To amend the Internal Revenue Code of 1986 to comply with the World Trade Organization rulings on the FSC/ETI benefit in a manner that preserves manufacturing jobs and production activities in the United States, and for other purposes.

November 21, 2003

Mr. SMITH (for himself and Mr. BREAUX) introduced the following bill; which was read twice and referred to the Committee on Finance

To amend the Internal Revenue Code of 1986 to comply with the World Trade Organization rulings on the FSC/ETI benefit in a manner that preserves manufacturing jobs and production activities in the United States, 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.

(a) SHORT TITLE- This Act may be cited as the `American Manufacturing Jobs 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.

SEC. 2. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME.

(a) IN GENERAL- Section 114 is hereby repealed.

(b) CONFORMING AMENDMENTS-

(1)(A) Subpart E of part III of subchapter N of chapter 1 (relating to qualifying foreign trade income) is hereby repealed.

(B) The table of subparts for such part III is amended by striking the item relating to subpart E.

(2) The table of sections for part III of subchapter B of chapter 1 is amended by striking the item relating to section 114.

(3) The second sentence of section 56(g)(4)(B)(i) is amended by striking `or under section 114'.

(4) Section 275(a) is amended--

(A) by inserting `or' at the end of paragraph (4)(A), by striking `or' at the end of paragraph (4)(B) and inserting a period, and by striking subparagraph (C), and

(B) by striking the last sentence.

(5) Paragraph (3) of section 864(e) is amended--

(A) by striking:

`(3) TAX-EXEMPT ASSETS NOT TAKEN INTO ACCOUNT-

`(A) IN GENERAL- For purposes of'; and inserting:

`(3) TAX-EXEMPT ASSETS NOT TAKEN INTO ACCOUNT- For purposes of', and

(B) by striking subparagraph (B).

(6) Section 903 is amended by striking `114, 164(a),' and inserting `164(a)'.

(7) Section 999(c)(1) is amended by striking `941(a)(5),'.

(c) EFFECTIVE DATE-

(1) IN GENERAL- The amendments made by this section shall apply to transactions occurring after the date of the enactment of this Act.

(2) BINDING CONTRACTS- The amendments made by this section shall not apply to any transaction in the ordinary course of a trade or business which occurs pursuant to a binding contract--

(A) which is between the taxpayer and a person who is not a related person (as defined in section 943(b)(3) of such Code, as in effect on the day before the date of the enactment of this Act), and

(B) which is in effect on September 17, 2003, and at all times thereafter.

(d) REVOCATION OF SECTION 943(e) ELECTIONS-

(1) IN GENERAL- In the case of a corporation that elected to be treated as a domestic corporation under section 943(e) of the Internal Revenue Code of 1986 (as in effect on the day before the date of the enactment of this Act)--

(A) the corporation may, during the 1-year period beginning on the date of the enactment of this Act, revoke such election, effective as of such date of enactment, and

(B) if the corporation does revoke such election--

(i) such corporation shall be treated as a domestic corporation transferring (as of such date of enactment) all of its property to a foreign corporation in connection with an exchange described in section 354 of such Code, and

(ii) no gain or loss shall be recognized on such transfer.

(2) EXCEPTION- Subparagraph (B)(ii) of paragraph (1) shall not apply to gain on any asset held by the revoking corporation if--

(A) the basis of such asset is determined in whole or in part by reference to the basis of such asset in the hands of the person from whom the revoking corporation acquired such asset,

(B) the asset was acquired by transfer (not as a result of the election under section 943(e) of such Code) occurring on or after the 1st day on which its election under section 943(e) of such Code was effective, and

(C) a principal purpose of the acquisition was the reduction or avoidance of tax (other than a reduction in tax under section 114 of such Code, as in effect on the day before the date of the enactment of this Act).

(e) GENERAL TRANSITION-

(1) IN GENERAL- In the case of a taxable year ending after the date of the enactment of this Act and beginning before January 1, 2007, for purposes of chapter 1 of such Code, a current FSC/ETI beneficiary shall be allowed a deduction equal to the transition amount determined under this subsection with respect to such beneficiary for such year.

(2) CURRENT FSC/ETI BENEFICIARY- The term `current FSC/ETI beneficiary' means any corporation which entered into one or more transactions during its taxable year beginning in calendar year 2002 with respect to which FSC/ETI benefits were allowable.

(3) TRANSITION AMOUNT- For purposes of this subsection--

(A) IN GENERAL- The transition amount applicable to any current FSC/ETI beneficiary for any taxable year is the phaseout percentage of the base period amount.

