
‘‘(1) DISTRIBUTIONS.—If a United States per-
son receives an excess distribution in respect of
stock to which this section applies, then—
‘‘(A) the amount of the excess distribution
shall be allocated ratably to each day in the tax-
payer’s holding period for the stock,
‘‘(B) with respect to such excess distribu-
tion, the taxpayer’s gross income for the cur-
rent year shall include (as ordinary income)
only the amounts allocated under subparagraph
(A) to—
‘‘(i) the current year, or
‘‘(ii) any period in the taxpayer’s
holding period before the first day of the
first taxable year of the corporation which
begins after December 31, 1986, and for
which it was a passive foreign corporation,
and
‘‘(C) the tax imposed by this chapter for
the current year shall be increased by the de-
ferred tax amount (determined under sub-
section (c)).
203
‘‘(2) DISPOSITIONS.—If the taxpayer disposes
of stock to which this section applies, then the rules
of paragraph (1) shall apply to any gain recognized
on such disposition in the same manner as if such
gain were an excess distribution.
‘‘(3) DEFINITIONS.—For purposes of this sub-
part—
‘‘(A) HOLDING
PERIOD.—The taxpayer’s
holding period shall be determined under sec-
tion 1223; except that—
‘‘(i) for purposes of applying this sec-
tion to an excess distribution, such holding
period shall be treated as ending on the
date of such distribution, and
‘‘(ii) if section 1291 applied to such
stock with respect to the taxpayer for any
prior taxable year, such holding period
shall be treated as beginning on the first
day of the first taxable year beginning
after the last taxable year for which sec-
tion 1291 so applied.
‘‘(B) CURRENT YEAR.—The term ‘current
year’ means the taxable year in which the ex-
cess distribution or disposition occurs.
‘‘(b) EXCESS DISTRIBUTION.—
204
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘excess distribution’ means any dis-
tribution in respect of stock received during any tax-
able year to the extent such distribution does not ex-
ceed its ratable portion of the total excess distribu-
tion (if any) for such taxable year.
‘‘(2) TOTAL EXCESS DISTRIBUTION.—For pur-
poses of this subsection—
‘‘(A) IN GENERAL.—The term ‘total excess
distribution’ means the excess (if any) of—
‘‘(i) the amount of the distributions in
respect of the stock received by the tax-
payer during the taxable year, over
‘‘(ii) 125 percent of the average
amount received in respect of such stock
by the taxpayer during the 3 preceding
taxable years (or, if shorter, the portion of
the taxpayer’s holding period before the
taxable year).
For purposes of clause (ii), any excess distribu-
tion received during such 3-year period shall be
taken into account only to the extent it was in-
cluded in gross income under subsection
(a)(1)(B).
205
‘‘(B) NO EXCESS FOR FIRST YEAR.—The
total excess distributions with respect to any
stock shall be zero for the taxable year in which
the taxpayer’s holding period in such stock be-
gins.
‘‘(3) ADJUSTMENTS.—Under regulations pre-
scribed by the Secretary—
‘‘(A) determinations under this subsection
shall be made on a share-by-share basis, except
that shares with the same holding period may
be aggregated,
‘‘(B) proper adjustments shall be made for
stock splits and stock dividends,
‘‘(C) if the taxpayer does not hold the
stock during the entire taxable year, distribu-
tions received during such year shall be
annualized,
‘‘(D) if the taxpayer’s holding period in-
cludes periods during which the stock was held
by another person, distributions received by
such other person shall be taken into account
as if received by the taxpayer,
‘‘(E) if the distributions are received in a
foreign currency, determinations under this
subsection shall be made in such currency and
206
the amount of any excess distribution deter-
mined in such currency shall be translated into
dollars,
‘‘(F) proper adjustment shall be made for
amounts not includible in gross income by rea-
son of section 959(a) or for which a deduction
is allowable under section 245(c), and
‘‘(G) if a charitable deduction was allow-
able under section 642(c) to a trust for any dis-
tribution of its income, proper adjustments
shall be made for the deduction so allowable to
the extent allocable to distributions or gain in
respect of stock in a passive foreign corpora-
tion.
For purposes of subparagraph (F), any amount not
includible in gross income by reason of section
551(d) (as in effect on January 1, 1993) or 1293(c)
(as so in effect) shall be treated as an amount not
includible in gross income by reason of section
959(a).
‘‘(c) DEFERRED TAX AMOUNT.—For purposes of this
section—
‘‘(1) IN
GENERAL.—The term ‘deferred tax
amount’ means, with respect to any distribution or
207
disposition to which subsection (a) applies, an
amount equal to the sum of—
‘‘(A) the aggregate increases in taxes de-
scribed in paragraph (2), plus
‘‘(B) the aggregate amount of interest (de-
termined in the manner provided under para-
graph (3)) on such increases in tax.
Any increase in the tax imposed by this chapter for
the current year under subsection (a) to the extent
attributable to the amount referred to in subpara-
graph (B) shall be treated as interest paid under
section 6601 on the due date for the current year.
‘‘(2) AGGREGATE INCREASES IN TAXES.—For
purposes of paragraph (1)(A), the aggregate in-
creases in taxes shall be determined by multiplying
each amount allocated under subsection (a)(1)(A) to
any taxable year (other than any taxable year re-
ferred to in subsection (a)(1)(B)) by the highest rate
of tax in effect for such taxable year under section
1 or 11, whichever applies.
‘‘(3) COMPUTATION OF INTEREST.—
‘‘(A) IN GENERAL.—The amount of inter-
est referred to in paragraph (1)(B) on any in-
crease determined under paragraph (2) for any
208
taxable year shall be determined for the pe-
riod—
‘‘(i) beginning on the due date for
such taxable year, and
‘‘(ii) ending on the due date for the
taxable year with or within which the dis-
tribution or disposition occurs,
by using the rates and method applicable under
section 6621 for underpayments of tax for such
period.
‘‘(B) DUE
DATE.—For purposes of this
subsection, the term ‘due date’ means the date
prescribed by law (determined without regard to
extensions) for filing the return of the tax im-
posed by this chapter for the taxable year.
‘‘(C) SPECIAL RULE.—For purposes of de-
termining the amount of interest referred to in
paragraph (1)(B), the amount of any increase
in tax determined under paragraph (2) shall be
determined without regard to any reduction
under section 1294(d) for a tax described in
paragraph (2)(A)(ii) thereof.
‘‘SEC. 1294. DEFINITIONS AND SPECIAL RULES.
‘‘(a) STOCK TO WHICH SECTION 1293 APPLIES.—
209
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, section 1293 shall apply to
any stock in a passive foreign corporation unless—
‘‘(A) such stock is marketable stock as of
the time of the distribution or disposition in-
volved, or
‘‘(B)(i) with respect to each of such cor-
poration’s taxable years for which such corpora-
tion was a passive foreign corporation and
which began after December 31, 1993, and in-
cluded any portion of the taxpayer’s holding pe-
riod in such stock—
‘‘(I) such corporation was United
States controlled (within the meaning of
section 1292(a)(2)), or
‘‘(II) such corporation was treated as
a controlled foreign corporation under sec-
tion 1292(b) with respect to the taxpayer,
and
‘‘(ii) with respect to each of such corpora-
tion’s taxable years for which such corporation
was a passive foreign corporation and which
begin after December 31, 1986, and before
January 1, 1994, and included any portion of
the taxpayer’s holding period in such stock,
210
such corporation was treated as a qualified
electing fund under this part (as in effect on
January 1, 1993) with respect to the taxpayer.
‘‘(2) TREATMENT
WHERE
STOCK
BECOMES
MARKETABLE.—If any stock in a passive foreign
corporation becomes marketable stock after the be-
ginning of the taxpayer’s holding period in such
stock, and if the requirements of paragraph (1)(B)
are not satisfied, section 1293 shall apply to—
‘‘(A) any distributions with respect to, or
disposition of, such stock in the taxable year of
the taxpayer in which it becomes so marketable,
and
‘‘(B) any amount which, but for section
1293, would have been included in gross income
under section 1291(a) with respect to such
stock for such taxable year in the same manner
as if such amount were gain on the disposition
of such stock.
‘‘(3) ELECTION
TO
RECOGNIZE
GAIN
WHERE
COMPANY BECOMES SUBJECT TO CURRENT INCLU-
SIONS.—
‘‘(A) IN GENERAL.—If—
‘‘(i) a passive foreign corporation first
meets the requirements of clause (i) of
211
paragraph (1)(B) with respect to the tax-
payer for a taxable year of such taxpayer
which begins after December 31, 1993,
‘‘(ii) the taxpayer holds stock in such
company on the first day of such taxable
year, and
‘‘(iii) the taxpayer establishes to the
satisfaction of the Secretary the fair mar-
ket value of such stock on such first day,
the taxpayer may elect to recognize gain as if
he sold such stock on such first day for such
fair market value.
‘‘(B) ADDITIONAL ELECTION FOR SHARE-
HOLDER OF CONTROLLED FOREIGN CORPORA-
TIONS.—
‘‘(i) IN GENERAL.—If—
‘‘(I) a passive foreign corporation
first 
meets 
the 
requirements 
of
subclause (I) of paragraph (1)(B)(i)
with respect to the taxpayer for a tax-
able year of such taxpayer which be-
gins after December 31, 1993,
‘‘(II) the taxpayer holds stock in
such corporation on the first day of
such taxable year, and
212
‘‘(III) such corporation is a con-
trolled foreign corporation without re-
gard to this part,
the taxpayer may elect to be treated as receiv-
ing a dividend on such first day in an amount
equal to the portion of the post-1986 earnings
and profits of such corporation attributable
(under regulations prescribed by the Secretary)
to the stock in such corporation held by the tax-
payer on such first day. The amount treated as
a dividend under the preceding sentence shall
be treated as an excess distribution and shall be
allocated under section 1293(a)(1)(A) only to
days during periods taken into account in deter-
mining the post-1986 earnings and profits so
attributable.
‘‘(ii) POST-1986 EARNINGS AND PROF-
ITS.—For purposes of clause (i), the term
‘post-1986 earnings and profits’ means
earnings and profits which were accumu-
lated in taxable years of the corporation
beginning after December 31, 1986, and
during the period or periods the stock was
held by the taxpayer while the corporation
was a passive foreign corporation.
213
‘‘(iii) COORDINATION
WITH
SECTION
959(e).—For purposes of section 959(e),
any amount treated as a dividend under
this subparagraph shall be treated as in-
cluded in gross income under section
1248(a).
‘‘(C) ADJUSTMENTS.—In the case of any
stock to which subparagraph (A) or (B) ap-
plies—
‘‘(i) the adjusted basis of such stock
shall be increased by the gain recognized
under subparagraph (A) or the amount
treated as a dividend under subparagraph
(B), as the case may be, and
‘‘(ii) the taxpayer’s holding period in
such stock shall be treated as beginning on
the first day referred to in such subpara-
graph.
