Page:United States Statutes at Large Volume 100 Part 3.djvu/723

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2531

(2) Subparagraph (C) of section 6038(c)(4) (relating to penalty of reducing foreign tax credit) is amended by striking out all that follows "the amount o f and inserting in lieu thereof "post1986 undistributed earnings." (d) CLERICAL AMENDMENT.—The table of sections for subpart A of part III of subchapter N of chapter 1 is amended by striking out the item relating to section 902 and inserting in lieu thereof the following: "Sec. 902. Deemed paid credit where domestic corporation owns 10 percent or more of voting stock of foreign corporation."

(e) EFFECTIVE DATE.—The amendments made by this section shall apply to distributions by foreign corporations out of, and to inclusions under section 951(a) of the Internal Revenue Code of 1986 attributable to, earnings and profits for taxable years beginning after December 31, 1986. SEC. 1203. CLARIFICATION OF TREATMENT OF SEPARATE LIMITATION LOSSES. (a) GENERAL RULE.—Subsection (f) of section 904 (relating to recap-

ture of overall foreign loss) is amended by adding at the end thereof the following new paragraph: "(5) TREATMENT OF SEPARATE LIMITATION LOSSES.—

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"(A) IN GENERAL.—The amount of the separate limitation losses for any taxable year shall reduce income from sources within the United States for such teixable year only to the extent the aggregate amount of such losses exceeds the aggregate amount of the separate limitation incomes for such taxable year. "(B) ALLOCATION OF LOSSES.—The separate limitation losses for any taxable year (to the extent such losses do not exceed the separate limitation incomes for such year) shall be allocated among (and operate to reduce) such incomes on a proportionate basis. "(C) RECHARACTERIZATION OF SUBSEQUENT INCOME.—If—

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"(i) a separate limitation loss from any income category (hereinafter in this subparagraph referred to as 'the loss category') was allocated to income from any other category under subparagraph (B), and "(ii) the loss category has income for a subsequent taxable year, such income (to the extent it does not exceed the aggregate separate limitation losses from the loss category not previously recharacterized under this subparagraph) shall be recharacterized as income from such other category in proportion to the prior reductions under subparagraph (B) in such other category not previously taken into account under this subparagraph. Nothing in the preceding sentence shall be construed as recharacterizing any tax. "(D) SPECIAL RULES FOR LOSSES FROM SOURCES IN THE

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UNITED STATES.—Any loss from sources in the United States for any taxable year (to the extent such loss does not exceed the separate limitation incomes from such year) shall be allocated among (and operate to reduce) such incomes on a proportionate basis. This subparagraph shall be applied after subparagraph (B). "(E) DEFINITIONS.—For purposes of this paragraph—

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