In the Senate of the United States,
November 1 (legislative day, September 22), 2000.
Resolved, That the bill from the House of Representa-
tives (H.R. 4986) entitled ‘‘An Act to amend the Internal
Revenue Code of 1986 to repeal the provisions relating to for-
eign sales corporations (FSCs) and to exclude extraterritorial
income from gross income.’’, do pass with the following
AMENDMENT:
Strike out all after the enacting clause and insert:
SECTION 1. SHORT TITLE.
(a) SHORT TITLE.—This Act may be cited as the
‘‘FSC Repeal and Extraterritorial Income Exclusion Act
of 2000’’.
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(b) AMENDMENT OF 1986 CODE.—Except as otherwise
expressly provided, whenever in this Act an amendment or
repeal is expressed in terms of an amendment to, or repeal
of, a section or other provision, the reference shall be consid-
ered to be made to a section or other provision of the Inter-
nal Revenue Code of 1986.
SEC. 2. REPEAL OF FOREIGN SALES CORPORATION RULES.
Subpart C of part III of subchapter N of chapter 1
(relating to taxation of foreign sales corporations) is hereby
repealed.
SEC. 3. TREATMENT OF EXTRATERRITORIAL INCOME.
(a) IN GENERAL.—Part III of subchapter B of chapter
1 (relating to items specifically excluded from gross income)
is amended by inserting before section 115 the following new
section:
‘‘SEC. 114. EXTRATERRITORIAL INCOME.
‘‘(a) EXCLUSION.—Gross income does not include
extraterritorial income.
‘‘(b) EXCEPTION.—Subsection (a) shall not apply to
extraterritorial income which is not qualifying foreign
trade income as determined under subpart E of part III
of subchapter N.
‘‘(c) DISALLOWANCE OF DEDUCTIONS.—
‘‘(1) IN GENERAL.—Any deduction of a taxpayer
allocated under paragraph (2) to extraterritorial in-
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come of the taxpayer excluded from gross income
under subsection (a) shall not be allowed.
‘‘(2) ALLOCATION.—Any deduction of the tax-
payer properly apportioned and allocated to the
extraterritorial income derived by the taxpayer from
any transaction shall be allocated on a proportionate
basis between—
‘‘(A) the extraterritorial income derived
from such transaction which is excluded from
gross income under subsection (a), and
‘‘(B) the extraterritorial income derived
from such transaction which is not so excluded.
‘‘(d) DENIAL
OF CREDITS
FOR CERTAIN FOREIGN
TAXES.—Notwithstanding any other provision of this chap-
ter, no credit shall be allowed under this chapter for any
income, war profits, and excess profits taxes paid or ac-
crued to any foreign country or possession of the United
States with respect to extraterritorial income which is ex-
cluded from gross income under subsection (a).
‘‘(e) EXTRATERRITORIAL INCOME.—For purposes of
this section, the term ‘extraterritorial income’ means the
gross income of the taxpayer attributable to foreign trading
gross receipts (as defined in section 942) of the taxpayer.’’.
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‘‘(2) ALTERNATIVE COMPUTATION.—A taxpayer
may compute its qualifying foreign trade income
under a subparagraph of paragraph (1) other than
the subparagraph which results in the greatest
amount of such income.
‘‘(3) LIMITATION ON USE OF FOREIGN TRADING
GROSS RECEIPTS METHOD.—If any person computes
its qualifying foreign trade income from any trans-
action with respect to any property under paragraph
(1)(B), the qualifying foreign trade income of such
person (or any related person) with respect to any
other transaction involving such property shall be
zero.
‘‘(4) RULES FOR MARGINAL COSTING.—The Sec-
retary shall prescribe regulations setting forth rules
for the allocation of expenditures in computing for-
eign trade income under paragraph (1)(C) in those
cases where a taxpayer is seeking to establish or
maintain a market for qualifying foreign trade prop-
erty.
‘‘(5) PARTICIPATION
IN
INTERNATIONAL
BOY-
COTTS, ETC.—Under regulations prescribed by the
Secretary, the qualifying foreign trade income of a
taxpayer for any taxable year shall be reduced (but
not below zero) by the sum of—
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‘‘(A) an amount equal to such income mul-
tiplied by the international boycott factor deter-
mined under section 999, and
‘‘(B) any illegal bribe, kickback, or other
payment (within the meaning of section 162(c))
paid by or on behalf of the taxpayer directly or
indirectly to an official, employee, or agent in
fact of a government.
