[Congressional Bills 106th Congress]
[From the U.S. Government Publishing Office]
[H.R. 4986 Enrolled Bill (ENR)]

        H.R.4986

                       One Hundred Sixth Congress

                                 of the

                        United States of America


                          AT THE SECOND SESSION

           Begun and held at the City of Washington on Monday,
             the twenty-fourth day of January, two thousand


                                 An Act


 
  To amend the Internal Revenue Code of 1986 to repeal the provisions 
      relating to foreign sales corporations (FSCs) and to exclude 
               extraterritorial income from gross income.

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

SECTION 1. SHORT TITLE.

    (a) Short Title.--This Act may be cited as the ``FSC Repeal and 
Extraterritorial Income Exclusion Act of 2000''.
    (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.

SEC. 2. REPEAL OF FOREIGN SALES CORPORATION RULES.

    Subpart C of part III of subchapter N of chapter 1 (relating to 
taxation of foreign sales corporations) is hereby repealed.

SEC. 3. TREATMENT OF EXTRATERRITORIAL INCOME.

    (a) In General.--Part III of subchapter B of chapter 1 (relating to 
items specifically excluded from gross income) is amended by inserting 
before section 115 the following new section:

``SEC. 114. EXTRATERRITORIAL INCOME.

    ``(a) Exclusion.--Gross income does not include extraterritorial 
income.
    ``(b) Exception.--Subsection (a) shall not apply to 
extraterritorial income which is not qualifying foreign trade income as 
determined under subpart E of part III of subchapter N.
    ``(c) Disallowance of Deductions.--
        ``(1) In general.--Any deduction of a taxpayer allocated under 
    paragraph (2) to extraterritorial income of the taxpayer excluded 
    from gross income under subsection (a) shall not be allowed.
        ``(2) Allocation.--Any deduction of the taxpayer properly 
    apportioned and allocated to the extraterritorial income derived by 
    the taxpayer from any transaction shall be allocated on a 
    proportionate basis between--
            ``(A) the extraterritorial income derived from such 
        transaction which is excluded from gross income under 
        subsection (a), and
            ``(B) the extraterritorial income derived from such 
        transaction which is not so excluded.
    ``(d) Denial of Credits for Certain Foreign Taxes.--Notwithstanding 
any other provision of this chapter, no credit shall be allowed under 
this chapter for any income, war profits, and excess profits taxes paid 
or accrued to any foreign country or possession of the United States 
with respect to extraterritorial income which is excluded from gross 
income under subsection (a).
    ``(e) Extraterritorial Income.--For purposes of this section, the 
term `extraterritorial income' means the gross income of the taxpayer 
attributable to foreign trading gross receipts (as defined in section 
942) of the taxpayer.''.
    (b) Qualifying Foreign Trade Income.--Part III of subchapter N of 
chapter 1 is amended by inserting after subpart D the following new 
subpart:

              ``Subpart E--Qualifying Foreign Trade Income

        ``Sec. 941. Qualifying foreign trade income.
        ``Sec. 942. Foreign trading gross receipts.
        ``Sec. 943. Other definitions and special rules.

``SEC. 941. QUALIFYING FOREIGN TRADE INCOME.