‘‘(b) RULES RELATING TO STOCK ACQUIRED FROM
A DECEDENT.—
‘‘(1) BASIS.—In the case of stock of a passive
foreign corporation acquired by bequest, devise, or
inheritance (or by the decedent’s estate), notwith-
standing section 1014, the basis of such stock in the
hands of the person so acquiring it shall be the ad-
214
justed basis of such stock in the hands of the dece-
dent immediately before his death (or, if lesser, the
basis which would have been determined under sec-
tion 1014 without regard to this paragraph).
‘‘(2) DEDUCTION FOR ESTATE TAX.—If stock
in a passive foreign corporation is acquired from a
decedent, the taxpayer shall, under regulations pre-
scribed by the Secretary, be allowed (for the taxable
year of the sale or exchange) a deduction from gross
income equal to that portion of the decedent’s estate
tax deemed paid which is attributable to the excess
of (A) the value at which such stock was taken into
account for purposes of determining the value of the
decedent’s gross estate, over (B) the basis deter-
mined under paragraph (1).
‘‘(3) EXCEPTIONS.—This subsection shall not
apply to any stock in a passive foreign corporation
if—
‘‘(A) section 1293 would not have applied
to a disposition of such stock by the decedent
immediately before his death, or
‘‘(B) the decedent was a nonresident alien
at all times during his holding period in such
stock.
215
‘‘(c) RECOGNITION OF GAIN.—Except as otherwise
provided in regulations, in the case of any transfer of stock
in a passive foreign company to which section 1293 ap-
plies, where (but for this subsection) there is not full rec-
ognition of gain, the excess (if any) of—
‘‘(1) the fair market value of such stock, over
‘‘(2) its adjusted basis,
shall be treated as gain from the sale or exchange of such
stock and shall be recognized notwithstanding any provi-
sion of law. Proper adjustment shall be made to the basis
of property for gain recognized under the preceding sen-
tence.
‘‘(d) COORDINATION WITH FOREIGN TAX CREDIT
RULES.—
‘‘(1) IN GENERAL.—If there are creditable for-
eign taxes with respect to any distribution in respect
of stock in a passive foreign corporation—
‘‘(A) the amount of such distribution shall
be determined for purposes of section 1293 with
regard to section 78,
‘‘(B) the excess distribution taxes shall be
allocated ratably to each day in the taxpayer’s
holding period for the stock, and
‘‘(C) to the extent—
216
‘‘(i) that such excess distribution
taxes are allocated to a taxable year re-
ferred to in section 1293(a)(1)(B), such
taxes shall be taken into account under
section 901 for the current year, and
‘‘(ii) that such excess distribution
taxes are allocated to any other taxable
year, such taxes shall reduce (subject to
the principles of section 904 and not below
zero) the increase in tax determined under
section 1293(c)(2) for such taxable year by
reason of such distribution (but such taxes
shall not be taken into account under sec-
tion 901).
‘‘(2) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) CREDITABLE FOREIGN TAXES.—The
term ‘creditable foreign taxes’ means, with re-
spect to any distribution—
‘‘(i) any foreign taxes deemed paid
under section 902 with respect to such dis-
tribution, and
‘‘(ii) any withholding tax imposed with
respect to such distribution,
217
but only if the taxpayer chooses the benefits of
section 901 and such taxes are creditable under
section 901 (determined without regard to
paragraph (1)(C)(ii)).
‘‘(B) EXCESS DISTRIBUTION TAXES.—The
term ‘excess distribution taxes’ means, with re-
spect to any distribution, the portion of the
creditable foreign taxes with respect to such
distribution which is attributable (on a pro rata
basis) to the portion of such distribution which
is an excess distribution.
‘‘(C) SECTION
1248
GAIN.—The rules of
this subsection also shall apply in the case of
any gain which but for this section would be in-
cludible in gross income as a dividend under
section 1248.
‘‘(e) ATTRIBUTION OF OWNERSHIP.—For purposes
of this subpart—
‘‘(1) ATTRIBUTION
TO
UNITED
STATES
PER-
SONS.—This subsection—
‘‘(A) shall apply to the extent that the ef-
fect is to treat stock of a passive foreign cor-
poration as owned by a United States person,
and
218
‘‘(B) except as provided in paragraph (3)
or in regulations, shall not apply to treat stock
owned (or treated as owned under this sub-
section) by a United States person as owned by
any other person.
‘‘(2) CORPORATIONS.—
‘‘(A) IN GENERAL.—If 50 percent or more
in value of the stock of a corporation (other
than an S corporation) is owned, directly or in-
directly, by or for any person, such person shall
be considered as owning the stock owned di-
rectly or indirectly by or for such corporation in
that proportion which the value of the stock
which such person so owns bears to the value
of all stock in the corporation.
‘‘(B) 50-PERCENT
LIMITATION
NOT
TO
APPLY IN CERTAIN CASES.—For purposes of de-
termining whether a shareholder of a passive
foreign corporation (or whether a United States
shareholder of a controlled foreign corporation
which is not a passive foreign corporation) is
treated as owning stock owned directly or indi-
rectly by or for such corporation, subparagraph
(A) shall be applied without regard to the 50-
percent limitation contained therein.
219
‘‘(C) FAMILY AND PARTNER ATTRIBUTION
FOR 50-PERCENT LIMITATION.—For purposes of
determining whether the 50-percent limitation
of subparagraph (A) is met, the constructive
ownership rules of section 544(a)(2) shall apply
in addition to the other rules of this subsection.
‘‘(3) PARTNERSHIPS, ETC.—Except as provided
in regulations, stock owned, directly or indirectly, by
or for a partnership, S corporation, estate, or trust
shall be considered as being owned proportionately
by its partners, shareholders, or beneficiaries (as the
case may be).
‘‘(4) OPTIONS.—To the extent provided in regu-
lations, if any person has an option to acquire stock,
such stock shall be considered as owned by such per-
son. For purposes of this paragraph, an option to
acquire such an option, and each one of a series of
such options, shall be considered as an option to ac-
quire such stock.
‘‘(5) SUCCESSIVE APPLICATION.—Stock consid-
ered to be owned by a person by reason of the appli-
cation of paragraph (2), (3), or (4) shall, for pur-
poses of applying such paragraphs, be considered as
actually owned by such person.
220
‘‘(f) OTHER SPECIAL RULES.—For purposes of this
subpart—
‘‘(1) TIME FOR DETERMINATION.—Stock held
by a taxpayer shall be treated as stock in a passive
foreign corporation if, at any time during the hold-
ing period of the taxpayer with respect to such
stock, such corporation (or any predecessor) was a
passive foreign corporation. The preceding sentence
shall not apply if the taxpayer elects to recognize
gain (as of the last day of the last taxable year for
which the company was a passive foreign corpora-
tion) under rules similar to the rules of subsection
(a)(3)(A).
‘‘(2) APPLICATION OF SUBPART WHERE STOCK
HELD BY OTHER ENTITY.—Under regulations—
‘‘(A) IN GENERAL.—In any case in which
a United States person is treated as owning
stock in a passive foreign corporation by reason
of subsection (e)—
‘‘(i) any transaction which results in
the United States person being treated as
no longer owning such stock,
‘‘(ii) any disposition of such stock by
the person owning such stock, and
221
‘‘(iii) any distribution of property in
respect of such stock to the person holding
such stock,
shall be treated as a disposition by, or distribu-
tion to, the United States person with respect
to the stock in the passive foreign corporation.
‘‘(B) AMOUNT TREATED IN SAME MANNER
AS PREVIOUSLY TAXED INCOME.—Rules similar
to the rules of section 959(b) shall apply to any
amount described in subparagraph (A) in re-
spect of stock which the taxpayer is treated as
owning under subsection (e).
‘‘(C) COORDINATION WITH SECTION 951.—
If, but for this subparagraph, an amount would
be taken into account under section 1293 by
reason of subparagraph (A) and such amount
would also be included in the gross income of
the taxpayer under section 951, such amount
shall only be taken into account under section
1293.
‘‘(3) DISPOSITIONS.—Except as provided in
regulations, if a taxpayer uses any stock in a passive
foreign corporation as security for a loan, the tax-
payer shall be treated as having disposed of such
stock.
222
‘‘Subpart C—General Provisions
‘‘Sec. 1296. Passive foreign corporation.
‘‘Sec. 1297. Special rules.
‘‘SEC. 1296. PASSIVE FOREIGN CORPORATION.
‘‘(a) IN GENERAL.—For purposes of this part, except
as otherwise provided in this subpart, the term ‘passive
foreign corporation’ means any foreign corporation if—
‘‘(1) 60 percent or more of the gross income of
such corporation for the taxable year is passive in-
come,
‘‘(2) the average percentage of assets (by value)
held by such corporation during the taxable year
which produce passive income or which are held for
the production of passive income is at least 50 per-
cent, or
‘‘(3) such corporation is registered under the
Investment Company Act of 1940, as amended (15
U.S.C. 80a–1 to 80b–2), either as a management
company or as a unit investment trust.
A foreign corporation may elect to have the determination
under paragraph (2) based on the adjusted bases of its
assets in lieu of their value. Such an election, once made,
may be revoked only with the consent of the Secretary.
‘‘(b) PASSIVE INCOME.—For purposes of this sec-
tion—
223
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, the term ‘passive income’
means any income which is of a kind which would
be foreign personal holding company income as de-
fined in section 954(c) without regard to paragraph
(3) thereof.
‘‘(2) EXCEPTIONS.—Except as provided in reg-
ulations, the term ‘passive income’ does not include
any income—
‘‘(A) derived in the active conduct of a
banking business by an institution licensed to
do business as a bank in the United States (or,
to the extent provided in regulations, by any
other corporation),
‘‘(B) derived in the active conduct of an in-
surance business by a corporation which is pre-
dominantly engaged in an insurance business
and which would be subject to tax under sub-
chapter L if it were a domestic corporation,
‘‘(C) which is interest, a dividend, or a
rent or royalty, which is received or accrued
from a related person (within the meaning of
section 954(d)(3)) to the extent such amount is
properly allocable (under regulations prescribed
224
by the Secretary) to income of such related per-
son which is not passive income, or
‘‘(D) any foreign trade income of a FSC.
For purposes of subparagraph (C), the term ‘related
person’ has the meaning given such term by section
954(d)(3) determined by substituting ‘foreign cor-
poration’ for ‘controlled foreign corporation’ each
place it appears in section 954(d)(3).
‘‘(3) TREATMENT OF INCOME FROM CERTAIN
ASSETS.—To the extent that any asset is properly
treated as not held for the production of passive in-
come for purposes of subsection (a)(2), all income
from such asset shall be treated as income which is
not passive income.
