(B) Subparagraph (B) of section 898(b)(2) is
amended by striking ‘‘and sections 551(f) and 554,
whichever are applicable,’’.
(C) Paragraph (3) of section 898(b) is amended
to read as follows:
‘‘(3) UNITED
STATES
SHAREHOLDER.—The
term ‘United States shareholder’ has the meaning
given to such term by section 951(b), except that, in
the case of a foreign corporation having related per-
son insurance income (as defined in section
953(c)(2)), the Secretary may treat any person as a
United States shareholder for purposes of this sec-
tion if such person is treated as a United States
shareholder under section 953(c)(1).’’
(D) Subsection (c) of section 898 is amended to
read as follows:
‘‘(c) DETERMINATION OF REQUIRED YEAR.—
‘‘(1) IN GENERAL.—The required year is—
‘‘(A) the majority U.S. shareholder year,
or
‘‘(B) if there is no majority U.S. share-
holder year, the taxable year prescribed under
regulations.
‘‘(2) 1-MONTH DEFERRAL ALLOWED.—A speci-
fied foreign corporation may elect, in lieu of the tax-
able year under paragraph (1)(A), a taxable year be-
ginning 1 month earlier than the majority U.S.
shareholder year.
‘‘(3) MAJORITY U.S. SHAREHOLDER YEAR.—
‘‘(A) IN GENERAL.—For purposes of this
subsection, the term ‘majority U.S. shareholder
year’ means the taxable year (if any) which, on
each testing day, constituted the taxable year
of—
‘‘(i) each United States shareholder
described in subsection (b)(2)(A), and
‘‘(ii) each United States shareholder
not described in clause (i) whose stock was
treated 
as 
owned 
under 
subsection
(b)(2)(B) by any shareholder described in
such clause.
‘‘(B) TESTING
DAY.—The testing days
shall be—
‘‘(i) the first day of the corporation’s
taxable year (determined without regard to
this section), or
‘‘(ii) the days during such representa-
tive period as the Secretary may pre-
scribe.’’
(13) Clause (ii) of section 904(d)(2) is amended
to read as follows:
‘‘(ii) CERTAIN AMOUNTS INCLUDED.—
Except as provided in clause (iii), the term
‘passive income’ includes, except as pro-
vided in subparagraph (E)(iii) or para-
graph (3)(I), any amount includible in
gross income under section 1293 (relating
to certain passive foreign investment com-
panies).’’
(14)(A) Subparagraph (A) of section 904(g)(1)
is amended by adding ‘‘or’’ at the end of clause (i),
by striking clause (ii), and by redesignating clause
(iii) as clause (ii).
(B) The paragraph heading of paragraph (2) of
section 904(g) is amended by striking ‘‘FOREIGN
PERSONAL HOLDING OR’’.
(15) Section 951 is amended by striking sub-
sections (c) and (d) and by redesignating subsections
(e) and (f) as subsections (c) and (d), respectively.
(16) Paragraph (3) of section 989(b) is amend-
ed by striking ‘‘, 551(a),’’.
(17) Paragraph (5) of section 1014(b) is hereby
repealed.
(18) Subsection (a) of section 1016 is amended
by striking paragraph (13) and by redesignating the
following paragraphs accordingly.
(19)(A) Paragraph (3) of section 1212(a) is
amended to read as follows:
‘‘(3) SPECIAL RULES ON CARRYBACKS.—A net
capital loss of a corporation shall not be carried
back under paragraph (1)(A) to a taxable year—
‘‘(A) for which it is a regulated investment
company (as defined in section 851), or
‘‘(B) for which it is a real estate invest-
ment trust (as defined in section 856).’’
(B) The amendment made by subparagraph (A)
shall apply to taxable years beginning after Decem-
ber 31, 2004.
(20) Section 1223 is amended by striking para-
graph (10) and by redesignating the following para-
graphs accordingly.
(21) Subsection (d) of section 1248 is amended
by striking paragraph (5) and by redesignating
paragraphs (6) and (7) as paragraphs (5) and (6),
respectively.
(22) Paragraph (2) of section 1260(c) is
amended by striking subparagraphs (H) and (I) and
by redesignating subparagraph (J) as subparagraph
(H).
(23) Subparagraph (F) of section 1291(b)(3) is
amended by striking ‘‘551(d), 959(a),’’ and inserting
‘‘959(a)’’.
