Public Law 89–809

Section 861(a)(1) is amended by striking out subparagraphs (B) and (C) and inserting in lieu thereof the following:

“(B)“(B)

interest received from a resident alien individual or a domestic corporation, when it is shown to the satisfaction of the Secretary or his delegate that less than 20 percent of the gross income from all sources of such individual or such corporation has been derived from sources within the United States, as determined under the provisions of this part, for the 3-year period ending with the close of the taxable year of such individual or such corporation preceding the payment of such interest, or for such part of such period as may be applicable,

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“(C)“(C)

interest received from a foreign corporation (other than interest paid or credited after December 31, 1972, by a domestic branch of a foreign corporation, if such branch is engaged in the commercial banking business), when it is shown to the satisfaction of the Secretary or his delegate that less than 50 percent of the gross income from all sources of such foreign corporation for the 3-year period ending with the close of its taxable year preceding the payment of such interest (or for such part of such period as the corporation has been in existence) was effectively connected with the conduct of a trade or business within the United States,

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“(D)“(D)

in the case of interest received from a foreign corporation (other than interest paid or credited after December 31, 1972, by a domestic branch of a foreign corporation, if such branch is engaged in the commercial banking business), 50 percent or more of the gross income of which from all sources for the 3-year period ending with the close of its taxable year preceding the payment of such interest (or for such part of such period as the corporation has been in existence) was effectively connected with the conduct of a trade or business within the United States, an amount of such interest which bears the same ratio to such interest as the gross income of such foreign corporation for such period which was not effectively connected with the conduct of a trade or business within the United States bears to its gross income from all sources, “(E) income derived by a foreign central bank of issue from bankers’ acceptances, and

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“(F)“(F)

interest on deposits with a foreign branch of a domestic corporation or a domestic partnership, if such branch is engaged in the commercial banking business.”

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Section 861 (relating to income from sources within the United States) is amended by adding after subsection (c)(as added by paragraph (1)(B)) the following new subsection:

“(d)“(d)

Special Rules for Application of Paragraphs (1)(B), (1)(C), (1)(D), and (2)(B) of Subsection (a).—

“(1)“(1)

New entities.—

For purposes of paragraphs (1)(B), (1)(C), (1)(D), and (2)(B) of subsection (a), if the resident alien individual, domestic corporation, or foreign corporation, as the case may be, has no gross income from any source for the 3-year period (or part thereof) specified, the 20 percent test or the 50 percent test, as the case may be, shall be applied with respect to the taxable year of the payor in which payment of the interest or dividends, as the case may be, is made.

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“(2)“(2)

Transition rule.—

For purposes of paragraphs (1)(C), (1)(D), and (2)(B) of subsection (a), the gross income of the foreign corporation for any period before the first taxable year beginning after December 31, 1966, which is effectively connected with the conduct of a trade or business within the United States is an amount equal to the gross income for such period from sources within the United States.”

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by striking out “For purposes of this part,” and inserting in lieu thereof

“(a)“(a)

Sale, Etc.—

For purposes of this part,”; and

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by adding at the end thereof the following new subsections:

“(b)“(b)

Trade or Business Within the United States.—

For purposes of this part, part II, and chapter 3, the term ‘trade or business within the United States’ includes the performance of personal services within the United States at any time within the taxable year, but does not include—

“(1)“(1)

Performance of personal services for foreign employer.—

The performance of personal services—

“(A)“(A)

for a nonresident alien individual, foreign partnership, or foreign corporation, not engaged in trade or business within the United States, or

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“(B)“(B)

for an office or place of business maintained in a foreign country or in a possession of the United States by an individual who is a citizen or resident of the United States or by a domestic partnership or a domestic corporation,

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by a nonresident alien individual temporarily present in the United States for a period or periods not exceeding a total of 90 days during the taxable year and whose compensation for such services does not exceed in the aggregate $3,000.

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“(2)“(2)

Trading in securities or commodities.—

“(A)“(A)

Stocks and securities.—

“(i)“(i)

In general.—

Trading in stocks or securities through a resident broker, commission agent, custodian, or other independent agent.

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“(ii)“(ii)

Trading for taxpayer’s own account.—

Trading in stocks or securities for the taxpayer’s own account, whether by the taxpayer or his employees or through a resident broker, commission agent, custodian, or other agent, and whether or not any such employee or agent has discretionary authority to make decisions in effecting the transactions. This clause shall not apply in the case of a dealer in stocks or securities, or in the case of a corporation (other than a corporation which is, or but

Post, p. 1559.

for section 542(c)(7) or 543(b)(1)(C) would be, a personal holding company) the principal business of which is trading in stocks or securities for its own account, if its principal office is in the United States.

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“(B)“(B)

Commodities.—

“(i)“(i)

In general.—

Trading in commodities through a resident broker, commission agent, custodian, or other independent agent.

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“(ii)“(ii)

Trading for taxpayer’s own account.—

Trading in commodities for the taxpayer’s own account, whether by the taxpayer or his employees or through a resident broker, commission agent, custodian, or other agent, and whether or not any such employee or agent has discretionary authority to make decisions in effecting the transactions. This clause shall not apply in the case of a dealer in commodities.

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“(iii)“(iii)

Limitation.—

Clauses (i) and (ii) shall apply only if the commodities are of a kind customarily dealt in on an organized commodity exchange and if the transaction is of a kind customarily consummated at such place.

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“(C)“(C)

Limitation.—

Subparagraphs (A)(i) and (B)(i) shall apply only if, at no time during the taxable year, the taxpayer has an office or other fixed place of business in the United States through which or by the direction of which the transactions in stocks or securities, or in commodities, as the case may be, are effected.

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“(c)“(c)

Effectively Connected Income, Etc.—

“(1)“(1)

General rule.—

For purposes of this title—

“(A)“(A)

In the case of a nonresident alien individual or a foreign corporation engaged in trade or business within the United States during the taxable year, the rules set forth in paragraphs (2), (3), and (4) shall apply in determining the income, gain, or loss which shall be treated as effectively connected with the conduct of a trade or business within the United States.

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“(B)“(B)

Except as provided in section 871(d) or sections 882 (d) and (e), in the case of a nonresident alien individual or a

Post, pp. 1547, 1555.

foreign corporation not engaged in trade or business within the United States during the taxable year, no income, gain, or loss shall be treated as effectively connected with the conduct of a trade or business within the United States.

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“(2)“(2)

Periodical, etc., income from sources within united states—factors.—

In determining whether income from sources within the United States of the types described in section 871 (a)(1) or section 881(a), or whether gain or loss from sources within the United States from the sale or exchange of capital assets, is effectively connected with the conduct of a trade or business within the United States, the factors taken into account shall include whether—

“(A)“(A)

the income, gain, or loss is derived from assets used in or held for use in the conduct of such trade or business, or

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“(B)“(B)

the activities of such trade or business were a material factor in the realization of the income, gain, or loss.

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In determining whether an asset is used in or held for use in the conduct of such trade or business or whether the activities of such trade or business were a material factor in realizing an item of income, gain, or loss, due regard shall be given to whether or not such asset or such income, gain, or loss was accounted for through such trade or business. In applying this paragraph and paragraph (4), interest referred to in section 861(a)(1)(A) shall be

Ante, p. 1541.

considered income from sources within the United States.

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“(3)“(3)

Other income from sources within united states.—

All income, gain, or loss from sources within the United States (other than income, gain, or loss to which paragraph (2) applies) shall be treated as effectively connected with the conduct of a trade or business within the United States.

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“(4)“(4)

Income from sources without united states.—

“(A)“(A)

Except as provided hi subparagraphs (B) and (C), no income, gain, or loss from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States.

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“(B)“(B)

Income, gain, or loss from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States by a nonresident alien individual or a foreign corporation if such person has an office or other fixed place of business within the United States to which such income, gain, or loss is attributable and such income, gain, or loss—

“(i)“(i)

consists of rents or royalties for the use of or for the privilege of using intangible property described in section 862(a)(4)(including any gain or loss realized on the sale of such property) derived in the active conduct of such trade or business;

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“(ii)“(ii)

consists of dividends or interest, or gain or loss from the sale or exchange of stock or notes, bonds, or other evidences of indebtedness, and either is derived in the active conduct of a banking, financing, or similar business within the United States or is received by a corporation the principal business of which is trading in stocks or securities for its own account; or

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“(iii)“(iii)

is derived from the sale (without the United States) through such office or other fixed place of business of personal property described in section 1221(1), except that this clause shall not apply if the property is sold for use, consumption, or disposition outside the United States and an office or other fixed place of business of the taxpayer outside the United States participated materially in such sale.

