To amend the Internal Revenue Code of 1986 to simplify certain rules relating to the taxation of United States businesses operating abroad, and for other purposes.

January 8, 2003

Mr. HOUGHTON (for himself, Mr. SAM JOHNSON of Texas, Mr. PORTMAN, and Mr. RAMSTAD) introduced the following bill; which was referred to the Committee on Ways and Means

To amend the Internal Revenue Code of 1986 to simplify certain rules relating to the taxation of United States businesses operating abroad, and for other purposes.

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

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF CONTENTS.

(a) SHORT TITLE- This Act may be cited as the `Fairness, Simplification and Competitiveness for American Business Act of 2003'.

(b) AMENDMENT OF 1986 CODE- Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.

(c) TABLE OF CONTENTS- The table of contents for this Act is as follows:

Sec. 1. Short title; amendment of 1986 Code; table of contents.

TITLE I--TREATMENT OF CONTROLLED FOREIGN CORPORATIONS

Sec. 101. Expansion of de minimis rule under subpart F.

Sec. 102. Clarification of treatment of pipeline transportation income.

Sec. 103. Look-through treatment for sales of partnership interests.

Sec. 104. Repeal of foreign personal holding company rules and foreign investment company rules.

Sec. 105. Determination of foreign personal holding company income with respect to transactions in commodities.

Sec. 106. Repeal of CFC rules on foreign base company sales and services income.

Sec. 107. Look-thru treatment of payments between related controlled foreign corporations under foreign personal holding company income rules.

Sec. 108. Reduction to 3 foreign tax credit baskets.

Sec. 109. Effective date.

TITLE II--PROVISIONS RELATING TO FOREIGN TAX CREDIT

Sec. 201. Recharacterization of overall domestic loss.

Sec. 202. Special rules relating to financial services income.

Sec. 203. Look-thru rules to apply to dividends from noncontrolled section 902 corporations.

Sec. 204. Application of look-thru rules to foreign tax credit.

Sec. 205. 10-year foreign tax credit carryforward.

Sec. 206. Repeal of limitation of foreign tax credit under alternative minimum tax.

Sec. 207. Attribution of stock ownership through partnerships to apply in determining section 902 and 960 credits.

Sec. 208. Repeal of special rules for applying foreign tax credit in case of foreign oil and gas income.

TITLE III--OTHER PROVISIONS

Sec. 301. Application of uniform capitalization rules to foreign persons.

Sec. 302. United States property not to include certain assets acquired by dealers in ordinary course of trade or business.

Sec. 303. Treatment of certain dividends of regulated investment companies.

Sec. 304. Airline mileage awards to certain foreign persons.

Sec. 305. Interest payments deductible where disqualified guarantee has economic effect.

Sec. 306. Modifications of reporting requirements for certain foreign-owned corporations.

Sec. 307. Election not to use average exchange rate for foreign tax paid other than in functional currency.

Sec. 308. Repeal of special capital gains tax on aliens present in the United States for 183 days or more.

Sec. 309. Repeal of withholding tax on dividends from certain foreign corporations.

Sec. 310. Interest expense allocation rules.

Sec. 311. Permanent extension of Subpart F exemption for active financing.

TITLE I--TREATMENT OF CONTROLLED FOREIGN CORPORATIONS

SEC. 101. EXPANSION OF DE MINIMIS RULE UNDER SUBPART F.

(a) IN GENERAL- Clause (ii) of section 954(b)(3)(A) (relating to de minimis, etc., rules) is amended by striking `$1,000,000' and inserting `$5,000,000'.

(b) TECHNICAL AMENDMENTS-

(1) Clause (ii) of section 864(d)(5)(A) is amended by striking `$1,000,000' and inserting `$5,000,000'.

(2) Clause (i) of section 881(c)(5)(A) is amended by striking `$1,000,000' and inserting `$5,000,000'.

SEC. 102. CLARIFICATION OF TREATMENT OF PIPELINE TRANSPORTATION INCOME.

Section 954(g)(1) (defining foreign base company oil related income) 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 inserting after subparagraph (B) the following new subparagraph:

`(C) the pipeline transportation of oil or gas within such foreign country.'

SEC. 103. LOOK-THROUGH TREATMENT FOR SALES OF PARTNERSHIP INTERESTS.

(a) IN GENERAL- Section 954(c) (defining foreign personal holding company income) is amended by adding at the end the following new paragraph:

`(4) LOOK-THROUGH RULE FOR CERTAIN PARTNERSHIP SALES-

`(A) IN GENERAL- In the case of any sale by a controlled foreign corporation of an interest in a partnership with respect to which such corporation is a 25-percent owner, such corporation shall be treated for purposes of this subsection as selling the proportionate share of

the assets of the partnership attributable to such interest.

`(B) 25-PERCENT OWNER- For purposes of this paragraph, the term `25-percent owner' means a controlled foreign corporation which owns 25 percent or more of the capital or profits interest in the partnership. The constructive ownership rules of section 958(b) shall apply for purposes of the preceding sentence.'

(b) CONFORMING AMENDMENT- Section 954(c)(1)(B)(ii) is amended by inserting `except as provided in paragraph (4),' before `which'.

SEC. 104. REPEAL OF FOREIGN PERSONAL HOLDING COMPANY RULES AND FOREIGN INVESTMENT COMPANY RULES.

(a) GENERAL RULE- The following provisions are hereby repealed:

(1) Part III of subchapter G of chapter 1 (relating to foreign personal holding companies).

(2) Section 1246 (relating to gain on foreign investment company stock).

(3) Section 1247 (relating to election by foreign investment companies to distribute income currently).

(b) EXEMPTION OF FOREIGN CORPORATIONS FROM PERSONAL HOLDING COMPANY RULES-

(1) IN GENERAL- Subsection (c) of section 542 (relating to exceptions) is amended--

(A) by striking paragraph (5) and inserting the following:

`(5) a foreign corporation,',

(B) by striking paragraphs (7) and (10) and by redesignating paragraphs (8) and (9) as paragraphs (7) and (8), respectively,

(C) by inserting `and' at the end of paragraph (7) (as so redesignated), and

(D) by striking `; and' at the end of paragraph (8) (as so redesignated) and inserting a period.

(2) TREATMENT OF INCOME FROM PERSONAL SERVICE CONTRACTS- Paragraph (1) of section 954(c) is amended by adding at the end the following new subparagraph:

`(H) PERSONAL SERVICE CONTRACTS-

`(i) Amounts received under a contract under which the corporation is to furnish personal services; if some person other than the corporation has the right to designate (by name or by description) the individual who is to perform the services, or if the individual who is to perform the services is designated (by name or by description) in the contract; and

`(ii) amounts received from the sale or other disposition of such a contract.

This subparagraph shall apply with respect to amounts received for services under a particular contract only if at some time during the taxable year 25 percent or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for the individual who has performed, is to perform, or may be designated (by name or by description) as the one to perform, such services.'

(c) CONFORMING AMENDMENTS-

(1) Paragraph (2) of section 171(c) is amended--

(A) by striking `, or by a foreign personal holding company, as defined in section 552', and

(B) by striking `, or a foreign personal holding company'.

(2) Paragraph (2) of section 245(a) is amended by striking `foreign personal holding company or'

(3) Section 312 is amended by striking subsection (j).

(4) Subsection (m) of section 312 is amended by striking `, a foreign investment company (within the meaning of section 1246(b)), or a foreign personal holding company (within the meaning of section 552)'.

(5) Subsection (e) of section 443 is amended by striking paragraph (3) and by redesignating paragraphs (4) and (5) as paragraphs (3) and (4), respectively.

(6) Subparagraph (B) of section 465(c)(7) is amended to by adding `or' at the end of clause (i), by striking clause (ii), and by redesignating clause (iii) as clause (ii).

