H. R. 4520—73
‘‘(B) FINANCIAL
CORPORATION.—For purposes of this
paragraph, the term ‘financial corporation’ means any cor-
poration if at least 80 percent of its gross income is income
described in section 904(d)(2)(D)(ii) and the regulations
thereunder which is derived from transactions with persons
who are not related (within the meaning of section 267(b)
or 707(b)(1)) to the corporation. For purposes of the pre-
ceding sentence, there shall be disregarded any item of
income or gain from a transaction or series of transactions
a principal purpose of which is the qualification of any
corporation as a financial corporation.
‘‘(C) ANTI-ABUSE RULES.—In the case of a corporation
which is a member of an electing financial institution
group, to the extent that such corporation—
‘‘(i) distributes dividends or makes other distribu-
tions with respect to its stock after the date of the
enactment of this paragraph to any member of the
pre-election worldwide affiliated group (other than to
a member of the electing financial institution group)
in excess of the greater of—
‘‘(I) its average annual dividend (expressed as
a percentage of current earnings and profits)
during the 5-taxable-year period ending with the
taxable year preceding the taxable year, or
‘‘(II) 25 percent of its average annual earnings
and profits for such 5-taxable-year period, or
‘‘(ii) deals with any person in any manner not
clearly reflecting the income of the corporation (as
determined under principles similar to the principles
of section 482),
an amount of indebtedness of the electing financial institu-
tion group equal to the excess distribution or the under-
statement or overstatement of income, as the case may
be, shall be recharacterized (for the taxable year and subse-
quent taxable years) for purposes of this paragraph as
indebtedness of the worldwide affiliated group (excluding
the electing financial institution group). If a corporation
has not been in existence for 5 taxable years, this subpara-
graph shall be applied with respect to the period it was
in existence.
‘‘(D) ELECTION.—An election under this paragraph with
respect to any financial institution group may be made
only by the common parent of the pre-election worldwide
affiliated group and may be made only for the first taxable
year beginning after December 31, 2008, in which such
affiliated group includes 1 or more financial corporations.
Such an election, once made, shall apply to all financial
corporations which are members of the electing financial
institution group for such taxable year and all subsequent
years unless revoked with the consent of the Secretary.
‘‘(E) DEFINITIONS RELATING TO GROUPS.—For purposes
of this paragraph—
‘‘(i) 
PRE-ELECTION
WORLDWIDE
AFFILIATED
GROUP.—The term ‘pre-election worldwide affiliated
group’ means, with respect to a corporation, the world-
wide affiliated group of which such corporation would
H. R. 4520—74
(but for an election under this paragraph) be a member
for purposes of applying paragraph (1).
‘‘(ii) ELECTING
FINANCIAL
INSTITUTION
GROUP.—
The term ‘electing financial institution group’ means
the group of corporations to which this subsection
applies separately by reason of the application of para-
graph (4)(A) and which includes financial corporations
by reason of an election under subparagraph (A).
‘‘(F) REGULATIONS.—The Secretary shall prescribe such
regulations as may be appropriate to carry out this sub-
section, including regulations—
‘‘(i) providing for the direct allocation of interest
expense in other circumstances where such allocation
would be appropriate to carry out the purposes of
this subsection,
‘‘(ii) preventing assets or interest expense from
being taken into account more than once, and
‘‘(iii) dealing with changes in members of any group
(through acquisitions or otherwise) treated under this
paragraph as an affiliated group for purposes of this
subsection.
‘‘(6) ELECTION.—An election to have this subsection apply
with respect to any worldwide affiliated group may be made
only by the common parent of the domestic affiliated group
referred to in paragraph (1)(C) and may be made only for
the first taxable year beginning after December 31, 2008, in
which a worldwide affiliated group exists which includes such
affiliated group and at least 1 foreign corporation. Such an
election, once made, shall apply to such common parent and
all other corporations which are members of such worldwide
affiliated group for such taxable year and all subsequent years
unless revoked with the consent of the Secretary.’’.
(b) EXPANSION OF REGULATORY AUTHORITY.—Paragraph (7) of
section 864(e) is amended—
(1) by inserting before the comma at the end of subpara-
graph (B) ‘‘and in other circumstances where such allocation
would be appropriate to carry out the purposes of this sub-
section’’, and
(2) by striking ‘‘and’’ at the end of subparagraph (E), by
redesignating subparagraph (F) as subparagraph (G), and by
inserting after subparagraph (E) the following new subpara-
graph:
‘‘(F) preventing assets or interest expense from being
taken into account more than once, and’’.
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to taxable years beginning after December 31, 2008.
SEC. 402. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.
(a) GENERAL RULE.—Section 904 is amended by redesignating
subsections (g), (h), (i), (j), and (k) as subsections (h), (i), (j), (k),
and (l) respectively, and by inserting after subsection (f) the fol-
lowing new subsection:
‘‘(g) RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.—
‘‘(1) GENERAL
RULE.—For purposes of this subpart and
section 936, in the case of any taxpayer who sustains an overall
domestic loss for any taxable year beginning after December
31, 2006, that portion of the taxpayer’s taxable income from
H. R. 4520—75
sources within the United States for each succeeding taxable
year which is equal to the lesser of—
‘‘(A) the amount of such loss (to the extent not used
under this paragraph in prior taxable years), or
‘‘(B) 50 percent of the taxpayer’s taxable income from
sources within the United States for such succeeding tax-
able year,
shall be treated as income from sources without the United
States (and not as income from sources within the United
States).
‘‘(2) OVERALL DOMESTIC LOSS DEFINED.—For purposes of
this subsection—
‘‘(A) IN
GENERAL.—The term ‘overall domestic loss’
means any domestic loss to the extent such loss offsets
taxable income from sources without the United States
for the taxable year or for any preceding taxable year
by reason of a carryback. For purposes of the preceding
sentence, the term ‘domestic loss’ means the amount by
which the gross income for the taxable year from sources
within the United States is exceeded by the sum of the
deductions properly apportioned or allocated thereto (deter-
mined without regard to any carryback from a subsequent
taxable year).
‘‘(B) TAXPAYER
MUST
HAVE
ELECTED
FOREIGN
TAX
CREDIT
FOR
YEAR
OF
LOSS.—The term ‘overall domestic
loss’ shall not include any loss for any taxable year unless
the taxpayer chose the benefits of this subpart for such
taxable year.
‘‘(3) CHARACTERIZATION OF SUBSEQUENT INCOME.—
‘‘(A) IN
GENERAL.—Any income from sources within
the United States that is treated as income from sources
without the United States under paragraph (1) shall be
allocated among and increase the income categories in
proportion to the loss from sources within the United States
previously allocated to those income categories.
‘‘(B) INCOME CATEGORY.—For purposes of this para-
graph, the term ‘income category’ has the meaning given
such term by subsection (f)(5)(E)(i).
‘‘(4) COORDINATION WITH SUBSECTION (f).—The Secretary
shall prescribe such regulations as may be necessary to coordi-
nate the provisions of this subsection with the provisions of
subsection (f).’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 535(d)(2) is amended by striking ‘‘section
904(g)(6)’’ and inserting ‘‘section 904(h)(6)’’.
(2) Subparagraph (A) of section 936(a)(2) is amended by
striking ‘‘section 904(f)’’ and inserting ‘‘subsections (f) and (g)
of section 904’’.
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to losses for taxable years beginning after December
31, 2006.
SEC. 403. LOOK-THRU RULES TO APPLY TO DIVIDENDS FROM NONCON-
TROLLED SECTION 902 CORPORATIONS.
(a) IN GENERAL.—Section 904(d)(4) (relating to look-thru rules
apply to dividends from noncontrolled section 902 corporations)
is amended to read as follows:
H. R. 4520—76
‘‘(4) LOOK-THRU
APPLIES
TO
DIVIDENDS
FROM
NONCON-
TROLLED SECTION 902 CORPORATIONS.—
‘‘(A) IN GENERAL.—For purposes of this subsection, any
dividend from a noncontrolled section 902 corporation with
respect to the taxpayer shall be treated as income described
in a subparagraph of paragraph (1) in proportion to the
ratio of—
‘‘(i) the portion of earnings and profits attributable
to income described in such subparagraph, to
‘‘(ii) the total amount of earnings and profits.
