Revenue Reconciliation Act
page6
 
8.
Repeal of exception for certain sales by
manufacturers to dealer (sec. 878 of the bill and
sec. 811(c)(9) of the Tax Reform Act of 1986 (P.L.
99-514))
Present
Law
In general, the installment sales method of
accounting may not be used by dealers in personal
property. Present law provides an exception which
permits the use of the installment method for
installment obligations arising from the sale of
tangible personal property by a manufacturer of the
property (or an affiliate of the manufacturer) to a
dealer,120
but only if the dealer is obligated to make payments
of principal only when the dealer resells (or rents)
the property, the manufacturer has the right to
repurchase the property at a fixed (or
ascertainable) price after no longer than a nine
month period following the sale to the dealer, and
certain other conditions are met. In order to meet
the other conditions, the aggregate face amount of
the installment obligations that otherwise qualify
for the exception must equal at least 50 percent of
the total sales to dealers that gave rise to such
receivables (the "fifty percent test") in
both the taxable year and the preceding taxable
year, except that, if the taxpayer met all of the
requirements for the exception in the preceding
taxable year, the taxpayer would not be treated as
failing to meet the fifty percent test before the
second consecutive year in which the taxpayer did
not actually meet the test. For purposes of applying
the fifty percent test, the aggregate face amount of
the taxpayer's receivables is computed using the
weighted average of the taxpayer's receivables
outstanding at the end of each month during the
taxpayer's taxable year. In addition, these
requirements must be met by the taxpayer in its
first taxable year beginning after October 22, 1986,
except that obligations issued before that date are
treated as meeting the applicable requirements if
such obligations were conformed to the requirements
of the provision within 60 days of that date.
Reasons
for Change
The committee believes that the special exception
that permitted certain dealers to use the
installment method is no longer necessary or
approriate and the installment sale method of
accounting should not be available to such dealers.
Accordingly, the committee bill repeals that
exception.
Explanation
of Provision
The bill repeals the exception that permits the use
of the installment method of accounting for certain
sales by manufacturers to dealers.
Effective
Date
The provision is effective for taxable years
beginning one year after the date of enactment. Any
resulting adjustment from a required change in
accounting will be includible ratably over the
4-year taxable years beginning after that date.
9.
Cash out of certain accrued benefits (sec. 879 of
the bill and secs. 411 and 417 of the Code)
Present
Law
Under present law, in the case of an employee whose
plan participation terminates, a qualified plan may
involuntarily "cash out" the benefit
(i.e., pay out the balance to the credit of a plan
participant without the participant's consent, and,
if applicable, the consent of the participant's
spouse) if the present value of the benefit does not
exceed $3,500. If a benefit is cashed out under this
rule and the participant subsequently returns to
employment covered by the plan, then service taken
into account in computing benefits payable under the
plan after the return need not include service with
respect to which benefits were cashed out unless the
employee "buys back" the benefit.
Generally, a cash-out distribution from a qualified
plan to a plan participant can be rolled over, tax
free, to an IRA or to another qualified plan.
Reasons
for Change
The Committee believes that the limit on involuntary
cash-outs should be raised to $5,000 in recognition
of the effects of inflation and the value of small
benefits payable under a qualified pension plan.
Explanation
of Provision
The bill increases the limit on involuntary
cash-outs to $5,000 from $3,500. The $5,000 amount
is adjusted annually for inflation beginning after
1997 in $50 increments. The bill will also make the
corresponding changes to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA").
Effective
Date
The provision is effective for plan years beginning
on and after the date of enactment.
10.
Election to receive taxable cash compensation in
lieu of nontaxable parking benefits (sec. 880 of the
bill and sec. 132 of the Code)
Present
Law
Under present law, up to $165 per month of
employer-provided parking is excludable from gross
income. In order for the exclusion to apply, the
parking must be provided in addition to and not in
lieu of any compensation that is otherwise payable
to the employee. Employer-provided parking cannot be
provided as part of a cafeteria plan.
