Taxpayer
Relief Act of 1997 page5
 
Senate Amendment
The Senate amendment is the same as the House bill,
except that the Senate amendment repeals only the
grandfather rule applicable to that portion of the
business of Mutual of America which is attributable
to pension business.
Effective date. --Same as the House bill.
Conference
Agreement
The conference agreement follows the House bill.
G. Foreign Provisions
1. Inclusion of income from notional principal
contracts and stock lending transactions under
subpart F (sec. 1171 of the House bill and sec. 861
of the Senate amendment)
Present
Law
Under the subpart F rules, the
U.S.
10-percent shareholders of a controlled foreign
corporation ("CFC") are subject to
U.S.
tax currently oncertain income earned by the CFC,
whether or not such income is distributed to the
shareholders. The income subject to current
inclusion under the subpart F rules includes, among
other things, "foreign personal holding
companyincome."
Foreign personal holding company income generally
consists of the following: dividends, interest,
royalties, rents and annuities; net gains from sales
or exchanges of (1) property that gives rise to the
foregoing types of income, (2) property that does
not give rise to income, and (3) interests in
trusts, partnerships, and REMICs; net gains from
commodities transactions; net gains from foreign
currency transactions; and income that is equivalent
to interest. Income from notional principal
contracts referenced to commodities, foreign
currency, interest rates, or indices thereon is
treated as foreign personal holding company income;
income from equity swaps or other types of notional
principal contracts is not treated as foreign
personal holding company income. Income derived from
transfers of debt securities (but not equity
securities) pursuant to the rules governing
securities lending transactions (sec. 1058) is
treated as foreign personal holding company income.
Income earned by a CFC that is a regular dealer in
the property sold or exchanged generally is excluded
from the definition of foreign personal holding
company income. However, no exception is available
for a CFC that is a regular dealer in financial
instruments referenced to commodities.
A
U.S.
shareholder of a passive foreign investment
company("PFIC") is subject to
U.S.
tax and an interest charge with respect to certain
distributions from the PFIC and gains on
dispositions of the stock of the PFIC, unless the
shareholder elects to include in income currently
for
U.S.
tax purposes its share of the earnings of the PFIC.
A foreign corporation is a PFIC if it satisfies
either a passive income test or a passive assets
test. For this purpose, passive income is defined by
reference to foreign personal holding company
income.
House
Bill
The House bill treats net income from all types of
notional principal contracts as a new category of
foreign personal holding company income. However,
income, gain, deduction or loss from a notional
principal contract entered into to hedge an item of
income in another category of foreign personal
holding company income is included in that other
category.
The House bill treats payments in lieu of dividends
derived from equity securities lending transactions
pursuant to section 1058 as another new category of
foreign personal holding company income.
The House bill provides an exception from foreign
personal holding company income for certain income,
gain, deduction, or loss from transactions
(including hedging transactions) entered into in the
ordinary course of a CFC's business as a regular
dealer in property, forward contracts, options,
notional principal contracts, or similar financial
instruments (including instruments referenced to
commodities).
These modifications to the definition of foreign
personal holding company income apply for purposes
of determining a foreign corporation's status as a
PFIC.
Effective date. --The provision applies to
taxable years beginningafter the date of enactment.
Senate
Amendment
The Senate amendment is the same as the House bill.
Conference
Agreement
The conference agreement follows the House bill and
the Senate amendment. The conferees wish to clarify
the treatment of notional principal contracts under
the provision. Although net income from notional
principal contracts is added as a new category of
foreign personal holding company income, amounts
with respect to a notional principal contract
entered into to hedge an item described in another
category of foreign personal holding company income
are taken into account under the rules of such other
category. In this regard, gains and losses from
transactions in inventory property are covered by an
exclusion from the category of personal holding
company income for net gains from property
transactions; income from a notional principal
contract entered into to hedge inventory property is
taken into account under such category and thus
similarly is excluded from foreign personal holding
company income.
2. Restrict like-kind exchange rules for certain
personal property (sec. 1172 of the House bill and
sec. 862 of the Senate amendment)
Present
Law
An exchange of property, like a sale, generally is a
taxable event. However, no gain or loss is
recognized if property held for productive use in a
trade or business or for investment is exchanged for
property of a"like-kind" which is to be
held for productive use in a trade or business or
for investment (sec. 1031). In general, any kind of
real estate is treated as of a like-kind with other
real property as long as the properties are both
located either within or both outside the
United States
. In addition, certain types of property, such as
inventory, stocks and bonds, and partnership
interests, are not eligible for nonrecognition
treatment under section 1031.