‘‘(B) EARNINGS AND PROFITS OF CONTROLLED FOREIGN
CORPORATIONS.—In the case of any distribution from a
controlled foreign corporation to a United States share-
holder, rules similar to the rules of subparagraph (A) shall
apply in determining the extent to which earnings and
profits of the controlled foreign corporation which are
attributable to dividends received from a noncontrolled sec-
tion 902 corporation may be treated as income in a separate
category.
‘‘(C) SPECIAL RULES.—For purposes of this paragraph—
‘‘(i) EARNINGS AND PROFITS.—
‘‘(I) IN
GENERAL.—The rules of section 316
shall apply.
‘‘(II) REGULATIONS.—The Secretary may pre-
scribe regulations regarding the treatment of dis-
tributions out of earnings and profits for periods
before the taxpayer’s acquisition of the stock to
which the distributions relate.
‘‘(ii) INADEQUATE
SUBSTANTIATION.—If the Sec-
retary determines that the proper subparagraph of
paragraph (1) in which a dividend is described has
not been substantiated, such dividend shall be treated
as income described in paragraph (1)(A).
‘‘(iii) COORDINATION
WITH
HIGH-TAXED
INCOME
PROVISIONS.—Rules similar to the rules of paragraph
(3)(F) shall apply for purposes of this paragraph.
‘‘(iv) LOOK-THRU WITH RESPECT TO CARRYOVER OF
CREDIT.—Rules similar to subparagraph (A) also shall
apply to any carryforward under subsection (c) from
a taxable year beginning before January 1, 2003, of
tax allocable to a dividend from a noncontrolled section
902 corporation with respect to the taxpayer. The Sec-
retary may by regulations provide for the allocation
of any carryback of tax allocable to a dividend from
a noncontrolled section 902 corporation from a taxable
year beginning on or after January 1, 2003, to a taxable
year beginning before such date for purposes of allo-
cating such dividend among the separate categories
in effect for the taxable year to which carried.’’.
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (E) of section 904(d)(1) is hereby repealed.
(2) Section 904(d)(2)(C)(iii) is amended by adding ‘‘and’’
at the end of subclause (I), by striking subclause (II), and
by redesignating subclause (III) as subclause (II).
(3) The last sentence of section 904(d)(2)(D) is amended
to read as follows: ‘‘Such term does not include any financial
services income.’’.
H. R. 4520—77
(4) Section 904(d)(2)(E) is amended—
(A) by inserting ‘‘or (4)’’ after ‘‘paragraph (3)’’ in clause
(i), and
(B) by striking clauses (ii) and (iv) and by redesignating
clause (iii) as clause (ii).
(5) Section 904(d)(3)(F) is amended by striking ‘‘(D), or
(E)’’ and inserting ‘‘or (D)’’.
(6) 
Section 
864(d)(5)(A)(i) 
is 
amended 
by 
striking
‘‘(C)(iii)(III)’’ and inserting ‘‘(C)(iii)(II)’’.
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to taxable years beginning after December 31, 2002.
SEC. 404. REDUCTION TO 2 FOREIGN TAX CREDIT BASKETS.
(a) IN GENERAL.—Paragraph (1) of section 904(d) (relating to
separate application of section with respect to certain categories
of income) is amended to read as follows:
‘‘(1) IN GENERAL.—The provisions of subsections (a), (b),
and (c) and sections 902, 907, and 960 shall be applied sepa-
rately with respect to—
‘‘(A) passive category income, and
‘‘(B) general category income.’’.
(b) CATEGORIES.—Paragraph (2) of section 904(d) is amended
by striking subparagraph (B), by redesignating subparagraph (A)
as subparagraph (B), and by inserting before subparagraph (B)
(as so redesignated) the following new subparagraph:
‘‘(A) CATEGORIES.—
‘‘(i) PASSIVE CATEGORY INCOME.—The term ‘passive
category income’ means passive income and specified
passive category income.
‘‘(ii) GENERAL CATEGORY INCOME.—The term ‘gen-
eral category income’ means income other than passive
category income.’’.
(c) SPECIFIED PASSIVE CATEGORY INCOME.—Subparagraph (B)
of section 904(d)(2), as so redesignated, is amended by adding
at the end the following new clause:
‘‘(v) SPECIFIED
PASSIVE
CATEGORY
INCOME.—The
term ‘specified passive category income’ means—
‘‘(I) dividends from a DISC or former DISC
(as defined in section 992(a)) to the extent such
dividends are treated as income from sources with-
out the United States,
‘‘(II) taxable income attributable to foreign
trade income (within the meaning of section
923(b)), and
‘‘(III) distributions from a FSC (or a former
FSC) out of earnings and profits attributable to
foreign trade income (within the meaning of sec-
tion 923(b)) or interest or carrying charges (as
defined in section 927(d)(1)) derived from a trans-
action which results in foreign trade income (as
defined in section 923(b)).’’.
(d) TREATMENT OF FINANCIAL SERVICES.—Paragraph (2) of sec-
tion 904(d), as amended by section 403(b)(3), is amended by striking
subparagraph (D), by redesignating subparagraph (C) as subpara-
graph (D), and by inserting before subparagraph (D) (as so redesig-
nated) the following new subparagraph:
H. R. 4520—78
‘‘(C) TREATMENT OF FINANCIAL SERVICES INCOME AND
COMPANIES.—
‘‘(i) IN GENERAL.—Financial services income shall
be treated as general category income in the case of—
‘‘(I) a member of a financial services group,
and
‘‘(II) any other person if such person is
predominantly engaged in the active conduct of
a banking, insurance, financing, or similar busi-
ness.
‘‘(ii) FINANCIAL SERVICES GROUP.—The term ‘finan-
cial services group’ means any affiliated group (as
defined in section 1504(a) without regard to paragraphs
(2) and (3) of section 1504(b)) which is predominantly
engaged in the active conduct of a banking, insurance,
financing, or similar business. In determining whether
such a group is so engaged, there shall be taken into
account only the income of members of the group that
are—
‘‘(I) United States corporations, or
‘‘(II) controlled foreign corporations in which
such United States corporations own, directly or
indirectly, at least 80 percent of the total voting
power and value of the stock.
‘‘(iii) PASS-THRU ENTITIES.—The Secretary shall by
regulation specify for purposes of this subparagraph
the treatment of financial services income received or
accrued by partnerships and by other pass-thru entities
which are not members of a financial services group.’’.
(e) TREATMENT OF INCOME TAX BASE DIFFERENCES.—Paragraph
(2) of section 904(d) is amended by redesignating subparagraphs
(H) and (I) as subparagraphs (I) and (J), respectively, and by
inserting after subparagraph (G) the following new subparagraph:
‘‘(H) TREATMENT OF INCOME TAX BASE DIFFERENCES.—
‘‘(i) IN
GENERAL.—In the case of taxable years
beginning after December 31, 2006, tax imposed under
the law of a foreign country or possession of the United
States on an amount which does not constitute income
under United States tax principles shall be treated
as imposed on income described in paragraph (1)(B).
‘‘(ii) SPECIAL RULE FOR YEARS BEFORE 2007.—
‘‘(I) IN GENERAL.—In the case of taxes paid
or accrued in taxable years beginning after
December 31, 2004, and before January 1, 2007,
a taxpayer may elect to treat tax imposed under
the law of a foreign country or possession of the
United States on an amount which does not con-
stitute income under United States tax principles
as tax imposed on income described in subpara-
graph (C) or (I) of paragraph (1).
‘‘(II) ELECTION IRREVOCABLE.—Any such elec-
tion shall apply to the taxable year for which made
and all subsequent taxable years described in sub-
clause (I) unless revoked with the consent of the
Secretary.’’.
(f) CONFORMING AMENDMENTS.—
H. R. 4520—79
(1) Clause (iii) of section 904(d)(2)(B) (relating to exceptions
from passive income), as so redesignated, is amended by
striking subclause (I) and by redesignating subclauses (II) and
(III) as subclauses (I) and (II), respectively.
