[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[H.R. 2513 Introduced in House (IH)]







105th CONGRESS
  1st Session
                                H. R. 2513

 To amend the Internal Revenue Code of 1986 to restore and modify the 
  provision of the Taxpayer Relief Act of 1997 relating to exempting 
 active financing income from foreign personal holding company income 
 and to provide for the nonrecognition of gain on the sale of stock in 
       agricultural processors to certain farmers' cooperatives.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                           September 23, 1997

   Mr. Archer (for himself, Mr. Hulshof, Mr. Rangel, Mr. Thomas, Mr. 
Houghton, Mr. Nussle, Ms. Dunn, and Mr. Levin) introduced the following 
  bill; which was referred to the Committee on Ways and Means, and in 
      addition to the Committee on the Budget, for a period to be 
subsequently determined by the Speaker, in each case for consideration 
  of such provisions as fall within the jurisdiction of the committee 
                               concerned

_______________________________________________________________________

                                 A BILL


 
 To amend the Internal Revenue Code of 1986 to restore and modify the 
  provision of the Taxpayer Relief Act of 1997 relating to exempting 
 active financing income from foreign personal holding company income 
 and to provide for the nonrecognition of gain on the sale of stock in 
       agricultural processors to certain farmers' cooperatives.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. EXEMPTION FOR ACTIVE FINANCING INCOME.

