LOOK-THRU RULES TO APPLY TO DIVIDENDS FROM NONCONTROLLED SECTION 902 CORPORATIONS.

SEC. 403. LOOK-THRU RULES TO APPLY TO DIVIDENDS FROM NONCONTROLLED SECTION 902 CORPORATIONS. (a) In General.—Section 904(d)(4) (relating to look-thru rules apply to dividends from noncontrolled section 902 corporations) is amended to read as follows: 118 STAT. 1493 “(4) Look-thru applies to dividends from noncontrolled section 902 corporations.—“(A) In general.—For purposes of this subsection, any dividend from a noncontrolled section 902 corporation with respect to the taxpayer shall be treated as income described in a subparagraph of paragraph (1) in proportion to the ratio of—“(i) the portion of earnings and profits attributable to income described in such subparagraph, to “(ii) the total amount of earnings and profits. “(B) Earnings and profits of controlled foreign corporations.—In the case of any distribution from a controlled foreign corporation to a United States shareholder, rules similar to the rules of subparagraph (A) shall apply in determining the extent to which earnings and profits of the controlled foreign corporation which are attributable to dividends received from a noncontrolled section 902 corporation may be treated as income in a separate category.“(C) Special rules.—For purposes of this paragraph—“(i) Earnings and profits.—“(I) In general.—The rules of section 316 shall apply. “(II) Regulations.—The Secretary may prescribe regulations regarding the treatment of distributions out of earnings and profits for periods before the taxpayer’s acquisition of the stock to which the distributions relate.“(ii) Inadequate substantiation.—If the Secretary determines that the proper subparagraph of paragraph (1) in which a dividend is described has not been substantiated, such dividend shall be treated as income described in paragraph (1)(A).“(iii) Coordination with high-taxed income provisions.—Rules similar to the rules of paragraph (3)(F) shall apply for purposes of this paragraph.“(iv) Look-thru with respect to carryover of credit.—Rules similar to subparagraph (A) also shall apply to any carryforward under subsection (c) from a taxable year beginning before January 1, 2003, of tax allocable to a dividend from a noncontrolled section 902 corporation with respect to the taxpayer. The Secretary may by regulations provide for the allocation of any carryback of tax allocable to a dividend from a noncontrolled section 902 corporation from a taxable year beginning on or after January 1, 2003, to a taxable year beginning before such date for purposes of allocating such dividend among the separate categories in effect for the taxable year to which carried.”.(b) Conforming Amendments.—(1) Subparagraph (E) of section 904(d)(1) is hereby repealed.(2) Section 904(d)(2)(C)(iii) is amended by adding “and” at the end of subclause (I), by striking subclause (II), and by redesignating subclause (III) as subclause (II).(3) The last sentence of section 904(d)(2)(D) is amended to read as follows: “Such term does not include any financial services income.”.118 STAT. 1494(4) Section 904(d)(2)(E) is amended—(A) by inserting “or (4)” after “paragraph (3)” in clause (i), and(B) by striking clauses (ii) and (iv) and by redesignating clause (iii) as clause (ii).(5) Section 904(d)(3)(F) is amended by striking “(D), or (E)” and inserting “or (D)”.(6) Section 864(d)(5)(A)(i) is amended by striking “(C)(iii)(III)” and inserting “(C)(iii)(II)”.(c) Effective Date.—The amendments made by this section shall apply to taxable years beginning after December 31, 2002.