DEDUCTIONS, CREDITS, ETC.

SEC. 502. DEDUCTIONS, CREDITS, ETC. (a) Dividends Received Deduction—Section 246 (relating to rules applying to deductions for dividends received) is amended by redesignating subsection (d) as subsection (e) and by inserting after subsection (c) the following: “(d) Dividends From a DISC or Former DISC.—No deduction shall be allowed under section 243 in respect of a dividend from a corporation which is a DISC or former DISC (as defined in section 992(a)) to the extent such dividend is paid out of the corporation’s accumulated DISC income or previously taxed income, or is a deemed distribution pursuant to section 995 (b)(1).” (b) Foreign Tax Credit— (1) Section 901 (d) (relating to corporations treated as foreign corporations) is amended by adding at the end thereof the following: “For purposes of this subpart, dividends from a DISC or former DISC (as defined in section 992(a)) shall be treated as dividends from a foreign corporation to the extent such dividends are treated under part I as income from sources without the United States.” (2) The heading of section 904(f) and paragraph (1) of section 904(f) (relating to limitation on foreign tax credit) are amended to read as follows: “(f) Application of Section in Case of Certain Interest Income and Dividends From a DISC or Former DISC.— “(1) In general—The provisions of subsections (a), (c), (d), and (e) of this section shall be applied separately with respect to each of the following items of income— “(A) the interest income described in paragraph (2), “(B) dividends from a DISC or former DISC (as defined in section 992(a)) to the extent such dividends are treated as income from sources without the United States, and “(C) income other than the interest income described in paragraph (2) and dividends described in subparagraph (3) Section 904(f)(3) (relating to limitation on foreign tax credit) is amended to read as follows: “(3) Overall limitation not to apply—The limitation provided by subsection (a) (2) shall not apply with respect to the interest income described in paragraph (2) or to dividends described in paragraph (1) (B). The Secretary or his delegate shall by regulations prescribe the manner of application of subsection (e) with respect to cases in which the limitation provided by sub-section (a)(2) applies with respect to income described in paragraph (1) (B) and (C).” (4) Section 904(f) is amended by adding at the end thereof the following new paragraph: “(5) DISC dividends aggregated for purposes of per-country limitation.—In the case of a taxpayer who for the taxable year has dividends described in paragraph (1) (B) from more than 85 Stat. 550one corporation, the limitation provided by subsection (a)(1) shall be applied with respect to the aggregate of such dividends. (c) Western Hemisphere Trade Corporations—Section 922 (relating to special deduction for Western Hemisphere Trade Corporations) is amended by adding at the end thereof the following: “No deduction shall be allowed under this section to a corporation for a taxable year for which it is a DISC or in which it owns at any time stock in a DISC or former DISC (as defined in section 992(a)).” (d) Income From Sources Within Possessions of the United States.—Section 931(a) (relating to the general rule applicable to income from sources within possessions of the United States) is amended by adding at the end thereof the following: “This section shall not apply in the case of a corporation for a taxable year for which it is a DISC or in which it owns at any time stock in a DISC or former DISC (as defined in section 992 (a)).” (e) Includible Corporations—Section 1504(b) (relating to definition of “includible corporations”) is amended by adding at the end thereof the following new paragraph: “(7) A DISC or former DISC (as defined in section 992(a)).” (f) Basis of DISC Stock Acquired From Decedent—Section 1014 (relating to basis of property acquired from a decedent) is amended by adding at the end thereof the following new subsection: “(d) Special Rule With Respect to DISC Stock.—If stock owned by a decedent in a DISC or former DISC (as defined in section 992 (a)) acquires a new basis under subsection (a), such basis (determined before the application of this subsection) shall be reduced by the amount (if any) which would have been included in gross income under section 995(c) as a dividend if the decedent had lived and sold the stock at its fair market value on the estate tax valuation date. In computing the gain the decedent would have had if he had lived and sold the stock, his basis shall be determined without regard to the last sentence of section 996(e)(2) (relating to reductions of basis of DISC stock). For purposes of this subsection, the estate tax valuation date is the date of the decedent’s death or, in the case of an election under section 2032, the applicable valuation date prescribed by that section.”