I
105TH CONGRESS
1ST SESSION
H. R. 1783
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 4, 1997
Mr. HOUGHTON (for himself, Mr. LEVIN, Mr. CRANE, Mr. MATSUI, Mr. ENG-
LISH of Pennsylvania, Mr. HERGER, and Mr. SAM JOHNSON of Texas)
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’’.
(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 PASSIVE FOREIGN INVESTMENT
COMPANIES
Sec. 101. United States shareholders of controlled foreign corporations not sub-
ject to PFIC inclusion.
Sec. 102. Election of mark to market for marketable stock in passive foreign
investment company.
Sec. 103. Modification to definition of passive income.
Sec. 104. Effective date.
TITLE II—TREATMENT OF CONTROLLED FOREIGN
CORPORATIONS
Sec. 201. Gain on certain stock sales by controlled foreign corporations treated
as dividends.
Sec. 202. Miscellaneous modifications to subpart F.
Sec. 203. Indirect foreign tax credit allowed for certain lower tier companies.
Sec. 204. Exemption for active financing income.
Sec. 205. Application of separate foreign tax credit limitation for noncontrolled
section 902 corporations.
Sec. 206. Study of proper treatment of European Union under same country
exceptions.
Sec. 207. Expansion of de minimis rule under subpart F.
Sec. 208. Subpart F earnings and profits determined under generally accepted
accounting principles.
Sec. 209. Clarification of treatment of pipeline transportation income.
Sec. 210. Deduction for dividends received from certain foreign corporations.
TITLE III—OTHER PROVISIONS
Sec. 301. Exchange rate used in translating foreign taxes.
Sec. 302. Election to use simplified section 904 limitation for alternative mini-
mum tax.
Sec. 303. Modification of section 1491.
Sec. 304. Modification of section 367(b).
Sec. 305. Increase in filing thresholds for returns as to organization of foreign
corporations and acquisitions of stock in such corporations.
Sec. 306. Application of uniform capitalization rules to foreign persons.
Sec. 307. Extension of period to which excess foreign taxes may be carried.
Sec. 308. Recharacterization of overall domestic loss.
Sec. 309. Treatment of foreign sales corporations.
Sec. 310. Special rules relating to financial services income.
Sec. 311. United States property not to include certain assets acquired by deal-
ers in ordinary course of trade or business.
Sec. 312. Treatment of certain dividends of regulated investment companies.
Sec. 313. Intangible property not to include certain preliminary agreements.
Sec. 314. Study of interest allocation.
TITLE I—TREATMENT OF PAS-
SIVE FOREIGN INVESTMENT
COMPANIES
SEC. 
101. 
UNITED 
STATES 
SHAREHOLDERS 
OF 
CON-
TROLLED 
FOREIGN 
CORPORATIONS 
NOT
SUBJECT TO PFIC INCLUSION.
Section 1297, as redesignated by section 102, is
amended by adding at the end the following new
subsection:
‘‘(e) EXCEPTION FOR UNITED STATES SHAREHOLD-
ERS OF CONTROLLED FOREIGN CORPORATIONS.—
‘‘(1) IN GENERAL.—For purposes of this part,
a corporation shall not be treated with respect to a
shareholder as a passive foreign investment company
during the qualified portion of such shareholder’s
holding period with respect to stock in such
corporation.
‘‘(2) QUALIFIED
PORTION.—For purposes of
this subsection, the term ‘qualified portion’ means
the portion of the shareholder’s holding period—
‘‘(A) which is after December 31, 1997,
and
‘‘(B) during which the shareholder is a
United States shareholder (as defined in section
951(b)) of the corporation and the corporation
is a controlled foreign corporation.
‘‘(3) NEW
HOLDING
PERIOD
IF
QUALIFIED
PORTION ENDS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), if the qualified portion of a
shareholder’s holding period with respect to any
stock ends after December 31, 1997, solely for
purposes of this part, the shareholder’s holding
period with respect to such stock shall be treat-
ed as beginning as of the first day following
such period.
‘‘(B) 
EXCEPTION.—Subparagraph 
(A)
shall not apply if such stock was, with respect
to such shareholder, stock in a passive foreign
investment company at any time before the
qualified portion of the shareholder’s holding
period with respect to such stock and no elec-
tion under section 1298(b)(1) is made.’’
SEC. 102. ELECTION OF MARK TO MARKET FOR MARKET-
ABLE STOCK IN PASSIVE FOREIGN INVEST-
MENT COMPANY.
(a) IN GENERAL.—Part VI of subchapter P of chap-
ter 1 is amended by redesignating subpart C as subpart
D, by redesignating sections 1296 and 1297 as sections
1297 and 1298, respectively, and by inserting after sub-
part B the following new subpart:
‘‘Subpart C—Election of Mark to Market for
Marketable Stock
‘‘Sec. 1296. Election of mark to market for marketable stock.
‘‘SEC. 
1296. 
ELECTION 
OF 
MARK 
TO 
MARKET 
FOR
MARKETABLE STOCK.
‘‘(a) GENERAL RULE.—In the case of marketable
stock in a passive foreign investment company which is
owned (or treated under subsection (g) as owned) by a
United States person at the close of any taxable year of
such person, at the election of such person—
‘‘(1) If the fair market value of such stock as
of the close of such taxable year exceeds its adjusted
basis, such United States person shall include in
gross income for such taxable year an amount equal
to the amount of such excess.
‘‘(2) If the adjusted basis of such stock exceeds
the fair market value of such stock as of the close
of such taxable year, such United States person
shall be allowed a deduction for such taxable year
equal to the lesser of—
‘‘(A) the amount of such excess, or
‘‘(B) the unreversed inclusions with respect
to such stock.
‘‘(b) BASIS ADJUSTMENTS.—
‘‘(1) IN GENERAL.—The adjusted basis of stock
in a passive foreign investment company—
‘‘(A) shall be increased by the amount in-
cluded in the gross income of the United States
person under subsection (a)(1) with respect to
such stock, and
‘‘(B) shall be decreased by the amount al-
lowed as a deduction to the United States per-
son under subsection (a)(2) with respect to
such stock.
