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Page:United States Statutes at Large Volume 100 Part 3.djvu/700

 100 STAT. 2508

PUBLIC LAW 99-514—OCT. 22, 1986 by striking out the period at the end of subparagraph (B) and inserting in lieu thereof ", and", and by adding at the end thereof the following new subparagraph: "(C) sections 79, 89, 106, 117(d), 120, 125, 127, 129, 132, 2740"), and 505." (j) OTHER CONFORMING AMENDMENTS.—
 * *^F '^ >' (C) by striking out "and" at the end of subparagraph (A),

(1) The table of sections for part II of subchapter B of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 89. Benefits provided under certain employee benefit plans."

(2) Subsection (a) of section 106 (relating to contributions by employer to accident and health plans) is amended to read as follows: "(a) IN GENERAL.—Gross income of an employee does not include employer-provided coverage under an accident or health plan." (3) Section 505(b) is amended by adding at the end thereof the following new paragraph: "(6) COMPENSATION.—For purposes of this subsection, the term 'compensation' has the meaning given such term by section 414(s)." (k) EFFECTIVE DATES.—

(1) IN GENERAL.—The amendments made by this section shall apply to years beginning after the later of — (A) December 31, 1987, or (B) the earlier of— ,, (i) the date which is 3 months after the date on which the Secretary of the Treasury or his delegate issues such regulations as are necessary to carry out the provisions of section 89 of the Internal Revenue Code of 1986 (as added by this section), or (ii) December 31, 1988. (2) SPECIAL RULE FOR COLLECTIVE BARGAINING PLAN.—In

the

case of a plan maintained pursuant to 1 or more collective bargaining agreements between employee representatives and 1 or more employers ratified before March 1, 1986, the amendments made by this section shall not apply to employees covered by such an agreement in years beginning before the earlier of^ (A) the date on which the last of such collective bargaining agreements terminates (determined without regard to any extension thereof after February 28, 1986), or (B) January 1, 1991. A plan shall not be required to take into account employees to which the preceding sentence applies for purposes of applying section 89 of the Internal Revenue Code of 1986 (as added by this section) to employees to which the preceding sentence does not apply for any year preceding the year described in the preceding sentence. (3) EXCEPTION FOR CERTAIN GROUP-TERM INSURANCE PLANS.—In

the case of a plan described in section 223(d)(2) of the Tax Reform Act of 1984, such plan shall be treated as meeting the requirements of section 89 of the Internal Revenue Code of 1986 (as added by this section) with respect to individuals described in section 223(d)(2) of such Act. An employer may elect to disregard such individuals in applying section 89 of such Code (as so added) to other employees of the employer.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/701

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2509

(4) SPECIAL RULE FOR CHURCH PLANS.—In the case of a church plan (within the meaning of section 414(e)(3) of the Internal Revenue Code of 1986) maintaining an insured accident and health plan, the amendments made by this section shall apply to years beginning after December 31, 1988. (5) CAFETERIA PLANS.—The amendments made by subsection (d)(2) shall apply to taxable years beginning after December 31, 1983.

PART II—OTHER PROVISIONS SEC. 1161. DEDUCTIBILITY OF HEALTH INSURANCE COSTS OF SELF-EMPLOYED INDIVIDUALS.

(a) GENERAL RULE.—Section 162 (relating to trade or business expenses), as amended by this Act, is amended by redesignating subsection (n) as subsection (m) and by inserting after subsection (1) the following new subsection: "(m) SPECIAL RULES FOR HEALTH INSURANCE COSTS OF SELF-EMPLOYED INDIVIDUALS.—

"(1) IN GENERAL.—In the case of an individual who is an employee within the meaning of section 401(c)(1), there shall be allowed as a deduction under this section an amount equal to 25 percent of the amount paid during the taxable year for insurance which constitutes medical care for the taxpayer, his spouse, and dependents. "(2) LIMITATIONS.— "(A) DOLLAR AMOUNT.—No deduction shall be allowed

under paragraph (1) to the extent that the amount of such deduction exceeds the taxpayer's earned income (within the meaning of section 401(c)). "(B) REQUIRED COVERAGE.—Paragraph (1) shall not apply to any taxpayer for any taxable year unless coverage is provided under 1 or more plans meeting the requirements of section 89, treating such coverage as an employer-provided benefit. "(C) OTHER COVERAGE.—Paragraph (1) shall not apply to

any taxpayer who is eligible to participate in any subsidized health plan maintained by any employer of the taxpayer or of the spouse of the taxpayer. "(3) COORDINATION WITH MEDICAL DEDUCTION.—Any amount paid by a taxpayer for insurance to which paragraph (1) applies shall not be taken into account in computing the amount allowable to the taxpayer as a deduction under section 213(a). "(4) TERMINATION.—This subsection shall not apply to any taxable year beginning after December 31, 1989." Ob) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendment made by this section shall apply to taxable years beginning after December 31, 1986. (2) TRANSITIONAL RULE.—In the case of any year to which section 89 of the Internal Revenue Code of 1986 does not apply, section 162(m)(2)(B) of such Code shall be applied by substituting any nondiscrimination requirements otherwise applicable for the requirements of section 89 of such Code. (3) ASSISTANCE.—The Secretary of the Treasury or his delegate shall provide guidance to self-employed individuals to assist them in meeting the requirements of section 89 of the

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license: Creative Commons - Attribution Share-Alike - https://creativecommons.org/licenses/by-sa/4.0/


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Page:United States Statutes at Large Volume 100 Part 3.djvu/702

 100 STAT. 2510

PUBLIC LAW 99-514—OCT. 22, 1986 Internal Revenue Code of 1986 with respect to coverage required by the amendments made by this section.

SEC. 1162. 2-YEAR EXTENSION OF EXCLUSIONS FOR EDUCATIONAL ASSISTANCE PROGRAMS AND GROUP LEGAL PLANS. (a) EDUCATIONAL ASSISTANCE PROGRAMS.—

(1) EXTENSION.—Subsection (d) of section 127 (relating to termination of exclusion for amounts received under educational assistance programs) is amended by striking out "1985" and inserting in lieu thereof "1987". (2) INCREASE IN AMOUNT.—Paragraph (2) of section 127(a) is amended by striking out "$5,000" each place it appears in the text and the heading thereof and inserting in lieu thereof "$5,250". (b) GROUP LEGAL PLANS.—Subsection (e) of section 120 (relating to

termination of exclusion for amounts received under qualified group legal services plans) is amended by striking out "1985 and inserting in lieu thereof "1987". (c) EFFECTIVE DATES.— (1) SUBSECTION (a).—The amendments made by subsection (a)

shall apply to taxable years beginning after December 31, 1985. (2) SUBSECTION (b).—The amendment made by subsection (b) shall apply to years ending after December 31, 1985. (3) CAFETERIA PLAN WITH GROUP LEGAL BENEFITS.—If, within 60 days after the date of the enactment of this Act, an employee elects under a cafeteria plan under section 125 of the Internal Revenue Code of 1986 coverage for group legal benefits to which section 120 of such Code applies, such election may, at the election of the taxpayer, apply to all legal services provided during 1986. The preceding sentence shall not apply to any plan which on August 16, 1986, offered such group legal benefits under such plan. SEC. 1163. $5,000 LIMIT ON DEPENDENT CARE ASSISTANCE EXCLUSION.

(a) GENERAL RULE.—Subsection (a) of section 129 (relating to dependent care assistance programs) is amended to read as follows: "(a) EXCLUSION.—

"(1) IN GENERAL.—Gross income of an employee does not include amounts paid or incurred by the employer for dependent care assistance provided to such employee if the assistance is furnished pursuant to a program which is described in subsection (d). "(2) LIMITATION OF EXCLUSION.—The aggregate amount ex-

cluded from the gross income of the taxpayer under this section for any taxable year shall not exceed $5,000 ($2,500 in the case of a separate return by a married individual). For purposes of the preceding sentence, marital status shall be determined under the rules of paragraphs (3) and (4) of section 21(e)." 0>) TREATMENT OF ONSITE FACILITIES.—Subsection (e) of section 129 is amended by adding at the end thereof the following new paragraph: "(8) TREATMENT OF ONSITE FACILITIES.—In the case of an onsite facility, except to the extent provided in regulations, the amount excluded with respect to any dependent shall be based on— "(A) utilization, and

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Page:United States Statutes at Large Volume 100 Part 3.djvu/703

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2511

"(B) the value of the services provided." (c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. SEC. 1164. TAX TREATMENT OF FACULTY HOUSING. (a) IN GENERAL.—Section 119 (relating to meals or lodging furnished for the convenience of the employer) is amended by adding at the end thereof the following new subsection: "(d) LODGING FURNISHED BY CERTAIN EDUCATIONAL INSTITUTIONS TO EMPLOYEES.—

"(1) IN GENERAL.—In the case of an employee of an educational institution, gross income shall not include the value of qualified campus lodging furnished to such employee during the taxable year. "(2) EXCEPTION IN CASES OF INADEQUATE RENT.—Paragraph (1)

shall not apply to the extent of the excess of— "(A) the lesser of^ "(i) 5 percent of the appraised value (as of the close of the calendar year in which the taxable year begins) of the qualified campus lodging, or "(ii) the average of the rentals paid by individuals (other than employees or students of the educational institution) during such calendar year for lodging provided by the educational institution which is comparable to the qualified campus lodging provided to the employee, over "(B) the rent paid by the employee for the qualified campus lodging during such calendar year. "(3) QuAUFiED CAMPUS LODGING.—For purposes of this subsection, the term 'qualified campus lodging' means lodging to which subsection (a) does not apply and which is— "(A) located on, or in the proximity of, a campus of the educational institution, and "(B) furnished to the employee, his spouse, and any of his dependents by or on behalf of such institution for use as a residence. "(4) EDUCATIONAL INSTITUTION.—For purposes of this paragraph, the term 'educational institution means an institution described in section 170(b)(l)(A)(ii).". (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 1985. SEC. 1165. LIMITATION ON ACCRUAL OF VACATION PAY. (a) GENERAL RULE.—Paragraph (1) of section 463(a) (relating to accrual of vacation pay) is amended by striking out "and expected to be paid during the taxable year or within 12 months following the close of the taxable year" and inserting in lieu thereof "and paid during the taxable year or within Vz months following the close of the taxable year". (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 1986. SEC. 1166. TREATMENT OF CERTAIN FULL-TIME LIFE INSURANCE SALESMEN. (a) GENERAL RULE.—Paragraph (20) of section 7701(a) (defining employee) is amended by striking out "and 106" and inserting in lieu thereof "106, and 125".