(24) Paragraph (2) of section 1294(a) is
amended to read as follows:
‘‘(2) 
ELECTION
NOT
PERMITTED
WHERE
AMOUNTS OTHERWISE INCLUDIBLE UNDER SECTION
951.—The taxpayer may not make an election under
paragraph (1) with respect to the undistributed
PFIC earnings tax liability attributable to a quali-
fied electing fund for the taxable year if any amount
is includible in the gross income of the taxpayer
under section 951 with respect to such fund for such
taxable year.’’
(25) Section 6035 is hereby repealed.
(26) Subparagraph (D) of section 6103(e)(1) is
amended by striking clause (iv) and redesignating
clauses (v) and (vi) as clauses (iv) and (v), respec-
tively.
(27) Subparagraph (B) of section 6501(e)(1) is
amended to read as follows:
‘‘(B) CONSTRUCTIVE
DIVIDENDS.—If the
taxpayer omits from gross income an amount
properly 
includible 
therein 
under 
section
951(a), the tax may be assessed, or a pro-
ceeding in court for the collection of such tax
may be done without assessing, at any time
within 6 years after the return was filed.’’
(28) Subsection (a) of section 6679 is
amended—
(A) by striking ‘‘6035, 6046, and 6046A’’
in paragraph (1) and inserting ‘‘6046 and
6046A’’, and
(B) by striking paragraph (3).
(29) Sections 170(f)(10)(A), 508(d), 4947 and
section 4948(c)(4) are each amended by striking
‘‘556(b)(2),’’ each place it appears.
(30) The table of parts for subchapter G of
chapter 1 is amended by striking the item relating
to part III.
(31) The table of sections for part IV of sub-
chapter P of chapter 1 is amended by striking the
items relating to sections 1246 and 1247.
(32) The table of sections for subpart A of part
III of subchapter A of chapter 61 of such Code is
amended by striking the item relating to section
6035.
SEC. 104. 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 feasi-
bility 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 the 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. 105. EFFECTIVE DATE.
Except as otherwise provided in this title, the amend-
ments made by this title shall apply to taxable years of
foreign corporations beginning after December 31, 2002,
and taxable years of United States persons owning stock
in such corporations with or within which such corpora-
tions’ taxable years end.
TITLE 
II—PROVISIONS 
RELAT-
ING TO FOREIGN TAX CREDIT
SEC. 201. EXTENSION OF PERIOD TO WHICH EXCESS FOR-
EIGN TAXES MAY BE CARRIED.
(a) GENERAL RULE.—Section 904(c) (relating to
carryback and carryover of excess tax paid) is amended
by striking ‘‘in the first, second, third, fourth, or fifth’’
and inserting ‘‘in any of the first 10’’.
(b) EXCESS EXTRACTION TAXES.—Paragraph (1) of
section 907(f) is amended by striking ‘‘in the first, second,
third, fourth, or fifth’’ and inserting ‘‘in any of the first
10’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to excess foreign taxes which (with-
out regard to the amendments made by this section) may
be carried to any taxable year beginning after December
31, 2001.
SEC. 202. RECHARACTERIZATION OF OVERALL DOMESTIC
LOSS.
(a) GENERAL RULE.—Section 904 is amended by re-
designating subsections (g), (h), (i), (j), and (k) as sub-
sections (h), (i), (j), (k), and (l) respectively, and by in-
serting after subsection (f) the following new subsection:
‘‘(g) RECHARACTERIZATION OF OVERALL DOMESTIC
LOSS.—
‘‘(1) GENERAL
RULE.—For purposes of this
subpart, in the case of any taxpayer who sustains an
overall domestic loss for any taxable year beginning
after December 31, 2002, that portion of the tax-
payer’s taxable income from sources within the
United States for each succeeding taxable year
which is equal to the lesser of—
‘‘(A) the amount of such loss (to the extent
not used under this paragraph in prior taxable
years), or
‘‘(B) 50 percent of the taxpayer’s taxable
income from sources within the United States
for such succeeding taxable year,
shall be treated as income from sources without the
United States (and not as income from sources with-
in the United States).