‘‘(b) FOREIGN TRADE INCOME.—For purposes of this
subpart—
‘‘(1) IN GENERAL.—The term ‘foreign trade in-
come’ means the taxable income of the taxpayer at-
tributable to foreign trading gross receipts of the tax-
payer.
‘‘(2) SPECIAL
RULE
FOR
COOPERATIVES.—In
any case in which an organization to which part I
of subchapter T applies which is engaged in the mar-
keting of agricultural or horticultural products sells
qualifying foreign trade property, in computing the
taxable income of such cooperative, there shall not be
taken into account any deduction allowable under
subsection (b) or (c) of section 1382 (relating to pa-
tronage dividends, per-unit retain allocations, and
nonpatronage distributions).
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‘‘(c) FOREIGN SALE AND LEASING INCOME.—For pur-
poses of this section—
‘‘(1) IN GENERAL.—The term ‘foreign sale and
leasing 
income’ 
means, 
with 
respect 
to 
any
transaction—
‘‘(A) foreign trade income properly allocable
to activities which—
‘‘(i) 
are 
described 
in 
paragraph
(2)(A)(i) or (3) of section 942(b), and
‘‘(ii) are performed by the taxpayer (or
any person acting under a contract with
such taxpayer) outside the United States, or
‘‘(B) foreign trade income derived by the
taxpayer in connection with the lease or rental
of qualifying foreign trade property for use by
the lessee outside the United States.
‘‘(2) SPECIAL RULES FOR LEASED PROPERTY.—
‘‘(A) SALES
INCOME.—The term ‘foreign
sale and leasing income’ includes any foreign
trade income derived by the taxpayer from the
sale of property described in paragraph (1)(B).
‘‘(B) LIMITATION IN CERTAIN CASES.—Ex-
cept as provided in regulations, in the case of
property which—
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‘‘(i) 
was 
manufactured, 
produced,
grown, or extracted by the taxpayer, or
‘‘(ii) was acquired by the taxpayer
from a related person for a price which was
not determined in accordance with the rules
of section 482,
the amount of foreign trade income which may
be treated as foreign sale and leasing income
under paragraph (1)(B) or subparagraph (A) of
this paragraph with respect to any transaction
involving such property shall not exceed the
amount which would have been determined if the
taxpayer had acquired such property for the
price determined in accordance with the rules of
section 482.
‘‘(3) SPECIAL RULES.—
‘‘(A) EXCLUDED PROPERTY.—Foreign sale
and leasing income shall not include any income
properly allocable to excluded property described
in subparagraph (B) of section 943(a)(3) (relat-
ing to intangibles).
‘‘(B) ONLY DIRECT EXPENSES TAKEN INTO
ACCOUNT.—For purposes of this subsection, any
expense other than a directly allocable expense
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shall not be taken into account in computing for-
eign trade income.
‘‘SEC. 942. FOREIGN TRADING GROSS RECEIPTS.
‘‘(a) FOREIGN TRADING GROSS RECEIPTS.—
‘‘(1) IN GENERAL.—Except as otherwise provided
in this section, for purposes of this subpart, the term
‘foreign trading gross receipts’ means the gross re-
ceipts of the taxpayer which are—
‘‘(A) from the sale, exchange, or other dis-
position of qualifying foreign trade property,
‘‘(B) from the lease or rental of qualifying
foreign trade property for use by the lessee out-
side the United States,
‘‘(C) for services which are related and sub-
sidiary to—
‘‘(i) any sale, exchange, or other dis-
position of qualifying foreign trade prop-
erty by such taxpayer, or
‘‘(ii) any lease or rental of qualifying
foreign trade property described in subpara-
graph (B) by such taxpayer,
‘‘(D) for engineering or architectural serv-
ices for construction projects located (or proposed
for location) outside the United States, or
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‘‘(E) for the performance of managerial
services for a person other than a related person
in furtherance of the production of foreign trad-
ing gross receipts described in subparagraph (A),
(B), or (C).