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Page:United States Statutes at Large Volume 100 Part 3.djvu/704

 100 STAT. 2512

PUBLIC LAW 99-514—OCT. 22, 1986 (b) EFFECTIVE D A T E. — The amendment

made

by subsection

(a)

shall apply to yfears beginning after December 31, 1985. SEC. 1167. EXTENSION OF DUE DATE FOR STUDY OF WELFARE BENEFIT PLANS. Section 560(b) of the T a x Reform Act of 1984 is amended by striking o u t " February 1, 1985" and inserting in lieu thereof " the date which is 1 year after the date of the e n a c t m e n t of the Tax Reform Act of 1986". SEC. 1168. EXCLUSION FROM GROSS INCOME OF CERTAIN MILITARY BENEFITS. (a) EXCLUSION F R O M GROSS I N C O M E. — Part III of subchapter B of

chapter 1 (relating to items specifically excluded from gross income) is amended by redesignating section 134 a s section 135 and by inserting after section 133 the following new section: "SEC. 134. CERTAIN MILITARY BENEFITS. "(a) GENERAL RULE.—Gross income shall not include any qualified military benefit. "(b) QUALIFIED MILITARY B E N E F I T. — For purposes of t h i s section—

"(1) IN GENERAL.—The term 'qualified military benefit' means any allowance or in-kind benefit which— "(A) is received by any m e m b e r or former m e m b e r of the uniformed services of the United States or any dependent of such m e m b e r by reason of such m e m b e r ' s s t a t u s or service p,^j J a s a m e m b e r of such uniformed services, and "(B) w a s excludable from gross income on September 9, 1986, under any provision of law or regulation the r e under which w a s in effect on such date (other than a provision of this title). "(2) N o OTHER BENEFIT TO BE EXCLUDABLE EXCEPT AS PROVIDED BY THIS TITLE.—Notwithstanding any other provision of law, no benefit shall b e t r e a t e d a s a qualified military benefit unless such benefit— "(A) is a benefit described in paragraph (1), or "(B) is excludable from gross income under this title without regard to any provision of law which is not contained in t h i s title and which is not contained in a revenue Act. "(3) LIMITATIONS ON MODIFICATIONS.—

"(A) IN GENERAL.—Except a s provided in subparagraph (B), no modification or adjustment of any qualified military benefit after September 9, 1986, under any provision of law or regulation described in paragraph (1) shall be t a k e n into account. "(B) EXCEPTION FOR CERTAIN ADJUSTMENTS TO CASH BENE-

1^

FITS.—Subparagraph (A) shall not apply to any adjustment to any qualified military benefit payable in cash which— "(i) is pursuant to a provision of law or regulation (as in effect on September 9, 1986), and "(ii) is determined by reference to any fluctuation in cost, price, currency, or other similar index." (b) The table of sections for part III of subchapter B of chapter 1 is amended by striking o u t the item relating to section 134 and inserting in lieu thereof the following new items: "Sec. 134. Certain military benefits. "Sec. 135. Cross references to other Acts."

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Page:United States Statutes at Large Volume 100 Part 3.djvu/705

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2513

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986.

Subtitle C—Changes Relating to Employee Stock Ownership Plans SEC. 1171. REPEAL OF EMPLOYEE STOCK OWNERSHIP CREDIT. (a) IN GENERAL.—Section 41 (relating to employee stock ownership credit) is hereby repealed. (b) TECHNICAL AND CONFORMING AMENDMENTS.—

(1) Subsection (b) of section 38 is amended by striking out paragraph (4), by striking out ", plus" at the end of paragraph (3) and inserting in lieu thereof a period, and by inserting "plus" at the end of paragraph (2). (2) Subsection (d) of section 38 is amended— (A) by striking out "196(a), and 404(i)" and inserting in lieu thereof "and 196(a)", and (B) by striking out "41(a),". (3) Subsection (c) of section 56 is amended by striking out the last sentence. (4) Subparagraph (B) of section 108(b)(2) is amended by striking out the last sentence. (5) Paragraph (21) of section 401(a) is hereby repealed. (6) Subsection (i) of section 404 (relating to deductibility of unused portions of employee stock ownership credit) is hereby repealed. (7)(A) Section 6699 (relating to assessable penalties relating to tax credit employee stock ownership plan) is hereby repealed. (B) The table of sections for subchapter B of chapter 68 is amended by striking out the item relating to section 6699. (c) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided in paragraph (2), the amendments made by this section shall apply to compensation paid or accrued after December 31, 1986, in taxable years ending after such date. (2) SECTIONS 404(i) AND 6699 TO CONTINUE TO APPLY TO PRE-1987 CREDITS.—The provisions of sections 404(i) and 6699 of the Internal Revenue Code of 1986 shall continue to apply with respect to credits under section 41 of such Code attributable to compensation paid or accrued before January 1, 1987 (or under section 38 of such Code with respect to qualified investment before January 1, 1983). SEC. 1172. ESTATE TAX DEDUCTION FOR PROCEEDS FROM SALES OF EMPLOYER SECURITIES. (a) IN GENERAL.—Part IV of subchapter A of chapter 11 (relating to taxable estate) is amended by adding at the end thereof the following new section: "SEC. 2057. SALES OF EMPLOYER SECURITIES TO EMPLOYEE STOCK OWNERSHIP PLANS OR WORKER-OWNED COOPERATIVES. "(a) GENERAL RULE.—For purposes of the tax imposed by section

2001, the value of the taxable estate shall be determined by deduct-

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Page:United States Statutes at Large Volume 100 Part 3.djvu/706

 100 STAT. 2514

PUBLIC LAW 99-514—OCT. 22, 1986

ing from the value of the gross estate an amount equal to 50 percent of the qualified proceeds of a qualified sale of employer securities. "(b) QUALIFIED SALE.—For purposes of this section, the term 'qualified sale' means any sale of employer securities by the executor of an estate to— "(1) an employee stock ownership plan is described in section 4975(e)(7), or "(2) an eligible worker-owned cooperative (within the meaning of section 1042(c)). "(c) QUALIFIED PROCEEDS.—For purposes of this section— "(1) IN GENERAL.—The term 'qualified proceeds' means the amount received by the estate from the sale of employer securities at any time before the date on which the return of the tax imposed by section 2001 is required to be filed (including any extensions). "(2) PROCEEDS FROM CERTAIN SECURITIES NOT QUALIFIED.—The

term 'qualified proceeds' shall not include the proceeds from the sale of any employer securities if such securities were received by the decedent— "(A) in a distribution from a plan exempt from tax under ^.41 section 501(a) which meets the requirements of section 401(a), or "(B) as a transfer pursuant to an option or other right to acquire stock to which section 83, 422, 422A, 423, or 424 applies. "(d) WRITTEN STATEMENT REQUIRED.—

"(1) IN GENERAL.—No deduction shall be allowed under subsection (a) unless the executor of the estate of the decedent files with the Secretary the statement described in paragraph (2). "(2) STATEMENT.—A statement is described in this paragraph if it is a verified written statement of— "(A) the employer whose employees are covered by the ,; plan described in subsection (b)(1), or "(B) any authorized officer of the cooperative described in subsection (b)(2), consenting to the application of section 4979A with respect to such employer or cooperative. "(e) EMPLOYER SECURITIES.—For purposes of this section, the term 'employer securities' has the meaning given such term by section 409(1). "(f) TERMINATION.—This section shall not apply to any sale after December 31, 1991." (b) CONFORMING AMENDMENTS.—

'fj •is fj;,c • 'j'n.4

(1) Section 409(n)(l) is amended— (A) by inserting "or section 2057" after "section 1042", (B) by inserting "or any decedent if the executor of the estate of such decedent makes a qualified sale to which section 2057 applies," after "securities" in subparagraph (A)(i) thereof, and (C) by inserting "or the decedent" after "taxpayer" in subparagraph iA)iii) thereof (2) Section 4979A is amended— (A) by inserting "or section 2057" after "section 1042" in subsection (b)(l) thereof, and (B) Hjy inserting "or section 2057(d)" after "section 1042(b)(8)(B)" in subsection (c) thereof.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/707

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2515

(3) The table of sections for part IV of subchapter A of chapter 11 is amended by adding a t the end thereof the following new item: "Sec. 2057. Sales of employer securities to employee stock ownership plans or worker-owned cooperatives."

(c) EFFECTIVE D A T E. — The amendments m a d e by this section shall apply to sales after the date of the e n a c t m e n t of this Act with respect to which a n election is m a d e by the executor of a n e s t a t e who is required to file the r e t u r n of the tax imposed by the I n t e r n a l Revenue Code of 1986 on a date (including extensions) after the date of the e n a c t m e n t of this Act. SEC. 1173. PROVISIONS RELATING TO LOANS USED TO ACQUIRE EMPLOYER SECURITIES. (a) DEDUCTION FOR DIVIDENDS P A I D TO REPAY L O A N S. —

(1) IN GENERAL. — Paragraph (2) of section 404(k) (relating to dividend paid deductions) is amended by striking out " o r " a t the end of subparagraph (A), by striking o u t the period a t the e n d of subparagraph (B) and inserting in lieu thereof ", or", and by inserting a t the end thereof the following n e w subparagraph: "(C) the dividend with respect to employer securities is used to m a k e payments on a loan described in section 404(a)(9)." (2) CONFORMING AMENDMENT.—Section 404(k) is amended by

adding a t the end thereof the following n e w sentence: " Any deduction under paragraph (2)(C) shall be allowable in the taxable year of the corporation in which the dividend is used to repay the loan described in such paragraph. " (b) SECURITIES ACQUISITION L O A N S. — (1) APPLICATION TO INTEREST RECEIVED BY RIC.—

(A) IN GENERAL.—Section 133(a) (relating to exclusion for interest on certain loans used to acquire employer securirsp, ties) is amended by striking o u t " o r " a t the e n d of paragraph (2), by inserting " o r " a t the end of paragraph (3), and by adding a t the end thereof the following n e w paragraph: "(4) a regulated investment company (as defined in section 851).". (B)

CONFORMING

AMENDMENT.—Section

852(b)(5)

is

amended by adding a t the end thereof the following n e w subparagraph: "(C) INTEREST O N CERTAIN LOANS USED TO ACQUIRE EM-

PLOYER SECURITIES.—For purposes of this paragraph — "(i) 50 percent of the a m o u n t of any loan of the regulated investment company which qualifies a s a securities acquisition loan (as defined in section 133) shall be t r e a t e d a s a n obligation described in section 103(a), and "(ii) 50 percent of the interest received on such loan shall be t r e a t e d a s interest excludable from gross income under section 103." (2) SECURITIES ACQUISITION LOAN.—Section 133(b)(l) (defining

securities acquisition loan) is amended to read a s follows: "(1) IN GENERAL.—For purposes of this section, the term 'securities acquisition loan' means — "(A) any loan to a corporation or to a n employee stock ownership plan to the e x t e n t that the proceeds a r e used to

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Page:United States Statutes at Large Volume 100 Part 3.djvu/708

 100 STAT. 2516

PUBLIC LAW 99-514—OCT. 22, 1986 acquire employer securities for the plan, or are used to refinance such a loan, or "(B) any loan to a corporation to the extent that, within 30 days, employer securities are transferred to the plan in an amount equal to the proceeds of such loan and such securities are allocable to accounts of plan participants within 1 year of the date of such loan, except that this subparagraph shall not apply to any loan the commitment period of which exceeds 7 years. For purposes of this paragraph, the term 'employer securities' has the meaning given such term by section 409(1)." (c) EFFECTIVE DATES.—

(1) DIVIDENDS.—The amendments made by subsection (a) shall apply to dividends paid in taxable years beginning after the date of the enactment of this Act. (2) SUBSECTION (b).—

i' '

(A) The amendments made by subsection (b)(1) shall apply to loans used to acquire employer securities after the date of the enactment of this Act, including loans used to refinance loans used to acquire employer securities before such date if such loans were used to acquire employer securities after May 23, 1984. (B)(i) Section 133(b)(1)(A) of the Internal Revenue Code of 1986, as amended by subsection (b)(2), shall apply to any loan used to refinance a loan which— (I) met the requirements of section 1330t))(l) (as in effect when such loan was entered into), and (II) was used to acquire securities after July 18, 1984. (ii) If a loan described in clause (i) has a term of greater than 7 years, clause (i) shall apply only to interest accruing on such loan during the first 7 years. (C) Section 133(b)(1)(B) of the Internal Revenue Code of 1986, as added by - subsection (b)(2), shall apply to loans incurred after the date of enactment of this Act.

