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Page:United States Statutes at Large Volume 100 Part 3.djvu/734

 100 STAT. 2542

PUBLIC LAW 99-514—OCT. 22, 1986 .. "(i) such section shall be applied by substituting ' the
 * j.,
 * 't -. jj

individual or corporation making the payment ' for 'controlled foreign corporation' each place it appears, and "(ii) such section shall be applied by substituting '10 percent' for '50 percent' each place it a p p e a r s. " (b) TREATMENT

OF DIVIDENDS.—Subparagraph

(A) of

section

861(a)(2) (relating to dividends) is amended to read a s follows: "(A) from a domestic corporation other than a corporation which has a n election in effect under section 936, or". (c) W I T H H O L D I N G T A X N O T TO A P P L Y TO CERTAIN INTEREST AND DIVIDENDS.—

(1) NONRESIDENT ALIENS.—Section 871 (relating to tax on nonresident aliens) is amended by redesignating subsection (i) a s subsection (j) and by inserting after subsection (h) the following new subsection: "(i) T A X N O T TO A P P L Y TO CERTAIN INTEREST AND DIVIDENDS.—

"(1) IN GENERAL.—No tax shall be imposed under paragraph (1)(A) or (1)(C) of subsection (a) on any a m o u n t described in paragraph (2). "(2)

AMOUNTS

TO W H I C H

PARAGRAPH

(D

APPLIES.—The

a m o u n t s described in this paragraph a r e a s follows: ,,, "(A) I n t e r e s t on deposits, if such interest is not effectively connected with the conduct of a trade or business within the United States. "(B) A p e r c e n t a g e of any dividend paid by a domestic corporation m e e t i n g the 80-percent foreign business 3;jc requirements of section 861(c)(l) equal to the percentage determined for purposes of section 861(c)(2)(A). , "(C) Income derived by a foreign central bank of issue from b a n k e r s ' acceptances. "(3) DEPOSITS.—For purposes of paragraph (2), the term 'deposits' means a m o u n t s which a r e — "(A) deposits with persons c a r r y i n g on the b a n k i n g business, "(B) deposits or w i t h d r a w a b l e accounts with savings institutions c h a r t e r e d and supervised a s savings and loan or similar associations under Federal or State law, b u t only to the e x t e n t that a m o u n t s paid or credited on such deposits or accounts a r e deductible under section 591 (determined without regard to sections 265 and 291) in computing the tax a b l e income of such institutions, and "(C) a m o u n t s held by a n insurance company under a n a g r e e m e n t to pay interest the r e o n. " (2) FOREIGN CORPORATIONS.—Section 881 (relating to tax on

foreign corporations) is amended by redesignating subsection (d) a s subsection (e) and by inserting after subsection (c) the following new subsection: "(d) T A X N O T TO A P P L Y TO CERTAIN INTEREST AND D IV I D E N D S. — N o

tax shall be imposed under paragraph (1) or (3) of subsection (a) on any a m o u n t described in section 871(i)(2)." (3) WITHHOLDING TAX.—Subsection (c) of section 1441 (relating to exceptions) is amended by adding a t the end thereof the following new pargigraph: "(10) EXCEPTION FOR CERTAIN INTEREST A N D DIVIDENDS.—No

tax shall be required to be deducted and withheld under subsection (a) from any a m o u n t described in section 871(i)(2)."

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Page:United States Statutes at Large Volume 100 Part 3.djvu/735

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2543

(4) REPORTING REQUIREMENTS.—Subparagraph (B) of section 6049(b)(5) is amended by striking out "or" at the end of clause (ii), by striking out the period at the end of clause (iii) and inserting in lieu thereof ", or", and by adding at the end thereof the following new clause: "(iv) such amount is described in section 871(i)(2)." (5) CONFORMING AMENDMENTS.—

(A) Paragraph (1) of section 861(a) (as amended by subsection (a)) is amended by striking out subparagraphs (A) and (E) and by redesignating subparagraphs (B), (C), (D), (F), (G), and (H) as subparagraphs (A), (B), (C), (D), (E), and (F), respectively. •^ * * " (B) Subparagraph (D) of section 861(a)(1) (as so redesignated) is amended by striking out "paragraph (2) of subsection (c)" and inserting in lieu thereof "subparagraph (B) of section 871(i)(3)". xul* (C) Subsection (d) of section 861 is amended to read as follows: "(d) SPECIAL RULE FOR APPLICATION OF SUBSECTION (a)(2)(B).—For

purposes of subsection (a)(2)(B), if the foreign corporation has no gross income from any source for the 3-year period (or part thereof) specified, the requirements of such subsection shall be applied with respect to the taxable year of such corporation in which the payment of the dividend is made." (d) EFFECTIVE DATES.—

(1) IN GENERAL.—The amendments made by this section shall apply to payments after December 31, 1986. (2) TREATMENT OF CERTAIN INTEREST.—

(A) IN GENERAL.—The amendments made by this section shall not apply to any interest paid or accrued on any obligation outstanding on December 31, 1985. The preceding sentence shall not apply to any interest paid pursuant to any extension or renewal of such an obligation agreed to after December 31, 1985. (B) SPECIAL RULE FOR RELATED PAYEE.—If the payee of any interest to which subparagraph (A) applies is related (within the meaning of section 904(d)(2)(G) of the Internal Revenue Code of 1986) to the payor, such interest shall be treated for purposes of section 904 of such Code as if the payor were a controlled foreign corporation (within the meaning of section 957(a) of such Code). (3) TRANSITIONAL RULE.— (A) YEARS BEFORE 1988.—In

applying the amendments made by this section to any payment made by a corporation in a taxable year of such corporation beginning before January 1, 1988, the requirements of clause (ii) of section 861(c)(1)(B) of the Internal Revenue Code of 1986 (relating to active business requirements), as amended by this section, shall not apply to gross income of such corporation for taxable years beginning before January 1, 1987. (B) YEARS AFTER 1987.—In applying the amendments

" ,

made by this section to any payment made by a corporation in a taxable year of such corporation beginning after December 31, 1987, the testing period for purposes of section 861(c) of such Code (as so amended) shall not include any taxable year beginning before January 1, 1987.

••:• (4) CERTAIN DIVIDENDS.—

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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/736

 100 STAT. 2544

PUBLIC LAW 99-514—OCT. 22, 1986

1^,^;* uw

(A) IJJ QEjEjj^L.—The amendments m a d e by this section shall not apply to any dividend paid before January 1, 1991, by a qualified corporation with respect to stock which was o u t s t and i n g on May 31, 1985. (B) Q U A L I F I E D CORPORATION.—For purposes of s u b p a r a -

^ a

g r a p h (A), the term 'qualified corporation' means any business systems corporation which— (i) w a s incorporated in Delaware in February, 1979, (ii) is h e a d q u a r t e r e d in G a r d e n City, N e w York, and (iii) the p a r e n t corporation of which is a resident of Sweden.

SEC. 1215. RULES FOR ALLOCATING INTEREST. ETC., TO FOREIGN SOURCE INCOME. (a) GENERAL RULE.—Section 864 (relating to definitions) is amended by adding a t the e n d thereof the following new subsection: "(e) RULES FOR ALLOCATING INTEREST, E T C. — For purposes of t h i s

subchapter (except a s provided in regulations)— "(1) T R E A T M ENT OF AFFILIATED G R O U P S. — The tax a b l e income

of each m e m b e r of a n affiliated g r o u p from sources outside the United States shall b e determined by allocating and apportioning interest expense of each m e m b e r a s if all m e m b e r s of such group w e r e a single corporation. "(2) GROSS INCOME METHOD MAY NOT BE USED FOR INTEREST.—

All allocations and a p p o r t i o n m e n t s of interest expense shall be m a d e on the basis of assets r a the r than gross income. "(3) TAX-EXEMPT ASSETS N O T TAKEN INTO ACCOUNT.—For pur-

poses of allocating and a p p o r t i o n i n g any deductible expense, any tax-exempt asset (and any income from such a n asset) shall not be t a k e n into account. A similar r u l e shall apply in the case of any dividend (other than a qualifying dividend a s defined in section 243(b)) for which a deduction is allowable under section 243 or 245(a) and any stock the dividends on which would be so deductible and would not be qualifying dividends (as so defined). "(4) BASIS O F STOCK I N CERTAIN CORPORATIONS ADJUSTED FOR

EARNINGS AND PROFITS CHANGES.—For purposes of allocating and apportioning expenses on the basis of assets, the adjusted basis of any asset which is stocl^ in a corporation which is not included in the affiliated g r o u p and in which m e m b e r s of the affiliated g r o u p own 10 percent or more of the total combined voting power of all classes of stock entitled to vote in such corporation shall be— "(A) increased by the a m o u n t of the e a r n i n g s and profits of such corporation a t t r i b u t a b l e to such stock and accumulated during the period the tax p a y e r held such stock, or "(B) reduced (but not below zero) by any deficit in earnings and profits of such corporation a t t r i b u t a b l e to such stock for such period. "(5) AFFILIATED G R O U P. — For purposes of t h i s

'j'if

subsection—

"(A) IN GENERAL.—Except a s provided in subparagraph (B), the term 'affiliated group' has the m e a n i n g given such term by section 1504 (determined without regard to paragraph (4) of section 1504(b)). "(B) T R E A T M ENT OF CERTAIN FINANCIAL INSTITUTIONS.—

For purposes of subparagraph (A), any corporation described in subparagraph (C) shall be t r e a t e d a s a n includible corporation for purposes of section 1504 only for purposes of

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Page:United States Statutes at Large Volume 100 Part 3.djvu/737

 PUBLIC LAW 99-514—OCT. 22, 1986 Bl

100 STAT. 2545

applying such section separately to corporations so described. "(C) DESCRIPTION.—A corporation is described in this subparagraph if— "(i) such corporation is a financial institution described in section 581 or 591, "(ii) the business of such financial institution is predominantly with persons other than related persons (within the meaning of subsection (d)(4)) or their customers, and "(iii) such financial institution is required by State or Federal law to be operated separately from any other entity which is not such an institution. "(6) ALLOCATION AND APPORTIONMENT OF OTHER EXPENSES.—

Expenses other than interest which are not directly allocable and apportioned to any specific income producing activity shall be allocated and apportioned as if all members of the affiliated group were a single corporation. "(7) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations providing— "(A) for the resourcing of income of any member of an affiliated group or modifications to the consolidated return regulations to the extent such resourcing or modification is necessary to carry out the purposes of this section, "(B) for direct allocation of interest expense incurred to carry out an integrated financial transaction to any interest (or interest-type income) derived from such transaction, and "(C) for the apportionment of expenses allocated to for/' eign source income among the members of the affiliated ':•: group and various categories of income described in section 904(d)(1)." (b) CLERICAL AMENDMENTS.—

(1) The section heading for section 864 is amended to read as follows: SEC. 864. DEFINITIONS AND SPECIAL RULES."