Reasons
for Change
The Committee believes that the present-law rules
relating to employer-provided parking result in an
overutilization of parking as a fringe benefit. By
permitting employers to offer cash compensation in
lieu of parking, the Committee believes that
employees will be more likely to elect to receive
cash compensation, which will increase the electing
employees' taxable income. In addition, the election
to take cash may promote sound energy policy by
increasing the use of mass transit and reduce the
amount of commuting by car.
Explanation
of Provision
Under the bill, no amount is includible in the
income of an employee merely because the employer
offers the employee a choice between cash and
employer-provided parking. The amount of cash
offered is includible in income only if the employee
chooses the cash instead of parking.
Effective
Date
The provision is effective with respect to taxable
years beginning after December 31, 1997.
11.
Extension of Federal unemployment surtax (sec. 881
of the bill and sec. 3301 of the Code)
Present
Law
The Federal Unemployment Tax Act (FUTA) imposes a
6.2-percent gross tax rate on the first $7,000 paid
annually by covered employers to each employee.
Employers in States with programs approved by the
Federal Government and with no delinquent Federal
loans may credit 5.4-percentage points against the
6.2-percent tax rate, making the minimum, net
Federal unemployment tax rate 0.8 percent. Since all
States have approved programs, 0.8 percent is the
Federal tax rate that generally applies. This
Federal revenue finances administration of the
system, half of the Federal-State extended benefits
program, and a Federal account for State loans. The
States use the revenue turned back to them by the
5.4 percent credit to finance their regular State
programs and half of the Federal-State extended
benefits program.
In 1976, Congress passed a temporary surtax of 0.2
percent of taxable wages to be added to the
permanent FUTA tax rate. Thus, the current 0.8
percent FUTA tax rate has two components: a
permanent tax rate of 0.6 percent, and a temporary
surtax rate of 0.2 percent. The temporary surtax has
been subsequently extended through 1998.
Reasons
for Change
The Committee believes that the surtax extension
will increase the Federal Unemployment Trust Fund to
provide a cushion against future expenditures. The
monies retained in the Federal Unemployment Account
of the Federal Unemployment Trust Fund can then be
used to make loans to the 53 State Unemployment
Compensation benefit accounts as needed.
Explanation
of Provision
The bill extends the temporary surtax rate through
December 31, 2007. The bill also increases the limit
from 0.25 percent to 0.50 percent of covered wages
on the Federal Unemployment Account (FUA) in the
Unemployment Trust Fund
Effective
Date
The provision is effective for labor performed on or
after January 1, 1999.
12.
Repeal of excess distribution and excess retirement
accumulation taxes (sec. 882 of the bill and sec.
4980A of the Code)
Present
Law
Under present law, a 15-percent excise tax is
imposed on excess distributions from qualified
retirement plans, tax-sheltered annuities, and IRAs.
Excess distributions are generally the aggregate
amount of retirement distributions from such plans
during any calendar year in excess of $160,000 (for
1997) or 5 times that amount in the case of a
lump-sum distribution. The 15-percent excise tax
does not apply to distributions received in 1997,
1998, and 1999.
An additional 15-percent estate tax is imposed on an
individual's excess retirement accumulations. Excess
retirement accumulations are generally the balance
in retirement plans in excess of the present value
of a benefit that would not be subject to the
15-percent tax in excess distributions.
Reasons
for Change
The excess distribution and retirement accumulation
taxes are designed to limit the overall tax-deferred
savings by individuals, as well as to help ensure
that tax-favored retirement vehicles are used
primarily for retirement purposes. The Committee
believes that the limits on contributions and
benefits applicable to each type of vehicle are
sufficient limits on tax-deferred savings.
Additional penalties are unnecessary, and may also
deter individuals from saving. The excess
accumulation and distribution taxes also
inappropriately penalize favorable investment
returns.
Explanation
of Provision
The bill repeals both the 15-percent excise tax on
excess distributions and the 15-percent estate tax
on excess retirement accumulations.
