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 PUBLIC LAW 99-514—OCT. 22, 1986 eluded in the gross income of a United States shareholder for any taxable year both under subsection (a)(l)(A)(i) and under section 1293 (relating to current taxation of income from certain passive foreign investment companies), such amount shall be included in the gross income of such shareholder only under subsection (a)(1)(A)." (d) EXTENSION OF STATUTE OF LIMITATION.—Section 6503 (relating to suspension of running of period of limitation) is amended by redesignating subsection (j) as subsection (k) and by inserting after subsection (i) the following new subsection: "(j) EXTENSION OF TIME FOR PAYMENT OF UNDISTRIBUTED P F I C EARNINGS TAX LIABILITY.—The running of any period of limitations

for collection of any amount of undistributed PFIC earnings tax liability (as defined in section 1294(b)) shall be suspended for the period of any extension of time under section 1294 for payment of such amount." (e) COORDINATION WITH FOREIGN PERSONAL HOLDING COMPANY

PROVISIONS.—Section 551 is amended by redesignating subsection (g) as subsection (h) and by inserting after subsection (f) the following new subsection: "(g) COORDINATION WITH PASSIVE FOREIGN INVESTMENT COMPANY

PROVISIONS.—If, but for this subsection, an amount would be included in the gross income of any person under subsection (a) and under section 1293 (relating to current taxation of income from certain passive foreign investment companies), such amount shall be included in the gross income of such person only under subsection (a)." (f) OTHER TECHNICAL AMENDMENTS.—

(1) Subsection (b) of section 532 (relating to exceptions from accumulated earnings tax) is amended by striking out "or" at the end of paragraph (2), by striking out the period at the end of paragraph (3) and inserting in lieu thereof ", or", and by adding at the end thereof the following new paragraph: "(4) a passive foreign investment company (as defined in section 1296)." (2) Subsection (c) of section 542 (relating to exceptions from personal holding company provisions) is amended by striking out "and" at the end of paragraph (8), by striking out the period at the end of paragraph (9) and inserting in lieu thereof "; and", and by adding at the end thereof the following new paragraph: "(10) a passive foreign investment company (as defined in section 1296)." (3) The second sentence of section 851(b) is amended— (A) by striking out "section 951(a)(l)(A)(i)" and inserting in lieu thereof "section 951(a)(l)(A)(i) or 1293(a)", and (B) by striking out "section 959(a)(1)" and inserting in lieu thereof "section 959(a)(1) or 1293(c) (as the case may be)". (4)(A) Subparagraph (A) of section 904(g)(1) is amended by striking out "or" at the end of clause (i), by striking out the period at the end of clause (ii) and inserting in lieu thereof ", or", and by adding at the end thereof the following new clause: "(iii) section 1293 (relating to current taxation of income from qualified funds)." (B) The paragraph heading of section 904(g)(2) is amended by striking out "HOLDING COMPANY" and inserting in lieu thereof "HOLDING OR PASSIVE FOREIGN INVESTMENT COMPANY".

100 STAT. 2575

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 100 STAT. 2576

PUBLIC LAW 99-514—OCT. 22, 1986

(g) CLERICAL AMENDMENT.—The table of parts for subchapter P of chapter 1 is amended by adding at the end thereof the following new item: "Part VI. Treatment of certain passive foreign investment companies."

(h) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 1986. SEC. 1236. TREATMENT OF INTEREST ON OBLIGATIONS OF THE UNITED STATES RECEIVED BY BANKS ORGANIZED IN GUAM.

(a) IN GENERAL.—Subsection (e) of section 882 (relating to interest on United States obligations received by banks organized in possessions) is amended by adding at the end thereof the following sentence: "The preceding sentence shall not apply to any Guam corporation which is treated as not being a foreign corporation by section 881(b)(1) for the taxable year." (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to taxable years beginning after November 16, 1985.

Subtitle E—Treatment of Foreign Taxpayers SEC. 1241. BRANCH PROFITS TAX.

(a) GENERAL RULE.—Subpart B of part II of subchapter N of chapter 1 (relating to foreign corporations) is amended by redesignating section 884 as section 885 and by inserting after section 883 the following new section: "SEC. 884. BRANCH PROFITS TAX.

"(a) IMPOSITION OF TAX.—In addition to the tax imposed by section 882 for any taxable year, there is hereby imposed on any foreign corporation a tax equal to 30 percent of the dividend equivalent amount for the taxable year. "(b) DIVIDEND EQUIVALENT AMOUNT.—For purposes of subsection (a), the term 'dividend equivalent amount' means the foreign corporation's effectively connected earnings and profits for the taxable year adiusted as provided in this subsection: (1) REDUCTION FOR INCREASE IN U.S. NET EQUITY.—If—

"(A) the U.S. net equity of the foreign corporation as of the close of the taxable year, exceeds "(B) the U.S. net equity of the foreign corporation as of the close of the preceding taxable year, the effectively connected earnings and profits for the taxable year shall be reduced (but not below zero) by the amount of such excess. "(2) INCREASE FOR DECREASE IN NET EQUITY.— "(A) IN GENERAL.—If^

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"(i) the U.S. net equity of the foreign corporation as of the close of the preceding taxable year, exceeds "(ii) the U.S. net equity of the foreign corporation as of the close of the taxable year, the effectively connected earnings and profits for the taxable year shall be increased by the amount of such excess. "(B) LIMITATION.—The increase under subparagraph (A) for any taxable year shall not exceed the aggregate reduc-

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2577

tions under paragraph (1) for prior taxable years to the extent not previously taken into account under subparagraph (A). "(c) U.S. NET EQUITY.—For purposes of this section— "(1) IN GENERAL.—The term 'U.S. net equity' means— "(A) U.S. assets, reduced (including below zero) by "(B) U.S. liabilities. "(2) U.S. ASSETS AND U.S. LIABILITIES.—For purposes of paragraph (D— "(A) U.S. ASSETS.—The term 'U.S. assets' means the money and aggregate adjusted bases of property of the foreign corporation treated as connected with the conduct of a trade or business in the United States under regulations prescribed by the Secretary. For purposes of the preceding sentence, the adjusted basis of any property shall be its adjusted basis for purposes of computing earnings and profits. "(B) U.S. LIABILITIES.—The term 'U.S. liabilities' means the liabilities of the foreign corporation treated as connected with the conduct of a trade or business in the United States under regulations prescribed by the Secretary. "(C) REGULATIONS TO BE CONSISTENT WITH ALLOCATION OF

DEDUCTIONS.—The regulations prescribed under subparagraphs (A) and (B) shall be consistent with the allocation of deductions under section 882(c)(1). "(d) EFFECTIVELY CONNECTED EARNINGS AND PROFITS.—For purposes of this section— "(1) IN GENERAL.—The term 'effectively connected earnings and profits' means earnings and profits (without diminution by reason of any distributions made during the taxable year) which are attributable to income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business within the United States. "(2) EXCEPTION FOR CERTAIN INCOME.—The term 'effectively connected earnings and profits' shall not include any earnings and profits attributable to— "(A) income not includible in gross income under paragraph (1) or (2) of section 883(a), "(B) income treated as effectively connected with the conduct of a trade or business within the United States under section 921(d) or 926(b), "(C) gain on the disposition of a United States real property interest described in section 897(c)(l)(A)(ii), or ' (D) income treated as effectively connected with the conduct of a trade or business within the United States under section 953(c)(3)(C). Property and liabilities of the foreign corporation treated as connected with such income under regulations prescribed by the Secretary shall not be taken into account in determining the U.S. assets or U.S. liabilities of the foreign corporation. "(e) COORDINATION WITH INCOME TAX TREATIES; ETC.— "(1) LIMITATION ON TREATY EXEMPTION.—No income tax treaty

between the United States and a foreign country shall exempt any foreign corporation from the tax imposed by subsection (a; (or reduce the amount thereof) unless— "(A) such foreign corporation is a quEdified resident of such foreign country, or

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 100 STAT. 2578

PUBLIC LAW 9 9 - 5 1 4 - O C T. 22, 1986

"(B) such foreign corporation is not a qualified resident of such foreign country but such income tax treaty permits a withholding tax on dividends described in section 861(a)(2)(B) which are paid by such foreign corporation. "(2) TREATY MODIFICATIONS.—If a foreign corporation is a qualified resident of a foreign country with which the United States has an income tax treaty— "(A) the rate of tax under subsection (a) shall be the rate of tax specified in such treaty— "(i) on branch profits if so specified, or "(ii) if not so specified, on dividends paid by a domestic corporation to a corporation resident in such country which wholly owns such domestic corporation, and "(B) any other limitations under such treaty on the tax imposed by subsection (a) shall apply. "(3) COORDINATION WITH 2ND TIER WITHHOLDING TAX.—

"(A) IN GENERAL.—If a foreign corporation is not exempt for any taxable year from the tax imposed by subsection (a) by reason of a treaty, no tax shall be imposed by section 871(a), 881(a), 1441, or 1442 on any dividends paid by such corporation during the taxable year. "(B) LIMITATION ON CERTAIN TREATY BENEFITS.—No foreign corporation which is not a qualified resident of a foreign country shall be entitled to claim benefits under any income tax treaty between the United States and such foreign country with respect to dividends— "(i) which are paid by such foreign corporation and with respect to which such foreign corporation is otherwise required to deduct and withhold tax under section 1441 or 1442, or "(ii) which are received by such foreign corporation and are described in section 861(a)(2)(B). "(4) QUALIFIED RESIDENT.—For purposes of this subsection— "(A) IN GENERAL.—Except as otherwise provided in this paragraph, the term 'qualified resident' means, with respect to any foreign country, any foreign corporation which is a resident of such foreign country unless— "(i) more than 50 percent (by value) of the stock of such foreign corporation is owned (within the meaning of section 883(c)(4)) by individuals who are not residents ac of such foreign country and who are not United States citizens or resident aliens, or e • "(ii) 50 percent or more of its income is used (directly or indirectly) to meet liabilities to persons who are not residents of such foreign country or the United States. "(B) SPECIAL RULE FOR PUBLICLY TRADED CORPORATIONS.—
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A foreign corporation which is a resident of a foreign country shall be treated as a qualified resident of such foreign country if— "(i) the stock of such corporation is primarily and regularly traded on an established securities market in such foreign country, or .1' "(ii) such corporation is wholly owned (either directly or indirectly) by another foreign corporation which is if tn. organized in such foreign country and the stock of which is so traded.