(2) Clause (i) of section 904(d)(2)(D) (defining financial
services income), as so redesignated, is amended by adding
‘‘or’’ at the end of subclause (I) and by striking subclauses
(II) and (III) and inserting the following new subclause:
‘‘(II) passive income (determined without
regard to subparagraph (B)(iii)(II)).’’.
(3) Section 904(d)(2)(D) (defining financial services income),
as so redesignated and amended by section 404(b)(3), is
amended by striking clause (iii).
(4) Paragraph (3) of section 904(d) is amended to read
as follows:
‘‘(3) LOOK-THRU IN CASE OF CONTROLLED FOREIGN CORPORA-
TIONS.—
‘‘(A) IN
GENERAL.—Except as otherwise provided in
this paragraph, dividends, interest, rents, and royalties
received or accrued by the taxpayer from a controlled for-
eign corporation in which the taxpayer is a United States
shareholder shall not be treated as passive category income.
‘‘(B) SUBPART F INCLUSIONS.—Any amount included in
gross income under section 951(a)(1)(A) shall be treated
as passive category income to the extent the amount so
included is attributable to passive category income.
‘‘(C) INTEREST, RENTS, AND ROYALTIES.—Any interest,
rent, or royalty which is received or accrued from a con-
trolled foreign corporation in which the taxpayer is a
United States shareholder shall be treated as passive cat-
egory income to the extent it is properly allocable (under
regulations prescribed by the Secretary) to passive category
income of the controlled foreign corporation.
‘‘(D) DIVIDENDS.—Any dividend paid out of the earnings
and profits of any controlled foreign corporation in which
the taxpayer is a United States shareholder shall be treated
as passive category income in proportion to the ratio of—
‘‘(i) the portion of the earnings and profits attrib-
utable to passive category income, to
‘‘(ii) the total amount of earnings and profits.
‘‘(E) LOOK-THRU
APPLIES
ONLY
WHERE
SUBPART
F
APPLIES.—If a controlled foreign corporation meets the
requirements of section 954(b)(3)(A) (relating to de minimis
rule) for any taxable year, for purposes of this paragraph,
none of its foreign base company income (as defined in
section 954(a) without regard to section 954(b)(5)) and none
of its gross insurance income (as defined in section
954(b)(3)(C)) for such taxable year shall be treated as pas-
sive category income, except that this sentence shall not
apply to any income which (without regard to this sentence)
would be treated as financial services income. Solely for
purposes of applying subparagraph (D), passive income
of a controlled foreign corporation shall not be treated
as passive category income if the requirements of section
954(b)(4) are met with respect to such income.
‘‘(F) COORDINATION WITH HIGH-TAXED INCOME PROVI-
SIONS.—
H. R. 4520—80
‘‘(i) In determining whether any income of a con-
trolled foreign corporation is passive category income,
subclause (II) of paragraph (2)(B)(iii) shall not apply.
‘‘(ii) Any income of the taxpayer which is treated
as passive category income under this paragraph shall
be so treated notwithstanding any provision of para-
graph (2); except that the determination of whether
any amount is high-taxed income shall be made after
the application of this paragraph.
‘‘(G) DIVIDEND.—For purposes of this paragraph, the
term ‘dividend’ includes any amount included in gross
income in section 951(a)(1)(B). Any amount included in
gross income under section 78 to the extent attributable
to amounts included in gross income in section 951(a)(1)(A)
shall not be treated as a dividend but shall be treated
as included in gross income under section 951(a)(1)(A).
‘‘(H) LOOK-THRU APPLIES TO PASSIVE FOREIGN INVEST-
MENT COMPANY INCLUSION.—If—
‘‘(i) a passive foreign investment company is a
controlled foreign corporation, and
‘‘(ii) the taxpayer is a United States shareholder
in such controlled foreign corporation,
any amount included in gross income under section 1293
shall be treated as income in a separate category to the
extent such amount is attributable to income in such cat-
egory.’’.
(5) Paragraph (2) of section 904(d) is amended by adding
at the end the following new subparagraph:
‘‘(K) TRANSITIONAL RULES FOR 2007 CHANGES.—For pur-
poses of paragraph (1)—
‘‘(i) taxes carried from any taxable year beginning
before January 1, 2007, to any taxable year beginning
on or after such date, with respect to any item of
income, shall be treated as described in the subpara-
graph of paragraph (1) in which such income would
be described were such taxes paid or accrued in a
taxable year beginning on or after such date, and
‘‘(ii) the Secretary may by regulations provide for
the allocation of any carryback of taxes with respect
to income from a taxable year beginning on or after
January 1, 2007, to a taxable year beginning before
such date for purposes of allocating such income among
the separate categories in effect for the taxable year
to which carried.’’.
(6) Section 904(j)(3)(A)(i) is amended by striking ‘‘subsection
(d)(2)(A)’’ and inserting ‘‘subsection (d)(2)(B)’’.
(g) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by this section
shall apply to taxable years beginning after December 31, 2006.
(2) TRANSITIONAL RULE RELATING TO INCOME TAX BASE DIF-
FERENCE.—Section 904(d)(2)(H)(ii) of the Internal Revenue Code
of 1986, as added by subsection (e), shall apply to taxable
years beginning after December 31, 2004.
H. R. 4520—81
SEC. 405. ATTRIBUTION OF STOCK OWNERSHIP THROUGH PARTNER-
SHIPS TO APPLY IN DETERMINING SECTION 902 AND 960
CREDITS.
(a) IN GENERAL.—Subsection (c) of section 902 is amended
by redesignating paragraph (7) as paragraph (8) and by inserting
after paragraph (6) the following new paragraph:
‘‘(7) CONSTRUCTIVE OWNERSHIP THROUGH PARTNERSHIPS.—
Stock owned, directly or indirectly, by or for a partnership
shall be considered as being owned proportionately by its part-
ners. Stock considered to be owned by a person by reason
of the preceding sentence shall, for purposes of applying such
sentence, be treated as actually owned by such person. The
Secretary may prescribe such regulations as may be necessary
to carry out the purposes of this paragraph, including rules
to account for special partnership allocations of dividends,
credits, and other incidents of ownership of stock in determining
proportionate ownership.’’.
(b) CLARIFICATION OF COMPARABLE ATTRIBUTION UNDER SEC-
TION 901(b)(5).—Paragraph (5) of section 901(b) is amended by
striking ‘‘any individual’’ and inserting ‘‘any person’’.
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to taxes of foreign corporations for taxable years of
such corporations beginning after the date of the enactment of
this Act.
SEC. 406. CLARIFICATION OF TREATMENT OF CERTAIN TRANSFERS
OF INTANGIBLE PROPERTY.
(a) IN GENERAL.—Subparagraph (C) of section 367(d)(2) is
amended by adding at the end the following new sentence: ‘‘For
purposes of applying section 904(d), any such amount shall be
treated in the same manner as if such amount were a royalty.’’.
(b) EFFECTIVE DATE.—The amendment made by this section
shall apply to amounts treated as received pursuant to section
367(d)(2) of the Internal Revenue Code of 1986 on or after August
5, 1997.
SEC. 407. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN
ASSETS OF CONTROLLED FOREIGN CORPORATION.
(a) IN GENERAL.—Section 956(c)(2) (relating to exceptions from
property treated as United States property) is amended by striking
‘‘and’’ at the end of subparagraph (J), by striking the period at
the end of subparagraph (K) and inserting a semicolon, and by
adding at the end the following new subparagraphs:
‘‘(L) securities acquired and held by a controlled foreign
corporation in the ordinary course of its business as a
dealer in securities if—
‘‘(i) the dealer accounts for the securities as securi-
ties held primarily for sale to customers in the ordinary
course of business, and
‘‘(ii) the dealer disposes of the securities (or such
securities mature while held by the dealer) within
a period consistent with the holding of securities for
sale to customers in the ordinary course of business;
and
‘‘(M) an obligation of a United States person which—
‘‘(i) is not a domestic corporation, and
‘‘(ii) is not—
H. R. 4520—82
‘‘(I) a United States shareholder (as defined
in section 951(b)) of the controlled foreign corpora-
tion, or
‘‘(II) a partnership, estate, or trust in which
the controlled foreign corporation, or any related
person (as defined in section 954(d)(3)), is a
partner, beneficiary, or trustee immediately after
the acquisition of any obligation of such partner-
ship, estate, or trust by the controlled foreign cor-
poration.’’.