‘‘(2) OVERALL DOMESTIC LOSS DEFINED.—For
purposes of this subsection and section 936—
‘‘(A) IN GENERAL.—The term ‘overall do-
mestic loss’ means any domestic loss to the ex-
tent such loss offsets taxable income from
sources without the United States for the tax-
able year or for any preceding taxable year by
reason of a carryback. For purposes of the pre-
ceding sentence, the term ‘domestic loss’ means
the amount by which the gross income for the
taxable year from sources within the United
States is exceeded by the sum of the deductions
properly apportioned or allocated thereto (deter-
mined without regard to any carryback from a
subsequent taxable year).
‘‘(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, 2002.
SEC. 203. SPECIAL RULES RELATING TO FINANCIAL SERV-
ICES INCOME.
(a) EXCEPTION FOR INTEREST ON CERTAIN SECURI-
TIES.—Section 904(d)(2)(B) (relating to high withholding
tax interest) is amended by redesignating clause (iii) as
clause (iv) and by inserting after clause (ii) the following
new clause:
‘‘(iii) EXCEPTION FOR INTEREST ON
DEALER PROPERTY.—The term ‘high with-
holding tax interest’ shall not include any
interest on a security (within the meaning
of section 475(c)(2)) which is received or
accrued by a person that holds the security
in connection with the holder’s activities as
a dealer in securities (within the meaning
of section 475(c)(1)).’’
(b) EXCEPTION
FOR INCOME
ON DEALER PROP-
ERTY.—Subsection 904(g) (relating to source rules in case
of United States-owned foreign corporations) is amended
by redesignating paragraph (11) as paragraph (12) and
by adding after paragraph (10) the following new para-
graph:
‘‘(11) EXCEPTION
FOR
INCOME
ON
DEALER
PROPERTY.—Paragraph (1) shall not apply to any
amount derived from a United States-owned foreign
corporation that is derived from income on a secu-
rity (within the meaning of section 475(c)(2)) which
is received or accrued by a person that holds the se-
curity in connection with the holder’s activities as a
dealer in securities (within the meaning of section
475(c)(1)).’’
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by
this section shall apply to taxable years beginning
after December 31, 2002.
(2) DEEMED PAID CREDITS.—In the case of
any credit under section 901 of the Internal Revenue
Code of 1986 by reason of section 902 or 960 of
such Code, the amendments made by this section
shall apply to taxable years of foreign corporations
beginning after December 31, 2002, and to taxable
years of United States shareholders in such corpora-
tions with or within which such taxable years of for-
eign corporations end.
SEC. 204. APPLICATION OF LOOK-THRU RULES TO FOREIGN
TAX CREDIT.
(a) INTEREST, RENTS, AND ROYALTIES.—
(1) NONCONTROLLED
SECTION
902
CORPORA-
TION.—Section 904(d)(4)(A) is amended to read as
follows:
‘‘(A) IN GENERAL.—For purposes of this
subsection—
‘‘(i) any applicable dividend shall be
treated as income in a separate category in
proportion to the ratio of—
‘‘(I) the portion of the earnings
and profits described in subparagraph
(B)(ii) attributable to income in such
category, to
‘‘(II) the total amount of earn-
ings and profits, and
‘‘(ii) any interest, rent, or royalty
which is received or accrued from a non-
controlled section 902 corporation with re-
spect to the taxpayer shall be treated as
income in a separate category to the extent
it is properly allocable (under regulations
prescribed by the Secretary) to income of
such corporation in such category.’’
(2) PARTNERSHIPS.—Section 904(d)(6)(C) (re-
lating to regulations) is amended—
(A) by inserting ‘‘or (4)(A)(ii)’’ after
‘‘paragraph (3)(C)’’, and
(B) by inserting ‘‘or noncontrolled section
902 corporations, whichever is applicable’’ after
‘‘controlled foreign corporations’’.
(3) CONFORMING AMENDMENT.—The heading
for section 904(d)(4) is amended by inserting ‘‘, IN-
TEREST, 
RENTS, 
OR
ROYALTIES’’ after ‘‘DIVI-
DENDS’’.
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2002.
SEC. 205. 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)
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) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxes of foreign corporations
for taxable years of such corporations beginning after De-
cember 31, 2002.
SEC. 206. STUDY OF WHETHER TO REPEAL SPECIAL RULES
IN SECTION 907 ON FOREIGN OIL AND GAS IN-
COME.
