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 '' •

"(C)

PUBLIC LAW 94-455—OCT. 4, 1976 CONSTRUCTIVE OWNERSHIP.—Section 318 ( r e l a t i n g to

90 STAT. 1601 26 USC 318.

constructive ownership of stock) shall apply in determining the ownership of stock, except that section 3 1 8 (a)(2)(C) and 3 1 8 (a)(3)(C) shall be applied without regard to the 50 percent limitation contained therein. " (D) SHORT TAXABLE TEARS.—If one of the taxable years of

the corporation referred to in paragraph (1)(B) is a short taxable year, then such paragraph and paragraph (6) shall be applied by substituting 'first, second, or t h i r d ' for 'first or second' each time such phrase occurs. " (5) EXCEPTIONS.—This subsection shall not apply to a purchase or other acquisition of stock (or of an interest in a partnership or trust owning stock in the corporation) — " (A) from a person whose ownership of stock would be attributed to the holder by application of paragraph (4)(C) to the extent that such stock would be so attributed; " (B) if (and to the extent) the basis thereof is determined under section 1014 or 1023 (relating to property acquired Post, p. 1872. from a decedent), or section 1015(a) or (b) (relating to property acquired by gift or transfers in t r u s t); " (C) by a security holder or creditor in exchange for the relinquishment or extinguishment in whole or part of a claim against the corporation, unless the claim was acquired for the purpose of acquiring such stock; " (D) by one or more persons who were full-time employees of the corporation at all times during the period of 36 months ending on the last day of the taxable year of the corporation (or at all times during the period of the corporation's existence, if s h o r t e r);, " (E) by a trust described in section 401(a) which is exempt from tax under section 501(a) and which benefits exclusively the employees (or their beneficiaries) of the corporation, including a member of a controlled group of corporations (within the meaning of section 1563(a) determined without regard to section 1563(a)(4) and (e)(3)(C)) which includes such corporation; " (F) by an employee stock ownership plan meeting the requirements of section 301(d) of the T a x Reduction Act of 1975; or 26 USC 46 nole. " (G) i n a recapitalization described in section 368(a)(1) (E). "(6)

SUCCESSIVE APPLICATIONS o r SUBSECTION.—If—

" (A) a net operating loss carryover is reduced under this subsection at the end of a taxable year of a corporation, and " (B) any person described in paragraph (4)(B) who owns stock of the corporation on the last day of such taxable year does not own, on the last day of the first or second succeeding taxable year of the corporation, u greater percentage of the total fair market value of the participating stock or of all the stock of the corporation than such person owned on the last day of such taxable year, then, for purposes of applying this subsection as of the end of the first or second succeeding taxable year (as the case may be), stock owned by such person at the end of such succeeding taxable year shall be considered owned by such person a t the beginning of the first o r second preceding taxable year. Other rules relating Regulations.

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 90 STAT. 1602

y:

PUBLIC LAW 94-455—OCT. 4, 1976 to the manner and extent of successive applications of this section in the case of increases in ownership and transfers of stock by the persons described in paragraph (4)(B) shall be prescribed by regulations issued by the Secretary. "(b)

26 USC 368.

REORGANIZATIONS.—

" (1) IN GENERAL.—If one corporation acquires the stock or assets of another corporation in a reorganization described in section 3 6 8 (a)(1)(A), (B), (C), (D) (but only if the requirements of section 354(b)(1) are m e t), or (F), and if— " (A) the acquiring or acquired corporation has a net operating loss for the taxable year which includes the date of the acquisition, or a net operating loss carryover from a prior taxable year to such taxable year, and " (B) the shareholders (immediately before the reorganization) of such corporation ( the 'loss corporation'), as the result of owning stock of the loss corporation, own (immediately after the reorganization) less than 40 percent of the total fair market value of the participating stock or of all the stock of the acquiring corporation, then the net operating loss carryover (if any) of the loss corporation from the taxable year which includes the date of the acquisition, and the net operating loss carryovers (if any) of the loss corporation from prior taxable years to such taxable year and subsequent taxable years, shall be reduced by the percentage determined under paragraph (2). " (2) REDUCTION OF NET OPERATING LOSS CARRYOVER.— " (A) O W N E R S H I P OF 20 PERCENT OR MORE.—If such share-

holders own less than 40 percent, but not less than 20 percent, of the total fair market value of the participating stock or of all the stock of the acquiring corporation, the reduction applicable under paragraph (1) shall be the percentage equal to the number of percentage points (including fractions thereof) less than 40 percent, multiplied by three and onehalf. "(B)

OWNERSHIP or

LESS THAN

20 PERCENT.—If

such

shareholders own less than 20 percent of the total fair market value of the participating stock or of all the stock of the acquiring corporation, the reduction applicable under paragraph (1) shall be the sum of— " (i) the percentage that would be determined under subparagraph (A) if the shareholders owned 20 percent of such stock, plus " ( i i) the percentage equal to the number of percentage points (including fractions thereof) of such stock less than 20 percent, multiplied by one and one-half. The reduction under this paragraph shall be determined by reference to the lesser of the percentage of the total fair market value of the participating stock or of all the stock of the acquiring corporation owned by such shareholders. "(3)

LOSSES o r CONTROLLED CORPORATIONS.—For purposes of

this subsection— "(A)

...

HOLDING COMPANIES.—If,

immediately

before

the

reorganization, the acquiring or acquired corporation controls a corporation which has a net operating loss for the taxable year which includes the date of the acquisition, or a net operating loss carryover from a prior taxable year to such taxable year, the acquiring or acquired corporation, as the case

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 PUBLIC LAW 94-455—OCT. 4, 1976

90 STAT. 1603

may be, shall be treated as the loss corporation (whether or not such corporation is a loss corporation). The reduction, if any, so determined under paragraph (2) shall be applied to the losses of such controlled corporation. " (B) TRIANGULAR REORGANIZATIONS.—Except as otherwise provided in paragraph (5), if the shareholders of the loss corporation (immediately before the reorganization) own, as a result of the reorganization, stock in a corporation controlling the acquiring corporation, such shareholders shall be treated as owning (immediately after the reorganization) a percentage of the total fair market value of the participating stock and of all the stock of the acquiring corporation owned by the controlling corporation equal to the percentage of the total fair market value of the participating stock and of all the stock, respectively, of the controlling corporation owned by such shareholders. " (4) SPECIAL RULES.—For purposes of applying paragraph (1)(B)"(A)

CERTAIN RELATED TRANSACTIONS.—If,

-^ ' 7:

immediately

before the reorganization— " (i) one or more shareholders of the loss corporation own stock of such corporation which such shareholder acquired during the 36-month period ending on the date of the acquisition in a transaction described in paragraph (1) or in subsection (a)(1)(C) (unless excepted by subsection (a)(5)), and " ( i i) such shareholders own more than 50 percent of the total fair market value of the stock of another corporation a party to the reorganization, or any such shareholder is a corporation controlled by another corporation a party to the reorganization, then such shareholders shall not be treated as shareholders of the loss corporation with respect to such stock. " (B) CERTAIN PRIOR OWNERSHIP or LOSS CORPORATION.—If,

immediately before the reorganization, the acquiring or acquired corporation owns stock of the loss corporation, then paragraph (1)(B) shall be applied by treating the shareholders of the loss corporation as owning an additional amount of the total fair market value of the participating stock and of all the stock of the acquiring corporation, as a ^ result of owning stock in the loss corporation, equal to the total fair market value of the participating stock and of all the stock, respectively, of the loss corporation owned (immediately before the reorganization) by the acquiring or acquired corporation. This subparagraph shall not apply to stock of the loss corporation owned by the acquiring or acquired corporation if such stock was acquired by such corporation within the 36-month period ending on the date of the reorganization in a transaction described in subsection (a)(1)(C) (unless excepted by subsection (a)(5)); or to a reorganization described in section 368(a)(1)(B) or (C) to the extent the 26 USC 368. acquired corporation does not distribute the stock received by it to its own shareholders. "(C)

CERTAIN ASSET ACQUISITIONS.—If a loss corporation

receives stock of the acquiring corporation in a reorganization described in section 3 6 8 (a)(1)(C) and does not distribute such stock to its shareholders, paragraph (1)(B) shall be

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 90 STAT. 1604

e PUBLIC LAW 94-455—OCT. 4, 1976 applied by treating the shareholders of the loss corporation as owning (immediately after the reorganization) such undistributed stock in proportion to the fair market value of the stock which such shareholders own in the loss corporation. "(5)

26 USC 368.

CERTAIN STOCK-FOR-STOCK REORGANIZATIONS.—In the case

of a reorganization described in section 368(a)(1)(B) in which the acnuired corporation is a loss corporation— "(A)

STOCK W H I C H IS E X C H A N G E D. — Paragraph s (1)(B)

and (2) shall be applied by reference to the ownership of stock of the loss corporation ( r a the r than the acquiring corporation) immediately after the reorganization. Shareholders of the loss corporation who exchange stock of the loss corporation shall be treated as owning (immediately after the reorganization) a percentage of the total fair market value of the participating stock and of all the stock of the loss corporation acquired in the exchange by the acquiring corporation which is equal to the percentage of the total fair market value of the participating stock and of all the stock, respectively, of the acquiring corporation owned (immediately after the reorganization) by such shareholders. ,

" (B) STOCK W H I C H IS NOT EXCHANGED.—Stock of the loss

corporation owned by shareholders immediately before the reorganization which was not exchanged in the reorganization shall be taken into account in applying paragraph (1) (B). For purposes of the preceding sentence, the acquiring corporation (or a corporation controlled by the acquiring corporation) shall not be treated as a shareholder of the loss corporation with respect to stock of the loss corporation acquired in a transaction described in paragraph (1), or in subsection (a)(1)(C) (unless excepted by subsection (a) (5)), during the 36-month period ending on the date of the exchange.

V

" (C) TRIANGULAR EXCHANGES.—For purposes of a p p l y i n g

J..^... '""' '

the rules in this paragraph, if the shareholders of the loss corporation receive stock of a corporation controlling the acquiring corporation, such shareholders shall be treated as owning a percentage of the participating stock and of all the stock of the acquiring corporation owned by the controlling corporation equal to the percentage of the total fair market value of the participating stock and of all the stock, respectively, which such shareholders own of the controlling corporation immediately after the reorganization. " (6) EXCEPTIONS.—The limitations in this subsection shall not apply— " (A) if the same persons own substantially all the stock of the acquiring corporation and of the other corporation in substantially the same proportions; or " (B) to a net operating loss carryover from a taxable year if the acquiring or acquired corporation owned at least 40 percent of the total fair market value of the participating stock and of all the stock of the loss corporation at all times during the last half of such taxable year. For purposes of subparagraph (A), if the acquiring o r acquired corporation is controlled by another corporation, the shareholders of the controlling corporation shall be considered as also owning the stock owned by the controlling corporation in that proportion which the total fair market value of the stock which

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Page:United States Statutes at Large Volume 90 Part 2.djvu/137

 90 STAT. 1605

PUBLIC LAW 94-455—OCT. 4, 1976

each shareholder owns in the controlling corporation bears to the total fair market value of all the stock in the controlling corporation. " (c) KuLES RELATING TO STOCK.—For purposes of this section— " (1) The term 'stock' means all shares of stock, except stock which— " (A) is not entitled to vote, " (B) is fixed and preferred as to dividends and does not participate in corporate growth to any significant extent, " (C) has redemption and liquidation rights which do not exceed the paid-in capital or p a r value represented by such stock (except for a reasonable redemption premium in excess of such paid-in capital or p a r value), and " (D) is not convertible into another class of stock. " (2) The term 'participating stock' means stock (including common stock) which represents an interest in the earnings and assets of the issuing corporation which is not limited to a stated amount of money or property or percentage of paid-in capital or p a r value, or by any similar formula. " (3) The Secretary shall prescribe regulations under which— " (A) stock or convertible securities shall be treated as stock or participating stock, or " (B) stock (however denoted) shall not be treated as stock or participating stock, by reason of conversion and call rights, rights in earnings and assets, priorities and preferences as to distributions of earnings or assets, and similar factors."' (f)

CONFORMING AMENDMENTS. — (1) AMENDMENT OF SECTION 368.—Section 368(c)

( r e l a t i n g to

, "Stock."