If section 1031 applies to an exchange of
properties, the basis of the property received in
the exchange is equal to the basis of the property
transferred, decreased by any money received by the
taxpayer, and further adjusted for any gain or loss
recognized on the exchange.
House
Bill
The House bill provides that personal property
predominantly used within the
United States
and personal property predominantly used outside the
United States
are not "like-kind" properties. For this
purpose, the useof the property surrendered in the
exchange will be determined based upon the use
during the 24 months immediately prior to the
exchange. Similarly, for section 1031 to apply,
property received in the exchange must continue in
the same use (i.e., foreign or domestic) for the 24
months immediately after the exchange.
The 24-month period is reduced to such lesser time
as the taxpayer held the property, unless such
shorter holding period is a result of a transaction
(or series of transactions) structured to avoid the
purposes of the provision. Property described in
section 168(g)(4) (generally, property used both
within and without the United States that is
eligible for accelerated depreciation as if used in
the United States) will be treated as property
predominantly used in the United States.
Effective date. --The provision is effective
for exchanges afterJune 8, 1997, unless the exchange
is pursuant to a binding contract in effect on such
date and all times thereafter. A contract will not
fail to be considered to be binding solely because
(1) it provides for a sale in lieu of an exchange or
(2) either the property to be disposed of as
relinquished property or the property to be acquired
as replacement property (whichever is applicable)
was not identified under the contract before
June 9, 1997
.
Senate
Amendment
The Senate amendment is the same as the House bill.
Conference
Agreement
The conference agreement follows the House bill and
the Senate amendment.
3. Impose holding period requirement for claiming
foreign tax credits with respect to dividends (sec.
1173 of the House bill and sec. 863 of the Senate
amendment)
Present
Law
A
U.S.
person that receives a dividend from a foreign
corporation generally is entitled to a credit for
foreign income taxes paid on the dividend,
regardless of the shareholder's holding period for
the stock. If a regulated investment company ("
RIC
") elects,
U.S.
persons that receive dividends fromthe
RIC
generally are entitled to an indirect credit for
foreign taxes paid by the
RIC
, regardless of the shareholder's holding period for
the
RIC
stock. A
U.S.
corporation that receives a dividend from a foreign
corporation in which it has a 10-percent or greater
voting interest generally is entitled to an indirect
credit for foreign taxes paid by the foreign
corporation, also regardless of the shareholder's
holding period.
House
Bill
The House bill disallows the foreign tax credits
normally available with respect to a dividend from a
corporation or
RIC
if the shareholder has not held the stock for 16
days in the case of common stock and 46 days in the
case of preferred stock. The disallowance applies
both to foreign tax credits for foreign withholding
taxes that are paid on the dividend where the
dividend-paying stock is held for less than these
holding periods and to indirect foreign tax credits
for taxes paid by a lower-tier foreign corporation
or a
RIC
where any of the required stock in the chain of
ownership is held for less than these holding
periods. Periods during which a taxpayer is
protected from risk of loss generally are not
counted toward the holding period requirement. In
the case of a bona fide contract to
sell stock, a special rule applies for purposes of
indirect foreign tax credits. The House bill also
provides an exception for foreign active securities
dealers.
Effective date. --The provision is effective
for dividends paid or accrued more than 30 days
after the date of enactment.
Senate
Amendment
The Senate amendment is the same as the House bill
with one modification. Under the Senate amendment,
the special rule for contracts to sell stock does
not apply to indirect foreign tax credits of a
RIC
shareholder.
Conference
Agreement
The conference agreement generally follows the
Senate amendment with one modification. The
conference agreement grants regulatory authority to
the Secretary of the Treasury to treat certain
foreign taxes as not subject to the provision. The
conferees anticipate that this authority may be used
to address internal withholding taxes imposed by a
foreign country on persons that do business in the
foreign country.
4. Penalties for failure to file disclosure of
exemption for income from the international
operation of ships or aircraft by foreign persons
(sec. 1174 of the House bill)
Present
Law
The
United States
generally imposes a 4-percent tax on the U.S.-source
gross transportation income of foreign persons that
is not effectively connected with the foreign
person's conduct of a
U.S.
trade or business (sec. 887). Foreign persons
generally are subject to
U.S.
tax at regular graduated rates on net income,
including transportation income, that is effectively
connected with a
U.S.
trade or business (secs. 871(b) and 882).
