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105th Congress                                            Rept. 105-318
                        HOUSE OF REPRESENTATIVES

 1st Session                                                     Part 1
_______________________________________________________________________


 
 EXCEPTIONS FOR CERTAIN ACTIVE FINANCING INCOME AND NONRECOGNITION OF 
 GAIN ON SALE OF STOCK IN AGRICULTURAL PROCESSORS TO CERTAIN FARMERS' 
                              COOPERATIVES

                                _______
                                

October 9, 1997.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

_______________________________________________________________________


    Mr. Archer, from the Committee on Ways and Means, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 2513]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Ways and Means, to whom was referred the 
bill (H.R. 2513) to amend the Internal Revenue Code of 1986 to 
restore and modify the provision of the Taxpayer Relief Act of 
1997 relating to exempting active financing income from foreign 
personal holding company income and to provide for the 
nonrecognition of gain on the sale of stock in agricultural 
processors to certain farmers' cooperatives, having considered 
the same, reports favorably thereon with an amendment and 
recommend that the bill as amended do pass.

                                CONTENTS

                                                                   Page
 I. Introduction......................................................7
        A. Purpose and Summary...................................     7
        B. Background and Need for Legislation...................     8
        C. Legislative History...................................     8
II. Explanation of the Bill...........................................8
        A. Exceptions Under Subpart F for Certain Active 
            Financing Income (sec. 1)............................     8
        B. Tax-Free Rollover of Gain on Sale of Stock in 
            Agricultural Processing Facilities to Certain 
            Farmers' Cooperatives (sec. 2).......................    17
III.Vote of the Committee............................................22

IV. Budget Effects of the Bill.......................................22
        A. Committee Estimates...................................    22
        B. Budget Authority and Tax Expenditures.................    25
        C. Cost Estimate Prepared by the Congressional Budget 
            Office...............................................    25
 V. Other Matters To Be Discussed Under the Rules of the House.......27
        A. Committee Oversight Findings and Recommendations......    27
        B. Summary of Findings and Recommendations of the 
            Committee on Government Reform and Oversight.........    27
        C. Constitutional Authority Statement....................    27
        D. Information Relating to Unfunded Mandates.............    27
        E. Applicability of House Rule XXI5(c)...................    27
VI. Changes in Existing Law Made by the Bill, as Reported............28
    The amendment is as follows:
  Strike out all after the enacting clause and insert in lieu 
thereof the following:

SECTION 1. EXEMPTION FOR ACTIVE FINANCING INCOME.

  (a) Exemption From Foreign Personal Holding Company Income.--Section 
954 of the Internal Revenue Code of 1986 (as amended by subsection (d)) 
is amended by adding at the end the following new subsection:
  ``(h) Special Rule for Income Derived in the Active Conduct of 
Insurance Businesses and Banking, Financing, or Similar Businesses.--
          ``(1) In general.--For purposes of subsection (c)(1), foreign 
        personal holding company income shall not include income which 
        is--
                  ``(A) derived in the active conduct by a controlled 
                foreign corporation of a banking, financing, or similar 
                business, but only if--
                          ``(i) the corporation is predominantly 
                        engaged in the active conduct of such business, 
                        and
                          ``(ii) such income is derived from 
                        transactions with customers located within the 
                        country under the laws of which the corporation 
                        is created or organized,
                  ``(B) received from a person other than a related 
                person (within the meaning of subsection (d)(3)) and 
                derived from the investments made by a qualifying 
                insurance company of its reserves or of 80 percent of 
                its unearned premiums (as both are determined in the 
                manner prescribed under paragraph (4)), or
                  ``(C) received from a person other than a related 
                person (within the meaning of subsection (d)(3)) and 
                derived from investments made by a qualifying insurance 
                company of an amount of its assets equal to--
                          ``(i) in the case of property, casualty, or 
                        health insurance contracts, one-third of its 
                        premiums earned on such insurance contracts 
                        during the taxable year (as defined in section 
                        832(b)(4)), and
                          ``(ii) in the case of life insurance or 
                        annuity contracts, 10 percent of the reserves 
                        described in subparagraph (B) for such 
                        contracts.
          ``(2) Predominantly engaged.--For purposes of paragraph 
        (1)(A), a controlled foreign corporation shall be deemed 
        predominantly engaged in the active conduct of a banking, 
        financing, or similar business only if--
                  ``(A) more than 70 percent of its gross income is 
                derived from such business from transactions with 
                customers which are located within the country under 
                the laws of which the corporation is created or 
                organized, or
                  ``(B) the corporation is--
                          ``(i) engaged in the active conduct of a 
                        banking business and is an institution licensed 
                        to do business as a bank in the United States 
                        (or is any other corporation not so licensed 
                        which is specified by the Secretary in 
                        regulations), or
                          ``(ii) engaged in the active conduct of a 
                        securities business and is registered as a 
                        securities broker or dealer under section 15(a) 
                        of the Securities Exchange Act of 1934 or is 
                        registered as a Government securities broker or 
                        dealer under section 15C(a) of such Act (or is 
                        any other corporation not so registered which 
                        is specified by the Secretary in regulations).
          ``(3) Principles for determining insurance income.--Except as 
        provided by the Secretary, for purposes of paragraphs (1) (B) 
        and (C)--
                  ``(A) in the case of any contract which is a separate 
                account-type contract (including any variable contract 
                not meeting the requirements of section 817), income 
                credited under such contract shall be allocable only to 
                such contract, and
                  ``(B) income not allocable under subparagraph (A) 
                shall be allocated ratably among contracts not 
                described in subparagraph (A).
          ``(4) Methods for determining unearned premiums and 
        reserves.--For purposes of paragraph (1)(B)--
                  ``(A) Property and casualty contracts.--The unearned 
                premiums and reserves of a qualifying insurance company 
                with respect to property, casualty, or health insurance 
                contracts shall be determined using the same methods 
                and interest rates which would be used if such company 
                were subject to tax under subchapter L.
                  ``(B) Life insurance and annuity contracts.--The 
                amount of the reserve of a qualifying insurance company 
                for any life insurance or annuity contract shall be 
                equal to the greater of--
                          ``(i) the net surrender value of such 
                        contract (as defined in section 807(e)(1)(A)), 
                        or
                          ``(ii) the reserve determined under paragraph 
                        (5).
                  ``(C) Limitation on reserves.--In no event shall the 
                reserve determined under this paragraph for any 
                contract as of any time exceed the amount which would 
                be taken into account with respect to such contract as 
                of such time in determining foreign statement reserves 
                (less any catastrophe, deficiency, or similar 
                reserves).
          ``(5) Amount of reserve.--The amount of the reserve 
        determined under this paragraph with respect to any contract 
        shall be determined in the same manner as it would be 
        determined if the qualifying insurance company were subject to 
        tax under subchapter L, except that in applying such 
        subchapter--
                  ``(A) the interest rate determined for the foreign 
                country in which such company is created or organized 
                and which, except as provided by the Secretary, is 
                calculated in the same manner as the Federal mid-term 
                rate under section 1274(d) shall be substituted for the 
                applicable Federal interest rate,
                  ``(B) the highest assumed interest rate permitted to 
                be used in determining foreign statement reserves shall 
                be substituted for the prevailing State assumed 
                interest rate, and
                  ``(C) tables for mortality and morbidity which 
                reasonably reflect the current mortality and morbidity 
                risks in the foreign country shall be substituted for 
                the mortality and morbidity tables otherwise used for 
                such subchapter.
          ``(6) Definitions.--For purposes of this subsection--
                  ``(A) Qualifying insurance company.--The term 
                `qualifying insurance company' means any entity which--
                          ``(i) is subject to regulation as an 
                        insurance company by the country under the laws 
                        of which the entity is created or organized,
                          ``(ii) derives at least 50 percent of its net 
                        written premiums from the insurance or 
                        reinsurance of risks located within such 
                        country, and
                          ``(iii) is engaged in the active conduct of 
                        an insurance business and would be subject to 
                        tax under subchapter L if it were a domestic 
                        corporation.
                  ``(B) Life insurance or annuity contract.--For 
                purposes of this section and section 953, the 
                determination of whether a contract issued by a 
                controlled foreign corporation is a life insurance 
                contract or an annuity contract shall be made without 
                regard to sections 72(s), 101(f), 817(h), and 7702 if--
                          ``(i) such contract is regulated as a life 
                        insurance or annuity contract by the country 
                        under the laws of which the corporation is 
                        created or organized, and
                          ``(ii) no policyholder, insured, annuitant, 
                        or beneficiary with respect to the contract is 
                        a United States person.
                  ``(C) Noncancellable accident and health insurance 
                contracts.--A noncancellable accident and health 
                insurance contract shall be treated for purposes of 
                this subsection in the same manner as a life insurance 
                contract except that paragraph (4)(B)(i) shall not 
                apply.
                  ``(D) Located.--
                          ``(i) In general.--The determination of where 
                        a customer is located shall be made under rules 
                        prescribed by the Secretary.
                          ``(ii) Special rule for qualified business 
                        units.--Gross income derived by a corporation's 
                        qualified business unit (within the meaning of 
                        section 989(a)) from transactions with 
                        customers which are located in the country in 
                        which the qualified business unit both 
                        maintains its principal office and conducts 
                        substantial business activity shall be treated 
                        as derived from transactions with customers 
                        which are located within the country under the 
                        laws of which the controlled foreign 
                        corporation is created or organized.
                  ``(E) Customer.--
                          ``(i) In general.--The term `customer' means, 
                        with respect to any controlled foreign 
                        corporation, any person which has a customer 
                        relationship with such corporation.
                          ``(ii) Exception for related, etc. persons.--
                        A person who is a related person (as defined in 
                        subsection (d)(3)), an officer, a director, or 
                        an employee with respect to any controlled 
                        foreign corporation shall not be treated as a 
                        customer with respect to any transaction if a 
                        principal purpose of such transaction is to 
                        satisfy any requirement of this subsection.
          ``(7) Anti-abuse rules.--For purposes of applying this 
        subsection and subsection (c)(2)(C)(ii), there shall be 
        disregarded any item of income, gain, loss, or deduction with 
        respect to any transaction or series of transactions one of the 
        principal purposes of which is qualifying income or gain for 
        the exclusion under this section, including--
                  ``(A) any change in the method of computing reserves 
                or any other transaction or series of transactions a 
                principal purpose of which is the acceleration or 
                deferral of any item in order to claim the benefits of 
                such exclusion through the application of this 
                subsection, and
                  ``(B) organizing entities in order to satisfy any 
                same country requirement under this subsection.
          ``(8) Coordination with other provisions.--
                  ``(A) Section 901(k).--
                          ``(i) In general.--The amount of qualified 
                        taxes (as defined in section 901(k)(4)) to 
                        which paragraphs (1) and (2) of section 901(k) 
                        do not apply by reason of paragraph (4) of such 
                        section 901(k) shall be reduced by an amount 
                        which bears the same ratio to such qualified 
                        taxes as the amount of income from the active 
                        conduct of a securities business which is not 
                        subpart F income solely by reason of this 
                        subsection, subsection (c)(2)(C)(ii), and 
                        subsection (e)(2)(C) bears to the total income 
                        from the active conduct of a securities 
                        business by a controlled foreign corporation 
                        which is not subpart F income. The 
                        determination under the preceding sentence 
                        shall be made by treating all members of an 
                        affiliated group as 1 corporation. For purposes 
                        of this clause, the term `subpart F income' has 
                        the meaning given such term by section 952(a) 
                        but determined without regard to section 952(c) 
                        and paragraphs (3) and (4) of subsection (b) of 
                        this section.
                          ``(ii) Election not to have subsection and 
                        certain other provisions apply.--Clause (i) 
                        shall not apply for any taxable year of a 
                        foreign corporation if such corporation (and 
                        all members of the affiliated group of which 
                        such corporation is a member) elect not to have 
                        this subsection, subsection (c)(2)(C)(ii), and 
                        subsection (e)(2)(C) apply for such taxable 
                        year.
                  ``(B) Treatment of income to which section 953 
                applies.--Subparagraphs (B) and (C) of paragraph (1) 
                shall not apply to investment income allocable to 
                contracts that insure related party risks or risks 
                located in a foreign country other than the country in 
                which the qualifying insurance company is created or 
                organized.
          ``(9) Application.--This subsection, subsection 
        (c)(2)(C)(ii), and subsection (e)(2)(C) shall apply only to the 
        first full taxable year of a foreign corporation beginning 
        after December 31, 1997, and before January 1, 1999, and to 
        taxable years of United States shareholders with or within 
        which such taxable year of such foreign corporation ends.''
  (b) Special Rules for Dealers.--Section 954(c)(2)(C) of such Code is 
amended to read as follows:
                  ``(C) Exception for dealers.--Except as provided by 
                regulations, in the case of a regular dealer in 
                property (within the meaning of paragraph (1)(B)), 
                forward contracts, option contracts, or similar 
                financial instruments (including notional principal 
                contracts and all instruments referenced to 
                commodities), there shall not be taken into account in 
                computing foreign personal holding income--
                          ``(i) any item of income, gain, deduction, or 
                        loss (other than any item described in 
                        subparagraph (A), (E), or (G) of paragraph (1)) 
                        from any transaction (including hedging 
                        transactions) entered into in the ordinary 
                        course of such dealer's trade or business as 
                        such a dealer, and
                          ``(ii) if such dealer is a dealer in 
                        securities (within the meaning of section 475), 
                        any interest or dividend or equivalent amount 
                        described in subparagraph (E) or (G) of 
                        paragraph (1) from any transaction (including 
                        any hedging transaction or transaction 
                        described in section 956(c)(2)(J)) entered into 
                        in the ordinary course of such dealer's trade 
                        or business as such a dealer in securities, but 
                        only if employees of the dealer which are 
                        located in the country under the laws of which 
                        the dealer is created or organized (or in the 
                        case of a qualified business unit described in 
                        section 989(a) which both maintains its 
                        principal office and conducts substantial 
                        business activity in a country, employees of 
                        such unit which are located in such country) 
                        materially participate in such transaction.''.
  (c) Exemption From Foreign Base Company Services Income.--Paragraph 
(2) of section 954(e) of such Code (as amended by subsection (d)) is 
amended by striking ``or'' at the end of subparagraph (A), by striking 
the period at the end of subparagraph (B) and inserting ``, or'', and 
by adding at the end the following:
                  ``(C)(i) a transaction by the controlled foreign 
                corporation if the income from the transaction is not 
                foreign personal holding company income by reason of 
                subsection (h), or
                  ``(ii) a transaction by the controlled foreign 
                corporation if subsection (c)(2)(C)(ii) applies to such 
                transaction.''.
  (d) Repeal of Canceled Provisions.--Section 1175 of the Taxpayer 
Relief Act of 1997, and the amendments made by such section, are hereby 
repealed, and the Internal Revenue Code of 1986 shall be applied and 
administered as if such section (and amendments) had never been 
enacted.
  (e) Budgetary Treatment.--For purposes of section 10213 of the 
Balanced Budget Act of 1997, the provisions of this section shall be 
considered to have been enacted as part of the Taxpayer Relief Act of 
1997.

