I
105TH CONGRESS
1ST SESSION
H. R. 2513
To amend the Internal Revenue Code of 1986 to restore and modify the
provision of the Taxpayer Relief Act of 1997 relating to exempting
active financing income from foreign personal holding company income
and to provide for the nonrecognition of gain on the sale of stock
in agricultural processors to certain farmers’ cooperatives.
IN THE HOUSE OF REPRESENTATIVES
SEPTEMBER 23, 1997
Mr. ARCHER (for himself, Mr. HULSHOF, Mr. RANGEL, Mr. THOMAS, Mr.
HOUGHTON, Mr. NUSSLE, Ms. DUNN, and Mr. LEVIN) introduced the fol-
lowing bill; which was referred to the Committee on Ways and Means,
and in addition to the Committee on the Budget, for a period to be subse-
quently determined by the Speaker, in each case for consideration of such
provisions as fall within the jurisdiction of the committee concerned
A BILL
To amend the Internal Revenue Code of 1986 to restore
and modify the provision of the Taxpayer Relief Act
of 1997 relating to exempting active financing income
from foreign personal holding company income and to
provide for the nonrecognition of gain on the sale of
stock in agricultural processors to certain farmers’ co-
operatives.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. EXEMPTION FOR ACTIVE FINANCING INCOME.
(a) EXEMPTION FROM FOREIGN PERSONAL HOLD-
ING COMPANY INCOME.—Section 954 of the Internal Rev-
enue Code of 1986 (as amended by subsection (d)) is
amended by adding at the end the following new sub-
section:
‘‘(h) SPECIAL RULE FOR INCOME DERIVED IN THE
ACTIVE
CONDUCT
OF
INSURANCE
BUSINESSES
AND
BANKING, FINANCING, OR SIMILAR BUSINESSES.—
‘‘(1) IN GENERAL.—For purposes of subsection
(c)(1), foreign personal holding company income
shall not include income which is—
‘‘(A) derived in the active conduct by a
controlled foreign corporation of a banking, fi-
nancing, or similar business, but only if—
‘‘(i) the corporation is predominantly
engaged in the active conduct of such busi-
ness, and
‘‘(ii) such income is derived from
transactions with customers located within
the country under the laws of which the
corporation is created or organized,
‘‘(B) received from a person other than a
related person (within the meaning of sub-
section (d)(3)) and derived from the invest-
ments made by a qualifying insurance company
of its reserves or of 80 percent of its unearned
premiums (as both are determined in the man-
ner prescribed under paragraph (4)), or
‘‘(C) received from a person other than a
related person (within the meaning of sub-
section (d)(3)) and derived from investments
made by a qualifying insurance company of an
amount of its assets equal to—
‘‘(i) in the case of contracts regulated
in the country in which sold as property,
casualty, or health insurance contracts,
one-third of its premiums earned on such
insurance contracts during the taxable year
(as defined in section 832(b)(4)), and
‘‘(ii) in the case of contracts regulated
in the country in which sold as life insur-
ance or annuity contracts, 10 percent of
the reserves described in subparagraph (B)
for such contracts.
‘‘(2) PREDOMINANTLY
ENGAGED.—For pur-
poses of paragraph (1)(A), a controlled foreign cor-
poration shall be deemed predominantly engaged in
the active conduct of a banking, financing, or similar
business only if—
‘‘(A) more than 70 percent of its gross in-
come is derived from such business from trans-
actions with customers which are located within
the country under the laws of which the cor-
poration is created or organized, or
‘‘(B) the corporation is—
‘‘(i) engaged in the active conduct of
a banking business and is an institution li-
censed to do business as a bank in the
United States (or is any other corporation
not so licensed which is specified by the
Secretary in regulations), or
‘‘(ii) engaged in the active conduct of
a securities business and is registered as a
securities broker or dealer under section
15(a) of the Securities Exchange Act of
1934 or is registered as a Government se-
curities broker or dealer under section
15C(a) of such Act (or is any other cor-
poration not so registered which is speci-
fied by the Secretary in regulations).
‘‘(3) PRINCIPLES
FOR
DETERMINING
INSUR-
ANCE
INCOME.—Except as provided by the Sec-
retary, for purposes of paragraphs (1) (B) and
(C)—
‘‘(A) in the case of any contract which is
a separate account-type contract (including any
variable contract not meeting the requirements
of section 817), income credited under such
contract shall be allocable only to such contract,
and
‘‘(B) income not allocable under subpara-
graph (A) shall be allocated ratably among con-
tracts not described in subparagraph (A).
