DIVIDENDS FROM LESS DEVELOPED COUNTRY CORPORATIONS TO BE GROSSED UP FOR PURPOSES OF DETERMINING UNITED STATES INCOME AND FOREIGN TAX CREDIT AGAINST THAT INCOME.

SEC. 1033. DIVIDENDS FROM LESS DEVELOPED COUNTRY CORPORATIONS TO BE GROSSED UP FOR PURPOSES OF DETERMINING UNITED STATES INCOME AND FOREIGN TAX CREDIT AGAINST THAT INCOME. (a) Foreign Taxes Deemed Paid by Domestic Corporations.— Section 902 (relating to credit for corporate stockholders in foreign corporations) is amended to read as follows: “SEC. 902, CREDIT FOR CORPORATE STOCKHOLDER IN FOREIGN CORPORATION. “(a) Treatment of Taxes Paid by Foreign Corporation.— For purposes of this subpart, a domestic corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States, on or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which the amount of such dividends (determined without regard to section 78) bears to the amount of such 90 STAT. 1627accumulated profits in excess of such, income, war profits, and excess profits taxes (other than those deemed paid). “(b) Foreign Subsidiary of First and Second Foreign Corporation.— “(1) One tier.— If the foreign corporation described in subsection (a)(hereinafter in this subsection referred to as the ‘first foreign corporation’) owns 10 percent or more of the voting stock of a second foreign corporation from which it receives dividends in any taxable year, it shall be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such second foreign corporation to any foreign country or to any possession of the United States, on or with respect to the accumulated profits of such second foreign corporation from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits in excess of such income, war profits, and excess profits taxes (other than those deemed paid). “(2) Two tiers.— If such first foreign corporation owns 10 percent or more of the voting stock of a second foreign corporation which, in turn, owns 10 percent or more of the voting stock of a third foreign corporation from which the second foreign corporation receives dividends in any taxable year, the second foreign corporation shall be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid by such third foreign corporation to any foreign country or to any possession of the United States, on or with respect to the accumulated profits of such third foreign corporation from which such dividends were paid, which the amount of such dividends bears to the amount or such accumulated profits in excess of such income, war profits, and excess profits taxes. “(3) Voting stock requirement.— For purposes of this subpart— “(A) paragraph (1) shall not apply unless the percentage of voting stock owned by the domestic corporation in the first foreign corporation and the percentage of voting stock owned by the first foreign corporation in the second foreign corporation when multiplied together equal at least 5 percent, and “(B) paragraph (2) shall not apply unless the percentage arrived at for purposes of applying paragraph (I) when multiplied by the percentage of voting stock owned by the second foreign corporation in the third foreign corporation is equal to at least 5 percent. “(c) Applicable Rules.— “(1) Accumulated profits defined.— For purposes of this section. the term ‘accumulated profits’ means, with respect to any foreign corporation, (he amount of its gains, profits, or income computed without reduction by the amount, of the income, war profits, and excess profits taxes imposed on or with respect to such profits or income by any foreign country or by any possession of the United States. The Secretary shall have full power to determine from the accumulated profits of what year or years such dividends were paid, treating dividends paid in the first 60 days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shown otherwise), and in other respects treating dividends as having 90 STAT. 1628been paid from the most recently accumulated gains, profits, or earnings. “(2) Accounting periods.— In the ease of a foreign corporation the income, war profits, and excess profits taxes of which are determined on the basis of an accounting period of less than 1 year, the word ‘year’ as used in this subsection, shall be construed to mean such accounting period. “(d) Cross References.— “(1) For inclusion in gross income of an amount equal to taxes deemed paid under subsection (a), see section 78. “(2) For application of subsections (a) and (b) with respect to taxes deemed paid in a prior taxable year by a United States shareholder with respect to a controlled foreign corporation, see section 960. “(3) For reduction of credit with respect to dividends paid out of accumulated profits for years for which certain information is not furnished, see section 6038.” (b) Conforming Amendments.— (1) Section 78 (relating to dividends received from certain foreign corporations) is amended— (A) by striking out “section 902(a)(1)” and inserting in lieu thereof “section 902(a)”, and (B) by striking out “section 900(a)(1)(C)” and inserting in lieu thereof “section 960(a)(1)”. (2) Paragraph (1) of section 960(a)(Mating to special rules for foreign tax credit) is amended by striking out “bears to—” and all that follows down through the period at the end of such paragraph and inserting in lieu thereof “bears to the entire amount of the earnings and profits of such foreign corporation for such taxable year.”. (3) Section 535(b)(1) (relating to accumulated taxable income) is amended by striking out “section 902(a)(1) or 960(a)(1)(C)” and inserting in lieu thereof “section 902(a) or 960(a)” (4) Section 545(b)(1) (relating to undistributed personal holding company income) is amended by striking out “section 902(a)(1) or 960(a)(1)(C)” and inserting in lieu thereof “section 902(a) or 960(a)(1)”. (c) Effective Dates.—The amendments made by this section shall apply— (1) in respect of any distribution received by a domestic corporation after December 31, 1977, and (2) in respect of any distribution received by a domestic corporation before January 1, 1978, in a taxable year of such corporation beginning after December 31, 1975, but only to the extent that such distribution is made out of the accumulated profits of a foreign corporation for a taxable year (of such foreign corporation) beginning after December 31, 1975. For purposes of paragraph (2), a distribution made by a foreign corporation out or its profits which are attributable to a distribution received from a foreign corporation to which section 902(b) of the Internal Revenue Code of 1954 applies shall be treated as made out of the accumulated profits of a foreign corporation for a taxable year beginning before January 1, 1976, to the extent that such distribution was paid out of the accumulated profits of such foreign corporation for a taxable year beginning before January 1, 1976.