SEC. 1174. REQUIREMENTS FOR EMPLOYEE STOCK OWNERSHIP PLANS. (a) DISTRIBUTIONS ON PLAN TERMINATIONS PERMITTED.—

(1) IN GENERAL.—Paragraph (1) of section 409(d) (requiring that employer securities must stay in the plan) is amended by striking out "or separation from service" and inserting in lieu thereof "separation from service, or termination of the plan". (2) EFFECTIVE DATE.—The amendment made by this subsection shall apply to plan terminations after December 31, 1984.

OJ) DISTRIBUTION AND PAYMENT REQUIREMENTS.—

(1) IN GENERAL.—Section 409 (relating to qualifications for employee stock ownership plans) is amended by redesignating ,,, subsection (o) as subsection (p) and by inserting after subsection (n) the following new subsection: "(o) DISTRIBUTION AND PAYMENT REQUIREMENTS.—A plan meets the requirements of this subsection if— "(1) DISTRIBUTION REQUIREMENT.—

,,,
 * i

"(A) IN GENERAL.—The plan provides that, unless the participant otherwise elects, the distribution of the participant's account balance in the plan will commence not later than 1 year after the close of the plan year—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/709

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2517

"(i) in which the participant separates from service by reason of the attainment of normal retirement age under the plan, disability, or death, or "(ii) which is the 5th plan year following the plan year in which the participant otherwise separates from service, except that this clause shall not apply if the participant is reemployed by the employer before such year. "(B) EXCEPTION FOR CERTAIN FINANCED SECURITIES.—For

purposes of this subsection, the account balance of a participant shall not include any employer securities acquired with the proceeds of the loan described in section 404(a)(9) until the close of the plan year in which such loan is repaid in full. "(C) LIMITED DISTRIBUTION PERIOD.—The plan provides that, unless the participant elects otherwise, the distribution of the participant's account balance will be in substantially equal periodic payments (not less frequently than annually) over a period not longer than the greater of— "(i) 5 years, or "(ii) in the case of a participant with an account balance in excess of $500,000, 5 years plus 1 additional year (but not more than 5 additional years) for each $100,000 or fraction thereof by which such balance exceeds $500,000. "(2) CosT-OF-uviNG ADJUSTMENT.—The Secretary shall adjust the dollar amounts under paragraph (1)(C) at the same time and in the same manner as under section 415(d)." (2) CONFORMING AMENDMENTS.—Sections 409(a)(3) is amended by striking out "and (h)" and inserting in lieu thereof "(h), and (o)". (3) EFFECTIVE DATE.—The amendments made by this subsection shall apply to distributions attributable to stock acquired after December 31, 1986. (c) PUT OPTION REQUIREMENTS.— (1) PAYMENT REQUIREMENT.—

(A) IN GENERAL.—Subsection (h) of section 409 (relating to right to demand employer securities; put option) is amended by adding at the end thereof the following new paragraphs: "(5) PAYMENT REQUIREMENT FOR TOTAL DISTRIBUTION.—If an

employer is required to repurchase employer securities which are distributed to the employee as part of a total distribution, the requirements of paragraph (1)(B) shall be treated as met if— "(A) the amount to be paid for the employer securities is paid in substantially equal periodic payments (not less frequently than annually) over a period beginning not later than 30 days after the exercise of the put option described in paragraph (4) and not exceeding 5 years, and "(B) there is adequate security provided and reasonable interest paid on the unpaid amounts referred to in subparagraph (A). For purposes of this paragraph, the term 'total distribution' means the distribution within 1 taxable year to the recipient of the balance to the credit of the recipient's account. "(6)

PAYMENT

REQUIREMENT

FOR INSTALLMENT

DISTRIBU

TiONS.—If an employer is required to repurchase employer secu-

71-194 0 - 89 - 2A: QL. 3 Part3

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Page:United States Statutes at Large Volume 100 Part 3.djvu/710

 100 STAT. 2518

PUBLIC LAW 99-514—OCT. 22, 1986

s'^ rities as part of an installment distribution, the requirements of '^ paragraph (I)(B) shall be treated as met if the amount to be paid for the employer securities is paid not later than 30 days after the exercise of the put option described in paragraph (4)." (B) EFFECTIVE DATE.—The amendment made by this paragraph shall apply to distributions attributable to stock acquired after December 31, 1986, except that a plan may elect to have such amendment apply to all distributions V; after the date of the enactment of this Act. (2) PUT OPTION REQUIREMENT EXTENDED TO STOCK BONUS PLANS.—

(A) IN GENERAL.—Section 401(a)(23) is amended to read as follows: , "(23) A stock bonus plan shall not be treated as meeting the requirements of this section unless such plan meets the requirements of subsections (h) and (o) of section 409, except that in appl)ang section 409(h) for purposes of this paragraph, the term > 'employer securities' shall include any securities of the employer held by the plan." (B) EFFECTIVE DATE.—The amendment made by this paragraph shall apply to distributions attributable to stock acquired after December 31, 1986. (d) NONDISCRIMINATION REQUIREMENTS.—

(1) IN GENERAL.—Subparagraph (A) of section 415(c)(6) is, j^, amended by striking out "the group of employees consisting of I.J officers, shareholders owning more than 10 percent of the employer's stock (determined under subparagraph (B)(iv)), or employees described in subparagraph (B)(iii)" and inserting in lieu thereof "highly compensated employees (within the meaning of section 414(q))". ^

(2) CONFORMING AMENDMENTS.—

->-v^

(A) Subparagraph (B) of section 415(c)(6) is amended by striking out clauses (iii) and (iv) thereof. (B) Subparagraph (C) of section 415(c)(6) is amended by striking out "the group of employees consisting of officers, vi shareholders owning more than 10 percent of the employt er's stock (determined under subparagraph (B)(iv)), or in lieu thereof "highly compensated employees (within the fH meaning of section 414(q))". (3) EFFECTIVE DATE.—The amendments made by this subsec1 tion shall apply to years beginning after December 31, 1986. SEC. 1175. ADDITIONAL QUALIFICATION REQUIREMENTS. (a) ADDITIONAL QUALIFICATION STOCK OWNERSHIP PLANS.—
 * f; ji employees described in subparagraph (B)(iii)" and inserting

REQUIREMENTS FOR EMPLOYEE

(1) IN GENERAL.—Subsection (a) of section 401 (relating to qualified pension, profit-sharing, and stock bonus plans), as amended by this Act, is amended by inserting after paragraph (27) the following new paragraph: J1

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"(28) ADDITIONAL REQUIREMENTS RELATING TO EMPLOYEE STOCK OWNERSHIP PLANS.—

"(A) IN GENERAL.—In the case of a trust which is part of an employee stock ownership plan (within the meaning of section 4975(e)(7)) or a plan which meets the requirements of section 409(a), such trust shall not constitute a qualified

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Page:United States Statutes at Large Volume 100 Part 3.djvu/711

 PUBLIC LAW 99-514—OCT. 22, 1986 ^ f

100 STAT. 2519

trust under this section unless such plan meets the requirements of subparagraphs (B) and (C). "(B) DIVERSIFICATION OF INVESTMENTS.—

"(i) IN GENERAL.—A plan meets the requirements of -,.. this subparagraph if each qualified participant in the plan may elect within 90 days after the close of each plan year in the qualified election period to direct the i; plan as to the investment of at least 25 percent of the participant's account in the plan (to the extent such portion exceeds the amount to which a prior election under this subparagraph applies). In the case of the % ,^ election year in which the participant can make his last election, the preceding sentence shall be applied by substituting '50 percent' for '25 percent'. "(ii) METHOD OF MEETING REQUIREMENTS.—A plan shall be treated as meeting the requirements of clause (i) i f "(I) the portion of the participant's account covered by the election under clause (i) is distributed within 90 days after the period during which the
 * .t. J

election may be made, or "(II) the plan offers at least 3 investment options ,.. (not inconsistent with regulations prescribed by the Secretary) to each participant making an election under clause (i). . p "(iii) QUALIFIED PARTICIPANT.—For purposes of this subparagraph, the term 'qualified participant' means any employee who has completed at least 10 years of participation under the plan and has attained age 55. "(iv) QUALIFIED ELECTION PERIOD.—For purposes of this subparagraph, the term 'qualified election period' means the 5-plan-year period beginning with the plan year after the plan year in which the participant attains age 55 (or, if later, beginning with the plan year after the 1st plan year in which the individual 1st became a qualified participant). ,ir«: "^^^ U^^ ^^ INDEPENDENT APPRAISER.—A plan meets the requirements of this subparagraph if all valuations of employer securities which are not readily tradable on an established securities market with respect to activities carried on by the plan are by an independent appraiser. For purposes of the preceding sentence, the term 'independent appraiser' means any appraiser meeting requirements similar to the requirements of the regulations prescribed under b section 170(a)(l)." o (2) EFFECTIVE DATE.—The amendment made by this subsection shall apply to stock acquired after December 31, 1986. SEC. 1176. SPECIAL ESOP REQUIREMENTS.

(a) IN GENERAL.—Section 401(a)(22) (relating to qualified pension, profit sharing and stock bonus plans) is amended by inserting at the end thereof the following new sentence: "The requirements of subsection (e) of section 409 shall not apply to any employees of an employer who are participants in any defined contribution plan established and maintained by such employer if the stock of such employer is not publicly traded and the trade or business of such

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Page:United States Statutes at Large Volume 100 Part 3.djvu/712

 100 STAT. 2520

PUBLIC LAW 99-514—OCT. 22, 1986

employer consists of publishing on a regular basis a newspaper for general circulation." (b) Section 409(1) is amended by adding at the end thereof the following new paragraph: "(4) NONVOTING COMMON STOCK MAY BE ACQUIRED IN CERTAIN

CASES.—Nonvoting common stock of an employer described in the last sentence of section 401(a)(22) shall be treated as employer securities if an employer has a class of nonvoting common stock outstanding and the specific shares that the plan ' acquires have been issued and outstanding for at least 24 months." (c) EFFECTIVE DATES.—The amendment made by subsection (a) shall be effective December 31, 1986. The amendment made by subsection (b) shall apply to acquisitions of securities after December 31, 1986. SEC. 1177. TRANSITION RULES.

