[Congressional Bills 106th Congress]
[From the U.S. Government Publishing Office]
[H.R. 2270 Introduced in House (IH)]







106th CONGRESS
  1st Session
                                H. R. 2270

   To amend the Internal Revenue Code of 1986 to reform the interest 
                           allocation rules.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             June 17, 1999

Mr. Portman (for himself and Mr. Matsui) introduced the following bill; 
         which was referred to the Committee on Ways and Means

_______________________________________________________________________

                                 A BILL


 
   To amend the Internal Revenue Code of 1986 to reform the interest 
                           allocation rules.

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

SECTION. 1. SHORT TITLE.

    This Act may be cited as the ``Interest Allocation Reform Act''.

SEC. 2. INTEREST ALLOCATION RULES.

    (a) In General.--Section 864 of the Internal Revenue Code of 1986 
(relating to definitions and special rules with respect to source rules 
and general rules relating to foreign income) is amended by 
redesignating subsection (f) as subsection (g) and by inserting after 
subsection (e) the following new subsection:
    ``(f) Election With Respect to Interest Allocation.--For purposes 
of this subchapter--
            ``(1) Election.--
                    ``(A) In general.--If a member of an affiliated 
                group so elects, this subsection shall apply in lieu 
                paragraphs (1) and (5) of subsection (e) for purposes 
                of all allocations and apportionments of interest 
                expense.
                    ``(B) When made; application.--An election under 
                this paragraph may be made only for the taxpayer's 
                first taxable year for which this subsection is 
                effective and for which the taxpayer is a member of an 
                affiliated group. An election under this paragraph 
                shall apply to all members of the affiliated group. An 
                election under this paragraph, once made, shall apply 
                to the taxable year for which made and all subsequent 
                years unless revoked with the consent of the Secretary.
            ``(2) Treatment of affiliated groups.--Except as otherwise 
        provided in this subsection, the taxable income of an 
        affiliated group from sources outside the United States shall 
        be determined by allocating and apportioning interest expense 
        to such income in an amount equal to--
                    ``(A) the total interest expense of the expanded 
                affiliated group which includes such affiliated group, 
                multiplied by
                    ``(B) a percentage equal to the ratio which the 
                foreign assets of the expanded affiliated group bears 
                to all assets of the expanded affiliated group.
            ``(3) Treatment of foreign subsidiary interest expense.--
        Interest expense allocated to foreign source income under the 
        rules of paragraph (2) shall be reduced (but not below zero) by 
        any interest expense incurred by any foreign corporation in the 
        expanded affiliated group to the extent such interest would 
        have been allocated and apportioned to foreign source income of 
        such corporation if this subsection were applied to a group 
        consisting of all the foreign corporations in the expanded 
        affiliated group. A similar reduction shall be made in the case 
        of a corporation described in section 1504(b)(4).
            ``(4) Basis of stock in certain corporations adjusted for 
        earnings and profits.--The basis adjustment rules of subsection 
        (e)(4) shall be applied only to stock in a corporation which is 
        not included in the expanded affiliated group and in which 
        members of the expanded affiliated group own 10 percent or more 
        of the total combined voting power of all classes of stock 
        entitled to vote.
            ``(5) Exception for interest expense of certain domestic 
        subsidiaries.--
                    ``(A) In general.--A domestic corporation which is 
                a member of an affiliated group and which incurs 
                interest expense with respect to qualified indebtedness 
                (as defined in subparagraph (C)) may elect to allocate 
                and apportion interest expense incurred with respect to 
                such qualified indebtedness under the rules of this 
                subsection as if such corporation were the common 
                parent of an expanded affiliated group consisting of 
                such domestic corporation and any corporation at a 
                lower level in the chain of corporations that includes 
                such domestic corporation.
                    ``(B) Equalization rule.--If an election under 
                subparagraph (A) is made by any member of an affiliated 
                group, all interest expense of such affiliated group 
                not incurred with respect to qualified indebtedness 
                shall be allocated and apportioned to foreign source 
                income to the extent such expense does not exceed the 
                amount of all interest expense which, but for this 
                paragraph, would have been so allocated and 
                apportioned.
                    ``(C) Qualified indebtedness.--For purposes of this 
                paragraph, qualified indebtedness means any borrowing 
                from any unrelated party which is not guaranteed (or 
                otherwise directly supported) by any corporation within 
