Internal Revenue Code:Sec. 936. Puerto Rico and possession tax credit
From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.
From TaxAlmanac
Contents |
Location in Internal Revenue Code
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter N - Tax Based on Income From Sources Within or Without
the United States
PART III - INCOME FROM SOURCES WITHOUT THE UNITED STATES
Subpart D - Possessions of the United States
Statute
Sec. 936. Puerto Rico and possession tax credit
(a) Allowance of credit
(1) In general
Except as otherwise provided in this section, if a domestic
corporation elects the application of this section and if the
conditions of both subparagraph (A) and subparagraph (B) of
paragraph (2) are satisfied, there shall be allowed as a credit
against the tax imposed by this chapter an amount equal to the
portion of the tax which is attributable to the sum of -
(A) the taxable income, from sources without the United
States, from -
(i) the active conduct of a trade or business within a
possession of the United States, or
(ii) the sale or exchange of substantially all of the
assets used by the taxpayer in the active conduct of such
trade or business, and
(B) the qualified possession source investment income.
(2) Conditions which must be satisfied
The conditions referred to in paragraph (1) are:
(A) 3-year period
If 80 percent or more of the gross income of such domestic
corporation for the 3-year period immediately preceding the
close of the taxable year (or for such part of such period
immediately preceding the close of such taxable year as may be
applicable) was derived from sources within a possession of the
United States (determined without regard to subsections (f) and
(g) of section 904'');
and
(B) Trade or business
If 75 percent or more of the gross income of such domestic
corporation for such period or such part thereof was derived
from the active conduct of a trade or business within a
possession of the United States.
(3) Credit not allowed against certain taxes
The credit provided by paragraph (1) shall not be allowed
against the tax imposed by -
(A) section 59A (relating to environmental tax),
(B) section 531 (relating to the tax on accumulated
earnings),
(C) section 541 (relating to personal holding company tax),
or
(D) section 1351 (relating to recoveries of foreign
expropriation losses).
(4) Limitations on credit for active business income
(A) In general
The amount of the credit determined under paragraph (1) for
any taxable year with respect to income referred to in
subparagraph (A) thereof shall not exceed the sum of the
following amounts:
(i) 60 percent of the sum of -
(I) the aggregate amount of the possession corporation's
qualified possession wages for such taxable year, plus
(II) the allocable employee fringe benefit expenses of
the possession corporation for the taxable year.
(ii) The sum of -
(I) 15 percent of the depreciation allowances for the
taxable year with respect to short-life qualified tangible
property,
(II) 40 percent of the depreciation allowances for the
taxable year with respect to medium-life qualified tangible
property, and
(III) 65 percent of the depreciation allowances for the
taxable year with respect to long-life qualified tangible
property.
(iii) If the possession corporation does not have an
election to use the method described in subsection
(h)(5)(C)(ii) (relating to profit split) in effect for the
taxable year, the amount of qualified possession income taxes
for the taxable year allocable to nonsheltered income.
(B) Election to take reduced credit
(i) In general
If an election under this subparagraph applies to a
possession corporation for any taxable year -
(I) subparagraph (A), and the provisions of subsection
(i), shall not apply to such possession corporation for
such taxable year, and
(II) the credit determined under paragraph (1) for such
taxable year with respect to income referred to in
subparagraph (A) thereof shall be the applicable percentage
of the credit which would otherwise have been determined
under such paragraph with respect to such income.
Notwithstanding subclause (I), a possession corporation to
which an election under this subparagraph applies shall be
entitled to the benefits of subsection (i)(3)(B) for taxes
allocable (on a pro rata basis) to taxable income the tax on
which is not offset by reason of this subparagraph.
(ii) Applicable percentage
The term ''applicable percentage'' means the percentage
determined in accordance with the following table:
In the case of taxable The
years beginning in: percentage is:
1994 60
1995 55
1996 50
1997 45
1998 and thereafter 40.
(iii) Election
(I) In general
An election under this subparagraph by any possession
corporation may be made only for the corporation's first
taxable year beginning after December 31, 1993, for which
it is a possession corporation.
(II) Period of election
An election under this subparagraph shall apply to the
taxable year for which made and all subsequent taxable
years unless revoked.
(III) Affiliated groups
If, for any taxable year, an election is not in effect
for any possession corporation which is a member of an
affiliated group, any election under this subparagraph for
any other member of such group is revoked for such taxable
year and all subsequent taxable years. For purposes of
this subclause, members of an affiliated group shall be
determined without regard to the exceptions contained in
section 1504(b) and as if the constructive ownership rules
of section 1563(e) applied for purposes of section 1504(a).
The Secretary may prescribe regulations to prevent the
avoidance of this subclause through deconsolidation or
otherwise.
(C) Cross reference
For definitions and special rules applicable to this
paragraph, see subsection (i).
(b) Amounts received in United States
In determining taxable income for purposes of subsection (a),
there shall not be taken into account as income from sources
without the United States any gross income which was received by
such domestic corporation within the United States, whether derived
from sources within or without the United States. This subsection
shall not apply to any amount described in subsection (a)(1)(A)(i)
received from a person who is not a related person (within the
meaning of subsection (h)(3) but without regard to subparagraphs
(D)(ii) and (E)(i) thereof) with respect to the domestic
corporation.
(c) Treatment of certain foreign taxes
For purposes of this title, any tax of a foreign country or a
possession of the United States which is paid or accrued with
respect to taxable income which is taken into account in computing
the credit under subsection (a) shall not be treated as income, war
profits, or excess profits taxes paid or accrued to a foreign
country or possession of the United States, and no deduction shall
be allowed under this title with respect to any amounts so paid or
accrued.
(d) Definitions and special rules
For purposes of this section -
(1) Possession
The term ''possession of the United States'' includes the
Commonwealth of Puerto Rico and the Virgin Islands.
(2) Qualified possession source investment income
The term ''qualified possession source investment income''
means gross income which -
(A) is from sources within a possession of the United States
in which a trade or business is actively conducted, and
(B) the taxpayer establishes to the satisfaction of the
Secretary is attributable to the investment in such possession
(for use therein) of funds derived from the active conduct of a
trade or business in such possession, or from such investment,
less the deductions properly apportioned or allocated thereto.
(3) Carryover basis property
(A) In general
Income from the sale or exchange of any asset the basis of
which is determined in whole or in part by reference to its
basis in the hands of another person shall not be treated as
income described in subparagraph (A) or (B) of subsection
(a)(1).
(B) Exception for possessions corporations, etc.
For purposes of subparagraph (A), the holding of any asset by
another person shall not be taken into account if throughout
the period for which such asset was held by such person section
931, this section, or section 957(c) (as in effect on the day
before the date of the enactment of the Tax Reform Act of 1986)
applied to such person.
(4) Investment in qualified Caribbean Basin countries
(A) In general
For purposes of paragraph (2)(B), an investment in a
financial institution shall, subject to such conditions as the
Secretary may prescribe by regulations, be treated as for use
in Puerto Rico to the extent used by such financial institution
(or by the Government Development Bank for Puerto Rico or the
Puerto Rico Economic Development Bank) -
(i) for investment, consistent with the goals and purposes
of the Caribbean Basin Economic Recovery Act, in -
(I) active business assets in a qualified Caribbean Basin
country, or
(II) development projects in a qualified Caribbean Basin
country, and
(ii) in accordance with a specific authorization granted by
the Commissioner of Financial Institutions of Puerto Rico
pursuant to regulations issued by such Commissioner.
A similar rule shall apply in the case of a direct investment
in the Government Development Bank for Puerto Rico or the
Puerto Rico Economic Development Bank.
(B) Qualified Caribbean Basin country
For purposes of this subsection, the term ''qualified
Caribbean Basin country'' means any beneficiary country (within
the meaning of section 212(a)(1)(A) of the Caribbean Basin
Economic Recovery Act) which meets the requirements of clauses
(i) and (ii) of section 274(h)(6)(A) and the Virgin Islands.
(C) Additional requirements
Subparagraph (A) shall not apply to any investment made by a
financial institution (or by the Government Development Bank
for Puerto Rico or the Puerto Rico Economic Development Bank)
unless -
(i) the person in whose trade or business such investment
is made (or such other recipient of the investment) and the
financial institution or such Bank certify to the Secretary
and the Commissioner of Financial Institutions of Puerto Rico
that the proceeds of the loan will be promptly used to
acquire active business assets or to make other authorized
expenditures, and
(ii) the financial institution (or the Government
Development Bank for Puerto Rico or the Puerto Rico Economic
Development Bank) and the recipient of the investment funds
agree to permit the Secretary and the Commissioner of
Financial Institutions of Puerto Rico to examine such of
their books and records as may be necessary to ensure that
the requirements of this paragraph are met.
(D) Requirement for investment in Caribbean Basin countries
(i) In general
For each calendar year, the government of Puerto Rico shall
take such steps as may be necessary to ensure that at least
$100,000,000 of qualified Caribbean Basin country investments
are made during such calendar year.