SEC. 2. NONRECOGNITION OF GAIN ON SALE OF STOCK TO CERTAIN FARMERS' 
                    COOPERATIVES.

  (a) In General.--Part III of subchapter O of chapter 1 of the 
Internal Revenue Code of 1986 (relating to nontaxable exchanges) is 
amended by inserting after section 1042 the following new section:

``SEC. 1042A. SALES OF STOCK TO CERTAIN FARMERS' COOPERATIVES.

  ``(a) Nonrecognition of Gain.--If--
          ``(1) the taxpayer elects the application of this section 
        with respect to any sale of qualified agricultural processor 
        stock,
          ``(2) the taxpayer purchases qualified replacement property 
        within the replacement period, and
          ``(3) the requirements of subsection (c) are met with respect 
        to such sale,
then the gain (if any) on such sale which would be recognized as long-
term capital gain shall be recognized only to the extent that the 
amount realized on such sale exceeds the cost to the taxpayer of such 
qualified replacement property. The preceding sentence shall not apply 
to a sale by an eligible farmers' cooperative.
  ``(b) Limitation.--
          ``(1) In general.--If subsection (a) applies to the sale of 
        any stock by the taxpayer in a qualified agricultural 
        processor, the aggregate amount of gain taken into account by 
        the taxpayer under subsection (a) with respect to stock in such 
        processor shall not exceed the amount of the limitation under 
        paragraph (2) which is allocated to such sale by the eligible 
        farmers' cooperative.
          ``(2) Allocation.--The amount allocated under this paragraph 
        by any cooperative with respect to stock acquired by such 
        cooperative during any taxable year of such cooperative shall 
        not exceed $75,000,000.
          ``(3) Aggregation rules.--All eligible farmers' cooperatives 
        which are under common control (within the meaning of 
        subsection (a) or (b) of section 52) shall be treated as 1 
        cooperative for purposes of paragraph (2), and the limitation 
        under such paragraph shall be allocated among such cooperatives 
        in such manner as the Secretary shall prescribe.
  ``(c) Requirements To Qualify for Nonrecognition.--A sale of 
qualified agricultural processor stock meets the requirements of this 
subsection if--
          ``(1) Sale to eligible farmers' cooperative.--Such stock is 
        sold to an eligible farmers' cooperative.
          ``(2) Special rule for certain cooperatives.--
                  ``(A) In general.--In the case of a sale of such 
                stock to an eligible farmers' cooperative described in 
                subparagraph (B), the processor purchased, during at 
                least 3 of the 5 most recent taxable years of such 
                processor ending on or before the date of the sale, 
                more than one-half of the agricultural or horticultural 
                products to be refined or processed by such processor 
                from such cooperative or farmers who are members of 
                such cooperative.
                  ``(B) Cooperatives described.--A cooperative is 
                described in this subparagraph with respect to any sale 
                if, for any taxable year ending before the date of such 
                sale--
                          ``(i) such cooperative had gross receipts of 
                        more than $1,000,000,000, or
                          ``(ii) such cooperative sold more than a de 
                        minimis amount of specialty produce.
                  ``(C) Specialty produce.--For purposes of 
                subparagraph (B), the term `specialty produce' means 
                any agricultural or horticultural product other than 
                wheat, feed grains, oil seeds, cotton, rice, cattle, 
                hogs, sheep, or dairy products.
                  ``(D) Special rules.--
                          ``(i) Gross receipts.--For purposes of 
                        subparagraph (B)(i), rules similar to the rules 
                        of paragraph (2), and subparagraphs (B) and (C) 
                        of paragraph (3), of section 448(c) shall 
                        apply.
                          ``(ii) Predecessor.--Any reference in this 
                        paragraph to a cooperative or processor shall 
                        be treated as including a reference to any 
                        predecessor thereof.
          ``(3) Cooperative must hold 100 percent of stock after 
        sale.--The eligible farmers' cooperative owns, immediately 
        after the sale, all of the qualified agricultural processor 
        stock of the corporation.
          ``(4) Written statement and holding period.--Requirements 
        similar to the requirements of paragraphs (3) and (4) of 
        section 1042(b) are met.
  ``(d) Definitions.--For purposes of this section--
          ``(1) Qualified agricultural processor stock.--The term 
        `qualified agricultural processor stock' means stock (other 
        than stock described in section 1504(a)(4)) issued by a 
        qualified agricultural processor.
          ``(2) Qualified agricultural processor.--The term `qualified 
        agricultural processor' means a domestic C corporation 
        substantially all of the assets of which are used in the active 
        conduct of the trade or business of refining or processing 
        agricultural or horticultural products in the United States.
          ``(3) Eligible farmers' cooperative.--The term `eligible 
        farmers' cooperative' means an organization to which part I of 
        subchapter T applies and which is engaged in the marketing of 
        agricultural or horticultural products.
          ``(4) Replacement period.--The term `replacement period' 
        means the period which begins 3 months before the date on which 
        the sale of qualified agricultural processor stock occurs and 
        which ends 12 months after the date of such sale.
          ``(5) Qualified replacement property.--
                  ``(A) In general.--Except as provided in subparagraph 
                (B), the term `qualified replacement property' has the 
                meaning given such term by section 1042(c)(4).
                  ``(B) Exception.--The term `qualified replacement 
                property' shall not include any security issued by the 
                taxpayer or by any corporation controlled by the 
                taxpayer immediately after the purchase. For purposes 
                of the preceding sentence, the term `control' has the 
                meaning given such term by section 304(c) (determined 
                by substituting `10 percent' for `50 percent' each 
                place it appears in paragraph (1) thereof).
  ``(e) Special Rules.--
          ``(1) In general.--Except as otherwise provided in this 
        subsection, rules similar to the rules of paragraphs (5) and 
        (6) of section 1042(c), subsections (d), (e), and (f) of 
        section 1042, section 1016(a)(22), and section 1223(13) shall 
        apply for purposes of this section.
          ``(2) Certain provisions not to apply.--
                  ``(A) Recognition on complete liquidation.--Section 
                332 shall not apply to the liquidation into the 
                cooperative or any related person of a qualified 
                agricultural processor if the cooperative or related 
                person acquired the stock in such processor in a sale 
                to which subsection (a) applied.
                  ``(B) Deemed sale election not available.--No 
                election may be made under section 338(h)(10) with 
                respect to a sale to which subsection (a) applies.
  ``(f) Recapture of Tax Benefit Where Lack of Continuity.--
          ``(1) In general.--If there is a recapture event during any 
        taxable year with respect to any sale to an eligible farmers' 
        cooperative to which this section applied, such cooperative's 
        tax imposed by this chapter for such taxable year shall be 
        increased by an amount equal to--
                  ``(A) the recapture percentage of the amount 
                allocated under subsection (b) to such sale, multiplied 
                by
                  ``(B) the highest rate of tax imposed by section 11 
                for such taxable year.
          ``(2) Recapture event.--For purposes of this subsection, a 
        recapture event shall be treated as occurring in any taxable 
        year if--
                  ``(A) any portion of such taxable year is within the 
                3-year period beginning on the date on which the 
                eligible farmers' cooperative acquired stock in a 
                qualified agricultural processor in a sale to which 
                this section applied and, as of the close of such 
                portion, there is a decrease in the direct or indirect 
                percentage ownership of such stock held by such 
                cooperative which was not previously taken into account 
                under this subsection, or
                  ``(B) such taxable year is one of the first 5 taxable 
                years ending after the date of such sale and is the 
                third of such taxable years during which one-half or 
                less of the agricultural or horticultural products 
                refined or processed by the qualified agricultural 
                processor are purchased from the eligible farmers' 
                cooperative or farmers who are members of such 
                cooperative.
          ``(3) Recapture percentage.--For purposes of this subsection, 
        the term `recapture percentage' means--
                  ``(A) in the case of a recapture event described in 
                paragraph (2)(A), the percentage equal to a fraction--
                          ``(i) the numerator of which is the 
                        percentage decrease described in paragraph 
                        (2)(A), and
                          ``(ii) the denominator of which is the 
                        percentage which the qualified agricultural 
                        processor stock acquired by the cooperative in 
                        a sale to which this section applied bears to 
                        all qualified agricultural processor stock in 
                        the processor, and
                  ``(B) in the case of a recapture event described in 
                paragraph (2)(B), 100 percent.
        In no event shall the recapture percentage for any taxable year 
        exceed 100 percent minus the sum of the recapture percentages 
        for all prior taxable years.
          ``(4) Exceptions to purchase requirement.--The purchase 
        requirement of paragraph (2)(B) shall be treated as met for any 
        taxable year if the Secretary determines that such requirement 
        was not met due to 1 or more of the following: flood, drought, 
        or other weather-related conditions, environmental 
        contamination, disease, fire, or other similar extenuating 
        circumstances prescribed by the Secretary.
  ``(g) Coordination With Section 1042.--No election may be made under 
this section with respect to any sale if an election is made under 
section 1042 with respect to such sale.
  ``(h) Regulations.--The Secretary shall prescribe such regulations as 
are appropriate to carry out this section, including regulations which 
treat 2 or more sales which are part of the same transaction as 1 
sale.''
  (b) Conforming Amendments.--
          (1) Paragraph (2) of section 26(b) of such Code is amended by 
        striking ``and'' at the end of subparagraph (P), by striking 
        the period at the end of subparagraph (Q) and inserting ``, 
        and'', and by adding at the end the following new subparagraph:
                  ``(R) section 1042A(f) (relating to recapture of tax 
                benefit where lack of continuity in certain 
                agricultural processors).''
          (2) The table of sections for part III of subchapter O of 
        chapter 1 of such Code is amended by inserting after the item 
        relating to section 1042 the following new item:

                              ``Sec. 1042A. Sales of stock to certain 
                                        farmers' cooperatives.''

  (c) Effective Date.--The amendments made by this section shall apply 
to sales after December 31, 1997.
  (d) Budgetary Treatment.--For purposes of section 10213 of the 
Balanced Budget Act of 1997, the provisions of this section shall be 
considered to have been enacted as part of the Taxpayer Relief Act of 
1997.

                            I. INTRODUCTION

                         A. Purpose and Summary

    H.R. 2513, as amended, provides modifications to two tax 
provisions contained in the Taxpayer Relief Act of 1997 (``1997 
Act'') that were canceled pursuant to the President's line item 
veto authority: (1) temporary exceptions under subpart F for 
certain of active financing income; and (2) nonrecognition of 
gain on the sale of stock in agricultural processors facilities 
to certain farmer's cooperatives.

                 B. Background and Need for Legislation

    The bill, as amended, is intended to replace the two tax 
provisions that were canceled by the President's line item veto 
in the 1997 Act with modifications that are acceptable to the 
Committee, the Treasury Department, and the President. The 
Committee worked closely with the Administration and the 
affected industries to accomplish this goal, which is reflected 
in the Committee bill as reported.

                         C. Legislative History

    H.R. 2513 was introduced by Chairman Archer and Messrs. 
Hulshof and Rangel on September 23, 1997, and was amended by 
the Committee in a markup on September 23, 1997. An amendment 
in the nature of a substitute (offered by Chairman Archer) was 
adopted by a voice vote, with a quorum present. The bill, as 
amended, was ordered favorably reported by a voice vote on 
September 23, 1997, with a quorum present.

