Text: H.R.4986 — 106th Congress (1999-2000)All Bill Information (Except Text)

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Public Law No: 106-519 (11/15/2000)

 
[106th Congress Public Law 519]
[From the U.S. Government Printing Office]


<DOC>
[DOCID: f:publ519.106]


[[Page 114 STAT. 2423]]

Public Law 106-519
106th Congress

                                 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. <<NOTE: Nov. 15, 
                         2000 -  [H.R. 4986]>> 

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled, <<NOTE: FSC Repeal and 
Extraterritorial Income Exclusion Act of 2000.>> 

SECTION 1. SHORT TITLE.

    (a) <<NOTE: 26 USC 1 note.>>  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 <<NOTE: 26 USC 
921-927.>>  (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hereby repealed.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.

[[Page 114 STAT. 2424]]

    ``(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) <<NOTE: Regulations.>>  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--

[[Page 114 STAT. 2425]]

                    ``(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

[[Page 114 STAT. 2426]]

                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.--

[[Page 114 STAT. 2427]]

            ``(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.

[[Page 114 STAT. 2428]]

    ``(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) <<NOTE: Regulations.>>  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) <<NOTE: Applicability.>>  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

[[Page 114 STAT. 2429]]

                    ``(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

[[Page 114 STAT. 2430]]

        (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) <<NOTE: Applicability.>>  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

[[Page 114 STAT. 2431]]

                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,

[[Page 114 STAT. 2432]]

        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) <<NOTE: 26 
        USC 56.>>  is amended by inserting before the period ``or under 
        section 114''.
            (2) Section 275(a) <<NOTE: 26 USC 275.>>  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) <<NOTE: 26 USC 864.>>  
        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

[[Page 114 STAT. 2433]]

                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 <<NOTE: 26 USC 903.>>  is amended by 
        striking ``164(a)'' and inserting ``114, 164(a),''.
            (5) Section 999(c)(1) <<NOTE: 26 USC 999.>>  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. <<NOTE: 26 USC 941 note.>> 

    (a) <<NOTE: Applicability.>>  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

[[Page 114 STAT. 2434]]

        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) <<NOTE: Applicability.>>  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) <<NOTE: Applicability.>>  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

[[Page 114 STAT. 2435]]

                      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.

    Approved November 15, 2000.

LEGISLATIVE HISTORY--H.R. 4986:
---------------------------------------------------------------------------

HOUSE REPORTS: No. 106-845 (Comm. on Ways and Means).
SENATE REPORTS: No. 106-416 (Comm. on Finance).
CONGRESSIONAL RECORD, Vol. 146 (2000):
            Sept. 12, 13, considered and passed House.
            Nov. 1, considered and passed Senate, amended.
            Nov. 14, House concurred in Senate amendment.
WEEKLY COMPILATION OF PRESIDENTIAL DOCUMENTS, Vol. 36 (2000):
            Nov. 15, Presidential statement.

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