(7) Paragraph (1) of section 543(b) is amended by inserting `and' at the end of subparagraph (A), by striking `, and' at the end of subparagraph (B) and inserting a period, and by striking subparagraph (C).

(8) Paragraph (1) of section 562(b) is amended by striking `or a foreign personal holding company described in section 552'.

(9) Section 563 is amended--

(A) by striking subsection (c),

(B) by redesignating subsection (d) as subsection (c), and

(C) by striking `subsection (a), (b), or (c)' in subsection (c) (as so redesignated) and inserting `subsection (a) or (b)'.

(10) Subsection (d) of section 751 is amended by adding `and' at the end of paragraph (2), by striking paragraph (3), by redesignating paragraph (4) as paragraph (3), and by striking `paragraph (1), (2), or (3)' in paragraph (3) (as so redesignated) and inserting paragraph (1) or (2)'.

(11) Paragraph (2) of section 864(d) is amended by striking subparagraph (A) and by redesignating subparagraphs (B) and (C) as subparagraphs (A) and (B), respectively.

(12)(A) Subparagraph (A) of section 898(b)(1) is amended to read as follows:

`(A) which is treated as a controlled foreign corporation for any purpose under subpart F of part III of this subchapter, and'.

(B) Subparagraph (B) of section 898(b)(2) is amended by striking `and sections 551(f) and 554, whichever are applicable,'.

(C) Paragraph (3) of section 898(b) is amended to read as follows:

`(3) UNITED STATES SHAREHOLDER- The term `United States shareholder' has the meaning given to such term by section 951(b), except that, in the case of a foreign corporation having related person insurance income (as defined in section 953(c)(2)), the Secretary may treat any person as a United States shareholder for purposes of this section if such person is treated as a United States shareholder under section 953(c)(1).'

(D) Subsection (c) of section 898 is amended to read as follows:

`(c) DETERMINATION OF REQUIRED YEAR-

`(1) IN GENERAL- The required year is--

`(A) the majority U.S. shareholder year, or

`(B) if there is no majority U.S. shareholder year, the taxable year prescribed under regulations.

`(2) 1-MONTH DEFERRAL ALLOWED- A specified foreign corporation may elect, in lieu of the taxable year under paragraph (1)(A), a taxable year beginning 1 month earlier than the majority U.S. shareholder year.

`(3) MAJORITY U.S. SHAREHOLDER YEAR-

`(A) IN GENERAL- For purposes of this subsection, the term `majority U.S. shareholder year' means the taxable year (if any) which, on each testing day, constituted the taxable year of--

`(i) each United States shareholder described in subsection (b)(2)(A), and

`(ii) each United States shareholder not described in clause (i) whose stock was treated as owned under subsection (b)(2)(B) by any shareholder described in such clause.

`(B) TESTING DAY- The testing days shall be--

`(i) the first day of the corporation's taxable year (determined without regard to this section), or

`(ii) the days during such representative period as the Secretary may prescribe.'

(13) Clause (ii) of section 904(d)(2) is amended to read as follows:

`(ii) CERTAIN AMOUNTS INCLUDED- Except as provided in clause (iii), the term `passive income' includes, except as provided in subparagraph (E)(iii) or paragraph (3)(I), any amount includible in gross income under section 1293 (relating to certain passive foreign investment companies).'

(14)(A) Subparagraph (A) of section 904(g)(1) is amended by adding `or' at the end of clause (i), by striking clause (ii), and by redesignating clause (iii) as clause (ii).

(B) The paragraph heading of paragraph (2) of section 904(g) is amended by striking `FOREIGN PERSONAL HOLDING OR'.

(15) Section 951 is amended by striking subsections (c) and (d) and by redesignating subsections (e) and (f) as subsections (c) and (d), respectively.

(16) Paragraph (3) of section 989(b) is amended by striking `, 551(a),'.

(17) Paragraph (5) of section 1014(b) is hereby repealed.

(18) Subsection (a) of section 1016 is amended by striking paragraph (13) and by redesignating the following paragraphs accordingly.

(19)(A) Paragraph (3) of section 1212(a) is amended to read as follows:

`(3) SPECIAL RULES ON CARRYBACKS- A net capital loss of a corporation shall not be carried back under paragraph (1)(A) to a taxable year--

`(A) for which it is a regulated investment company (as defined in section 851), or

`(B) for which it is a real estate investment trust (as defined in section 856).'

(B) The amendment made by subparagraph (A) shall apply to taxable years beginning after December 31, 2004.

(20) Section 1223 is amended by striking paragraph (10) and by redesignating the following paragraphs accordingly.

(21) Subsection (d) of section 1248 is amended by striking paragraph (5) and by redesignating paragraphs (6) and (7) as paragraphs (5) and (6), respectively.

(22) Paragraph (2) of section 1260(c) is amended by striking subparagraphs (H) and (I) and by redesignating subparagraph (J) as subparagraph (H).

(23) Subparagraph (F) of section 1291(b)(3) is amended by striking `551(d), 959(a),' and inserting `959(a)'.

(24) Paragraph (2) of section 1294(a) is amended to read as follows:

`(2) ELECTION NOT PERMITTED WHERE AMOUNTS OTHERWISE INCLUDIBLE UNDER SECTION 951- The taxpayer may not make an election under paragraph (1) with respect to the undistributed PFIC earnings tax liability attributable to a qualified electing fund for the taxable year if any amount is includible in the gross income of the taxpayer under section 951 with respect to such fund for such taxable year.'

(25) Section 6035 is hereby repealed.

(26) Subparagraph (D) of section 6103(e)(1) is amended by striking clause (iv) and redesignating clauses (v) and (vi) as clauses (iv) and (v), respectively.

(27) Subparagraph (B) of section 6501(e)(1) is amended to read as follows:

`(B) CONSTRUCTIVE DIVIDENDS- If the taxpayer omits from gross income an amount properly includible therein under section 951(a), the tax may be assessed, or a proceeding in court for the collection of such tax may be done without assessing, at any time within 6 years after the return was filed.'

(28) Subsection (a) of section 6679 is amended--

(A) by striking `6035, 6046, and 6046A' in paragraph (1) and inserting `6046 and 6046A', and

(B) by striking paragraph (3).

(29) Sections 170(f)(10)(A), 508(d), 4947 and section 4948(c)(4) are each amended by striking `556(b)(2),' each place it appears.

(30) The table of parts for subchapter G of chapter 1 is amended by striking the item relating to part III.

(31) The table of sections for part IV of subchapter P of chapter 1 is amended by striking the items relating to sections 1246 and 1247.

(32) The table of sections for subpart A of part III of subchapter A of chapter 61 of such Code is amended by striking the item relating to section 6035.

SEC. 105. DETERMINATION OF FOREIGN PERSONAL HOLDING COMPANY INCOME WITH RESPECT TO TRANSACTIONS IN COMMODITIES.

(a) IN GENERAL- Clauses (i) and (ii) of section 954(c)(1)(C) (relating to commodity transactions) are amended to read as follows:

`(i) arise out of commodity hedging transactions (as defined in paragraph (5)(A)),

`(ii) are active business gains or losses from the sale of commodities, but only if substantially all of the controlled foreign corporation's commodities are property described in paragraph (1), (2) or (8) of section 1221(a), or'.

(b) DEFINITION AND SPECIAL RULES- Subsection (c) of section 954 is amended by adding after paragraph (4) the following new paragraph:

`(5) DEFINITION AND SPECIAL RULES RELATING TO COMMODITY TRANSACTIONS-

`(A) COMMODITY HEDGING TRANSACTIONS- For purposes of paragraph (1)(C)(i), the term `commodity hedging transaction' means any transaction with respect to a commodity if such transaction--

`(i) is a hedging transaction as defined in section 1221(b)(2), determined--

`(I) without regard to subparagraph (A)(ii) thereof,

`(II) by applying subparagraph (A)(i) thereof by substituting `ordinary property or property described in section 1231(b)' for `ordinary property', and

`(III) by substituting `controlled foreign corporation' for `taxpayer' each place it appears, and

`(ii) is clearly identified as such in accordance with section 1221(a)(7).