"Participating stock."

Regulations.

26 USC 368.

the definition of control) is amended by striking out " and this part, " and inserting in lieu thereof "this part, and part V,'\ (2) AMENDMENT OF SECTION 383.—Section 383

( r e l a t i n g to

26 USC 383.

special limitations on certain carryovers) is amended to read as follows: ' "SEC. 383. SPECIAL LIMITATIONS ON UNUSED INVESTMENT CREDITS, WORK INCENTIVE PROGRAM CREDITS, FOREIGN TAXES, AND CAPITAL LOSSES. " I n the case of a change of ownership of a corporation in the manner described in section 382(a) or (b), the limitations provided in section Ante, p. 1599, 382 in such cases with respect to net operating losses shall apply i n the same manner, as provided under regulations prescribed by the Secretary, with respect to any unused investment credit of the corporation under section 4 6 (b), to any unused work incentive program credit of Ante, p. 1582. the corporation under section 5 0 A (b), to any excess foreign taxes of the corporation under section 9 0 4 (d), and to any net capital loss of the Post, p. 1620. corporation under section 1212." (g) EFFECTIVE D A T E. —

(1) The amendments made by subsections (a), (b), (c), and (d) shall apply to losses incurred in taxable years ending after December 31, 1975. (2) For purposes of applying sections 382(a) and 383 (as it relates to section 3 8 2 (a)) of the Internal Revenue Code of 1954, as amended by subsections (e) and (f), the amendments made by subsections (e) and (f) shall take effect for taxable years beginning after June 30, 1978, except that the beginning of the taxable years specified i n clause (ii) of section 382(a)(1)(B) of

26 USC 172 note. 26 USC 382 note.

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 90 STAT. 1606 26 USC 382 "°*Ante, p. 1599.

46 USC 1177-1.

PUBLIC LAW 94-455—OCT. 4, 1976 such Code, as so amended, shall be considered to be the later of: (A) the beginning of such taxable years, or (B) January 1, 1978. (3) Sections 382(b) and 383 (as it relates to section 3 8 2 (b)) of the I n t e r n a l Revenue Code of 1954, as amended by subsections (e) and (f), shall apply ( and such sections as in effect prior to such amendment shall not apply) to reorganizations pursuant to a p l a n of reorganization adopted by one or more of the parties thereto on or after January 1, 1978. For purposes of the preceding sentence, a corporation shall be considered to have adopted a plan of reorganization on the date on which a resolution of the board of directors is passed adopting the plan or recommending its adoption to the shareholders, or on the date on which the shareholders approve the plan of reorganization, whichever is earlier. SEC. 807. SMALL FISHING VESSEL CONSTRUCTION RESERVES. I n addition to any other vessel which may be deemed an "eligible vessel" and a "qualified vessel" under section 607 of the Merchant Marine Act, 1936 (46 U.S.C. 1177), a commercial fishing vessel under five net tons b u t not under two net tons— (1) which is constructed in the United States and, if reconstructed, is reconstructed in the United States; (2) which is owned by a citizen of the United States; (3) which has a home port in the United States; and (4) which is operated i n the commercial fisheries of the United States, shall be considered to be a n "eligible vessel" and a "qualified vessel" for the purposes of such section 607.

TITLE IX—SMALL BUSINESS PROVISIONS 26 USC 11.

SEC. 901. EXTENSION OF CERTAIN CORPORATE INCOME TAX REDUCTIONS. (a) IN GENERAL.—Subsections (a), (b), (c), and (d) of section 11 (relating to tax imposed on corporations) are amended to read as follows: " (a) CORPORATIONS IN GENERAL. — A tax is hereby imposed for each

'

taxable year on the taxable income of every corporation. The tax shall consist of a normal tax computed under subsection (b) and a surtax computed under subsection (c). " (b) NORMAL T A X. — The n o r m a l tax is equal to —

^

" (1) in the case of a taxable year ending after December 31, 1977,22 percent of the taxable income, and " (2) in the case of a taxable year ending after December 31, 1974, and before January 1, 1978, the sum of— " (A) 20 percent of so much of the taxable income as does not exceed $25,000, plus " (B) 22 percent of so much of the taxable income as exceeds $25,000. " (c) SURTAX.—The surtax is 26 percent of the amount by which the taxable income exceeds the surtax exemption for the taxable year. " (d) SURTAX E X E M P T I O N. — For purposes of this subtitle, the surtax exemption for any taxable year is— " (1) $25,000 in the case of a taxable year ending after December 31, 1977, or " (2) $50,000 in the case of a taxable year ending after December 31, 1974, and before January 1, 1978,

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 PUBLIC LAW 94-455—OCT. 4, 1976

90 STAT. 1607

except that, with respect to a corporation to which section 1561 (relating to certain m u h i p l e tax benefits in the case of certain controlled corporations) applies for the taxable year, the surtax exemption for the taxable year is the amount determined under such section." (b) M U T U A L INSURANCE C O M P A N I E S. —

.

(1) I x GENERAL.—Section 821(a)(1) (relating to mutual insurance companies) is amended to read as follows: " (1) XoRMAL T A X. — A normal tax equal to— " (A) in the case of a taxable year ending after December 31, 1977, 22 percent of the mutual insurance company taxable income, or 44 percent of the amount by which such taxable income exceeds $6,000, whichever is lesser, or " (B) in the case of a taxable year ending after December 31, 1974, and before January 1, 1978— " (i) 20 percent of so much of the mutual insurance company taxable income as does not exceed $25,000, plus " ( i i) 22 percent of so much of the mutual insurance company taxable income as exceeds $25,000, or 44 percent of the amount by which such taxable income exceeds $6,000, whichever is lesser; plus". (2)

SMALL COMPANIES.—Section 8 2 1 (c)(1)(A)

(relating

26 USC 821.

,

to

alternative tax for certain small companies) is amended to read as follows: " (A) NORMAL TAX.—A normal tax equal to —

" (i) in the case of a taxable year ending after December 31, 1977, 22 percent of the taxable investment income, or 44 percent of the amount by which such taxable income exceeds $3,000, whichever is lesser, or " ( i i) in the case of a taxable year ending after December 31, 1974, and before January 1, 1978, 20 percent of so much of the taxable investment income as does not exceed $25,000, plus 22 percent of so much of the taxable investment income as exceeds $25,000, or 44 percent of the amount by which such taxable income exceeds $3,000, whichever is lesser; plus".

.

.

-";

,

. i,;<

'

(c) CONFORMING AMENDMENTS. —

(1) Section 1561(a) (relating to certain multiple tax benefits in the case of certain controlled corporations) is amended by adding a t the end thereof the following ncAv sentence: " I n applying section 11(b)(2), the first $25,000 of taxable income and the second $25,000 of taxable income shall each be allocated among the component members of a controlled group of corporations in the same manner as the surtax exemption is allocated." (2) Subsection (f) of section 21 (relating to change in surtax exemption treated as a change in a rate of tax) is amended by striking out " T a x Reduction Act of 1975" and all that follows and inserting in lieu thereof the following: " T a x Reduction Act of 1975 in the surtax exemption and any change under section 11(d) in the surtax exemption shall be treated as a change in a rate of tax." (3) Section 6154 (relating to installment payments of estimated income tax by corporations) is amended by striking out subsection (h). (d) EFFECTIVE DATES.—The amendment made by subsection (a) shall take effect on December 23, 1975. The amendments made by subsection (b) shall apply to taxable years ending after December 31,

26 USC 1561.

'

' J^^^^

26 USC 21.

)t

26 USC 1 note, 26 USC 6154. 26 USC 11 note,

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 9 0 STAT. 1608

PUBLIC LAW 94-455—OCT. 4, 1976

1974. The amendments made by subsection (c) shall apply to taxable years ending after December 31, 1975. SEC. 902. CHANGES IN SUBCHAPTER S RULES. (a) NUMBER OF SHAREHOLDERS.—

26 USC 1371.

(1) IN GENERAL.—Subsection (a)(1) of section 1371 (relating to the definition of small business corporation) is amended to read as follows: " (1) have (except as provided in subsection (e)) more than 10 shareholders;". (2) SPECIAL SHAREHOLDER RULES.—Section 1371 is amended by

adding at the end thereof the following new subsection: " (e) SPECIAL SHAREHOLDER RULES. —

" (1) A small business corporation which has been an electing small business corporation for a period of five consecutive taxable years may not have more than 15 shareholders. " (2) If, during the 5-year period set forth in paragraph (1), the number of shareholders of an electing small business corporation increases to an amount in excess of 10 ( b u t not in excess of 15) solely by reason of additional shareholders who acquired their stock through inheritance, the corporation may have a number of additional shareholders equal to the number by which the inheriting shareholders cause the total number of shareholders of such corporation to exceed 10." (3) EFFECTIVE DATE.—The amendments made by this subsection shall apply to taxable years beginning after December 31, 1976.

26 USC 1371 "°*^-

(b) DISTRIBUTIONS BY SUBCHAPTER S CORPORATIONS.—

26 USC 1377.

(1) IN GENERAL.—Section 1377 (relating to special rules applicable to earnings and profits of electing small business corporations) is amended by a d d i n g at the end thereof the following new subsection: " (d) DISTRIBUTIONS OF UNDISTRIBUTED TAXABLE INCOME PREVIOUSLY

TAXED TO SHAREHOLDERS.—For purposes of determining whether a distribution by an electing small business corporation constitutes a distribution of such corporation's undistributed taxable income previously taxed to shareholders (as provided for in section 1375(d)), the earnings and profits of such corporation for the taxable year in which the distribution is made shall be computed without regard to section 312 (m). Such computation shall be made without regard to section 312(m) only for such purposes." (2) EFFECTIVE DATE.—The amendment made by this subsection shall apply to taxable years beginning after December 31, 1975.