                      II. EXPLANATION OF THE BILL

   A. Exceptions Under Subpart F for Certain Active Financing Income

             (sec. 1 of the bill and sec. 954 of the Code)

                              present law

    Under the subpart F rules, certain U.S. shareholders of a 
controlled foreign corporation (``CFC'') are subject to U.S. 
tax currently on certain income earned by the CFC, whether or 
not such income is distributed to the shareholders. The income 
subject to current inclusion under the subpart F rules 
includes, among other things, ``foreign personal holding 
company income'' and insurance income. The U.S. 10-percent 
shareholders of a CFC also are subject to current inclusion 
with respect to their shares of the CFC's foreign base company 
services income (i.e., income derived from services performed 
for a related person outside the country in which the CFC is 
organized).
    Foreign personal holding company income generally consists 
of the following: dividends, interest, royalties, rents and 
annuities; net gains from sales or exchanges of (1) property 
that gives rise to the preceding types of income, (2) property 
that does not give rise to income, and (3) interests in trusts, 
partnerships, and REMICs; net gains from commodities 
transactions; net gains from foreign currency transactions; 
income that is equivalent to interest; income from notional 
principal contracts; and payments in lieu of dividends.
    Insurance income subject to current inclusion under the 
subpart F rules includes any income of a CFC attributable to 
the issuing or reinsuring of any insurance or annuity contract 
in connection with risks located in a country other than the 
CFC's country of organization and related person insurance 
income. Subpart F insurance income also includes income 
attributable to an insurance contract in connection with risks 
located within the CFC's country of organization, as the result 
of an arrangement under which another corporation receives a 
substantially equal amount of consideration for insurance of 
other-country risks. Investment income of a CFC that is 
allocable to any insurance or annuity contract related to risks 
located outside the CFC's country of organization is taxable as 
subpart F insurance income (Prop. Treas. reg. sec. 1.953-1(a)). 
Investment income allocable to contracts insuring risks located 
within the CFC's country of organization generally is taxable 
as foreign personal holding company income.
    Present law provides rules determining whether contracts 
are treated as life insurance or annuity contracts for Federal 
income tax purposes. A statutory definition of ``life insurance 
contract,'' designed to limit the investment orientation of the 
contract, is provided in section 7702 (and section 101(f) 
provides similar rules for certain contracts issued before 
January 1, 1985). Certain variable contracts (other than 
pension plan contracts) are not treated as annuity, endowment, 
or life insurance contracts for any period (and any subsequent 
period) for which the investments made by the underlying 
segregated asset account are not adequately diversified (sec. 
817(h)). In addition, a contract is not treated as an annuity 
contract unless rules are satisfied with respect to required 
distributions where the holder dies before the entire interest 
in thecontract has been distributed (sec. 72(s)). Other rules 
determining whether contracts are treated as life insurance or annuity 
contracts also apply under present law.
    Under a provision enacted as part of the Taxpayer Relief 
Act of 1997, the foreign tax credits normally available for 
foreign taxes paid with respect to a dividend are not allowed 
if the taxpayer has not held the dividend-paying stock for 16 
days (46 days in case of preferred stock). Periods during which 
the taxpayer is protected from risk of loss with respect to the 
stock generally are disregarded in determining the taxpayer's 
holding period. An exception from this holding period 
requirement is provided for foreign taxes with respect to 
dividends received by a foreign dealer in securities on stock 
held in its capacity as a dealer.

                           Reasons for Change

    The subpart F rules historically have been aimed at 
requiring current inclusion by the U.S. shareholders of income 
of a CFC that is either passive or easily movable. Prior to the 
enactment of the 1986 Act, exceptions from the current 
inclusion rules of subpart F were provided for income derived 
in the conduct of a banking, financing, or similar business or 
derived from certain investments made by an insurance company. 
The Committee is concerned that the 1986 Act's repeal of these 
exceptions has resulted in the extension of the subpart F 
provisions to income that is neither passive nor easily 
moveable. The Committee believes that the provision of 
exceptions from foreign personal holding company income for 
income from the active conduct of an insurance, banking, 
financing or similar business is appropriate.
    The provision in the bill is similar to a provision that 
was contained in the Taxpayer Relief Act of 1997 and that was 
canceled by the President in accordance with the Line Item Veto 
Act. The provision in the bill reflects significant 
modifications to the canceled provision to address concerns 
about the breadth of that provision.

                        Explanation of Provision

In general

    The bill provides temporary exceptions from foreign 
personal holding company income and foreign base company 
services income for subpart F purposes for certain income that 
is derived in the active conduct of an insurance, banking, 
financing or similar business. These exceptions are applicable 
only for taxable years beginning in 1998.
    With respect to income derived in the active conduct of an 
insurance business, the provision differs from the canceled 
provision in the Taxpayer Relief Act of 1997 in the following 
significant respects. First, rather than providing several 
alternative methods for determining reserves for life insurance 
and annuity contracts, such reserves are the greater of: (1) 
the net surrender value of the contracts; or (2) the reserves 
determined using the U.S. method (i.e., the method that would 
apply if the company were subject to tax under subchapter L), 
but using foreign interest rates and foreign mortality and 
morbidity tables. Second, the special rule for start-up 
companies that was included in the canceled provision has been 
eliminated, as has the look-through rule. Third, the bill 
provides that the present-law statutory definition of a life 
insurance contract (under secs. 7702 or 101(f)), as well as the 
distribution on death requirement of section 72(s) and the 
diversification requirement of section 817(h), do not apply for 
purposes of determining whether a contract issued by a CFC is a 
life insurance or annuity contract under sections 953 and 954 
of the Code, provided that (1) the contract is regulated as a 
life insurance or annuity contract by the country in which the 
CFC is created or organized, and (2) none of the policyholders, 
the insureds or annuitants, or the beneficiaries with respect 
to the contract are U.S. persons.
    With respect to income derived in the active conduct of a 
banking, financing, or similar business, the provision differs 
from the canceled provision in the Taxpayer Relief Act of 1997 
in the following significant respects. First, the exceptions 
from foreign personal holding company income and foreign base 
company services income generally apply only to income derived 
from transactions with customers located in the same country in 
which the CFC is created or organized (or in which a qualified 
business unit of the CFC maintains its principal office and 
conducts substantial business activity). Second, the 
determination of where a customer is treated as located is made 
under rules to be prescribed by the Secretary of the Treasury. 
Third, the look-through rule that was included in the canceled 
provision for purposes of determining the income eligible for 
the exceptions has been eliminated. Fourth, the provision 
includes rules for the coordination of the application of these 
new exceptions to income from the active conduct of a 
securities business with the application of the present-law 
exception for securities dealers from the dividend holding 
period requirement provided in section 901(k)(4).
    The Committee recognizes that insurance, banking, 
financing, and similar businesses are businesses the active 
conduct of which involves the generation of income, such as 
interest and dividends, of a type that generally is treated as 
passive for purposes of subpart F. The Committee further 
recognizes that the line between income derived in the active 
conduct of such businesses and income otherwise derived by 
entities so engaged can be difficult to draw. The Committee 
believes that the treatment of income derived by these 
businesses under subpart F requires further study and invites 
the comments of taxpayers and the Treasury Department regarding 
these issues in general and the exceptions provided by this 
temporary provision in particular.

Income from the active conduct of an insurance business

    The bill provides an exception from foreign personal 
holding company income for certain investment income of a 
qualifying insurance company with respect to contracts insuring 
risks located within the CFC's country of creation or 
organization. The rules of this provision differ from the rules 
of present-law section 953 of the Code, which determines the 
subpart F inclusions of a U.S. shareholder relating to 
insurance income of a CFC. Such insurance income under section 
953 generally is computed in accordance with the rules of 
subchapter L of the Code. Review of this provision's insurance 
rules would be appropriate when final guidance under section 
953 is published by the Treasury Department. Among other 
issues, this review shouldconsider whether it is more 
appropriate to determine the reserves for property and casualty 
contracts of CFCs using the applicable foreign interest rate and, if 
sufficient data is available, a foreign loss payment pattern, when 
using the applicable U.S. interest rate and U.S. loss payment pattern 
results in a materially different reserve amount.
    The exception applies to income (received from a person 
other than a related person) from investments made by a 
qualifying insurance company of its reserves or 80 percent of 
its unearned premiums (as defined for purposes of the 
provision). The provision applies only with respect to 
contracts insuring same-country risks that are not related 
party insurance contracts. For this purpose, in the case of 
property, casualty, or health insurance contracts (other than 
noncancellable accident and health insurance contracts), 
unearned premiums and reserves mean unearned premiums and 
reserves for losses incurred determined using the methods and 
interest rates that would be used if the qualifying insurance 
company were subject to tax under subchapter L of the Code. 
Thus, for this purpose, unearned premiums are determined in 
accordance with section 832(b)(4), and reserves for losses 
incurred are determined in accordance with section 832(b)(5) 
and 846 of the Code (as well as any other rules applicable to a 
U.S. property and casualty insurance company with respect to 
such amounts).
    In the case of a life insurance or annuity contract, 
reserves for such contracts are determined as follows. The 
reserves equal the greater of: (1) the net surrender value of 
the contract (as defined in section 807(e)(1)(A)), including in 
the case of pension plan contracts, or (2) the amount 
determined by applying the tax reserve method that would apply 
if the qualifying insurance company were subject to tax under 
subchapter L of the Code, with the following modifications. 
First, there is substituted for the applicable Federal interest 
rate an interest rate determined for the foreign country in 
which the qualifying insurance company was created or 
organized, calculated (except as provided by the Treasury 
Secretary in order to address insufficient data and similar 
problems) in the same manner as the mid-term applicable Federal 
interest rate (``AFR'') (within the meaning of section 
1274(d)). Second, there is substituted for the prevailing State 
assumed rate the highest assumed interest rate permitted to be 
used for purposes of determining statement reserves in the 
foreign country for the contract. Third, in lieu of U.S. 
mortality and morbidity tables, there are applied mortality and 
morbidity tables that reasonably reflect the current mortality 
and morbidity risks in the foreign country. In the case of a 
noncancellable accident and health insurance contract, reserves 
for such contract are determined using the tax reserve method 
that would apply if the qualifying insurance company were 
subject to tax under subchapter L of the Code, with the three 
modifications described above.
    In no event may the reserve for any contract at any time 
exceed the foreign statement reserve for the contract, reduced 
by any catastrophe or deficiency reserve or any similar 
reserve. This rule applies whether the contract is regulated as 
a property, casualty, health, life insurance, annuity, or any 
other type of insurance contract.
    The bill provides that the present-law statutory definition 
of a life insurance contract (under secs. 7702 or 101(f)), as 
well as the distribution on death requirement of section 72(s) 
and the diversification requirement of section 817(h), do not 
apply for purposes of determining whether a contract issued by 
a CFC is a life insurance or annuity contract under sections 
953 and 954 of the Code, provided that (1) the contract is 
regulated as a life insurance or annuity contract by the 
country in which the CFC is created or organized, and (2) none 
of the policyholders, the insureds or annuitants, or the 
beneficiaries with respect to the contract are U.S. persons. 
However, if any such persons are U.S. persons, this exception 
from the application of those rules does not apply.
    The bill also provides an exception for income from the 
investment of assets equal to (1) one-third of premiums earned 
during the taxable year on property, casualty, or health 
insurance contracts (other than noncancellable accident and 
health insurance contracts), and (2) 10 percent of reserves 
(determined for purposes of the provision) for life insurance, 
annuity or noncancellable accident and health insurance 
contracts.
    To prevent the shifting of relatively high-yielding assets 
to generate investment income that qualifies under this 
temporary exception, the provision specifies that, except as 
provided by the Treasury Secretary, income is allocated to 
contracts as follows. In the case of a separate-account-type 
contract (including a variable contract not meeting the 
requirements of section 817), the income credited under the 
contract is allocable only to that contract. Income not so 
allocated is allocated ratably among all contracts that are not 
separate account-type contracts.
    Under the bill, a qualifying insurance company means any 
entity which: (1) is regulated as an insurance company under 
the laws of the country in which it is created or organized; 
(2) derives at least 50 percent of its net written premiums 
from the insurance or reinsurance of risks located within the 
country in which it is created or organized; and (3) is engaged 
in the active conduct of an insurance business and would be 
subject to tax under subchapter L if it were a domestic 
corporation.
    The bill clarifies that the rules added by this provision 
do not apply to investment income (includable in the income of 
a U.S. shareholder of a CFC pursuant to section 953) allocable 
to contracts that insure related party risks or risks located 
in a country other than the country in which the qualifying 
insurance company is created or organized.