‘‘(2) SPECIAL
RULE
FOR
STOCK
CONSTRUC-
TIVELY OWNED.—In the case of stock in a passive
foreign investment company which the United States
person is treated as owning under subsection (g)—
‘‘(A) the adjustments under paragraph (1)
shall apply to such stock in the hands of the
person actually holding such stock but only for
purposes of determining the subsequent treat-
ment under this chapter of the United States
person with respect to such stock, and
‘‘(B) similar adjustments shall be made to
the adjusted basis of the property by reason of
which the United States person is treated as
owning such stock.
‘‘(c) CHARACTER AND SOURCE RULES.—
‘‘(1) ORDINARY TREATMENT.—
‘‘(A) GAIN.—Any amount included in gross
income under subsection (a)(1), and any gain
on the sale or other disposition of marketable
stock in a passive foreign investment company
(with respect to which an election under this
section is in effect), shall be treated as ordinary
income.
‘‘(B) LOSS.—Any—
‘‘(i) amount allowed as a deduction
under subsection (a)(2), and
‘‘(ii) loss on the sale or other disposi-
tion of marketable stock in a passive for-
eign investment company (with respect to
which an election under this section is in
effect) to the extent that the amount of
such loss does not exceed the unreversed
inclusions with respect to such stock,
shall be treated as an ordinary loss. The
amount so treated shall be treated as a deduc-
tion allowable in computing adjusted gross
income.
‘‘(2) SOURCE.—The source of any amount in-
cluded in gross income under subsection (a)(1) (or
allowed as a deduction under subsection (a)(2)) shall
be determined in the same manner as if such
amount were gain or loss (as the case may be) from
the sale of stock in the passive foreign investment
company.
‘‘(d) UNREVERSED INCLUSIONS.—For purposes of
this section, the term ‘unreversed inclusions’ means, with
respect to any stock in a passive foreign investment com-
pany, the excess (if any) of—
‘‘(1) the amount included in gross income of
the taxpayer under subsection (a)(1) with respect to
such stock for prior taxable years, over
‘‘(2) the amount allowed as a deduction under
subsection (a)(2) with respect to such stock for prior
taxable years.
The amount referred to in paragraph (1) shall include any
amount which would have been included in gross income
under subsection (a)(1) with respect to such stock for any
prior taxable year but for section 1291.
‘‘(e) MARKETABLE STOCK.—For purposes of this
section—
‘‘(1) IN
GENERAL.—The term ‘marketable
stock’ means—
‘‘(A) any stock which is regularly traded
on—
‘‘(i) a national securities exchange
which is registered with the Securities and
Exchange Commission or the national mar-
ket system established pursuant to section
11A of the Securities and Exchange Act of
1934, or
‘‘(ii) any exchange or other market
which the Secretary determines has rules
adequate to carry out the purposes of this
part,
‘‘(B) to the extent provided in regulations,
stock in any foreign corporation which is com-
parable to a regulated investment company and
which offers for sale or has outstanding any
stock of which it is the issuer and which is re-
deemable at its net asset value, and
‘‘(C) to the extent provided in regulations,
any option on stock described in subparagraph
(A) or (B).
‘‘(2) SPECIAL RULE FOR REGULATED INVEST-
MENT COMPANIES.—In the case of any regulated in-
vestment company which is offering for sale or has
outstanding any stock of which it is the issuer and
which is redeemable at its net asset value, all stock
in a passive foreign investment company which it
owns directly or indirectly shall be treated as mar-
ketable stock for purposes of this section. Except as
provided in regulations, similar treatment as mar-
ketable stock shall apply in the case of any other
regulated investment company which publishes net
asset valuations at least annually.
‘‘(f) TREATMENT OF CONTROLLED FOREIGN COR-
PORATIONS WHICH ARE SHAREHOLDERS
IN PASSIVE
FOREIGN INVESTMENT COMPANIES.—In the case of a for-
eign corporation which is a controlled foreign corporation
and which owns (or is treated under subsection (g) as own-
ing) stock in a passive foreign investment company—
‘‘(1) this section (other than subsection (c)(2))
shall apply to such foreign corporation in the same
manner as if such corporation were a United States
person, and
‘‘(2) for purposes of subpart F of part III of
subchapter N—
‘‘(A) any amount included in gross income
under subsection (a)(1) shall be treated as for-
eign personal holding company income de-
scribed in section 954(c)(1)(A), and
‘‘(B) any amount allowed as a deduction
under subsection (a)(2) shall be treated as a de-
duction allocable to foreign personal holding
company income so described.
‘‘(g) STOCK OWNED THROUGH CERTAIN FOREIGN
ENTITIES.—Except as provided in regulations—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, stock owned, directly or indirectly, by or for a
foreign partnership or foreign trust or foreign estate
shall be considered as being owned proportionately
by its partners or beneficiaries. Stock considered to
be owned by a person by reason of the application
of the preceding sentence shall, for purposes of ap-
plying such sentence, be treated as actually owned
by such person.
‘‘(2) TREATMENT OF CERTAIN DISPOSITIONS.—
In any case in which a United States person is
treated as owning stock in a passive foreign invest-
ment company by reason of paragraph (1)—
‘‘(A) any disposition by the United States
person or by any other person which results in
the United States person being treated as no
longer owning such stock, and
‘‘(B) any disposition by the person owning
such stock,
shall be treated as a disposition by the United
States person of the stock in the passive foreign in-
vestment company.
‘‘(h) COORDINATION WITH SECTION 851(b).—For
purposes of paragraphs (2) and (3) of section 851(b), any
amount included in gross income under subsection (a)
shall be treated as a dividend.
‘‘(i) STOCK ACQUIRED FROM A DECEDENT.—In the
case of stock of a passive foreign investment company
which is acquired by bequest, devise, or inheritance (or
by the decedent’s estate) and with respect to which an
election under this section was in effect as of the date of
the decedent’s death, notwithstanding section 1014, the
basis of such stock in the hands of the person so acquiring
it shall be the adjusted basis of such stock in the hands
of the decedent immediately before his death (or, if lesser,
the basis which would have been determined under section
1014 without regard to this subsection).