Effective
Date
The provision repealing the excess distribution tax
is effective with respect to excess distributions
received after December 31, 1996. The repeal of the
excess accumulation tax is effective with respect to
decedents dying after December 31, 1996.
13.
Treatment of charitable remainder trusts with
greater than 50 percent annual payout (sec. 883 of
the bill and sec. 664 of the Code)
Present
Law
In
general
Sections 170(f), 2055(e)(2) and 2522(c)(2) disallow
a charitable deduction for income, estate or gift
tax purposes, respectively, where the donor
transfers an interest in property to a charity (e.g.,
a remainder) while also either retaining an interest
in that property (e.g., an income interest)
or transferring an interest in that property to a
noncharity for less than full and adequate
consideration. Exceptions to this general rule are
provided for (1) remainder interests in charitable
remainder annuity trusts, charitable remainder
unitrusts, pooled income funds, farms, and personal
residences; (2) present interests in the form of a
guaranteed annuity or a fixed percentage of the
annual value of the property, (3) an undivided
portion of the donor's entire interest in the
property, and (4) a qualified conservation easement.
Charitable
remainder annuity trusts and charitable remainder
unitrusts
A charitable remainder annuity trust is a trust
which is required to pay, at least annually, a fixed
dollar amount at least 5 percent of the initial
value of the trust to a non-charity for the life of
an individual or period of less than 20 years, with
the remainder passing to charity. A charitable
remainder unitrust is a trust which generally is
required to pay, at least annually, a fixed
percentage of the fair market value of the trust's
assets determined at least annually to a non-charity
for the life of an individual or period less than 20
years, with the remainder passing to charity. Sec.
664(d).
Distributions from a charitable remainder annuity
trust or charitable remainder unitrust are treated
in the following order as: (1) ordinary income to
the extent of the trust's current and previously
undistributed ordinary income for the trust's year
in which the distribution occurred, (2) capital
gains to the extent of the trust's current capital
gain and previously undistributed capital gain for
the trust's year in which the distribution occurred;
(3) other income (e.g., tax-exempt income) to
the extent of the trust's current and previously
undistributed other income for the trust's year in
which the distribution occurred, and (4) corpus.
Sec. 664(b).
Distributions are includible in the income of the
beneficiary for the year that the annuity or
unitrust amount is required to be distributed even
though the annuity or unitrust amount is not
distributed until after the close of the trust's
taxable year. Treas. Reg. sec. 1.664-1(d)(4).
Reasons
for Change
The Committee is concerned that the interplay of the
rules governing the timing of income from
distributions from charitable remainder trusts (i.e.,
Treas. Reg. sec. 1.664-1(d)(4)) and the rules
governing the character of distributions (i.e.,
sec. 664(b)) have created opportunities for abuse
where the required annual payments are a large
portion of the trust and realization of income and
gain can be postponed until a year later than the
accrual of such large payments. For example, some
taxpayers have been creating charitable remainder
unitrusts with a required annual payout of 80
percent of the trust's assets and then funding the
trust with highly appreciated nondividend paying
stock which the trust sells in a year subsequent to
when the required distribution is includible in the
beneficiary's income, and using proceeds from that
sale to pay the required distribution attributable
to the prior year. Those taxpayers have treated the
distribution of 80 percent of the trust's assets
attributable to the trust's first required
distribution as non-taxable distributions of corpus
because the trust had not realized any income in its
first taxable year. The Committee believes that such
treatment is abusive and is inconsistent with the
purpose of the charitable remainder trust rules. In
order to limit this kind of abuse, the Committee
bill provides that a trust cannot be a charitable
remainder trust if the required payout is greater
than 50 percent of the initial fair market value of
the trusts assets (in the case of a charitable
remainder annuity trust) or 50 percent of the annual
value of the trusts assets (in the case of a
charitable remainder unitrust).