`(B) REGULATIONS- The Secretary shall prescribe such regulations as are appropriate to carry out the purposes of paragraph (1)(C) in the case of transactions involving related parties.'

(c) EFFECTIVE DATE- The amendments made by this section shall apply to commodity hedging transactions entered into on or after the date of enactment of this Act.

SEC. 106. REPEAL OF CFC RULES ON FOREIGN BASE COMPANY SALES AND SERVICES INCOME.

(a) IN GENERAL- Subsection (a) of section 954 (relating to foreign base company income) is amended by striking paragraphs (2) and (3) and by redesignating paragraphs (4) and (5) as paragraphs (2) and (3), respectively.

(b) CERTAIN SALES- Paragraph (1) of section 954(c) is amended by adding at the end the following new subparagraph:

`(H) CERTAIN SALES- Income (whether in the form of profits, commissions, fees, or otherwise) derived in connection with the purchase of personal property from a related person and its sale to any person, the sale of personal property to any person on behalf of a related person, the purchase of personal property from any person and its sale to a related person, or the purchase of personal property from any person on behalf of a related person where--

`(i) the property which is purchased (or in the case of property sold on behalf of a related person, the property which is sold) is manufactured, produced, grown, or extracted in the United States, and

`(ii) the property is sold for use, consumption, or disposition in the United States, or, in the case of property purchased on behalf of a related person, is purchased for use, consumption, or disposition in the United States.'

(c) CONFORMING AMENDMENTS-

(1) Clause (iii) of section 952(c)(1)(B) is amended by striking subclauses (III) and (IV) and by redesignating subclauses (V) and (VI) as subclauses (III) and (IV), respectively.

(2) Section 953(c)(6)(A) is amended by striking `section 954(d)(3)' and inserting `section 954(b)(9)'.

(3) Subsection (b) of section 954 is amended by adding at the end the following new paragraph:

`(9) RELATED PERSON DEFINED- For purposes of this subsection, a person is a related person with respect to a controlled foreign corporation if--

`(A) such person is an individual, corporation, partnership, trust, or estate which controls, or is controlled by, the controlled foreign corporation, or

`(B) such person is a corporation, partnership, trust, or estate which is controlled by the same person or persons which control the controlled foreign corporation.

For purposes of the preceding sentence, control means, with respect to a corporation, the ownership, directly or indirectly, of stock possessing more than 50 percent of the total voting power of all classes of

stock entitled to vote or of the total value of stock of such corporation. In the case of a partnership, trust, or estate, control means the ownership, directly or indirectly, of more than 50 percent (by value) of the beneficial interests in such partnership, trust, or estate. For purposes of this paragraph, rules similar to the rules of section 958 shall apply.'

(4) Paragraph (5) of section 954(b) is amended by striking `the foreign base company sales income, the foreign base company services income,'.

(5) Section 954 is amended by striking subsections (d) and (e).

(6) Sections 552(c)(2), 861(c)(2)(B), 904(d)(2)(H), 953(e), 955(b), 958(b), 971(f), 988(e)(3)(C), 1297(b)(2), 1298(d)(3), and 1298(e)(2)(B) are each amended by striking `954(d)(3)' each place it appears and inserting `954(b)(9)'.

SEC. 107. LOOK-THRU TREATMENT OF PAYMENTS BETWEEN RELATED CONTROLLED FOREIGN CORPORATIONS UNDER FOREIGN PERSONAL HOLDING COMPANY INCOME RULES.

Subsection (c) of section 954 is amended by adding after paragraph (3) the following new paragraph:

`(4) LOOK-THRU IN THE CASE OF RELATED CONTROLLED FOREIGN CORPORATIONS- For purposes of this subsection, dividends, interest, rents, and royalties received from a controlled foreign corporation which is a related person (as defined in subsection (b)(9)) shall not be treated as foreign personal holding company income to the extent attributable (determined under rules similar to the rules of subparagraphs (C) and (D) of section 904(d)(3)) to income of the related person which is not subpart F income (as defined in section 952).'

SEC. 108. REDUCTION TO 3 FOREIGN TAX CREDIT BASKETS.

(a) IN GENERAL- Paragraph (1) of section 904(d) (relating to separate application of section with respect to certain categories of income) is amended to read as follows:

`(1) IN GENERAL- The provisions of subsections (a), (b), and (c) and sections 902, 907, and 960 shall be applied separately with respect to income described in each of the following items of income:

`(A) passive income and other passive category income,

`(B) financial services income, and

`(C) income other than income described in subparagraph (A) or (B).'

(b) OTHER PASSIVE CATEGORY INCOME- Subparagraph (A) of section 904(d)(2) is amended by adding at the end the following new clause:

`(v) OTHER PASSIVE CATEGORY INCOME- The term `other passive category income' means--

`(I) dividends from a DISC or former DISC (as defined in section 992(a)) to the extent such dividends are treated as income from sources without the United States,

`(II) taxable income attributable to foreign trade income (within the meaning of section 923(b)), and

`(III) distributions from a FSC (or a former FSC) out of earnings and profits attributable to foreign trade income (within the meaning of section 923(b)) or interest or carrying charges (as defined in section 927(d)(1)) derived from a transaction which results in foreign trade income (as defined in section 923(b)).'

(c) CONFORMING AMENDMENTS-

(1) Paragraph (2) of section 904(d) is amended by striking subparagraphs (B) and (D).

(2)(A) Subclause (III) of section 904(d)(2)(C)(i) is amended to read as follows:

`(III) high-taxed export financing interest.'

(B) Subparagraph (C) of section 904(d)(2) is amended by adding at the end the following new clause:

`(iv) HIGH-TAXED EXPORT FINANCING INTEREST- The term `high-taxed export financing interest' means any interest if--

`(I) such interest is subject to a withholding tax of a foreign country or possession of the United States (or other tax determined on a gross basis), and

`(II) the rate of such tax applicable to such interest is at least 5 percent.

The Secretary may by regulations provide that export financing interest (not otherwise high-taxed export financing interest) shall be treated as high-taxed export financing interest where necessary to prevent avoidance of the purposes of this subparagraph, and a tax shall not be treated as a withholding tax or other tax imposed on a gross basis if such tax is in the nature of a prepayment of a tax imposed on a net basis.'

(3) Clause (iii) of section 904(d)(2)(C) is amended to read as follows:

`(iii) EXCEPTIONS- The term `financial services income' does not include--

`(I) in the case of a corporation, dividends from noncontrolled section 902 corporations out of earnings and profits accumulated in taxable years beginning before January 1, 2003, and

`(II) any export financing interest which is not high-taxed export financing interest.'

(4) Subparagraph (E) of section 904(d)(2) is amended by striking clause (ii) and by redesignating clauses (iii) and (iv) as clauses (ii) and (iii), respectively.

(5) Clause (i) of section 904(d)(3)(F) is amended to read as follows:

`(i) IN GENERAL- Except as provided in clause (ii), the separate categories are--

`(I) passive income and other passive category income, and

`(II) financial services income.'

(6) Paragraph (3) of section 904(d) is amended by striking subparagraph (H) and by redesignating subparagraph (I) as subparagraph (H).

(7) Paragraph (2) of section 904(d) is amended by adding at the end the following new subparagraph:

`(I) TRANSITIONAL RULE FOR 2003 CHANGES- For purposes of paragraph (1), taxes carried from any taxable year beginning before January 1, 2004, to any taxable year beginning on or after such date, with respect to any item of income shall be treated as described in the subparagraph of paragraph (1) in which such income would be described were such taxes paid or accrued in a taxable year beginning on or after such date.'

