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SEC. 403. SEPARATE APPLICATION OF FOREIGN TAX CRED-
IT LIMITATION, ETC., TO ITEMS RESOURCED 
UNDER TREATIES. 
(a) IN GENERAL.—Subsection (d) of section 904 is 
amended by redesignating paragraph (6) as paragraph (7) 
and by inserting after paragraph (5) the following new 
paragraph: 
‘‘(6) 
SEPARATE
APPLICATION
TO
ITEMS 
RESOURCED UNDER TREATIES.— 
‘‘(A) IN GENERAL.—If— 
‘‘(i) without regard to any treaty obli-
gation of the United States, any item of in-
come would be treated as derived from 
sources within the United States, 
‘‘(ii) under a treaty obligation of the 
United States, such item would be treated 
as arising from sources outside the United 
States, and 
‘‘(iii) the taxpayer chooses the benefits 
of such treaty obligation, 
subsections (a), (b), and (c) of this section and 
sections 902, 907, and 960 shall be applied sepa-
rately with respect to each such item. 
‘‘(B) COORDINATION
WITH
OTHER
PROVI-
SIONS.—This paragraph shall not apply to any
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item of income to which subsection (h)(10) or 
section 865(h) applies. 
‘‘(C) REGULATIONS.—The Secretary may 
issue such regulations or other guidance as is 
necessary or appropriate to carry out the pur-
poses of this paragraph, including regulations or 
other guidance which provides that related items 
of income may be aggregated for purposes of this 
paragraph.’’. 
(b) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after the date 
of the enactment of this Act. 
SEC. 404. LIMITATION ON THE AMOUNT OF FOREIGN TAXES 
DEEMED PAID WITH RESPECT TO SECTION 
956 INCLUSIONS. 
(a) IN GENERAL.—Section 960 is amended by adding 
at the end the following new subsection: 
‘‘(c) LIMITATION WITH RESPECT TO SECTION 956 IN-
CLUSIONS.— 
‘‘(1) IN GENERAL.—If there is included under 
section 951(a)(1)(B) in the gross income of a domestic 
corporation any amount attributable to the earnings 
and profits of a foreign corporation which is a mem-
ber of a qualified group (as defined in section 902(b)) 
with respect to the domestic corporation, the amount
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of any foreign income taxes deemed to have been paid 
during the taxable year by such domestic corporation 
under section 902 by reason of subsection (a) with re-
spect to such inclusion in gross income shall not ex-
ceed the amount of the foreign income taxes which 
would have been deemed to have been paid during the 
taxable year by such domestic corporation if cash in 
an amount equal to the amount of such inclusion in 
gross income were distributed as a series of distribu-
tions (determined without regard to any foreign taxes 
which would be imposed on an actual distribution) 
through the chain of ownership which begins with 
such foreign corporation and ends with such domestic 
corporation. 
‘‘(2) AUTHORITY TO PREVENT ABUSE.—The Sec-
retary shall issue such regulations or other guidance 
as is necessary or appropriate to carry out the pur-
poses of this subsection, including regulations or other 
guidance which prevent the inappropriate use of the 
foreign corporation’s foreign income taxes not deemed 
paid by reason of paragraph (1).’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to acquisitions of United States property 
(as defined in section 956(c) of the Internal Revenue Code 
of 1986) after May 20, 2010.
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•HR 4213 EAH1S 
SEC. 405. SPECIAL RULE WITH RESPECT TO CERTAIN RE-
DEMPTIONS BY FOREIGN SUBSIDIARIES. 
(a) IN GENERAL.—Paragraph (5) of section 304(b) is 
amended by redesignating subparagraph (B) as subpara-
graph (C) and by inserting after subparagraph (A) the fol-
lowing new subparagraph: 
‘‘(B) SPECIAL RULE IN CASE OF FOREIGN 
ACQUIRING CORPORATION.—In the case of any 
acquisition to which subsection (a) applies in 
which the acquiring corporation is a foreign cor-
poration, no earnings and profits shall be taken 
into account under paragraph (2)(A) (and sub-
paragraph (A) shall not apply) if more than 50 
percent of the dividends arising from such acqui-
sition (determined without regard to this sub-
paragraph) would not— 
‘‘(i) be subject to tax under this chap-
ter for the taxable year in which the divi-
dends arise, or 
‘‘(ii) be includible in the earnings and 
profits of a controlled foreign corporation 
(as defined in section 957 and without re-
gard to section 953(c)).’’. 
(b) EFFECTIVE DATE.—The amendments made by this 
section shall apply to acquisitions after May 20, 2010.