(b) CONFORMING AMENDMENT.—Section 956(c)(2) is amended
by striking ‘‘and (K)’’ in the last sentence and inserting ‘‘, (K),
and (L)’’.
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to taxable years of foreign corporations beginning after
December 31, 2004, and to taxable years of United States share-
holders with or within which such taxable years of foreign corpora-
tions end.
SEC. 408. TRANSLATION OF FOREIGN TAXES.
(a) ELECTIVE EXCEPTION FOR TAXES PAID OTHER THAN IN FUNC-
TIONAL CURRENCY.—Paragraph (1) of section 986(a) (relating to
determination of foreign taxes and foreign corporation’s earnings
and profits) is amended by redesignating subparagraph (D) as
subparagraph (E) and by inserting after subparagraph (C) the fol-
lowing new subparagraph:
‘‘(D) ELECTIVE EXCEPTION FOR TAXES PAID OTHER THAN
IN FUNCTIONAL CURRENCY.—
‘‘(i) IN GENERAL.—At the election of the taxpayer,
subparagraph (A) shall not apply to any foreign income
taxes the liability for which is denominated in any
currency other than in the taxpayer’s functional cur-
rency.
‘‘(ii) APPLICATION TO QUALIFIED BUSINESS UNITS.—
An election under this subparagraph may apply to
foreign income taxes attributable to a qualified busi-
ness unit in accordance with regulations prescribed
by the Secretary.
‘‘(iii) ELECTION.—Any such election shall apply to
the taxable year for which made and all subsequent
taxable years unless revoked with the consent of the
Secretary.’’.
(b) SPECIAL RULE FOR REGULATED INVESTMENT COMPANIES.—
(1) IN GENERAL.—Section 986(a)(1), as amended by sub-
section (a), is amended by redesignating subparagraph (E) as
subparagraph (F) and by inserting after subparagraph (D) the
following:
‘‘(E) SPECIAL RULE FOR REGULATED INVESTMENT COMPA-
NIES.—In the case of a regulated investment company
which takes into account income on an accrual basis, sub-
paragraphs (A) through (D) shall not apply and foreign
income taxes paid or accrued with respect to such income
shall be translated into dollars using the exchange rate
as of the date the income accrues.’’.
(2) 
CONFORMING
AMENDMENT.—Section 
986(a)(2) 
is
amended by inserting ‘‘or (E)’’ after ‘‘subparagraph (A)’’.
H. R. 4520—83
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to taxable years beginning after December 31, 2004.
SEC. 409. REPEAL OF WITHHOLDING TAX ON DIVIDENDS FROM CER-
TAIN FOREIGN CORPORATIONS.
(a) IN GENERAL.—Paragraph (2) of section 871(i) (relating to
tax not to apply to certain interest and dividends) is amended
by adding at the end the following new subparagraph:
‘‘(D) Dividends paid by a foreign corporation which
are treated under section 861(a)(2)(B) as income from
sources within the United States.’’.
(b) EFFECTIVE DATE.—The amendment made by this section
shall apply to payments made after December 31, 2004.
SEC. 410. EQUAL TREATMENT OF INTEREST PAID BY FOREIGN PART-
NERSHIPS AND FOREIGN CORPORATIONS.
(a) IN GENERAL.—Paragraph (1) of section 861(a) is amended
by striking ‘‘and’’ at the end of subparagraph (A), by striking the
period at the end of subparagraph (B) and inserting ‘‘, and’’, and
by adding at the end the following new subparagraph:
‘‘(C) in the case of a foreign partnership, which is
predominantly engaged in the active conduct of a trade
or business outside the United States, any interest not
paid by a trade or business engaged in by the partnership
in the United States and not allocable to income which
is effectively connected (or treated as effectively connected)
with the conduct of a trade or business in the United
States.’’.
(b) EFFECTIVE DATE.—The amendments made by this section
shall apply to taxable years beginning after December 31, 2003.
SEC. 411. TREATMENT OF CERTAIN DIVIDENDS OF REGULATED
INVESTMENT COMPANIES.
(a) TREATMENT OF CERTAIN DIVIDENDS.—
(1) NONRESIDENT ALIEN INDIVIDUALS.—Section 871 (relating
to tax on nonresident alien individuals) is amended by redesig-
nating subsection (k) as subsection (l) and by inserting after
subsection (j) the following new subsection:
‘‘(k) EXEMPTION FOR CERTAIN DIVIDENDS OF REGULATED INVEST-
MENT COMPANIES.—
‘‘(1) INTEREST-RELATED DIVIDENDS.—
‘‘(A) IN GENERAL.—Except as provided in subparagraph
(B), no tax shall be imposed under paragraph (1)(A) of
subsection (a) on any interest-related dividend received
from a regulated investment company.
‘‘(B) EXCEPTIONS.—Subparagraph (A) shall not apply—
‘‘(i) to any interest-related dividend received from
a regulated investment company by a person to the
extent such dividend is attributable to interest (other
than interest described in subparagraph (E) (i) or (iii))
received by such company on indebtedness issued by
such person or by any corporation or partnership with
respect to which such person is a 10-percent share-
holder,
‘‘(ii) to any interest-related dividend with respect
to stock of a regulated investment company unless
the person who would otherwise be required to deduct
and withhold tax from such dividend under chapter
H. R. 4520—84
3 receives a statement (which meets requirements
similar to the requirements of subsection (h)(5)) that
the beneficial owner of such stock is not a United
States person, and
‘‘(iii) to any interest-related dividend paid to any
person within a foreign country (or any interest-related
dividend payment addressed to, or for the account of,
persons within such foreign country) during any period
described in subsection (h)(6) with respect to such
country.
Clause (iii) shall not apply to any dividend with respect
to any stock which was acquired on or before the date
of the publication of the Secretary’s determination under
subsection (h)(6).
‘‘(C) INTEREST-RELATED
DIVIDEND.—For purposes of
this paragraph, the term ‘interest-related dividend’ means
any dividend (or part thereof) which is designated by the
regulated investment company as an interest-related divi-
dend in a written notice mailed to its shareholders not
later than 60 days after the close of its taxable year.
If the aggregate amount so designated with respect to
a taxable year of the company (including amounts so des-
ignated with respect to dividends paid after the close of
the taxable year described in section 855) is greater than
the qualified net interest income of the company for such
taxable year, the portion of each distribution which shall
be an interest-related dividend shall be only that portion
of the amounts so designated which such qualified net
interest income bears to the aggregate amount so des-
ignated. Such term shall not include any dividend with
respect to any taxable year of the company beginning after
December 31, 2007.
‘‘(D) QUALIFIED NET INTEREST INCOME.—For purposes
of subparagraph (C), the term ‘qualified net interest income’
means the qualified interest income of the regulated invest-
ment company reduced by the deductions properly allocable
to such income.
‘‘(E) QUALIFIED
INTEREST
INCOME.—For purposes of
subparagraph (D), the term ‘qualified interest income’
means the sum of the following amounts derived by the
regulated investment company from sources within the
United States:
‘‘(i) Any amount includible in gross income as
original issue discount (within the meaning of section
1273) on an obligation payable 183 days or less from
the date of original issue (without regard to the period
held by the company).
‘‘(ii) Any interest includible in gross income
(including amounts recognized as ordinary income in
respect of original issue discount or market discount
or acquisition discount under part V of subchapter
P and such other amounts as regulations may provide)
on an obligation which is in registered form; except
that this clause shall not apply to—
‘‘(I) any interest on an obligation issued by
a corporation or partnership if the regulated
H. R. 4520—85
investment company is a 10-percent shareholder
in such corporation or partnership, and
‘‘(II) any interest which is treated as not being
portfolio interest under the rules of subsection
(h)(4).
‘‘(iii) Any interest referred to in subsection (i)(2)(A)
(without regard to the trade or business of the regu-
lated investment company).
‘‘(iv) Any interest-related dividend includable in
gross income with respect to stock of another regulated
investment company.
