Tax Expenditure Reduction Act of 1981

Tax Expenditure Reduction Act of 1981 - Amends the Internal Revenue Code to repeal the Puerto Rico and possession tax credit and revise the income tax credit for taxes paid to foreign countries and possessions of the United States.

Repeals the exemption from taxation of domestic international sales corporations (DISC). Terminates DISC status for any corporation for taxable years beginning after December 31, 1980.

Includes in the gross income of a U.S. shareholder of a controlled foreign corporation, with specified exceptions, the taxpayer's pro rata share of the corporation's undistributed profits for the taxable year. Terminates the inclusion of certain amounts in the gross income of such a shareholder with respect to taxable years beginning after December 31, 1980.

Denies the foreign tax credit for oil and gas extraction taxes. Treats income from the extraction of foreign oil and gas, for purposes of the limitation on such credit, as income from sources within the United States.

Repeals the provisions allowing percentage depletion of natural resources, mines and wells.

Eliminates the deduction for intangible drilling and development costs in the case of oil and gas wells and geothermal wells.

Provides for a limitation of $2,000 on the deduction for interest on consumer indebtedness (defined as interest paid or accrued on indebtedness not related to trade or business, the production of income, or expenditures for the purchase of the taxpayer's principal residence).

Disallows the deduction for entertainment, amusement or recreation expenses related to the active conduct of the taxpayer's trade or business. Reduces by one-half the amount allowable as a deduction for business meals.