155 
in which the taxpayer is a United States share-
holder 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 cat-
egory income to the extent the amount so in-
cluded is attributable to passive category in-
come. 
‘‘(C) INTEREST, 
RENTS, 
AND
ROYAL-
TIES.—Any interest, rent, or royalty which is 
received or accrued from a controlled foreign 
corporation in which the taxpayer is a United 
States shareholder shall be treated as passive 
category income to the extent it is properly allo-
cable (under regulations prescribed by the Sec-
retary) to passive category income of the con-
trolled 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—
156 
‘‘(i) the portion of the earnings and 
profits attributable to passive category in-
come, 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 para-
graph, 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 insur-
ance 
income 
(as 
defined 
in 
section 
954(b)(3)(C)) for such taxable year shall be 
treated as passive 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 corpora-
tion shall not be treated as passive category in-
come if the requirements of section 954(b)(4) 
are met with respect to such income.
157 
‘‘(F) COORDINATION
WITH
HIGH-TAXED 
INCOME PROVISIONS.— 
‘‘(i) In determining whether any in-
come of a controlled 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 in-
come under section 78 to the extent attrib-
utable 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).
158 
‘‘(H) LOOK-THRU
APPLIES
TO
PASSIVE 
FOREIGN INVESTMENT COMPANY INCLUSION.— 
If— 
‘‘(i) a passive foreign investment com-
pany is a controlled foreign corporation, 
and 
‘‘(ii) the taxpayer is a United States 
shareholder in such controlled foreign cor-
poration, 
any amount included in gross income under sec-
tion 1293 shall be treated as income in a sepa-
rate category to the extent such amount is at-
tributable to income in such category.’’. 
(5) TREATMENT
OF
INCOME
TAX
BASE
DIF-
FERENCES.—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.—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
159 
be treated as imposed on income described in 
paragraph (1)(B).’’ 
(6) Paragraph (2) of section 904(d) is amended 
by adding at the end the following new subpara-
graph: 
‘‘(K) TRANSITIONAL
RULES
FOR
2007 
CHANGES.—For purposes 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 in-
come, shall be treated as described in the 
subparagraph of paragraph (1) in which 
such income would be described were such 
taxes paid or accrued in a taxable year be-
ginning 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 to such a 
taxable year for purposes of allocating such 
income among the separate categories in 
effect for such taxable year.’’. 
(7) Section 904(j)(3)(A)(i) is amended by strik-
ing ‘‘subsection (d)(2)(A)’’ and inserting ‘‘subsection 
(d)(2)(B)’’.
160 
(f) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2006. 
SEC. 304. LOOK-THRU RULES TO APPLY TO DIVIDENDS 
FROM NONCONTROLLED SECTION 902 COR-
PORATIONS. 
(a) IN GENERAL.—Section 904(d)(4) (relating to 
look-thru rules apply to dividends from noncontrolled sec-
tion 902 corporations) is amended to read as follows: 
‘‘(4) LOOK-THRU APPLIES TO DIVIDENDS FROM 
NONCONTROLLED SECTION 902 CORPORATIONS.— 
‘‘(A) IN GENERAL.—For purposes of this 
subsection, any dividend from a noncontrolled 
section 902 corporation with respect to the tax-
payer shall be treated as income described in a 
subparagraph of paragraph (1) in proportion to 
the ratio of— 
‘‘(i) the portion of earnings and prof-
its attributable to income described in such 
subparagraph, to 
‘‘(ii) the total amount of earnings and 
profits. 
‘‘(B) EARNINGS
AND
PROFITS
OF
CON-
TROLLED
FOREIGN
CORPORATIONS.—In the 
case of any distribution from a controlled for-
161 
eign corporation to a United States share-
holder, rules similar to the rules of subpara-
graph (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 section 
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 Sec-
retary may prescribe regulations re-
garding the treatment of distributions 
out of earnings and profits for periods 
before the taxpayer’s acquisition of 
the stock to which the distributions 
relate. 
‘‘(ii) 
INADEQUATE
SUBSTAN-
TIATION.—If the Secretary determines that 
the proper subparagraph of paragraph (1) 
in which a dividend is described has not 
been substantiated, such dividend shall be
162 
treated as income described in paragraph 
(1)(A). 
‘‘(iii) COORDINATION
WITH
HIGH- 
TAXED INCOME PROVISIONS.—Rules simi-
lar 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 Secretary may 
by regulations provide for the allocation of 
any carryback of tax allocable to a divi-
dend from a noncontrolled section 902 cor-
poration to such a taxable year for pur-
poses of allocating such dividend among 
the separate categories in effect for such 
taxable year.’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Subparagraph (E) of section 904(d)(1) is 
hereby repealed.
163 
(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 in-
clude any financial services income.’’. 
(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 strik-
ing ‘‘(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. 305. ATTRIBUTION OF STOCK OWNERSHIP THROUGH 
PARTNERSHIPS 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)
164 
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 partners. Stock consid-
ered to be owned by a person by reason of the pre-
ceding sentence shall, for purposes of applying such 
sentence, be treated as actually owned by such per-
son. 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 SECTION 901(b)(5).—Paragraph (5) of section 
901(b) is amended by striking ‘‘any individual’’ and in-
serting ‘‘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.