‘‘(j) COORDINATION WITH SECTION 1291 FOR FIRST
YEAR OF ELECTION.—
‘‘(1) TAXPAYERS
OTHER
THAN
REGULATED
INVESTMENT COMPANIES.—
‘‘(A) IN GENERAL.—If the taxpayer elects
the application of this section with respect to
any marketable stock in a corporation after the
beginning of the taxpayer’s holding period in
such stock, and if the requirements of subpara-
graph (B) are not satisfied, section 1291 shall
apply to—
‘‘(i) any distributions with respect to,
or disposition of, such stock in the first
taxable year of the taxpayer for which such
election is made, and
‘‘(ii) any amount which, but for sec-
tion 1291, would have been included in
gross income under subsection (a) with re-
spect to such stock for such taxable year in
the same manner as if such amount were
gain on the disposition of such stock.
‘‘(B) REQUIREMENTS.—The requirements
of this subparagraph are met if, with respect to
each of such corporation’s taxable years for
which such corporation was a passive foreign
investment company and which begin after De-
cember 31, 1986, and included any portion of
the taxpayer’s holding period in such stock,
such corporation was treated as a qualified
electing fund under this part with respect to the
taxpayer.
‘‘(2) SPECIAL RULES FOR REGULATED INVEST-
MENT COMPANIES.—
‘‘(A) IN GENERAL.—If a regulated invest-
ment company elects the application of this sec-
tion with respect to any marketable stock in a
corporation after the beginning of the tax-
payer’s holding period in such stock, then, with
respect to such company’s first taxable year for
which such company elects the application of
this section with respect to such stock—
‘‘(i) section 1291 shall not apply to
such stock with respect to any distribution
or disposition during, or amount included
in gross income under this section for,
such first taxable year, but
‘‘(ii) such regulated investment com-
pany’s tax under this chapter for such first
taxable year shall be increased by the ag-
gregate amount of interest which would
have 
been 
determined 
under 
section
1291(c)(3) if section 1291 were applied
without regard to this subparagraph.
Clause (ii) shall not apply if for the preceding
taxable year the company elected to mark to
market the stock held by such company as of
the last day of such preceding taxable year.
‘‘(B) DISALLOWANCE OF DEDUCTION.—No
deduction shall be allowed to any regulated in-
vestment company for the increase in tax under
subparagraph (A)(ii).
‘‘(k) ELECTION.—This section shall apply to market-
able stock in a passive foreign investment company which
is held by a United States person only if such person elects
to apply this section with respect to such stock. Such an
election shall apply to the taxable year for which made
and all subsequent taxable years unless—
‘‘(1) such stock ceases to be marketable stock,
or
‘‘(2) the Secretary consents to the revocation of
such election.
‘‘(l) TRANSITION RULE FOR INDIVIDUALS BECOMING
SUBJECT TO UNITED STATES TAX.—If any individual be-
comes a United States person in a taxable year beginning
after December 31, 1997, solely for purposes of this sec-
tion, the adjusted basis (before adjustments under sub-
section (b)) of any marketable stock in a passive foreign
investment company owned by such individual on the first
day of such taxable year shall be treated as being the
greater of its fair market value on such first day or its
adjusted basis on such first day.’’
(b) COORDINATION
WITH
INTEREST
CHARGE,
ETC.—
(1) Paragraph (1) of section 1291(d) is amend-
ed by adding at the end the following new flush
sentence:
‘‘Except as provided in section 1296(j), this section
also shall not apply if an election under section
1296(k) is in effect for the taxpayer’s taxable year.’’
(2) The subsection heading for subsection (d) of
section 1291 is amended by striking ‘‘SUBPART B’’
and inserting ‘‘SUBPARTS B AND C’’.
(3) Subparagraph (A) of section 1291(a)(3) is
amended to read as follows:
‘‘(A) HOLDING
PERIOD.—The taxpayer’s
holding period shall be determined under sec-
tion 1223; except that—
‘‘(i) for purposes of applying this sec-
tion to an excess distribution, such holding
period shall be treated as ending on the
date of such distribution, and
‘‘(ii) if section 1296 applied to such
stock with respect to the taxpayer for any
prior taxable year, such holding period
shall be treated as beginning on the first
day of the first taxable year beginning
after the last taxable year for which sec-
tion 1296 so applied.’’
(c) TREATMENT OF MARK-TO-MARKET GAIN UNDER
SECTION 4982.—
(1) Subsection (e) of section 4982 is amended
by adding at the end the following new paragraph:
‘‘(6) TREATMENT OF GAIN RECOGNIZED UNDER
SECTION 1296.—For purposes of determining a regu-
lated investment company’s ordinary income—
‘‘(A) notwithstanding paragraph (1)(C),
section 1296 shall be applied as if such compa-
ny’s taxable year ended on October 31, and
‘‘(B) any ordinary gain or loss from an ac-
tual disposition of stock in a passive foreign in-
vestment company during the portion of the
taxable year after October 31 shall be taken
into account in determining such company’s or-
dinary income for the following taxable year.
This paragraph shall not apply to a company mak-
ing an election under paragraph (4).’’
(2) Subsection (b) of section 852 is amended by
adding at the end the following new paragraph:
‘‘(10) SPECIAL RULE FOR CERTAIN LOSSES ON
STOCK IN PASSIVE FOREIGN INVESTMENT COMPA-
NIES.—To the extent provided in regulations, the
taxable income of a regulated investment company
(other than a company to which an election under
section 4982(e)(4) applies) shall be computed with-
out regard to any net reduction in the value of any
stock with respect to which an election under section
1296(k) is in effect occurring after October 31 of
the taxable year, and any such reduction shall be
treated as occurring on the first day of the following
taxable year.’’
(3) Subsection (c)(2) of section 852 is amended
by inserting ‘‘, without regard to any net reduction
in the value of any stock of a passive foreign invest-
ment company with respect to which an election
under section 1296(k) is in effect occurring after
October 31 of such year,’’ after ‘‘October 31 of such
year’’.