26 USC 1377 note.

(c) ADDITIONAL CHANGES I N SUBCHAPTER S RULES. — (1) ESTATE OF DECEASED SPOUSE NOT TO BE TREATED AS SHARE-

26 USC 1371.

HOLDER.—Subsection (c) of section 1371 (relating to stock owned by husband and wife) is amended to read as follows: " (c) STOCK O W N E D BY HUSBAND AND W I F E. — For purposes of sub-

„,, -. ,

^

.;,j, it.

V

section (a)(1) stock which— " (1) is community property of a husband and wife (or the income from which is community income) under the applicable community property law of a State, " (2) is held by a husband and wife as joint tenants, tenants by the entirety, or tenants in common, " (3) was, on the date of death of a spouse, stock described in paragraph (1) o r (2), and is, by reason of such death, held by the estate of the deceased spouse and the surviving spouse, or by the estates of both spouses (by reason of their deaths on the same

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 PUBLIC LAW 94-455—OCT. 4, 1976

9 0 STAT. 1609

date), in the same proportion as held by the spouses before such death, or " (4) was, on the date of the death of a surviving spouse, stock described i n paragraph (3), and is, by reason of such death, held by the estates of both spouses in the same proportion as held by the spouses before their deaths, shall be treated as owned by one shareholder." (2) BROADENING CLASSES INCLUDE CERTAIN TRUSTS.

or

PERMISSIBLE

SHAREHOLDERS TO

(A) Section 1371 (relating to definitions for purposes of 26 USC 1371. subchapter S) is amended b}^ a d d i n g at the end thereof the following new subsection: "(f)

CERTAIN TRLTSTS PERMITTED AS SHAREHOLDERS.—For purposes

of subsection (a), the following trusts may be shareholders: " (1) A trust all of which is treated as owned by the grantor <: under subpart E of part I of subchapter J of this chapter. 26 USC 671. " (2) A trust created primarily to exercise the voting power of stock transferred to it. " (3) Any trust with respect to stock transferred to i t pursuant to the terms of a will, but only for the 60-day period beginning on the day on which such stock is transferred to it. I n the case of a trust described in paragraph (2), each beneficiary of the trust shall, for purposes of subsection (a)(1), be treated as a shareholder.". (B) Paragraph (2) of section 1371(a) is amended by striking out " ( other than an e s t a t e) " and inserting in lieu thereof " ( other than a n estate and other than a trust described in subsection (f)) ". (3) N E W SHAREHOLDERS MUST ArriRMATivELy ELECT TO TERMI-

NATE ELECTION.—Paragraph (1) of section 1372(e) (relating to 26 USC 1372. termination of election) is amended to read as follows: " (1) N E W SHAREHOLDERS.—

" (A) A n election under subsection (a) made by a small business corporation shall terminate if any person who was not a shareholder in such corporation— " (i) on the first d a y of the first taxable year of the corporation for which the election is effective, if such election is made on or before such first day, or " ( i i) on the day on which the election is made, if such election is made after such first day, becomes a shareholder in such corporation and affirmatively refuses (in such manner as the Secretary shall by regulations prescribe) to consent to such election on or before the 60th day after the day on which he acquires the stock. " (B) I f the person acquiring the stock is the estate of a decedent, the period under subparagraph (A) for affirmatively refusing to consent to the election shall expire on the 60th day after whichever of the following is the earlier: " (i) The day on which the executor or administrator of the estate qualifies; or " ( i i) The last day of the taxable year of the corporation in which the decedent died. " (C) Any termination of a n election under subparagraph (A) by reason of the affirmative refusal of any person to consent to such election shall be effective for the taxable year of the corporation in which such person becomes a shareholder

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 90 STAT. 1610

26 USC 1371 note.

PUBLIC LAW 94-455—OCT. 4, 1976 in the corporation and for all succeeding taxable years of the corporation.". (4) EFFECTIVE DATE.—The amendments made by this subsection shall apply to taxable years beginning after December 31, 1976.

TITLE X—CHANGES IN THE TREATMENT OF FOREIGN INCOME '

PART I—FOREIGN TAX PROVISIONS AFFECTING INDIVIDUALS ABROAD SEC. 1011. INCOME EARNED ABROAD BY UNITED STATES CITIZENS LIVING OR RESIDING ABROAD. (a) REDucTioisr OF LIMITATIONS ON A M O U N T EXCLUDABLE.—Para-

26 USC 911.

g r a p h (1) of section 911(c) relating to limitations on amount of exclusion) is amended to read as follows: " (1) L I M I T A T I O N S ON AMOUNT OF EXCLUSION.—

" (A) IN GENERAL.—Except as provided in subparagraphs (B) and (C), the amount excluded from the gross income of an individual under subsection (a) for any taxable year shall not exceed an amount which shall be computed on a daily basis at an annual rate of $15,000. "(B)

EMPLOYEES o r CHARITABLE ORGANIZATIONS.—If any

individual performs qualified charitable services during any taxable year, the amount of the earned income attributable to such services excluded from the gross income of the individual under subsection (a) for the taxable year shall not exceed an amount which shall be computed on a daily basis at an annual rate of $20,000. " (C) SPECIAL RULE. — I f any i n d i v i d u a l p e r for m s qualified

charitable services and other services during any taxable year, the amount of the earned income attributable to such other services excluded from the gross income of the individual under subsection (a) for the taxable year shall not (after the application of subparagraph (A) with respect to such earned income) exceed $15,000 reduced by the amount of the earned income attributable to qualified charitable services excluded from gross income under subsection (a) for the taxable year. "(D)

QUALIFIED CHARITABLE SERVICES.—For purposes of

this subsection, the term 'qualified charitable services' means services performed by an employee for an employer created or organized in the United States, or under the law of the United States, any State, or the District of Columbia, which meets the requirements of section 501(c)(3). " (b) ADDITIONAL L I M I T A T I O N S ON E X C L U S I O N. — (1) DISALLOWANCE o r FOREIGN TAX CREDIT W I T H RESPECT TO

EXCLUDED AMOUNTS.—The last sentence of subsection (a) of section 911 (relating to earned income from sources without the United States) is amended to read as follows: " A n individual shall not be allowed as a deduction from his gross income any deductions (other than those allowed by section 151, relating to personal exemptions), or as a credit against the tax imposed by this chapter any credit for the amount of taxes paid or accrued to a foreign country or possession of the United States, to the extent that such deductions o r credit is properly allocable to or chargeable against amounts excluded from gross income under this subsection."

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 PUBLIC LAW 94-455—OCT. 4, 1976 (2)

90 STAT. 1611

DISALLOWANCE OF EXCLUSION FOR INCOME RECEIVED OTHER

THAN I N COUNTRY WHERE EARNED.—Section 911(c) (relating to special rules for earned income from sources without the United States) is amended by a d d i n g at the end thereof the following new paragraph: "(8)

REQUIREMENT AS

TO PLACE

OF RECEIPT.—N'o

amount

received by an individual during the taxable year which constitutes earned income (entitled to the exclusion under subsection (a)) attributable to services performed in a foreign country or countries shall be excluded under subsection (a) if such amount is received by such individual outside of the foreign country or countries where such services were performed and if one of the purposes is the avoidance of any tax imposed by such foreign country or countries on such amount." (3)

26 USC 911.

' '

INCLUSION OF EARNED INCOME I N COMPUTATION OF RATE OF

TAX.—Section 911 (relating to earned income from sources without the United States) is amended by redesignating subsection (d) as subsection- (f) and by inserting after subsection (c) the following new subsections: "(d) AMOTTNT EXCLUDED U N D E R SUBSECTION COMPUTATION OF T A X. —

(a)

INCLUDED I N

" (1) COMPUTATION OF TAX.—If for any taxable year an individual has earned income which is excluded from gross income under subsection (a), the tax imposed by section 1 or section 1201 Post, p. 1786. shall be the excess of— " (A) the tax imposed by section 1 or section 1201 (whichever is applicable) on the amount of net taxable income, over " (B) the tax imposed by section 1 or section 1201 (whichever is applicable) on the amount of net excluded earned income. " (2) DEFINITIONS. — For purposes of this subsection— " (A) the term 'net taxable income' means an amount equal to the sum of the amount of taxable income for the taxable year plus the amount of net excluded earned income of such individual for such taxable year; and " (B) the term 'net excluded earned income' means the excess of the amount of earned income excluded under subsection (a) for the taxable year over the amount of the deductions disallowed with respect to such excluded earned income for such taxable year under subsection (a). "(e)

SECTION N O T TO A P P L Y. —

" (1) IN GENERAL.—An individual entitled to the benefits of this section for a taxable year may elect, in such manner and at such time as shall be prescribed by the Secretary, not to have the provisions of this section apply^ " (2) EFFECT OF ELECTION.—An election under paragraph (1) shall apply to the taxable year for which made and to all subsequent taxable years. Such election may not be revoked except with the consent of the Secretary." (c)

ALLOWANCE OF FOREIGN T A X CREDITS TO INDIVIDUALS T A K I N G

STANDARD DEDUCTION.—Section 36 (relating to credits not allowed to 26 USC 36. individuals p a y i n g optional tax or taking standard deduction) is amended by striking out "sections 32, 33, and " and inserting in lieu thereof "sections 32 and". (d) EFFECTIVE D A T E. — The amendments made by this section shall 26 USC 911 apply to taxable years beginning after December 31, 1975. note.

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Page:United States Statutes at Large Volume 90 Part 2.djvu/144

 90 STAT. 1612

PUBLIC LAW 94-455—OCT. 4, 1976 SEC. 1012. INCOME TAX TREATMENT OF NONRESIDENT ALIEN INDIVIDUALS WHO ARE MARRIED TO CITIZENS OR RESIDENTS OF THE UNITED STATES.

?;< V-

(a) ELECTION STATES.—

26 USC 6013.

TO B E TREATED AS RESIDENTS OF THE UNITED

(1) IN GENERAL.—Section 6013 (relating to joint returns of income tax by husband and wife) is amended by a d d i n g a t the end thereof the following new subsections:

Tc

" (g) ELECTION To TREAT NONRESIDENT A L I E N INDIVIDUAL AS R E S I DENT OF THE UNITED STATES.—

" (1) IN GENERAL.—A nonresident alien individual with respect to whom this subsection is i n effect for the taxable year shall be treated as a resident of the United States for purposes of chapter 1 for all of such taxable year. " (2) INDIVIDUALS WITH RESPECT TO WHOM THIS SUBSECTION IS IN EFFECT.—This subsection shall be in effect with respect to any individual who, a t the time an election was made under this subsection, was a nonresident alien individual married to a citizen or resident of the United States, if both of them made such election to have the benefits of this subsection apply to them. " (3) DURATION OF ELECTION.—An election under this subsection shall apply to the taxable year for which made and to all subsequent taxable years until terminated under paragraph (4) or (5); except that any such election shall not apply for any taxable year if neither spouse is a citizen or resident of the United States a t any time during such year. " (4) TERMINATION o r ELECTION.—An election under this subsection shall terminate a t the earliest of the following t i m e s:

26 USC 1.

b

"(A)

REVOCATION

BY TAXPAYERS.—If

either

taxpayer

revokes the election, as of the first taxable year for which the last d a y prescribed by law for filing the r e t u r n of tax under chapter 1 has not yet occurred. " (B) D E A T H. — I n the case of the death of either spouse, as of the beginning of the first taxable year of the spouse who survives following the taxable year i n which such death occurred; except that if the spouse who survives is a citizen or resident of the United States who is a surviving spouse entitled to the benefits of section 2, the time provided by this subparagraph shall be as of the close of the last taxable year for which such individual is entitled to the benefits of section 2.