    (a) Exemption From Foreign Personal Holding Company Income.--
Section 954 of the Internal Revenue Code of 1986 (as amended by 
subsection (d)) is amended by adding at the end the following new 
subsection:
    ``(h) Special Rule for Income Derived in the Active Conduct of 
Insurance Businesses and Banking, Financing, or Similar Businesses.--
            ``(1) In general.--For purposes of subsection (c)(1), 
        foreign personal holding company income shall not include 
        income which is--
                    ``(A) derived in the active conduct by a controlled 
                foreign corporation of a banking, financing, or similar 
                business, but only if--
                            ``(i) the corporation is predominantly 
                        engaged in the active conduct of such business, 
                        and
                            ``(ii) such income is derived from 
                        transactions with customers located within the 
                        country under the laws of which the corporation 
                        is created or organized,
                    ``(B) received from a person other than a related 
                person (within the meaning of subsection (d)(3)) and 
                derived from the investments made by a qualifying 
                insurance company of its reserves or of 80 percent of 
                its unearned premiums (as both are determined in the 
                manner prescribed under paragraph (4)), or
                    ``(C) received from a person other than a related 
                person (within the meaning of subsection (d)(3)) and 
                derived from investments made by a qualifying insurance 
                company of an amount of its assets equal to--
                            ``(i) in the case of contracts regulated in 
                        the country in which sold as property, 
                        casualty, or health insurance contracts, one-
                        third of its premiums earned on such insurance 
                        contracts during the taxable year (as defined 
                        in section 832(b)(4)), and
                            ``(ii) in the case of contracts regulated 
                        in the country in which sold as life insurance 
                        or annuity contracts, 10 percent of the 
                        reserves described in subparagraph (B) for such 
                        contracts.
            ``(2) Predominantly engaged.--For purposes of paragraph 
        (1)(A), a controlled foreign corporation shall be deemed 
        predominantly engaged in the active conduct of a banking, 
        financing, or similar business only if--
                    ``(A) more than 70 percent of its gross income is 
                derived from such business from transactions with 
                customers which are located within the country under 
                the laws of which the corporation is created or 
                organized, or
                    ``(B) the corporation is--
                            ``(i) engaged in the active conduct of a 
                        banking business and is an institution licensed 
                        to do business as a bank in the United States 
                        (or is any other corporation not so licensed 
                        which is specified by the Secretary in 
                        regulations), or
                            ``(ii) engaged in the active conduct of a 
                        securities business and is registered as a 
                        securities broker or dealer under section 15(a) 
                        of the Securities Exchange Act of 1934 or is 
                        registered as a Government securities broker or 
                        dealer under section 15C(a) of such Act (or is 
                        any other corporation not so registered which 
                        is specified by the Secretary in regulations).
            ``(3) Principles for determining insurance income.--Except 
        as provided by the Secretary, for purposes of paragraphs (1) 
        (B) and (C)--
                    ``(A) in the case of any contract which is a 
                separate account-type contract (including any variable 
contract not meeting the requirements of section 817), income credited 
under such contract shall be allocable only to such contract, and
                    ``(B) income not allocable under subparagraph (A) 
                shall be allocated ratably among contracts not 
                described in subparagraph (A).
            ``(4) Methods for determining unearned premiums and 
        reserves.--For purposes of paragraph (1)(B)--
                    ``(A) Property and casualty contracts.--The 
                unearned premiums and reserves of a qualifying 
                insurance company with respect to property, casualty, 
                or health insurance contracts shall be determined using 
                the same methods and interest rates which would be used 
                if such company were subject to tax under subchapter L.
                    ``(B) Life insurance and annuity contracts.--The 
                amount of the reserve of a qualifying insurance company 
                for any life insurance or annuity contract shall be 
                equal to the greater of--
                            ``(i) the net surrender value of such 
                        contract (as defined in section 807(e)(1)(A)), 
                        or
                            ``(ii) the reserve determined under 
                        paragraph (5).
                    ``(C) Limitation on reserves.--In no event shall 
                the reserve determined under this paragraph for any 
                contract as of any time exceed the amount which would 
                be taken into account with respect to such contract as 
                of such time in determining foreign statement reserves 
                (less any catastrophe, deficiency, or similar 
                reserves).
            ``(5) Amount of reserve.--The amount of the reserve 
        determined under this paragraph with respect to any contract 
        shall be determined in the same manner as it would be 
        determined if the qualifying insurance company were subject to 
        tax under subchapter L, except that in applying such 
        subchapter--
                    ``(A) the interest rate determined for the foreign 
                country in which such company is created or organized 
                and which, except as provided by the Secretary, is 
                calculated in the same manner as the Federal mid-term 
                rate under section 1274(d) shall be substituted for the 
                applicable Federal interest rate,
                    ``(B) the highest assumed interest rate permitted 
                to be used in determining foreign statement reserves 
                shall be substituted for the prevailing State assumed 
                interest rate, and
                    ``(C) tables for mortality and morbidity which 
                reasonably reflect the current mortality and morbidity 
                risks in the foreign country shall be substituted for 
                the mortality and morbidity tables otherwise used for 
                such subchapter.
            ``(6) Definitions.--For purposes of this subsection--
                    ``(A) Qualifying insurance company.--The term 
                `qualifying insurance company' means any entity which--
                            ``(i) is subject to regulation as an 
                        insurance company by the country under the laws 
                        of which the entity is created or organized,
                            ``(ii) derives at least 50 percent of its 
                        net written premiums from the insurance or 
                        reinsurance of risks located within such 
                        country, and
                            ``(iii) is engaged in the active conduct of 
                        an insurance business and would be subject to 