‘‘(4) METHODS FOR DETERMINING UNEARNED
PREMIUMS AND RESERVES.—For purposes of para-
graph (1)(B)—
‘‘(A) PROPERTY
AND
CASUALTY
CON-
TRACTS.—The unearned premiums and reserves
of a qualifying insurance company with respect
to property, casualty, or health insurance con-
tracts shall be determined using the same meth-
ods and interest rates which would be used if
such company were subject to tax under sub-
chapter L.
‘‘(B) LIFE INSURANCE AND ANNUITY CON-
TRACTS.—The amount of the reserve of a quali-
fying insurance company for any life insurance
or annuity contract shall be equal to the greater
of—
‘‘(i) the net surrender value of such
contract 
(as 
defined 
in 
section
807(e)(1)(A)), or
‘‘(ii) the reserve determined under
paragraph (5).
‘‘(C) LIMITATION
ON
RESERVES.—In no
event shall the reserve determined under this
paragraph for any contract as of any time ex-
ceed the amount which would be taken into ac-
count with respect to such contract as of such
time in determining foreign statement reserves
(less any catastrophe, deficiency, or similar re-
serves).
‘‘(5) AMOUNT OF RESERVE.—The amount of
the reserve determined under this paragraph with
respect to any contract shall be determined in the
same manner as it would be determined if the quali-
fying insurance company were subject to tax under
subchapter L, except that in applying such sub-
chapter—
‘‘(A) the interest rate determined for the
foreign country in which such company is cre-
ated or organized and which, except as provided
by the Secretary, is calculated in the same man-
ner as the Federal mid-term rate under section
1274(d) shall be substituted for the applicable
Federal interest rate,
‘‘(B) the highest assumed interest rate
permitted to be used in determining foreign
statement reserves shall be substituted for the
prevailing State assumed interest rate, and
‘‘(C) tables for mortality and morbidity
which reasonably reflect the current mortality
and morbidity risks in the foreign country shall
be substituted for the mortality and morbidity
tables otherwise used for such subchapter.
‘‘(6) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) QUALIFYING INSURANCE COMPANY.—
The term ‘qualifying insurance company’ means
any entity which—
‘‘(i) is subject to regulation as an in-
surance company by the country under the
laws of which the entity is created or orga-
nized,
‘‘(ii) derives at least 50 percent of its
net written premiums from the insurance
or reinsurance of risks located within such
country, and
‘‘(iii) is engaged in the active conduct
of an insurance business and would be sub-
ject to tax under subchapter L if it were
a domestic corporation.
‘‘(B) LIFE INSURANCE OR ANNUITY CON-
TRACT.—For purposes of this section and sec-
tion 953, the determination of whether a con-
tract issued by a controlled foreign corporation
is a life insurance contract or an annuity con-
tract shall be made without regard to sections
72(s), 101(f), 817(h), and 7702 if—
‘‘(i) such contract is regulated as a
life insurance or annuity contract by the
country under the laws of which the cor-
poration is created or organized, and
‘‘(ii) no policyholder, insured, annu-
itant, or beneficiary with respect to the
contract is a United States person.
‘‘(C) LOCATED.—
‘‘(i) IN GENERAL.—The determination
of where a customer is located shall be
made under rules prescribed by the Sec-
retary.
‘‘(ii) SPECIAL RULE FOR QUALIFIED
BUSINESS
UNITS.—Gross income derived
by a corporation’s qualified business unit
(within the meaning of section 989(a))
from transactions with customers which
are located in the country in which the
qualified business unit both maintains its
principal office and conducts substantial
business activity shall be treated as derived
from transactions with customers which
are located within the country under the
laws of which the controlled foreign cor-
poration is created or organized.
‘‘(D) CUSTOMER.—
‘‘(i) IN
GENERAL.—The term ‘cus-
tomer’ means, with respect to any con-
trolled foreign corporation, any person
which has a customer relationship with
such corporation.
‘‘(ii) EXCEPTION FOR RELATED, ETC.