(ii) Qualified Caribbean Basin country investment
For purposes of clause (i), the term ''qualified Caribbean
Basin country investment'' means any investment if -
(I) the income from such investment is treated as
qualified possession source investment income by reason of
subparagraph (A), and
(II) such investment is not (directly or indirectly) a
refinancing of a prior investment (whether or not such
prior investment was a qualified Caribbean Basin country
investment).
(e) Election
(1) Period of election
The election provided in subsection (a) shall be made at such
time and in such manner as the Secretary may by regulations
prescribe. Any such election shall apply to the first taxable
year for which such election was made and for which the domestic
corporation satisfied the conditions of subparagraphs (A) and (B)
of subsection (a)(2) and for each taxable year thereafter until
such election is revoked by the domestic corporation under
paragraph (2). If any such election is revoked by the domestic
corporation under paragraph (2), such domestic corporation may
make a subsequent election under subsection (a) for any taxable
year thereafter for which such domestic corporation satisfies the
conditions of subparagraphs (A) and (B) of subsection (a)(2) and
any such subsequent election shall remain in effect until revoked
by such domestic corporation under paragraph (2).
(2) Revocation
An election under subsection (a) -
(A) may be revoked for any taxable year beginning before the
expiration of the 9th taxable year following the taxable year
for which such election first applies only with the consent of
the Secretary; and
(B) may be revoked for any taxable year beginning after the
expiration of such 9th taxable year without the consent of the
Secretary.
(f) Limitation on credit for DISC's and FSC's
No credit shall be allowed under this section to a corporation
for any taxable year -
(1) for which it is a DISC or former DISC, or
(2) in which it owns at any time stock in a -
(A) DISC or former DISC, or
(B) FSC or former FSC.
(g) Exception to accumulated earnings tax
(1) For purposes of section 535, the term ''accumulated taxable
income'' shall not include taxable income entitled to the credit
under subsection (a).
(2) For purposes of section 537, the term ''reasonable needs of
the business'' includes assets which produce income eligible for
the credit under subsection (a).
(h) Tax treatment of intangible property income
(1) In general
(A) Income attributable to shareholders
The intangible property income of a corporation electing the
application of this section for any taxable year shall be
included on a pro rata basis in the gross income of all
shareholders of such electing corporation at the close of the
taxable year of such electing corporation as income from
sources within the United States for the taxable year of such
shareholder in which or with which the taxable year of such
electing corporation ends.
(B) Exclusion from the income of an electing corporation
Any intangible property income of a corporation electing the
application of this section which is included in the gross
income of a shareholder of such corporation by reason of
subparagraph (A) shall be excluded from the gross income of
such corporation.
(2) Foreign shareholders; shareholders not subject to tax
(A) In general
Paragraph (1)(A) shall not apply with respect to any
shareholder -
(i) who is not a United States person, or
(ii) who is not subject to tax under this title on
intangible property income which would be allocated to such
shareholder (but for this subparagraph).
(B) Treatment of nonallocated intangible property income
For purposes of this subtitle, intangible property income of
a corporation electing the application of this section which is
not included in the gross income of a shareholder of such
corporation by reason of subparagraph (A) -
(i) shall be treated as income from sources within the
United States, and
(ii) shall not be taken into account under subsection
(a)(2).
(3) Intangible property income
For purposes of this subsection -
(A) In general
The term ''intangible property income'' means the gross
income of a corporation attributable to any intangible property
other than intangible property which has been licensed to such
corporation since prior to 1948 and is in use by such
corporation on the date of the enactment of this subparagraph.
(B) Intangible property
The term ''intangible property'' means any -
(i) patent, invention, formula, process, design, pattern,
or know-how;
(ii) copyright, literary, musical, or artistic composition;
(iii) trademark, trade name, or brand name;
(iv) franchise, license, or contract;
(v) method, program, system, procedure, campaign, survey,
study, forecast, estimate, customer list, or technical data;
or
(vi) any similar item,
which has substantial value independent of the services of any
individual.
(C) Exclusion of reasonable profit
The term ''intangible property income'' shall not include any
portion of the income from the sale, exchange or other
disposition of any product, or from the rendering of services,
by a corporation electing the application of this section which
is determined by the Secretary to be a reasonable profit on the
direct and indirect costs incurred by such electing corporation
which are attributable to such income.
(D) Related person
(i) In general
A person (hereinafter referred to as the ''related
person'') is related to any person if -
(I) the related person bears a relationship to such
person specified in section 267(b) or section 707(b)(1), or
(II) the related person and such person are members of
the same controlled group of corporations.
(ii) Special rule
For purposes of clause (i), section 267(b) and section
707(b)(1) shall be applied by substituting ''10 percent'' for
''50 percent''.
(E) Controlled group of corporations
The term ''controlled group of corporations'' has the meaning
given to such term by section 1563(a), except that -
(i) ''more than 10 percent'' shall be substituted for ''at
least 80 percent'' and ''more than 50 percent'' each place
either appears in section 1563(a), and
(ii) the determination shall be made without regard to
subsections (a)(4), (b)(2), and (e)(3)(C) of section 1563.
(4) Distributions to meet qualification requirements
(A) In general
If the Secretary determines that a corporation does not
satisfy a condition specified in subparagraph (A) or (B) of
subsection (a)(2) for any taxable year by reason of the
exclusion from gross income under paragraph (1)(B), such
corporation shall nevertheless be treated as satisfying such
condition for such year if it makes a pro rata distribution of
property after the close of such taxable year to its
shareholders (designated at the time of such distribution as a
distribution to meet qualification requirements) with respect
to their stock in an amount which is equal to -
(i) if the condition of subsection (a)(2)(A) is not
satisfied, that portion of the gross income for the period
described in subsection (a)(2)(A) -
(I) which was not derived from sources within a
possession, and
(II) which exceeds the amount of such income for such
period which would enable such corporation to satisfy the
condition of subsection (a)(2)(A),
(ii) if the condition of subsection (a)(2)(B) is not
satisfied, that portion of the gross income for such period -
(I) which was not derived from the active conduct of a
trade or business within a possession, and
(II) which exceeds the amount of such income for such
period which would enable such corporation to satisfy the
conditions of subsection (a)(2)(B), or
(iii) if neither of such conditions is satisfied, that
portion of the gross income which exceeds the amount of gross
income for such period which would enable such corporation to
satisfy the conditions of subparagraphs (A) and (B) of
subsection (a)(2).
(B) Effectively connected income
In the case of a shareholder who is a nonresident alien
individual or a foreign corporation, trust, or estate, any
distribution described in subparagraph (A) shall be treated as
income which is effectively connected with the conduct of a
trade or business conducted through a permanent establishment
of such shareholder within the United States.
(C) Distribution denied in case of fraud or willful neglect
Subparagraph (A) shall not apply to a corporation if the
determination of the Secretary described in subparagraph (A)
contains a finding that the failure of such corporation to
satisfy the conditions in subsection (a)(2) was due in whole or
in part to fraud with intent to evade tax or willful neglect on
the part of such corporation.
(5) Election out
(A) In general
The rules contained in paragraphs (1) through (4) do not
apply for any taxable year if an election pursuant to
subparagraph (F) is in effect to use one of the methods
specified in subparagraph (C).
(B) Eligibility
(i) Requirement of significant business presence
An election may be made to use one of the methods specified
in subparagraph (C) with respect to a product or type of
service only if an electing corporation has a significant
business presence in a possession with respect to such
product or type of service. An election may remain in effect
with respect to such product or type of service for any
subsequent taxable year only if such electing corporation
maintains a significant business presence in a possession
with respect to such product or type of service in such
subsequent taxable year. If an election is not in effect for
a taxable year because of the preceding sentence, the
electing corporation shall be deemed to have revoked the
election on the first day of such taxable year.
(ii) Definition
For purposes of this subparagraph, an electing corporation
has a ''significant business presence'' in a possession for a
taxable year with respect to a product or type of service if:
(I) the total production costs (other than direct
material costs and other than interest excluded by
regulations prescribed by the Secretary) incurred by the
electing corporation in the possession in producing units
of that product sold or otherwise disposed of during the
taxable year by the affiliated group to persons who are not
members of the affiliated group are not less than 25
percent of the difference between (a) the gross receipts
from sales or other dispositions during the taxable year by
the affiliated group to persons who are not members of the
affiliated group of such units of the product produced, in
whole or in part, by the electing corporation in the
possession, and (b) the direct material costs of the
purchase of materials for such units of that product by all
members of the affiliated group from persons who are not
members of the affiliated group; or
(II) no less than 65 percent of the direct labor costs of
the affiliated group for units of the product produced
during the taxable year in whole or in part by the electing
corporation or for the type of service rendered by the
electing corporation during the taxable year, is incurred
by the electing corporation and is compensation for
services performed in the possession; or
(III) with respect to purchases and sales by an electing
corporation of all goods not produced in whole or in part
by any member of the affiliated group and sold by the
electing corporation to persons other than members of the
affiliated group, no less than 65 percent of the total
direct labor costs of the affiliated group in connection
with all purchases and sales of such goods sold during the
taxable year by such electing corporation is incurred by
such electing corporation and is compensation for services
performed in the possession.
