Taxable income for purpose of computing limitation

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 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.

(C) Coordination with capital gains rates The Secretary may by regulations modify the application of this paragraph and paragraph (3) to the extent necessary to properly reflect any capital gain rate differential under section 1(h) and the computation of net capital gain.

For purposes of this subsection—

(A) Foreign source capital gain net income The term “foreign source capital gain net income” means the lesser of— (i) capital gain net income from sources without the United States, or (ii) capital gain net income.

(B) Foreign source net capital gain The term “foreign source net capital gain” means the lesser of— (i) net capital gain from sources without the United States, or (ii) net capital gain.

(C) Section 1231 gains The term “gain from the sale or exchange of capital assets” includes any gain so treated under section 1231.

(D) Capital gain rate differential There is a capital gain rate differential for any year if subsection (h) of section 1 applies to such taxable year.

(E) Rate differential portion 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— (I) the highest rate of tax set forth in subsection (a), (b), (c), (d), or (e) of section 1 (whichever applies), over (II) the alternative rate of tax determined under section 1(h), bears to (ii) that rate referred to in subclause (I).

For purposes of subsection (a), in the case of a domestic corporation which is a United States shareholder with respect to a specified 10-percent owned foreign corporation, such shareholder’s taxable income from sources without the United States (and entire taxable income) shall be determined without regard to—

(A) the foreign-source portion of any dividend received from such foreign corporation, and

(B) any deductions properly allocable or apportioned to— (i) income (other than amounts includible under section 951(a)(1) or 951A(a)) with respect to stock of such specified 10-percent owned foreign corporation, or (ii) such stock to the extent income with respect to such stock is other than amounts includible under section 951(a)(1) or 951A(a). Any term which is used in section 245A and in this paragraph shall have the same meaning for purposes of this paragraph as when used in such section.

Solely for purposes of the application of subsection (a) with respect to amounts described in subsection (d)(1)(A), the taxpayer’s taxable income from sources without the United States shall be determined by allocating and apportioning—

(A) any deduction allowed under section 250(a)(1)(B) (and any deduction allowed under section 164(a)(3) for taxes imposed on amounts described in section 250(a)(1)(B)) to such income,

(B) no amount of interest expense or research and experimental expenditures to such income, and

(C) any other deduction to such income only if such deduction is directly allocable to such income.

Any amount or deduction which would (but for subparagraphs (B) and (C)) have been allocated or apportioned to such income shall only be allocated or apportioned to income which is from sources within the United States.

For purposes of this section, if a United States person maintains an office or other fixed place of business in a foreign country (determined under rules similar to the rules of section 864(c)(5)), the portion of income which—

(A) is from the sale or exchange outside the United States of inventory property (within the meaning of section 865(i)(1))— (i) which is produced in the United States, (ii) which is for use outside the United States, and (iii) to which the third sentence of section 863(b) applies, and

(B) is attributable (determined under rules similar to the rules of section 864(c)(5)) to such office or other fixed place of business,

shall be treated as from sources without the United States, except that the amount so treated shall not exceed 50 percent of the income from the sale or exchange of such inventory property.