(2) The table of sections for part I of subchapter N of chapter 1 is amended by striking out the item relating to section 864 and inserting in lieu thereof the following: "Sec. 864. Definitions and special rules." (c) EFFECTIVE DATES.—

(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 1986. (2) TRANSITIONAL RULES.— (A) GENERAL PHASE-IN.—Except as provided in subpara-

' '\- ^

graph (B), in the case of the 1st 3 taxable years of the taxpayer beginning after December 31, 1986, the amendments made by this section shall apply only to the applicable percentage (determined under the following table) of the interest expenses paid or accrued by the taxpayer during the taxable year with respect to an aggregate amount of indebtedness which does not exceed the aggre-

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Page:United States Statutes at Large Volume 100 Part 3.djvu/738

 100 STAT. 2546

PUBLIC LAW 99-514—OCT. 22, 1986

OS

gate amount of indebtedness outstanding on November 16, 1985:

^'^'

•"•• •" ' ' > - ^ ' • ' = ' • » > •?*!:• ^ In the case of the: 1st taxable year 2nd taxable year 3rd taxable year

,^js, s>r

••'-• • • ^ • s

The applicable percentage is: 25 50 75.

-•

(B) CONSOLIDATION RULE NOT TO APPLY TO CERTAIN INTEREST.— INTEREST ATTRIBUTABLE TO INCREASE IN INDEBTEDi NESS FROM JANUARY 1, 1984, THROUGH MAY 28, 1985.—In

.^,,^ ,..

. >,|,,.,j

the case of the first 5 taxable years of the taxpayer beginning after December 31, 1986, with respect to interest expenses attributable to the excess of— (I) the amount of the outstanding debt of the taxpayer on May 29, 1985, over (II) the amount of the outstanding debt of the taxpayer on December 31, 1983, paragraph (1) of section 864(e) of the Internal Revenue Code of 1986 (as added by this section) shall apply only to the applicable percentage (determined under the following table) of such interest expenses paid or accrued by the taxpayer during the taxable year:

,, ^.

.

'•"- -• '

•>.

" ^ "'i..; j-fj

•,;.

The applicable percentage is: 16% SSVa 50 66% 83%.

In the case of the: 1st taxable year 2nd taxable year 3rd taxable year 4th taxable year 5th taxable year

(ii) I N T E R E S T A T T R I B U T A B L E TO I N C R E A S E I N I N D E B T E D -

N E S S FROM JANUARY 1, 1983, THROUGH DECEMBER 31,

1983.—In the case of the first 4 taxable years of the taxpayer beginning after December 31, 1986, with respect to interest expenses attributable to the excess of(I) the amount of the outstanding debt of the taxpayer on January 1, 1984, over (II) the amount of the outstanding debt of the taxpayer on December 31, 1982, paragraph (1) of section 864(e) of the Internal Revenue Code of 1986 (as added by this section) shall apply only to the applicable percentage (determined under the following table) of such interest expenses paid or accrued by the taxpayer during the taxable year:

Hi.br.-;

•;. tu 4 '

^^ ' c •',.

".i"

'

In the case of the: 1st taxable year 2nd taxable year 3rd taxable year 4th taxable year

The applicable percentage is: 20 40 60 80.

(iii) ORDERING RULE.—For purposes of this subparagraph, indebtedness outstanding on November 16, 1985, shall be treated as attributable first to any excess described in clause (i), then to any excess described in clause (ii), and then to other indebtedness. (iv) TREATMENT OF AFFILIATED GROUP.—For purposes of this subparagraph, all members of the same affili-

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Page:United States Statutes at Large Volume 100 Part 3.djvu/739

 w

PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2547

ated group of corporations (as defined in section 864(e)(5)(A) of the Internal Revenue Code of 1986, as added by this section) shall be treated as one taxpayer whether or not such members filed a consolidated return. (C) SPECIAL RULE.—In the case of the first 9 taxable years beginning after December 31, 1986, the following applicable percentages shall be applied (in lieu of those set forth in subparagraph (A)) to interest expenses paid or accrued with respect to the amount of indebtedness described in subparagraph (D) or (E): The applicable percentage is: 10 20 30 40 50 60 70 80 90.

In the case of the: 1st taxable year 2nd taxable year 3rd taxable year 4th taxable year 5th taxable year 6th taxable year 7th taxable year 8th taxable year 9th taxable year (D)

INDEBTEDNESS

OUTSTANDING

ON

M A Y 29,

1985.—

Indebtedness is described in this subparagraph if it is indebtedness (which was outstanding on May 29, 1985) of a corporation incorporated on June 13, 1917, which has its principal place of business in Bartlesville, Oklahoma. (E) INDEBTEDNESS OUTSTANDING ON MAY 29, 1985.—Indebt-

edness is described in this subparagraph if it is indebtedness (which was outstanding on May 29, 1985) of a member of an affiliated group (as defined in section 1504(a)), the common parent of which was incorporated on August 26, 1926, and has its principal place of business in Harrison, New York. (3) SPECIAL RULE.—

(A) IN GENERAL.—In the case of a qualified corporation, in lieu of applying paragraph (2), the amendments made by this section shall not apply to interest expenses allocable to any indebtedness to the extent such indebtedness does not exceed $500,000,000 if— (i) the indebtedness was incurred to develop or improve existing property that is owned by the taxpayer on November 16, 1985, and was acquired with the intent to develop or improve the property, (ii) the loan agreement with respect to the indebtedness provides that the funds are to be utilized for purposes of developing or improving the above property, and (iii) the debt to equity ratio of the companies that join in the filing of the consolidated return is less than 15 percent. (B) QUALIFIED CORPORATION.—For purposes of subparagraph (A), the term "qualified corporation" means a corporation— (i) which was incorporated in Delaware on June 29, 1964, (ii) the principal subsidiary of which is a resident of Arkansas, and

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Page:United States Statutes at Large Volume 100 Part 3.djvu/740

 100 STAT. 2548

PUBLIC LAW 99-514—OCT. 22, 1986

I y i

I

(iii) which is a member of an affiliated group the average daily United States production of oil of which is less than 50,000 barrels and the average daily United States refining of which is less than 150,000 barrels. (4) SPECIAL RULES FOR SUBSIDIARY.—The amendments made by this section shall not apply to interest on up to the applicable dollar amount of indebtedness of a subsidiary incorporated on February 11, 1975, the indebtedness of which on May 6, 1986, included— (A) $100,000,000 face amount of 11% percent notes due in 1990, (B) $100,000,000 of 8% percent notes due in 1989, (C) 6% percent Japanese yen notes due in 1991, and (D) 5% percent Swiss franc bonds due in 1994. For purposes of this paragraph, the term "applicable dollar amount" means $600,000,000 in the case of taxable years beginning in 1987 through 1991, $500,000,000 in the case of the taxable year beginning in 1992, $400,000,000 in the case of the taxable year beginning in 1993, $300,000,000 in the case of the taxable year beginning in 1994, $200,000,000 in the case of the taxable year beginning in 1995, $100,000,000 in the case of the taxable year beginning in 1996, and zero in the case of taxable years beginning after 1996. (5) SPECIAL RULE FOR FINANCIAL CORPORATION.—For purposes of section 864(e)(5) of the Internal Revenue Code of 1986 (as added by this section), a corporation shall be treated as described in subparagraph (C) of such section for any taxable year if— (A) such corporation is a Delaware corporation incorporated on August 20, 1959, and (B) such corporation was primarily engaged in the financing of dealer inventory or consumer purchases on May 29, 1985, and at all times thereafter before the close of the taxable year.

i

,

(6) S P E C I A L RULES FOR A L L O C A T I N G GENERAL A N D A D M I N I S T R A -

T IV E EXPENSES.—

.,.:..

(A) IN GENERAL.—In the case of an affiliated group of domestic corporations the common parent of which has its principal office in New Brunswick, New Jersey, and has a certificate of organization which was filed with the Secretary of the State of New Jersey on November 10, 1887, the amendments made by this section shall not apply to the phase-in percentage of general and administrative expenses paid or incurred in its 1st 3 taxable years beginning after December 31, 1986. (B) PHASE-IN PERCENTAGE.—For purposes of subparagraph (A):

In the case of taxable f, years beginning in: ' * 1987 1988 1989

-

,..

., -

.

The phase-in percentage is: 75 50 25.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/741

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2549

SEC. 1216. 1-YEAR MODIFICATION IN REGULATIONS PROVIDING FOR ALLOCATION OF RESEARCH AND EXPERIMENTAL EXPENDITURES.

(a) GENERAL RULE.—For purposes of section 861(b), section 8620)), and section 863(b) of the Internal Revenue Code of 1954, notwithstanding section 864(e) of such Code— (1) 50 percent of all amounts allowable as a deduction for qualified research and experimental expenditures shall be apportioned to income from sources within the United States and deducted from such income in determining the amount of taxable income from sources within the United States, and (2) the remaining portion of such amounts shall be apportioned on the basis of gross sales or gross income. The preceding sentence shall not apply to any expenditures described in section 1.861-8(e)(3)(i)(B) of the Income Tax Regulations. (b) QuAUFiED RESEARCH A N D EXPERIMENTAL EXPENDITURES.—For

purposes of this section— (1) IN GENERAL.—The term "qualified research and experimental expenditures" means amounts— (A) which are research and experimental expenditures within the meaning of section 174 of such Code, and (B) which are attributable to activities conducted in the United States. (2) TREATMENT OF DEPRECIATION, ETC.—Rules similar to the rules of section 174(c) of such Code shall apply. (c) EFFECTIVE DATE.—This section shall apply to taxable years beginning after August 1, 1986, and on or before August 1, 1987.

Subtitle C—Taxation of Income Earned Through Foreign Corporations SEC. 1221. INCOME SUBJECT TO CURRENT TAXATION. (a) DEFINITION INCOME.—

OF

FOREIGN

PERSONAL

HOLDING

COMPANY

(1) IN GENERAL.—Subsection (c) of section 954 (defining foreign personal holding company income) is amended to read as follows: "(c) FOREIGN PERSONAL HOLDING COMPANY INCOME.—

"(1) IN GENERAL.—For purposes of subsection (a)(1), the term 'foreign personal holding company income' means the portion of the gross income which consists of: "(A) DIVIDENDS, ETC.—Dividends, interest, royalties, rents, and annuities. "(B) CERTAIN PROPERTY TRANSACTIONS.—The excess of gains over losses from the sale or exchange of property— "(i) which gives rise to income described in subparagraph (A) (after application of paragraph (2)(A)), or "(ii) which does not give rise to any income. This subparagraph shall not apply to gain from the sale or exchange of any property which, in the hands of the taxpayer, is property described in section 1221(1) or to gain from the sale or exchange of any property by a regular dealer in such property. "(C) COMMODITIES TRANSACTIONS.—The excess of gains over losses from transactions (including futures, forward.