(d) CONFORMING AMENDMENTS.—
(1) Sections 532(b)(4) and 542(c)(10) are each
amended by striking ‘‘section 1296’’ and inserting
‘‘section 1297’’.
(2) Subsection (f) of section 551 is amended by
striking ‘‘section 1297(b)(5)’’ and inserting ‘‘section
1298(b)(5)’’
(3) Subsections (a)(1) and (d) of section 1293
are each amended by striking ‘‘section 1297(a)’’ and
inserting ‘‘section 1298(a)’’.
(4) Paragraph (3) of section 1297(b), as redes-
ignated by subsection (a), is hereby repealed.
(5) The table of sections for subpart D of part
VI of subchapter P of chapter 1, as redesignated by
subsection (a), is amended to read as follows:
‘‘Sec. 1297. Passive foreign investment company.
‘‘Sec. 1298. Special rules.’’
(6) The table of subparts for part VI of sub-
chapter P of chapter 1 is amended by striking the
last item and inserting the following new items:
‘‘Subpart C. Election of mark to market for marketable stock.
‘‘Subpart D. General provisions.’’
(e) CLARIFICATION OF GAIN RECOGNITION ELEC-
TION.—The last sentence of section 1298(b)(1), as so re-
designated, is amended by inserting ‘‘(determined without
regard to the preceding sentence)’’ after ‘‘investment
company’’.
SEC. 103. MODIFICATION TO DEFINITION OF PASSIVE
INCOME.
Paragraph (1) of section 1297(b) (defining passive
income), as redesignated by section 102, is amended by
inserting before the period ‘‘without regard to paragraph
(3) thereof’’.
SEC. 104. EFFECTIVE DATE.
The amendments made by this title shall apply to—
(1) taxable years of United States persons be-
ginning after December 31, 1997, and
(2) taxable years of foreign corporations ending
with or within such taxable years of United States
persons.
TITLE II—TREATMENT OF CON-
TROLLED 
FOREIGN 
COR-
PORATIONS
SEC. 201. GAIN ON CERTAIN STOCK SALES BY CONTROLLED
FOREIGN 
CORPORATIONS 
TREATED 
AS
DIVIDENDS.
(a) GENERAL RULE.—Section 964 (relating to mis-
cellaneous provisions) is amended by adding at the end
the following new subsection:
‘‘(e) GAIN
ON CERTAIN STOCK SALES
BY CON-
TROLLED
FOREIGN
CORPORATIONS
TREATED
AS
DIVIDENDS.—
‘‘(1) IN GENERAL.—If a controlled foreign cor-
poration sells or exchanges stock in any other for-
eign corporation, gain recognized on such sale or ex-
change shall be included in the gross income of such
(1) TREATMENT AS DIVIDENDS.—The amend-
ment made by subsection (a) shall apply to gain rec-
ognized on transactions occurring after the date of
the enactment of this Act.
(2) SECTION
904.—The amendment made by
subsection (b) shall apply to distributions after the
date of the enactment of this Act.
SEC. 202. MISCELLANEOUS MODIFICATIONS TO SUBPART F.
(a) SECTION 1248 GAIN TAKEN INTO ACCOUNT IN
DETERMINING PRO RATA SHARE.—
(1) IN
GENERAL.—Paragraph (2) of section
951(a) (defining pro rata share of subpart F in-
come) is amended by adding at the end the following
new sentence:
‘‘For purposes of subparagraph (B), any gain in-
cluded in the gross income of any person as a divi-
dend under section 1248 shall be treated as a dis-
tribution received by such person with respect to the
stock involved.’’
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply to dispositions after the
date of the enactment of this Act.
(b) BASIS ADJUSTMENTS IN STOCK HELD BY FOR-
EIGN CORPORATION.—
(1) IN GENERAL.—Section 961 (relating to ad-
justments to basis of stock in controlled foreign cor-
porations and of other property) is amended by add-
ing at the end the following new subsection:
‘‘(c) BASIS ADJUSTMENTS IN STOCK HELD BY FOR-
EIGN CORPORATION.—Under regulations prescribed by
the Secretary, if a United States shareholder is treated
under section 958(a)(2) as owning any stock in a con-
trolled foreign corporation which is actually owned by an-
other controlled foreign corporation, adjustments similar
to the adjustments provided by subsections (a) and (b)
shall be made to the basis of such stock in the hands of
such other controlled foreign corporation, but only for the
purposes of determining the amount included under sec-
tion 951 in the gross income of such United States share-
holder (or any other United States shareholder who ac-
quires from any person any portion of the interest of such
United States shareholder by reason of which such share-
holder was treated as owning such stock, but only to the
extent of such portion, and subject to such proof of iden-
tity of such interest as the Secretary may prescribe by reg-
ulations).’’
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply for purposes of deter-
mining inclusions for taxable years of United States
shareholders beginning after December 31, 1997.
(c) DETERMINATION
OF PREVIOUSLY TAXED IN-
COME IN SECTION 304 DISTRIBUTIONS, ETC.—
(1) IN GENERAL.—Section 959 (relating to ex-
clusion from gross income of previously taxed earn-
ings and profits) is amended by adding at the end
the following new subsection:
‘‘(g) ADJUSTMENTS FOR CERTAIN TRANSACTIONS.—
If, by reason of—
‘‘(1) a transaction to which section 304 applies,
‘‘(2) the structure of a United States sharehold-
er’s holdings in controlled foreign corporations, or
‘‘(3) other circumstances,
there would be a multiple inclusion of any item in income
(or an inclusion or exclusion without an appropriate basis
adjustment) by reason of this subpart, the Secretary may
prescribe regulations providing such modifications in the
application of this subpart as may be necessary to elimi-
nate such multiple inclusion or provide such basis adjust-
ment, as the case may be.’’
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall take effect on the date of the
enactment of this Act.
