[Federal Register Volume 63, Number 1 (Friday, January 2, 1998)]
[Rules and Regulations]
[Pages 6-24]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33985]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 8750]
RIN 1545-AV40
General Rules for Making and Maintaining Qualified Electing Fund
Elections
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary and final regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains 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). This document also
contains temporary regulations that provide guidance for shareholders
that wish to make a section 1295 election that will apply on a
retroactive basis (retroactive election). In addition, this document
contains a temporary regulation that provides guidance under section
1291 to a PFIC shareholder that is a tax-exempt organization. Temporary
regulations are needed to provide taxpayers additional time to satisfy
certain requirements to make the section 1295 election. The text of
these temporary regulations also serves as the text of proposed
regulations set forth in the notice of proposed rulemaking on this
subject in the Proposed Rules section of this issue of the Federal
Register. In addition, this document removes Sec. 1.1291-9(i)(1) of the
final regulations, and amends Sec. 1.1297-3T. References to sections
1296 and 1297 in this document are references to sections 1296 and 1297
as in effect before the effective date of section 1122(a) of the Tax
Relief Act of 1997.
DATES: These regulations are effective January 2, 1998.
For dates of applicability, see Secs. 1.1291-1T(e)(2), 1.1293-
1T(a)(2)(ii),
[[Page 7]]
1.1293-1T(c)(3), 1.1295-1T(k), 1.1295-3T(h), and Sec. 1.1297-3T(c)(3)
of these regulations.
FOR FURTHER INFORMATION CONTACT:
Gayle Novig, (202) 622-3840 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These regulations are being issued without prior notice and public
procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553).
For this reason, the collections of information contained in these
regulations have been reviewed and, pending receipt and evaluation of
public comments, approved by the Office of Management and Budget under
control number 1545-1555. Responses to these collections of information
are mandatory.
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.
For further information concerning these collections of
information, and where to submit comments on the collections of
information and the accuracy of the estimated burden, and suggestions
for reducing this burden, please refer to the preamble to the cross-
referencing notice of proposed rulemaking published in the Proposed
Rules section of this issue of the Federal Register.
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.
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1) under sections 1291, 1293, 1295, and 1297 of the Internal
Revenue Code. Sections 1291, 1293, 1295, and 1297 were added by the Tax
Reform Act of 1986, effective for taxable years of foreign corporations
beginning after December 31, 1986. As originally enacted, the section
1295 election was an election made by the PFIC. The Technical and
Miscellaneous Revenue Act of 1988 (TAMRA) amended section 1295,
effective for taxable years of foreign corporations beginning after
December 31, 1986, to change the section 1295 election to a
shareholder-by-shareholder election. Sections 1291, 1293, and 1297 also
were amended by TAMRA; sections 1293 and 1297 were further amended by
the Omnibus Budget Reconciliation Act of 1993. Section 1297 also was
amended by the Revenue Reconciliation Act of 1989 and the Small
Business Job Protection Act of 1996. In addition, the Taxpayer Relief
Act of 1997 (1997 TRA) amended section 1 to provide categories of long-
term capital gain and the maximum rates of tax to which the categories
are subject. In certain cases, this amendment affects the calculation
of net capital gain for purposes of section 1293.
Guidance for making the election under section 1295 was first
provided on March 2, 1988, in the Federal Register (53 FR 6770), with
the publication of temporary regulations (TD 8178) relating to the
section 1295 election. These temporary regulations provided guidance to
PFICs making the section 1295 election and therefore became obsolete
with the 1988 amendment to section 1295. The Internal Revenue Service
published Notice 88-125, 1988-2 C.B. 535, to provide guidance to
shareholders making the section 1295 election under section 1295, as
amended. Notice 88-125 was an administrative pronouncement, as that
term is used in Sec. 1.6661-3(b)(2) of the Income Tax Regulations, and
taxpayers could rely on Notice 88-125 to the same extent as a revenue
ruling or a revenue procedure. Notice 88-125 stated that taxpayers
could rely on the notice until regulations were published, and that
those regulations would be effective for taxable years beginning after
December 31, 1986.
Proposed regulations published April 1, 1992 (57 FR 11024), provide
a general rule regarding the application of section 1291 to a PFIC
shareholder that is an organization exempt from tax under chapter 1. In
addition, these proposed regulations provide general rules regarding
the application of section 1293 and special rules regarding the
application of section 1295, including rules with respect to transfers
of PFIC stock subject to a section 1295 election. Proposed regulation
Sec. 1.1295-2, published December 24, 1996 (61 FR 67752), permits
certain shareholders to make a special section 1295 election with
respect to certain preferred stock. Proposed regulation Sec. 1.1293-2,
also published December 24, 1996 (61 FR 67752), provides the special
inclusion rules applicable to shareholders that make the special
section 1295 election with respect to their preferred stock.
Temporary regulations Sec. 1.1297-3T, published March 2, 1988 (53
FR 6770), provides guidance for making the deemed sale election under
section 1297(b)(1) to purge the PFIC taint from stock of a foreign
corporation that is treated as stock of a PFIC under section
1297(b)(1). Section 1.1291-9(i)(1) of the regulations, published
December 27, 1996 (61 FR 68149), provides that the deemed dividend
election rules of Sec. 1.1291-9 do not apply to elections made under
section 1297(b)(1). A similar rule had been provided in temporary
regulations published April 1, 1992 (52 FR 10992). The temporary
regulations, which had been effective April 1, 1992, sunset April 1,
1995.
Treasury and the Service believe that immediate guidance in the
form of temporary regulations regarding the section 1295 election is
necessary. First, the regulations provide significant new QEF election
procedures that are beneficial to taxpayers. For example, the
regulations provide procedures for both retroactive and protective
elections. The benefits provided by these changes may be jeopardized,
or simply unavailable (as a result of closed taxable years), if
taxpayers cannot immediately rely on them. Second, although the
regulations embody guidance already provided in Notice 88-125, the
regulations significantly reduce the burden for making and maintaining
the election and clarify, most often in favor of taxpayers, significant
ambiguities left by the Notice. Treasury and the Service believe that
the benefits of immediate guidance significantly outweigh any advantage
obtained by issuing the regulations in proposed form only because these
temporary regulations prevent prejudice to taxpayers as a consequence
of a further delay in guidance and because they benefit taxpayers by
providing additional time to make certain elections. Finally, the
temporary regulations provide guidance concerning the manner in which
section 1(h), which was added to the Code by 1997 TRA, effective for
taxable years ending after May 6, 1997, applies to determine the net
capital gain of the PFIC and the QEF shareholder's pro rata share of
the net capital gain. Therefore, it would be impractical and contrary
to public interest to issue this Treasury decision with prior notice
under section 553(b) of title 5 of the United States Code.
Explanation of Provisions
A foreign corporation is a passive foreign investment company
(PFIC) for a taxable year if the foreign corporation satisfies either
the income or asset test of section 1296(a) for that year. A foreign
corporation is a PFIC under the income test if 75 percent or more of
its gross income for its taxable year is passive, or investment-type,
income.
[[Page 8]]
Alternatively, under the asset test, a foreign corporation is a PFIC if
50 percent or more of the average fair market value of its assets
during its taxable year are assets that produce or are held for the
production of passive income. A shareholder of a foreign corporation
that qualifies as a PFIC is subject to the interest charge regime of
section 1291 with respect to certain distributions by the PFIC and
certain dispositions of its stock. Generally, a shareholder may avoid
the interest charge regime by making a timely election under section
1295 to treat a PFIC as a QEF, in which case the shareholder will be
taxable annually under section 1293 on its pro rata shares of the
ordinary ordinary earnings and net capital gain of the PFIC. Under
section 1295(a), a section 1295 election will apply with respect to the
PFIC if the PFIC complies with requirements prescribed by the Secretary
for purposes of determining the ordinary earnings and net capital gain
of the PFIC and otherwise carrying out the purposes of the PFIC
provisions.
Section 1295(b)(1) provides that a shareholder may make a section
1295 election with respect to a PFIC for any taxable year of the
shareholder (shareholder election year). Once made, the election will
apply to that year and to all subsequent years of the shareholder
unless revoked with the consent of the Secretary. Section 1295(b)(2)
prescribes the time for making the election. In general, for the
section 1295 election to be applicable to a taxable year, the
shareholder must make the election by the due date, as extended under
section 6081, for the shareholder's return for that taxable year.
However, to the extent provided in regulations, a section 1295 election
may be made for a taxable year after the time required if the
shareholder failed to make a timely election because the shareholder
reasonably believed that the foreign corporation was not a PFIC.
This document provides temporary regulations that interpret
sections 1291, 1293, 1295, and 1297. In particular, the temporary
regulations incorporate the rules of Notice 88-125, with certain
modifications. The temporary regulations also clarify the rules of the
notice and proposed regulation Sec. 1.1295-1(b) with respect to the
application of section 1295 to options, lapse of PFIC status, cessation
of ownership of PFIC stock, transfer of stock subject to a section 1295
election to a pass through entity, and tax-exempt organizations. The
temporary regulations also provide rules regarding invalidation,
termination and revocation of a section 1295 election. In addition, the
temporary regulations introduce rules for making a retroactive
election. Finally, the temporary regulations provide guidance
concerning the application of the deemed dividend election rules to
elections under section 1297(b)(1).
1. Rules of Notice 88-125
Temporary regulation Sec. 1.1295-1T(c) through (g) adopts the rules
provided in Notice 88-125, with certain modifications. These
modifications reflect certain comments received with respect to the
notice.
Notice 88-125 describes the requirements a shareholder must satisfy
to make and maintain a section 1295 election. In particular, each year
the shareholder must file Form 8621 with its income tax return and
attach a PFIC Annual Information Statement (described below). In the
year of election, the shareholder also must attach a Shareholder
Election Statement. Notice 88-125 requires satisfaction of the election
and annual reporting requirements with respect to each PFIC for which
the shareholder makes the section 1295 election.
Commenters indicated that these election and annual reporting
requirements are burdensome, especially if the shareholder is making
the election with respect to many foreign corporations. In response to
the comments, the temporary regulations change these requirements to
reduce the burden on the electing shareholder. First, the temporary
regulations eliminate the need to file a Shareholder Election
Statement. Second, the temporary regulations eliminate the need to file
a copy of the PFIC Annual Information Statement with Form 8621 and
require instead that the shareholder retain a copy of the PFIC Annual
Information Statement for production upon examination by the Service.
Thus, to make and maintain a section 1295 election, the shareholder
need only file Form 8621 for each PFIC on an annual basis and maintain
records to support the information entered on that form.
Notice 88-125 imposes certain requirements on PFICs and on
intermediaries through which shareholders own PFIC stock. The notice
requires a PFIC to provide its shareholders with a PFIC Annual
Information Statement containing information necessary to determine
each shareholder's yearly income inclusion. In the case of indirect
ownership of PFIC stock, a nominee or shareholder of record that has
received a PFIC Annual Information Statement may issue its own
statement to the shareholder containing the relevant information in
lieu of passing on the PFIC Annual Information Statement.
The temporary regulations allow PFICs and intermediaries more
flexibility in fulfilling these requirements. A PFIC that owns directly
or indirectly any shares of one or more PFICs may provide its
shareholders with a PFIC Annual Information Statement in which it
combines the required information and representations of the PFIC and
any lower tier PFICs. The PFIC may use any format for a combined PFIC
Annual Information Statement provided the required information and
representations are clearly presented and identified with the
respective corporations. Similarly, an intermediary through which a
shareholder indirectly holds stock in more than one PFIC may provide
the shareholder a combined statement based on multiple PFIC Annual
Information Statements. Comments are requested concerning alternative
reporting methods that could further reduce the burden on electing
shareholders.
As provided in Notice 88-125, the PFIC Annual Information Statement
must include the shareholder's pro rata shares of the ordinary earnings
and net capital gain of the PFIC for the PFIC's taxable year or
information that will enable the shareholder to calculate its pro rata
shares. In addition, the PFIC Annual Information Statement must contain
information about distributions to shareholders and a statement that
the PFIC will permit the shareholder to inspect and copy its permanent
books of account, records, and other documents of the PFIC necessary to
determine that the ordinary earnings and net capital gain of the PFIC
have been calculated according to federal income tax accounting
principles. Commenters indicated that it was unclear in the notice
whether a shareholder, rather than the PFIC, could calculate the
requisite federal income tax information with respect to a PFIC that
did not keep its books and records according to U.S. Tax accounting
rules. In response to the comments, the temporary regulations clarify
that a shareholder may obtain the books, records and other documents of
the foreign corporation necessary for the shareholder to determine the
correct earnings and profits and net capital gain of the PFIC according
to federal income tax principles and calculate the shareholder's pro
rata shares of the PFIC's ordinary earnings and net capital gain. The
temporary regulations provide that, in that case, the PFIC must include
a statement in its PFIC Annual Information Statement that it has
permitted the shareholder to examine the PFIC's books of account,
records,
[[Page 9]]
and other documents necessary for the shareholder to calculate the
amounts of ordinary earnings and net capital gain.
Notice 88-125 provides that a domestic partnership makes the
section 1295 election rather than each individual partner that is an
indirect shareholder of the PFIC by reason of the partner's interest in
the partnership. The notice also provides that an S corporation makes
the section 1295 election. This entity-level election in the case of
domestic partnerships and S corporations reflects the view that
multiple elections by the partners or S corporation shareholders would
be more burdensome than the single entity-level election. The temporary
regulations adopt the rules of the notice with respect to elections by
domestic pass through entities, clarifying that the section 1295
election with respect to stock owned directly or indirectly by a
domestic trust or estate generally is also made at the entity level.