PERSONS.—A person who is a related per-
son (as defined in section 954(d)(3)), an
officer, a director, or an employee with re-
spect to any controlled foreign corporation
shall not be treated as a customer with re-
spect to any transaction if a principal pur-
pose of such transaction is to satisfy any
requirement of this subsection.
‘‘(7) ANTI-ABUSE RULES.—For purposes of ap-
plying this subsection and subsection (c)(2)(C)(ii),
there shall be disregarded any item of income, gain,
loss, or deduction with respect to any transaction or
series of transactions one of the principal purposes
of which is qualifying income or gain for the exclu-
sion under this section, including—
‘‘(A) any change in the method of comput-
ing reserves or any other transaction or series
of transactions a principal purpose of which is
the acceleration or deferral of any item in order
to claim the benefits of such exclusion through
the application of this subsection, and
‘‘(B) organizing entities in order to satisfy
any same country requirement under this sub-
section.
‘‘(8) COORDINATION
WITH
OTHER
PROVI-
SIONS.—
‘‘(A) SECTION
901(K).—This subsection,
subsection 
(c)(2)(C)(ii), 
and 
subsection
(e)(2)(C) shall not apply for any taxable year of
a foreign corporation unless such corporation
(and all members of each affiliated group of
which such corporation is a member) elect not
to have the provisions of section 901(k)(4)
apply to any taxes paid or accrued during such
taxable year by such foreign corporation or any
such member.
‘‘(B) SECTION 953.—This subsection shall
not apply to investment income allocable to con-
tracts that insure related party risks or risks lo-
cated in a foreign country other than the coun-
try in which the qualifying insurance company
is created or organized.
‘‘(9) 
APPLICATION.—This 
subsection, 
sub-
section (c)(2)(C)(ii), and subsection (e)(2)(C) shall
apply only to the first full taxable year of a foreign
corporation beginning after December 31, 1997, and
before January 1, 1999, and to taxable years of
United States shareholders with or within which
such taxable year of such foreign corporation ends.’’.
(b) 
SPECIAL
RULES
FOR
DEALERS.—Section
954(c)(2)(C) of such Code is amended to read as follows:
‘‘(C) EXCEPTION FOR DEALERS.—Except
as provided by regulations, in the case of a reg-
ular dealer in property (within the meaning of
paragraph (1)(B)), forward contracts, option
contracts, or similar financial instruments (in-
cluding notional principal contracts and all in-
struments referenced to commodities), there
shall not be taken into account in computing
foreign personal holding income—
‘‘(i) any item of income, gain, deduc-
tion, or loss (other than any item described
in subparagraph (A), (E), or (G) of para-
graph (1)) from any transaction (including
hedging transactions) entered into in the
ordinary course of such dealer’s trade or
business as such a dealer, and
‘‘(ii) if such dealer is a dealer in secu-
rities (within the meaning of section 475),
any interest or dividend or equivalent
amount described in subparagraph (E) or
(G) of paragraph (1) from any transaction
(including any hedging transaction or
transaction 
described 
in 
section
956(c)(2)(J)) entered into in the ordinary
course of such dealer’s trade or business as
such a dealer in securities, but only if em-
ployees of the dealer which are located in
the country under the laws of which the
dealer is created or organized (or in the
case of a qualified business unit described
in section 989(a) which both maintains its
principal office and conducts substantial
business activity in a country, employees of
such unit which are located in such coun-
try) materially participate in such trans-
action.’’.
(c) EXEMPTION FROM FOREIGN BASE COMPANY
SERVICES INCOME.—Paragraph (2) of section 954(e) of
such Code (as amended by subsection (d)) is amended 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 the following:
‘‘(C)(i) a transaction the income from
which is not foreign personal holding company
income by reason of subsection (h), or
‘‘(ii) a transaction to which subsection
(c)(2)(C)(ii) applies.’’.
(d) REPEAL
OF CANCELED PROVISIONS.—Section
1175 of the Taxpayer Relief Act of 1997, and the amend-
ments made by such section, are hereby repealed, and the
Internal Revenue Code of 1986 shall be applied and ad-
ministered as if such section (and amendments) had never
been enacted.
(e) BUDGETARY TREATMENT.—For purposes of sec-
tion 10213 of the Balanced Budget Act of 1997, the provi-
sions of this section shall be considered to have been en-
acted as part of the Taxpayer Relief Act of 1997.