(a) STUDY.—The Secretary of the Treasury or the
Secretary’s delegate shall—
(1) conduct a study to determine the revenue
impact and desirability of repealing section 907 of
the Internal Revenue Code of 1986 (relating to spe-
cial rules in case of foreign oil and gas income), and
(2) include in such study recommendations (if
any) for an alternative regime that substantially re-
duces compliance costs for affected companies but
achieves the same anti-abuse goals of such section
(as reflected in the revenue impact associated with
the new regime).
(b) REPORT.—Not later than 6 months after the date
of the 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.
TITLE III—OTHER PROVISIONS
SEC. 301. DEDUCTION FOR DIVIDENDS RECEIVED FROM
CERTAIN FOREIGN CORPORATIONS.
(a) CONSTRUCTIVE OWNERSHIP RULES TO APPLY IN
DETERMINING 80-PERCENT OWNERSHIP.—Section 245
(a)(5) (relating to post-1986 undistributed U.S. earnings)
is amended by adding at the end the following flush sen-
tence:
‘‘Section 318(a) shall apply for purposes of subpara-
graph (B).’’
(b) DIVIDENDS TO INCLUDE SUBPART F DISTRIBU-
TIONS.—Section 245(a) (relating to dividends from 10-
percent owned foreign corporations) is amended by adding
at the end the following new paragraph:
‘‘(12) SUBPART
F
INCLUSIONS
TREATED
AS
DIVIDENDS.—For purposes of this subsection, the
term ‘dividend’ shall include any amount the tax-
payer is required to include in gross income for the
taxable year under section 951(a).’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2002.
SEC. 302. APPLICATION OF UNIFORM CAPITALIZATION
RULES TO FOREIGN PERSONS.
(a) IN GENERAL.—Section 263A(c) (relating to ex-
ceptions) is amended by adding at the end the following
new paragraph:
‘‘(7) FOREIGN PERSONS.—Except for purposes
of applying sections 871(b)(1) and 882(a)(1), this
section shall not apply to any taxpayer who is not
a United States person if such taxpayer capitalizes
costs of produced property or property acquired for
resale by applying the method used to ascertain the
income, profit, or loss for purposes of reports or
statements to shareholders, partners, other propri-
etors, or beneficiaries, or for credit purposes.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 2002. Section 481 of the Internal Revenue
Code of 1986 shall not apply to any change in a method
of accounting by reason of such amendment.
SEC. 303. UNITED STATES PROPERTY NOT TO INCLUDE
CERTAIN ASSETS ACQUIRED BY DEALERS IN
ORDINARY COURSE OF TRADE OR BUSINESS.
(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 ‘‘; and’’, and by adding at the end the fol-
lowing new subparagraph:
‘‘(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 securities as
securities held primarily for sale to customers
in the ordinary course of business, and (ii) the
dealer disposes of the securities (or such securi-
ties mature while held by the dealer) within a
period consistent with the holding of securities
for sale to customers in the ordinary course of
business.’’
(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, 2002, and to taxable
years of United States shareholders with or within which
such taxable years of foreign corporations end.
SEC. 304. TREATMENT OF CERTAIN DIVIDENDS OF REGU-
LATED INVESTMENT COMPANIES.
(a) TREATMENT OF CERTAIN DIVIDENDS.—
(1) NONRESIDENT ALIEN INDIVIDUALS.—Sec-
tion 871 (relating to tax on nonresident alien indi-
viduals) is amended by redesignating subsection (k)
as subsection (l) and by inserting after subsection (j)
the following new subsection:
‘‘(k) EXEMPTION FOR CERTAIN DIVIDENDS OF REG-
ULATED INVESTMENT COMPANIES.—
‘‘(1) INTEREST-RELATED DIVIDENDS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), no tax shall be imposed
under paragraph (1)(A) of subsection (a) on
any interest-related dividend received from a
regulated investment company.
‘‘(B) 
EXCEPTIONS.—Subparagraph 
(A)
shall not apply—
‘‘(i) to any interest-related dividend
received from a regulated investment com-
pany by a person to the extent such divi-
dend is attributable to interest (other than
interest described in subparagraph (E) (i)
or (iii)) received by such company on in-
debtedness issued by such person or by any
corporation or partnership with respect to
which such person is a 10-percent share-
holder,
‘‘(ii) to any interest-related dividend
with respect to stock of a regulated invest-
ment company unless the person who
would otherwise be required to deduct and
withhold tax from such dividend under
chapter 3 receives a statement (which
meets requirements similar to the require-
ments of subsection (h)(5)) that the bene-
ficial owner of such stock is not a United
States person, and
‘‘(iii) to any interest-related dividend
paid to any person within a foreign coun-
try (or any interest-related dividend pay-
ment addressed to, or for the account of,
persons within such foreign country) dur-
ing any period described in subsection
(h)(6) with respect to such country.