                        tax under subchapter L if it were a domestic 
                        corporation.
                    ``(B) Life insurance or annuity contract.--For 
                purposes of this section and section 953, the 
                determination of whether a contract issued by a 
                controlled foreign corporation is a life insurance 
                contract or an annuity contract shall be made without 
                regard to sections 72(s), 101(f), 817(h), and 7702 if--
                            ``(i) such contract is regulated as a life 
                        insurance or annuity contract by the country 
                        under the laws of which the corporation is 
                        created or organized, and
                            ``(ii) no policyholder, insured, annuitant, 
                        or beneficiary with respect to the contract is 
                        a United States person.
                    ``(C) Located.--
                            ``(i) In general.--The determination of 
                        where a customer is located shall be made under 
                        rules prescribed by the Secretary.
                            ``(ii) Special rule for qualified business 
                        units.--Gross income derived by a corporation's 
qualified business unit (within the meaning of section 989(a)) from 
transactions with customers which are located in the country in which 
the qualified business unit both maintains its principal office and 
conducts substantial business activity shall be treated as derived from 
transactions with customers which are located within the country under 
the laws of which the controlled foreign corporation is created or 
organized.
                    ``(D) Customer.--
                            ``(i) In general.--The term `customer' 
                        means, with respect to any controlled foreign 
                        corporation, any person which has a customer 
                        relationship with such corporation.
                            ``(ii) Exception for related, etc. 
                        persons.--A person who is a related person (as 
                        defined in section 954(d)(3)), an officer, a 
                        director, or an employee with respect to any 
                        controlled foreign corporation shall not be 
                        treated as a customer with respect to any 
                        transaction if a principal purpose of such 
                        transaction is to satisfy any requirement of 
                        this subsection.
            ``(7) Anti-abuse rules.--For purposes of applying this 
        subsection and subsection (c)(2)(C)(ii), there shall be 
        disregarded any item of income, gain, loss, or deduction with 
        respect to any transaction or series of transactions one of the 
        principal purposes of which is qualifying income or gain for 
        the exclusion under this section, including--
                    ``(A) any change in the method of computing 
                reserves or any other transaction or series of 
                transactions a principal purpose of which is the 
                acceleration or deferral of any item in order to claim 
                the benefits of such exclusion through the application 
                of this subsection, and
                    ``(B) organizing entities in order to satisfy any 
                same country requirement under this subsection.
            ``(8) Coordination with other provisions.--
                    ``(A) Section 901(k).--This subsection, subsection 
                (c)(2)(C)(ii), and subsection (e)(2)(C) shall not apply 
                for any taxable year of a foreign corporation unless 
                such corporation (and all members of each affiliated 
                group of which such corporation is a member) elect not 
                to have the provisions of section 901(k)(4) apply to 
                any taxes paid or accrued during such taxable year by 
                such foreign corporation or any such member.
                    ``(B) Section 953.--This subsection shall not apply 
                to investment income allocable to contracts that insure 
                related party risks or risks located in a foreign 
                country other than the country in which the qualifying 
                insurance company is created or organized.
            ``(9) Application.--This subsection, subsection 
        (c)(2)(C)(ii), and subsection (e)(2)(C) shall apply only to the 
        first full taxable year of a foreign corporation beginning 
        after December 31, 1997, and before January 1, 1999, and to 
        taxable years of United States shareholders with or within 
        which such taxable year of such foreign corporation ends.''.
    (b) Special Rules for Dealers.--Section 954(c)(2)(C) of such Code 
is amended to read as follows:
                    ``(C) Exception for dealers.--Except as provided by 
                regulations, in the case of a regular dealer in 
                property (within the meaning of paragraph (1)(B)), 
                forward contracts, option contracts, or similar 
                financial instruments (including notional principal 
                contracts and all instruments referenced to 
                commodities), there shall not be taken into account in 
                computing foreign personal holding income--
                            ``(i) any item of income, gain, deduction, 
                        or loss (other than any item described in 
                        subparagraph (A), (E), or (G) of paragraph (1)) 
                        from any transaction (including hedging 
                        transactions) entered into in the ordinary 
                        course of such dealer's trade or business as 
                        such a dealer, and
                            ``(ii) if such dealer is a dealer in 
                        securities (within the meaning of section 475), 
                        any interest or dividend or equivalent amount 
                        described in subparagraph (E) or (G) of 
                        paragraph (1) from any transaction (including 
                        any hedging transaction or transaction 
                        described in section 956(c)(2)(J)) entered into 
                        in the ordinary course of such dealer's trade 
                        or business as such a dealer in securities, but 
                        only if employees of the dealer which are 
                        located in the country under the laws of which 
                        the dealer is created or organized (or in the 
                        case of a qualified business unit described in 
section 989(a) which both maintains its principal office and conducts 
substantial business activity in a country, employees of such unit 
which are located in such country) materially participate in such 
transaction.''.
    (c) Exemption From Foreign Base Company Services Income.--Paragraph 
(2) of section 954(e) of such Code (as amended by subsection (d)) is 
amended by striking ``or'' at the end of subparagraph (A), by striking 
the period at the end of subparagraph (B) and inserting ``, or'', and 
by adding at the end the following:
                    ``(C)(i) a transaction the income from which is not 
                foreign personal holding company income by reason of 
                subsection (h), or
                    ``(ii) a transaction to which subsection 
                (c)(2)(C)(ii) applies.''.
    (d) Repeal of Canceled Provisions.--Section 1175 of the Taxpayer 
Relief Act of 1997, and the amendments made by such section, are hereby 
repealed, and the Internal Revenue Code of 1986 shall be applied and 
administered as if such section (and amendments) had never been 
enacted.
    (e) Budgetary Treatment.--For purposes of section 10213 of the 
Balanced Budget Act of 1997, the provisions of this section shall be 
considered to have been enacted as part of the Taxpayer Relief Act of 
1997.