    ``(a) Qualifying Foreign Trade Income.--For purposes of this 
subpart and section 114--
        ``(1) In general.--The term `qualifying foreign trade income' 
    means, with respect to any transaction, the amount of gross income 
    which, if excluded, will result in a reduction of the taxable 
    income of the taxpayer from such transaction equal to the greatest 
    of--
            ``(A) 30 percent of the foreign sale and leasing income 
        derived by the taxpayer from such transaction,
            ``(B) 1.2 percent of the foreign trading gross receipts 
        derived by the taxpayer from the transaction, or
            ``(C) 15 percent of the foreign trade income derived by the 
        taxpayer from the transaction.
    In no event shall the amount determined under subparagraph (B) 
    exceed 200 percent of the amount determined under subparagraph (C).
        ``(2) Alternative computation.--A taxpayer may compute its 
    qualifying foreign trade income under a subparagraph of paragraph 
    (1) other than the subparagraph which results in the greatest 
    amount of such income.
        ``(3) Limitation on use of foreign trading gross receipts 
    method.--If any person computes its qualifying foreign trade income 
    from any transaction with respect to any property under paragraph 
    (1)(B), the qualifying foreign trade income of such person (or any 
    related person) with respect to any other transaction involving 
    such property shall be zero.
        ``(4) Rules for marginal costing.--The Secretary shall 
    prescribe regulations setting forth rules for the allocation of 
    expenditures in computing foreign trade income under paragraph 
    (1)(C) in those cases where a taxpayer is seeking to establish or 
    maintain a market for qualifying foreign trade property.
        ``(5) Participation in international boycotts, etc.--Under 
    regulations prescribed by the Secretary, the qualifying foreign 
    trade income of a taxpayer for any taxable year shall be reduced 
    (but not below zero) by the sum of--
            ``(A) an amount equal to such income multiplied by the 
        international boycott factor determined under section 999, and
            ``(B) any illegal bribe, kickback, or other payment (within 
        the meaning of section 162(c)) paid by or on behalf of the 
        taxpayer directly or indirectly to an official, employee, or 
        agent in fact of a government.
    ``(b) Foreign Trade Income.--For purposes of this subpart--
        ``(1) In general.--The term `foreign trade income' means the 
    taxable income of the taxpayer attributable to foreign trading 
    gross receipts of the taxpayer.
        ``(2) Special rule for cooperatives.--In any case in which an 
    organization to which part I of subchapter T applies which is 
    engaged in the marketing of agricultural or horticultural products 
    sells qualifying foreign trade property, in computing the taxable 
    income of such cooperative, there shall not be taken into account 
    any deduction allowable under subsection (b) or (c) of section 1382 
    (relating to patronage dividends, per-unit retain allocations, and 
    nonpatronage distributions).
    ``(c) Foreign Sale and Leasing Income.--For purposes of this 
section--
        ``(1) In general.--The term `foreign sale and leasing income' 
    means, with respect to any transaction--
            ``(A) foreign trade income properly allocable to activities 
        which--
                ``(i) are described in paragraph (2)(A)(i) or (3) of 
            section 942(b), and
                ``(ii) are performed by the taxpayer (or any person 
            acting under a contract with such taxpayer) outside the 
            United States, or
            ``(B) foreign trade income derived by the taxpayer in 
        connection with the lease or rental of qualifying foreign trade 
        property for use by the lessee outside the United States.
        ``(2) Special rules for leased property.--
            ``(A) Sales income.--The term `foreign sale and leasing 
        income' includes any foreign trade income derived by the 
        taxpayer from the sale of property described in paragraph 
        (1)(B).
            ``(B) Limitation in certain cases.--Except as provided in 
        regulations, in the case of property which--
                ``(i) was manufactured, produced, grown, or extracted 
            by the taxpayer, or
                ``(ii) was acquired by the taxpayer from a related 
            person for a price which was not determined in accordance 
            with the rules of section 482,
        the amount of foreign trade income which may be treated as 
        foreign sale and leasing income under paragraph (1)(B) or 
        subparagraph (A) of this paragraph with respect to any 
        transaction involving such property shall not exceed the amount 
        which would have been determined if the taxpayer had acquired 
        such property for the price determined in accordance with the 
        rules of section 482.
        ``(3) Special rules.--
            ``(A) Excluded property.--Foreign sale and leasing income 
        shall not include any income properly allocable to excluded 
        property described in subparagraph (B) of section 943(a)(3) 
        (relating to intangibles).
            ``(B) Only direct expenses taken into account.--For 
        purposes of this subsection, any expense other than a directly 
        allocable expense shall not be taken into account in computing 
        foreign trade income.

``SEC. 942. FOREIGN TRADING GROSS RECEIPTS.