71-194 0 - 89 - 25: QL. 3 Part3

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Page:United States Statutes at Large Volume 100 Part 3.djvu/742

 100 STAT. 2550

PUBLIC LAW 99-514—OCT. 22, 1986

and similar transactions) in any commodities. This subpara• ii graph shall not apply to gains or losses which— "(i) arise out of bona fide hedging transactions ^1 reasonably necessary to the conduct of any business by .j^ a producer, processor, merchant, or handler of a commodity in the manner in which such business is ^^'.,; customarily and usually conducted by others, "(ii) are active business gains or losses from the sale of commodities, but only if substantially all of the controlled foreign corporation's business is as an active producer, processor, merchant, or handler of commodities, or "(iii) are foreign currency gains or losses (as defined in section 9880))) attributable to any section 988 transactions. "(D) FOREIGN CURRENCY GAINS.—The excess of foreign currency gains over foreign currency losses (as defined in ,,., section 988(b)) attributable to any section 988 transactions. This subparagraph shall not apply in the case of any trans^,^.. action directly related to the business needs of the controlled foreign corporation. ^^<j

^,

"(E)

INCOME

EQUIVALENT TO INTEREST.—Any

income

equivalent to interest, including income from commitment fees (or similar amounts) for loans actually made. "(2) EXCEPTION FOR CERTAIN AMOUNTS.— "(A) R E N T S AND ROYALTIES DERIVED IN ACTIVE BUSINESS.—

- Pi

?;/-,

Foreign personal holding company income shall not include rents and royalties which are derived in the active conduct of a trade or business and which are received from a person other than a related person (within the meaning of subsection (d)(3)). "(B) CERTAIN EXPORT FINANCING.—Foreign personal holding company income shall not include any interest which is derived in the conduct of a banking business and which is export financing interest (as defined in section 904(d)(2)(G)). "(3) CERTAIN INCOME RECEIVED FROM RELATED PERSONS.—

"(A) IN GENERAL.—Except as provided in subparagraph (B), the term 'foreign personal holding company income' does not include— "(i) dividends and interest received from a related .. person which (I) is created or organized under the laws t of the same foreign country under the laws of which the controlled foreign corporation is created or orga5j.;ifj;; nized, and (II) has a substantial part of its assets used in its trade or business located in such same foreign ., country, and "(ii) rents and royalties received from a related 3. J person for the use of, or the privilege of using, property j^ within the country under the laws of which the controlled foreign corporation is created or organized. "(B) EXCEPTION NOT TO APPLY TO ITEMS WHICH REDUCE SUBPART F INCOME.—Subparagraph (A) shall not apply in

the case of any interest, rent, or royalty to the extent such interest, rent, or royalty reduces the payor's subpart F income." (2) CONFORMING AMENDMENT.—Subparagraph (A) of section

864(d)(5) (relating to certain provisions not to apply) is amended

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Page:United States Statutes at Large Volume 100 Part 3.djvu/743

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2551

by striking out clauses (iii) and (iv) and inserting in lieu thereof the following: "(iii) Subparagraph (B) of section 954(c)(2) (relating to certain export financing). "(iv) Clause (i) of section 954(c)(3)(A) (relating to certain income received from related persons)." (b) DEFINITION OF INSURANCE INCOME.—

(1) IN GENERAL.—Subsection (a) of section 953 (defining income derived from the insurance of United States risks) is amended to read as follows: "(a) GENERAL RULE.—For purposes of section 952(a)(l), the term 'insurance income' means any income which— "(1) is attributable to the issuing (or reinsuring) of any insurance or annuity contract— "(A) in connection with property in, liability arising out of activity in, or in connection with the lives or health of residents of, a country other than the country under the If/ laws of which the controlled foreign corporation is created or organized, or "(B) in connection with risks not described in subparagraph (A) as the result of any arrangement whereby another corporation receives a substantially equal amount of premiums or other consideration in respect of issuing (or reinsuring) a contract described in subparagraph (A), and "(2) would (subject to the modifications provided by paragraphs (1) and (2) of subsection (b)) be taxed under subchapter L of this chapter if such income were the income of a domestic insurance company." (2) SPECIAL RULE FOR CERTAIN CAPTIVE INSURANCE COMPA-

NIES.—Section 953 is amended by adding at the end thereof the following new subsection: "(c) SPECIAL RULE FOR CERTAIN CAPTIVE INSURANCE COMPANIES.—

"(1) IN GENERAL.—For purposes only of taking into account «„. related person insurance income— "(A) the term 'United States shareholder' means, with respect to any foreign corporation, a United States person (as defined in section 957(c)) who owns (within the meaning of section 958(a)) any stock of the foreign corporation, and "(B) the term 'controlled foreign corporation' has the meaning given to such term by section 957(a) determined by substituting '25 percent or more' for 'more than 50 percent. lu; "(2) RELATED PERSON INSURANCE INCOME.—For purposes of this subsection, the term 'related person insurance income' means any insurance income attributable to a policy of insur.-. ance or reinsurance with respect to which the primary insured is a United States shareholder in the foreign corporation or a related person (within the meaning of section 954(d)(3)) to such a shareholder. "(3) EXCEPTIONS.— "(A) CORPORATIONS NOT HELD BY INSUREDS.—Paragraph

(1) shall not apply to any foreign corporation if at all times during the taxable year of such foreign corporation— "(i) less than 20 percent of the total combined voting power of all classes of stock of such corporation entitled to vote, and i V •; "(ii) less than 20 percent of the total value of such corporation,

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Page:United States Statutes at Large Volume 100 Part 3.djvu/744

 100 STAT. 2552

PUBLIC LAW 99-514—OCT. 22, 1986

l©s ' <4 >' -It, ^ It J: •

is owned (directly or indirectly under the principles of section 883(c)(4)) by persons who are the primary insured under any policy of insurance or reinsurance issued by such corporation or who are related persons (within the meaning of section 954(d)(3)) to any such primary insured. "(B) D E MINIMIS EXCEPTION.—Paragraph (1) shall not apply to any foreign corporation for a taxable year of such corporation if the related person insurance income of such corporation for such taxable year is less than 20 percent of its insurance income for such taxable year determined without regard to those provisions of subsection (a)(1) which limit insurance income to income from countries other than the country in which the corporation was created or organized. "(C)

ELECTION TO TREAT INCOME AS EFFECTIVELY CON-

1 ^'

NECTED.—Paragraph (1) shall not apply to any foreign corporation for any taxable year if— "(i) such corporation elects (at such time and in such manner as the Secretary may prescribe)— - '^ • > "(I) to treat its related person insurance income for such taxable year as income effectively con* c nected with the conduct of a trade or business in the United States, and b'i "(II) to waive all benefits with respect to related person insurance income under any income tax t-i treaty between the United States and any foreign • -:: i. > country, and "(ii) such corporation meets such requirements as the Secretary shall prescribe to ensure that the tax im> posed by this chapter on such income is paid. "(D) SPECIAL RULES FOR SUBPARAGRAPH (C).— "(i) ELECTION IRREVOCABLE.—Any election

- '^•< under which made and all subsequent taxable years unless revoked with the consent of the Secretary. (ii) EXEMPTION FROM TAX IMPOSED BY SECTION 4371.— The tax imposed by section 4371 shall not apply with respect to any related person insurance income treated as effectively connected with the conduct of a trade or business within the United States under subparagraph (C). '
 * •. 'M V subparagraph (C) shall apply to the taxable year for

"(4) TREATMENT OF MUTUAL INSURANCE COMPANIES.—In

the

case of a mutual insurance company— -» " "(A) this subsection shall apply, "(B) policyholders of such company shall be treated as f shareholders, and j'»' "(C) appropriate adjustments in the application of this subpart shall be made under regulations prescribed by the Secretary. "(5) REGULATIONS.—The Secretary shall prescribe such regu" lations as may be necessary to carry out the purposes of this subsection, including regulations preventing the^ avoidance of >. this subsection through cross insurance arrangements or otherwise." (3) CONFORMING AMENDMENTS.—

(A) Paragraph (1) of section 952(a) (defining subpart F income) is amended to read as follows:

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Page:United States Statutes at Large Volume 100 Part 3.djvu/745

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2553

"(1) insurance income (as defined under section 953),". (B) Subsection (e) of section 954 is amended by striking out the last sentence. (C) Subsection (b) of section 957 is amended by striking out "income derived from insurance of United States risks" and inserting in lieu thereof "insurance income". (D) The section heading for section 953 is amended to read as follows: "SEC. 953. INSURANCE INCOME."

(E) The table of sections for subpart F of part III of subchapter N of chapter 1 is amended by striking out the item relating to section 953 and inserting in lieu thereof the following: "Sec. 953. Insurance income." (c) REPEAL OF EXCLUSION FOR REINVESTED SHIPPING INCOME.—

(1) IN GENERAL.—Paragraph (2) of section 9540?) (relating to exclusion for reinvested shipping income) is hereby repealed. (2) SPACE AND CERTAIN OCEAN ACTIVITIES INCLUDED.—Subsec-

tion if) of section 954 (defining foreign base company shipping income) is amended by adding at the end thereof the following new sentence: "Such term includes any income derived from a space or ocean activity (as defined in section 863(d)(2))." (3) CONFORMING AMENDMENTS.—

ofy f

(A)(i) Section 954 is amended by striking out subsection (g) and by redesignating subsection (h) as subsection (g). (ii) Paragraph (5) of section 954(a) is amended by striking out "determined under subsection (h)" and inserting in lieu thereof "determined under subsection (g)". (B) Subparagraph (A) of section 955(a)(1) is amended by striking out "all prior taxable years" and inserting in lieu thereof "all prior taxable years beginning before 1987". (C) Subparagraph (A) of section 955(a)(2) is amended by striking out "at the close of the preceding taxable year" and inserting in lieu thereof "as of the close of the last taxable year beginning before 1987".

(d) EXCEPTION WHERE FOREIGN CORPORATION NOT AVAILED OF TO

REDUCE TAX.—Paragraph (4) of section 954(b) (relating to exception for foreign corporations not availed of to reduce taxes) is amended to read as follows: "(4) EXCEPTION FOR CERTAIN INCOME SUBJECT TO HIGH FOREIGN

TAXES.—For purposes of subsection (a) and section 953, foreign base company income and insurance income shall not include in any item of income received by a controlled foreign corporation if the taxpayer establishes to the satisfaction of the Secretary -B" that such income was subject to an effective rate of income tax imposed by a foreign country greater than 90 percent of the maximum rate of tax specified in section 11. The preceding sentence shall not apply to foreign base company oil-related income described in subsection (a)(5)." (e) DEFINITION OF RELATED PERSON.—

(1) Paragraph (3) of section 954(d) (defining related person) is amended by striking out subparagraphs (A), (B), and (C), and inserting in lieu thereof the following:

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Page:United States Statutes at Large Volume 100 Part 3.djvu/746

 100 STAT. 2554

PUBLIC LAW 99-514—OCT. 22, 1986

"(A) such person is an individual, corporation, partner&aL\; ship, trust, or estate which controls, or is controlled by, the controlled foreign corporation, or "(B) such person is a corporation, partnership, trust, or estate which is controlled by the same person or persons which control the controlled foreign corporation." e (2) Paragraph (3) of section 954(d) is amended by striking out the last 2 sentences and inserting in lieu thereof the following: "For purposes of the preceding sentence, control means, with respect to a corporation, the ownership, directly or indirectly, of 1 stock possessing 50 percent or more of the total voting power of 5 all classes of stock entitled to vote or of the total value of stock B of such corporation. In the case of a partnership, trust, or estate, control means the ownership, directly or indirectly, of 50 percent or more (by value) of the beneficial interests in such partnership, trust, or estate. For purposes of this paragraph, rules similar to the rules of section 958 shall apply." (f) REPEAL OF CERTAIN LIMITATIONS ON AMOUNT OF SUBPART F