(a) SECTION 1171.—The amendments made by section 1171 shall not apply in the case of a tax credit employee stock ownership plan if— (1) such plan was favorably approved on September 23, 1983, by employees, and (2) not later than January 11, 1984, the employer of such employees was 100 percent owned by such plan. (b) SUBTITLE NOT TO APPLY TO CERTAIN NEWSPAPER.—The amendments made by this subtitle shall not apply to any daily newspaper— (1) which was first published on December 17, 1855, and which ^" began publication under its current name in 1954, and » (2) which is published in a constitutional home rule city ^ (within the meaning of section 143(d)(3)(C) of the Internal Reve- nue Code of 1986) which has a population of less than 2,500,000.

TITLE XII—FOREIGN TAX PROVISIONS Subtitle A—Foreign Tax Credit ModiHcations SEC. 1201. SEPARATE APPLICATION OF SECTION 904 WITH RESPECT TO CERTAIN CATEGORIES OF INCOME.

(a) GENERAL RULE.—Paragraph (1) of section 904(d) (relating to separate application of section 904 with respect to certain income) is amended by striking out subparagraph (A), by redesignating subparagraphs (B), (C), (D), and (E) as subparagraphs (F), (G), (H), and (I), respectively, and by inserting before subparagraph (F) (as so redesignated) the following new subparagraphs: "(A) passive income, "(B) high withholding tax interest, "(C) financial services income, "(D) shipping income, "(E) dividends from each noncontrolled section 902 corporation,". (b) CATEGORIES DEFINED.—Subsection (d) of section 904 is amended by striking out paragraphs (2) and (3) and inserting in lieu thereof the following new paragraphs:

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Page:United States Statutes at Large Volume 100 Part 3.djvu/713

 PUBLIC LAW 99-514-OCT. 22, 1986

100 STAT. 2521

"(2) DEFINITIONS A N D SPECIAL RULES.—For purposes of t h i s

subsection— "(A) PASSIVE I N C O M E. —

"(i) IN GENERAL.—Except as otherwise provided in this subparagraph, the term 'passive income' means any income received or accrued by any person which is of a kind which would be foreign personal holding company income (as defined in section 954(c)). "(ii) CERTAIN AMOUNTS INCLUDED.—The term 'passive

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income' includes any a m o u n t includible in gross income under section 551 or section 1293 (relating to certain passive foreign investment companies). "(iii) EXCEPTIONS.—The term 'passive income' shall not include— "(I) any income described in a subparagraph of paragraph (1) other than subparagraph (A), "(II) any export financing interest, "(III) any high-taxed income, and "(IV) any foreign oil and g a s extraction income (as defined in section 907(c)). "(B) H I G H WITHHOLDING TAX INTEREST.—

"(i) IN GENERAL.—Except a s otherwise provided in this subparagraph, the term 'high withholding tax interest' means any interest if— "(I) such interest is subject to a withholding tax of a foreign country or possession of the United States (or other tax determined on a gross basis), and "(II) the r a t e of such tax applicable to such interest is a t least 5 percent. "(ii) EXCEPTION FOR EXPORT F I N A N C I N G. — The

term

'high withholding tax interest' shall not include any export financing interest. "(iii) REGULATIONS.—The Secretary may by regulations provide that a m o u n t s (not otherwise high withholding tax interest) shall be treated a s high withholding tax interest w h e r e necessary to prevent avoidance of the purposes of this subparagraph. "(C) F I N A N C I A L SERVICES I N C O M E. —

"(i) IN GENERAL.—Except a s otherwise provided in this subparagraph, the term 'financial services income' means income received or accrued by any person which is not passive income (determined without regard to subparagraph (A)(iii)(I)) and which— "(I) is derived in the active conduct of a banking, financing, or similar business, or derived from the investment by a n insurance company of its une a r n e d p r e m i u m s or reserves ordinary and necessary for the proper conduct of its insurance business, or "(II) is of a kind which would be insurance income as defined in section 953(a) determined without regard to those provisions of paragraph (1)(A) of such section which limit insurance income to income from countries other than the country in which the corporation w a s created or organized.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/714

 100 STAT. 2522

PUBLIC LAW 99-514—OCT. 22, 1986 "(ii) SPECIAL RULE IF ENTITY PREDOMINANTLY ENGAGED

IN BANKING, ETC., BUSINESS.—If, for any taxable year, an entity is predominantly engaged in the active conduct of a banking, insurance, financing, or similar business, the term 'financial services income' includes ' ' any passive income (determined without regard to U subparagraph (A)(iiiXD) of such corporation for such taxable year. In the case of any entity described in the " preceding sentence, the term 'shipping income' shall not include any income treated as financial services . ^;.' income under the preceding sentence. "(iii) EXCEPTION FOR EXPORT FINANCING.—The term [ ' e • 'financial services income' does not include any export financing interest. 5;. "(iv) HIGH WITHHOLDING TAX INTEREST.—The term 'financial services income' does not include any high withholding teix interest. "(D) SHIPPING INCOME.—The term 'shipping income' > r means any income received or accrued by any person which is of a kind which would be foreign base company shipping income (as defined in section 954(0). "(E) N O N C O N T R O L L E D S E C T I O N 902 CORPORATION.—

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"(i) IN GENERAL.—The term 'noncontrolled section 902 corporation' means any foreign corporation with respect to which the taxpayer meets the stock ownership requirements of section 902(a) (or, for purposes of applying paragraph (3), the requirements of section 902(b)). A controlled foreign corporation shall not be . ' treated as a noncontrolled section 902 corporation with respect to any distribution out of its earnings and profits for periods during which it was a controlled . foreign corporation. "(ii) SPECIAL RULE FOR TAXES ON HIGH-WITHHOLDING

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. ' ^' ';

TAX INTEREST.—If a foreign corporation is a noncontrolled section 902 corporation with respect to the taxpayer, taxes on high withholding tax interest (to the extent imposed at a rate in excess of 5 percent) shall not be treated as foreign taxes for purposes of determining the amount of foreign taxes deemed paid by the taxpayer under section 902. "(F) HIGH-TAXED INCOME.—The term 'high-taxed income' means any income which (but for this subparagraph) would be passive income if the sum of— "(i) the foreign income taxes paid or accrued by the taxpayer with respect to such income, and "(ii) the foreign income taxes deemed paid by the taxpayer with respect to such income under section 902 or 960, exceeds the highest rate of tax specified in section 1 or 11 (whichever applies) multiplied by the amount of such income (determined with regard to section 78). For purposes of the preceding sentence, the term 'foreign income taxes' means any income, war profits, or excess profits tax imposed by any foreign country or possession of the United States. "(G) EXPORT FINANCING INTEREST.—For purposes of this paragraph, the term 'export financing interest' means any

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Page:United States Statutes at Large Volume 100 Part 3.djvu/715

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2523

interest derived from financing the sale (or other disposition) for use or consumption outside the United States of any property— "(i) which is manufactured, produced, grown, or extracted in the United States by the taxpayer or a related person, and value of which is attributable to products imported into the United States. For purposes of clause (ii), the fair market value of any property imported into the United States shall be its appraised value, as determined by the Secretary under section 402 of the Tariff Act of 1930 (19 U.S.C. 1401a) in connection with its importation. "(H) RELATED PERSON.—For purposes of this paragraph, the term 'related person' has the meaning given such term by section 954(d)(3), except that such section shall be applied by substituting 'the person with respect to whom the determination is being made' for 'controlled foreign corporation' each place it appears.
 * '(ii) not more than 50 percent of the fair market

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"(I) TRANSITIONAL RULE.—For purposes of paragraph (1)—

"(i) taxes paid or accrued in a taxable year beginning before January 1, 1987, with respect to income which was described in subparagraph (A) of paragraph (1) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) shall be treated as taxes paid or accrued with respect to income described in subparagraph (A) of paragraph (1) (as in effect after such date), "(ii) taxes paid or accrued in a taxable year beginning before January 1, 1987, with respect to income which was described in subparagraph (E) of paragraph (1) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) shall be treated as taxes paid or accrued with respect to income described in subparagraph (I) of paragraph (1) (as in effect after such date) except to the extent that— "(I) the taxpayer establishes to the satisfaction of the Secretary that such taxes were paid or accrued "' with respect to shipping income, or "(II) in the case of an entity meeting the requirements of subparagraph (C)(ii), the taxpayer establishes to the satisfaction of the Secretary that such > taxes were paid or accrued with respect to finannl - ^ cial services income, and "(iii) taxes paid or accrued in a taxable year begin3>c* ill- u ning before January 1, 1987, with respect to income described in any other subparagraph of paragraph (1) -rr • (as so in effect before such date) shall be treated as ri, taxes paid or accrued with respect to income described in the corresponding subparagraph of paragraph (1) (as r so in effect after such date). "(3) LOOK-THRU IN CASE OF CONTROLLED FOREIGN CORPORATIONS.—

"(A) IN GENERAL.—Except as otherwise provided in this paragraph, dividends, interest, rents, and royalties received or accrued by the taxpayer from a controlled foreign

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Page:United States Statutes at Large Volume 100 Part 3.djvu/716

 100 STAT. 2524

PUBLIC LAW 99-514—OCT. 22, 1986 corporation in which the taxpayer is a United States share" holder shall not be treated as income in a separate category. "(B) SUBPART F INCLUSIONS.—Any amount included in gross income under section 951(a)(1)(A) shall be treated as, income in a separate category to the extent the amount so " included is attributable to income in such category. "(C) INTEREST, RENTS, AND ROYALTIES.—Any interest, rent, or royalty which is received or accrued from a controlled foreign corporation in which the taxpayer is a United States shareholder shall be treated as income in a separate J, category to the extent it is properly allocable (under regulations prescribed by the Secretary) to income of the controlled foreign corporation in such category. "(D) DIVIDENDS.—Any dividend paid out of the earnings and profits of any controlled foreign corporation in which the taxpayer is a United States shareholder shall be treated as income in a separate category in proportion to the ratio of— "(i) the portion of the earnings and profits attributable to income in such category, to "(ii) the total amount of earnings and profits.

"(E) LOOK-THRU APPLIES ONLY WHERE SUBPART F APPLIES.—

If a controlled foreign corporation meets the requirements of section 954(b)(3)(A) (relating to de minimis rule) for any taxable year, for purposes of this paragraph, none of its income for such taxable year shall be treated as income in a separate category. Solely for purposes of applying subparagraph (D), income (other than high withholding tax interest and dividends from a noncontrolled section 902 corporation) of a controlled foreign corporation shall not be treated as income in a separate category if the requirements of section 954(b)(4) are met with respect to such income. "(F) SEPARATE CATEGORY.—For purposes of this paragraph, the term 'separate category' means any category of income described in subparagraph (A), (B), (C), (D), or (E) of paragraph (1). "(G) DIVIDEND.—For purposes of this paragraph, the term 'dividend' includes any amount included in gross income in section 951(a)(1)(B). Any amount included in gross income under section 78 to the extent attributable to amounts included in gross income in section 951(a)(1)(A) shall not be treated as a dividend but shall be treated as included in gross income under section 951(a)(1)(A). "(4) CONTROLLED FOREIGN CORPORATION; UNITED STATES SHARE-

^ HOLDER.—For purposes of this subsection— "(A) CONTROLLED FOREIGN CORPORATION.—The term 'controlled foreign corporation' has the meaning given such -: term by section 957 (taking into account section 953(c)). "(B) UNITED STATES SHAREHOLDER.—The term 'United States shareholder' has the meaning given such term by section 951(b) (taking into account section 953(c)). "(5) REGULATIONS.—The Secretary shall prescribe such regu*' lations as may be necessary or appropriate for the purposes of this subsection, including regulations—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/717

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2525

"(A) for the application of paragraph (3) and subsection (f)(5) in the case of income paid (or loans made) through 1 or more entities or between 2 or more chains of entities, "(B) preventing the manipulation of the character of income the effect of which is to avoid the purposes of this subsection, and "(C) providing that rules similar to the rules of paragraph i (3)(C) shall apply to interest, rents, and royalties received or accrued from entities which would be controlled foreign corporations if they were foreign corporations." (c) SOURCE RULE.—Paragraph (5) of section 954(b) (relating to deductions) is amended by adding at the end thereof the following new sentence: "Except to the extent provided in regulations prescribed by the Secretary, any interest which is paid or accrued by the controlled foreign corporation to any United States shareholder in such corporation (or any controlled foreign corporation related to such a shareholder) shall be allocated first to foreign personal holding company income which is passive income (within the meaning of section 904(d)(2)) of such corporation to the extent thereof. The Secretary may, by regulations, provide that the preceding sentence shall apply also to interest paid or accrued to other persons." (d) TECHNICAL AMENDMENTS.—

(1) The subsection heading of section 904(d) is amended to read as follows: "(d) SEPARATE APPLICATION OF SECTION WITH RESPECT TO CERTAIN CATEGORIES OF INCOME.—".