    ``(a) Foreign Trading Gross Receipts.--
        ``(1) In general.--Except as otherwise provided in this 
    section, for purposes of this subpart, the term `foreign trading 
    gross receipts' means the gross receipts of the taxpayer which 
    are--
            ``(A) from the sale, exchange, or other disposition of 
        qualifying foreign trade property,
            ``(B) from the lease or rental of qualifying foreign trade 
        property for use by the lessee outside the United States,
            ``(C) for services which are related and subsidiary to--
                ``(i) any sale, exchange, or other disposition of 
            qualifying foreign trade property by such taxpayer, or
                ``(ii) any lease or rental of qualifying foreign trade 
            property described in subparagraph (B) by such taxpayer,
            ``(D) for engineering or architectural services for 
        construction projects located (or proposed for location) 
        outside the United States, or
            ``(E) for the performance of managerial services for a 
        person other than a related person in furtherance of the 
        production of foreign trading gross receipts described in 
        subparagraph (A), (B), or (C).
    Subparagraph (E) shall not apply to a taxpayer for any taxable year 
    unless at least 50 percent of its foreign trading gross receipts 
    (determined without regard to this sentence) for such taxable year 
    is derived from activities described in subparagraph (A), (B), or 
    (C).
        ``(2) Certain receipts excluded on basis of use; subsidized 
    receipts excluded.--The term `foreign trading gross receipts' shall 
    not include receipts of a taxpayer from a transaction if--
            ``(A) the qualifying foreign trade property or services--
                ``(i) are for ultimate use in the United States, or
                ``(ii) are for use by the United States or any 
            instrumentality thereof and such use of qualifying foreign 
            trade property or services is required by law or 
            regulation, or
            ``(B) such transaction is accomplished by a subsidy granted 
        by the government (or any instrumentality thereof) of the 
        country or possession in which the property is manufactured, 
        produced, grown, or extracted.
        ``(3) Election to exclude certain receipts.--The term `foreign 
    trading gross receipts' shall not include gross receipts of a 
    taxpayer from a transaction if the taxpayer elects not to have such 
    receipts taken into account for purposes of this subpart.
    ``(b) Foreign Economic Process Requirements.--
        ``(1) In general.--Except as provided in subsection (c), a 
    taxpayer shall be treated as having foreign trading gross receipts 
    from any transaction only if economic processes with respect to 
    such transaction take place outside the United States as required 
    by paragraph (2).
        ``(2) Requirement.--
            ``(A) In general.--The requirements of this paragraph are 
        met with respect to the gross receipts of a taxpayer derived 
        from any transaction if--
                ``(i) such taxpayer (or any person acting under a 
            contract with such taxpayer) has participated outside the 
            United States in the solicitation (other than advertising), 
            the negotiation, or the making of the contract relating to 
            such transaction, and
                ``(ii) the foreign direct costs incurred by the 
            taxpayer attributable to the transaction equal or exceed 50 
            percent of the total direct costs attributable to the 
            transaction.
            ``(B) Alternative 85-percent test.--A taxpayer shall be 
        treated as satisfying the requirements of subparagraph (A)(ii) 
        with respect to any transaction if, with respect to each of at 
        least two subparagraphs of paragraph (3), the foreign direct 
        costs incurred by such taxpayer attributable to activities 
        described in such subparagraph equal or exceed 85 percent of 
        the total direct costs attributable to activities described in 
        such subparagraph.
            ``(C) Definitions.--For purposes of this paragraph--
                ``(i) Total direct costs.--The term `total direct 
            costs' means, with respect to any transaction, the total 
            direct costs incurred by the taxpayer attributable to 
            activities described in paragraph (3) performed at any 
            location by the taxpayer or any person acting under a 
            contract with such taxpayer.
                ``(ii) Foreign direct costs.--The term `foreign direct 
            costs' means, with respect to any transaction, the portion 
            of the total direct costs which are attributable to 
            activities performed outside the United States.
        ``(3) Activities relating to qualifying foreign trade 
    property.--The activities described in this paragraph are any of 
    the following with respect to qualifying foreign trade property--
            ``(A) advertising and sales promotion,
            ``(B) the processing of customer orders and the arranging 
        for delivery,
            ``(C) transportation outside the United States in 
        connection with delivery to the customer,
            ``(D) the determination and transmittal of a final invoice 
        or statement of account or the receipt of payment, and
            ``(E) the assumption of credit risk.
        ``(4) Economic processes performed by related persons.--A 
    taxpayer shall be treated as meeting the requirements of this 
    subsection with respect to any sales transaction involving any 
    property if any related person has met such requirements in such 
    transaction or any other sales transaction involving such property.
    ``(c) Exception From Foreign Economic Process Requirement.--
        ``(1) In general.--The requirements of subsection (b) shall be 
    treated as met for any taxable year if the foreign trading gross 
    receipts of the taxpayer for such year do not exceed $5,000,000.
        ``(2) Receipts of related persons aggregated.--All related 
    persons shall be treated as one person for purposes of paragraph 
    (1), and the limitation under paragraph (1) shall be allocated 
    among such persons in a manner provided in regulations prescribed 
    by the Secretary.
        ``(3) Special rule for pass-thru entities.--In the case of a 
    partnership, S corporation, or other pass-thru entity, the 
    limitation under paragraph (1) shall apply with respect to the 
    partnership, S corporation, or entity and with respect to each 
    partner, shareholder, or other owner.

