[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[S. 2231 Introduced in Senate (IS)]







105th CONGRESS
  2d Session
                                S. 2231

 To amend the Internal Revenue Code of 1986 to simplify certain rules 
 relating to the taxation of United States business operating abroad, 
                        and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             June 25, 1998

   Mr. Hatch (for himself, Mr. Baucus, and Mr. Mack) introduced the 
 following bill; which was read twice and referred to the Committee on 
                                Finance

_______________________________________________________________________

                                 A BILL


 
 To amend the Internal Revenue Code of 1986 to simplify certain rules 
 relating to the taxation of United States business operating abroad, 
                        and for other purposes.

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

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``International Tax 
Simplification for American Competitiveness Act of 1998''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.
    (c) Table of Contents.--The table of contents for this Act is as 
follows:

Sec. 1. Short title; amendment of 1986 Code; table of contents.
         TITLE I--TREATMENT OF CONTROLLED FOREIGN CORPORATIONS

Sec. 101. Avoidance of multiple inclusions in section 304 transactions 
                            involving foreign corporations.
Sec. 102. Exemption for active financing income.
Sec. 103. Study of proper treatment of European Union under same 
                            country exceptions.
Sec. 104. Expansion of de minimis rule under subpart F.
Sec. 105. Subpart F earnings and profits determined under generally 
                            accepted accounting principles.
Sec. 106. Clarification of treatment of pipeline transportation income.
Sec. 107. Subpart F treatment of income from transmission of high 
                            voltage electricity.
Sec. 108. Look-through treatment for sales of partnership interests.
Sec. 109. Effective date.
          TITLE II--PROVISIONS RELATING TO FOREIGN TAX CREDIT

Sec. 201. Extension of period to which excess foreign taxes may be 
                            carried.
Sec. 202. Recharacterization of overall domestic loss.
Sec. 203. Special rules relating to financial services income.
Sec. 204. Foreign tax credit treatment of dividends from noncontrolled 
                            section 902 corporations.
Sec. 205. Application of look-thru rules to foreign tax credit.
Sec. 206. Ordering rules for foreign tax credit carryovers.
Sec. 207. Repeal of limitation of foreign tax credit under alternative 
                            minimum tax.
                      TITLE III--OTHER PROVISIONS

Sec. 301. Deduction for dividends received from certain foreign 
                            corporations.
Sec. 302. Application of uniform capitalization rules to foreign 
                            persons.
Sec. 303. Treatment of military property of foreign sales corporations.
Sec. 304. United States property not to include certain assets acquired 
                            by dealers in ordinary course of trade or 
                            business.
Sec. 305. Treatment of dividends received from certain regulated 
                            investment companies.
Sec. 306. Regulatory authority to exclude certain preliminary 
                            agreements from definition of intangible 
                            property.
Sec. 307. Airline mileage awards to certain foreign persons.
Sec. 308. Repeal of reduction of subpart F income of export trade 
                            corporations.
Sec. 309. Study of interest allocation.

         TITLE I--TREATMENT OF CONTROLLED FOREIGN CORPORATIONS

SEC. 101. AVOIDANCE OF MULTIPLE INCLUSIONS IN SECTION 304 TRANSACTIONS 
              INVOLVING FOREIGN CORPORATIONS.

    (a) In General.--Subsection (b) of section 304 is amended by adding 
at the end the following new paragraph:
            ``(6) Avoidance of multiple inclusions, etc.--In the case 
        of any acquisition to which subsection (a) applies in which the 
        acquiring corporation or the issuing corporation is a foreign 
        corporation, the Secretary shall prescribe such regulations as 
        are appropriate in order to eliminate a multiple inclusion of 
        any item in income by reason of this subpart and to provide 
        appropriate basis adjustments (including modifications to the 
        application of sections 959 and 961).''
    (b) Conforming Amendment.--Paragraph (5) of section 304(b) is 
amended by striking subparagraph (B) and by redesignating subparagraph 
(C) as subparagraph (B).
    (c) Effective Date.--The amendments made by this section shall take 
effect as if included in the amendments made by section 1013 of the 
Taxpayer Relief Act of 1997.

