AMENDMENTS RELATED TO TITLE III OF THE REFORM ACT.

SEC. 1003. AMENDMENTS RELATED TO TITLE III OF THE REFORM ACT. (a) Amendments Related to Section 301 of the Reform Act.— (1) Subparagraph. (B) of section 172(d)(4) of the 1986 Code is amended by striking out “, (2)(B),”. (2) Paragraph (1) of section 3402(m) of the 1986 Code is amended by striking out “section 62) (other than paragraph (13) thereof)” and inserting in lieu thereof “section 62(a) (other than paragraph (10) thereof))”. (3) Paragraph (2) of section 1212(b) of the 1986 Code is amended to read as follows: “(2) Treatment of amounts allowed under section 1211(b) (1) or (2).— “(A) In general.— For purposes of determining the excess referred to in subparagraph (A) or (B) of paragraph (1), there shall be treated as a short-term capital gain in the taxable year an amount equal to the lesser of— “(i) the amount allowed for the taxable year under paragraph (1) or (2) of section 1211(b), or “(ii) the adjusted taxable income for such taxable year. “(B) Adjusted taxable income.— For purposes of subparagraph (A), the term ‘adjusted taxable income’ means taxable income increased by the sum of— “(i) the amount allowed for the taxable year under paragraph (1) or (2) of section 1211(b), and “(ii) the deduction allowed for such year under section 151 or any deduction in lieu thereof For purposes of the preceding sentence, any excess of the deductions allowed for the taxable year over the gross income for such year shall be taken into account as negative taxable income.” (b) Amendments Related to Section 302 of the Reform Act.— (1) Section 302 of the Reform Act is amended by striking out subsection (c). 102 STAT. 3383 (2) (A) Paragraph (2) of section 904(b) of the 1986 Code is amended to read as follows: “(2) Capital gains.— For purposes of this section— “(A) In general.—Taxable income from sources outside the United States shall include gain from the sale or ex-change of capital assets only to the extent of foreign source capital gain net income. “(B) Special rules where capital gain rate differential.— In the case of any taxable year for which there is a capital gain rate differential— “(i) in lieu of applying subparagraph (A), the taxable income from sources outside 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 the rate differential portion of foreign source net capital gain, “(ii) the entire taxable income shall include gain from the sale or exchange of capital assets only in an amount equal to capital gain net income reduced by the rate differential portion of net capital gain, and “(iii) for purposes of determining taxable income from sources outside the United States, any net capital loss (and any amount which is a short-term capital loss under section 1212(a)) from sources outside 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 the rate differential portion of the excess of net capital gain from sources within the United States over net capital gain.” (B) Paragraph (3) of section 904(b) of the 1986 Code is amended by striking out subparagraph (D) and inserting in lieu thereof the following new subparagraphs: “(D) Capital gain rate differential.— There is a capital gain rate differential for any taxable year if— “(i) in the case of a taxpayer other than a corporation, subsection (j) of section 1 applies to such taxable year, or “(ii) in the case of a corporation, any rate of tax imposed by section 11, 511, or 831 (a) or (b) (whichever applies) exceeds the alternative rate of tax under section 1201(a) (determined without regard to the last sentence of section 11(b)). “(E) Rate differential portion.— “(i) In general.— The rate differential portion of foreign source net capital gain, net capital gain, or the excess of net capital gain from sources within the United States over net capital gain, as the case may be, is the same proportion of such amount as— “(I) the excess of the highest applicable tax rate over the alternative tax rate, bears to “(II) the highest applicable tax rate. “(ii) Highest applicable tax rate.—For purposes of clause (i), the term ‘highest applicable tax rate’ means— “(I) in the case of a taxpayer other than a corporation, the highest rate of tax set forth in subsec-102 STAT. 3384tion (a), (b), (c), (d), or (e) of section 1 (whichever applies), or “(II) in the case of a corporation, the highest rate of tax specified in section 11(b). “(iii) Alternative tax rate.— For purposes of clause (i), the term ‘alternative tax rate’ means— “(I) in the case of a taxpayer other than a corporation, the alternative rate of tax determined under section l(j), or “(II) in the case of a corporation, the alternative rate of tax under section 1201(a).” (3) Effective for taxable years beginning after December 31, 1987, paragraph (1) of section 1445(e) of the 1986 Code is amended by striking out “34 percent” and inserting in lieu thereof “34 percent (or, to the extent provided in regulations, 28 percent)”. (c) Amendments Related to Section 311 of the Reform Act.— (1) Subsection (a) of section 1201 of the 1986 Code is amended by striking out “831(a)” and inserting in lieu thereof “831 (a) or (b)”. (2) Subsection (c) of section 311 of the Reform Act is amended by inserting before the period at the end thereof the following: “; except that the amendment made by subsection (b)(4) shall apply to payments made after December 31, 1986”. (3) Subparagraph (D) of section 593(b)(2) of the 1986 Code is amended by striking out “and” at the end of clause (iii), by striking out the period at the end of clause (iv) and inserting in lieu thereof “, and”, and by adding at the end thereof the following new clause: “(v) if there is a capital gain rate differential (as defined in section 904(b)(3)(D)) for the taxable year, by excluding from gross income the rate differential portion (within the meaning of section 904(b)(3)(E)) of the lesser of— “(I) the net long-term capital gain for the taxable year, or “(II) the net long-term capital gain for the tax-able year from the sale or exchange of property other than property described in clause (iii).” (d) Amendment Related to Section 321 of the Reform Act.— (1) (A) Subsection (b) of section 422A of the 1986 Code is amended by adding at the end thereof the following new sentence: “Such term shall not include any option if (as of the time the option is granted) the terms of such option provide that it will not be treated as an incentive stock option.” (B) In the case of an option granted after December 31, 1986, and on or before the date of the enactment of this Act, such option shall not be treated as an incentive stock option if the terms of such option are amended before the date 90 days after such date of enactment to provide that such option will not be treated as an incentive stock option. (2) (A) Section 422A of the 1986 Code is amended by adding at the end thereof the following new subsection: “(d) $100,000 Per Year Limitation.— “(1) In general.—To the extent that the aggregate fair market value of stock with respect to which incentive stock 102 STAT. 3385options (determined without regard to this subsection) are exercisable for the 1st time by any individual during any calendar year (under all plans of the individual’s employer corporation and its parent and subsidiary corporations) exceeds $100,000, such options shall be treated as options which are not incentive stock options. “(2) Ordering rule.— Paragraph (1) shall be applied by taking options into account in the order in which they were granted. “(3) Determination of fair market value.—For purposes of paragraph (1), the fair market value of any stock shall be determined as of the time the option with respect to such stock is granted.” (B) Subsection (b) of section 422A of the 1986 Code is amended by adding “and” at the end of paragraph (5), by striking out “; and” at the end of paragraph (6) and inserting in lieu thereof a period, and by striking out paragraph (7). (C) Paragraph (1) of section 422A(c) of the 1986 Code is amended by striking out “paragraph (7) of subsection (b)” and inserting in lieu thereof “subsection (d)”.