‘‘(F) 10-PERCENT SHAREHOLDER.—For purposes of this
paragraph, the term ‘10-percent shareholder’ has the
meaning given such term by subsection (h)(3)(B).
‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—
‘‘(A) IN GENERAL.—Except as provided in subparagraph
(B), no tax shall be imposed under paragraph (1)(A) of
subsection (a) on any short-term capital gain dividend
received from a regulated investment company.
‘‘(B) EXCEPTION
FOR
ALIENS
TAXABLE
UNDER
SUB-
SECTION (a)(2).—Subparagraph (A) shall not apply in the
case of any nonresident alien individual subject to tax
under subsection (a)(2).
‘‘(C) SHORT-TERM
CAPITAL
GAIN
DIVIDEND.—For pur-
poses of this paragraph, the term ‘short-term capital gain
dividend’ means any dividend (or part thereof) which is
designated by the regulated investment company as a
short-term capital gain dividend in a written notice mailed
to its shareholders not later than 60 days after the close
of its taxable year. If the aggregate amount so designated
with respect to a taxable year of the company (including
amounts so designated with respect to dividends paid after
the close of the taxable year described in section 855)
is greater than the qualified short-term gain of the company
for such taxable year, the portion of each distribution which
shall be a short-term capital gain dividend shall be only
that portion of the amounts so designated which such quali-
fied short-term gain bears to the aggregate amount so
designated. Such term shall not include any dividend with
respect to any taxable year of the company beginning after
December 31, 2007.
‘‘(D) QUALIFIED
SHORT-TERM
GAIN.—For purposes of
subparagraph (C), the term ‘qualified short-term gain’
means the excess of the net short-term capital gain of
the regulated investment company for the taxable year
over the net long-term capital loss (if any) of such company
for such taxable year. For purposes of this subparagraph—
‘‘(i) the net short-term capital gain of the regulated
investment company shall be computed by treating
any short-term capital gain dividend includible in gross
income with respect to stock of another regulated
investment company as a short-term capital gain, and
‘‘(ii) the excess of the net short-term capital gain
for a taxable year over the net long-term capital loss
for a taxable year (to which an election under section
4982(e)(4) does not apply) shall be determined without
regard to any net capital loss or net short-term capital
H. R. 4520—86
loss attributable to transactions after October 31 of
such year, and any such net capital loss or net short-
term capital loss shall be treated as arising on the
1st day of the next taxable year.
To the extent provided in regulations, clause (ii) shall apply
also for purposes of computing the taxable income of the
regulated investment company.’’.
(2) FOREIGN CORPORATIONS.—Section 881 (relating to tax
on income of foreign corporations not connected with United
States business) is amended by redesignating subsection (e)
as subsection (f) and by inserting after subsection (d) the fol-
lowing new subsection:
‘‘(e) TAX NOT TO APPLY TO CERTAIN DIVIDENDS OF REGULATED
INVESTMENT COMPANIES.—
‘‘(1) INTEREST-RELATED DIVIDENDS.—
‘‘(A) IN GENERAL.—Except as provided in subparagraph
(B), no tax shall be imposed under paragraph (1) of sub-
section (a) on any interest-related dividend (as defined
in section 871(k)(1)) received from a regulated investment
company.
‘‘(B) EXCEPTION.—Subparagraph (A) shall not apply—
‘‘(i) to any dividend referred to in section
871(k)(1)(B), and
‘‘(ii) to any interest-related dividend received by
a controlled foreign corporation (within the meaning
of section 957(a)) to the extent such dividend is attrib-
utable to interest received by the regulated investment
company from a person who is a related person (within
the meaning of section 864(d)(4)) with respect to such
controlled foreign corporation.
‘‘(C) TREATMENT
OF
DIVIDENDS
RECEIVED
BY
CON-
TROLLED FOREIGN CORPORATIONS.—The rules of subsection
(c)(5)(A) shall apply to any (within the meaning of section
957(a)) to the extent such dividend is attributable to
interest received by the regulated investment company
which is described in clause (ii) of section 871(k)(1)(E)
(and not described in clause (i) or (iii) of such section).
‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—No tax shall
be imposed under paragraph (1) of subsection (a) on any short-
term capital gain dividend (as defined in section 871(k)(2))
received from a regulated investment company.’’.
(3) WITHHOLDING TAXES.—
(A) Section 1441(c) (relating to exceptions) is amended
by adding at the end the following new paragraph:
‘‘(12) CERTAIN
DIVIDENDS
RECEIVED
FROM
REGULATED
INVESTMENT COMPANIES.—
‘‘(A) IN
GENERAL.—No tax shall be required to be
deducted and withheld under subsection (a) from any
amount 
exempt 
from 
the 
tax 
imposed 
by 
section
871(a)(1)(A) by reason of section 871(k).
‘‘(B) SPECIAL RULE.—For purposes of subparagraph (A),
clause (i) of section 871(k)(1)(B) shall not apply to any
dividend unless the regulated investment company knows
that such dividend is a dividend referred to in such clause.
A similar rule shall apply with respect to the exception
contained in section 871(k)(2)(B).’’.
H. R. 4520—87
(B) Section 1442(a) (relating to withholding of tax on
foreign corporations) is amended—
(i) by striking ‘‘and the reference in section
1441(c)(10)’’ and inserting ‘‘the reference in section
1441(c)(10)’’, and
(ii) by inserting before the period at the end the
following: ‘‘, and the references in section 1441(c)(12)
to sections 871(a) and 871(k) shall be treated as refer-
ring to sections 881(a) and 881(e) (except that for pur-
poses 
of 
applying 
subparagraph 
(A) 
of 
section
1441(c)(12), as so modified, clause (ii) of section
881(e)(1)(B) shall not apply to any dividend unless
the regulated investment company knows that such
dividend is a dividend referred to in such clause)’’.
(b) ESTATE TAX TREATMENT OF INTEREST IN CERTAIN REGU-
LATED INVESTMENT COMPANIES.—Section 2105 (relating to property
without the United States for estate tax purposes) is amended
by adding at the end the following new subsection:
‘‘(d) STOCK IN A RIC.—
‘‘(1) IN GENERAL.—For purposes of this subchapter, stock
in a regulated investment company (as defined in section 851)
owned by a nonresident not a citizen of the United States
shall not be deemed property within the United States in
the proportion that, at the end of the quarter of such investment
company’s taxable year immediately preceding a decedent’s date
of death (or at such other time as the Secretary may designate
in regulations), the assets of the investment company that
were qualifying assets with respect to the decedent bore to
the total assets of the investment company.
‘‘(2) QUALIFYING ASSETS.—For purposes of this subsection,
qualifying assets with respect to a decedent are assets that,
if owned directly by the decedent, would have been—
‘‘(A) amounts, deposits, or debt obligations described
in subsection (b) of this section,
‘‘(B) debt obligations described in the last sentence
of section 2104(c), or
‘‘(C) other property not within the United States.
‘‘(3) TERMINATION.—This subsection shall not apply to
estates of decedents dying after December 31, 2007.’’.
(c) TREATMENT OF REGULATED INVESTMENT COMPANIES UNDER
SECTION 897.—
(1) Paragraph (1) of section 897(h) is amended by striking
‘‘REIT’’ each place it appears and inserting ‘‘qualified invest-
ment entity’’.
(2) Paragraphs (2) and (3) of section 897(h) are amended
to read as follows:
‘‘(2) SALE OF STOCK IN DOMESTICALLY CONTROLLED ENTITY
NOT TAXED.—The term ‘United States real property interest’
does not include any interest in a domestically controlled quali-
fied investment entity.
‘‘(3) DISTRIBUTIONS BY DOMESTICALLY CONTROLLED QUALI-
FIED INVESTMENT ENTITIES.—In the case of a domestically con-
trolled qualified investment entity, rules similar to the rules
of subsection (d) shall apply to the foreign ownership percentage
of any gain.’’.
(3) Subparagraphs (A) and (B) of section 897(h)(4) are
amended to read as follows:
H. R. 4520—88
‘‘(A) QUALIFIED INVESTMENT ENTITY.—
‘‘(i) IN GENERAL.—The term ‘qualified investment
entity’ means—
‘‘(I) any real estate investment trust, and
‘‘(II) any regulated investment company.