(d) CLARIFICATION OF TREATMENT OF BRANCH TAX
EXEMPTIONS OR REDUCTIONS.—
(1) IN
GENERAL.—Subsection (b) of section
952 is amended by adding at the end the following
new sentence: ‘‘For purposes of this subsection, any
exemption (or reduction) with respect to the tax im-
posed by section 884 shall not be taken into ac-
count.’’
(2) EFFECTIVE DATE.—The amendment made
by paragraph (1) shall apply to taxable years begin-
ning after December 31, 1986.
SEC. 203. INDIRECT FOREIGN TAX CREDIT ALLOWED FOR
CERTAIN LOWER TIER COMPANIES.
(a) SECTION 902 CREDIT.—
(1) IN
GENERAL.—Subsection (b) of section
902 (relating to deemed taxes increased in case of
certain 2nd and 3rd tier foreign corporations) is
amended to read as follows:
‘‘(b) DEEMED TAXES INCREASED IN CASE OF CER-
TAIN LOWER TIER CORPORATIONS.—
‘‘(1) IN GENERAL.—If—
‘‘(A) any foreign corporation is a member
of a qualified group, and
‘‘(B) such foreign corporation owns 10 per-
cent or more of the voting stock of another
member of such group from which it receives
dividends in any taxable year,
such foreign corporation shall be deemed to have
paid the same proportion of such other member’s
post-1986 foreign income taxes as would be deter-
mined under subsection (a) if such foreign corpora-
tion were a domestic corporation.
‘‘(2) QUALIFIED
GROUP.—For purposes of
paragraph (1), the term ‘qualified group’ means—
‘‘(A) the foreign corporation described in
subsection (a), and
‘‘(B) any other foreign corporation if—
‘‘(i) the domestic corporation owns at
least 5 percent of the voting stock of such
other 
foreign 
corporation 
indirectly
through a chain of foreign corporations
connected through stock ownership of at
least 10 percent of their voting stock,
‘‘(ii) the foreign corporation described
in subsection (a) is the first tier corpora-
tion in such chain, and
‘‘(iii) such other corporation is not
below the sixth tier in such chain.
The term ‘qualified group’ shall not include any for-
eign corporation below the third tier in the chain re-
ferred to in clause (i) unless such foreign corpora-
tion is a controlled foreign corporation (as defined in
section 957) and the domestic corporation is a Unit-
ed States shareholder (as defined in section 951(b))
in such foreign corporation. Paragraph (1) shall
apply to those taxes paid by a member of the quali-
fied group below the third tier only with respect to
periods during which it was a controlled foreign
corporation.’’
(2) CONFORMING AMENDMENTS.—
(A) Subparagraph (B) of section 902(c)(3)
is amended by adding ‘‘or’’ at the end of clause
(i) and by striking clauses (ii) and (iii) and in-
serting the following new clause:
‘‘(ii) the requirements of subsection
(b)(2) are met with respect to such foreign
corporation.’’
(B) Subparagraph (B) of section 902(c)(4)
is amended by striking ‘‘3rd foreign corpora-
tion’’ 
and 
inserting 
‘‘sixth 
tier 
foreign
corporation’’.
(C) The heading for paragraph (3) of sec-
tion 902(c) is amended by striking ‘‘WHERE DO-
MESTIC
CORPORATION
ACQUIRES
PERCENT
OF
FOREIGN
CORPORATION’’ and inserting
‘‘WHERE
FOREIGN
CORPORATION
FIRST
QUALIFIES’’.
(D) Paragraph (3) of section 902(c) is
amended by striking ‘‘ownership’’ each place it
appears.
(b) SECTION 960 CREDIT.—Paragraph (1) of section
960(a) (relating to special rules for foreign tax credits)
is amended to read as follows:
‘‘(1) DEEMED PAID CREDIT.—For purposes of
subpart A of this part, if there is included under
section 951(a) in the gross income of a domestic cor-
poration any amount attributable to earnings and
profits of a foreign corporation which is a member
of a qualified group (as defined in section 902(b))
with respect to the domestic corporation, then, ex-
cept to the extent provided in regulations, section
902 shall be applied as if the amount so included
were a dividend paid by such foreign corporation
(determined by applying section 902(c) in accord-
ance with section 904(d)(3)(B)).’’
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to taxes of any foreign cor-
poration for taxable years of such corporation begin-
ning after December 31, 1997.
(2) SPECIAL RULE.—In the case of any chain
of foreign corporations described in clauses (i) and
(ii) of section 902(b)(2)(B) of the Internal Revenue
Code of 1986 (as amended by this section), no liq-
uidation, reorganization, or similar transaction in a
taxable year beginning after December 31, 1997,
shall have the effect of permitting taxes to be taken
into account under section 902 of the Internal Reve-
nue Code of 1986 which could not have been taken
into account under such section but for such trans-
action.
SEC. 204. EXEMPTION FOR ACTIVE FINANCING INCOME.
(a) EXEMPTION FROM FOREIGN PERSONAL HOLD-
ING COMPANY INCOME.—Subsection (c) of section 954 is
amended by adding at the end the following new para-
graph:
‘‘(4) CERTAIN
INCOME
DERIVED
IN
ACTIVE
CONDUCT OF TRADE OR BUSINESS.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (1), foreign personal holding company in-
come shall not include income which is—
‘‘(i) derived in or incident to the ac-
tive conduct by a controlled foreign cor-
poration of a banking, financing, or similar
business, but only if the corporation is pre-
dominantly engaged in the active conduct
of such business,
‘‘(ii) received from a person other
than a related person (within the meaning
of subsection (d)(3)) and derived from the
investments made by a qualifying insur-
ance company of its unearned premiums or
reserves ordinary and necessary for the
proper conduct of its insurance business,
or
‘‘(iii) received from a person other
than a related person (within the meaning
of subsection (d)(3)) and derived from in-
vestments made by a qualifying insurance
company of an amount of its assets equal
to—
‘‘(I) in the case of contracts reg-
ulated in the country in which sold as
property, casualty, or health insurance
contracts, one-third of its premiums
earned on insurance contracts during
the taxable year (as defined in section
832(b)(4)), and
‘‘(II) in the case of contracts reg-
ulated in the country in which sold as
life insurance or annuity contracts,
the greater of 10 percent of the re-
serves described in clause (ii) or
$10,000,000,
which are not directly or indirectly attrib-
utable to the insurance or reinsurance of
risks of persons who are related persons
(within the meaning of subsection (d)(3)).
