FSC Repeal and Extraterritorial Income Exclusion Act of 2000
PL 106-519 (H.R.4986), enacted 11/15/2000

PUBLIC LAW 106-519—NOV. 15, 2000 
114 STAT. 2423 
Public Law 106-519 
106th Congress 
An Act 
To amend the Internal Revenue Code of 1986 to repeal the provisions relating 
j - 
„ ^ . . 
to foreign sales corporations (FSCs) and to exclude extraterritorial income from 
X:—'. 
gross income. 
[H.R. 4986] 
Be it enacted by the Senate and House of Representatives of 
the United States of America in Congress assembled, 
FSC Repeal and 
Extraterritorial 
SECTION 1. SHORT TITLE. 
Income Exclusion 
(a) SHORT TITLE.—This Act may be cited as the "FSC Repeal 
^6\jscTnote. 
and Extraterritorial Income Exclusion Act of 2000". 
(b) AMENDMENT OF 1986 CODE.—Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed 
m 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 provision of the Internal Revenue Code of 1986. 
SEC. 
2. 
REPEAL 
OF 
FOREIGN 
SALES 
CORPORATION 
RULES. 
Subpart C of part III of subchapter N of chapter 1 (relating 
26 USC 921-927. 
to taxation of foreign sales corporations) is hereby repealed.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 income of the taxpayer 
excluded from gross income under subsection (a) shall not be 
allowed. 
"(2) ALLOCATION.—Any deduction of the taxpayer 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. 
114 STAT. 2424 
PUBLIC LAW 106-519—NOV. 15, 2000 
"(d) DENIAL OF CREDITS FOR CERTAIN FOREIGN TAXES.—Not-
withstanding any other provision of this chapter, no credit shall 
be allowed under this chapter for any income, war profits, and 
excess profits taxes paid or accrued to any foreign country or 
possession of the United States with respect to extraterritorial 
income which is excluded 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.". 
(b) QUALIFYING FOREIGN TRADE INCOME.—Part III of sub-
chapter N of chapter 1 is amended by inserting after subpart 
D the following new subpart: 
**Subpart E—Qualifying Foreign Trade Income 
"Sec. 941. Qualifying foreign trade income. 
"Sec. 942. Foreign trading gross receipts. 
"Sec. 943. Other definitions and special rules. 
••SEC. 941. QUALIFYING FOREIGN TRADE INCOME. 
"(a) QUALIFYING FOREIGN TRADE INCOME.—For purposes of this 
subpart and section 114— 
"(1) IN GENERAL.—The term 'qualifying foreign 
trade 
income' means, with respect to any transaction, the amount 
of gross income which, if excluded, will result in a reduction 
of the taxable income of the taxpayer from such transaction 
equal to the greatest o
f
— 
"(A) 30 percent of the foreign sale and leasing income 
derived by the taxpayer from such transaction, 
"(B) 1.2 percent of the foreign trading gross receipts 
derived by the taxpayer from the transaction, or 
"(C) 15 percent of the foreign trade income derived 
by the taxpayer from the transaction. 
In no event shall the amoimt determined under subparagraph 
(B) exceed 200 percent of the amount determined under 
subparagraph (C). 
"(2) ALTERNATIVE COMPUTATION.—A taxpayer may compute 
its qualif5dng 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 for-
eign trade income from any transaction with respect to any 
property under paragraph (1)(B), the qualif3dng foreign trade 
income of such person (or any related person) with respect 
to £iny other transaction involving such property shall be zero. 
"(4) RULES FOR MARGINAL COSTING.—The Secretary shall 
prescribe regulations setting forth rules for the allocation of 
expenditures in computing foreign trade income under para-
graph (1)(C) in those cases where a taxpayer is seeking to 
establish or maintain a market for qualifying foreign trade 
property. 
Regulations. 
"(5) PARTICIPATION IN INTERNATIONAL BOYCOTTS, 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 o
f
— 
PUBLIC LAW 106-519—NOV. 15, 2000 
114 STAT. 2425 
"(A) an amount equal to such income multiplied by 
the international boycott factor determined 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 income' means 
the taxable income of the taxpayer attributable to foreign 
trading gross receipts of the taxpayer. 