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 PUBLIC LAW 99-514—OCT. 22, 1986 ^

100 STAT. 2579

"(C) SECRETARIAL AUTHORITY.—The Secretary may, in his

sole discretion, treat a foreign corporation as being a qualified resident of a foreign country if such corporation establishes to the satisfaction of the Secretary that such corporation meets such requirements as the Secretary may establish to ensure that individuals who are not residents of such foreign country do not use the treaty between such foreign country and the United States in a manner inconsistent with the purposes of this subsection. "(f) TREATMENT OF INTEREST ALLOCABLE TO EFFECTIVELY CONNECTED INCOME.—

"(1) IN GENERAL.—In the case of a foreign corporation engaged in a trade or business in the United States, for purposes i of sections 871, 881, 1441, and 1442— "(A) any interest paid by such trade or business in the , United States shall be treated as if it were paid by a domestic corporation, and "(B) to the extent the amount of interest allowable as a deduction under section 882 in computing the effectively % P' connected taxable income of such foreign corporation exceeds the interest described in subparagraph (A), such foreign corporation shall be liable for tax under section 881(a) in the same manner as if such excess were interest paid to such foreign corporation by a wholly owned domestic corporation on the last day of such foreign corporation's taxable year. Rules similar to the rules of subsection (e)(3)(B) shall apply to interest described in the preceding sentence. "(2) EFFECTIVELY CONNECTED TAXABLE INCOME.—For purposes of this subsection, the term 'effectively connected taxable income' means tsixable income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business within the United States. "(g) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations providing for appropriate adjustments in the determination of the dividend equivalent amount in connection with the distribution to shareholders or transfer to a controlled corporation of the taxpayer's U.S. assets and other adjustments in such determination as are necessary or appropriate to carry out the purposes of this section." (b) AMENDMENTS TO INTEREST AND DIVIDEND SOURCING RULES.—

(1) INTEREST.—Paragraph (1) of section 861(a) (as amended by section 1214) is amended— >R (A) by striking out "residents, corporate or otherwise," in i: the matter preceding subparagraph (A) and inserting in lieu thereof "noncorporate residents or domestic corporailaite f tions", and (B) by striking out subparagraphs (B) and (C) and by redesignating subparagraphs (D), (E), and (F) as subpara** graphs (B), (C), and (D), respectively. (2) DIVIDENDS.—Subparagraph (B) of section 861(a)(2) is amended— (A) by striking out "50 percent" and inserting in lieu thereof "25 percent", and f (B) by striking out "effectively connected" each place it vd J •» appears and inserting in lieu thereof "effectively connected

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 100 STAT. 2580

PUBLIC LAW 99-514—OCT. 22, 1986

£

(or treated as effectively connected other than under section 884(d)(2))". (c) DISALLOWANCE OF CREDIT.—Subsection (b) of section 906 is

amended by adding at the end thereof the following new paragraph: "(6) No credit shall be allowed under this section against the tax imposed by section 884." (d) CLERICAL AMENDMENT.—The table of sections for subpart B of part II of subchapter N of chapter 1 is amended by striking out the item relating to section 884 and inserting in lieu thereof the following: ^,. ^»... "Sec. 884. Branch profits tax. ^ "Sec. 885. Cross references." (e) EFFECTIVE DATE.—The amendments made by this section shall

apply to taxable years beginning after December 31, 1986. SEC. 1242. TREATMENT OF DEFERRED PAYMENTS AND APPRECIATION ARISING OUT OF BUSINESS CONDUCTED WITHIN THE UNITED STATES. (a) GENERAL RULE.—Subsection (c) of section 864 (defining effec-

tively connected income) is amended by adding at the end thereof the following new paragraphs: "(6) TREATMENT OF CERTAIN DEFERRED PAYMENTS, ETC.—For

purposes of this title, any income or gain of a nonresident alien individual or a foreign corporation for any taxable year which is attributable to a sale or exchange of property or the perform* ance of services (or any other transaction) in any other taxable year shall be treated as effectively connected with the conduct of a trade or business within the United States if it would have been so treated if such income or gain were taken into account in such other taxable year. "(7) TREATMENT OF CERTAIN PROPERTY TRANSACTIONS.—For

purposes of this title, if any property ceases to be used or held for use in connection with the conduct of a trade or business within the United States, the determination of whether any income or gain attributable to a sale or exchange of such property occurring within 10 years after such cessation is effectively connected with the conduct of a trade or business within the United States shall be made as if such sale or exchange occurred immediately before such cessation." (b) CONFORMING AMENDMENTS.—Paragraph (1) of section 864(c) is

amended— (1) by striking out "and (4)" in subparagraph (A) and inserting in lieu thereof "(4), (6), and (7)", and (2) by striking out "as provided in" in subparagraph (B) and inserting in lieu thereof "as provided in paragraph (6) or (7) or in". (c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. SEC. 1243. TREATMENT UNDER SECTION 877 OF PROPERTY RECEIVED IN TAX-FREE EXCHANGES, ETC. (a) GENERAL RULE.—Subsection (c) of section 877 (relating to

expatriation to avoid tax) is amended by adding at the end thereof the following new sentence: "For purposes of this section, gain on the sale or exchange of property which has a basis determined in whole or in part by

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Page:United States Statutes at Large Volume 100 Part 3.djvu/773

 PUBLIC LAW 99-514—OCT. 22, 1986 reference to property described in paragraph (1) or (2) shall be treated as gain described in paragraph (1) or (2)." (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to sales or exchanges of property received in exchanges after September 25, 1985. SEC. 1244. STUDY OF UNITED STATES REINSURANCE INDUSTRY.

The Secretary of the Treasury or his delegate shall conduct a study to determine whether United States reinsurance corporations are placed at a significant competitive disadvantage with foreign reinsurance corporations by existing treaties between the United States and foreign countries. The Secretary shall report before January 1, 1988, the results of such study to the Committee on Finance of the United States Senate and the Committee on Ways and Means of the House of Representatives. SEC. 1245. INFORMATION WITH RESPECT TO CERTAIN FOREIGN-OWNED CORPORATIONS.

(a) IN GENERAL.—Paragraph (1) of section 6038A(b) (relating to certain required information) is amended— (1) by striking out "each corporation" in the matter preceding subparagraph (A) and inserting in lieu thereof "each person", and (2) by striking out subparagraph (A) and inserting in lieu thereof the following: "(A) is a related party to the reporting corporation, and". (b) CONFORMING AMENDMENTS.—

(1) Paragraph (2) of section 6038A(b) is amended by striking out "each corporation" and inserting in lieu thereof "each person". '' (2) Paragraph (3) of section 6038A(b) is amended to read as ' "(3) transactions between the reporting corporation and each ' foreign person which is a related party to the reporting corporation." (3) Subsection (b) of section 6038A is amended by striking out "and" at the end of paragraph (2), by striking out the period at the end of paragraph (3) and inserting in lieu thereof ", and", and by adding at the end thereof the following new paragraph: ' "(4) such information as the Secretary may require for purposes of carrying out the provisions of section 453C." (4) Paragraph (2) of section 6038A(c) is amended to read as s follows: ? "(2) RELATED PARTY.—The term 'related party' means— "(A) any person who is related to the reporting corporation within the meaning of section 267(b) or 707(b)(1), and "(B) any other person who is related (within the meaning of section 482) to the reporting corporation." (5) Paragraph (1) of section 6038(a) is amended by striking out "and" at the end of subparagraph (D), by striking out the period at the end of subparagraph (E) and inserting in lieu thereof ", and", and by inserting after subparagraph (E) the following I new subparagraph: "(F) such information as the Secretary may require for i purposes of carrying out the provisions of section 453C." (c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986.
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71-19A 0 - 89 - 26: QL. 3 Part3

100 STAT. 2581

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 100 STAT. 2582

PUBLIC LAW 99-514—OCT. 22, 1986

SEC. 1246. WITHHOLDING TAX ON AMOUNTS PAID BY PARTNERSHIPS TO FOREIGN PARTNERS.

(a) IN GENERAL,—Subchapter A of chapter 3 (relating to withholding of tax on nonresident) is amended by adding at the end thereof the following new section: "SEC. 1446. WITHHOLDING TAX ON AMOUNTS PAID BY PARTNERSHIPS TO FOREIGN PARTNERS.

"(a) GENERAL RULE.—Except as provided in this section, if a partnership has any income, gain, or loss which is effectively connected or treated as effectively connected with the conduct of a trade or business within the United States, any person described in section 1441(a) shall be required to deduct and withhold a tax equal to 20 percent of any amount distributed to a partner which is not a United States person. "(]o) LIMITATION IF LESS THAN 80 PERCENT OF GROSS INCOME IS EFFECTIVELY CONNECTED WITH UNITED STATES TRADE OR BUSINESS.—

"(1) IN GENERAL.—If the effectively connected percentage is less than 80 percent, only the effectively connected percentage of any distribution shall be taken into account under subsection

4" (a). "(2) EFFECTIVELY CONNECTED PERCENTAGE.—For purposes of paragraph (1) the term 'effectively connected percentage' means ^" the percentage of the gross income of the partnership for the 3 j^^ taxable years preceding the taxable year of the distribution " which is effectively connected (or treated as effectively con„ ^ nected) with the conduct of a trade or business within the ' United States. .,^.,,,,,_.^,.,.,. '.•,.:••...-•,--^r} -'H--^ ••• "(c) EXCEPTIONS.— ' ^-« '-• ... ,<•. ^^^ "(1) AMOUNTS ON WHICH TAX WITHHELD.—Subsection (a) shall

not apply to that portion of any distribution with respect to which a tax is required to be deducted and withheld under section 1441 or 1442 (or would be required to be deducted and withheld but for a treaty). "(2)

PARTNERSHIPS WITH CERTAIN ALLOCATIONS.—Except

as

provided in regulations, subsection (a) shall not apply to any partnership with respect to which substantially all income from sources within the United States and substantially all income .-, which is effectively connected with the conduct of a trade or business within the United States is properly allocated to jfi United States persons. "(3) COORDINATION WITH SECTION 1445.—Under regulations proper adjustments shall be made in the amount required to be -! deducted and withheld under subsection (a) for amounts deducted and withheld under section 1445. "(d) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section." (b) COORDINATION WITH SECTION 6401(b).—Paragraph (2) of section 6401(b) (relating to excessive credits treated as overpayments) is amended by adding at the end thereof the following new sentence: "The preceding sentence shall not apply to any amount deducted and withheld under section 1446." (c) CONFORMING AMENDMENT.—The table of sections for subchapter A of chapter 3 is amended by adding at the end thereof the following new item:

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2583

"Sec. 1446. Withholding tax on amounts paid by partnerships to foreign partners."

(d) EFFECTIVE DATE.—The amendment made by this section shall apply to distributions after December 31, 1987 (or, if earlier, the effective date (which shall not be earlier than January 1, 1987) of the initial regulations issued under section 1446 of the Internal Revenue Code of 1986 as added by this section). SEC. 1247. INCOME OF FOREIGN GOVERNMENTS.

(a) SPECIAL RULE.—Section 892 (relating to income of foreign governments and of international organizations) is amended to read as follows: "SEC. 892. INCOME OF FOREIGN GOVERNMENTS AND OF INTERNATIONAL ORGANIZATIONS. "(a) FOREIGN GOVERNMENTS.—

"(1) IN GENERAL.—The income of foreign governments received from— "(A) investments in the United States in— "(i) stocks, bonds, or other domestic securities owned by such foreign governments, or "(ii) financial instruments held in the execution of governmental financial or monetary policy, or "(B) interest on deposits in banks in the United States of ' moneys belonging to such foreign governments, shall not be included in gross income and shall be exempt from taxation under this subtitle. "(2) INCOME RECEIVED DIRECTLY OR INDIRECTLY FROM COMMERCIAL ACTIVITIES.—

„„^ A .;,.