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SEC. 406. MODIFICATION OF AFFILIATION RULES FOR PUR-
POSES OF RULES ALLOCATING INTEREST EX-
PENSE. 
(a) IN
GENERAL.—Subparagraph (A) of section 
864(e)(5) is amended by adding at the end the following: 
‘‘Notwithstanding the preceding sentence, a foreign corpora-
tion shall be treated as a member of the affiliated group 
if— 
‘‘(i) more than 50 percent of the gross 
income of such foreign corporation for the 
taxable year is effectively connected with the 
conduct of a trade or business within the 
United States, and 
‘‘(ii) at least 80 percent of either the 
vote or value of all outstanding stock of such 
foreign corporation is owned directly or in-
directly by members of the affiliated group 
(determined with regard to this sentence).’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to taxable years beginning after the date 
of the enactment of this Act.
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•HR 4213 EAH1S 
SEC. 407. TERMINATION OF SPECIAL RULES FOR INTEREST 
AND DIVIDENDS RECEIVED FROM PERSONS 
MEETING THE 80-PERCENT FOREIGN BUSI-
NESS REQUIREMENTS. 
(a) IN GENERAL.—Paragraph (1) of section 861(a) is 
amended by striking subparagraph (A) and by redesig-
nating subparagraphs (B) and (C) as subparagraphs (A) 
and (B), respectively. 
(b) GRANDFATHER RULE WITH RESPECT TO WITH-
HOLDING ON INTEREST AND DIVIDENDS RECEIVED FROM 
PERSONS MEETING THE 80-PERCENT FOREIGN BUSINESS 
REQUIREMENTS.— 
(1) IN GENERAL.—Subparagraph (B) of section 
871(i)(2) is amended to read as follows: 
‘‘(B) The active foreign business percentage 
of— 
‘‘(i) any dividend paid by an existing 
80/20 company, and 
‘‘(ii) any interest paid by an existing 
80/20 company.’’. 
(2) DEFINITIONS AND SPECIAL RULES.—Section 
871 is amended by redesignating subsections (l) and 
(m) as subsections (m) and (n), respectively, and by 
inserting after subsection (k) the following new sub-
section:
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•HR 4213 EAH1S 
‘‘(l) RULES RELATING TO EXISTING 80/20 COMPA-
NIES.—For purposes of this subsection and subsection 
(i)(2)(B)— 
‘‘(1) EXISTING 80/20 COMPANY.— 
‘‘(A) IN GENERAL.—The term ‘existing 80/ 
20 company’ means any corporation if— 
‘‘(i) such corporation met the 80-per-
cent foreign business requirements of section 
861(c)(1) (as in effect before the enactment 
of this subsection) for such corporation’s 
last taxable year beginning before January 
1, 2011, 
‘‘(ii) such corporation meets the 80- 
percent foreign business requirements of 
subparagraph (B) with respect to each tax-
able year after the taxable year referred to 
in clause (i), and 
‘‘(iii) there has not been an addition of 
a substantial line of business with respect to 
such corporation after the date of the enact-
ment of this subsection. 
‘‘(B) FOREIGN BUSINESS REQUIREMENTS.— 
‘‘(i) 
IN
GENERAL.—A 
corporation 
meets the 80-percent foreign business re-
quirements of this subparagraph if it is
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•HR 4213 EAH1S 
shown to the satisfaction of the Secretary 
that at least 80 percent of the gross income 
from all sources of such corporation for the 
testing period is active foreign business in-
come. 
‘‘(ii) ACTIVE
FOREIGN
BUSINESS
IN-
COME.—For purposes of clause (i), the term 
‘active foreign business income’ means gross 
income which— 
‘‘(I) is derived from sources out-
side the United States (as determined 
under this subchapter), and 
‘‘(II) is attributable to the active 
conduct of a trade or business in a for-
eign country or possession of the 
United States. 
‘‘(iii) TESTING PERIOD.—For purposes 
of this subsection, the term ‘testing period’ 
means the 3-year period ending with the 
close of the taxable year of the corporation 
preceding the payment (or such part of such 
period as may be applicable). If the cor-
poration has no gross income for such 3- 
year period (or part thereof), the testing pe-
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•HR 4213 EAH1S 
riod shall be the taxable year in which the 
payment is made. 
‘‘(2) ACTIVE FOREIGN BUSINESS PERCENTAGE.— 
The term ‘active foreign business percentage’ means, 
with respect to any existing 80/20 company, the per-
centage which— 
‘‘(A) the active foreign business income of 
such company for the testing period, is of 
‘‘(B) the gross income of such company for 
the testing period from all sources. 