Clause (iii) shall not apply to any dividend with
respect to any stock which was acquired on or
before the date of the publication of the Sec-
retary’s determination under subsection (h)(6).
‘‘(C) INTEREST-RELATED DIVIDEND.—For
purposes of this paragraph, an interest-related
dividend is any dividend (or part thereof) which
is designated by the regulated investment com-
pany as an interest-related dividend in a writ-
ten notice mailed to its shareholders not later
than 60 days after the close of its taxable year.
If the aggregate amount so designated with re-
spect to a taxable year of the company (includ-
ing amounts so designated with respect to divi-
dends paid after the close of the taxable year
described in section 855) is greater than the
qualified net interest income of the company for
such taxable year, the portion of each distribu-
tion which shall be an interest-related dividend
shall be only that portion of the amounts so
designated which such qualified net interest in-
come bears to the aggregate amount so des-
ignated.
‘‘(D) 
QUALIFIED
NET
INTEREST
IN-
COME.—For purposes of subparagraph (C), the
term ‘qualified net interest income’ means the
qualified interest income of the regulated in-
vestment company reduced by the deductions
properly allocable to such income.
‘‘(E) QUALIFIED INTEREST INCOME.—For
purposes of subparagraph (D), the term ‘quali-
fied interest income’ means the sum of the fol-
lowing amounts derived by the regulated invest-
ment company from sources within the United
States:
‘‘(i) Any amount includible in gross
income as original issue discount (within
the meaning of section 1273) on an obliga-
tion payable 183 days or less from the date
of original issue (without regard to the pe-
riod held by the company).
‘‘(ii) Any interest includible in gross
income (including amounts recognized as
ordinary income in respect of original issue
discount or market discount or acquisition
discount under part V of subchapter P and
such other amounts as regulations may
provide) on an obligation which is in reg-
istered form; except that this clause shall
not apply to—
‘‘(I) any interest on an obligation
issued by a corporation or partnership
if the regulated investment company
is a 10-percent shareholder in such
corporation or partnership, and
‘‘(II) any interest which is treat-
ed as not being portfolio interest
under the rules of subsection (h)(4).
‘‘(iii) Any interest referred to in sub-
section (i)(2)(A) (without regard to the
trade or business of the regulated invest-
ment company).
‘‘(iv) Any interest-related dividend in-
cludable in gross income with respect to
stock of another regulated investment com-
pany.
‘‘(F) 10-PERCENT
SHAREHOLDER.—For
purposes of this paragraph, the term ‘10-per-
cent shareholder’ has the meaning given such
term by subsection (h)(3)(B).
‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), no tax shall be imposed
under paragraph (1)(A) of subsection (a) on
any short-term capital gain dividend received
from a regulated investment company.
‘‘(B) EXCEPTION
FOR
ALIENS
TAXABLE
UNDER
SUBSECTION (a)(2).—In the case of
dividends received from a regulated investment
company before January 1, 2003, subparagraph
(A) shall not apply in the case of any non-
resident alien individual subject to tax under
subsection (a)(2).
‘‘(C) SHORT-TERM
CAPITAL
GAIN
DIVI-
DEND.—For purposes of this paragraph, a
short-term capital gain dividend is any dividend
(or part thereof) which is designated by the reg-
ulated investment company as a short-term cap-
ital gain dividend in a written notice mailed to
its shareholders not later than 60 days after the
close of its taxable year. If the aggregate
amount so designated with respect to a taxable
year of the company (including amounts so des-
ignated with respect to dividends paid after the
close of the taxable year described in section
855) is greater than the qualified short-term
gain of the company for such taxable year, the
portion of each distribution which shall be a
short-term capital gain dividend shall be only
that portion of the amounts so designated
which such qualified short-term gain bears to
the aggregate amount so designated.