"(A) IN GENERAL.—Paragraph (1) shall not apply to any income— "(i) derived from the conduct of any commercial activity (whether within or outside the United States), or "(ii) received from or by a controlled commercial entity. "(B) CONTROLLED COMMERCIAL ENTITY.—For purposes of

.,

subparagraph (A), the term 'controlled commercial entity' means any entity engaged in commercial activities (whether within or outside the United States) if the government— "(i) holds (directly or indirectly) any interest in such vji':^.^ entity which (by value or voting interest) is 50 percent or more of the total of such interests in such entity, or liens, fi: "(ii) holds (directly or indirectly) any other interest in such entity which provides the foreign government with effective control of such entity. For purposes of the preceding sentence, a central bank of issue shall be treated as a controlled commercial entity only if engaged in commercial activities within the United States. "(b) INTERNATIONAL ORGANIZATIONS.—The income of international organizations received from investments in the United States in stocks, bonds, or other domestic securities owned by such international organizations, or from interest on deposits in banks in the United States of moneys belonging to such international organizations, or from any other source within the United States, shall not

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 100 STAT. 2584

PUBLIC LAW 99-514—OCT. 22, 1986

be included in gross income and shall be exempt from taxation under this subtitle. "(c) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section." (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to amounts received on or after July 1, 1986, except that no amount shall be required to be deducted and withheld by reason of the amendment made by subsection (a) from any payment made before the date of the enactment of this Act. SEC. 1248. LIMITATION ON COST OF PROPERTY IMPORTED FROM RELATED PERSONS.

(a) IN GENERAL.—Part IV of subchapter O of chapter 1 (relating to special rules for determination of basis) is amended by inserting after section 1059 the following new section: "SEC. 1059A. LIMITATION ON TAXPAYERS BASIS OR INVENTORY COST IN PROPERTY IMPORTED FROM RELATED PERSONS.

"(a) IN GENERAL.—If any property is imported into the United States in a transaction (directly or indirectly) between related persons (within the meaning of section 482), the amount of any costs— "(1) which are taken into account in computing the basis or inventory cost of such property by the purchaser, and "(2) which are also taken into account in computing the customs value of such property, shall not, for purposes of computing such basis or inventory cost for purposes of this chapter, be greater than the amount of such costs taken into account in computing such customs value. "(b) CUSTOMS VALUE; IMPORT.—For purposes of this section— "(1) CUSTOMS VALUE.—The term 'customs value' means the value taken into account for purposes of determining the amount of any customs duties or any other duties which may be imposed on the importation of any property. "(2) IMPORT.—Except as provided in regulations, the term 'import' means the entering, or withdrawal from warehouse, for consumption." (h) CONFORMING AMENDMENT.—The table of sections for part IV of subchapter O of chapter 1 is amended by inserting after the item relating to section 1059 and inserting in lieu thereof the following new item: "Sec. 1059A. Limitation on taxpayer's basis or inventory cost in property imported from related persons."

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to transactions entered into after March 18, 1986. SEC. 1249. TREATMENT OF DUAL RESIDENCE CORPORATIONS.

(a) GENERAL RULE.—Section 1503 (relating to consolidated return) is amended by adding at the end thereof the following new subsection: "(d) DUAL CONSOLIDATED Loss.—

"(1) IN GENERAL.—The dual consolidated loss for any taxable year of any corporation shall not be allowed to reduce the taxable income of any other member of the affiliated group for - the taxable year or any other taxable year. i_i.. "(2) DUAL CONSOLIDATED LOSS.—For purposes of this section—

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2585

"(A) IN GENERAL.—Except as provided in subparagraph (B), the term 'dual consoUdated loss' means any net operating loss of a domestic corporation which is subject to an income tax of a foreign country on its income without regard to whether such income is from sources in or outside of such foreign country, or is subject to such a tax on a fi" r 3 residence basis. "(B) SPECIAL RULE WHERE LOSS NOT USED UNDER FOREIGN

V

- . LAW.—To the extent provided in regulations, the term 'dual c consolidated loss' shall not include any loss which, under ,, . the foreign income tax law, does not offset the income of any foreign corporation." (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to net operating losses for taxable years beginning after December 31, 1986.

Subtitle F—Foreign Currency Transactions SEC. 1261. TREATMENT OF FOREIGN CURRENCY TRANSACTIONS.

(a) GENERAL RULE.—Part III of subchapter N of chapter 1 is amended by adding at the end thereof the following new subpart:

"Subpart J—Foreign Currency Transactions ->f '•'

"Sec. 985. Functional currency. "Sec. 986. Determination of foreign corporanon's earnings and profits and foreign taxes. "Sec. 987. Branch transactions. "Sec. 988. Treatment of certain foreign currency transactions. "Sec. 989. Other definitions and special rules.

"SEC. 985. FUNCTIONAL CURRENCY.

"(a) IN GENERAL.—Unless otherwise provided in regulations, all determinations under this subtitle shall be made in the taxpayer's functional currency. "(b) FUNCTIONAL CURRENCY.—

"(1) IN GENERAL.—For purposes of this subtitle, the term 'functional currency' means— "(A) except as provided in subparagraph (B), the dollar, or "(B) in the case of a qualified business unit, the currency of the economic environment in which a significant part of such unit's activities are conducted and which is used by such unit in keeping its books and records. "(2) FUNCTIONAL CURRENCY WHERE ACTIVITIES PRIMARILY CONDUCTED IN DOLLARS.—The functional currency of any qualified

1 business unit shall be the dollar if activities of such unit are primarily conducted in dollars. "(3) ELECTION.—To the extent provided in regulations, the taxpayer may elect to use the dollar as the functional currency for any qualified business unit if— "(A) such unit keeps its books and records in dollars, or "(B) the taxpayer uses a method of accounting that

approximates a separate transactions method. Any such election shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.

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 100 STAT. 2586

PUBLIC LAW 99-514—OCT. 22, 1986

sin, t t "(4) C H A N G E I N FUNCTIONAL CURRENCY TREATED AS A CHANGE

^ ^

IN METHOD OF ACCOUNTING.—Any change in the functional currency shall be treated as a change in the tax p a y e r ' s method of accounting for purposes of section 481 under procedures to be established by the Secretary.

"SEC. 986. DETERMINATION OF FOREIGN CORPORATION'S EARNINGS AND PROFITS AND FOREIGN TAXES. "(a) E A R N I N G S AND PROFITS AND DISTRIBUTIONS.—For purposes of

determining the tax under this subtitle— "(1) of any shareholder of any foreign corporation, the earnings and profits of such corporation shall be determined in the ''' corporation's functional currency, and "(2) in the case of any United States person, the earnings and profits determined under paragraph (1) (when distributed, deemed distributed, or otherwise t a k e n into account under this subtitle) shall (if necessary) be t r a n s l a t e d into dollars using the appropriate exchange r a t e. "(b) FOREIGN T A X E S. —

^;

"

«i

"(1) IN GENERAL.—In determining the a m o u n t of foreign taxes deemed paid under section 902 or 960— "(A) any foreign income taxes paid by a foreign corporation shall be t r a n s l a t e d into dollars using the exchange r a t e s a s of the t i m e of payment, and "(B) any adjustment to the a m o u n t of foreign income taxes paid by a foreign corporation shall be t r a n s l a t e d into "^ dollars using— "(i) except a s provided in clause (ii), the appropriate exchange r a t e as of when such adjustment is made, and "(ii) in the case of any refund or credit of foreign taxes, using the exchange r a t e a s of the t i m e of original payment of such foreign income taxes. "(2) FOREIGN INCOME TAXES.—For purposes of paragraph (1),

'foreign income taxes' means any income, w a r profits, or excess profits taxes paid to any foreign country or to any possession of the United States. ft: "(c) PREVIOUSLY T A X E D E A R N I N G S AND P R OF I T S. —

-n

"(1) IN GENERAL.—Foreign currency gain or loss with respect to distributions of previously taxed earnings and profits (as described in section 959 or 1293(c)) a t t r i b u t a b l e to movements in exchange r a t e s between the times of deemed and actual distribution shall be recognized and t r e a t e d a s o r d i n a r y income or loss from the s a m e source a s the associated income inclusion. "(2) DISTRIBUTIONS THROUGH TIERS.—The Secretary s h a l l pre-

fa- scribe regulations with respect to the t r e a t m e n t of distributions of previously taxed e a r n i n g s and profits through tiers of foreign corporations. , v^ .; v ,> ^, "SEC. 987. BRANCH TRANSACTIONS. "In the case of any tax p a y e r having 1 or more qualified business units with a functional currency other than the dollar, taxable income of such tax p a y e r shall be determined— "(1) by computing the taxable income or loss separately for each such u n i t in its functional currency, "(2) by t r a n s l a t i n g the income or loss s e p a r a t e l y computed under paragraph (1) a t the a p p r o p r i a t e exchange r a t e.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/779

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2587

"(3) by making proper adjustments (as prescribed by the Secretary) for transfers of property between qualified business units of the taxpayer having different functional currencies, including— "(A) treating post-1986 remittances from each such unit as made on a pro rata basis out of post-1986 accumulated earnings, and "(B) treating gain or loss determined under this paragraph as ordinary income or loss, respectively, and sourcing such gain or loss by reference to the source of the income giving rise to post-1986 accumulated earnings, and "(4) by translating foreign income taxes paid by each qualified business unit of the taxpayer in the same manner as provided under section 986(b).

'ir .: .:

"SEC. 988. TREATMENT OF CERTAIN FOREIGN CURRENCY TRANSACTIONS. "(a) GENERAL RULE.— liBi "(1) TREATMENT AS ORDINARY INCOME OR LOSS.—

to », 2

"(A) IN GENERAL.—Except as otherwise provided in section, any foreign currency gain or loss attributable section 988 transaction shall be computed separately treated as ordinary income or loss (as the case may

this to a and be).

"(B) SPECIAL RULE FOR FORWARD CONTRACTS, ETC.—Except

as provided in regulations, a taxpayer may elect to treat any foreign currency gain or loss attributable to a forward contract, a futures contract, or option described in subsection (c)(l)(B)(iii) which is a capital asset in the hands of the taxpayer and which is not a part of a straddle (within the meaning of section 1092(c), without regard to paragraph (4) thereofi as capital gain or loss (as the case may be) if the taxpayer makes such election and identifies such transaction before the close of the day on which such transaction is entered into (or such earlier time as the Secretary may prescribe).