Subparagraph (E) shall not apply to a taxpayer for
any taxable year unless at least 50 percent of its for-
eign trading gross receipts (determined without re-
gard to this sentence) for such taxable year is derived
from activities described in subparagraph (A), (B), or
(C).
‘‘(2) CERTAIN RECEIPTS EXCLUDED ON BASIS OF
USE; SUBSIDIZED RECEIPTS EXCLUDED.—The term
‘foreign trading gross receipts’ shall not include re-
ceipts of a taxpayer from a transaction if—
‘‘(A) the qualifying foreign trade property
or services—
‘‘(i) are for ultimate use in the United
States, or
‘‘(ii) are for use by the United States
or any instrumentality thereof and such use
of qualifying foreign trade property or serv-
ices is required by law or regulation, or
‘‘(B) such transaction is accomplished by a
subsidy granted by the government (or any in-
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strumentality thereof) of the country or posses-
sion in which the property is manufactured, pro-
duced, grown, or extracted.
‘‘(3) ELECTION
TO
EXCLUDE
CERTAIN
RE-
CEIPTS.—The term ‘foreign trading gross receipts’
shall not include gross receipts of a taxpayer from a
transaction if the taxpayer elects not to have such re-
ceipts taken into account for purposes of this subpart.
‘‘(b) FOREIGN ECONOMIC PROCESS REQUIREMENTS.—
‘‘(1) IN GENERAL.—Except as provided in sub-
section (c), a taxpayer shall be treated as having for-
eign trading gross receipts from any transaction only
if economic processes with respect to such transaction
take place outside the United States as required by
paragraph (2).
‘‘(2) REQUIREMENT.—
‘‘(A) IN
GENERAL.—The requirements of
this paragraph are met with respect to the gross
receipts of a taxpayer derived from any trans-
action if—
‘‘(i) such taxpayer (or any person act-
ing under a contract with such taxpayer)
has participated outside the United States
in the solicitation (other than advertising),
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the negotiation, or the making of the con-
tract relating to such transaction, and
‘‘(ii) the foreign direct costs incurred
by the taxpayer attributable to the trans-
action equal or exceed 50 percent of the
total direct costs attributable to the trans-
action.
‘‘(B) ALTERNATIVE
85-PERCENT
TEST.—A
taxpayer shall be treated as satisfying the re-
quirements of subparagraph (A)(ii) with respect
to any transaction if, with respect to each of at
least 2 subparagraphs of paragraph (3), the for-
eign direct costs incurred by such taxpayer at-
tributable to activities described in such sub-
paragraph equal or exceed 85 percent of the total
direct costs attributable to activities described in
such subparagraph.
‘‘(C) DEFINITIONS.—For purposes of this
paragraph—
‘‘(i) TOTAL DIRECT COSTS.—The term
‘total direct costs’ means, with respect to
any transaction, the total direct costs in-
curred by the taxpayer attributable to ac-
tivities described in paragraph (3) per-
formed at any location by the taxpayer or
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any person acting under a contract with
such taxpayer.
‘‘(ii) FOREIGN
DIRECT
COSTS.—The
term ‘foreign direct costs’ means, with re-
spect to any transaction, the portion of the
total direct costs which are attributable to
activities performed outside the United
States.
‘‘(3) ACTIVITIES RELATING TO QUALIFYING FOR-
EIGN TRADE PROPERTY.—The activities described in
this paragraph are any of the following with respect
to qualifying foreign trade property—
‘‘(A) advertising and sales promotion,
‘‘(B) the processing of customer orders and
the arranging for delivery,
‘‘(C) transportation outside the United
States in connection with delivery to the cus-
tomer,
‘‘(D) the determination and transmittal of
a final invoice or statement of account or the re-
ceipt of payment, and
‘‘(E) the assumption of credit risk.
‘‘(4) ECONOMIC PROCESSES PERFORMED BY RE-
LATED
PERSONS.—A taxpayer shall be treated as
meeting the requirements of this subsection with re-
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spect to any sales transaction involving any property
if any related person has met such requirements in
such transaction or any other sales transaction in-
volving such property.