"(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 marketing of agricultural or horti-
cultural 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 sub-
section (b) or (c) of section 1382 (relating to patronage divi-
dends, per-unit retain allocations, and nonpatronage distribu-
tions). 
"(c) FOREIGN SALE AND LEASING INCOME.—For purposes 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.—Except as provided 
in regulations, in the case of property which— 
"(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 accord-
ance 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 tax-
payer 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 einy income properly allocable 
114 STAT. 2426 
PUBLIC LAW 106-519—NOV. 15, 2000 
to excluded property described in subparagraph (B) of sec-
tion 943(a)(3) (relating to intangibles). 
"(B) ONLY DIRECT EXPENSES TAKEN INTO ACCOUNT.— 
For purposes of this subsection, any expense other than 
a directly allocable expense shall not be taken into account 
in computing foreign 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 receipts of the taxpayer which 
are— 
"(A) from the sale, exchange, or other disposition of 
qualifying foreign trade property, 
"(B) from the lease or rental of C3^ualifying foreign trade 
property for use by the lessee outside the United States, 
"(C) for services which are related and subsidiary to— 
"(i) any sale, exchange, or other disposition of 
qualifying foreign trade property by such taxpayer, 
or 
"(ii) any lease or rental of qualifying foreign trade 
property described in subparagraph (B) by such tax-
payer, 
"(D) for engineering or architectural services for 
construction projects located (or proposed for location) out-
side the United States, or 
"(E) for the performance of managerial services for 
a person other than a related person in furtherance of 
the production of foreign trading 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 foreign trading gross 
receipts (determined without regard to this sentence) for such 
taxable year is derived from activities described in subpara-
graph (A), (B), or (C). 
"(2) CERTAIN RECEIPTS EXCLUDED ON BASIS OF USE; SUB-
SIDIZED RECEIPTS EXCLUDED.—The term 'foreign trading gross 
receipts' shall not include receipts of a taxpayer from a trans-
action 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 for-
eign trade property or services is required by law or 
regulation, or 
"(B) such transaction is accomplished by a subsidy 
granted by the government (or £uiy instrumentality thereof) 
of the country or possession in which the property is manu-
factured, produced, grown, or extracted. 
"(3) ELECTION TO EXCLUDE CERTAIN RECEIPTS.—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 receipts taken into account for purposes of this 
subpart. 
"(b) FOREIGN ECONOMIC PROCESS REQUIREMENTS.— 
PUBLIC LAW 106-519—NOV. 15, 2000 
114 STAT. 2427 
"(1) IN GENERAL.—Except as provided in subsection (c), 
a taxpayer shall be treated as having foreign 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 transaction if— 
"(i) such taxpayer (or any person acting under 
a contract with such taxpayer) has participated outside 
the United States in the solicitation (other than adver-
tising), the negotiation, or the making of the contract 
relating to such transaction, and 
"(ii) the foreign direct costs incurred by the tax-
payer attributable to the transaction equal or exceed 
50 percent of the total direct costs attributable to the 
transaction. 
"(B) ALTERNATIVE 85-PERCENT TEST.—^A taxpayer shall 
be treated as satisfying the requirements of subparagraph 
(A)(ii) with respect to any transaction if, with respect to 
each of at least two subparagraphs of paragraph (3), the 
foreign direct costs incurred by such taxpayer attributable 
to activities described in such subparagraph 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 incurred by the taxpayer attributable to 
activities described in paragraph (3) performed at any 
location by the teixpayer or any person acting under 
a contract with such taxpayer. 
"(ii) FOREIGN DIRECT COSTS.—The term 'foreign 
direct costs' means, with respect to any transaction, 
the portion of the total direct costs which are attrib-
utable to activities performed outside the United 
States. 
"(3) ACTIVITIES RELATING TO QUALIFYING FOREIGN 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 customer, 
"(D) the determination and transmittal of a final 
invoice or statement of account or the receipt of payment, 
and 
"(E) the assumption of credit risk. 