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“(C)“(C)

In the case of a foreign corporation taxable under part I of subchapter L, any income from sources without the United States which is attributable to its United States business shall be treated as effectively connected with the conduct of a trade or business within the United States.

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“(D)“(D)

No income from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States if it either—

“(i)“(i)

consists of dividends, interest, or royalties paid by a foreign corporation in which the taxpayer owns (within the meaning of section 958(a)), or is considered as owning (by applying the ownership rules of section 958(b)), more than 50 percent of the total combined voting power of all classes of stock entitled to vote, or

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“(ii)“(ii)

is subpart F income within the meaning of section 952(a).

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“(5)“(5)

Rules for application of paragraph (4)(B).—

For purposes of subparagraph (B) of paragraph (4)—

“(A)“(A)

in determining whether a nonresident alien individual or a foreign corporation has an office or other fixed place of business, an office or other fixed place of business of an agent shall be disregarded unless such agent (i) has the authority to negotiate and conclude contracts in the name of the nonresident alien individual or foreign corporation and regularly exercises that authority or has a stock of merchandise from which he regularly fills orders on behalf of such individual or foreign corporation, and (ii) is not a general commission agent, broker, or other agent of independent status acting in the ordinary course of his business,

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“(B)“(B)

income, gain, or loss shall not be considered as attributable to an office or other fixed place of business within the United States unless such office or fixed place of business is a material factor in the production of such income, gain, or loss and such office or fixed place of business regularly carries on activities of the type from which such income, gain, or loss is derived, and

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“(C)“(C)

the income, gain, or loss which shall be attributable to an office or other fixed place of business within the United States shall be the income, gain, or loss property allocable thereto, but, in the case of a sale described in clause (iii) of such subparagraph, the income which shall lie treated as attributable to an office or other fixed place of business within the United States shall not exceed the income which would be derived from sources within the United States if the sale were made in the United States.”

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The amendments made by subsections (a), (c), and (d) shall apply with respect to taxable years beginning after December 31, 1966; except that in applying section 864(c)(4)(B)(iii) of the Internal Revenue Code of 1954 (as added by subsection (d)) with respect to a binding contract entered into on or before February 24, 1966, activities in the United States on or before such date in negotiating or carrying out such contract shall not be taken into account.

The amendments made by subsection (b) shall apply with respect to amounts received after December 31, 1966.

Section 871 (relating to tax on nonresident alien individuals)

68A Stat. 278.

is amended to read as follows:

“SEC. 871. TAX ON NONRESIDENT ALIEN INDIVIDUALS.

“(a)“(a)

Income Not Connected With United States Business—30 Percent Tax.—

“(1)“(1)

Income other than capital gains.—

There is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a nonresident alien individual as—

“(A)“(A)

interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income,

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“(B)“(B)

gains described in section 402(a)(2), 403(a)(2), or 631 (b) or (c), and gains on transfers described in section 1235 made on or before October 4, 1966,

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“(C)“(C)

in the case of bonds or other evidences of indebtedness issued after September 28, 1965, amounts which under section 1232 are considered as gains from the sale or exchange of property which is not a capital asset, and

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“(D)“(D)

gains from the sale or exchange after October 4, 1966, of patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like property, or of any interest in any such property, to the extent such gains are from payments which are contingent on the productivity, use, or disposition of the property or interest sold or exchanged, or from payments which are treated as being so contingent under subsection (e),

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but only to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States.

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“(2)“(2)

Capital gains of aliens present in the united states 183 days or more.—

In the case of a nonresident alien individual present in the United States for a period or periods aggregating 183 days or more during the taxable year, there is hereby imposed for such year a tax of 30 percent of the amount by which his gains, derived from sources within the United States, from the sale or exchange at any time during such year of capital assets exceed his losses, allocable to sources within the United States, from the sale or exchange at any time during such year of capital assets. For purposes of this paragraph, gams and losses shall be taken into account only if, and to the extent that, they would be recognized and taken into account if such gains and losses were effectively connected with the conduct of a trade or business within the United States, except that such gains and losses shall be

68A Stat. 320.

determined without regard to section 1202 (relating to deduction for capital gains) and such losses shall be determined without the benefits of the capital loss carryover provided in section 1212. Any gain or loss which is taken into account in determining the tax under paragraph (1) or subsection (b) shall not be taken into account in determining the tax under this paragraph. For purposes of the 183-day requirement of this paragraph, a nonresident alien individual not engaged in trade or business within the United States who has not established a taxable year for any prior period shall be treated as having a taxable year which is the calendar year.

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“(b)“(b)

Income Connected With United States Business—Graduated Rate of Tax.—

“(1)“(1)

Imposition of tax.—

A nonresident alien individual engaged in trade or business within the United States during

Post, p 1550.

the taxable year shall be taxable as provided in section 1 or 1201(b) on his taxable income which is effectively connected with the conduct of a trade or business within the United States.

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“(2)“(2)

Determination of taxable income.—

In determining taxable income for purposes of paragraph (1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States.

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“(c)“(c)

Participants in Certain Exchange or Training Programs.—

For purposes of this section, a nonresident alien individual who (without regard to this subsection) is not engaged in trade or business within the United States and who is temporarily present in the United States as a nonimmigrant under subparagraph (F) or (J) of section 101(a)(15) of the Immigration and Nationality Act, as amended

66 Stat. 168; 75 Stat. 534.

(8 U.S.C. 1101(a)(15)(F) or (J)), shall be treated as a nonresident alien individual engaged in trade or business within the United

75 Stat. 536

State, and any income described in section 1441(b)(1) or (2) which is received by such individual shall, to the extent derived from sources within the United States, be treated as effectively connected with the conduct of a trade or business within the United States.

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“(d)“(d)

Election To Treat Real Property Income as Income Connected With United States Business.—

“(1)“(1)

In general.—

A nonresident alien individual who during the taxable year derives any income—

“(A)“(A)

from real property held for the production of income and located in the United States, or from any interest in such real property, including (i) gains from the sale or exchange of such real property or an interest therein, (ii) rents or royalties from mines, wells, or other natural deposits, and

68A Stat. 213.

(iii) gains described in section 631 (b) or (c), and

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“(B)“(B)

which, but for this subsection, would not be treated as income which is effectively connected with the conduct of a trade or business within the United States,

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may elect for such taxable year to treat all such income as income which is effectively connected with the conduct of a trade or business within the United States. In such case, such income shall be taxable as provided in subsection (b)(1) whether or not such individual is engaged in trade or business within the United States during the taxable year. An election under this paragraph for any taxable year shall remain in effect for all subsequent taxable years, except that it may be revoked with the consent of the Secretary or his delegate with respect to any taxable year.

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“(2)“(2)

Election after revocation.—

If an election has been made under paragraph (1) and such election has been revoked, a new election may not be made under such paragraph for any taxable year before the 5th taxable year which begins after the first taxable year for which such revocation is effective, unless the Secretary or his delegate consents to such new election.

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“(3)“(3)

Form and time of election and revocation.—

An election under paragraph (1), and any revocation of such an election, may be made only in such manner and at such time as the Secretary or his delegate may by regulations prescribe.

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“(e)“(e)

Gains From Sale or Exchange of Certain Intangible Property.—

For purposes of subsection (a)(1)(D), and for purposes of sections881(a)(4), 1441(b), and 1442(a)—

68A Stat. 357; Post, pp. 1555, 1557.

“(1)“(1)

Payments treated as contingent on use, etc.—

If more than 50 percent of the gain for any taxable year from the sale or exchange of any patent, copyright, secret process or formula, good will, trademark, trade brand, franchise, or other like property, or of any interest in any such property, is from payments which are contingent on the productivity, use, or disposition of such property or interest, all of the gain for the taxable year from the sale or exchange of such property or interest shall be treated as being from payments which are contingent on the productivity, use, or disposition of such property or interest.

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“(2)“(2)

Source rule.—

In determining whether gains described in subsection (a)(1)(D) and section 881(a)(4) are received from sources within the United States, such gains shall be treated as rentals or royalties for the use of, or privilege of using, property or an interest in property.

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“(f)“(f)

Certain Annuities Received Under Qualified Plans.—

For purposes of this section, gross income does not include any amount received as an annuity under a qualified annuity plan described in section

72 Stat. 1622.

403(a)(1), or from a qualified trust described in section 401(a) which is exempt from tax under section 501(a), if—

“(1)“(1)

all of the personal services by reason of which such annuity is payable were either (A) personal services performed outside the United States by an individual who, at the time of performance of such personal services, was a nonresident alien, or (B) personal services described in section 864(b)(1) performed

Ante, pp. 1544.

within the United States by such individual, and

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“(2)“(2)

at the time the first amount is paid as such annuity under such annuity plan, or by such trust, 90 percent or more of the employees for whom contributions or benefits are provided under such annuity plan, or under the plan or plans of which such trust is a part, are citizens or residents of the United States.”