‘‘(3) AGGREGATION RULES.—For purposes of ap-
plying paragraph (1) (other than subparagraph 
(A)(i) thereof) and paragraph (2)— 
‘‘(A) IN
GENERAL.—The corporation re-
ferred to in paragraph (1)(A) and all of such 
corporation’s subsidiaries shall be treated as one 
corporation. 
‘‘(B) SUBSIDIARIES.—For purposes of sub-
paragraph (A), the term ‘subsidiary’ means any 
corporation in which the corporation referred to 
in subparagraph (A) owns (directly or indi-
rectly) stock meeting the requirements of section 
1504(a)(2) (determined by substituting ‘50 per-
cent’ for ‘80 percent’ each place it appears and 
without regard to section 1504(b)(3)).
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•HR 4213 EAH1S 
‘‘(4) REGULATIONS.—The Secretary may issue 
such regulations or other guidance as is necessary or 
appropriate to carry out the purposes of this section, 
including regulations or other guidance which provide 
for the proper application of the aggregation rules de-
scribed in paragraph (3).’’. 
(c) CONFORMING AMENDMENTS.— 
(1) Section 861 is amended by striking sub-
section (c) and by redesignating subsections (d), (e), 
and (f) as subsections (c), (d), and (e), respectively. 
(2) Paragraph (9) of section 904(h) is amended 
to read as follows: 
‘‘(9) TREATMENT OF CERTAIN DOMESTIC COR-
PORATIONS.—In the case of any dividend treated as 
not from sources within the United States under sec-
tion 861(a)(2)(A), the corporation paying such divi-
dend shall be treated for purposes of this subsection 
as a United States-owned foreign corporation.’’. 
(3) Subsection (c) of section 2104 is amended in 
the last sentence by striking ‘‘or to a debt obligation 
of a domestic corporation’’ and all that follows and 
inserting a period. 
(d) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall
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•HR 4213 EAH1S 
apply to taxable years beginning after December 31, 
2010. 
(2) GRANDFATHER
RULE
FOR
OUTSTANDING 
DEBT OBLIGATIONS.— 
(A) IN GENERAL.—The amendments made 
by this section shall not apply to payments of 
interest on obligations issued before the date of 
the enactment of this Act. 
(B) 
EXCEPTION
FOR
RELATED
PARTY 
DEBT.—Subparagraph (A) shall not apply to 
any interest which is payable to a related person 
(determined under rules similar to the rules of 
section 954(d)(3)). 
(C) SIGNIFICANT MODIFICATIONS TREATED 
AS NEW ISSUES.—For purposes of subparagraph 
(A), a significant modification of the terms of 
any obligation (including any extension of the 
term of such obligation) shall be treated as a new 
issue. 
SEC. 408. SOURCE RULES FOR INCOME ON GUARANTEES. 
(a) AMOUNTS
SOURCED
WITHIN
THE
UNITED 
STATES.—Subsection (a) of section 861 is amended by add-
ing at the end the following new paragraph: 
‘‘(9) GUARANTEES.—Amounts—
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•HR 4213 EAH1S 
SEC. 409. LIMITATION ON EXTENSION OF STATUTE OF LIMI-
TATIONS FOR FAILURE TO NOTIFY SEC-
RETARY OF CERTAIN FOREIGN TRANSFERS. 
(a) IN GENERAL.—Paragraph (8) of section 6501(c) 
is amended— 
(1) by striking ‘‘In the case of any information’’ 
and inserting the following: 
‘‘(A) IN GENERAL.—In the case of any in-
formation’’; and 
(2) by adding at the end the following: 
‘‘(B) APPLICATION
TO
FAILURES
DUE
TO 
REASONABLE CAUSE.—If the failure to furnish 
the information referred to in subparagraph (A) 
is due to reasonable cause and not willful ne-
glect, subparagraph (A) shall apply only to the 
item or items related to such failure.’’. 
(b) EFFECTIVE DATE.—The amendments made by this 
section shall take effect as if included in section 513 of the 
Hiring Incentives to Restore Employment Act. 
Subtitle B—Personal Service In-
come Earned in Pass-thru Enti-
ties 
SEC. 411. PARTNERSHIP INTERESTS TRANSFERRED IN CON-
NECTION WITH PERFORMANCE OF SERVICES. 