``SEC. 943. OTHER DEFINITIONS AND SPECIAL RULES.

    ``(a) Qualifying Foreign Trade Property.--For purposes of this 
subpart--
        ``(1) In general.--The term `qualifying foreign trade property' 
    means property--
            ``(A) manufactured, produced, grown, or extracted within or 
        outside the United States,
            ``(B) held primarily for sale, lease, or rental, in the 
        ordinary course of trade or business for direct use, 
        consumption, or disposition outside the United States, and
            ``(C) not more than 50 percent of the fair market value of 
        which is attributable to--
                ``(i) articles manufactured, produced, grown, or 
            extracted outside the United States, and
                ``(ii) direct costs for labor (determined under the 
            principles of section 263A) performed outside the United 
            States.
    For purposes of subparagraph (C), the fair market value of any 
    article imported into the United States shall be its appraised 
    value, as determined by the Secretary under section 402 of the 
    Tariff Act of 1930 (19 U.S.C. 1401a) in connection with its 
    importation, and the direct costs for labor under clause (ii) do 
    not include costs that would be treated under the principles of 
    section 263A as direct labor costs attributable to articles 
    described in clause (i).
        ``(2) U.S. taxation to ensure consistent treatment.--Property 
    which (without regard to this paragraph) is qualifying foreign 
    trade property and which is manufactured, produced, grown, or 
    extracted outside the United States shall be treated as qualifying 
    foreign trade property only if it is manufactured, produced, grown, 
    or extracted by--
            ``(A) a domestic corporation,
            ``(B) an individual who is a citizen or resident of the 
        United States,
            ``(C) a foreign corporation with respect to which an 
        election under subsection (e) (relating to foreign corporations 
        electing to be subject to United States taxation) is in effect, 
        or
            ``(D) a partnership or other pass-thru entity all of the 
        partners or owners of which are described in subparagraph (A), 
        (B), or (C).
    Except as otherwise provided by the Secretary, tiered partnerships 
    or pass-thru entities shall be treated as described in subparagraph 
    (D) if each of the partnerships or entities is directly or 
    indirectly wholly owned by persons described in subparagraph (A), 
    (B), or (C).
        ``(3) Excluded property.--The term `qualifying foreign trade 
    property' shall not include--
            ``(A) property leased or rented by the taxpayer for use by 
        any related person,
            ``(B) patents, inventions, models, designs, formulas, or 
        processes whether or not patented, copyrights (other than 
        films, tapes, records, or similar reproductions, and other than 
        computer software (whether or not patented), for commercial or 
        home use), goodwill, trademarks, trade brands, franchises, or 
        other like property,
            ``(C) oil or gas (or any primary product thereof),
            ``(D) products the transfer of which is prohibited or 
        curtailed to effectuate the policy set forth in paragraph 
        (2)(C) of section 3 of Public Law 96-72, or
            ``(E) any unprocessed timber which is a softwood.
    For purposes of subparagraph (E), the term `unprocessed timber' 
    means any log, cant, or similar form of timber.
        ``(4) Property in short supply.--If the President determines 
    that the supply of any property described in paragraph (1) is 
    insufficient to meet the requirements of the domestic economy, the 
    President may by Executive order designate the property as in short 
    supply. Any property so designated shall not be treated as 
    qualifying foreign trade property during the period beginning with 
    the date specified in the Executive order and ending with the date 
    specified in an Executive order setting forth the President's 
    determination that the property is no longer in short supply.
    ``(b) Other Definitions and Rules.--For purposes of this subpart--
        ``(1) Transaction.--
            ``(A) In general.--The term `transaction' means--
                ``(i) any sale, exchange, or other disposition,
                ``(ii) any lease or rental, and
                ``(iii) any furnishing of services.
            ``(B) Grouping of transactions.--To the extent provided in 
        regulations, any provision of this subpart which, but for this 
        subparagraph, would be applied on a transaction-by-transaction 
        basis may be applied by the taxpayer on the basis of groups of 
        transactions based on product lines or recognized industry or 
        trade usage. Such regulations may permit different groupings 
        for different purposes.
        ``(2) United states defined.--The term `United States' includes 
    the Commonwealth of Puerto Rico. The preceding sentence shall not 
    apply for purposes of determining whether a corporation is a 
    domestic corporation.
        ``(3) Related person.--A person shall be related to another 