SEC. 2. NONRECOGNITION OF GAIN ON SALE OF STOCK TO
CERTAIN FARMERS’ COOPERATIVES.
(a) IN GENERAL.—Part III of subchapter O of chap-
ter 1 of the Internal Revenue Code of 1986 (relating to
nontaxable exchanges) is amended by inserting after sec-
tion 1042 the following new section:
‘‘SEC. 1042A. SALES OF STOCK TO CERTAIN FARMERS’ CO-
OPERATIVES.
‘‘(a) NONRECOGNITION OF GAIN.—If—
‘‘(1) the taxpayer elects the application of this
section with respect to any sale of qualified agricul-
tural processor stock,
‘‘(2) the taxpayer purchases qualified replace-
ment property within the replacement period, and
‘‘(3) the requirements of subsection (c) are met
with respect to such sale,
then the gain (if any) on such sale which would be recog-
nized as long-term capital gain shall be recognized only
to the extent that the amount realized on such sale exceeds
the cost to the taxpayer of such qualified replacement
property.
‘‘(b) LIMITATION.—
‘‘(1) IN GENERAL.—If subsection (a) applies to
the sale of any stock by the taxpayer in a qualified
agricultural processor, the aggregate amount of gain
taken into account by the taxpayer under subsection
(a) with respect to stock in such processor shall not
exceed the amount of the limitation under paragraph
(2) which is allocated to such sale by the eligible
farmers’ cooperative.
‘‘(2) 
ALLOCATION.—The 
amount 
allocated
under this paragraph by any cooperative with re-
spect to stock acquired by such cooperative during
any taxable year of such cooperative shall not exceed
$75,000,000.
‘‘(3) AGGREGATION RULES.—All eligible farm-
ers’ cooperatives which are under common control
(within the meaning of subsection (a) or (b) of sec-
tion 52) shall be treated as 1 cooperative for pur-
poses of paragraph (2), and the limitation under
such paragraph shall be allocated among such co-
operatives in such manner as the Secretary shall
prescribe.
‘‘(c) REQUIREMENTS
TO
QUALIFY
FOR
NON-
RECOGNITION.—A sale of qualified agricultural processor
stock meets the requirements of this subsection if—
‘‘(1) SALE TO ELIGIBLE FARMERS’ COOPERA-
TIVE.—Such stock is sold to an eligible farmers’ co-
operative.
‘‘(2) COOPERATIVE MUST HOLD 100 PERCENT
OF STOCK AFTER SALE.—The eligible farmers’ coop-
erative owns, immediately after the sale, all of the
qualified agricultural processor stock of the corpora-
tion.
‘‘(3) WRITTEN STATEMENT AND HOLDING PE-
RIOD.—Requirements similar to the requirements of
paragraphs (3) and (4) of section 1042(b) are met.
‘‘(d) DEFINITIONS.—For purposes of this section—
‘‘(1) QUALIFIED
AGRICULTURAL
PROCESSOR
STOCK.—The term ‘qualified agricultural processor
stock’ means stock (other than stock described in
section 1504(a)(4)) issued by a qualified agricultural
processor.
‘‘(2) QUALIFIED AGRICULTURAL PROCESSOR.—
The term ‘qualified agricultural processor’ means a
domestic C corporation—
‘‘(A) substantially all of the assets of
which are used in the active conduct of the
trade or business of refining or processing agri-
cultural or horticultural products in the United
States, and
‘‘(B) which, during at least 3 of the 5 most
recent taxable years of such processor ending
on or before the date of the sale, purchased
more than one-half of such products to be re-
fined or processed from—
‘‘(i) farmers who make up the eligible
farmers’ cooperative which is purchasing
stock in the corporation in a transaction to
which this subsection is to apply, or
‘‘(ii) such cooperative.
‘‘(3) ELIGIBLE FARMERS’ COOPERATIVE.—The
term ‘eligible farmers’ cooperative’ means an organi-
zation to which part I of subchapter T applies and
which is engaged in the marketing of agricultural or
horticultural products.
‘‘(4) REPLACEMENT
PERIOD.—The term ‘re-
placement period’ means the period which begins 3
months before the date on which the sale of qualified
agricultural processor stock occurs and which ends
12 months after the date of such sale.
‘‘(5) QUALIFIED REPLACEMENT PROPERTY.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), the term ‘qualified replace-
ment property’ has the meaning given such
term by section 1042(c)(4).
