TAX TREATMENT OF CORPORATIONS CONDUCTING TRADE OR BUSINESS IN PUERTO RICO AND POSSESSIONS OF THE UNITED STATES.

SEC. 1051. TAX TREATMENT OF CORPORATIONS CONDUCTING TRADE OR BUSINESS IN PUERTO RICO AND POSSESSIONS OF THE UNITED STATES. (a) Allowance of Puerto Rican and Possession Tax Credit.— Section 33 (relating to taxes of foreign countries and possessions of the United States) is amended to read as follows: “SEC. 33. TAXES OF FOREIGN COUNTRIES AND POSSESSIONS OF THE UNITED STATES; POSSESSION TAX CREDIT. “(a) Foreign Tax Credit.— The amount of taxes imposed by foreign countries and possessions of the United States shall be allowed as a credit against the tax imposed by this chapter to the extent provided in section 901. “(b) Section 936 Credit.— In the case of a domestic corporation, the amount provided by section 936 (relating to Puerto Rico and possession tax credit) shall be allowed as a credit against the tax imposed by this chapter.” (b) Rules on Possession Tax Credit.— Subpart D of part III of subchapter N of chapter 1 (relating to possessions of the United States) is amended by adding at the end thereof the following new section: “SEC. 936. PUERTO RICO AND POSSESSION TAX CREDIT. “(a) Allowance of Credit.— “(1) In general.— Except, as provided in paragraph (2), in the ease of a domestic corporation which elects the application of this section, there shall be allowed as a credit against the tax imposed, by this chapter an amount equal to the portion of the tax which is attributable, to taxable income, from sources without the. United States, from the active conduct of a trade or business within a possession of the United States, and from qualified possession source investment income, if the conditions of both subparagraph (A) and subparagraph (B) are satisfied: “(A) 3-year period.— If 80 percent or more of the gross income of such domestic corporation for the 3-year period immediately preceding the close of the taxable year (or for such part of such period immediately preceding the close of such taxable year as may be applicable) was derived from sources within a possession of the United Stales (determined without regard to section 904(f)): and 90 STAT. 1644 “(B) Trade or business.— If 50 percent or more of the gross income of such domestic corporation for such period or such part thereof was derived from the active conduct of a trade or business within a possession of the United States. “(2) Credit not allowed against certain taxes.— The credit provided by paragraph (1) shall not be allowed against the tax imposed by— “(A) section 56 (relating to minimum tax), “(B) section 531 (relating to the tax on accumulated earnings), “(C) section 541 (relating to personal holding company tax), “(D) section 1333 (relating to war loss recoveries), or “(E) section 1351 (relating to recoveries of foreign expropriation losses). “(b) Amounts Received in United States.— In determining taxable income for purposes of subsection (a), there shall not be taken into account as income from sources without the United States any gross income which was received by such domestic corporation within the United States, whether derived from sources within or without the United States. “(c) Treatment of Certain Foreign Taxes.— For purposes of this title, any lax of a foreign country or a possession of the United States which is paid or accrued with respect to taxable income which is taken into account in computing the credit under subsection (n) shall not be treated as income, war profits, or excess profits taxes paid or accrued to a foreign country or possession of the United States, and no deduction shall be allowed under this title with respect to any amounts so paid or accrued. “(d) Definitions.— For purposes of this section— “(1) Possession.— The term ‘possession of the United Slates’ includes the Commonwealth of Puerto Rico, but does not include the Virgin Islands of the United States. “(2) Qualified possession source investment income.— The term ‘qualified possession source investment income’ means gross income which— “(A) is from sources within a possession of the United States in which a trade or business is actively conducted, and “(B) the taxpayer establishes to the satisfaction of the Secretary is attributable to the investment in such possession (for use therein) of funds derived from the active conduct of a trade or business in such possession, or from such investment, less the deductions properly apportioned or allocated thereto. “(e) Election.— “(1) Period of election.— The election provided tn subsection (a) shall be made at such time and in such manner as the Secretary may by regulations prescribe. Any such election shall apply to the first taxable year for which such election was made and for which the domestic corporation satisfied the conditions of subparagraphs (A) and (B) of subsection (a)(1) and for each taxable year thereafter until such election is revoked by the domestic corporation under paragraph (2). If any such election is revoked by the domestic, corporation under paragraph (2), such domestic corporation may make a subsequent election under subsection (a) for any taxable year thereafter for which such domestic cor-90 STAT. 1645poration satisfies the conditions of subparagraphs (A) and (B) of subsection (a)(1) and any such subsequent election shall remain in effect until revoked by such domestic corporation under paragraph (2). “(2) Revocation.— An election under subsection (a)— “(A) may be revoked for any taxable year beginning before the expiration of the 9th taxable year following the taxable year for which such election first applies only with the consent of the Secretary; and “(B) may be revoked for any taxable year beginning after the expiration of such 9th taxable year without the consent of the Secretary. “(f) DISC or Former DISC Corporation Ineligible for Credit.— No credit shall be allowed under this section to a corporation for a taxable year for which it is a DISC or former DISC (as defined in section 992(a)) or in which it owns at any time stock in a DISC or former DISC. “(g) Exception to Accumulated Earnings Tax.— “(1) For purposes of section 535. the term ‘accumulated taxable income’ shall not include taxable income entitled to the credit under subsection (a). “(2) For purposes of section 537, the term ‘reasonable needs of the business’ includes assets which produce income eligible for the credit under subsection (a).” (c) Amendments of Section 931.— (1) Subsection (a) of section 931 (relating to genera) rule in the case of income from sources within possessions of the United Stales) is amended to read as follows: “(a) General Rule.— In the ease of individual citizens of the United States, gross income means only gross income from sources within the United States if the conditions of both paragraph (1) and paragraph (2) arc satisfied: “(1) 3-year period.