Notwithstanding satisfaction of one of the foregoing tests, an
electing corporation shall not be treated as having a
significant business presence in a possession with respect to
a product produced in whole or in part by the electing
corporation in the possession, for purposes of an election to
use the method specified in subparagraph (C)(ii), unless such
product is manufactured or produced in the possession by the
electing corporation within the meaning of subsection
(d)(1)(A) of section 954.
(iii) Special rules
(I) An electing corporation which produces a product or
renders a type of service in a possession on the date of the
enactment of this clause is not required to meet the
significant business presence test in a possession with
respect to such product or type of service for its taxable
years beginning before January 1, 1986.
(II) For purposes of this subparagraph, the costs incurred
by an electing corporation or any other member of the
affiliated group in connection with contract manufacturing by
a person other than a member of the affiliated group, or in
connection with a similar arrangement thereto, shall be
treated as direct labor costs of the affiliated group and
shall not be treated as production costs incurred by the
electing corporation in the possession or as direct material
costs or as compensation for services performed in the
possession, except to the extent as may be otherwise provided
in regulations prescribed by the Secretary.
(iv) Regulations
The Secretary may prescribe regulations setting forth:
(I) an appropriate transitional (but not in excess of
three taxable years) significant business presence test for
commencement in a possession of operations with respect to
products or types of service after the date of the
enactment of this clause and not described in subparagraph
(B)(iii)(I),
(II) a significant business presence test for other
appropriate cases, consistent with the tests specified in
subparagraph (B)(ii),
(III) rules for the definition of a product or type of
service, and
(IV) rules for treating components produced in whole or
in part by a related person as materials, and the costs
(including direct labor costs) related thereto as a cost of
materials, where there is an independent resale price for
such components or where otherwise consistent with the
intent of the substantial business presence tests.
(C) Methods of computation of taxable income
If an election of one of the following methods is in effect
pursuant to subparagraph (F) with respect to a product or type
of service, an electing corporation shall compute its income
derived from the active conduct of a trade or business in a
possession with respect to such product or type of service in
accordance with the method which is elected.
(i) Cost sharing
(I) Payment of cost sharing
If an election of this method is in effect, the electing
corporation must make a payment for its share of the cost
(if any) of product area research which is paid or accrued
by the affiliated group during that taxable year. Such
share shall not be less than the same proportion of 110
percent of the cost of such product area research which the
amount of ''possession sales'' bears to the amount of
''total sales'' of the affiliated group. The cost of
product area research paid or accrued solely by the
electing corporation in a taxable year (excluding amounts
paid directly or indirectly to or on behalf of related
persons and excluding amounts paid under any cost sharing
agreements with related persons) will reduce (but not below
zero) the amount of the electing corporation's cost sharing
payment under this method for that year. In the case of
intangible property described in subsection (h)(3)(B)(i)
which the electing corporation is treated as owning under
subclause (II), in no event shall the payment required
under this subclause be less than the inclusion or payment
which would be required under section 367(d)(2)(A)(ii) or
section 482 if the electing corporation were a foreign
corporation.
(a) Product area research
For purposes of this section, the term ''product area
research'' includes (notwithstanding any provision to the
contrary) the research, development and experimental
costs, losses, expenses and other related deductions -
including amounts paid or accrued for the performance of
research or similar activities by another person;
qualified research expenses within the meaning of section
41(b); amounts paid or accrued for the use of, or the
right to use, research or any of the items specified in
subsection (h)(3)(B)(i); and a proper allowance for
amounts incurred for the acquisition of any of the items
specified in subsection (h)(3)(B)(i) - which are properly
apportioned or allocated to the same product area as that
in which the electing corporation conducts its
activities, and a ratable part of any such costs, losses,
expenses and other deductions which cannot definitely be
allocated to a particular product area.
(b) Affiliated group
For purposes of this subsection, the term ''affiliated
group'' shall mean the electing corporation and all other
organizations, trades or businesses (whether or not
incorporated, whether or not organized in the United
States, and whether or not affiliated) owned or
controlled directly or indirectly by the same interests,
within the meaning of section 482.
(c) Possession sales
For purposes of this section, the term ''possession
sales'' means the aggregate sales or other dispositions
for the taxable year to persons who are not members of
the affiliated group by members of the affiliated group
of products produced, in whole or in part, by the
electing corporation in the possession which are in the
same product area as is used for determining the amount
of product area research, and of services rendered, in
whole or in part, in the possession in such product area
to persons who are not members of the affiliated group.
(d) Total sales
For purposes of this section, the term ''total sales''
means the aggregate sales or other dispositions for the
taxable year to persons who are not members of the
affiliated group by members of the affiliated group of
all products in the same product area as is used for
determining the amount of product area research, and of
services rendered in such product area to persons who are
not members of the affiliated group.
(e) Product area
For purposes of this section, the term ''product area''
shall be defined by reference to the three-digit
classification of the Standard Industrial Classification
code. The Secretary may provide for the aggregation of
two or more three-digit classifications where
appropriate, and for a classification system other than
the Standard Industrial Classification code in
appropriate cases.
(II) Effect of election
For purposes of determining the amount of its gross
income derived from the active conduct of a trade or
business in a possession with respect to a product produced
by, or type of service rendered by, the electing
corporation for a taxable year, if an election of this
method is in effect, the electing corporation shall be
treated as the owner (for purposes of obtaining a return
thereon) of intangible property described in subsection
(h)(3)(B)(i) which is related to the units of the product
produced, or type of service rendered, by the electing
corporation. Such electing corporation shall not be
treated as the owner (for purposes of obtaining a return
thereon) of any intangible property described in subsection
(h)(3)(B)(ii) through (v) (to the extent not described in
subsection (h)(3)(B)(i)) or of any other nonmanufacturing
intangible. Notwithstanding the preceding sentence, an
electing corporation shall be treated as the owner (for
purposes of obtaining a return thereon) of (a) intangible
property which was developed solely by such corporation in
a possession and is owned by such corporation, (b)
intangible property described in subsection (h)(3)(B)(i)
acquired by such corporation from a person who was not
related to such corporation (or to any person related to
such corporation) at the time of, or in connection with,
such acquisition, and (c) any intangible property described
in subsection (h)(3)(B)(ii) through (v) (to the extent not
described in subsection (h)(3)(B)(i)) and other
nonmanufacturing intangibles which relate to sales of units
of products, or services rendered, to unrelated persons for
ultimate consumption or use in the possession in which the
electing corporation conducts its trade or business.
(III) Payment provisions
(a) The cost sharing payment determined under
subparagraph (C)(i)(I) for any taxable year shall be made
to the person or persons specified in subparagraph
(C)(i)(IV)(a) not later than the time prescribed by law for
filing the electing corporation's return for such taxable
year (including any extensions thereof). If all or part of
such payment is not timely made, the amount of the cost
sharing payment required to be paid shall be increased by
the amount of interest that would have been due under
section 6601(a) had the portion of the cost sharing payment
that is not timely made been an amount of tax imposed by
this title and had the last date prescribed for payment
been the due date of the electing corporations (FOOTNOTE 1)
return (determined without regard to any extension
thereof). The amount by which a cost sharing payment
determined under subparagraph (C)(i)(I) is increased by
reason of the preceding sentence shall not be treated as a
cost sharing payment or as interest. If failure to make
timely payment is due in whole or in part to fraud or
willful neglect, the electing corporation shall be deemed
to have revoked the election made under subparagraph (A) on
the first day of the taxable year for which the cost
sharing payment was required.
(FOOTNOTE 1) So in original. Probably should be
''corporation's''.
(b) For purposes of this title, any tax of a foreign
country or possession of the United States which is paid or
accrued with respect to the payment or receipt of a cost
sharing payment determined under subparagraph (C)(i)(I) or
of an amount of increase referred to in subparagraph
(C)(i)(III)(a) shall not be treated as income, war profits,
or excess profits taxes paid or accrued to a foreign
country or possession of the United States, and no
deduction shall be allowed under this title with respect to
any amounts of such tax so paid or accrued.
(IV) Special rules
(a) The amount of the cost sharing payment determined
under subparagraph (C)(i)(I), and any increase in the
amount thereof in accordance with subparagraph
(C)(i)(III)(a), shall not be treated as income of the
recipient, but shall reduce the amount of the deductions
(and the amount of reductions in earnings and profits)
otherwise allowable to the appropriate domestic member or
members (other than an electing corporation) of the
affiliated group, or, if there is no such domestic member,
to the foreign member or members of such affiliated group
as the Secretary may provide under regulations.