‘‘(c) EXCEPTION FROM FOREIGN ECONOMIC PROCESS
REQUIREMENT.—
‘‘(1) IN
GENERAL.—The requirements of sub-
section (b) shall be treated as met for any taxable
year if the foreign trading gross receipts of the tax-
payer for such year do not exceed $5,000,000.
‘‘(2) RECEIPTS OF RELATED PERSONS AGGRE-
GATED.—All related persons shall be treated as one
person for purposes of paragraph (1), and the limita-
tion under paragraph (1) shall be allocated among
such persons in a manner provided in regulations
prescribed by the Secretary.
‘‘(3) SPECIAL RULE FOR PASS-THRU ENTITIES.—
In the case of a partnership, S corporation, or other
pass-thru entity, the limitation under paragraph (1)
shall apply with respect to the partnership, S cor-
poration, or entity and with respect to each partner,
shareholder, or other owner.
‘‘SEC. 943. OTHER DEFINITIONS AND SPECIAL RULES.
‘‘(a) QUALIFYING FOREIGN TRADE PROPERTY.—For
purposes of this subpart—
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‘‘(1) IN GENERAL.—The term ‘qualifying foreign
trade property’ means property—
‘‘(A) manufactured, produced, grown, or ex-
tracted within or outside the United States,
‘‘(B) held primarily for sale, lease, or rent-
al, in the ordinary course of trade or business for
direct use, consumption, or disposition outside
the United States, and
‘‘(C) not more than 50 percent of the fair
market value of which is attributable to—
‘‘(i) articles manufactured, produced,
grown, or extracted outside the United
States, and
‘‘(ii) direct costs for labor (determined
under the principles of section 263A) per-
formed outside the United States.
For purposes of subparagraph (C), the fair market
value of any article imported into the United States
shall be its appraised value, as determined by the Sec-
retary under section 402 of the Tariff Act of 1930 (19
U.S.C. 1401a) in connection with its importation,
and the direct costs for labor under clause (ii) do not
include costs that would be treated under the prin-
ciples of section 263A as direct labor costs attrib-
utable to articles described in clause (i).
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‘‘(2) U.S. TAXATION
TO
ENSURE
CONSISTENT
TREATMENT.—Property which (without regard to this
paragraph) is qualifying foreign trade property and
which is manufactured, produced, grown, or extracted
outside the United States shall be treated as quali-
fying foreign trade property only if it is manufac-
tured, produced, grown, or extracted by—
‘‘(A) a domestic corporation,
‘‘(B) an individual who is a citizen or resi-
dent of the United States,
‘‘(C) a foreign corporation with respect to
which an election under subsection (e) (relating
to foreign corporations electing to be subject to
United States taxation) is in effect, or
‘‘(D) a partnership or other pass-thru enti-
ty all of the partners or owners of which are de-
scribed in subparagraph (A), (B), or (C).
Except as otherwise provided by the Secretary, tiered
partnerships or pass-thru entities shall be treated as
described in subparagraph (D) if each of the partner-
ships or entities is directly or indirectly wholly owned
by persons described in subparagraph (A), (B), or
(C).
‘‘(3) EXCLUDED
PROPERTY.—The term ‘quali-
fying foreign trade property’ shall not include—
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‘‘(A) property leased or rented by the tax-
payer for use by any related person,
‘‘(B) patents, inventions, models, designs,
formulas, or processes whether or not patented,
copyrights (other than films, tapes, records, or
similar reproductions, and other than computer
software (whether or not patented), for commer-
cial or home use), goodwill, trademarks, trade
brands, franchises, or other like property,
‘‘(C) oil or gas (or any primary product
thereof),
‘‘(D) products the transfer of which is pro-
hibited or curtailed to effectuate the policy set
forth in paragraph (2)(C) of section 3 of Public
Law 96–72, or
‘‘(E) any unprocessed timber which is a
softwood.
For purposes of subparagraph (E), the term ‘unproc-
essed timber’ means any log, cant, or similar form of
timber.
‘‘(4) PROPERTY IN SHORT SUPPLY.—If the Presi-
dent determines that the supply of any property de-
scribed in paragraph (1) is insufficient to meet the
requirements of the domestic economy, the President
may by Executive order designate the property as in
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short supply. Any property so designated shall not be
treated as qualifying foreign trade property during
the period beginning with the date specified in the
Executive order and ending with the date specified in
an Executive order setting forth the President’s deter-
mination that the property is no longer in short sup-
ply.