SEC. 102. 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--
                                    ``(I) with customers located within 
                                the country under the laws of which the 
corporation is created or organized, or
                                    ``(II) with customers not described 
                                in subclause (I), but only if employees 
                                of the corporation which are located in 
                                the country under the laws of which the 
                                corporation 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,
                    ``(B) received from a customer by a controlled 
                foreign corporation which is a qualifying insurance 
                company for the issuing or reinsuring of any insurance 
                or annuity contract, but only if the customer is 
                located in the country under the laws of which the 
                controlled foreign corporation is created or organized,
                    ``(C) 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
                    ``(D) 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 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 life insurance or 
                        annuity contracts, 10 percent of the reserves 
                        described in subparagraph (B) for such 
                        contracts.
        Subparagraphs (C) and (D) shall not apply to income allocable 
        to any contract to which subparagraph (B) does not apply 
        (determined after applying paragraph (6)(D)(ii)).
            ``(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 described 
                in subclause (I) or (II) of paragraph (1)(A)(ii), 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 subparagraphs (C) 
        and (D) of paragraph (1)--
                    ``(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)(C)--
                    ``(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, 
                        and
                            ``(ii) 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) Noncancellable accident and health insurance 
                contracts.--A noncancellable accident and health 
                insurance contract shall be treated for purposes of 
                this subsection in the same manner as a life insurance 
                contract except that paragraph (4)(B)(i) shall not 
                apply.
                    ``(D) 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.
                    ``(E) 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) Special rules relating to 
                        insurance.--For purposes of paragraph (1)(B)--
                                    ``(I) except as provided in 
                                regulations, the customer shall be the 
                                insured under the insurance or annuity 
                                contract, and
                                    ``(II) income received from a 
                                related person (as defined in 
                                subsection (d)(3)) for a policy of 
                                reinsurance shall not be treated as 
                                income received from a customer unless 
                                the premium would have qualified under 
                                paragraph (1)(B) if the controlled 
                                foreign corporation had received the 
                                premium directly from the party first 
                                insured by the customer.
                            ``(iii) Exception for related, etc. 
                        persons.--A person who is a related person (as 
                        defined in subsection (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 or with respect to any 
                        transaction described in paragraph 
                        (1)(A)(ii)(II).
            ``(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 to act as customers in 
                order to satisfy any same country requirement under 
                this subsection.''
    (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 by the controlled foreign 
                corporation if the income from the transaction is not 
                foreign personal holding company income by reason of 
                subsection (h), or
                    ``(ii) a transaction by the controlled foreign 
                corporation if subsection (c)(2)(C)(ii) applies to such 
                transaction.''
    (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.

SEC. 103. STUDY OF PROPER TREATMENT OF EUROPEAN UNION UNDER SAME 
              COUNTRY EXCEPTIONS.

    (a) Study.--The Secretary of the Treasury or the Secretary's 
delegate shall conduct a study on the feasibility of treating all 
countries included in the European Union as 1 country for purposes of 
applying the same country exceptions under subpart F of part III of 
subchapter N of chapter 1 of the Internal Revenue Code of 1986. Such 
study shall include consideration of methods of ensuring that taxpayers 
are subject to a substantial effective rate of foreign tax in such 
countries if such treatment is adopted.
    (b) Report.--Not later than 6 months after the date of enactment of 
this Act, the Secretary of the Treasury shall report to the Committee 
on Ways and Means of the House of Representatives and the Committee on 
Finance of the Senate the results of the study conducted under 
subsection (a), including recommendations (if any) for legislation.

SEC. 104. EXPANSION OF DE MINIMIS RULE UNDER SUBPART F.

    (a) In General.--Subparagraph (A) of section 954(b)(3) (relating to 
de minimis, etc., rules) is amended--
            (1) by striking ``5 percent'' in clause (i) and inserting 
        ``10 percent'', and
            (2) by striking ``$1,000,000'' in clause (ii) and inserting 
        ``$2,000,000''.
    (b) Technical Amendments.--
            (1) Clause (ii) of section 864(d)(5)(A) is amended by 
        striking ``5 percent or $1,000,000'' and inserting ``10 percent 
        or $2,000,000''.
            (2) Clause (i) of section 881(c)(5)(A) is amended by 
        striking ``5 percent or $1,000,000'' and inserting ``10 percent 
        or $2,000,000''.

SEC. 105. SUBPART F EARNINGS AND PROFITS DETERMINED UNDER GENERALLY 
              ACCEPTED ACCOUNTING PRINCIPLES.

    (a) In General.--Subsection (a) of section 964 (relating to 
miscellaneous provisions) is amended by striking ``rules substantially 
similar to those applicable to domestic corporations, under regulations 
prescribed by the Secretary'' and inserting ``generally accepted 
accounting principles in the United States''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to distributions during, and the determination of the inclusion 
under section 951 of the Internal Revenue Code of 1986 with respect to, 
taxable years of foreign corporations beginning after December 31, 
1998.

SEC. 106. CLARIFICATION OF TREATMENT OF PIPELINE TRANSPORTATION INCOME.

    Section 954(g)(1) (defining foreign base company oil related 
income) 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 inserting after subparagraph (B) the following new 
subparagraph:
                    ``(C) the pipeline transportation of oil or gas 
                within such foreign country.''

SEC. 107. SUBPART F TREATMENT OF INCOME FROM TRANSMISSION OF HIGH 
              VOLTAGE ELECTRICITY.