The temporary regulations also adopt the rules of the notice with
respect to interests held by foreign pass through entities. Interest
holder in foreign partnerships, trusts, and estates must make the
section 1295 election with respect to their indirect interests in PFICs
held through those entities; foreign entities may not make the section
1295 election.
Partnerships, S corporations, trusts, and estates are referred to
as pass through entities in the temporary regulations. The regulations
clarify that an election made by a domestic pass through entity is made
in the pass through entity's capacity as a shareholder, as specially
defined in temporary regulation Sec. 1.1295-1T(j) for purposes of the
section 1295 election provisions. Thus, the domestic pass through
entity takes the section 1293 inclusion into account in its return for
the year in which or with which the PFIC's taxable year ends, and the
interest holders in the pass through entity take the section 1293
inclusion into account under the rules applicable to inclusions of
income from the pass through entity. In addition, the temporary
regulations clarify that if an interest holder in a domestic pass
through entity transfers stock of a PFIC subject to a section 1295
election to the pass through entity, the section 1295 election
continues to apply to the interest holder whether or not the pass
through entity makes the section 1295 election.
Similarly, the temporary regulations clarify the effect of the
termination under section 708(b) of a partnership on a section 1295
election made by the partnership. Section 1.1295-1T(b)(3)(iii) provides
that, notwithstanding the termination of section 1295 election when a
partnership terminates, the partners of the former partnership that are
partners of the new partnership are bound by the section 1295 election
made by the former partnership whether or not the new partnership makes
a section 1295 election.
Notice 88-125 does not provide any special rules concerning tax-
exempt entities. As provided in proposed regulations under section 1291
(see Regulation Project INTL-656-87, published at 1992-1 C.B. 1124),
section 1291 and the regulations under section 1291 apply to a tax-
exempt organization that is a shareholder of a PFIC that is not a
pedigreed QEF, within the meaning of Sec. 1.1291-9(j)(2)(ii), only if a
dividend from the PFIC would be taxable to the organization under
subchapter F. Section 1.1291-1T(e) of these temporary regulations
provides the same rule. To prevent such a tax-exempt organization from
being subject to an unnecessary section 1295 election that may have
adverse consequences to the tax-exempt entity (e.g., an excise tax on
gross investment income of a private foundation that arises as a
consequence of a section 1295 election), the temporary regulations
provide a rule that precludes a tax-exempt entity that is not taxable
with respect to dividends from a PFIC from making a section 1295
election with respect to that PFIC or from being subject to a pass
through entity level election.
Commenters indicated that Notice 88-125 is unclear about which
taxable year of the PFIC is the first taxable year to which the section
1295 election applies. Temporary regulation Sec. 1.1295-1T(c)(2)
clarifies that the section 1295 election is effective with respect to
the taxable year of the foreign corporation that ends during the
shareholder's election year. Because certain shareholders may have
misinterpreted Notice 88-125, the Commissioner will respect a section
1295 election made prior to February 2, 1998 that was intended to be
effective for the taxable year of the PFIC that began during the
shareholder's election year provided that it is clear from all the
facts and circumstances that the shareholder intended the election to
be effective for that taxable year of the foreign corporation. For
example, a calendar year shareholder that made the section 1295
election in its 1995 return with respect to a foreign corporation whose
taxable year began in 1995 and ended in 1996, with the intention that
the election first apply to the foreign corporation's taxable year
ended in 1996, will be treated as having made a valid section 1295
election with respect to that year.
2. Additional Clarifications
A. Options
Options with respect to PFIC stock present unique problems under
section 1295. Section 1297(a)(4) provides that, under regulations, an
option to acquire stock may be treated as ownership of stock.
Proposed regulations under section 1291 (see Regulation Project
INTL-656-87, published in 1992-1 C.B. 1124) provide that options are
treated like stock for purposes of section 1291. Under proposed
regulation Sec. 1.1291-1(d), an option is considered to be stock of a
PFIC that is not a pedigreed QEF for purposes of applying section 1291
to a disposition of the option, unless the holder of the actual stock
which is subject to the option is currently including income from the
stock under section 1293. Under proposed regulation Sec. 1.1291-
1(h)(3), the holding period of stock acquired upon exercise of an
option treated as stock under Sec. 1.1291-1(d) includes the period the
option was held. These rules recognize that the value of an option is
linked to the value of the underlying stock and therefore such an
option should be subject to the PFIC rules.
Because of the potential for application of section 1291 to options
or stock acquired upon exercise of options, some option holders have
requested that regulations provide rules for making a section 1295
election with respect to an option. Application of a section 1295
election and the section 1293 current inclusion regime to options would
present serious computational issues and would be administratively
burdensome. Therefore, the temporary regulations continue the rule that
any shareholder's section 1295 election with respect to stock of a PFIC
does not apply to options to acquire stock of the PFIC and that an
option holder may not make a section 1295 election with respect to the
optioned stock. Accordingly, if a shareholder of stock subject to a
section 1295 election exercises an option to purchase additional shares
of stock of that PFIC, the stock received will be subject to the
section 1295 election made by the shareholder, but, because of the
rules of proposed regulation Sec. 1.1291-1(h)(3), the stock may be
treated as stock of an unpedigreed QEF.
Comments are requested concerning the option rule. In particular,
comments are requested that identify any administratively feasible
mechanisms that would permit a shareholder to make a section 1295
election that will apply to options.
[[Page 10]]
B. Section 1295 Election Made in a Joint Return
Section 1.1295-1T(b)(4) of the temporary regulations clarifies the
application of a section 1295 election made in a joint return within
the meaning of section 6013. The temporary regulations provide that a
section 1295 election made in a joint return will be treated as having
been made by both spouses that join in the filing of that return.
C. Lapse in PFIC Status or in Ownership
Section 1.1295-1T(c)(2) of the temporary regulations clarifies the
status of a shareholder's section 1295 election with respect to a
foreign corporation after the foreign corporation ceases to be a PFIC
and a QEF, or after the shareholder ceases to be a shareholder of the
PFIC. In general, once a section 1295 election is made with respect to
a corporation, it remains in effect, although not applicable, during
those years that the foreign corporation is not a PFIC. Therefore, if
the corporation requalifies as a PFIC, the section 1295 election
previously made is still valid, and the shareholder is required to
satisfy the requirements of that election. Furthermore, as indicated in
H.R. No. 795, 100th Cong., 2d Sess., at 567 (1988), an election remains
in effect with respect to a shareholder, although dormant, after a
shareholder disposes of its entire interest in the PFIC. Upon the
shareholder's reacquisition of a interest in the PFIC, the section 1295
election will apply to the newly acquired stock.
D. Invalidation, Termination, and Revocation of Section 1295 Elections
As provided in temporary regulation Sec. 1.1295-T(i)(1), the
Commissioner has discretion to invalidate or terminate a section 1295
election if the shareholder or the QEF fails to satisfy the section
1295 election requirements. However, intentional failure to satisfy the
section 1295 election requirements will not automatically result in
invalidation or termination. If the Commissioner invalidates a section
1295 election, the shareholder will be treated as if it never made a
section 1295 election with respect to the PFIC. If the Commissioner
terminates a section 1295 election for a taxable year, the section 1295
election will be valid for all taxable years before that year, but
inapplicable to that year and all subsequent taxable years.
Once a shareholder makes a section 1295 election, the shareholder
may revoke its section 1295 election only with the consent of the
Commissioner. Temporary regulation Sec. 1.1295-1T(i)(2) provides the
rules for requesting consent to revoke an election.
The effects of an invalidation, termination, or revocation of a
section 1295 are provided in Sec. 1.1295-1T(i)(3) of the temporary
regulations. In the Commissioner's discretion, stock of a foreign
corporation, with respect to which the section 1295 election is
invalidated, terminated, or revoked will be treated as sold as of the
last day of the PFIC's last taxable year as a QEF. The Commissioner
also has the discretion to impose any other terms and conditions that
the Commissioner deems necessary to ensure a shareholder's compliance
with sections 1291 through 1297. In addition, revocation will terminate
all section 1294 elections.
Section 1.1295-1T(i)(4) of the temporary regulations permits a
shareholder to make another section 1295 election with respect to the
PFIC after the fifth taxable year following the invalidation,
termination, or revocation. However, the shareholder may request
consent to make the section 1295 election for an earlier taxable year.
3. Section 1293
The temporary regulations provide guidance to PFICs concerning the
application of section 1(h) to section 1293 and the calculation of net
capital gain. Section 1.1293-1T(a)(2) of the temporary regulations
provides three alternatives for a QEF to calculate and report net
capital gain. First, the PFIC may calculate and report to its share-
holders the amount of each category of long-term capital gain provided
in section 1(h). Alternatively, the PFIC may determine and report a
single amount of net capital gain, stating that that amount of long-
term capital gain is subject to the highest capital gain rate of tax
applicable to the shareholder. Under the third option, the PFIC may
treat the total of its earnings and profits for the taxable year as
ordinary earnings. The provision of these options is intended to
simplify compliance with the requirements of sections 1293 and 1295. It
is anticipated that, without providing these options, some PFICs would
not be willing or able to calculate the categories of net capital gain
required by section 1(h) and therefore would not provide the
information necessary for a QEF shareholder to maintain a valid section
1295 election. A shareholder that has access to information necessary
to calculate its pro rata share of the PFIC's ordinary earnings and net
capital gain may also use any of these options. The Service requests
comments about how net capital gain should be calculated, especially in
light of the 1997 Act changes to section 1.
The temporary regulations under section 1293 also clarify the
application of the current inclusion rules of section 1293 to interests
in a QEF held through a domestic pass through entity. The temporary
regulations provide generally that a U.S. person that is a shareholder
of the QEF by reason of an interest in a domestic pass through entity
takes into account its pro rata shares of the ordinary earnings and net
capital gain of the QEF attributable to the QEF shares held by the pass
through entity according to the general rules applicable to inclusions
of income from the pass through entity.
4. Exempt organizations subject to section 1291
As stated above, the temporary regulations include the rule of
proposed regulation Sec. 1.1291-1(e). Under temporary regulation
Sec. 1.1291-1T(e), if the shareholder of a PFIC is an organization
exempt from tax under this chapter (including an Individual Retirement
Account (IRA)), section 1291 and these regulations apply to such
shareholder only if a dividend from the PFIC would be taxable to the
organization under subchapter F.
5. Effective Dates of Temporary Regulations Secs. 1.1291-1T(e), 1.1293-
1T(a)(2), 1.1293-1T(c) and 1.1295-1T
As stated above, Notice 88-125 provides that the notice's rules
will be provided in regulations applicable to taxable years beginning
after 1986. However, because the temporary regulations do not adopt the
rules of Notice 88-125 in their entirety, the temporary regulations
will not be retroactively applied. Therefore, Sec. 1.1295-1T(c) through
(j) will apply to taxable years of shareholders beginning after
December 31, 1997. As provided in Sec. 1.1295-1T(h), the Internal
Revenue Service will honor taxpayer reliance on Notice 88-125 for
taxable years beginning after December 31, 1986, and before January 1,
1998. Thus, if a person made a valid section 1295 election under the
rules of Notice 88-125 for taxable years beginning before January 1,
1998, and, for those taxable years, complied with the rules of the
notice relating to maintaining that election, the election remains in
effect for taxable years beginning after December 31, 1997. However,
elections made under Notice 88-125, as well as elections made under
these temporary regulations, must be maintained as provided in the
temporary regulations.
Temporary regulation Sec. 1.1291-1T(e) will apply on and after
April 1, 1992.
[[Page 11]]
Section 1.1293-1T(a)(2) of the temporary regulations will apply to
sales by QEFs during their taxable years ending on or after May 7,
1997. Temporary regulation Secs. 1.1293-1T(c) and 1.1295-1T(b)(2)(iii),
(b)(3), and (b)(4) will apply to taxable years of shareholders
beginning after December 31, 1997.
6. Retroactive Section 1295 Elections
a. In General
Section 1295(b)(2) provides that, to the extent provided in
regulations, a shareholder may make a section 1295 election with
respect to a foreign corporation later than the election due date if
the shareholder failed to make a timely section 1295 election because
the shareholder reasonably believed that the foreign corporation was
not a PFIC. In temporary regulation Sec. 1.1295-3T, Treasury and the
Service interpret section 1295(b)(2) to permit a shareholder of a PFIC
to make a retroactive election in certain limited circumstances where
the shareholder possessed reasonable belief that the corporation was
not a PFIC or the shareholder demonstrates that it reasonably relied on
the advice of a qualified tax professional.
As described below, the temporary regulations set forth two
distinct sets of rules for making a retroactive election. Under the
first set of rules, a shareholder of a PFIC that meets certain
conditions may make a retroactive election without obtaining the
consent of the Commissioner (protective regime). A shareholder may make
a retroactive election under the protective regime only if the
shareholder possessed reasonable belief as of the election due date
that the foreign corporation was not a PFIC. A shareholder of a PFIC
may make a retroactive election under the protective regime even after
the issue of PFIC status has been raised in an audit by the Service.
Under the second set of rules, a shareholder may make a retroactive
election only after obtaining the Commissioner's consent (consent
regime). To make a retroactive election under the consent regime, the
shareholder must demonstrate, to the satisfaction of the Commissioner,
that the shareholder's failure to make a timely section 1295 election
resulted from the shareholder's reasonable reliance on the advice of a
qualified tax professional. A shareholder of a PFIC may not make a
retroactive election under the consent regime unless the shareholder
files a request for consent before the issue of PFIC status is raised
on audit.
The temporary regulations provide the exclusive rules for making a
retroactive election. Thus, a shareholder that does not satisfy the
requirements of the temporary regulations may not seek relief under any
other provision of the law, including Sec. 301.9100 regulations.
Although such a shareholder may not make a retroactive election, the
shareholder may be able to attain certain benefits associated with a
retroactive election by making a section 1295 election for the current
year together with a purging election under section 1291(d)(2).
b. Protective Regime
A shareholder that satisfies the requirements of the protective
regime may make a retroactive election under the rules of temporary
regulation Sec. 1.1295-3T(c) through (e) without obtaining the
Commissioner's consent. This regime requires that the shareholder
possess reasonable belief, contemporaneous with the election due date,
that the foreign corporation was not a PFIC.
The legislative history of section 1295 suggests that in certain
circumstances a shareholder that reasonably believed that a foreign
corporation was not a PFIC for a taxable year (e.g., based on a
reasonable valuation of the corporation's assets) may make a
retroactive election if the Service determines, upon examination, that
the corporation was in fact a PFIC for such taxable year (e.g., based
on the Service's valuation of the corporation's assets for the taxable
year). Consistent with the legislative history, temporary regulation
Sec. 1.1295-3T(c) through (e) permits a shareholder to make a
retroactive election for a taxable year of the shareholder (retroactive
election year), even if the Service raises the PFIC status of the
corporation upon audit. Although the shareholder need not request the
Service's consent to make a retroactive election under this regime, the
shareholder must satisfy certain conditions to make a retroactive
election.
First, except for certain small shareholders, the shareholder must
be able to establish that the shareholder reasonably believed, within
the meaning of temporary regulation Sec. 1.1295-3T(d), as of the
election due date, that the foreign corporation was not a PFIC.
Temporary regulation Sec. 1.1295-3T(d) interprets the reasonable belief
standard to require an actual determination by the shareholder, based
on a good faith application of the law, that a foreign corporation was
not a PFIC. Therefore, to satisfy the reasonable belief requirement,
the shareholder must know and understand the PFIC provisions, and must
make a good faith effort to apply the income and asset tests of section
1296 to determine whether the foreign corporation is a PFIC.
Except for certain small shareholders, a shareholder must file a
single Protective Statement pursuant to temporary regulation
Sec. 1.1295-3T(c) that applies to a taxable year to preserve the
shareholder's ability to make a retroactive election with respect to
such taxable year of the shareholder and subsequent taxable years. The
Protective Statement must contain information describing the basis for
the shareholder's conclusion as of the election due date that the
foreign corporation was not a PFIC for its taxable year that ended in
the first taxable year of the shareholder for which the Protective
Statement applies. As part of the Protective Statement, the shareholder
must extend the periods of limitations for the assessment of taxes
determined under sections 1291 through 1297 (PFIC related taxes) for
all taxable years to which the Protective Statement will apply, as
provided in Sec. 1.1295-3T(c)(4) of the temporary regulations. The
shareholder also must include certain additional information in the
Protective Statement. A special transition rule permits shareholders to
use the protective regime for taxable years ending prior to January 2,
1998 provided the periods of limitations on the assessment of taxes for
such years have not expired.
Temporary regulation Sec. 1.1295-3T(e) provides special rules for
certain small shareholders. A shareholder that qualifies under
Sec. 1.1295-3T(e) for a taxable year will not be required to satisfy
the reasonable belief requirement or file a Protective Statement to
preserve the shareholder's ability to make a retroactive election with
respect to such year (a qualified shareholder).
Except as provided below, a shareholder is a qualified shareholder
only if the shareholder owns, directly, indirectly or constructively,
less than two percent of the vote and value of each class of stock of
the foreign corporation during such year, and has not filed a
Protective Statement that applies to an earlier year included in the
shareholder's holding period of stock of the foreign corporation. In
addition, for the special rule to apply to a taxable year of the
shareholder, the foreign corporation or its U.S. counsel must have
indicated in a corporate filing, shareholder mailing or similar
document that the foreign corporation reasonably believed that it was
not a PFIC for the taxable year of the foreign
[[Page 12]]
corporation that ended with or within such taxable year of the
shareholder. However, no shareholder will be a qualified shareholder if
the shareholder knew that the corporation was in fact a PFIC or knew or
had reason to know that a corporate filing relating to the
corporation's PFIC status was inaccurate. For this purpose, a
shareholder will be treated as knowing that the corporation was in fact
a PFIC if the principal activity of the foreign corporation is owning
or trading a diversified portfolio of stock, securities, or other
financial contracts. A qualified shareholder that makes a valid
retroactive election in its earliest open taxable year in which the
foreign corporation is a PFIC may, subject to certain conditions, be
treated as a shareholder of a pedigreed QEF even if the period of
limitations for the assessment of taxes for an earlier taxable year in
which the corporation qualified as a PFIC has expired.
c. Consent Regime
Certain taxpayers have urged the Service to interpret the
reasonable belief requirement of section 1295(b)(2) to allow a
shareholder to make a retroactive election if the shareholder or its
tax adviser did not know or properly apply the PFIC rules. In
particular, certain taxpayers have recommended adoption of the
reasonable action and good faith standard of Sec. 301.9100 regulations
for demonstrating reasonable belief.
Treasury and the Service recognize that the PFIC rules are complex
and, in some cases, difficult for shareholders to apply. Accordingly,
the temporary regulations provide that, in certain limited
circumstances, a shareholder may obtain the Commissioner's consent to
make a retroactive election, even if the shareholder failed to know or
properly apply the PFIC rules in the earlier year. Under temporary
regulation Sec. 1.1295-3T(f), a shareholder that reasonably relied on
the advice of a qualified tax professional may request consent to make
a retroactive election.
In response to taxpayer comments, Treasury and the Service have
incorporated into the consent regime certain rules set forth in
Sec. 301.9100 regulations. As described below, temporary regulation
Sec. 1.1295-3T(f)(1) and (4), respectively, require the shareholder to
have reasonably relied on a qualified tax professional and to document
such reliance. The Service will not grant consent under this regime if
doing so would prejudice the interests of the government by placing the
shareholder in a position more favorable then if the shareholder had
made the section 1295 election on a timely basis. The temporary
regulations provide that in certain cases the interests of the
government may be preserved by a closing agreement between the Service
and the shareholder requiring the shareholder to make a payment to the
government that compensates the government for amounts that would have
been due in respect of closed years affected by the retroactive
election.
Under temporary regulation Sec. 1.1295-3T(f)(2), the Service will
treat a shareholder as having reasonably relied on a qualified tax
professional (including an employee of the shareholder), within the
meaning of the Sec. 301.9100 regulations, if the qualified tax
professional failed to identify the corporation as a PFIC or failed to
advise the shareholder of the consequences of making, or failing to
make, a section 1295 election. Therefore, if a qualified tax
professional, due to ignorance of the law or negligence, failed to
identify the corporation as a PFIC or failed to advise the shareholder
of the consequences of making, or failing to make, the section 1295
election, the Commissioner may consent to a retroactive election.
However, in no event will the Commissioner consent to a retroactive
election if, prior to the application for such consent, the Service has
raised the PFIC status of the foreign corporation in an audit of the
retroactive election year or any subsequent year. Furthermore, a
shareholder may not disregard knowledge that the corporation was a PFIC
or advice or knowledge relating to the tax consequences of owning stock
of a PFIC and then request relief under this regime.
d. Who Makes a Retroactive Election and Who Satisfies the Requirements
of the Protective or Consent Regime
Temporary regulation Sec. 1.1295-3T adopts the rules of temporary
regulation Sec. 1.1295-1T(d), relating to who may make a section 1295
election, for purposes of determining the appropriate person to satisfy
the requirements of the protective or consent regime and to make a
retroactive election. Consistent with these rules, temporary regulation
Sec. 1.1295-3T(c)(3) provides that the person that executes and files
the Protective Statement under the protective regime is the person that
makes the section 1295 election, as provided in Sec. 1.1295-1T(d).
Temporary regulation Sec. 1.1295-3T(f)(4)(vi) sets forth a similar rule
for requests for consent under the consent regime. In addition,
temporary regulation Sec. 1.1295-3T(g)(3) provides for an entity-level
retroactive election in the case of domestic partnerships, S
corporations, domestic nongrantor trusts, and domestic estates that own
stock of a PFIC, and a partner or beneficiary-level retroactive
election in the case of foreign partnerships, foreign trusts, domestic
grantor trusts, and foreign estates that own stock of a PFIC.
The Service welcomes comments concerning the benefits of requiring
certain entities, rather than their interest holders, to satisfy the
requirements under the protective and consent regimes. In particular,
comments are requested concerning whether requiring S corporations,
domestic nongrantor trusts, and domestic estates to satisfy the
requirements of the protective regime at the entity-level is
inappropriate.
e. Making a Retroactive Election
A shareholder that has satisfied the requirements of the protective
regime or has obtained the consent of the Commissioner under the
consent regime must comply with the rules in temporary regulation
Sec. 1.1295-3T(g) for making a retroactive election. In general, the
shareholder must file an amended return for the retroactive election
year in which the shareholder complies with the requirements for making
a section 1295 election, report its pro rata shares of the ordinary
earnings and net capital gain of the foreign corporation for that year
(section 1293 inclusion), if any, and pay any taxes resulting from the
redetermination of its income and any applicable section 6621 interest.
The shareholder also must file amended returns for the taxable years
that follow the retroactive election year in which the foreign
corporation is a PFIC and a QEF to report the section 1293 inclusion
for each of these years, and pay the resulting tax and section 6621
interest. If the shareholder's taxable year in which the corporation
first qualified as a PFIC, or the retroactive election year or any
subsequent taxable years, are closed for the assessment of PFIC related
taxes (i.e., in certain cases where the shareholder is a qualified
shareholder or the shareholder has obtained the consent of the
Commissioner to file a retroactive election), the shareholder must file
amended returns to report section 1293 inclusions in all open affected
years beginning with the first taxable year open for the assessment of
tax on such amounts.
7. Removal of Sec. 1.1291-9(i)(1)
Section 1121 of the 1997 TRA amends section 1296, adding section
1296(e). Section 1296(e) provides that after December 31, 1997, a
controlled foreign corporation (as defined in section
[[Page 13]]
957(a)) (CFC) will not be treated as a PFIC with respect to a U.S.
shareholder (as defined in section 951(b)) of the CFC. After a
shareholder ceases to qualify for this exception, because the
shareholder creases to be subject to subpart F, generally the
shareholder will have a new holding period for purposes of the PFIC
provisions pursuant to section 1296(e)(3)(A). However, pursuant to
section 1296(e)(3)(B), if the foreign corporation was a nonqualified
fund before the shareholder qualified for this exception, and the
shareholder did not make the section 1297(b)(1) election to purge the
stock of its PFIC taint, the shareholder will not get a new holding
period when it ceases to qualify for the exception for U.S.
shareholders of CFCs. Congress, in the Conference Report to the 1997
TRA, H.R. Rept. 105-220, 105th Congress, 1st session, at 625, stated
that ``the stock held by such shareholder continues to be treated as
PFIC stock unless the shareholder makes an election to pay tax and an
interest charge with respect to the unrealized appreciation in the
stock or the accumulated earnings of the corporation.'' Congress thus
indicated its intent that a shareholder may apply the rules of either
section 1291(d)(2)(A), the deemed sale election, or section
1291(d)(2)(B), the deemed dividend election, when making the section
1297(b)(1) election to purge a former PFIC of its PFIC taint. In order
to give effect to that intent, Treasury and the IRS have decided to
remove Sec. 1.1291-9(i)(1), which provides that the rules of
Sec. 1.1291-9, the deemed dividend election, do not apply to an
election under section 1297(b)(1). The removal of Sec. 1.1291-9(i)(1)
is effective as of January 2, 1998. Section 1.1291-9(i)(2) is not
affected by the removal of Sec. 1.1291-9(i)(1).
8. Section 1297
The temporary regulations amend Sec. 1.1297-3T to provide that a
shareholder of a former PFIC, within the meaning of Sec. 1.1291-
9(j)(2)(iv), that was a CFC during its last taxable year as a PFIC
under section 1296(a), may apply the rules of the deemed dividend
election under section 1291(d)(2)(B) and Sec. 1.1291-9 to its section
1297(b)(1) election made by the time and in the manner provided in
Sec. 1.1297-3T(b). If the time for making a section 1297(b)(1)
election, provided in Sec. 1.1297-3T(b), expired before January 2,
1998, a shareholder that applied the rules of section 1291(d)(2)(A) and
Sec. 1.1291-10 to a section 1297(b)(1) election, made with respect to a
former PFIC that was a CFC in its last taxable year as a PFIC under
section 1296(a), may file an amended return for its taxable year that
includes the termination date, as defined in Sec. 1.1297-3T(a), and
apply the rules of the deemed dividend election to its section
1297(b)(1) election at any time before the expiration of the period of
limitations for the assessment of taxes for that taxable year. Section
1.1297-3T(c) is effective as of January 2, 1998.
Special Analyses
It has been determined that this Treasury Decision 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, these temporary regulations will
be submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small business. An
initial regulatory flexibility analysis has been prepared for the
proposed regulations for which these temporary regulations serve as a
text and which is set forth in the notice of proposed rulemaking on
this subject in the Proposed Rules section of this issue of the Federal
Register.
Drafting Information
The principal authors of these 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
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
the following entries, in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1291-1T also issued under 26 U.S.C. 1291.* * *
Section 1.1293-1T also issued under 26 U.S.C. 1293.* * *
Section 1.1295-1T also issued under 26 U.S.C. 1295(b).
Section 1.1295-3T also issued under 26 U.S.C. 1295(b).* * *
Sec. 1.1291-0 [Amended]
Par. 2. Section 1.1291-0 is amended by removing and reserving the
entry for Sec. 1.1291-9(i)(1).
Par. 3. The section heading and introductory text for Sec. 1.1294-0
are added to read as follows:
Sec. 1.1294-0 Table of contents.
This section contains a listing of the headings for Sec. 1.1294-1T.
Par. 4. The section heading and introductory text for Sec. 1.1297-0
are added to read as follows:
Sec. 1.1297-0 Table of contents.
This section contains a listing of the headings for Sec. 1.1297-3T.
Sec. 1.1291-0T [Amended]
Par. 5. Section 1.1291-0T is amended by:
1. Transferring the listing of the section heading and entries for
Sec. 1.1294-1T to new Sec. 1.1294-0.
2. Transferring the listing of the section heading and entries for
Sec. 1.1297-3T to new Sec. 1.1297-0.
3. Removing the section heading and introductory text.
Par. 6. Section 1.1291-1T is added to read as follows:
Sec. 1.1291-1T Taxation of U.S. persons that are shareholders of PFICs
that are not pedigreed QEFs (temporary).
(a) through (d) [Reserved].
(e) Exempt organization as shareholder--(1) In general. If the
shareholder of a PFIC is an organization exempt from tax under this
chapter, section 1291 and these regulations apply to such shareholder
only if a dividend from the PFIC would be taxable to the organization
under subchapter F.
(2) Effective date. Paragraph (e)(1) of this section is applicable
on and after April 1, 1992.
Sec. 1.1291-9 [Amended]
Par. 7. Section 1.1291-9 is amended by removing and reserving
paragraph (i)(1).
Par. 8. Section 1.1293-0 is added to read as follows.
Sec. 1.1293-0 Table of contents.
This section contains a listing of the headings for Sec. 1.1293-1T.
Sec. 1.1293-1T Current inclusion of income of qualified electing
funds (temporary).
(a) In general. [Reserved].
(1) Other rules. [Reserved].
(2) Net capital gain defined.
(i) In general.
(ii) Effective date.
(b) Other rules [Reserved].
(c) Application of rules of inclusion with respect to stock held
by a pass through entity.
[[Page 14]]
(1) In general.
(2) QEF stock transferred to a pass through entity.
(i) Pass through entity makes a section 1295 election.
(ii) Pass through entity does not make a section 1295 election.
(3) Effective date.
Par. 9. Section 1.1293-1T is added to read as follows:
Sec. 1.1293-1T Current taxation of income from qualified electing
funds (temporary).
(a) In general. [Reserved].
(1) Other rules. [Reserved].
(2) Net capital gain defined--(i) In general. This paragraph (a)(2)
defines the term net capital gain for purposes of sections 1293 and
1295 and the regulations under those sections. The QEF, as defined in
Sec. 1.1291-9(j)(2)(i), in determining its net capital gain for a
taxable year, may either--
(A) Calculate and report the amount of each category of long-term
capital gain provided in section 1(h) that was recognized by the PFIC
in the taxable year;
(B) Calculate and report the amount of net capital gain recognized
by the PFIC in the taxable year, stating that that amount is subject to
the highest capital gain rate of tax applicable to the shareholder; or
(C) Calculate its earnings and profits for the taxable year and
report the entire amount as ordinary earnings.
(ii) Effective date. Paragraph (a)(2)(i) of this section is
applicable to sales by QEFs during their taxable years ending on or
after May 7, 1997.
(b) Other rules. [Reserved].
(c) Application of rules of inclusion with respect to stock held by
a pass through entity--(1) In general. A domestic pass through entity
takes into account its pro rata shares of the ordinary earnings and net
capital gain attributable to the QEF shares held by the pass through
entity. A U.S. person that indirectly owns QEF shares through the
domestic pass through entity accounts for its pro rata shares of
ordinary earnings and net capital gain attributable to the QEF shares
according to the general rules applicable to inclusions of income from
the domestic pass through entity. For the definition of pass through
entity, see Sec. 1.1295-1T(j).
(2) QEF stock transferred to a pass through entity--(i) Pass
through entity makes a section 1295 election. If a shareholder
transfers stock subject to a section 1295 election to a domestic pass
through entity of which it is an interest holder and the pass through
entity makes a section 1295 election with respect to that stock, as
provided in Sec. 1.1295-1T(D)(2), the shareholder takes into account
its pro rata shares of the ordinary earnings and net capital gain
attributable to the QEF shares under the rules applicable to inclusions
of income from the pass through entity.
(ii) Pass through entity does not make a section 1295 election. If
the pass through entity does not make a section 1295 election with
respect to the PFIC, the shares of which were transferred to the pass
through entity subject to the 1295 election of the shareholder, the
shareholder continues to be subject, in its capacity as an indirect
shareholder, to the income inclusion rules of section 1293 and
reporting rules required of shareholders of QEFs. Proper adjustments to
reflect an inclusion in income under section 1293 by the indirect
shareholder must be made, under the principles of Sec. 1.1291-9(f), to
the basis of the indirect shareholder's interest in the pass through
entity.
(3) Effective date. Paragraph (c) of this section is applicable to
taxable years of shareholders beginning after December 31, 1997.
Par. 10. Section 1.1295-0 is added to read as follows:
Sec. 1.1295-0 Table of contents.
This section contains a listing of the headings for Secs. 1.1295-1T
and 1.1295-3T.
Sec. 1.1295-1T Qualified electing funds (temporary).
(a) In general. [Reserved.]
(b) Application of section 1295 election. [Reserved.]
(1) Election personal to shareholder. [Reserved.]
(2) Election applicable to specific corporation only.
(i) In general. [Reserved.]
(ii) Stock of QEF received in a nonrecognition transfer.
[Reserved.]
(iii) Exception for options.
(3) Application of general rules to stock held by a pass through
entity.
(i) Stock subject to a section 1295 election transferred to a
pass through entity.
(ii) Limitation on application of pass through entity's section
1295 election.
(iii) Effect of partnership termination on section 1295
election.
(iv) Characterization of stock held through a pass through
entity.
(4) Application of general rules to a taxpayer filing a joint
return under section 6013.
(c) Effect of section 1295 election.
(1) In general.
(2) Years to which section 1295 election applies.
(i) In general.
(ii) Effect of PFIC status on election.
(iii) Effect on election of complete termination of a
shareholder's interest in the PFIC.
(iv) Effect on section 1295 election of transfer of stock to a
domestic pass through entity.
(v) Examples.
(d) Who may make a section 1295 election.
(1) General rule.
(2) Application of general rule to pass through entities.
(i) Partnerships.
(A) Domestic partnership.
(B) Foreign partnership.
(ii) S corporation.
(iii) Trust or estate.
(A) Domestic trust or estate.
(1) Nongrantor trust or estate.
(2) Grantor trust.
(B) Foreign trust or estate.
(1) Nongrantor trust or estate.
(2) Grantor trust.
(iv) Indirect ownership of the pass through entity or the PFIC.
(3) Member of consolidated return group as shareholder.
(4) Option holder.
(5) Exempt organization.
(e) Time for making a section 1295 election.
(f) Manner of making a section 1295 election and the annual
election requirements of the shareholder.
(1) Manner of making the election.
(2) Annual election requirements.
(i) In general.
(ii) Retention of documents.
(g) Annual election requirements of the PFIC or intermediary.
(1) PFIC Annual Information Statement.
(2) Alternative documentation.
(3) Annual Intermediary Statement.
(4) Combined statements.
(i) PFIC Annual Information Statement.
(ii) Annual Intermediary Statement.
(h) Transition rules.
(i) Invalidation, termination or revocation of section 1295
election.
(1) Invalidation or termination of election at the discretion of
the Commissioner.
(i) In general.
(ii) Deferral of section 1293 inclusion.
(iii) When effective.
(2) Shareholder revocation.
(i) In general.
(ii) Time for and manner of requesting consent to revoke.
(A) Time.
(B) Manner of making request.
(iii) When effective.
(3) Effect of invalidation, termination, or revocation.
(4) Election after invalidation, termination, or revocation.
(j) Definitions.
(k) Effective date.
Sec. 1.1295-3T Retroactive elections (temporary).
(a) In general.
(b) General rule.
(c) Protective Statement.
(1) In general.
(2) Reasonable belief statement.
(3) Who executes and files the Protective Statement.
(4) Waiver of the periods of limitations.
(i) Time for and manner of extending periods of limitations.
(A) In general.
(B) Application of general rule to domestic partnerships.
[[Page 15]]
(1) In general
(2) Special rules.
(i) Addition of partner to non-TEFRA partnership.
(ii) Change in status from non-TEFRA partnership to TEFRA
partnership.
(C) Application of general rule to domestic nongrantor trusts
and domestic estates.
(D) Application of general rule to S corporations.
(E) Effect on waiver of complete termination of a pass through
entity or pass through entity's business.
(F) Application of general rule to foreign partnerships, foreign
trusts, domestic or foreign grantor trusts, and foreign estates.
(ii) Terms of waiver.
(A) Scope of waiver.
(B) Period of waiver.
(5) Time for and manner of filing a Protective Statement.
(i) In general.
(ii) Special rule for taxable years ended before January 2, 1998
(6) Applicability of the Protective Statement.
(i) In general.
(ii) Invalidity of the Protective Statement.
(7) Retention of Protective Statement and information
demonstrating reasonable belief.
(d) Reasonable belief.
(1) In general.
(2) Knowledge of law required.
(e) Special rules for qualified shareholders.
(1) In general.
(2) Qualified shareholder.
(3) Exceptions.
(f) Special consent.
(1) In general.
(2) Reasonable reliance on a qualified tax professional.
(i) In general.
(ii) Shareholder deemed to have not reasonably relied on a
qualified tax professional.
(3) Prejudice to the interests of the United States government.
(i) General rule.
(ii) Elimination of prejudice to the interests of the United
States government.
(4) Procedural requirements.
(i) Filing instructions.
(ii) Affidavit from shareholder.
(iii) Affidavits from other persons.
(iv) Other information.
(v) Notification of Internal Revenue Service.
(vi) Who requests special consent under this paragraph (f) and
who enters into a closing agreement.
(g) Time for and manner of making a retroactive election.
(1) Time for making a retroactive election.
(i) In general.
(ii) Transition rule.
(iii) Ownership not required at time retroactive election is
made.
(2) Manner of making a retroactive election.
(3) Who makes the retroactive election.
(4) Other elections.
(i) Section 1291(d)(2) election.
(ii) Section 1294 election.
(h) Effective date.
Par. 11. Section 1.1295-1T is added to read as follows:
Sec. 1.1295-1T Qualified electing funds (temporary).
(a) In general. [Reserved].
(b) Application of section 1295 election. [Reserved]
(1) Election personal to shareholder. [Reserved].
(2) Election applicable to specific corporation only--
(i) In general. [Reserved].
(ii) Stock of QEF received in a nonrecognition transfer.
[Reserved].
(iii) Exception for options. A shareholder's section 1295 election
does not apply to any option to buy stock of the PFIC.
(3) Application of general rules to stock held by a pass through
entity--(i) Stock subject to a section 1295 election transferred to a
pass through entity. A shareholder's section 1295 election will not
apply to a domestic pass through entity to which the shareholder
transfers stock subject to section 1295 election, or to any other U.S.
person that is an interest holder or beneficiary of the domestic pass
through entity. However, as provided in paragraph (c)(2)(iv) of this
section (relating to a transfer to a domestic pass through entity of
stock subject to a section 1295 election), a shareholder that transfers
stock subject to a section 1295 election to a pass through entity will
continue to be subject to the section 1295 election with respect to the
stock indirectly owned through the pass through entity and any other
stock of that PFIC owned by the shareholder.
(ii) Limitation on application of pass through entity's section
1295 election. Except as provided in paragraph (c)(2)(iv) of this
section, a section 1295 election made by a domestic pass through entity
does not apply to other stock of the PFIC held directly or indirectly
by the interest holder or beneficiary.
(iii) Effect of partnership termination on section 1295 election.
Termination of a section 1295 election made by a domestic partnership
by reason of the termination of the partnership under section 708(b)
will not terminate the section 1295 election with respect to partners
of the terminated partnership that are partners of the new partnership.
Except as otherwise provided, the stock of the PFIC of which the new
partners are indirect shareholders will be treated as stock of a QEF
only if the new domestic partnership makes a section 1295 election with
respect to that stock.
(iv) Characterization of stock held through a pass through entity.
Stock of a PFIC held through a pass through entity will be treated as
stock of a pedigreed QEF with respect to an interest holder or
beneficiary only if--
(A) In the case of PFIC stock acquired (other than in a transaction
in which gain is not recognized pursuant to regulations under section
1291(f) with respect to that stock), and held by a domestic pass
through entity, the pass through entity makes the section 1295 election
and the PFIC has been a QEF with respect to the pass through entity for
all taxable years that are included wholly or partly in the pass
through entity's holding period of the PFIC stock and during which the
foreign corporation was a PFIC within the meaning of Sec. 1.1291-
9(j)(1); or
(B) In the case of PFIC stock transferred by an interest holder or
beneficiary to a pass through entity in a transaction in which gain is
not recognized pursuant to regulations under section 1291(f) with
respect to that stock and held by the pass through entity, the PFIC
stock transferred to the pass through entity was treated as stock of a
pedigreed QEF with respect to the interest holder or beneficiary at the
time of the transfer and the pass through entity makes a section 1295
election.
(4) Application of general rules to a taxpayer filing a joint
return under section 6013. A section 1295 election made by a taxpayer
in a joint return, within the meaning of section 6013, will be treated
as also made by the spouse that joins in the filing of that return.
(c) Effect of section 1295 election--(1) In general. Except as
otherwise provided in this paragraph (c), the effect of a shareholder's
section 1295 election is to treat the foreign corporation as a QEF with
respect to the shareholder for each taxable year of the foreign
corporation ending with or within a taxable year of the shareholder for
which the election is effective. A section 1295 election is effective
for the shareholder's election year and all subsequent taxable years of
the shareholder unless invalidated, terminated or revoked as provided
in paragraph (i) of this section. The terms shareholder and
shareholder's election year are defined in paragraph (j) of this
section.
(2) Years to which section 1295 election applies--(i) In general.
Except as otherwise provided in this paragraph (c), a foreign
corporation with respect to which a section 1295 election is made will
be treated as a QEF for its taxable year ending with or within the
shareholder's election year and all subsequent taxable years of the
foreign corporation that are included wholly or partly in the
shareholder's holding period (or periods) of stock of the foreign
corporation.
(ii) Effect of PFIC status on election. A foreign corporation will
not be treated
[[Page 16]]
as a QEF for any taxable year of the foreign corporation that the
foreign corporation is not a PFIC under section 1296(a) and is not
treated as a PFIC under section 1297(b)(1). However, cessation of a
foreign corporation's status as a PFIC will not terminate a section
1295 election.
(iii) Effect on election of complete termination of a shareholder's
interest in the PFIC. Complete termination of a shareholder's direct
and indirect interest in stock of a foreign corporation will not
terminate a shareholder's section 1295 election with respect to the
foreign corporation.
(iv) Effect on section 1295 election of transfer of stock to a
domestic pass through entity. The transfer of a shareholder's direct or
indirect interest in stock of a foreign corporation to a domestic pass
through entity (as defined in paragraph (j) of this section) will not
terminate the shareholder's section 1295 election with respect to the
foreign corporation, whether or not the pass through entity makes a
section 1295 election. For the rules concerning the application of
section 1293 to stock transferred to a domestic pass through entity,
see Sec. 1.1293-1T(c).
(v) Examples. The following examples illustrate the rules of this
paragraph (c)(2).
Example 1. In 1998, C, a U.S. person, purchased stock of FC, a
foreign corporation that is a PFIC. Both FC and C are calendar year
taxpayers. C made a timely section 1295 election to treat FC as a
QEF in C's 1998 return, and FC was therefore a pedigreed QEF. C
included its shares of FC's 1998 ordinary earnings and net capital
gain in C's 1998 Income and did not make a section 1294 election to
defer the time for payment of tax on that income. In 1999, 2000, and
2001, FC did not satisfy either the income or asset test of section
1296(a), and therefore was neither a PFIC nor a QEF. C therefore did
not have to include its pro rata shares of the ordinary earnings and
net capital gain of FC pursuant to section 1293, or satisfy the
section 1295 annual reporting requirements for any of those years.
FC qualified as a PFIC again in 2002. Because C had made a section
1295 election in 1998, and the election had not been invalidated,
terminated, or revoked, within the meaning of paragraph (i) of this
section, C's section 1295 election remains in effect for 2002. C
therefore is subject in 2002 to the income inclusion and reporting
rules required of shareholders of QEFs.
Example 2. The facts are the same as in Example (1) except that
FC did not lose PFIC status in any year and C sold all the FC stock
in 1999 and repurchased stock of FC in 2002. Because C had made a
section 1295 election in 1998 with respect to stock of FC, and the
election had not been invalidated, terminated, or revoked, within
the meaning of paragraph (i) of this section, C's section 1295
election remained in effect and therefore applies to the stock of FC
purchased by C in 2002. C therefore is subject in 2002 to the income
inclusion and reporting rules required of shareholders of QEFs.
Example 3. The facts are the same as in Example (2) except that
C is a partner in domestic partnership P and C transferred its FC
stock to P in 1999. Because C had made a section 1295 election in
1998 with respect to stock of FC, and the election had not been
invalidated, terminated, or revoked, within the meaning of paragraph
(i) of this section, C's section 1295 election remains in effect
with respect to its indirect interest in the stock of FC. If P does
not make the section 1295 election with respect to the FC stock, C
will continue to be subject, in C's capacity as an indirect
shareholder of FC, to the income inclusion and reporting rules
required of shareholders of QEFs in 1999 and subsequent years. If P
makes the section 1295 election, C will take into account its pro
rata shares of the ordinary earnings and net capital gain of the FC
under the rules applicable to inclusions of income from P.
(d) Who may make a section 1295 election--(1) General rule. Except
as otherwise provided in this paragraph (d), any U.S. person that is a
shareholder (as defined in paragraph (j) of this section) of a PFIC,
including a shareholder that holds stock of a PFIC in bearer form, may
make a section 1295 election with respect to that PFIC. The shareholder
need not own directly or indirectly any stock of the PFIC at the time
the shareholder makes the section 1295 election provided the
shareholder is a shareholder of the PFIC during the taxable year of the
PFIC that ends with or within the taxable year of the shareholder for
which the section 1295 election is made. Except in the case of a
shareholder that is an exempt organization that may not make a section
1295 election, as provided in paragraph (d)(5) of this section, in a
chain of ownership only the first U.S. person that is a shareholder of
the PFIC may make the section 1295 election.
(2) Application of general rule to pass through entities--(i)
Partnerships--(A) Domestic partnership. A domestic partnership that
holds an interest in stock of a PFIC makes the section 1295 election
with request to that PFIC. The partnership election applies only to the
stock of the PFIC held directly or indirectly by the partnership and
not to any other stock held directly or indirectly by any partner. As
provided in Sec. 1.1293-1T(c)(1), shareholders owning stock of a QEF by
reason of an interest in the partnership take into account the section
1293 inclusions with respect to the QEF shares owned by the partnership
under the rules applicable to inclusions of income from the
partnership.
(B) Foreign partnership. A U.S. person that holds an interest in a
foreign partnership that, in turn, holds an interest in stock of a PFIC
makes the section 1295 election with respect to that PFIC. A partner's
election applies to the stock of the PFIC owned directly or indirectly
by the foreign partnership and to any other stock of the PFIC owned by
that partner. A section 1295 election by a partner applies only to that
partner.
(ii) S corporation. An S corporation that holds an interest in
stock of a PFIC makes the section 1295 election with respect to that
PFIC. The S corporation election applies only to the stock of the PFIC
held directly or indirectly by the S corporation and not to any other
stock held directly or indirectly by any S corporation shareholder. As
provided in Sec. 1.1293-1T(c)(1), shareholders owning stock of a QEF by
reason of an interest in the S corporation take into account the
section 1293 inclusions with respect to the QEF shares under the rules
applicable to inclusions of income from the S corporation.
(iii) Trust or estate--(A) Domestic trust or estate--(1) Nongrantor
trust or estate. A domestic nongrantor trust or a domestic estate that
holds an interest in stock of a PFIC makes the section 1295 election
with respect to that PFIC. The trust or estate's election applies only
to the stock of the PFIC held directly or indirectly by the trust or
estate and not to any other stock held directly or indirectly by any
beneficiary. As provided in Sec. 1.1293-1T(c)(1), shareholders owning
stock of a QEF by reason of an interest in a domestic trust or estate
take into account the section 1293 inclusions with respect to the QEF
shares under the rules applicable to inclusions of income from the
trust or estate.
(2) Grantor trust. A U.S. person that is treated under sections 671
through 678 as the owner of the portion of a domestic trust that owns
an interest in stock of a PFIC makes the section 1295 election with
respect to that PFIC. If that person ceases to be treated as the owner
of the portion of the trust that owns an interest in the PFIC stock and
is a beneficiary of the trust, that person's section 1295 election will
continue to apply to the PFIC stock indirectly owned by that person
under the rules of paragraph (c)(2)(iv) of this section as if the
person had transferred its interest in the PFIC stock to the trust.
However, the stock will be treated as stock of a PFIC that is not a QEF
with respect to other beneficiaries of the trust, unless the trust
makes the section 1295 election as provided in paragraph
(d)(2)(iii)(A)(1) of this section.
(B) Foreign trust or estate--(1) Nongrantor trust or estate. A U.S.
[[Page 17]]
person that is a beneficiary of a foreign nongrantor trust or estate
that holds an interest in stock of a PFIC makes the section 1295
election with respect to that PFIC. A beneficiary's section 1295
election applies to all the PFIC stock owned directly and indirectly by
the trust or estate and to the other PFIC stock owned directly or
indirectly by the beneficiary. A section 1295 election by a beneficiary
applies only to that beneficiary.
(2) Grantor trust. A U.S. person that is treated under sections 671
through 679 as the owner of the portion of a foreign trust that owns an
interest in stock of a PFIC stock makes the section 1295 election with
respect to that PFIC. If that person ceases to be treated as the owner
of the portion of the trust that owns an interest in the PFIC stock and
is a beneficiary of the trust, that person's section 1295 election will
continue to apply to the PFIC stock indirectly owned by that person
under the rules of paragraph (c)(2)(iv) of this section. However, as
provided in paragraph (d)(2)(iii)(B)(1) of this section, any other
shareholder that is a beneficiary of the trust and that wishes to treat
the PFIC as a QEF must make the section 1295 election.
(iv) Indirect ownership of the pass through entity or the PFIC. The
rules of this paragraph (d)(2) apply whether or not the shareholder
holds its interest in the pass through entity directly or indirectly
and whether or not the pass through entity holds its interest in the
PFIC directly or indirectly.
(3) Member of consolidated return group as shareholder. Pursuant to
Sec. 1.1502-77(a), the common parent of an affiliated group of
corporations that join in filing a consolidated income tax return makes
a section 1295 election for all members of the affiliated group. An
election by a common parent will be effective for all members of the
affiliated group with respect to interests in PFIC stock held at the
time the election is made or at any time thereafter. A separate
election must be made by the common parent for each PFIC of which a
member of the affiliated group is a shareholder.
(4) Option holder. A holder of an option to acquire stock of a PFIC
may not make a section 1295 election that will apply to the option or
to the stock subject to the option.
(5) Exempt organization. A tax-exempt organization that is not
taxable under section 1291, pursuant to Sec. 1.1291-1T(e), with respect
to a PFIC may not make a section 1295 election with respect to that
PFIC. In addition, such an exempt organization will not be subject to
any section 1295 election made by a domestic pass through entity.
(e) Time for making a section 1295 election. Except as provided in
Sec. 1.1295-3T, a shareholder making the section 1295 election must
make the election on or before the due date, as extended under section
6081 (election due date), for filing the shareholder's income tax
return for the first taxable year to which the election will apply. The
section 1295 election must be made in the original return for that
year, or in an amended return, provided the amended return is filed on
or before the election due date.
(f) Manner of making a section 1295 election and the annual
election requirements of the shareholder--(1) Manner of making the
election. A shareholder must make a section 1295 election by--
(i) Completing Form 8621 in the manner required by that form and
this section for making the section 1295 election;
(ii) Attaching Form 8621 to its federal income tax return filed by
the election due date for the shareholder's election year;
(iii) Receiving and reflecting in Form 8621 the information
provided in the PFIC Annual Information Statement described in
paragraph (g)(1) of this section, the Annual Intermediary Statement
described in paragraph (g)(3) of this section, or the applicable
combined statement described in paragraph (g)(4) of this section, for
the taxable year of the PFIC ending with or within the taxable year for
which Form 8621 is being filed. If the PFIC Annual Information
Statement contains a statement described in paragraph (g)(1)(ii)(C) of
this section, the shareholder must attach a statement to Form 8621 that
indicates that the shareholder rather than the QEF calculated the QEF's
ordinary earnings and net capital gain; and
(iv) Filing a copy of Form 8621 with the Philadelphia Service
Center, P.O. Box 21086, Philadelphia, PA 19114 by the election due
date.
(2) Annual election requirements--(i) In general. A shareholder
that makes a section 1295 election with respect to a PFIC held directly
or indirectly, for each taxable year to which the section 1295 election
applies, must--
(A) Complete Form 8621 in the manner required by that form and this
section;
(B) Attach Form 8621 to its federal income tax return filed by the
due date of the return, as extended;
(C) Receive and reflect in Form 8621 the PFIC Annual Information
Statement described in paragraph (g)(1) of this section, the Annual
Intermediary Statement described in paragraph (g)(3) of this section,
or the applicable combined statement described in paragraph (g)(4) of
this section, for the taxable year of the PFIC ending with or within
the taxable year for which Form 8621 is being filed. If the PFIC Annual
Information Statement contains a statement described in paragraph
(g)(1)(ii)(C) of this section, the shareholder must attach a statement
to its Form 8621 that the shareholder rather than the PFIC provided the
calculations of the PFIC's ordinary earnings and net capital gain; and
(D) File a copy of Form 8621 with the Philadelphia Service Center,
P.O. Box 21086, Philadelphia, PA 19114 by the election due date.
(ii) Retention of documents. For all taxable years subject to the
section 1295 election, the shareholder must retain copies of all Forms
8621, with their attachments, and PFIC Annual Information Statements or
Annual Intermediary Statements. Failure to produce those documents at
the request of the Commissioner in connection with an examination may
result in invalidation or termination of the shareholder's section 1295
election.
(g) Annual election requirements of the PFIC or intermediary--(1)
PFIC Annual Information Statement. For each year of the PFIC ending in
a taxable year of a shareholder to which the shareholder's section 1295
election applies, the PFIC must provide the shareholder with a PFIC
Annual Information Statement. The PFIC Annual Information Statement is
a statement of the PFIC, signed by the PFIC or an authorized
representative of the PFIC, that contains the following information and
representation--
(i) The first and last days of the taxable year of the PFIC to
which the PFIC Annual Information Statement applies;
(ii) Either--
(A) The shareholder's pro rata shares of the ordinary earnings and
net capital gain (as defined in Sec. 1.1295-1T(a)(2)) of the PFIC for
the taxable year indicated in paragraph (g)(1)(i) of this section; or
(B) Sufficient information to enable the shareholder to calculate
its pro rata shares of the PFIC's ordinary earnings and net capital
gain, for that taxable year; or
(C) A statement that the foreign corporation has permitted the
shareholder to examine the books of account, records, and other
documents of the foreign corporation for the shareholder to calculate
the amounts of the PFIC's ordinary earnings and the net capital gain
according to federal income
[[Page 18]]
tax accounting principles and to calculate the shareholder's pro rata
shares of the PFIC's ordinary earnings and net capital gain;
(iii) The amount of cash and the fair market value of other
property distributed or deemed distributed to the shareholder during
the taxable year of the PFIC to which the PFIC Annual Information
Statement pertains; and
(iv) Either--
(A) A statement that the PFIC will permit the shareholder to
inspect and copy the PFIC's permanent books of account, records, and
such other documents as may be maintained by the PFIC to establish that
the PFIC's ordinary earnings and net capital gain are computed in
accordance with U.S. income tax principles, and to verify these amounts
and the shareholder's pro rata shares thereof; or
(B) In lieu of the statement required in paragraph (g)(1)(iv)(A) of
this section, a description of the alternative documentation
requirements approved by the Commissioner, with a copy of the private
letter ruling and the closing agreement entered into by the
Commissioner and the PFIC pursuant to paragraph (g)(2) of this section.
(2) Alternative documentation. In rare and unusual circumstances,
the Commissioner will consider alternative documentation requirements
necessary to verify the ordinary earnings and net capital gain of a
PFIC other than the documentation requirements described in paragraph
(g)(1)(iv)(A) of this section. Alternative documentation requirements
will be allowed only pursuant to a private letter ruling and a closing
agreement entered into by the Commissioner and the PFIC describing an
alternative method of verifying the PFIC's ordinary earnings and net
capital gain. If the PFIC has not obtained a private letter ruling from
the Commissioner approving an alternative method of verifying the
PFIC's ordinary earnings and net capital gain by the time a shareholder
is required to make a section 1295 election, the shareholder may not
use an alternative method for that taxable year.
(3) Annual Intermediary Statement. In the case of a U.S. person
that is a shareholder of a PFIC through an intermediary, as defined in
paragraph (j) of this section, an Annual Intermediary Statement issued
by an intermediary containing the information described in paragraph
(g)(1) of this section and reporting the indirect owner's pro rata
shares of the ordinary earnings and net capital gain of the QEF as
described in paragraph (g)(1)(i)(A) of this section, may be provided to
the indirect owner in lieu of the PFIC Annual Information Statement if
the following conditions are satisfied--
(i) The intermediary receives a copy of the PFIC Annual Information
Statement or the intermediary receives an annual intermediary statement
from another intermediary which contains a statement that the other
intermediary has received a copy of the PFIC Annual Information
Statement and represents that the conditions of paragraphs (g)(3)(ii)
and (g)(3)(iii) of this section are met;
(ii) The representations and information contained in the Annual
Intermediary Statement reflect the representations and information
contained in the PFIC Annual Information Statement; and
(iii) The PFIC Annual Information Statement issued to the
intermediary contains either the representation set forth in paragraph
(g)(1)(iv)(A) of this section, or, if alternative documentation
requirements were approved by the Commissioner pursuant to paragraph
(g)(2) of this section, a copy of the private letter ruling and closing
agreement between the Commissioner and the PFIC, agreeing to an
alternative method of verifying PFIC ordinary earnings and net capital
gain as described in paragraph (g)(2) of this section;
(4) Combined statements--(i) PFIC Annual Information Statement. A
PFIC that owns directly or indirectly any stock of one or more PFICs
with respect to which a shareholder may make the section 1295 election
may prepare a PFIC Annual Information Statement that combines with its
own information and representations the information and representations
of all the PFICs. The PFIC may use any format for a combined PFIC
Annual Information Statement provided the required information and
representations are separately stated and identified with the
respective corporations.
(ii) Annual Intermediary Statement. An intermediary described in
paragraph (g)(3) of this section that owns directly or indirectly stock
of one or more PFICs with respect to which an indirect shareholder may
make the section 1295 election may prepare an Annual Intermediary
Statement that combines with its own information and representations
the information and representations with respect to all the PFICs. The
intermediary may use any format for a combined Annual Intermediary
Statement provided the required information and representations are
separately stated and identified with the intermediary and the
respective corporations.
(h) Transition rules. The rules of Notice 88-125, 1988-2 C.B. 535
(see Sec. 601.601(d)(2)(ii)(b) of this chapter), apply for making
elections and maintaining elections for taxable years beginning after
December 31, 1986, and before January 1, 1998. Elections made under
Notice 88-125 must be maintained as provided in Sec. 1.1295-1T for
taxable years beginning after December 31, 1997. A section 1295
election made prior to February 2, 1998 that was intended to be
effective for the taxable year of the PFIC that began during the
shareholder's election year will be effective for that taxable year of
the foreign corporation provided that it is clear from all the facts
and circumstances that the shareholder intended the election to be
effective for that taxable year of the foreign corporation.
(i) Invalidation, termination, or revocation of section 1295
election--(1) Invalidation or termination of election at the discretion
of the Commissioner--(i) In general. The Commissioner, in the
Commissioner's discretion, may invalidate or terminate a section 1295
election applicable to a shareholder if the shareholder, the PFIC, or
any intermediary fails to satisfy the requirements for making a section
1295 election or the annual election requirements of this section to
which the shareholder, PFIC, or intermediary is subject, including the
requirement to provide, on request, copies of the books and records of
the PFIC or other documentation substantiating the ordinary earnings
and net capital gain of the PFIC.
(ii) Deferral of section 1293 inclusion. The Commissioner may
invalidate any pass through entity section 1295 election with respect
to an interest holder or beneficiary if the section 1293 inclusion with
respect to that interest holder or beneficiary is not included in the
gross income of either the pass through entity, an intermediate pass
through entity, or the interest holder or beneficiary within two years
of the end of the PFIC's taxable year due to nonconforming taxable
years of the interest holder and the pass through entity or any
intermediate pass through entity.
(iii) When effective. Termination of a shareholder's section 1295
election will be effective for the taxable year of the PFIC determined
by the Commissioner in the Commissioner's discretion. An invalidation
of a shareholder's section 1295 election will be effective for the
first taxable year to which the section 1295 election applied, and the
shareholder whose election is
[[Page 19]]
invalidated will be treated as if the section 1295 election never was
made.
(2) Shareholder revocation--(i) In general. In the Commissioner's
discretion, upon a finding of a substantial change in circumstances,
the Commissioner may consent to a shareholder's request to revoke a
section 1295 election. Request for revocation must be made by the
shareholder that made the election and at the time and in the manner
provided in paragraph (i)(2)(ii) of this section.
(ii) Time for and manner of requesting consent to revoke--(A) Time.
The shareholder must request consent to revoke the section 1295
election no later than 12 calendar months after the discovery of the
substantial change of circumstances that forms the basis for the
shareholder's request to revoke the section 1295 election.
(B) Manner of making request. A shareholder requests consent to
revoke a section 1295 election by filing a ruling request with the
Office of the Associate Chief Counsel (International). The ruling
request must satisfy the requirements, including payment of the user
fee, for filing ruling requests with that office.
(iii) When effective. Unless otherwise determined by the
Commissioner, revocation of a section 1295 election will be effective
for the first taxable year of the PFIC beginning after the date the
Commissioner consents to the revocation.
(3) Effect of invalidation, termination, or revocation. An
invalidation, termination, or revocation of a section 1295 election--
(i) Terminates all section 1294 elections, as provided in
Sec. 1.1294-1T(e), and the undistributed PFIC earnings tax liability
and interest thereon are due by the due date, without regard to
extensions, for the return for the last taxable year of the shareholder
to which the section 1295 election applies;
(ii) In the Commissioner's discretion, results in a deemed sale of
the QEF stock on the last day of the PFIC's last taxable year as a QEF,
in which gain, but not loss, will be recognized and with respect to
which appropriate basis and holding period adjustments will be made;
and
(iii) Subjects the shareholder to any other terms and conditions
that the Commissioner determines are necessary to ensure the
shareholder's compliance with sections 1291 through 1297 or any other
provisions of the Code.
(4) Election after invalidation, termination or revocation. Without
the Commissioner's consent a shareholder whose section 1295 election
was invalidated, terminated, or revoked under this paragraph (i) may
not make the section 1295 election with respect to the PFIC before the
sixth taxable year ending after the taxable year in which the
invalidation, termination or revocation became effective.
(j) Definitions. For purposes of this section--
Intermediary is a nominee or shareholder of record that holds stock
on behalf of the shareholder or on behalf of another person in a chain
of ownership between the shareholder and the PFIC, and any direct or
indirect beneficial owner of PFIC stock (including a beneficial owner
that is a pass through entity) in the chain of ownership between the
shareholder and the PFIC.
Pass through entity is a partnership, S corporation, trust, or
estate.
Shareholder has the same meaning as the term shareholder in
Sec. 1.1291-9(j)(3), except that for purposes of this section, a
partnership and an S corporation also are treated as shareholders.
Furthermore, unless otherwise provided, an interest holder of a pass
through entity, which is treated as a shareholder of a PFIC, also will
be treated as a shareholder of the PFIC.
Shareholder's election year is the taxable year of the shareholder
for which it made the section 1295 election.
(k) Effective date. Section 1.1295-1T(b)(2)(iii), (b)(3), (b)(4),
and (c) through (j) is applicable to taxable years of shareholders
beginning after December 31, 1997.
Par. 12. Section 1.1295-3T is added to read as follows:
Sec. 1.1295-3T Retroactive elections (temporary).
(a) In general. This section prescribes the exclusive rules under
which a shareholder, as defined in Sec. 1.1295-1T(j), may make a
section 1295 election for a taxable year after the election due date,
as defined in Sec. 1.1295-1T(e) (retroactive election). Therefore, a
shareholder may not seek such relief under any other provision of the
law, including Sec. 301.9100 of this chapter. Paragraph (b) of this
section describes the general rules for a shareholder to preserve the
ability to make a retroactive election. These rules require that the
shareholder possess reasonable belief as of the election due date that
the foreign corporation was not a PFIC for its taxable year that ended
in the shareholder's taxable year to which the election due date
pertains, and that the shareholder file a Protective Statement to
preserve its ability to make a retroactive election. Paragraph (c) of
this section establishes the terms, conditions and other requirements
with respect to a Protective Statement required to be filed under the
general rules. Paragraph (d) of this section sets forth factors that
establishes a shareholder's reasonable belief that a foreign
corporation was not a PFIC. Paragraph (e) of this section prescribes
special rules for certain shareholders that are deemed to satisfy the
reasonable belief requirement and therefore are not required to file a
Protective Statement. Paragraph (f) of this section describes the
limited circumstances under which the Commissioner may permit a
shareholder that lacked the requisite reasonable belief or failed to
satisfy the requirements of paragraph (b) or (e) of this section to
make a retroactive election. Paragraph (g) of this section provides the
time for and manner of making a retroactive election. Paragraph (h) of
this section provides the effective date of this section.
(b) General rule. Except as provided in paragraphs (e) and (f) of
this section, a shareholder may make a retroactive election for a
taxable year of the shareholder (retroactive election year) only if the
shareholder--
(1) Reasonably believed, within the meaning of paragraph (d) of
this section, as of the election due date that the foreign corporation
was not a PFIC for its taxable year that ended during the retroactive
election year;
(2) Filed a Protective Statement with respect to the foreign
corporation, applicable to the retroactive election year, in which the
shareholder described the basis for its reasonable belief and extended,
in the manner provided in paragraph (c)(4) of this section, the periods
of limitations on the assessment of taxes determined under sections
1291 and 1297 with respect to the foreign corporation (PFIC related
taxes) for all taxable years of the shareholder to which the Protective
Statement applies; and
(3) Complied with the other terms and conditions of the Protective
Statement.
(c) Protective Statement--(1) In general. A Protective Statement is
a statement executed under penalties of perjury by the shareholder, or
a person authorized to sign a federal income tax return on behalf of
the shareholder, that preserves the shareholder's ability to make a
retroactive election. To file a Protective Statement that applies to a
taxable year of the shareholder, the shareholder must reasonably
believe as of the election due date that the foreign corporation was
not a PFIC for the foreign corporation's taxable year that ended during
the retroactive election year. The Protective Statement must contain--
[[Page 20]]
(i) The shareholder's reasonable belief statement, as described in
paragraph (c)(2) of this section;
(ii) The shareholder's agreement extending the periods of
limitations on the assessment of PFIC related taxes for all taxable
years to which the Protective Statement applies, as provided in
paragraph (c)(4) of this section; and
(iii) The following information and representations--
(A) The shareholder's name, address, taxpayer identification
number, and the shareholder's first taxable year to which the
Protective Statement applies;
(B) The foreign corporation's name, address, and taxpayer
identification number, if any; and
(C) The highest percentage of shares of each class of stock of the
foreign corporation held directly or indirectly by the shareholder
during the shareholder's first taxable year to which the Protective
Statement applies.
(2) Reasonable belief statement. The Protective Statement must
contain a reasonable belief statement, as described in paragraph (c)(1)
of this section. The reasonable belief statement is a description of
the shareholder's basis for its reasonable belief that the foreign
corporation was not a PFIC for its taxable year that ended with or
within the shareholder's first taxable year to which the Protective
Statement applies. If the Protective Statement applies to a taxable
year or years described in paragraph (c)(5)(ii) of this section, the
reasonable belief statement must describe the shareholder's basis for
its reasonable belief that the foreign corporation was not a PFIC for
the foreign corporation's taxable year or years that ended in such
taxable year or years of the shareholder. The reasonable belief
statement must discuss the application of the income and asset tests to
the foreign corporation and the factors, including those stated in
paragraph (d) of this section, that affect the results of those tests.
(3) Who executes and files the Protective Statement. The person
that executes and files and Protective Statement is the person that
makes the section 1295 election, as provided in Sec. 1.1295-1T(d).
(4) Waiver of the periods of limitations--(i) Time for and manner
of extending periods of limitations. (A) In general. A shareholder that
files the Protective Statement with the Commissioner must extend the
periods of limitations on the assessment of all PFIC related taxes for
all of the shareholder's taxable years to which the Protective
Statement applies, as provided in this paragraph (c)(4). The
shareholder is required to execute the waiver on such form as the
Commission may prescribe for purposes of this paragraph (c)(4). Until
that form is published, the shareholder must execute a statement in
which the shareholder agrees to extend the periods of limitations on
the assessment of taxes for all the shareholder's taxable years to
which the Protective Statement applies, as provided in this paragraph
(c)(4), and agrees to the restrictions in paragraph (c)(4)(ii)(A) of
this section. The shareholder or a person authorized to sign the
shareholder's federal income tax return must sign the form or
statement. A properly executed form or statement authorized by this
paragraph (c)(4) will be deemed consented to and signed by a Service
Center Director or the Assistant Commissioner (International) for
purposes of Sec. 301.6501(c)-1(d) of this chapter.
(B) Application of general rule to domestic partnerships-- (1) In
general. A domestic partnership that holds an interest in stock of a
PFIC satisfies the waiver requirement of paragraph (c)(4) of this
section pursuant to the rules of this paragraph (c)(4)(i)(B)(1). The
partnership must file one or more waivers obtained or arranged under
this paragraph (c)(4)(i)(B) as part of the Protective Statement, as
provided in paragraph (c)(1) of this section. The partnership must
either--
(i) Obtain from each partner the partner's waiver of the periods of
limitations;
(ii) Obtain from each partner a duly executed power of attorney
under Sec. 601.501 of this chapter authorizing the partnership to
extend that partner's periods of limitations, and execute a waiver on
behalf of the partners; or
(iii) In the case of a domestic partnership governed by the unified
audit and litigation procedures of sections 6221 through 6233 (TEFRA
partnership), arrange for the tax matters partner (or any other person
authorized to enter into an agreement to extend the periods of
limitations), as provided in section 6229(b), to execute a waiver on
behalf of all the partners.
(2) Special rules--(i) Addition of partner to non-TEFRA
partnership. In the case of any individual who becomes a partner in a
domestic partnership other than a TEFRA partnership (non-TEFRA
partnership) in a taxable year subsequent to the year in which the
partnership filed a Protective Statement, the partner and the
partnership must comply with the rules applicable to non-TEFRA
partnerships, as provided in paragraph (c)(4)(i)(B)(1) of this section,
by the due date, as extended, for the federal income tax return of the
partnership for the taxable year during which the individual became a
partner. Failure to so comply will render the Protective Statement
invalid with respect to the partnership and partners.
(ii) Change in status from non-TEFRA partnership to TEFRA
partnership. If a partnership is a non-TEFRA partnership in one taxable
year but becomes a TEFRA partnership in a subsequent taxable year, the
partnership must file one or more waivers obtained or arranged under
this paragraph (c)(4)(i)(B)(2)(ii), as part of the Protective
Statement, as provided in paragraph (c)(1) of this section. The
partnership must either--obtain from any new partner the partner's
waiver described in this paragraph (c)(4); obtain from the new partner
a duly executed power of attorney under Sec. 601.501 of this chapter
authorizing the partnership to extend the partner's periods of
limitations, and execute a waiver on behalf of the new partner; or
arrange for the tax matters partner (or any other person authorized to
enter into an agreement to extend the periods of limitations) to
execute a waiver on behalf of all the partners. In each case, the
partnership must attach any new waiver of a partner's periods of
limitations, and a copy of the Protective Statement to its federal
income tax return for that taxable year.
(C) Application of general rule to domestic nongrantor trusts and
domestic estates. A domestic nongrantor trust or a domestic estate that
holds an interest in stock of a PFIC satisfies the waiver requirement
of this paragraph (c)(4) at the entity level. For this purpose, such
entity must comply with rules similar to those applicable to non-TEFRA
partnerships, as provided in paragraph (c)(4)(i)(B)(1) of this section.
(D) Application of general rule to S corporations. An S corporation
that holds an interest in stock of a PFIC satisfies the waiver
requirement of this paragraph (c)(4) at the S corporation level. For
this purpose, the S corporation must comply with rules similar to those
applicable to non-TEFRA partnerships, as provided in paragraph
(c)(4)(i)(B)(1) of this section. However, in the case of an S
corporation that was governed by the unified audit corporate
proceedings of sections 6241 through 6245 for any taxable year to which
a Protective Statement applies (former TEFRA S corporation), the tax
matters person (or any other person authorized to enter into such an
agreement), as was provided in sections 6241 through 6245, may execute
a waiver described in this paragraph (c)(4) that applies to such
taxable year; for any other taxable year, the former TEFRA S
corporation must comply with rules
[[Page 21]]
similar to those applicable to non-TEFRA partnerships.
(E) Effect on waiver of complete termination of a pass through
entity or pass through entity's business. The complete termination of a
pass through entity described in paragraphs (c)(4)(i)(B) through (D) of
this section, or a pass through entity's trade or business, will not
terminate a waiver that applies to a partner, shareholder, or
beneficiary.
(F) Application of general rule to foreign partnerships, foreign
trusts, domestic or foreign grantor trusts, and foreign estates. A U.S.
person that is a partner or beneficiary of a foreign partnership,
foreign trust, or foreign estate that holds an interest in stock of a
PFIC satisfies the waiver requirement of this paragraph (c)(4) at the
partner or beneficiary level. A U.S. person that is treated under
sections 671 through 679 as the owner of the portion of a domestic or
foreign trust that owns an interest in PFIC stock also satisfies the
waiver requirement at the owner level. A waiver by a partner or
beneficiary applies only to that partner or beneficiary, and is not
affected by a complete termination of the entity or the entity's trade
or business.
(ii) Terms of waiver--(A) Scope of waiver. The waiver of the
periods of limitations is limited to the assessment of PFIC related
taxes. If the period of limitations for a taxable year affected by a
retroactive election has expired with respect to the assessment of
other non-PFIC related taxes, no adjustments, other than consequential
changes, may be made by the Internal Revenue Service or by the
shareholder to any other item of income, deduction, or credit for that
year. If the period of limitations for refunds or credits for a taxable
year affected by a retroactive election is open only by virtue of the
assessment period extension and section 6511(c), no refund or credit is
allowable on grounds other than adjustments to PFIC related taxes and
consequential changes.
(B) Period of Waiver. The extension of the periods of limitations
on the assessment of PFIC related taxes will be effective for all of
the shareholder's taxable years to which the Protective Statement
applies. In addition, the waiver, to the extent it applies to the
period of limitations for a particular year, will terminate with
respect to that year no sooner than three years from the date on which
the shareholder files an amended return, as provided in paragraph (g)
of this section, for that year. For the suspension of the running of
the period of limitations for the collection of taxes for which a
shareholder has elected under section 1294 to extend the time for
payment, as provided in paragraph (g)(3)(ii) of this section, see
sections 6503(i) and 6229(h).
(5) Time for and manner of filing a Protective Statement--(i) In
general. Except as provided in paragraph (c)(5)(ii) of this section, a
Protective Statement must be attached to the shareholder's federal
income tax return for the shareholder's first taxable year to which the
Protective Statement will apply. The shareholder also must file a copy
of the Protective Statement with the Philadelphia Service Center, P.O.
21086, Philadelphia, PA 19114. The shareholder must file its return and
the copy of the Protective Statement by the due date, as extended, for
the return.
(ii) Special rule for taxable years ended before January 2, 1998. A
shareholder may file a Protective Statement that applies to the
shareholder's taxable year or years that ended before January 2, 1998,
provided the period of limitations on the assessment of taxes for any
such year has not expired (open year). The shareholder must file the
Protective Statement applicable to such open year or years, as provided
in paragraph (c)(5)(i) of this section, by the due date, as extended,
for the shareholder's return for the first taxable year ending after
January 2, 1998.
(6) Applicability of the Protective Statement--(i) In general.
Except as otherwise provided in this paragraph (c)(6), a Protective
Statement applies to the shareholder's first taxable year for which the
Protective Statement was filed and to each subsequent taxable year. The
Protective Statement will not apply to any taxable year of the
shareholder during which the shareholder does not own any stock of the
foreign corporation or to any taxable year thereafter. Accordingly, if
the shareholder has not made a retroactive election with respect to the
previously owned stock by the time the shareholder reacquires stock of
the foreign corporation, the shareholder must file another Protective
Statement to preserve its right to make a retroactive election with
respect to the later acquired stock. For the rule that provides that a
section 1295 election made with respect to a foreign corporation
applies to stock of that corporation acquired after a lapse in
ownership, see Sec. 1.1295-1T(c)(2)(iii).
(ii) Invalidity of the Protective Statement. A shareholder will be
treated as if it never filed a Protective Statement if--
(A) The shareholder failed to make a retroactive election by the
date prescribed for making the retroactive election in paragraph (g)(1)
of this section; or
(B) The waiver of the periods of limitations terminates (by reason
of a court decision or other determination) with respect to any taxable
year before the expiration of three years from the date of filing of an
amended return for that year pursuant to paragraph (g) of this section.
(7) Retention of Protective Statement and information demonstrating
reasonable belief. A shareholder that files a Protective Statement must
retain a copy of the Protective Statement and its attachments and must,
for each taxable year of the shareholder to which the Protective
Statement applies, retain information sufficient to demonstrate the
shareholder's reasonable belief that the foreign corporation was not a
PFIC for the taxable year of the foreign corporation ending during each
such taxable year of the shareholder.
(d) Reasonable belief--(1) In general. A foreign corporation is a
PFIC for a taxable year if the foreign corporation satisfies either the
income or asset test of section 1296(a). To determine whether a
shareholder had reasonable belief that the foreign corporation is not a
PFIC under section 1296(a), the shareholder must consider all relevant
facts and circumstances. Reasonable belief may be based on a variety of
factors, including reasonable asset valuations as well as reasonable
interpretations of the applicable provisions of the Code, regulations,
and administrative guidance regarding the direct and indirect ownership
of the income or assets of the foreign corporation, the proper
character of that income or those assets, and similar issues.
Reasonable belief may be based on reasonable predictions regarding
income to be earned and assets to be owned in subsequent years where
qualifications of the foreign corporation as a PFIC for the current
taxable year will depend on the qualification of the corporation as a
PFIC in a subsequent year. Reasonable belief may be based on an
analysis of generally available financial information of the foreign
corporation. To determine whether a shareholder had reasonable belief
that the foreign corporation was not a PFIC, the Commissioner may
consider the size of the shareholder's interest in the foreign
corporation.
(2) Knowledge of law required. Reasonable belief must be based on a
good faith effort to apply the Code, regulations, and related
administrative guidance. Any person's failure to know or apply these
provisions will not form the basis of reasonable belief.
[[Page 22]]
(e) Special rules for qualified shareholders--(1) In general. A
shareholder that is a qualified shareholder, as defined in paragraph
(e)(2) of this section, for a taxable year of the shareholder is not
required to satisfy the reasonable belief requirement of paragraph
(b)(1) of this section or file a Protective Statement to preserve its
ability to make a retroactive election with respect to such taxable
year. Accordingly, a qualified shareholder may make a retroactive
election for any open taxable year in the shareholder's holding period.
The retroactive election will be treated as made in the earliest
taxable year of the shareholder during which the foreign corporation
qualified as a PFIC (including a taxable year ending prior to January
2, 1998) and the shareholder will be treated as a shareholder of a
pedigreed QEF, as defined in Sec. 1.1291-9(j)(2)(ii), provided the
shareholder--
(i) Has been a qualified shareholder with respect to the foreign
corporation for all taxable years of the shareholder included in the
shareholder's holding period during which the foreign corporation was a
PFIC, or in the case of taxable years ending before January 2, 1998,
the shareholder satisfies the criteria of a qualified shareholder, for
all such years; or
(ii) Has been a qualified shareholder, or in the case of taxable
years ending before January 2, 1998 satisfies the criteria of a
qualified shareholder, for all taxable years in its holding period
before it filed a Protective Statement, which Protective Statement is
applicable to all subsequent years, beginning with the first taxable
year in which the shareholder is not a qualified shareholder.