,f, r

"(2) GAIN OR LOSS TREATED AS INTEREST FOR CERTAIN PUR-

POSES.—To the extent provided in regulations, any amount treated as ordinary income or loss under paragraph (1) shall be treated as interest income or expense (as the case may be). "(3) SOURCE.—

"(A) IN GENERAL.—Except as otherwise provided in regulations, in the case of any amount treated as ordinary income or loss under paragraph (1) (without regard to _ i „. paragraph (1)(B)), the source of such amount shall be determined by reference to the residence of the taxpayer or the qualified business unit of the taxpayer on whose books the asset, liability, or item of income or expense is properly n reflected. i^if "(B) R E S I D E N C E. — For purposes of t h i s subpart — gi ly "(i) IN GENERAL.—The residence of any person shall be— 'iim iBs' "(I) in the case of an individual, the country in which such individual's tax home (as defined in •. i ic, n section 911(d)(3)) is located, "(II) in the case of any corporation, partnership, trust, or estate which is a United States person (as ^, .L defined in section 7701(a)(30)), the United States, and

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Page:United States Statutes at Large Volume 100 Part 3.djvu/780

 100 STAT. 2588

PUBLIC LAW 99-514—OCT. 22, 1986

'3jii- "

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"(III) in the case of any corporation, partnership, trust, or estate which is not a United States person, a country other than the United States. "(ii) EXCEPTION.—In the case of a qualified business unit of any taxpayer (including an individual), the residence of such unit shall be the country in which the principal place of business of such qualified business unit is located. "(C) SPECIAL RULE FOR CERTAIN RELATED PARTY LOANS.—

Except to the extent provided in regulations, in the case of a loan by a United States person or a related person to a 10percent owned foreign corporation which is denominated in a currency other than the dollar and bears interest at a rate at least 10 percentage points higher than the Federal mid-term rate (determined under section 1274(d)) at the W^iVi time such loan is entered into, the following rules shall apply: "(i) For purposes of section 904 only, such loan shall V '• be marked to market on an annual basis. "(ii) Any interest income earned with respect to such loan for the taxable year shall be treated as income from sources within the United States to the extent of .1 any loss attributable to clause (i). r- For purposes of this subparagraph, the term 'related ,. -. person' has the meaning given such term by section 954(d)(3), except that such section shall be applied by substituting 'United States person' for 'controlled foreign corporation' each place such term appears. "(D) 10-PERCENT OWNED FOREIGN CORPORATION.—The term '10-percent owned foreign corporation' means any foreign J corporation in which the United States person owns directly or indirectly at least 10 percent of the voting stock. "(b) FOREIGN CURRENCY GAIN OR LOSS.—For purposes of this section— "(1) FOREIGN CURRENCY GAIN.—The term 'foreign currency gain' means any gain from a section 988 transaction to the extent such gain does not exceed gain realized by reason of V changes in exchange rates on or after the booking date and before the payment date. "(2) FOREIGN CURRENCY LOSS.—The term 'foreign currency loss' means any loss from a section 988 transaction to the extent such loss does not exceed the loss realized by reason of changes in exchange rates on or after the booking date and before the payment date. "(c) OTHER DEFINITIONS.—For purposes of this section— v;i

"(1) SECTION 988 TRANSACTION.—

"(A) IN GENERAL.—The term 'section 988 transaction' means any transaction described in subparagraph (B) if the ' amount which the taxpayer is entitled to receive (or is required to pay) by reason of such transaction— •'• '. "(i) is denominated in terms of a nonfunctional currency, or "(ii) is determined by reference to the value of 1 or qlii-.^ I more nonfunctional currencies. "(B)

DESCRIPTION OF TRANSACTIONS.—For purposes

of

subparagraph (A), the following transactions are described in this subparagraph:

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Page:United States Statutes at Large Volume 100 Part 3.djvu/781

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2589

"(i) The acquisition of a debt instrument or becoming the obligor under a debt instrument. "(ii) Accruing (or otherwise taking into account) for purposes of this subtitle any item of expense or gross income or receipts which is to be paid or received after the date on which so accrued or taken into account, "(iii) Entering into or acquiring any forward contract, futures contract, option, or similar financial instrument if such instrument is not marked to market at the close of the taxable year under section 1256. The Secretary may prescribe regulations excluding from the application of clause (ii) any class of items the taking into account of which is not necessary to carry out the purposes of this section by reason of the small amounts or short periods involved, or otherwise. "(C) SPECIAL RULES FOR DISPOSITION OF NONFUNCTIONAL CURRENCY.—

i'

i ,.., /jj -.

"(i) IN GENERAL.—In the case of any disposition of any nonfunctional currency— "(I) such disposition shall be treated as a section 988 transaction, and "(II) for purposes of determining the foreign currency gain or loss from such transaction, paragraphs (1) and (2) of subsection (b) shall be applied by substituting 'acquisition date' for 'booking date' and 'disposition' for 'payment date', "(ii)

NONFUNCTIONAL CURRENCY.—For purposes

of

this section, the term 'nonfunctional currency' includes coin or currency, and nonfunctional currency denomi,„ nated demand or time deposits or similar instruments issued by a bank or other financial institution. "(2) BOOKING DATE.—The term 'booking date' means— "(A) in the case of a transaction described in paragraph dXBXi), the date of acquisition or on which the taxpayer becomes the obligor, "(B) in the case of a transaction described in paragraph (IXBXii), the date on which accrued or otherwise taken into account, or "(C) in the case of a transaction described in paragraph •- (IXBXiii), the date on which the position is entered into or acquired. "(3) PAYMENT DATE.—The term 'payment date' means— "(A) in the case of a transaction described in paragraph -' (I)(B)(i) or (ii), the date on which payment is made or received, or "(B) in the case of a transaction described in paragraph (l)(B)(iii), the date payment is made or received or the ';,< date the taxpayer's rights with respect to the position are terminated. "(4) DEBT INSTRUMENT.—The term 'debt instrument' means a bond, debenture, note, or certificate or other evidence of indebt edness. To the extent provided in regulations, such term shall include preferred stock. "(d) TREATMENT OF 988 HEDGING TRANSACTIONS.—

"(1) IN GENERAL.—To the extent provided in regulations, if any section 988 transaction is part of a 988 hedging transaction, all transactions which are part of such 988 hedging transaction

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Page:United States Statutes at Large Volume 100 Part 3.djvu/782

 100 STAT. 2590

PUBLIC LAW 99-514—OCT. 22, 1986

W

shall be integrated and treated as a single transaction or otherwise treated consistently for purposes of this section. For pur^- poses of the preceding sentence, the determination of whether any transaction is a section 988 transaction shall be determined '^ without regard to whether such transaction would otherwise be marked-to-market under section 1256 and such term shall not ' include any transaction with respect to which an election is made under subsection (a)(1)(B). Sections 1092 and 1256 shall '.:^ not apply to a transaction covered by this subsection. "(2) 988 HEDGING TRANSACTION.—For purposes of paragraph (1), the term '988 hedging transaction' means any transaction— ^., "(A) entered into by the taxpayer primarily— ^^^' "(i) to reduce risk of currency fluctuations with respect to property which is held or to be held by the .,, s.,«j-.,.. taxpayer, or "(ii) to reduce risk of currency fluctuations with to fi*;*'•'-' respect to borrowings made or to be made, or obligations incurred or to be incurred, by the taxpayer, and 5;;• "(B) identified by the Secretary or the taxpayer as being a 988 hedging transaction. "(e) APPLICATION TO INDIVIDUALS.—This section shall apply to section 988 transactions entered into by an individual only to the extent expenses properly allocable to such transactions meet the requirements of section 162 or 212 (other than that part of section 212 dealing with expenses incurred in connection with taxes). "SEC. 989. OTHER DEFINITIONS AND SPECIAL RULES. "(a) QUALIFIED BUSINESS UNIT.—For purposes of this subpart, the term 'qualified business unit' means any separate and clearly identified unit of a trade or business of a taxpayer which maintains separate books and records. "(b) APPROPRIATE EXCHANGE RATE.—Except as provided in regulations, for purposes of this subpart, the term 'appropriate exchange rate' means— "(1) in the case of an actual distribution of earnings and profits, the spot rate on the date such distribution is included in income, "(2) in the case of an actual or deemed sale or exchange of stock in a foreign corporation treated as a dividend under section 1248, the spot rate on the date the deemed dividend is ^1^. included in income, .J* * "(3) in the case of any amounts included in income under section 951(a), 551(a), or 1293(a), the weighted average exchange iin rate for the taxable year of the foreign corporation, or "(4) in the case of any other qualified business unit of a yi taxpayer, the weighted average exchange rate for the taxable year of such qualified business unit. "(c) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subpart, including regulations— "(1) setting forth procedures to be followed by taxpayers with qualified business units using a net worth method of accounting before the enactment of this subpart, "(2) limiting the recognition of foreign currency loss on cer" tain remittances from qualified business units, ^ " "

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Page:United States Statutes at Large Volume 100 Part 3.djvu/783

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2591

"(3) providing for the recharacterization of interest and principal payments with respect to obligations denominated in certain hyperinflationary currencies, "(4) providing for alternative adjustments to the application of section 905(c), and "(5) providing for the appropriate treatment of related party transactions (including transactions between qualified business units of the same taxpayer)."

'C

(b) APPLICATION OF SECTION 1092 TO FOREIGN CURRENCY.—Section

1092(d) is amended by adding at the end thereof the following new paragraph: • ''

^* '

"(7) SPECIAL RULES FOR FOREIGN CURRENCY.— "(A) POSITION TO INCLUDE INTEREST IN CERTAIN DEBT.—For

purposes of paragraph (2), an obligor's interest in a nonfunctional currency denominated debt obligation is treated as a position in the nonfunctional currency. "(B) ACTIVELY TRADED REQUIREMENT.—For purposes of

" '

paragraph (1), foreign currency for which there is an active interbank market is presumed to be actively traded."

(c) REPEAL OF SPECIAL TREATMENT OF BANKS FOR HEDGING EXCEP-

TION.—Subsection (e) of section 1256 (relating to mark to market not to apply to hedging transactions) is amended by striking out paragraph (4) and by redesignating paragraph (5) as paragraph (4). (d) CLERICAL AMENDMENT.—The table of subparts for part III of subchapter N of chapter 1 is amended by adding at the end thereof the following new item: "Subpart J. Foreign currency transactions." (e) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided in paragraph (2), the amendments made by this section shall apply to taxable years beginning after December 31, 1986. (2) S P E C I A L RULES FOR P U R P O S E S OF S E C T I O N S 902 A N D 9 6 0. — For

purposes of applying sections 902 and 960 of the Internal Revenue Code of 1986, the amendments made by this section shall apply to— ,., (A) earnings and profits of the foreign corporation for taxable years beginning after December 31, 1986, and .,;. (B) foreign taxes paid or accrued by the foreign corporation with respect to such earnings and profits.

Subtitle G—Tax Treatment of Possessions PART I—TREATMENT OF GUAM, AMERICAN SAMOA, AND THE NORTHERN MARIANA ISLANDS SEC. 1271. AUTHORITY OF GUAM, AMERICAN SAMOA, AND THE NORTHERN MARIANA ISLANDS TO ENACT REVENUE LAWS.

