[Congressional Record Volume 147, Number 178 (Thursday, December 20, 2001)]
[Senate]
[Pages S13945-S13946]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. GRAHAM:
  S. 1863. A bill to amend the Internal Revenue Code of 1986 to clarify 
treatment for foreign tax credit limitation purposes of certain 
transfers of intangible property; to the Committee on Finance.
  Mr. GRAHAM. Mr. President, today I am introducing legislation that 
will clarify the proper tax treatment of intangible assets transferred 
to foreign corporations. This bill is necessary to avoid trapping 
unwary taxpayers who relied on Congressional intent when it made 
changes to this area of the tax code in 1997.
  Transfers of intangible property from a U.S. person to a foreign 
corporation

[[Page S13946]]

in a transaction that would be tax-free under Code section 351 or 361 
are subject to special rules. Pursuant to section 367(d), the U.S. 
person making such a transfer is treated as 1. having sold the 
intangible property in exchange for payments that are contingent on the 
productivity, use, or disposition of such property and 2. receiving 
amounts that reasonably reflect the amounts that would have been 
received annually over the useful life of such property. The deemed 
royalty amounts included in the gross income of the U.S. person by 
reason of this rule are treated as ordinary income and the earnings and 
profits of the foreign corporation to which the intangible property was 
distributed are reduced by such amounts.
  Prior to the Taxpayer Relief Act of 1997 (the ``1997 Act''), the 
deemed royalties under section 367(d) were treated as U.S.-source 
income and therefore were not eligible for foreign tax credits. The 
1997 Act eliminated this special ``deemed U.S. source rule'' and 
provided that deemed royalties under section 367(d) are treated as 
foreign-source income to the same extent that an actual royalty payment 
would be so treated. The 1997 Act reflected a recognition that the 
previous rule was intended to discourage transfers of intangible 
property to foreign corporations, relative to licenses of such 
intangible property, but that the enhanced information reporting 
included in the 1997 Act made it unnecessary to continue to so 
discourage transfers relative to licenses.
  The 1997 Act intended to eliminate the penalty provided by the prior-
law deemed U.S. source rule under section 367(d) 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). With the 1997 
Act's elimination of the penalty source rule of section 367(d), it was 
intended that taxpayers could 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.
  The 1997 Act's goal of eliminating the penalty treatment of transfers 
of intangible property under section 367(d) 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 the deemed royalty payments under section 367(d) are 
characterized for foreign tax credit limitation purposes in the same 
manner as an actual royalty, 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 of the foreign tax credit limitation treatment 
of a deemed royalty under section 367(d), ensuring that the penalty 
that was intended to be eliminated with the 1997 Act is in fact 
eliminated.
  The bill clarifies that the deemed income inclusions under section 
367(d) upon a transfer of intangible property to a foreign corporation 
are characterized for purposes of the foreign tax credit limitation 
rules in the same manner as an actual royalty is characterized. The tax 
treatment of such a transfer of intangible property to a foreign 
corporation thus would be the same as the tax treatment that applies if 
the intangible property is made available to the foreign corporation 
through a license arrangement.
  The bill's provision would be effective for income inclusions under 
section 367(d) on or after August 5, 1997, which is the effective date 
of the 1997 Act provision eliminating the special deemed U.S. source 
rule under section 367(d). Like the 1997 Act provision, the bill's 
provision would be effective for transfers made, and for royalties 
deemed received, on or after August 5, 1997.
  I ask unanimous consent that the text of the bill be printed in the 
Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 1863

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

     SECTION 1. CLARIFICATION OF TREATMENT OF CERTAIN TRANSFERS OF 
                   INTANGIBLE PROPERTY.

       (a) In General.--Subparagraph (C) of section 367(d)(2) of 
     the Internal Revenue Code of 1986 (relating to transfer of 
     intangibles treated as transfer pursuant to sale of 
     contingent payments) is amended by adding at the end the 
     following new sentence: ``For purposes of applying the 
     various categories of income described in section 904(d)(1), 
     any such amount shall be treated in the same manner as if 
     such amount were a royalty.''.
       (b) Effective Date; Waiver of Limitations.--
       (1) Effective date.--The amendment made by this section 
     shall take effect as if included in the amendments made by 
     section 1131(b) of the Taxpayer Relief Act of 1997.
       (2) Waiver of limitations.--If refund or credit of any 
     overpayment of tax resulting from the application of the 
     amendment made by this section is prevented at any time 
     before the close of the 1-year period beginning on the date 
     of the enactment of this Act by the operation of any law or 
     rule of law (including res judicata), such refund or credit 
     may nevertheless be made or allowed if claimed therefor is 
     filed before the close of such period.
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