‘‘(4) TREATMENT OF CERTAIN MATCHED RE-
PURCHASE TRANSACTIONS.—
‘‘(A) IN GENERAL.—In the case of any for-
eign corporation engaged in the active conduct
of a trade or business as a dealer in securi-
ties—
‘‘(i) an amount properly treated as in-
terest income by reason of a qualified
matched transaction shall be netted with
the amount properly treated as interest ex-
pense by reason of such transaction, and
225
any net income resulting from such netting
shall be treated as an item of gross inter-
est income, and
‘‘(ii) the offsetting positions which are
part of such transaction shall be netted
and the net position shall be treated as a
single asset.
‘‘(B) 
QUALIFIED
MATCHED
TRANS-
ACTION.—For purposes of subparagraph (A)
the term ‘qualified matched transaction’ means
a sale and repurchase agreement with respect
to a security and an offsetting reverse agree-
ment with respect to the same security, entered
into by the foreign corporation in the active
conduct of its trade or business of being a
dealer in securities, and properly treated as
offsetting agreements in a matched book.
‘‘(C) SECURITY.—For purposes of this
paragraph, the term ‘security’ has the meaning
given such term by section 1236(c).
‘‘(c) LOOK-THROUGH
IN
CASE
OF
25-PERCENT
OWNED CORPORATION.—If a foreign corporation owns
(directly or indirectly) at least 25 percent (by value) of
the stock of another corporation, for purposes of determin-
ing whether such foreign corporation is a passive foreign
226
corporation, such foreign corporation shall be treated as
if it—
‘‘(1) held its proportionate share of the assets
of such other corporation, and
‘‘(2) received directly its proportionate share of
the income of such other corporation.
‘‘SEC. 1297. SPECIAL RULES.
‘‘(a) UNITED STATES PERSON.—For purposes of this
part, the term ‘United States person’ has the meaning
given to such term by section 7701(a)(30).
‘‘(b) CONTROLLED FOREIGN CORPORATION.—For
purposes of this part, the term ‘controlled foreign corpora-
tion’ has the meaning given such term by section 957(a).
‘‘(c) MARKETABLE STOCK.—For purposes of this
part—
‘‘(1) IN
GENERAL.—The term ‘marketable
stock’ means—
‘‘(A) any stock which is regularly traded
on—
‘‘(i) a national securities exchange
which is registered with the Securities and
Exchange Commission or the national mar-
ket system established pursuant to section
11A of the Securities and Exchange Act of
1934, or
227
‘‘(ii) any exchange or other market
which the Secretary determines has rules
adequate to carry out the purposes of this
part, and
‘‘(B) to the extent provided in regulations,
stock in any foreign corporation which is com-
parable to a regulated investment company and
which offers for sale or has outstanding any
stock of which it is the issuer and which is re-
deemable at its net asset value.
‘‘(2) SPECIAL RULE FOR REGULATED INVEST-
MENT COMPANIES.—In the case of any regulated in-
vestment company which is offering for sale or has
outstanding any stock of which it is the issuer and
which is redeemable at its net asset value, all stock
in a passive foreign corporation which it owns (or is
treated under section 1291(g) as owning) shall be
treated as marketable stock for purposes of this
part. Except as provided in regulations, a similar
rule shall apply in the case of any other regulated
investment company.
‘‘(d) OTHER SPECIAL RULES.—For purposes of this
part—
‘‘(1) CERTAIN CORPORATIONS NOT TREATED AS
PASSIVE.—A corporation shall not be treated as a
228
passive foreign corporation for the 1st taxable year
such corporation has gross income (hereinafter in
this paragraph referred to as the ‘start-up year’)
if—
‘‘(A) no predecessor of such corporation
was a passive foreign corporation,
‘‘(B) it is established to the satisfaction of
the Secretary that such corporation will not be
a passive foreign corporation for either of the
1st 2 taxable years following the start-up year,
and
‘‘(C) such corporation is not a passive for-
eign corporation for either of the 1st 2 taxable
years following the start-up year.
‘‘(2) CERTAIN CORPORATIONS CHANGING BUSI-
NESSES.—A corporation shall not be treated as a
passive foreign corporation for any taxable year if—
‘‘(A) neither such corporation (nor any
predecessor) was a passive foreign corporation
for any prior taxable year,
‘‘(B) it is established to the satisfaction of
the Secretary that—
‘‘(i) substantially all of the passive in-
come of the corporation for the taxable
year is attributable to proceeds from the
229
disposition of 1 or more active trades or
businesses, and
‘‘(ii) such corporation will not be a
passive foreign corporation for either of
the first 2 taxable years following the tax-
able year, and
‘‘(C) such corporation is not a passive for-
eign corporation for either of such 2 taxable
years.
For purposes of section 1296(c), any passive income
referred to in subparagraph (B)(i) shall be treated
as income which is not passive income and any as-
sets which produce income so described shall be
treated as assets producing income other than pas-
sive income.
‘‘(3) TREATMENT OF CERTAIN FOREIGN COR-
PORATIONS OWNING STOCK IN 25-PERCENT OWNED
DOMESTIC CORPORATION.—
‘‘(A) IN GENERAL.—If a foreign corpora-
tion owns at least 25 percent (by value) of the
stock of a domestic corporation, for purposes of
determining whether such foreign corporation is
a passive foreign corporation, any qualified
stock held by such domestic corporation shall be
treated as an asset which does not produce pas-
230
sive income (and is not held for the production
of passive income) and any amount included in
gross income with respect to such stock shall
not be treated as passive income.
‘‘(B) QUALIFIED STOCK.—For purposes of
subparagraph (A), the term ‘qualified stock’
means any stock in a C corporation which is a
domestic corporation and which is not a regu-
lated investment company or real estate invest-
ment trust.
‘‘(4) TREATMENT OF CORPORATION WHICH WAS
A PFIC.—A corporation shall be treated as a passive
foreign corporation for any taxable year beginning
before January 1, 1994, if and only if such corpora-
tion was a passive foreign investment company
under this part as in effect for such taxable year.
‘‘(5) SEPARATE INTERESTS TREATED AS SEPA-
RATE CORPORATIONS.—Under regulations prescribed
by the Secretary, where necessary to carry out the
purposes of this part, separate classes of stock (or
other interests) in a corporation shall be treated as
interests in separate corporations.
‘‘(e) TREATMENT
OF
CERTAIN
LEASED
PROP-
ERTY.—For purposes of section 1296(a)(2)—
231
‘‘(1) IN
GENERAL.—Any tangible personal
property with respect to which the foreign corpora-
tion is the lessee under a lease with a term of at
least 12 months shall be treated as an asset actually
held by such corporation.
‘‘(2) DETERMINATION OF VALUE.—
‘‘(A) IN GENERAL.—The value of any asset
to which paragraph (1) applies shall be the less-
er of—
‘‘(i) the fair market value of such
property, or
‘‘(ii) the unamortized portion (as de-
termined under regulations prescribed by
the Secretary) of the present value of the
payments under the lease for the use of
such property.
‘‘(B) PRESENT VALUE.—For purposes of
subparagraph (A), the present value of pay-
ments described in subparagraph (A)(ii) shall
be determined in the manner provided in regu-
lations prescribed by the Secretary—
‘‘(i) as of the beginning of the lease
term, and
‘‘(ii) except as provided in such regu-
lations, by using a discount rate equal to
232
the applicable Federal rate determined
under section 1274(d)—
‘‘(I) by substituting the lease
term for the term of the debt instru-
ment, and
‘‘(II) without regard to para-
graph (2) or (3) thereof.
‘‘(3) EXCEPTIONS.—This subsection shall not
apply in any case where—
‘‘(A) the lessor is a related person (as de-
fined in the last sentence of section 1296(b)(2))
with respect to the foreign corporation, or
‘‘(B) a principal purpose of leasing the
property was to avoid the provisions of this
part.
‘‘(f) ELECTION BY CERTAIN PASSIVE FOREIGN COR-
PORATIONS TO BE TREATED AS A DOMESTIC CORPORA-
TION.—
‘‘(1) IN GENERAL.—For purposes of this title,
if—
‘‘(A) a passive foreign corporation would
qualify as a regulated investment company
under part I of subchapter M if such passive
foreign corporation were a domestic corpora-
tion,
233
‘‘(B) such passive foreign corporation
meets such requirements as the Secretary shall
prescribe to ensure that the taxes imposed by
this title on such passive foreign corporation
are paid, and
‘‘(C) such passive foreign corporation
makes an election to have this paragraph apply
and waives all benefits which are granted by the
United States under any treaty and to which
such corporation would otherwise be entitled by
reason of being a resident of another country,
such corporation shall be treated as a domestic cor-
poration.
‘‘(2) CERTAIN
RULES
MADE
APPLICABLE.—
Rules similar to the rules of paragraphs (2), (3),
(4)(A), and (5) of section 953(d) shall apply with re-
spect to any corporation making an election under
paragraph (1).
‘‘(g) SPECIAL RULES FOR CERTAIN TAXPAYERS.—
‘‘(1) TAX-EXEMPT
ORGANIZATIONS.—In the
case of any organization exempt from tax under sec-
tion 501—
‘‘(A) this part shall apply to any stock in
a passive foreign corporation owned (or treated
as owned under section 1294(e)) by such orga-
234
nization only to the extent that a dividend on
such stock would be taken into account in de-
termining the unrelated business taxable income
of such organization, and
‘‘(B) to the extent that this part applies to
any such stock, this part shall be applied in the
same manner as if such organization were not
exempt from tax under section 501(a).
‘‘(2) TREATMENT OF STOCK HELD BY POOLED
INCOME FUND.—If stock in a passive foreign cor-
poration is owned (or treated as owned under section
1294(e)) by a pooled income fund (as defined in sec-
tion 642(c)(5)) and no portion of any gain from a
disposition of such stock may be allocated to income
under the terms of the governing instrument of such
fund—
‘‘(A) section 1293 shall not apply to any
gain on a disposition of such stock by such fund
if (without regard to section 1293) a deduction
would be allowable with respect to such gain
under section 642(c)(3),
‘‘(B) subpart A shall not apply with re-
spect to such stock, and
‘‘(C) in determining whether section 1293
applies to any distribution in respect of such
235
stock, such stock shall be treated as failing to
qualify 
for 
the 
exceptions 
under 
section
1294(a)(1).
‘‘(h) INFORMATION FROM SHAREHOLDERS.—Every
United States person who owns stock in any passive for-
eign corporation shall furnish with respect to such cor-
poration such information as the Secretary may prescribe.
‘‘(i) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this part, including regula-
tions—
‘‘(1) providing that gross income shall be deter-
mined without regard to section 1293 for such pur-
poses as may be specified in such regulations, and
‘‘(2) to prevent avoidance of the provisions of
this part through changes in citizenship or residence
status.’’
(b) INSTALLMENT SALES TREATMENT NOT AVAIL-
ABLE.—Paragraph (2) of section 453(k) is amended by
striking ‘‘or’’ at the end of subparagraph (A), by inserting
‘‘or’’ at the end of subparagraph (B), and by adding at
the end thereof the following new subparagraph:
‘‘(C) stock in a passive foreign corporation
(as defined in section 1296) if section 1293 ap-
plies to such sale,’’.