INCOME.—Section 952 (defining subpart F income) is amended by striking out subsections (c) and (d) and inserting in lieu thereof the following: "(c) LIMITATION.— "^ • • " - - ^"^ 'r.''^a Ti -^l' -v.^/,.:/.,..-.,. ^T. "(1) IN GENERAL.— riBm'. "(A) SUBPART F INCOME LIMITED TO CURRENT EARNINGS

''• '

AND PROFITS.—For purposes of subsection (a), the subpart F income of any controlled foreign corporation for any taxable year shall not exceed the earnings and profits of such corporation for such taxable year. "(B) CERTAIN PRIOR YEAR DEFICITS MAY BE TAKEN INTO ACCOUNT.—

<

^

^' V. 5, i '^. i

"(i) IN GENERAL.—The amount included in the gross income of any United States shareholder under section 951(a)(l)(A)(i) for any taxable year and attributable to a qualified activity shall be reduced by the amount of such shareholder's pro rata share of any qualified deficit. "(ii) QUALIFIED DEFICIT.—The term 'qualified deficit' means any deficit in earnings and profits of the controlled foreign corporation for any prior taxable year which began after December 31, 1986, and for which the controlled foreign corporation was a controlled foreign corporation; but only to the extent such deficit— "(I) is attributable to the same qualified activity as the activity giving rise to the income being offset, and "(II) has not previously been taken into account under this subparagraph. "(iii) QUALIFIED ACTIVITY.—For purposes of this paragraph, the term 'qualified activity' means any activity giving rise to— "(I) foreign base company shipping income, "(II) foreign base company oil related income, "(III) in the case of a qualified insurance com', tr pany, insurance income or ' ' ~ "(IV) in the case of a qualified financial institution, foreign personal holding company income.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/747

 PUBLIC LAW 99-514—OCT. 22, 1986 t n ^ .i^< 1

^r t ^ ^ .J '(\

100 STAT. 2555

"(iv) PRO RATA SHARE.—For purposes of this paragraph, the shareholder's pro rata share of any deficit for any prior taxable year shall be determined under rules similar to rules under section 951(a)(2) for whichever of the following yields the smaller share: "(I) the close of the taxable year, or "(II) the close of the taxable year in which the deficit arose. "(v) QUALIFIED INSURANCE COMPANY.—For purposes of this subparagraph, the term 'qualified insurance company' means any controlled foreign corporation predominantly engaged in the active conduct of an insurance business in the taxable year and in the prior taxable years in which the deficit arose. "(vi) QUALIFIED FINANCIAL INSTITUTION.—For purposes of this paragraph, the term 'qualified financial institution' means any controlled foreign corporation predominantly engaged in the active conduct of a banking, financing, or similar business in the taxable year and in the prior taxable year in which the deficit arose.

"(2) RECHARACTERIZATION IN SUBSEQUENT TAXABLE YEARS.—If

the subpart F income of any controlled foreign corporation for any taxable year was reduced by reason of paragraph (1)(A), any excess of the earnings and profits of such corporation for any subsequent taxable year over the subpart F income of such foreign corporation for such taxable year shall be recharacterized as subpart F income under rules similar to the rules applicable under section 904(f)(5)." (g) EFFECTIVE DATES.—

'

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

r '

(2) SPECIAL RULE FOR REPEAL OF EXCLUSION FOR REINVESTMENT SHIPPING INCOME.—

-

(A) IN GENERAL.—In the case of any qualified controlled foreign corporation— (i) the amendments made by subsection (c) shall apply to taxable years ending on or after January 1, 1992, and (ii) sections 955(a)(1)(A) and 955(a)(2)(A) of the Internal Revenue Code of 1986 (as amended by subsection (c)(3)) shall be applied by substituting "ending before 1992" for "beginning before 1987".

,

^ ^

(B) QUALIFIED CONTROLLED FOREIGN CORPORATION.—For

purposes of subparagraph (A), the term "qualified controlled foreign corporation" means any controlled foreign corporation (as defined in section 957 of such Code)— (i) if the United States agent of such corporation is a domestic corporation incorporated on March 13, 1951, and -^n (ipif_ (I) the certificate of incorporation of such corporation is dated July 23, 1963, and !'':. • • (II) such corporation has a wholly owned subsidiary and its certificate of incorporation is dated November 2, 1965.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/748

 100 STAT. 2556

PUBLIC LAW 99-514—OCT. 22, 1986 (3) EXCEPTION FOR CERTAIN REINSURANCE CONTRACTS.—

(A) IN GENERAL.—In the case of the 1st 3 taxable years of a qualified controlled foreign insurer beginning after ' M, December 31, 1986, the amendments made by this section shall not apply to the phase-in percentage of any qualified reinsurance income. 9fi ri) (B) PHASE-IN PERCENTAGE.—For purposes of subparagraph (A): '*

In the case of taxable years beginning in: 1987 1988 1989

•

..

The phase-in percentage is: 75 50 25.

(C) QUALIFIED CONTROLLED FOREIGN INSURER.—For

pur-

' foreign insurer" means— (i) any controlled foreign corporation which on August 16, 1986, was a member of an affiliated group (as defined in section 1504(a) of the Internal Revenue Code of 1986 without regard to subsection (b)(3) thereof) ^ which had as its common parent a corporation incorporated in Delaware on July 9, 1967, with executive " offices in New York, New York, or (ii) any controlled foreign corporation which on August 16, 1986, was a member of an affiliated group (as so defined) which had as its common parent a "i« * ' ' corporation incorporated in Delaware on March 31, 1982, with executive offices in Philadelphia, Pennsylvania. (D) QUALIFIED REINSURANCE INCOME.—For purposes of this paragraph, the term 'qualified reinsurance income' -'Tit means any insurance income attributable to risks (other than risks described in section 953(a) or 954(e) of such Code as in effect on the day before the date of the enactment of this Act) assumed as of August 16, 1986, under a reinsurance contract in effect on such date. For purposes of the preceding sentence, insurance income shall mean the ikir, underwriting income (as defined in section 832(b)(3) of such Code) and investment income derived from an amount of assets (to be segregated and separately identified) equiva-nl lent to the ordinary and necessary insurance reserves and necessary surplus equal to Vs of earned premium attributable to such contracts. SEC. 1222. TESTING CONTROLLED FOREIGN CORPORATIONS AND FOREIGN PERSONAL HOLDING COMPANIES BY VALUE AND VOTING POWER. (a) DEFINITION OF CONTROLLED FOREIGN CORPORATION.—
 * ' poses of this paragraph, the term "qualified controlled

^,

(1) IN GENERAL.—Subsection (a) of section 957 (defining controlled foreign corporation) is amended to read as follows: "(a) GENERAL RULE.—For purposes of this subpart, the term 'controlled foreign corporation' means any foreign corporation if more than 50 percent of— "(1) the total combined voting power of all classes of stock of r>ii such corporation entitled to vote, or "(2) the total value of the stock of such corporation,

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Page:United States Statutes at Large Volume 100 Part 3.djvu/749

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2557

is owned (within the meaning of section 958(a)), or is considered as owned by applying the rules of ownership of section 958(b), by United States shareholders on any day during the taxable year of such foreign corporation." (2) SPECIAL RULE FOR INSURANCE.—Subsection (b) of section

957 is amended by striking out "all classes of stock" and inserting in lieu thereof "all classes of stock (or more than 25 percent of the total value of stock)". (b) DEFINITION OF FOREIGN PERSONAL HOLDING COMPANY.—Para-

graph (2) of section 552(a) (defining foreign personal holding company) is amended to read as follows: "(2) STOCK OWNERSHIP REQUIREMENT.—At any time during the taxable year more than 50 percent of— "(A) the total combined voting power of all classes of stock of such corporation entitled to vote, or "(B) the total value of the stock of such corporation, is owned (directly or indirectly) by or for not more than 5 ,j individuals who are citizens or residents of the United States group')." (c) EFFECTIVE DATE.—
 * (hereinafter in this part referred to as the 'United States

(1) IN GENERAL.—The amendments made by this section shall apply to taxable years of foreign corporations beginning after I December 31, 1986; except that for purposes of applying sections 951(a)(1)(B) and 956 of the Internal Revenue Code of 1986, such amendments shall take effect on August 16, 1986. (2) TRANSITIONAL RULE.—In the case of any corporation treated as a controlled foreign corporation by reason of the amendments made by this section, property acquired before August 16, 1986, shall not be taken into account under section 956(b) of the Internal Revenue Code of 1986. (3) SPECIAL RULE FOR BENEFICIARY OF TRUST.—In the case of an { individual— , (A) who is a beneficiary of a trust which was established on December 7, 1979, under the laws of a foreign jurisdiction, and (B) who was not a citizen or resident of the United States on the date the trust was established, amounts which are included in the gross income of such beneficiary under section 951(a) of the Internal Revenue Code of 1986 with respect to stock held by the trust (and treated as distributed to the trust) shall be treated as the first amounts which are distributed by the trust to such beneficiary and as amounts to which section 959(a) of such Code applies. SEC. 1223. SUBPART F DE MINIMIS RULE.

(a) GENERAL RULE.—Paragraph (3) of section 954(b) (relating to special rule where foreign base company income is less than 10 percent or more than 70 percent of gross income) is amended to read as follows: "(3) D E MINIMIS, ETC., RULES.—For purposes of subsection (a) and section 953— "(A) DE MINIMIS RULE.—If the sum of foreign base company income (determined without regard to paragraph (5)) s^jtj) and the gross insurance income for the taxable year is less than the lesser of— "(i) 5 percent of gross income, or "(ii) $1,000,000,

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Page:United States Statutes at Large Volume 100 Part 3.djvu/750

 100 STAT. 2558

PUBLIC LAW 99-514—OCT. 22, 1986

. fc < no part of the gross income for the taxable year shall be t r e a t e d as foreign base company income or insurance lo income. "(B)

FOREIGN

BASE COMPANY

INCOME

A N D INSURANCE

noi*

INCOME IN EXCESS OF 70 PERCENT OF GROSS INCOME.—If the s u m of the foreign base company income (determined with.1. out regard to paragraph (5)) and the gross insurance income for the taxable year exceeds 70 percent of gross income, the / *t- * e n t i r e gross income for the tax a b l e year shall, subject to the •.T.t. ^ provisions of paragraph s (4) and (5), be t r e a t e d a s foreign base company income o r insurance income (whichever is s r ' >r appropriate). "(C) GROSS INSURANCE INCOME.—For purposes of s u b p a r a -

- ^;*•

g r a p h s (A) and (B), the term 'gross insurance income' means any item of gross income t a k e n into account in determining insurance income under section 953."