(2) Subparagraph (I) of section 904(d)(1) (as redesignated by subsection (a)) is amended by striking out "in subparagraph (A), (B), (C), or (D)" and inserting in lieu thereof "in any of the preceding subparagraphs". (3) Paragraph (1) of section 904(d) is amended by inserting "and sections 902, 907, and 960" after "subsections (a), (b), and (c)". (4) Clause (i) of section 864(d)(5)(A) is amended to read as follows: "(i) Subparagraphs (A)(iii)(II), (B)(ii), and (C)(iii) of section 904(d)(2) (relating to exceptions for export financing interest)." (e) EFFECTIVE DATES.—

(1) IN GENERAL.—Except as provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 1986. (2) QUALIFIED LOANS.—

(A) IN GENERAL.—The following shall not be treated as high withholding tax interest for purposes of applying section 904(d) of the Internal Revenue Code of 1986 (as amended by this section): (i) Any interest received or accrued by any taxpayer during any taxable year beginning after December 31, 1986, and before January 1, 1990, on any pre-1990 qualified loan, and (ii) The phase-out percentage of any interest received or accrued by any taxpayer during any taxable year beginning after December 31, 1989 on any post-1989 qualified loan. (B) PHASE-OUT PERCENTAGE.—For purposes of subparagraph (A) the phase-out percentage is—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/718

 100 STAT. 2526

PUBLIC LAW 99-514—OCT. 22, 1986

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.

In the case of the following taxable years beginning after 12/31/89: 1st 2nd 3rd 4th 5th or succeeding

The phase out percentage is: 80 60 40 20 0

(C) PRE-1990 QUALIFIED LOAN.—For purposes of subpara-

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graph (A), the term "pre-1990 qualified loan" means, with respect to any taxable year beginning before January 1, 1990, any qualified loan outstanding at any time during such taxable year to the extent that the total amount of foreign taxes which would be creditable (without regard to the limitation of section 904 of the Internal Revenue Code of 1986) with respect to all qualified loans outstanding at any time during such taxable year does not exceed the applicable credit limit for such taxable year. (D) POST-1989 QUALIFIED LOANS.—For purposes of Subparagraph (A), the term "post-1989 qualified loan" means any qualified loan outstanding as of the close of the 1st taxable year of the taxpayer beginning after December 31, 1988, to the extent that the total amount of foreign taxes which would be creditable (without regard to the limitation of section 904 of the Internal Revenue Code of 1986) with respect to all qualified loans outstanding as of the close of such taxable year does not exceed the applicable credit limit for post-1989 qualified loans. (E) CLASSIFICATION OF QUALIFIED LOANS.—For purposes of this paragraph, if the foreign taxes creditable for any taxable year beginning before January 1, 1990, with respect to any qualified loan, when added to the aggregate amount of foreign taxes creditable for such taxable year with respect to qualified loans entered into by the taxpayer before the date on which such qualified loan was entered into, exceed the applicable credit limit, then that portion of a qualified loan which causes the taxpayer to exceed the applicable credit limit shall not be treated as a pre-1990 or post-1989 qualified loan, as the case may be. (F) APPLICABLE CREDIT LIMIT.—

(i) IN GENERAL.—The applicable credit limit shall be equal to— (I) except as provided in subclause (II), 110 percent of the base credit amount multiplied by the applicable interest rate adjustment for the taxable ' '„, year, and (II) in the case of post-1989 qualified loans, the ,,.,, amount determined under subclause (I) (without t, i ^, regard to the interest rate adjustment) multiplied by the interest rate adjustment for post-1989 qualified loans. ,. (ii) BASE CREDIT AMOUNT.—The base credit amount of a taxpayer shall be an amount equal to the principal i'i'-i'' amount of qualified loans held by such taxpayer on November 16, 1985, multiplied by the product of—
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(I) the interest rate applicable to such loan on November 16, 1985, and

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Page:United States Statutes at Large Volume 100 Part 3.djvu/719

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2527

(II) the foreign withholding tax rate applicable to interest payable with respect to such loan on November 16, 1985. (G) INTEREST RATE ADJUSTMENT.—

(i) IN GENERAL.—Except as provided in clause (ii), the applicable interest rate adjustment shall equal the ratio of the weighted average 6-month London Interbank Offered Rate (LIBOR) for the taxable year in question to LIBOR on November 15, 1985. (ii) PosT-1989 QUALIFIED LOANS.—The applicable interest rate adjustment for post-1989 qualified loans shall be equal to the ratio of LIBOR on the last day of the taxpayer's 1st taxable year beginning after December 31, 1988 to LIBOR on November 15, 1985. (H) QUALIFIED LOAN.—For purposes of this subsection, the term "qualified loan" means any loan made by the taxpayer to any of the following countries or any resident thereof for use in such country: (i) Argentina. (xvii) Morocco. (ii) Bolivia. (xviii) Mozambique. (iii) Brazil. (xix) Niger. (iv) Chile. (xx) Nigeria. (v) Colombia. (xxi) Panama. (vi) Costa Rica. (xxii) Peru. (vii) The Dominican (xxiii) The Philippines. Republic. (xxiv) Romania. (viii) Ecuador. (xxv) Senegal. (ix) Guyana. (xxvi) Sierra Leone. (x) Honduras. (xxvii) The Sudan. (xi) The Ivory Coast. (xviii) Togo. (xii) Jamaica. (xxix) Uruguay, (xiii) Liberia. (xxx) Venezuela, (xiv) Madagascar. (xxxi) Yugoslavia. (xv) Malawi. (xxxii) Zaire, (xvi) Mexico. (xxxiii) Zambia. (I) No BENEFIT FOR INCREASED WITHHOLDING TAXES.—No

benefit shall be allowable by reason of this paragraph for any foreign withholding tax imposed on interest payable with respect to any qualified loan to the extent the rate of such tax exceeds the foreign withholding tax rate applicable to interest payable with respect to such loan on November 16, 1985. (3) SPECIAL RULE FOR TAXPAYER WITH OVERALL FOREIGN LOSS.—

(A) IN GENERAL.—If a taxpayer incorporated on June 20, 1928, the principal headquarters of which is in Minneapolis, Minnesota, sustained an overall foreign loss (as defined in section 904(f)(2) of the Internal Revenue Code of 1954) in taxable years beginning before January 1, 1986, in connection with 2 separate trades or businesses which the taxpayer had, during 1985, substantially disposed of in tax-free transactions pursuant to section 355 of such Code, then an amount, not to exceed $40,000,000 of foreign source income, which, but for this paragraph, would not be treated as overall limitation income, shall be so treated.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/720

 100 STAT. 2528

PUBLIC LAW 99-514—OCT. 22, 1986

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(B) SUBSTANTIAL DISPOSITION.—For purposes of this paragraph, a taxpayer shall be treated as having substantially disposed of a trade or business if the retained portion of such business had sales of less than 10 percent of the annual sales of such business for taxable years ending in 1985.

SEC. 1202. DEEMED PAID CREDIT UNDER SECTIONS 902 AND 960 DETERMINED ON ACCUMULATED BASIS.

(a) GENERAL RULE.—Section 902 (relating to credit for corporate stockholder in foreign corporation) is amended to read as follows: "SEC. 902. DEEMED PAID CREDIT WHERE DOMESTICORPORATION OWNS 10 PERCENT OR MORE OF VOTING STOCK OF FOREIGN CORPORATION. "(a) TAXES PAID BY FOREIGN CORPORATION TREATED AS PAID BY DOMESTICORPORATION.—For purposes of this subpart, a domestic

corporation which owns 10 percent or more of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of such foreign corporation's post-1986 foreign income taxes as— "(1) the amount of such dividends (determined without regard to section 78), bears to "(2) such foreign corporation's post-1986 undistributed earnings. "0)) DEEMED TAXES INCREASED IN CASE OF CERTAIN 2ND AND 3RD TIER FOREIGN CORPORATIONS.—

"(1) 2ND TIER.—If the foreign corporation described in subsection (a) (hereinafter in this section referred to as the '1st tier corporation') owns 10 percent or more of the voting stock of a 2nd foreign corporation from which it receives dividends in any taxable year, the 1st tier corporation shall be deemed to have paid the same proportion of such 2nd foreign corporation's post1986 foreign income taxes as would be determined under subsection (a) if such 1st tier corporation were a domestic corporation. "(2) 3RD TIER.—If such 1st tier corporation owns 10 percent or more of the voting stock of a 2nd foreign corporation which, in turn, owns 10 percent or more of the voting stock of a 3rd foreign corporation from which the 2nd corporation receives dividends in any taxable year, such 2nd foreign corporation shall be deemed to have paid the same proportion of such 3rd foreign corporation's post-1986 foreign income taxes as would be determined under subsection (a) if such 2nd foreign corporation were a domestic corporation. "(3) 5 PERCENT STOCK REQUIREMENT.—For purposes of this subpart— "(A) FOR 2ND TIER.—Paragraph (1) shall not apply unless the percentage of voting stock owned by the domestic corf poration in the 1st tier corporation and the percentage of voting stock owned by the 1st tier corporation in the 2nd foreign corporation when multiplied together equal at least 5 percent. "(B) FOR 3RD TIER.—Paragraph (2) shall not apply unless the percentage arrived at for purposes of applying paragraph (1) when multiplied by the percentage of voting stock owned by the 2nd foreign corporation in the 3rd foreign corporation is equal to at least 5 percent.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/721

