TREATMENT OF CAPITAL GAINS FOR PURPOSES OF FOREIGN TAX CREDIT.

SEC. 1034. TREATMENT OF CAPITAL GAINS FOR PURPOSES OF FOREIGN TAX CREDIT. (a) In General.— Section (b) of section 904 (relating to taxable income for purposes of computing the foreign tax credit imitation), as amended by section 1031 of this Act, is amended to read as follows: “(b) Taxable Income for Purpose of Computing Limitation.— “(1) Personal exemptions.— For purposes of subsection (a), tile taxable income in the case of an individual, estate, or trust shall be computed without any deduction for personal exemptions under section 151 or 642 (b). “(2) Capital gains.— For purposes of subsection (a)— “(A) Corporations.— In the case of a corporation— “(i) the taxable income of such corporation from sources without the United States shall include gain from the sale or exchange of capital assets only in an amount equal to foreign source capital gain net income reduced by three-eight is of foreign source net capital gain,. “(ii) the entire taxable income of such corporation shall include gain from the sale or exchange of capital assets only in an amount equal to capital gain net income reduced by three-eights of net capital gain, and “(iii) any net capital loss from sources without the United States to the extent taken into account in determining capital gain net income for the taxable year shall be reduced by an amount equal to three-eighths of the excess of net capital gain from sources within the United States over net capital gain. “(B) Other taxpayers.— In the case of a taxpayer other than a taxpayer described in subparagraph (A), taxable income from sources without the United States shall include gain from the sale or exchange of capital assets only to the extent of foreign source capital gain net income. “(3) Definitions.— For purposes of this subsection— “(A) Foreign source capital gain net income.— The term ‘foreign source capital gain net income’ means the lesser of— “(i) capital gain net income from sources without the United States, or “(ii) capital gain net income. “(B) Foreign source net capital gain.— The term ‘foreign source net capital gain’ means the lesser of— “(i) net capital gain from sources without the United States, or “(ii) net capital gain. “(C) Exception for gain from the sale of certain personal property.— For purposes of this paragraph, there shall be included as gain from sources within the United States any gain from sources without the United States from the sale or exchange of a capital asset which is personal property which— “(i) in the case of an individual, is sold or exchanged outside of the country (or possession) of the individual’s residence, “(ii) in the case of a corporation, is stock in a second corporation sold or exchanged other than in a country (or possession) in which such second corporation derived more than 50 percent of its gross income for the 3-year 90 STAT. 1630period ending with the close of such second corporation’s taxable year immediately preceding the year during which the sale or exchange occurred, or “(iii) in the case of any taxpayer, is personal property (other than stock in a corporation) sold or exchanged other than in a country (or possession) in which such property is used in a trade or business of the taxpayer or in which such taxpayer derived more than 50 percent of its gross income for the 3-year period ending with the close of its taxable year immediately preceding the year during which the sale or exchange occurred, unless such gain is subject to an income, war profits, or excess profits tax of a foreign country or possession of the United States, and the rate of tax applicable to such gain is 10 percent or more of the gain from the sale or exchange (computed under this chapter). “(D) Section 1231 gains.— The term ‘gain from the sale or exchange of capital assets’ includes any gain so treated under section 1231.” (b) Effective Dates.— The amendment made by this section shall apply to taxable years beginning after December 31, 1975, except that the provisions of section 904(b)(3)(C) shall only apply to sales or exchanges made after November 12, 1975.