165 
SEC. 306. 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 pur-
suant to section 367(d)(2) of the Internal Revenue Code 
of 1986 on or after August 5, 1997. 
SEC. 307. UNITED STATES PROPERTY NOT TO INCLUDE 
CERTAIN ASSETS OF CONTROLLED FOREIGN 
CORPORATION. 
(a) IN GENERAL.—Section 956(c)(2) (relating to ex-
ceptions 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 con-
trolled foreign corporation in the ordinary 
course of its business as a dealer in securities 
if— 
‘‘(i) the dealer accounts for the securi-
ties as securities held primarily for sale to
166 
customers in the ordinary course of busi-
ness, and 
‘‘(ii) the dealer disposes of the securi-
ties (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 busi-
ness; and 
‘‘(M) an obligation of a United States per-
son which— 
‘‘(i) is not a domestic corporation, and 
‘‘(ii) is not— 
‘‘(I) a United States shareholder 
(as defined in section 951(b)) of the 
controlled foreign corporation, 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 imme-
diately after the acquisition of any ob-
ligation of such partnership, estate, or 
trust by the controlled foreign cor-
poration.’’.
167 
(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 corpora-
tions beginning after December 31, 2004, and to taxable 
years of United States shareholders with or within which 
such taxable years of foreign corporations end. 
SEC. 308. ELECTION NOT TO USE AVERAGE EXCHANGE 
RATE FOR FOREIGN TAX PAID OTHER THAN 
IN FUNCTIONAL CURRENCY. 
(a) IN GENERAL.—Paragraph (1) of section 986(a) 
(relating to determination of foreign taxes and foreign cor-
poration’s earnings and profits) is amended by redesig-
nating subparagraph (D) as subparagraph (E) and by in-
serting after subparagraph (C) the following new subpara-
graph: 
‘‘(D) ELECTIVE
EXCEPTION
FOR
TAXES 
PAID
OTHER
THAN
IN
FUNCTIONAL
CUR-
RENCY.— 
‘‘(i) IN GENERAL.—At the election of 
the taxpayer, subparagraph (A) shall not 
apply to any foreign income taxes the li-
ability for which is denominated in any
168 
currency other than in the taxpayer’s func-
tional currency. 
‘‘(ii) APPLICATION
TO
QUALIFIED 
BUSINESS UNITS.—An election under this 
subparagraph may apply to foreign income 
taxes attributable to a qualified business 
unit in accordance with regulations pre-
scribed by the Secretary. 
‘‘(iii) ELECTION.—Any such election 
shall apply to the taxable year for which 
made and all subsequent taxable years un-
less revoked with the consent of the Sec-
retary.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2004. 
SEC. 309. REPEAL OF WITHHOLDING TAX ON DIVIDENDS 
FROM CERTAIN FOREIGN CORPORATIONS. 
(a) IN GENERAL.—Paragraph (2) of section 871(i) 
(relating to tax not to apply to certain interest and divi-
dends) is amended by adding at the end the following new 
subparagraph: 
‘‘(D) Dividends paid by a foreign corpora-
tion 
which 
are 
treated 
under 
section
169 
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. 310. PROVIDE EQUAL TREATMENT FOR INTEREST 
PAID BY FOREIGN PARTNERSHIPS AND FOR-
EIGN 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 ef-
fectively 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.
170 
SEC. 311. LOOK-THRU TREATMENT OF PAYMENTS BE-
TWEEN 
RELATED 
CONTROLLED 
FOREIGN 
CORPORATIONS UNDER FOREIGN PERSONAL 
HOLDING COMPANY INCOME RULES. 
(a) IN GENERAL.—Subsection (c) of section 954, as 
amended by this Act, is amended by adding after para-
graph (4) the following new paragraph: 
‘‘(5) LOOK-THRU IN THE CASE OF RELATED 
CONTROLLED
FOREIGN
CORPORATIONS.—For pur-
poses of this subsection, dividends, interest, rents, 
and royalties received or accrued from a controlled 
foreign corporation which is a related person (as de-
fined in subsection (b)(9)) shall not be treated as 
foreign personal holding company income to the ex-
tent attributable or properly allocable (determined 
under rules similar to the rules of subparagraphs 
(C) and (D) of section 904(d)(3)) to income of the 
related person which is not subpart F income (as de-
fined in section 952). For purposes of this para-
graph, interest shall include factoring income which 
is treated as income equivalent to interest for pur-
poses of paragraph (1)(E). The Secretary shall pre-
scribe such regulations as may be appropriate to 
prevent the abuse of the purposes of this para-
graph.’’.
171 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years of foreign corpora-
tions beginning after December 31, 2004, and to taxable 
years of United States shareholders with or within which 
such taxable years of foreign corporations end. 
SEC. 312. LOOK-THRU TREATMENT FOR SALES OF PART-
NERSHIP INTERESTS. 
