‘‘(B) TAXPAYER
MUST
HAVE
ELECTED 
FOREIGN TAX CREDIT FOR YEAR OF LOSS.—
The term ‘overall domestic loss’ shall not in-
clude any loss for any taxable year unless the 
taxpayer chose the benefits of this subpart for 
such taxable year. 
‘‘(3) CHARACTERIZATION OF SUBSEQUENT IN-
COME.—
‘‘(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 in-
come categories.
‘‘(B) INCOME CATEGORY.—For purposes of 
this paragraph, 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 coordinate 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 begin-
ning after December 31, 2004. 
SEC. 1113. REDUCTION TO 2 FOREIGN TAX CREDIT BAS-
KETS. 
(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 fol-
lows: 
‘‘(1) IN
GENERAL.—The provisions of sub-
sections (a), (b), and (c) and sections 902, 907, and 
960 shall be applied separately 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 redesig-
nating subparagraph (A) as subparagraph (B), and by in-
serting 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 cat-
egory income. 
‘‘(ii) GENERAL CATEGORY INCOME.—
The term ‘general category income’ means 
income other than passive category in-
come.’’
(c) SPECIFIED PASSIVE CATEGORY INCOME.—Sub-
paragraph (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 cat-
egory 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 
without 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 
section 923(b)) or interest or carrying 
charges 
(as 
defined 
in 
section 
927(d)(1)) derived from a transaction 
which results in foreign trade income 
(as defined in section 923(b)).’’
(d) TREATMENT OF FINANCIAL SERVICES.—Para-
graph (2) of section 904(d) is amended by striking sub-
paragraph (D), by redesignating subparagraph (C) as sub-
paragraph (D), and by inserting before subparagraph (D) 
(as so redesignated) the following new subparagraph: 
‘‘(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, insur-
ance, financing, or similar business. 
‘‘(ii) FINANCIAL SERVICES GROUP.—
The term ‘financial 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 pre-
dominantly engaged in the active conduct 
of a banking, insurance, financing, or simi-
lar 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 corpora-
tions in which such United States cor-
porations 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 treat-
ment 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) CONFORMING AMENDMENTS.—
(1) Clause (iii) of section 904(d)(2)(B) (relating 
to exceptions from passive income), as so redesig-
nated, 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 insert-
ing 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, 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 CORPORATIONS.—
‘‘(A) IN GENERAL.—Except as otherwise 
provided in this paragraph, dividends, interest, 
rents, and royalties received or accrued by the 
taxpayer from a controlled foreign corporation 
in which the taxpayer is a United States share-