236
(c) TREATMENT OF MARK-TO-MARKET GAIN UNDER
SECTION 4982.—
(1) Subsection (e) of section 4982 is amended
by adding at the end thereof the following new para-
graph:
‘‘(6) TREATMENT OF GAIN RECOGNIZED UNDER
SECTION 1291.—For purposes of determining a regu-
lated investment company’s ordinary income—
‘‘(A) notwithstanding paragraph (1)(C),
section 1291 shall be applied as if such compa-
ny’s taxable year ended on October 31, and
‘‘(B) any ordinary gain or loss from an ac-
tual disposition of stock in a passive foreign
corporation during the portion of the calendar
year after October 31 shall be taken into ac-
count in determining such company’s ordinary
income for the following calendar year.
In the case of a company making an election under
paragraph (4), the preceding sentence shall be ap-
plied by substituting the last day of the company’s
taxable year for October 31.’’
(2) Subsection (b) of section 852 is amended by
adding at the end thereof the following new para-
graph:
237
‘‘(10) SPECIAL RULE FOR CERTAIN LOSSES ON
STOCK
IN
PASSIVE
FOREIGN
CORPORATIONS.—To
the extent provided in regulations, the taxable in-
come of a regulated investment company (other than
a company to which an election under section
4982(e)(4) applies) shall be computed without re-
gard to any net reduction in the value of any stock
of a passive foreign corporation to which section
1291 applies occurring after October 31 of the tax-
able year, and any such reduction shall be treated as
occurring on the first day of the following taxable
year.’’
(3) Subsection (c) of section 852 is amended by
inserting after ‘‘October 31 of such year’’ the follow-
ing: ‘‘, without regard to any net reduction in the
value of any stock of a passive foreign corporation
to which section 1291 applies occurring after Octo-
ber 31 of such year,’’.
(d) TREATMENT OF CERTAIN PREVIOUSLY TAXED
AMOUNTS.—Subsection (e) of section 959 is amended—
(1) by adding at the end thereof the following
new sentence: ‘‘A similar rule shall apply in the case
of amounts included in gross income under section
1293 (as in effect on January 1, 1993).’’, and
238
(2) by striking ‘‘AMOUNTS PREVIOUSLY TAXED
UNDER SECTION 1248’’ in the subsection heading
and 
inserting 
‘‘CERTAIN
PREVIOUSLY
TAXED
AMOUNTS’’.
SEC. 403. TECHNICAL AND CONFORMING AMENDMENTS.
(a) GENERAL RULE.—
(1) Paragraph (2) of section 171(c) is amend-
ed—
(A) by striking ‘‘, or by a foreign personal
holding company, as defined in section 552’’,
and
(B) by striking ‘‘, or a foreign personal
holding company’’.
(2) Section 312 is amended by striking sub-
section (j).
(3) Subsection (m) of section 312 is amended
by striking ‘‘, a foreign investment company (within
the meaning of section 1246(b)), or a foreign per-
sonal holding company (within the meaning of sec-
tion 552)’’ and inserting ‘‘or a passive foreign cor-
poration (as defined in section 1296)’’.
(4) Subsection (e) of section 443 is amended by
striking paragraph (3) and by redesignating para-
graphs (4) and (5) as paragraphs (3) and (4), re-
spectively.
239
(5) Clause (ii) of section 465(c)(7)(B) is
amended to read as follows:
‘‘(ii) a passive foreign corporation
with respect to which the stock ownership
requirements of section 1292(a)(2)(B) are
met, or’’.
(6) Subsection (b) of section 535 is amended by
striking paragraph (9).
(7) Subsection (d) of section 535 is hereby re-
pealed.
(8) Paragraph (1) of section 543(b) is amended
by inserting ‘‘and’’ at the end of subparagraph (A),
by striking ‘‘, and’’ at the end of subparagraph (B)
and inserting a period, and by striking subparagraph
(C).
(9) Paragraph (1) of section 562(b) is amended
by striking ‘‘or a foreign personal holding company
described in section 552’’.
(10) Section 563 is amended—
(A) by striking subsection (c),
(B) by redesignating subsection (d) as sub-
section (c), and
(C) by striking ‘‘subsection (a), (b), or (c)’’
in subsection (c) (as so redesignated) and in-
serting ‘‘subsection (a) or (b)’’.
240
(11) Paragraph (2) of section 751(d) is amend-
ed by striking ‘‘subsection (a) of section 1246 (relat-
ing to gain on foreign investment company stock)’’
and inserting ‘‘section 1291 (relating to stock in cer-
tain passive foreign corporations marked to mar-
ket)’’.
(12) Subsection (b) of section 851 is amended
by striking the sentence following paragraph (4)(B)
which contains a reference to section 1293(a).
(13) Clause (ii) of section 864(b)(2)(A) is
amended by striking ‘‘(other than’’ and all that fol-
lows down through ‘‘holding company)’’ and insert-
ing ‘‘(other than a corporation which would be a
personal holding company but for section 542(c)(5)
and which is not United States controlled (as de-
fined in section 1292(a)(2))’’.
(14) Subsection (d) of section 904 is amended
by striking paragraphs (2)(A)(ii), (2)(E)(iii), and
(3)(I).
(15)(A) Subparagraph (A) of section 904(g)(1)
is amended to read as follows:
‘‘(A) Any amount included in gross income
under section 951(a) (relating to amounts in-
cluded in gross income of United States share-
holders).’’
241
(B) The paragraph heading of paragraph (2) of
section 904(g) is amended by striking ‘‘AND FOR-
EIGN PERSONAL HOLDING OR PASSIVE FOREIGN IN-
VESTMENT COMPANY’’.
(16) Section 951 is amended by striking sub-
sections (c), (d), and (f), and by redesignating sub-
section (e) as subsection (c).
(17) Paragraph (1) of section 986(c) is amend-
ed by striking ‘‘or 1293(c)’’.
(18) Paragraph (3) of section 989(b) is amend-
ed by striking ‘‘, 551(a), or 1293(a)’’.
(19) Paragraph (5) of section 1014(b) is hereby
repealed.
(20) Subsection (a) of section 1016 is amended
by striking paragraph (13) and by redesignating the
following paragraphs accordingly.
(21) Paragraph (3) of section 1212(a) is
amended—
(A) by striking subparagraph (A),
(B) by redesignating subparagraphs (B)
and (C) as subparagraphs (A) and (B), respec-
tively, and
(C) by amending subparagraph (D) to read
as follows:
242
‘‘(C) for which it is a passive foreign cor-
poration.’’
(22) Section 1223 is amended by striking para-
graph (10) and by redesignating the following para-
graphs accordingly.
(23) Subsection (d) of section 1248 is amended
by striking paragraphs (5) and (7).
(24)(A) Subsection (a) of section 6035 is
amended by striking ‘‘foreign personal holding com-
pany (as defined in section 552)’’ and inserting
‘‘passive foreign corporation with respect to which
the 
stock 
ownership 
requirements 
of 
section
1292(a)(2)(B) are met’’.
(B) The section heading for section 6035 is
amended by striking ‘‘FOREIGN PERSONAL
HOLDING 
COMPANIES’’ 
and 
inserting
‘‘CLOSELY HELD PASSIVE FOREIGN
CORPORATIONS’’.
(C) The table of sections for subpart A of part
III of subchapter A of chapter 61 is amended by
striking ‘‘foreign personal holding companies’’ in the
item relating to section 6035 and inserting ‘‘closely-
held passive foreign corporations’’.
(25) Subparagraph (D) of section 6103(e)(1) is
amended by striking clause (iv) and redesignating
243
clauses (v) and (vi) as clauses (iv) and (v), respec-
tively.
(26) Subparagraph (B) of section 6501(e)(1) is
amended to read as follows:
‘‘(B) CONSTRUCTIVE
DIVIDENDS.—If the
taxpayer omits from gross income an amount
properly 
includible 
therein 
under 
section
951(a), the tax may be assessed, or a proceed-
ing in court for the collection of such tax may
be done without assessing, at any time within
6 years after the return was filed.’’
(27) Section 4947 and section 4948(c)(4) are
each amended by striking ‘‘556(b)(2),’’ each place it
appears.
(b) CLERICAL AMENDMENTS.—
(1) The table of parts for subchapter G of
chapter 1 is amended by striking the item relating
to part III.
(2) The table of sections for part IV of sub-
chapter P of chapter 1 is amended by striking the
items relating to sections 1246 and 1247.
(3) The table of parts for subchapter P of chap-
ter 1 is amended by striking the item relating to
part VI and inserting the following:
‘‘Part VI. Treatment of passive foreign corporations.’’
244
SEC. 404. EFFECTIVE DATE.
(a) GENERAL RULE.—Except as otherwise provided
in this section, the amendments made by this subtitle shall
apply to—
(1) taxable years of United States persons be-
ginning after December 31, 1993, and
(2) taxable years of foreign corporations ending
with or within such taxable years of United States
persons.
(b) DENIAL OF INSTALLMENT SALES TREATMENT.—
The amendment made by section 402(b) shall apply to dis-
positions after December 31, 1993.
(c) BASIS RULE.—The amendments made by this
subtitle shall not affect the determination of the basis of
any stock acquired from a decedent in a taxable year be-
ginning before January 1, 1994.
(d) STUDY.—
(1) IN GENERAL.—The Secretary of the Treas-
ury shall conduct a study of the tax treatment for
purposes of the rules applicable to passive foreign
corporations (as amended by this subtitle) of securi-
ties sale and repurchase transactions and securities
lending and borrowing transactions.
(2) REPORT.—Not later than the day 1 year
after the date of the enactment of this Act, the Sec-
retary of the Treasury shall submit to the Commit-
245
tee on Ways and Means of the House of Representa-
tives and the Committee on Finance a report on the
study conducted under this subsection, together with
such recommendations as he may deem advisable.
Subtitle B—Treatment of
Controlled Foreign Corporations
SEC. 411. GAIN 
ON 
CERTAIN 
STOCK 
SALES 
BY 
CON-
TROLLED FOREIGN CORPORATIONS TREAT-
ED AS DIVIDENDS.
(a) GENERAL RULE.—Section 964 (relating to mis-
cellaneous provisions) is amended by adding at the end
thereof the following new subsection:
‘‘(f) GAIN
ON CERTAIN STOCK SALES
BY CON-
TROLLED FOREIGN CORPORATIONS TREATED AS DIVI-
DENDS.—
‘‘(1) IN GENERAL.—If a controlled foreign cor-
poration sells or exchanges stock in any other for-
eign corporation, gain recognized on such sale or ex-
change shall be included in the gross income of such
controlled foreign corporation as a dividend to the
same extent that it would have been so included
under section 1248(a) if such controlled foreign cor-
poration were a United States person. For purposes
of determining the amount which would have been so
includible, the determination of whether such other
246
foreign corporation was a controlled foreign corpora-
tion shall be made without regard to the preceding
sentence.