    Section 954(e) (relating to foreign base company services income) 
is amended by adding at the end the following new paragraph:
            ``(3) Exception for income from transmission of high 
        voltage electricity.--The term `foreign base company services 
        income' does not include income derived in connection with the 
        performance of services which are related to the transmission 
        of high voltage electricity.''

SEC. 108. LOOK-THROUGH TREATMENT FOR SALES OF PARTNERSHIP INTERESTS.

    (a) In General.--Section 954(c) (defining foreign personal holding 
company income) is amended by adding at the end the following new 
paragraph:
            ``(4) Look-through rule for certain partnership sales.--
                    ``(A) In general.--In the case of any sale by a 
                controlled foreign corporation of an interest in a 
                partnership with respect to which such corporation is a 
                10-percent owner, such corporation shall be treated for 
                purposes of this subsection as selling the 
                proportionate share of the assets of the partnership 
                attributable to such interest.
                    ``(B) 10-percent owner.--For purposes of this 
                paragraph, the term `10-percent owner' means a 
                controlled foreign corporation which owns 10 percent or 
                more of the capital or profits interest in the 
                partnership. The constructive ownership rules of 
                section 958(b) shall apply for purposes of the 
                preceding sentence.''
    (b) Conforming Amendment.--Section 954(c)(1)(B)(ii) is amended by 
inserting ``except as provided in paragraph (4),'' before ``which''.

SEC. 109. EFFECTIVE DATE.

    Except as otherwise provided in this title, the amendments made by 
this title shall apply to taxable years of controlled foreign 
corporations beginning after December 31, 1998, and taxable years of 
United States shareholders with or within which such taxable years of 
controlled foreign corporations end.

          TITLE II--PROVISIONS RELATING TO FOREIGN TAX CREDIT

SEC. 201. EXTENSION OF PERIOD TO WHICH EXCESS FOREIGN TAXES MAY BE 
              CARRIED.

    (a) General Rule.--Subsection (c) of section 904 (relating to 
carryback and carryover of excess tax paid) is amended by striking ``in 
the first, second, third, fourth, or fifth'' and inserting ``in any of 
the first 10''.
    (b) Excess Extraction Taxes.--Paragraph (1) of section 907(f) is 
amended by striking ``in the first, second, third, fourth, or fifth'' 
and inserting ``in any of the first 10''.
    (c) Effective Date.--The amendments made by this section shall 
apply to excess foreign taxes arising in taxable years beginning after 
December 31, 1998.

SEC. 202. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.

    (a) General Rule.--Section 904 is amended by redesignating 
subsections (g), (h), (i), (j), and (k) as subsections (h), (i), (j), 
(k), and (l) respectively, and by inserting after subsection (f) the 
following new subsection:
    ``(g) Recharacterization of Overall Domestic Loss.--
            ``(1) General rule.--For purposes of this subpart, in the 
        case of any taxpayer who sustains an overall domestic loss for 
        any taxable year beginning after December 31, 1998, that 
        portion of the taxpayer's taxable income from sources within 
        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 years), or
                    ``(B) 50 percent of the taxpayer's taxable income 
                from sources within the United States for such 
                succeeding taxable year,
        shall be treated as income from sources without the United 
        States (and not as income from sources within the United 
        States).
            ``(2) Overall domestic loss defined.--For purposes of this 
        subsection and section 936--
                    ``(A) In general.--The term `overall domestic loss' 
                means any domestic loss to the extent such loss offsets 
                taxable income from sources without the United States 
                for the taxable year or for any preceding taxable year 
                by reason of a carryback. For purposes of the preceding 
                sentence, the term `domestic loss' means the amount by 
                which the gross income for the taxable year from 
                sources within the United States is exceeded by the sum 
                of the deductions properly apportioned or allocated 
                thereto (determined without regard to any carryback 
                from a subsequent taxable year).
                    ``(B) Taxpayer must have elected foreign tax credit 
                for year of loss.--The term `overall domestic loss' 
                shall not include any loss for any taxable year unless 
                the taxpayer chose the benefits of this subpart for 
                such taxable year.
            ``(3) Characterization of subsequent income.--
                    ``(A) In general.--Any income from sources within 
                the United States that is treated as income from 
                sources without the United States under paragraph (1) 
                shall be allocated among and increase the income 
                categories in proportion to the loss from sources 
                within the United States previously allocated to those 
                income categories.
                    ``(B) Income category.--For purposes of this 
                paragraph, the term `income category' has the meaning 
                given to such term by subsection (f)(5)(E)(i).
            ``(4) Coordination with subsection (f).--The Secretary 
        shall prescribe such regulations as may be necessary to 
        coordinate the provisions of this subsection with the 
        provisions of subsection (f).''
    (b) Conforming Amendment.--Subparagraph (A) of section 936(a)(2) is 
amended by striking ``section 904(f)'' and inserting ``subsections (f) 
and (g) of section 904''.
    (c) Effective Date.--The amendments made by this section shall 
apply to losses for taxable years beginning after December 31, 1998.

