To amend the Internal Revenue Code of 1986 to apply look-thru rules for purposes of the foreign tax credit limitation to dividends from foreign corporations not controlled by a domestic corporation.

April 11, 2003

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

To amend the Internal Revenue Code of 1986 to apply look-thru rules for purposes of the foreign tax credit limitation to dividends from foreign corporations not controlled by a domestic corporation.

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

SECTION 1. LOOK-THRU RULES TO APPLY TO DIVIDENDS FROM NONCONTROLLED SECTION 902 CORPORATIONS.

(a) IN GENERAL- Paragraph (4) of section 904(d) of the Internal Revenue Code of 1986 (relating to separate application of section with respect to certain categories of income) 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 the rules of 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) of the Internal Revenue Code of 1986, 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) of such Code, 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) of such Code, 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) of such Code 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) of such Code is amended by striking `(D), or (E)' and inserting `or (D)'.

(6) Section 864(d)(5)(A)(i) of such Code 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.

END