HR 2270 IH

106th CONGRESS

1st Session

H. R. 2270

To amend the Internal Revenue Code of 1986 to reform the interest allocation rules.

IN THE HOUSE OF REPRESENTATIVES

June 17, 1999

Mr. PORTMAN (for himself and Mr. MATSUI) introduced the following bill; which was referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to reform the interest allocation rules.

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

SECTION. 1. SHORT TITLE.

This Act may be cited as the `Interest Allocation Reform Act'.

SEC. 2. INTEREST ALLOCATION RULES.

(a) IN GENERAL- Section 864 of the Internal Revenue Code of 1986 (relating to definitions and special rules with respect to source rules and general rules relating to foreign income) is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection:

`(f) ELECTION WITH RESPECT TO INTEREST ALLOCATION- For purposes of this subchapter--

`(1) ELECTION-

`(A) IN GENERAL- If a member of an affiliated group so elects, this subsection shall apply in lieu paragraphs (1) and (5) of subsection (e) for purposes of all allocations and apportionments of interest expense.

`(B) WHEN MADE; APPLICATION- An election under this paragraph may be made only for the taxpayer's first taxable year for which this subsection is effective and for which the taxpayer is a member of an affiliated group. An election under this paragraph shall apply to all members of the affiliated group. An election under this paragraph, once made, shall apply to the taxable year for which made and all subsequent years unless revoked with the consent of the Secretary.

`(2) TREATMENT OF AFFILIATED GROUPS- Except as otherwise provided in this subsection, the taxable income of an affiliated group from sources outside the United States shall be determined by allocating and apportioning interest expense to such income in an amount equal to--

`(A) the total interest expense of the expanded affiliated group which includes such affiliated group, multiplied by

`(B) a percentage equal to the ratio which the foreign assets of the expanded affiliated group bears to all assets of the expanded affiliated group.

`(3) TREATMENT OF FOREIGN SUBSIDIARY INTEREST EXPENSE- Interest expense allocated to foreign source income under the rules of paragraph (2) shall be reduced (but not below zero) by any interest expense incurred by any foreign corporation in the expanded affiliated group to the extent such interest would have been allocated and apportioned to foreign source income of such corporation if this subsection were applied to a group consisting of all the foreign corporations in the expanded affiliated group. A similar reduction shall be made in the case of a corporation described in section 1504(b)(4).

`(4) BASIS OF STOCK IN CERTAIN CORPORATIONS ADJUSTED FOR EARNINGS AND PROFITS- The basis adjustment rules of subsection (e)(4) shall be applied only to stock in a corporation which is not included in the expanded affiliated group and in which members of the expanded affiliated group own 10 percent or more of the total combined voting power of all classes of stock entitled to vote.

`(5) EXCEPTION FOR INTEREST EXPENSE OF CERTAIN DOMESTIC SUBSIDIARIES-

`(A) IN GENERAL- A domestic corporation which is a member of an affiliated group and which incurs interest expense with respect to qualified indebtedness (as defined in subparagraph (C)) may elect to allocate and apportion interest expense incurred with respect to such qualified indebtedness under the rules of this subsection as if such corporation were the common parent of an expanded affiliated group consisting of such domestic corporation and any corporation at a lower level in the chain of corporations that includes such domestic corporation.

`(B) EQUALIZATION RULE- If an election under subparagraph (A) is made by any member of an affiliated group, all interest expense of such affiliated group not incurred with respect to qualified indebtedness shall be allocated and apportioned to foreign source income to the extent such expense does not exceed the amount of all interest expense which, but for this paragraph, would have been so allocated and apportioned.

`(C) QUALIFIED INDEBTEDNESS- For purposes of this paragraph, qualified indebtedness means any borrowing from any unrelated party which is not guaranteed (or otherwise directly supported) by any corporation within the same expanded affiliated group as the borrower (other than a corporation at a lower level in the chain of includible corporations). If a borrowing is not treated as qualified indebtedness solely because it is guaranteed (or otherwise directly supported) by another corporation, then--

`(i) such borrowing shall be treated as the borrowing of such other corporation if such other corporation is at a higher level in the chain of includible corporations than the borrowing corporation, or

`(ii) if such other corporation is in a different chain of includible corporations, such borrowing shall be treated as the borrowing of the first common parent of the borrowing corporation and the guaranteeing corporation.

`(D) EFFECT OF CERTAIN TRANSACTIONS ON QUALIFIED INDEBTEDNESS- To the extent that a domestic corporation allocating interest expense under the rules of subparagraph (A)--

`(i) distributes dividends or makes other distributions with respect to its stock in any year to any member of its affiliated group in excess of the greater of--

`(I) its average annual dividend (expressed as a percentage of current earnings and profits) during the 5 taxable year period ending with the taxable year preceding the taxable year, or

`(II) 25 percent of its average annual earnings and profits for such 5 taxable year period, or

`(ii) deals with any related party in any manner not clearly reflecting the income of the corporation,

an amount of qualified indebtedness equal to the excess distribution or the understatement or overstatement of income, as the case may be, shall be recharacterized for purposes of this paragraph as nonqualified indebtedness. If a corporation has not been in existence for 5 taxable years, this subparagraph shall be applied with respect to the period it was in existence.

`(E) EFFECT OF ELECTION ON GROUP- If 1 member of an affiliated group makes an election under subparagraph (A), all members of such group shall be treated as having made such election.

`(6) TREATMENT OF CERTAIN FINANCIAL INSTITUTIONS-

`(A) IN GENERAL- Any corporation that is predominantly engaged in the active conduct of a banking, insurance, financing, or similar business may elect to be treated as a member of an affiliated or expanded affiliated group only for purposes of applying this subsection to corporations so engaged.

`(B) DEFINITION- A corporation shall be considered to be predominantly engaged in a banking, insurance, financing, or similar business if at least 80 percent of its gross income is income described in section 904(d)(2)(C)(ii) and the regulations thereunder.

`(C) EFFECT OF CERTAIN TRANSACTIONS- Rules similar to the rules of paragraph (5)(D) shall apply in the case of transactions between a corporation included in the group described in subparagraph (A) and another member of the affiliated group that is not included in the group described in subparagraph (A).

`(D) EFFECT OF ELECTION ON GROUP- If 1 member of an affiliated group makes an election under subparagraph (A), all members of such group shall be treated as having made such election.

`(7) AFFILIATED GROUP- For purposes of this subsection--

`(A) AFFILIATED GROUP- The term `affiliated group' has the meaning given by such term in section 1504(a) (determined without regard to paragraph (2) of section 1504(b)).

`(B) EXPANDED AFFILIATED GROUP- The term `expanded affiliated group' means an affiliated group determined without regard to paragraph (2), (3), or (4) of section 1504(b) (but does not include a FSC as defined in section 922(a)).

`(8) REGULATIONS- The Secretary shall prescribe regulations providing for the direct allocation of interest expense in other circumstances where such allocation would be necessary or appropriate to carry out the purposes of this subsection.'

(b) CONFORMING AMENDMENT- Subsection (e) of section 864 is amended by striking `subchapter--' and inserting `subchapter, except as provided in subsection (f)--'.

END