Transportation income is any income derived from, or
in connection with, the use (or hiring or leasing
for use) of a vessel or aircraft (or a container
used in connection therewith) or the performance of
services directly related to such use (sec.
863(c)(3)). Income attributable to transportation
that begins and ends in the
United States
is treated as derived from sources in the United
States (sec. 863(c)(1)). In the case of
transportation that either begins or ends in the
United States, generally 50 percent of such income
is treated as U.S. source and 50 percent is treated
as foreign source (sec. 863(c)(2)). U.S.-source
transportation income is treated as effectively
connected with a foreign person's conduct of U.S.
trade or business only if the foreign person has a
fixed place of business in the United States that is
involved in the earning of such income and
substantially all of such income of the foreign
person is attributable to regularly scheduled
transportation (sec. 887(b)(4)).
An exemption from U.S. tax is provided for income
derived by a nonresident alien individual or foreign
corporation from the international operation of a
ship or aircraft, provided that the foreign country
in which such individual is resident or such
corporation is organized grants an equivalent
exemption to individual residents of the United
States or corporations organized in the United
States (secs. 872(b)(1) and (2) and 883(a)(1)) and
(2)).
Pursuant to guidance published by the Internal
Revenue Service, a nonresident alien individual or
foreign corporation that is entitled to an exemption
from U.S. tax for its income from the international
operation of ships or aircraft must file a U.S.
income tax return and must attach to such return a
statement claiming the exemption (Rev. Proc. 91-12,
1991-1 C.B. 473). If the foreign person is claiming
an exemption based on an applicable income tax
treaty, the foreign person must disclose that fact
as required by the Secretary of the Treasury (sec.
6114). The penalty for failure to make disclosure of
a treaty-based position as required under section
6114 is $1,000 for an individual and $10,000 for a
corporation (sec. 6712).
House
Bill
Under the House bill, a foreign person that claims
exemption from U.S. tax for income from the
international operation of ships or aircraft, but
does not satisfy the filing requirements for
claiming such exemption, is subject to the penalty
of the denial of such exemption and any deductions
or credits otherwise allowable in determining the
U.S. tax liability with respect to such income. If a
foreign person that has a fixed placed of business
in the United States fails to satisfy the filing
requirements for claiming an exemption from U.S. tax
for its income from the international operation of
ships or aircraft, such person is subject to the
additional penalty that foreign source income from
the international operation of ships or aircraft
would be treated as effectively connected with the
conduct of a U.S. trade or business, but only to the
extent that such income is attributable to such
fixed place of business in the United States. Income
so treated as effectively connected with a
U.S.
business is subject to
U.S.
tax at graduated rates (and is subject to the
disallowance of deductions and credits described
above). These penalties do not apply in the case of
a failure to disclose that is due to reasonable
cause. The provision would not apply to the extent
the application would be contrary to any treaty
obligation of the
United States
.
The House bill also provides for the provision of
information by the U.S. Customs Service to the
Secretary of the Treasury regarding foreign-flag
ships engaged in shipping to or from the
United States
.
Effective date. --The provision is effective
for taxable yearsbeginning after
December 31, 1997
.
Senate
Amendment
No provision.
Conference
Agreement
The conference agreement does not include the
provision in the House bill.
5. Limitation on treaty benefits for payments to
hybrid entities (sec. 1175 of the House bill and
sec. 742 of the Senate amendment)
Present
Law
Nonresident alien individuals and foreign
corporations (collectively, foreign persons) that
are engaged in business in the
United States
are subject to
U.S.
tax on the income from such business in the same
manner as a
U.S.
person. In addition, the
United States
imposes tax on certain types of
U.S.
source income, including interest, dividends and
royalties, of foreign persons not engaged in
business in the
United States
. Such tax is imposed on a gross basis and is
collected through withholding. The statutory rate of
this withholding tax is 30 percent. However, most
U.S.
income tax treaties provide for a reduction in rate,
or elimination, of this withholding tax. Treaties
generally provide for different applicable
withholding tax rates for different types of income.
Moreover, the applicable withholding tax rates
differ among treaties. The specific withholding tax
rates pursuant to a treaty are the result of
negotiations between the
United States
and the treaty partner.