Income from the active conduct of a banking, financing, or similar 
        business

    The bill provides an exception from foreign personal 
holding company income for income that is derived in the active 
conduct by a CFC of a banking, financing, or similar business 
from transactions with customers located within the same 
country under the laws of which the CFC is created or 
organized. For this purpose, the Committee intends that income 
derived from the following types of activities will be 
considered to be income derived in the active conduct of a 
banking, financing, or similar business:
          (1) regularly making personal, mortgage, industrial, 
        or other loans in the ordinary course of the 
        corporation's trade or business;
          (2) factoring evidences of indebtedness for 
        customers;
          (3) purchasing, selling, discounting, or negotiating 
        for customers notes, drafts, checks, bills of exchange, 
        acceptances, or other evidences of indebtedness;
          (4) issuing letters of credit and negotiating drafts 
        drawn thereunder for customers;
          (5) performing trust services, including as a 
        fiduciary, agent, or custodian, for customers, provided 
        such trust activities are not performed in connection 
        with services provided by a dealer in stock, securities 
        or similar financial instruments;
          (6) arranging foreign exchange transactions 
        (including any section 988 transaction within the 
        meaning of section 988(c)(1)) for, or engaging in 
        foreign exchange transactions with, customers;
          (7) arranging interest rate or currency futures, 
        forwards, options or notional principal contracts for, 
        or entering into such transactions with, customers;
          (8) underwriting issues of stock, debt instruments or 
        other securities under best efforts or firm commitment 
        agreements for customers;
          (9) engaging in leasing (including entering into 
        leases and purchasing, servicing and disposing of 
        leases and leased assets);
          (10) providing charge and credit card services or 
        factoring receivables obtained in the course of 
        providing such services;
          (11) providing traveler's check and money order 
        services for customers;
          (12) providing correspondent bank services for 
        customers;
          (13) providing paying agency and collection agency 
        services for customers;
          (14) maintaining restricted reserves (including money 
        or securities) in a segregated account in order to 
        satisfy a capital or reserve requirement imposed by a 
        local banking or securities regulatory authority;
          (15) engaging in hedging activities directly related 
        to another activity described herein;
          (16) repackaging mortgages and other financial assets 
        into securities and servicing activities with respect 
        to such assets (including the accrual of interest 
        incidental to such activity);
          (17) engaging in financing activities typically 
        provided by an investment bank, such as project 
        financing provided in connection with construction 
        projects, structured finance (including the extension 
        of a loan and the sale of participations or interests 
        in the loan to other financial institutions or 
        investors), and leasing activities to the extent 
        incidental to such financing activities;
          (18) providing financial or investment advisory 
        services, investment management services, fiduciary 
        services, or custodial services;
          (19) purchasing or selling stock, debt instruments, 
        interest rate or currency futures or other securities 
        or derivative financial products (including notional 
        principal contracts) from or to customers and holding 
        stock, debt instruments and other securities as 
        inventory for sale to customers, unless the relevant 
        securities or derivative financial products are not 
        held in a dealer capacity;
          (20) effecting transactions in securities for 
        customers as a securities broker;
          (21) investing premiums accepted by insurance brokers 
        or agents for transmittal to insurance companies on 
        behalf of policyholders and other income from insurance 
        brokerage or agency services, except to the extent that 
        the income is derived from transactions that would give 
        rise to foreign base company services income under 
        section 954(e)(1); and
          (22) any other activity that the Secretary of the 
        Treasury determines to be a financing activity 
        conducted by active corporations in the ordinary course 
        of their business.
    This exception for income derived in the active conduct of 
a banking, financing, or similar business from transactions 
with same-country customers applies only if the CFC is 
predominantly engaged in the active conduct of a banking, 
financing, or similar business. In this regard, a CFC that 
would be subject to tax under subchapter L of the Code if it 
were a domestic corporation is not predominantly engaged in the 
active conduct of a banking, financing, or similar business. 
For this purpose, a CFC is considered to be predominantly 
engaged in the active conduct of a banking, financing or 
similar business if more than 70 percent of its gross income is 
derived from such business from transactions with customers 
located within the same country under the laws of which the 
corporation is created or organized. Alternatively, a CFC is 
considered to be predominantly engaged in the active conduct of 
a banking, financing, or similar business if (1) it is engaged 
in the active conduct of a banking business and it is an 
institution licensed to do business as a bank in the United 
States (or is any other corporation not so licensed which is 
specified in regulations) or (2) it is engaged in the active 
conduct of a securities business and it is registered as a 
securities broker or dealer or Government securities broker or 
dealer under the Securities Exchange Act of 1934 (or is any 
other corporation not so registered which is specified in 
regulations). In this regard, the Committee intends that these 
requirements for the active conduct of a banking or securities 
business will be interpreted in the manner provided in the 
regulations proposed under section 1296(b) (as in effect prior 
to the enactment of the Taxpayer Relief Act of 1997); the 
Committee further intends that these requirements will 
beconsidered to be satisfied by an entity that is a qualified bank 
affiliate or qualified securities affiliate as defined under such 
proposed regulations. See Prop. Treas. Reg. secs. 1.1296-4 and 1.1296-
6.
    For purposes of this exception, a customer of a CFC is any 
person that has a customer relationship with the CFC. However, 
a related person (within the meaning of sec. 954(d)(3)), 
officer, director, or employee of any CFC is not treated as a 
customer with respect to any transaction a principal purpose of 
which is to satisfy any requirement for this exception. In 
applying this exception, certain income derived by a qualified 
business unit of a CFC is treated as derived from transactions 
with customers located in the same country in which the CFC is 
created or organized. This treatment applies to income derived 
by a qualified business unit of a CFC from transactions with 
customers that are located in the country in which the 
qualified business unit maintains its principal office and 
conducts substantial business activity. The determination of 
where a customer is located will be made under rules to be 
prescribed by the Secretary of the Treasury.
    An additional exception from the definition of foreign 
personal holding company income is provided for certain income 
derived by a securities dealer within the meaning of section 
475. This exception applies to interest or dividends (or 
equivalent amounts described in sec. 954(c)(1) (E) or (G)) from 
any transaction (including a hedging transaction or a 
transaction consisting of a deposit of collateral or margin 
described in section 956(c)(2)(J)) entered into in the ordinary 
course of the dealer's trade or business as such a securities 
dealer, but only if there is material participation in such 
transaction by employees located in the country under the laws 
of which the dealer is created or organized (or, in the case of 
a qualified business unit of the dealer that both maintains its 
principal office and conducts substantial business in a 
country, employees located in that country).

Anti-abuse rule

    The bill includes an anti-abuse rule which is applicable 
for purposes of these exceptions from foreign personal holding 
company income. For purposes of applying these exceptions, 
items with respect to a transaction or series of transactions 
will be disregarded if one of the principal purposes of the 
transaction or transactions is to qualify income or gain for 
these exceptions. The reach of this anti-abuse rule explicitly 
includes any change in the method of computing reserves or any 
other transaction or transactions one of the principal purposes 
of which is the acceleration or deferral of any item in order 
to claim the benefits of these exceptions and the organization 
of entities in order to satisfy any same country requirement 
for these exceptions. The Committee intends that factors 
relevant in determining whether an entity has been organized in 
a particular country for a principal purpose of qualifying for 
these exceptions will include, among other things, whether 
existing and substantial customers are and have been located in 
that country.

Foreign base company services income

    The bill also includes a corresponding exception from 
foreign base company services income. This exception applies to 
income derived in connection with the performance of services 
that are directly related to a transaction by the CFC the 
income from which is not foreign personal holding company 
income by reason of section 954(h). This exception also applies 
to income derived in connection with the performance of 
services that are directly related to a transaction by the CFC 
to which the additional exception for certain income of dealers 
applies.

Coordination with section 901(k)

    The bill includes rules for coordinating these exceptions 
to foreign personal holding company income and foreign base 
company services income for certain active financing income 
with the dividend holding period requirement of section 901(k). 
Under the bill, the foreign taxes for which credits are 
allowable by reason of the securities dealer exception to the 
dividend holding period requirement are reduced by a 
proportionate amount based on the ratio of (1) the income from 
the active conduct of a securities business which is not 
subpart F income solely because of these active financing 
income exceptions, to (2) the total income from the active 
conduct of a securities business by a CFC which is not subpart 
F income (including income to which these exceptions apply). 
For this purpose, subpart F income is as defined in section 
952(a), but calculated without applying the rules of section 
954(b) (3) and (4) and without applying the earnings and 
profits limitations set forth in section 952(c). This rule is 
applied on an affiliated group basis (i.e., by treating all 
members of an affiliated group as one corporation). For this 
purpose, the Committee intends that income from the active 
conduct of a securities business be determined in the manner 
provided in the regulations proposed under section 1296(b) (as 
in effect prior to the enactment of the Taxpayer Relief Act of 
1997). See Prop. Treas. Reg. Sec. 1.1296-6. Alternatively, if 
the corporation (and all members of the affiliated group of 
which it is a member) so elect, these exceptions for active 
financing income would not apply and the securities dealer 
exception to the dividend holding period requirement would 
apply without modification. For purposes of these rules, an 
affiliated group is as defined under section 1504, but 
determined without regard to sec. 1504(b) (2) and (3).
    Section 901(k) was enacted as part of the Taxpayer Relief 
Act of 1997 in order to eliminate implicit subsidies provided 
by the U.S. Treasury to U.S. taxpayers (including U.S. 
shareholders of CFCs) that generate low-tax foreign source 
income. The securities industry argued in connection with that 
legislation that the exception for securities dealers provided 
in section 901(k)(4) was necessary to alleviate the competitive 
tax disadvantage faced by U.S.-owned securities dealers because 
such dealers did not enjoy the same opportunity as foreign-
owned competitors to defer home country tax on low-tax foreign 
income. For purposes of this provision, the Committee has 
adopted the coordination rule described above because the 
subpart F exceptions provided by the bill eliminate the primary 
factual premise for the section 901(k)(4) exception for 
securities dealers. However, the Committee believes that it 
would be appropriate to continue studying these competing 
concerns in order to determine whether this coordination rule 
adequately addresses those concerns or whether it should be 
modified in connection with any extension of the provision.

                             Effective Date

    The provision applies only to the first full taxable year 
of a foreign corporation beginning in 1998, and to the taxable 
years of United States shareholders with or within which such 
taxable year of such foreign corporations ends.

     B. Tax-Free Rollover of Gain on Sale of Stock in Agricultural 
         Processing Facilities to Certain Farmers' Cooperatives

          (sec. 2 of the bill and new sec. 1042A of the Code)

                              Present Law

    There are no provisions under present law which permit the 
tax-free rollover of gain on the sale of stock in a processing 
or refining company to a farmers' cooperative.
    However, if certain requirements are satisfied, a taxpayer 
may defer recognition of gain on the sale of qualified 
securities to an employee stock ownership plan (``ESOP'') or an 
eligible worker-owned cooperative to the extent that the 
taxpayer reinvests the proceeds in qualified replacement 
property (sec. 1042). Gain is recognized when the taxpayer 
disposes of the qualified replacement property. One of the 
requirements that must be satisfied for deferral to apply is 
that, immediately after the sale, the ESOP must own at least 30 
percent of the stock of the corporation issuing the qualified 
securities. In general, qualified securities are securities 
issued by a domestic C corporation that has no stock 
outstanding that is readily tradeable on an established 
securities market. Deferral treatment does not apply to gain on 
the sale of qualified securities by a C corporation.

                           Reasons for Change

Background

    The Committee understands that much of the final value of 
farm products often is generated not in their production on the 
farm, but during the processing or refining of farm products 
after those products leave the farm. The Committee believes 
that, in order for farmers to share more of that final value, 
farmers must directly or indirectly own some of the processing 
or refining facilities. The Committee believes it appropriate 
to facilitate the transfer of refiners and processors to 
farmers' cooperatives.
    The Taxpayer Relief Act of 1997 contained a provision (sec. 
968 of the Act) that provided for the tax-free rollover of gain 
on the sale of stock of a corporation that owns farm product 
processing or refining facilities if the stock was sold to a 
cooperative which was selling farm produce for refining or 
processing in those facilities. However, the provision was 
canceled by the President under the recently enacted line-item 
veto legislation.
    Nonetheless, the Committee continues to believe that it is 
appropriate to facilitate the transfer of refining and 
processing facilities to farmers' cooperatives. The Committee 
continues to believe that an appropriate way to facilitate such 
transfers is to provide for the tax-free rollover of gain on 
the sale of stock of a corporation that owns farm product 
processing and refining facilities, including restrictions that 
better target the benefit of the provision and address many of 
the concerns that caused the President to cancel the provision 
in the Taxpayer Relief Act of 1997.
    Accordingly, the Committee bill will permit the tax-free 
rollover of gain on the sale of all (i.e., 100 percent) of the 
stock of a corporation that owns a processing facility to a 
cooperative which is engaged in marketing agricultural or 
horticultural products. The seller would have to reinvest the 
proceeds from the sale of the stock of the corporation owning 
the processing facilities in stock of an active C corporation 
other than stock of the selling corporation or any related 
person.

