I
105TH CONGRESS
2D SESSION
H. R. 3730
To amend the Internal Revenue Code of 1986 to provide for the elimination
of certain foreign base company shipping income from foreign base com-
pany income.
IN THE HOUSE OF REPRESENTATIVES
APRIL 23, 1998
Mr. SHAW (for himself and Mr. JEFFERSON) introduced the following bill;
which was referred to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to provide
for the elimination of certain foreign base company ship-
ping income from foreign base company income.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Shipping Income Reform Act of 1997’’.
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
ment or repeal is expressed in terms of an amendment
to, or a repeal of, a section or other provision, the ref-
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erence shall be considered to be made to a section of the
Internal Revenue Code of 1986.
SEC. 2. ELIMINATION OF CERTAIN FOREIGN BASE COM-
PANY SHIPPING INCOME FROM FOREIGN
BASE COMPANY INCOME.
Subsection 954(b) is amended by inserting the follow-
ing paragraph (2):
‘‘(2) EXCLUSION FOR CERTAIN SHIPPING IN-
COME.—
‘‘(A) INCOME OF CERTAIN FOREIGN COR-
PORATIONS.—For purposes of subsection (a),
foreign base company income does not in-
clude—
‘‘(i) income derived from the operation
of a vessel registered in the Bahamas,
Honduras, the Republic of Liberia, the Re-
public of Panama, the Republic of the
Marshall Islands, or such other country as
the Secretary of Transportation certifies, if
the owner, operator, or a member of its
controlled group, as defined in subpara-
graph (E)(iii), enters into an agreement
with the Secretary of Transportation to
own or operate a qualified U.S.-flag fleet
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for at least 320 days of the taxable year;
or
‘‘(ii) the shipping income of a con-
trolled foreign corporation that owns or op-
erates vessels that do not derive U.S.-
source income (other than dividend or in-
terest income) in the taxable year and have
not engaged in the carriage of any cargoes
in the U.S. import or export trade in that
period.
For purposes of the preceding sentence, the
term ‘U.S. import or export trade’ shall mean
the carriage of goods or other commodities to
or from United States ports whether or not via
transshipment at a foreign port; and a charter
to a member of a controlled group (as defined
in subparagraph (E)(iii)) shall not be consid-
ered carriage in the U.S. import or export
trade.
‘‘(B) INCOME OF CARIBBEAN BASIN SHIP-
PING
CORPORATION.—For purposes of sub-
section (a), foreign base company income does
not include income derived from the operation
of a vessel owned by a Caribbean Basin Ship-
ping Corporation.
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‘‘(C) INAPPLICABILITY
TO
PETROLEUM
TRANSPORTATION.—The exclusions set forth in
subparagraphs (A) and (B) shall not apply to
foreign base company shipping income properly
allocable to any vessel engaged in the carriage
of petroleum or related products or byproducts
if the controlled group (as defined in section
267(f)(1) 
without 
regard 
to 
section
1563(b)(2)(C)) of which the taxpayer is a mem-
ber is engaged principally in the trade or busi-
ness of exploring for, or extracting, refining or
marketing of, petroleum or related products or
byproducts.
‘‘(D) DEFINITION
OF
CARIBBEAN
BASIN
SHIPPING CORPORATION.—For purposes of this
section—
‘‘(i) CARIBBEAN BASIN SHIPPING COR-
PORATION.—The term ‘Caribbean Basin
shipping corporation’ means a corporation
if, for the taxable year, at least 75 percent
of its foreign base company shipping in-
come (determined without regard to this
paragraph (2)) is Caribbean Basin ship-
ping income.
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‘‘(ii) CARIBBEAN BASIN SHIPPING IN-
COME.—The term ‘Caribbean Basin ship-
ping income’ means foreign base company
shipping income derived from or in connec-
tion with the operation of any non-pas-
senger vessel in foreign commerce within
any Caribbean Basin country, among Car-
ibbean Basin countries, or between any
Caribbean Basin country and the United
States, including that portion of any trans-
shipping originating or terminating in any
non-Caribbean Basin country that other-
wise satisfies these requirements.
‘‘(iii) CARIBBEAN BASIN COUNTRY.—
The term ‘Caribbean Basin country’ means
any beneficiary country (as defined in sec-
tion 212(a)(1)(A) of the Caribbean Basin
Economic Recovery Act); except that such
term shall also include Anguilla, Colombia,
Mexico, the U.S. Virgin Islands and Ven-
ezuela.
‘‘(iv) SPECIAL RULES.—For purposes
of determining whether a controlled foreign
corporation is a Caribbean Basin shipping
corporation, all members of the same affili-
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ated group (within the meaning of section
1504(a)) shall be treated as one corpora-
tion, except that—
‘‘(I) section 1504(a)(2) shall be
applied by substituting 50 percent for
80 percent; and
‘‘(II) section 1504(b)(3) shall not
apply.