The application of the withholding tax is more
complicated in the case of income derived through an
entity, such as a limited liability company, that is
treated as a partnership for
U.S.
tax purposes but may be treated as a corporation for
purposes of the tax laws of a treaty partner. The
Treasury regulations include specific rules that
apply in the case of income derived through an
entity that is treated as a partnership for
U.S.
tax purposes. In the case of a payment of an item of
U.S. source income to a U.S. partnership, the
partnership is required to impose the withholding
tax to the extent the item of income is includible
in the distributive share of a partner who is a
foreign person. Tax-avoidance opportunities may
arise in applying the reduced rates of withholding
tax provided under a treaty to cases involving
income derived through a limited liability company
or other hybrid entity (e.g., an entity that is
treated as a partnership for
U.S.
tax purposes but as a corporation for purposes of
the treaty partner's tax laws).
Following the passage of the House bill and the
Senate amendment, proposed and temporary regulations
were issued addressing the application of the
reduced rates of withholding tax provided under a
treaty in cases involving a hybrid entity. Temp.
Treas. reg. sec. 1.894-1T.
House
Bill
The House bill limits the availability of a reduced
rate of withholding tax pursuant to an income tax
treaty in order to prevent tax avoidance. Under the
House bill, a foreign person is entitled to a
reduced rate of withholding tax under a treaty with
a foreign country on an item of income derived
through an entity that is a partnership (or is
otherwise treated as transparent) for U.S. tax
purposes only if such item is treated for purposes
of the taxation laws of such foreign country as an
item of income of such person. This rule does not
apply if the treaty itself contains a provision
addressing the applicability of the treaty in the
case of income derived through a partnership.
Moreover, the rule does not apply if the foreign
country imposes tax on an actual distribution of
such item of income from such partnership to such
person. In this regard, the foreign country will be
considered to impose tax on a distribution even
though such tax may be reduced or eliminated by
reason of deductions or credits otherwise available
to the taxpayer.
The House bill addresses a potential tax-avoidance
opportunity for Canadian corporations with
U.S.
subsidiaries that arises because of the interaction
between the
U.S.
tax law, the Canadian tax law, and the income tax
treaty between the
United States
and
Canada
. Through the use of a U.S. limited liability
company, which is treated as a partnership for U.S.
tax purposes but as a corporation for Canadian tax
purposes, a payment of interest (which is deductible
for U.S. tax purposes) may be converted into a
dividend (which is excludable for Canadian tax
purposes). Accordingly, interest paid by a U.S.
subsidiary through a U.S. limited liability company
to a Canadian parent corporation would be deducted
by the U.S. subsidiary for U.S. tax purposes and
would be excluded by the Canadian parent corporation
for Canadian tax purposes; the only tax on such
interest would be a U.S. withholding tax, which may
be imposed at a reduced rate of 10 percent (rather
than the full statutory rate of 30 percent) pursuant
to the income tax treaty between the United States
and Canada. Under the House bill, withholding tax is
imposed at the full statutory rate of 30 percent in
such case. The provision would not apply if the
U.S.-Canadian income tax treaty is amended to
include a provision reaching a similar result. In
this regard, the
United States
and
Canada
recently negotiated a proposed protocol that would
amend the provision in the treaty governing
cross-border social security payments and this issue
could be addressed in the context of that protocol
or an additional protocol. Moreover, the provision
would not apply if
Canada
were to impose tax on the Canadian parent on
dividends received from the
U.S.
limited liability company.
It is believed that the provision generally is
consistent with
U.S.
treaty obligations, including the U.S.-Canada
treaty. The
United States
has recognized authority to implement its tax
treaties so as to avoid abuses.
Effective date. --The provision is effective
upon date of enactment.
Senate
Amendment
The Senate amendment provides that the Secretary of
the Treasury shall prescribe regulations to
determine the extent to which a taxpayer shall be
denied benefits under an income tax treaty of the
United States with respect to any payment received
by, or income attributable to activities of, an
entity that is treated as a partnership for U.S.
federal income tax purposes (or is otherwise treated
as fiscally transparent for such purposes) but is
treated as fiscally non-transparent for purposes of
the tax laws of the jurisdiction of residence of the
taxpayer.