Additional targeting provisions

    Dollar cap.--In order to better target the tax benefit of 
the tax-free rollover to smaller processing facilities, the 
Committee bill limits the maximum amount of gain that can 
qualify from the tax-free rollover with respect to the 
acquisition by an eligible farmers' cooperative in any taxable 
year to $75 million.
    Prevention of conversion of deferral into exemption.--In 
order to prevent the effective conversion of a deferral 
provision into an exemption, the Committee bill provides that 
the reinvestment of the sales proceeds by the seller not be in 
stock of the selling corporation or a related person.
    Relationship between cooperative and processing facilities 
(the ``50-percent test'').--Because the purpose of the 
provision is to facilitate the acquisition of processing and 
refining facilities that process or refine products downstream 
of the cooperative, the Committee believes that the benefits of 
tax-free rollover should be provided only where more than half 
of the agricultural products processed or refined in the 
acquired processing facilities were purchased from the 
cooperative or its members for an adequate period of time. The 
Committee believes that the effect of this rule should be to 
increase the portion of the tax benefit of the tax-free 
rollover that is passed through to the cooperative because only 
a sale to that particular cooperative will be eligible for the 
tax-free rollover.
    The bill that the President canceled required that this 50-
percent test be met only for the one year period prior to the 
sale of the processing corporation to the cooperative. The 
Committee now believes that the one-year period provided in the 
prior bill was insufficient and that this ``50-percent test'' 
generally should be met for the five-year periods both 
proceding and succeeding the sale of the stock of the 
processing corporation to the cooperative. Nonetheless, the 
Committee believes that determining whether a processing 
corporation meets this 50-percent test might prove burdensome 
in the case of small cooperatives (i.e., those cooperatives 
that never had gross receipts in excess of $1 billion for any 
taxable year) or cooperatives that principally sold fungible 
commodities that are not ``specialty produce'' (i.e., 
agricultural or horticultural products other than wheat, feed 
grains, oil seeds, cotton, rice, cattle, hogs, sheep, or diary 
products) which are more easily traced. Accordingly, the 
Committee bill provides that the 50-percent test be met for 
only the five-year period after their purchase by the 
cooperative in the case of small cooperatives and cooperatives 
that deal solely in nonspecialty produce.
    Retention of corporate tax on income of processor.--
Similarly, the Committee believes that the provision should 
insure that assets stay in corporate solution unless gain on 
those assets is recognized. Accordingly, the Committee bill 
provides that the liquidation of the corporation owning the 
processing facilities be ineligible for tax-free liquidation 
under section 332. Further, the provision would prevent a basis 
step-up without gain recognition by disallowing the application 
section 338(h)(10) to the acquiring cooperative.
    Recapture of tax benefit.--In addition, in order to prevent 
the use of the provision to sell refining and processing 
facilities to a person other than a farmers' cooperative, the 
Committee bill provides that an excise tax is imposed on the 
cooperative if it sells or otherwise disposes of its interest 
in the processing or refining facilities within three years of 
its purchase of this interest.

                        Explanation of Provision

In general

    The bill provides for the deferral of certain gains from 
the sale of ``qualified agricultural processor stock'' to an 
``eligible farmers' cooperative'' to the extent that the 
taxpayers purchases ``qualified replacement property'' within 
the ``replacement period.'' Deferral is available only if, 
immediately after the sale, the eligible farmers' cooperative 
owns 100 percent of the stock (other than certain preferred 
stock described in section 1504(a)(4)) and only to the extent 
that the eligible farmers' cooperative allocates a portion of 
its annual $75 million limitation to the seller (i.e., the 
maximum aggregate amount that can be deferred by all sellers to 
a single cooperative in any taxable year of the cooperative may 
not exceed $75 million). For this purpose, all cooperatives 
which are under common control are treated as a single 
cooperative.
    There is no limit on the number of qualified agricultural 
processors that a taxpayer can sell to an eligible farmers' 
cooperative or cooperatives in any one year or years to which 
tax-free rollover may apply. However, only gain that would be 
long-term capital gain may be deferred under this provision.
    In order for gain to be deferred, the seller must have held 
the stock of the qualified agricultural processor for three 
years prior to its sale and the cooperative to whom the 
qualified agricultural processor is sold must consent to the 
imposition of a tax on all or a portion of the deferred gain if 
there is a subsequent ``recapture event.'' No election to defer 
gain under this provision may be made if an election to defer 
gain had been made with respect to the sale under section 1042. 
The provision does not apply if the seller is an eligible 
farmers' cooperative.

Qualified agricultural processor stock

    In general, stock is qualified agricultural processor stock 
if it is stock (other than certain preferred stock described in 
section 1504(a)(4)) issued by a qualified agricultural 
processor. A qualified agricultural processor is a domestic C 
corporation substantially all of the assets ofwhich are used in 
the active conduct of the trade or business of refining or processing 
agricultural or horticultural products in the United States. Stock in a 
processor may be qualified agricultural processor stock even if the 
stock of the qualified agricultural processor is publicly traded and 
even if all of the products refined or processed within the United 
States were products grown or raised outside the United States.

Eligible farmers' cooperative

    An eligible farmers' cooperative is an organization which 
is treated as a cooperative for Federal income tax purposes 
(whether or not such cooperative is described in section 521) 
and which is engaged in the marketing of agricultural or 
horticultural products.

50-percent test

    In order for the sale of qualified agricultural processor 
stock to certain eligible farmers' cooperatives to be eligible 
for the tax-free rollover, the processor must meet a 50-percent 
test. In general, a processor meets the 50-percent test if more 
than 50 percent of the agricultural or horticultural products 
to be refined or processed by the qualified agricultural 
processor were purchased from the eligible farmers' cooperative 
that is purchasing the qualified agricultural processor, or 
from members of that cooperative, for at least three of the 
five taxable years of the processor ending on or before the 
date of the purchase of the qualified agricultural processor by 
the eligible farmers' cooperative. For this purpose, purchases 
by the processor from intermediary owners of agricultural 
commodities may be counted as a purchase from a cooperative or 
its members if written evidence is available that the 
commodities were transferred from the cooperative or its 
members to the intermediary which transferred such commodities 
to the processor or another intermediary or intermediaries who 
ultimately transferred those commodities to the processor.
    Cooperatives required to meet this 50-percent test are (1) 
any cooperative or any predecessor (and any related person 
under sections 52(a), 52(b), 414(m), or 414(o)) who had gross 
receipts of more than $1 billion for any taxable year preceding 
the purchase of qualified agricultural processor stock or (2) 
any cooperative that sold more than a de minimis amount of 
specialty produce. For purposes of the first rule, the sales of 
predecessors of the cooperative are to be taken into account, 
but gross receipts exclude sales returns and allowances. If any 
year is a short year, the amount of the gross receipts for 
those years is annualized. For purposes of the second rule, 
specialty produce is any agricultural or horticultural product 
other than wheat, feed grains, oil seeds, cotton, rice, cattle, 
hogs, sheep, or dairy products.

Qualified reinvestment property

    Gain on the sale of processor stock to a cooperative is not 
recognized only to the extent that the proceeds from the sale 
of the processor stock are invested in securities of an active 
C corporation. Qualified reinvestment property may not be 
securities of the selling corporation or any corporation in 
which the selling corporation owns 10 percent (applying the 
principles of section 304(c)) of the stock of that selling 
corporation. Qualified reinvestment property also does not 
include securities in the qualified agricultural processor.
    The basis of any qualified reinvestment property is reduced 
by any gain that is not recognized by reason of this provision. 
Thus, any deferred gain will be recognized when the seller 
disposes of the reinvestment property, other than in 
dispositions which are part of a reorganization, dispositions 
at death, gift, or divorce.

Reinvestment period

    The seller would have to reinvest the proceeds from the 
sale of the stock of the corporation owning the processing 
facilities within a period beginning 3 months before and ending 
one year after such sale.

Special rules applicable to qualified agricultural processor

    The liquidation of a qualified refiner or processor into a 
cooperative is not tax-exempt under section 332 if the 
cooperative acquired the qualified refiner or processor in a 
transaction on which gain had been deferred under this 
provision. Section 338(h)(10) shall not apply to the 
acquisition of a qualified refiner or processor if the 
cooperative acquires the qualified refiner or processor in a 
transaction on which gain had been deferred under this 
provision.

Recapture tax on dispositions, etc., of qualified agricultural 
        processor

    General rule.--If there is a ``recapture event'' with 
respect to an eligible farmers' cooperative during a taxable 
year, a tax is imposed on the eligible farmers' cooperative 
equal to the highest corporate tax rate multiplied by the 
``recapture percentage'' of any gain which was allocated to the 
seller of the stock in the qualified agricultural processor.
    Recapture event.--A recapture event is either one or both 
of the following events:
          (1) A decrease, within the three year period 
        subsequent to the acquisition of the processor by the 
        cooperative, in the percentage of the stock in the 
        processor that is owned, directly or indirectly, by the 
        cooperative; or
          (2) The failure, in any three of the five taxable 
        years following the acquisition of the processor by the 
        cooperative, of the cooperative to purchase more than 
        one-half of the agricultural or horticultural products 
        which it processes or refines from the cooperative or 
        its members.
    A decrease described in (1) above can occur, for example, 
if (a) the cooperative sells some or all of its stock in the 
processor or (b) the processor issues more stock to someone 
other than the cooperative.
    Recapture percentage.--The recapture percentage is the 
percentage by which the ownership by the eligible farmers' 
cooperative in the eligible agricultural processor which 
qualified for the tax-free rollover decreases. Where the 
recapture event is a failure to meet the 50-percent test 
(described in (2), above), the recapture percentage is 100 
percent.
    Exception for failure to meet 50-percent test because of 
uncontrollable circumstances.--No recapture tax is imposed if 
the Treasury Secretary determines that the failure of the 
processor to meet the 50-percent test is due to flood, drought, 
other weather-related conditions, environmental contamination, 
disease, fire, or similar extenuating circumstances prescribed 
by the Treasury Secretary.

Treasury regulations

    The bill directs that the Secretary of the Treasury issue 
regulations that are appropriate to carry out the purposes of 
this provision, including regulations treating two or more 
sales which are part of the same transaction as a single sale.

                             Effective Date

    The provision applies to sales after December 31, 1997.

                       III. VOTE OF THE COMMITTEE

    In compliance with clause 2(l)(2)(B) of rule XI of the 
Rules of the House of Representatives, the following statement 
is made concerning the vote on the motion to report the bill. 
The bill (H.R. 2513) was ordered favorably reported, as amended 
by voice vote on September 23, 1997, with a quorum present.

                     IV. BUDGET EFFECTS OF THE BILL

                         A. Committee Estimates

    In compliance with clause 7(a) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the estimated budget effects of the bill as 
reported.
    The bill, as reported, is estimated to have the following 
effect on the budget:

   ESTIMATED BUDGET EFFECTS OF H.R. 2513 AS REPORTED BY THE COMMITTEE ON WAYS AND MEANS ON SEPTEMBER 23, 1997 TO RESTORE AND MODIFY PROVISIONS IN THE   
                          ``TAXPAYER RELIEF ACT OF 1997'' CANCELLED PURSUANT TO THE LINE ITEM VETO ACT--FISCAL YEARS 1998-2007                          
                                                                [In millions of dollars]                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
            Provision                  Effective       1998    1999    2000    2001    2002    2003    2004    2005    2006    2007    1998-02   1998-07
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. Exemption from subpart F for   tybi 1998              -14     -41      -2  ......  ......  ......  ......  ......  ......  ......       -57       -57
 certain active financing income                                                                                                                        
 (section 1).                                                                                                                                           
2. Deferral of gain on sales of   sea 12/31/97            -1      -3      -4      -4      -4      -4      -4      -4      -4      -4       -15       -34
 stock in farm product refining                                                                                                                         
 firms to farm coops which                                                                                                                              
 supply the firm with raw farm                                                                                                                          
 products for refining (section                                                                                                                         
 2).                                                                                                                                                    
                                                     ---------------------------------------------------------------------------------------------------
      Net total.................  ..................     -15     -44      -6      -4      -4      -4      -4      -4      -4      -4       -72       -91
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note. Details may not add to totals due to rounding.                                                                                                    
                                                                                                                                                        
Legend for ``Effective'' column: sea=sales or exchanges after; tybi=taxable years beginning in.                                                         

    The Joint Committee on Taxation estimates that the bill as 
reported would lose $72 million over the 5-year period, fiscal 
years 1998-2002. However, the bill includes language stating 
that it should be treated as if it had been part of the 
Taxpayer Relief Act of 1997. Therefore, it should not trigger a 
sequester under Pay-go procedures.

                B. Budget Authority and Tax Expenditures

                            budget authority

    In compliance with subdivision (B) of clause 2(l)(3) of 
rule XI of the Rules of the House of Representatives, the 
Committee states that the provisions of the bill as reported 
involve no new or increased budget authority.

                            tax expenditures

    In compliance with subdivision (B) of clause 2(l)(3) of 
rule XI of the Rules of the House of Representatives, the 
Committee states that the provisions of the bill as reported 
involve increased tax expenditures in the amounts shown in the 
revenue table in IV.A., above.

      C. Cost Estimate Prepared by the Congressional Budget Office

    In compliance with subdivision (C) of clause 2(l)(3) of 
rule XI of the Rules of the House of Representatives, requiring 
cost estimate prepared by the Congressional Budget Office, the 
Committee advises that the Congressional Budget Office has 
submitted the following statement on this bill.

