[Congressional Record Volume 147, Number 49 (Thursday, April 5, 2001)]
[Extensions of Remarks]
[Pages E568-E569]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




             AMENDMENTS TO THE TAXPAYER RELIEF ACT OF 1997

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                         HON. E. CLAY SHAW, JR.

                               of florida

                    in the house of representatives

                        Wednesday, April 4, 2001

  Mr. SHAW. Mr. Speaker, today I am introducing a bill that would 
eliminate a trap for the unwary that was inadvertently created with the 
Taxpayer Relief Act of 1997. The bill would clarify the treatment for 
foreign tax credit limitation purposes of the income inclusions that 
arise upon a transfer of intangible property to a foreign corporation.
  Section 367(d) of the Internal Revenue Code provides for income 
inclusions in the

[[Page E569]]

form of deemed royalties upon the transfer of intangible property by a 
U.S. person to a foreign corporation. Prior to the 1997 Act, these 
income inclusions under section 367(d) were deemed to be U.S.-source 
income and thus were not eligible for foreign tax credits. The 
international joint venture reforms included in the 1997 Act eliminated 
this special source rule and provided that deemed royalties under 
section 367(d) are treated as foreign-source income for foreign tax 
credit purposes to the same extent as an actual royalty payment.
  The amendments made by the 1997 Act were intended to eliminate the 
penalty that was provided by the prior-law deemed U.S. source rule and 
that had operated to discourage taxpayers from transferring intangible 
property in a transaction that would be covered by section 367(d). 
Prior to the 1997 Act, in order to avoid this penalty, taxpayers 
licensed intangible property to foreign corporations instead of 
transferring such property in a transaction that would be subject to 
section 367(d). The 1997 Act's elimination of the penalty source rule 
of section 367(d) was intended to allow taxpayers to transfer 
intangible property to a foreign corporation in a transaction that 
gives rise to deemed royalty payments under section 367(d) instead of 
having to structure the transaction with the foreign corporation as a 
license in exchange for actual royalty payments.
  However, the intended goal of the 1997 Act provision is achieved only 
if the deemed royalty payments under section 367(d) not only are 
sourced for foreign tax credit purposes in the same manner as actual 
royalty payments, but also are characterized for foreign tax credit 
limitation purposes in the same manner as actual royalty payments. 
Without a clarification that deemed royalty payments are characterized 
for foreign tax credit limitation purposes in the same manner as an 
actual royalty payment, there is a risk in many cases that such deemed 
royalties would be characterized in a manner that leads to a foreign 
tax credit result that is equally as disadvantageous as the result that 
arose under the penalty source rule that was intended to be eliminated 
by the 1997 Act.
  The bill I am introducing today provides the needed clarification 
that deemed royalties under section 367(d) are treated for foreign tax 
credit limitation purposes in the same manner as an actual royalty, 
ensuring that the penalty that was intended to be eliminated with the 
1997 Act is in fact eliminated. Without this clarification, a taxpayer 
that transfers intangible property in reliance on the 1997 Act will 
find that its transfer is in fact effectively subject to the penalty 
that the taxpayer believed had been eliminated. Without the 
clarification, those taxpayers that have structured their transactions 
in reliance on the 1997 Act provision will be worse off than they would 
have been if the purported repeal of the penalty source rule had never 
occurred and they had continued to structure their transactions to 
avoid that penalty. This bill will achieve the intended goals of the 
1997 Act and prevent a terrible trap for the unwary that has been 
inadvertently created.

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