‘‘(2) SAME COUNTRY EXCEPTION NOT APPLICA-
BLE.—Clause (i) of section 954(c)(3)(A) shall not
apply to any amount treated as a dividend by reason
of paragraph (1).
‘‘(3) CLARIFICATION OF DEEMED SALES.—For
purposes of this subsection, a controlled foreign cor-
poration shall be treated as having sold or ex-
changed any stock if, under any provision of this
subtitle, such controlled foreign corporation is treat-
ed as having gain from the sale or exchange of such
stock.’’.
(b) AMENDMENT OF SECTION 904(d).—Clause (i) of
section 904(d)(2)(E) is amended by striking ‘‘and except
as provided in regulations, the taxpayer was a United
States shareholder in such corporation’’.
(c) EFFECTIVE DATES.—
(1) The amendment made by subsection (a)
shall apply to gain recognized on transactions occur-
ring after the date of the enactment of this Act.
(2) The amendment made by subsection (b)
shall apply to distributions after the date of the en-
actment of this Act.
247
SEC. 412. AUTHORITY TO PRESCRIBE SIMPLIFIED METHOD
FOR APPLYING SECTION 960(b)(2).
(a) GENERAL RULE.—Paragraph (2) of section
960(b) is amended by adding at the end thereof the follow-
ing new sentence: ‘‘The Secretary may prescribe regula-
tions requiring the use of simplified methods set forth in
such regulations for determining the amount of the in-
crease referred to in the preceding sentence.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall take effect on the date of the enact-
ment of this Act.
SEC. 413. MISCELLANEOUS MODIFICATIONS TO SUBPART
F.
(a) SECTION 1248 GAIN TAKEN INTO ACCOUNT IN
DETERMINING PRO RATA SHARE.—
(1) IN
GENERAL.—Paragraph (2) of section
951(a) (defining pro rata share of subpart F in-
come) is amended by adding at the end thereof the
following new sentence: ‘‘For purposes of subpara-
graph (B), any gain included in the gross income of
any person as a dividend under section 1248 shall
be treated as a distribution received by such person
with respect to the stock involved.’’
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply to dispositions after the
date of the enactment of this Act.
248
(b) BASIS ADJUSTMENTS IN STOCK HELD BY FOR-
EIGN CORPORATION.—
(1) IN GENERAL.—Section 961 (relating to ad-
justments to basis of stock in controlled foreign cor-
porations and of other property) is amended by add-
ing at the end thereof the following new subsection:
‘‘(c) BASIS ADJUSTMENTS IN STOCK HELD BY FOR-
EIGN CORPORATION.—Under regulations prescribed by
the Secretary, if a United States shareholder is treated
under section 958(a)(2) as owning any stock in a con-
trolled foreign corporation which is actually owned by an-
other controlled foreign corporation, adjustments similar
to the adjustments provided by subsections (a) and (b)
shall be made to the basis of such stock in the hands of
such other controlled foreign corporation, but only for the
purposes of determining the amount included under sec-
tion 951 in the gross income of such United States share-
holder (or any other United States shareholder who ac-
quires from any person any portion of the interest of such
United States shareholder by reason of which such share-
holder was treated as owning such stock, but only to the
extent of such portion, and subject to such proof of iden-
tity of such interest as the Secretary may prescribe by reg-
ulations).’’
249
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply for purposes of deter-
mining inclusions for taxable years of United States
shareholders beginning after December 31, 1993.
(c) DETERMINATION
OF PREVIOUSLY TAXED IN-
COME IN SECTION 304 DISTRIBUTIONS, ETC.—
(1) IN GENERAL.—Section 959 (relating to ex-
clusion from gross income of previously taxed earn-
ings and profits) is amended by adding at the end
thereof the following new subsection:
‘‘(f) ADJUSTMENTS FOR CERTAIN TRANSACTIONS.—
If by reason of—
‘‘(1) a transaction to which section 304 applies,
‘‘(2) the structure of a United States sharehold-
er’s holdings in controlled foreign corporations, or
‘‘(3) other circumstances,
there would be a multiple inclusion of any item in income
(or an inclusion or exclusion without an appropriate basis
adjustment) by reason of this subpart, the Secretary may
prescribe regulations providing such modifications in the
application of this subpart as may be necessary to elimi-
nate such multiple inclusion or provide such basis adjust-
ment, as the case may be.’’
250
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall take effect on the date of the
enactment of this Act.
(d) CLARIFICATION OF TREATMENT OF BRANCH TAX
EXEMPTIONS OR REDUCTIONS.—
(1) IN
GENERAL.—Subsection (b) of section
952 is amended by adding at the end thereof the fol-
lowing new sentence: ‘‘For purposes of this sub-
section, any exemption (or reduction) with respect to
the tax imposed by section 884 shall not be taken
into account.’’
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply to taxable years begin-
ning after December 31, 1986.
SEC. 414. INDIRECT FOREIGN TAX CREDIT ALLOWED FOR
CERTAIN LOWER TIER COMPANIES.
(a) SECTION 902 CREDIT.—
(1) IN
GENERAL.—Subsection (b) of section
902 (relating to deemed taxes increased in case of
certain 2nd and 3rd tier foreign corporations) is
amended to read as follows:
‘‘(b) DEEMED TAXES INCREASED IN CASE OF CER-
TAIN LOWER TIER CORPORATIONS.—
‘‘(1) IN GENERAL.—If—
251
‘‘(A) any foreign corporation is a member
of a qualified group, and
‘‘(B) such foreign corporation owns 10 per-
cent or more of the voting stock of another
member of such group from which it receives
dividends in any taxable year,
such foreign corporation shall be deemed to have
paid the same proportion of such other member’s
post-1986 foreign income taxes as would be deter-
mined under subsection (a) if such foreign corpora-
tion were a domestic corporation.
‘‘(2) QUALIFIED
GROUP.—For purposes of
paragraph (1), the term ‘qualified group’ means—
‘‘(A) the foreign corporation described in
subsection (a), and
‘‘(B) any other foreign corporation if—
‘‘(i) the domestic corporation owns at
least 5 percent of the voting stock of such
other 
foreign 
corporation 
indirectly
through a chain of foreign corporations
connected through stock ownership of at
least 10 percent of their voting stock,
‘‘(ii) the foreign corporation described
in subsection (a) is the first tier corpora-
tion in such chain, and
252
‘‘(iii) such other corporation is not
below the sixth tier in such chain,
The term ‘qualified group’ shall not include any for-
eign corporation below the third tier in the chain re-
ferred to in clause (i) unless such foreign corpora-
tion is a controlled foreign corporation (as defined in
section 957) and the domestic corporation is a Unit-
ed States shareholder (as defined in section 951(b))
in such foreign corporation. Paragraph (1) shall
apply to those taxes paid by a member of the quali-
fied group below the third tier only with respect to
periods during which it was a controlled foreign cor-
poration.’’
(2) CONFORMING AMENDMENTS.—
(A) Subparagraph (B) of section 902(c)(3)
is amended by adding ‘‘or’’ at the end of clause
(i) and by striking clauses (ii) and (iii) and in-
serting the following new clause:
‘‘(ii) the requirements of subsection
(b)(2) are met with respect to such foreign
corporation.’’
(B) Subparagraph (B) of section 902(c)(4)
is amended by striking ‘‘3rd foreign corpora-
tion’’ and inserting ‘‘sixth tier foreign corpora-
tion’’.
253
(C) The heading for paragraph (3) of sec-
tion 902(c) is amended by striking ‘‘WHERE DO-
MESTIC
CORPORATION
ACQUIRES
PERCENT
OF
FOREIGN
CORPORATION’’ and inserting
‘‘WHERE FOREIGN CORPORATION FIRST QUALI-
FIES’’.
(D) Paragraph (3) of section 902(c) is
amended by striking ‘‘ownership’’ each place it
appears.
(b) SECTION 960 CREDIT.—Paragraph (1) of section
960(a) (relating to special rules for foreign tax credits)
is amended to read as follows:
‘‘(1) DEEMED PAID CREDIT.—For purposes of
subpart A of this part, if there is included under
section 951(a) in the gross income of a domestic cor-
poration any amount attributable to earnings and
profits of a foreign corporation which is a member
of a qualified group (as defined in section 902(b))
with respect to the domestic corporation, then, ex-
cept to the extent provided in regulations, section
902 shall be applied as if the amount so included
were a dividend paid by such foreign corporation
(determined by applying section 902(c) in accord-
ance with section 904(d)(3)(B)).’’
(c) EFFECTIVE DATE.—
254
(1) IN GENERAL.—The amendments made by
this section shall apply to taxes of foreign corpora-
tions for taxable years of such corporations begin-
ning after the date of enactment of this Act.
(2) SPECIAL RULE.—In the case of any chain
of foreign corporations described in clauses (i) and
(ii) of section 902(b)(2)(B) of the Internal Revenue
Code of 1986 (as amended by this section), no liq-
uidation, reorganization, or similar transaction in a
taxable year beginning after the date of the enact-
ment of this Act shall have the effect of permitting
taxes to be taken into account under section 902 of
the Internal Revenue Code of 1986 which could not
have been taken into account under such section but
for such transaction.
SEC. 415. STUDY ON INVESTMENTS BY CONTROLLED FOR-
EIGN 
CORPORATION 
IN 
UNITED 
STATES
PROPERTY.
(a) GENERAL RULE.—The Secretary of the Treasury
shall conduct a study on tax treatment of investments by
controlled foreign corporations in obligations of United
States persons other than corporations. Such study shall
include the Secretary’s views as to whether the treatment
of such investments should be changed, along with a dis-
255
cussion of the merits and consequences of any such
change.
(b) REPORT.—Not later than December 31, 1993,
the Secretary of the Treasury shall submit to the Commit-
tee on Ways and Means of the House of Representatives
and the Committee on Finance a report on the study con-
ducted under this subsection, together with such rec-
ommendations as he may deem advisable.
Subtitle C—Other Provisions
SEC. 421. EXCHANGE RATE USED IN TRANSLATING FOR-
EIGN TAXES.
(a) ACCRUED TAXES TRANSLATED BY USING AVER-
AGE RATE FOR YEAR TO WHICH TAXES RELATE.—
(1) IN
GENERAL.—Subsection (a) of section
986 (relating to translation of foreign taxes) is
amended to read as follows:
‘‘(a) FOREIGN INCOME TAXES.—
‘‘(1) TRANSLATION OF ACCRUED TAXES.—
‘‘(A) IN GENERAL.—For purposes of deter-
mining the amount of the foreign tax credit, in
the case of a taxpayer who takes foreign income
taxes into account when accrued, the amount of
any foreign income taxes (and any adjustment
thereto) shall be translated into dollars by using
256
the average exchange rate for the taxable year
to which such taxes relate.