SEC. 2. NONRECOGNITION OF GAIN ON SALE OF STOCK TO CERTAIN FARMERS' 
              COOPERATIVES.

    (a) In General.--Part III of subchapter O of chapter 1 of the 
Internal Revenue Code of 1986 (relating to nontaxable exchanges) is 
amended by inserting after section 1042 the following new section:

``SEC. 1042A. SALES OF STOCK TO CERTAIN FARMERS' COOPERATIVES.

    ``(a) Nonrecognition of Gain.--If--
            ``(1) the taxpayer elects the application of this section 
        with respect to any sale of qualified agricultural processor 
        stock,
            ``(2) the taxpayer purchases qualified replacement property 
        within the replacement period, and
            ``(3) the requirements of subsection (c) are met with 
        respect to such sale,
then the gain (if any) on such sale which would be recognized as long-
term capital gain shall be recognized only to the extent that the 
amount realized on such sale exceeds the cost to the taxpayer of such 
qualified replacement property.
    ``(b) Limitation.--
            ``(1) In general.--If subsection (a) applies to the sale of 
        any stock by the taxpayer in a qualified agricultural 
        processor, the aggregate amount of gain taken into account by 
        the taxpayer under subsection (a) with respect to stock in such 
        processor shall not exceed the amount of the limitation under 
        paragraph (2) which is allocated to such sale by the eligible 
        farmers' cooperative.
            ``(2) Allocation.--The amount allocated under this 
        paragraph by any cooperative with respect to stock acquired by 
        such cooperative during any taxable year of such cooperative 
        shall not exceed $75,000,000.
            ``(3) Aggregation rules.--All eligible farmers' 
        cooperatives which are under common control (within the meaning 
        of subsection (a) or (b) of section 52) shall be treated as 1 
        cooperative for purposes of paragraph (2), and the limitation 
        under such paragraph shall be allocated among such cooperatives 
        in such manner as the Secretary shall prescribe.
    ``(c) Requirements To Qualify for Nonrecognition.--A sale of 
qualified agricultural processor stock meets the requirements of this 
subsection if--
            ``(1) Sale to eligible farmers' cooperative.--Such stock is 
        sold to an eligible farmers' cooperative.
            ``(2) Cooperative must hold 100 percent of stock after 
        sale.--The eligible farmers' cooperative owns, immediately 
        after the sale, all of the qualified agricultural processor 
        stock of the corporation.
            ``(3) Written statement and holding period.--Requirements 
        similar to the requirements of paragraphs (3) and (4) of 
        section 1042(b) are met.
    ``(d) Definitions.--For purposes of this section--
            ``(1) Qualified agricultural processor stock.--The term 
        `qualified agricultural processor stock' means stock (other 
        than stock described in section 1504(a)(4)) issued by a 
        qualified agricultural processor.
            ``(2) Qualified agricultural processor.--The term 
        `qualified agricultural processor' means a domestic C 
        corporation--
                    ``(A) substantially all of the assets of which are 
                used in the active conduct of the trade or business of 
                refining or processing agricultural or horticultural 
                products in the United States, and
                    ``(B) which, during at least 3 of the 5 most recent 
                taxable years of such processor ending on or before the 
                date of the sale, purchased more than one-half of such 
                products to be refined or processed from--
                            ``(i) farmers who make up the eligible 
                        farmers' cooperative which is purchasing stock 
                        in the corporation in a transaction to which 
                        this subsection is to apply, or
                            ``(ii) such cooperative.
            ``(3) Eligible farmers' cooperative.--The term `eligible 
        farmers' cooperative' means an organization to which part I of 
        subchapter T applies and which is engaged in the marketing of 
        agricultural or horticultural products.
            ``(4) Replacement period.--The term `replacement period' 
        means the period which begins 3 months before the date on which 
        the sale of qualified agricultural processor stock occurs and 
        which ends 12 months after the date of such sale.
            ``(5) Qualified replacement property.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the term `qualified replacement 
                property' has the meaning given such term by section 
                1042(c)(4).
                    ``(B) Exception.--The term `qualified replacement 
                property' shall not include any security issued by the 
                taxpayer or by any corporation controlled by the 
                taxpayer immediately after the purchase. For purposes 
                of the preceding sentence, the term `control' has the 
                meaning given such term by section 304(c) (determined 
                by substituting `10 percent' for `50 percent' each 
                place it appears in paragraph (1) thereof).
    ``(e) Special Rules.--
            ``(1) In general.--Except as otherwise provided in this 
        subsection, rules similar to the rules of paragraphs (5) and 
        (6) of section 1042(c), subsections (d), (e), and (f) of 
        section 1042, section 1016(a)(22), and section 1223(13) shall 
        apply for purposes of this section.
            ``(2) Certain provisions not to apply.--
                    ``(A) Recognition on complete liquidation.--Section 
                332 shall not apply to the liquidation into the 
                cooperative or any related person of a qualified 
                agricultural processor if the cooperative or related 
                person acquired the stock in such processor in a sale 
                to which subsection (a) applied.
                    ``(B) Deemed sale election not available.--No 
                election may be made under section 338(h)(10) with 
                respect to a sale to which subsection (a) applies.
    ``(f) Coordination With Section 1042.--No election may be made 
under this section with respect to any sale if an election is made 
under section 1042 with respect to such sale.''
    (b) Excise Tax on Sale By Cooperative of Stock in Processor.--
Chapter 43 of such Code is amended by inserting after section 4978 the 
following new section:

