I
105TH CONGRESS
2D SESSION
H. R. 4173
To amend the Internal Revenue Code of 1986 to simplify certain rules
relating to the taxation of United States business operating abroad,
and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
JUNE 25, 1998
Mr. HOUGHTON (for himself, Mr. LEVIN, Mr. CRANE, Mr. MATSUI, Mr. SAM
JOHNSON of Texas, Mr. HERGER, Mr. ENGLISH of Pennsylvania, and Mr.
NEAL of Massachusetts) introduced the following bill; which was referred
to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to simplify
certain rules relating to the taxation of United States
business operating abroad, and for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE;
TABLE OF CONTENTS.
(a) SHORT TITLE.—This Act may be cited as the
‘‘International Tax Simplification for American Competi-
tiveness Act of 1998’’.
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
ment or repeal is expressed in terms of an amendment
to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986.
(c) TABLE OF CONTENTS.—The table of contents for
this Act is as follows:
Sec. 1. Short title; amendment of 1986 Code; table of contents.
TITLE I—TREATMENT OF CONTROLLED FOREIGN CORPORATIONS
Sec. 101. Avoidance of multiple inclusions in section 304 transactions involving
foreign corporations.
Sec. 102. Exemption for active financing income.
Sec. 103. Study of proper treatment of European Union under same country
exceptions.
Sec. 104. Expansion of de minimis rule under subpart F.
Sec. 105. Subpart F earnings and profits determined under generally accepted
accounting principles.
Sec. 106. Clarification of treatment of pipeline transportation income.
Sec. 107. Subpart F treatment of income from transmission of high voltage
electricity.
Sec. 108. Look-through treatment for sales of partnership interests.
Sec. 109. Effective date.
TITLE II—PROVISIONS RELATING TO FOREIGN TAX CREDIT
Sec. 201. Extension of period to which excess foreign taxes may be carried.
Sec. 202. Recharacterization of overall domestic loss.
Sec. 203. Special rules relating to financial services income.
Sec. 204. Foreign tax credit treatment of dividends from noncontrolled section
902 corporations.
Sec. 205. Application of look-thru rules to foreign tax credit.
Sec. 206. Ordering rules for foreign tax credit carryovers.
Sec. 207. Repeal of limitation of foreign tax credit under alternative minimum
tax.
TITLE III—OTHER PROVISIONS
Sec. 301. Deduction for dividends received from certain foreign corporations.
Sec. 302. Application of uniform capitalization rules to foreign persons.
Sec. 303. Treatment of military property of foreign sales corporations.
Sec. 304. United States property not to include certain assets acquired by deal-
ers in ordinary course of trade or business.
Sec. 305. Treatment of dividends received from certain regulated investment
companies.
Sec. 306. Regulatory authority to exclude certain preliminary agreements from
definition of intangible property.
Sec. 307. Airline mileage awards to certain foreign persons.
Sec. 308. Repeal of reduction of subpart F income of export trade corporations.
Sec. 309. Study of interest allocation.
TITLE I—TREATMENT OF CON-
TROLLED 
FOREIGN 
COR-
PORATIONS
SEC. 101. AVOIDANCE OF MULTIPLE INCLUSIONS IN SEC-
TION 304 TRANSACTIONS INVOLVING FOR-
EIGN CORPORATIONS.
(a) IN GENERAL.—Subsection (b) of section 304 is
amended by adding at the end the following new para-
graph:
‘‘(6) AVOIDANCE
OF
MULTIPLE
INCLUSIONS,
ETC.—In the case of any acquisition to which sub-
section (a) applies in which the acquiring corpora-
tion or the issuing corporation is a foreign corpora-
tion, the Secretary shall prescribe such regulations
as are appropriate in order to eliminate a multiple
inclusion of any item in income by reason of this
subpart and to provide appropriate basis adjust-
ments (including modifications to the application of
sections 959 and 961).’’
(b) CONFORMING AMENDMENT.—Paragraph (5) of
section 304(b) is amended by striking subparagraph (B)
and by redesignating subparagraph (C) as subparagraph
(B).
(c) EFFECTIVE DATE.—The amendments made by
this section shall take effect as if included in the amend-
ments made by section 1013 of the Taxpayer Relief Act
of 1997.
SEC. 102. 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—
‘‘(I) with customers located with-
in the country under the laws of
which the corporation is created or or-
ganized, or
‘‘(II) with customers not de-
scribed in subclause (I), but only if
employees of the corporation which
are located in the country under the
laws of which the corporation is cre-
ated or organized (or in the case of a
qualified business unit described in
section 989(a) which both maintains
its principal office and conducts sub-
stantial business activity in a country,
employees of such unit which are lo-
cated in such country) materially par-
ticipate in such transaction,
‘‘(B) received from a customer by a con-
trolled foreign corporation which is a qualifying
insurance company for the issuing or reinsuring
of any insurance or annuity contract, but only
if the customer is located in the country under
the laws of which the controlled foreign cor-
poration is created or organized,
‘‘(C) 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
‘‘(D) 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 property, casualty,
or health insurance contracts, one-third of
its premiums earned on such insurance
contracts during the taxable year (as de-
fined in section 832(b)(4)), and
‘‘(ii) in the case of life insurance or
annuity contracts, 10 percent of the re-
serves described in subparagraph (B) for
such contracts.
