section 4382 (a) (2) to limit the Federal documentary stamp tax exemption now available to domestic building and loan associations (as defined in paragraph 19 of section 7701 (a) as amended by section 6 (c) of this Act) and cooperative banks to shares or certificates of stock issued by such associations and banks which represent deposits or withdrawable accounts. Thus, the exemption will not apply to shares or certificates of stock issued by such associations and banks which represent their capital stock or to certificates of indebtedness issued by these associations and banks. The amendment made by section 6(e) (2) is effective January 1, 1963.

643 (a) (6), 643 (d), 665, 666 (a), 668 (a), 669, 6048, 6677, 7701 (a) (30), 7701 (a) (31)

Distributions by foreign trusts.-Under the law prior to this amendment foreign trusts could be established for the benefit of U.S. beneficiaries by U.S. grantors or settlors in such a way that little or no tax on the foreign trust's income would be paid to the United States. Section 7 of the Act amends several sections of the Code in order to tax U.S. beneficiaries of foreign trusts to which U.S. persons have transferred money or property in approximately the same manner as if the income had been distributed to the beneficiary currently as earned. Only that portion of a foreign trust which was created by a United States person or to which a U.S. person transferred property. will be affected by these new provisions. Section 643, relating to definitions for estates and trusts, is amended to provide special rules for foreign trusts, the most important one being that in computing the distributable net income of a foreign trust, any excess of capital gains over capital losses shall be taken into account. Section 665, relating to definitions concerning the treatment of excess distributions by trusts, is amended to provide that an accumulation distribution, in the case of a foreign trust created by a U.S. person, is any distribution in excess of current distributable net income. Under section 666, as amended. the restriction of the throwback rule to the 5 preceding taxable years of the trust is removed for foreign trusts created by a U.S. person. Instead an unlimited throwback is provided, applying however only to years governed by the 1954 Code. Section 669, a new section relating to special rules applicable to certain foreign trusts, is added to subchapter J of chapter 1. It provides special rules relating to the treatment of excess distributions by foreign trusts created by U.S. persons. If the beneficiary furnishes certain information relating to the operation and accounts of the foreign trust, he may elect to compute his tax liability under either of two methods. If these methods are not elected, he must compute his liability in the ordinary way by including in income the entire amount of an accumulation distribution. The first method, known as the "exact method," is similar to that provided for domestic trusts except the restriction of the throwback rule to the 5 preceding taxable years has been removed and replaced by an unlimited throwback. The second method, known as the "short-cut method," in effect averages the tax attributable to the distribution over the same number of years which equal the number in which the income was earned by the trust. An average amount is included in the ben

eficiary's income for the current year and each of the two immediately preceding years. From these three years the average additional tax for one year is determined and then multiplied by the number of years of the total accumulation. The new section specifies how the beneficiary may change from one method to the other and provides other rules for situations where the new methods must be adjusted to fit the unusual facts of a particular distribution. The Act also adds two new sections to the Code relating to information returns and penalties for failure to file them. New section 6048 requires that a United States person who either creates a foreign trust or transfers money or property to a foreign trust must file an information return and new section 6677 provides a civil penalty for those persons who fail to file the return required by section 6048, unless it is shown that such failure is due to reasonable cause.

821, 822, 823, 824, 825, 826, 831, 832

Taxation of mutual fire and casualty insurance companies.-Section 8 of this Act amends Part II of subchapter 6 of chapter 1 of the Code to provide that mutual fire and casualty insurance companies, previously subject to a tax either on net investment income or gross investment income and premiums, shall be subject to a tax upon a total income base at ordinary corporate rates. Mutual insurance company taxable income is to be comprised of investment income and statutory underwriting income. Certain small companies with total receipts not exceeding $150,000 are tax exempt. Those companies with gross receipts between $150,000 and $500,000 are taxed at corporate rates only on investment income. Those companies with total receipts not exceeding $1,100,000 receive a diminishing $6,000 special deduction against underwriting income. This special deduction vanishes when total receipts equal $1,100,000. A special transitional rule applies to companies which experienced underwriting losses in years prior to 1962.