                                     U.S. Congress,
                               Congressional Budget Office,
                                Washington, DC, September 30, 1997.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
reviewed H.R. 2513, which would amend the Internal Revenue Code 
of 1986 to restore in a modified form two provisions in the 
Taxpayer Relief Act of 1997 that were canceled by the President 
pursuant to the Line Item Veto Act. The provisions would exempt 
active financing income from foreign personal holding company 
income and provide for the nonrecognition of gain on the sale 
of stock in agricultural processors to certain farmers' 
cooperatives.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Alyssa 
Treszkowski.
            Sincerely,
                                         June E. O'Neill, Director.
    Enclosure.

H.R. 2513--To amend the Internal Revenue Code of 1986 to restore and 
        modify the provision of the Taxpayer Relief Act of 1997 
        relating to exempting active financing income from foreign 
        personal holding company income and to provide for the 
        nonrecognition of gain on the sale of stock in agricultural 
        processors to certain farmers' cooperatives.

    Summary: H.R. 2513 would restore in a modified form two 
provisions in the Taxpayer Relief Act of 1997 that were 
canceled by the President pursuant to the Line Item Veto Act. 
The first provision amends the Internal Revenue Code to restore 
the exemption of active financing income from foreign personal 
holding income. The second provision amends the Internal 
Revenue Code to provide for the deferral of gain on the sale of 
stock in agricultural processors to certain farmers' 
cooperatives. The Joint Committee on Taxation (JCT) estimates 
that enacting this bill would reduce governmental receipts by 
$72 million over the 1998-2002 period. Because enacting this 
bill would affect receipts, pay-as-you-go procedures ordinarily 
would apply to the bill. However, the legislation contains a 
provision that directs the Director of the Office of Management 
and Budget to exclude the effects of this legislation from the 
pay-as-you-go procedures.
    H.R. 2513 contains no new private-sector or 
intergovernmental mandates as defined in the Unfunded Mandates 
Reform Act of 1995 (UMRA) and would not impose any costs on 
state, local, or tribal governments.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of H.R. 2513 is shown in the attached JCT 
table.
    Direct spending and receipt effects: Section 252 of the 
Balanced Budget and Emergency Deficit Control Act of 1985 sets 
up pay-as-you-go procedures for legislation affecting direct 
spending or receipts. CBO's estimate of the effects of H.R. 
2513 on direct spending and receipts are summarized below, but 
section 2(d) of the bill directs the Director of the Office of 
Management and Budget to exclude these effects from the pay-as-
you-go procedures.

                                       DIRECT SPENDING AND RECEIPT EFFECTS                                      
                                    [By fiscal year, in billions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                   1998    1999    2000    2001    2002    2003    2004    2005    2006    2007 
----------------------------------------------------------------------------------------------------------------
Changes in outlays..............                                                                                
(9) Not Applicable                                                                                              
Changes in receipts.............     -15     -44      -6      -4      -4      -4      -4      -4      -4      -4
----------------------------------------------------------------------------------------------------------------

    Intergovernmental and private-sector impact: The bill 
contains no new private-sector or intergovernmental mandates as 
defined in UMRA and would not impose any costs on state, 
tribal, or local governments.
    Estimate prepared by: Alyssa Trzeszkowski.
    Estimate approved by: Rosemary Marcuss, Assistant Director 
for Tax Analysis.

     V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE

          A. Committee Oversight Findings and Recommendations

    With respect to subdivision (A) of clause 2(l)(3) of rule 
XI of the Rules of the House of Representatives (relating to 
oversight findings), the Committee advises that it was the 
result of the Committee's oversight activities concerning the 
application of provisions in the Taxpayer Relief Act of 1997 
that were canceled by the President's line item veto relating 
to exceptions under subpart F for certain active financing 
income and nonrecognition of gain on the sale of stock in 
agricultural processors to certain farmers' cooperatives that 
the Committee concluded that it is appropriate to enact the 
provisions contained in the bill as reported.

    B. Summary of Findings and Recommendations of the Committee on 
                    Government Reform and Oversight

    With respect to subdivision (D) of clause 2(l)(3) of rule 
XI of the Rules of the House of Representatives, the Committee 
advises that no oversight findings or recommendations have been 
submitted to this Committee by the Committee on Government 
Reform and Oversight with respect to the provisions contained 
in the bill.

                 C. Constitutional Authority Statement

    With respect to clause 2(l)(4) of rule XI of the Rules of 
the House of Representatives (relating to Constitutional 
Authority), the Committee states that the Committee's action in 
reporting this bill is derived from Article I of the 
Constitution, Section 7 (``All bills for raising revenue shall 
originate in the House of Representatives'') and Section 8 
(``The Congress shall have power to lay and collect taxes, 
duties, imposts and excises, to pay the debts . . . of the 
United States''), and from the 16th Amendment to the 
Constitution.

              D. Information Relating to Unfunded Mandates

    This information is provided in accordance with section 423 
of the Unfunded Mandates Act of 1995 (P.L. 104-4).
    The Committee has determined that the provisions of the 
bill do not impose a Federal mandate on the private sector nor 
a Federal intergovernmental mandate. Thus, the provisions of 
the bill do not affect the competitive balance between the 
private sector and State, local, and tribal governments.

                 E. Applicability of House Rule XXI5(c)

    Rule XXI5(c) of the Rules of the House of Representatives 
provides, in part, that ``No bill or joint resolution, 
amendment, or conference report carrying a Federal income tax 
rate increase shall be considered as passed or agreed to unless 
so determined by a vote of not less than three-fifths of the 
Members.'' The Committee has carefully reviewed the provisions 
of the bill, and states that the provisions of the bill do not 
involve any Federal income tax rate increase within the meaning 
of the rule.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    In compliance with clause 3 of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman).

                     INTERNAL REVENUE CODE OF 1986

          * * * * * * *

                        Subtitle A--Income Taxes

          * * * * * * *

                  CHAPTER 1--NORMAL TAXES AND SURTAXES

          * * * * * * *

                      PART IV--CREDITS AGAINST TAX

          * * * * * * *

               Subpart A--Nonrefundable Personal Credits

          * * * * * * *

SEC. 26. LIMITATION BASED ON TAX LIABILITY; DEFINITION OF TAX 
                    LIABILITY.

  (a) * * *
  (b) Regular Tax Liability.--For purposes of this part--
          (1) In general.--The term ``regular tax liability'' 
        means the tax imposed by this chapter for the taxable 
        year.
          (2) Exception for certain taxes.--For purposes of 
        paragraph (1), any tax imposed by any of the following 
        provisions shall not be treated as tax imposed by this 
        chapter:
                  (A) * * *
          * * * * * * *
                  (O) sections 453(l)(3) and 453A(c) (relating 
                to interest on certain deferred tax 
                liabilities),
                  (P) section 860K (relating to treatment of 
                transfers of high-yield interests to 
                disqualified holders), [and]
                  (Q) section 220(f)(4) (relating to additional 
                tax on medical savings account distributions 
                not used for qualified medical expenses)[.], 
                and
                  (R) section 1042A(f) (relating to recapture 
                of tax benefit where lack of continuity in 
                certain agricultural processors).
          * * * * * * *

        PART III--INCOME FROM SOURCES WITHOUT THE UNITED STATES

          * * * * * * *

               Subpart F--Controlled Foreign Corporations

          * * * * * * *

SEC. 954. FOREIGN BASE COMPANY INCOME.