‘‘(D) QUALIFIED SHORT-TERM GAIN.—For
purposes of subparagraph (C), the term ‘quali-
fied short-term gain’ means the excess of the
net short-term capital gain of the regulated in-
vestment company for the taxable year over the
net long-term capital loss (if any) of such com-
pany for such taxable year. For purposes of this
subparagraph—
‘‘(i) the net short-term capital gain of
the regulated investment company shall be
computed by treating any short-term cap-
ital gain dividend includible in gross in-
come with respect to stock of another regu-
lated investment company as a short-term
capital gain, and
‘‘(ii) the excess of the net short-term
capital gain for a taxable year over the net
long-term capital loss for a taxable year (to
which an election under section 4982(e)(4)
does not apply) shall be determined with-
out regard to any net capital loss or net
short-term capital loss attributable to
transactions after October 31 of such year,
and any such net capital loss or net short-
term capital loss shall be treated as arising
on the 1st day of the next taxable year.
To the extent provided in regulations, clause
(ii) shall apply also for purposes of computing
the taxable income of the regulated investment
company.’’
(2) FOREIGN CORPORATIONS.—Section 881 (re-
lating to tax on income of foreign corporations not
connected with United States business) is amended
by redesignating subsection (e) as subsection (f) and
by inserting after subsection (d) the following new
subsection:
‘‘(e) TAX NOT TO APPLY TO CERTAIN DIVIDENDS
OF REGULATED INVESTMENT COMPANIES.—
‘‘(1) INTEREST-RELATED DIVIDENDS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), no tax shall be imposed
under paragraph (1) of subsection (a) on any
interest-related dividend (as defined in section
871(k)(1)) received from a regulated investment
company.
‘‘(B) 
EXCEPTION.—Subparagraph 
(A)
shall not apply—
‘‘(i) to any dividend referred to in sec-
tion 871(k)(1)(B), and
‘‘(ii) to any interest-related dividend
received by a controlled foreign corporation
(within the meaning of section 957(a)) to
the extent such dividend is attributable to
interest received by the regulated invest-
ment company from a person who is a re-
lated person (within the meaning of section
864(d)(4)) with respect to such controlled
foreign corporation.
‘‘(C) TREATMENT
OF
DIVIDENDS
RE-
CEIVED
BY
CONTROLLED
FOREIGN
CORPORA-
TIONS.—The rules of subsection (c)(5)(A) shall
apply to any interest-related dividend received
by a controlled foreign corporation (within the
meaning of section 957(a)) to the extent such
dividend is attributable to interest received by
the regulated investment company which is de-
scribed in clause (ii) of section 871(k)(1)(E)
(and not described in clause (i) or (iii) of such
section).
‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—
No tax shall be imposed under paragraph (1) of sub-
section (a) on any short-term capital gain dividend
(as defined in section 871(k)(2)) received from a
regulated investment company.’’
(3) WITHHOLDING TAXES.—
(A) Section 1441(c) (relating to excep-
tions) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(12) CERTAIN
DIVIDENDS
RECEIVED
FROM
REGULATED INVESTMENT COMPANIES.—
‘‘(A) IN GENERAL.—No tax shall be re-
quired to be deducted and withheld under sub-
section (a) from any amount exempt from the
tax imposed by section 871(a)(1)(A) by reason
of section 871(k).
‘‘(B) SPECIAL
RULE.—For purposes of
subparagraph 
(A), 
clause 
(i) 
of 
section
871(k)(1)(B) shall not apply to any dividend
unless the regulated investment company knows
that such dividend is a dividend referred to in
such clause. A similar rule shall apply with re-
spect to the exception contained in section
871(k)(2)(B).’’
(B) Section 1442(a) (relating to with-
holding of tax on foreign corporations) is
amended—
(i) by striking ‘‘and the reference in
section 1441(c)(10)’’ and inserting ‘‘the
reference in section 1441(c)(10)’’, and
(ii) by inserting before the period at
the end the following: ‘‘, and the references
in section 1441(c)(12) to sections 871(a)
and 871(k) shall be treated as referring to
sections 881(a) and 881(e) (except that for
purposes of applying subparagraph (A) of
section 1441(c)(12), as so modified, clause
(ii) of section 881(e)(1)(B) shall not apply
to any dividend unless the regulated invest-
ment company knows that such dividend is
a dividend referred to in such clause)’’.