(b) TECHNICAL AMENDMENTS. —

(1) Clause (ii) of section 864(d)(5)(A) is amended by striking out "less than 10 p e r c e n t " and inserting in lieu thereof "less than 5 percent or $1,000,000". (2) Clause (i) of section 881(c)(4)(A) is amended by striking out " "less than 10 p e r c e n t " and inserting in lieu thereof "less than 5 percent or $1,000,000". (c) EFFECTIVE D A T E. — The amendments m a d e by this section shall apply to taxable years beginning after December 31, 1986. SEC. 1224. REPEAL OF SPECIAL TREATMENT OF POSSESSIONS CORPORATIONS. (a) GENERAL RULE.—Section 957 (defining controlled foreign corporations; United States persons) is amended by striking o u t subsection (c) and by redesignating subsection (d) as subsection (c). (b) EFFECTIVE D A T E S. —

be '> s '

(1) IN GENERAL.—The amendment m a d e by subsection (a) shall apply to tax a b l e year s of foreign corporations beginning after December 31, 1986; except that for purposes of applying sections 951(a)(1)(B) and 956 of the I n t e r n a l Revenue Code of 1986. such amendments shall t a k e effect on August 16, 1986. (2) TRANSITIONAL RULE.—In the case of any corporation t r e a t e d a s a controlled foreign corporation by reason of the amendment m a d e by subsection (a), property acquired before August 16, 1986, shall not be t a k e n into account under section 9560?) of the I n t e r n a l Revenue Code of 1986.

SEC. 1225. ONLY EFFECTIVELY CONNECTED CAPITAL GAINS AND LOSSES OF FOREIGN CORPORATIONS TAKEN INTO ACCOUNT FOR PURPOSES OF ACCUMULATED EARNINGS TAX AND PER54, SONAL HOLDING COMPANY PROVISIONS. (a) ACCUMULATED E A R N I N G S TAX.—Subsection (b) of section 535

(relating to adjustments to taxable income) is amended by adding a t the end thereof the following new paragraph: "(9) SPECIAL RULE FOR CAPITAL GAINS A N D LOSSES O F FOREIGN

CORPORATIONS.—In the case of a foreign corporation, paragraph ^' (6) shall be applied by taking into account only g a i n s and losses which a r e effectively connected with the conduct of a trade or business within the United States and a r e not e x e m p t from tax under treaty."

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Page:United States Statutes at Large Volume 100 Part 3.djvu/751

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2559

OJ) PERSONAL HOLDING COMPANY PROVISIONS.—Subsection (b) of

section 545 (relating to adjustments to taxable income) is amended by adding at the end thereof the following new paragraph: "(7) SPECIAL RULE FOR CAPITAL GAINS AND LOSSES OF FOREIGN

CORPORATIONS.—In the case of a foreign corporation, paragraph (5) shall be applied by taking into account only gains and losses which are effectively connected with the conduct of a trade or business within the United States and are not exempt from tax under treaty." (c) EFFECTIVE DATE.—The amendments made by this section shall apply to gains and losses realized on or after March 1, 1986. SEC. 1226. DEDUCTIONS FOR DIVIDENDS RECEIVED FROM CERTAIN FOREIGN CORPORATIONS. (a) GENERAL RULE.—Subsection (a) of section 245 is amended to read as follows: "(a) DIVIDENDS FROM TIONS.—

10-PERCENT OWNED FOREIGN

CORPORA-

"(1) IN GENERAL.—In the case of dividends received by a corporation from a qualified 10-percent owned foreign corporation, there shall be allowed as a deduction an amount equal to the percent (specified in section 243 for the taxable year) of the U.S.-source portion of such dividends. "(2) QUALIFIED IO-PERCENT OWNED FOREIGN CORPORATION.—

For purposes of this subsection, the term 'qualified 10-percent owned foreign corporation' means any foreign corporation (other than a foreign personal holding company or passive foreign investment company) if at least 10 percent of the stock of such corporation (by vote and value) is owned by the taxpayer. (3) U.S.-SOURCE PORTION.—For purposes of this subsection, the U.S.-source portion of any dividend is an amount which bears the same ratio to such dividend as— "(A) the post-1986 undistributed U.S. earnings, bears to "(B) the total post-1986 undistributed earnings. "(4) PosT-1986 UNDISTRIBUTED EARNINGS.—For purposes of this subsection, the term 'post-1986 undistributed earnings' has the meaning given to such term by section 902(c)(1). "(5) PoST-1986 UNDISTRIBUTED U.S. EARNINGS.—For purpoSeS of

this subsection, the term 'post-1986 undistributed U.S. earnings' means the portion of the post-1986 undistributed earnings which is attributable to— "(A) income of the qualified 10-percent owned foreign corporation which is effectively connected with the conduct ^ of a trade or business within the United States and subject " to tax under this chapter, or, _, "(B) any dividend received (directly or through a wholly Zip owned foreign corporation) from a domestic corporation at least 80 percent of the stock of which Osy vote and value) is owned (directly or through such wholly owned foreign corporation) by the qualified 10-percent owned foreign corporation. "(6) SPECIAL RULE.—If the 1st day on which the requirements of paragraph (2) 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 post1986 undistributed U.S. earnings of such corporation shall be

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Page:United States Statutes at Large Volume 100 Part 3.djvu/752

 100 STAT. 2560

PUBLIC LAW 99-514—OCT. 22, 1986 determined by only taking into account periods beginning on and after the 1st day of the 1st taxable year in which such requirements are met. "(7) COORDINATION WITH SUBSECTION (b).—Earnings and profits of any qualified 10-percent owned foreign corporation for any taxable year shall not be taken into account under this subsection if the deduction provided by subsection (b) would be allowable with respect to dividends paid out of such earnings and profits. "(8) COORDINATION WITH SECTION 902.—In the case of a dividend received by a corporation from a qualified 10-percent owned foreign corporation, no credit shall be allowed under section 901 for any taxes treated as paid under section 902 with respect to the U.S.-source portion of such dividend. "(9) COORDINATION WITH SECTION 904.—For purposes of section

904, the U.S.-source portion of any dividend received by a corporation from a qualified 10-percent owned foreign corporation shall be treated as from sources in the United States." (b) TECHNICAL AMENDMENT.—Subsection (d) of section 959 is amended by striking out the period at the end thereof and inserting in lieu thereof "; except that such distributions shall immediately reduce earnings and profits." (c) EFFECTIVE DATES.—

(1) IN GENERAL.—The amendment made by subsection (a) shall apply to distributions out of earnings and profits for taxable years beginning after December 31, 1986. (2) SUBSECTION (b).—The amendment made by subsection (b) shall apply to distributions after the date of the enactment of this Act. SEC. 1227. SPECIAL RULE FOR APPLICATION OF SECTION 954 TO CERTAIN DIVIDENDS.

(a) IN GENERAL.—For purposes of section 954(c)(3)(A) of the Internal Revenue Code of 1986, any dividends received by a qualified controlled foreign corporation (within the meaning of section 951 of such Code) during any of its 1st 5 taxable years beginning after December 31, 1986, with respect to its 32.7 percent interest in a Brazilian corporation shall be treated as if such Brazilian corporation were a related person to the qualified controlled foreign corporation to the extent the Brazilian corporation's income is attributable to its interest in the trade or business of mining in Brazil. (h) QUALIFIED CONTROLLED FOREIGN CORPORATION.—For purposes of this section, a qualified controlled foreign corporation is a corporation the greater than 99 percent shareholder of which is a company originally incorporated in Montana on July 9, 1951 (the name of which was changed on August 10, 1966). (c) EFFECTIVE DATE.—The amendment made by this section shall apply to dividends received after December 31, 1986. SEC. 1228. SPECIAL RULE FOR APPLYING SECTION 897.

(a) IN GENERAL.—For purposes of section 897 of the Internal Revenue Code of 1986, gain shall not be recognized on the transfer, sale, exchange, or other disposition, of shares of stock of a United States real property holding company, if— (1) such United States real property holding company is a Delaware corporation incorporated on January 17, 1984,

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Page:United States Statutes at Large Volume 100 Part 3.djvu/753

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2561

(2) the transfer, sale, exchange, or other disposition is to any member of a qualified ownership group, (3) the recipient of the share of stock elects, for purposes of such section 897, a carryover basis in the transferred shares, and (4) an election under this section applies to such transfer, sale, exchange, or other disposition. (b) MEMBER OF A QUALIFIED OWNERSHIP GROUP.—For purposes of this section, the term "member of a qualified ownership group" means a corporation incorporated on June 16, 1890, under the laws of the Netherlands or a corporation incorporated on October 18, 1897, under the laws of the United Kingdom or any corporation owned directly or indirectly by either or both such corporations. (c) ELECTION.—An election under this section shall be made at such time and in such manner as the Secretary of the Treasury or his delegate may prescribe, and an election under this section may only be made with respect to 1 transfer, sale, exchange, or other disposition. (d) EFFECTIVE DATE.—The provisions of this section shall take effect on the date of the enactment of this section.

Subtitle D—Special Tax Provisions for United States Persons SEC. 1231. MODIFICATIONS TO SECTION 936. (a) TREATMENT OF INTANGIBLES.— (1) COST SHARING METHOD.—Section

936(h)(5)(C)(i)(I)

is

amended— (A) by striking out "the same proportion of the cost" and inserting in lieu thereof "the same proportion of 110 percent of the cost", and (B) by adding at the end thereof the following new sentence: "In the case of intangible property described in subsection (h)(3)(B)(i) which the electing corporation is treated as owning under subclause (II), in no event shall the i, payment required under this subclause be less than the inclusion or payment which would be required under section 367(d)(2)(A)(ii) or section 482 if the electing corporation were a foreign corporation." (2)

PROFIT

SPUT

METHOD.—Section

936(h)(5)(C)(ii)(II)

is

amended by striking out "the third sentence thereof)" and inserting in lieu thereof "the third and fourth sentences thereof, but substituting '120 percent' for '110 percent' in the second sentence thereof)". Qo) MODIFICATION OF REQUIREMENT THAT AMOUNTS B E RECEIVED IN

THE UNITED STATES.—Subsection (h) of section 936 is amended by adding at the end thereof the following new sentence: "This subsection shall not apply to any amount described in subsection (a)(l)(A)(i) received from a person who is not a related person (within the meaning of subsection (h)(3) but without regard to subparagraphs (D)(ii)(I) and (E)(i) thereof) with respect to the domestic corporation." (c) TREATMENT OF CERTAIN INVESTMENT INCOME AS QUALIFIED POSSESSION SOURCE INVESTMENT INCOME.—Subsection (d) of section

936 is amended by adding at the end thereof the following new paragraph:

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Page:United States Statutes at Large Volume 100 Part 3.djvu/754

 100 STAT. 2562

PUBLIC LAW 99-514—OCT. 22, 1986 -

"(4) INVESTMENT IN QUALIFIED CARIBBEAN BASIN COUNTRIES.—

tf;: i!;?

oo •'5, .jf X i iJ9

Ki

nrife f.' *

t«;

''