(B) PHASEOUT PERCENTAGE-

(i) IN GENERAL- In the case of a taxpayer using the calendar year as its taxable year, the phaseout percentage shall be determined under the following table:

The phaseout percentage is:

2004

--80

2005

--80

2006

--60.

(ii) SPECIAL RULE FOR 2003- The phaseout percentage for 2003 shall be the amount that bears the same ratio to 100 percent as the number of days after the date of the enactment of this Act bears to 365.

(iii) SPECIAL RULE FOR FISCAL YEAR TAXPAYERS- In the case of a taxpayer not using the calendar year as its taxable year, the phaseout percentage is the weighted average of the phaseout percentages determined under the preceding provisions of this paragraph with respect to calendar years any portion of which is included in the taxpayer's taxable year. The weighted average shall be determined on the basis of the respective portions of the taxable year in each calendar year.

(C) SHORT TAXABLE YEAR- The Secretary shall prescribe guidance for the computation of the transition amount in the case of a short taxable year.

(4) BASE PERIOD AMOUNT- For purposes of this subsection, the base period amount is the FSC/ETI benefit for the taxpayer's taxable year beginning in calendar year 2002.

(5) FSC/ETI BENEFIT- For purposes of this subsection, the term `FSC/ETI benefit' means--

(A) amounts excludable from gross income under section 114 of such Code, and

(B) the exempt foreign trade income of related foreign sales corporations from property acquired from the taxpayer (determined without regard to section 923(a)(5) of such Code (relating to special rule for military property), as in effect on the day before the date of the enactment of the FSC Repeal and Extraterritorial Income Exclusion Act of 2000).

In determining the FSC/ETI benefit there shall be excluded any amount attributable to a transaction with respect to which the taxpayer is the lessor unless the leased property was manufactured or produced in whole or in significant part by the taxpayer.

(6) SPECIAL RULE FOR AGRICULTURAL AND HORTICULTURAL COOPERATIVES- Determinations under this subsection with respect to an organization described in section 943(g)(1) of such Code, as in effect on the day before the date of the enactment of this Act, shall be made at the cooperative level and the purposes of this subsection shall be carried out in a manner similar to section 199(h)(2) of such Code, as added by this Act. Such determinations shall be in accordance with such requirements and procedures as the Secretary may prescribe.

(7) CERTAIN RULES TO APPLY- Rules similar to the rules of section 41(f) of such Code shall apply for purposes of this subsection.

(8) COORDINATION WITH BINDING CONTRACT RULE- The deduction determined under paragraph (1) for any taxable year shall be reduced by the phaseout percentage of any FSC/ETI benefit realized for the taxable year by reason of subsection (c)(2) or section 5(c)(1)(B) of the FSC Repeal and Extraterritorial Income Exclusion Act of 2000, except that for purposes of this paragraph the phaseout percentage for 2003 shall be treated as being equal to 100 percent.

(9) SPECIAL RULE FOR TAXABLE YEAR WHICH INCLUDES DATE OF ENACTMENT- In the case of a taxable year which includes the date of the enactment of this Act, the deduction allowed under this subsection to any current FSC/ETI beneficiary shall in no event exceed--

(A) 100 percent of such beneficiary's base period amount for calendar year 2003, reduced by

(B) the FSC/ETI benefit of such beneficiary with respect to transactions occurring during the portion of the taxable year ending on the date of the enactment of this Act.

SEC. 3. DEDUCTION RELATING TO INCOME ATTRIBUTABLE TO UNITED STATES PRODUCTION ACTIVITIES.

(a) IN GENERAL- Part VI of subchapter B of chapter 1 (relating to itemized deductions for individuals and corporations) is amended by adding at the end the following new section:

`SEC. 199. INCOME ATTRIBUTABLE TO DOMESTIC PRODUCTION ACTIVITIES.

`(a) ALLOWANCE OF DEDUCTION-

`(1) IN GENERAL- There shall be allowed as a deduction an amount equal to 9 percent of the qualified production activities income of the taxpayer for the taxable year.

`(2) PHASEIN- In the case of taxable years beginning in 2003, 2004, 2005, 2006, 2007, or 2008, paragraph (1) shall be applied by substituting for the percentage contained therein the transition percentage determined under the following table:

The transition percentage is:

2003 or 2004

--1

2005

--2

2006

--3

2007 or 2008

--6.

`(b) DEDUCTION LIMITED TO WAGES PAID-

`(1) IN GENERAL- The amount of the deduction allowable under subsection (a) for any taxable year shall not exceed 50 percent of the W-2 wages of the employer for the taxable year.