(a) IN GENERAL.—Except as provided in subsection (b), nothing in the laws of the United States shall prevent Guam, American Samoa, or the Northern Mariana Islands from enacting tax laws (which shall apply in lieu of the mirror system) with respect to income— (1) from sources within, or effectively connected with the conduct of a trade or business within, any such possession, or (2) received or accrued by any resident of such possession.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/784

 100 S T A T. 2592

P U B L I C L A W 9 9 - 5 1 4 — O C T. 22, 1986 (b) A G R E E M E N T S TO ALLEVIATE CERTAIN PROBLEMS RELATING TO

TAX ADMINISTRATION.—Subsection (a) shall apply to G u a m, American Samoa, or the Northern M a r i a n a Islands only if (and so long as) an implementing a g r e e m e n t is in effect between the United States and such possession with respect to— (1) the elimination of double taxation involving taxation by < such possession and taxation by the United States, (2) the establishment of rules under which the evasion or , avoidance of United States income tax shall not be permitted or facilitated by such possession, (3) the exchange of information between such possession and the United States for purposes of tax administration, and (4) the resolution of other problems arising in connection with the administration of the tax laws of such possession or the United States. Any such implementing a g r e e m e n t shall be executed on behalf of the United States by the Secretary of the Treasury after consultation with the Secretary of the Interior. (c) R E V E N U E S N O T TO D E C R E A S E. — The to t a l a m o u n t of the r e v e n u e

received by any possession referred to in subsection (a) pursuant to its tax laws during the implementation year and each of the 4 fiscal years thereafter shall not be less than the revenue (adjusted for inflation) which w a s received by such possession pursuant to tax laws for its last fiscal year before the implementation year. (d) NONDISCRIMINATORY T R E A T M E N T R E Q U I R E D. — Nothing in any

tax law of a possession referred to in subsection (a) may discriminate against any United States person or any resident (corporate or otherwise) of any other possession. (e) ENFORCEMENT. —

^

(1) IN GENERAL.—If the Secretary of the Treasury (after consultation with the Secretary of the Interior) determine s that any possession has failed to comply with subsection (c) or (d), the Secretary of the Treasury shall so notify the Governor of such possession in writing. If such possession does not comply with subsection (c) or (d) (as the case may be) within 90 days of such notification, the Secretary of the Treasury shall notify the Congress of such noncompliance. Unless the Congress by law provides otherwise, the m i r r o r system of taxation shall be reinstated in such possession and shall be in full force and effect for taxable years beginning after such notification to the Congress. (2) SPECIAL RULE FOR REVENUE REQUIREMENTS.—If the failure

to comply with subsection (c) is for good cause and does not jeopardize the fiscal integrity of the possession, the Secretary may waive the requirements of subsection (c) for such period as he determines appropriate. ,..« (f) DEFINITIONS AND SPECIAL RULES. — ' '" ^ (1) IMPLEMENTATION YEAR.—For purposes of t h i s section, the

^ r •i r

term "implementation year " means the 1st fiscal year of the possession in which the tax laws authorized by subsection (a) t a k e effect. (2) MIRROR SYSTEM.—For purposes of this section, the m i r r o r system of taxation consists of the provisions of law (in effect on the day before the date of the e n a c t m e n t of this Act) which m a k e the provisions of the income tax laws of the United States (as in effect from time to time) in effect in a possession of the United States.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/785

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2593

(3) SPECIAL RULE FOR NORTHERN MARIANA ISLANDS.—Notwith-

s t and i n g the provisions of the last clause of section 601(a) of Public Law 94-241, the Commonwealth of the Northern Maria n a Islands may elect to continue its m i r r o r system of taxation without regard to w h e the r G u a m enacts tax laws under the authority provided in subsection (a). SKC. 1272. KXCLISION OF POSSESSION SOURCE INCOME FROM THE C.ROSS INCOME OF CERTAIN INDIVIDUALS.

(a) IN GENERAL.—Section 931 (relating to income from sources within possessions of the United States) is amended to read as follows: "SEC. 931. INCOME FROM SOURCES WITHIN GUAM. AMERICAN SAMOA. OR THE NORTHERN MARIANA ISLANDS. "(a) GENERAL RULE. — I n the case of a n individual who is a bona

fide resident of a specified possession during the e n t i r e taxable year, gross income shall not include— "(1) income derived from sources within any specified possession, and "(2) income effectively connected with the conduct of a trade or business by such individual within any specified possession. "(b) DEDUCTIONS, E T C. ALLOCABLE TO EXCLUDED A M O U N T S N O T

ALLOWABLE.—An individual shall not be allowed— "(1) as a deduction from gross income any deductions (other than the deduction under section 151, relating to personal exemptions), or "(2) any credit, properly allocable or chargeable against a m o u n t s excluded from gross income under this section. "(c) SPECIFIED POSSESSION.—For purposes of this section, the term 'specified possession' means G u a m, American Samoa, and the Northern M a r i a n a Islands. "(d) SPECIAL RULES. — For purposes of t h i s section— "(1) EMPLOYEES OF THE UNITED STATES.—Amounts paid

for

services performed a s a n employee of the United States (or any agency thereoO shall be treated as not described in paragraph (1) or (2) of subsection (a). "(2) DETERMINATION OF SOURCE, ETC.—The determination as to

w h e the r income is described in paragraph (1) or (2) of subsection (a) shall be made under regulations prescribed by the Secretary. "(8) DETERMINATION OF RESIDENCY.—For purposes of t h i s sec-

tion and section 876, the determination of w h e the r a n individual is a bona fide resident of Guam, American Samoa, or the Northern M a r i a n a Islands shall be made under regulations prescribed by the Secretary." (b) EXEMPTION F R O M WITHHOLDING T A X; T A X IMPOSED BY SEC-

TION 1.—Section 876 (relating to alien residents of P u e r to Rico) is amended to read as follows: •SEC. 876. ALIEN RESIDENTS OF PUERTO RICO. GUAM. AMERICAN SAMOA. OR THE NORTHERN MARIANA ISLANDS.

"(a) GENERAL RULE.—This subpart shall not apply to any alien individual who is a bona fide resident of P u e r to Rico, G u a m, American Samoa, or the Northern M a r i a n a Islands during the e n t i r e taxable year and such alien shall be subject to the tax imposed by section 1.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/786

 100 STAT. 2594

PUBLIC LAW 99-514—OCT. 22, 1986 "(b) C R O S S R E F E R E N C E S. —

>

•

•

"For exclusion from gross income of income derived from sources witiiin— "(1) Guam, American Samoa, and the Northern Mariana Islands, see section 931, and "(2) Puerto Rico, see section 933." i-'•;^ ,' •' 1i • s J Jr" (c) EXEMPTION FROM WAGE WITHHOLDING FOR CERTAIN SERVICES PERFORMED IN POSSESSIONS.—Paragraph (8) of section 3401(a) (defin-

ing wages) is amended by adding at the end thereof the following new subparagraph: "(D) for services for the United States (or any agency thereof) performed by a citizen of the United States within j?.i, a possession of the United States to the extent the United States (or such agency) withholds taxes on such remuneration pursuant to an agreement with such possession; or". (d) TECHNICAL AND CONFORMING AMENDMENTS.—

(1) Section 932 (relating to citizens of possessions of the United States) is hereby repealed. (2) Section 935 (relating to coordination of United States and Guam individual income taxes) is hereby repealed. (3) Paragraphs (1) and (2) of section 933 are each amended by inserting ", or any credit," before "properly". (4) Subparagraph (C) of section 32(c)(1) is amended to read as follows: "(C) INDIVIDUAL WHO CLAIMS BENEFITS OF SECTION 911 NOT ELIGIBLE INDIVIDUAL.—The term 'eligible individual' does

not include an individual who, for the taxable year, claims ' --, j^ the benefits of section 911 (relating to citizens or residents of the United States living abroad)." (5) Clause (vii) of section 48(a)(2)(B) is amended by striking out "932,". (6) Paragraph (6) of section 63(c) (relating to certain individuals, etc., not eligible for standard deduction), as amended by title I of this Act, is amended by striking out subparagraph (C) and by redesignating subparagraphs (D) and (E) as subparagraphs (C) and (D), respectively. (7) Section 153 is amended by striking out paragraph (4) and by redesignating paragraph (5) as paragraph (4). (8) Paragraph (8) of section 1402(a) is amended by striking out "and section 931 (relating to income from sources within possessions of the United States)" and by inserting "and" after "of the employer),". (9) Paragraph (9) of section 1402(a) is amended to read as follows: "(9) the exclusion from gross income provided by section 931 shall not apply;". (10) Clause (iii) of section 60910t))(l)(B) is amended by striking out "possessions of the United States" and inserting in lieu thereof "Guam, American Samoa, or the Northern Mariana Islands". (11) Subsection (b) of section 7655 is amended by redesignating paragraphs (1) and (2) as paragraphs (2) and (3), respectively, and by inserting before paragraph (2), as so redesignated, the following new paragraph: "(1) Section 931, relating to income tax on residents of Guam, American Samoa, or the Northern Mariana Islands;".

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Page:United States Statutes at Large Volume 100 Part 3.djvu/787

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2595

(12) The table of sections for subpart D of part III of subchapter N of chapter 1 is amended by striking out the items relating to sections 932 and 935 and by striking out the item relating to section 931 and inserting in lieu thereof the following: "Sec. 931. Income from sources within Guam, American Samoa, or the Northern Mariana Islands."

(13) The table of sections for subpart A of part II of subchapter N of chapter 1 is amended by striking out the item relating to section 876 and inserting in lieu thereof the follow' ing: "Sec. 876. Alien residents of Puerto Rico, Guam, American Samoa, or the Northern Mariana Islands." SEC. 1273. TREATMENT OF CORPORATIONS ORGANIZED IN GUAM, AMERICAN SAMOA, OR THE NORTHERN MARIANA ISLANDS.