"(4) 
ECONOMIC PROCESSES PERFORMED BY RELATED PER-
SONS.—A taxpayer shall be treated as meeting the requirements 
of this subsection with respect to any sales transaction involving 
any property if any related person has met such requirements 
in such transaction or any other sales transaction involving 
such property. 
114 STAT. 2428 
PUBLIC LAW 106-519—NOV. 15, 2000 
"(c) EXCEPTION FROM FOREIGN ECONOMIC PROCESS REQUIRE-
MENT.— 
"(1) IN GENERAL.—The requirements of subsection (b) shall 
be treated as met for any taxable year if the foreign trading 
f
ross receipts of the taxpayer for such year do not exceed 
5,000,000. 
Regulations. 
"(2) RECEIPTS OF RELATED PERSONS AGGREGATED.—All 
related persons shall be treated as one person for purposes 
of paragraph (1), and the limitation under paragraph (1) shall 
be allocated among such persons in a manner provided in 
regulations prescribed by the Secretary. 
Applicability. 
"(3) SPECIAL RULE FOR PASS-THRU ENTITIES.—In t h e case 
of a partnership, S corporation, or other pass-thru entity, the 
limitation under paragraph (1) shall apply with respect to the 
partnership, S corporation, 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— 
"(1) IN GENERAL.—The term 'qualifying foreign trade prop-
ert5^ means property— 
"(A) manufactured, produced, grown, or extracted 
within or outside the United States, 
"(B) held primarily for sale, lease, or rental, 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) performed 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 Secretary 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 attributable to arti-
cles described in clause (i). 
"(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 qualif3dng foreign trade property only if it is manufactured, 
produced, grown, or extracted by— 
"(A) a domestic corporation, 
"(B) an individual who is a citizen or resident of the 
United States, 
"(C) a foreign corporation with respect to which an 
election under subsection (e) (relating to foreign corpora-
tions electing to be subject to United States taxation) is 
in effect, or 
PUBLIC LAW 106-519—NOV. 15, 2000 
114 STAT. 2429 
"(D) a partnership or other pass-thru entity all of the 
partners or owners of which are described in subparagraph 
(A), (B), or (C). 
Except as otherwise provided by the Secretary, tiered partner-
ships or pass-thru entities shall be treated as described in 
subparagraph (D) if each of the partnerships or entities is 
directly or indirectly wholly owned by persons described in 
subparagraph (A), (B), or (C). 
"(3) EXCLUDED PROPERTY.—The term 'qualifying foreign 
trade property' shall not include— 
"(A) property leased or rented by the taxpayer 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 
commercial 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 prohibited or 
curtailed to effectuate the policy set forth m 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 'unprocessed 
timber' means any log, cant, or similar form of timber. 
"(4) PROPERTY IN SHORT SUPPLY.—If the President deter-
mines that the supply of any property described in paragraph 
(1) is insufficient to meet the requirements of the domestic 
economy, the President may by Executive order designate the 
property as in short supply. Aiiy 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 determination that the property is no 
longer in short supply. 
"(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 disposition, 
"(ii) any lease or rental, and 
"(iii) any fiimishing of services. 
"(B) GROUPING OF TRANSACTIONS.—TO the extent pro-
vided in regulations, any provision of this subpart which, 
but for this subparagraph, would be applied on a trans-
action-by-transaction 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 regula-
tions may permit different groupings for different purposes. 
"(2) UNITED STATES DEFINED.—The term 'United States' 
includes the Commonwealth of Puerto Rico. The preceding sen-
tence shall not apply for purposes of determining whether a 
corporation is a domestic corporation. 
"(3) RELATED PERSON.—A person shall be related to another 
person if such persons are treated as a single employer under 
subsection (a) or (b) of section 52 or subsection (m) or (o) 
of section 414, except that determinations under subsections 
114 STAT. 2430 
PUBLIC LAW 106-519—NOV. 15, 2000 
(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, produced, 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 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 taxpayer'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 with-
holding tax shall not be treated as paid or accrued with respect 
to extraterritorial income which is excluded from gross income 
under section 114(a). For purposes of this paragraph, the term 
'withholding t£ix' 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 tax-
payer with respect to extraterritorial income from any trans-
action if the taxpayer computes its qualifying foreign trade 
income 
with 
respect 
to 
the 
transaction 
under 
section 
941(a)(1)(A). 
