DENIAL OF PORTFOLIO INTEREST EXEMPTION FOR CONTINGENT INTEREST.

SEC. 13237. DENIAL OF PORTFOLIO INTEREST EXEMPTION FOR CONTINGENT INTEREST. (a) General Rule.— (1) Subsection (h) of section 871 (relating to repeal of tax on interest of nonresident alien individuals received from certain portfolio debt investments) is amended by redesignating paragraphs (4), (5), and (6) as paragraphs (5), (6), and (7), respectively, and by inserting after paragraph (3) the following new paragraph: “(4) Portfolio interest not to include certain contingent interest.— For purposes of this subsection— “(A) In general.— Except as otherwise provided in this paragraph, the term 'portfolio interest’ shall not include— “(i) any interest if the amount of such interest is determined by reference to— “(I) any receipts, sales or other cash flow of the debtor or a related person, “(II) any income or profits of the debtor or a related person, “(III) any change in value of any property of the debtor or a related person, or “(IV) any dividend, partnership distributions, or similar payments made by the debtor or a related person, or 107 STAT. 507 “(ii) any other type of contingent interest that is identified by the Secretary by regulation, where a denial of the portfolio interest exemption is necessary or appropriate to prevent avoidance of Federal income tax. “(B) Related person.— The term ‘related person’ means any person who is related to the debtor within the meaning of section 267(b) or 707(b)(1), or who is a party to any arrangement undertaken for a purpose of avoiding the application of this paragraph. “(C) Exceptions.— Subparagraph (A)(i) shall not apply to— “(i) any amount of interest solely by reason of the fact that the timing of any interest or principal payment is subject to a contingency, “(ii) any amount of interest solely by reason of the fact that the interest is paid with respect to nonrecourse or limited recourse indebtedness, “(iii) any amount of interest all or substantially all of which is determined by reference to any other amount of interest not described in subparagraph (A) (or by reference to the principal amount of indebtedness on which such other interest is paid), “(iv) any amount of interest solely by reason of the fact that the debtor or a related person enters into a hedging transaction to reduce the risk of interest rate or currency fluctuations with respect to such interest, “(v) any amount of interest determined by reference to— “(I) changes in the value of property (including stock) that is actively traded (within the meaning of section 1092(d)) other than property described in section 897(c)(1) or (g), “(II) the yield on property described in subclause (I), other than a debt instrument that pays interest described in subparagraph (A), or stock or other property that represents a beneficial interest in the debtor or a related person, or “(III) changes in any index of the value of property described in subclause (I) or of the yield on property described in subclause (II), and “(vi) any other type of interest identified by the Secretary by regulation. “(D) Exception for certain existing indebtedness.— Subparagraph (A) shall not apply to any interest paid or accrued with respect to any indebtedness with a fixed term— “(i) which was issued on or before April 7, 1993, or “(ii) which was issued after such date pursuant to a written binding contract in effect on such date and at all times thereafter before such indebtedness was issued.” (2) Subsection (c) of section 881 is amended by redesignating paragraphs (4), (5), and (6) as paragraphs (5), (6), and 107 STAT. 508(7), respectively, and by inserting after paragraph (3) the following new paragraph: “(4) Portfolio interest not to include certain contingent interest.— For purposes of this subsection, the term ‘portfolio interest’ shall not include any interest which is treated as not being portfolio interest under the rules of section 871(h)(4).” (b) Estate Tax Treatment.— Subsection (b) of section 2105 is amended— (1) by striking “this subchapter” in the material preceding paragraph (1) and inserting “this subchapter, the following shall not be deemed property within the United States”, and (2) by striking paragraph (3) and all that follows down through the period at the end thereof and inserting the following: “(3) debt obligations, if, without regard to whether a statement meeting the requirements of section 871(h)(5) has been received, any interest thereon would be eligible for the exemption from tax under section 871(h)(1) were such interest received by the decedent at the time of his death. Notwithstanding the preceding sentence, if any portion of the interest on an obligation referred to in paragraph (3) would not be eligible for the exemption referred to in paragraph (3) by reason of section 871(h)(4) if the interest were received by the decedent at the time of his death, then an appropriate portion (as determined in a manner prescribed by the Secretary) of the value (as determined for purposes of this chapter) of such debt obligation shall be deemed property within the United States.” (c) Conforming Amendments.— (1) Clause (ii) of section 871(h)(2)(B) is amended by striking “paragraph (4)” and inserting “paragraph (5)”. (2) Clause (ii) of section 881(c)(2)(B) is amended by striking “section 871(h)(4)” and inserting “section 871(h)(5)”. (3) Paragraph (6) of section 881(c) (as redesignated by subsection (a)) is amended by striking “section 871(h)(5)” each place it appears and inserting “section 871(h)(6)”. (4) Paragraph (9) of section 1441(c) is amended by striking “section 871(n)(3)” and inserting “section 871(h)(3) or (4)”. (5) Subsection (a) of section 1442 is amended— (A) by striking “871(h)(3)” and inserting “871(h)(3) or (4)”, and (B) by striking “881(c)(3)” and inserting “881(c)(3) or (4)”. (d) Effective Date.— The amendments made by this section shall apply to interest received after December 31, 1993; except that the amendments made by subsection (b) shall apply to the estates of decedents dying after December 31, 1993.