‘‘(B) APPLICABLE PRINCIPLES.—
‘‘(i) BANKING, ETC. INCOME.—The
Secretary shall prescribe regulations which
interpret subparagraph (A)(i) in accord-
ance with the applicable principles of sec-
tion 904(d)(2)(C), except that in prescrib-
ing such regulations, the Secretary shall
include income from all leases in income
from a banking, financing, or similar busi-
ness.
‘‘(ii) LOOK-THRU
RULES.—The Sec-
retary shall prescribe regulations consist-
ent with the principles of section 904(d)(3)
which provide that dividends, interest, in-
come equivalent to interest, rents, or royal-
ties received or accrued from a related per-
son (within the meaning of subsection
(d)(3)) shall be subject to look-thru treat-
ment for purposes of this section.
‘‘(iii) SPECIAL RULE FOR BANKING OR
SECURITIES BUSINESS.—In the case of a
corporation described in subparagraph
(C)(ii), the regulations under clauses (i)
and (ii) shall be consistent with the appli-
cable principles of section 1296(b) (as in
effect on the day before the enactment of
the International Tax Simplification for
American Competitiveness Act).
‘‘(C) 
PREDOMINANTLY
ENGAGED.—For
purposes of subparagraph (A)(i), a corporation
shall be deemed predominantly engaged in the
active conduct of a banking, financing, or simi-
lar business only if—
‘‘(i) more than 70 percent of its gross
income from such business is derived from
transactions with unrelated persons (as de-
fined in subsection (d)(3)), and more than
20 percent of its gross income from that
business is derived from transactions with
unrelated persons (as so defined) located
within the country under the laws of which
the controlled foreign corporation is cre-
ated or organized, or
‘‘(ii) the corporation is—
‘‘(I) predominantly engaged in
the active conduct of a banking or se-
curities business (within the meaning
of section 1296(b), as in effect before
the enactment of the International
Tax Simplification for American Com-
petitiveness Act), or
‘‘(II) a qualified bank affiliate or
a qualified securities affiliate for pur-
poses of section 1296(b) (as so in ef-
fect).
‘‘(D) QUALIFYING INSURANCE COMPANY.—
For purposes of clauses (ii) and (iii) of sub-
paragraph (A), the term ‘qualifying insurance
company’ means any entity which is subject to
regulation as an insurance company under the
laws of its country of incorporation and which
realizes at least 50 percent of its gross income
(other than gross income derived from invest-
ments) from premiums written on risks situated
within its country of incorporation.’’
(b) EXEMPTION FROM FOREIGN BASE COMPANY
SERVICES INCOME.—Paragraph (2) of section 954(e) 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) the active conduct by a controlled for-
eign corporation of a banking, financing, insur-
ance, or similar business, but only if the cor-
poration is predominantly engaged in the active
conduct of that business (within the meaning of
subsection (c)(4)(C)).’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years of foreign corpora-
tions beginning after December 31, 1997, and to taxable
years of United States shareholders with or within which
such taxable years of foreign corporations end.
SEC. 205. APPLICATION OF SEPARATE FOREIGN TAX CRED-
IT LIMITATION FOR NONCONTROLLED SEC-
TION 902 CORPORATIONS.
(a) LOOK-THRU IN CASE OF NONCONTROLLED SEC-
TION 902 CORPORATIONS IF INFORMATION AVAILABLE.—
Section 904(d) (relating to separate application of section
with respect to certain categories of income) is amended
by redesignating paragraphs (4) and (5) as paragraphs
(5) and (6), respectively, and by inserting after paragraph
(3) the following new paragraph:
‘‘(4) LOOK-THRU
IN
THE
CASE
OF
CERTAIN
NONCONTROLLED SECTION 902 CORPORATIONS.—
‘‘(A) IN GENERAL.—Dividends received or
accrued by a corporation from a noncontrolled
section 902 corporation shall be treated as not
described in paragraph (1)(E) if information
necessary to make the determinations under
subparagraph (B) is readily available to the
taxpayer.
‘‘(B) ALLOCATION OF DIVIDENDS AMONG
CATEGORIES.—Dividends treated as provided in
subparagraph (A) which are paid out of the
earnings or profits of such corporation shall be
treated as income in a separate category in pro-
portion to the ratio of—
‘‘(i) the portion of the earnings and
profits attributable to income in such sepa-
rate category, to
‘‘(ii) the total amount of earnings and
profits.
‘‘(C) COORDINATION WITH OTHER PROVI-
SIONS.—Dividends treated as provided in sub-
paragraph (A) shall not be treated as dividends
from a noncontrolled section 902 corporation
for purposes of subparagraphs (C)(iii) and (D)
of paragraph (2).’’
(b) DIVIDENDS
FROM
OTHER
NONCONTROLLED
SECTION 902 CORPORATIONS ALL IN SAME SEPARATE
BASKET.—Subparagraph (E) of section 904(d)(1) is
amended to read as follows:
‘‘(E) in the case of a corporation, except as
provided in paragraph (4), dividends from all
noncontrolled section 902 corporations,’’.
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by
this section shall apply to taxable years of foreign
corporations beginning after December 31, 1997,
and to taxable years of United States shareholders
in which or with which such taxable years of foreign
corporations end.
(2) DIVIDENDS.—The amendments made by
this section shall apply to dividends paid out of
earnings and profits accumulated during taxable
years of foreign corporations beginning after Decem-
ber 31, 1997. For purposes of the preceding sen-
tence, the rules of section 316 of the Internal Reve-
nue Code of 1986 shall apply.
SEC. 206. 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
legislation.