                the same expanded affiliated group as the borrower 
                (other than a corporation at a lower level in the chain 
                of includible corporations). If a borrowing is not 
                treated as qualified indebtedness solely because it is 
                guaranteed (or otherwise directly supported) by another 
                corporation, then--
                            ``(i) such borrowing shall be treated as 
                        the borrowing of such other corporation if such 
                        other corporation is at a higher level in the 
                        chain of includible corporations than the 
                        borrowing corporation, or
                            ``(ii) if such other corporation is in a 
                        different chain of includible corporations, 
                        such borrowing shall be treated as the 
                        borrowing of the first common parent of the 
                        borrowing corporation and the guaranteeing 
                        corporation.
                    ``(D) Effect of certain transactions on qualified 
                indebtedness.--To the extent that a domestic 
                corporation allocating interest expense under the rules 
                of subparagraph (A)--
                            ``(i) distributes dividends or makes other 
                        distributions with respect to its stock in any 
                        year to any member of its affiliated group in 
                        excess of the greater of--
                                    ``(I) its average annual dividend 
                                (expressed as a percentage of current 
                                earnings and profits) during the 5 
                                taxable year period ending with the 
                                taxable year preceding the taxable 
                                year, or
                                    ``(II) 25 percent of its average 
                                annual earnings and profits for such 5 
                                taxable year period, or
                            ``(ii) deals with any related party in any 
                        manner not clearly reflecting the income of the 
                        corporation,
                an amount of qualified indebtedness equal to the excess 
                distribution or the understatement or overstatement of 
                income, as the case may be, shall be recharacterized 
                for purposes of this paragraph as nonqualified 
                indebtedness. If a corporation has not been in 
                existence for 5 taxable years, this subparagraph shall 
                be applied with respect to the period it was in 
                existence.
                    ``(E) Effect of election on group.--If 1 member of 
                an affiliated group makes an election under 
                subparagraph (A), all members of such group shall be 
                treated as having made such election.
            ``(6) Treatment of certain financial institutions.--
                    ``(A) In general.--Any corporation that is 
                predominantly engaged in the active conduct of a 
                banking, insurance, financing, or similar business may 
                elect to be treated as a member of an affiliated or 
                expanded affiliated group only for purposes of applying 
                this subsection to corporations so engaged.
                    ``(B) Definition.--A corporation shall be 
                considered to be predominantly engaged in a banking, 
                insurance, financing, or similar business if at least 
                80 percent of its gross income is income described in 
                section 904(d)(2)(C)(ii) and the regulations 
                thereunder.
                    ``(C) Effect of certain transactions.--Rules 
                similar to the rules of paragraph (5)(D) shall apply in 
                the case of transactions between a corporation included 
                in the group described in subparagraph (A) and another 
                member of the affiliated group that is not included in 
                the group described in subparagraph (A).
                    ``(D) Effect of election on group.--If 1 member of 
                an affiliated group makes an election under 
                subparagraph (A), all members of such group shall be 
                treated as having made such election.
            ``(7) Affiliated group.--For purposes of this subsection--
                    ``(A) Affiliated group.--The term `affiliated 
                group' has the meaning given by such term in section 
                1504(a) (determined without regard to paragraph (2) of 
                section 1504(b)).
                    ``(B) Expanded affiliated group.--The term 
                `expanded affiliated group' means an affiliated group 
                determined without regard to paragraph (2), (3), or (4) 
                of section 1504(b) (but does not include a FSC as 
                defined in section 922(a)).
            ``(8) Regulations.--The Secretary shall prescribe 
        regulations providing for the direct allocation of interest 
        expense in other circumstances where such allocation would be 
        necessary or appropriate to carry out the purposes of this 
        subsection.''
    (b) Conforming Amendment.--Subsection (e) of section 864 is amended 
by striking ``subchapter--'' and inserting ``subchapter, except as 
provided in subsection (f)--''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after December 31, 1999.
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