^

" (C) LEGAL SEPARATION.—In the case of the legal separa-

tion of the couple under a decree of divorce or of separate maintenance, as of the beginning of the taxable year in which such legal separation occurs. ,

"(D)

TERMINATION BY SECRETARY.—At the time provided

in paragraph (5). " (5) TERMINATION BY SECRETARY.—The Secretary may termi-

nate any election under this subsection for any taxable year if he determines that either spouse has failed— " (A) to keep such books and records, " (B) to g r a n t such access to such books and records, or " (C) to supply such other information, as may be reasonably necessary to ascertain the amount of liability for taxes under chapter 1 of either spouse for such taxable year.

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Page:United States Statutes at Large Volume 90 Part 2.djvu/145

 PUBLIC LAW 94-455—OCT. 4, 1976

90 STAT. 1613

" (6) O N L Y ONE ELECTION.—If any election under this subsection for any two individuals is terminated under paragraph (4) or (5) for any taxable year, such two individuals shall be ineligible to make an election under this subsection for any subsequent taxable year. " (h) JOINT E E T U R N, E T C., FOR YEAR I N W H I C H NONRESIDENT A L I E N BECOMES RESIDENT OF UNITED STATES.— " (1) IN GENERAL.—If—

" (A) any individual is a nonresident alien individual a t the beginning of any taxable year b u t is a resident of the United States a t the close of such taxable year, " (B) a t the close of such taxable year, such individual is married to a citizen or resident of the United States, and " (C) both individuals elect the benefits of this subsection at the time and in the manner prescribed by the Secretary by regulation, then the individual referred to in subparagraph (A) shall be treated as a resident of the United States for purposes of chapter 1 for all of such taxable year. " (2) O N L Y ONE ELECTION.—If any election under this subsection applies for any 2 individuals for any taxable year, such 2 individuals shall be ineligible to make an election under this subsection for any subsequent taxable year." (2) CLERICAL AMENDMENT.—Section 871(g)

( r e l a t i n g to cross

' *• 26 USC 1.

26 USC 871.

references) is amended by adding at the end thereof the following new paragraph: "(7) For election to treat married nonresident alien individual as resident of United States in certain cases, see subsections (g) and (h) of section 6013." (b) T A X TREATMENT OF CERTAIN COMMUNITY INCOME I N THE CASE OF A RESIDENT OR C I T I Z E N OF THE UNITED STATES W H O I S MARRIED TO A NONRESIDENT A L I E N INDIVIDUAL.—

' • "- '

'

(1) IN GENERAL.—Subpart A of part II of subchapter N of chapter 1 (relating to nonresident alien individuals) is amended by a d d i n g a t the end thereof the following new section: "SEC. 879. TAX TREATMENT OF CERTAIN COMMUNITY INCOME IN THE 26 USC 879. CASE OF A RESIDENT OR CITIZEN OF THE UNITED STATES WHO IS MARRIED TO A NONRESIDENT ALIEN INDIVIDUAI^ "(a)

GENERAL RULE. — I n the case of a citizen or resident of the

United States who is married to a nonresident alien individual and who has community income for the taxable year, such community income shall be treated as follows: " (1) E a r n e d income (within the meaning of section 9 1 1 (b)), other than trade or business income and a partner's distributive share of partnership income, shall be treated as the income of the spouse who rendered the personal services, " (2) Trade or business income, and a partner's distributive share of partnership income, shall be treated as provided in section 1402(a)(5), " (3) Cornmunity income not described in paragraph (1) or (2) which is derived from the separate property (as determined under the applicable community property law) of one spouse shall be treated as the income of such spouse, and " (4) A l l other such community income shall be treated as provided in the applicable community property law.

89-194 O—78—pt. 2

10

^ -

,1

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Page:United States Statutes at Large Volume 90 Part 2.djvu/146

 90 STAT. 1614 Ante, p. 1612.

PUBLIC LAW 94-455—OCT. 4, 1976 " (b) EXCEPTION W H E R E ELECTION UNDER SECTION 6013(g) I s IN

EFFECT.—Subsection (a) shall not apply for any taxable year for which an election under subsection (g) or (h) of section 6013 (relating to election to treat nonresident alien individual as resident of the United States) is in effect. "(c)

DEFINITIONS

AND SPECIAL

RULES.—For

purposes

of

this

section— " (1) COMMUNITY INCOME.—The term 'community income' means income which, under applicable community property laws, is treated as community income. " (2) COMMUNITY PROPERTY LAWS.—The term 'community p r o p -

erty laws' means the community property laws of a State, a foreign country, or a possession of the United States. " (3) DETERMINATION OF MARITAL STATUS.—The determination

of marital status shall be made under section 1 4 3 (a). " 26 USC 981.

(2) REPEAL o r SECTION 9 8 1. — Subpart II of part III of sub-

chapter N of chapter 1 (relating to election as to treatment of income subject to foreign community property laws) is hereby repealed. (3) CLERICAL AMENDMENTS.—

(A) The table of sections for subpart A of part II of subchapter N of chapter 1 is amended by adding a t the end thereof the following new item: "Sec. 879. Tax treatment of certain community income in the case of a resident or citizen of the United States who is married to a nonresident alien individual." (B) The table of subparts for part III of subchapter N of chapter 1 is amended by striking out the item relating to subpart G. (c) D U E D A T E FOR F I L I N G ESTIMATED T A X R E T U R N S I N THE CASE OF

26 USC 6073.

26 USC 6013 note.

CERTAIN NONRESIDENT ALIENS.—Subsection (a) of section 6073 (relating to time for filing declarations of estimated tax by individuals) is amended by adding at the end thereof the following sentence: " I n the case of a nonresident alien described in section 6072(c), the requirements of section 6015 shall be deemed to be first met no earlier than after April 1 and before June 2 of the taxable year.". (d) EFFECTIVE DATES.—The amendments made by subsection (a) shall apply to taxable years ending on or after December 31, 1975. The amendments made by subsections (b) and (c) shall apply to taxable years beginning after December 31, 1976. "SEC. 1013. FOREIGN TRUSTS HAVING ONE OR MORE UNITED STATES BENEFICIARIES TO BE TAXED CURRENTLY TO GANTOR. (a) TAXATION o r INCOME TO GRANTOR OF T R U S T. — Subpart E of

26 USC 679.

part I of subchapter J of chapter 1 (relating to grantors and others treated as substantial owners) is amended by a d d i n g at the end thereof the following new section: "SEC. 679. FOREIGN TRUSTS HAVING ONE OR MORE UNITED STATES BENEFICIARIES. " (a) TRANSFEROR TREATED AS O W N E R. —

" (1) IN GENERAL.—A United States person who directly or indirectly transfers property to a foreign t r u s t (other than a t r u s t described i n section 404(a)(4)) shall be treated as the owner for his taxable year of the portion of such t r u s t attributable to such property if for such year there is a United States beneficiary of any portion of such trust. " (2) EXCEPTIONS.—Paragraph (1) shall not apply—

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Page:United States Statutes at Large Volume 90 Part 2.djvu/147

 PUBLIC LAW 94-455—OCT. 4, 1976 "(A)

TRANSFERS BY REASON OF DEATH.—To any

9 0 STAT. 1615 transfer

by reason of the death of the transferor. "(B)

TRANSFERS WHERE GAIN I S RECOGNIZED TO TRANS-

FEROR.—To any sale or exchange of the property at its fair market value in a transaction i n which all of the gain to the transferor is realized a t the time of the transfer and is recognized either at such time or is returned as provided in section 453. " (b) TRUSTS ACQUIRING UNITED STATES B E N E F I C I A R I E S. — I f —

" (1) subsection (a) applies to a trust for the transferor's taxable year, and " (2) subsection (a) would have applied to the trust for his immediately preceding taxable year b u t for the fact that for such preceding taxable year there Avas no United States beneficiar}^ for any portion of the trust, then, for purposes of this subtitle, the transferor shall be treated as h a v i n g income for the taxable year (in addition to his other income for such year) equal to the undistributed n e t income ( a t the close of such immediately preceding taxable year) attributable to the portion of the trust referred to in subsection (a).

" (c) TRUSTS TREATED AS HAVING A UNITED STATES BENEFICIARY.—

" (1) IN GENERAL.—For purposes of this section, a trust shall be treated as h a v i n g a United States beneficiary for the taxable year unless— " (A) under the terms of the trust, no part of the income or corpus of the trust may be paid or accumulated during the taxable year to or for the benefit of a United States person, and " (B) if the trust were terminated a t any time during the taxable year, n o part of the income or corpus of such trust could be paid to or for the benefit of a United States person. " (2) ATTRIBUTION OF O W N E R S H I P. — For purposes of paragraph

(1), an amount shall be treated as paid or accumulated to or for the benefit of a United States person if such amount is paid to or accumulated for a foreign corporation, foreign partnership, or foreign trust or estate, and— " (A) in the case of a foreign corporation, more than 50 percent of the total combined voting power of all classes of stock entitled to vote of such corporation is OAvned (within the meaning of section 9 5 8 (a)) or is considered to be owned (within the meaning of section 9 5 8 (b)) by United States shareholders (as defined in section 9 5 1 (b)), " (B) in the case of a foreign partnership, a United States person is a part n e r of such partnership, or " (C) in the case of a foreign trust or estate, such trust o r estate has a United States beneficiary (within the meaning of paragraph (1)). ". (b) GRANTOR To B E TREATED AS OWNER.—Subsection (b) of sec-

tion 678 (relating to persons other than grantors treated as substan- 26 USC 678. tial OAvners) is amended by striking out everything after "modified," and inserting in lieu thereof "if the g r a n to r of the trust or a transferor (to whom section 679 applies) is otherwise treated as the owner under the provisions of this subpart other than this section.". (c) TREATMENT OF CAPITAL G A I N S AND LOSSES OF CERTAIN FOREIGN TRUSTS.— (1) FOREIGN TRUSTS CREATED BY UNITED STATES PERSONS TREATED LIKE OTHER FOREIGN TRUSTS.—Subparagraph (C) of section 643

26 USC 643.

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Page:United States Statutes at Large Volume 90 Part 2.djvu/148

 90 STAT. 1616

PUBLIC LAW 94-455—OCT. 4, 1976 (a)(6) (relating to distributable net income in case of foreign trusts) is amended by striking out "foreign t r u s t created by a United States person" and inserting in lieu thereof "foreign trust". (2) TRAXSITIOXAL RULE FOR FOREIGN TRUSTS.—Section 643(a)

26 USC 643.

(6) is amended by adding a t the end thereof the following new subparagraph: " (D) Effective for distributions made in taxable years beginning after December 31, 1975, the undistributed n e t income of each foreign t r u s t for each taxable year beginning on or before December 31, 1975, remaining undistributed a t the close of the last taxable year beginning on or before December 31, 1975, shall be redetermined by taking into account the deduction allowed by section 1202." (d) RETURNS FOR FOREIGN TRUSTS HAVING O N E OR MORE UNITED STATES BENEFICIARIES.—

26 USC 6048.

(1) Section 6048 (relating to returns as to creation of or transfers to certain foreign trusts) is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection: " (c) A N N U A L RETURNS FOR FOREIGN TRUSTS H A VI N G O N E OR MORE UNITED STATES B E N E F I C I A R I E S. — E a c h tax p a y e r subject to tax under

26 USC 6677.

section 679 (relating to foreign trusts h a v i n g one or more United States beneficiaries) for his taxable year with respect to any trust shall make a return with respect to such trust for such year at such time and in such manner, and setting forth such information, as the Secretary may by regulations prescribe.". (2) Section 6677(a) (relating to failure to file information returns with respect to certain foreign trusts) is amended by striking out "to a t r u s t " and inserting in lieu thereof " to a trust (or, in the case of a failure with respect to section 6048(c), equal to 5 percent of the value of the corpus of the trust at the close of the taxable year) ". (e) CONFORMING AMENDMENTS. —

I 26 USC 643. 26 USC 6048.