(a) IN GENERAL.—Section 954(c) (defining foreign 
personal holding company income), as amended by this 
Act, is amended by adding after paragraph (5) the fol-
lowing new paragraph: 
‘‘(6) LOOK-THRU RULE FOR CERTAIN PARTNER-
SHIP SALES.— 
‘‘(A) IN
GENERAL.—In the case of any 
sale by a controlled 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 appropriate to pre-
vent abuse of the purposes of this paragraph, 
including regulations providing for coordination
172 
of this paragraph with the provisions of sub-
chapter K. 
‘‘(B) 25-PERCENT OWNER.—For purposes 
of this paragraph, the term ‘25-percent owner’ 
means a controlled foreign corporation which 
owns directly 25 percent or more of the capital 
or profits interest in a partnership. For pur-
poses 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 cap-
ital or profits interest held directly or indirectly 
by such corporation or partnership.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years of foreign corpora-
tions beginning after December 31, 2004, and to taxable 
years of United States shareholders with or within which 
such taxable years of foreign corporations end. 
SEC. 313. REPEAL OF FOREIGN PERSONAL HOLDING COM-
PANY RULES AND FOREIGN INVESTMENT 
COMPANY RULES. 
(a) GENERAL RULE.—The following provisions are 
hereby repealed:
173 
(1) Part III of subchapter G of chapter 1 (re-
lating to foreign personal holding companies). 
(2) Section 1246 (relating to gain on foreign in-
vestment company stock). 
(3) Section 1247 (relating to election by foreign 
investment companies to distribute income cur-
rently). 
(b) EXEMPTION OF FOREIGN CORPORATIONS FROM 
PERSONAL HOLDING COMPANY RULES.— 
(1) IN
GENERAL.—Subsection (c) of section 
542 (relating to exceptions) is amended— 
(A) by striking paragraph (5) and insert-
ing the following: 
‘‘(5) a foreign corporation,’’, 
(B) by striking paragraphs (7) and (10) 
and by redesignating paragraphs (8) and (9) as 
paragraphs (7) and (8), respectively, 
(C) by inserting ‘‘and’’ at the end of para-
graph (7) (as so redesignated), and 
(D) by striking ‘‘; and’’ at the end of para-
graph (8) (as so redesignated) and inserting a 
period. 
(2) TREATMENT OF INCOME FROM PERSONAL 
SERVICE
CONTRACTS.—Paragraph (1) of section
174 
954(c) is amended by adding at the end the fol-
lowing new subparagraph: 
‘‘(I) PERSONAL SERVICE CONTRACTS.— 
‘‘(i) Amounts received under a con-
tract under which the corporation is to fur-
nish personal services if— 
‘‘(I) some person other than the 
corporation has the right to designate 
(by name or by description) the indi-
vidual who is to perform the services, 
or 
‘‘(II) the individual who is to per-
form the services is designated (by 
name or by description) in the con-
tract, and 
‘‘(ii) amounts received from the sale 
or other disposition 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 out-
standing stock of the corporation is owned, di-
rectly or indirectly, by or for the individual who 
has performed, is to perform, or may be des-
175 
ignated (by name or by description) as the one 
to perform, such services.’’. 
(c) CONFORMING AMENDMENTS.— 
(1) Section 1(h) is amended— 
(A) in paragraph (10), by inserting ‘‘and’’ 
at the end of subparagraph (F), by striking 
subparagraph (G), and by redesignating sub-
paragraph (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) Section 163(e)(3)(B), as amended by sec-
tion 642(a) of this Act, is amended by striking 
‘‘which is a foreign personal holding company (as 
defined in section 552), a controlled foreign corpora-
tion (as defined in section 957), or’’ and inserting 
‘‘which is a controlled foreign corporation (as de-
fined in section 957) or’’. 
(3) Paragraph (2) of section 171(c) is amend-
ed— 
(A) by striking ‘‘, or by a foreign personal 
holding company, as defined in section 552’’, 
and
176 
(B) by striking ‘‘, or foreign personal hold-
ing company’’. 
(4) Paragraph (2) of section 245(a) is amended 
by striking ‘‘foreign personal holding company or’’. 
(5) Section 267(a)(3)(B), as amended by sec-
tion 642(b) of this Act, is amended by striking ‘‘to 
a foreign personal holding company (as defined in 
section 552), a controlled foreign corporation (as de-
fined in section 957), or’’ and inserting ‘‘to a con-
trolled foreign corporation (as defined in section 
957) or’’. 
(6) Section 312 is amended by striking sub-
section (j). 
(7) Subsection (m) of section 312 is amended 
by striking ‘‘, a foreign investment company (within 
the meaning of section 1246(b)), or a foreign per-
sonal holding company (within the meaning of sec-
tion 552)’’. 
(8) Subsection (e) of section 443 is amended by 
striking paragraph (3) and by redesignating para-
graphs (4) and (5) as paragraphs (3) and (4), re-
spectively. 
(9) Subparagraph (B) of section 465(c)(7) is 
amended by adding ‘‘or’’ at the end of clause (i), by