(a) TREATMENT UNDER SUBPART F.—Subsection (c) of section 957 (relating to controlled foreign corporations; United States persons), as amended by section 1224, is amended by adding "and" at the end of paragraph (1) and by striking out paragraphs (2) and (3) and inserting in lieu thereof the following new paragraph: "(2) with respect to a corporation organized under the laws of Guam, American Samoa, or the Northern Mariana Islands— "(A) 80 percent or more of the gross income of which for the 3-year period ending at the close of the taxable year (or for such part of such period as such corporation or any 15'C,: ' predecessor has been in existence) was derived from sources v; • within such a possession or was effectively connected with the conduct of a trade or business in such a possession, and "(B) 50 percent or more of the gross income of which for such period (or part) was derived from the conduct of an active trade or business within such a possession, such term does not include an individual who is a bona fide J'' resident of Guam, American Samoa, or the Northern Mariana Islands. For purposes of subparagraphs (A) and (B) of paragraph (2), the determination as to whether income was derived from sources within a possession, was effectively connected with the conduct of a trade or business within a possession, or derived from the active conduct of a trade or business within a possession shall be made under regulations prescribed by the Secretary." (b) EXEMPTION FROM WITHHOLDING.—

(1) IN GENERAL.—Subsection (b) of section 881 (relating to exception for certain Guam and Virgin Islands corporations) is amended by striking out paragraphs (1) and (2) and inserting in
 * lieu thereof the following:

"(1) IN GENERAL.—For purposes of this section and section ^i 884, a corporation created or organized in Guam, American Samoa, the Northern Mariana Islands, or the Virgin Islands or under the law of any such possession shall not be treated as a foreign corporation for any taxable year if— .,. "(A) at all times during such taxable year less than 25 percent in value of the stock of such corporation is beneficially owned (directly or indirectly) by foreign persons, "(B) at least 65 percent of the gross income of such corporation is shown to the satisfaction of the Secretary to

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Page:United States Statutes at Large Volume 100 Part 3.djvu/788

 100 STAT. 2596

PUBLIC LAW 99-514—OCT. 22, 1986 ^ '•

be effectively connected with the conduct of a trade or business in such a possession or the United States for the 3-year period ending with the close of the taxable year of such corporation (or for such part of such period as the corporation or any predecessor has been in existence), and A'A •.. "(C!) no substantial part of the income of such corporation is used (directly or indirectly) to satisfy obligations to per^, j^ sons who are not bona fide residents of such a possession or '^'*''^ the United States." J

(2) T E C H N I C A L AMENDMENTS.—

(A) Subsection (b) of section 881 is amended by redesignating paragraph (3) as paragraph (2) and by striking out paragraph (4). (B) Subsection (c) of section 1442 is amended to read as follows: "(c) EXCEPTION FOR CERTAIN POSSESSIONS CORPORATIONS.—For purposes of this section, the term 'foreign corporation' does not include a corporation created or organized in Guam, American Samoa, the Northern Mariana Islands, or the Virgin Islands or under the law of any such possession if the requirements of subparagraphs (A), (B), and (C) of section 881(b)(1) are met with respect to such corporation." PART II—TREATMENT OF THE VIRGIN ISLANDS

)

SEC. 1274. COORDIN.ATION OF IMTED STATES AND VIR(,IN ISLANDS INCOME TAXES.

(a) IN GENERAL.—Subpart D of part III of subchapter N of chapter 1 is amended by inserting after section 931 the following new section: "SEC. 932. COORDIN.ATION OF UNITED ST.ATES.AND VIRGIN ISLANDS INCO.ME T.4XES. "(a) TREATMENT OF UNITED STATES RESIDENTS.— •; "(1) APPLICATION OF SUBSECTION.—This subsection

shall apply

to an individual for the taxable year if^ "(A) such individual— "(i) is a citizen or resident of the United States (other H than a bona fide resident of the Virgin Islands at the •-,-,.. close of the taxable year), and &bj_.-. < "(ii) has income derived from sources within the Virgin Islands, or effectively connected with the conduct of a trade or business within such possession, for the taxable year, or ? "(B) such individual files a joint return for the taxable eyear with an individual described in subparagraph (A). "(2) FILING REQUIREMENT.—Each individual to whom this n- subsection applies for the taxable year shall file his income tax J' return for the taxable year with both the United States and the 1 Virgin Islands. i' "(3) EXTENT OF INCOME TAX LIABILITY.—In the case of an individual to whom this subsection applies in a taxable year for 5 purposes of so much of this title (other than this section and -^ section 7654) as relates to the taxes imposed by this chapter, the United States shall be treated as including the Virgin Islands. "(b) PORTION OF UNITED STATES TAX LIABILITY PAYABLE TO THE VIRGIN ISLANDS.—

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100 STAT. 2597

"(1) IN GENERAL.—Each individual to whom subsection (a) applies for the taxable year shall pay the applicable percentage of the taxes imposed by this chapter for such taxable year (determined without regard to paragraph (3)) to the Virgin Islands. "(2) APPLICABLE PERCENTAGE.—

" .7

"(A) IN GENERAL.—For purposes of paragraph (1), the term 'applicable percentage' means the percentage which Virgin Islands adjusted gross income bears to adjusted gross income. "(B) VI R G I N ISLANDS ADJUSTED GROSS INCOME.—For pur-

' ' "

poses of subparagraph (A), the term 'Virgin Islands adjusted gross income' means adjusted gross income determined by taking into account only income derived from sources within the Virgin Islands and deductions properly apportioned or allocable thereto. "(3) A M O U N T S PAID ALLOWED AS CREDIT.—There shall be al-

lowed a s a credit against the tax imposed by this chapter for the taxable year a n a m o u n t equal to the taxes required to be paid to the Virgin Islands under paragraph (1) which a r e so paid. "(c) T R E A T M E N T OF VI R G I N ISLANDS R E S I D E N T S. —

"(1) APPLICATION OF SUBSECTION.—This subsection shall apply to a n individual for the taxable year if— "(A) such individual is a bona fide resident of the Virgin Islands a t the close of the taxable year, or "(B) such individual files a joint r e t u r n for the taxable year with a n individual described in subparagraph (A). "(2) F I L I N G REQUIREMENT.—Each individual to whom this subsection applies for the taxable year shall file his income tax r e t u r n for the taxable year with the Virgin Islands. "(3) E X T E N TO F INCOME TAX LIABILITY.—In the case of a n

individual to whom this subsection applies in a taxable year for purposes of so m u c h of this title (other than this section and section 7654) a s relates to the taxes imposed by this chapter, the Virgin Islands shall be t r e a t e d as including the United States. "(4) RESIDENTS O F THE VIRGIN ISLANDS.—In the case of a n

individual w h o is a bona fide resident of the Virgin Islands a t the close of the taxable year and who, on his r e t u r n of income tax to the Virgin Islands, reports income from all sources and identifies the source of each item shown on such r e t u r n, for purposes of calculating income tax liability to the United States gross income shall not include any a m o u n t included in gross income on such r e t u r n. "(d) SPECIAL RULE FOR JOINT R E T U R N S. — I n the case of a joint

r e t u r n, this section shall be applied on the basis of the residence of the spouse w h o has the g r e a t e r adjusted gross income (determined without regard to community property laws) for the taxable year. "(e) SECTION N O T TO A P P L Y TO T A X IMPOSED I N VI R G I N ISLANDS.—

This section shall not apply for purposes of determining income tax liability incurred to the Virgin Islands." (b) AUTHORITY

TO IMPOSE

NONDISCRIMINATORY

LOCAL

INCOME

TAXES.—Nothing in any provision of Federal law shall prevent the Virgin Islands from imposing on any person nondiscriminatory local income taxes. Any taxes so imposed shall be t r e a t e d in the s a m e m a n n e r a s State and local income taxes under section 164 of the I n t e r n a l Revenue Code of 1954 and shall not be t r e a t e d a s taxes to which section 901 of such Code applies.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/790

 100 STAT. 2598

PUBLIC LAW 99-514—OCT. 22, 1986

(c) REGULATIONS ON APPLICATION OF MIRROR SYSTEM.—The Secretary of the Treasury or his delegate shall prescribe such regulations as may be necessary or appropriate for applying this title for purposes of determining tax liability incurred to the Virgin Islands. (d) CLERICAL AMENDMENT.—The table of sections for such subpart D is amended by inserting after the item relating to section 931 the following new item: "Sec. 932. Coordination of United States and Virgin Islands income taxes." SEC. 127.5. VIRGIN ISLANDS CORPORATIONS ALLOWED POSSESSION TAX CREDIT. (a) POSSESSION TAX CREDIT ALLOWED.—

(1) IN GENERAL.—Paragraph (1) of section 936(d) (defining possession) is amended by striking out ", but does not include the Virgin Islands of the United States" and inserting in lieu thereof "and the Virgin Islands". (2) CONFORMING AMENDMENTS.—

(A) Section 934 is amended by striking out subsections (e) and (f). (B) Subsection (e) of section 246 is amended by striking out "or 934(e)(3)".

I (b)

CLARIFICATION OF TREATMENT OF VIRGIN ISLANDS INHAB-

ITANTS.—Subparagraph (B) of section 7651(5) (relating to the Virgin Islands) is amended to read as follows: "(B) For purposes of this title, section 28(a) of the Revised Organic Act of the Virgin Islands shall be effective as if such section 28(a) had been enacted before the enactment of this title and such section 28(a) shall have no effect on the amount of income tax liability required to be paid by any person to the United States." (c) TECHNICAL AND CONFORMING AMENDMENTS.—

(1) Section 934 is amended by striking out subsections (b), (c), and (d). (2)(A) Subsection (a) of section 934 is amended by striking out "or (c) or in section 934A". (B) Section 934, as amended by paragraph (1), is amended by inserting after subsection (a) the following new subsection: "(b) REDUCTIONS PERMITTED WITH RESPECT TO CERTAIN INCOME.—

"(1) IN GENERAL.—Except as provided in paragraph (2), subsection (a) shall not apply with respect to so much of the tax liability referred to in subsection (a) as is attributable to income derived from sources within the Virgin Islands or income effectively connected with the conduct of a trade or business within the Virgin Islands. "(2) EXCEPTION FOR LIABILITY PAID BY CITIZENS OR RESIDENTS OF THE UNITED STATES.—Paragraph (1) shall not apply to any liabil-

ity payable to the Virgin Islands under section 932(b). "(3) SPECIAL RULE FOR NON-UNITED STATES INCOME OF CERTAIN FOREIGN CORPORATIONS.—

,ij e

"(A) IN GENERAL.—In the case of a qualified foreign corporation, subsection (a) shall not apply with respect to so much of the tax liability referred to in subsection (a) as is attributable to income which is derived from sources outside the United States and which is not effectively connected with the conduct of a trade or business within the United States.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/791

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2599

"(B) QUAUriED FOREIGN CORPORATION.—FOF purpOSeS o f

subparagraph (A), the term 'qualified foreign corporation' means any foreign corporation if less than 10 percent of— "(i) the total voting power of the stock of such corporation, and h^ f "(ii) the total value of the stock of such corporation, ^ is owned or treated as owned (within the meaning of section 958) by 1 or more United States persons. ~i«: "(4) DETERMINATION OF INCOME SOURCE, ETC.—The determinant tion as to whether income is derived from sources within the with the conduct of a trade or business within the Virgin
 * Virgin Islands or the United States or is effectively connected
 * Islands or the United States shall be made under regulations

prescribed by the Secretary." (3) Section 934A (relating to income tax rates on Virgin Islands source income) is hereby repealed. (4) Subparagraph (B) of section 28(d)(3) is amended to read as, follows: "(B) SPECIAL LIMITATION FOR CORPORATIONS TO WHICH SECTION 936 APPLIES.—No credit shall be allowed under this

section with respect to any clinical testing conducted by a corporation to which an election under section 936 applies." n. (5) Clause (vii) of section 48(a)(2)(B) is amended by striking out "or which is entitled to the benefits of section 9340t>)" and by striking out ", 933, or 934(c)" and inserting in lieu thereof "or 933". (6) Clause (i) of section 338(h)(6)(B) is amended by striking out "a corporation described in section 934(b),". (7) Subparagraph (B) of section 864(d)(5) is amended to read as follows: "(B) SPECIAL RULES FOR POSSESSIONS.—An amount treated d as interest under paragraph (1) shall not be treated as ac income described in subparagraph (A) or (B) of section 936(a)(l) unless such amount is from sources within a ,J possession of the United States (determined after the application of paragraph (1))." (8) The table of sections for subpart D of part III of subchapter N of chapter 1 is amended by striking out the item relating to section 934A.