(d) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2003.

SEC. 109. EFFECTIVE DATE.

Except as otherwise provided in this title, the amendments made by this title shall apply to taxable years of foreign corporations beginning after December 31, 2003, and taxable years of United States persons owning stock in such corporations with or within which such corporations' taxable years end.

TITLE II--PROVISIONS RELATING TO FOREIGN TAX CREDIT

SEC. 201. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.

(a) GENERAL RULE- Section 904 is amended by redesignating subsections (g), (h), (i), (j), and (k) as subsections (h), (i), (j), (k), and (l) respectively, and by inserting after subsection (f) the following new subsection:

`(g) RECHARACTERIZATION OF OVERALL DOMESTIC LOSS-

`(1) GENERAL RULE- For purposes of this subpart, in the case of any taxpayer who sustains an overall domestic loss for any taxable year beginning after December 31, 2003, that portion of the taxpayer's taxable income from sources within the United States for each succeeding taxable year which is equal to the lesser of--

`(A) the amount of such loss (to the extent not used under this paragraph in prior taxable years), or

`(B) 50 percent of the taxpayer's taxable income from sources within the United States for such succeeding taxable year,

shall be treated as income from sources without the United States (and not as income from sources within the United States).

`(2) OVERALL DOMESTIC LOSS DEFINED- For purposes of this subsection and section 936--

`(A) IN GENERAL- The term `overall domestic loss' means any domestic loss to the extent such loss offsets taxable income from sources without the United States for the taxable year or for any preceding taxable year by reason of a carryback. For purposes of the preceding sentence, the term `domestic loss' means the amount by which the gross income for the taxable year from sources within the United States is exceeded by the sum of the deductions properly apportioned or allocated thereto (determined without regard to any carryback from a subsequent taxable year).

`(B) TAXPAYER MUST HAVE ELECTED FOREIGN TAX CREDIT FOR YEAR OF LOSS- The term `overall domestic loss' shall not include any loss for any taxable year unless the taxpayer chose the benefits of this subpart for such taxable year.

`(3) CHARACTERIZATION OF SUBSEQUENT INCOME-

`(A) IN GENERAL- Any income from sources within the United States that is treated as income from sources without the United States under paragraph (1) shall be allocated among and increase the income categories in proportion to the loss from sources within the United States previously allocated to those income categories.

`(B) INCOME CATEGORY- For purposes of this paragraph, the term `income category' has the meaning given such term by subsection (f)(5)(E)(i).

`(4) COORDINATION WITH SUBSECTION (f)- The Secretary shall prescribe such regulations as may be necessary to coordinate the provisions of this subsection with the provisions of subsection (f).'

(b) CONFORMING AMENDMENTS-

(1) Section 535(d)(2) is amended by striking `section 904(g)(6)' and inserting `section 904(h)(6)'.

(2) Subparagraph (A) of section 936(a)(2) is amended by striking `section 904(f)' and inserting `subsections (f) and (g) of section 904'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to losses for taxable years beginning after December 31, 2003.

SEC. 202. SPECIAL RULES RELATING TO FINANCIAL SERVICES INCOME.

(a) FINANCIAL SERVICES INCOME IN EXCESS OF 80 PERCENT OF GROSS INCOME- Section 904(d)(2)(C) (relating to financial services income) is amended by adding at the end the following new clause:

`(iv) INCOME EXCEEDING 80 PERCENT OF GROSS INCOME- If the financial services income (as defined in clause (i)) of any person exceeds 80 percent of gross income, the entire gross income for the taxable year shall be treated as financial services income.'

(b) EXCEPTION FOR INCOME ON DEALER PROPERTY- Subsection 904(g) (relating to source rules in case of United States-owned foreign corporations) is amended by redesignating paragraph (11) as paragraph (12) and by adding after paragraph (10) the following new paragraph:

`(11) EXCEPTION FOR INCOME ON DEALER PROPERTY- Paragraph (1) shall not apply to any amount derived from a United States-owned foreign corporation that is derived from income on a security (within the meaning of section 475(c)(2)) which is received or accrued by a person that holds the security in connection with the holder's activities as a dealer in securities (within the meaning of section 475(c)(1)).'

(c) EFFECTIVE DATES-

(1) IN GENERAL- The amendments made by this section shall apply to taxable years beginning after December 31, 2003.

(2) DEEMED PAID CREDITS- In the case of any credit under section 901 of the Internal Revenue Code of 1986 by reason of section 902 or 960 of such Code, the amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2003, and to taxable years of United States shareholders in such corporations with or within which such taxable years of foreign corporations end.

SEC. 203. LOOK-THRU RULES TO APPLY TO DIVIDENDS FROM NONCONTROLLED SECTION 902 CORPORATIONS.

(a) IN GENERAL- Section 904(d)(4) (relating to look-thru rules apply to dividends from noncontrolled section 902 corporations) is amended to read as follows:

`(4) LOOK-THRU APPLIES TO DIVIDENDS FROM NONCONTROLLED SECTION 902 CORPORATIONS-

`(A) IN GENERAL- For purposes of this subsection, any dividend from a noncontrolled section 902 corporation with respect to the taxpayer shall be treated as income in a separate category in proportion to the ratio of--

`(i) the portion of earnings and profits attributable to income in such category, to

`(ii) the total amount of earnings and profits.

`(B) SPECIAL RULES- For purposes of this paragraph--

`(i) IN GENERAL- Rules similar to the rules of paragraph (3)(F) shall apply.

`(ii) EARNINGS AND PROFITS-

`(I) IN GENERAL- The rules of section 316 shall apply.

`(II) REGULATIONS- The Secretary may prescribe regulations regarding the treatment of distributions out of earnings and profits for periods before the taxpayer's acquisition of the stock to which the distributions relate.

`(iii) DIVIDENDS NOT ALLOCABLE TO SEPARATE CATEGORY- The portion of any dividend from a noncontrolled section 902 corporation which is not treated as income in a separate category under subparagraph (A) shall be treated as a dividend to which subparagraph (A) does not apply.

`(iv) LOOK-THRU WITH RESPECT TO CARRYFORWARDS OF CREDIT- Rules similar to subparagraph (A) also shall apply to any carryforward under subsection (c) from a taxable year beginning before January 1, 2003, of tax allocable to a dividend from a noncontrolled section 902 corporation with respect to the taxpayer.'.

(b) CONFORMING AMENDMENTS-

(1) Subparagraph (E) of section 904(d)(1), as in effect both before and after the amendments made by section 1105 of the Taxpayer Relief Act of 1997, is hereby repealed.

(2) Section 904(d)(2)(C)(iii), as so in effect, is amended by striking subclause (II) and by redesignating subclause (III) as subclause (II).

(3) The last sentence of section 904(d)(2)(D), as so in effect, is amended to read as follows: `Such term does not include any financial services income.'

(4) Section 904(d)(2)(E) is amended--

(A) by inserting `or (4)' after `paragraph (3)' in clause (i), and

(B) by striking clauses (ii) and (iv) and by redesignating clause (iii) as clause (ii).

(5) Section 904(d)(3)(F) is amended by striking `(D), or (E)' and inserting `or (D)'.

(6) Section 864(d)(5)(A)(i) is amended by striking `(C)(iii)(III)' and inserting `(C)(iii)(II)'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2002.

SEC. 204. APPLICATION OF LOOK-THRU RULES TO FOREIGN TAX CREDIT.

