(3) (2) Section 275(a) is amended—
(A) by striking ‘‘or’’ at the end of para-
graph (4)(A), by striking the period at the end
of paragraph (4)(B) and inserting ‘‘, or’’, and
by adding at the end of paragraph (4) the fol-
lowing new subparagraph:
‘‘(C) such taxes are paid or accrued with
respect to qualifying foreign trade income (as
defined in section 941).’’; and
(B) by adding at the end the following the
following new sentence: ‘‘A rule similar to the
rule of section 943(d) shall apply for purposes
of paragraph (4)(C).’’.
(4) (3) Paragraph (3) of section 864(e) is
amended—
(A) by striking ‘‘For purposes of’’ and in-
serting:
‘‘(A) IN GENERAL.—For purposes of’’; and
(B) by adding at the end the following new
subparagraph:
‘‘(B) 
ASSETS
PRODUCING
EXEMPT
EXTRATERRITORIAL INCOME.—For purposes of
allocating and apportioning any interest ex-
pense, there shall not be taken into account any
qualifying foreign trade property (as defined in
section 943(a)) which is held by the taxpayer
for lease or rental in the ordinary course of
trade or business for use by the lessee outside
the United States (as defined in section
943(b)(2)).’’.
(5) (4) Section 903 is amended by striking
‘‘164(a)’’ and inserting ‘‘114, 164(a),’’.
(6) (5) Section 999(c)(1) is amended by insert-
ing ‘‘941(a)(5),’’ after ‘‘908(a),’’.
(7) (6) The table of sections for part III of sub-
chapter B of chapter 1 is amended by inserting be-
fore the item relating to section 115 the following
new item:
‘‘Sec. 114. Extraterritorial income.’’.
(8) (7) The table of subparts for part III of
subchapter N of chapter 1 is amended by striking
the item relating to subpart E and inserting the fol-
lowing new item:
‘‘Subpart E. Qualifying foreign trade income.’’.
(9) (8) The table of subparts for part III of
subchapter N of chapter 1 is amended by striking
the item relating to subpart C.
SEC. 5. EFFECTIVE DATE.
(a) IN GENERAL.—The amendments made by this
Act shall apply to transactions after September 30, 2000.
(b) NO NEW FSCS; TERMINATION
OF INACTIVE
FSCS.—
(1) NO NEW FSCS.—No corporation may elect
after September 30, 2000, to be a FSC (as defined
in section 922 of the Internal Revenue Code of
1986, as in effect before the amendments made by
this Act).
(2) TERMINATION
OF
INACTIVE
FSCS.—If a
FSC has no foreign trade income (as defined in sec-
tion 923(b) of such Code, as so in effect) for any pe-
riod of 5 consecutive taxable years beginning after
December 31, 2001, such FSC shall cease to be
treated as a FSC for purposes of such Code for any
taxable year beginning after such period.
(c) TRANSITION PERIOD FOR EXISTING FOREIGN
SALES CORPORATIONS.—
(1) IN GENERAL.—In the case of a FSC (as so
defined) in existence on September 30, 2000, and at
all times thereafter, the amendments made by this
Act shall not apply to any transaction in the ordi-
nary course of trade or business involving a FSC
which occurs—
(A) before January 1, 2002; or
(B) after December 31, 2001, pursuant to
a binding contract—
(i) which is between the FSC (or any
related person) and any person which is
not a related person; and
(ii) which is in effect on September
30, 2000, and at all times thereafter.
For purposes of this paragraph, a binding contract
shall include a purchase option, renewal option, or
replacement option which is included in such con-
tract and which is enforceable against the seller or
lessor.
(2) ELECTION TO HAVE AMENDMENTS APPLY
EARLIER.—A taxpayer may elect to have the amend-
ments made by this Act apply to any transaction by
a FSC or any related person to which such amend-
ments would apply but for the application of para-
graph (1). Such election shall be effective for the
taxable year for which made and all subsequent tax-
able years, and, once made, may be revoked only
with the consent of the Secretary of the Treasury.
(3) RELATED PERSON.—For purposes of this
subsection, the term ‘‘related person’’ has the mean-
ing given to such term by section 943(b)(3) of such
Code, as added by this Act.
(d) SPECIAL RULES RELATING TO LEASING TRANS-
ACTIONS.—
(1) SALES INCOME.—If foreign trade income in
connection with the lease or rental of property de-
scribed in section 927(a)(1)(B) of such Code (as in
effect before the amendments made by this Act) is
treated as exempt foreign trade income for purposes
of section 921(a) of such Code (as so in effect), such
property shall be treated as property described in
section 941(c)(1)(B) of such Code (as added by this
Act) for purposes of applying section 941(c)(2) of
such Code (as so added) to any subsequent trans-
action involving such property to which the amend-
ments made by this Act apply.
(2) LIMITATION ON USE OF GROSS RECEIPTS
METHOD.—If any person computed its foreign trade
income from any transaction with respect to any
property on the basis of a transfer price determined
under the method described in section 925(a)(1) of
such Code (as in effect before the amendments made
by this Act), then the qualifying foreign trade in-
come (as defined in section 941(a) of such Code, as
in effect after such amendment) of such person (or
any related person) with respect to any other trans-
action involving such property (and to which the
amendments made by this Act apply) shall be zero.
Calendar No. 817
106TH CONGRESS
2D SESSION
H. R. 4986
[Report No. 106–416]
AN ACT
To amend the Internal Revenue Code of 1986 to
repeal the provisions relating to foreign sales cor-
porations (FSCs) and to exclude extraterritorial
income from gross income.
SEPTEMBER 20, 2000
Reported with amendments