    person if such persons are treated as a single employer under 
    subsection (a) or (b) of section 52 or subsection (m) or (o) of 
    section 414, except that determinations under subsections (a) and 
    (b) of section 52 shall be made without regard to section 1563(b).
        ``(4) Gross and taxable income.--Section 114 shall not be taken 
    into account in determining the amount of gross income or foreign 
    trade income from any transaction.
    ``(c) Source Rule.--Under regulations, in the case of qualifying 
foreign trade property manufactured, produced, grown, or extracted 
within the United States, the amount of income of a taxpayer from any 
sales transaction with respect to such property which is treated as 
from sources without the United States shall not exceed--
        ``(1) in the case of a taxpayer computing its qualifying 
    foreign trade income under section 941(a)(1)(B), the amount of the 
    taxpayer's foreign trade income which would (but for this 
    subsection) be treated as from sources without the United States if 
    the foreign trade income were reduced by an amount equal to 4 
    percent of the foreign trading gross receipts with respect to the 
    transaction, and
        ``(2) in the case of a taxpayer computing its qualifying 
    foreign trade income under section 941(a)(1)(C), 50 percent of the 
    amount of the taxpayer's foreign trade income which would (but for 
    this subsection) be treated as from sources without the United 
    States.
    ``(d) Treatment of Withholding Taxes.--
        ``(1) In general.--For purposes of section 114(d), any 
    withholding tax shall not be treated as paid or accrued with 
    respect to extraterritorial income which is excluded from gross 
    income under section 114(a). For purposes of this paragraph, the 
    term `withholding tax' means any tax which is imposed on a basis 
    other than residence and for which credit is allowable under 
    section 901 or 903.
        ``(2) Exception.--Paragraph (1) shall not apply to any taxpayer 
    with respect to extraterritorial income from any transaction if the 
    taxpayer computes its qualifying foreign trade income with respect 
    to the transaction under section 941(a)(1)(A).
    ``(e) Election To Be Treated as Domestic Corporation.--
        ``(1) In general.--An applicable foreign corporation may elect 
    to be treated as a domestic corporation for all purposes of this 
    title if such corporation waives all benefits to such corporation 
    granted by the United States under any treaty. No election under 
    section 1362(a) may be made with respect to such corporation.
        ``(2) Applicable foreign corporation.--For purposes of 
    paragraph (1), the term `applicable foreign corporation' means any 
    foreign corporation if--
            ``(A) such corporation manufactures, produces, grows, or 
        extracts property in the ordinary course of such corporation's 
        trade or business, or
            ``(B) substantially all of the gross receipts of such 
        corporation are foreign trading gross receipts.
        ``(3) Period of election.--
            ``(A) In general.--Except as otherwise provided in this 
        paragraph, an election under paragraph (1) shall apply to the 
        taxable year for which made and all subsequent taxable years 
        unless revoked by the taxpayer. Any revocation of such election 
        shall apply to taxable years beginning after such revocation.
            ``(B) Termination.--If a corporation which made an election 
        under paragraph (1) for any taxable year fails to meet the 
        requirements of subparagraph (A) or (B) of paragraph (2) for 
        any subsequent taxable year, such election shall not apply to 
        any taxable year beginning after such subsequent taxable year.
            ``(C) Effect of revocation or termination.--If a 
        corporation which made an election under paragraph (1) revokes 
        such election or such election is terminated under subparagraph 
        (B), such corporation (and any successor corporation) may not 
        make such election for any of the 5 taxable years beginning 
        with the first taxable year for which such election is not in 
        effect as a result of such revocation or termination.
        ``(4) Special rules.--
            ``(A) Requirements.--This subsection shall not apply to an 
        applicable foreign corporation if such corporation fails to 
        meet the requirements (if any) which the Secretary may 
        prescribe to ensure that the taxes imposed by this chapter on 
        such corporation are paid.
            ``(B) Effect of election, revocation, and termination.--
                ``(i) Election.--For purposes of section 367, a foreign 
            corporation making an election under this subsection shall 
            be treated as transferring (as of the first day of the 
            first taxable year to which the election applies) all of 
            its assets to a domestic corporation in connection with an 
            exchange to which section 354 applies.
                ``(ii) Revocation and termination.--For purposes of 
            section 367, if--