(a) INTEREST, RENTS, AND ROYALTIES-

(1) NONCONTROLLED SECTION 902 CORPORATION- Section 904(d)(4)(A), as amended by section 203, is amended to read as follows:

`(A) IN GENERAL- For purposes of this subsection--

`(i) any applicable dividend shall be treated as income in a separate category in proportion to the ratio of--

`(I) the portion of the earnings and profits attributable to income in such category, to

`(II) the total amount of earnings and profits, and

`(ii) any interest, rent, or royalty which is received or accrued from a noncontrolled section 902 corporation with respect to the taxpayer shall be treated as income in a separate category to the extent it is properly allocable (under regulations prescribed by the Secretary) to income of such corporation in such category.'

(2) PARTNERSHIPS- Section 904(d)(6)(C) (relating to regulations) is amended--

(A) by inserting `or (4)(A)(ii)' after `paragraph (3)(C)', and

(B) by inserting `or noncontrolled section 902 corporations, whichever is applicable' after `controlled foreign corporations'.

(3) CONFORMING AMENDMENT- The heading for section 904(d)(4), as amended by section 203, is amended by inserting `, INTEREST, RENTS, OR ROYALTIES' after `DIVIDENDS'.

(b) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2003.

SEC. 205. 10-YEAR FOREIGN TAX CREDIT CARRYFORWARD.

(a) GENERAL RULE- Section 904(c) (relating to carryback and carryover of excess tax paid) is amended by striking `in the first, second, third, fourth, or fifth' and inserting `in any of the first 10'.

(b) EXCESS EXTRACTION TAXES- Paragraph (1) of section 907(f) is amended by striking `in the first, second, third, fourth, or fifth' and inserting `in any of the first 10'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to excess foreign taxes which (without regard to the amendments made by this section) may be carried to any taxable year beginning after December 31, 2002.

SEC. 206. REPEAL OF LIMITATION OF FOREIGN TAX CREDIT UNDER ALTERNATIVE MINIMUM TAX.

(a) IN GENERAL- Section 59(a) (relating to alternative minimum tax foreign tax credit) is amended by striking paragraph (2) and by redesignating paragraphs (3) and (4) as paragraphs (2) and (3), respectively.

(b) CONFORMING AMENDMENT- Section 53(d)(1)(B)(i)(II) is amended by striking `and if section 59(a)(2) did not apply'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2003.

SEC. 207. ATTRIBUTION OF STOCK OWNERSHIP THROUGH PARTNERSHIPS TO APPLY IN DETERMINING SECTION 902 AND 960 CREDITS.

(a) IN GENERAL- Subsection (c) of section 902 is amended by redesignating paragraph (7) as paragraph (8) and by inserting after paragraph (6) the following new paragraph:

`(7) CONSTRUCTIVE OWNERSHIP THROUGH PARTNERSHIPS- Stock owned, directly or indirectly, by or for a partnership shall be considered as being owned proportionately by its partners. Stock considered to be owned by a person by reason of the preceding sentence shall, for purposes of applying such sentence, be treated as actually owned by such person. The Secretary may prescribe such regulations as may be necessary to carry out the purposes of this paragraph, including rules to account for special partnership allocations of dividends, credits, and other incidents of ownership of stock in determining proportionate ownership.'

(b) EFFECTIVE DATE- The amendment made by this section shall apply to taxes of foreign corporations for taxable years of such corporations beginning after December 31, 2003.

SEC. 208. REPEAL OF SPECIAL RULES FOR APPLYING FOREIGN TAX CREDIT IN CASE OF FOREIGN OIL AND GAS INCOME.

(a) IN GENERAL- Section 907 (relating to special rules in case of foreign oil and gas income) is repealed.

(b) CONFORMING AMENDMENTS-

(1) Each of the following provisions are amended by striking `907,':

(A) Section 245(a)(10).

(B) Section 865(h)(1)(B).

(C) Section 904(d)(1).

(D) Section 904(g)(10)(A).

(2) Section 904(f)(5)(E)(iii) is amended by inserting `, as in effect before its repeal by the Fairness, Simplification and Competitiveness for American Business Act of 2003' after `section 907(c)(4)(B)'.

(3) Section 954(g)(1) is amended by inserting `, as in effect before its repeal by the Fairness, Simplification and Competitiveness for American Business Act of 2003' after `907(c)'.

(4) Section 6501(i) is amended--

(A) by striking `, or under section 907(f) (relating to carryback and carryover of disallowed oil and gas extraction taxes)', and

(B) by striking `or 907(f)'.

(5) The table of sections for subpart A of part III of subchapter N of chapter 1 is amended by striking the item relating to section 907.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2003.

TITLE III--OTHER PROVISIONS

SEC. 301. APPLICATION OF UNIFORM CAPITALIZATION RULES TO FOREIGN PERSONS.

(a) IN GENERAL- Section 263A(c) (relating to exceptions) is amended by adding at the end the following new paragraph:

`(7) FOREIGN PERSONS- Except for purposes of applying sections 871(b)(1) and 882(a)(1), this section shall not apply to any taxpayer who is not a United States person if such taxpayer capitalizes costs of produced property or property acquired for resale by applying the method used to ascertain the income, profit, or loss for purposes of reports or statements to shareholders, partners, other proprietors, or beneficiaries, or for credit purposes.'

(b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 2003. Section 481 of the Internal Revenue Code of 1986 shall not apply to any change in a method of accounting by reason of such amendment.

SEC. 302. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN ASSETS ACQUIRED BY DEALERS IN ORDINARY COURSE OF TRADE OR BUSINESS.

(a) IN GENERAL- Section 956(c)(2) (relating to exceptions from property treated as United States property)

is amended by striking `and' at the end of subparagraph (J), by striking the period at the end of subparagraph (K) and inserting `; and', and by adding at the end the following new subparagraph:

`(L) securities acquired and held by a controlled foreign corporation in the ordinary course of its business as a dealer in securities if (i) the dealer accounts for the securities as securities held primarily for sale to customers in the ordinary course of business, and (ii) the dealer disposes of the securities (or such securities mature while held by the dealer) within a period consistent with the holding of securities for sale to customers in the ordinary course of business.'

(b) CONFORMING AMENDMENT- Section 956(c)(2) is amended by striking `and (K)' in the last sentence and inserting `, (K), and (L)'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2003, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.

SEC. 303. TREATMENT OF CERTAIN DIVIDENDS OF REGULATED INVESTMENT COMPANIES.

(a) TREATMENT OF CERTAIN DIVIDENDS-

(1) NONRESIDENT ALIEN INDIVIDUALS- Section 871 (relating to tax on nonresident alien individuals) is amended by redesignating subsection (k) as subsection (l) and by inserting after subsection (j) the following new subsection:

`(k) EXEMPTION FOR CERTAIN DIVIDENDS OF REGULATED INVESTMENT COMPANIES-

`(1) INTEREST-RELATED DIVIDENDS-

`(A) IN GENERAL- Except as provided in subparagraph (B), no tax shall be imposed under paragraph (1)(A) of subsection (a) on any interest-related dividend received from a regulated investment company.

`(B) EXCEPTIONS- Subparagraph (A) shall not apply--

`(i) to any interest-related dividend received from a regulated investment company by a person to the extent such dividend is attributable to interest (other than interest described in subparagraph (E) (i) or (iii)) received by such company on indebtedness issued by such person or by any corporation or partnership with respect to which such person is a 10-percent shareholder,

`(ii) to any interest-related dividend with respect to stock of a regulated investment company unless the person who would otherwise be required to deduct and withhold tax from such dividend under chapter 3 receives a statement (which meets requirements similar to the requirements of subsection (h)(5)) that the beneficial owner of such stock is not a United States person, and

`(iii) to any interest-related dividend paid to any person within a foreign country (or any interest-related dividend payment addressed to, or for the account of, persons within such foreign country) during any period described in subsection (h)(6) with respect to such country.