‘‘(b) OTHER DEFINITIONS AND RULES.—For purposes
of this subpart—
‘‘(1) TRANSACTION.—
‘‘(A) IN GENERAL.—The term ‘transaction’
means—
‘‘(i) any sale, exchange, or other dis-
position,
‘‘(ii) any lease or rental, and
‘‘(iii) any furnishing of services.
‘‘(B) GROUPING OF TRANSACTIONS.—To the
extent provided in regulations, any provision of
this subpart which, but for this subparagraph,
would be applied on a transaction-by-trans-
action basis may be applied by the taxpayer on
the basis of groups of transactions based on
product lines or recognized industry or trade
usage. Such regulations may permit different
groupings for different purposes.
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‘‘(2) UNITED
STATES
DEFINED.—The term
‘United States’ includes the Commonwealth of Puerto
Rico. The preceding sentence shall not apply for pur-
poses of determining whether a corporation is a do-
mestic corporation.
‘‘(3) RELATED PERSON.—A person shall be re-
lated to another person if such persons are treated as
a single employer under subsection (a) or (b) of sec-
tion 52 or subsection (m) or (o) of section 414, except
that determinations under subsections (a) and (b) of
section 52 shall be made without regard to section
1563(b).
‘‘(4) GROSS AND TAXABLE INCOME.—Section 114
shall not be taken into account in determining the
amount of gross income or foreign trade income from
any transaction.
‘‘(c) SOURCE RULE.—Under regulations, in the case
of qualifying foreign trade property manufactured, pro-
duced, grown, or extracted within the United States, the
amount of income of a taxpayer from any sales transaction
with respect to such property which is treated as from
sources without the United States shall not exceed—
‘‘(1) in the case of a taxpayer computing its
qualifying foreign trade income under section
941(a)(1)(B), the amount of the taxpayer’s foreign
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trade income which would (but for this subsection) be
treated as from sources without the United States if
the foreign trade income were reduced by an amount
equal to 4 percent of the foreign trading gross receipts
with respect to the transaction, and
‘‘(2) in the case of a taxpayer computing its
qualifying foreign trade income under section
941(a)(1)(C), 50 percent of the amount of the tax-
payer’s foreign trade income which would (but for
this subsection) be treated as from sources without the
United States.
‘‘(d) TREATMENT OF WITHHOLDING TAXES.—
‘‘(1) IN
GENERAL.—For purposes of section
114(d), any withholding tax shall not be treated as
paid or accrued with respect to extraterritorial in-
come which is excluded from gross income under sec-
tion 114(a). For purposes of this paragraph, the term
‘withholding tax’ means any tax which is imposed on
a basis other than residence and for which credit is
allowable under section 901 or 903.
‘‘(2) EXCEPTION.—Paragraph (1) shall not
apply to any taxpayer with respect to extraterritorial
income from any transaction if the taxpayer com-
putes its qualifying foreign trade income with respect
to the transaction under section 941(a)(1)(A).
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‘‘(e) ELECTION TO BE TREATED AS DOMESTIC COR-
PORATION.—
‘‘(1) IN GENERAL.—An applicable foreign cor-
poration may elect to be treated as a domestic cor-
poration for all purposes of this title if such corpora-
tion waives all benefits to such corporation granted
by the United States under any treaty. No election
under section 1362(a) may be made with respect to
such corporation.
‘‘(2) APPLICABLE FOREIGN CORPORATION.—For
purposes of paragraph (1), the term ‘applicable for-
eign corporation’ means any foreign corporation if—
‘‘(A) such corporation manufactures, pro-
duces, grows, or extracts property in the ordi-
nary course of such corporation’s trade or busi-
ness, or
‘‘(B) substantially all of the gross receipts of
such corporation are foreign trading gross re-
ceipts.
‘‘(3) PERIOD OF ELECTION.—
‘‘(A) IN
GENERAL.—Except as otherwise
provided in this paragraph, an election under
paragraph (1) shall apply to the taxable year for
which made and all subsequent taxable years un-
less revoked by the taxpayer. Any revocation of
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such election shall apply to taxable years begin-
ning after such revocation.