‘‘(ii) TERMINATION.—Clause (i)(II) shall not apply
after December 31, 2007.
‘‘(B) DOMESTICALLY CONTROLLED.—The term ‘domesti-
cally controlled qualified investment entity’ means any
qualified investment entity in which at all times during
the testing period less than 50 percent in value of the
stock was held directly or indirectly by foreign persons.’’.
(4) Subparagraphs (C) and (D) of section 897(h)(4) are
each amended by striking ‘‘REIT’’ and inserting ‘‘qualified
investment entity’’.
(5) The subsection heading for subsection (h) of section
897 is amended by striking ‘‘REITS’’ and inserting ‘‘CERTAIN
INVESTMENT ENTITIES’’.
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as otherwise provided in this sub-
section, the amendments made by this section shall apply to
dividends with respect to taxable years of regulated investment
companies beginning after December 31, 2004.
(2) ESTATE
TAX
TREATMENT.—The amendment made by
subsection (b) shall apply to estates of decedents dying after
December 31, 2004.
(3) CERTAIN OTHER PROVISIONS.—The amendments made
by subsection (c) (other than paragraph (1) thereof) shall take
effect after December 31, 2004.
SEC. 412. LOOK-THRU TREATMENT FOR SALES OF PARTNERSHIP
INTERESTS.
(a) IN GENERAL.—Section 954(c) (defining foreign personal
holding company income) is amended by adding after paragraph
(3) the following new paragraph:
‘‘(4) LOOK-THRU RULE FOR CERTAIN PARTNERSHIP SALES.—
‘‘(A) IN GENERAL.—In the case of any sale by a con-
trolled foreign corporation of an interest in a partnership
with respect to which such corporation is a 25-percent
owner, such corporation shall be treated for purposes of
this subsection as selling the proportionate share of the
assets of the partnership attributable to such interest. The
Secretary shall prescribe such regulations as may be appro-
priate to prevent abuse of the purposes of this paragraph,
including regulations providing for coordination of this
paragraph with the provisions of subchapter K.
‘‘(B) 25-PERCENT OWNER.—For purposes of this para-
graph, the term ‘25-percent owner’ means a controlled for-
eign corporation which owns directly 25 percent or more
of the capital or profits interest in a partnership. For
purposes of the preceding sentence, if a controlled foreign
corporation is a shareholder or partner of a corporation
or partnership, the controlled foreign corporation shall be
treated as owning directly its proportionate share of any
such capital or profits interest held directly or indirectly
by such corporation or partnership.’’.
H. R. 4520—89
(b) EFFECTIVE DATE.—The amendment made by this section
shall apply to taxable years of foreign corporations beginning after
December 31, 2004, and to taxable years of United States share-
holders with or within which such taxable years of foreign corpora-
tions end.
SEC. 413. REPEAL OF FOREIGN PERSONAL HOLDING COMPANY RULES
AND FOREIGN INVESTMENT COMPANY RULES.
(a) GENERAL
RULE.—The following provisions are hereby
repealed:
(1) Part III of subchapter G of chapter 1 (relating to foreign
personal holding companies).
(2) Section 1246 (relating to gain on foreign investment
company stock).
(3) Section 1247 (relating to election by foreign investment
companies to distribute income currently).
(b) EXEMPTION
OF FOREIGN CORPORATIONS FROM PERSONAL
HOLDING COMPANY RULES.—
(1) IN GENERAL.—Subsection (c) of section 542 (relating
to exceptions) is amended—
(A) by striking paragraph (5) and inserting the fol-
lowing:
‘‘(5) a foreign corporation,’’,
(B) by striking paragraphs (7) and (10) and by redesig-
nating paragraphs (8) and (9) as paragraphs (7) and (8),
respectively,
(C) by inserting ‘‘and’’ at the end of paragraph (7)
(as so redesignated), and
(D) by striking ‘‘; and’’ at the end of paragraph (8)
(as so redesignated) and inserting a period.
(2) TREATMENT OF INCOME FROM PERSONAL SERVICE CON-
TRACTS.—Paragraph (1) of section 954(c) is amended by adding
at the end the following new subparagraph:
‘‘(I) PERSONAL SERVICE CONTRACTS.—
‘‘(i) Amounts received under a contract under
which the corporation is to furnish personal services
if—
‘‘(I) some person other than the corporation
has the right to designate (by name or by descrip-
tion) the individual who is to perform the services,
or
‘‘(II) the individual who is to perform the serv-
ices is designated (by name or by description) in
the contract, and
‘‘(ii) amounts received from the sale or other dis-
position of such a 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 outstanding stock of the corporation is
owned, directly or indirectly, by or for the individual who
has performed, is to perform, or may be designated (by
name or by description) as the one to perform, such serv-
ices.’’.
(c) CONFORMING AMENDMENTS.—
(1) Section 1(h) is amended—
H. R. 4520—90
(A) in paragraph (10), by inserting ‘‘and’’ at the end
of subparagraph (F), by striking subparagraph (G), and
by redesignating subparagraph (H) as subparagraph (G),
and
(B) by striking ‘‘a foreign personal holding company
(as defined in section 552), a foreign investment company
(as defined in section 1246(b)), or’’ in paragraph (11)(C)(iii).
(2) Paragraph (2) of section 171(c) is amended—
(A) by striking ‘‘, or by a foreign personal holding
company, as defined in section 552’’, and
(B) by striking ‘‘, or foreign personal holding company’’.
(3) Paragraph (2) of section 245(a) is amended by striking
‘‘foreign personal holding company or’’.
(4) Section 312 is amended by striking subsection (j).
(5) Subsection (m) of section 312 is amended by striking
‘‘, a foreign investment company (within the meaning of section
1246(b)), or a foreign personal holding company (within the
meaning of section 552)’’.
(6) Subsection (e) of section 443 is amended by striking
paragraph (3) and by redesignating paragraphs (4) and (5)
as paragraphs (3) and (4), respectively.
(7) Subparagraph (B) of section 465(c)(7) is amended by
adding ‘‘or’’ at the end of clause (i), by striking clause (ii),
and by redesignating clause (iii) as clause (ii).
(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 subsection (c),
and
(C) by striking ‘‘subsection (a), (b), or (c)’’ in subsection
(c) (as so redesignated) and inserting ‘‘subsection (a) or
(b)’’.
(11) Subsection (d) of section 751 is amended by adding
‘‘and’’ at the end of paragraph (2), by striking paragraph (3),
by redesignating paragraph (4) as paragraph (3), and by
striking ‘‘paragraph (1), (2), or (3)’’ in paragraph (3) (as so
redesignated) and inserting ‘‘paragraph (1) or (2)’’.
(12) Paragraph (2) of section 864(d) is amended by striking
subparagraph (A) and by redesignating subparagraphs (B) and
(C) as subparagraphs (A) and (B), respectively.
(13)(A) Subparagraph (A) of section 898(b)(1) is amended
to read as follows:
‘‘(A) which is treated as a controlled foreign corporation
for any purpose under subpart F of part III of this sub-
chapter, and’’.
(B) Subparagraph (B) of section 898(b)(2) is amended by
striking 
‘‘and 
sections 
551(f) 
and 
554, 
whichever 
are
applicable,’’.
(C) Paragraph (3) of section 898(b) is amended to read
as follows:
H. R. 4520—91
‘‘(3) UNITED
STATES
SHAREHOLDER.—The term ‘United
States shareholder’ has the meaning given to such term by
section 951(b), except that, in the case of a foreign corporation
having related person insurance income (as defined in section
953(c)(2)), the Secretary may treat any person as a United
States shareholder for purposes of this section if such person
is treated as a United States shareholder under section
953(c)(1).’’.
(D) Subsection (c) of section 898 is amended to read as
follows:
‘‘(c) DETERMINATION OF REQUIRED YEAR.—
‘‘(1) IN GENERAL.—The required year is—
‘‘(A) the majority U.S. shareholder year, or
‘‘(B) if there is no majority U.S. shareholder year,
the taxable year prescribed under regulations.