SEC. 203. SPECIAL RULES RELATING TO FINANCIAL SERVICES INCOME.

    (a) Exception for Interest on Certain Securities.--Subparagraph (B) 
of section 904(d)(2) (relating to high withholding tax interest) is 
amended by redesignating clause (iii) as clause (iv) and by inserting 
after clause (ii) the following new clause:
                            ``(iii) Exception for interest on dealer 
                        property.--The term `high withholding tax 
                        interest' shall not include any interest on a 
                        security (within the meaning of section 
                        475(c)(2)) which is received or accrued by a 
                        person that holds the security in connection 
                        with the holder's activities as a dealer in 
                        securities (within the meaning of section 
                        475(c)(1)).''
    (b) Financial Services Income in Excess of 80 Percent of Gross 
Income.--Subparagraph (C) of section 904(d)(2) (relating to financial 
services income) is amended by adding at the end the following new 
clause:
                            ``(iv) Income exceeding 80 percent of gross 
                        income.--If the financial services income (as 
                        defined by clause (i)) of any person exceeds 80 
                        percent of gross income, the entire gross 
                        income for the taxable year shall be treated as 
                        financial services income.''
    (c) Exception for Income on Dealer Property.--Subsection 904(g) is 
amended by redesignating paragraph (11) as paragraph (12) and by adding 
after paragraph (10) the following new paragraph:
            ``(11) Exception for income on dealer property.--Paragraph 
        (1) shall not apply to any amount derived from a United States-
        owned foreign corporation that is derived from income on a 
        security (within the meaning of section 475(c)(2)) which is 
        received or accrued by a person that holds the security in 
        connection with the holder's activities as a dealer in 
        securities (within the meaning of section 475(c)(1)).''
    (d) Effective Dates.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after December 31, 1998.
            (2) Deemed paid credits.--In the case of any credit under 
        section 901 of the Internal Revenue Code of 1986 by reason of 
        section 902 or 960 of such Code, the amendments made by this 
        section shall apply to taxable years of foreign corporations 
        beginning after December 31, 1998, and to taxable years of 
        United States shareholders in such corporations with or within 
        which such taxable years of foreign corporations end.

SEC. 204. FOREIGN TAX CREDIT TREATMENT OF DIVIDENDS FROM NONCONTROLLED 
              SECTION 902 CORPORATIONS.

    (a) Look-Thru Rules To Apply to Dividends Attributable to Post-1998 
Earnings.--Section 904(d)(4)(B)(ii) (defining applicable dividend) is 
amended by striking ``2002'' and inserting ``1998''.
    (b) Separate Basket Only To Apply to Pre-1999 Earnings.--Each of 
the following provisions are amended by striking ``2003'' and inserting 
``1999'':
            (1) Section 904(d)(1)(E).
            (2) Section 904(d)(2)(C)(iii)(II).
            (3) Section 904(d)(2)(D).
    (c) Coordination With Taxpayer Relief Act.--Section 1105(c) of the 
Taxpayer Relief Act of 1997 is amended by striking ``2002'' and 
inserting ``1998''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1998.

SEC. 205. APPLICATION OF LOOK-THRU RULES TO FOREIGN TAX CREDIT.

    (a) Interest, Rents, and Royalties.--
            (1) Noncontrolled section 902 corporation.--Section 
        904(d)(4)(A) is amended to read as follows:
                    ``(A) In general.--For purposes of this 
                subsection--
                            ``(i) any applicable dividend shall be 
                        treated as income in a separate category in 
                        proportion to the ratio of--
                                    ``(I) the portion of the earnings 
                                and profits described in subparagraph 
                                (B)(ii) attributable to income in such 
                                category, to
                                    ``(II) the total amount of such 
                                earnings and profits, and
                            ``(ii) any interest, rent, or royalty which 
                        is received or accrued from a noncontrolled 
                        section 902 corporation with respect to the 
                        taxpayer shall be treated as income in a 
                        separate category to the extent it is properly 
                        allocable (under regulations prescribed by the 
                        Secretary) to income of such corporation in 
                        such category.''
            (2) Partnerships.--Section 904(d)(6)(C) is amended--
                    (A) by inserting ``or (4)(A)(ii)'' after 
                ``paragraph (3)(C)'', and
                    (B) by inserting ``or noncontrolled section 902 
                corporations, whichever is applicable'' after 
                ``controlled foreign corporations''.
            (3) Conforming amendment.--The heading for section 
        904(d)(4) is amended by inserting ``, interest, rents, or 
        royalties'' after ``dividends''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1998.