‘‘(B) 
TERMINATION.—If 
a 
corporation
which made an election under paragraph (1) for
any taxable year fails to meet the requirements
of subparagraph (A) or (B) of paragraph (2) for
any subsequent taxable year, such election shall
not apply to any taxable year beginning after
such subsequent taxable year.
‘‘(C) EFFECT OF REVOCATION OR TERMI-
NATION.—If a corporation which made an elec-
tion under paragraph (1) revokes such election
or such election is terminated under subpara-
graph (B), such corporation (and any successor
corporation) may not make such election for any
of the 5 taxable years beginning with the first
taxable year for which such election is not in ef-
fect as a result of such revocation or termination.
‘‘(4) SPECIAL RULES.—
‘‘(A) 
REQUIREMENTS.—This 
subsection
shall not apply to an applicable foreign corpora-
tion if such corporation fails to meet the require-
ments (if any) which the Secretary may pre-
scribe to ensure that the taxes imposed by this
chapter on such corporation are paid.
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‘‘(B) EFFECT
OF
ELECTION, REVOCATION,
AND TERMINATION.—
‘‘(i) ELECTION.—For purposes of sec-
tion 367, a foreign corporation making an
election under this subsection shall be treat-
ed as transferring (as of the first day of the
first taxable year to which the election ap-
plies) all of its assets to a domestic corpora-
tion in connection with an exchange to
which section 354 applies.
‘‘(ii) 
REVOCATION
AND
TERMI-
NATION.—For purposes of section 367, if—
‘‘(I) an election is made by a cor-
poration under paragraph (1) for any
taxable year, and
‘‘(II) such election ceases to apply
for any subsequent taxable year,
such corporation shall be treated as a domestic
corporation transferring (as of the 1st day of the
first such subsequent taxable year to which such
election ceases to apply) all of its property to a
foreign corporation in connection with an ex-
change to which section 354 applies.
‘‘(C) ELIGIBILITY FOR ELECTION.—The Sec-
retary may by regulation designate one or more
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classes of corporations which may not make the
election under this subsection.
‘‘(f) RULES RELATING TO ALLOCATIONS OF QUALI-
FYING FOREIGN TRADE INCOME FROM SHARED PARTNER-
SHIPS.—
‘‘(1) IN GENERAL.—If—
‘‘(A) a partnership maintains a separate
account for transactions (to which this subpart
applies) with each partner,
‘‘(B) distributions to each partner with re-
spect to such transactions are based on the
amounts in the separate account maintained
with respect to such partner, and
‘‘(C) such partnership meets such other re-
quirements as the Secretary may by regulations
prescribe,
then such partnership shall allocate to each partner
items of income, gain, loss, and deduction (including
qualifying foreign trade income) from any trans-
action to which this subpart applies on the basis of
such separate account.
‘‘(2) SPECIAL RULES.—For purposes of this sub-
part, in the case of a partnership to which paragraph
(1) applies—
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‘‘(A) any partner’s interest in the partner-
ship shall not be taken into account in deter-
mining whether such partner is a related person
with respect to any other partner, and
‘‘(B) the election under section 942(a)(3)
shall be made separately by each partner with
respect to any transaction for which the partner-
ship maintains separate accounts for each part-
ner.
‘‘(g) EXCLUSION
FOR PATRONS
OF AGRICULTURAL
AND HORTICULTURAL COOPERATIVES.—Any amount de-
scribed in paragraph (1) or (3) of section 1385(a)—
‘‘(1) which is received by a person from an orga-
nization to which part I of subchapter T applies
which is engaged in the marketing of agricultural or
horticultural products, and
‘‘(2) which is allocable to qualifying foreign
trade income and designated as such by the organiza-
tion in a written notice mailed to its patrons during
the payment period described in section 1382(d),
shall be treated as qualifying foreign trade income of such
person for purposes of section 114. The taxable income of
the organization shall not be reduced under section 1382
by reason of any amount to which the preceding sentence
applies.
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‘‘(h) SPECIAL RULE FOR DISCS.—Section 114 shall
not apply to any taxpayer for any taxable year if, at any
time during the taxable year, the taxpayer is a member of
any controlled group of corporations (as defined in section
927(d)(4), as in effect before the date of the enactment of
this subsection) of which a DISC is a member.’’
