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 ex-
change 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 corpora-
tion, 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 sec-
tion 1201(a) (determined without regard to the last
sentence of section ll(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 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 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 cor-
poration, the highest rate of tax set forth in subsec-