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“(g)“(g)

Cross References.—

“(1)“(1)

For tax treatment of certain amounts distributed by the United States to nonresident alien individuals, see section 402(a)(4).

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“(2)“(2)

For taxation of nonresident alien individuals who are expatriate United States citizens, see section 877.

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“(3)“(3)

For doubling of tax on citizens of certain foreign countries, see section 891.

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“(4)“(4)

For adjustment of tax in case of nationals or residents of certain foreign countries, see section 896.

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“(5)“(5)

For withholding of tax at source on nonresident alien individuals, see section 1441.

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“(6)“(6)

For the requirement of making a declaration of estimated tax by certain nonresident alien individuals, see section 6015(i).”

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Section 1 (relating to tax on individuals) is amended by redesignating subsection (d) as subsection (e), and by inserting after subsection (c) the following new subsection:

“(d)“(d)

Nonresident Aliens.—

In the case of a nonresident alien individual, the tax imposed by subsection (a) shall apply only as provided

Ante, p. 1547; Post, p. 1551

by section 871 or 877.”

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Subsection (a) of section 872 (relating to gross income of nonresident alien individuals) is amended to read as follows:

“(a)“(a)

General Rule.—

In the case of a nonresident alien individual, gross income includes only—

“(1)“(1)

gross income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, and

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“(2)“(2)

gross income which is effectively connected with the conduct of a trade or business within the United States.”

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Subparagraph (B) of section 872(b)(3) (relating to compensation of participants in certain exchange or training programs) is amended by striking out “by a domestic corporation” and inserting in lieu thereof “by a domestic corporation, a domestic partnership, or an individual who is a citizen or resident of the United States”.

Subsection (B) of section 872 (relating to exclusions from gross income) is amended by adding at the end thereof the following new paragraph:

“(4)“(4)

Certain bond income of residents of the ryukyu islands or the trust territory of the pacific islands.—

Income derived by a nonresident alien individual from a series E or series H United States savings bond, if such individual acquired such bond while a resident of the Ryukyu Islands or the Trust Territory of the Pacific Islands.”

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Section 873 (relating to deductions allowed to nonresident alien individuals) is amended to read as follows:

“SEC. 873. DEDUCTIONS.

“(a)“(a)

General Rule.—

In the case of a nonresident alien individual, the deductions shall be allowed only for purposes of section 871 (b) and (except as provided by subsection (b) ) only if and to the extent that they are connected with income which is effectively connected with the conduct of a trade or business within the United States; and the proper apportionment and allocation of the deductions for this purpose shall be determined as provided in regulations prescribed by the Secretary or his delegate.

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“(b)“(b)

Exceptions.—

The following deductions shall be allowed whether or not they are connected with income which is effectively connected with the conduct of a trade or business within the United States:

“(1)“(1)

Losses.—

The deduction, for losses of property not connected with the trade or business if arising from certain casualties

78 Stat. 43.

or theft, allowed by section 165(c)(3), but only if the loss is of property located within the United States.

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“(2)“(2)

Charitable contributions.—

The deduction for charitable contributions and gifts allowed by section 170.

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“(3)“(3)

Personal exemption.—

The deduction for personal exemptions allowed by section 151, except that in the case of a nonresident alien individual who is not a resident of a contiguous country only one exemption shall be allowed under section 151.

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“(c)“(c)

Cross References.—

“(1)“(1)

For disallowance of standard deduction, see section 142(b)(1).

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“(2)“(2)

For rule that certain foreign taxes are not to be taken into account in determining deduction or credit, see section 906(b)(1).”

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Section 154(3) (relating to cross references in respect of

68A Stat. 45

deductions for personal exemptions) is amended to read as follows:

“(3)“(3)

For exemptions of nonresident aliens, see section 873(b)(3).”

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Section 875 (relating to partnerships) is amended to read

68A Stat. 281.

as follows:

“SEC. 875. PARTNERSHIPS; BENEFICIARIES OF ESTATES AND TRUSTS.

“For purposes of this subtitle—

“(1)“(1)

a nonresident alien individual or foreign corporation shall be considered as being engaged in a trade or business within the United States if the partnership of which such individual or corporation is a member is so engaged, and

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“(2)“(2)

a nonresident alien individual or foreign corporation which is a beneficiary of an estate or trust which is engaged in any trade or business within the United States shall be treated as being engaged in such trade or business within the United States.”

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The table of sections for subpart A of part II of subchapter N of chapter 1 is amended by striking out the item relating to section 875 and inserting in lieu thereof the following:

Subpart A of part II of subchapter N of chapter 1 (relating to nonresident alien individuals) is amended by redesignating section 877 as section 878, and by inserting after section 876 the following new section:

“SEC. 877. EXPATRIATION TO AVOID TAX.

“(a)“(a)

In General.—

Every nonresident alien individual who at any time after March 8, 1965, and within the 10-year period immediately preceding the close of the taxable year lost United States citizenship, unless such loss did not have for one of its principal purposes the avoidance of taxes under this subtitle or subtitle B, shall be taxable

26 USC 1–2524

for such taxable year in the manner provided in subsection (b) if the tax imposed pursuant to such subsection exceeds the tax which, without regard to this section, is imposed pursuant to section 871.

Ante, p 1547.

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“(b)“(b)

Alternative Tax.—

A nonresident alien individual described in subsection (a) shall be taxable for the taxable year as provided in section 1 or section 1201(b), except that—

Ante, p. 1550

“(1)“(1)

the gross income shall include only the gross income described in section 872(a)(as modified by subsection (c) of this section), and

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“(2)“(2)

the deductions shall be allowed if and to the extent that they are connected with the gross income included under this section, except that the capital loss carryover provided by section

78 Stat. 99.

1212(b) shall not be allowed; and the proper allocation and apportionment of the deductions for this purpose shall be determined as provided under regulations prescribed by the Secretary or his delegate.

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Ante, p. 1550.

For purposes of paragraph (2), the deductions allowed by section 873(b) shall be allowed; and the deduction (for losses not connected with the trade or business if incurred in transactions entered into for

68A Stat. 49.

profit) allowed by section 165(c)(2) shall be allowed, but only if the profit, if such transaction had resulted in a profit, would be included in gross income under this section.

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“(c)“(c)

Special Rules of Source.—

For purposes of subsection (b), the following items of gross income shall be treated as income from sources within the United States:

“(1)“(1)

Sale of property.—

Gains on the sale or exchange of property (other than stock or debt obligations) located in the United States.

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“(2)“(2)

Stock or debt obligations.—

Gains on the sale or exchange of stock issued by a domestic corporation or debt obligations of United States persons or of the United States, a State or political subdivision thereof, or the District of Columbia.

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“(d)“(d)

Exception for Loss of Citizenship for Certain Causes.—

Subsection (a) shall not apply to a nonresident alien individual whose loss of United States citizenship resulted from the application of section 301(b), 350, or 355 of the Immigration and Nationality Act, as amended

66 Stat. 236.

(8U.S.C. 1401(b), 1482, or 1487).

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“(e)“(e)

Burden of Proof.—

If the Secretary or his delegate establishes that it is reasonable to believe that an individual’s loss of United States citizenship would, but for this section, result in a substantial reduction for the taxable year in the taxes on his probable income for such year, the burden of proving for such taxable year that such loss of citizenship did not have for one of its principal purposes the avoidance

26 USC 1–2524.

of taxes under this subtitle or subtitle B shall be on such individual.”