(a) MODIFICATION TO ELECTION TO INCLUDE PART-
NERSHIP INTEREST IN GROSS INCOME IN YEAR OF TRANS-
249 
•HR 4213 EAH1S 
FER.—Subsection (c) of section 83 is amended by redesig-
nating paragraph (4) as paragraph (5) and by inserting 
after paragraph (3) the following new paragraph: 
‘‘(4) PARTNERSHIP INTERESTS.—Except as pro-
vided by the Secretary, in the case of any transfer of 
an interest in a partnership in connection with the 
provision of services to (or for the benefit of) such 
partnership— 
‘‘(A) the fair market value of such interest 
shall be treated for purposes of this section as 
being equal to the amount of the distribution 
which the partner would receive if the partner-
ship sold (at the time of the transfer) all of its 
assets at fair market value and distributed the 
proceeds of such sale (reduced by the liabilities of 
the partnership) to its partners in liquidation of 
the partnership, and 
‘‘(B) the person receiving such interest shall 
be treated as having made the election under 
subsection (b)(1) unless such person makes an 
election under this paragraph to have such sub-
section not apply.’’. 
(b) CONFORMING AMENDMENT.—Paragraph (2) of sec-
tion 83(b) is amended by inserting ‘‘or subsection 
(c)(4)(B)’’ after ‘‘paragraph (1)’’.
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•HR 4213 EAH1S 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to interests in partnerships transferred 
after the date of the enactment of this Act. 
SEC. 412. INCOME OF PARTNERS FOR PERFORMING INVEST-
MENT MANAGEMENT SERVICES TREATED AS 
ORDINARY INCOME RECEIVED FOR PERFORM-
ANCE OF SERVICES. 
(a) IN GENERAL.—Part I of subchapter K of chapter 
1 is amended by adding at the end the following new sec-
tion: 
‘‘SEC. 710. SPECIAL RULES FOR PARTNERS PROVIDING IN-
VESTMENT 
MANAGEMENT 
SERVICES 
TO 
PARTNERSHIP. 
‘‘(a) TREATMENT OF DISTRIBUTIVE SHARE OF PART-
NERSHIP ITEMS.—For purposes of this title, in the case of 
an investment services partnership interest— 
‘‘(1) IN
GENERAL.—Notwithstanding section 
702(b)— 
‘‘(A) any net income with respect to such 
interest for any partnership taxable year shall be 
treated as ordinary income, and 
‘‘(B) any net loss with respect to such inter-
est for such year, to the extent not disallowed 
under paragraph (2) for such year, shall be 
treated as an ordinary loss.
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•HR 4213 EAH1S 
All items of income, gain, deduction, and loss which 
are taken into account in computing net income or 
net loss shall be treated as ordinary income or ordi-
nary loss (as the case may be). 
‘‘(2) TREATMENT OF LOSSES.— 
‘‘(A) LIMITATION.—Any net loss with re-
spect to such interest shall be allowed for any 
partnership taxable year only to the extent that 
such loss does not exceed the excess (if any) of— 
‘‘(i) the aggregate net income with re-
spect to such interest for all prior partner-
ship taxable years, over 
‘‘(ii) the aggregate net loss with respect 
to such interest not disallowed under this 
subparagraph for all prior partnership tax-
able years. 
‘‘(B) CARRYFORWARD.—Any net loss for 
any partnership taxable year which is not al-
lowed by reason of subparagraph (A) shall be 
treated as an item of loss with respect to such 
partnership interest for the succeeding partner-
ship taxable year. 
‘‘(C) BASIS ADJUSTMENT.—No adjustment 
to the basis of a partnership interest shall be
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•HR 4213 EAH1S 
made on account of any net loss which is not al-
lowed by reason of subparagraph (A). 
‘‘(D) PRIOR
PARTNERSHIP
YEARS.—Any 
reference in this paragraph to prior partnership 
taxable years shall only include prior partner-
ship taxable years to which this section applies. 
‘‘(3) NET INCOME AND LOSS.—For purposes of 
this section— 
‘‘(A) NET INCOME.—The term ‘net income’ 
means, with respect to any investment services 
partnership interest for any partnership taxable 
year, the excess (if any) of— 
‘‘(i) all items of income and gain taken 
into account by the holder of such interest 
under section 702 with respect to such in-
terest for such year, over 
‘‘(ii) all items of deduction and loss so 
taken into account. 
‘‘(B) NET LOSS.—The term ‘net loss’ means, 
with respect to such interest for such year, the 
excess (if any) of the amount described in sub-
paragraph (A)(ii) over the amount described in 
subparagraph (A)(i). 
‘‘(4) SPECIAL RULE FOR DIVIDENDS.—Any divi-
dend taken into account in determining net income or