SEC. 207. 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
amended—
(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’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 208. SUBPART F EARNINGS AND PROFITS DETER-
MINED 
UNDER 
GENERALLY 
ACCEPTED
ACCOUNTING 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’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to distributions during, and the
determination of the inclusion under section 951 of the
Internal Revenue Code of 1986 with respect to, taxable
years of foreign corporations beginning after December
31, 1997.
SEC. 209. CLARIFICATION OF TREATMENT OF PIPELINE
TRANSPORTATION INCOME.
(a) IN GENERAL.—Section 954(g)(1) (defining for-
eign base company oil related income) is amended by strik-
ing ‘‘or’’ at the end of subparagraph (A), by striking the
period at the end of subparagraph (B) and inserting ‘‘,
or’’, and by inserting after subparagraph (B) the following
new subparagraph:
‘‘(C) the pipeline transportation of oil or
gas within such foreign country.’’
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 210. 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) 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, 1997.
TITLE III—OTHER PROVISIONS
SEC. 
301. 
EXCHANGE 
RATE 
USED 
IN 
TRANSLATING
FOREIGN TAXES.
(a) ACCRUED TAXES TRANSLATED BY USING AVER-
AGE RATE FOR YEAR TO WHICH TAXES RELATE.—
(1) IN
GENERAL.—Subsection (a) of section
986 (relating to translation of foreign taxes) is
amended to read as follows:
‘‘(a) FOREIGN INCOME TAXES.—
‘‘(1) TRANSLATION OF ACCRUED TAXES.—
‘‘(A) IN GENERAL.—For purposes of deter-
mining the amount of the foreign tax credit, in
the case of a taxpayer which takes foreign in-
come taxes into account when accrued, the
amount of any foreign income taxes (and any
adjustment thereto) shall be translated into dol-
lars by using the average exchange rate for the
taxable year to which such taxes relate.
‘‘(B) EXCEPTION FOR CERTAIN TAXES.—
Subparagraph (A) shall not apply to any for-
eign income taxes paid—
‘‘(i) after the date 2 years after the
close of the taxable year to which such
taxes relate, or
‘‘(ii) before the beginning of the tax-
able year to which such taxes relate.
‘‘(C) EXCEPTION FOR INFLATIONARY CUR-
RENCIES.—Subparagraph (A) shall not apply to
any foreign income taxes the liability for which
is denominated in any currency determined to
be an inflationary currency under regulations
prescribed by the Secretary.
‘‘(D) CROSS REFERENCE.—
‘‘For adjustments where tax is not paid within 2
years, see section 905(c).
‘‘(2) TRANSLATION OF TAXES TO WHICH PARA-
GRAPH (1) DOES NOT APPLY.—For purposes of de-
termining the amount of the foreign tax credit, in
the case of any foreign income taxes to which sub-
paragraph (A) of paragraph (1) does not apply—
‘‘(A) such taxes shall be translated into
dollars using the exchange rates as of the time
such taxes were paid to the foreign country or
possession of the United States, and
‘‘(B) any adjustment to the amount of
such taxes shall be translated into dollars
using—
‘‘(i) except as provided in clause (ii),
the exchange rate as of the time when such
adjustment is paid to the foreign country
or possession, or
‘‘(ii) in the case of any refund or cred-
it of foreign income taxes, using the ex-
change rate as of the time of the original
payment of such foreign income taxes.
‘‘(3) FOREIGN INCOME TAXES.—For purposes
of this subsection, the term ‘foreign income taxes’
means any income, war profits, or excess profits
taxes paid or accrued to any foreign country or to
any possession of the United States.’’
(2) ADJUSTMENT WHEN NOT PAID WITHIN 2
YEARS AFTER YEAR TO WHICH TAXES RELATE.—
Subsection (c) of section 905 is amended to read as
follows:
‘‘(c) ADJUSTMENTS TO ACCRUED TAXES.—
‘‘(1) IN GENERAL.—If—
‘‘(A) accrued taxes when paid differ from
the amounts claimed as credits by the taxpayer,
‘‘(B) accrued taxes are not paid before the
date 2 years after the close of the taxable year
to which such taxes relate, or
‘‘(C) any tax paid is refunded in whole or
in part,
the taxpayer shall notify the Secretary, who shall re-
determine the amount of the tax for the year or
years affected.
‘‘(2) SPECIAL
RULE
FOR
TAXES
NOT
PAID
WITHIN 2 YEARS.—In making the redetermination
under paragraph (1), no credit shall be allowed for
accrued taxes not paid before the date referred to in
subparagraph (B) of paragraph (1). Any such taxes
subsequently paid shall be taken into account for the
taxable year to which they relate and a redetermina-
tion under this section shall be made on account of
such payment.
‘‘(3) ADJUSTMENTS.—The amount of tax due
on any redetermination under paragraph (1) (if any)
shall be paid by the taxpayer on notice and demand
by the Secretary, and the amount of tax overpaid (if
any) shall be credited or refunded to the taxpayer in
accordance with subchapter B of chapter 66 (section
6511 et seq.).
‘‘(4) BOND
REQUIREMENTS.—In the case of
any tax accrued but not paid, the Secretary, as a
condition precedent to the allowance of the credit
provided in this subpart, may require the taxpayer
to give a bond, with sureties satisfactory to and ap-
proved by the Secretary, in such sum as the Sec-
retary may require, conditioned on the payment by
the taxpayer of any amount of tax found due on any
such redetermination. Any such bond shall contain
such further conditions as the Secretary may
require.
‘‘(5) OTHER SPECIAL RULES.—In any redeter-
mination under paragraph (1) by the Secretary of
the amount of tax due from the taxpayer for the
year or years affected by a refund, the amount of
the taxes refunded for which credit has been allowed
under this section shall be reduced by the amount of
any tax described in section 901 imposed by the for-
eign country or possession of the United States with
respect to such refund; but no credit under this sub-
part, or deduction under section 164, shall be al-
lowed for any taxable year with respect to any such
tax imposed on the refund. No interest shall be as-
sessed or collected on any amount of tax due on any
redetermination by the Secretary, resulting from a
refund to the taxpayer, for any period before the re-
ceipt of such refund, except to the extent interest
was paid by the foreign country or possession of the
United States on such refund for such period.’’