‘‘(B) EXCEPTION.—The term ‘qualified re-
placement property’ shall not include any secu-
rity issued by the taxpayer or by any corpora-
tion controlled by the taxpayer immediately
after the purchase. For purposes of the preced-
ing sentence, the term ‘control’ has the mean-
ing given such term by section 304(c) (deter-
mined by substituting ‘10 percent’ for ‘50 per-
cent’ each place it appears in paragraph (1)
thereof).
‘‘(e) SPECIAL RULES.—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, rules similar to the rules of
paragraphs (5) and (6) of section 1042(c), sub-
sections (d), (e), and (f) of section 1042, section
1016(a)(22), and section 1223(13) shall apply for
purposes of this section.
‘‘(2) CERTAIN PROVISIONS NOT TO APPLY.—
‘‘(A) RECOGNITION
ON
COMPLETE
LIQ-
UIDATION.—Section 332 shall not apply to the
liquidation into the cooperative or any related
person of a qualified agricultural processor if
the cooperative or related person acquired the
stock in such processor in a sale to which sub-
section (a) applied.
‘‘(B) DEEMED SALE ELECTION NOT AVAIL-
ABLE.—No election may be made under section
338(h)(10) with respect to a sale to which sub-
section (a) applies.
‘‘(f) COORDINATION WITH SECTION 1042.—No elec-
tion may be made under this section with respect to any
sale if an election is made under section 1042 with respect
to such sale.’’
(b) EXCISE TAX
ON SALE BY COOPERATIVE
OF
STOCK
IN PROCESSOR.—Chapter 43 of such Code is
amended by inserting after section 4978 the following new
section:
‘‘SEC. 4978A. TAX ON CERTAIN DISPOSITIONS OF STOCK TO
WHICH SECTION 1042A APPLIED.
‘‘(a) IMPOSITION OF TAX.—If, during the 3-year pe-
riod beginning on the date on which the eligible farmers’
cooperative acquired stock in a qualified agricultural proc-
essor in a sale to which section 1042A applied, such coop-
erative disposes of any stock in such processor, there is
hereby imposed a tax on the disposition equal to 10 per-
cent of the amount realized on the disposition.
‘‘(b) LIABILITY FOR TAX.—The tax imposed by this
section shall be paid by the eligible farmers’ cooperative.
‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) TERMS USED IN SECTION 1042a.—Terms
used in this section which also are used in section
1042A shall have the respective meanings given such
terms by section 1042A.
‘‘(2) DISPOSITION.—
‘‘(A) IN GENERAL.—The term ‘disposition’
includes any distribution.
‘‘(B) EXCHANGES
AS
PART
OF
REORGA-
NIZATION.—Such term shall not include an ex-
change of stock in any reorganization described
in section 368(a)(1) for stock of another cor-
poration except to the extent that such reorga-
nization results in the cooperative owning di-
rectly or indirectly less than all outstanding
stock of the processor (other than stock de-
scribed in section 1504(a)(4)).
‘‘(C) ISSUANCES OF NEW STOCK.—Any is-
suance of new stock of the processor (other
than to the cooperative) shall be treated as a
disposition of such stock by the cooperative and
the cooperative shall be treated as realizing on
such disposition an amount equal to the fair
market value of such stock as of the date of is-
suance.
‘‘(3) ORDERING RULE.—In any case in which
the eligible farmers’ cooperative holds stock in a
qualified agricultural processor which was acquired
in a sale to which section 1042A applied and holds
stock in such processor which was not so acquired,
any disposition of stock by the cooperative shall be
treated as the disposition of stock acquired in the
sale to which section 1042A applied to the extent
thereof.’’
(c) CLERICAL AMENDMENTS.—
(1) The table of sections for part III of sub-
chapter O of chapter 1 of such Code is amended by
inserting after the item relating to section 1042 the
following new item:
‘‘Sec. 1042A. Sales of stock to certain farmers’ cooperatives.’’
(2) The table of sections for chapter 43 of such
Code is amended by inserting after the item relating
to section 4978 the following new item:
‘‘Sec. 4978A. Tax on certain dispositions of stock to which section
1042A applied.’’
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to sales after December 31, 1997.
(e) BUDGETARY TREATMENT.—For purposes of sec-
tion 10213 of the Balanced Budget Act of 1997, the provi-