‘‘(E) DEFINITION OF QUALIFIED U.S.-FLAG
FLEET.—For purposes of this section—
‘‘(i) QUALIFIED U.S.-FLAG FLEET.—
The term ‘qualified U.S. flag fleet’ means
a fleet of four or more U.S.-flag cargo ves-
sels or two or more U.S.-flag passenger
vessels, each such vessel having a dead-
weight tonnage of not less than 10,000
deadweight tons and, in the case of a pas-
senger vessel, having berth or stateroom
accommodations for at least 275 pas-
sengers, for which a member of the con-
trolled group of which the controlled for-
eign corporation is a member is the owner
(or demise charterer) and which vessels
have been placed in service and operated
for at least 320 days in the preceding tax-
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able year with days during which the vessel
is drydocked or undergoing survey, inspec-
tion or repair considered to be days on
which the vessel is operated;
‘‘(ii) U.S.-FLAG
VESSEL.—The term
‘U.S.-flag vessel’ means any vessel which is
documented under the laws of the United
States and is subject to the provisions of
section 8103 of title 46, United States
Code, relating to manning by citizens of
the United States.
‘‘(iii) 
CONTROLLED
GROUP.—The
term ‘controlled group’ has the meaning
given such term by section 1563(a) except
that—
‘‘(I) section 1563(a) shall be ap-
plied by substituting 50 percent for
80 percent; and
‘‘(II) section 1563(b)(2)(C) shall
not apply.
‘‘(iv) SPECIAL RULES.—In determin-
ing the qualified U.S.-flag fleet of a con-
trolled group—
‘‘(I) if a U.S.-flag vessel which is
part of a qualified U.S.-flag fleet is
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destroyed by casualty or purchased by
requisition pursuant to section 1242
of title 46, United States Code, it may
continue to be included in such quali-
fied U.S.-flag fleet during the replace-
ment period, but only if a member of
the controlled group is or becomes the
owner (or demise charterer) of a re-
placement U.S.-flag vessel which is
placed in service (and not retired from
service) within the replacement period;
and
‘‘(II) if a member of the con-
trolled group owns (directly or indi-
rectly) at least 25 percent (by value)
of the stock of another corporation, or
at least 25 percent of the interest in
the capital or profits of a partnership,
such member shall be treated as if it
were the owner (or demise charterer)
of its proportionate share of the U.S.
flag vessels of which such corporation
or partnership is the owner (or demise
charterer).
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‘‘(v) 
REPLACEMENT
PERIOD.—The
term ‘replacement period’ means the period
beginning on the date on which the cas-
ualty or purchase by requisition occurs and
ending on the earlier of the date—
‘‘(I) on which a replacement
U.S.-flag vessel is placed in service, or
‘‘(II) which is four years after
the close of the taxable year in which
the casualty or purchase by requisi-
tion occurs.
‘‘(vi) REPLACEMENT
U.S.-FLAG
VES-
SEL.—The term ‘replacement U.S.-flag
vessel’ means a U.S. flag vessel for which
a member of the controlled group has en-
tered into a binding contract for the pur-
chase or construction of such vessel during
the period—
‘‘(I) beginning on the day follow-
ing the date on which there is a loss
by casualty or purchase by requisition
pursuant to section 1242 of title 46,
United States Code, of a vessel in-
cluded in such controlled group’s
qualified U.S.-flag fleet, and
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‘‘(II) ending on the date which is
two years after the date of such cas-
ualty or such purchase, but only if
such U.S.-flag vessel would be in-
cluded in the controlled group’s quali-
fied U.S.-flag fleet when it is placed
in service.’’
SEC. 3. REINVESTMENT IN U.S.-FLAG SHIPS.
(a) REINVESTMENT
IN
U.S.-FLAG
SHIPS.—Sub-
section 956(c)(2) is amended by inserting at the end
thereof the following:
‘‘(J) any amount of funds loaned to a
United States person for the acquisition, con-
struction, or reconstruction of a vessel docu-
mented under the laws of the United States.
Any interest payable on indebtedness described in
(J) shall be free from U.S. income tax withholding
under sections 1441 and 1442 if such interest is
paid to an individual resident in or corporation or
other entity organized under the laws of The Baha-
mas, Honduras, the Republic of Liberia, the Repub-
lic of Panama, the Republic of the Marshall Islands,
or such other country as the Secretary of Transpor-
tation certifies.’’
(b) CONFORMING AMENDMENTS.—
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(1) Section 956(c)(2)(H) is amended by delet-
ing ‘‘; and’’ and inserting in lieu thereof ‘‘;’’.
(2) Section 956(c)(2)(I) is amended by deleting
the period at the end thereof and inserting ‘‘; and’’
in lieu thereof.
SEC. 4. EFFECTIVE DATE.
The amendments made by this Act are effective for
taxable years beginning after the date of enactment of this
Act.
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