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The table of sections for subpart A of part II of subchapter N of chapter 1 is amended by striking out the item relating to section 877 and inserting in lieu thereof the following:

by striking out “, or of any partnership not engaged in trade or business within the United States and composed in whole or in part of nonresident aliens,” in subsection (a) and inserting in lieu thereof “or of any foreign partnership”;

by striking out “(except interest on deposits with persons carrying on the banking business paid to persons not engaged in business in the United States)” in subsection (b);

by striking out “and amounts described in section 402(a)(2)” and all that follows in the first sentence of subsection (b) and inserting in lieu thereof “gains described in section 402(a)(2), 403(a)(2), or 631 (b) or (c), amounts subject to tax under section 871(a)(1)(C),

Ante, p. 1547.

gains subject to tax under section 871(a)(1)(D), and gains on transfers described in section 1235 made on or before October 4, 1966.”;

by adding at the end of subsection (b) the following new sentence:

“In the case of a nonresident alien individual who is a member of a domestic partnership, the items of income referred to in subsection (a) shall be treated as referring to items specified in this subsection included in his distributive share of the income of such partnership.”;

by striking out paragraph (1) of subsection (c) and inserting in lieu thereof the following new paragraph:

“(1)“(1)

Income connected with united states business.—

No deduction or withholding under subsection (a) shall be required in the case of any item of income (other than compensation for personal services) which is effectively connected with the conduct of a trade or business within the United States and which is included in the gross income of the recipient under section 871 (b)(2) for the taxable year.”;

#

by amending paragraph (4) of subsection (c) to read as

75 Stat. 536.

follows:

“(4)“(4)

Compensation of certain aliens.—

Under regulations prescribed by the Secretary or his delegate, compensation for personal services may be exempted from deduction and withholding under subsection (a).”;

#

by striking out “amounts described in section 402(a)(2), section 403(a)(2), section 631 (b) and (c), and section 1235, which are considered to be gains from the sale or exchange of capital assets,” in paragraph (5) of subsection (c) and inserting in lieu thereof “gains described in section 402(a)(2), 40.3(a)(2), or 631 (b) or (c), gains subject to tax under section 871(a)(1)(D), and gains on transfers described in section 1235 made on or before October 4, 1966,”, and by striking out “proceeds from such sale or exchange,” in such paragraph and inserting in lieu thereof “amount payable,”;

by adding at the end of subsection (c) the following new

70 Stat. 563.

paragraph:

“(7)“(7)

Certain annuities received under qualified plans.—

No deduction or withholding under subsection (a) shall be required in the case of any amount received as an annuity if such amount is, under section 871(f), exempt from the tax imposed by section 871 (a).”; and

#

by redesignating subsection (d) as (e), and by inserting after subsection (c) the following new subsection:

“(d)“(d)

Exemption of Certain Foreign Partnerships.—

Subject to such terms and conditions as may be provided by regulations prescribed by the Secretary or his delegate, subsection (a) shall not apply in the case of a foreign partnership engaged in trade or business within the United States if the Secretary or his delegate determines that the requirements of subsection (a) impose an undue administrative burden and that the collection of the tax imposed by section

Ante. p. 1547.

871(a) on the members of such partnership who are nonresident alien individuals will not be jeopardized by the exemption.”

#

by striking out that portion of subsection (a) which precedes paragraph (1) and inserting in lieu thereof the following:

“(a)“(a)

Requirement of Declaration.—

Except as otherwise provided in subsection (i), every individual shall make a declaration of his estimated tax for the taxable year if—;

#

by redesignating subsection (i) as subsection (j); and

by inserting after subsection (h) the following new subsection:

“(i)“(i)

Nonresident Alien Individuals.—

No declaration shall be required to be made under this section by a nonresident alien individual unless—

“(1)“(1)

withholding under chapter 24 is made applicable to the wages, as defined in section 3401 (a), of such individual,

#

“(2)“(2)

such individual has income (other than compensation for personal services subject to deduction and withholding under section 1441) which is effectively connected with the conduct of a trade or business within the United States, or

#

“(3)“(3)

such individual is a resident of Puerto Rico during the entire taxable year.”

#

#

Section 7701 (a)(31)(defining foreign estate or trust) is amended by striking out “from sources without the United States” and inserting in lieu thereof “, from sources without the United States which is not effectively connected with the conduct of a trade or business within the United States,”.

Section 1493 (defining foreign trust for purposes of chapter 5) is repealed.

The amendments made by this section (other than the amendments made by subsections (h), (i), and (k)) shall apply with respect to taxable years beginning after December 31, 1966.

The amendments made by subsection (h) shall apply with respect to payments made in taxable years of recipients beginning after December 31, 1966.

The amendments made by subsection (i) shall apply with respect to payments occurring after December 31, 1966.

The amendments made by subsection (k) shall apply with respect to remuneration paid after December 31, 1966.

Section 882 (relating to tax on resident foreign corporations) is amended to read as follows:

“SEC. 882. TAX ON INCOME OF FOREIGN CORPORATIONS CONNECTED WITH UNITED STATES BUSINESS.

“(a)“(a)

Normal Tax and Surtax.—

“(1)“(1)

Imposition of tax.—

A foreign corporation engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 11 or 1201(a) on its

Post, p 1557.

taxable income which is effectively connected with the conduct of a trade or business within the United States.

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“(2)“(2)

Determination of taxable income.—

In determining taxable income for purposes of paragraph (1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States.

#

#

“(b)“(b)

Gross Income.—

In the case of a foreign corporation, gross income includes only—

“(1)“(1)

gross income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, and

#

“(2)“(2)

gross income which is effectively connected with the conduct of a trade or business within the United States.

#

#

“(c)“(c)

Allowance of Deductions and Credits.—

“(1)“(1)

Allocation of deductions.—

“(A)“(A)

General rule.—

In the case of a foreign corporation, the deductions shall be allowed only for purposes of subsection (a) and (except as provided by subparagraph (B)) only if and to the extent that they are connected with income which is effectively connected with the conduct of a trade or business within the United States; and the proper apportionment and allocation of the deductions for this purpose shall be determined as provided in regulations prescribed by the Secretary or his delegate.

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“(B)“(B)

Charitable contributions.—

The deduction for charitable contributions and gifts provided by section 170 shall be allowed whether or not connected with income which is effectively connected with the conduct of a trade or business within the United States.

#

#

“(2)“(2)

Deductions and credits allowed only if return filed.—

A foreign corporation shall receive the benefit of the deductions and credits allowed to it in this subtitle only by filing or causing to be filed with the Secretary or his delegate a true and accurate

26 USC 6001–7852.

return, in the manner prescribed in subtitle F, including therein all the information which the Secretary or his delegate may deem necessary for the calculation of such deductions and credits. The preceding sentence shall not apply for purposes of the tax imposed by section 541 (relating to personal holding company tax), and shall not be construed to deny the credit provided by section 32 for tax withheld at source or the credit provided by

79 Stat. 167.

Post, p. 1568.

section 39 for certain uses of gasoline and lubricating oil.

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“(3)“(3)

Foreign tax credit.—

-Except as provided by section 906, foreign corporations shall not be allowed the credit against the tax for taxes of foreign countries and possessions of the United

Post, p. 1569.

States allowed by section 901.

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“(4)“(4)

Cross reference.—

“For rule that certain foreign taxes are not to be taken into account in determining deduction or credit, see section 906(b)(1).

#

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“(d)“(d)

Election To Treat Real Property Income as Income Connected With United States Business.—

“(1)“(1)

In general.—

A foreign corporation which during the taxable year derives any income—

“(A)“(A)

from real property located in the United States, or from any interest in such real property, including (i) gains from the sale or exchange of real property or an interest therein, (ii) rents or royalties from mines, wells, or other natural deposits, and (iii) gains described in section 631 (b) or (c),and

#

“(B)“(B)

which, but for this subsection, would not be treated as income effectively connected with the conduct of a trade or business within the United States,

#

may elect for such taxable year to treat all such income as income which is effectively connected with the conduct of a trade or business within the United States. In such case, such income shall be taxable as provided in subsection (a)(1) whether or not such corporation is engaged in trade or business within the United States during the taxable year. An election under this paragraph for any taxable year shall remain in effect for all subsequent taxable years, except that it may be revoked with the consent of the Secretary or his delegate with respect to any taxable year.

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“(2)“(2)

Election after revocation, etc.—

Paragraphs (2) and (3) or section 871 (d) shall apply in respect of elections under this

Ante, p. 1547.

subsection in the same manner and to the same extent as they apply in respect of elections under section 871(d).

#

#

“(e)“(e)

Interest on United States Obligations Received by Banks Organized in Possessions.—

In the case of a corporation created or organized in, or under the law of, a possession of the United States which is carrying on the banking business in a possession of the United States, interest on obligations of the United States shall—

“(1)“(1)

for purposes of this subpart, be treated as income which is effectively connected with the conduct of a trade or business within the United States, and

#

“(2)“(2)

shall be taxable as provided in subsection (a)(1) whether or not such corporation is engaged in trade or business within the United States during the taxable year.

#

#

“(f)“(f)

Returns of Tax by Agent.—

If any foreign corporation has no office or place of business in the United States but has an agent in the United States, the return required under section 6012 shall be

68A Stat. 732.

made by the agent.”