"(e) ELECTION TO BE TREATED AS DOMESTIC CORPORATION.— 
"(1) IN GENERAL.—^An applicable foreign corporation may 
elect to be treated as a domestic corporation for all purposes 
of this title if such corporation 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 foreign corporation' means 
any foreign corporation if— 
"(A) such corporation manufactures, produces, grows, 
or extracts property in the ordinary course of such corpora-
tion's trade or business, or 
"(B) substantially all of the gross receipts of such cor-
poration are foreign trading gross receipts. 
"(3) PERIOD OF ELECTION.— 
Applicability. 
"(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 
PUBLIC LAW 106-519—NOV. 15, 2000 
114 STAT. 2431 
taxable years unless revoked by the taxpayer. Any revoca-
tion of such election shall apply to taxable years beginning 
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 elec-
tion shall not apply to any taxable year beginning after 
such subsequent taxable year. 
"(C) EFFECT OF REVOCATION OR TERMINATION.—If a 
corporation which made an election under paragraph (1) 
revokes such election or such election is terminated under 
subparagraph (B), such corporation (and any successor cor-
poration) 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 effect as a result of such 
revocation or termination. 
"(4) SPECIAL RULES.— 
"(A) REQUIREMENTS.—This subsection shall not apply 
to an applicable foreign corporation if such corporation 
fails to meet the requirements (if any) which the Secretary 
may prescribe to ensure that the taxes imposed by this 
chapter on such corporation are paid. 
"(B) EFFECT OF ELECTION, REVOCATION, AND TERMI-
NATION.— 
"(i) ELECTION.—For purposes of section 367, a for-
eign corporation making an election under this sub-
section shall be treated as transferring (as of the first 
day of the first taxable year to which the election 
applies) all of its assets to a domestic corporation in 
connection with an exchange to which section 354 
applies. 
! 
"(ii) REVOCATION AND TERMINATION.—For purposes 
of section 367, if— 
"(I) an election is made by a corporation under 
paragraph (1) for any taxable year, and 
"(II) such election ceases to apply for any sub-
sequent 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 exchange to which section 354 applies. 
"(C) ELIGIBILITY FOR ELECTION.—The Secretary may 
by regulation designate one or more classes of corporations 
which may not make the election under this subsection. 
"(f) RULES RELATING TO ALLOCATIONS OF QUALIFYING FOREIGN 
TRADE INCOME FROM SHARED PARTNERSHIPS.— 
"(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 respect to such 
trsmsactions are based on the amounts in the separate 
account maintained with respect to such partner, and 
"(C) such partnership meets such other requirements 
as the Secretary may by regulations prescribe. 
114 STAT. 2432 
PUBLIC LAW 106-519—NOV. 15, 2000 
then such partnership shall allocate to each partner items 
of income, gain, loss, and deduction (including qualifying foreign 
trade income) from any transaction to which this subpart 
applies on the basis of such separate account. 
"(2) SPECIAL RULES.—For purposes of this subpart, in the 
case of a partnership to which paragraph (1) applies— 
(A) any partner's interest in the partnership shall 
not be taken into account in determining 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 partnership maintains separate accounts for 
each partner. 
"(g) EXCLUSION FOR PATRONS OF AGRICULTURAL AND HORTI-
CULTURAL COOPERATIVES.—^Any amount described in paragraph (1) 
or (3) of section 1385(a)— 
"(1) which is received by a person from £in organization 
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 organization 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. 
"(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. 
26 use 56. 
(1) The second sentence of section 56(g)(4)(B)(i) is amended 
by inserting before the period "or under section 114". 
26 use 275. 
(2) Section 275(a) is amended— 
(A) by striking "or" at the end of paragraph (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 respect to 
qualifying foreign trade income (as defined 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).". 