The Senate amendment addresses the potential
tax-avoidance opportunity that may arise in applying
the reduced rates of withholding tax provided under
a treaty to cases involving income derived through a
limited liability company or other hybrid entity
(e.g., an entity that is treated as a partnership
for U.S. tax purposes but as a corporation for
purposes of the treaty partner's tax laws). Such a
tax-avoidance opportunity may arise, for example,
for Canadian corporations with
U.S.
subsidiaries because of the interaction between the
U.S.
tax law, the Canadian tax law, and the income tax
treaty between the
United States
and
Canada
. Through the use of a U.S. limited liability
company, which is treated as a partnership for U.S.
tax purposes but as a corporation for Canadian tax
purposes, a payment of interest (which is deductible
for U.S. tax purposes) may be converted into a
dividend (which is excludable for Canadian tax
purposes). Accordingly, interest paid by a U.S.
subsidiary through a U.S. limited liability company
to a Canadian parent corporation would be deducted
by the U.S. subsidiary for U.S. tax purposes and
would be excluded by the Canadian parent corporation
for Canadian tax purposes; the only tax on such
interest would be a U.S. withholding tax, which may
be imposed at a reduced rate of 10 percent (rather
than the full statutory rate of 30 percent) pursuant
to the income tax treaty between the United States
and Canada. It is expected that the regulations will
impose withholding tax at the full statutory rate of
30 percent in such case.
Effective date. --The provision is effective
upon date of enactment.
Conference
Agreement
The conference agreement generally follows the House
bill with a modification to provide regulatory
authority to address the availability of treaty
benefits in situations that involve hybrid entities
but that are not covered by the denial of benefits
specifically provided by the provision. Under the
conference agreement, a foreign person is not
entitled to a reduced rate of withholding tax under
a treaty with a foreign country on an item of income
derived through an entity that is treated as a
partnership (or is otherwise treated as fiscally
transparent) for U.S. tax purposes if (i) such item
is not treated for purposes of the taxation laws of
such foreign country as an item of income of such
person, (ii) the foreign country does not impose tax
on an actual distribution of such item of income
from such entity to such person, and (iii) the
treaty itself does not contain a provision
addressing the applicability of the treaty in the
case of income derived through a partnership or
other fiscally transparent entity. In addition, the
conference agreement grants the Secretary of the
Treasury authority to prescribe regulations to
determine, in situations other than the situation
specifically described in the statutory provision,
the extent to which a taxpayer shall not be entitled
to benefits under an income tax treaty of the United
States with respect to any payment received by, or
income attributable to activities of, an entity that
is treated as a partnership for U.S. federal income
tax purposes (or is otherwise treated as fiscally
transparent for such purposes) but is treated as
fiscally non-transparent for purposes of the tax
laws of the jurisdiction of residence of the
taxpayer.
The conferees note that on June 30, 1997 the
Secretary issued proposed and temporary regulations
addressing the availability of treaty benefits in
cases involving hybrid entities. The conferees
believe that these regulations are consistent with
the provision in the conference agreement. The
conferees also believe that the provision in the
conference agreement and the temporary and proposed
regulations are consistent with
U.S.
treaty obligations. Such provision and such
regulations represent interpretations of
U.S.
treaties clarifying those situations involving
hybrid entities in which taxpayers are entitled to
treaty benefits and those situations in which they
are not.
6. Interest on underpayments that are reduced by
foreign tax credit carrybacks (sec. 1176 of the
House bill and sec. 865 of the Senate amendment)
Present
Law
U.S.
persons may credit foreign taxes against
U.S.
tax on foreign source income. The amount of foreign
tax credits that can be claimed in a year is subject
to a limitation that prevents taxpayers from using
foreign tax credits to offset
U.S.
tax on
U.S.
source income. Separate limitations are applied to
specific categories of income. The amount of
creditable taxes paid or accrued in any taxable year
which exceeds the foreign tax credit limitation is
permitted to be carried back two years and carried
forward five years.
For purposes of the computation of interest on
overpayments of tax, if an overpayment for a taxable
year results from a foreign tax credit carryback
from a subsequent taxable year, the overpayment is
deemed not to arise prior to the filing date for the
subsequent taxable year in which the foreign taxes
were paid or accrued (sec. 6611(g)). Accordingly,
interest does not accrue on the overpayment prior to
the filing date for the year of the carryback that
effectively created such overpayment. In Fluor
Corp. v.
