SPECIAL TAX PROVISIONS.

SEC. 105. SPECIAL TAX PROVISIONS. (a) Income Affected by Treaty.— Section 894 (relating to income exempt under treaties) is amended to read as follows: “SEC. 894. INCOME AFFECTED BY TREATY. “(a) Income Exempt Under Treaty.— Income of any kind, to the extent required by any treaty obligation of the United States, shall not be included in gross income and shall be exempt from taxation under this subtitle. “(b) Permanent Establishment in United States.— For purposes of applying any exemption from, or reduction of, any tax provided by any treaty to which the United States is a party with respect to income which is not effectively connected with the conduct of a trade or business within the United States, a nonresident alien individual or a foreign corporation shall be deemed not to have a permanent establishment in the United States at any time during the taxable year. This subsection shall not apply in respect of the tax computed under section 877(b).” (b) Adjustment of Tax Because of Burdensome or Discriminatory Foreign Taxes.— Subpart C of part II of subchapter N of chapter 1 (relating to miscellaneous provisions applicable to nonresident80 Stat. 1564aliens and foreign corporations) is amended by adding at the end thereof the following new section: “SEC. 896. ADJUSTMENT OF TAX ON NATIONALS, RESIDENTS, AND CORPORATIONS OF CERTAIN FOREIGN COUNTRIES. “(a) Imposition of More Burdensome Taxes by Foreign Country.— Whenever the President finds that— “(1) under the laws of any foreign country, considering the tax system of such foreign country, citizens of the United States not residents of such foreign country or domestic corporations are being subjected to more burdensome taxes, on any item of income received by such citizens or corporations from sources within such foreign country, than taxes imposed by the provisions of this subtitle on similar income derived from sources within the United States by residents or corporations of such foreign country, “(2) such foreign country, when requested by the United States to do so, has not acted to revise or reduce such taxes so that they are no more burdensome than taxes imposed by the provisions of this subtitle on similar income derived from sources within the United States by residents or corporations of such foreign country, and “(3) it is in the public interest to apply pre–1967 tax provisions in accordance with the provisions of this subsection to residents or corporations of such foreign country, the President shall proclaim that the tax on such similar income derived from sources within the United States by residents or corporations of such foreign country shall, for taxable years beginning after such proclamation, be determined under this subtitle without regard to amendments made to this subchapter and chapter 3 on or after the date of enactment of this section. “(b) Imposition of Discriminatory Taxes by Foreign Country.— Whenever the President finds that— “(1) under the laws of any foreign country, citizens of the United States or domestic corporations (or any class of such citizens or corporations) are, with respect to any item of income, being subjected to a higher effective rate of tax than are nationals, residents, or corporations of such foreign country (or a similar class of such nationals, residents, or corporations) under similar circumstances; “(2) such foreign country, when requested by the United States to do so, has not acted to eliminate such higher effective rate of tax; and “(3) it is in the public interest to adjust, in accordance with the provisions of this subsection, the effective rate of tax imposed by this subtitle on similar income of nationals, residents, or corporations of such foreign country (or such similar class of such nationals, residents, or corporations), the President shall proclaim that the tax on similar income of nationals, residents, or corporations of such foreign country (or such similar class of such nationals, residents, or corporations) shall, for taxable years beginning after such proclamation, be adjusted so as to cause the effective rate of tax imposed by this subtitle on such similar income to be substantially equal to the effective rate of tax imposed by such foreign country on such item of income of citizens of the United States or domestic corporations (or such class of citizens or corporations). In implementing a proclamation made under this subsection, the effective rate of tax imposed by this subtitle on an item of income may be adjusted by the disallowance, in whole or in part, of any deduction, credit, or exemption which would otherwise 80 Stat. 1565be allowed with respect to that item of income or by increasing the rate of tax otherwise applicable to that item of income. “(c) Alleviation of More Burdensome or Discriminatory Taxes.— Whenever the President finds that— “(1) the laws of any foreign country with respect to which the President has made a proclamation under subsection (a) have been modified so that citizens of the United States not residents of such foreign country or domestic corporations are no longer subject to more burdensome taxes on the item of income derived by such citizens or corporations from sources within such foreign country, or “(2) the laws of any foreign country with respect to which the President has made a proclamation under subsection (b) have been modified so that citizens of the United States or domestic corporations (or any class of such citizens or corporations) are no longer subject to a higher effective rate of tax on the item of income, he shall proclaim that the tax imposed by this subtitle on the similar income of nationals, residents, or corporations of such foreign country shall, for any taxable year beginning after such proclamation, be determined under this subtitle without regard to such subsection. “(d) Notification of Congress Required.