— If 80 percent or more of the gross income of such citizen (computed without the benefit of this section) for the 3-year period immediately preceding the close of the taxable year (or for such part of such period immediately preceding the close of such taxable year as may be applicable) was derived from sources within a possession of the United States; and “(2) Trade or business.— If 50 percent or more of his gross income (computed without the benefit of this section) for such period or such part thereof was derived from the active conduct of a trade or business within a possession of the United States either on his own account or as an employee or agent of another.”, (2) Subsection (e) of section 931 (defining the term “possession”) is amended to read as follows: “(c) Definition.— For purposes of this section, the term ‘possession of the United States’ does not include the Commonwealth of Puerto Rico, the Virgin Islands of the United States, or Guam.”. (3) Subsections (d). (e). and (f) of section 931 are each amended by striking out “persons” each place it appeal’s and inserting in lieu thereof “a citizen of the United States”. (d) Amendments of Section 901.— (1) Section 901 (d) (relating to certain corporations treated as foreign corporations) is amended to read as follows: “(d) Treatment of Dividends From a DISC or Former DISC.— For purposes of this subpart, dividends from a DISC or former DISC 90 STAT. 1646(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) Section 901 (relating to tuxes of foreign countries and possessions of the United States) is amended by redesignating subsection (g) as (h) and by inserting after subsection (f) the following new subsection: “(g) Certain Taxes Paid With Respect to Distributions From Possessions Corporations.— “(1) In general.— For purposes of this chapter, any tux of a foreign country or possession of the United States which is paid or accrued with respect to any distribution from a corporation, to the extent that such distribution is attributable to periods during which such corporation is a possessions corporation, shall not be treated as income, war profits, or excess profits taxes paid or accrued to a foreign country or possession of the United States, and no deduction shall be allowed under this title with respect to any amount so paid or accrued. “(2) Possessions corporation.— For purposes of paragraph (1), a corporation shall be treated as a possessions corporation for any period during which an election under section 935 applied to such corporation or during which section 931 (as in elicit on the day before the date of the enactment of the Tax Reform Act of 1976) applied to such corporation.” (e) Amendment of Section 904(b).— Section 904(b)(as amended by sections 1031 and 1034(a) of this Act) is amended by adding at the end thereof the following new paragraph: “(4) Coordination with section 936.— For purposes of subsection (a), in the case of a corporation, the taxable income shall not include any portion thereof taken into account for purposes of the credit (if any) allowed by section 936.” (f) Dividends Received Deduction Allowed.— (1) Section 243(b)(1)(defining qualifying dividends) is amended by adding “either” at the end of subparagraph (A), by striking out the period at the end of subparagraph (B)(i) and inserting in lieu thereof a comma and “or”, and by adding at the end thereof the following new subparagraph: “(C) such dividends are paid by a corporation with respect, to which an election under section 936 is in effect for the taxable year in which such dividends are paid.”. (2) Section 243(b)(5)(defining affiliated group) is amended by inserting “. 1504(b)(4),” immediately after “1504(h)(2)”. (3) Section 246(a) (relating to dividends from certain corporations) is amended to read as follows: “(a) Deduction Not Allowed fob Dividends From Certain Corporations.— The deductions allowed by sections 243, 244, and 245 shall not apply to any dividend from a corporation which. for the taxable year of the corporation in which the distribution is made, or for the next preceding taxable year of the corporation, is a corporation exempt from tax tinder section 501 (relating to certain charitable, etc., organizations) or section 521 (relating to farmer’s” cooperative associations) (g) Consolidated Return Treatment.— Section 1504 (b) (4) (defining includible corporation) is amended to read as follows: “(4) Corporations with respect to which an election under section 936 (relating to possession tax credit) is in effect for the taxable year.”. 90 STAT. 1647 (h) Conforming Amendment.— (1) Section 48(a)(2)(B)(vii) (relating to definition of section 38 property) is amended by striking out “(other than a corporation entitled to the benefits of section 931 or 934(b))” and inserting in lieu thereof the following: “(other than ti corporation which has an election in effect under section 936 or which is entitled to the benefits of section 934(b))”. (2) Paragraph (2) of subsection 116(b) (relating to certain dividends excluded from partial exclusion of dividends received by individuals) is amended tn read as follows: “(2) a corporation which, for the taxable year of the corporation in which the distribution is made, or for the next preceding taxable year of the corporation, is a corporation exempt from lax under section 501 (relating to certain charitable, etc., organizations) or section 521 (relating to farmers cooperative associations); or”. (3) Section 861(a)(2)(A) (relating to income from sources within the United States) is amended by striking out “other than a corporation entitled to the benefits of section 931.” and inserting in lien thereof (be following: “other than a corporation which has an election in effect under section 936,”. (4) Section 61191(b)(2)(B)(ii) (relating to place of tiling for corporations) is amended by striking out “section 931 (relating to income from sources within possessions of the United States).” and inserting in lieu thereof the following: “section 936 (relating to possession tax credit),”. (i) Effective Date.— (1) Except as provided by paragraph (2). the amendments made by this section shall apply to taxable years beginning after December 31, 1975, except that “qualified possession source investment income” as defined in section 936(d)(2) of the Internal Revenue Code of 1954 shall include income from any source outside the United States if the taxpayer establishes to the satisfaction of the Secretary of the Treasury or his delegate that the income from such sources was earned before October 1, 1976. (2) The a mend ii lent made by subsection (d)(2) shall not apply to any tax imposed by a possession of the United States with respect to the complete liquidation occurring before January 1, 1979, of a corporation to the extent that such tax is attributable to earnings and profits accumulated by such corporation during periods ending before January 1, 1976.