Clause (iii) shall not apply to any dividend with respect to any stock which was acquired on or before the date of the publication of the Secretary's determination under subsection (h)(6).

`(C) INTEREST-RELATED DIVIDEND- For purposes of this paragraph, an interest-related dividend is any dividend (or part thereof) which is designated by the regulated investment company as an interest-related dividend in a written notice mailed to its shareholders not later than 60 days after the close of its taxable year. If the aggregate amount so designated with respect to a taxable year of the company (including amounts so designated with respect to dividends paid after the close of the taxable year described in section 855) is greater than the qualified net interest income of the company for such taxable year, the portion of each distribution which shall be an interest-related dividend shall be only that portion of the amounts so designated which such qualified net interest income bears to the aggregate amount so designated.

`(D) QUALIFIED NET INTEREST INCOME- For purposes of subparagraph (C), the term `qualified net interest income' means the qualified interest income of the regulated investment company reduced by the deductions properly allocable to such income.

`(E) QUALIFIED INTEREST INCOME- For purposes of subparagraph (D), the term `qualified interest income' means the sum of the following amounts derived by the regulated investment company from sources within the United States:

`(i) Any amount includible in gross income as original issue discount (within the meaning of section 1273) on an obligation payable 183 days or less from the date of original issue (without regard to the period held by the company).

`(ii) Any interest includible in gross income (including amounts recognized as ordinary income in respect of original issue discount or market discount or acquisition discount under part V of subchapter P and such other amounts as regulations may provide) on an obligation which is in registered form; except that this clause shall not apply to--

`(I) any interest on an obligation issued by a corporation or partnership if the regulated investment company is a 10-percent shareholder in such corporation or partnership, and

`(II) any interest which is treated as not being portfolio interest under the rules of subsection (h)(4).

`(iii) Any interest referred to in subsection (i)(2)(A) (without regard to the trade or business of the regulated investment company).

`(iv) Any interest-related dividend includable in gross income with respect to stock of another regulated investment company.

`(F) 10-PERCENT SHAREHOLDER- For purposes of this paragraph, the term `10-percent shareholder' has the meaning given such term by subsection (h)(3)(B).

`(2) SHORT-TERM CAPITAL GAIN DIVIDENDS-

`(A) IN GENERAL- Except as provided in subparagraph (B), no tax shall be imposed under paragraph (1)(A) of subsection (a) on any short-term capital gain dividend received from a regulated investment company.

`(B) EXCEPTION FOR ALIENS TAXABLE UNDER SUBSECTION (a)(2)- In the case of dividends received from a regulated investment company before January 1, 2003, subparagraph (A) shall not apply in the case of any nonresident alien individual subject to tax under subsection (a)(2).

`(C) SHORT-TERM CAPITAL GAIN DIVIDEND- For purposes of this paragraph, a short-term capital gain dividend is any dividend (or part thereof) which is designated by the regulated investment company as a short-term capital gain dividend in a written notice mailed to its shareholders not later than 60 days after the close of its taxable year. If the aggregate amount so designated with respect to a taxable year of the company (including amounts so designated with respect to dividends paid after the close of the taxable year described in section 855) is greater than the qualified short-term gain of the company for such taxable year, the portion of each distribution which shall be a short-term capital gain dividend shall be only that portion of the amounts so designated which such qualified short-term gain bears to the aggregate amount so designated.

`(D) QUALIFIED SHORT-TERM GAIN- For purposes of subparagraph (C), the term `qualified short-term gain' means the excess of the net short-term capital gain of the regulated investment company for the taxable year over the net long-term capital loss (if any) of such company for such taxable year. For purposes of this subparagraph--

`(i) the net short-term capital gain of the regulated investment company shall be computed by treating any short-term capital gain dividend includible in gross income with respect to stock of another regulated investment company as a short-term capital gain, and

`(ii) the excess of the net short-term capital gain for a taxable year over the net long-term capital loss for a taxable year (to which an election under section 4982(e)(4) does not apply) shall be determined without regard to any net capital loss or net short-term capital loss attributable to transactions after October 31 of such year, and any such net capital loss or net short-term capital loss shall be treated as arising on the 1st day of the next taxable year.

To the extent provided in regulations, clause (ii) shall apply also for purposes of computing the taxable income of the regulated investment company.'

(2) FOREIGN CORPORATIONS- Section 881 (relating to tax on income of foreign corporations not connected with United States business) is amended by redesignating subsection (e) as subsection (f) and by inserting after subsection (d) the following new subsection:

`(e) TAX NOT TO APPLY TO CERTAIN DIVIDENDS OF REGULATED INVESTMENT COMPANIES-

`(1) INTEREST-RELATED DIVIDENDS-

`(A) IN GENERAL- Except as provided in subparagraph (B), no tax shall be imposed under paragraph (1) of subsection (a) on any interest-related dividend (as defined in section 871(k)(1)) received from a regulated investment company.

`(B) EXCEPTION- Subparagraph (A) shall not apply--

`(i) to any dividend referred to in section 871(k)(1)(B), and

`(ii) to any interest-related dividend received by a controlled foreign corporation (within the meaning of section 957(a)) to the extent such dividend is attributable to interest received by the regulated investment company from a person who is a related person (within the meaning of section 864(d)(4)) with respect to such controlled foreign corporation.

`(C) TREATMENT OF DIVIDENDS RECEIVED BY CONTROLLED FOREIGN CORPORATIONS- The rules of subsection (c)(5)(A) shall apply to any interest-related dividend received by a controlled foreign corporation (within the meaning of section 957(a)) to the extent such dividend is attributable to interest received by the regulated investment company which is described in clause (ii) of section 871(k)(1)(E) (and not described in clause (i) or (iii) of such section).

`(2) SHORT-TERM CAPITAL GAIN DIVIDENDS- No tax shall be imposed under paragraph (1) of subsection (a) on any short-term capital gain dividend (as defined in section 871(k)(2)) received from a regulated investment company.'

(3) WITHHOLDING TAXES-

(A) Section 1441(c) (relating to exceptions) is amended by adding at the end the following new paragraph:

`(12) CERTAIN DIVIDENDS RECEIVED FROM REGULATED INVESTMENT COMPANIES-

`(A) IN GENERAL- No tax shall be required to be deducted and withheld under subsection (a) from any amount exempt from the tax imposed by section 871(a)(1)(A) by reason of section 871(k).

`(B) SPECIAL RULE- For purposes of subparagraph (A), clause (i) of section 871(k)(1)(B) shall not apply to any dividend unless the regulated investment company knows that such dividend is a dividend referred to in such clause. A similar rule shall apply with respect to the exception contained in section 871(k)(2)(B).'

(B) Section 1442(a) (relating to withholding of tax on foreign corporations) is amended--

(i) by striking `and the reference in section 1441(c)(10)' and inserting `the reference in section 1441(c)(10)', and

(ii) by inserting before the period at the end the following: `, and the references in section 1441(c)(12) to sections 871(a) and 871(k) shall be treated as referring to sections 881(a) and 881(e) (except that for purposes of applying subparagraph (A) of section 1441(c)(12), as so modified, clause (ii) of section 881(e)(1)(B) shall not apply to any dividend unless the regulated investment company knows that such dividend is a dividend referred to in such clause)'.

(b) ESTATE TAX TREATMENT OF INTEREST IN CERTAIN REGULATED INVESTMENT COMPANIES- Section 2105 (relating to property without the United States for estate tax purposes) is amended by adding at the end the following new subsection:

`(d) STOCK IN A RIC-

`(1) IN GENERAL- For purposes of this subchapter, stock in a regulated investment company (as defined in section 851) owned by a nonresident not a citizen of the United States shall not be deemed property within the United States in the proportion that, at the end of the quarter of such investment company's taxable year immediately preceding a decedent's date of death (or at such other time as the Secretary may designate in regulations), the assets of the investment company that were qualifying assets with respect to the decedent bore to the total assets of the investment company.