#

#

The table of sections for subpart B of part II of subchapter N of chapter 1 is amended by striking out the items relating to sections 881 and 882 and inserting in lieu thereof the following:

by striking out “and has derived 50 percent or more of its gross income from sources within the United States,” in that portion of subsection (a) which precedes paragraph (1) and by inserting in lieu thereof “and if 50 percent or more of the gross income of such corporation from all sources for such period is effectively connected with the conduct of a trade or business within the United States,”;

by striking out “from sources within the United States” in paragraph (1) and inserting in lieu thereof “which is effectively connected with the conduct of a trade or business within the United States”;

by striking out “from sources within the United States” in paragraph (2) and inserting in lieu thereof “, which is effectively connected with the conduct of a trade or business within the United States,”; and

by adding after paragraph (2) the following new sentence:

“For purposes of this subsection, the gross income of the foreign corporation for any period before the first taxable year beginning after December 31, 1966, which is effectively connected with the conduct of a trade or business within the United States is an amount equal to the gross income for such period from sources within the United States.”

Section 245 (relating to dividends received from certain foreign corporations) is amended by redesignating subsection (b) as(c), and by inserting after subsection (a) the following new subsection:

“(b)“(b)

Certain Dividends Received From Wholly Owned Foreign Subsidiaries.—

“(1)“(1)

In general.—

In the case of dividends described in paragraph (2) received from a foreign corporation by a domestic corporation which, for its taxable year in which such dividends are received, owns (directly or indirectly) all of the outstanding stock of such foreign corporation, there shall be allowed as a deduction (in lieu of the deduction provided by subsection (a)) an amount equal to 100 percent of such dividends.

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“(2)“(2)

Eligible dividends.—

Paragraph (1) shall apply only to dividends which are paid out of the earnings and profits of a foreign corporation for a taxable year during which—

“(A)“(A)

all of its outstanding stock is owned (directly or indirectly) by the domestic corporation to which such dividends are paid; and

#

“(B)“(B)

all of its gross income from all sources is effectively connected with the conduct of a trade or business within the United States.

#

#

“(3)“(3)

Exception.—

Paragraph (1) shall not apply to any dividends if an election under section 1562 is effective for either—

78 Stat. 117.

“(A)“(A)

the taxable year of the domestic corporation in which such dividends are received, or

#

“(B)“(B)

the taxable year of the foreign corporation out of the earnings and profits of which such dividends are paid.”

#

#

#

Subsection (a) of such section 245 is amended by adding at

Ante, p. 1558.

the end thereof (after the sentence added by subsection (d)(4)) the following new sentence: “For purposes of paragraph (2), there shall not be taken into account any taxable year within such uninterrupted period if, with respect to dividends paid out of the earnings and profits of such year, the deduction provided by subsection (b) would be allowable.”

Subsection (c) of such section 245 (as redesignated by paragraph (1)) is amended by striking out “subsection (a)” and inserting in lieu thereof “subsections (a) and (b)”.

by striking out “gross income from sources within the United States” in clause (i) and inserting in lieu thereof “gross income, which is effectively connected with the conduct of a trade or business within the United States”;

by striking out “gross income from sources without the United States” in clause (ii) and inserting in lieu thereof “gross income which is not effectively connected with the conduct of a trade or business within the United States”; and

by adding at the end thereof the following new sentences: “For purposes of clause (i), the gross income of a foreign corporation for any period before its first taxable year beginning after December 31, 1966, which is effectively connected with the conduct of a trade or business within the United States is an amount equal to the gross income for such period from sources within the United States. For purposes of clause (ii), the gross income of a foreign corporation for any period before its first taxable year beginning after December 31, 1966, which is not effectively connected with the conduct of a trade or business within the United States is an amount equal to the gross income for such period from sources without the United States.”

Paragraph (7) of section 542(c) (relating to corporations

68A Stat. 186; 78 Stat. 79.

not subject to personal holding company tax) is amended to read as follows:

“(7)“(7)

a foreign corporation (other than a corporation which has income to which section 543(a)(7) applies for the taxable

78 Stat. 81.

year), if all of its stock outstanding during the last half of the taxable year is owned by nonresident alien individuals, whether directly or indirectly through foreign estates, foreign trusts, foreign partnerships, or other foreign corporations;”.

#

Section 543(b)(1) (relating to definition of ordinary gross income) is amended—

Section 545 (relating to definition of undistributed personal holding company income) is amended—

Section 842 (relating to computation of gross income) is

68A Stat. 267.

amended to read as follows:

“SEC. 842. FOREIGN CORPORATIONS CARRYING ON INSURANCE BUSINESS.

“If a foreign corporation carrying on an insurance business within the United States would qualify under part I, II, or III of this subchapter for the taxable year if (without regard to income not effectively

26 USC 801–832.

connected with the conduct of any trade or business within the United States) it were a domestic corporation, such corporation shall be taxable under such part on its income effectively connected with its conduct of any trade or business within the United States. With respect to the remainder of its income, which is from sources within the United States, such a foreign corporation shall be taxable as provided in section 881.”

Ante, p. 1555

#

The table of sections for part IV of subchapter L of chapter 1 is amended by striking out the item relating to section 842 and inserting in lieu thereof the following:

Section 819 (relating to foreign life insurance companies)

73 Stat. 136.

is amended—

Section 821 (relating to tax on mutual insurance companies to which part II applies) is amended—

Section 822 (relating to determination of taxable investment income) is amended by striking out subsection (e) and by redesignating subsection (f) as subsection (e).

Section 831 (relating to tax on certain other insurance companies) is amended—

Section 832 (relating to insurance company taxable income) is amended by striking out subsection (d) and by redesignating subsection (e) as subsection (d).

The second sentence of section 841 (relating to credit for foreign taxes) is amended by striking out “sentence,” and inserting in lieu thereof “sentence (and for purposes of applying section

Post, p. 1568.

906 with respect to a foreign corporation subject to tax under this subchapter),”.

Section 884 is amended to read as follows:

“SEC. 884. CROSS REFERENCES.

“(1)“(1)

For special provisions relating to unrelated business income of foreign educational, charitable, and certain other exempt organizations, see section 512(a).

#

“(2)“(2)

For special provisions relating to foreign corporations carrying on an insurance business within the United States, see section 842.

#

“(3)“(3)

For rules applicable in determining whether any foreign corporation is engaged in trade or business within the United States, see section 864(b).

#

“(4)“(4)

For adjustment of tax in case of corporations of certain foreign countries, see section 896.

#

“(5)“(5)

For allowance of credit against the tax in case of a foreign corporation having income effectively connected with the conduct of a trade or business within the United States, see section 906.

#

“(6)“(6)

For withholding at source of tax on income of foreign corporations, see section 1442.”

#

#

Section 953(b)(3)(F) is amended by striking out

76 Stat. 1009.

“832(b)(5)” and inserting in lieu thereof “832(c)(5)”.

Section 1249(a) is amended by striking out “Except as provided

76 Stat. 1045.

in subsection (c), gain” and inserting in lieu thereof “Gain”.

by striking out the item relating to section 894 and inserting in lieu thereof

by adding at the end of such table the following:

Part III of subchapter N of chapter 1 (relating to income

68A Stat. 285; 76 Stat. 1006.

26 USC 901–972.

from sources without the United States) is amended by adding at the end thereof the following new subpart:

“Subpart H— Income of Certain Nonresident United States Citizens Subject to Foreign Community Property Laws

“SEC. 981. ELECTION AS TO TREATMENT OF INCOME SUBJECT TO FOREIGN COMMUNITY PROPERTY LAWS.

“(a)“(a)

General Rule.—

In the case of any taxable year beginning after December 31, 1966, if—

“(1)“(1)

an individual is (A) a citizen of the United States, (B) a bona fide resident of a foreign country or countries during the entire taxable year, and (C) married at the close of the taxable year to a spouse who is a nonresident alien during the entire taxable year, and

#

“(2)“(2)

such individual and his spouse elect to have subsection (b) apply to their community income under foreign community property laws,

#

then subsection (b) shall apply to such income of such individual and such spouse for the taxable year and for all subsequent taxable years for which the requirements of paragraph (1) are met, unless the Secretary or his delegate consents to a termmation of the election.

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“(b)“(b)

Treatment of Community Income.—

For any taxable year to which an election made under subsection (a) applies, the community income under foreign community property laws of the husband and wife making the election shall be treated as follows:

“(1)“(1)

Earned income (within the meaning of the first sentence of section 911(b)), other than trade or business income and a partner’s distributive share of partnership income, shall be treated as the income of the spouse who rendered the personal services.

#

“(2)“(2)

Trade or business income, and a partner’s distributive share of partnership income, shall be treated as provided in

68A Stat. 354; 68 Stat. 1087.

section 1402(a)(5).

#

“(3)“(3)

Community income not described in paragraph (1) or (2) which is derived from the separate property (as determined under the applicable foreign community property law) of one spouse shall be treated as the income of such spouse.

#

“(4)“(4)

All other such community income shall be treated as provided in the applicable foreign community property law.