(b) If an election of this method is in effect, the
electing corporation shall determine its intercompany
pricing under the appropriate section 482 method, provided,
however, that an electing corporation shall not be denied
use of the resale price method for purposes of such
intercompany pricing merely because the reseller adds more
than an insubstantial amount to the value of the product by
the use of intangible property.
(c) The amount of qualified research expenses, within the
meaning of section 41, of any member of the controlled
group of corporations (as defined in section 41(f)) of
which the electing corporation is a member shall not be
affected by the cost sharing payment required under this
method.
(ii) Profit split
(I) General rule
If an election of this method is in effect, the electing
corporation's taxable income derived from the active
conduct of a trade or business in a possession with respect
to units of a product produced or type of service rendered,
in whole or in part, by the electing corporation shall be
equal to 50 percent of the combined taxable income of the
affiliated group (other than foreign affiliates) derived
from covered sales of units of the product produced or type
of service rendered, in whole or in part, by the electing
corporation in a possession.
(II) Computation of combined taxable income
Combined taxable income shall be computed separately for
each product produced or type of service rendered, in whole
or in part, by the electing corporation in a possession.
Combined taxable income shall be computed (notwithstanding
any provision to the contrary) for each such product or
type of service rendered by deducting from the gross income
of the affiliated group (other than foreign affiliates)
derived from covered sales of such product or type of
service all expenses, losses, and other deductions properly
apportioned or allocated to gross income from such sales or
services, and a ratable part of all expenses, losses, or
other deductions which cannot definitely be allocated to
some item or class of gross income, which are incurred by
the affiliated group (other than foreign affiliates).
Notwithstanding any other provision to the contrary, in
computing the combined taxable income for each such product
or type of service rendered, the research, development, and
experimental costs, expenses and related deductions for the
taxable year which would otherwise be apportioned or
allocated to the gross income of the affiliated group
(other than foreign affiliates) derived from covered sales
of such product produced or type of service rendered, in
whole or in part, by the electing corporation in a
possession, shall not be less than the same proportion of
the amount of the share of product area research determined
under subparagraph (C)(i)(I) (without regard to the third
and fourth sentences thereof, but substituting ''120
percent'' for ''110 percent'' in the second sentence
thereof) in the product area which includes such product or
type of service, that such gross income from the product or
type of service bears to such gross income from all
products and types of services, within such product area,
produced or rendered, in whole or part, by the electing
corporation in a possession.
(III) Division of combined taxable income
50 percent of the combined taxable income computed as
provided in subparagraph (C)(ii)(II) shall be allocated to
the electing corporation. Combined taxable income,
computed without regard to the last sentence of
subparagraph (C)(ii)(II), less the amount allocated to the
electing corporation under the preceding sentence, shall be
allocated to the appropriate domestic member or members
(other than any electing corporation) of the affiliated
group and shall be treated as income from sources within
the United States, or, if there is no such domestic member,
to a foreign member or members of such affiliated group as
the Secretary may provide under regulations.
(IV) Covered sales
For purposes of this paragraph, the term ''covered
sales'' means sales by members of the affiliated group
(other than foreign affiliates) to persons who are not
members of the affiliated group or to foreign affiliates.
(D) Unrelated person
For purposes of this paragraph, the term ''unrelated person''
means any person other than a person related within the meaning
of paragraph (3)(D) to the electing corporation.
(E) Electing corporation
For purposes of this subsection, the term ''electing
corporation'' means a domestic corporation for which an
election under this section is in effect.
(F) Time and manner of election; revocation
(i) In general
An election under subparagraph (A) to use one of the
methods under subparagraph (C) shall be made only on or
before the due date prescribed by law (including extensions)
for filing the tax return of the electing corporation for its
first taxable year beginning after December 31, 1982. If an
election of one of such methods is made, such election shall
be binding on the electing corporation and such method must
be used for each taxable year thereafter until such election
is revoked by the electing corporation under subparagraph
(F)(iii). If any such election is revoked by the electing
corporation under subparagraph (F)(iii), such electing
corporation may make a subsequent election under subparagraph
(A) only with the consent of the Secretary.
(ii) Manner of making election
An election under subparagraph (A) to use one of the
methods under subparagraph (C) shall be made by filing a
statement to such effect with the return referred to in
subparagraph (F)(i) or in such other manner as the Secretary
may prescribe by regulations.
(iii) Revocation
(I) Except as provided in subparagraph (F)(iii)(II), an
election may be revoked for any taxable year only with the
consent of the Secretary.
(II) An election shall be deemed revoked for the year in
which the electing corporation is deemed to have revoked such
election under subparagraph (B)(i) or (C)(i)(III)(a).
(iv) Aggregation
(I) Where more than one electing corporation in the
affiliated group produces any product or renders any services
in the same product area, all such electing corporations must
elect to compute their taxable income under the same method
under subparagraph (C).
(II) All electing corporations in the same affiliated group
that produce any products or render any services in the same
product area may elect, subject to such terms and conditions
as the Secretary may prescribe by regulations, to compute
their taxable income from export sales under a different
method from that used for all other sales and services. For
this purpose, export sales means all sales by the electing
corporation of products to foreign persons for use or
consumption outside the United States and its possessions,
provided such products are manufactured or produced in the
possession within the meaning of subsection (d)(1)(A) of
section 954, and further provided (except to the extent
otherwise provided by regulations) the income derived by such
foreign person on resale of such products (in the same state
or in an altered state) is not included in foreign base
company income for purposes of section 954(a).
(III) All members of an affiliated group must consent to an
election under this subsection at such time and in such
manner as shall be prescribed by the Secretary by
regulations.
(6) Treatment of certain sales made after July 1, 1982
(A) In general
For purposes of this section, in the case of a disposition of
intangible property made by a corporation after July 1, 1982,
any gain or loss from such disposition shall be treated as gain
or loss from sources within the United States to which
paragraph (5) does not apply.
(B) Exception
Subparagraph (A) shall not apply to any disposition by a
corporation of intangible property if such disposition is to a
person who is not a related person to such corporation.
(C) Paragraph does not affect eligibility
This paragraph shall not apply for purposes of determining
whether the corporation meets the requirements of subsection
(a)(2).
(7) Section 864(e)(1) not to apply
This subsection shall be applied as if section 864(e)(1)
(relating to treatment of affiliated groups) had not been
enacted.
(8) Regulations
The Secretary shall prescribe such regulations as may be
necessary or appropriate to carry out the purposes of this
subsection, including rules for the application of this
subsection to income from leasing of products to unrelated
persons.
(i) Definitions and special rules relating to limitations of
subsection (a)(4)
(1) Qualified possession wages
For purposes of this section -
(A) In general
The term ''qualified possession wages'' means wages paid or
incurred by the possession corporation during the taxable year
in connection with the active conduct of a trade or business
within a possession of the United States to any employee for
services performed in such possession, but only if such
services are performed while the principal place of employment
of such employee is within such possession.
(B) Limitation on amount of wages taken into account
(i) In general
The amount of wages which may be taken into account under
subparagraph (A) with respect to any employee for any taxable
year shall not exceed 85 percent of the contribution and
benefit base determined under section 230 of the Social
Security Act for the calendar year in which such taxable year
begins.
(ii) Treatment of part-time employees, etc.
If -
(I) any employee is not employed by the possession
corporation on a substantially full-time basis at all times
during the taxable year, or
(II) the principal place of employment of any employee
with the possession corporation is not within a possession
at all times during the taxable year,
the limitation applicable under clause (i) with respect to
such employee shall be the appropriate portion (as determined
by the Secretary) of the limitation which would otherwise be
in effect under clause (i).
(C) Treatment of certain employees
The term ''qualified possession wages'' shall not include any
wages paid to employees who are assigned by the employer to
perform services for another person, unless the principal trade
or business of the employer is to make employees available for
temporary periods to other persons in return for compensation.
All possession corporations treated as 1 corporation under
paragraph (5) shall be treated as 1 employer for purposes of
the preceding sentence.
(D) Wages
(i) In general
Except as provided in clause (ii), the term ''wages'' has
the meaning given to such term by subsection (b) of section
3306 (determined without regard to any dollar limitation
contained in such section). For purposes of the preceding
sentence, such subsection (b) shall be applied as if the term
''United States'' included all possessions of the United
States.
(ii) Special rule for agricultural labor and railway labor
In any case to which subparagraph (A) or (B) of paragraph
(1) of section 51(h) applies, the term ''wages'' has the
meaning given to such term by section 51(h)(2).
(2) Allocable employee fringe benefit expenses
(A) In general
The allocable employee fringe benefit expenses of any
possession corporation for any taxable year is an amount which
bears the same ratio to the amount determined under
subparagraph (B) for such taxable year as -
(i) the aggregate amount of the possession corporation's
qualified possession wages for such taxable year, bears to
(ii) the aggregate amount of the wages paid or incurred by
such possession corporation during such taxable year.