United States
, 35 Fed. Cl. 520 (1996), the court held that in
the case of an underpayment of tax (rather than an
overpayment) for a taxable year that is eliminated
by a foreign tax credit carryback from a subsequent
taxable year, interest does not accrue on the
underpayment that is eliminated by the foreign tax
credit carryback. The Government has filed an appeal
in the Fluor case.
House
Bill
Under the House bill, if an underpayment for a
taxable year is reduced or eliminated by a foreign
tax credit carryback from a subsequent taxable year,
such carryback does not affect the computation of
interest on the underpayment for the period ending
with the filing date for such subsequent taxable
year in which the foreign taxes were paid or
accrued. The House bill also clarifies the
application of the interest rules of both section
6601 and section 6611 in the case of a foreign tax
credit carryback that is triggered by a net
operating loss or net capital loss carryback; in
such a case, a deficiency is not considered to have
been reduced, and an overpayment is not considered
to have been created, until the filing date for the
subsequent year in which the loss carryback arose.
No inference is intended regarding the computation
of interest under present law in the case of a
foreign tax credit carryback (including a foreign
tax credit carryback that is triggered by a net
operating loss or net capital loss carryback).
Effective date. --The provision is effective
for foreign taxesactually paid or accrued in taxable
years beginning after date of enactment.
Senate
Amendment
The Senate amendment is the same as the House bill.
Conference
Agreement
The conference agreement follows the House bill and
the Senate amendment.
7. Determination of period of limitations relating
to foreign tax credits (sec. 1177 of the House bill
and sec. 866 of the Senate amendment)
Present
Law
U.S.
persons may credit foreign taxes against
U.S.
tax on foreign source income. The amount of foreign
tax credits that can be claimed in a year is subject
to a limitation that prevents taxpayers from using
foreign tax credits to offset
U.S.
tax on
U.S.
source income. Separate limitations are applied to
specific categories of income. The amount of
creditable taxes paid or accrued in any taxable year
which exceeds the foreign tax credit limitation is
permitted to be carried back two years and carried
forward five years.
For purposes of the period of limitations on filing
claims for credit orrefund, in the case of a claim
relating to an overpayment attributable to foreign
tax credits, the limitations period is ten years
from the filing date for the taxable year with
respect to which the claim is made. The Internal
Revenue Service has taken the position that, in the
case of a foreign tax credit carryforward, the
period of limitations is determined by reference to
the year in which the foreign taxes were paid or
accrued (and not the year to which the foreign tax
credits are carried) (Rev. Rul. 84-125, 1984-2 C.B.
125). However, the court in Ampex Corp. v. United
States, 620 F.2d 853 (1980), held that, in the
case of a foreign tax credit carryforward, the
period of limitations is determined by reference to
the year to which the foreign tax credits are
carried (and not the year in which the foreign taxes
were paid or accrued).
House
Bill
Under the House bill, in the case of a claim
relating to an overpayment attributable to foreign
tax credits, the limitations period is determined by
reference to the year in which the foreign taxes
were paid or accrued (and not the year to which the
foreign tax credits are carried). No inference is
intended regarding the determination of such
limitations period under present law.
Effective date. --The provision is effective
for foreign taxes paidor accrued in taxable years
beginning after date of enactment.
Senate
Amendment
The Senate amendment is the same as the House bill.
Conference
Agreement
The conference agreement follows the House bill and
the Senate amendment.
8. Treatment of income from certain sales of
inventory as
U.S.
source (sec. 864 of the Senate amendment)
Present
Law
U.S.
persons are subject to
U.S.
tax on their worldwide income. A credit against
U.S.
tax on foreign source income is allowed for foreign
taxes. The amount of foreign tax credits that can be
claimed in a year is subject to a limitation that
prevents taxpayers from using foreign tax credits to
offset
U.S.
tax on
U.S.
source income. Specific rules apply in determining
whether income is from
U.S.
or foreign sources. Income from the sale or exchange
of inventory property generally is sourced where the
sale occurs. In Liggett Group, Inc. v.
Commissioner, 58 T.C.M. 1167 (1990), the court
concluded that a sale of inventory property by a
U.S.
corporation to
U.S.
customers gave rise to foreign source income because
the sale occurred outside the
United States
.
House
Bill
No provision.
Senate
Amendment
Under the Senate amendment, income from a sale of
inventory property by a
U.S.
resident to another
U.S.
resident for use, consumption, or disposition in the
United States
is treated as
U.S.
source income, if the sale is not attributable to an
office or other fixed place of business maintained
by the seller outside the
United States
.