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2529

"(c) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) POST-1986 UNDISTRIBUTED EARNINGS.—The term 'post-1986 undistributed earnings' means the amount of the earnings and profits of the foreign corporation (computed in accordance with sections 964 and 986) accumulated in taxable years beginning after December 31, 1986— "(A) as of the close of the taxable year of the foreign corporation in which the dividend is distributed, and "(B) without diminution by reason of dividends distributed during such taxable year. "(2) POST-1986 FOREIGN INCOME TAXES.—The term 'post-1986 foreign income taxes' means the sum of— "(A) the foreign income taxes with respect to the taxable year of the foreign corporation in which the dividend is distributed, and "(B) the foreign income taxes with respect to prior taxable years beginning after December 31, 1986, to the extent •' such foreign taxes were not deemed paid with respect to dividends distributed by the foreign corporation in prior taxable years. "(3) SPECIAL RULE WHERE DOMESTICORPORATION ACQUIRES lo PERCENT OF FOREIGN CORPORATION AFTER DECEMBER 31, 1986.—

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"(A) IN GENERAL.—If the 1st day on which the ownership requirements of subparagraph (B) are met with respect to any foreign corporation is in a taxable year of such corporation beginning after December 31, 1986, the post-1986 undistributed earnings and the post-1986 foreign income taxes of such foreign corporation shall be determined by taking into account only periods beginning on and after the 1st day of the 1st taxable year in which such ownership requirements are met. "(B) OWNERSHIP REQUIREMENTS.—The ownership requirements of this subparagraph are met with respect to any foreign corporation if— "(i) 10 percent or more of the voting stock of such foreign corporation is owned by a domestic corporation, "(ii) the requirements of subsection (b)(3)(A) are met with respect to such foreign corporation and 10 percent or more of the voting stock of such foreign corporation is owned by another foreign corporation described in clause (i), or "(iii) the requirements of subsection (b)(3)(B) are met with respect to such foreign corporation and 10 percent or more of the voting stock of such foreign corporation is owned by another foreign corporation described in clause (ii). "(4) FOREIGN INCOME TAXES.—

i

'

"(A) IN GENERAL.—The term 'foreign income taxes' means any income, war profits, or excess profits taxes paid by the foreign corporation to any foreign country or possession of the United States. "(B) TREATMENT OF DEEMED TAXES.—Except for purposes of determining the amount of the post-1986 foreign income taxes of a 3rd foreign corporation referred to in subsection (b)(2), the term 'foreign income taxes' includes any such

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Page:United States Statutes at Large Volume 100 Part 3.djvu/722

 100 STAT. 2530

PUBLIC LAW 99-514—OCT. 22, 1986

•ifLt T taxes deemed to be paid by the foreign corporation under this section. a^ii "(5) ACCOUNTING PERIODS.—In the case of a foreign corporation the income, war profits, and excess profits taxes of which are determined on the basis of an accounting period of less than 2j4,, 1 year, the word 'year' as used in this subsection shall be construed to mean such accounting period. "(6)

TREATMENT OF DISTRIBUTIONS FROM EARNINGS BEFORE

1987.— .,;^ "(A) IN GENERAL.—In the case of any dividend paid by a foreign corporation out of accumulated profits (as defined in ,:, ys - this section as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) for taxable years beginning before the 1st taxable year taken into account in p; _ determining the post-1986 undistributed earnings of such corporation— ^ •,,, "(i) this section (as amended by the Tax Reform Act of 1986) shall not apply, but . /; "(ii) this section (as in effect on the day before the ' • date of the enactment of such Act) shall apply. '

"(B) DIVIDENDS PAID FIRST OUT OF POST-1986 EARNINGS.—

,

. Any dividend in a taxable year beginning after December 31, 1986, shall be treated as made out of post-1986 undistributed earnings to the extent thereof. "(7) REGULATIONS.—The Secretary shall provide such regulations as may be necessary or appropriate to carry out the provisions of this section and secton 960, including provisions which provide for the separate application of this section to reflect the separate application of section 904 to separate types of income and loss.

"(d) CROSS REFERENCES.— "(1) For inclusion in gross income of an amount equal to taxes deemed ,,,. paid under subsection (a), see section 78. ^ ^ "(2) For application of subsections (a) and (b) with respect to taxes deemed paid in a prior taxable year by a United States shareholder with respect to a controlled foreign corporation, see section 960. "(3) For reduction of credit with respect to dividends paid out of post1986 undistributed earnings for years for which certain information is not furnished, see section 6038." (b) SECTION 960 CREDIT DETERMINED ON ACCUMULATED BASIS.—The

first sentence of section 960(a)(1) (relating to taxes paid by a foreign corporation) is amended by striking out "then" and all that follows down through the period at the end thereof and inserting in lieu thereof the following: "then, except to the extent provided in regulations, such domestic corporation shall be deemed to have paid a portion of such ,. foreign corporation's post-1986 foreign income taxes determined under section 902 in the same manner as if the amount so included were a dividend paid by such foreign corporation (determined by applying section 902(c) in accordance with section 904(d)(3)(B))." (c) TECHNICAL AMENDMENTS.—

(1) Subparagraph (B) of section 6038(a)(1) (relating to information with respect to certain foreign corporations) is amended to read as follows: "(B) the post-1986 undistributed earnings (as defined in section 902(c)) of such foreign corporation,".

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(2) Subparagraph (C) of section 6038(c)(4) (relating to penalty of reducing foreign tax credit) is amended by striking out all that follows "the amount o f and inserting in lieu thereof "post1986 undistributed earnings." (d) CLERICAL AMENDMENT.—The table of sections for subpart A of part III of subchapter N of chapter 1 is amended by striking out the item relating to section 902 and inserting in lieu thereof the following: "Sec. 902. Deemed paid credit where domestic corporation owns 10 percent or more of voting stock of foreign corporation."

(e) EFFECTIVE DATE.—The amendments made by this section shall apply to distributions by foreign corporations out of, and to inclusions under section 951(a) of the Internal Revenue Code of 1986 attributable to, earnings and profits for taxable years beginning after December 31, 1986. SEC. 1203. CLARIFICATION OF TREATMENT OF SEPARATE LIMITATION LOSSES. (a) GENERAL RULE.—Subsection (f) of section 904 (relating to recap-

ture of overall foreign loss) is amended by adding at the end thereof the following new paragraph: "(5) TREATMENT OF SEPARATE LIMITATION LOSSES.—

•
 * ) b

-::.,-'

"(A) IN GENERAL.—The amount of the separate limitation losses for any taxable year shall reduce income from sources within the United States for such teixable year only to the extent the aggregate amount of such losses exceeds the aggregate amount of the separate limitation incomes for such taxable year. "(B) ALLOCATION OF LOSSES.—The separate limitation losses for any taxable year (to the extent such losses do not exceed the separate limitation incomes for such year) shall be allocated among (and operate to reduce) such incomes on a proportionate basis. "(C) RECHARACTERIZATION OF SUBSEQUENT INCOME.—If—

,.„ '!,, »

"(i) a separate limitation loss from any income category (hereinafter in this subparagraph referred to as 'the loss category') was allocated to income from any other category under subparagraph (B), and "(ii) the loss category has income for a subsequent taxable year, such income (to the extent it does not exceed the aggregate separate limitation losses from the loss category not previously recharacterized under this subparagraph) shall be recharacterized as income from such other category in proportion to the prior reductions under subparagraph (B) in such other category not previously taken into account under this subparagraph. Nothing in the preceding sentence shall be construed as recharacterizing any tax. "(D) SPECIAL RULES FOR LOSSES FROM SOURCES IN THE

• H' i

UNITED STATES.—Any loss from sources in the United States for any taxable year (to the extent such loss does not exceed the separate limitation incomes from such year) shall be allocated among (and operate to reduce) such incomes on a proportionate basis. This subparagraph shall be applied after subparagraph (B). "(E) DEFINITIONS.—For purposes of this paragraph—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/724

 100 STAT. 2532

PUBLIC LAW 99-514—OCT. 22, 1986

-4j\,..

"(i) INCOME CATEGORY.—The term 'income category' means each separate category of income described in subsection (d)(1). "(ii) SEPARATE LIMITATION INCOME.—The term 'sepaj,, -.. rate limitation income' means, with respect to any income category, the taxable income from sources outside the United States, separately computed for such category, "(iii) SEPARATE LIMITATION LOSS.—The term 'separate • •'^ limitation loss' means, with respect to any income category, the loss from such category determined under the principles of section 907(c)(4)(B).'^ (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to losses incurred in taxable years beginning after December 31, 1986. SEC. 1204. FOREIGN TAXES USED TO PROVIDE SUBSIDIES. (a) TREATMENT OF CERTAIN SUBSIDIES.—Section 901 (relating to

credit for foreign taxes) is amended by redesignating subsection (i) as subsection (j) and by inserting after subsection (h) the following new subsection: "(i) TAXES USED TO PROVIDE SUBSIDIES.—Any income, war profits,

or excess profits tax shall not be treated as a tax for purposes of this title to the extent— "(1) the amount of such tax is used (directly or indirectly) by the country imposing such tax to provide a subsidy by any means to the taxpayer, a related person (within the meaning of section 482), or any party to the transaction or to a related transaction, and "(2) such subsidy is determined (directly or indirectly) by reference to the amount of such tax, or the base used to compute the amount of such tax." 0)) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to foreign taxes paid or accrued in taxable years beginning after December 31, 1986, SEC. 1205. LIMITATION ON CARRYBACK OF FOREIGN TAX CREDITS TO TAXABLE YEARS BEGINNING BEFORE 1987. (a) DETERMINATION OF EXCESS CREDITS.—

(1) IN GENERAL.—Any taxes paid or accrued in a taxable year beginning after 1986 may be treated under section 904(c) of the Internal Revenue Code of 1954 as paid or accrued in a taxable year beginning before 1987 only to the extent such taxes would be so treated if the tax imposed by chapter 1 of such Code for the taxable year beginning after 1986 were determined by applying section 1 or 11 of such Code (as the case may be) as in 1 effect on the day before the date of the enactment of this Act. (2) ADJUSTMENTS.—Under regulations prescribed by the Secretary of the Treasury or his delegate proper adjustments shall be made in the application of paragraph (1) to take into account— (A) the repeal of the zero bracket amount, and (B) the changes in the treatment of capital gains. (b) COORDINATION WITH SEPARATE BASKETS.—Any taxes paid or accrued in a taxable year beginning after 1986 which (after the application of subsection (a)) are treated as paid or accrued in a taxable year beginning before 1987 shall be treated as imposed on

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income described in section 904(d)(1)(E) of the Internal Revenue Code of 1954 (as in effect on the day before the date of the enactment of this Act). No taxes paid or accrued in a taxable year beginning after 1986 with respect to high withholding tax interest (as defined in section 904(d)(2)(B) of the Internal Revenue Code of 1986 as amended by this Act) may be treated as paid or accrued in a taxable year beginning before 1987.

Subtitle B—Source Rules i

SEC, 1211. DETERMINATION OF SOURCE IN CASE OF SALES OF PERSONAL PROPERTY.