`(2) W-2 wages- For purposes of paragraph (1), the term `W-2 wages' means the sum of the aggregate amounts the taxpayer is required to include on statements under paragraphs (3) and (8) of section 6051(a) with respect to employment of employees of the taxpayer during the taxpayer's taxable year.

`(3) SPECIAL RULES-

`(A) PASS-THRU ENTITIES- In the case of an S corporation, partnership, estate or trust, or other pass-thru entity, the limitation under this subsection shall apply at the entity level.

`(B) ACQUISITIONS AND DISPOSITIONS- The Secretary shall provide for the application of this subsection in cases where the taxpayer acquires, or disposes of, the major portion of a trade or business or the major portion of a separate unit of a trade or business during the taxable year.

`(c) QUALIFIED PRODUCTION ACTIVITIES INCOME- For purposes of this section, the term `qualified production activities income' means an amount equal to the portion of the modified taxable income of the taxpayer which is attributable to domestic production activities.

`(d) DETERMINATION OF INCOME ATTRIBUTABLE TO DOMESTIC PRODUCTION ACTIVITIES- For purposes of this section--

`(1) IN GENERAL- The portion of the modified taxable income which is attributable to domestic production activities is so much of the modified taxable income for the taxable year as does not exceed--

`(A) the taxpayer's domestic production gross receipts for such taxable year, reduced by

`(B) the sum of--

`(i) the costs of goods sold that are allocable to such receipts,

`(ii) other deductions, expenses, or losses directly allocable to such receipts, and

`(iii) a proper share of other deductions, expenses, and losses that are not directly allocable to such receipts or another class of income.

`(2) ALLOCATION METHOD- The Secretary shall prescribe rules for the proper allocation of items of income, deduction, expense, and loss for purposes of determining income attributable to domestic production activities.

`(3) SPECIAL RULES FOR DETERMINING COSTS-

`(A) IN GENERAL- For purposes of determining costs under clause (i) of paragraph (1)(B), any item or service brought into the United States shall be treated as acquired by purchase, and its cost shall be treated as not less than its fair market value immediately after it entered the United States. A similar rule shall apply in determining the adjusted basis of leased or rented property where the lease or rental gives rise to domestic production gross receipts.

`(B) EXPORTS FOR FURTHER MANUFACTURE- In the case of any property described in subparagraph (A) that had been exported by the taxpayer for further manufacture, the increase in cost or adjusted basis under subparagraph (A) shall not exceed the difference between the value of the property when exported and the value of the property when brought back into the United States after the further manufacture.

`(4) MODIFIED TAXABLE INCOME- The term `modified taxable income' means taxable income computed without regard to the deduction allowable under this section.

`(e) DOMESTIC PRODUCTION GROSS RECEIPTS- For purposes of this section--

`(1) IN GENERAL- The term `domestic production gross receipts' means the gross receipts of the taxpayer which are derived from--

`(A) any sale, exchange, or other disposition of, or

`(B) any lease, rental, or license of,

qualifying production property which was manufactured, produced, grown, or extracted in whole or in significant part by the taxpayer within the United States.

`(2) SPECIAL RULES FOR CERTAIN PROPERTY- In the case of any qualifying production property described in subsection (f)(1)(C)--

`(A) such property shall be treated for purposes of paragraph (1) as produced in significant part by the taxpayer within the United States if more than 50 percent of the aggregate development and production costs are incurred by the taxpayer within the United States, and

`(B) if a taxpayer acquires such property before such property begins to generate substantial gross receipts, any development or production costs incurred before the acquisition shall be treated as incurred by the taxpayer for purposes of subparagraph (A) and paragraph (1).

`(f) QUALIFYING PRODUCTION PROPERTY- For purposes of this section--

`(1) IN GENERAL- Except as otherwise provided in this paragraph, the term `qualifying production property' means--

`(A) any tangible personal property,

`(B) any computer software, and

`(C) any property described in section 168(f) (3) or (4), including any underlying copyright or trademark.

`(2) EXCLUSIONS FROM QUALIFYING PRODUCTION PROPERTY- The term `qualifying production property' shall not include--

`(A) consumable property that is sold, leased, or licensed by the taxpayer as an integral part of the provision of services,

`(B) oil or gas,

`(C) electricity,

`(D) water supplied by pipeline to the consumer,

`(E) utility services, or

`(F) any film, tape, recording, book, magazine, newspaper, or similar property the market for which is primarily topical or otherwise essentially transitory in nature.