‘‘(2) 1-MONTH DEFERRAL ALLOWED.—A specified foreign cor-
poration may elect, in lieu of the taxable year under paragraph
(1)(A), a taxable year beginning 1 month earlier than the
majority U.S. shareholder year.
‘‘(3) MAJORITY U.S. SHAREHOLDER YEAR.—
‘‘(A) IN GENERAL.—For purposes of this subsection, the
term ‘majority U.S. shareholder year’ means the taxable
year (if any) which, on each testing day, constituted the
taxable year of—
‘‘(i) each United States shareholder described in
subsection (b)(2)(A), and
‘‘(ii) each United States shareholder not described
in clause (i) whose stock was treated as owned under
subsection (b)(2)(B) by any shareholder described in
such clause.
‘‘(B) TESTING DAY.—The testing days shall be—
‘‘(i) the first day of the corporation’s taxable year
(determined without regard to this section), or
‘‘(ii) the days during such representative period
as the Secretary may prescribe.’’.
(14) Clause (ii) of section 904(d)(2)(A) is amended to read
as follows:
‘‘(ii) CERTAIN AMOUNTS INCLUDED.—Except as pro-
vided in clause (iii), the term ‘passive income’ includes,
except as provided in subparagraph (E)(iii) or para-
graph (3)(I), any amount includible in gross income
under section 1293 (relating to certain passive foreign
investment companies).’’.
(15)(A) Subparagraph (A) of section 904(h)(1), as redesig-
nated by this Act, is amended by adding ‘‘or’’ at the end of
clause (i), by striking clause (ii), and by redesignating clause
(iii) as clause (ii).
(B) The paragraph heading of paragraph (2) of section
904(h), as so redesignated, is amended by striking ‘‘FOREIGN
PERSONAL HOLDING OR’’.
(16) Section 951 is amended by striking subsections (c)
and (d) and by redesignating subsections (e) and (f) as sub-
sections (c) and (d), respectively.
(17) Paragraph (3) of section 989(b) is amended by striking
‘‘, 551(a),’’.
(18) Paragraph (5) of section 1014(b) is amended by
inserting ‘‘and before January 1, 2005,’’ after ‘‘August 26, 1937,’’.
H. R. 4520—92
(19) Subsection (a) of section 1016 is amended by striking
paragraph (13).
(20)(A) Paragraph (3) of section 1212(a) is amended to
read as follows:
‘‘(3) SPECIAL RULES ON CARRYBACKS.—A net capital loss
of a corporation shall not be carried back under paragraph
(1)(A) to a taxable year—
‘‘(A) for which it is a regulated investment company
(as defined in section 851), or
‘‘(B) for which it is a real estate investment trust
(as defined in section 856).’’.
(B) The amendment made by subparagraph (A) shall apply
to taxable years beginning after December 31, 2004.
(21) Section 1223 is amended by striking paragraph (10)
and by redesignating the following paragraphs accordingly.
(22) Subsection (d) of section 1248 is amended by striking
paragraph (5) and by redesignating paragraphs (6) and (7)
as paragraphs (5) and (6), respectively.
(23) Paragraph (2) of section 1260(c) is amended by striking
subparagraphs (H) and (I) and by redesignating subparagraph
(J) as subparagraph (H).
(24)(A) Subparagraph (F) of section 1291(b)(3) is amended
by striking ‘‘551(d), 959(a),’’ and inserting ‘‘959(a)’’.
(B) Subsection (e) of section 1291 is amended by inserting
‘‘(as in effect on the day before the date of the enactment
of the American Jobs Creation Act of 2004)’’ after ‘‘section
1246’’.
(25) Paragraph (2) of section 1294(a) is amended to read
as follows:
‘‘(2) ELECTION NOT PERMITTED WHERE AMOUNTS OTHERWISE
INCLUDIBLE UNDER SECTION 951.—The taxpayer may not make
an election under paragraph (1) with respect to the undistrib-
uted PFIC earnings tax liability attributable to a qualified
electing fund for the taxable year if any amount is includible
in the gross income of the taxpayer under section 951 with
respect to such fund for such taxable year.’’.
(26) Section 6035 is hereby repealed.
(27) Subparagraph (D) of section 6103(e)(1) is amended
by striking clause (iv) and redesignating clauses (v) and (vi)
as clauses (iv) and (v), respectively.
(28) 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 pro-
ceeding in court for the collection of such tax may be
done without assessing, at any time within 6 years after
the return was filed.’’.
(29) Subsection (a) of section 6679 is amended—
(A) by striking ‘‘6035, 6046, and 6046A’’ in paragraph
(1) and inserting ‘‘6046 and 6046A’’, and
(B) by striking paragraph (3).
(30) Sections 170(f)(10)(A), 508(d), 4947, and 4948(c)(4) are
each amended by striking ‘‘556(b)(2),’’ each place it appears.
(31) The table of parts for subchapter G of chapter 1
is amended by striking the item relating to part III.
H. R. 4520—93
(32) The table of sections for part IV of subchapter P
of chapter 1 is amended by striking the items relating to
sections 1246 and 1247.
(33) The table of sections for subpart A of part III of
subchapter A of chapter 61 is amended by striking the item
relating to section 6035.
(d) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in paragraph (2), the
amendments made by this section shall apply to taxable years
of foreign corporations beginning after December 31, 2004, and
to taxable years of United States shareholders with or within
which such taxable years of foreign corporations end.
(2) SUBSECTION
(c)(27).—The amendments made by sub-
section (c)(27) shall apply to disclosures of return or return
information with respect to taxable years beginning after
December 31, 2004.
SEC. 414. DETERMINATION OF FOREIGN PERSONAL HOLDING COM-
PANY INCOME WITH RESPECT TO TRANSACTIONS IN
COMMODITIES.
(a) IN GENERAL.—Clauses (i) and (ii) of section 954(c)(1)(C)
(relating to commodity transactions) are amended to read as follows:
‘‘(i) arise out of commodity hedging transactions
(as defined in paragraph (4)(A)),
‘‘(ii) are active business gains or losses from the
sale of commodities, but only if substantially all of
the controlled foreign corporation’s commodities are
property described in paragraph (1), (2), or (8) of section
1221(a), or’’.
(b) DEFINITION AND SPECIAL RULES.—Subsection (c) of section
954, as amended by this Act, is amended by adding after paragraph
(4) the following new paragraph:
‘‘(5) DEFINITION
AND
SPECIAL
RULES
RELATING
TO
COM-
MODITY TRANSACTIONS.—
‘‘(A) COMMODITY
HEDGING
TRANSACTIONS.—For pur-
poses of paragraph (1)(C)(i), the term ‘commodity hedging
transaction’ means any transaction with respect to a com-
modity if such transaction—
‘‘(i) is a hedging transaction as defined in section
1221(b)(2), determined—
‘‘(I) without regard to subparagraph (A)(ii)
thereof,
‘‘(II) by applying subparagraph (A)(i) thereof
by substituting ‘ordinary property or property
described in section 1231(b)’ for ‘ordinary property’,
and
‘‘(III) by substituting ‘controlled foreign cor-
poration’ for ‘taxpayer’ each place it appears, and
‘‘(ii) is clearly identified as such in accordance with
section 1221(a)(7).
‘‘(B) TREATMENT OF DEALER ACTIVITIES UNDER PARA-
GRAPH (1)(C).—Commodities with respect to which gains
and losses are not taken into account under paragraph
(2)(C) in computing a controlled foreign corporation’s for-
eign personal holding company income shall not be taken
into account in applying the substantially all test under
paragraph (1)(C)(ii) to such corporation.
H. R. 4520—94
‘‘(C) REGULATIONS.—The Secretary shall prescribe such
regulations as are appropriate to carry out the purposes
of paragraph (1)(C) in the case of transactions involving
related parties.’’.
(c) MODIFICATION OF EXCEPTION FOR DEALERS.—Clause (i) of
section 954(c)(2)(C) is amended by inserting ‘‘and transactions
involving physical settlement’’ after ‘‘(including hedging trans-
actions’’.
(d) EFFECTIVE DATE.—The amendments made by this section
shall apply to transactions entered into after December 31, 2004.
SEC. 415. MODIFICATIONS TO TREATMENT OF AIRCRAFT LEASING AND
SHIPPING INCOME.