#

#

“(c)“(c)

Election for Pre–1967 Years.—

“(1)“(1)

Election.—

If an individual meets the requirements of subsections (a)(1)(A) and (C) for any taxable year beginning before January 1, 1967, and if such individual and the spouse referred to in subsection (a)(1)(C) elect under this subsection, then paragraph (2) of this subsection shall apply to their community income under foreign community property laws for all open taxable years beginning before January 1, 1967 (whether under this chapter, the corresponding provisions of the Internal

53 Stat. 1.

Revenue Code of 1939, or the corresponding provisions of prior revenue laws), for which the requirements of subsection (a)(1)(A) and (C) are met.

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“(2)“(2)

Effect of election.—

For any taxable year to which an election made under this subsection applies, the community income under foreign community property laws of the husband and wife making the election shall be treated as provided by subsection (b), except that the other community income described in paragraph (4) of subsection (b) shall be treated as the income of the spouse who, for such taxable year, had gross income under paragraphs (1), (2), and (3) of subsection (b), plus separate gross income, greater than that of the other spouse.

#

#

“(d)“(d)

Time for Making Elections; Period of Limitations; etc.—

“(1)“(1)

Time.—

An election under subsection (a) or (c) for a taxable year may be made at any time while such year is still open, and shall be made in such manner as the Secretary or his delegate shall by regulations prescribe.

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“(2)“(2)

Extension of period for assessing deficiencies and making refunds.—

If any taxable year to which an election under subsection (a) or (c) applies is open at the time such election is made, the period for assessing a deficiency against, and the period for filing claim for credit or refund of any overpayment by, the husband and wife for such taxable year, to the extent such defi-ciency or overpayment is attributable to such an election, shall not expire before 1 year after the date of such election.

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“(3)“(3)

Alien spouse need not join in subsection (c) election in certain cases.—

If the Secretary or his delegate determines—

“(A)“(A)

that an election under subsection (c) would not affect the liability for Federal income tax of the spouse referred to in subsection (a)(1)(C) for any taxable year, or

#

“(B)“(B)

that the effect on such liability for tax cannot be ascertained and that to deny the election to the citizen of the United States would be inequitable and cause undue hardship,

#

such spouse shall not be required to join in such election, and paragraph (2) of this subsection shall not apply with respect to such spouse.

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“(4)“(4)

Interest.—

To the extent that any overpayment or deficiency for a taxable year is attributable to an election made under this section, no interest shall be allowed or paid for any period before the day which is 1 year after the date of such elect ion.

#

#

“(e)“(e)

Definitions and Special Rules.—

For purposes of this section—

“(1)“(1)

Deductions.—

Deductions shall be treated in a manner consistent with the manner provided by this section for the income to which they relate.

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“(2)“(2)

Open years.—

A taxable year of a citizen of the United States and his spouse shall be treated as ‘open’ if the period for assessing a deficiency against such citizen for such year has not expired before the date of the election under subsection (a) or (c), as the case may be.

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“(3)“(3)

Elections in case of decedents.—

If a husband or wife is deceased his election under this section may be made by his executor, administrator, or other person charged with his property.

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“(4)“(4)

Death of spouse during taxable year.—

In applying subsection (a)(1)(C), and in determining under subsection (c)(2) which spouse has the greater income for a taxable year, if a husband or wife dies the taxable year of the surviving spouse shall be treated as ending on the date of such death.”

#

#

#

#

The table of subparts for such part III is amended by adding at the end thereof the following:

Section 911(d) (relating to earned income from sources

76 Stat. 1005.

without the United States) is amended—

Section 6513(b) (relating to time tax is considered paid in

68A Stat. 812.

the case of prepaid income tax) is amended to read as follows:

“(b)“(b)

Prepaid Income Tax.—

For purposes of section 6511 or 6512—

“(1)“(1)

Any tax actually deducted and withheld at the source during any calendar year under chapter 24 shall, in respect of the

26 USC 3401–3404.

recipient of the income, be deemed to have been paid by him on the 15th day of the fourth month following the close of his taxable year with respect to which such tax is allowable as a credit under section 31.

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“(2)“(2)

Any amount paid as estimated income tax for any taxable year shall be deemed to have been paid on the last day prescribed

68A Stat. 732.

for filing the return under section 6012 for such taxable year (determined without regard to any extension of time for filing such return).

#

“(3)“(3)

Any tax withheld at the source under chapter 3 shall, in respect of the recipient of the income, be deemed to have been paid by such recipient on the last day prescribed for filing the return under section 6012 for the taxable year (determined without regard to any extension of time for filing) with respect to which such tax is allowable as a credit under section 1462. For this purpose, any exemption granted under section 6012 from the requirement of filing a return shall be disregarded.”

#

#

Section 6513(c) (relating to return and payment of Social Security taxes and income tax withholding) is amended—

Section 6501(b) (relating to time returns deemed filed) is amended—

The amendments made by this subsection shall take effect on the date of the enactment of this Act.

Subpart A of part III of subchapter N of chapter 1 (relating to foreign tax credit) is amended by adding at the end thereof the following new section:

“SEC. 906. NONRESIDENT ALIEN INDIVIDUALS AND FOREIGN CORPORATIONS.

“(a)“(a)

Allowance of Credit.—

A nonresident alien individual or a foreign corporation engaged in trade or business within the United States during the taxable year shall be allowed a credit under section 901 for the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year (or deemed, under section

76 Stat. 999.

902, paid or accrued during the taxable year) to any foreign country or possession of the United States with respect to income effectively connected with the conduct of a trade or business within the United States.

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“(b)“(b)

Special Rules.—

“(1)“(1)

For purposes of subsection (a) and for purposes of determining the deductions allowable under sections 873(a) and 882(c), in determining the amount of any tax paid or accrued to any foreign country or possession there shall not be taken into account any amount of tax to the extent the tax so paid or accrued is imposed with respect to income from sources within the United States which would not be taxed by such foreign country or possession but for the fact that—

“(A)“(A)

in the case of a nonresident alien individual, such individual is a citizen or resident of such foreign country or possession, or

#

“(B)“(B)

in the case of a foreign corporation, such corporation was created or organized under the law of such foreign country or possession or is domiciled for tax purposes in such country or possession.

#

#

“(2)“(2)

For purposes of subsection (a), in applying section 904

68A Stat. 287.

the taxpayer’s taxable income shall be treated as consisting only of the taxable income effectively connected with the taxpayer’s conduct of a trade or business within the United States.

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“(3)“(3)

The credit allowed pursuant to subsection (a) shall not be allowed against any tax imposed by section 871(a) (relating to

Ante, p 1547.

income of nonresident alien individual not connected with United States business) or 881 (relating to income of foreign corporations

Ante, p. 1555.

not connected with United States business).

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“(4)“(4)

For purposes of sections 902(a) and 78, a foreign corporation

76 Stat. 999, 1001.

choosing the benefits of this subpart which receives dividends shall, with respect to such dividends, be treated as a domestic corporation.”

#

#

#

The table of sections for such subpart A is amended by adding at the end thereof the following:

Section 874(c) is amended by striking out

68A Stat. 281.

“(c)“(c)

Foreign Tax Credit Not Allowed.—

A nonresident” and inserting in lieu thereof the following:

#

“(c)“(c)

Foreign Tax Credit.—

Except as provided in section 906, a

Ante, p. 1568

nonresident”.

#

Subsection (b) of section 901 (relating to amount allowed) is amended by redesignating paragraph (4) as paragraph (5), and by inserting after paragraph (3) the following new paragraph:

“(4)“(4)

Nonresident alien individuals and foreign corporations.—

In the case of any nonresident alien individual not described in section 876 and in the case of any foreign corporation, the amount determined pursuant to section 906; and”.

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Paragraph (5)(as redesignated) of section 901(b) is amended by striking out “or (3),” and inserting in lieu thereof “(3), or (4),”.

The amendments made by this subsection shall apply with respect to taxable years beginning after December 31, 1966. In applying section 904 of the Internal Revenue Code of 1954 with respect to section 906 of such Code, no amount may be carried from or to any taxable year beginning before January 1, 1967, and no such year shall be taken into account.

Paragraph (3) of section 901(b) (relating to amount of foreign tax credit allowed in case of alien resident of the United States or Puerto Rico) is amended by striking out “, if the foreign country of which such alien resident is a citizen or subject, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country”.