"(A) IN GENERAL.—For purposes of paragraph (2)(B), an investment in a financial institution shall, subject to such conditions as the Secretary may prescribe by regulations, be treated as for use in Puerto Rico to the extent used by such financial institution (or by the Government Development Bank for Puerto Rico or the Puerto Rico Economic Development Bank)— "(i) for investment, consistent with the goals and purposes of the Caribbean Basin Economic Recovery Act, in— "(I) active business assets in a qualified Caribbean Basin country, or "(II) development projects in a qualified Caribbean Basin country, and "(ii) in accordance with a specific authorization granted by the Government Development Bank for Puerto Rico pursuant to regulations issued by the Secretary of the Treasury of Puerto Rico. A similar rule shall apply in the case of a direct investment in the Government Development Bank for Puerto Rico or the Puerto Rico Economic Development Bank. "(B) QUALIFIED CARIBBEAN BASIN COUNTRY.—For purposes of this subsection, the term 'qualified Caribbean Basin country' means any beneficiary country (within the meaning of section 212(a)(1)(A) of the Caribbean Basin Economic Recovery Act) which meets the requirements of clauses (i) and (ii) of section 274(h)(6)(A). "(C) ADDITIONAL REQUIREMENTS.—Subparagraph (A) shall not apply to any investment made by a financial institution (or by the Government Development Bank for Puerto Rico or the Puerto Rico Economic Development Bank) unless— "(i) the person in whose trade or business such investment is made (or such other recipient of the investment) and the financial institution or such Bank certify to the Secretary and the Secretary of the Treasury of Puerto Rico that the proceeds of the loan will be promptly used to acquire active business assets or to make other authorized expenditures, and "(ii) the financial institution (or the Government Development Bank for Puerto Rico or the Puerto Rico Economic Development Bank) and the recipient of the investment funds agree to permit the Secretary and the Secretary of the Treasury of Puerto Rico to examine such of their books and records as may be necessary to ensure that the requirements of this paragraph are met."

(d) INCREASE IN AMOUNT OF GROSS INCOME WHICH MUST B E FROM TRADE OR BUSINESS.—

(1) IN GENERAL.—Subparagraph (B) of section 936(a)(2) is amended by striking out "65 percent" and inserting in lieu thereof "75 percent". (2) CONFORMING AMENDMENT.—Paragraph (2) of section 936(a) is amended by striking out subparagraph (C). (e) TREATMENT OF CERTAIN ROYALTY PAYMENTS.—

"

(1) IN GENERAL.—Section 482 (relating to allocation of income and deductions among taxpayers) is amended by adding at the

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Page:United States Statutes at Large Volume 100 Part 3.djvu/755

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2563

end thereof the following new sentence: "In the case of any transfer (or license) of intangible property (within the meaning of section 936(h)(3)(B)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible." (2) TECHNICAL AMENDMENT.—Subparagraph (A) of section 367(d)(2) (relating to transfers of intangibles treated as transfer pursuant to sale for contingent payments) is amended by adding at the end thereof the following new sentence: "The amounts taken into account under clause (ii) shall be commensurate with the income attributable to the intangible." (0 TECHNICAL CORRECTION TO PROFIT-SPLIT RULES.—The last sentence of section 936(h)(5)(C)(ii)(II) is amended by striking out "all products produced and types of service rendered" and inserting in lieu thereof "all products and types of services, within such product area, produced or rendered", (g) EFFECTIVE DATES.—

(1) IN GENERAL.—Except as provided in paragraphs (2) and (3), the amendments made by this section shall apply to taxable years beginning after December 31, 1986. (2) SPECIAL RULE FOR TRANSFER OF INTANGIBLES.—

(A) IN GENERAL.—The amendments made by subsection (e) shall apply to taxable years beginning after December 31, 1986, but only with respect to transfers after November 16, 1985, or licenses granted after such date (or before such date with respect to property not in existence or owned by the taxpayer on such date). (B) SPECIAL RULE FOR SECTION 936.—For purposes of section 936(h)(5)(C) of the Internal Revenue Code of 1986 the amendments made by subsection (e) shall apply to taxable years beginning after December 31, 1986, without regard to when the transfer (or license) was made. (3) SUBSECTION (f).—The amendment made by subsection (f) shall apply to taxable years beginning after December 31, 1982. (4) TRANSITIONAL RULE.—In the case of a corporation— (A) with respect to which an election under section 936 of the Internal Revenue Code of 1986 (relating to possessions tax credit) is in effect, (B) which produced an end-product form in Puerto Rico on or before September 3, 1982, (C) which began manufacturing a component of such K, product in Puerto Rico in its taxable year beginning in 1983, and (D) with respect to which a Puerto Rican tax exemption was granted on June 27, 1983, ,; such corporation shall treat such component as a separate product for such taxable year for purposes of determining whether such corporation had a significant business presence in Puerto Rico with respect to such product and its income with respect to such product. SEC. 1232. TREATMENT OF CERTAIN PERSONS IN PANAMA.

(a) GENERAL RULE.—Nothing in the Panama Canal Treaty (or in any agreement implementing such Treaty) shall be construed as exempting (in whole or in part) any citizen or resident of the United States from any tax under the Internal Revenue Code of 1954 or

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PUBLIC LAW 99-514—OCT. 22, 1986

1986. The preceding sentence shall apply to all taxable years whether beginning before, on, or after the date of the enactment of this Act (or in the case of any tax not imposed with respect to a taxable year, to taxable events after the date of enactment of this Act.) (b) TREATMENT OF EMPLOYEES OF PANAMA CANAL COMMISSION AND DEPARTMENT OF DEFENSE FOR PURPOSES OF SECTION 912.—Employees

of the Panama Canal Commission and civilian employees of the Defense Department of the United States stationed in Panama may exclude from gross income allowances which are comparable to the allowances excludable under section 912(1) of the Internal Revenue Code of 1986 by employees of the State Department of the United States stationed in Panama. The preceding sentence shall apply to taxable years beginning after December 31, 1986. SEC. 1233. PROVISIONS RELATING TO SECTION 911 EXCLUSION. (a) REDUCTION IN SECTION 911 EXCLUSION.—Subparagraph (A) of

section 911(b)(2) (relating to limitation on foreign earned income) is amended to read as follows: "(A) IN GENERAL.—The foreign earned income of an individual which may be excluded under subsection (a)(1) for any taxable year shall not exceed the amount of foreign earned income computed on a daily basis at an annual rate of $70,000." (b) SECTION 911 EXCLUSION NOT AVAILABLE TO INDIVIDUALS VIOLATING FEDERAL TRAVEL AND OTHER RESTRICTIONS.—Section 911(d)

(relating to definitions and special rules) is amended by redesignating paragraph (8) as paragraph (9) and by inserting after paragraph (7) the following new paragraph: "(8) LIMITATION ON INCOME EARNED IN RESTRICTED COUNTRY.—

"(A) IN GENERAL.—If travel (or any transaction in connection with such travel) with respect to any foreign country is subject to the regulations described in subparagraph (B) during any period— "(i) the term 'foreign earned income' shall not include any income from sources within such country attributable to services performed during such period, "(ii) the term 'housing expenses' shall not include any expenses allocable to such period for housing in ^' - •*^' such country or for housing of the spouse or dependents of the taxpayer in another country while the taxpayer '* •''" ' is present in such country, and "(iii) an individual shall not be treated as a bona fide resident of, or as present in, a foreign country for any • ' ' ' day during which such individual was present in such country during such period. "(B) REGULATIONS.—For purposes of this paragraph, regulations are described in this subparagraph if such regulations— ' "(i) have been adopted pursuant to the Trading With the Enemy Act (50 U.S.C. App. 1 et seq.), or the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.), and "(ii) include provisions generally prohibiting citizens and residents of the United States from engaging in '-• transactions related to travel to, from, or within a '•' foreign country.

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"(C) EXCEPTION.—Subparagraph (A) shall not apply to any individual during any period in which such individual's activities are not in violation of the regulations described in subparagraph (B)." (c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. SEC. 1234. FOREIGN COMPLIANCE PROVISIONS. (a) INFORMATION RETURNS.—

(1) IN GENERAL.—Subpart A of part III of subchapter A of chapter 61 (relating to information concerning persons subject to special provisions) is amended by inserting after section 6039D the following new section: "SEC. 6039E. INFORMATION CONCERNING RESIDENT STATUS.

"(a) GENERAL RULE.—Notwithstanding any other provision of law, any individual who— "(1) applies for a United States passport (or a renewal thereof), or "(2) applies to be lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws, shall include with any such application a statement which includes the information described in subsection (b). "(b) INFORMATION TO B E PROVIDED.—Information required under subsection (a) shall include— "(1) the taxpayer's TIN (if any), "(2) in the case of a passport applicant, any foreign country in which such individual is residing, "(3) in the case of an individual seeking permanent residence, information with respect to whether such individual is required to file a return of the tax imposed by chapter 1 for such individual's most recent 3 taxable years, and "(4) such other information as the Secretary may prescribe. "(c) PENALTY.—Any individual failing to provide a statement required under subsection (a) shall be subject to a penalty equal to $500 for each such failure, unless it is shown that such failure is due to reasonable cause and not to willful neglect. "(d) INFORMATION TO B E PROVIDED TO SECRETARY.—Notwithstand-

ing any other provision of law, any agency of the United States which collects (or is required to collect) the statement under subsection (a) shall— "(1) provide any such statement to the Secretary, and "(2) provide to the Secretary the name (and any other identifying information) of any individual refusing to comply with the provisions of subsection (a). "(e) EXEMPTION.—The Secretary may by regulations exempt any class of individuals from the requirements of this section if he determines that applying this section to such individuals is not necessary to carry out the purposes of this section." (2) CONFORMING AMENDMENT.—The table of sections for subpart A of part III of subchapter A of chapter 61 is amended by inserting after the item relating to section 6039D the following new item: "Sec. 6039E. Information concerning resident status."

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Page:United States Statutes at Large Volume 100 Part 3.djvu/758

 100 STAT. 2566

PUBLIC I^AW 99-514—OCT. 22, 1986 (3) EFFECTIVE DATE.—The amendments made by this subsection shall apply to applications submitted after December 81, 1987 (or, if earlier, the effective date which shall not be earlier than January 1, 1987) of the initial regulations issued under section 6039E of the Internal Revenue Code of 1986 as added by this subsection),

(b) WITHHOLDING ON CERTAIN DEFERRED PAYMENTS OUTSIDE THE UNITED STATES.—

(1) IN GENERAL.—Subsection (d) of section 3405 (relating to definitions and special rules) is amended by adding at the end thereof the following new paragraph: "(13) ELECTION MAY NOT BE MADE WITH RESPECT TO CERTAIN PAYMENTS OUTSIDE THE UNITED STATES.—

"(A) IN GENERAL.—Except as provided in subparagraph (B), in the case of any periodic payment or nonperiodic distribution which is to be delivered outside of the United ""^ States, no election may be made under subsection (a)(2) or . ^ (b)(3) with respect to such payment. ,'sw"(g) EXCEPTION.—Subparagraph (A) shall not apply if the recipient certifies to the payor, in such manner as the ^.. "'•:•' Secretary may prescribe, that such person is not— ^•''' "(i) a United States citizen who is a bona fide resident of a foreign country, or ^*^"(ii) an individual to whom section 877 applies." (2) EFFECTIVE DATE.—The amendment made by this subsection shall apply to payments after December 31, 1986. SEC. 1235. TREATMENT OF CERTAIN PASSIVE FOREIGN INVESTMENT COMPANIES.