SEC. 4. TECHNICAL AND CONFORMING AMENDMENTS.
(1) The second sentence of section 56(g)(4)(B)(i)
is amended by inserting before the period ‘‘or under
section 114’’.
(2) Section 275(a) is amended—
(A) by striking ‘‘or’’ at the end of para-
graph (4)(A), by striking the period at the end
of paragraph (4)(B) and inserting ‘‘, or’’, and by
adding at the end of paragraph (4) the following
new subparagraph:
‘‘(C) such taxes are paid or accrued with re-
spect to qualifying foreign trade income (as de-
fined in section 941).’’; and
(B) by adding at the end the following the
following new sentence: ‘‘A rule similar to the
rule of section 943(d) shall apply for purposes of
paragraph (4)(C).’’.
(3) 
Paragraph 
(3) 
of 
section 
864(e) 
is
amended—
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(A) by striking ‘‘For purposes of’’ and in-
serting:
‘‘(A) IN GENERAL.—For purposes of’’; and
(B) by adding at the end the following new
subparagraph:
‘‘(B) 
ASSETS
PRODUCING
EXEMPT
EXTRATERRITORIAL
INCOME.—For purposes of
allocating and apportioning any interest ex-
pense, there shall not be taken into account any
qualifying foreign trade property (as defined in
section 943(a)) which is held by the taxpayer for
lease or rental in the ordinary course of trade or
business for use by the lessee outside the United
States (as defined in section 943(b)(2)).’’.
(4) Section 903 is amended by striking ‘‘164(a)’’
and inserting ‘‘114, 164(a),’’.
(5) Section 999(c)(1) is amended by inserting
‘‘941(a)(5),’’ after ‘‘908(a),’’.
(6) The table of sections for part III of sub-
chapter B of chapter 1 is amended by inserting before
the item relating to section 115 the following new
item:
‘‘Sec. 114. Extraterritorial income.’’.
(7) The table of subparts for part III of sub-
chapter N of chapter 1 is amended by striking the
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item relating to subpart E and inserting the following
new item:
‘‘Subpart E. Qualifying foreign trade income.’’.
(8) The table of subparts for part III of sub-
chapter N of chapter 1 is amended by striking the
item relating to subpart C.
SEC. 5. EFFECTIVE DATE.
(a) IN GENERAL.—The amendments made by this Act
shall apply to transactions after September 30, 2000.
(b) NO
NEW
FSCS; TERMINATION
OF
INACTIVE
FSCS.—
(1) NO NEW FSCS.—No corporation may elect
after September 30, 2000, to be a FSC (as defined in
section 922 of the Internal Revenue Code of 1986, as
in effect before the amendments made by this Act).
(2) TERMINATION OF INACTIVE FSCS.—If a FSC
has no foreign trade income (as defined in section
923(b) of such Code, as so in effect) for any period
of 5 consecutive taxable years beginning after Decem-
ber 31, 2001, such FSC shall cease to be treated as
a FSC for purposes of such Code for any taxable year
beginning after such period.
(c) TRANSITION PERIOD
FOR EXISTING FOREIGN
SALES CORPORATIONS.—
(1) IN GENERAL.—In the case of a FSC (as so
defined) in existence on September 30, 2000, and at
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all times thereafter, the amendments made by this Act
shall not apply to any transaction in the ordinary
course of trade or business involving a FSC which
occurs—
(A) before January 1, 2002; or
(B) after December 31, 2001, pursuant to a
binding contract—
(i) which is between the FSC (or any
related person) and any person which is not
a related person; and
(ii) which is in effect on September 30,
2000, and at all times thereafter.
For purposes of this paragraph, a binding contract
shall include a purchase option, renewal option, or
replacement option which is included in such contract
and which is enforceable against the seller or lessor.
(2) ELECTION
TO
HAVE
AMENDMENTS
APPLY
EARLIER.—A taxpayer may elect to have the amend-
ments made by this Act apply to any transaction by
a FSC or any related person to which such amend-
ments would apply but for the application of para-
graph (1). Such election shall be effective for the tax-
able year for which made and all subsequent taxable
years, and, once made, may be revoked only with the
consent of the Secretary of the Treasury.