  (a) * * *
          * * * * * * *
  (c) Foreign Personal Holding Company Income.--
          (1) * * *
          (2) Exception for certain amounts.--
                  (A) * * *
          * * * * * * *
                  [(C) Exception for dealers.--Except as 
                provided in subparagraph (A), (E), or (G) of 
                paragraph (1) or by regulations, in the case of 
                a regular dealer in property (within the 
                meaning of paragraph (1)(B)), forward 
                contracts, option contracts, or similar 
                financial instruments (including notional 
                principal contracts and all instruments 
                referenced to commodities), there shall not be 
                taken into account in computing foreign 
                personal holding income any item of income, 
                gain, deduction, or loss from any transaction 
                (including hedging transactions) entered into 
                in the ordinary course of such dealer's trade 
                or business as such a dealer.]
                  (C) Exception for dealers.--Except as 
                provided by regulations, in the case of a 
                regular dealer in property (within the meaning 
                of paragraph (1)(B)), forward contracts, option 
                contracts, or similar financial instruments 
                (including notional principal contracts and all 
                instruments referenced to commodities), there 
                shall not be taken into account in computing 
                foreign personal holding income--
                          (i) any item of income, gain, 
                        deduction, or loss (other than any item 
                        described in subparagraph (A), (E), or 
                        (G) of paragraph (1)) from any 
                        transaction (including hedging 
                        transactions) entered into in the 
                        ordinary course of such dealer's trade 
                        or business as such a dealer, and
                          (ii) if such dealer is a dealer in 
                        securities (within the meaning of 
                        section 475), any interest or dividend 
                        or equivalent amount described in 
                        subparagraph (E) or (G) of paragraph 
                        (1) from any transaction (including any 
                        hedging transaction or transaction 
                        described in section 956(c)(2)(J)) 
                        entered into in the ordinary course of 
                        such dealer's trade or business as such 
                        a dealer in securities, but only if 
                        employees of the dealer which are 
                        located in the country under the laws 
                        of which the dealer is created or 
                        organized (or in the case of a 
                        qualified business unit described in 
                        section 989(a) which both maintains its 
                        principal office and conducts 
                        substantial business activity in a 
                        country, employees ofsuch unit which 
are located in such country) materially participate in such 
transaction.
          * * * * * * *
  (e) Foreign Base Company Services Income.--
          (1)  * * *
          (2) Exception.--Paragraph (1) shall not apply to 
        income derived in connection with the performance of 
        services which are directly related to--
                  (A) the sale or exchange by the controlled 
                foreign corporation of property manufactured, 
                produced, grown, or extracted by it and which 
                are performed before the time of the sale or 
                exchange, [or]
                  (B) an offer or effort to sell or exchange 
                such property[.], or
                  (C)(i) a transaction by the controlled 
                foreign corporation if the income from the 
                transaction is not foreign personal holding 
                company income by reason of subsection (h), or
                  (ii) a transaction by the controlled foreign 
                corporation if subsection (c)(2)(C)(ii) applies 
                to such transaction.
          * * * * * * *
  (h) Special Rule for Income Derived in the Active Conduct of 
Insurance Businesses and Banking, Financing, or Similar 
Businesses.--
          (1) In general.--For purposes of subsection (c)(1), 
        foreign personal holding company income shall not 
        include income which is--
                  (A) derived in the active conduct by a 
                controlled foreign corporation of a banking, 
                financing, or similar business, but only if--
                          (i) the corporation is predominantly 
                        engaged in the active conduct of such 
                        business, and
                          (ii) such income is derived from 
                        transactions with customers located 
                        within the country under the laws of 
                        which the corporation is created or 
                        organized,
                  (B) received from a person other than a 
                related person (within the meaning of 
                subsection (d)(3)) and derived from the 
                investments made by a qualifying insurance 
                company of its reserves or of 80 percent of its 
                unearned premiums (as both are determined in 
                the manner prescribed under paragraph (4)), or
                  (C) received from a person other than a 
                related person (within the meaning of 
                subsection (d)(3)) and derived from investments 
                made by a qualifying insurance company of an 
                amount of its assets equal to--
                          (i) in the case of property, 
                        casualty, or health insurance 
                        contracts, one-third of its premiums 
                        earned on such insurance contracts 
                        during the taxable year (as defined in 
                        section 832(b)(4)), and
                          (ii) in the case of life insurance or 
                        annuity contracts, 10 percent of the 
                        reserves described in subparagraph (B) 
                        for such contracts.
          (2) Predominantly engaged.--For purposes of paragraph 
        (1)(A), a controlled foreign corporation shall be 
        deemed predominantly engaged in the active conduct of a 
        banking, financing, or similar business only if--
                  (A) more than 70 percent of its gross income 
                is derived from such business from transactions 
                with customers which are located within the 
                country under the laws of which the corporation 
                is created or organized, or
                  (B) the corporation is--
                          (i) engaged in the active conduct of 
                        a banking business and is an 
                        institution licensed to do business as 
                        a bank in the United States (or is any 
                        other corporation not so licensed which 
                        is specified by the Secretary in 
                        regulations), or
                          (ii) engaged in the active conduct of 
                        a securities business and is registered 
                        as a securities broker or dealer under 
                        section 15(a) of the Securities 
                        Exchange Act of 1934 or is registered 
                        as a Government securities broker or 
                        dealer under section 15C(a) of such Act 
                        (or is any other corporation not so 
                        registered which is specified by the 
                        Secretary in regulations).
          (3) Principles for determining insurance income.--
        Except as provided by the Secretary, for purposes of 
        paragraphs (1) (B) and (C)--
                  (A) in the case of any contract which is a 
                separate account-type contract (including any 
                variable contract not meeting the requirements 
                of section 817), income credited under such 
                contract shall be allocable only to such 
                contract, and
                  (B) income not allocable under subparagraph 
                (A) shall be allocated ratably among contracts 
                not described in subparagraph (A).
          (4) Methods for determining unearned premiums and 
        reserves.--For purposes of paragraph (1)(B)--
                  (A) Property and casualty contracts.--The 
                unearned premiums and reserves of a qualifying 
                insurance company with respect to property, 
                casualty, or health insurance contracts shall 
                be determined using the same methods and 
                interest rates which would be used if such 
                company were subject to tax under subchapter L.
                  (B) Life insurance and annuity contracts.--
                The amount of the reserve of a qualifying 
                insurance company for any life insurance or 
                annuity contract shall be equal to the greater 
                of--
                          (i) the net surrender value of such 
                        contract (as defined in section 
                        807(e)(1)(A)), or
                          (ii) the reserve determined under 
                        paragraph (5).
                  (C) Limitation on reserves.--In no event 
                shall the reserve determined under this 
                paragraph for any contract as of any time 
                exceed the amount which would be taken into 
                account with respect to such contract as of 
                such time in determining foreign statement 
                reserves (less any catastrophe, deficiency, or 
                similar reserves).
          (5) Amount of reserve.--The amount of the reserve 
        determined under this paragraph with respect to any 
        contract shall be determined in the same manner as it 
        would be determined if the qualifying insurance company 
        were subject to tax under subchapter L, except that in 
        applying such subchapter--
                  (A) the interest rate determined for the 
                foreign country in which such company is 
                created or organized and which, except as 
                provided by the Secretary, is calculated in the 
                same manner as the Federal mid-term rate under 
                section 1274(d) shall be substituted for the 
                applicable Federal interest rate,
                  (B) the highest assumed interest rate 
                permitted to be used in determining foreign 
                statement reserves shall be substituted for the 
                prevailing State assumed interest rate, and
                  (C) tables for mortality and morbidity which 
                reasonably reflect the current mortality and 
                morbidity risks in the foreign country shall be 
                substituted for the mortality and morbidity 
                tables otherwise used for such subchapter.
          (6) Definitions.--For purposes of this subsection--
                  (A) Qualifying insurance company.--The term 
                ``qualifying insurance company'' means any 
                entity which--
                          (i) is subject to regulation as an 
                        insurance company by the country under 
                        the laws of which the entity is created 
                        or organized,
                          (ii) derives at least 50 percent of 
                        its net written premiums from the 
                        insurance or reinsurance of risks 
                        located within such country, and
                          (iii) is engaged in the active 
                        conduct of an insurance business and 
                        would be subject to tax under 
                        subchapter L if it were a domestic 
                        corporation.
                  (B) Life insurance or annuity contract.--For 
                purposes of this section and section 953, the 
                determination of whether a contract issued by a 
                controlled foreign corporation is a life 
                insurance contract or an annuity contract shall 
                be made without regard to sections 72(s), 
                101(f), 817(h), and 7702 if--
                          (i) such contract is regulated as a 
                        life insurance or annuity contract by 
                        the country under the laws of which the 
                        corporation is created or organized, 
                        and
                          (ii) no policyholder, insured, 
                        annuitant, or beneficiary with respect 
                        to the contract is a United States 
                        person.
                  (C) Noncancellable accident and health 
                insurance contracts.--A noncancellable accident 
                and health insurance contract shall be treated 
                for purposes of this subsection in the same 
                manner as a life insurance contract except that 
                paragraph (4)(B)(i) shall not apply.
                  (D) Located.--
                          (i) In general.--The determination of 
                        where a customer is located shall be 
                        made under rules prescribed by the 
                        Secretary.
                          (ii) Special rule for qualified 
                        business units.--Gross income derived 
                        by a corporation's qualified business 
                        unit (within the meaning of section 
                        989(a)) from transactions with 
                        customers which are located in the 
                        country in which the qualified business 
                        unit both maintains its principal 
                        office and conducts substantial 
                        business activity shall be treated as 
                        derived from transactions with 
                        customers which are located within the 
                        country under the laws of which the 
                        controlled foreign corporation is 
                        created or organized.
                  (E) Customer.--
                          (i) In general.--The term 
                        ``customer'' means, with respect to any 
                        controlled foreign corporation, any 
                        person which has a customer 
                        relationship with such corporation.
                          (ii) Exception for related, etc. 
                        persons.--A person who is a related 
                        person (as defined in subsection 
                        (d)(3)), an officer, a director, or an 
                        employee with respect to any controlled 
                        foreign corporation shall not be 
                        treated as a customer with respect to 
                        any transaction if a principal purpose 
                        of such transaction is to satisfy any 
                        requirement of this subsection.
          (7) Anti-abuse rules.--For purposes of applying this 
        subsection and subsection (c)(2)(C)(ii), there shall be 
        disregarded any item of income, gain, loss, or 
        deduction with respect to any transaction or series of 
        transactions one of the principal purposes of which is 
        qualifying income or gain for the exclusion under this 
        section, including--
                  (A) any change in the method of computing 
                reserves or any other transaction or series of 
                transactions a principal purpose of which is 
                the acceleration or deferral of any item in 
                order to claim the benefits of such exclusion 
                through the application of this subsection, and
                  (B) organizing entities in order to satisfy 
                any same country requirement under this 
                subsection.
          (8) Coordination with other provisions.--
                  (A) Section 901(k).--
                          (i) In general.--The amount of 
                        qualified taxes (as defined in section 
                        901(k)(4)) to which paragraphs (1) and 
                        (2) of section 901(k) do not apply by 
                        reason of paragraph (4) of such section 
                        901(k) shall be reduced by an amount 
                        which bears the same ratio to such 
                        qualified taxes as the amount of income 
                        from the active conduct of a securities 
                        business which is not subpart F income 
                        solely by reason of this subsection, 
                        subsection (c)(2)(C)(ii), and 
                        subsection (e)(2)(C) bears to the total 
                        income from the active conduct of a 
                        securities business by a controlled 
                        foreign corporation which is not 
                        subpart F income. The determination 
                        under the preceding sentence shall be 
                        made by treating all members of an 
                        affiliated group as 1 corporation. For 
                        purposes of this clause, the term 
                        ``subpart F income'' has the meaning 
                        given such term by section 952(a) but 
                        determined without regard to section 
                        952(c) and paragraphs (3) and (4) of 
                        subsection (b) of this section.
                          (ii) Election not to have subsection 
                        and certain other provisions apply.--
                        Clause (i) shall not apply for any 
                        taxable year of a foreign corporation 
                        if such corporation (and all members of 
                        the affiliated group of which such 
                        corporation is a member) elect not to 
                        have this subsection, subsection 
                        (c)(2)(C)(ii), and subsection (e)(2)(C) 
                        apply for such taxable year.
                  (B) Treatment of income to which section 953 
                applies.--Subparagraphs (B) and (C) of 
                paragraph (1) shall not apply to investment 
                income allocable to contracts that insure 
                related party risks or risks located in a 
                foreign country other than the country in which 
                the qualifying insurance company is created or 
                organized.
          (9) Application.--This subsection, subsection 
        (c)(2)(C)(ii), and subsection (e)(2)(C) shall apply 
        only to the first full taxable year of a foreign 
        corporation beginning after December 31, 1997, and 
        before January 1, 1999, and to taxable years of United 
        States shareholders with or within which such taxable 
        year of such foreign corporation ends.
          * * * * * * *

         Subchapter O--Gain or Loss on Disposition of Property

          * * * * * * *

                 PART III--COMMON NONTAXABLE EXCHANGES

        Sec. 1031. Exchange of property held for productive use or 
                  investment.
     * * * * * * *
        Sec. 1042A. Sales of stock to certain farmers' cooperatives.
          * * * * * * *

SEC. 1042A. SALES OF STOCK TO CERTAIN FARMERS' COOPERATIVES.

  (a) Nonrecognition of Gain.--If--
          (1) the taxpayer elects the application of this 
        section with respect to any sale of qualified 
        agricultural processor stock,
          (2) the taxpayer purchases qualified replacement 
        property within the replacement period, and
          (3) the requirements of subsection (c) are met with 
        respect to such sale,
then the gain (if any) on such sale which would be recognized 
as long-term capital gain shall be recognized only to the 
extent that the amount realized on such sale exceeds the cost 
to the taxpayer of such qualified replacement property. The 
preceding sentence shall not apply to a sale by an eligible 
farmers' cooperative.
  (b) Limitation.--
          (1) In general.--If subsection (a) applies to the 
        sale of any stock by the taxpayer in a qualified 
        agricultural processor, the aggregate amount of gain 
        taken into account by the taxpayer under subsection (a) 
        with respect to stock in such processor shall not 
        exceed the amount of the limitation under paragraph (2) 
        which is allocated to such sale by the eligible 
        farmers' cooperative.
          (2) Allocation.--The amount allocated under this 
        paragraph by any cooperative with respect to stock 
        acquired by such cooperative during any taxable year of 
        such cooperative shall not exceed $75,000,000.
          (3) Aggregation rules.--All eligible farmers' 
        cooperatives which are under common control (within the 
        meaning of subsection (a) or (b) of section 52) shall 
        be treated as 1 cooperative for purposes of paragraph 
        (2), and the limitation under such paragraph shall be 
        allocated among such cooperatives in such manner as the 
        Secretary shall prescribe.
  (c) Requirements To Qualify for Nonrecognition.--A sale of 
qualified agricultural processor stock meets the requirements 
of this subsection if--
          (1) Sale to eligible farmers' cooperative.--Such 
        stock is sold to an eligible farmers' cooperative.
          (2) Special rule for certain cooperatives.--
                  (A) In general.--In the case of a sale of 
                such stock to an eligible farmers' cooperative 
                described in subparagraph (B), the processor 
                purchased, during at least 3 of the 5 most 
                recent taxable years of such processor ending 
                on or before the date of the sale, more than 
                one-half of the agricultural or horticultural 
                products to be refined or processed by such 
                processor from such cooperative or farmers who 
                are members of such cooperative.
                  (B) Cooperatives described.--A cooperative is 
                described in this subparagraph with respect to 
                any sale if, for any taxable year ending before 
                the date of such sale--
                          (i) such cooperative had gross 
                        receipts of more than $1,000,000,000, 
                        or
                          (ii) such cooperative sold more than 
                        a de minimis amount of specialty 
                        produce.
                  (C) Specialty produce.--For purposes of 
                subparagraph (B), the term ``specialty 
                produce'' means any agricultural or 
                horticultural product other than wheat, feed 
                grains, oil seeds, cotton, rice, cattle, hogs, 
                sheep, or dairy products.
                  (D) Special rules.--
                          (i) Gross receipts.--For purposes of 
                        subparagraph (B)(i), rules similar to 
                        the rules of paragraph (2), and 
                        subparagraphs (B) and (C) of paragraph 
                        (3), of section 448(c) shall apply.
                          (ii) Predecessor.--Any reference in 
                        this paragraph to a cooperative or 
                        processor shall be treated as including 
                        a reference to any predecessor thereof.
          (3) Cooperative must hold 100 percent of stock after 
        sale.--The eligible farmers' cooperative owns, 
        immediately after the sale, all of the qualified 
        agricultural processor stock of the corporation.
          (4) Written statement and holding period.--
        Requirements similar to the requirements of paragraphs 
        (3) and (4) of section 1042(b) are met.
  (d) Definitions.--For purposes of this section--
          (1) Qualified agricultural processor stock.--The term 
        ``qualified agricultural processor stock'' means stock 
        (other than stock described in section 1504(a)(4)) 
        issued by a qualified agricultural processor.
          (2) Qualified agricultural processor.--The term 
        ``qualified agricultural processor'' means a domestic C 
        corporation substantially all of the assets of which 
        are used in the active conduct of the trade or business 
        of refining or processing agricultural or horticultural 
        products in the United States.
          (3) Eligible farmers' cooperative.--The term 
        ``eligible farmers' cooperative'' means an organization 
        to which part I of subchapter T applies and which is 
        engaged in the marketing of agricultural or 
        horticultural products.
          (4) Replacement period.--The term ``replacement 
        period'' means the period which begins 3 months before 
        the date on which the sale of qualified agricultural 
        processor stock occurs and which ends 12 months after 
        the date of such sale.
          (5) Qualified replacement property.--
                  (A) In general.--Except as provided in 
                subparagraph (B), the term ``qualified 
                replacement property'' has the meaning given 
                such term by section 1042(c)(4).
                  (B) Exception.--The term ``qualified 
                replacement property'' shall not include any 
                security issued by the taxpayer or by any 
                corporation controlled by the taxpayer 
                immediately after the purchase. For purposes of 
                the preceding sentence, the term ``control'' 
                has the meaning given such term by section 
                304(c) (determined by substituting ``10 
                percent'' for ``50 percent'' each place it 
                appears in paragraph (1) thereof).
  (e) Special Rules.--
          (1) In general.--Except as otherwise provided in this 
        subsection, rules similar to the rules of paragraphs 
        (5) and (6) of section 1042(c), subsections (d), (e), 
        and (f) of section 1042, section 1016(a)(22), and 
        section 1223(13) shall apply for purposes of this 
        section.
          (2) Certain provisions not to apply.--
                  (A) Recognition on complete liquidation.--
                Section 332 shall not apply to the liquidation 
                into the cooperative or any related person of a 
                qualified agricultural processor if the 
                cooperative or related person acquired the 
                stock in such processor in a sale to which 
                subsection (a) applied.
                  (B) Deemed sale election not available.--No 
                election may be made under section 338(h)(10) 
                with respect to a sale to which subsection (a) 
                applies.
  (f) Recapture of Tax Benefit Where Lack of Continuity.--
          (1) In general.--If there is a recapture event during 
        any taxable year with respect to any sale to an 
        eligible farmers' cooperative to which this section 
        applied, such cooperative's tax imposed by this chapter 
        for such taxable year shall be increased by an amount 
        equal to--
                  (A) the recapture percentage of the amount 
                allocated under subsection (b) to such sale, 
                multiplied by
                  (B) the highest rate of tax imposed by 
                section 11 for such taxable year.
          (2) Recapture event.--For purposes of this 
        subsection, a recapture event shall be treated as 
        occurring in any taxable year if--
                  (A) any portion of such taxable year is 
                within the 3-year period beginning on the date 
                on which the eligible farmers' cooperative 
                acquired stock in a qualified agricultural 
                processor in a sale to which this section 
                applied and, as of the close of such portion, 
                there is a decrease in the direct or indirect 
                percentage ownership of such stock held by such 
                cooperative which was not previously taken into 
                account under this subsection, or
                  (B) such taxable year is one of the first 5 
                taxable years ending after the date of such 
                sale and is the third of such taxable years 
                during which one-half or less of the 
                agricultural or horticultural products refined 
                or processed by the qualified agricultural 
                processor are purchased from the eligible 
                farmers' cooperative or farmers who are members 
                of such cooperative.
          (3) Recapture percentage.--For purposes of this 
        subsection, the term ``recapture percentage'' means--
                  (A) in the case of a recapture event 
                described in paragraph (2)(A), the percentage 
                equal to a fraction--
                          (i) the numerator of which is the 
                        percentage decrease described in 
                        paragraph (2)(A), and
                          (ii) the denominator of which is the 
                        percentage which the qualified 
                        agricultural processor stock acquired 
                        by the cooperative in a sale to which 
                        this section applied bears to all 
                        qualified agricultural processor stock 
                        in the processor, and
                  (B) in the case of a recapture event 
                described in paragraph (2)(B), 100 percent.
        In no event shall the recapture percentage for any 
        taxable year exceed 100 percent minus the sum of the 
        recapture percentages for all prior taxable years.
          (4) Exceptions to purchase requirement.--The purchase 
        requirement of paragraph (2)(B) shall be treated as met 
        for any taxable year if the Secretary determines that 
        such requirement was not met due to 1 or more of the 
        following: flood, drought, or other weather-related 
        conditions, environmental contamination, disease, fire, 
        or other similar extenuating circumstances prescribed 
        by the Secretary.
  (g) Coordination With Section 1042.--No election may be made 
under this section with respect to any sale if an election is 
made under section 1042 with respect to such sale.
  (h) Regulations.--The Secretary shall prescribe such 
regulations as are appropriate to carry out this section, 
including regulations which treat 2 or more sales which are 
part of the same transaction as 1 sale.
                              ----------                              