— No proclamation shall be issued by the President pursuant to this section unless, at least 30 days prior to such proclamation, he has notified the Senate and the House of Representatives of his intention to issue such proclamation. “(e) Implementation by Regulations.— The Secretary or his delegate shall prescribe such regulations as he deems necessary or appropriate to implement this section.” (c) Clerical Amendments.— The table of sections for subpart C of part II of subchapter N of chapter 1 is amended— (1) by striking out the item relating to section 894 and inserting in lieu thereof “Sec. 894. Income affected by treaty.”; (2) by adding at the end of such table the following: “Sec. 896. Adjustment of tax on nationals, residents, and corporations of certain foreign countries.” (d) Effective Date.— The amendments made by this section (other than subsections (e) and (f)) shall apply with respect to taxable years beginning after December 31, 1966. (e) Elections by Nonresident United States Citizens Who Are Subject to Foreign Community Property Laws.— (1) Part III of subchapter N of chapter 1 (relating to income 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. “SEC. 981. ELECTION AS TO TREATMENT OF INCOME SUBJECT TO FOREIGN COMMUNITY PROPERTY LAWS. “(a) General Rule.—In the case of any taxable year beginning after December 31, 1966, if— “(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 80 Stat. 1566year to a spouse who is a nonresident alien during the entire taxable year, and “(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. “(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) 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) Trade or business income, and a partner’s distributive share of partnership income, shall be treated as provided in section 1402(a)(5). “(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) All other such community income shall be treated as provided in the applicable foreign community property law. “(c) Election for Pre–1967 Years.— “(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 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. “(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) Time for Making Elections; Period of Limitations; etc.— “(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. “(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-80 Stat. 1567ciency or overpayment is attributable to such an election, shall not expire before 1 year after the date of such election. “(3) Alien spouse need not join in subsection (c) election in certain cases.— If the Secretary or his delegate determines— “(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) 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. “(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) Definitions and Special Rules.— For purposes of this section— “(1) Deductions.—Deductions shall be treated in a manner consistent with the manner provided by this section for the income to which they relate. “(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. “(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. “(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.” (2) The table of subparts for such part III is amended by adding at the end thereof the following: “Subpart H. Income of certain nonresident United States citizens subject to foreign community property laws.” (3) Section 911(d) (relating to earned income from sources without the United States) is amended— (A) by striking out “For administrative” and inserting in lieu thereof the following: “(1) For administrative”; and (B) by adding at the end thereof the following: “(2) For elections as to treatment of income subject to foreign community property laws, see section 981.” (f) Presumptive Date of Payment for Tax Withheld Under Chapter 3.— (1) Section 6513(b) (relating to time tax is considered paid in the case of prepaid income tax) is amended to read as follows: “(b) Prepaid Income Tax.— For purposes of section 6511 or 6512— “(1) Any tax actually deducted and withheld at the source during any calendar year under chapter 24 shall, in respect of the 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. 80 Stat. 1568 “(2) Any amount paid as estimated income tax for any taxable year shall be deemed to have been paid on the last day prescribed for filing the return under section 6012 for such taxable year (determined without regard to any extension of time for filing such return). “(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.” (2) Section 6513(c) (relating to return and payment of Social Security taxes and income tax withholding) is amended— (A) by striking out “chapter 21 or 24” and inserting in lieu thereof “chapter 3, 21, or 24”; and (B) by striking out “remuneration” in paragraph (2) and inserting in lieu thereof “remuneration or other amount”. (3) Section 6501(b) (relating to time returns deemed filed) is amended— (A) by striking out “chapter 21 or 24” in paragraphs (1) and (2) and inserting in lieu thereof “chapter 3, 21, or 24”; and (B) by inserting after “taxes” in the heading of paragraph (2) “and tax imposed by chapter 3”. (4) The amendments made by this subsection shall take effect on the date of the enactment of this Act.