On April 18, 1997, the Treasury Department proposed
regulations providing additional rules under
sections 664 and 2702 to address the abuse described
above and other perceived abuses involving
distributions from charitable remainder trusts. One
of those proposed rules would require that payment
of any required annuity or unitrust amount by a
charitable remainder trust be made by the close of
the trust's taxable year in which such payments are
due. See Prop. Treas. Reg. secs. 1.664-2(a)(1)(i)
and 1.664-3(a)(1)(i). The Committee intends that the
provision of the Committee bill does not limit or
alter the validity of the regulations proposed by
the Treasury Department on April 18, 1997, or the
Treasury Department's authority to address this or
other abuses of the rules governing the taxation of
charitable remainder trusts or their beneficiaries.
Explanation
of Provision
Under the provision, a trust would not qualify as
charitable remainder annuity trust if the annuity
for a year is greater than 50 percent of the initial
fair market value of the trust's assets or a trust
would not qualify as a charitable remainder unitrust
if the percentage of assets that are required to be
distributed at least annually is greater than 50
percent. Any trust that fails this 50 percent rule
will not be a charitable remainder trust whose
taxation is governed under section 664, but will be
treated as a complex trust and, accordingly, all of
its income will be taxed to its beneficiaries or to
the trust.
Effective
Date
The provision applies to transfers to a trust made
after June 18, 1997.
14.
Tax on prohibited transactions (sec. 884 of
the
bill and sec. 4975 of the Code)
Present
Law
Present law prohibits certain transactions
(prohibited transactions) between a qualified plan
and a disqualified person in order to prevent
persons with a close relationship to the qualified
plan from using that relationship to the detriment
of plan participants and beneficiaries. A two-tier
excise tax is imposed on prohibited transactions.
The initial level tax was equal to 10-percent of the
amount involved with respect to the transaction. If
the transaction is not corrected within a certain
period, a tax equal to 100 percent of the amount
involved may be imposed.
Reasons
for Change
The Committee believes it is appropriate to increase
the initial level prohibited transaction tax to
discourage disqualified persons from engaging in
such transactions.
Explanation
of Provision
The bill increases the initial-level prohibited
transaction tax from 10-percent to 15-percent. No
changes were made to the prohibited transaction
provisions of title I of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA").
Effective
Date
The provision is effective with respect to
prohibited transactions occurring after the date of
enactment.
15.
Basis recovery rules (sec. 885 of the bill and sec.
72 of the Code)
Present
Law
Under present law, amounts received as an annuity
under a tax-qualified pension plan generally are
includible in income in the year received, except to
the extent the amount received represents return of
the recipient's investment in the contract (i.e.,
basis). The portion of each annuity payment that
represents a return of basis generally is determined
by a simplified method. Under this method, the
portion of each annuity payment that is a return to
basis is equal to the employee's total basis as of
the annuity starting date, divided by the number of
anticipated payments under a specified table, shown
below. The number of anticipated payments listed in
the table is based on the age of the primary
annuitant on the annuity starting date.
Age of Primary Annuitant Number of
Payments:
55 or less 360
56-60 310
61-65 260
66-70 210
71 or more 160
If the number of payments is fixed under the terms
of the annuity, that number is used instead of the
number of anticipated payments listed in the table.
The simplified method is not available if the
primary annuitant has attained age 75 on the annuity
starting date unless there are fewer than 5 years of
guaranteed payments under the annuity. If, in
connection with commencement of annuity payments,
the recipient receives a lump-sum payment that is
not part of the annuity stream, such payment is
taxable under the rules relating to annuities (sec.
72) as if received before the annuity starting date,
and the investment in the contract used to calculate
the simplified exclusion ratio for the annuity
payments is reduced by the amount of the payment. In
no event is the total amount excluded from income as
nontaxable return of basis greater than the
recipient's total investment in the contract.
Reasons
for Change
The table for determining anticipated payments does
not differ depending on whether the annuity is
payable in the form of a single life annuity or a
joint and survivor annuity. Applying the table for
single life annuities to joint and survivor
annuities understates the expected payments under a
joint and survivor annuity.