            SECTION 1175 OF THE TAXPAYER RELIEF ACT OF 1997

[SEC. 1175. EXEMPTION FOR ACTIVE FINANCING INCOME.

  [(a) Exemption From Foreign Personal Holding Company 
Income.--Section 954 is amended by adding at the end the 
following new subsection:
  [``(h) Special Rule for Income Derived in the Active Conduct 
of Banking, Financing, or Similar Businesses.--
          [``(1) In general.--For purposes of subsection 
        (c)(1), foreign personal holding company income shall 
        not include income which is--
                  [``(A) derived in the active conduct by a 
                controlled foreign corporation of a banking, 
                financing, or similar business, but only if the 
                corporation is predominantly engaged in the 
                active conduct of such business,
                  [``(B) received from a person other than a 
                related person (within the meaning of 
                subsection (d)(3)) and derived from the 
                investments made by a qualifying insurance 
                company of its reserves or of 80 percent of its 
                unearned premiums (as both are determined in 
                the manner prescribed under paragraph (4)), or
                  [``(C) received from a person other than a 
                related person (within the meaning of 
                subsection (d)(3)) and derived from investments 
                made by a qualifying insurance company of an 
                amount of its assets equal to--
                          [``(i) in the case of contracts 
                        regulated in the country in which sold 
                        as property, casualty, or health 
                        insurance contracts, one-third of its 
                        premiums earned on such insurance 
                        contracts during the taxable year (as 
                        defined in section 832(b)(4)), and
                          [``(ii) in the case of contracts 
                        regulated in the country in which sold 
                        as life insurance or annuity contracts, 
                        the greater of--
                                  [``(I) 10 percent of the 
                                reserves described in 
                                subparagraph (B) for such 
                                contracts, or
                                  [``(II) in the case of a 
                                qualifying insurance company 
                                which is a start-up company, 
                                $10,000,000.
          [``(2) Principles for determining applicable 
        income.--
                  [``(A) Banking and financing income.--The 
                determination as to whether income is described 
                in paragraph (1)(A) shall be made--
                          [``(i) except as provided in clause 
                        (ii), in accordance with the applicable 
                        principles of section 904(d)(2)(C)(ii), 
                        except that such income shall include 
                        income from all leases entered into in 
                        the ordinary course of the active 
                        conduct of a banking, financing, or 
                        similar business, and
                          [``(ii) in the case of a corporation 
                        described in paragraph (3)(B), in 
                        accordance with the applicable 
                        principles of section 1296(b) (as in 
                        effect on the day before the enactment 
                        of the Taxpayer Relief Act of 1997) for 
                        determining what is not passive income.
                  [``(B) Insurance income.--Under rules 
                prescribed by the Secretary, for purposes of 
                paragraphs (1) (B) and (C)--
                          [``(i) in the case of contracts which 
                        are separate account-type contracts 
                        (including variable contracts not 
                        meeting the requirements of section 
                        817), only income specifically 
                        allocable to such contracts shall be 
                        taken into account, and
                          [``(ii) in the case of other 
                        contracts, income not allocable under 
                        clause (i) shall be allocated ratably 
                        among such contracts.
                  [``(C) Look-thru rules.--The Secretary shall 
                prescribe regulations consistent with the 
                principles of section 904(d)(3) which provide 
                that dividends, interest, income equivalent to 
                interest, rents, or royalties received or 
                accrued from a related person (within the 
                meaning of subsection (d)(3)) shall be subject 
                to look-thru treatment for purposes of this 
                subsection.
          [``(3) Predominantly engaged.--For purposes of 
        paragraph (1)(A), a corporation shall be deemed 
        predominantly engaged in the active conduct of a 
        banking, financing, or similar business only if--
                  [``(A) more than 70 percent of its gross 
                income is derived from such business from 
                transactions with persons which are not related 
                persons (as defined in subsection (d)(3)) and 
                which are located within the country under the 
                laws of which the controlled foreign 
                corporation is created or organized, or
                  [``(B) the corporation is--
                          [``(i) engaged in the active conduct 
                        of a banking or securities business 
                        (within the meaning of section 1296(b), 
                        as in effect before the enactment of 
                        the Taxpayer Relief Act of 1997), or
                          [``(ii) a qualified bank affiliate or 
                        a qualified securities affiliate 
                        (within the meaning of the proposed 
                        regulations under such section 
                        1296(b)).
          [``(4) Methods for determining unearned premiums and 
        reserves.--For purposes of paragraph (1)(B)--
                  [``(A) Property and casualty contracts.--The 
                unearned premiums and reserves of a qualifying 
                insurance company with respect to property, 
                casualty, or health insurance contracts shall 
                be determined using the same methods and 
                interest rates which would be used if such 
                company were subject to tax under subchapter L.
                  [``(B) Life insurance and annuity 
                contracts.--The reserves of a qualifying 
                insurance company with respect to life 
                insurance or annuity contracts shall be 
                determined under the method described in 
                paragraph (5) which such company elects to 
                apply for purposes of this paragraph. Such 
                election shall be made at such time and in such 
                manner as the Secretary may prescribe and, once 
                made, shall be irrevocable without the consent 
                of the Secretary.
                  [``(C) Limitation on reserves.--In no event 
                shall the reserve determined under this 
                paragraph for any contract as of any time 
                exceed the amount which would be takeninto 
account with respect to such contract as of such time in determining 
foreign annual statement reserves (less any catastrophe or deficiency 
reserves).
          [``(5) Methods.--The methods described in this 
        paragraph are as follows:
                  [``(A) U.S. method.--The method which would 
                apply if the qualifying insurance company were 
                subject to tax under subchapter L, except that 
                the interest rate used shall be an interest 
                rate determined for the foreign country in 
                which such company is created or organized and 
                which is calculated in the same manner as the 
                Federal mid-term rate under section 1274(d).
                  [``(B) Foreign method.--A preliminary term 
                method, except that the interest rate used 
                shall be the interest rate determined for the 
                foreign country in which such company is 
                created or organized and which is calculated in 
                the same manner as the Federal mid-term rate 
                under section 1274(d). If a qualifying 
                insurance company uses such a preliminary term 
                method with respect to contracts insuring risks 
                located in such foreign country, such method 
                shall apply if such company elects the method 
                under this clause.
                  [``(C) Cash surrender value.--A method under 
                which reserves are equal to the net surrender 
                value (as defined in section 807(e)(1)(A)) of 
                the contract.
          [``(6) Definitions.--For purposes of this 
        subsection--
                  [``(A) Terms relating to insurance 
                companies.--
                          [``(i) Qualifying insurance 
                        company.--The term `qualifying 
                        insurance company' means any entity 
                        which--
                                  [``(I) is subject to 
                                regulation as an insurance 
                                company under the laws of its 
                                country of incorporation,
                                  [``(II) realizes at least 50 
                                percent of its net written 
                                premiums from the insurance or 
                                reinsurance of risks located 
                                within the country in which 
                                such entity is created or 
                                organized, and
                                  [``(III) is engaged in the 
                                active conduct of an insurance 
                                business and would be subject 
                                to tax under subchapter L if it 
                                were a domestic corporation.
                          [``(ii) Start-up company.--A 
                        qualifying insurance company shall be 
                        treated as a start-up company if such 
                        company (and any predecessor) has not 
                        been engaged in the active conduct of 
                        an insurance business for more than 5 
                        years as of the beginning of the 
                        taxable year of such company.
                  [``(B) Located.--For purposes of paragraph 
                (3)(A)--
                          [``(i) In general.--A person shall be 
                        treated as located--
                                  [``(I) except as provided in 
                                subclause (II), within the 
                                country in which it maintains 
                                an office or other fixed place 
                                of business through which it 
                                engages in a trade or business 
                                and by which the transaction is 
                                effected, or
                                  [``(II) in the case of a 
                                natural person, within the 
                                country in which such person is 
                                physically located when such 
                                person enters into a 
                                transaction.
                          [``(ii) Special rule for qualified 
                        business units.--Gross income derived 
                        by a corporation's qualified business 
                        unit (within the meaning of section 
                        989(a)) from transactions with persons 
                        which are not related persons (as 
                        defined in subsection (d)(3)) and which 
                        are located in the country in which the 
                        qualified business unit both maintains 
                        its principal office and conducts 
                        substantial business activity shall be 
                        treated as derived from transactions 
                        with persons which are not related 
                        persons (as defined in subsection 
                        (d)(3)) and which are located within 
                        the country under the laws of which the 
                        controlled foreign corporation is 
                        created or organized.
          [``(7) Anti-abuse rules.--For purposes of applying 
        this subsection, there shall be disregarded any item of 
        income, gain, loss, or deduction with respect to any 
        transaction or series of transactions one of the 
        principal purposes of which is qualifying income or 
        gain for the exclusion under this section, including 
        any change in the method of computing reserves or any 
        other transaction or series of transactions a principal 
        purpose of which is the acceleration or deferral of any 
        item in order to claim the benefits of such exclusion 
        through the application of this subsection.
          [``(8) Coordination with section 953.--This 
        subsection shall not apply to investment income 
        allocable to contracts that insure related party risks 
        or risks located in a foreign country other than the 
        country in which the qualifying insurance company is 
        created or organized.
          [``(9) Application.--This subsection shall apply to 
        the first full taxable year of a foreign corporation 
        beginning after December 31, 1997, and before January 
        1, 1999, and to taxable years of United States 
        shareholders with or within which such taxable year of 
        such foreign corporation ends.''.
  [(b) Exemption From Foreign Base Company Services Income.--
Paragraph (2) of section 954(e) is amended by striking ``or'' 
at the end of subparagraph (A), by striking the period at the 
end of subparagraph (B) and inserting ``, or'', and by adding 
at the end the following:
                  [``(C) in the case of taxable years described 
                in subsection (h)(8), the active conduct by a 
                controlled foreign corporation of a banking, 
                financing, insurance, or similar business, but 
                only if the corporation is predominantly 
                engaged in the active conduct of such business 
                (within the meaning of subsection (h)(3)) or is 
                a qualifying insurance company.''.
  [(c) Effective Date.--The amendments made by this section 
shall apply to the first full taxable year of a foreign 
corporation beginning after December 31, 1997, and before 
January 1, 1999, and to taxable years of United States 
shareholders with or within which such taxable year of such 
foreign corporation ends.]