(1) The table of sections for subpart. E of part I of subchapter J of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 679. Foreign trusts having one or more United States beneficiaries." (2) Subsection (d) of section 643 is hereby repealed. (3) Subsection (d) of section 6048 (as redesignated by subsection (d)) is amended to read as follows: "(d)

26 USC 6041.

"For provisions relating to penalties for violation of this section, see sections 6677 and 7203." (4) The heading of section 6048 is amended to read as follows: "SEC. 6048. RETURNS AS TO CERTAIN FOREIGN TRUSTS.". (5) The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by striking out the item relating to section 6048 and inserting in lieu thereof the following: "Sec. 6048. Returns as to certain foreign trusts." (f)

26 USC 679 ^°^-

CROSS R E F E R E N C E. —

EFFECTIVE D A T E S. —

(1) IN GENERAL.—The amendments made by this section (other than subsection (c)) shall apply to taxable years ending after December 31, 1975, b u t only in the case of—

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Page:United States Statutes at Large Volume 90 Part 2.djvu/149

 PUBLIC LAW 94-455—OCT. 4, 1976

90 STAT. 1617

(A) foreign trusts created after May 21, 1974, and (B) transfers of property to foreign trusts after May 21, 1974. (2) CHANGES IN CAPITAL GAIN RULES FOR FOREIGN TRUSTS.—The

amendments made by subsection (c) shall apply to taxable years beginning after December 31, 1975. SEC. 1014. INTEREST CHARGE ON ACCUMULATION DISTRIBUTIONS FROM FOREIGN TRUSTS. (a) T A X TO INCLUDE SPECIAL INTEREST CHARGE.—Section 667(a)

.-^eA- ; W^S:

26 USC 643

"ot^-

^"•^^> P- 1575.

(as amended by section 701 of this Act) is amended by striking out ^"fi^" and " at the end of paragraph (1), by striking out the period a t the end of paragraph (2) and inserting in lieu thereof ", and '', and by a d d i n g at the end thereof the following new paragraph: " (3) in the case of a foreign trust, the interest charge determined as provided in section 668." Infra. (b)

COMPUTATION OF SPECIAL INTEREST C H A R G E. — Subpart D of

part I of subchapter J of chapter 1 (relating to treatment of excess distributions by trusts) is amended by a d d i n g at the end thereof the following new section: "SEC. 668. INTEREST CHARGE ON ACCUMULATION DISTRIBUTIONS FROM FOREIGN TRUSTS. "(a)

,,,,,,.

26 USC 668.

GENERAL RULE. — For purposes of the tax determined under

section 6 6 7 (a), the interest.charge is an amount equal to 6 percent of the partial tax computed under section 667(b) multiplied by a fraction— " (1) the numerator of which is the sum of the number of taxable years between each taxable year to which the distribution is allocated under section 666(a) and the taxable year of the distribution (counting in each case the taxable year to which the distribution is allocated b u t not counting the taxable year of the distribution), and " (2) the denominator of which is the number of taxable years to which the distribution is allocated under section 6 6 6 (a). " (b) LIMITATION.—The total amount of the interest charge shall not, when added to the total partial tax computed under section 667 (b), exceed the amount of the accumulation distribution (other than the amount of tax deemed distributed by section 666(b) or (c)) in respect of which such partial tax was determined.

..
 * ,-;J ^ ^^„..,

... ^ ^. ^ < j

" (c) SPECIAL RULES. — " (1) INTEREST CHARGE NOT DEDUCTIBLE,—The interest charge

determined under this section shall not be allowed as a deduction for purposes of any tax imposed by this title. "(2)

TRANSITIONAL

RULE.—For

purposes

of

this

section,

undistributed net income existing in a trust as of January 1, 1977, shall be treated as allocated under section 666(a) to the first taxable year beginning after December 31, 1976."

"'*'^

{^'^

'^^*''"

(c) CLERICAL AMENDMENT. — The table of sections for subpart D of

part I of subchapter J of chapter 1 is amended by a d d i n g a t the end thereof of the following new item: Sec. 668. Interest charge on accumulation distributions from foreign trusts."

(d) EFFECTIVE D A T E. — The amendments made by this section shall a p p l y to taxable years beginning after December 31, 1976. SEC. 1015. EXCISE TAX ON TRANSFERS OF PROPERTY TO FOREIGN PERSONS TO AVOID FEDERAL INCOME TAX, (a) AMENDMENT OF SECTION 1491.—Section 1491 ( r e l a t i n g to im-

position of tax) is amended to read as follows:

26 USC 668 °°*®'^" 26 USC 1491.

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Page:United States Statutes at Large Volume 90 Part 2.djvu/150

 90 STAT. 1618 26 USC 1491.

PUBLIC LAW 94-455—OCT. 4, 1976

"SEC. 1491. IMPOSITION OF TAX.

"There is hereby imposed on the transfer of property by a citizen or resident of the United States, or by a domestic corporation or partnership, or by a t r u s t which is not a foreign trust, to a foreign corporation as paid-in surplus or as a contribution to capital, or to a foreign trust, or to a foreign partnership, an excise tax equal to 35 percent of the excess of— " (1) the fair market value of the property so transferred, over " (2) the sum of— " (A) the adjusted basis (for determining gain) of such property in the hands of the transferor, plus " (B) the amount of the gain recognized to the transferor at the time of the transfer." 26 USC 1492.

Infra.

(b) AMENDMENTS or SECTION 1492.—Section 1492 ( r e l a t i n g to non-

taxable transfers) is amended— (1) by striking out in paragraph (3) "section 367(d) applies." and inserting in lieu thereof "section 367 applies; o r " and (2) by a d d i n g a t the end thereof the following new paragraph: " (4) To a transfer for which an election has been made under section 1057." (c) ELECTION TO TREAT AS TAXABLE E X C H A N G E. — Part IV of sub-

Ante, p. 1545.

chapter O of chapter 1 (relating to special rules for determining gain or loss on disposition of property) is amended by redesignating section 1057 as section 1058 and by inserting after section 1056 the following new section:

26 USC 1057.

"SEC. 1057. ELECTION TO TREAT TRANSFER TO FOREIGN TRUST, ETC., AS TAXABLE EXCHANGE.

Supra.

" I n lieu of payment of the tax imposed by section 1491, the taxpayer may elect (for purposes of this subtitle), at such time and in such manner as the Secretary may prescribe, to treat a transfer described in section 1491 as a sale or exchange of property for an amount equal in value to the fair market value of the property transferred and to recognize as gain the excess of— " (1) the fair market value of the property so transferred, over " (2) the adjusted basis (for determining gain) of such property in the hands of the tranferor.". (c) CLERICAL AMENDMENT. — The table of sections for part IV of

subchapter O of chapter 1 is amended by striking out the last item thereof and inserting in lieu thereof: "See. 1057. Election to treat transfer to foreign trust, etc., as taxable exchange. "Sec. 1058. Cross references."

26 USC 1491 note-

(d) EFFECTIVE D A T E. — The amendments made by this section shall apply to transfers of property after October 2, 1975. PART II—AMENDMENTS AFFECTING TAX TREATMENT OF CONTROLLED FOREIGN CORPORATIONS A N D THEIR SHAREHOLDERS SEC. 1021. AMENDMENT OF PROVISION RELATING TO INVESTMENT IN UNITED STATES PROPERTY BY CONTROLLED FOREIGN CORPORATIONS. (a) EXCEPTIONS TO DEFINITION o r UNITED STATES

26 USC 956.

PROPERTY.—

Section 9 5 6 (b)(2) (relating to exceptions to definition of United States property) is amended by striking out " and " a t the end of sub-

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Page:United States Statutes at Large Volume 90 Part 2.djvu/151

 PUBLIC LAW 94-455—OCT. 4, 1976

90 STAT. 1619

paragraph (E), by redesignating subparagraph (F) as subparagraph (H), and by inserting after subparagraph (E) the following new subparagraphs: " (F) the stock or obligations of a domestic corporation which is neither a United States shareholder (as defined in section 9 5 1 (b)) of the controlled foreign corporation, n o r a domestic corporation, 25 percent or more of the total combined voting power of which, immediately after the acquisition of any stock in such domestic corporation by the controlled foreign corporation, is owned, or is considered as being owned, by such United States shareholders in the a g g r e g a t e; " (G) any movable property (other than a vessel or aircraft) which is used for the purpose of exploring for, developing, removing, or t r a n s p o r t i n g resources from ocean waters or under such waters Avhen used on the Continental Shelf of the United States; and". (b)

CONSTRUCTIVE O W N E R S H I P OF STOCK.—Section 958(b) ( r e l a t i n g

26 USC 958.

to rules for determining stock ownership) is amended— (1) by striking out "954(d)(3), " the first place it appears and inserting in lieu thereof "954(d)(3), 956(b)(2), "; (2) by striking out " 9 5 4 (d)(3), " the second place i t appears and inserting in lieu thereof "954(d)(3), to treat the stock of a domestic corporation as owned by a United States shareholder of the conti-olled foreign corporation for purposes of section 956(b) (2), "; and (3) by a d d i n g at the end thereof the following new sentence: " Paragraph s (1) and (4) shall not apply for purposes of section 956(b)(2) to treat stock of a domestic corporation as not owned by a United States shareholder." (c) EFFECTIVE DATE.—The amendments made by this section shall 26 USC 956 apply to taxable years of foreign corporations beginning after Decern- "^'t^ber 31, 1975, and to taxable years of United States shareholders (within the meaning of section 951(b) of the I n t e r n a l Revenue Code of 1954) within which or with which such taxable years of such foreign corporations end. I n determining for purposes of any taxable year referred to in the preceding sentence the amount referred to in section 956(a)(2)(A) of the I n t e r n a l Revenue Code of 1954 for the last taxable year of a corporation beginning before January 1, 1976, the amendments made by this section shall be deemed also to apply to such .., ' last taxable year. SEC. 1022. REPEAL OF EXCLUSION FOR EARNINGS OF LESS DEVELOPED COUNTRY CORPORATIONS FOR PURPOSES OF SECTION 1248. (a) AMENDMENT OF SECTION 1 2 4 8 (d). — Paragraph (3) of section

26 USC 1248.

1248(d) (relathig to exclusion from earnings and profits of gain from certain sales or exchanges of stock in certain foreign corporations) is amended to read as follows: "(3)

LESS

DEVELOPED

COUNTRY

CORPORATIONS

UNDER

PRIOR

EAw.—Earnings and profits of a foreign corporation which were accumulated during any taxable year beginning before January 1, 1976, while such corporation was a less developed country corporation under section 902(d) as in effect before the enactment of the T a x Reduction Act of 1975.". (b) EFFECTIVE D A T E. — The amendment made by subsection (a) shall a p p l y to taxable years beginning after December 31, 1975.

