disallowance 321. Disallowance of deduction for expenses allocable to exempt income of a controlled foreign corporation (a) In general Part IX of subchapter B of chapter 1 is amended by adding at the end the following: 265A. Expenses allocable to exempt income of a controlled foreign corporation (a) In general In the case of a United States shareholder of a controlled foreign corporation for any taxable year, no deduction shall be allowed under this chapter for— (1) the disallowed portion of any allocable CFC interest, or (2) expenses directly allocable to the excludable portion of subpart F income (as defined in section 959(g)(3)(B)). (b) Disallowed portion For purposes of this section— (1) In general The term disallowed portion means, with respect to any allocable CFC interest in connection with a controlled foreign corporation, the exclusion percentage of the amount which bears the same ratio to the amount of such interest as— (A) the corporation's modified active income (as defined in section 952) for the applicable taxable year, bears to (B) the corporation's current earnings and profits. (2) Current earnings and profits For purposes of this subsection— (A) In general The term current earnings and profits means the earnings and profits of the controlled foreign corporation for the applicable taxable year, without diminution by reason of distributions made during the taxable year. (B) Special rule for determining earnings and profits Earnings and profits of any controlled foreign corporation shall be determined without regard to paragraphs (4), (5), and (6) of section 312(n). Under regulations, the preceding sentence shall not apply to the extent it would increase earnings and profits by an amount which was previously distributed by the controlled foreign corporation. (3) Exclusion percentage The term exclusion percentage means, with respect to any controlled foreign corporation for any taxable year, the number of percentage points by which 100 percent exceeds the inclusion percentage determined under