Subparagraphs (C) and (D) shall not apply to in-
come allocable to any contract to which subpara-
graph (B) does not apply (determined after applying
paragraph (6)(D)(ii)).
‘‘(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 described in subclause (I) or (II) of
paragraph (1)(A)(ii), 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 subparagraphs (C) and (D)
of paragraph (1)—
‘‘(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)(C)—
‘‘(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, and
‘‘(ii) 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) NONCANCELLABLE
ACCIDENT
AND
HEALTH
INSURANCE
CONTRACTS.—A
noncancellable accident and health insurance
contract shall be treated for purposes of this
subsection in the same manner as a life insur-
ance contract except that paragraph (4)(B)(i)
shall not apply.
‘‘(D) 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.
‘‘(E) 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) SPECIAL
RULES
RELATING
TO
INSURANCE.—For purposes of paragraph
(1)(B)—
‘‘(I) except as provided in regula-
tions, the customer shall be the in-
sured under the insurance or annuity
contract, and
‘‘(II) income received from a re-
lated person (as defined in subsection
(d)(3)) for a policy of reinsurance
shall not be treated as income re-
ceived from a customer unless the pre-
mium would have qualified under
paragraph (1)(B) if the controlled for-
eign corporation had received the pre-
mium directly from the party first in-
sured by the customer.
‘‘(iii) EXCEPTION FOR RELATED, ETC.
PERSONS.—A person who is a related per-
son (as defined in subsection (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 or with re-
spect to any transaction described in para-
graph (1)(A)(ii)(II).
‘‘(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 to act as cus-
tomers in order to satisfy any same country re-
quirement under this subsection.’’
(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 by the controlled for-
eign corporation if the income from the trans-
action is not foreign personal holding company
income by reason of subsection (h), or
‘‘(ii) a transaction by the controlled foreign
corporation if subsection (c)(2)(C)(ii) applies to
such transaction.’’
(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.
SEC. 103. STUDY OF PROPER TREATMENT OF EUROPEAN
UNION UNDER SAME COUNTRY EXCEPTIONS.
(a) STUDY.—The Secretary of the Treasury or the
Secretary’s delegate shall conduct a study on the feasibil-
ity of treating all countries included in the European
Union as 1 country for purposes of applying the same
country exceptions under subpart F of part III of sub-
chapter N of chapter 1 of the Internal Revenue Code of
1986. Such study shall include consideration of methods
of ensuring that taxpayers are subject to a substantial ef-
fective rate of foreign tax in such countries if such treat-
ment is adopted.
(b) REPORT.—Not later than 6 months after the date
of enactment of this Act, the Secretary of the Treasury
shall report to the Committee on Ways and Means of the
House of Representatives and the Committee on Finance
of the Senate the results of the study conducted under
subsection (a), including recommendations (if any) for leg-
islation.
SEC. 104. EXPANSION OF DE MINIMIS RULE UNDER SUB-
PART F.
(a) IN GENERAL.—Subparagraph (A) of section
954(b)(3) (relating to de minimis, etc., rules) is amend-
ed—
(1) by striking ‘‘5 percent’’ in clause (i) and in-
serting ‘‘10 percent’’, and
(2) by striking ‘‘$1,000,000’’ in clause (ii) and
inserting ‘‘$2,000,000’’.
(b) TECHNICAL AMENDMENTS.—
(1) Clause (ii) of section 864(d)(5)(A) is
amended by striking ‘‘5 percent or $1,000,000’’ and
inserting ‘‘10 percent or $2,000,000’’.
(2) Clause (i) of section 881(c)(5)(A) is amend-
ed by striking ‘‘5 percent or $1,000,000’’ and insert-
ing ‘‘10 percent or $2,000,000’’.
SEC. 105. SUBPART F EARNINGS AND PROFITS DETER-
MINED UNDER GENERALLY ACCEPTED AC-
COUNTING PRINCIPLES.
(a) IN GENERAL.—Subsection (a) of section 964 (re-
lating to miscellaneous provisions) is amended by striking
‘‘rules substantially similar to those applicable to domestic
corporations, under regulations prescribed by the Sec-
retary’’ and inserting ‘‘generally accepted accounting prin-
ciples in the United States’’.
performance of services which are related to the
transmission of high voltage electricity.’’
SEC. 108. LOOK-THROUGH TREATMENT FOR SALES OF
PARTNERSHIP INTERESTS.
(a) IN GENERAL.—Section 954(c) (defining foreign
personal holding company income) is amended by adding
at the end the following new paragraph:
‘‘(4) LOOK-THROUGH
RULE
FOR
CERTAIN
PARTNERSHIP 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 10-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.
‘‘(B) 10-PERCENT OWNER.—For purposes
of this paragraph, the term ‘10-percent owner’
means a controlled foreign corporation which
owns 10 percent or more of the capital or prof-
its interest in the partnership. The constructive
ownership rules of section 958(b) shall apply
for purposes of the preceding sentence.’’