(a) GENERAL RULE.—Subchapter P of chapter 1 is amended by adding at the end thereof the following new part: "PART VI—TREATMENT OF CERTAIN PASSIVE FOREIGN INVESTMENT COMPANIES "Subpart A. Interest on tax deferral. "Subpart B. Treatment of qualified electing funds. "Subpart C. General provisions.

''

'. " ' • '•

•'•'''

"Subpart A—Interest on Tax Deferral "Sec. 1291. Interest on tax deferral.

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.

i

"SEC. 1291. INTEREST ON TAX DEFERRAL. "(a) TREATMENT OF DISTRIBUTIONS AND STOCK DISPOSITIONS.—

"(1) DISTRIBUTIONS.—If a United States person receives an excess distribution in respect of stock in a passive foreign investment company, then— "(A) the amount of the excess distribution shall be allocated ratably to each day in the taxpayer's holding period for the stock, "(B) with respect to such excess distribution, the taxpayer's gross income for the current year shall include (as ordinary income) only the amounts allocated under subparagraph (A) to— "(i) the current year, or • • •.'. >. "(ii) any period in the taxpayer's holding period before the 1st day of the 1st taxable year of the com-

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Page:United States Statutes at Large Volume 100 Part 3.djvu/759

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2567

pany for which it was a passive foreign investment company (or, if later, January 1, 1987), and "(C) the tax imposed by this chapter for the current year shall be increased by the deferred tax amount (determined under subsection (c)). "(2) DISPOSITIONS.—If the taxpayer disposes of stock in a passive foreign investment company, then the rules of paragraph (1) shall apply to any gain recognized on such disposition in the same manner as if such gain were an excess distribution. ,j., "(3) DEFINITIONS.—For purposes of this section— "(A) HOLDING PERIOD.—The taxpayer's holding period shall be determined under section 1223; except that, in the case of an excess distribution, such holding period shall be treated as ending on the date of such distribution. "(B) CURRENT YEAR.—The term 'current year' means the taxable year in which the excess distribution or disposition occurs. "(4) COORDINATION WITH SECTION 904.—Subparagraph (B) of paragraph (1) shall not apply for purposes of section 904. "(5) SECTION 902 NOT TO APPLY.—Section 902 shall not apply to any dividend paid by a passive foreign investment company unless such company is a qualified electing fund. "(b) EXCESS DISTRIBUTION.—

"(1) IN GENERAL.—For purposes of this section, the term 'excess distribution' means any distribution in respect of stock received during any taxable year to the extent such distribution does not exceed its ratable portion of the total excess distribution (if any) for such taxable year. "(2) TOTAL EXCESS DISTRIBUTION.—For purposes of this subsection— "(A) IN GENERAL.—The term 'total excess distribution' means the excess (if any) of— "(i) the amount of the distributions in respect of the stock received by the taxpayer during the taxable year, over "(ii) 125 percent of the average amount received in respect of such stock by the taxpayer during the 3 preceding taxable years (or, if shorter, the portion of J!}e !«^ the taxpayer's holding period before the taxable year). "(B) No EXCESS FOR IST YEAR.—The total excess distributions with respect to any stock shall be zero for the taxable year in which the taxpayer's holding period in such stock begins. • "(3) ADJUSTMENTS.—Under regulations prescribed by the Secretary— "(A) determinations under this subsection shall be made on a share-by-share basis, except that shares with the same holding period may be aggregated, "(B) proper adjustments shall be made for stock splits and "(C) if the taxpayer does not hold the stock during the Biilii-: entire taxable year, distributions received during such year shall be annualized, "(D) if the taxpayer's holding period includes periods during which the stock was held by another person, distributions received by such other person shall be taken into account as if received by the taxpayer, and
 * V,, stock dividends,

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Page:United States Statutes at Large Volume 100 Part 3.djvu/760

 100 STAT. 2568

PUBLIC LAW 99-514—OCT. 22, 1986

«r,v,:

"(E) if the distributions are received in a foreign currency, determinations under this subsection shall be made ' ' ' ' in such currency and the amount of any excess distribution .K.',. determined in such currency shall be translated into dollars. "(c) DEFERRED TAX AMOUNT.—For purposes of this section— "(1) IN GENERAL.—The term 'deferred tax amount' means, with respect to any distribution or disposition to which subsection (a) applies, an amount equal to the sum of— "(A) the aggregate increases in taxes described in paragraph (2), plus "(B) the aggregate amount of interest (determined in the no manner provided under paragraph (3)) on such increases in tax. "(2) AGGREGATE INCREASES IN TAXES.—For purposes of paragraph (1)(A), the aggregate increases in taxes shall be determined by multiplying each amount allocated under subsection 1o (a)(1)(A) to any taxable year (other than any taxable year referred to in subsection (a)(1)(B)) by the highest rate of tax in effect for such taxable year under section 1 or 11, whichever applies. "(3) COMPUTATION OF INTEREST.—

"(A) IN GENERAL.—The amount of interest referred to in paragraph (1)(B) on any increase determined under paragraph (2) for any taxable year shall be determined for the period— "(i) beginning on the due date for such taxable year, "(ii) ending on the due date for the taxable year with ^.,^ or within which the distribution or disposition occurs, by using the rates and method applicable under section, 6621 for underpayments of tax for such period. "(B) DUE DATE.—For purposes of this subsection, the term 'due date' means the date prescribed by law (determined without regard to extensions) for filing the return of the tax imposed by this chapter for the taxable year. '(d) COORDINATION WITH SUBPART B.—

"(1) IN GENERAL.—This section shall not apply with respect to— "(A) any distribution paid by a passive foreign investment . company during a taxable year for which such company is a qualified electing fund, and "(B) any disposition of stock in a passive foreign investment company if such company is a qualified electing fund for each of its taxable years— "(i) which begins after December 31, 1986, and for which such company is a passive foreign investment company, and "(ii) which includes any portion of the taxpayer's holding period. "(2) ELECTION TO RECOGNIZE GAIN WHERE COMPANY BECOMES QUALIFIED ELECTING FUND.— "(A) IN GENERAL.—If^

"(i) a passive foreign investment company becomes a qualified electing fund for a taxable year which begins after December 31, 1986,

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Page:United States Statutes at Large Volume 100 Part 3.djvu/761

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7/

100 STAT. 2569

"(ii) the taxpayer holds stock in such company on the first day of such taxable year, and "(iii) the taxpayer establishes to the satisfaction of the Secretary the fair market value of such stock on such first day, the taxpayer may elect to recognize gain as if he sold such stock on such first day for such fair market value. "(B) ADJUSTMENTS.—In the case of any stock to which subparagraph (A) applies— "(i) the adjusted basis of such stock shall be increased by the gain recognized under subparagraph (A), and "(ii) the taxpayer's holding period in such stock shall be treated as beginning on the first day referred to in subparagraph (A).

"(e) CERTAIN BASIS, ETC., RULES MADE APPLICABLE.—Rules similar

to the rules of subsections (c), (d), (e), and if) of section 1246 shall apply for purposes of this section; except that— "(1) the reduction under subsection (e) of such section shall be the excess of the basis determined under section 1014 over the adjusted basis of the stock immediately before the decedent's death, and "(2) such a reduction shall not apply in the case of a decedent who was not a nonresident alien at all times during his holding period in the stock. "(f) NoNRECOGNiTiON PROVISIONS.—To the extent provided in regulations, gain shall be recognized on any disposition of stock in a passive foreign investment company. "Subpart B—Treatment of Qualified Electing Funds "Sec. 1293. Current taxation of income from qualified electing funds. "Sec. 1294. Election to extend time for payment of tax on undistributed earnings. "Sec. 129.5. Qualified electing fund.

"SEC. 1 9 3 CURRENT TAXATION OF INCOME FROM QUALIFIED ELECTING 2.. FUNDS. "(a) INCLUSION.—

"(1) IN GENERAL.—Every United States person who owns (or is treated under section 1297(a) as owning) stock of a qualified electing fund at any time during the taxable year of such fund shall include in gross income— "(A) as ordinary income, such shareholder's pro rata share of the ordinary earnings of such fund for such year, iJ and "(B) as long-term capital gain, such shareholder's pro rata share of the net capital gain of such fund for such year. "(2) YEAR OF INCLUSION.—The inclusion under paragraph (1) shall be for the taxable year of the shareholder in which or with which the taxable year of the fund ends. "(b) PRO RATA SHARE.—The pro rata share referred to in subsection (a) in the case of any shareholder is the amount which would have been distributed with respect to the shareholder's stock if, on each day during the taxable year of the fund, the fund had distributed to each shareholder a pro rata share of that day's ratable share of the fund's ordinary earnings and net capital gain for such year. "(c) PREVIOUSLY TAXED AMOUNTS DISTRIBUTED TAX FREE.—If the

taxpayer establishes to the satisfaction of the Secretary that any

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Page:United States Statutes at Large Volume 100 Part 3.djvu/762

 100 STAT. 2570

PUBLIC LAW 99-514—OCT. 22, 1986

amount distributed by a passive foreign investment company is paid out of earnings and profits of the company which were included under subsection (a) in the income of any United States person, such amount shall be treated as a distribution which is not a dividend. "(d) BASIS ADJUSTMENTS.—The basis of the taxpayer's stock in a passive foreign investment company shall be— "(1) increased by any amount which is included in the income > < of the taxpayer under subsection (a) with respect to such stock, and • "(2) decreased by any amount distributed with respect to such stock which is not includible in the income of the taxpayer by reason of subsection (c). A similar rule shall apply also in the case of any property if by reason of holding such property the taxpayer is treated under section 1297(a) as owning stock in a qualified electing fund. "(e) ORDINARY EARNINGS.—For purposes of this section— "(1) ORDINARY EARNINGS.—The term 'ordinary earnings' f^ means the excess of the earnings and profits of the qualified ^•' electing fund for the taxable year over its net capital gain for such taxable year. ^,

"(2) LIMITATION ON NET CAPITAL GAIN.—A qualified electing

fund's net capital gain for any taxable year shall not exceed its earnings and profits for such taxable year. "(f) FOREIGN TAX CREDIT ALLOWED I N THE CASE OF 10-PERCENT CORPORATE SHAREHOLDER.—For purposes of section 960—

"(1) any amount included in the gross income under subsection (a) shall be treated as if it were included under section 951(a), and "(2) any amount excluded from gross income under subsection (c) shall be treated in the same manner as amounts excluded from gross income under section 959.