Statutory underwriting income is underwriting income less a special deduction consisting of one percent of the year's incurred losses and 25 percent of the year's underwriting income. The special deduction amounts are set aside in a protection against loss account for a fiveyear period to be available to pay extraordinary losses. If not absorbed by such losses within five years, a portion of the amount set aside is then taxed as underwriting income and the balance remains permanently in the protection against loss account to pay any extraordinary losses. Losses exceeding investment income and amounts in the protection against loss account are treated like net operating loss carrybacks and carryovers. Special treatment concerning the size of protection against loss accounts is given companies underwriting certain windstorm risks.

Reciprocal underwriters, previously taxed only upon investment income exceeding $50,000, are now taxed like other mutuals. In addition they may elect to take a credit for taxes paid by their attorney-infacts. Factory mutuals, in the past treated as mutuals, are now taxed as though they are stock companies. Mutual marine companies, previously taxed as stock companies, will continue to be taxed like stock companies.

These amendments apply to taxable years beginning after December 31, 1962.

78, 902(a), 902(b), 902(c), 902(d), 902(e), 861(a) (2) (B) Foreign tax credit gross-up of dividends.-In general, prior to section 9 of this Act, a domestic corporation (owning 10 percent or more of the stock of a foreign corporation) was permitted a partial double allowance for foreign taxes paid by its subsidiary with respect to the dividends distributed. This resulted from the fact that the foreign taxes were excluded from the income of the parent, as dividends are paid on an after-tax basis, and a partial credit was also allowed under section 902 for the same foreign taxes to the extent applicable to the actual distribution.

Section 9 of this Act adds a new section 78 to provide, in effect, that if a domestic corporation elects to take a credit (rather than a deduction) for taxes paid by a foreign subsidiary (other than a less developed country corporation) it must, in addition to the dividend received, take into income the foreign taxes paid with respect to the profits on which such dividend was distributed, that is, gross-up the dividends received. The amendment to section 902 provided by this Act, in effect, allows as a foreign tax credit (within existing limitations) the foreign tax paid on this "grossed-up" amount (the total arrived at under section 78), rather than only that tax which is allocable to the actual dividend under the rule enunciated by the court in the American Chicle Company case, 316 U.S. 450 (1942).

This section, by repealing section 902(d), discontinues the treatment of certain royalties paid in lieu of dividends, as dividends for the purpose of the foreign tax credit.

Section 861 (a) (2) (B) has also been amended by this section to treat as U.S. source incore the 15 percent of the dividends remaining in income after taking the 85-percent dividends received deduction which is available, under certain circumstances, to a domestic parent where its foreign subsidiary had U.S. source income. The amendment changes the present rule which permitted this 15-percent excess to be treated as foreign source income for the purpose of limitations on the foreign tax credit.

These amendments apply in respect of any distributions received after December 31, 1964. They also apply to distributions received before January 1, 1965, but only to the extent they are made from the accumulated profits of the subsidiary for its taxable years beginning after December 31, 1962.

904

Separate limitation on foreign tax credit with respect to certain interest income.-Section 10 of this Act amends section 904, relating to limitations on the foreign tax credit, by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) a new subsection (f) relating to special rules in case of interest income. Under section 904, an unused foreign tax credit results when the foreign rate of tax is higher than the U.S. rate on the same income. To offset this unused foreign tax credit, U.S. taxpayers often transfer short-term capital abroad to countries where the interest income from the investment will be taxed at a rate lower than the U.S. tax on

such income. New subsection (f) provides that the limitation on the foreign tax credit is to be applied separately to certain interest income as opposed to the rest of a taxpayer's income and further provides that the limitation with respect to the interest income always must be applied on a per-country basis. The provision is made applicable to all interest income, except interest-(1) derived from transactions directly related to the active conduct of a trade or business in a foreign country or U.S. possession; (2) derived in the conduct of a banking, financing, or similar business; (3) received from a corporation in which the taxpayer owns at least 10 percent of the voting stock; (4) and interest received on obligations acquired where it was necessary to dispose of an active trade or business carried on in a foreign country or United States possession or to dispose of securities in a foreign subsidiary corporation in which the taxpayer has had at least a 10 percent voting interest. Transitional rules are provided for computing carrybacks and carryovers where any year involved is a year to which the new provision is not applicable. The new subsection applies with respect to taxable years beginning after the date of enactment of the Act but only with respect to interest resulting from transactions consummated after April 2, 1962.