SEC. 206. ORDERING RULES FOR FOREIGN TAX CREDIT CARRYOVERS.

    (a) In General.--Section 904(c) (relating to carryback and 
carryover of excess tax paid), as amended by section 201, is amended to 
read as follows:
    ``(c) Carryback and Carryover of Excess Tax Paid.--
            ``(1) In general.--If the sum of--
                    ``(A) the foreign tax credit carryovers under this 
                subsection to a taxable year, plus
                    ``(B) the amount of all taxes paid to foreign 
                countries or possessions of the United States for the 
                taxable year and for which the taxpayer elects to have 
                the benefits of this subpart apply,
        exceeds the limitation under subsection (a), such excess shall 
        be a foreign tax credit carryback to each of the 2 preceding 
        taxable years and a foreign tax credit carryforward to each of 
        the 10 following taxable years.
            ``(2) Ordering rules.--For purposes of any provision of the 
        title where it is necessary to ascertain the extent to which 
        the credits to which this subpart applies are used in a taxable 
        year or as a carryback or carryforward, such taxes shall be 
        treated as used--
                    ``(A) first from carryovers to such taxable year,
                    ``(B) then from credits arising in such taxable 
                year, and
                    ``(C) finally from carrybacks to such taxable year.
            ``(3) Limitations on carryovers.--
                    ``(A) Credit only.--A credit may be carried to a 
                taxable year under this subsection only if the taxpayer 
                chooses for such taxable year to have the benefits of 
                this subpart apply to taxes paid or accrued to foreign 
                countries or any possessions of the United States. Any 
                amount so carried may be availed of only as a credit 
                and not a deduction.
                    ``(B) Limitation to apply.--The amount of the 
                credit carryforward or carryback to a taxable year (the 
                `carryover year') from a taxable year under this 
                subsection shall not exceed the excess (if any) of--
                            ``(i) the limitation under subsection (a) 
                        for the carryover year, over
                            ``(ii) the sum of--
                                    ``(I) the credits arising in the 
                                carryover year, plus
                                    ``(II) carryforwards and carrybacks 
                                to the carryover year from taxable 
                                years earlier than the taxable year 
                                from which the credit is being carried 
                                (whether or not the taxpayer chooses to 
                                have the benefits of this subpart apply 
                                with respect to such earlier taxable 
                                year).''
    (b) Effective Date.--The amendment made by this section applies to 
taxable years beginning after December 31, 1998.

SEC. 207. REPEAL OF LIMITATION OF FOREIGN TAX CREDIT UNDER ALTERNATIVE 
              MINIMUM TAX.

    (a) In General.--Section 59(a) (relating to alternative minimum tax 
foreign tax credit) is amended by striking paragraph (2) and by 
redesignating paragraphs (3) and (4) as paragraphs (2) and (3), 
respectively.
    (b) Conforming Amendment.--Section 53(d)(1)(B)(i)(II) is amended by 
striking ``and if section 59(a)(2) did not apply''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1998.

                      TITLE III--OTHER PROVISIONS

SEC. 301. DEDUCTION FOR DIVIDENDS RECEIVED FROM CERTAIN FOREIGN 
              CORPORATIONS.

    (a) Constructive Ownership Rules To Apply in Determining 80-Percent 
Ownership.--Section 245 (a)(5) (relating to post-1986 undistributed 
U.S. earnings) is amended by adding at the end the following flush 
sentence:
        ``Section 318(a) shall apply for purposes of subparagraph 
        (B).''
    (b) Dividends To Include Subpart F Distributions.--Section 245(a) 
is amended by adding at the end the following new paragraph:
            ``(12) Subpart f inclusions treated as dividends.--For 
        purposes of this subsection, the term `dividend' shall include 
        any amount the taxpayer is required to include in gross income 
        for the taxable year under section 951(a).''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1998.

SEC. 302. APPLICATION OF UNIFORM CAPITALIZATION RULES TO FOREIGN 
              PERSONS.

    (a) In General.--Section 263A(c) (relating to exceptions) is 
amended by adding at the end the following new paragraph:
            ``(7) Foreign persons.--This section shall apply to any 
        taxpayer who is not a United States person only for purposes of 
        applying sections 871(b)(1) and 882(a)(1).''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 1998. Section 481 
of the Internal Revenue Code of 1986 shall not apply to any change in a 
method of accounting by reason of such amendment.

SEC. 303. TREATMENT OF MILITARY PROPERTY OF FOREIGN SALES CORPORATIONS.

    (a) In General.--Section 923(a) (defining exempt foreign trade 
income) is amended by striking paragraph (5) and by redesignating 
paragraph (6) as paragraph (5).
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 1998.