^"-t^' P- 1626. 26 USC 1 note. 26 USC 1248 note.

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Page:United States Statutes at Large Volume 90 Part 2.djvu/152

 90 STAT. 1620

26 USC 954.

\~^,,,^,, ^, 26 USC 954 °°*^^ ^

26 USC 954.

PUBLIC LAW 94-455—OCT. 4, 1976 SEC. 1023. EXCLUSION FROM SUBPART F OF CERTAIN EARNINGS OF INSURANCE COMPANIES. (a) IN GENERAL. — Paragraph (3) of section 954(c) (relating to foreign personal holding company income) is amended by striking out " o r " at the end of subparagraph (A), by striking out the period at the end of subparagraph (B) and inserting in lieu thereof ", or", and by adding at the end thereof the following new subparagraph: " (C) dividends, interest, and gains from the sale or exchange of stock or securities received from a person other than a related person (within the meaning of subsection (d) (3)) derived from investments made by an insurance company of a n amount of its assets equal to one-third of its premiums earned on insurance contracts (other than life insurance and annuity contracts) during the taxable year (as defined in section 8 3 2 (b)(4)) which are not directly or indirectly attributable to the insurance or reinsurance of risks of persons who are related persons (within the meaning of subsection (d)(3)). ". (b) EFFECTIVE D A T E. — The amendment made by this section shall apply to taxable years of foreign corporations beginning after December 31, 1975, and to taxable years of United States shareholders (within the meaning of section 951(b) of the I n t e r n a l Revenue Code of 1954) within which or with which such taxable years of such foreign corporations end. SEC. 1024. SHIPPING PROFITS OF FOREIGN CORPORATIONS. (a)

CERTAIN S H I P P I N G OPERATIONS.—Subsection (b)

of section 954

(relating to foreign base company income) is amended by adding at the end thereof the following new paragraph: .,4-i

,.

, -afOi;

26 USC 954 note.

'*^ '

•

"C^) SPECIAL EXCLUSION FOR FOREIGN BASE COMPANY SHIPPING

INCOME.—Income of a corporation which is foreign base company shipping income under paragraph (4) of subsection (a) (determined without regard to the exclusion under paragraph (2) of this subsection) shall be excluded from foreign base company income if derived by a controlled foreign corporation from, or in connection with, the use (or h i r i n g or leasing for use) of an aircraft or vessel in foreign commerce between two points within the foreign country in which such corporation is created or organized and such aircraft or vessel is registered." (b) EFFECTIVE D A T E. — The amendment made by this section shall apply to taxable years of foreign corporations beginning after December 31, 1975, and to taxable years of United States shareholders (within the meaning of section 951(b) of the I n t e r n a l Revenue Code of 1954) within which or with which such taxable years of such foreign corporations end.

PART III—AMENDMENTS AFFECTING TREATMENT OF FOREIGN TAXES SEC. 1031. REQUIREMENT THAT FOREIGN TAX CREDIT BE DETERMINED ON OVERALL BASIS. 26 USC 904.

(a)

OVERALL LIMITATION ON FOREIGN T A X CREDIT.—Section

904

(relating to limitation on foreign tax credit) is amended to read as follows: "SEC. 904. LIMITATION ON CREDIT. " (a) LIMITATION.—The total amount of the credit taken under section 901(a) shall not exceed the same proportion of the tax against

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Page:United States Statutes at Large Volume 90 Part 2.djvu/153

 PUBLIC LAW 94-455—OCT. 4, 1976

90 STAT. 1621

which such credit is taken which the taxpayer's taxable income from sources without the United States (but not in excess of the taxpayer's entire taxable income) bears to his entire taxable income for the same taxable year. " (b) TAXABLE INCOME FOR PURPOSES OF COMPUTIXG LIMITATION.—•

For puri^oses of subsection (a), the taxable income in the case of a n individual, estate, or trust shall be computed without any deduction for personal exemptions under section 151 or 642(b). "(c)

CARRYIiACK AND CARRYOVER

OF ExCESS

TAX

PAID.

Auy

26 USC 151, 642.

amount by which all taxes paid or accrued to foreign countries or possessions of the United States for any taxable year for which the taxpayer chooses to have the benefits of this subpart exceed the limitation under subsection (a) shall be deemed taxes paid or accrued to foreign countries or possessions of the United States in the second preceding taxable year, i n the first preceding taxable year, and i n the first, second, t h i r d, fourth, or fifth succeeding taxable years, i n that order and to the extent not deemed taxes paid or accrued i n a p r i o r taxable year, in the amount by which the limitation under subsection (a) for such preceding or succeeding taxable year exceeds the sum of the taxes paid o r accrued to foreign countries or possessions of the United States for such preceding or succeeding taxable year and the amount of the taxes for any taxable year earlier than the current taxable year which shall be deemed to have been paid or accrued in such preceding or subsequent taxable year (whether o r not the taxpayer chooses to have the benefits of this subpart with respect to such earlier taxable year). Such amount deemed paid or accrued i n any year may be availed of only as a tax credit and not as a deduction and only if the taxpayer for such year chooses to have the benefits of this subpart as to taxes paid or accrued for that year to foreign countries or possessions of the United States. " (d) APPLICATION OP SECTION I N CASE OF CERTAIN INTEREST I N C O M E AND DIVIDENDS F R O M A D I S C OR FORMER D I S C. —

" (1) IN GENERAL.—The provisions of subsectious (a), (b), and (c) shall be applied separately with respect to each of the following items of income: " (A) the interest income described i n paragraph (2), " (B) dividends from a DIvSC or former D I S C (as defined in section 9 9 2 (a)) to the extent such dividends are treated as income from sources without the United States, and " (C) income other than the interest income described in paragraph (2) and dividends described in subparagraph (B). " (2) INTEREST INCOME TO WHICH APPLICABLE.—For purposes of t h i s subsection, the interest income described in this paragraph is interest other than interest— " (A) derived from any transaction which is directly related to the active conduct by the taxpayer of a trade or business i n a foreign country or a possession of the United States, " (B) derived i n the conduct by the taxpayer of a banking, financing, or similar business, iii " (C) received from a corporation in which the taxpayer (or one or more includible corporations in an affiliated group, • as defined in section 1504, of which the taxpayer is a member) owns, directly or indirectly, at least 10 percent of the voting stock, or

•,.'_

,.

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Page:United States Statutes at Large Volume 90 Part 2.djvu/154

 9 0 STAT. 1622

PUBLIC LAW 94-455—OCT. 4, 1976 " (D) received on obligations acquired as a result of the disposition of a trade or business actively conducted by the taxpayer i n a foreign country or possession of the United States or as a result of the disposition of stock o r obligations of a corporation in which the taxpayer owned a t least 10 percent of the voting stock. For purposes of subparagraph (C), stock owned, directly o r indirectly, by or for a foreign corporation, shall be considered as being proportionately owned by its shareholders.

/

" (e) TRANSITIONAL RULES FOR CARRYBACKS AND CARRYOVERS FOR TAXPAYERS ON THE PER-COUNTRY L I M I T A T I O N. — " (1) APPLICATION o r SUBSECTION.—This subsection shall a p p l y

only to a taxpayer who is on the per-country limitation for his last taxable year beginning before January 1, 1976. " (2) CARRYOVERS TO YEARS BEGINNING AFTER DECEMBER

SI,

1975.—In the case of any taxpayer to whom this subsection applies, any carryover from a taxable year beginning before January 1, 1976, may be used in taxaole years beginning after December 31, 1975, to the extent provided in subsection (c), but only to the extent such carryover could have been used in such succeeding taxable years if the per-country limitation continued to apply to all taxable years beginning after December 31, 1975. " (3) CARRYBACKS TO YEARS BEGINNING BEFORE JANUARY

, •

i,

19 7 6.—In the case of any taxpayer to whom this subsection applies, any carryback from a taxable year beginning after December 31, 1975, may be used in taxable years beginning before January 1, 1976, to the extent provided in subsection (c), but only to the extent such carryback could have been used i n such preceding taxable year if the per-country limitation continued to apply to all taxable years beginning after December 31, 1975. " (4) APPLICATION

OF LIMITATIONS.—For

purposes

of

this

subsection— " (A) the overall limitation shall be applied before the percountry limitation, and " (B) where the amount of any carryback or carryover is reduced by the overall limitation, the reduction shall be allocated to the amounts carried from each country or possession in proportion to the taxes paid or accrued to such country or possession in the taxable year from which such amount is being carried. " (f) CROSS REFERENCE.— "For increase of limitation under subsection (a) for taxes paid with respect to amounts received which were included in the gross income of the taxpayer for a prior taxable year as a United States shareholder with respect to a controlled foreign corporation, see section 960(b)." (b) CONFORMING AMENDMENTS. —

26 USC 901, 9^026 USC 243.

(1) Sections 901(a), 901 (b), and 960(b) are amended by striking out "applicable limitation" each place i t appears and inserting in lieu thereof "limitation". (2) Subparagraph (B) of section 2 4 3 (b)(3) is amended to read as follows: " (B) the members of such affiliated group shall be treated as one taxpayer for purposes of making the election under section 901(a) (relating to allowance of foreign tax credit), and".