In no event shall the amount determined under the preceding
sentence exceed 15 percent of the amount referred to in clause
(i).
(B) Expenses taken into account
For purposes of subparagraph (A), the amount determined under
this subparagraph for any taxable year is the aggregate amount
allowable as a deduction under this chapter to the possession
corporation for such taxable year with respect to -
(i) employer contributions under a stock bonus, pension,
profit-sharing, or annuity plan,
(ii) employer-provided coverage under any accident or
health plan for employees, and
(iii) the cost of life or disability insurance provided to
employees.
Any amount treated as wages under paragraph (1)(D) shall not be
taken into account under this subparagraph.
(3) Treatment of possession taxes
(A) Amount of credit for possession corporations not using
profit split
(i) In general
For purposes of subsection (a)(4)(A)(iii), the amount of
the qualified possession income taxes for any taxable year
allocable to nonsheltered income shall be an amount which
bears the same ratio to the possession income taxes for such
taxable year as -
(I) the increase in the tax liability of the possession
corporation under this chapter for the taxable year by
reason of subsection (a)(4)(A) (without regard to clause
(iii) thereof), bears to
(II) the tax liability of the possession corporation
under this chapter for the taxable year determined without
regard to the credit allowable under this section.
(ii) Limitation on amount of taxes taken into account
Possession income taxes shall not be taken into account
under clause (i) for any taxable year to the extent that the
amount of such taxes exceeds 9 percent of the amount of the
taxable income for such taxable year.
(B) Deduction for possession corporations using profit split
Notwithstanding subsection (c), if a possession corporation
is not described in subsection (a)(4)(A)(iii) for the taxable
year, such possession corporation shall be allowed a deduction
for such taxable year in an amount which bears the same ratio
to the possession income taxes for such taxable year as -
(i) the increase in the tax liability of the possession
corporation under this chapter for the taxable year by reason
of subsection (a)(4)(A), bears to
(ii) the tax liability of the possession corporation under
this chapter for the taxable year determined without regard
to the credit allowable under this section.
In determining the credit under subsection (a) and in applying
the preceding sentence, taxable income shall be determined
without regard to the preceding sentence.
(C) Possession income taxes
For purposes of this paragraph, the term ''possession income
taxes'' means any taxes of a possession of the United States
which are treated as not being income, war profits, or excess
profits taxes paid or accrued to a possession of the United
States by reason of subsection (c).
(4) Depreciation rules
For purposes of this section -
(A) Depreciation allowances
The term ''depreciation allowances'' means the depreciation
deductions allowable under section 167 to the possession
corporation.
(B) Categories of property
(i) Qualified tangible property
The term ''qualified tangible property'' means any tangible
property used by the possession corporation in a possession
of the United States in the active conduct of a trade or
business within such possession.
(ii) Short-life qualified tangible property
The term ''short-life qualified tangible property'' means
any qualified tangible property to which section 168 applies
and which is 3-year property or 5-year property for purposes
of such section.
(iii) Medium-life qualified tangible property
The term ''medium-life qualified tangible property'' means
any qualified tangible property to which section 168 applies
and which is 7-year property or 10-year property for purposes
of such section.
(iv) Long-life qualified tangible property
The term ''long-life qualified tangible property'' means
any qualified tangible property to which section 168 applies
and which is not described in clause (ii) or (iii).
(v) Transitional rule
In the case of any qualified tangible property to which
section 168 (as in effect on the day before the date of the
enactment of the Tax Reform Act of 1986) applies, any
reference in this paragraph to section 168 shall be treated
as a reference to such section as so in effect.
(5) Election to compute credit on consolidated basis
(A) In general
Any affiliated group may elect to treat all possession
corporations which would be members of such group but for
section 1504(b)(3) or (4) as 1 corporation for purposes of this
section. The credit determined under this section with respect
to such 1 corporation shall be allocated among such possession
corporations in such manner as the Secretary may prescribe.
(B) Election
An election under subparagraph (A) shall apply to the taxable
year for which made and all succeeding taxable years unless
revoked with the consent of the Secretary.
(6) Possession corporation
The term ''possession corporation'' means a domestic
corporation for which the election provided in subsection (a) is
in effect.
(j) Termination
(1) In general
Except as otherwise provided in this subsection, this section
shall not apply to any taxable year beginning after December 31,
1995.
(2) Transition rules for active business income credit
Except as provided in paragraph (3) -
(A) Economic activity credit
In the case of an existing credit claimant -
(i) with respect to a possession other than Puerto Rico,
and
(ii) to which subsection (a)(4)(B) does not apply,
the credit determined under subsection (a)(1)(A) shall be
allowed for taxable years beginning after December 31, 1995,
and before January 1, 2002.
(B) Special rule for reduced credit
(i) In general
In the case of an existing credit claimant to which
subsection (a)(4)(B) applies, the credit determined under
subsection (a)(1)(A) shall be allowed for taxable years
beginning after December 31, 1995, and before January 1,
1998.
(ii) Election irrevocable after 1997
An election under subsection (a)(4)(B)(iii) which is in
effect for the taxpayer's last taxable year beginning before
1997 may not be revoked unless it is revoked for the
taxpayer's first taxable year beginning in 1997 and all
subsequent taxable years.
(C) Economic activity credit for Puerto Rico
For economic activity credit for Puerto Rico, see section
30A.
(3) Additional restricted credit
(A) In general
In the case of an existing credit claimant -
(i) the credit under subsection (a)(1)(A) shall be allowed
for the period beginning with the first taxable year after
the last taxable year to which subparagraph (A) or (B) of
paragraph (2), whichever is appropriate, applied and ending
with the last taxable year beginning before January 1, 2006,
except that
(ii) the aggregate amount of taxable income taken into
account under subsection (a)(1)(A) for any such taxable year
shall not exceed the adjusted base period income of such
claimant.
(B) Coordination with subsection (a)(4)
The amount of income described in subsection (a)(1)(A) which
is taken into account in applying subsection (a)(4) shall be
such income as reduced under this paragraph.
(4) Adjusted base period income
For purposes of paragraph (3) -
(A) In general
The term ''adjusted base period income'' means the average of
the inflation-adjusted possession incomes of the corporation
for each base period year.
(B) Inflation-adjusted possession income
For purposes of subparagraph (A), the inflation-adjusted
possession income of any corporation for any base period year
shall be an amount equal to the sum of -
(i) the possession income of such corporation for such base
period year, plus
(ii) such possession income multiplied by the inflation
adjustment percentage for such base period year.
(C) Inflation adjustment percentage
For purposes of subparagraph (B), the inflation adjustment
percentage for any base period year means the percentage (if
any) by which -
(i) the CPI for 1995, exceeds
(ii) the CPI for the calendar year in which the base period
year for which the determination is being made ends.
For purposes of the preceding sentence, the CPI for any
calendar year is the CPI (as defined in section 1(f)(5)) for
such year under section 1(f)(4).
(D) Increase in inflation adjustment percentage for growth
during base years
The inflation adjustment percentage (determined under
subparagraph (C) without regard to this subparagraph) for each
of the 5 taxable years referred to in paragraph (5)(A) shall be
increased by -
(i) 5 percentage points in the case of a taxable year
ending during the 1-year period ending on October 13, 1995;
(ii) 10.25 percentage points in the case of a taxable year
ending during the 1-year period ending on October 13, 1994;
(iii) 15.76 percentage points in the case of a taxable year
ending during the 1-year period ending on October 13, 1993;
(iv) 21.55 percentage points in the case of a taxable year
ending during the 1-year period ending on October 13, 1992;
and
(v) 27.63 percentage points in the case of a taxable year
ending during the 1-year period ending on October 13, 1991.
(5) Base period year
For purposes of this subsection -
(A) In general
The term ''base period year'' means each of 3 taxable years
which are among the 5 most recent taxable years of the
corporation ending before October 14, 1995, determined by
disregarding -
(i) one taxable year for which the corporation had the
largest inflation-adjusted possession income, and
(ii) one taxable year for which the corporation had the
smallest inflation-adjusted possession income.
(B) Corporations not having significant possession income
throughout 5-year period
(i) In general
If a corporation does not have significant possession
income for each of the most recent 5 taxable years ending
before October 14, 1995, then, in lieu of applying
subparagraph (A), the term ''base period year'' means only
those taxable years (of such 5 taxable years) for which the
corporation has significant possession income; except that,
if such corporation has significant possession income for 4
of such 5 taxable years, the rule of subparagraph (A)(ii)
shall apply.
(ii) Special rule
If there is no year (of such 5 taxable years) for which a
corporation has significant possession income -
(I) the term ''base period year'' means the first taxable
year ending on or after October 14, 1995, but
(II) the amount of possession income for such year which
is taken into account under paragraph (4) shall be the
amount which would be determined if such year were a short
taxable year ending on September 30, 1995.