Explanation
of Provision
Under the bill, the present-law table would apply to
benefits based on the life of one annuitant. A
separate table would apply to benefits based on the
life of more than one annuitant, as follows:
Combined age of annuitants: No. of payments:
110 or less 410
111-120 360
121-130 310
131-140 260
141 and over 210
Effective
Date
The provision is effective with respect to annuity
starting dates beginning after December 31, 1997.
TITLE
IX. FOREIGN-RELATED SIMPLIFICATION PROVISIONS
1.
General provisions affecting treatment of controlled
foreign corporations (secs. 911-913 of the bill and
secs. 902, 904, 951, 952, 959, 960, 961, 964, and
1248 of the Code)
Present
Law
If an upper-tier controlled foreign corporation
("CFC") sells stock of a lower-tier CFC,
the gain generally is included in the income of
U.S.
10-percent shareholders as subpart F income and such
U.S.
shareholder's basis in the stock of the first-tier
CFC is increased to account for the inclusion. The
inclusion is not characterized for foreign tax
credit limitation purposes by reference to the
nature of the income of the lower-tier CFC; instead
it generally is characterized as passive income.
For purposes of the foreign tax credit limitations
applicable to so-called 10/50 companies, a CFC is
not treated as a 10/50 company with respect to any
distribution out of its earnings and profits for
periods during which it was a CFC and, except as
provided in regulations, the recipient of the
distribution was a U.S. 10-percent shareholder in
such corporation.
If subpart F income of a lower-tier CFC is included
in the gross income of a
U.S.
10-percent shareholder, no provision of present law
allows adjustment of the basis of the upper-tier
CFC's stock in the lower-tier CFC.
The subpart F income earned by a foreign corporation
during its taxable year is taxed to the persons who
are
U.S.
10-percent shareholders of the corporation on the
last day, in that year, on which the corporation is
a CFC. In the case of a U.S. 10-percent shareholder
who acquired stock in a CFC during the year, such
inclusions are reduced by all or a portion of the
amount of dividends paid in that year by the foreign
corporation to any person other than the acquiror
with respect to that stock.
As a general rule, subpart F income does not include
income earned from sources within the
United States
if the income is effectively connected with the
conduct of a
U.S.
trade or business by the CFC. This general rule does
not apply, however, if the income is exempt from, or
subject to a reduced rate of,
U.S.
tax pursuant to a provision of a
U.S.
treaty.
A
U.S.
corporation that owns at least 10 percent of the
voting stock of a foreign corporation is treated as
if it had paid a share of the foreign income taxes
paid by the foreign corporation in the year in which
the foreign corporation's earnings and profits
become subject to
U.S.
tax as dividend income of the
U.S.
shareholder. A
U.S.
corporation also may be deemed to have paid taxes
paid by a second- or third-tier foreign corporation
if certain conditions are satisfied.
Reasons
for Change
The Committee believes that complexities are caused
by uncertainties and gaps in the present statutory
schemes for taxing gains on dispositions of stock in
CFCs as dividend income or subpart F income. The
Committee believes that it is appropriate to reduce
complexities by rationalizing these rules.
The Committee also understands that certain
arbitrary limitations placed on the operation of the
indirect foreign tax credit may have resulted in
taxpayers undergoing burdensome and sometimes costly
corporate restructuring. In other cases, there is
concern that these limitations may have contributed
to decisions by
U.S.
companies against acquiring foreign subsidiaries.
The Committee deems it appropriate to ease these
restrictions.
Explanation
of Provision
Lower-tier
CFCs
Characterization
of gain on stock disposition
Under the bill, if a CFC is treated as having gain
from the sale or exchange of stock in a foreign
corporation, the gain is treated as a dividend to
the same extent that it would have been so treated
under section 1248 if the CFC were a
U.S.
person. This provision, however, does not affect the
determination of whether the corporation whose stock
is sold or exchanged is a CFC.