Section 901 is amended by redesignating subsections (c) and (d) as subsections (d) and (e), and by inserting after subsection (b) the following new subsection:

“(c)“(c)

Similar Credit Required for Certain Alien Residents.—

Whenever the President finds that—

“(1)“(1)

a foreign country, in imposing income, war profits, and excess profits taxes, does not allow to citizens of the United States residing in such foreign country a credit for any such taxes paid or accrued to the United States or any foreign country, as the case may be, similar to the credit allowed under subsection (b)(3),

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“(2)“(2)

such foreign country, when requested by the United States to do so, has not acted to provide such a similar credit to citizens of the United States residing in such foreign country, and

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“(3)“(3)

it is in the public interest to allow the credit under subsection (b)(3) to citizens or subjects of such foreign country only if it allows such a similar credit to citizens of the United States residing in such foreign country,

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the President shall proclaim that, for taxable years beginning while the proclamation remains in effect, the credit under subsection (b)(3) shall be allowed to citizens or subjects of such foreign country only if such foreign country, in imposing income, war profits, and excess profits taxes, allows to citizens of the United States residing in such foreign country such a similar credit.”

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Section 2014 (relating to credit for foreign death taxes) is amended by striking out the second sentence of subsection (a), and by adding at the end of such section the following new subsection:

“(h)“(h)

Similar Credit Required for Certain Alien Residents.—

Whenever the President finds that—

“(1)“(1)

a foreign country, in imposing estate, inheritance, legacy, or succession taxes, does not allow to citizens of the United States resident in such foreign country at the time of death a credit similar to the credit allowed under subsection (a),

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“(2)“(2)

such foreign country, when requested by the United States to do so has not acted to provide such a similar credit in the case of citizens of the United States resident in such foreign country at the time of death, and

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“(3)“(3)

it is in the public interest to allow the credit under subsection (a) in the case of citizens or subjects of such foreign country only if it allows such a similar credit in the case of citizens of the United States resident in such foreign country at the time of death,

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the President shall proclaim that, in the case of citizens or subjects of such foreign country dying while the proclamation remains in effect, the credit under subsection (a) shall be allowed only if such foreign country allows such a similar credit in the case of citizens of the United States resident in such foreign country at the time of death.”

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The amendments made by this subsection (other than paragraph (3)) shall apply with respect to taxable years beginning after December 31, 1966. The amendment made by paragraph (3) shall apply with respect to estates of decedents dying after the date of the enactment of this Act.

Section 904(f)(2) (relating to application of limitations on foreign tax credit in case of certain interest income) is amended—

The amendments made by paragraph (1) shall apply to interest received after December 31, 1965, in taxable years ending after such date.

by striking out “and” at the end of clause (v);

by striking out the period at the end of clause (vi) and inserting in lieu thereof and”; and

by adding at the end thereof the following new clause:

“(vii)“(vii)

any property which is owned by a domestic corporation (other than a corporation entitled to the benefits of section 931 or 934(b)) or by a United States citizen (other than a citizen entitled to the benefits of

68A Stat. 291; 74 Stat. 998.

section 931, 932, 933, or 934(c)) and which is used predominantly in a possession of the United States by such a corporation or such a citizen, or by a corporation created or organized in, or under the law of, a possession of the United States.”

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Each of the following provisions of section 401 is amended by striking out “(determined without regard to section 404(a)(10))” each place it appears:

Subparagraph (A) of section 404(e)(2) is amended by striking out “(determined without regard to subsection (a)(10))”.

Paragraph (1) and subparagraph (B) of paragraph (2) of section 404(e) are each amended by striking out “(determined without regard to paragraph (10) thereof)”.

Section 543(a)(2) (relating to adjusted income from rents

78 Stat. 81.

included in personal holding company income) is amended by striking out the last sentence thereof.

Section 543(b)(2) (relating to definition of adjusted ordinary gross income) is amended by adding at the end thereof the following new subparagraph:

“(D)“(D)

Certain excluded rents.—

From the gross income consisting of compensation described in subparagraph (D) of paragraph (3) subtract the amount allowable as deductions for the items described in clauses (i), (ii), (iii), and (iv) of subparagraph (A) to the extent allocable, under regulations prescribed by the Secretary or his delegate, to such gross income. The amount subtracted under this subparagraph shall not exceed such gross income.”

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by inserting “clay, laterite, and nephelite syenite” after “anorthosite” in paragraph (2)(B); and

by striking out “if paragraph (5)(B) does not apply” in paragraph (3)(B) and inserting in lieu thereof “if neither paragraph (2)(B) nor (5)(B) applies”.

by striking out “mollusk shells (including clam shells and oyster shells),” in paragraph (5)(A), and

by inserting “mollusk shells (including clam shells and oyster shells),” after “marble,” in paragraph (6).

by renumbering paragraphs (5) and (6) as (6) and (7), respectively, and by inserting after paragraph (4) the following new paragraph:

“(5)“(5)

7½ percent—clay and shale used or sold for use in the manufacture of sewer pipe or brick, and clay, shale, and slate used or sold for use as sintered or burned lightweight aggregates.”;

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by striking out in paragraph (3)(B)(as amended by section 207(a)(2)) “if neither paragraph (2)(B) nor (5)(B) applies” and inserting in lieu thereof “if neither paragraph (2)(B), (5), or (6)(B) applies”;

by striking out in paragraph (6)(as renumbered by paragraph (1)) “shale, and stone, except stone described in paragraph (6)” and inserting in lieu thereof “shale (except shale described in paragraph (5)), and stone (except stone described in paragraph (7))”;

by striking out, in subparagraph (B) of paragraph (6)(as so renumbered), “building or paving brick,” and by striking out “sewer pipe,”; and

by inserting after “any such other mineral” in paragraph (7)(as so renumbered) “(other than slate to which paragraph (5) applies)”.

Section 1382(a) (relating to gross income of cooperatives) is amended by striking out the period at the end thereof and inserting “or by reason of any amount paid to a patron as a per-unit retain allocation (as defined in section 1388(f)).”

Section 1382(b) is amended—

Section 1382(e) is amended to read as follows:

76 Stat. 1047.

“(e)“(e)

Products Marketed Under Pooling Arrangements.—

For purposes of subsection (b), in the case of a pooling arrangement for the marketing of products—

“(1)“(1)

the patronage shall (to the extent provided in regulations prescribed by the Secretary or his delegate) be treated as patronage occurring during the taxable year in which the pool closes, and

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“(2)“(2)

the marketing of products shall be treated as occurring during any of the taxable years in which the pool is open.”

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Section 1382(f) is amended by striking out “subsection (b)” and inserting in lieu thereof “paragraphs (1) and (2) of subsection (b)”.

The heading for section 1383 is amended by striking out the period at the end thereof and inserting “OR NONQUALIFIED PER-UNIT RETAIN CERTIFICATES.”

Section 1383(a) is amended—

Section 1383 (b)(2) is amended—

The table of sections for part I of subchapter T of chapter 1 is amended by striking out—

and inserting in lieu thereof—

Section 1385(a) is amended by striking out “and” at the end of paragraph (1), by striking out the period at the end of paragraph (2) and inserting in lieu thereof “, and”, and by adding at the end thereof the following new paragraph:

“(3)“(3)

the amount of any per-unit retain allocation which is paid in qualified per-unit retain certificates and which is received by him during the taxable year from an organization described in section 1381(a).”

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The heading for section 1385(c) is amended by striking out “Allocation” and inserting in lieu thereof “Allocation and Certain Nonqualified Per-Unit Retain Certificates”.

Section 1385(c)(1) is amended to read as follows:

“(1)“(1)

Application of subsection.—

This subsection shall apply

“(A)“(A)

any nonqualified written notice of allocation which—

“(i)“(i)

was paid as a patronage dividend, or

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“(ii)“(ii)

was paid by an organization described in section 1381 (a)(1) on a patronage basis with respect to earnings derived from business or sources described in section 1382(c)(2)(A),and

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“(B)“(B)

any nonqualified per-unit retain certificate which was paid as a per-unit retain allocation.”

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Section 1385(c)(2) is amended—

The table of parts for subchapter T of chapter 1 is amended by striking out—

and inserting in lieu thereof—

(A) Section 1388(e)(1) is amended by striking out “allocation)” and inserting in lieu thereof “allocation or a per-unit retain certificate)”.

Section 1388 is amended by adding at the end thereof the following new subsections:

“(f)“(f)

Per-Unit Retain Allocation.—

For purposes of this subchapter, the term ‘per-unit retain allocation’ means any allocation, by an organization to which part I of this subchapter applies, other than by payment in money or other property (except per-unit retain certificates) to a patron with respect to products marketed for him, the amount of which is fixed without reference to the net earnings of the organization pursuant to an agreement between the organization and the patron.

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“(g)“(g)

Per-Unit Retain Certificate.—

For purposes of this subchapter, the term ‘per-unit retain certificate’ means any written notice which discloses to the recipient the stated dollar amount of a per-unit retain allocation to him by the organization.

