Page:United States Statutes at Large Volume 102 Part 4.djvu/413

 PUBLIC LAW 100-647—NOV. 10, 1988

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 exchange of capital assets only to the extent of foreign source capital gain net income. "(B) SPECIAL RULES WHERE CAPITAL GAIN RATE DIFFEREN-

TIAL.—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 capited 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-

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