PART III—COVER OVER OF INCOME TAXES SEC. 1276. COVER OVER OF INCOME TAXES.

(a) IN GENERAL.—Section 7654 (relating to coordination of United States and Guam individual income taxes) is amended to read as follows: "SEC. 7654. COORDINATION OF UNITED STATES AND CERTAIN POSSESSION INDIVIDUAL INCOME TAXES.

"(a) GENERAL RULE.—The net collection of taxes imposed by chapter 1 for each taxable year with respect to an individual to which section 931 or 932(c) applies shall be covered into the Treasury of the specified possession of which such individual is a bona fide resident. "OD) DEFINITION AND SPECIAL RULE.—For purposes of this section— "(1) NET COLLECTIONS.—In determining net collections for a taxable year, an appropriate adjustment shall be made for

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Page:United States Statutes at Large Volume 100 Part 3.djvu/792

 100 STAT. 2600

PUBLIC LAW 99-514—OCT. 22, 1986

credits allowed against the tax liability and refunds made of income taxes for the taxable year. "(2) SPECIFIED POSSESSION.—The term 'specified possession' -^ means Guam, American Samoa, the Northern Mariana Islands, and the Virgin Islands. "(c) TRANSFERS.—The transfers of funds between the United States and any specified possession required by this section shall be made not less frequently than annually. "(d) FEDERAL PERSONNEL.—In addition to the amount determined under subsection (a), the United States shall pay to each specified possession at such times and in such manner as determined by the Secretary— "(1) the amount of the taxes deducted and withheld by the United States under chapter 24 with respect to compensation J paid to members of the Armed Forces who are stationed in such possession but who have no income tax liability to such possesg sion with respect to such compensation by reason of the Soldiers' and Sailors' Civil Relief Act (50 App. U.S.C. 501 et seq.), and e "(2) the amount of the taxes deducted and withheld under « chapter 24 with respect to amounts paid for services performed as an employee of the United States (or any agency thereof) in a specified possession with respect to an individual unless section 931 or 932(c) applies. •'(e) REGULATIONS.—The Secretary shall prescribe such regulacions as may be necessary to carry out the provisions of this section and sections 931 and 932, including regulations prohibiting the rebate of taxes covered over which are allocable to United States source income and prescribing the information which the individuals to whom such sections may apply shall furnish to the Secretary." (b) CLERICAL AMENDMENT.—The table of sections for subchapter D of chapter 78 is amended by striking out the item relating to section 7654 and inserting in lieu thereof the following: "Sec. 7654. Coordination of United States and certain possession individual income taxes."

'

PART IV—EFFECTIVE DATE

SEC. 1277. EFFECTIVE DATE.

(a) IN GENERAL.—Except as otherwise provided in this section, the amendments made by this subtitle shall apply to taxable years beginning after December 31, 1986. (b) SPECIAL RULE FOR GUAM, AMERICAN SAMOA, AND THE NORTHERN MARIANA ISLANDS.—The amendments made by this subtitle

shall apply with respect to Guam, American Samoa, or the Northern Mariana Islands (and to residents thereof and corporations created or organized therein) only if (and so long as) an implementing agreement under section 1271 is in effect between the United States and such possession. (c) SPECIAL RULES FOR THE VIRGIN ISLANDS.—

(1) IN GENERAL.—The amendments made by section 1275(c) thereof and corporations created or organized therein) only if i the United States and the Virgin Islands with respect to the
 * shall apply with respect to the Virgin Islands (and residents
 * (and so long as) an implementing agreement is in effect between

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Page:United States Statutes at Large Volume 100 Part 3.djvu/793

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2601

establishment of rules under which the evasion or avoidance of United States income tax shall not be permitted or facilitated by such possession. Any such implementing agreement shall be executed on behalf of the United States by the Secretary of the Treasury, after consultation with the Secretary of the Interior. (2) SECTION 1275(b).—

(A) IN GENERAL.—The amendment made by section 1275(b) shall apply with respect to— (i) any taxable year beginning after December 31, us 1986, and

(ii) any pre-1987 open year. (B) SPECIAL RULES.—In the case of any pre-1987 open year— (i) the amendment made by section 1275(b) shall not apply to income from sources in the Virgin Islands or income effectively connected with the conduct of a trade or business in the Virgin Islands, and ,,^<y.' (ii) the taxpayer shall be allowed a credit— •':•;.. (I) against any additional tax imposed by subtitle .or A of the Internal Revenue Code of 1954 (by reason of the amendment made by section 1275(b)) on ••" '• income not described in clause (i), (II) for any tax paid to the Virgin Islands before - o; fvjj the date of the enactment of this Act and attributable to such income. ' For purposes of clause (ii)(II), any tax paid before January 1, 1987, pursuant to a process in effect before August 16, 1986, shall be treated as paid before the date of the enactment of this Act. (C) PRE-1987 OPEN YEAR.—For purposes of this paragraph, the term "pre-1987 open year" means any taxable year beginning before January 1, 1987, if on the date of the i enactment of this Act the assessment of a deficiency of income tax for such taxable year is not barred by any law or rule of law. (D) EXCEPTION.—In the case of any pre-1987 open year, the amendment made by section 1275(b) shall not apply to any domestic corporation if— (i) during the fiscal year which ended May 31, 1986, tjyjf such corporation was actively engaged directly or through a subsidiary in the conduct of a trade or business in the Virgin Islands and such trade or business consists of business related to marine activities, and / (ii) such corporation was incorporated on March 31, 1 1983, in Delaware. (E) EXCEPTION FOR CERTAIN TRANSACTIONS.—

(i) IN GENERAL.—In the case of any pre-1987 open year, the amendment made by section 1275(b) shall not apply to any income derived from transactions described in clause (ii) by 1 or more corporations which were formed in Delaware on or about March 6, 1981, and which have owned 1 or more office buildings in St. Thomas, United States Virgin Islands, for at least 5 years before the date of the enactment of this Act. (ii) DESCRIPTION OF TRANSACTIONS.—The transactions

described in this clause are—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/794

 100 STAT. 2602

PUBLIC LAW 99-514—OCT. 22, 1986

», ~:, h, r^, - .,

(I) the redemptions of limited partnership interests for cash and property described in an agreement (as amended) dated March 12, 1981, (II) the subsequent disposition of the properties ., distributed in such redemptions, and (III) interest earned before January 1, 1987, on ,v« < bank deposits of proceeds received from such redemptions to the extent such deposits are located '',.-in the United States Virgin Islands. (iii) LIMITATION.—The aggregate reduction in tax by reason of this subparagraph shall not exceed $8,312,000. If the taxes which would be payable as the result of the application of the amendment made by {{,,• • '^ section 1275(b) to pre-1987 open years exceeds the io • ' limitation of the preceding sentence, such excess shall ( be treated as attributable to income received in taxable years in reverse chronological order. (d) REPORT ON IMPLEMENTING AGREEMENTS.—If, during the 1-year

period beginning on the date of the enactment of this Act, any implementing agreement described in subsection (b) or (c) is not executed, the Secretary of the Treasury or his delegate shall report to the Committee on Finance of the United States Senate, the Committee on Ways and Means, and the Committee on Interior and Insular Affairs of the House of Representatives with respect to— (1) the status of such negotiations, and (2) the reason why such agreement has not been executed. (e) TREATMENT OF CERTAIN UNITED STATES PERSONS.—Except as

otherwise provided in regulations prescribed by the Secretary of the Treasury or his delegate, if a United States person becomes a resident of Guam, American Samoa, or the Northern Mariana Islands, the rules of section 877(c) of the Internal Revenue Code of 1954 shall apply to such person during the 10-year period beginning when such person became such a resident. The preceding sentence shall apply to dispositions after December 31, 1985, in taxable years ending after such date.

-^

TITLE XIII—TAX-EXEMPT BONDS

Subtitle A—Amendments of Internal Revenue Code of 1954 SEC. 1301. STATE AND LOCAL BONDS. (a) EXCLUSION FOR INTEREST ON BONDS WHICH MEET CERTAIN

REQUIREMENTS.—Section 103 (relating to interest on certain governmental obligations) is amended to read as follows: "SEC. 103. INTEREST ON STATE AND LOCAL BONDS.

^

"(a) EXCLUSION.—Except as provided in subsection (b), gross income does not include interest on any State or local bond. "(b) EXCEPTIONS.—Subsection (a) shall not apply to— "(1) PRIVATE ACTIVITY BOND WHICH IS NOT A QUALIFIED BOND.—

f J-

Any private activity bond which is not a qualified bond (within the meaning of section 141). "(2) ARBITRAGE BOND.—Any arbitrage bond (within the meaning of section 148).

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Page:United States Statutes at Large Volume 100 Part 3.djvu/795

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2603

"(3) BOND NOT IN REGISTERED FORM, ETC.—Any bond unless such bond meets the applicable requirements of section 149. "(c) DEFINITIONS.—For purposes of this section and part IV— "(1) STATE OR LOCAL BOND.—The term 'State or local bond' means an obligation of a State or political subdivision thereof "(2) STATE.—The term 'State' includes the District of Columbia and any possession of the United States." (b) TAX EXEMPTION REQUIREMENTS FOR STATE AND LOCAL BONDS.—

Part IV of subchapter B of chapter 1 (relating to determination of marital status) is amended to read as follows: "PART IV—TAX EXEMPTION REQUIREMENTS FOR STATE AND LOCAL BONDS •' t

"Subpart A. Private activity bonds. "Subpart B. Requirements applicable to all State and local bonds. "Subpart C. Definitions and special rules.

"Subpart A—Private Activity Bonds "Sec. "Sec. "Sec.

sj:jijf> .,,

141. Private activity bond; qualified bond. 142. Exempt facility bond. 143. Mortgage revenue bonds: qualified mortgage and qualified veterans' mortgage bond. "Sec. 144. Qualified small issue bond; qualified student loan bond; qualified redevelopment bond. "Sec. 145. Qualified 501(c)(3) bond. "Sec. 146. Volume cap. "Sec. 147. Other requirements applicable to certain private activity bonds.

"SEC. 141. PRIVATE ACTIVITY BOND; QUALIFIED BOND.