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(3) EXCEPTION FOR OLD EARNINGS AND PROFITS
OF CERTAIN CORPORATIONS.—
(A) IN GENERAL.—In the case of a foreign
corporation to which this paragraph applies—
(i) earnings and profits of such cor-
poration accumulated in taxable years end-
ing before October 1, 2000, shall not be in-
cluded in the gross income of the persons
holding stock in such corporation by reason
of section 943(e)(4)(B)(i), and
(ii) rules similar to the rules of clauses
(ii), (iii), and (iv) of section 953(d)(4)(B)
shall apply with respect to such earnings
and profits.
The preceding sentence shall not apply to earn-
ings and profits acquired in a transaction after
September 30, 2000, to which section 381 applies
unless the distributor or transferor corporation
was immediately before the transaction a foreign
corporation to which this paragraph applies.
(B) EXISTING FSCS.—This paragraph shall
apply to any controlled foreign corporation (as
defined in section 957) if—
(i) such corporation is a FSC (as so
defined) in existence on September 30, 2000,
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(ii) such corporation is eligible to
make the election under section 943(e) by
reason of being described in paragraph
(2)(B) of such section, and
(iii) such corporation makes such elec-
tion not later than for its first taxable year
beginning after December 31, 2001.
(C) OTHER
CORPORATIONS.—This para-
graph shall apply to any controlled foreign cor-
poration (as defined in section 957), and such
corporation shall (notwithstanding any provi-
sion of section 943(e)) be treated as an applica-
ble foreign corporation for purposes of section
943(e), if—
(i) such corporation is in existence on
September 30, 2000,
(ii) as of such date, such corporation is
wholly owned (directly or indirectly) by a
domestic corporation (determined without
regard to any election under section 943(e)),
(iii) for each of the 3 taxable years
preceding the first taxable year to which the
election under section 943(e) by such con-
trolled foreign corporation applies—
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(I) all of the gross income of such
corporation is subpart F income (as
defined in section 952), including by
reason of section 954(b)(3)(B), and
(II) in the ordinary course of such
corporation’s trade or business, such
corporation regularly sold (or paid
commissions) to a FSC which on Sep-
tember 30, 2000, was a related person
to such corporation,
(iv) such corporation has never made
an election under section 922(a)(2) (as in
effect before the date of the enactment of this
paragraph) to be treated as a FSC, and
(v) such corporation makes the election
under section 943(e) not later than for its
first taxable year beginning after December
31, 2001.
The preceding sentence shall cease to apply as of
the date that the domestic corporation referred to
in clause (ii) ceases to wholly own (directly or
indirectly) such controlled foreign corporation.
(4) RELATED
PERSON.—For purposes of this
subsection, the term ‘‘related person’’ has the meaning
given to such term by section 943(b)(3).
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(5) SECTION REFERENCES.—Except as otherwise
expressly provided, any reference in this subsection to
a section or other provision shall be considered to be
a reference to a section or other provision of the Inter-
nal Revenue Code of 1986, as amended by this Act.
(d) SPECIAL RULES RELATING TO LEASING TRANS-
ACTIONS.—
(1) SALES INCOME.—If foreign trade income in
connection with the lease or rental of property de-
scribed in section 927(a)(1)(B) of such Code (as in ef-
fect before the amendments made by this Act) is treat-
ed as exempt foreign trade income for purposes of sec-
tion 921(a) of such Code (as so in effect), such prop-
erty shall be treated as property described in section
941(c)(1)(B) of such Code (as added by this Act) for
purposes of applying section 941(c)(2) of such Code
(as so added) to any subsequent transaction involving
such property to which the amendments made by this
Act apply.
(2) LIMITATION
ON
USE
OF
GROSS
RECEIPTS
METHOD.—If any person computed its foreign trade
income from any transaction with respect to any
property on the basis of a transfer price determined
under the method described in section 925(a)(1) of
such Code (as in effect before the amendments made
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by this Act), then the qualifying foreign trade income
(as defined in section 941(a) of such Code, as in effect
after such amendment) of such person (or any related
person) with respect to any other transaction involv-
ing such property (and to which the amendments
made by this Act apply) shall be zero.
Attest:
Secretary.