(iii) Significant possession income
For purposes of this subparagraph, the term ''significant
possession income'' means possession income which exceeds 2
percent of the possession income of the taxpayer for the
taxable year (of the period of 6 taxable years ending with
the first taxable year ending on or after October 14, 1995)
having the greatest possession income.
(C) Election to use one base period year
(i) In general
At the election of the taxpayer, the term ''base period
year'' means -
(I) only the last taxable year of the corporation ending
in calendar year 1992, or
(II) a deemed taxable year which includes the first ten
months of calendar year 1995.
(ii) Base period income for 1995
In determining the adjusted base period income of the
corporation for the deemed taxable year under clause (i)(II),
the possession income shall be annualized and shall be
determined without regard to any extraordinary item.
(iii) Election
An election under this subparagraph by any possession
corporation may be made only for the corporation's first
taxable year beginning after December 31, 1995, for which it
is a possession corporation. The rules of subclauses (II)
and (III) of subsection (a)(4)(B)(iii) shall apply to the
election under this subparagraph.
(D) Acquisitions and dispositions
Rules similar to the rules of subparagraphs (A) and (B) of
section 41(f)(3) shall apply for purposes of this subsection.
(6) Possession income
For purposes of this subsection, the term ''possession income''
means, with respect to any possession, the income referred to in
subsection (a)(1)(A) determined with respect to that possession.
In no event shall possession income be treated as being less than
zero.
(7) Short years
If the current year or a base period year is a short taxable
year, the application of this subsection shall be made with such
annualizations as the Secretary shall prescribe.
(8) Special rules for certain possessions
(A) In general
In the case of an existing credit claimant with respect to an
applicable possession, this section (other than the preceding
paragraphs of this subsection) shall apply to such claimant
with respect to such applicable possession for taxable years
beginning after December 31, 1995, and before January 1, 2006.
(B) Applicable possession
For purposes of this paragraph, the term ''applicable
possession'' means Guam, American Samoa, and the Commonwealth
of the Northern Mariana Islands.
(9) Existing credit claimant
For purposes of this subsection -
(A) In general
The term ''existing credit claimant'' means a corporation -
(i)(I) which was actively conducting a trade or business in
a possession on October 13, 1995, and
(II) with respect to which an election under this section
is in effect for the corporation's taxable year which
includes October 13, 1995, or
(ii) which acquired all of the assets of a trade or
business of a corporation which -
(I) satisfied the requirements of subclause (I) of clause
(i) with respect to such trade or business, and
(II) satisfied the requirements of subclause (II) of
clause (i).
(B) New lines of business prohibited
If, after October 13, 1995, a corporation which would (but
for this subparagraph) be an existing credit claimant adds a
substantial new line of business (other than in an acquisition
described in subparagraph (A)(ii)), such corporation shall
cease to be treated as an existing credit claimant as of the
close of the taxable year ending before the date of such
addition.
(C) Binding contract exception
If, on October 13, 1995, and at all times thereafter, there
is in effect with respect to a corporation a binding contract
for the acquisition of assets to be used in, or for the sale of
assets to be produced from, a trade or business, the
corporation shall be treated for purposes of this paragraph as
actively conducting such trade or business on October 13, 1995.
The preceding sentence shall not apply if such trade or
business is not actively conducted before January 1, 1996.
(10) Separate application to each possession
For purposes of determining -
(A) whether a taxpayer is an existing credit claimant, and
(B) the amount of the credit allowed under this section,
this subsection (and so much of this section as relates to this
subsection) shall be applied separately with respect to each
possession.
Sources
(Added Pub. L. 94-455, title X, Sec. 1051(b), Oct. 4, 1976, 90
Stat. 1643; amended Pub. L. 94-455, title XIX, Sec. 1901(b)(37)(B),
Oct. 4, 1976, 90 Stat. 1803; Pub. L. 95-600, title VII, Sec.
701(u)(11)(A), (B), Nov. 6, 1978, 92 Stat. 2917; Pub. L. 97-248,
title II, Sec. 201(d)(8)(B), formerly Sec. 201(c)(8)(B), Sec.
213(a), Sept. 3, 1982, 96 Stat. 420, 452, renumbered Sec.
201(d)(8)(B), Pub. L. 97-448, title III, Sec. 306(a)(1)(A)(i), Jan.
12, 1983, 96 Stat. 2400; Pub. L. 98-369, div. A, title IV, Sec.
474(r)(22), title VII, Sec. 712(g), title VIII, Sec. 801(d)(11),
July 18, 1984, 98 Stat. 843, 947, 997; Pub. L. 99-499, title V,
Sec. 516(b)(1)(B), Oct. 17, 1986, 100 Stat. 1770; Pub. L. 99-514,
title II, Sec. 231(d)(3)(G), title VII, Sec. 701(e)(4)(I), title
XII, Sec. 1231(a)-(d), (f), 1275(a)(1), title XVIII, Sec.
1812(c)(4)(C), Oct. 22, 1986, 100 Stat. 2179, 2343, 2561-2563,
2598, 2835; Pub. L. 100-647, title I, Sec. 1002(h)(3),
1012(h)(2)(B), (j), (n)(4), (5), title VI, Sec. 6132(a), Nov. 10,
1988, 102 Stat. 3370, 3502, 3512, 3515, 3721; Pub. L. 101-382,
title II, Sec. 227(a), Aug. 20, 1990, 104 Stat. 661; Pub. L.
101-508, title XI, Sec. 11704(a)(11), Nov. 5, 1990, 104 Stat.
1388-518; Pub. L. 103-66, title XIII, Sec. 13227(a), (b), Aug. 10,
1993, 107 Stat. 489, 490; Pub. L. 104-188, title I, Sec. 1601(a),
1704(t)(37), (80), Aug. 20, 1996, 110 Stat. 1827, 1889, 1891.)
References in Text
REFERENCES IN TEXT
The date of the enactment of the Tax Reform Act of 1986, referred
to in subsecs. (d)(3)(B) and (i)(4)(B)(v), is the date of enactment
of Pub. L. 99-514, which was approved Oct. 22, 1986.
The Caribbean Basin Economic Recovery Act, referred to in subsec.
(d)(4)(A)(i), (B), is title II of Pub. L. 98-67, Aug. 5, 1983, 97
Stat. 384, which is classified principally to chapter 15 (Sec. 2701
et seq.) of Title 19, Customs Duties. Section 212 of that Act is
classified to section 2702 of Title 19. For complete classification
of this Act to the Code, see Short Title note set out under section
2701 of Title 19 and Tables.
The date of the enactment of this subparagraph, referred to in
subsec. (h)(3)(A), means the date of enactment of Pub. L. 97-248,
which was approved Sept. 3, 1982.
The date of the enactment of this clause, referred to in subsec.
(h)(5)(B)(iii)(I), (iv), means the date of enactment of Pub. L.
97-248, which was approved Sept. 3, 1982.
Section 230 of the Social Security Act, referred to in subsec.
(i)(1)(B)(i), is classified to section 430 of Title 42, The Public
Health and Welfare.
Miscellaneous
AMENDMENTS
2004 - Pub. L. 108-357, Sec. 402(b)(2). Subparagraph (A) of
section 936(a)(2) is amended by striking ``section 904(f)'' and
inserting ``subsections (f) and (g) of section 904''.
1996 - Subsec. (a)(4)(A)(ii)(I). Pub. L. 104-188, Sec.
1704(t)(80), which directed that subcl. (I) be amended by
substituting ''depreciation'' for ''deprecation'', could not be
executed, because the word ''deprecation'' did not appear in text.
Subsec. (b). Pub. L. 104-188, Sec. 1704(t)(37), substituted
''subparagraphs (D)(ii)'' for ''subparagraphs (D)(ii)(I)''.
Subsec. (j). Pub. L. 104-188, Sec. 1601(a), added subsec. (j).
1993 - Subsec. (a)(1). Pub. L. 103-66, Sec. 13227(a)(1),
substituted ''Except as otherwise provided in this section'' for
''Except as provided in paragraph (3)''.
Subsec. (a)(4). Pub. L. 103-66, Sec. 13227(a)(2), added par. (4).
Subsec. (i). Pub. L. 103-66, Sec. 13227(b), added subsec. (i).
1990 - Subsec. (d)(4)(D). Pub. L. 101-382 added subpar. (D).
Subsec. (e)(1). Pub. L. 101-508 substituted ''subsection (a)(2)''
for ''subsection (a)(1)'' wherever appearing.
1988 - Subsec. (d)(3)(B). Pub. L. 100-647, Sec. 1012(j), inserted
''(as in effect on the day before the date of the enactment of the
Tax Reform Act of 1986)'' after ''section 957(c)''.
Subsec. (d)(4)(A)(ii). Pub. L. 100-647, Sec. 1012(n)(5)(A),
amended cl. (ii) generally. Prior to amendment, cl. (ii) read as
follows: ''in accordance with a specific authorization granted by
the Government Development Bank for Puerto Rico pursuant to
regulations issued by the Secretary of the Treasury of Puerto
Rico.''