SEC. 304. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN ASSETS ACQUIRED 
              BY DEALERS IN ORDINARY COURSE OF TRADE OR BUSINESS.

    (a) In General.--Section 956(c)(2) is amended by striking ``and'' 
at the end of subparagraph (J), by striking the period at the end of 
subparagraph (K) and inserting ``; and'', and by adding at the end the 
following new subparagraph:
                    ``(L) securities acquired and held by a controlled 
                foreign corporation in the ordinary course of its 
                business as a dealer in securities if (i) the dealer 
                accounts for the securities as securities held 
                primarily for sale to customers in the ordinary course 
                of business, and (ii) the dealer disposes of the 
                securities (or they mature while held by the dealer) 
                within a period consistent with the holding of 
                securities for sale to customers in the ordinary course 
                of business.''
    (b) Conforming Amendment.--Section 956(c)(2) is amended by striking 
``and (K)'' in the last sentence and inserting ``, (K), and (L)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years of foreign corporations beginning after December 
31, 1998, and to taxable years of United States shareholders or with or 
within which such taxable years of foreign corporations end.

SEC. 305. TREATMENT OF DIVIDENDS RECEIVED FROM CERTAIN REGULATED 
              INVESTMENT COMPANIES.

    (a) Nonresident Alien Individuals.--Section 871 (relating to tax on 
nonresident alien individuals) is amended by redesignating subsection 
(k) as subsection (l) and by inserting after subsection (j) the 
following new subsection:
    ``(k) Exemption for Dividends of Certain Regulated Investment 
Companies.--
            ``(1) In general.--Except as provided in paragraph (2), no 
        tax shall be imposed under paragraph (1)(A) of subsection (a) 
        on any qualifying dividend received from a regulated investment 
        company which satisfies the requirements of paragraph (3) for 
        the taxable year to which the dividend relates.
            ``(2) Exceptions.--Paragraph (1) shall not apply--
                    ``(A) to any dividend received from a regulated 
                investment company by a person if such company holds at 
                any time during the year indebtedness issued by such 
                person or by any corporation or partnership with 
                respect to which such person is a 10-percent 
                shareholder,
                    ``(B) to any dividend received from a regulated 
                investment company unless the person who would 
                otherwise be required to deduct and withhold tax from 
                such dividend under chapter 3 receives a statement 
                (which meets requirements similar to the requirements 
                of subsection (h)(5)) that the beneficial owner of such 
                stock is not a United States person,
                    ``(C) to any dividend received from a regulated 
                investment company by any person subject to tax under 
                subsection (a)(2), and
                    ``(D) to any dividend received from a regulated 
                investment company by any person within a foreign 
                country (or any dividend payment addressed to, or for 
                the account of, persons within such foreign country) 
                during any period described in subsection (h)(6) with 
                respect to such country.
        Subparagraph (D) shall not apply to any dividend with respect 
        to any stock which was acquired on or before the date of the 
        publication of the Secretary's determination under subsection 
        (h)(6).
            ``(3) Eligible regulated investment companies.--A regulated 
        investment company satisfies the requirements of this paragraph 
        for a taxable year if--
                    ``(A) the company satisfies the requirements of 
                section 852(a) for the taxable year, and
                    ``(B) the company is a publicly offered regulated 
                investment company (within the meaning of section 
                67(c)(2)(B)).
            ``(4) Qualifying dividend.--
                    ``(A) In general.--For purposes of paragraph (1), a 
                dividend is a qualifying dividend if--
                            ``(i) 95 percent of the company's gross 
                        income for the qualifying dividend measurement 
                        period consists of income from permitted 
                        assets; and
                            ``(ii) the company treats the dividend as 
                        exempt from any requirement to deduct and 
                        withhold tax under section 1441 or 1442.
                    ``(B) Qualifying dividend measurement period.--For 
                purposes of this paragraph, the term `qualifying 
                dividend measurement period' means the 12-month period 
                ending with the last day of the second month preceding 
                the month in which the dividend is paid.
                    ``(C) Permitted assets.--For purposes of this 
                paragraph, and except as provided in subparagraph (D), 
                the term `permitted assets' means--
                            ``(i) debt instruments,
                            ``(ii) cash and cash equivalents,
                            ``(iii) hedges and guarantees of debt 
                        instruments held or to be acquired by the 
                        company,
                            ``(iv) contracts to acquire debt 
                        instruments,
                            ``(v) other interests (including options 
                        and forward contracts) with respect to debt 
                        instruments,
                            ``(vi) stock of a regulated investment 
                        company satisfying the requirements of 
                        paragraph (3), and
                            ``(vii) such other assets as the Secretary 
                        may by regulations prescribe.
                Income with respect to stock of a regulated investment 
                company described in clause (vi) shall be treated as 
                income from permitted assets only to the extent of 
                qualifying dividends received from such company and 
                gain on the sale or exchange of stock in such company 
                which is recognized in a month with respect to which 
                such company satisfies the requirements for payment of 
                a qualifying dividend.
                    ``(D) Exceptions.--The term `permitted asset' shall 
                not include--
                            ``(i) any obligation issued by a 
                        corporation or partnership in which the company 
                        is a 10-percent shareholder,
                            ``(ii) any obligation bearing interest 
                        which is treated as not being portfolio 