''

"SEC. 1294. ELECTION TO EXTEND TIME FOR PAYMENT OF TAX ON UNDISTRIBUTED EARNINGS. "(a) EXTENSION ALLOWED BY ELECTION.—

"(1) IN GENERAL.—At the election of the taxpayer, the time for p.? payment of any undistributed PFIC earnings tax liability of the taxpayer for the taxable year shall be extended to the extent i and subject to the limitations provided in this section. jv

"(2) ELECTION NOT PERMITTED WHERE AMOUNTS OTHERWISE INCLUDIBLE UNDER SECTION 551 O 951.—The taxpayer may not R

undistributed PFIC earnings tax liability attributable to a quali0 fied electing fund for the taxable year if— "(A) any amount is includible in the gross income of the t' taxpayer under section 551 with respect to such fund for riji; such taxable year, or "(B) any amount is includible in the gross income of the •->'' taxpayer under section 951 with respect to such fund for such taxable year. "0)) DEFINITIONS.—For purposes of this section— "(1) UNDISTRIBUTED PFIC EARNINGS TAX LIABILITY.—The term ' 'undistributed PFIC earnings tax liability' means, in the case of ' any taxpayer, the excess of— • "(A) the tax imposed by this chapter for the taxable year, over
 * make an election under paragraph (1) with respect to the

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Page:United States Statutes at Large Volume 100 Part 3.djvu/763

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100 STAT. 2571

"(B) the tax which would be imposed by this chapter for such year without regard to the inclusion in gross income under section 1293 of the undistributed earnings of a qualified electing fund. "(2) UNDISTRIBUTED EARNINGS.—The term 'undistributed earnings' means, with respect to any qualified electing fund, the excess (if any) of— "(A) the amount includible in gross income by reason of section 1293(a) for the taxable year, over "(B) the amount not includible in gross income by reason of section 1293(c) for such taxable year. "(c) TERMINATION OF EXTENSION.— "(1) DISTRIBUTIONS.—

^,,

"(A) IN GENERAL.—If a distribution is not includible in gross income for the taxable year by reason of section 1293(c), then the extension under subsection (a) for payment of the undistributed PFIC earnings tax liability with respect to the earnings to which such distribution is attributable shall expire on the last date prescribed by law (determined without regard to extensions) for filing the return of tax for such taxable year. "(B) ORDERING RULE.—For purposes of subparagraph (A), a distribution shall be treated as made from the most recently accumulated earnings and profits. "(2) DISPOSITIONS, ETC.—If—

"(A) stock in a passive foreign inv^tment company is disposed of during the taxable year, or .;..,... "(B) a passive foreign investment company ceases to be a qualified electing fund, all extensions under subsection (a) for payment of undistributed PFIC earnings tax liability attributable to such stock (or, in the case of such a cessation, attributable to any stock in such company) which had not expired before the date of such disposition or cessation shall expire on the last date prescribed by law (determined without regard to extensions) for filing the return of tax for the taxable year in which such disposition or cessation occurs. "(3) JEOPARDY.—If the Secretary believes that collection of an amount to which an extension under this section relates is in jeopardy, the Secretary shall immediately terminate such extension with respect to such amount, and notice and demand shall be made by him for payment of such amount. "(d) ELECTION.—The election under subsection (a) shall be made not later than the time prescribed by law (including extensions) for filing the return of tax imposed by this chapter for the taxable year. "(e) AUTHORITY TO REQUIRE BOND.—Section 6165 shall apply to any extension under this section as though the Secretary were extending the time for payment of the tax. "SEC. 1295. QUALIFIED ELECTING FUND.

"(a) GENERAL RULE.—For purposes of this part, the term 'qualified electing fund' means any passive foreign investment company if— "(1) an election under subsection (b) applies to such company for the taxable year, and "(2) such company complies for such taxable year with such requirements as the Secretary may prescribe for purposes of—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/764

 100 STAT. 2572

PUBLIC LAW 99-514—OCT. 22, 1986 "(A) determining the ordinary earnings and net capital gain of such company for the taxable year, "(B) ascertaining the ownership of its outstanding stock, and "(C) otherwise carrying out the purposes of this subpart. "(b) ELECTION.—

"(1) IN GENERAL.—A passive foreign investment company may make an election under this subsection for any taxable year. Such an election, once made, shall apply to all subsequent taxable years of such company for which such company is a passive foreign investment company unless revoked with the consent of the Secretary. "(2) WHEN MADE.—An election under this subsection may be made for any taxable year at any time before the 15th day of the 3rd month of the following taxable year.

"Subpart C—General Provisions "Sec. 1296. Passive foreign investment company. "Sec. 1297. Special rules. "SEC. 1296. PASSIVE FOREIGN INVESTMENT COMPANY.

"(a) IN GENERAL.—For purposes of this part, except as otherwise provided in this subpart the term 'passive foreign investment company' means any foreign corporation if— "(1) 75 percent or more of the gross income of such corporation for the taxable year is passive income, or "' ' "(2) the average percentage of assets (by value) held by such corporation during the taxable year which produce passive income or which are held for the production of passive income is at least 50 percent. "(b) PASSIVE INCOME.—For purposes of this section— "(1) IN GENERAL.—Except as provided in paragraph (2), the term 'passive income' has the meaning given such term by section 904(d)(2)(A) without regard to the exceptions contained in clause (iii) thereof. "(2) EXCEPTION FOR CERTAIN BANKS AND INSURANCE COMPA-

NIES.—Except as provided in regulations, the term 'passive income' does not include any income— "(A) derived in the active conduct of a banking business by an institution licensed to do business as a bank in the United States (or, to the extent provided in regulations, by any other corporation), or "(B) derived in the active conduct of an insurance business by a corporation which would be subject to tax under subchapter L if it were a domestic corporation. "(c) LOOK-THRU IN THE CASE OF 25-PERCENT OWNED CORPORA-

TIONS.—If a foreign corporation owns at least 25 percent (by value) of the stock of another corporation, for purposes of determining whether such foreign corporation is a passive foreign investment company, such foreign corporation shall be treated as if it— "(1) held its proportionate share of the assets of such other corporation, and "(2) received directly its proportionate share of the income of J' such other corporation. ..... i

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Page:United States Statutes at Large Volume 100 Part 3.djvu/765

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100 STAT. 2573

"(d) SECTION 1247 CORPORATIONS.—For purposes of this part, the term 'passive foreign investment company' does not include any foreign investment company to which section 1247 applies. "SEC. 1297. SPECIAL RULES.

"(a) ATTRIBUTION OF OWNERSHIP.—For purposes of this part— "(1) ATTRIBUTION TO UNITED STATES PERSONS.—This subsec-

tion—

'

"(A) shall apply to the extent that the effect is to treat stock of a passive foreign investment company as owned by a United States person, and "(B) except to the extent provided in regulations, shall not apply to treat stock owned (or treated as owned under this subsection) by a United States person as owned by any other person. "(2) CORPORATIONS.—

"(A) IN GENERAL.—If 50 percent or more in value of the stock of a corporation is owned, directly or indirectly, by or for any person, such person shall be considered as owning the stock owned directly or indirectly by or for such corporation in that proportion which the value of the stock which such person so owns bears to the value of all stock in the corporation. "(B) 50-PERCENT LIMITATION NOT TO APPLY TO PFIC.—For

purposes of determining whether a shareholder of a passive foreign investment company is treated as owning stock owned directly or indirectly by or for such company, subparagraph (A) shall be applied without regard to the 50percent limitation contained therein. "(3) PARTNERSHIPS, ETC.—Stock owned, directly or indirectly, by or for a partnership, estate, or trust shall be considered as being owned proportionately by its partners or beneficiaries. "(4) SUCCESSIVE APPLICATION.—Stock considered to be owned by a person by reason of the application of paragraph (2) or (3) shall, for purposes of applying such paragraphs, be considered as actually owned by such person. "(b) OTHER SPECIAL RULES.—For purposes of this part— "(1) TIME FOR DETERMINATION.—Stock held by a taxpayer shall be treated as stock in a passive foreign investment company if, at any time during the holding period of the taxpayer with respect to such stock, such corporation (or any predecessor) was a passive foreign investment corporation which was not a qualified electing fund. The preceding sentence shall not apply if the taxpayer elects to recognize gain (as of the last day of the last taxable year for which the company was a passive foreign investment company) under rules similar to the rules of section 1291(d)(2). "(2) CERTAIN CORPORATIONS NOT TREATED AS PFIC'S DURING

START-UP YEAR.—A Corporation shall not be treated as a passive foreign investment company for the first taxable year such corporation has gross income (hereinafter in this paragraph referred to as the 'start-up year') if^ "(A) no predecessor of such corporation was a passive foreign investment company, "(B) it is established to the satisfaction of the Secretary that such corporation will not be a passive foreign invest-

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Page:United States Statutes at Large Volume 100 Part 3.djvu/766

 100 STAT. 2574

PUBLIC LAW 99-514—OCT. 22, 1986

ment company for either of the 1st 2 taxable years follow• fi! ing the start-up year, and f "(C) such corporation is not a passive foreign investment company for either of the 1st 2 taxable years following the start-up year. "(3) CERTAIN CORPORATIONS CHANGING BUSINESSES.—A corporation shall not be treated as a passive foreign investment company for any taxable year if— "(A) such corporation (and any predecessor) was not a yt, passive foreign investment corporation for any prior taxable year, "(B) it is established to the satisfaction of the Secretary that— %n*3 cl "(i) substantially all of the passive income of the corporation for the taxable year is attributable to proceeds from the disposition of 1 or more active trades or "^ businesses, and "(ii) such corporation will not be a passive foreign investment company for either of the 1st 2 taxable years following such taxable year, and "(C) such corporation is not a passive foreign investment company for either of such 2 taxable years. "(4) SEPARATE
 * tfi

INTERESTS TREATED AS SEPARATE CORPORA-

TIONS.—Under regulations prescribed by the Secretary, where necessary to carry out the purposes of this part, separate classes of stock (or other interests) in a corporation shall be treated as interests in separate corporations. "(5) APPLICATION OF SECTION WHERE STOCK HELD BY OTHER

ENTITY.—Under regulations, in any case in which a United States person is treated as holding stock in a passive foreign investment company by reason of subsection (a), any disposition by the United States person or the person holding such stock which results in the United States person being treated as no longer holding such stock, shall be treated as a disposition by the United States person with respect to stock in the passive foreign investment company. "(6) DISPOSITIONS.—If a taxpayer uses any stock in a passive foreign investment company as security for a loan, the taxpayer shall be treated as having disposed of such stock. "(7) COORDINATION WITH SECTION 1246.—Section 1246 shall not apply to earnings and profits of any company for any taxable year beginning after December 31, 1986, if such company is a passive foreign investment company for such taxable year. "(c) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this part." (b) COORDINATION OF SECTION 1246 WITH SECTION 1248.—Section 1246 is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection: "(f) COORDINATION WITH SECTION 1248.—This section shall not apply to any gain to the extent such gain is treated as ordinary income under section 1248 (determined without regard to section 1248(g)(3))." (c) COORDINATION WITH SUBPART F.—Section 951 (relating

to

amounts included in gross income of United States shareholders) is amended by adding at the end thereof the following new subsection: "(f) COORDINATION WITH PASSIVE FOREIGN INVESTMENT COMPANY

PROVISIONS.—If, but for this subsection, an amount would be in-

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