Thus, for example, if a U.S. corporation owns 100
percent of the stock of a foreign corporation, which
owns 100 percent of the stock of a second foreign
corporation, then under the bill, any gain of the
first corporation upon a sale or exchange of stock
of the second corporation is treated as a dividend
for purposes of subpart F income inclusions to the
U.S. shareholder, to the extent of earnings and
profits of the second corporation attributable to
periods in which the first foreign corporation owned
the stock of the second foreign corporation while
the latter was a CFC with respect to the U.S.
shareholder.
Gain on disposition of stock in a related
corporation created or organized under the laws of,
and having a substantial part of its assets in a
trade or business in, the same foreign country as
the gain recipient, even if recharacterized as a
dividend under the proposal, is not excluded from
foreign personal holding company income under the
same-country exception that applies to actual
dividends.
Under the bill, for purposes of this rule, a CFC is
treated as having sold or exchanged stock if, under
any provision of subtitle A of the Code, the CFC is
treated as having gain from the sale or exchange of
such stock. Thus, for example, if a CFC distributes
to its shareholder stock in a foreign corporation,
and the distribution results in gain being
recognized by the CFC under section 311(b) as if the
stock were sold to the shareholder for fair market
value, the bill makes clear that, for purposes of
this rule, the CFC is treated as having sold or
exchanged the stock.
The bill also repeals a provision added to the Code
by the Technical and Miscellaneous Revenue Act of
1988 that, except as provided by regulations,
requires a recipient of a distribution from a CFC to
have been a U.S. 10-percent shareholder of that CFC
for the period during which the earnings and profits
which gave rise to the distribution were generated
in order to avoid treating the distribution as one
coming from a 10/50 company. Thus, under the bill, a
CFC is not treated as a 10/50 company with respect
to any distribution out of its earnings and profits
for periods during which it was a CFC, whether or
not the recipient of the distribution was a U.S.
10-percent shareholder of the corporation when the
earnings and profits giving rise to the distribution
were generated.
Adjustments
to basis of stock
Under the bill, when a lower-tier CFC earns subpart
F income, and stock in that corporation is later
disposed of by an upper-tier CFC, the resulting
income inclusion of the U.S. 10-percent
shareholders, under regulations, is to be adjusted
to account for previous inclusions, in a manner
similar to the adjustments provided to the basis of
stock in a first-tier CFC. Thus, just as the basis
of a U.S. 10-percent shareholder in a first-tier CFC
rises when subpart F income is earned and falls when
previously taxed income is distributed, so as to
avoid double taxation of the income on a later
disposition of the stock of that company, the
subpart F income from gain on the disposition of a
lower-tier CFC generally is reduced by income
inclusions of earnings that were not subsequently
distributed by the lower-tier CFC.
For example, assume that a
U.S.
person is the owner of all of the stock of a
first-tier CFC which, in turn, is the sole
shareholder of a second-tier CFC. In year 1, the
second-tier CFC earns $100 of subpart F income which
is included in the
U.S.
person's gross income for that year. In year 2, the
first-tier CFC disposes of the second-tier CFC's
stock and recognizes $300 of income with respect to
the disposition. All of that income constitutes
subpart F foreign personal holding company income.
Under the bill, the Secretary is granted regulatory
authority to reduce the U.S. person's year 2 subpart
F inclusion by $100 --the amount of year 1 subpart F
income of the second-tier CFC that was included, in
that year, in the U.S. person's gross income. Such
an adjustment, in effect, allows for a step-up in
the basis of the stock of the second-tier CFC to the
extent of its subpart F income previously included
in the
U.S.
person's gross income.
Subpart
F inclusions in year of acquisition
If a U.S. 10-percent shareholder acquires the stock
of a CFC from another U.S. 10-percent shareholder
during a taxable year of the CFC in which it earns
subpart F income, the proposal reduces the
acquiror's subpart F income inclusion for that year
by a portion of the amount of the dividend deemed
(under sec. 1248) to be received by the transferor.