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Page:United States Statutes at Large Volume 90 Part 2.djvu/155

 PUBLIC LAW 94-455—OCT. 4, 1976

90 STAT. 1623

(3) Paragraph (3) of section 1351(d) is amended to read as 26 USC 1351. follows: " (3) FOREIGN TAXES.—For purposes of this subsection,

any

choice made under subpart A of part III of subchapter N (relating to foreign tax credit) for any taxable year may be changed.". (4) Section 1503(b)(1) is amended by striking out ", and if 26 USC 1503. for the taxable year an election under section 904(b)(1) (relat- Post- p 1629. i n g to election of overall limitation on foreign tax credit) is in effect". (5) Sections 383, 6 0 3 8 (b)(1)(A), and 6501 (i) are each ^nfe, p. 1605. amended by striking out "section 9 0 4 (d) " each place it appears 26 USC 6038, therein and inserting in lieu thereof "section 904(c)". 6501. (6) Subsection (e) of section 907 (relating to transitional rules) 26 USC 907. is amended— (A) by striking out " (d) and (e) of section 904" in paragraph s (1) and (2) and inserting in lieu thereof " (d) and (e) of section 904 (as in effect on the d a y before the date of the enactment of the Tax Reform Act of 1976)"; Ante, p. 1520. (B) by striking out "section 904(a)(1) " in paragraph (2) and inserting in lieu thereof "section 9 0 4 (a)(1) (as so in effect)"; and (C) by striking out "section 904(e)(2) " in paragraph (2) ..- • (A) and inserting in lieu thereof "section 9 0 4 (e)(2) (as so in effect)". (c) EFFECTIVE D A T E S. —

26 USC 904

(1) IN GENERAL.—Except as provided in paragraph s (2) and "^^^• (3), the amendments made by this section shall apply to taxable years beginning after December 31, 1975. (2) EXCEPTION FOR CERTAIN M I N I N G OPERATIONS.—In the case of

a domestic corporation or includible corporation in an affiliated group (as defined in section 1504 of the Internal Revenue Code of 1954) which has as of October 1.1975— (A) been engaged in the active conduct of the trade or business of the extraction of minerals (of a character with respect to which a deduction for depletion is allowable under section 613 of such Code) outside the United States or its possessions for less than 5 years preceding the date of enactment of this Act, (B) h a d deductions properly apportioned or allocated to its gross income from such trade or business in excess of such gross income in a t least 2 taxable years, (C) 80 percent of its gross receipts are from the sale of such minerals, and (D) made commitments for substantial expansion of such mineral extraction activities, the amendments made by this section shall apply to taxable years beginning after December 31, 1978. I n the case of losses sustained in taxable years beginning before January 1, 1979, by any corporation to which this paragraph applies, the provisions of section 904(f) of such Code shall be applied with respect to such losses under the principles of section 904(a)(1) of such Code as in effect before the enactment of this Act. (3) EXCEPTION FOR INCOME FROM POSSESSIONS.—In the case of

gross income from sources within a possession of the United States (and the deductions properly apportioned or allocated thereto), the amendments made by this section shall apply to taxable years beginning after December 31, 1978. I n the case of losses sustained

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Page:United States Statutes at Large Volume 90 Part 2.djvu/156

 90 STAT. 1624

PUBLIC LAW 94-455—OCT. 4, 1976 in a possession of the United States in taxable years beginning before January 1, 1979, the provisions of section 904(f) of such Code shall be applied with respect to such losses under the principles of section 904(a)(1) of such Code as in effect before the enactment of this Act.

• * •

(4) CARRYBACKS AND CARRYOVERS I N THE CASE OF M I N I N G OPERA-

'• "

ff*'

26 USC 904.

TioNS AND INCOME FROM A POSSESSION.—In the casc of a taxpayer to whom paragraph (2) or (3) of this subsection applies, section 904(e) of such Code shall apply except that " January 1, 1979" shall be substituted for " January 1, 1976" each place it appears therein. I f such a taxpayer elects the overall limitation for a taxable year beginning before January 1, 1979, such section 904(e) shall be applied by substituting "the January 1, of the last year for which such taxpayer is on the per-country limitation" for " January 1, 1976" each place it appears therein. SEC. 1032. RECAPTURE OF FOREIGN LOSSES. (a) IN GENERAL.—Section 904 (as amended by section 1031 of this Act) is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection: " (f) RECAPTURE o r OVERALL FOREIGN Loss.— " (1) GENERAL RULE. — For purposes of

Post, p. 1643.

this

subpart

and

section 936, in the case of any taxpayer who sustains an overall foreign loss for any taxable year, that portion of the taxpayer's taxable income from sources without the United States for each succeeding taxable year which is equal to the lesser of— " (A) the amount of such loss (to the extent not used under this paragraph in prior taxable year s), or "(13) 50 percent (or such larger percent as the taxpayer may choose) of the taxpayer's taxable income from sources without the United States for such succeeding taxable year, shall be treated as income from sources within the United States (and not as income from sources without the United States).

"(2)

OVERALL FOREIGN LOSS DEFINED.—For purposes of

this

subsection, the term 'overall foreign loss' means the amount by which the gross income for the taxable year from sources without the United States (whether or not the taxpayer chooses the benefits of this subpart for such taxable year) for such year is exceeded by the sum of the deductions properly apportioned or allocated thereto, except that there shall not be taken into account— " (A) any net operating loss deduction allowable for such year under section 172(a) or any capital loss carrybacks and carryovers to such year under section 1212, and " (B) any— " (i) foreign expropriation loss for such year, as defined in section 172(k)(1), or " ( i i) loss for such year which arises from fire, storm, shipwreck, or other casualty, or from theft, to the extent such loss is not compensated for by insurance or otherwise. " (3) DISPOSITIONS.—

'•,

" (A) IN GENERAL.—For purposes of this chapter, if property which has been used predominantly without the United States in a trade or business is disposed of during any taxable year— " (i) the taxpayer, notwithstanding any other provision of this chapter (other than paragraph (1)), shall be deemed to have received and recognized taxable income

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Page:United States Statutes at Large Volume 90 Part 2.djvu/157

 PUBLIC LAW 94-455—OCT. 4, 1976 '

from sources without the United States in the taxable year of the disposition, by reason of such disposition, in an amount equal to the lesser of the excess of the fair market value of such property over the taxpayer's adjusted basis in such property or the remaining amount of the overall foreign losses which were not used under paragraph (1) for such taxable year or any prior taxable year, and " ( i i) paragraph (1) shall be applied with respect to such income by substituting '100 percent' for '50 percent'. I n determining for purposes of this subparagraph whether the predominant use of any property has been without the United States, there shall be taken into account use during the 3-year period ending on the date of the disposition (or, if shorter, the period during which the property has been used in the trade or business). "(B)

90 STAT. 1625

,

DISPOSITION DEFINED AND SPECIAL RULES.—

" (i) For purposes of this subsection, the term 'disposition' includes a sale, exchange, distribution, or gift of property whether or not gain or loss is recognized on the transfer. " ( i i) Any taxable income recognized solely by reason of subparagraph (A) shall have the same characterization it would have h a d if the taxpayer h a d sold or exchanged the property. " ( i i i) The Secretary shall prescribe such regula- Regulations, tions as he may deem necessary to provide for adjustments to the basis of property to reflect taxable income recognized solely by reason of subparagraph (A). " (C) EXCEPTIONS.—Xotwithstanding subparagraph (B), the term 'disposition' does not include— " (i) a disposition of property which is not a material factor in the realization of income by the taxpayer, o r " ( i i) a disposition of property to a domestic corporation in a distribution or transfer described in section 381(a). 26 USC 381. " (4) DETERMINATION OF FOREIGN OIL RELATED LOSS WHERE SECTION

907 APPLIES.—In the case of a corporation to which section 907 (b)(1) applies, the foreign oil related loss shall be the amount by Post, p. 1630. which the gross income for the taxable year from sources without the United States and its possessions (whether or not the taxpayer chooses the benefits of this subpart for such taxable year) taken into account in determining the foreign oil related income for such year is exceeded by the sum of the deductions properly apportioned or allocated thereto, except that there shall not be taken into account— " (A) any net operating loss deduction allowable for such year under section 172(a) or any capital loss carrybacks and carryovers to such year under section 1212, and "(B) any " (i) foreign expropriation loss for such year, as defined in section 172(k)(1), or " ( i i) loss for such year which arises from fire, storm, shipwreck, or other casualty, or from theft, to the extent such loss is not compensated for by insurance or otherwise.".

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Page:United States Statutes at Large Volume 90 Part 2.djvu/158

 90 STAT. 1626 26 USC 907.

PUBLIC LAW 94-455—OCT. 4, 1976 (b) COORDINATION W I T H SECTION 907.—Section 907 is amended—

(1) by striking out the last sentence of subsection (b) (as amended by section 1 0 3 5 (b)), and (2) by striking out subsection (f), and by redesignating subsection (g) as subsection (f). 26 USC 904

note.

(c) EFFECTIVE D A T E S. —

(1) IN GENERAL.—Except as provided in paragraph s (2) and (3), the amendments made by subsections (a) and (b)(2) shall apply to losses sustained in taxable years beginning after December 31, 1975, and the amendment made by subsection (b)(1) shall apply to taxable years beginning after December 31, 1975. (2) OBLIGATIONS OF FOREIGN GOVERNMENTS.—The ameiidments

made by subsection (a) shall not apply to losses on the sale, exchange, or other disposition of bonds, notes, or other evidences of indebtedness issued before May 14, 1976, by a foreign government or instrumentality thereof for the acquisition of property located in that country or stock of a corporation (created or organized in or under the laws of that foreign country) or indebtedness of such corporation. (3) SUBSTANTIAL

WORTHLESSNESS

BEFORE

ENACTMENT.—The

amendments made by subsection (a) shall not apply to losses incurred on the loss from stock or indebtedness of a corporation in which the taxpayer owned a t least 10 percent of the voting stock and which has sustained losses i n 3 out of the last 5 taxable years beginning before January 1, 1976, which has sustained a n overall loss for those 5 years, and with respect to which the taxpayer has terminated or will terminate all operations by reason of sale, liquidation, o r other disposition before January 1, 1977, of such corporation o r its assets. (4) L I M I T A T I O N BASED ON DEFICIT I N EARNINGS AND PROFITS.^—If

paragraph (3) would apply to a taxpayer b u t for the fact that the loss is sustained after December 31, 1976, and if the loss is sustained in a taxable year beginning before January 1, 1979, the amendments made by subsection (a) shall not apply to such loss to the extent that there was on December 31, 1975, a deficit in earnings and profits in the corporation from which the loss arose. SEC. 1033. DIVIDENDS FROM LESS DEVELOPED COUNTRY CORPORATIONS TO BE GROSSED UP FOR PURPOSES OF DETERMINING UNITED STATES INCOME AND FOREIGN TAX CREDIT AGAINST THAT INCOME. (a) FOREIGN TAXES D E E M E D P A I D BY DOMESTICORPORATIONS.—

26 USC 902.

Section 902 (relating to credit for corporate stockholders in foreign corporations) is amended to read as follows:

"SEC. 902. CREDIT FOR CORPORATE STOCKHOLDER IN FOREIGN CORPORATION. " (a) TREATMENT OF TAXES P A I D BY FOREIGN CORPORATION.—For

purposes of this subpart, a domestic corporation which owns a t least 10 percent of the voting stock of a foreign corporation from which i t receives dividends in any taxable year shall be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid o r deemed to be paid by such foreign corporation to any foreign country o r to any possession of the United States, on or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which the amount of such dividends (determined without regard to section 78) bears to the amount of such

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Page:United States Statutes at Large Volume 90 Part 2.djvu/159

 PUBLIC LAW 94-455—OCT. 4, 1976

90 STAT. 1627

accumulated profits i n excess of such income, w a r profits, and excess profits taxes (other than those deemed p a i d). " (b) FoEEiGN CORPORATION.—