‘‘(B) EXCEPTION
FOR
TAXES
NOT
PAID
WITHIN FOLLOWING 2 YEARS.—
‘‘(i) Subparagraph (A) shall not apply
to any foreign income taxes paid after the
date 2 years after the close of the taxable
year to which such taxes relate.
‘‘(ii) Subparagraph (A) shall not
apply to taxes paid before the beginning of
the taxable year to which such taxes relate.
‘‘(C) EXCEPTION FOR INFLATIONARY CUR-
RENCIES.—To the extent provided in regula-
tions, subparagraph (A) shall not apply to any
foreign income taxes the liability for which is
denominated in any currency determined to be
an inflationary currency under such regulations.
‘‘(D) CROSS REFERENCE.—
‘‘For adjustments where tax is not paid within 2
years, see section 905(c).
‘‘(2) TRANSLATION OF TAXES TO WHICH PARA-
GRAPH (1) DOES NOT APPLY.—For purposes of de-
termining the amount of the foreign tax credit, in
the case of any foreign income taxes to which sub-
paragraph (A) of paragraph (1) does not apply—
257
‘‘(A) such taxes shall be translated into
dollars using the exchange rates as of the time
such taxes were paid to the foreign country or
possession of the United States, and
‘‘(B) any adjustment to the amount of
such taxes shall be translated into dollars
using—
‘‘(i) except as provided in clause (ii),
the exchange rate as of the time when such
adjustment is paid to the foreign country
or possession, or
‘‘(ii) in the case of any refund or cred-
it of foreign income taxes, using the ex-
change rate as of the time of the original
payment of such foreign income taxes.
‘‘(3) FOREIGN INCOME TAXES.—For purposes
of this subsection, the term ‘foreign income taxes’
means any income, war profits, or excess profits
taxes paid or accrued to any foreign country or to
any possession of the United States.’’
(2) ADJUSTMENT WHEN NOT PAID WITHIN 2
YEARS AFTER YEAR TO WHICH TAXES RELATE.—
Subsection (c) of section 905 is amended to read as
follows:
‘‘(c) ADJUSTMENTS TO ACCRUED TAXES.—
258
‘‘(1) IN GENERAL.—If—
‘‘(A) accrued taxes when paid differ from
the amounts claimed as credits by the taxpayer,
‘‘(B) accrued taxes are not paid before the
date 2 years after the close of the taxable year
to which such taxes relate, or
‘‘(C) any tax paid is refunded in whole or
in part,
the taxpayer shall notify the Secretary, who shall re-
determine the amount of the tax for the year or
years affected.
‘‘(2) SPECIAL
RULE
FOR
TAXES
NOT
PAID
WITHIN 2 YEARS.—In making the redetermination
under paragraph (1), no credit shall be allowed for
accrued taxes not paid before the date referred to in
subparagraph (B) of paragraph (1). Any such taxes
if subsequently paid shall be taken into account for
the taxable year in which paid and no redetermina-
tion under this section shall be made on account of
such payment.
‘‘(3) ADJUSTMENTS.—The amount of tax due
on any redetermination under paragraph (1) (if any)
shall be paid by the taxpayer on notice and demand
by the Secretary, and the amount of tax overpaid (if
any) shall be credited or refunded to the taxpayer in
259
accordance with subchapter B of chapter 66 (section
6511 et seq.).
‘‘(4) BOND
REQUIREMENTS.—In the case of
any tax accrued but not paid, the Secretary, as a
condition precedent to the allowance of the credit
provided in this subpart, may require the taxpayer
to give a bond, with sureties satisfactory to and ap-
proved by the Secretary, in such sum as the Sec-
retary may require, conditioned on the payment by
the taxpayer of any amount of tax found due on any
such redetermination. Any such bond shall contain
such further conditions as the Secretary may re-
quire.
‘‘(5) OTHER SPECIAL RULES.—In any redeter-
mination under paragraph (1) by the Secretary of
the amount of tax due from the taxpayer for the
year or years affected by a refund, the amount of
the taxes refunded for which credit has been allowed
under this section shall be reduced by the amount of
any tax described in section 901 imposed by the for-
eign country or possession of the United States with
respect to such refund; but no credit under this sub-
part, or deduction under section 164, shall be al-
lowed for any taxable year with respect to any such
tax imposed on the refund. No interest shall be as-
260
sessed or collected on any amount of tax due on any
redetermination by the Secretary, resulting from a
refund to the taxpayer, for any period before the re-
ceipt of such refund, except to the extent interest
was paid by the foreign country or possession of the
United States on such refund for such period.’’
(b) AUTHORITY TO USE AVERAGE RATES.—
(1) IN
GENERAL.—Subsection (a) of section
986 (relating to foreign taxes) is amended by adding
at the end thereof the following new paragraph:
‘‘(3) AUTHORITY TO PERMIT USE OF AVERAGE
RATES.—To the extent prescribed in regulations, the
average exchange rate for the period (specified in
such regulations) during which the taxes or adjust-
ment is paid may be used instead of the exchange
rate as of the time of such payment.’’
(2) DETERMINATION
OF
AVERAGE
RATES.—
Subsection (c) of section 989 is amended by striking
‘‘and’’ at the end of paragraph (4), by striking the
period at the end of paragraph (5) and inserting ‘‘,
and’’, and by adding at the end thereof the following
new paragraph:
‘‘(6) setting forth procedures for determining
the average exchange rate for any period.’’
261
(3) CONFORMING
AMENDMENTS.—Subsection
(b) of section 989 is amended by striking ‘‘weight-
ed’’ each place it appears.
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by
subsections (a)(1) and (b) shall apply to taxes paid
or accrued in taxable years beginning after Decem-
ber 31, 1992.
(2) SUBSECTION (a)(2).—The amendment made
by subsection (a)(2) shall apply to taxes which relate
to taxable years beginning after December 31, 1992.
SEC. 422. ELECTION TO USE SIMPLIFIED SECTION 904 LIM-
ITATION FOR ALTERNATIVE MINIMUM TAX.
(a) GENERAL RULE.—Subsection (a) of section 59
(relating to alternative minimum tax foreign tax credit)
is amended by adding at the end thereof the following new
paragraph:
‘‘(3) ELECTION TO USE SIMPLIFIED SECTION
904 LIMITATION.—
‘‘(A) IN GENERAL.—In determining the al-
ternative minimum tax foreign tax credit for
any taxable year to which an election under this
paragraph applies—
‘‘(i) subparagraph (B) of paragraph
(1) shall not apply, and
262
‘‘(ii) the limitation of section 904
shall be based on the proportion which—
‘‘(I) the taxpayer’s taxable in-
come (as determined for purposes of
the regular tax) from sources without
the United States (but not in excess
of the taxpayer’s entire alternative
minimum taxable income), bears to
‘‘(II) the taxpayer’s entire alter-
native minimum taxable income for
the taxable year.
‘‘(B) ELECTION.—
‘‘(i) IN GENERAL.—An election under
this paragraph may be made only for the
taxpayer’s first taxable year which begins
after December 31, 1993, and for which
the taxpayer claims an alternative mini-
mum tax foreign tax credit.
‘‘(ii) ELECTION
REVOCABLE
ONLY
WITH
CONSENT.—An election under this
paragraph, once made, shall apply to the
taxable year for which made and all subse-
quent taxable years unless revoked with
the consent of the Secretary.’’
263
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1993.
SEC. 423. MODIFICATION OF SECTION 1491.
(a) GENERAL RULE.—So much of chapter 5 (relating
to tax on transfers to avoid income tax) as precedes sec-
tion 1492 is amended to read as follows:
‘‘CHAPTER 5—TREATMENT OF TRANSFERS
TO AVOID INCOME TAX
‘‘Sec. 1491. Recognition of gain.
‘‘Sec. 1492. Exceptions.
‘‘SEC. 1491. RECOGNITION OF GAIN.
‘‘In the case of any transfer of property by a United
States person to a foreign corporation as paid-in surplus
or as a contribution to capital, to a foreign estate or trust,
or to a foreign partnership, for purposes of this subtitle,
such transfer shall be treated as a sale or exchange for
an amount equal to the fair market value of the property
transferred, and the transferor shall recognize as gain the
excess of—
‘‘(1) the fair market value of the property so
transferred, over
‘‘(2) the adjusted basis (for purposes of deter-
mining gain) of such property in the hands of the
transferor.’’
(b) CONFORMING AMENDMENTS.—
264
(1) Section 1057 is hereby repealed.
(2) Section 1492 is amended to read as follows:
‘‘SEC. 1492. EXCEPTIONS.
‘‘The provisions of section 1491 shall not apply—
‘‘(1) If the transferee is an organization exempt
from income tax under part I of subchapter F of
chapter 1 (other than an organization described in
section 401(a)),
‘‘(2) To a transfer described in section 367, or
‘‘(3) To any other transfer, to the extent pro-
vided in regulations in accordance with principles
similar to the principles of section 367 or otherwise
consistent with the purpose of section 1491.’’
(3) Section 1494 is hereby repealed.
(4) The table of sections for part IV of sub-
chapter O of chapter 1 is amended by striking the
item relating to section 1057.
(5) The table of chapters for subtitle A is
amended by striking ‘‘Tax on’’ in the item relating
to chapter 5 and inserting ‘‘Treatment of’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to transfers after the date of the
enactment of this Act.
265
SEC. 424. MODIFICATION OF SECTION 367(b).
(a) GENERAL RULE.—Paragraph (1) of section
367(b) is amended to read as follows:
‘‘(1) IN GENERAL.—In the case of any trans-
action described in section 332, 351, 354, 355, 356,
or 361 in which the status of a foreign corporation
as a corporation is a general condition for non-
recognition by 1 or more of the parties to the trans-
action, income shall be required to be recognized to
the extent provided in regulations prescribed by the
Secretary which are necessary or appropriate to pre-
vent the avoidance of Federal income taxes. This
subsection shall not apply to a transaction in which
the foreign corporation is not treated as a corpora-
tion under subsection (a)(1).’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to transfers after December 31,
1993.
TITLE V—TREATMENT OF
INTANGIBLES
SEC. 501. AMORTIZATION OF GOODWILL AND CERTAIN
OTHER INTANGIBLES.
(a) GENERAL RULE.—Part VI of subchapter B of
chapter 1 (relating to itemized deductions for individuals
and corporations) is amended by adding at the end thereof
the following new section:
266
‘‘SEC. 197. AMORTIZATION OF GOODWILL AND CERTAIN
OTHER INTANGIBLES.
‘‘(a) GENERAL RULE.—A taxpayer shall be entitled
to an amortization deduction with respect to any amortiz-
able section 197 intangible. The amount of such deduction
shall be determined by amortizing the adjusted basis (for
purposes of determining gain) of such intangible ratably
over the 14-year period beginning with the month in which
such intangible was acquired.