(a) PERSONAL PROPERTY SOURCE RULES.—Part I of subchapter N of chapter 1 (relating to determination of source of income) is amended by adding at the end thereof the following new section: "SEC. 8 5 SOURCE RULES FOR PERSONAL PROPERTY SALES. 6. "(a) GENERAL RULE.—Except as otherwise provided in this section, income from the sale of personal property— "(1) by a United States resident shall be sourced in the United States, or "(2) by a nonresident shall be sourced outside the United States. "(b) EXCEPTION FOR INVENTORY PROPERTY.—In the case of income derived from the sale of inventory property— "(1) this section shall not apply, and "(2) such income shall be sourced under the rules of sections 861(a)(6), 862(a)(6), and 863(b). "(c) EXCEPTION FOR DEPRECIABLE PERSONAL PROPERTY.—

"(1) IN GENERAL.—Gain (not in excess of the depreciation adjustments) from the sale of depreciable personal property shall be allocated between sources in the United States and sources outside the United States— "(A) by treating the same proportion of such gain as sourced in the United States as the United States depreciation adjustments with respect to such property bear to the total depreciation adjustments, and "(B) by treating the remaining portion of such gain as sourced outside the United States. "(2) GAIN IN EXCESS OF DEPRECIATION.—Gain (in excess of the

depreciation adjustments) from the sale of depreciable personal property shall be sourced as if such property were inventory property. "(3) UNITED STATES DEPRECIATION ADJUSTMENTS.—For purposes of this subsection— "(A) IN GENERAL.—The term 'United States depreciation adjustments' means the portion of the depreciation adjustments to the adjusted basis of the property which are attributable to the depreciation deductions allowable in computing taxable income from sources in the United States. "(B) SPECIAL RULE FOR CERTAIN PROPERTY.—Except in the

case of property of a kind described in section 48(a)(2)(B), if, for any taxable year— "(i) such property is used predominantly in the United States, or

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Page:United States Statutes at Large Volume 100 Part 3.djvu/726

 100 STAT. 2534

PUBLIC LAW 99-514—OCT. 22, 1986

J,

^; ^,

"(ii) such property is used predominantly outside the United States, all of the depreciation deductions allowable for such year shall be treated as having been allocated to income from sources in the United States (or, where clause (ii) applies, from sources outside the United States). "(4) OTHER DEFINITIONS.—For purposes of this subsection— "(A) DEPRECIABLE PERSONAL PROPERTY.—The term 'depreciable personal property' means any personal property if the adjusted basis of such property includes depreciation adjustments. "(B) DEPRECIATION ADJUSTMENTS.—The term 'depreciation adjustments' means adjustments reflected in the adjusted basis of any property on account of depreciation deductions (whether allowed with respect to such property or other property and whether allowed to the taxpayer or to any other person). "(C) DEPRECIATION DEDUCTIONS.—The term 'depreciation deductions' means any deductions for depreciation or amortization or any other deduction allowable under any provision of this chapter which treats an otherwise capital expenditure as a deductible expense.

"(d) EXCEPTION FOR INTANGIBLES.—

"(1) IN GENERAL.—In the case of any sale of an intangible— "(A) this section shall apply only to the extent the payments in consideration of such sale are not contingent on vr > s *^he productivity, use, or disposition of the intangible, and "(B) to the extent such payments are so contingent, the source of such payments shall be determined under this .. part in the same manner as if such payments were royalties. "(2) INTANGIBLE.—For purposes of paragraph (1), the term 'intangible' means any patent, copyright, secret process or formula, goodwill, trademark, trade brand, or other like property. "(3) SPECIAL RULE IN THE CASE OF GOODWILL.—To the extent this section applies to the sale of goodwill, payments in consideration of such sale shall be treated as from sources in the country in which such goodwill was generated. "(e) SPECIAL RULES FOR SALES THROUGH OFFICES OR FIXED PLACES OF BUSINESS.— "(1) SALES BY RESIDENTS.—

' .,

"(A) IN GENERAL.—In the case of income not sourced under subsection (b), (c), (d), or (f), if a United States resident maintains an office or other fixed place of business outside the United States, income from sales of personal property attributable to such office or other fixed place of business shall be sourced outside the United States. "(B) TAX MUST BE IMPOSED.—Subparagraph (A) shall not

^

apply unless an income tax equal to at least 10 percent of the income from the sale is actually paid to a foreign country with respect to such income. "(2) SALES BY NONRESIDENTS.—

.1

"(A) IN GENERAL.—Notwithstanding any other provisions of this part, if a nonresident maintains an office or other fixed place of business in the United States, income from any sale of personal property (including inventory property) attributable to such office or other fixed place of business

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,

100 STAT. 2535

shall be sourced in the United States. The preceding sentence shall not apply for purposes of section 971 (defining export trade corporation). "(B) EXCEPTIONS.—Subparagraph (A) shall not apply to— "(i) any sale of inventory property which is sold for use, disposition, or consumption outside the United States if an office or other fixed place of business of the taxpayer outside the United States materially participated in the sale, or "(ii) any amount included in gross income under section 951(a)(l)(A). "(3) SALES ATTRIBUTABLE TO AN OFFICE OR OTHER FIXED PLACE

OF BUSINESS.—The principles of section 864(c)(5) shall apply in determining whether a taxpayer has an office or other fixed place of business and whether a sale is attributable to such an office or other fixed place of business. "(0 STOCK OF AFFIUATES.—If—

"(1) a United States resident sells stock in an affiliate which is a foreign corporation, "(2) such affiliate is engaged in the active conduct of a trade or business, and "(3) such sale occurs in the foreign country in which the affiliate derived more than 50 percent of its gross income for the 3-year period ending with the close of the affiliate's taxable year immediately preceding the year during which such sale occurred, any gain from such sale shall be sourced outside the United States. "(g) UNITED STATES RESIDENT; NONRESIDENT.—For purposes of this section— "(1) IN GENERAL.—Except as otherwise provided in this subsection— "(A) UNITED STATES RESIDENT.—The term 'United States resident' means— "(i) any individual who has a tax home (as defined in section 911(d)(3)) in the United States, and "(ii) any corporation, partnership, trust, or estate which is a United States person (as defined in section 7701(a)(30)). "(B) NONRESIDENT.—The term 'nonresident' means any person other than a United States resident. "(2) SPECIAL RULES FOR UNITED STATES CITIZENS AND RESIDENT

AUENS.—For purposes of this section, a United States citizen or resident alien shall not be treated as a nonresident with respect to any sale of personal property unless an income tax equal to at least 10 percent of the gain derived from such sale is actually i paid to a foreign country with respect to that gain. "(h) OTHER DEFINITIONS.—For purposes of this section— "(1) INVENTORY PROPERTY.—The term 'inventory property' means personal property described in paragraph (1) of section 1221. "(2) SALE INCLUDES EXCHANGE.—The term 'sale' includes an exchange or any other disposition. "(3) TREATMENT OF POSSESSIONS.—Any possession of the United States shall be treated as a foreign country. "(4) AFFILIATE.—The term 'affiliate' means a member of the . same affiliated group (within the meaning of section 1504(a) without regard to section 15040t))).

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Page:United States Statutes at Large Volume 100 Part 3.djvu/728

 100 STAT. 2536

PUBLIC LAW 99-514—OCT. 22, 1986

i

"(i) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purpose of this section, including regulations— "(1) relating to the treatment of losses from sales of personal ' property, and "(2) applying the rules of this section to income derived from trading in futures contracts, forward contracts, options contracts, and other instruments. "0") CROSS REFERENCES.— "(1) For provisions relating to the characterization as dividends for source purposes of gains from the sale of stock in certain foreign corporations, see section 1248. "(2) For sourcing of income from certain foreign currency transactions, see section 988." (b) CONFORMING AMENDMENTS.—

(1) Each of the following provisions are amended by striking out "personal property" and inserting in lieu thereof "inventory property (within the meaning of section 865(h)(1))": (A) Paragraphs (2) and (3) of section 863(b). "'" (B) Paragraph (6) of section 861(a). (C) Paragraph (6) of section 862(a). (2) Subparagraph (B) of section 864(c)(4) is amended by adding "or" at the end of clause (i), by striking out "; or" at the end of clause (ii) and inserting in lieu thereof a period, and by striking out clause (iii). (3) Paragraph (3) of section 904(b) is amended by striking out subparagraphs (C) and (D) and redesignating subparagraphs (E) and (F) as subparagraphs (C) and (D), respectively. (4) Subparagraph (D) of section 871(a)(1) is amended by striking out "or from payments which are treated as being so contingent under subsection (e),". (5) Subsection (e) of section 871 is hereby repealed. f (6) Paragraph (4) of section 881(a) is amended by striking out "or from payments which are treated as being so contingent under section 871(e),". (c) EFFECTIVE DATES.—

(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) SPECIAL RULE FOR FOREIGN PERSONS.—In the case of any foreign person other than any controlled foreign corporations (within the meaning of section 957(a) of the Internal Revenue Code of 1954), the amendments made by this section shall apply to transactions entered into after March 18, 1986. (d) STUDY.—The Secretary of the Treasury or his delegate shall conduct a study of the source rules for sales of inventory property. Not later than September 30, 1987, the Secretary of the Treasury or his delegate shall submit to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate a report of such study (together with such recommendations as he may deem advisable). SEC. 1212. SPECIAL RULES FOR TRANSPORTATION INCOME.

(a) GENERAL RULE.—Paragraph (2) of section 863(c) (relating to special rule for certain transportation income) is amended to read as follows:

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"(2) OTHER TRANSPORTATION HAVING UNITED STATES CONNECTION.—

"(A) IN GENERAL.—50 percent of all transportation income attributable to transportation which— "(i) is not described in paragraph (1), and "(ii) begins or ends in the United States, shall be treated as from sources in the United States.

'

"(B)

SPECIAL RULE FOR PERSONAL SERVICE INCOME.—

Subparagraph (A) shall not apply to any transportation income which is income derived from personal services performed by the taxpayer, unless such income is attributable to transportation which— "(i) begins in the United States and ends in a possession of the United States, or "(ii) begins in a possession of the United States and ends in the United States." (b) 4 PERCENT TAX ON GROSS TRANSPORTATION INCOME.—

(1) IN GENERAL.—Part II of subchapter N of chapter 1 (relating to nonresident alien individuals and foreign corporations) is amended by redesignating subpart C as subpart D and by inserting after subpart B the following new subpart: "Subpart C—Tax on Gross Transportation Income "Sec. 887. Imposition of tax on gross transportation income of nonresident aliens and foreign corporations. "SEC. 887. IMPOSITION OF TAX ON GROSS TRANSPORTATION INCOME OF NONRESIDENT ALIENS AND FOREIGN CORPORATIONS.

"(a) IMPOSITION OF TAX.—In the case of any nonresident alien individual or foreign corporation, there is hereby imposed for each taxable year a tax equal to 4 percent of such individual's or corporation's United States source gross transportation income for such taxable year. "(b)

UNITED STATES SOURCE GROSS TRANSPORTATION INCOME.—

"(1) IN GENERAL.—Except as provided in paragraph (2), the term 'United States source gross transportation income' means any gross income which is transportation income (as defined in section 863(c)(3)) to the extent such income is treated as from sources in the United States under section 863(c). "(2) EXCEPTION FOR CERTAIN INCOME EFFECTIVELY CONNECTED WITH BUSINESS IN THE UNITED STATES.—The term 'United States

source gross transportation income' shall not include any income taxable under section 871(b) or 882. "(3) DETERMINATION OF EFFECTIVELY CONNECTED INCOME.—For

•

purposes of this chapter, transportation income of any taxpayer shall not be treated as effectively connected with the conduct of a trade or business in the United States unless— "(A) the taxpayer has a fixed place of business in the United States involved in the earning of transportation income, and "(B) substantially all of the United States source gross transportation income (determined without regard to paragraph (2)) of the taxpayer is attributable to regularly scheduled transportation (or, in the case of income from the leasing of a vessel or aircraft, is attributable to a fixed place of business in the United States).