The portion by which the inclusion is reduced (as is
the case if a dividend was paid to the previous
owner of the stock) does not exceed the lesser of
the amount of dividends with respect to such stock
deemed received (under sec. 1248) by other persons
during the year or the amount determined by
multiplying the subpart F income for the year by the
proportion of the year during which the acquiring
shareholder did not own the stock.
Treatment
of U.S. income earned by a CFC
Under the bill, an exemption or reduction by treaty
of the branch profits tax that would be imposed
under section 884 on a CFC does not affect the
general statutory exemption from subpart F income
that is granted for
U.S.
source effectively connected income. For example,
assume a CFC earns income of a type that generally
would be subpart F income, and that income is earned
from sources within the
United States
in connection with business operations therein.
Further assume that repatriation of that income is
exempted from the
U.S.
branch profits tax under a provision of an
applicable
U.S.
income tax treaty. The bill provides that,
notwithstanding the treaty's effect on the branch
tax, the income is not treated as subpart F income
as long as it is not exempt from U.S. taxation (or
subject to a reduced rate of tax) under any other
treaty provision.
Extension
of indirect foreign tax credit
The bill extends the application of the indirect
foreign tax credit (secs. 902 and 960) to taxes paid
or accrued by certain fourth-, fifth-, and
sixth-tier foreign corporations. In general, three
requirements are required to be satisfied by a
foreign company at any of these tiers to qualify for
the credit. First, the company must be a CFC.
Second, the
U.S.
corporation claiming the credit under section 902(a)
must be a
U.S.
shareholder (as defined in sec. 951(b)) with respect
to the foreign company. Third, the product of the
percentage ownership of voting stock at each level
from the
U.S.
corporation down must equal at least 5 percent. The
bill limits the application of the indirect foreign
tax credit below the third tier to taxes paid or
incurred in taxable years during which the payor is
a CFC. Foreign taxes paid below the sixth tier of
foreign corporations remain ineligible for the
indirect foreign tax credit.
Effective
Dates
Lower-tier CFCs. --The provision that treats
gains on dispositions of stock in lower-tier CFCs as
dividends under section 1248 principles applies to
gains recognized on transactions occurring after the
date of enactment.
The provision that expands look-through treatment,
for foreign tax credit limitation purposes, of
dividends from CFCs is effective for distributions
after the date of enactment.
The provision that provides for regulatory
adjustments to
U.S.
shareholder inclusions, with respect to gains of
CFCs from dispositions of stock in lower-tier CFCs
is effective for determining inclusions for taxable
years of
U.S.
shareholders beginning after December 31, 1997.
Thus, the bill permits regulatory adjustments to an
inclusion occurring after the effective date to
account for income that was previously taxed under
the subpart F provisions either prior to or
subsequent to the effective date.
Subpart F inclusions in year of acquisition.
--The provision that permits dispositions of stock
to be taken into consideration in determining a
U.S.
shareholder's subpart F inclusion for a taxable year
is effective with respect to dispositions occurring
after the date of enactment.
Treatment of
U.S.
source income earned by a CFC. --The provision
concerning the effect of treaty exemptions from, or
reductions of, the branch profits tax on the
determination of subpart F income is effective for
taxable years beginning after December 31, 1986.
Extension of indirect foreign tax credit.
--The provision that extends application of the
indirect foreign tax credit to certain CFCs below
the third tier is effective for foreign taxes paid
or incurred by CFCs for taxable years of such
corporations beginning after the date of enactment.
In the case of any chain of foreign corporations,
the taxes of which would be eligible for the
indirect foreign tax credit, under present law or
under the bill, but for the denial of indirect
credits below the third or sixth tier, as the case
may be, no liquidation, reorganization, or similar
transaction in a taxable year beginning after the
date of enactment will have the effect of permitting
taxes to be taken into account under the indirect
foreign tax credit provisions of the Code which
could not have been taken into account under those
provisions but for such transaction.
2.
Simplify formation and operation of international
joint ventures (secs. 921, 931-935, and 941 of the
bill and secs. 367, 721, 1491-1494, 6031, 6038,
6038B, 6046A, and 6501 of the Code)
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