Subsec. (d)(4)(B). Pub. L. 100-647, Sec. 6132(a), inserted ''and
the Virgin Islands'' after ''274(h)(6)(A)''.
Subsec. (d)(4)(C)(i), (ii). Pub. L. 100-647, Sec. 1012(n)(5)(B),
substituted ''Commissioner of Financial Institutions of Puerto
Rico'' for ''Secretary of the Treasury of Puerto Rico''.
Subsec. (h)(5)(C)(i)(I). Pub. L. 100-647, Sec. 1012(n)(4),
amended directory language of Pub. L. 99-514, Sec. 1231(a)(1), see
1986 Amendment note below.
Subsec. (h)(5)(C)(i)(IV)(c). Pub. L. 100-647, Sec. 1002(h)(3),
substituted ''section 41'' and ''section 41(f)'' for ''section 30''
and ''section 30(f)'', respectively.
Subsec. (h)(7), (8). Pub. L. 100-647, Sec. 1012(h)(2)(B), added
par. (7) and redesignated former par. (7) as (8).
1986 - Subsec. (a)(2)(B). Pub. L. 99-514, Sec. 1231(d)(1),
substituted ''75 percent'' for ''65 percent''.
Subsec. (a)(2)(C). Pub. L. 99-514, Sec. 1231(d)(2), struck out
subpar. (C), transitional rule, which read as follows: ''In
applying subparagraph (B) with respect to taxable years beginning
after December 31, 1982, and before January 1, 1985, the following
percentage shall be substituted for '65 percent':
''For taxable years beginning
in calendar year: The percentage is:
1983 55
1984 60.''
Subsec. (a)(3). Pub. L. 99-499 in par. (3), as amended by Pub. L.
99-514, added subpar. (A) and redesignated former subpars. (A) to
(C) as (B) to (D), respectively.
Pub. L. 99-514, Sec. 701(e)(4)(I), struck out subpar. (A) which
read ''section 56 (relating to corporate minimum tax),'', and
redesignated subpars. (B), (C), and (E) as (A), (B), and (C),
respectively.
Subsec. (b). Pub. L. 99-514, Sec. 1231(b), inserted at end ''This
subsection shall not apply to any amount described in subsection
(a)(1)(A)(i) received from a person who is not a related person
(within the meaning of subsection (h)(3) but without regard to
subparagraphs (D)(ii)(I) and (E)(i) thereof) with respect to the
domestic corporation.''
Subsec. (d)(1). Pub. L. 99-514, Sec. 1275(a)(1), substituted
''and the Virgin Islands'' for '', but does not include the Virgin
Islands of the United States''.
Subsec. (d)(4). Pub. L. 99-514, Sec. 1231(c), added par. (4).
Subsec. (h)(3)(D)(ii). Pub. L. 99-514, Sec. 1812(c)(4)(C),
amended cl. (ii) generally. Prior to amendment, cl. (ii), special
rules, read as follows: ''For purposes of clause (i) -
''(I) section 267(b) and section 707(b)(1) shall be applied by
substituting '10 percent' for '50 percent', and
''(II) section 267(b)(3) shall be applied without regard to
whether a person was a personal holding company or a foreign
personal holding company.''
Subsec. (h)(5)(C)(i)(I). Pub. L. 99-514, Sec. 1231(a)(1), as
amended by Pub. L. 100-647, Sec. 1012(n)(4), in introductory
provisions, substituted ''the same proportion of 110 percent of the
cost'' for ''the same proportion of the cost'', and inserted at end
of material relating to payment of cost sharing ''In the case of
intangible property described in subsection (h)(3)(B)(i) which the
electing corporation is treated as owning under subclause (II), in
no event shall the payment required under this subclause be less
than the inclusion or payment which would be required under section
367(d)(2)(A)(ii) or section 482 if the electing corporation were a
foreign corporation.''
Subsec. (h)(5)(C)(i)(I)(a). Pub. L. 99-514, Sec. 231(d)(3)(G),
substituted ''section 41(b)'' for ''section 30(b)''.
Subsec. (h)(5)(C)(ii)(II). Pub. L. 99-514, Sec. 1231(f),
substituted ''all products and types of services, within such
product area, produced or rendered'' for ''all products produced
and types of service rendered''.
Pub. L. 99-514, Sec. 1231(a)(2), substituted ''the third and
fourth sentences thereof, but substituting '120 percent' for '110
percent' in the second sentence thereof)'' for ''the third sentence
thereof)''.
1984 - Subsec. (a)(2)(C). Pub. L. 98-369, Sec. 712(g),
substituted in table heading ''The percentage is'' for ''The
percentage tax is''.
Subsec. (f). Pub. L. 98-369, Sec. 801(d)(11), amended subsec. (f)
generally, substituting in heading ''Limitation on credit for
DISC's and FSC's'' for ''DISC or former DISC corporation ineligible
for credit'', and in text striking out reference to section 992(a)
and inserting provision disallowing a credit to a corporation for a
taxable year in which it owns at any time stock in a FSC or former
FSC.
Subsec. (h)(5)(C)(i)(I)(a). Pub. L. 98-369, Sec. 474(r)(22)(A),
substituted ''section 30(b)'' for ''section 44F(b)''.
Subsec. (h)(5)(C)(i)(IV)(c). Pub. L. 98-369, Sec. 474(r)(22)(B),
substituted ''section 30'' for ''section 44F'' and ''section
30(f)'' for ''section 44F(f)''.
1982 - Subsec. (a)(2)(B). Pub. L. 97-248, Sec. 213(a)(1)(A),
substituted ''65 percent'' for ''50 percent''.
Subsec. (a)(2)(C). Pub. L. 97-248, Sec. 213(a)(1)(B), added
subpar. (C).
Subsec. (a)(3)(A). Pub. L. 97-248, Sec. 201(d)(8)(B), formerly
Sec. 201(c)(8)(B), substituted ''(relating to corporate minimum
tax)'' for ''(relating to minimum tax)''.
Subsec. (h). Pub. L. 97-248, Sec. 213(a)(2), added subsec. (h).
1978 - Subsec. (a). Pub. L. 95-600, Sec. 701(u)(11)(A), reworked
provisions of par. (1) into introductory text, substituting
reference to par. (3) for reference to par. (2), and subpars. (A)
and (B), inserted introductory text of par. (2), redesignated
former subpars. (A) and (B) of par. (1) as subpars. (A) and (B) of
par. (2), and redesignated former par. (2) as (3).
Subsec. (d). Pub. L. 95-600, Sec. 701(u)(11)(B), substituted in
heading ''Definitions and special rules'' for ''Definitions'' and
added par. (3).
1976 - Subsec. (a)(2)(D). Pub. L. 94-455, Sec. 1901(b)(37)(B),
struck out subpar. (D) relating to war loss recoveries.
EFFECTIVE DATE OF 1996 AMENDMENT
Amendment by section 1601(a) of Pub. L. 104-188 applicable to
taxable years beginning after Dec. 31, 1995, except as otherwise
provided, see section 1601(c) of Pub. L. 104-188, set out as an
Effective Date note under section 30A of this title.
EFFECTIVE DATE OF 1993 AMENDMENT
Amendment by Pub. L. 103-66 applicable to taxable years beginning
after Dec. 31, 1993, see section 13227(f) of Pub. L. 103-66, set
out as a note under section 56 of this title.
EFFECTIVE DATE OF 1990 AMENDMENT
Section 227(b) of Pub. L. 101-382 provided that: ''The amendment
made by subsection (a) (amending this section) shall apply to
calendar years after 1989.''
EFFECTIVE DATE OF 1988 AMENDMENT
Amendment by sections 1002(h)(3) and 1012(h)(2)(B), (j), (n)(4),
(5) of Pub. L. 100-647 effective, except as otherwise provided, as
if included in the provision of the Tax Reform Act of 1986, Pub. L.
99-514, to which such amendment relates, see section 1019(a) of
Pub. L. 100-647, set out as a note under section 1 of this title.
Section 6132(b) of Pub. L. 100-647 provided that: ''The amendment
made by this section (amending this section) shall apply to
investments made after the date of the enactment of this Act (Nov.
10, 1988).''
EFFECTIVE DATE OF 1986 AMENDMENTS
Amendment by section 231(d)(3)(G) of Pub. L. 99-514 applicable to
taxable years beginning after Dec. 31, 1985, see section 231(g) of
Pub. L. 99-514, set out as a note under section 41 of this title.
Amendment by section 701(e)(4)(I) of Pub. L. 99-514 applicable to
taxable years beginning after Dec. 31, 1986, with certain
exceptions and qualifications, see section 701(f) of Pub. L.
99-514, set out as an Effective Date note under section 55 of this
title.