``SEC. 4978A. TAX ON CERTAIN DISPOSITIONS OF STOCK TO WHICH SECTION 
              1042A APPLIED.

    ``(a) Imposition of Tax.--If, during the 3-year period beginning on 
the date on which the eligible farmers' cooperative acquired stock in a 
qualified agricultural processor in a sale to which section 1042A 
applied, such cooperative disposes of any stock in such processor, 
there is hereby imposed a tax on the disposition equal to 10 percent of 
the amount realized on the disposition.
    ``(b) Liability for Tax.--The tax imposed by this section shall be 
paid by the eligible farmers' cooperative.
    ``(c) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Terms used in section 1042a.--Terms used in this 
        section which also are used in section 1042A shall have the 
        respective meanings given such terms by section 1042A.
            ``(2) Disposition.--
                    ``(A) In general.--The term `disposition' includes 
                any distribution.
                    ``(B) Exchanges as part of reorganization.--Such 
                term shall not include an exchange of stock in any 
                reorganization described in section 368(a)(1) for stock 
                of another corporation except to the extent that such 
                reorganization results in the cooperative owning 
                directly or indirectly less than all outstanding stock 
                of the processor (other than stock described in section 
                1504(a)(4)).
                    ``(C) Issuances of new stock.--Any issuance of new 
                stock of the processor (other than to the cooperative) 
                shall be treated as a disposition of such stock by the 
                cooperative and the cooperative shall be treated as 
                realizing on such disposition an amount equal to the 
                fair market value of such stock as of the date of 
                issuance.
            ``(3) Ordering rule.--In any case in which the eligible 
        farmers' cooperative holds stock in a qualified agricultural 
        processor which was acquired in a sale to which section 1042A 
        applied and holds stock in such processor which was not so 
        acquired, any disposition of stock by the cooperative shall be 
        treated as the disposition of stock acquired in the sale to 
        which section 1042A applied to the extent thereof.''
    (c) Clerical Amendments.--
            (1) The table of sections for part III of subchapter O of 
        chapter 1 of such Code is amended by inserting after the item 
        relating to section 1042 the following new item:

                              ``Sec. 1042A. Sales of stock to certain 
                                        farmers' cooperatives.''
            (2) The table of sections for chapter 43 of such Code is 
        amended by inserting after the item relating to section 4978 
        the following new item:

                              ``Sec. 4978A. Tax on certain dispositions 
                                        of stock to which section 1042A 
                                        applied.''
    (d) Effective Date.--The amendments made by this section shall 
apply to sales after December 31, 1997.
    (e) Budgetary Treatment.--For purposes of section 10213 of the 
Balanced Budget Act of 1997, the provisions of this section shall be 
considered to have been enacted as part of the Taxpayer Relief Act of 
1997.
                                 <all>