26 use 864. 
(3) Paragraph (3) of section 864(e) is amended— 
(A) by striking "For purposes of" and inserting: 
"(A) IN GENERAL.—For purposes of"; and 
(B) by adding at the end the following new subpara-
graph: 
"(B) 
ASSETS PRODUCING EXEMPT EXTRATERRITORIAL 
INCOME.—For purposes of allocating and apportioning any 
interest expense, there shall not be taken into account 
PUBLIC LAW 106-519—NOV. 15, 2000 
114 STAT. 2433 
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 26USC903. 
inserting "114, 164(a),". 
(5) Section 999(c)(1) is amended by inserting "941(a)(5)," 26USC999. 
after "908(a),". 
(6) The table of sections for part III of subchapter 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 subchapter N 
of chapter 1 is amended by striking the 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 subchapter N 
of chapter 1 is amended by striking the item relating to subpart 
C. 
SEC. 5. EFFECTIVE DATE. 
26 USC 941 note. 
(a) IN GENERAL.—The amendments made by this Act shall Applicability. 
apply to transactions after September 30, 2000. 
(b) No NEW FSCS; TERMINATION OF INACTIVE FSCS.— 
(1) NO NEW FSCS.—No corporation may elect after Sep-
tember 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 for-
eign 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 December 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 CORPORA-
TIONS.— 
(1) IN GENERAL.—In the case of a FSC (as so defined) 
in existence on September 30, 2000, and at 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 per-
son) 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 amendments made by this 
Act apply to any transaction by a FSC or any related person 
114 STAT. 2434 
PUBLIC LAW 106-519—NOV. 15, 2000 
Applicability. 
Applicability. 
to which such amendments would apply but for the application 
of paragraph (1). Such election shall be effective for the taxable 
year for which made and all subsequent taxable years, and, 
once made, may be revoked only with the consent of the Sec-
retary of the Treasury. 
(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 
corporation 
accumulated in taxable years ending before October 
1, 2000, shall not be included 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 earnings and 
profits acquired in a transaction after September 30, 2000, 
to which section 381 applies unless the distributor or trans-
feror 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; 
(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 election not later 
than for its first taxable year beginning after December 
31, 2001. 
(C) OTHER CORPORATIONS.—This paragraph shall apply 
to any controlled foreign corporation (as defined in section 
957), 
and such corporation shall (notwithstanding any 
provision of section 943(e)) be treated as an applicable 
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 sec-
tion 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 controlled foreign corporation applies— 
(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 
PUBLIC LAW 106-519—NOV. 15, 2000 
114 STAT. 2435 
of the enactment of this paragraph) to be treated as 
a FSC; and 
(v) such corporation makes the election under sec-
tion 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). 
(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 Internal Revenue Code of 1986, as 
amended by this Act. 
(d) SPECIAL RULES RELATING TO LEASING TRANSACTIONS.— 
(1) SALES INCOME.—If foreign trade income in connection 
with the lease or rental of prcrt)erty described in section 
927(a)(1)(B) of such Code (as in effect before the amendments 
made by this Act) is treated as exempt foreign trade income 
for purposes of section 921(a) of such Code (as so in effect), 
such property shall be treated as property described in section 
941(c)(1)(B) of such Code (as added by this Act) for purposes 
of appl)ring 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 trans-
action 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 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 involving such property (and 
to which the amendments made by this Act apply) shall be 
zero. 
Approved November 15, 2000. 
L E G I S L A T I V E H I S T O R Y — H . R . 4986: 
H O U S E REPORTS: No. 106-845 (Comm. on Ways and Means). 
SENATE REPORTS: No. 106-416 (Comm. on Finance). 
CONGRESSIONAL RECORD, Vol. 146 (2000): 
Sept. 12, 13, considered and passed House. 
Nov. 1, considered and passed Senate, amended. 
Nov. 14, House concurred in Senate amendment. 
WEEKLY COMPILATION OF PRESIDENTIAL DOCUMENTS, Vol. 36 (2000): 
Nov. 15, Presidential statement.