(a) ELIMINATION
OF
FOREIGN
BASE
COMPANY
SHIPPING
INCOME.—Section 954 (relating to foreign base company income)
is amended—
(1) by striking paragraph (4) of subsection (a) (relating
to foreign base company shipping income), and
(2) by striking subsection (f) (relating to foreign base com-
pany shipping income).
(b) SAFE HARBOR FOR CERTAIN LEASING ACTIVITIES.—Subpara-
graph (A) of section 954(c)(2) is amended by adding at the end
the following new sentence: ‘‘For purposes of the preceding sentence,
rents derived from leasing an aircraft or vessel in foreign commerce
shall not fail to be treated as derived in the active conduct of
a trade or business if, as determined under regulations prescribed
by the Secretary, the active leasing expenses are not less than
10 percent of the profit on the lease.’’.
(c) CONFORMING AMENDMENTS.—
(1) Section 952(c)(1)(B)(iii) is amended by striking subclause
(I) and redesignating subclauses (II) through (VI) as subclauses
(I) through (V), respectively.
(2) Subsection (b) of section 954 is amended—
(A) by striking ‘‘the foreign base company shipping
income,’’ in paragraph (5),
(B) by striking paragraphs (6) and (7), and
(C) by redesignating paragraph (8) as paragraph (6).
(d) EFFECTIVE DATE.—The amendments made by this section
shall apply to taxable years of foreign corporations beginning after
December 31, 2004, and to taxable years of United States share-
holders with or within which such taxable years of foreign corpora-
tions end.
SEC. 416. MODIFICATION OF EXCEPTIONS UNDER SUBPART F FOR
ACTIVE FINANCING.
(a) IN GENERAL.—Section 954(h)(3) is amended by adding at
the end the following:
‘‘(E) DIRECT CONDUCT OF ACTIVITIES.—For purposes of
subparagraph (A)(ii)(II), an activity shall be treated as
conducted directly by an eligible controlled foreign corpora-
tion or qualified business unit in its home country if the
activity is performed by employees of a related person
and—
‘‘(i) the related person is an eligible controlled for-
eign corporation the home country of which is the
same as the home country of the corporation or unit
to which subparagraph (A)(ii)(II) is being applied,
H. R. 4520—95
‘‘(ii) the activity is performed in the home country
of the related person, and
‘‘(iii) the related person is compensated on an
arm’s-length basis for the performance of the activity
by its employees and such compensation is treated
as earned by such person in its home country for
purposes of the home country’s tax laws.’’.
(b) EFFECTIVE DATE.—The amendment made by this section
shall apply to taxable years of such foreign corporations beginning
after December 31, 2004, and to taxable years of United States
shareholders with or within which such taxable years of such foreign
corporations end.
SEC. 417. 10-YEAR FOREIGN TAX CREDIT CARRYOVER; 1-YEAR FOREIGN
TAX CREDIT CARRYBACK.
(a) GENERAL RULE.—Section 904(c) (relating to carryback and
carryover of excess tax paid) is amended—
(1) by striking ‘‘in the second preceding taxable year,’’,
and
(2) by striking ‘‘, and in the first, second, third, fourth,
or fifth’’ and inserting ‘‘and in any of the first 10’’.
(b) EXCESS EXTRACTION TAXES.—Paragraph (1) of section 907(f)
is amended—
(1) by striking ‘‘in the second preceding taxable year,’’,
(2) by striking ‘‘, and in the first, second, third, fourth,
or fifth’’ and inserting ‘‘and in any of the first 10’’, and
(3) by striking the last sentence.
(c) EFFECTIVE DATE.—
(1) CARRYBACK.—The amendments made by subsections
(a)(1) and (b)(1) shall apply to excess foreign taxes arising
in taxable years beginning after the date of the enactment
of this Act.
(2) CARRYOVER.—The amendments made by subsections
(a)(2) and (b)(2) shall apply to excess foreign taxes which (with-
out regard to the amendments made by this section) may be
carried to any taxable year ending after the date of the enact-
ment of this Act.
SEC. 418. MODIFICATION OF THE TREATMENT OF CERTAIN REIT DIS-
TRIBUTIONS ATTRIBUTABLE TO GAIN FROM SALES OR
EXCHANGES 
OF 
UNITED 
STATES 
REAL 
PROPERTY
INTERESTS.
(a) IN GENERAL.—Paragraph (1) of section 897(h) (relating to
look-through of distributions) is amended by adding at the end
the following new sentence: ‘‘Notwithstanding the preceding sen-
tence, any distribution by a REIT with respect to any class of
stock which is regularly traded on an established securities market
located in the United States shall not be treated as gain recognized
from the sale or exchange of a United States real property interest
if the shareholder did not own more than 5 percent of such class
of stock at any time during the taxable year.’’.
(b) CONFORMING AMENDMENT.—Paragraph (3) of section 857(b)
(relating to capital gains) is amended by adding at the end the
following new subparagraph:
‘‘(F) CERTAIN DISTRIBUTIONS.—In the case of a share-
holder of a real estate investment trust to whom section
897 does not apply by reason of the second sentence of
section 897(h)(1), the amount which would be included
H. R. 4520—96
in computing long-term capital gains for such shareholder
under subparagraph (B) or (D) (without regard to this
subparagraph)—
‘‘(i) shall not be included in computing such share-
holder’s long-term capital gains, and
‘‘(ii) shall be included in such shareholder’s gross
income as a dividend from the real estate investment
trust.’’.
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to taxable years beginning after the date of the enact-
ment of this Act.
SEC. 419. EXCLUSION OF INCOME DERIVED FROM CERTAIN WAGERS
ON HORSE RACES AND DOG RACES FROM GROSS INCOME
OF NONRESIDENT ALIEN INDIVIDUALS.
(a) IN GENERAL.—Subsection (b) of section 872 (relating to
exclusions) is amended by redesignating paragraphs (5), (6), and
(7) as paragraphs (6), (7), and (8), respectively, and inserting after
paragraph (4) the following new paragraph:
‘‘(5) INCOME
DERIVED
FROM
WAGERING
TRANSACTIONS
IN
CERTAIN PARIMUTUEL POOLS.—Gross income derived by a non-
resident alien individual from a legal wagering transaction
initiated outside the United States in a parimutuel pool with
respect to a live horse race or dog race in the United States.’’.
(b) CONFORMING AMENDMENT.—Section 883(a)(4) is amended
by striking ‘‘(5), (6), and (7)’’ and inserting ‘‘(6), (7), and (8)’’.
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to wagers made after the date of the enactment of
this Act.
SEC. 420. LIMITATION OF WITHHOLDING TAX FOR PUERTO RICO COR-
PORATIONS.
(a) IN GENERAL.—Subsection (b) of section 881 is amended
by redesignating paragraph (2) as paragraph (3) and by inserting
after paragraph (1) the following new paragraph:
‘‘(2) COMMONWEALTH OF PUERTO RICO.—
‘‘(A) IN
GENERAL.—If dividends are received during
a taxable year by a corporation—
‘‘(i) created or organized in, or under the law of,
the Commonwealth of Puerto Rico, and
‘‘(ii) with respect to which the requirements of
subparagraphs (A), (B), and (C) of paragraph (1) are
met for the taxable year,
subsection (a) shall be applied for such taxable year by
substituting ‘10 percent’ for ‘30 percent’.
‘‘(B) APPLICABILITY.—If, on or after the date of the
enactment of this paragraph, an increase in the rate of
the Commonwealth of Puerto Rico’s withholding tax which
is generally applicable to dividends paid to United States
corporations not engaged in a trade or business in the
Commonwealth to a rate greater than 10 percent takes
effect, this paragraph shall not apply to dividends received
on or after the effective date of the increase.’’.
(b) WITHHOLDING.—Subsection (c) of section 1442 (relating to
withholding of tax on foreign corporations) is amended—
(1) by striking ‘‘For purposes’’ and inserting the following:
‘‘(1) GUAM, AMERICAN
SAMOA, THE
NORTHERN
MARIANA
ISLANDS, AND THE VIRGIN ISLANDS.—For purposes’’, and