‘‘(b) NO OTHER DEPRECIATION OR AMORTIZATION
DEDUCTION ALLOWABLE.—Except as provided in sub-
section (a), no depreciation or amortization deduction
shall be allowable with respect to any amortizable section
197 intangible.
‘‘(c) AMORTIZABLE SECTION 197 INTANGIBLE.—For
purposes of this section—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this section, the term ‘amortizable section
197 intangible’ means any section 197 intangible—
‘‘(A) which is acquired by the taxpayer
after the date of the enactment of this section,
and
‘‘(B) which is held in connection with the
conduct of a trade or business or an activity de-
scribed in section 212.
267
‘‘(2) EXCLUSION OF SELF-CREATED INTANGI-
BLES, ETC.—The term ‘amortizable section 197 in-
tangible’ shall not include any section 197 intangi-
ble—
‘‘(A) which is not described in subpara-
graph (D), (E), or (F) of subsection (d)(1), and
‘‘(B) which is created by the taxpayer.
This paragraph shall not apply if the intangible is
created in connection with a transaction (or series of
related transactions) involving the acquisition of as-
sets constituting a trade or business or substantial
portion thereof.
‘‘(3) ANTI-CHURNING RULES.—
‘‘For exclusion of intangibles acquired in certain
transactions, see subsection (f)(9).
‘‘(d) SECTION 197 INTANGIBLE.—For purposes of
this section—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this section, the term ‘section 197 intangi-
ble’ means—
‘‘(A) goodwill,
‘‘(B) going concern value,
‘‘(C) any of the following intangible items:
‘‘(i) workforce in place including its
composition and terms and conditions
268
(contractual or otherwise) of its employ-
ment,
‘‘(ii) business books and records, oper-
ating systems, or any other information
base (including lists or other information
with respect to current or prospective cus-
tomers),
‘‘(iii) any patent, copyright, formula,
process, design, pattern, knowhow, format,
or other similar item,
‘‘(iv) any customer-based intangible,
‘‘(v) any supplier-based intangible,
and
‘‘(vi) any other similar item,
‘‘(D) any license, permit, or other right
granted by a governmental unit or an agency or
instrumentality thereof,
‘‘(E) any covenant not to compete (or
other arrangement to the extent such arrange-
ment has substantially the same effect as a cov-
enant not to compete) entered into in connec-
tion with an acquisition (directly or indirectly)
of an interest in a trade or business or substan-
tial portion thereof, and
269
‘‘(F) any franchise, trademark, or trade
name.
‘‘(2) CUSTOMER-BASED INTANGIBLE.—
‘‘(A) IN GENERAL.—The term ‘customer-
based intangible’ means—
‘‘(i) composition of market,
‘‘(ii) market share, and
‘‘(iii) any other value resulting from
future provision of goods or services pursu-
ant to relationships (contractual or other-
wise) in the ordinary course of business
with customers.
‘‘(B) SPECIAL RULE FOR FINANCIAL INSTI-
TUTIONS.—In the case of a financial institu-
tion, the term ‘customer-based intangible’ in-
cludes deposit base and similar items.
‘‘(3) SUPPLIER-BASED INTANGIBLE.—The term
‘supplier-based intangible’ means any value resulting
from future acquisitions of goods or services pursu-
ant to relationships (contractual or otherwise) in the
ordinary course of business with suppliers of goods
or services to be used or sold by the taxpayer.
‘‘(e) EXCEPTIONS.—For purposes of this section, the
term ‘section 197 intangible’ shall not include any of the
following:
270
‘‘(1) FINANCIAL INTERESTS.—Any interest—
‘‘(A) in a corporation, partnership, trust,
or estate, or
‘‘(B) under an existing futures contract,
foreign currency contract, notional principal
contract, or other similar financial contract.
‘‘(2) LAND.—Any interest in land.
‘‘(3) COMPUTER SOFTWARE.—
‘‘(A) IN GENERAL.—Any—
‘‘(i) computer software which is read-
ily available for purchase by the general
public, is subject to a nonexclusive license,
and has not been substantially modified,
and
‘‘(ii) other computer software which is
not acquired in a transaction (or series of
related transactions) involving the acquisi-
tion of assets constituting a trade or busi-
ness or substantial portion thereof.
‘‘(B) COMPUTER
SOFTWARE
DEFINED.—
For purposes of subparagraph (A), the term
‘computer software’ means any program de-
signed to cause a computer to perform a de-
sired function. Such term shall not include any
data base or similar item unless the data base
271
or item is in the public domain and is incidental
to the operation of otherwise qualifying com-
puter software.
‘‘(4) CERTAIN
INTERESTS
OR
RIGHTS
AC-
QUIRED SEPARATELY.—Any of the following not ac-
quired in a transaction (or series of related trans-
actions) involving the acquisition of assets constitut-
ing a trade business or substantial portion thereof:
‘‘(A) Any interest in a film, sound record-
ing, video tape, book, or similar property.
‘‘(B) Any right to receive tangible property
or services under a contract or granted by a
governmental unit or agency or instrumentality
thereof.
‘‘(C) Any interest in a patent or copyright.
‘‘(D) To the extent provided in regulations,
any right under a contract (or granted by a
governmental unit or an agency or instrumen-
tality thereof) if such right—
‘‘(i) has a fixed duration of less than
14 years, or
‘‘(ii) is fixed as to amount and, with-
out regard to this section, would be recov-
erable under a method similar to the unit-
of-production method.
272
‘‘(5) INTERESTS UNDER LEASES AND DEBT IN-
STRUMENTS.—Any interest under—
‘‘(A) an existing lease of tangible property,
or
‘‘(B) except as provided in subsection
(d)(2)(B), any existing indebtedness.
‘‘(6) TREATMENT OF SPORTS FRANCHISES.—A
franchise to engage in professional football, basket-
ball, baseball, or other professional sport, and any
item acquired in connection with such a franchise.
‘‘(7) CERTAIN TRANSACTION COSTS.—Any fees
for professional services, and any transaction costs,
incurred by parties to a transaction with respect to
which any portion of the gain or loss is not recog-
nized under part III of subchapter C.
‘‘(f) SPECIAL RULES.—
‘‘(1) TREATMENT OF CERTAIN DISPOSITIONS,
ETC.—If there is a disposition of any amortizable
section 197 intangible acquired in a transaction or
series of related transactions (or any such intangible
becomes worthless) and one or more other amortiz-
able section 197 intangibles acquired in such trans-
action or series of related transactions are re-
tained—
273
‘‘(A) no loss shall be recognized by reason
of such disposition (or such worthlessness), and
‘‘(B) appropriate adjustments to the ad-
justed bases of such retained intangibles shall
be made for any loss not recognized under sub-
paragraph (A).
All persons treated as a single taxpayer under sec-
tion 41(f)(1) shall be so treated for purposes of the
preceding sentence.
‘‘(2) TREATMENT OF CERTAIN TRANSFERS.—
‘‘(A) IN GENERAL.—In the case of any sec-
tion 197 intangible transferred in a transaction
described in subparagraph (B), the transferee
shall be treated as the transferor for purposes
of applying this section with respect to so much
of the adjusted basis in the hands of the trans-
feree as does not exceed the adjusted basis in
the hands of the transferor.
‘‘(B) 
TRANSACTIONS
COVERED.—The
transactions described in this subparagraph
are—
‘‘(i) any transaction described in sec-
tion 332, 351, 361, 721, 731, 1031, or
1033, and
274
‘‘(ii) any transaction between mem-
bers of the same affiliated group during
any taxable year for which a consolidated
return is made by such group.
‘‘(3) TREATMENT OF AMOUNTS PAID PURSUANT
TO
COVENANTS
NOT
TO
COMPETE, 
ETC.—Any
amount paid or incurred pursuant to a covenant or
arrangement referred to in subsection (d)(1)(E)
shall be treated as an amount chargeable to capital
account.
‘‘(4) TREATMENT OF FRANCHISES, ETC.—
‘‘(A) FRANCHISE.—The term ‘franchise’
has the meaning given to such term by section
1253(b)(1).
‘‘(B) TREATMENT
OF
RENEWALS.—Any
renewal of a franchise, trademark, or trade
name (or of a license, a permit, or other right
referred to in subsection (d)(1)(D)) shall be
treated as an acquisition. The preceding sen-
tence shall only apply with respect to costs in-
curred in connection with such renewal.
‘‘(C) CERTAIN AMOUNTS NOT TAKEN INTO
ACCOUNT.—Any amount to which section
1253(d)(1) applies shall not be taken into ac-
count under this section.
275
‘‘(5) TREATMENT
OF
CERTAIN
REINSURANCE
TRANSACTIONS.—In the case of any amortizable sec-
tion 197 intangible resulting from an assumption re-
insurance transaction, the amount taken into ac-
count as the adjusted basis of such intangible under
this section shall be the excess of—
‘‘(A) the amount paid or incurred by the
acquirer under the assumption reinsurance
transaction, over
‘‘(B) the amount required to be capitalized
under section 848 in connection with such
transaction.
Subsection (b) shall not apply to any amount re-
quired to be capitalized under section 848.
‘‘(6) TREATMENT OF CERTAIN SUBLEASES.—
For purposes of this section, a sublease shall be
treated in the same manner as a lease of the under-
lying property involved.
‘‘(7) TREATMENT AS DEPRECIABLE.—For pur-
poses of this chapter, any amortizable section 197
intangible shall be treated as property which is of a
character subject to the allowance for depreciation
provided in section 167.
‘‘(8) TREATMENT OF CERTAIN INCREMENTS IN
VALUE.—This section shall not apply to any incre-
276
ment in value if, without regard to this section, such
increment is properly taken into account in deter-
mining the cost of property which is not a section
197 intangible.
‘‘(9) ANTI-CHURNING RULES.—For purposes of
this section—
‘‘(A) IN GENERAL.—The term ‘amortizable
section 197 intangible’ shall not include any
section 197 intangible which is described in
subparagraph (A) or (B) of subsection (d)(1)
(or for which depreciation or amortization
would not have been allowable but for this sec-
tion) and which is acquired by the taxpayer
after the date of the enactment of this section,
if—
‘‘(i) the intangible was held or used at
any time on or after July 25, 1991, and on
or before such date of enactment by the
taxpayer or a related person,
‘‘(ii) the intangible was acquired from
a person who held such intangible at any
time on or after July 25, 1991, and on or
before such date of enactment, and, as
part of the transaction, the user of such
intangible does not change, or
277
‘‘(iii) the taxpayer grants the right to
use such intangible to a person (or a per-
son related to such person) who held or
used such intangible at any time on or
after July 25, 1991, and on or before such
date of enactment.
For purposes of this subparagraph, the deter-
mination of whether the user of property
changes as part of a transaction shall be deter-
mined in accordance with regulations prescribed
by the Secretary. For purposes of this subpara-
graph, deductions allowable under section
1253(d) shall be treated as deductions allowable
for amortization.