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“(h)“(h)

Qualified Per-Unit Retain Certificate.—

“(1)“(1)

Defined.—

For purposes of this subchapter, the term ‘qualified per-unit retain certificate’ means any per-unit retain certificate which the distributee has agreed, in the manner provided in paragraph (2), to take into account at its stated dollar amount as provided in section 1385 (a).

76 Stat. 1048.

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“(2)“(2)

Manner of obtaining agreement.—

A distributee shall agree to take a per-unit retain certificate into account as provided in paragraph (1) only by—

“(A)“(A)

making such agreement in writing, or

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“(B)“(B)

obtaining or retaining membership in the organization after—

“(i)“(i)

such organization has adopted (after the date of the enactment of this subsection) a bylaw providing that membership in the organization constitutes such agreement, and

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“(ii)“(ii)

he has received a written notification and copy of such bylaw.

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“(3)“(3)

Period for which agreement is effective.—

“(A)“(A)

General rule.—

Except as provided in subparagraph (B)—

“(i)“(i)

an agreement described in paragraph (2)(A) shall be an agreement with respect to all products delivered by the distributee to the organization during the taxable year of the organization during which such agreement is made and all subsequent taxable years of the organization; and

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“(ii)“(ii)

an agreement described in paragraph (2)(B) shall be an agreement with respect to all products delivered by the distributee to the organization after he received the notification and copy described in paragraph (2)(B)(ii).

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“(B)“(B)

Revocation, etc.—

“(i)“(i)

Any agreement described in paragraph (2)(A) may be revoked (in writing) by the distributee at any time. Any such revocation shall be effective with respect to products delivered by the distributee on or after the first day of the first taxable year of the organization beginning after the revocation is filed with the organization; except that in the case of a pooling arrangement described in section 1382(e) a revocation made by a distributee

76 Stat. 1046.

shall not be effective as to any products which were delivered to the organization by the distributee before such revocation.

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“(ii)“(ii)

Any agreement described in paragraph (2)(B) shall not be effective with respect to any products delivered after the distributee ceases to be a member of the organization or after the bylaws of the organization cease to contain the provision described in paragraph (2)(B)(i).

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“(i)“(i)

Nonqualified Per-Unit Retain Certificate.—

For purposes of this subchapter, the term ‘nonqualified per-unit retain certificate’ means a per-unit retain certificate which is not described in subsection (h).”

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Amounts subject to reporting.—

Section 6044(b)(1) is amended by striking out “and” at the end of subparagraph (B), by striking out the period at the end of subparagraph (C) and inserting in lieu thereof “, and”, and by adding after subparagraph (C) the following new subparagraphs:

“(D)“(D)

the amount of any per-unit retain allocation (as defined in section 1388(f)) which is paid in qualified per-unit retain certificates (as defined in section 1388(h)), and

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“(E)“(E)

any amount described in section 1382 (b)(4) (relating to redemption of nonqualified per-unit retain certificates).”

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Determination of amount paid.—

The amendments made by subsections (a), (b), and (c) shall apply to per-unit retain allocations made during taxable years of an organization described in section 1381(a) (relating to organizations to which part I of subchapter T of chapter 1 applies) beginning after April 30, 1966, with respect to products delivered during such years.

The amendments made by subsection (d) shall apply with respect to calendar years after 1966.

Except as provided in paragraph (2), a written agreement between a patron and a cooperative association—

shall be effective (for the period prescribed in the agreement) for purposes of section 1388(h) of the Internal Revenue Code of 1954 as if entered into, pursuant to such section, after the date of the enactment of this Act.

An agreement described in paragraphs (1)(A) and (C) which was included in a by-law of the cooperative association and which is in effect on the date of the enactment of this Act shall be effective for purposes of section 1388(h) of such Code only for taxable years of the association beginning before May 1, 1967.

Section 4914(j)(1) (relating to loss of entitlement to exclusion in case of certain subsequent transfers) is amended—

Section 4918 (relating to exemption for prior American

78 Stat. 831.

ownership) is amended by adding at the end thereof the following new subsection:

“(g)“(g)

Certain Debt Obligations Arising Out of Loans To Assure Raw Material Sources.—

Under regulations prescribed by the Secretary or his delegate, subsection (a) shall not apply to the acquisition by a United States person of any debt obligation to which section 4914(d) applied where the acquisition of the debt obligation by such person is made with an intent to sell, or to offer to sell, any part of such debt obligation to United States persons. The preceding sentence shall not apply if the tax imposed by section 4911 has applied

78 Stat. 809.

to any prior acquisition of such debt obligation.”

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by striking out “at the time of the initial designation” in the last sentence of paragraph (2);

by striking out “An” in the first sentence of paragraph (3)(A)(i) and inserting in lieu thereof “Except as provided in clause (iii),an”;

by striking out “under this subparagraph” in paragraph (3)(A)(ii) and inserting in lieu thereof “under clause (i)”;

by adding after clause (ii) of paragraph (3)(A) the following new clauses:

“(iii)“(iii)

Initial designation after October 2, 1964.—

An insurance company which was not in existence on October 2, 1964, or was otherwise ineligible to establish a fund (or funds) of assets described in paragraph (2) by making an initial designation under clause (i) on or before such date, may establish (and thereafter currently maintain) such fund (or funds) of assets at any time after the enactment of this clause by designating stock of a foreign issuer or a debt obligation of a foreign obligor as a part of such fund in accordance with the provisions of clause (iv)(if applicable) and subparagraph (B)(i).

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“(iv)“(iv)

Funds involving currencies of former less developed countries.—

An insurance company desiring to establish a fund under clause (iii) with respect to insurance contracts payable in the currency of a country designated as a less developed country on October 2, 1964, which thereafter has such designation terminated

78 Stat. 827.

by an Executive order issued under section 4916(b), shall designate as assets of such fund, to the extent permitted by subparagraph (E), the stock of foreign issuers or debt obligations of foreign obligors as follows: First, stock and debt obligations having a period remaining to maturity of at least 1 year (other than stock or a debt obligation described in section 4916(a)) acquired before July 19, 1963, and owned by the company on the date which the President, in accordance with section 4916(b), communicates to Congress his intention to terminate the status of such country as a less developed country; second, stock and debt obligations having a period remaining to maturity of at least 1 year described m section 4916(a)(and owned by the company on the date of such termination) which, at the time of acquisition, qualified for the exclusion provided in such section because of the status of such country as a less developed country; and third, such stock or debt obligations as the company may elect to designate under subparagraph (B)(i). The period remaining to maturity referred to in the preceding sentence shall be determined as of the date of the President’s communication to Congress.”;

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by striking out “to maintain fund” in the heading of paragraph (3)(B);

by striking out “as provided in subparagraph (A)(ii)” in paragraph (3)(B)(i) and inserting in lieu thereof “under subparagraphs (A)(i) and (ii)”;

by inserting before the period at the end of the first sentence of paragraph (3)(C) the following: “; except that, with respect to a fund established under subparagraph (A)(iii), stock or debt obligations acquired before the establishment of such fund may not be designated as part of such fund under this subparagraph”;

by striking out “subparagraph (B),” in paragraph (3)(E)(i) and inserting in lieu thereof “subparagraph (A)(iv), (B),”;

by striking out “subparagraph (A)” in paragraph (4)(B)(i) and inserting in lieu thereof “subparagraph (A)(i)”;

by striking out “paragraph (3)(A)” in paragraph (4)(B)(ii) and inserting in lieu thereof “paragraph (3)(A)(i)”; and

by adding at the end of paragraph (4) the following new

78 Stat. 820.

paragraph:

“(C)“(C)

Special rule.—

For purposes of subparagraph (A), if a country designated as a less developed country on September 2, 1964, thereafter has such designation terminated by an Executive order issued under section 4916(b), all insurance

78 Stat. 827.

contracts payable in the currency of such country which were entered into before such designation was terminated shall be treated as insurance contracts payable in the currency of a country other than a less developed country.”

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In general.—

The Secretary of the Treasury shall, with respect to each presidential campaign, pay out of the Fund, as authorized by appropriation Acts, into the treasury of each political party which has complied with the provisions of paragraph (3) an amount (subject to the limitation in paragraph (3)(B)) determined under paragraph (2).

Determination of amounts.—

Limitations.—

The Comptroller General shall certify to the Secretary of the Treasury the amounts payable to any political party under paragraph (1). The Comptroller General’s determination as to the popular vote received by any candidate of any political party shall be final and not subject to review. The Comptroller General is authorized to prescribe such rules and regulations, and to conduct such examinations and investigations, as he determines necessary to carry out his duties and functions under this subsection.

Definitions.—

For purposes of this subsection—