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Page:United States Statutes at Large Volume 100 Part 3.djvu/730

 100 STAT. 2538

PUBLIC LAW 99-514—OCT. 22, 1986 "(c) COORDINATION WITH OTHER PROVISIONS.—Any income taxable

under this section shall not be taxable under section 871, 881, or 882." (2) CLERICAL AMENDMENT.—The table of subparts for part II of subchapter N is amended by striking out the item relating to subpart C and inserting in lieu thereof the following: "Subpart C. Tax on gross transportation income. "Subpart D. Miscellaneous provisions." • '« • i. (c) LIMITATION ON EXCLUSION OF TRANSPORTATION INCOME.—

(1) Subsection (b) of section 872 (relating to exclusions) is amended by striking out paragraphs (1) and (2) and inserting in lieu thereof the following: "(1) SHIPS OPERATED BY CERTAIN NONRESIDENTS.—Gross income derived by an individual resident of a foreign country from the operation of a ship or ships if such foreign country grants an equivalent exemption to citizens of the United States and to corporations organized in the United States. "(2) AIRCRAFT OPERATED BY CERTAIN NONRESIDENTS.—Gross

income derived by an individual resident of a foreign country from the operation of aircraft if such foreign country grants an equivalent exemption to citizens of the United States and to corporations organized in the United States." (2) Section 872(b) is amended by adding at the end thereof the following new paragraphs: "(5) CERTAIN RENTAL INCOME.—Income to which paragraphs (1) and (2) apply shall include income which is derived from the rental on a full or bareboat basis of a ship or ships or aircraft, as the case may be. "(6) APPLICATION TO DIFFERENT TYPES OF TRANSPORTATION.—

The Secretary may provide that this subsection be applied separately with respect to income from different types of transportation." (3) Subsection (a) of section 883 (relating to exclusions from gross income) is amended by striking out paragraphs (1) and (2) and by inserting in lieu thereof the following: "(1) SHIPS OPERATED BY CERTAIN FOREIGN CORPORATIONS.—

Gross income derived by a corporation organized in a country from the operation of a ship or ships if such country grants an equivalent exemption to citizens United States and to corporations organized in the States.

foreign foreign of the United

"(2) AIRCRAFT OPERATED BY CERTAIN FOREIGN CORPORATIONS.—

Gross income derived by a corporation organized in a foreign country from the operation of aircraft if such foreign country grants an equivalent exemption to citizens of the United States and to corporations organized in the United States." (4) Section 883(a) is amended by adding at the end thereof the following new paragraph: "(4) SPECIAL RULES.—The rules of paragraphs (5) and (6) of section 872(b) shall apply for purposes of this subsection." (5) Section 883 is amended by adding at the end thereof the following new subsection: "(c) TREATMENT OF CERTAIN FOREIGN CORPORATIONS.—

"(1) IN GENERAL.—Paragraphs (1) and (2) of subsection (a) shall not apply to any foreign corporation if 50 percent or more of the value of the stock of such corporation is owned by

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100 STAT. 2539

individuals who a r e not residents of such foreign country or a n other foreign country meeting the requirements of such paragraph s (1) and (2). "(2) T R E A T M E N T

O F CONTROLLED

FOREIGN

CORPORATIONS.—

Paragraph (1) shall not apply to any foreign corporation which is a controlled foreign corporation (as defined in section 957(a)). "(3) EXCEPTION FOR PUBLICLY TRADED CORPORATIONS.—Para-

g r a p h (1) shall not apply to any foreign corporation— "(A) the stock of which is primarily and regularly traded on a n established securities m a r k e t in the foreign country in which such corporation is organized, or "(B) which is wholly owned (either directly or indirectly) by a n other corporation m e e t i n g the requirements of subparagraph (A) and is organized in the s a m e foreign country a s such other corporation. "(4) STOCK OWNERSHIP THROUGH ENTITIES.—For purposes of

paragraph (1), stock owned (directly or indirectly) by or for a corporation, partnership, t r u s t, or e s t a t e shall be t r e a t e d as being owned proportionately by its shareholders, part n e r s, or beneficiaries. Stock considered to be owned by a person by reason of the application of the preceding sentence shall, for purposes of applying such sentence, be treated a s actually owned by such person." (d) R E P E A L O F SPECIAL T R E A T M E N T FOR LEASED AIRCRAFT, E T C. —

Section 861 is amended by striking o u t subsection (e) and by redesignating subsection (f) a s subsection (e). (e) CONFORMING AMENDMENT.—Section 863(b)(1) is amended by striking out " transportation or other services" and inserting in lieu thereof "services". (0 EFFECTIVE D A T E S. —

(1) IN GENERAL.—Except as provided in paragraph (2), the amendments m a d e by this section shall apply to taxable year s beginning after December 31, 1986. (2) SPECIAL RULE FOR CERTAIN LEASED PROPERTY.—The amend -

m e n t s m a d e by subsections (a) and (d) shall not apply to any income a t t r i b u t a b l e to property held by the tax p a y e r on January 1, 1986, if such property w a s first leased by the tax p a y e r before January 1, 1986, in a lease to which section 863(c)(2)(B) or 861(e) of the I n t e r n a l Revenue Code of 1954 (as in effect on the day before the date of the e n a c t m e n t of this Act) applied. (3) SPECIAL RULE FOR CERTAIN SHIPS LEASED BY THE UNITED STATES NAVY.—

(A) IN GENERAL.—In the case of any property described in subparagraph (B), paragraph (2) shall be applied by substituting "1987" for "1986" each place it appears. (B) PROPERTY TO WHICH PARAGRAPH APPLIES.—Property

described in this subparagraph consists of 4 ships which a r e to be leased by the United States Navy and which a r e the subject of I n t e r n a l Revenue Service rulings bearing the following dates and which involved the following a m o u n t of financing, respectively: •'

March. 1986 % February 5, 1986 April 22, 1986 May 22, 1986

$176,844,000 64,567,000 64,598,000 175,300,000.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/732

 100 S T A T. 2540

P U B L I C L A W 9 9 - 5 1 4 — O C T. 22, 1986

SEC. 1213. SOURCE RULE FOR SPACE AND CERTAIN OCEAN ACTIVITIES.

(a) GENERAL RULE.—Section 863 (relating to items not specified in section 861 or 862) is amended by adding a t the end thereof the following new subsections: "(d) SOURCE RULES FOR S P A C E AND CERTAIN O C E A N ACTIVITIES.—

"(1) IN GENERAL.—Except a s provided in regulations, any income derived from a space or ocean activity— "(A) if derived by a United States person, shall be sourced in the United States, and "(B) if derived by a person other than a United States person, shall be sourced outside the United States. "(2)

SPACE

OR OCEAN

ACTIVITY.—For

purposes

of

para-

g r a p h (D— "(A) IN GENERAL.—The term 'space or ocean activity' vj^, means— ,r "(i) any activity conducted in space, and '^^. "(ii) any activity conducted on or under w a t e r not r within the jurisdiction (as recognized by the United, \i States) of a foreign country, possession of the United States, or the United States. I Such term includes any activity conducted in Antarctica. "(B) EXCEPTION FOR CERTAIN ACTIVITIES.—The term 'space

''* ^

•' '"'

or ocean activity' shall not include— "(i) any activity giving rise to transportation income (as defined in section 863(c)), ^ "(ii) any activity giving rise to international commu.'^ ^ nications income (as defined in subsection (e)(2)), and ' "(iii) any activity with respect to mines, oil and gas wells, or other n a t u r a l deposits to the extent within the United States or any foreign country or possession of the United States (as defined in section 638). For purposes of applying section 638, the jurisdiction of any foreign country shall not include any jurisdiction not recognized by the United States.

"(e) INTERNATIONAL COMMUNICATIONS I N C O M E. — "(1) SOURCE RULES.— ' "(A) UNITED STATES PERSONS.—In the case of any United

States person, 50 percent of any international communications income shall be sourced in the United States and 50 percent of such income shall be sourced outside the United States. "(B) FOREIGN PERSONS.—

"(i) IN GENERAL.—Except as provided in regulations or clause (ii), in the case of any person other than a United States person, any international communications income shall be sourced outside the United States. "(ii) SPECIAL RULE FOR INCOME ATTRIBUTABLE TO OFFICE OR F IX E D PLACE OF BUSINESS IN THE UNITED

STATES.—In the case of any person (other than a United States person) w h o m a i n t a i n s a n office or other fixed place of business in the United States, any international communications income a t t r i b u t a b l e to such office or other fixed place of business shall be sourced in the United States. "(2) DEFINITION.—For purposes of this section, the term 'international communications income' includes all income derived

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2541

from the transmission of communications or data from the United States to any foreign country or from any foreign country to the United States." (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 1986. SEC. 1214. LIMITATIONS ON SPECIAL TREATMENT OF 80-20 CORPORATIONS. (a) INTEREST PAYMENTS.—

(1) IN GENERAL.—Subparagraph (B) of section 861(a)(1) (relating to interest) is amended to read as follows: "(B) interest from a resident alien individual or domestic corporation, if such individual or corporation meets the 80percent foreign business requirements of subsection (c)(1),". (2) FOREIGN BUSINESS REQUIREMENTS.—Subsection (c) of section 861 is amended to read as follows: "(c) FOREIGN BUSINESS REQUIREMENTS.— "(1) FOREIGN BUSINESS REQUIREMENTS.—

"(A) IN GENERAL.—An individual or corporation meets the 80-percent foreign business requirements of this paragraph if it is shown to the satisfaction of the Secretary that at least 80 percent of the gross income frpm all sources of such individual or corporation for the Resting period is active foreign business income. "(B) ACTIVE FOREIGN BUSINESS INCOME.—For purposes of

subparagraph (A), the term 'active foreign business income' means gross income which— "(i) is derived from sources outside the United States (as determined under this subchapter), and ^'' '^ "(ii) is attributable to the active conduct of a trade or business in a foreign country or possession of the >n; United States by the individual or corporation (or by a subsidiary or chain of subsidiaries of such corporation). "(C) TESTING PERIOD.—For purposes of this subsection, the term 'testing period' means the 3-year period ending with the close of the taxable year of the individual or corporation preceding the payment (or such part of such period as may be applicable). If the individual or corporation has no gross income for such 3-year period (or part thereof), the testing period shall be the taxable year in which the payment is made. "(2) LOOK-THRU WHERE RELATED PERSON RECEIVES INTEREST.—

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"(A) IN GENERAL.—In the case of interest received by a related person from a resident alien individual or domestic corporation meeting the 80-percent foreign business requirements of paragraph (1), subsection (a)(l)(A) shall apply only to a percentage of such interest equal to the percentage which— "(i) the gross income of such individual or corporation for the testing period from sources outside the United States (as determined under this subchapter), is of ' ' "(ii) the total gross income of such individual or corporation for the testing period. "(B) RELATED PERSON.—For purposes of this paragraph, the term 'related person' has the meaning given such term by section 954(d)(3), except that—

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