`(2) QUALIFYING ASSETS- For purposes of this subsection, qualifying assets with respect to a decedent are assets that, if owned directly by the decedent, would have been--

`(A) amounts, deposits, or debt obligations described in subsection (b) of this section,

`(B) debt obligations described in the last sentence of section 2104(c), or

`(C) other property not within the United States.'

(c) TREATMENT OF REGULATED INVESTMENT COMPANIES UNDER SECTION 897-

(1) Paragraph (1) of section 897(h) is amended by striking `REIT' each place it appears and inserting `qualified investment entity'.

(2) Paragraphs (2) and (3) of section 897(h) are amended to read as follows:

`(2) SALE OF STOCK IN DOMESTICALLY CONTROLLED ENTITY NOT TAXED- The term `United States real property interest' does not include any interest in a domestically controlled qualified investment entity.

`(3) DISTRIBUTIONS BY DOMESTICALLY CONTROLLED QUALIFIED INVESTMENT ENTITIES- In the case of a domestically controlled qualified investment entity, rules similar to the rules of subsection (d) shall apply to the foreign ownership percentage of any gain.'

(3) Subparagraphs (A) and (B) of section 897(h)(4) are amended to read as follows:

`(A) QUALIFIED INVESTMENT ENTITY- The term `qualified investment entity' means any real estate investment trust and any regulated investment company.

`(B) DOMESTICALLY CONTROLLED- The term `domestically controlled qualified investment entity' means any qualified investment entity in which at all times during the testing period less than 50 percent in value of the stock was held directly or indirectly by foreign persons.'

(4) Subparagraphs (C) and (D) of section 897(h)(4) are each amended by striking `REIT' and inserting `qualified investment entity'.

(5) The subsection heading for subsection (h) of section 897 is amended by striking `REITS' and inserting `CERTAIN INVESTMENT ENTITIES'.

(d) EFFECTIVE DATE-

(1) IN GENERAL- Except as otherwise provided in this subsection, the amendments made by this section shall apply to dividends with respect to taxable years of regulated investment companies beginning after the date of the enactment of this Act.

(2) ESTATE TAX TREATMENT- The amendment made by subsection (b) shall apply to estates of decedents dying after the date of the enactment of this Act.

(3) CERTAIN OTHER PROVISIONS- The amendments made by subsection (c) (other than paragraph (1) thereof) shall take effect on the date of the enactment of this Act.

SEC. 304. AIRLINE MILEAGE AWARDS TO CERTAIN FOREIGN PERSONS.

(a) IN GENERAL- The last sentence of section 4261(e)(3)(C) (relating to regulations) is amended by inserting `and mileage awards which are issued to individuals whose mailing addresses on record with the person providing the right to air transportation are outside the United States' before the period at the end thereof.

(b) EFFECTIVE DATE- The amendment made by this section shall apply to amounts paid, and benefits provided, after December 31, 2003.

SEC. 305. INTEREST PAYMENTS DEDUCTIBLE WHERE DISQUALIFIED GUARANTEE HAS ECONOMIC EFFECT.

(a) IN GENERAL- Section 163(j)(6)(D)(ii) (relating to exceptions to disqualified guarantee) is amended--

(1) by striking `or' at the end of subclause (I),

(2) by striking the period at the end of subclause (II) and inserting `, or',

(3) by inserting after subclause (II) the following new subclause:

`(III) if, in the case of a guarantee by a foreign person, the taxpayer establishes to the satisfaction of the Secretary that the taxpayer could have borrowed substantially the same principal amount from an unrelated person without the guarantee.', and

(4) by adding at the end the following new sentence: `For purposes of subclause (III), to the extent provided in regulations, the Secretary may reject a showing that a taxpayer could have borrowed substantially the same principal amount if such borrowing is on terms substantially dissimilar to those of the actual loan.'

(b) EFFECTIVE DATE- The amendments made by this section shall apply to guarantees issued on and after the date of the enactment of this Act.

SEC. 306. MODIFICATIONS OF REPORTING REQUIREMENTS FOR CERTAIN FOREIGN-OWNED CORPORATIONS.

(a) DE MINIMIS EXCEPTION- Section 6038A(b) (relating to required information) is amended by adding at the end the following new flush sentence:

`The Secretary shall not require the reporting corporation to report any information with respect to any foreign person which is a related person if the aggregate value of the transactions between the corporation and the related person (and any person related to such person) during the taxable year does not exceed $5,000,000.'

(b) TIME FOR PROVIDING TRANSLATIONS OF SPECIFIC DOCUMENTS- Notwithstanding Internal Revenue Service Regulation Sec. 1.6038A-3(f)(2), a taxpayer shall have at least 60 days to provide translations of specific documents it is requested to translate. Nothing in this subsection shall limit the right of a taxpayer to file a written request for an extension of time to comply with the request.

(c) EFFECTIVE DATES-

(1) EXCEPTION- The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 2003.

(2) TRANSLATIONS- Subsection (b) shall apply to requests made by the Internal Revenue Service after December 31, 2003.

SEC. 307. ELECTION NOT TO USE AVERAGE EXCHANGE RATE FOR FOREIGN TAX PAID OTHER THAN IN FUNCTIONAL CURRENCY.

(a) IN GENERAL- Paragraph (1) of section 986(a) (relating to determination of foreign taxes and foreign corporation's earnings and profits) is amended by redesignating subparagraph (D) as subparagraph (E) and by inserting after subparagraph (C) the following new subparagraph:

`(D) ELECTIVE EXCEPTION FOR TAXES PAID OTHER THAN IN FUNCTIONAL CURRENCY-

`(i) IN GENERAL- At the election of the taxpayer, subparagraph (A) shall not apply to any foreign income taxes the liability for which is denominated in any currency other than in the taxpayer's functional currency.

`(ii) APPLICATION TO QUALIFIED BUSINESS UNITS- An election under this subparagraph may apply to foreign income taxes attributable to a qualified business unit in accordance with regulations prescribed by the Secretary.

`(iii) ELECTION- Any such election shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.'

(b) EFFECTIVE DATE- The amendment made by this section shall apply to taxable years beginning after December 31, 2003.

SEC. 308. REPEAL OF SPECIAL CAPITAL GAINS TAX ON ALIENS PRESENT IN THE UNITED STATES FOR 183 DAYS OR MORE.

(a) IN GENERAL- Subsection (a) of section 871 is amended by striking paragraph (2) and by redesignating paragraph (3) as paragraph (2).

(b) EFFECTIVE DATE- The amendment made by this section shall apply to taxable years beginning after December 31, 2003.

SEC. 309. REPEAL OF WITHHOLDING TAX ON DIVIDENDS FROM CERTAIN FOREIGN CORPORATIONS.

(a) IN GENERAL- Paragraph (2) of section 871(i) (relating to tax not to apply to certain interest and dividends) is amended by adding at the end the following new subparagraph:

`(D) Dividends paid by a foreign corporation.'.

(b) EFFECTIVE DATE- The amendment made by this section shall apply to payments made after December 31, 2003.

SEC. 310. INTEREST EXPENSE ALLOCATION RULES.

(a) ELECTION TO ALLOCATE ON WORLDWIDE BASIS- Section 864 is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection:

`(f) ELECTION TO ALLOCATE INTEREST, ETC. ON WORLDWIDE BASIS- For purposes of this subchapter, at the election of the worldwide affiliated group--

`(1) ALLOCATION AND APPORTIONMENT OF INTEREST EXPENSE-

`(A) IN GENERAL- The taxable income of each domestic corporation which is a member of a worldwide affiliated group shall be determined by allocating and apportioning interest expense

of each member as if all members of such group were a single corporation.