                        interest under the rules of subsection (h)(4),
                            ``(iii) any obligation bearing interest or 
                        producing gain subject to a tax imposed by a 
                        foreign jurisdiction if the amount of such tax 
is reduced (or eliminated) by a treaty with the United States,
                            ``(iv) any United States real property 
                        interest (as defined in section 897(c)),
                            ``(v) any notional principal contract with 
                        respect to any obligation described in clauses 
                        (i) through (iv), and
                            ``(vi) such other assets as the Secretary 
                        may by regulations prescribe.
                    ``(E) Antiabuse rule.--A dividend shall not be 
                treated as a qualifying dividend if--
                            ``(i) the company has a principal purpose 
                        of using this subsection to avoid the 
                        provisions of paragraph (1)(A) of subsection 
                        (a) with respect to such dividend and such 
                        dividend is attributable to income other than 
                        income from permitted assets, and
                            ``(ii) the amount of such dividend is 
                        substantial in relation to the amount of the 
                        company's income from permitted assets for the 
                        qualifying dividend measurement period.
            ``(5) 10-percent shareholder.--For purposes of this 
        subsection, the term `10-percent shareholder' has the meaning 
        given to such term by subsection (h)(3)(B).
            ``(6) Regulations.--The Secretary may prescribe such 
        regulations as may be necessary or appropriate to carry out the 
        purposes of this subsection, including regulations to prevent 
        avoidance of the tax imposed by paragraph (1)(A) of subsection 
        (a) through arrangements, structures, or transactions that are 
        inconsistent with the purposes of this subsection.''
    (b) Foreign Corporations.--Section 881 is amended by redesignating 
subsection (e) as subsection (f) and by inserting after subsection (d) 
the following new subsection:
    ``(e) Tax Not To Apply to Dividends of Certain Regulated Investment 
Companies.--
            ``(1) In general.--Except as provided in paragraph (2), no 
        tax shall be imposed under paragraph (1) of subsection (a) on 
        any qualifying dividend (as defined in section 871(k)(4)) 
        received from a regulated investment company which satisfies 
        the requirements of section 871(k)(3).
            ``(2) Exception.--Paragraph (1) shall not apply--
                    ``(A) to any dividend to which section 871(k)(2) 
                applies, and
                    ``(B) to any dividend received by a controlled 
                foreign corporation (within the meaning of section 
                957(a)) if the regulated investment company holds at 
                any time during the taxable year any obligation issued 
                by a person who is a related person (within the meaning 
                of section 864(d)(4)) with respect to such controlled 
                foreign corporation.
            ``(3) Treatment of dividends received by controlled foreign 
        corporations.--The rules of subsection (c)(5)(A) shall apply to 
        any dividend described in paragraph (1) which is received by a 
        controlled foreign corporation (within the meaning of section 
        957(a)).''
    (c) Withholding Taxes.--
            (1) Subsection (c) of section 1441 is amended by adding at 
        the end the following new paragraph:
            ``(12) Dividends received from certain regulated investment 
        companies.--
                    ``(A) In general.--No tax shall be required to be 
                deducted and withheld under subsection (a) from any 
                amount exempt from the tax imposed by section 
                871(a)(1)(A) by reason of section 871(k).
                    ``(B) Special rule.--For purposes of subparagraph 
                (A), subparagraphs (A) and (C) of section 871(k)(2) 
                shall not apply to any dividend unless the regulated 
                investment company knows, or has reason to know, that 
                such dividend is a dividend referred to in either of 
                such subparagraphs.''
            (2) Subsection (a) of section 1442 is amended--
                    (A) by striking ``and the reference in section 
                1441(c)(10)'' and inserting ``the reference in section 
                1441(c)(10)'', and
                    (B) by inserting before the period at the end the 
                following: ``, and the references in section 
                1441(c)(12) to sections 871(a) and 871(k), 
                respectively, shall be treated as referring to sections 
                881(a) and 881(e), respectively (except that for 
                purposes of applying subparagraph (A) of section 
                1441(c)(12), as so modified, subparagraph (B) of 
                section 881(e)(2) shall not apply to any dividend 
                unless the regulated investment company knows, or has 
                reason to know, that such dividend is a dividend 
                referred to in such clause)''.
    (d) Estate Tax Treatment of Interest in Certain Regulated 
Investment Companies.--Section 2105 (relating to property without the 
United States for estate tax purposes) is amended by adding at the end 
the following new subsection:
    ``(d) Stock in a RIC.--
            ``(1) In general.--For purposes of this subchapter, stock 
        in a regulated investment company (as defined in section 851) 
        owned by a nonresident not a citizen of the United States shall 
        not be deemed property within the United States if--
                    ``(A) such investment company satisfies the gross 
                income requirement of section 871(k)(4)(A)(i) with 
                respect to the qualifying dividend measurement period 
                for the month in which the decedent's death occurs, and
                    ``(B) such investment company satisfies the 
                requirements of section 871(k)(3) for the company's 
                taxable year during which the decedent's date of death 
                occurs.
            ``(2) Antiabuse rule.--Paragraph (1) shall not apply if the 
        company is formed or availed of with a principal purpose of 
        avoiding tax with respect to assets held by the company which 
would be property within the United States if held directly by a 
nonresident.''
    (e) Effective Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to dividends with 
        respect to taxable years of regulated investment companies 
        beginning after the date of the enactment of this Act.
            (2) Estate tax treatment.--The amendments made by 
        subsection (d) shall apply to estates of decedents dying in 
        taxable years of regulated investment companies beginning after 
        the date of the enactment of this Act.