(b) ESTATE TAX TREATMENT OF INTEREST IN CER-
TAIN
REGULATED
INVESTMENT
COMPANIES.—Section
2105 (relating to property without the United States for
estate tax purposes) is amended by adding at the end the
following new subsection:
‘‘(d) STOCK IN A RIC.—
‘‘(1) IN GENERAL.—For purposes of this sub-
chapter, stock in a regulated investment company
(as defined in section 851) owned by a nonresident
not a citizen of the United States shall not be
deemed property within the United States in the
proportion that, at the end of the quarter of such in-
vestment company’s taxable year immediately pre-
ceding a decedent’s date of death (or at such other
time as the Secretary may designate in regulations),
the assets of the investment company that were
qualifying assets with respect to the decedent bore
to the total assets of the investment company.
‘‘(2) QUALIFYING
ASSETS.—For purposes of
this subsection, qualifying assets with respect to a
decedent are assets that, if owned directly by the de-
cedent, would have been—
‘‘(A) amounts, deposits, or debt obligations
described in subsection (b) of this section,
‘‘(B) debt obligations described in the last
sentence of section 2104(c), or
‘‘(C) other property not within the United
States.’’
(c) TREATMENT OF REGULATED INVESTMENT COM-
PANIES UNDER SECTION 897.—
(1) Paragraph (1) of section 897(h) is amended
by striking ‘‘REIT’’ each place it appears and in-
serting ‘‘qualified investment entity’’.
(2) Paragraphs (2) and (3) of section 897(h)
are amended to read as follows:
‘‘(2) SALE OF STOCK IN DOMESTICALLY CON-
TROLLED ENTITY NOT TAXED.—The term ‘United
States real property interest’ does not include any
interest in a domestically controlled qualified invest-
ment entity.
‘‘(3) DISTRIBUTIONS BY DOMESTICALLY CON-
TROLLED
QUALIFIED
INVESTMENT
ENTITIES.—In
the case of a domestically controlled qualified invest-
ment entity, rules similar to the rules of subsection
(d) shall apply to the foreign ownership percentage
of any gain.’’
(3) Subparagraphs (A) and (B) of section
897(h)(4) are amended to read as follows:
‘‘(A) QUALIFIED INVESTMENT ENTITY.—
The term ‘qualified investment entity’ means
any real estate investment trust and any regu-
lated investment company.
‘‘(B) DOMESTICALLY
CONTROLLED.—The
term ‘domestically controlled qualified invest-
ment entity’ means any qualified investment en-
tity in which at all times during the testing pe-
riod less than 50 percent in value of the stock
was held directly or indirectly by foreign per-
sons.’’
(4) Subparagraphs (C) and (D) of section
897(h)(4) are each amended by striking ‘‘REIT’’
and inserting ‘‘qualified investment entity’’.
(5) The subsection heading for subsection (h) of
section 897 is amended by striking ‘‘REITS’’ and
inserting ‘‘CERTAIN INVESTMENT ENTITIES’’.
(d) EFFECTIVE DATE.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by
this section shall apply to dividends with respect to
taxable years of regulated investment companies be-
ginning after the date of the enactment of this Act.
(2) ESTATE
TAX
TREATMENT.—The amend-
ment made by subsection (b) shall apply to estates
of decedents dying after the date of the enactment
of this Act.
(3) CERTAIN OTHER PROVISIONS.—The amend-
ments made by subsection (c) (other than paragraph
(1) thereof) shall take effect on the date of the en-
actment of this Act.
SEC. 305. AIRLINE MILEAGE AWARDS TO CERTAIN FOREIGN
PERSONS.
(a) IN GENERAL.—The last sentence of section
4261(e)(3)(C) (relating to regulations) is amended by in-
serting ‘‘and mileage awards which are issued to individ-
uals whose mailing addresses on record with the person
providing the right to air transportation are outside the
United States’’ before the period at the end thereof.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to amounts paid, and benefits pro-
vided, after December 31, 2002.
SEC. 306. 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
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 amendment made by
this section shall apply to taxable years beginning after
December 31, 2002.
SEC. 307. REPEAL OF SPECIAL CAPITAL GAINS TAX ON
ALIENS PRESENT IN THE UNITED STATES
FOR 183 DAYS OR MORE.
(a) IN GENERAL.—Subsection (a) of section 871 is
amended by striking paragraph (2) and by redesignating
paragraph (3) as paragraph (2).
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 2002.
SEC. 308. 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.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to payments made after December
31, 2002.
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