`(B) TREATMENT OF WORLDWIDE AFFILIATED GROUP- The taxable income of the domestic members of a worldwide affiliated group from sources outside the United States shall be determined by allocating and apportioning the interest expense of such domestic members to such income in an amount equal to the excess (if any) of--

`(i) the total interest expense of the worldwide affiliated group multiplied by the ratio which the foreign assets of the worldwide affiliated group bears to all the assets of the worldwide affiliated group, over

`(ii) the interest expense of all foreign corporations which are members of the worldwide affiliated group to the extent such interest expense of such foreign corporations would have been allocated and apportioned to foreign source income if this subsection were applied to a group consisting of all the foreign corporations in such worldwide affiliated group.

`(C) WORLDWIDE AFFILIATED GROUP- For purposes of this paragraph, the term `worldwide affiliated group' means an affiliated group as defined in section 1504(a), determined without regard to paragraphs (2), (3), and (4) of section 1504(b).

`(2) ALLOCATION AND APPORTIONMENT OF OTHER EXPENSES- Expenses other than interest which are not directly allocable or apportioned to any specific income producing activity shall be allocated and apportioned as if all members of the affiliated group were a single corporation. For purposes of the preceding sentence, the term `affiliated group' has the meaning given such term by section 1504 (determined without regard to paragraph (4) of section 1504(b)).

`(3) TREATMENT OF TAX-EXEMPT ASSETS; BASIS OF STOCK IN NONAFFILIATED 10-PERCENT OWNED CORPORATIONS- The rules of paragraphs (3) and (4) of subsection (e) shall apply for purposes of this subsection; except that paragraph (3) shall be applied on worldwide affiliated group basis.

`(4) TREATMENT OF CERTAIN FINANCIAL INSTITUTIONS-

`(A) IN GENERAL- For purposes of paragraph (1), any corporation described in subparagraph (B) shall be treated as an includible corporation for purposes of section 1504 only for purposes of applying this subsection separately to corporations so described.

`(B) DESCRIPTION- A corporation is described in this subparagraph if--

`(i) such corporation is a financial institution described in section 581 or 591,

`(ii) the business of such financial institution is predominantly with persons other than related persons (within the meaning of subsection (d)(4)) or their customers, and

`(iii) such financial institution is required by State or Federal law to be operated separately from any other entity which is not such an institution.

`(C) TREATMENT OF BANK HOLDING COMPANIES- To the extent provided in regulations--

`(i) a bank holding company (within the meaning of section 2(a) of the Bank Holding Company Act of 1956), and

`(ii) any subsidiary of a financial institution described in section 581 or 591 or of any bank holding company if such subsidiary is predominantly engaged (directly or indirectly) in the active conduct of a banking, financing, or similar business,

shall be treated as a corporation described in subparagraph (B).

`(5) ELECTION TO EXPAND FINANCIAL INSTITUTION GROUP OF WORLDWIDE GROUP-

`(A) IN GENERAL- If a worldwide affiliated group elects the application of this subsection, all financial corporations which--

`(i) are members of such worldwide affiliated group, but

`(ii) are not corporations described in paragraph (4)(B),

shall be treated as described in paragraph (4)(B) for purposes of applying paragraph (4)(A). This subsection (other than this paragraph) shall apply to any such group in the same manner as this subsection (other than this paragraph) applies to the pre-election worldwide affiliated group of which such group is a part.

`(B) FINANCIAL CORPORATION- For purposes of this paragraph, the term `financial corporation' means any corporation if at least 80 percent of its gross income is income described in section 904(d)(2)(C)(ii) and the regulations thereunder which is derived from transactions with persons who are not related (within the meaning of section 267(b) or 707(b)(1)) to the corporation. For purposes of the preceding sentence, there shall be disregarded any item of income or gain from a transaction or series of transactions a principal purpose of which is the qualification of any corporation as a financial corporation.

`(C) ANTIABUSE RULES- In the case of a corporation which is a member of an electing financial institution group, to the extent that such corporation--

`(i) distributes dividends or makes other distributions with respect to its stock after the date of the enactment of this paragraph to any member of the pre-election worldwide affiliated group (other than to a member of the electing financial institution group) in excess of the greater of--

`(I) its average annual dividend (expressed as a percentage of current earnings and profits) during the 5-taxable-year period ending with the taxable year preceding the taxable year, or

`(II) 25 percent of its average annual earnings and profits for such 5-taxable-year period, or

`(ii) deals with any person in any manner not clearly reflecting the income of the corporation (as determined under principles similar to the principles of section 482),

an amount of indebtedness of the electing financial institution group equal to the excess distribution or the understatement or overstatement of income, as the case may be, shall be recharacterized (for the taxable year and subsequent taxable years) for purposes of this paragraph as indebtedness of the worldwide affiliated group (excluding the electing financial institution group). If a corporation has not been in existence for 5 taxable years, this subparagraph shall be applied with respect to the period it was in existence.

`(D) ELECTION- An election under this paragraph with respect to any financial institution group may be made only by the common parent of the pre-election worldwide affiliated group and may be made only for the first taxable year beginning after December 31, 2002, in which such affiliated group includes 1 or more financial corporations. Such an election, once made, shall apply to all financial corporations which are members of the electing financial institution group for such taxable year and all subsequent years unless revoked with the consent of the Secretary.

`(E) DEFINITIONS RELATING TO GROUPS- For purposes of this paragraph--

`(i) PRE-ELECTION WORLDWIDE AFFILIATED GROUP- The term `pre-election worldwide affiliated group' means, with respect to a corporation, the worldwide affiliated group of which such corporation would (but for an election under this paragraph) be a member for purposes of applying paragraph (1).

`(ii) ELECTING FINANCIAL INSTITUTION GROUP- The term `electing financial institution group' means the group of corporations to which this subsection applies separately by reason of the application of paragraph (5)(A) and which includes financial corporations by reason of an election under subparagraph (A).

`(F) REGULATIONS- The Secretary shall prescribe such regulations as may be appropriate to carry out this subsection, including regulations--

`(i) providing for the direct allocation of interest expense in other circumstances where such allocation would be appropriate to carry out the purposes of this subsection,

`(ii) preventing assets or interest expense from being taken into account more than once, and

`(iii) dealing with changes in members of any group (through acquisitions or otherwise) treated under this paragraph as an affiliated group for purposes of this subsection.

`(6) ELECTION- An election to have this subsection apply with respect to any worldwide affiliated group may be made only by the common parent of the domestic affiliated group referred to in paragraph (1)(C) and may be made only for the first taxable year beginning after December 31, 2002, in which a worldwide affiliated group exists which includes such affiliated group and at least one foreign corporation. Such an election, once made, shall apply to such common parent and all other corporations which are members of such worldwide affiliated group for such taxable year and all subsequent years unless revoked with the consent of the Secretary.'.

(b) EXPANSION OF REGULATORY AUTHORITY- Paragraph (7) of section 864(e) is amended--

(1) by inserting before the comma at the end of subparagraph (B) `and in other circumstances where such allocation would be appropriate to carry out the purposes of this subsection', and

(2) by striking `and' at the end of subparagraph (E), by redesignating subparagraph (F) as subparagraph (G), and by inserting after subparagraph (E) the following new subparagraph:

`(F) preventing assets or interest expense from being taken into account more than once, and'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2003.

SEC. 311. PERMANENT EXTENSION OF SUBPART F EXEMPTION FOR ACTIVE FINANCING.

(a) IN GENERAL-

(1) Section 953(e)(10) is amended--

(A) by striking `, and before January 1, 2007,', and

(B) by striking the second sentence.

(2) Section 954(h)(9) is amended by striking `, and before January 1, 2007,'.

(b) EFFECTIVE DATE- The amendments made by subsection (a) shall apply to taxable years beginning after December 31, 2003.

END