SUBSIDIARY

OF

FIRST

AND SECOND

FOREIGN

" (1) O N E T2ER.—If the foreign corporation described in subsection (a) (hereinafter i n this subsection referred to as the 'first foreign corporation') owns 10 percent or more of the voting stock of a second foreign corporation from which i t receives dividends in any taxable year, i t shall be deemed to have paid the same proportion of any income, w a r profits, o r excess profits taxes paid or deemed to be paid by such second foreign corporation to any foreign country or to any possession of the United States, on or with respect to the accumulated profits of such second foreign corporation from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits in excess of such income, war profits, and excess profits taxes (other than those deemed p a i d). " (2) T w o TIERS.—If such first foreign corporation owns 10 percent or more of the voting stock of a second foreign corporation which, in turn, owns 10 percent or more of the voting stock of a t h i r d foreign corporation from which the second foreign corporation receives dividends in any taxable year, the second foreign corporation shall be deemed to have paid the same proportion of any income, w a r profits, or excess profits taxes paid by such t h i r d foreign corporation to any foreign country o r to any possession of the United States, on or with respect to the accumulated profits of such t h i r d foreign corporation from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits in excess of such income, w a r profits, and excess profits taxes. " (3) VOTING

STOCK

REQUIREMENT.—For

purposes

'

of

."•" •/ '• "

/''

•" ' '--"-^

^^f]? s^, A:

this

subpart— " (A) paragraph (1) shall not apply unless the percentage of voting stock owned by the domestic corporation in the first foreign corporation and the percentage of voting stock owned by the first foreign corporation in the second foreign corporation when multiplied together equal at least 5 percent, and " (B) paragraph (2) shall not apply unless the percentage arrived at for purposes of a p p l y i n g paragraph (1) when multiplied by the percentage of voting stock owned by the second foreign corporation in the t h i r d foreign corporation is equal to a t least 5 percent. " (c) APPLICABLE RULES. — " (1) ACCUMULATED PROFITS DEFINED.—For purposes of this sec-

tion, the t e n n 'accumulated profits' means, with respect to any foreign corporation, the amount of its gains, profits, or income computed without reduction by the amount of the income, w a r profits, and excess profits taxes imposed on or with respect to such profits o r income by any foreign country or by any possession of the United States. The Secretary shall have full power to determine from the accumulated profits of what year or years such dividends were paid, treating dividends paid in the first 60 days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shown otherwise), and i n other respects treating dividends as h a v i n g

^

dv

.; r;

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Page:United States Statutes at Large Volume 90 Part 2.djvu/160

 90 STAT. 1628

i '

PUBLIC LAW 94-455—OCT. 4, 1976 been paid from the most recently accumulated gains, profits, or earnings. " (2) ACCOUNTING PERIODS.—In the case of a foreign corporation the income, war profits, and excess profits taxes of which are determined on the basis of an accounting period of less than 1 year, the word 'year' as used in this subsection, shall be construed to mean such accounting period. "(d)

CROSS R E F E R E N C E S. —

"(1) For inclusion in gross income of an amount equal to taxes deemed paid under subsection (a), see section 78. "(2) For application of subsections (a) and (b) with respect to taxes deemed paid in a prior taxable year by a United States shareholder with respect to a controlled foreign corporation, see section 960. "(3) For reduction of credit with respect to dividends paid out of accumulated profits for years for which certain information is not furnished, see section 6038." (b)

26 USC 78.

26 USC 960.

26 USC 535.

26 USC 545.

26 USC 902 note.

Post, p. 1626.

CONFORMING AMENDMENTS. —

(1) Section 78 (relating to dividends received from certain foreign corporations) is amended— (A) by striking out "section 902(a)(1) " and inserting in lieu thereof "section 902(a) ", and (B) by striking out "section 960(a)(1)(C) " and inserting in lieu thereof "section 960(a)(1) ". (2) Paragraph (1) of section 960(a) (relating to special rules for foreign tax credit) is amended by striking out "bears to — " and all that follows down through the period at the end of such paragraph and inserting in lieu thereof "bears to the entire amount of the earnings and profits of such foreign corporation for such taxable year.". (3) Section 5 3 5 (b)(1) (relating to accumulated taxable income) is amended by striking out "section 902(a)(1) or 960(a) (1)(C) " and inserting in lieu thereof "section 902(a) or 960(a) (4) Section 5 4 5 (b)(1) (relating to undistributed personal holding company income) is amended by striking out "section 902(a)(1) or 960(a)(1)(C) " and inserting in lieu thereof "section 902(a) or 960(a)(1) ". (c) EFFECTIVE DATES.—The amendments made by this section shall apply— (1) in respect of any distribution received by a domestic corporation after December 31, 1977, and (2) in respect of any distribution received by a domestic corporation before January 1, 1978, in a taxable year of such corporation beginning after December 31, 1975, but only to the extent that such distribution is made out of the accumulated profits of a foreign corporation for a taxable year (of such foreign corporation) beginning after December 31, 1975. For purposes of paragraph (2), a distribution made by a foreign corporation out of its profits which are attributable to a distribution received from a foreign corporation to which section 902(b) of the I n t e r n a l Revenue Code of 1954 applies shall be treated as made out of the accumulated profits of a foreign corporation for a taxable year beginning before January 1, 1976, to the extent that such distribution was paid out of the accumulated profits of such foreign corporation for a taxable year beginning before January 1, 1976.

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Page:United States Statutes at Large Volume 90 Part 2.djvu/161

 PUBLIC LAW 94-455—OCT. 4, 1976

9 0 STAT. 1629

SEC. 1034. TREATMENT OF CAPITAL GAINS FOR PURPOSES OF FOREIGN TAX CREDIT. (a) IN" GENERAL.—Section (b) of section 904 (relating to taxable 26 USC 904. income for purposes of computing the foreign tax credit limitation), as amended by section 1031 of this Act, is amended to read as follows: " (b) TAXABLE I N C O M E FOR PURPOSE OF COMPUTING L I M I T A T I O N. — " (1) PERSONAL EXEMPTIONS.—For purposes of subsection (a),

the taxable income i n the case of a n individual, estate, or trust shall be computed without any deduction for personal exemptions under section 151 or 6 4 2 (b).

-

" (2) CAPITAL G A I N S. — For purposes of subsection (a) —

" (A) CORPORATIONS.—In the case of a corporation— " (i) the taxable income of such corporation from sources without the United States shall include gain from the sale or exchange of capital assets only in an amount equal to foreign source capital gain net income reduced by three-eighths of foreign source n e t capital S^^. . . . " ( i i) the entire taxable income of such corporation shall include gain from the sale or exchange of capital assets only in an amount equal to capital gain net income reduced by three-eights of net capital gain, and " ( i i i) any net capital loss from sources without the United States to the extent taken into account in determining capital gain net income for the taxable year shall be reduced by an amount equal to three-eighths of the excess of net capital gain from sources within the United States over net capital gain. " (B) OTHER TAXPAYERS.—In the case of a tax p a y e r other

than a tax p a y e r described in subparagraph (A), taxable income from sources without the United States shall include gain from the sale or exchange of capital assets only to the extent of foreign source capital gain net income. " (3) DEFINITIONS. — For purposes of this subsection— " (A) FOREIGN SOURCE CAPITAL GAIN NET INCOME.—The term

'foreign source capital gain net income' means the lesser of— " (i) capital gain net income from sources without the United States, or " (ii) capital gain net income. " (B) FOREIGN SOURCE N E T CAPITAL G A I N. — The term 'for-

eign source "(i) States, "(ii)

net capital gain' means the lesser of— net capital gain from sources without the United or net capital gain.

" (C) EXCEPTION FOR GAIN FROM THE SALE o r CERTAIN PER-

SONAL PROPERTY.—For purposes of this paragraph, there shall be included as gain from sources within the United States any gain from sources without the United States from the sale or exchange of a capital asset which is personal property which— " (i) i n the case of an individual, is sold or exchanged outside of the country (or possession) of the individual's residence, " ( i i) in the case of a corporation, is stock in a second corporation sold or exchanged other than in a country (or possession) i n which such second corporation derived more than 50 percent of its gross income for the 3-year

r

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 PUBLIC LAW 94-455—OCT. 4, 1976

9 0 STAT. 1630

"Gain from the sale or exchange of capital assets." 26 USC 904 note. Ante, p. 1620.

period ending with the close of such second corporation's taxable year immediately preceding the year during which the sale or exchange occurred, or " ( i i i) in the case of any taxpayer, is personal property (other than stock in a corporation) sold or exchanged other than in a country (or possession) in which such property is used in a trade or business of the taxpayer or in which such taxpayer derived more than 50 percent of its gross income for the 3-year period ending with the close of its taxable year immediately preceding the year during which the sale or exchange occurred, unless such gain is subject to an income, war profits, or excess profits tax of a foreign country or possession of the United States, and the rate of tax applicable to such gain is 10 percent or more of the gain from the sale or exchange (computed under this chapter). " (D) SECTION I 2 3 I GAINS.—The term 'gain from the sale or exchange of capital assets' includes any gain so treated under section 1231." (b) EFFECTIVE DATES.—The amendment made by this section shall apply to taxable years beginning after December 31, 1975, except that the provisions of section 904(b)(3)(C) shall only apply to sales or exchanges made after November 12, 1975. SEC. 1035. FOREIGN OIL AND GAS EXTRACTION INCOME. (a) REDUCTION I N L I M I T A T I O N ON FOREIGN T A X CREDITS ALLOWABLE

26 USC 907.

FOR O I L AND GAS EXTRACTION INCOME.—Subsection (a) of section 907

(relating to reduction in amounts allowable as foreign tax under section 901) is amended to read as follows: "(a)

REDUCTION I N A M O U N T ALLOWED AS FOREIGN T A X UNDER S E C -

TION 901.—In a p p l y i n g section 901, the amount of any oil and gas extraction taxes paid or accrued (or deemed to have been paid) during the taxable year which would (but for this subsection) be taken into account for purposes of section 901 shall be reduced by the amount (if any) by which the amount of such taxes exceeds the product of— " (1) the amount of the foreign oil and gas extraction income for the taxable year, multiplied by " (2) the percentage which is the sum of the normal tax rate and the surtax rate for the taxable year specified in section 1 1. " (b)

FOREIGN

O I L RELATED

INCOME

EARNED BY

INDIVIDUALS.—

Subsection (b) of section 907 (relating to special rules in case of foreign oil and gas income) is amended to read as follows: " (b) APPLICATION OF SECTION 904 L I M I T A T I O N. —

Ante, p. 1620.

" (1) CORPORATIONS.—In the case of a corporation, the provisions of section 904 shall be applied separately with respect to— " (A) foreign oil related income, and " (B) other taxable income. " (2) OTHER TAXPAYERS.—In the case of a taxpayer other than a corporation, the provisions of subsection (a) shall not apply and the provisions of section 904 shall be applied separately with respect to— " (A) foreign oil and gas extraction income, and " (B) other taxable income (including other foreign oil related income). I n the case of a corporation, with respect to foreign oil-related income, and in the case of a taxpayer other than a corporation, with respect to foreign oil and gas extraction income, the overall limitation provided

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