"(a) PRIVATE ACTIVITY BOND.—For purposes of this title, the term 'private activity bond' means any bond issued as part of an issue— "(1) which meets— "(A) the private business use test of paragraph (1) of subsection (b), and "(B) the private security or payment test of paragraph (2) of subsection (b), or (c). "(b) PRIVATE BUSINESS TESTS.— "(1) PRIVATE BUSINESS USE TEST.—Except as otherwise pro-
 * i "(2) which meets the private loan financing test of subsection

vided in this subsection, an issue meets the test of this paragraph if more than 10 percent of the proceeds of the issue are to be used for any private business use. "(2) PRIVATE SECURITY OR PAYMENT TEST.—Except as otherwise

provided in this subsection, an issue meets the test of this paragraph if the payment of the principal of, or the interest on, more than 10 percent of the proceeds of such issue is (under the terms of such issue or any underlying arrangement) directly or indirectly— "(A) secured by any interest in— "(i) property used or to be used for a private business use, or ' ''' "(ii) payments in respect of such property, or "(B) to be derived from payments (whether or not to the issuer) in respect of property, or borrowed money, used or to be used for a private business use.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/796

 100 STAT. 2604

PUBLIC LAW 99-514—OCT. 22, 1986 "(3) 5 PERCENT TEST FOR PRIVATE BUSINESS USE NOT RELATED O. DISPROPORTIONATE TO GOVERNMENT USE FINANCED BY THE ISSUE.—

"(A) IN GENERAL.—An issue shall be treated as meeting the tests of paragraphs (1) and (2) if such tests would be met if such paragraphs were applied— "(i) by substituting '5 percent' for '10 percent' each J ^,. place it appears, and yAr -i "(ii) by taking into account only— "(I) the proceeds of the issue which are to be used for any private business use which is not related to V J, any government use of such proceeds, "(II) the disproportionate related business use proceeds of the issue, and "(III) payments, property, and borrowed money with respect to any use of proceeds described in subclause (I) or (II). "(B) DISPROPORTIONATE RELATED BUSINESS USE PROCEEDS.—

For purposes of subparagraph (A), the disproportionate related business use proceeds of an issue is an amount equal to the aggregate of the excesses (determined under the following sentence) for each private business use of the such proceeds. The excess determined under this sentence ^'^'is the excess of— "(i) the proceeds of the issue which are to be used for the private business use, over til V I "(ii) the proceeds of the issue which are to be used for the government use to which such private business use relates. "(4) LOWER LIMITATION FOR CERTAIN OUTPUT FACILITIES.—An
 * K1proceeds of an issue which is related to a government use of

issue 5 percent or more of the proceeds of which are to be used with respect to any output facility (other than a facility for the furnishing of water) shall be treated as meeting the tests of paragraphs (1) and (2) if the nonqualified amount with respect to such issue exceeds the excess of— n "(A) $15,000,000, over JJ.J > "(B) the aggregate nonqualified amounts with respect to all prior tax-exempt issues 5 percent or more of the proceeds of which are or will be used with respect to such facility (or any other facility which is part of the same project). There shall not be taken into account under subparagraph (B) any bond which is not outstanding at the time of the later issue or which is to be redeemed (other than in an advance refunding) from the net proceeds of the later issue. "(5) COORDINATION WITH VOLUME CAP WHERE NONQUALIFIED AMOUNT EXCEEDS $15,000,000.—If the nonqualified amount with

respect to an issue— "(A) exceeds $15,000,000, but "(B) does not exceed the amount which would cause -a bond which is part of such issue to be treated as a private activity bond without regard to this paragraph, such bond shall nonetheless be treated as a private activity bond unless the issuer allocates a portion of its volume cap under section 146 to such issue in an amount equal to the excess of such nonqualified amount over $15,000,000.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/797

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2605

"(6) PRIVATE BUSINESS USE DEFINED.—

"(A) IN GENERAL.—For purposes of this subsection, the term 'private business u s e ' means use (directly or indirectly) in a trade or business carried on by any person other than a government a l unit. For purposes of the preceding sentence, use as a m e m b e r of the general public shall not be t a k e n into account. "(B) CLARIFICATION O F TRADE OR BUSINESS.—For purposes

of the 1st sentence of subparagraph (A), any activity carried on by a person other than a n a t u r a l person shall be t r e a t e d as a trade or business. "(7) GOVERNMENT USE.—The term 'government use' means any use other than a private business use. "(8) N O N Q U A L I F I E D A M O U N T. — For purposes of t h i s subsection,

?^ 1^,

the term 'nonqualified a m o u n t ' means, with respect to a n issue, the lesser of— "(A) the proceeds of such issue which a r e to be used for any private business use, or "(B) the proceeds of such issue with respect to which the r e a r e payments (or property or borrowed money) described in paragraph (2). "(9) EXCEPTION FOR QUALIFIED 501(C)(3) BONDS.—There

^'

shall

not be t a k e n into account under this subsection or subsection (c) the portion of the proceeds of a n issue which (if issued as a s e p a r a t e issue) would be t r e a t e d as a qualified 501(c)(3) bond if the issuer elects to t r e a t such portion as a qualified 501(c)(3) bond.

• "(c) PRIVATE L O A N F I N A N C I N G T E S T. —

"(1) IN GENERAL.—An issue meets the test of this subsection if ' the a m o u n t of the proceeds of the issue which a r e to be used (directly or indirectly) to m a k e or finance loans (other than loans described in paragraph (2)) to persons other than government a l u n i t s exceeds the lesser of— "(B) $5,000,000. "(2) EXCEPTION FOR TAX ASSESSMENT, ETC., LOANS.—For p u r -
 * •"(A) 5 percent of such proceeds, or

i

poses of paragraph (1), a loan is described in this paragraph if such loan— i "(A) enables the borrower to finance any government a l i tax or assessment of general application for a specific essential government a l function, or <M' T " (B) is a nonpurpose investment (within the m e a n i n g of section 148(f)(6)(A)). "(d) QUALIFIED B O N D. — For purposes of this part, the term 'qualified bond' means any private activity bond if— "(1) IN GENERAL. — S u c h bond is—

"(A) a n exempt facility bond, "(B) a qualified mortgage bond, y, r- .,, "(C) a qualified veterans ' mortgage bond, "(D) a qualified small issue bond, ^ "(E) a qualified student loan bond, "(F) a qualified redevelopment bond, or "(G) a qualified 501(c)(3) bond. "(2) VOLUME CAP.—Such bond is issued as part of a n issue which meets the applicable requirements of section 146, and "(3) OTHER REQUIREMENTS.—Such bond m e e t s the applicable

requirements of each subsection of section 147.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/798

 100 STAT. 2606

PUBLIC LAW 99-514—OCT. 22, 1986

"SEC. 142. EXEMPT FACILITY BOND.

"(a) GENERAL RULE.—For purposes of this part, the term 'exempt facility bond' means any bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used to provide— "(1) airports, "(2) docks and wharves, "(3) mass commuting facilities, "(4) facilities for the furnishing of water, -.,, "(5) sewage facilities, .„ "(6) solid waste disposal facilities, ,,j, "(7) qualified residential rental projects, "(8) facilities for the local furnishing of electric energy or gas, "(9) local district heating or cooling facilities, or "(10) qualified hazardous waste facilities. "(b) SPECIAL EXEMPT FACILITY BOND RULES.—For purposes of

subsection (a)— "(1) CERTAIN FACILITIES MUST BE GOVERNMENTALLY OWNED.—

"(A) IN GENERAL.—A facility shall be treated as described -'Ko; '-n in paragraph (1), (2), or (3) of subsection (a) only if all of the property to be financed by the net proceeds of the issue is to ilsti be owned by a governmental unit. iO -i......

"(B) SAFE HARBOR FOR LEASES AND MANAGEMENT CON-

TRACTS.—For purposes of subparagraph (A), property leased by a governmental unit shall be treated as owned by such governmental unit if— "(i) the lessee makes an irrevocable election (binding on the lessee and all successors in interest under the „. lease) not to claim depreciation or an investment credit with respect to such property, ,' "(ii) the lease term (as defined in 168(i)(3)) is not more than 80 percent of the reasonably expected economic life of the property (as determined under section 147(b)), and .. "(iii) the lessee has no option to purchase the propr tU-^r-i ^^ty other than at fair market value (as of the time such option is exercised). .,;, Rules similar to the rules of the preceding sentence shall apply to management contracts and similar types of operating agreements. "(2) LIMITATION ON OFFICE SPACE.—An office shall not be treated as described in a paragraph of subsection (a) unless— "(A) the office is located on the premises of a facility described in such a paragraph, and "(B) not more than a de minimis amount of the functions to be performed at such office is not directly related to the day-to-day operations at such facility. "(c) AIRPORTS, DOCKS AND WHARVES, AND MASS COMMUTING

FACILITIES.—For purposes of subsection (a)— "(1) STORAGE AND TRAINING FACILITIES.—Storage or training

facilities directly related to a facility described in paragraph (1), (2), or (3) of subsection (a) shall be treated as described in the paragraph in which such facility is described. "(2) EXCEPTION FOR CERTAIN PRIVATE FACILITIES.—Property

shall not be treated as described in paragraph (1), (2), or (3) of subsection (a) if such property is described in any of the follow-

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Page:United States Statutes at Large Volume 100 Part 3.djvu/799

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2607

ing subparagraphs and is to be used for any private business use (as defined in section 141(b)(6)). "(A) Any lodging facility. ^ "(B) Any retail facility (including food and beverage facilities) in excess of a size necessary to serve passengers and employees at the exempt facility. "(C) Any retail facility (other than parking) for passengers or the general public located outside the exempt facility terminal. "(D) Any office building for individuals who are not employees of a governmental unit or of the operating authority for the exempt facility. "(E) Any industrial park or manufacturing facility. "(d) QUALIFIED RESIDENTIAL RENTAL PROJECT.—For purposes of this section— "(1) IN GENERAL.—The term 'qualified residential rental project' means any project for residential rental property if, at all times during the qualified project period, such project meets the requirements of subparagraph (A) or (B), whichever is elected by the issuer at the time of the issuance of the issue with respect to such project: "(A) 20-50 TEST.—The project meets the requirements of ' ' * this subparagraph if 20 percent or more of the residential units in such project are occupied by individuals whose income is 50 percent or less of area median gross income. "(B) 40-60 TEST.—The project meets the requirements of this subparagraph if 40 percent or more of the residential units in such project are occupied by individuals whose income is 60 percent or less of area median gross income. For purposes of this paragraph, any property shall not be treated as failing to be residential rental property merely because part of the building in which such property is located is used for purposes other than residential rental purposes. "(2) DEFINITIONS AND SPECIAL RULES.—For purposes of this subsection— ,, "(A) QUALIFIED PROJECT PERIOD.—The term 'qualified project period' means the period beginning on the 1st day on which 10 percent of the residential units in the project are occupied and ending on the latest of— "(i) the date which is 15 years after the date on which 50 percent of the residential units in the project are occupied, .• "(ii) the 1st day on which no tax-exempt private activity bond issued with respect to the project is 'y],i't outstanding, or "(iii) the date on which any assistance provided with respect to the project under section 8 of the United States Housing Act of 1937 terminates. "(B)

t i5 ji;i f. "Si

INCOME

OF

INDIVIDUALS;

AREA

MEDIAN

GROSS

INCOME.—The income of individuals and area median gross income shall be determined by the Secretary in a manner consistent with determinations of lower income families and area median gross income under section 8 of the United States Housing Act of 1937 (or, if such program is terminated, under such program as in effect immediately before such termination). Determinations under the preceding sentence shall include adjustments for family size.

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