Earned income from sources without the United States.-Section 11 of this Act amends section 911, relating to taxability of earned income from sources without the United States, by placing an additional limitation on the amount of earned income which certain United States citizens living abroad may exclude from their gross income. In general, section 911, prior to this amendment, provided that an individual citizen of the United States who is a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year may exclude from his United States tax base his entire earned income from sources outside of the United States. In addition an individual who lives abroad, but does not establish a foreign residence, may exclude from his United States tax base his earned income up to $20,000 a year if he remains abroad for a period of 17 out of 18 consecutive months. Under the new provision, the exemption for bona fide residents of foreign countries will be limited to $20,000 a year for the first 3 years, the same limitation as for those physically present abroad for a period of 17 out of 18 consecutive months. After a bona fide resident has been abroad for 3 consecutive years, the limitation is raised to $35,000. Prior law is also changed by providing that amounts received shall be considered received in the taxable year in which the services to which the amounts are attributable are performed. However, no amount may be excluded under either limitation unless it is received before the close of the taxable year following the taxable year in which the services were performed. Regarding the treatment of earned income which is held to be community property under local law, the statute now provides that the aggregate amount excludable under either limitation from the gross income of a husband and wife shall equal the amount which would be excludable if the income did not constitute community income. There are 2 provisions in section 11 which relate to pensions and annuities. The first provides that no amount received as a pension or annuity may be excluded under either limitation. The second

relates to amounts contributed by an employer to certain nonqualified pension plans. It provides that where amounts must be included in an employee's gross income under sections 402 (b), 403 (c), and 403 (d), they may not be excluded by reference to section 911. A new provision in section 911 now provides that if an individual asserts and is held not subject to foreign income tax by the foreign authorities concerned on the grounds that he is not a resident of the country involved. this shall be conclusive evidence that he is not a bona fide resident of such country for purposes of section 911(a) (1), relating to bona fide residence. Another provision relating to fringe benefits which are noncash in nature, such as the use of a home or car, states that these fringe benefits will be entirely excluded from taxable income for a taxable year ending in 1963, excluded to the extent of two-thirds for years ending in 1964, and excluded to the extent of one-third for years ending in 1965. After 1965, these amounts must be included in gross income to the extent that they, together with any other income earned from foreign sources, exceed the applicable limitation. In general, the amendments to section 911 are effective with respect to all amounts received after March 12, 1962, which are attributable to services performed after December 31, 1962. They also apply to amounts received after December 31, 1962, which are attributable to services performed on or before December 31, 1962, unless there existed a right to receive such amounts on March 12, 1962.

Section 11 of this Act also amends section 72(f), relating to special rules for computing employee's contributions in connection with annuities. The amendment changes prior law by providing that, in general, amounts contributed after December 31, 1962, to a plan by an employer no longer shall be considered as part of the employee's contribution by reason of the application of section 911 unless the services were performed before January 1, 1963. This amendment to section 72 is effective for taxable years ending after December 31, 1962.

Controlled foreign corporation.-Section 12 of this Act amends the Code by adding subparts F (sections 951-963) and G (sections 970971) to Part III of subchapter N of chapter 1 (relating to income from sources without the United States). Prior to this amendment profits earned by foreign corporations were not taxed to United States shareholders until they were distributed as dividends. This section of the Act provides that certain types of income of foreign corporations controlled by United States shareholders are included in income of such shareholders in the year the income is earned, whether or not distributed.

951

Amounts included in gross income of United States shareholders.Section 951 provides that if a foreign corporation is a controlled foreign corporation, hereafter termed CFC (as defined in section 957), for at least 30 consecutive days during its taxable year, then every United States shareholder who owns stock in such corporation en the last day in such year on which the corporation is a CFC must include: 1. His prorata share of the CFC's subpart F income (as de fined in section 952),