‘‘(B) EXCEPTION
WHERE
GAIN
RECOG-
NIZED.—If—
‘‘(i) subparagraph (A) would not
apply to an intangible acquired by the tax-
payer but for the last sentence of subpara-
graph (C)(i), and
‘‘(ii) the person from whom the tax-
payer acquired the intangible elects, not-
withstanding any other provision of this
title—
278
‘‘(I) to recognize gain on the dis-
position of the intangible, and
‘‘(II) to pay a tax on such gain
which, when added to any other in-
come tax on such gain under this title,
equals such gain multiplied by the
highest rate of income tax applicable
to such person under this title,
then subparagraph (A) shall apply to the
intangible only to the extent that the tax-
payer’s adjusted basis in the intangible ex-
ceeds the gain recognized under clause
(ii)(I).
‘‘(C) RELATED
PERSON
DEFINED.—For
purposes of this paragraph—
‘‘(i) RELATED
PERSON.—A person
(hereinafter in this paragraph referred to
as the ‘related person’) is related to any
person if—
‘‘(I) the related person bears a
relationship to such person specified
in section 267(b) or section 707(b)(1),
or
‘‘(II) the related person and such
person are engaged in trades or busi-
279
nesses under common control (within
the meaning of subparagraphs (A)
and (B) of section 41(f)(1)).
For purposes of subclause (I), in applying
section 267(b) or 707(b)(1), ‘20 percent’
shall be substituted for ‘50 percent’.
‘‘(ii) TIME FOR MAKING DETERMINA-
TION.—A person shall be treated as related
to another person if such relationship ex-
ists immediately before or immediately
after the acquisition of the intangible in-
volved.
‘‘(D) 
ACQUISITIONS
BY
REASON
OF
DEATH.—Subparagraph (A) shall not apply to
the acquisition of any property by the taxpayer
if the basis of the property in the hands of the
taxpayer is determined under section 1014(a).
‘‘(E) 
SPECIAL
RULE
FOR
PARTNER-
SHIPS.—With respect to any increase in the
basis of partnership property under section 732,
734, or 743, determinations under this para-
graph shall be made at the partner level and
each partner shall be treated as having owned
and used such partner’s proportionate share of
the partnership assets.
280
‘‘(F) ANTI-ABUSE RULES.—The term ‘am-
ortizable section 197 intangible’ does not in-
clude any section 197 intangible acquired in a
transaction, one of the principal purposes of
which is to avoid the requirement of subsection
(c)(1) that the intangible be acquired after the
date of the enactment of this section or to avoid
the provisions of subparagraph (A).
‘‘(g) REGULATIONS.—The Secretary shall prescribe
such regulations as may be appropriate to carry out the
purposes of this section, including such regulations as may
be appropriate to prevent avoidance of the purposes of this
section through related persons or otherwise.’’
(b) MODIFICATIONS TO DEPRECIATION RULES.—
(1) TREATMENT
OF
CERTAIN
PROPERTY
EX-
CLUDED FROM SECTION 197.—Section 167 (relating
to depreciation deduction) is amended by redesignat-
ing subsection (f) as subsection (g) and by inserting
after subsection (e) the following new subsection:
‘‘(f) TREATMENT OF CERTAIN PROPERTY EXCLUDED
FROM SECTION 197.—
‘‘(1) COMPUTER SOFTWARE.—
‘‘(A) IN GENERAL.—If a depreciation de-
duction is allowable under subsection (a) with
respect to any computer software, such deduc-
281
tion shall be computed by using the straight
line method and a useful life of 36 months.
‘‘(B) COMPUTER
SOFTWARE.—For pur-
poses of this section, the term ‘computer soft-
ware’ has the meaning given to such term by
section 197(e)(3)(B); except that such term
shall not include any such software which is an
amortizable section 197 intangible.
‘‘(2) CERTAIN
INTERESTS
OR
RIGHTS
AC-
QUIRED SEPARATELY.—If a depreciation deduction
is allowable under subsection (a) with respect to any
property described in subparagraph (B), (C), or (D)
of section 197(e)(4), such deduction shall be com-
puted in accordance with regulations prescribed by
the Secretary.’’
(2) ALLOCATION OF BASIS IN CASE OF LEASED
PROPERTY.—Subsection (c) of section 167 is amend-
ed to read as follows:
‘‘(c) BASIS FOR DEPRECIATION.—
‘‘(1) IN GENERAL.—The basis on which exhaus-
tion, wear and tear, and obsolescence are to be al-
lowed in respect of any property shall be the ad-
justed basis provided in section 1011, for the pur-
pose of determining the gain on the sale or other
disposition of such property.
282
‘‘(2) SPECIAL RULE FOR PROPERTY SUBJECT
TO LEASE.—If any property is acquired subject to a
lease—
‘‘(A) no portion of the adjusted basis shall
be allocated to the leasehold interest, and
‘‘(B) the entire adjusted basis shall be
taken into account in determining the deprecia-
tion deduction (if any) with respect to the prop-
erty subject to the lease.’’
(c) AMENDMENTS
TO SECTION 1253.—Subsection
(d) of section 1253 is amended by striking paragraphs (2),
(3), (4), and (5) and inserting the following:
‘‘(2) OTHER PAYMENTS.—Any amount paid or
incurred on account of a transfer, sale, or other dis-
position of a franchise, trademark, or trade name to
which paragraph (1) does not apply shall be treated
as an amount chargeable to capital account.
‘‘(3) RENEWALS, ETC.—For purposes of deter-
mining the term of a transfer agreement under this
section, there shall be taken into account all renewal
options (and any other period for which the parties
reasonably expect the agreement to be renewed).’’
(d) AMENDMENT TO SECTION 848.—Subsection (g)
of section 848 is amended by striking ‘‘this section’’ and
inserting ‘‘this section or section 197’’.
283
(e) AMENDMENTS TO SECTION 1060.—
(1) Paragraph (1) of section 1060(b) is amend-
ed by striking ‘‘goodwill or going concern value’’ and
inserting ‘‘section 197 intangibles’’.
(2) Paragraph (1) of section 1060(d) is amend-
ed by striking ‘‘goodwill or going concern value (or
similar items)’’ and inserting ‘‘section 197 intangi-
bles’’.
(f) TECHNICAL AND CONFORMING AMENDMENTS.—
(1) Subsection (g) of section 167 (as redesig-
nated by subsection (b)) is amended to read as fol-
lows:
‘‘(g) CROSS REFERENCES.—
‘‘(1) For additional rule applicable to depreciation
of improvements in the case of mines, oil and gas
wells, other natural deposits, and timber, see sec-
tion 611.
‘‘(2) For amortization of goodwill and certain
other intangibles, see section 197.’’
(2) Subsection (f) of section 642 is amended by
striking ‘‘section 169’’ and inserting ‘‘sections 169
and 197’’.
(3) Subsection (a) of section 1016 is amended
by striking paragraph (19) and by redesignating the
following paragraphs accordingly.
(4) Subparagraph (C) of section 1245(a)(2) is
amended by striking ‘‘193, or 1253(d) (2) or (3)’’
and inserting ‘‘or 193’’.
284
(5) Paragraph (3) of section 1245(a) is amend-
ed by striking ‘‘section 185 or 1253(d) (2) or (3)’’.
(6) The table of sections for part VI of sub-
chapter B of chapter 1 is amended by adding at the
end thereof the following new item:
‘‘Sec. 197. Amortization of goodwill and certain other intangi-
bles.’’
(g) EFFECTIVE DATE.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by
this section shall apply with respect to property ac-
quired after the date of the enactment of this Act.
(2) ELECTION TO HAVE AMENDMENTS APPLY
TO PROPERTY ACQUIRED AFTER JULY 25, 1991.—
(A) IN
GENERAL.—If an election under
this paragraph applies to the taxpayer—
(i) the amendments made by this sec-
tion shall apply to property acquired by the
taxpayer after July 25, 1991,
(ii) subsection (c)(1)(A) of section
197 of the Internal Revenue Code of 1986
(as added by this section) (and so much of
subsection (f)(9)(A) of such section 197 as
precedes clause (i) thereof) shall be applied
with respect to the taxpayer by treating
285
July 25, 1991, as the date of the enact-
ment of such section, and
(iii) in applying subsection (f)(9) of
such section, with respect to any property
acquired by the taxpayer on or before the
date of the enactment of this Act, only
holding or use on July 25, 1991, shall be
taken into account.
(B) ELECTION.—An election under this
paragraph shall be made at such time and in
such manner as the Secretary of the Treasury
or his delegate may prescribe. Such an election
by any taxpayer, once made—
(i) may be revoked only with the con-
sent of the Secretary, and
(ii) shall apply to the taxpayer making
such election and any other taxpayer under
common control with the taxpayer (within
the meaning of subparagraphs (A) and (B)
of section 41(f)(1) of such Code) at any
time after November 22, 1991, and on or
before the date on which such election is
made.
(3) ELECTIVE
BINDING
CONTRACT
EXCEP-
TION.—
286
(A) IN GENERAL.—The amendments made
by this section shall not apply to any acquisi-
tion of property by the taxpayer if—
(i) such acquisition is pursuant to a
written binding contract in effect on the
date of the enactment of this Act and at
all times thereafter before such acquisition,
(ii) an election under paragraph (2)
does not apply to the taxpayer, and
(iii) the taxpayer makes an election
under this paragraph with respect to such
contract.
(B) ELECTION.—An election under this
paragraph shall be made at such time and in
such manner as the Secretary of the Treasury
or his delegate shall prescribe. Such an election,
once made—
(i) may be revoked only with the con-
sent of the Secretary, and
(ii) shall apply to all property ac-
quired pursuant to the contract with re-
spect to which such election was made.
(h) ANNUAL REPORTS.—The Secretary of the Treas-
ury shall submit annual reports to the Committee on Ways
and Means of the House of Representatives and the Com-
287
mittee on Finance of the Senate on the implementation
and effects of the amendments made by this section, in-
cluding the effects of such amendments on merger and
acquisition activities. The first such annual report shall
be submitted on or before December 31, 1994.
(i) ANNUAL REPORTS ON OUTSTANDING CASES.—
The Secretary of the Treasury shall submit annual reports
to the Committee on Ways and Means of the House of
Representatives and the Committee on Finance of the
Senate regarding the volume of cases still outstanding that
involve disputes regarding the amortization of intangibles,
progress made in resolving such cases, efforts made to co-
ordinate settlement proceedings, and factors inhibiting the
resolution of such cases. The report shall also address the
impact of the amendments made by this section on the
volume of disputes regarding the amortization of intangi-
bles. The first such annual report shall be submitted on
or before December 31, 1994.
SEC. 502. TREATMENT OF CERTAIN PAYMENTS TO RE-
TIRED OR DECEASED PARTNER.
(a) SECTION 736(b) NOT TO APPLY IN CERTAIN
CASES.—Subsection (b) of section 736 (relating to pay-
ments for interest in partnership) is amended by adding
at the end thereof the following new paragraph: