[Federal Register Volume 63, Number 1 (Friday, January 2, 1998)]
[Proposed Rules]
[Pages 39-42]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33984]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-115795-97]
RIN 1545-AV39
General Rules for Making and Maintaining Qualified Electing Fund
Elections
AGENCY: Internal Revenue Service (IRS), Treasury
ACTION: Notice of proposed rulemaking by cross-reference to temporary
regulations and notice of public hearing.
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SUMMARY: In the Rules and Regulations section of this issue of the
Federal Register, the IRS is issuing temporary regulations that provide
guidance to a passive foreign investment company (PFIC) shareholder
that makes the election under section 1295 (section 1295 election) to
treat the PFIC as a qualified electing fund (QEF). The temporary
regulations also provide guidance for shareholders that wish to make a
section 1295 election that will apply on a retroactive basis
(retroactive election). The temporary regulations also include a rule
concerning the taxation under section 1291 of an exempt organization
that is a shareholder of a PFIC that is not a pedigreed QEF. This rule
was originally proposed in 1992. The text of the temporary regulations
also serves as the text of these proposed regulations. In addition,
this document proposes amendments to proposed regulation Sec. 1.1296-
4(e), concerning the treatment of interbank deposits as loans for
purposes of the exception to passive income characterization of income
derived in the active conduct of a banking business. This document also
provides notice of a public hearing on these proposed regulations.
DATES: Written comments must be received by April 2, 1998. Requests to
speak and outlines of oral comments to be discussed at the public
hearing scheduled for April 16, 1998, must be received by March 26,
1998.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-115795-97), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered between the
hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-115795-97), Courier's
Desk, Internal Revenue Service, 1111 Constitution Avenue, NW,
Washington, DC. Alternatively, taxpayers may submit comments
electronically via the Internet by selecting the ``Tax Regs'' option on
the IRS Home Page, or by submitting comments directly to the IRS
Internet site at http://www.irs.ustreas.gov/prod/tax______regs/
comments.html. The public hearing will be held in Room 3313, Internal
Revenue Service, 1111 Constitution Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Gayle
Novig, (202) 622-3840; concerning submissions and the hearing,
Evangelista Lee, (202) 622-7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)).
Comments on the collection of information should be sent to the
Office of Management and Budget, Attn: Desk Officer for the Department
of the Treasury, Office of Information and Regulatory Affairs,
Washington, DC 20503, with copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224.
Comments on the collection of information should be received by March
3, 1998. Comments are specifically requested concerning:
Whether the proposed collection of information is necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information (see below);
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
The collection of information in this proposed regulation is in
proposed regulation Secs. 1.1295-1(f), 1.1295-1(g), 1.1295-3(c), and
1.1295-3(g). The information required in Sec. 1.1295-1 (f) and (g) will
notify the Internal Revenue Service that certain shareholders have made
the section 1295 election, and will enable the Internal Revenue Service
to determine if a shareholder is satisfying the election and annual
reporting requirements and is reporting income as required under
section 1293.
The information required in proposed regulation Sec. 1.1295-3(c)
will notify the IRS that certain shareholders of foreign corporations
have filed a Protective Statement to preserve their ability to make a
retroactive section 1295 election, and that those shareholders have
extended the periods of limitations for their taxable years to which
the Protective Statement will apply. The information will enable the
IRS to verify that the shareholders filing the Protective Statement had
the requisite reasonable belief at the time they filed the statement.
The information required in proposed regulation Sec. 1.1295-3(g) will
notify the IRS that a shareholder has made the retroactive election
and, in the case of a shareholder that filed a Protective Statement,
that the shareholder's waiver of the periods of
[[Page 40]]
limitations will terminate within three years of making the election.
The information will enable the Service to verify that the requirements
for making a retroactive election have been satisfied.
The collection of information and responses to these collections of
information are mandatory. The likely respondents are individuals,
businesses, and other for-profit organizations.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number assigned by the Office of
Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Estimated total annual reporting/recordkeeping burden: 623 hours.
The estimated annual burden per respondent varies from 15 minutes
to three hours, depending on individual circumstances, with an
estimated average of 29 minutes.
Estimated number of respondents: 1,290.
Estimated annual frequency of responses: Annually or one time only.
Background
Sections 1291, 1293, 1295, and 1297
Temporary regulations in the Rules and Regulations section of this
issue of the Federal Register amend the Income Tax Regulations (26 CFR
part 1) relating to sections 1291, 1293, 1295, and 1297. The temporary
regulations contain rules concerning the taxation of exempt
organizations under section 1291, elections under section 1295 to treat
passive foreign investment companies as qualified electing funds
(QEFs), the calculation of net capital gain for purposes of section
1293, and the inclusion of the pro rata shares of the earnings and
profits of QEFs held through pass through entities. The temporary
regulations amend Sec. 1.1297-3T, permitting in certain cases the
application of the rules of section 1291(d)(2)(B) to an election made
under section 1297(b)(1).
The text of those temporary regulations also serves as the text of
these proposed regulations. The preamble to the temporary regulations
explains the temporary regulations.
Section 1296
On April 28, 1995, proposed regulations were published providing
guidance for the exceptions to passive income characterization of
certain income derived by active foreign banks and foreign security
dealers provided in section 1296 (b)(2)(A) and (b)(3), respectively.
The proposed section 1296 regulations reflect comments received with
respect to Notice 89-81, 1989-2 C.B. 399. That notice established tests
for determining whether a foreign corporation qualified for the active
foreign bank exception. The notice specifically stated that interbank
deposits would not be treated as loans made in the ordinary course of a
banking business.
After consideration of the comments received with respect to the
Notice, the IRS and Treasury determined that interbank deposits were
made and accepted in the ordinary course of a banking business, and
therefore should be treated as such for purposes of section
1296(b)(2)(A). Accordingly, proposed regulation Sec. 1.1296-4(d)(3)
specifically includes interbank deposits with other deposits for
purposes of determining whether the foreign corporation satisfies the
deposit-taking requirements of Sec. 1.1296-4(d). Also in response to
comments, proposed regulation Sec. 1.1296-4(e) is clarified to
specifically provide that interbank deposits made with banks in the
ordinary course of business constitute loans for purposes of
Sec. 1.1296-4. This clarification is favorable to taxpayers, and is
proposed to be effective for taxable years beginning after December 31,
1994. It is also proposed that taxpayers may apply it to a taxable year
beginning after December 31, 1986, provided it is consistently applied
to that taxable year and all subsequent taxable years. The dates for
applying proposed regulation Sec. 1.1296-4(e) coincide with the dates
for which Sec. 1.1296-4 is proposed to be effective. See proposed
regulation Sec. 1.1296-4(k).
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. Pursuant to
section 7805(f) of the Internal Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business. It has been determined that an initial regulatory flexibility
analysis is required for the collection of information in this notice
of proposed rulemaking under 5 U.S.C. Sec. 603. This analysis is set
forth below under the heading ``Initial Regulatory Flexibility
Analysis.''
Initial Regulatory Flexibility Analysis
This initial analysis is provided pursuant to the Regulatory
Flexibility Act (5 U.S.C. chapter 6). The major objective of the
proposed regulations is to provide guidance to PFIC shareholders that
wish to elect under section 1295 to treat their PFICs as QEFs, and
provide guidance to those PFICs about the requirements imposed on them.
The legal basis for these requirements is contained in sections 1293,
1294, and 1295. The IRS and Treasury are not aware of any federal rules
that duplicate, overlap, or conflict with the proposed regulations.
The recordkeeping and reporting requirements of the proposed
regulations enable the Internal Revenue Service to identify those
taxpayers that are treating their PFICs as QEFs; to verify that those
U.S. taxpayers are currently including their shares of QEF earnings in
income, as required in section 1293 of the Internal Revenue Code; to be
informed of those QEF shareholders that are not paying their section
1293 tax liability because they made the section 1294 election to defer
the time for payment; to identify those shareholders of foreign
corporations that are preserving their right to make a retroactive
section 1295 election; to identify those shareholders making
retroactive elections and verify that they are satisfying the
requirements of a retroactive election; and, in the case of
shareholders that have filed Protective Statements, the dates by which
the shareholders' extensions of periods of limitations will terminate.
These proposed regulations will affect those small entities that
are PFICs, at least one shareholder of which makes the section 1295
election. The proposed regulations also will affect those small
entities that are PFIC shareholders that make the section 1295
election. The IRS and Treasury believe that affected small entities
generally will be small businesses, as local governments are not likely
to invest in PFICs. Also, few, if any, affected small entities likely
will be tax exempt organizations, because only a tax exempt entity that
is taxable under subchapter F on dividends received from the PFIC
generally would need to consider making the section 1295 election.
The collections of information in these proposed regulations would
impact a small entity that is treated as a QEF principally by requiring
the
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entity to calculate annually its ordinary earnings and net capital gain
according to federal income tax accounting principles, as required by
section 1293, and report that information to its shareholders that are
U.S. persons. With the enactment of section 1(h), the QEF also must
calculate each type of long term capital gain that it derived and the
applicable rates of tax for proper inclusion of the QEF's net capital
gain by the QEF shareholders. Alternatively, the regulations permit the
QEF to provide its shareholders with its books, records and other
documents necessary for the shareholders to calculate the ordinary
earnings and net capital gain amounts. This alternative will enable a
small entity that is a QEF to avoid the burden of calculating its net
capital gain by providing its shareholders with information with which
the shareholders can make the calculations.
The economic impact of other collections of information contained
in these proposed regulations would fall on a small entity that is a
shareholder of a PFIC for which it has made the section 1295 election
or that is a pass through entity to which an interest holder
transferred stock subject to a section 1295 election. The economic
impact would result primarily from the reporting and recordkeeping
requirements pertaining to (1) the manner for making the section 1295
election and the annual election requirements; (2) the calculation by
the shareholder (rather than the QEF) of the QEF's ordinary earnings
and net capital gain according to federal income tax principles, and
its pro rata shares thereof; (3) a request for consent to revoke a
section 1295 election; (4) the preservation of the right to make a
retroactive election under section 1295; (5) a request for consent to
make a retroactive election; (6) making a retroactive election,
including filing amended returns for the affected taxable years; and
(7) providing interest holders with PFIC statements and other
information received by an intermediary shareholder.
The proposed regulations reduce the burden under existing rules for
making the section 1295 election for all taxpayers, including small
businesses and other small entities. Unlike the current requirements
provided in Notice 88-125, the proposed regulations only require
electing shareholders to file Form 8621 to make the section 1295
election, thereby eliminating the shareholder election statement as
well as the requirement to file a copy of the PFIC Annual Information
Statement. The proposed regulations only require shareholders to retain
the PFIC Annual Information Statement or the Annual Intermediary
Statement received as well as a copy of their filings for each year to
which the section 1295 election applies. In addition, the proposed
regulations impose a lesser burden on small shareholders, typically
individuals and small entities, to preserve their right to make a
retroactive election and a lesser burden of making a retroactive
election. A small entity that owns less than five percent of each class
of stock of a foreign corporation and satisfies other requirements is
not required to file a Protective Statement to preserve its right to
make a retroactive election with respect to the foreign corporation.
Similarly, a small entity potentially has fewer amended returns to file
to make a retroactive election than a shareholder that filed a
Protective Statement. These changes in election requirements are
illustrative of IRS efforts to minimize burden, particularly with
respect to small entities.
An estimate of the number of small entities that would be affected
by these regulations is unavailable. In any event, the enactment in
1997 of the mark-to-market election for PFIC shareholders and the
elimination of the overlap in certain cases of subpart F and the PFIC
provisions, will reduce the number of small entities that would be
affected by these regulations.
None of the significant alternatives considered in drafting these
regulations would have significantly altered the economic impact of the
collections of information on small entities. In considering the
significant alternatives that would be permissible under the Code and
would enable the IRS to ensure compliance with the Code, the IRS and
Treasury concluded that the alternatives generally would impose equal
or greater burdens.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) that are submitted timely to the IRS. All
comments will be available for public inspection and copying.
A public hearing has been scheduled for April 16, 1998, at 10 a.m.,
in room 2615, Internal Revenue Building, 1111 Constitution Avenue, NW,
Washington, DC. Because of access restrictions, visitors will not be
admitted beyond the Internal Revenue lobby more than 15 minutes before
the hearing starts.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
Persons that wish to present oral comments at the hearing must
submit written comments by April 2, 1998, and submit an outline of the
topics to be discussed and the time to be devoted to each topic (signed
original and eight (8) copies) by March 26, 1998.
A period of 10 minutes will be allotted to each person for making
comments.
An agenda showing the schedule of speakers will be prepared after
the deadline for receiving outlines has passed. Copies of the agenda
will be available free of charge at the hearing.
Drafting Information
The principal authors of the proposed regulations are Gayle Novig
and Judith Cavell Cohen, of the Office of the Associate Chief Counsel
(International). Other personnel from the IRS and Treasury Department
also participated in the development of these regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.1291-1 is added to read as follows:
[The text of this proposed section is the same as the text of
Sec. 1.1291-1T published elsewhere in this issue of the Federal
Register.]
Par. 3. Section 1.1293-1 is added to read as follows:
Sec. 1.1293-1 Current taxation of income from qualified electing
funds.
[The text of this proposed section is the same as the text of
Sec. 1.1293-1T published elsewhere in this issue of the Federal
Register.]
Par. 4. Section 1.1295-1 is added to read as follows:
Sec. 1.1295-1 Qualified electing funds.
[The text of this proposed section is the same as the text of
Sec. 1.1295-1T published elsewhere in this issue of the Federal
Register.]
Par. 5. Section 1.1295-3 is added to read as follows:
Sec. 1.1295-3 Retroactive elections.
[The text of this proposed section is the same as the text of
Sec. 1.1295-3T published elsewhere in this issue of the Federal
Register.]
[[Page 42]]
Par. 6. In Sec. 1.1297-3, paragraph (c) is added to read as
follows:
Sec. 1.1297-3 Deemed sale election by a United States person that is a
shareholder of a passive foreign investment company.
[The text of this proposed paragraph (c) is the same as the text of
Sec. 1.1297-3T(c) published elsewhere in this issue of the Federal
Register.]
Par. 7 Section 1.1296-4(e) as proposed at 60 FR 20922 (April 28,
1995) is amended by adding a sentence at the end of the paragraph to
read as follows:
Sec. 1.1296-4 Characterization of certain banking income of foreign
banks as passive.
* * * * *
(e) Lending activities test. * * * An interbank deposit made in the
ordinary course of a corporation's banking business will be treated as
a loan for purposes of this section. For the effective date of this
paragraph (e), see paragraph (k) of this section.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
[FR Doc. 97-33984 Filed 12-31-97; 8:45 am]
BILLING CODE 4830-01-U