(b) AUTHORITY TO USE AVERAGE RATES.—
(1) IN
GENERAL.—Subsection (a) of section
986 (as amended by subsection (a)) is amended by
redesignating paragraph (3) as paragraph (4) and
inserting after paragraph (2) the following new
paragraph:
‘‘(3) AUTHORITY TO PERMIT USE OF AVERAGE
RATES.—To the extent prescribed in regulations, the
average exchange rate for the period (specified in
such regulations) during which the taxes or adjust-
ment is paid may be used instead of the exchange
rate as of the time of such payment.’’
(2) DETERMINATION
OF
AVERAGE
RATES.—
Subsection (c) of section 989 is amended by striking
‘‘and’’ at the end of paragraph (4), by striking the
period at the end of paragraph (5) and inserting ‘‘,
and’’, and by adding at the end the following new
paragraph:
‘‘(6) setting forth procedures for determining
the average exchange rate for any period.’’
(3) CONFORMING
AMENDMENTS.—Subsection
(b) of section 989 is amended by striking ‘‘weight-
ed’’ each place it appears.
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by
subsections (a)(1) and (b) shall apply to taxes paid
or accrued in taxable years beginning after Decem-
ber 31, 1997.
(2) SUBSECTION (a)(2).—The amendment made
by subsection (a)(2) shall apply to taxes which relate
to taxable years beginning after December 31, 1997.
SEC. 302. ELECTION TO USE SIMPLIFIED SECTION 904
LIMITATION FOR ALTERNATIVE MINIMUM
TAX.
(a) GENERAL RULE.—Subsection (a) of section 59
(relating to alternative minimum tax foreign tax credit)
is amended by adding at the end the following new
paragraph:
‘‘(4) ELECTION TO USE SIMPLIFIED SECTION
904 LIMITATION.—
‘‘(A) IN GENERAL.—In determining the al-
ternative minimum tax foreign tax credit for
any taxable year to which an election under this
paragraph applies—
‘‘(i) subparagraph (B) of paragraph
(1) shall not apply, and
‘‘(ii) the limitation of section 904
shall be based on the proportion which—
‘‘(I) the taxpayer’s taxable in-
come (as determined for purposes of
the regular tax) from sources without
the United States (but not in excess
of the taxpayer’s entire alternative
minimum taxable income), bears to
‘‘(II) the taxpayer’s entire alter-
native minimum taxable income for
the taxable year.
‘‘(B) ELECTION.—
‘‘(i) IN GENERAL.—An election under
this paragraph may be made only for the
taxpayer’s first taxable year which begins
after December 31, 1997, and for which
the taxpayer claims an alternative mini-
mum tax foreign tax credit.
‘‘(ii) ELECTION
REVOCABLE
ONLY
WITH
CONSENT.—An election under this
paragraph, once made, shall apply to the
taxable year for which made and all subse-
quent taxable years unless revoked with
the consent of the Secretary.’’
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 303. MODIFICATION OF SECTION 1491.
(a) GENERAL RULE.—So much of chapter 5 (relating
to tax on transfers to avoid income tax) as precedes sec-
tion 1492 is amended to read as follows:
‘‘CHAPTER 5—TREATMENT OF TRANSFERS
TO AVOID INCOME TAX
‘‘Sec. 1491. Recognition of gain.
‘‘Sec. 1492. Exceptions.
‘‘SEC. 1491. RECOGNITION OF GAIN.
‘‘In the case of any transfer of property by a United
States person to a foreign corporation as paid-in surplus
or as a contribution to capital, to a foreign estate or trust,
or to a foreign partnership, for purposes of this subtitle
(other than for purposes of section 679), such transfer
shall be treated as a sale or exchange for an amount equal
to the fair market value of the property transferred, and
the transferor shall recognize as gain the excess of—
‘‘(1) the fair market value of the property so
transferred, over
‘‘(2) the adjusted basis (for purposes of deter-
mining gain) of such property in the hands of the
transferor.
If a trust which is not a foreign trust becomes a foreign
trust, such trust shall be treated for purposes of this sec-
tion as having transferred, immediately before becoming
a foreign trust, all of its assets to a foreign trust.’’
(b) CONFORMING AMENDMENTS.—
(1) Section 1057 is hereby repealed.
(2) Section 1492 is amended to read as follows:
‘‘SEC. 1492. EXCEPTIONS.
‘‘The provisions of section 1491 shall not apply—
‘‘(1) if the transferee is an organization exempt
from income tax under part I of subchapter F of
chapter 1 (other than an organization described in
section 401(a)),
‘‘(2) to a transfer described in section 367, or
‘‘(3) to any other transfer, to the extent pro-
vided in regulations in accordance with principles
similar to the principles of section 367 or otherwise
consistent with the purpose of section 1491.’’
(3) Section 1494 is hereby repealed.
(4) Paragraph (8) of section 6501(c) is amend-
ed by inserting ‘‘or on any transfer by reason of sec-
tion 1491’’ after ‘‘section 367’’.
(5) Subsection (a) of section 6038B is amended
by striking ‘‘or’’ at the end of paragraph (1), by
adding ‘‘or’’ at the end of paragraph (2), and by in-
serting after paragraph (2) the following new para-
graph:
‘‘(3) makes any transfer described in section
1491,’’.
(6) The table of sections for part IV of sub-
chapter O of chapter 1 is amended by striking the
item relating to section 1057.
(7) The table of chapters for subtitle A is
amended by striking ‘‘Tax on’’ in the item relating
to chapter 5 and inserting ‘‘Treatment of’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to transfers after December 31,
1997.
SEC. 304. MODIFICATION OF SECTION 367(b).
(a) GENERAL RULE.—Paragraph (1) of section
367(b) is amended to read as follows:
‘‘(1) IN GENERAL.—In the case of any trans-
action described in section 332, 351, 354, 355, 356,
or 361 in which the status of a foreign corporation
as a corporation is a general condition for non-
recognition by 1 or more of the parties to the trans-
action, income shall be required to be recognized to