(2) Qualified shareholder. A shareholder will be treated as a
qualified shareholder for a taxable year if the shareholder did not
file a Protective Statement applicable to an earlier taxable year
included in the shareholder's holding period of the stock of the
foreign corporation currently held and--
(i) At all times during the taxable year the shareholder owned,
within the meaning of section 958, directly, indirectly, or
constructively, less than two percent of the vote and value of each
class of stock of the foreign corporation; and
(ii) With respect to the taxable year of the foreign corporation
ending within the shareholder's taxable year, the foreign corporation
or U.S. counsel for the foreign corporation indicated in a public
filing, disclosure statement or other notice provided to U.S. persons
that are shareholders of the foreign corporation (corporate filing)
that the foreign corporation--
(A) Reasonably believes that it is not or should not constitute a
PFIC for the corporation's taxable year; or
(B) Is unable to conclude that it is not or should not be a PFIC
(due to certain asset valuation or interpretation issues, or because
PFIC status will depend on the income or assets of the foreign
corporation in the corporation's subsequent taxable years) but
reasonably believes that, more likely than not, it ultimately will not
be a PFIC.
(3) Exceptions. Notwithstanding paragraph (e)(2)(ii) of this
section, a shareholder will not be treated as a qualified shareholder
for a taxable year of the shareholder if the shareholder knew or had
reason to know that a corporate filing regarding the foreign
corporation's PFIC status was inaccurate, or knew that the foreign
corporation was a PFIC for the taxable year of the foreign corporation
ending with or within such taxable year of the shareholder. For
purposes of this paragraph, a shareholder will be treated as knowing
that a foreign corporation was a PFIC if the principal activity of the
foreign corporation, directly or indirectly, is owning or trading a
diversified portfolio of stock, securities, or other financial
contracts.
(f) Special consent--(1) In general. A shareholder that has not
satisfied the requirements of paragraph (b) or (e) of this section may
request the consent of the Commissioner to make a retroactive election
for a taxable year of the shareholder provided the shareholder
satisfies the requirements set forth in this paragraph (f). The
Commissioner will grant relief under this paragraph (f) only if--
(i) The shareholder reasonably relied on a qualified tax
professional, within the meaning of paragraph (f)(2) of this section;
(ii) Granting consent will not prejudice the interests of the
United States government, as provided in paragraph (f)(3) of this
section;
(iii) The shareholder requests consent under paragraph (f) of this
section before a representative of the Internal Revenue Service raises
upon audit the PFIC status of the corporation for any taxable year of
the shareholder; and
(iv) The shareholder satisfies the procedural requirements set
forth in paragraph (f)(4) of this section.
(2) Reasonable reliance on a qualified tax professional--(i) In
general. Except as provided in paragraph (f)(2)(ii) of this section, a
shareholder is deemed to have reasonably relied on a qualified tax
professional only if the shareholder reasonably relied on a qualified
tax professional (including a tax professional employed by the
shareholder) who failed to identify the foreign corporation as a PFIC
or failed to advise the shareholder of the consequences of making, or
failing to make, the section 1295 election. A shareholder will not be
considered to have reasonably relied on a qualified tax professional if
the shareholder knew, or reasonably should have known, that the foreign
corporation was a PFIC and the availability of a section 1295 election,
or knew or reasonably should have known that the qualified tax
professional--
(A) Was not competent to render tax advice with respect to the
ownership of shares of a foreign corporation; or
(B) Did not have access to all relevant facts and circumstances.
(ii) Shareholder deemed to have not reasonably relied on a
qualified tax professional. For purposes of this paragraph (f)(2), a
shareholder is deemed to have not reasonably relied on a qualified tax
professional if the shareholder was informed by the qualified tax
professional that the foreign corporation was a PFIC and of the
availability of the section 1295 election and related tax consequences,
but either chose not to make the section 1295 election or was unable to
make a valid section 1295 election.
(3) Prejudice to the interests of the United States government--(1)
General rule. Except as otherwise provided in paragraph (f)(3)(ii) of
this section, the Commissioner will not grant consent under paragraph
(f) of this section if doing so would prejudice the interests of the
United States government. The interests of the United States government
are prejudiced if granting relief would result in the shareholder
having a lower tax liability, taking into account applicable interest
charges, in the aggregate for all years affected by the retroactive
election (other than by a de minimis amount) than the shareholder would
have had if the shareholder had made the section 1295 election by the
election due date. The time value of money is taken into account for
purposes of this computation.
(ii) Elimination of prejudice to the interests of the United States
government. Notwithstanding the general rule of paragraph (f)(3)(i) of
this section, if granting relief would prejudice the interests of the
United States government, the Commissioner may, in the Commissioner's
sole discretion, grant consent to make the election provided the
shareholder enters into a closing agreement with the Commissioner that
requires the shareholder to pay an amount sufficient
[[Page 23]]
to eliminate any prejudice to the United States government as a
consequence of the shareholder's inability to file amended returns for
closed taxable years.
(4) Procedural requirements--(i) Filing instructions. A shareholder
requests consent under paragraph (f) of this section to make a
retroactive election by filing with the Office of the Associate Chief
Counsel (International) a ruling request that includes the affidavits
required by this paragraph (f)(4). The ruling request must satisfy the
requirements, including payment of the user fee, for ruling requests
filed with that office.
(ii) Affidavit from shareholder. The shareholder, or a person
authorized to sign a federal income tax return on behalf of the
shareholder, must submit a detailed affidavit describing the events
that led to the failure to make a section 1295 election by the election
due date, and to the discovery thereof. The shareholder's affidavit
must describe the engagement and responsibilities of the qualified tax
professional as well as the extent to which the shareholder relied on
the tax professional. The shareholder must sign the affidavit under
penalties of perjury. An individual who signs for an entity must have
personal knowledge of the facts and circumstances at issue.
(iii) Affidavits from other persons. The shareholder must submit
detailed affidavits from individuals having knowledge or information
about the events that led to the failure to make a section 1295
election by the election due date, and to the discovery thereof. These
individuals must include the qualified tax professional upon whose
advice the shareholder relied, as well as any individual (including an
employee of the shareholder) who made a substantial contribution to the
return's preparation, and any accountant or attorney, knowledgeable in
tax matters, who advised the shareholder with regard to its ownership
of the stock of the foreign corporation. Each affidavit must describe
the individual's engagement and responsibilities as well as the advice
concerning the tax treatment of the foreign corporation that that
individual provided to the shareholder. Each affidavit also must
include the individual's name, address, and taxpayer identification
number, and must be signed by the individual under penalties of
perjury.
(iv) Other information. In connection with a request for consent
under this paragraph (f), a shareholder must provide any additional
information requested by the Commissioner.
(v) Notification of Internal Revenue Service. The shareholder must
notify the branch of the Associate Chief Counsel (International)
considering the request for relief under this paragraph (f) if, while
the shareholder's request for consent is pending, the Internal Revenue
Service begins an examination of the shareholder's return for the
retroactive election year or for any subsequent taxable year during
which the shareholder holds stock of the foreign corporation.
(vi) Who requests special consent under this paragraph (f) and who
enters into a closing agreement. The person that requests consent under
this paragraph (f) is the person that makes the section 1295 election,
as provided in Sec. 1.1295-1T(d). If a shareholder is required to enter
into a closing agreement with the Commissioner, as described in
paragraph (f)(3)(ii) of this section, rules similar to those under
paragraphs (c)(4)(i) (B) through (E) of this section apply for purposes
of determining the person that enters into the closing agreement.
(g) Time for and manner of making a retroactive election--(1) Time
for making a retroactive election--(i) In general. Except as otherwise
provided in paragraph (g)(1)(ii) of this section, a shareholder must
make a retroactive election, in the manner provided in paragraph (g)(2)
of this section, on or before the due date, as extended, for the
shareholder's return--
(A) In the case of a shareholder that makes a retroactive election
pursuant to paragraph (b) or (e) of this section, for the taxable year
in which the shareholder determines or reasonably should have
determined that the foreign corporation was a PFIC; or
(B) In the case of a shareholder that obtains the consent of the
Commissioner pursuant to paragraph (f) of this section for the taxable
year in which such consent is granted.
(ii) Transition rule. A shareholder that files a Protective
Statement for a taxable year described in paragraph (c)(5)(ii) of this
section may make a retroactive election by the due date, as extended,
for the return for the first taxable year ended after January 2, 1998
even if the shareholder determined or should have determined that the
foreign corporation was a PFIC for a year described in paragraph
(c)(5)(ii) of this section at any time on or before January 2, 1998.
(iii) Ownership not required at time retroactive election is made.
The shareholder need not own shares of the foreign corporation at the
time the shareholder makes a retroactive election with respect to the
foreign corporation.
(2) Manner of making a retroactive election. A shareholder that has
satisfied the requirements of paragraph (b) or (e) of this section, or
a shareholder that has been granted consent under paragraph (f) of this
section, must make a retroactive election in the manner provided in
Form 8621 for making a section 1295 election, and must attach Form 8621
to an amended return for the later of the retroactive election year or
the earliest open taxable year of the shareholder. The shareholder also
must file an amended return for each of its subsequent taxable years
affected by the retroactive election. In each amended return the
shareholder must redetermine its income tax liability for that year to
take into account the assessment of PFIC related taxes. If the period
of limitations for the assessment of taxes for a taxable year affected
by the retroactive election has expired except to the extent the waiver
of limitations, described in paragraph (c)(4) of this section, has
extended such period, no adjustments, other than consequential changes,
may be made to any other items of income, deduction, or credit in that
year. In addition, the shareholder must pay all taxes and interest
owing by reason of the PFIC and QEF status of the foreign corporation
in those years (except to the extent a section 1294 election extends
the time to pay the taxes and interest). A shareholder that filed a
Protective Statement must attach to Form 8621 filed with each amended
return a representation that the shareholder, until the taxable year in
which it determined or reasonably should have determined that the
foreign corporation was a PFIC, reasonably believed, within the meaning
of paragraph (d) of this section, that the foreign corporation was not
a PFIC in the taxable year for which the amended return is filed, and
in all other taxable years to which the Protective Statement applies. A
shareholder that entered into a closing agreement must comply with the
terms of that agreement, as provided in paragraph (f)(3)(ii) of this
section, to eliminate any prejudice to the United States government's
interests, as described in paragraph (f)(3) of this section.
(3) Who makes the retroactive election. The person that makes the
retroactive election is the person that makes the section 1295
election, as provided in Sec. 1.1295-1T(d). A partner, shareholder, or
beneficiary for which a pass through entity, as described in paragraphs
(c)(4)(i)(B) through (D) of this section, filed a Protective Statement
may make a retroactive election, if the pass through entity completely
terminates its business or otherwise ceases to exist.
(4) Other elections--(i) Section 1291(d)(2) election. If the
foreign
[[Page 24]]
corporation for which the shareholder makes a retroactive election will
be treated as an unpedigreed QEF, as defined in Sec. 1.1291-
9(j)(2)(iii), with respect to the shareholder, the shareholder may make
an election under section 1291(d)(2) to purge its holding period of the
years or parts of years before the effective date of the retroactive
election. If the qualification date, within the meaning of Sec. 1.1291-
9(e) or 1.1291-10(e), falls in a taxable year for which the period of
limitations has expired, the shareholder may treat the first day of the
retroactive election year as the qualification date. The shareholder
may make a section 1291(d)(2) election at the time that it makes the
retroactive election, but no later than two years after the date that
the amended return in which the retroactive election is made is filed.
For the requirements for making a section 1291(d)(2) election, see
Secs. 1.1291-9 and 1.1291-10.
(ii) Section 1294 election. A shareholder may make an election
under section 1294 to extend the time for payment of tax on the
shareholder's pro rata shares of the ordinary earnings and net capital
gain of the foreign corporation reported in the shareholder's amended
return, and section 6621 interest attributable to such tax, but only to
the extent the tax and interest are attributable to earnings that have
not been distributed to the shareholder. The shareholder must make a
section 1294 election for a taxable year at the time that it files its
amended return for that year, as provided in paragraph (g)(1) of this
section. For the requirements for making a section 1294 election, see
Sec. 1.1294-1T.
(h) Effective date. The rules of this section are effective as of
January 2, 1998.
Par. 13. Section 1.1297-3T(c) is added to read as follows:
Sec. 1.1297-3T Deemed sale election by a United States person that is
a shareholder of a passive foreign investment company (temporary).
* * * * *
(c) Application of deemed dividend election rules.--(1) In general.
A shareholder of a former PFIC, within the meaning of Sec. 1.1291-
9(j)(2)(iv), that was a controlled foreign corporation, within the
meaning of section 957(a) (CFC), during its last taxable year as a PFIC
under section 1296(a), may apply the rules of section 1291(d)(2)(B) and
Sec. 1.1291-9 to an election under section 1297(b)(1) and this section
made by the time and in the manner provided in paragraph (b) of this
section.
(2) Transition rule. If the time for making an election under this
section, as provided in paragraph (b) of this section, expired before
January 2, 1998, a shareholder that applied rules similar to the rules
of section 1291(d)(2)(A) and Sec. 1.1291-10 to an election under this
section made with respect to a corporation that was a CFC during its
last taxable year as a PFIC under section 1296(a) may file an amended
return for the taxable year that includes the termination date, as
defined in paragraph (a) of this section, and apply the rules of
section 1291(d)(2)(B) and Sec. 1.1291-9 at any time before the
expiration of the period of limitations for the assessment of taxes for
that taxable year.
(3) Effective date. The rules of this paragraph are effective as of
January 2, 1998.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 14. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 15. In Sec. 602.101, paragraph (c) is amended by adding
entries in numerical order to the table to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(c) * * *
------------------------------------------------------------------------
Current OMB
CFR part of section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.1295-1T................................................. 1545-1555
1.1295-3T................................................. 1545-1555
* * * * *
------------------------------------------------------------------------
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
Approved: December 15, 1997.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 97-33985 Filed 12-31-97; 8:45 am]
BILLING CODE 4830-01-P