SEC. 306. REGULATORY AUTHORITY TO EXCLUDE CERTAIN PRELIMINARY 
              AGREEMENTS FROM DEFINITION OF INTANGIBLE PROPERTY.

    (a) In General.--Section 936(h)(3)(B) (defining intangible property 
is amended by adding at the end the following new sentence: ``The 
Secretary shall by regulation provide that such term shall not include 
any preliminary agreement which is not legally enforceable.''
    (b) Effective Date.--The amendment made by this section shall apply 
to agreements entered into after the date of the enactment of this Act.

SEC. 307. AIRLINE MILEAGE AWARDS TO CERTAIN FOREIGN PERSONS.

    (a) In General.--The last sentence of section 4261(e)(3)(C) is 
amended by inserting ``and mileage awards which are issued to 
individuals whose mailing addresses on record with the person providing 
the air transportation are outside the United States'' before the 
period at the end thereof.
    (b) Effective Date.--The amendment made by this section shall apply 
to amounts paid, and benefits provided, after December 31, 1998.

SEC. 308. REPEAL OF REDUCTION OF SUBPART F INCOME OF EXPORT TRADE 
              CORPORATIONS.

    (a) In General.--Subpart G of part III of subchapter N of chapter 1 
(relating to export trade corporations) is repealed.
    (b) Treatment of Certain Actual Distributions.--
            (1) In general.--For purposes of applying the Internal 
        Revenue Code of 1986 with respect to actual distributions of 
        export trade income made after December 31, 1986, by an export 
        trade corporation or former export trade corporation that was 
        an export trade corporation on December 31, 1986, any export 
        trade income shall be treated as previously taxed income within 
        the meaning of section 959 of such Code.
            (2) Definitions.--For purposes of this subsection--
                    (A) Export trade corporation.--The term ``export 
                trade corporation'' has the meaning given such term by 
                section 971(a) of the Internal Revenue Code of 1986 (as 
                in effect before the amendment made by subsection (a)).
                    (B) Export trade income.--The term ``export trade 
                income'' has the meaning given such term by section 
                971(a) of the Internal Revenue Code of 1986 (as so in 
                effect).
    (c) Conforming Amendments.--
            (1) Section 865(e)(2)(A) is amended by striking the last 
        sentence.
            (2) Section 1297(b)(2)(D) is amended by striking ``or 
        export trade income of an export trade corporation (as defined 
        in section 971)''.
            (3) The table of parts for part III of subchapter N of 
        chapter 1 is amended by striking the item relating to subpart 
        G.
    (d) Effective Dates.--
            (1) In general.--The amendment made by subsection (a) shall 
        take effect on the date of enactment of this Act.
            (2) Distributions.--The amendment made by subsection (b) 
        shall take effect as if included in the amendments made by 
        section 1235 of the Tax Reform Act of 1986.

SEC. 309. STUDY OF INTEREST ALLOCATION.

    (a) Study.--The Secretary of the Treasury or the Secretary's 
delegate shall conduct a study of the rules under section 864(e) of the 
Internal Revenue Code of 1986 for allocating interest expense of 
members of an affiliated group. Such study shall include an analysis of 
the effect of such rules, including the effects such rules have on 
different industries.
    (b) Report.--Not later than 6 months after the date of enactment of 
this Act, the Secretary of the Treasury shall report to the Committee 
on Ways and Means of the House of Representatives and the Committee on 
Finance of the Senate the results of the study conducted under 
subsection (a), including recommendations (if any) for legislation.
                                 <all>