Section 1231(g) of Pub. L. 99-514, as amended by Pub. L. 100-647,
title I, Sec. 1012(n)(1)-(3), Nov. 10, 1988, 102 Stat. 3514,
provided that:
''(1) In general. - Except as provided in paragraphs (2) and (3),
the amendments made by this section (amending this section and
sections 367 and 482 of this title) shall apply to taxable years
beginning after December 31, 1986.
''(2) Special rule for transfer of intangibles. -
''(A) In general. - The amendments made by subsection (e)
(amending sections 367 and 482 of this title) shall apply to
taxable years beginning after December 31, 1986, but only with
respect to transfers after November 16, 1985, or licenses granted
after such date (or before such date with respect to property not
in existence or owned by the taxpayer on such date). In the case
of any transfer (or license) which is not to a foreign person,
the preceding sentence shall be applied by substituting 'August
16, 1986' for 'November 16, 1985'.
''(B) Special rule for section 936. - For purposes of section
936(h)(5)(C) of the Internal Revenue Code of 1986 the amendments
made by subsection (e) shall apply to taxable years beginning
after December 31, 1986, without regard to when the transfer (or
license), if any, was made.
''(3) Subsection (f). - The amendment made by subsection (f)
(amending this section) shall apply to taxable years beginning
after December 31, 1982.
''(4) Transitional rule. - In the case of a corporation -
''(A) with respect to which an election under section 936 of
the Internal Revenue Code of 1986 (relating to possessions tax
credit) is in effect,
''(B) which produced an end-product form in Puerto Rico on or
before September 3, 1982,
''(C) which began manufacturing a component of such product in
Puerto Rico in its taxable year beginning in 1983, and
''(D) with respect to which a Puerto Rican tax exemption was
granted on June 27, 1983,
such corporation shall treat such component as a separate product
for such taxable year for purposes of determining whether such
corporation had a significant business presence in Puerto Rico with
respect to such product and its income with respect to such
product.
''(5) Transitional rule for increase in gross income test. -
''(A) In general. - If -
''(i) a corporation fails to meet the requirements of
subparagraph (B) of section 936(a)(2) of the Internal Revenue
Code of 1986 (as amended by subsection (d)(1)) for any taxable
year beginning in 1987 or 1988,
''(ii) such corporation would have met the requirements of
such subparagraph (B) if such subparagraph had been applied
without regard to the amendment made by subsection (d)(1), and
''(iii) 75 percent or more of the gross income of such
corporation for such taxable year (or, in the case of a taxable
year beginning in 1988, for the period consisting of such
taxable year and the preceding taxable year) was derived from
the active conduct of a trade or business within a possession
of the United States, such corporation shall nevertheless be
treated as meeting the requirements of such subparagraph (B)
for such taxable year if it elects to reduce the amount of the
qualified possession source investment income for the taxable
year by the amount of the shortfall determined under
subparagraph (B) of this paragraph.
''(B) Determination of shortfall. - The shortfall determined
under this subparagraph for any taxable year is an amount equal
to the excess of -
''(i) 75 percent of the gross income of the corporation for
the 3-year period (or part thereof) referred to in section
936(a)(2)(A) of such Code, over
''(ii) the amount of the gross income of such corporation for
such period (or part thereof) which was derived from the active
conduct of a trade or business within a possession of the
United States.
''(C) Special rule. - Any income attributable to the investment
of the amount not treated as qualified possession source
investment income under subparagraph (A) shall not be treated as
qualified possession source investment income for any taxable
year.''
Amendment by section 1275(a)(1) of Pub. L. 99-514 applicable to
taxable years beginning after Dec. 31, 1986, with certain
exceptions and qualifications, see section 1277 of Pub. L. 99-514,
set out as a note under section 931 of this title.
Amendment by section 1812(c)(4)(C) of Pub. L. 99-514 effective,
except as otherwise provided, as if included in the provisions of
the Tax Reform Act of 1984, Pub. L. 98-369, div. A, to which such
amendment relates, see section 1881 of Pub. L. 99-514, set out as a
note under section 48 of this title.
Amendment by Pub. L. 99-499 applicable to taxable years beginning
after Dec. 31, 1986, see section 516(c) of Pub. L. 99-499, set out
as a note under section 26 of this title.
EFFECTIVE DATE OF 1984 AMENDMENT
Amendment by section 474(r)(22) of Pub. L. 98-369 applicable to
taxable years beginning after Dec. 31, 1983, and to carrybacks from
such years, see section 475(a) of Pub. L. 98-369, set out as a note
under section 21 of this title.
Amendment by section 712(g) of Pub. L. 98-369 effective as if
included in the provision of the Tax Equity and Fiscal
Responsibility Act of 1982, Pub. L. 97-248, to which such amendment
relates, see section 715 of Pub. L. 98-369, set out as a note under
section 31 of this title.
Amendment by section 801(d)(11) of Pub. L. 98-369 applicable to
transactions after Dec. 31, 1984, in taxable years ending after
such date, see section 805(a)(1) of Pub. L. 98-369, as amended, set
out as a note under section 245 of this title.
EFFECTIVE DATE OF 1982 AMENDMENT
Amendment by section 201(d)(8)(B) of Pub. L. 97-248 applicable to
taxable years beginning after Dec. 31, 1982, see section 201(e)(1)
of Pub. L. 97-248, set out as a note under section 5 of this title.
Section 213(e) of Pub. L. 97-248, as amended by Pub. L. 99-514,
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
''(1) In general. - Except as provided in paragraphs (2) and (3),
the amendments made by this section (amending this section and
sections 246, 367, and 934 of this title) shall apply to taxable
years beginning after December 31, 1982.
''(2) Certain sales made after july 1, 1982. - Paragraph (6) of
section 936(h) of the Internal Revenue Code of 1986 (formerly
I.R.C. 1954), and so much of section 934 to which such paragraph
applies by reason of section 934(e)(4) of such Code, shall apply to
taxable years ending after July 1, 1982.
''(3) Certain transfers of intangibles made after august 14,
1982. - Subsection (d) (amending section 367 of this title) shall
apply to taxable years ending after August 14, 1982.''
EFFECTIVE DATE OF 1978 AMENDMENT
Section 701(u)(11)(C) of Pub. L. 95-600, as amended by Pub. L.
99-514, Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ''The
amendments made by this paragraph (amending this section) shall
apply as if included in section 936 of the Internal Revenue Code of
1986 (formerly I.R.C. 1954) at the time of its addition by section
1051(b) of the Tax Reform Act of 1976 (Oct. 4, 1976).''
EFFECTIVE DATE OF 1976 AMENDMENT
Amendment by Pub. L. 94-455 applicable with respect to taxable
years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L.
94-455, set out as a note under section 2 of this title.
EFFECTIVE DATE
Section applicable to taxable years beginning after Dec. 31,
1975, except that qualified possession source investment income as
defined in subsec. (d)(2) of this section shall include income from
any source outside the United States if the taxpayer establishes to
the satisfaction of the Secretary of the Treasury or his delegate
that the income from such sources was earned before Oct. 1, 1976,
see section 1051(i) of Pub. L. 94-455, set out as an Effective Date
of 1976 Amendment note under section 27 of this title.
APPLICABILITY OF CERTAIN AMENDMENTS BY PUB. L. 99-514 IN RELATION
TO TREATY OBLIGATIONS OF UNITED STATES
For applicability of amendment by section 701(e)(4)(I) of Pub. L.
99-514 notwithstanding any treaty obligation of the United States
in effect on Oct. 22, 1986, with provision that for such purposes
any amendment by title I of Pub. L. 100-647 be treated as if it had
been included in the provision of Pub. L. 99-514 to which such
amendment relates, see section 1012(aa)(2), (4) of Pub. L. 100-647,
set out as a note under section 861 of this title.
PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989
For provisions directing that if any amendments made by subtitle
A or subtitle C of title XI (Sec. 1101-1147 and 1171-1177) or title
XVIII (Sec. 1800-1899A) of Pub. L. 99-514 require an amendment to
any plan, such plan amendment shall not be required to be made
before the first plan year beginning on or after Jan. 1, 1989, see
section 1140 of Pub. L. 99-514, as amended, set out as a note under
section 401 of this title.
REPORT ON POSSESSIONS CORPORATIONS
Section 441(a) of Pub. L. 98-369, as amended by Pub. L. 99-514,
Sec. 2, Oct. 22, 1986, 100 Stat. 2095; Pub. L. 100-647, title VI,
Sec. 6252(b)(1), Nov. 10, 1988, 102 Stat. 3752, which directed
Secretary of the Treasury to submit a report to Congress each
fourth calendar year on the operation and effect of sections 936
and 934(b) of this title, terminated, effective May 15, 2000,
pursuant to section 3003 of Pub. L. 104-66, as amended, set out as
a note under section 1113 of Title 31, Money and Finance. See,
also, page 142 of House Document No. 103-7.
References
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 27, 30A, 45C, 55, 56, 59,
168, 243, 246, 338, 367, 482, 864, 865, 901, 904, 1202, 1298, 1361,
1504, 6654, 6655 of this title.