Effective date. --The provision is effective
for taxable yearsbeginning after date of enactment.
Conference
Agreement
The conference agreement does not include the
provision in the Senate amendment.
9. Modify foreign tax credit carryover rules (sec.
867 of the Senate amendment)
Present
Law
U.S.
persons may credit foreign taxes against
U.S.
tax on foreign source income. The amount of foreign
tax credits that can be claimed in a year is subject
to a limitation that prevents taxpayers from using
foreign tax credits to offset
U.S.
tax on
U.S.
source income. Separate foreign tax credit
limitations are applied to specific categories of
income.
The amount of creditable taxes paid or accrued (or
deemed paid) in any taxable year which exceeds the
foreign tax credit limitation is permitted to be
carried back two years and forward five years. The
amount carried over may be used as a credit in a
carryover year to the extent the taxpayer otherwise
has excess foreign tax credit limitation for such
year. The separate foreign tax credit limitations
apply for purposes of the carryover rules.
House
Bill
No provision.
Senate
Amendment
The Senate amendment reduces the carryback period
for excess foreign tax credits from two years to one
year. The amendment also extends the excess foreign
tax credit carryforward period from five years to
seven years.
Effective date. --The provision applies to
foreign tax creditsarising in taxable years
beginning after
December 31, 1997
.
Conference
Agreement
The conference agreement does not include the
provision in the Senate amendment.
10. Repeal special exception to foreign tax credit
limitation for alternative minimum tax purposes
(sec. 868 of the Senate amendment)
Present
Law
Present law imposes a minimum tax on a corporation
to the extent the taxpayer's minimum tax liability
exceeds its regular tax liability. The corporate
minimum tax is imposed at a rate of 20 percent on
alternative minimum taxable income in excess of a
phased-out $40,000 exemption amount.
The combination of the taxpayer's net operating loss
carryover and foreign tax credits cannot reduce the
taxpayer's alternative minimum tax liability by more
than 90 percent of the amount determined without
these items.
The Omnibus Budget Reconciliation Act of 1989
("1989 Act")provided a special exception
to the limitation on the use of the foreign tax
credit against the tentative minimum tax. In order
to qualify for this exception, a corporation must
meet four requirements. First, more than 50 percent
of both the voting power and value of the stock of
the corporation must be owned by
U.S.
persons who are not members of an affiliated group
which includes such corporation. Second, all of the
activities of the corporation must be conducted in
one foreign country with which the
United States
has an income tax treaty in effect and such treaty
must provide for the exchange of information between
such country and the
United States
. Third, the corporation generally must distribute
to its shareholders all current earnings and profits
(except for certain amounts utilized for normal
maintenance or capital expenditures related to its
existing business). Fourth, all of such
distributions which are received by
U.S.
persons must be utilized by such persons in a
U.S.
trade or business. This exception applies to taxable
years beginning after
March 31, 1990
(with a proration rule effective for certain taxable
years which include
March 31, 1990
).
House
Bill
No provision.
Senate
Amendment
The special exception regarding the use of foreign
tax credits for purposes of the alternative minimum
tax, as provided by the 1989 Act, is repealed.
Effective date. --The provision is effective
for taxable yearsbeginning after the date of
enactment.
Conference
Agreement
The conference agreement follows the Senate
amendment.
H. Pension and Employee Benefit Provisions
1. Cashout of certain accrued benefits (sec. 917 of
the House bill and sec. 879 of the Senate amendment)
Present
Law
Under present law, in the case of an employee whose
plan participation terminates, a qualified plan may
involuntarily "cash out" thebenefit (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.
House
Bill
The House bill increases the limit on involuntary
cash outs from $3,500 to $5,000. The $5,000 amount
is adjusted for inflation beginning after 1998 in
$50 increments.
Effective date. --The provision is effective
for plan yearsbeginning after the date of enactment.
Senate
Amendment
The Senate amendment is the same as the House bill,
except the Senate amendment also makes a
corresponding change to title I of ERISA and
provides that the $5,000 amount is adjusted for
inflation beginning after 1997 in $50 increments.
Conference
Agreement
The conference agreement follows the House bill and
the Senate amendment, except that the conference
agreement does not increase the $5,000 limit for
inflation.
2. Election to receive taxable cash compensation in
lieu of nontaxable parking benefits (sec. 880 of the
Senate amendment)
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.
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