                    ``(I) an election is made by a corporation under 
                paragraph (1) for any taxable year, and
                    ``(II) such election ceases to apply for any 
                subsequent taxable year,

        such corporation shall be treated as a domestic corporation 
        transferring (as of the 1st day of the first such subsequent 
        taxable year to which such election ceases to apply) all of its 
        property to a foreign corporation in connection with an 
        exchange to which section 354 applies.
            ``(C) Eligibility for election.--The Secretary may by 
        regulation designate one or more classes of corporations which 
        may not make the election under this subsection.
    ``(f) Rules Relating to Allocations of Qualifying Foreign Trade 
Income From Shared Partnerships.--
        ``(1) In general.--If--
            ``(A) a partnership maintains a separate account for 
        transactions (to which this subpart applies) with each partner,
            ``(B) distributions to each partner with respect to such 
        transactions are based on the amounts in the separate account 
        maintained with respect to such partner, and
            ``(C) such partnership meets such other requirements as the 
        Secretary may by regulations prescribe,
    then such partnership shall allocate to each partner items of 
    income, gain, loss, and deduction (including qualifying foreign 
    trade income) from any transaction to which this subpart applies on 
    the basis of such separate account.
        ``(2) Special rules.--For purposes of this subpart, in the case 
    of a partnership to which paragraph (1) applies--
            ``(A) any partner's interest in the partnership shall not 
        be taken into account in determining whether such partner is a 
        related person with respect to any other partner, and
            ``(B) the election under section 942(a)(3) shall be made 
        separately by each partner with respect to any transaction for 
        which the partnership maintains separate accounts for each 
        partner.
    ``(g) Exclusion for Patrons of Agricultural and Horticultural 
Cooperatives.--Any amount described in paragraph (1) or (3) of section 
1385(a)--
        ``(1) which is received by a person from an organization to 
    which part I of subchapter T applies which is engaged in the 
    marketing of agricultural or horticultural products, and
        ``(2) which is allocable to qualifying foreign trade income and 
    designated as such by the organization in a written notice mailed 
    to its patrons during the payment period described in section 
    1382(d),
shall be treated as qualifying foreign trade income of such person for 
purposes of section 114. The taxable income of the organization shall 
not be reduced under section 1382 by reason of any amount to which the 
preceding sentence applies.
    ``(h) Special Rule for DISCs.--Section 114 shall not apply to any 
taxpayer for any taxable year if, at any time during the taxable year, 
the taxpayer is a member of any controlled group of corporations (as 
defined in section 927(d)(4), as in effect before the date of the 
enactment of this subsection) of which a DISC is a member.''.