`(g) DEFINITIONS AND SPECIAL RULES-

`(1) APPLICATION OF SECTION TO PASS-THRU ENTITIES- In the case of an S corporation, partnership, estate or trust, or other pass-thru entity--

`(A) subject to the provisions of paragraph (2) and subsection (b)(3)(A), this section shall be applied at the shareholder, partner, or similar level, and

`(B) the Secretary shall prescribe rules for the application of this section, including rules relating to--

`(i) restrictions on the allocation of the deduction to taxpayers at the partner or similar level, and

`(ii) additional reporting requirements.

`(2) EXCLUSION FOR PATRONS OF AGRICULTURAL AND HORTICULTURAL COOPERATIVES-

`(A) IN GENERAL- If any amount described in paragraph (1) or (3) of section 1385(a)--

`(i) is received by a person from an organization to which part I of subchapter T applies which is engaged in the marketing of agricultural or horticultural products, and

`(ii) is allocable to the portion of the qualified production activities income of the organization which is deductible under subsection (a) and designated as such by the organization in a written notice mailed to its patrons during the payment period described in section 1382(d),

then such person shall be allowed an exclusion from gross income with respect to such amount. The taxable income of the organization shall not be reduced under section 1382 by the portion of any such amount with respect to which an exclusion is allowable to a person by reason of this paragraph.

`(B) SPECIAL RULES- For purposes of applying subparagraph (A), in determining the qualified production activities income of the organization under this section--

`(i) there shall not be taken into account in computing the organization's modified taxable income any deduction allowable under subsection (b) or (c) of section 1382 (relating to patronage dividends, per-unit retain allocations, and nonpatronage distributions), and

`(ii) the organization shall be treated as having manufactured, produced, grown, or extracted in whole or significant part any qualifying production property marketed by the organization which its patrons have so manufactured, produced, grown, or extracted.

`(3) SPECIAL RULE FOR AFFILIATED GROUPS-

`(A) IN GENERAL- All members of an expanded affiliated group shall be treated as a single corporation for purposes of this section.

`(B) EXPANDED AFFILIATED GROUP- The term `expanded affiliated group' means an affiliated group as defined in section 1504(a), determined--

`(i) by substituting `50 percent' for `80 percent' each place it appears, and

`(ii) without regard to paragraphs (2) and (4) of section 1504(b).

`(4) COORDINATION WITH MINIMUM TAX- The deduction under this section shall be allowed for purposes of the tax imposed by section 55; except that for purposes of section 55, alternative minimum taxable income shall be taken into account in determining the deduction under this section.

`(5) ORDERING RULE- The amount of any other deduction allowable under this chapter shall be determined as if this section had not been enacted.

`(6) TRADE OR BUSINESS REQUIREMENT- This section shall be applied by only taking into account items which are attributable to the actual conduct of a trade or business.

`(7) POSSESSIONS, ETC-

`(A) IN GENERAL- For purposes of subsections (d) and (e), the term `United States' includes the Commonwealth of Puerto Rico, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, and the Virgin Islands of the United States.

`(B) SPECIAL RULES FOR APPLYING WAGE LIMITATION- For purposes of applying the limitation under subsection (b) for any taxable year--

`(i) the determination of W-2 wages of a taxpayer shall be made without regard to any exclusion under section 3401(a)(8) for remuneration paid for services performed in a jurisdiction described in subparagraph (A), and

`(ii) in determining the amount of any credit allowable under section 30A or 936 for the taxable year, there shall not be taken into account any wages which are taken into account in applying such limitation.

`(8) COORDINATION WITH TRANSITION RULES- For purposes of this section--

`(A) domestic production gross receipts shall not include gross receipts from any transaction if the binding contract transition relief of section 2(c)(2) of the American Manufacturing Jobs Act of 2003 applies to such transaction, and

`(B) any deduction allowed under section 2(e) of such Act shall be disregarded in determining the portion of the taxable income which is attributable to domestic production gross receipts.'.

(b) MINIMUM TAX- Section 56(g)(4)(C) (relating to disallowance of items not deductible in computing earnings and profits) is amended by adding at the end the following new clause:

`(v) DEDUCTION FOR DOMESTIC PRODUCTION- Clause (i) shall not apply to any amount allowable as a deduction under section 199.'.

(c) CLERICAL AMENDMENT- The table of sections for part VI of subchapter B of chapter 1 is amended by adding at the end the following new item:

`Sec. 199. Income attributable to domestic production activities.'.

(d) EFFECTIVE DATE-

(1) IN GENERAL- The amendments made by this section shall apply to taxable years ending after the date of the enactment of this Act.

(2) APPLICATION OF SECTION 15- Section 15 of the Internal Revenue Code of 1986 shall apply to the amendments made by this section as if they were changes in a rate of tax.

END