SEC. 4. TECHNICAL AND CONFORMING AMENDMENTS.

        (1) The second sentence of section 56(g)(4)(B)(i) is amended by 
    inserting before the period ``or under section 114''.
        (2) Section 275(a) is amended--
            (A) by striking ``or'' at the end of paragraph (4)(A), by 
        striking the period at the end of paragraph (4)(B) and 
        inserting ``, or'', and by adding at the end of paragraph (4) 
        the following new subparagraph:
            ``(C) such taxes are paid or accrued with respect to 
        qualifying foreign trade income (as defined in section 941).''; 
        and
            (B) by adding at the end the following the following new 
        sentence: ``A rule similar to the rule of section 943(d) shall 
        apply for purposes of paragraph (4)(C).''.
        (3) Paragraph (3) of section 864(e) is amended--
            (A) by striking ``For purposes of'' and inserting:
            ``(A) In general.--For purposes of''; and
            (B) by adding at the end the following new subparagraph:
            ``(B) Assets producing exempt extraterritorial income.--For 
        purposes of allocating and apportioning any interest expense, 
        there shall not be taken into account any qualifying foreign 
        trade property (as defined in section 943(a)) which is held by 
        the taxpayer for lease or rental in the ordinary course of 
        trade or business for use by the lessee outside the United 
        States (as defined in section 943(b)(2)).''.
        (4) Section 903 is amended by striking ``164(a)'' and inserting 
    ``114, 164(a),''.
        (5) Section 999(c)(1) is amended by inserting ``941(a)(5),'' 
    after ``908(a),''.
        (6) The table of sections for part III of subchapter B of 
    chapter 1 is amended by inserting before the item relating to 
    section 115 the following new item:
        ``Sec. 114. Extraterritorial income.''.

        (7) The table of subparts for part III of subchapter N of 
    chapter 1 is amended by striking the item relating to subpart E and 
    inserting the following new item:
        ``Subpart E. Qualifying foreign trade income.''.

        (8) The table of subparts for part III of subchapter N of 
    chapter 1 is amended by striking the item relating to subpart C.

SEC. 5. EFFECTIVE DATE.

    (a) In General.--The amendments made by this Act shall apply to 
transactions after September 30, 2000.
    (b) No New FSCs; Termination of Inactive FSCs.--
        (1) No new fscs.--No corporation may elect after September 30, 
    2000, to be a FSC (as defined in section 922 of the Internal 
    Revenue Code of 1986, as in effect before the amendments made by 
    this Act).
        (2) Termination of inactive fscs.--If a FSC has no foreign 
    trade income (as defined in section 923(b) of such Code, as so in 
    effect) for any period of 5 consecutive taxable years beginning 
    after December 31, 2001, such FSC shall cease to be treated as a 
    FSC for purposes of such Code for any taxable year beginning after 
    such period.
    (c) Transition Period for Existing Foreign Sales Corporations.--
        (1) In general.--In the case of a FSC (as so defined) in 
    existence on September 30, 2000, and at all times thereafter, the 
    amendments made by this Act shall not apply to any transaction in 
    the ordinary course of trade or business involving a FSC which 
    occurs--
            (A) before January 1, 2002; or
            (B) after December 31, 2001, pursuant to a binding 
        contract--
                (i) which is between the FSC (or any related person) 
            and any person which is not a related person; and
                (ii) which is in effect on September 30, 2000, and at 
            all times thereafter.
    For purposes of this paragraph, a binding contract shall include a 
    purchase option, renewal option, or replacement option which is 
    included in such contract and which is enforceable against the 
    seller or lessor.
        (2) Election to have amendments apply earlier.--A taxpayer may 
    elect to have the amendments made by this Act apply to any 
    transaction by a FSC or any related person to which such amendments 
    would apply but for the application of paragraph (1). Such election 
    shall be effective for the taxable year for which made and all 
    subsequent taxable years, and, once made, may be revoked only with 
    the consent of the Secretary of the Treasury.
        (3) Exception for old earnings and profits of certain 
    corporations.--
            (A) In general.--In the case of a foreign corporation to 
        which this paragraph applies--
                (i) earnings and profits of such corporation 
            accumulated in taxable years ending before October 1, 2000, 
            shall not be included in the gross income of the persons 
            holding stock in such corporation by reason of section 
            943(e)(4)(B)(i); and
                (ii) rules similar to the rules of clauses (ii), (iii), 
            and (iv) of section 953(d)(4)(B) shall apply with respect 
            to such earnings and profits.
        The preceding sentence shall not apply to earnings and profits 
        acquired in a transaction after September 30, 2000, to which 
        section 381 applies unless the distributor or transferor 
        corporation was immediately before the transaction a foreign 
        corporation to which this paragraph applies.
            (B) Existing fscs.--This paragraph shall apply to any 
        controlled foreign corporation (as defined in section 957) if--
                (i) such corporation is a FSC (as so defined) in 
            existence on September 30, 2000;
                (ii) such corporation is eligible to make the election 
            under section 943(e) by reason of being described in 
            paragraph (2)(B) of such section; and
                (iii) such corporation makes such election not later 
            than for its first taxable year beginning after December 
            31, 2001.
            (C) Other corporations.--This paragraph shall apply to any 
        controlled foreign corporation (as defined in section 957), and 
        such corporation shall (notwithstanding any provision of 
        section 943(e)) be treated as an applicable foreign corporation 
        for purposes of section 943(e), if--
                (i) such corporation is in existence on September 30, 
            2000;
                (ii) as of such date, such corporation is wholly owned 
            (directly or indirectly) by a domestic corporation 
            (determined without regard to any election under section 
            943(e));
                (iii) for each of the 3 taxable years preceding the 
            first taxable year to which the election under section 
            943(e) by such controlled foreign corporation applies--

                    (I) all of the gross income of such corporation is 
                subpart F income (as defined in section 952), including 
                by reason of section 954(b)(3)(B); and
                    (II) in the ordinary course of such corporation's 
                trade or business, such corporation regularly sold (or 
                paid commissions) to a FSC which on September 30, 2000, 
                was a related person to such corporation;

                (iv) such corporation has never made an election under 
            section 922(a)(2) (as in effect before the date of the 
            enactment of this paragraph) to be treated as a FSC; and
                (v) such corporation makes the election under section 
            943(e) not later than for its first taxable year beginning 
            after December 31, 2001.
        The preceding sentence shall cease to apply as of the date that 
        the domestic corporation referred to in clause (ii) ceases to 
        wholly own (directly or indirectly) such controlled foreign 
        corporation.
        (4) Related person.--For purposes of this subsection, the term 
    ``related person'' has the meaning given to such term by section 
    943(b)(3).
        (5) Section references.--Except as otherwise expressly 
    provided, any reference in this subsection to a section or other 
    provision shall be considered to be a reference to a section or 
    other provision of the Internal Revenue Code of 1986, as amended by 
    this Act.
    (d) Special Rules Relating to Leasing Transactions.--
        (1) Sales income.--If foreign trade income in connection with 
    the lease or rental of property described in section 927(a)(1)(B) 
    of such Code (as in effect before the amendments made by this Act) 
    is treated as exempt foreign trade income for purposes of section 
    921(a) of such Code (as so in effect), such property shall be 
    treated as property described in section 941(c)(1)(B) of such Code 
    (as added by this Act) for purposes of applying section 941(c)(2) 
    of such Code (as so added) to any subsequent transaction involving 
    such property to which the amendments made by this Act apply.
        (2) Limitation on use of gross receipts method.--If any person 
    computed its foreign trade income from any transaction with respect 
    to any property on the basis of a transfer price determined under 
    the method described in section 925(a)(1) of such Code (as in 
    effect before the amendments made by this Act), then the qualifying 
    foreign trade income (as defined in section 941(a) of such Code, as 
    in effect after such amendment) of such person (or any related 
    person) with respect to any other transaction involving such 
    property (and to which the amendments made by this Act apply) shall 
    be zero.

                               Speaker of the House of Representatives.

                            Vice President of the United States and    
                                               President of the Senate.