6 Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Rules and Regulations

seek and obtain certification under part

119 for operations under part 121 or

part 135, as applicable. The FAA

anticipates that most guides

transporting persons from point to point

for compensation or hire will conduct

those operations in accordance with the

requirements contained within part 135.

Qualification to obtain the appropriate

part 119 certification principally

includes the following:

—Level of airman certification; pilots

conducting operations under part 135

must hold, at a minimum, a

commercial pilot certificate and a

Class II medical certificate. 14 CFR

61.3, 135.95, and 135.243. In addition,

pilots may be required to hold an

instrument rating, except where such

a rating is not required under 14 CFR

135.243(d).

—Training and testing: each part 135

operator must properly test and keep

current the pilots who are used in

these operations. 14 CFR 135.97.

Subpart G of 14 CFR part 135

prescribes the tests and checks each

operator must perform. Subpart H of

14 CFR part 135 prescribes the

requirements for establishing and

maintaining an approved training

program. Those part 135 operators

who employ more than one pilot will

be required to provide training to

those pilots. 14 CFR 135.341.

—Aircraft requirements: each part 135

operator must have exclusive use of at

least one aircraft, 14 CFR 135.25, and

must accomplish annual and 100-

hour inspections or comply with an

approved inspection program on each

of these aircraft, 14 CFR 135.71 and

135.421. Subpart C of 14 CFR part 135

sets forth aircraft and equipment

requirements, which must be

complied with in addition to those

aircraft and equipment requirements

under 14 CFR part 91.

—Maintenance requirements: each part

135 operator using an aircraft that is

type certificated with a seating

configuration of 9 seats or less,

excluding any pilot seat, shall

maintain that aircraft in accordance

with 14 CFR parts 43 and 91, and

those requirements set forth in

subpart J of 14 CFR part 135. Each

operator shall comply with the

aircraft manufacturer’s recommended

maintenance program or a program

approved by the FAA. 14 CFR

135.421.

—Periodic surveillance: each part 135

operator may be subject to periodic

inspections of its required records and

its facilities. 14 CFR 135.73 and

135.75.

—Airplane operator security: each part

135 operator must comply with the

applicable security requirements

contained within 14 CFR part 108. 14

CFR 135.125.

—Drug and alcohol testing

requirements: each part 135 operator

must establish a drug and alcohol

testing program under 14 CFR 135.251

and 135.255.

Compliance Plan

The FAA intends to implement a plan

to aid guides and other new part 121 or

part 135 operators in obtaining the

appropriate part 119 certification in an

efficient, expeditious manner.

Implementation of this plan is expected

to occur during the 1998 calendar year.

During the year, the FAA may, of

necessity, devote the bulk of its

available resources to securing

compliance by processing certification

applications submitted by persons

under this plan. Accordingly, resources

that would normally be devoted toward

investigation and enforcement may be

constrained. The FAA does not expect

enforcement actions related to guides

operating without proper certification to

be a major focus during implementation

of the certification plan. However,

following this period, FAA resources

will be available for a strong

enforcement response regarding any

guides providing transportation by air

for compensation or hire without proper

certification. In addition, the FAA

expects that resources will be available

at that time to permit a special emphasis

on investigation and enforcement of

compliance with the appropriate

certification and operational

requirements for those guides who

transport persons by air for

compensation or hire.

The Alaskan Regional Flight

Standards District Offices (FSDOs)

intend to hold two informational

meetings in three different locations

within the State of Alaska. The three

Alaskan locations are Anchorage,

Fairbanks, and Juneau. The meetings

will be held in the spring and in the fall

of 1998 in each location, most likely

over a weekend. In addition, the FSDOs

will provide information and guidance

to those guides who contact or visit the

FSDOs in Anchorage, Fairbanks, and

Juneau. Information concerning the

technical requirements will be available

at the meetings and at the FSDOs.

During the weekend meetings, the

FSDOs will be providing personnel who

will conduct flight tests and examine

documentation and aircraft.

The FAA expects to accept and

consider part 119 certification

applications from guides during these

weekend meetings. The FAA further

expects to issue air carrier operating

certificates or commercial operating

certificates and appropriate operations

specifications to the guides when they

are determined to be qualified.

Issued in Washington, DC on December 24,

1997.

Guy Gardner,

Associate Administrator for Regulation and

Certification.

[FR Doc. 97–34164 Filed 12–31–97; 8:45 am]

BILLING CODE 4910–13–M

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 § 1.1291–9(i)(1) of

the final regulations, and amends

§ 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

§§ 1.1291–1T(e)(2), 1.1293–1T(a)(2)(ii),
Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Rules and Regulations 7

1.1293–1T(c)(3), 1.1295–1T(k), 1.1295–

3T(h), and § 1.1297–3T(c)(3) of these

regulations.

FOR FURTHER INFORMATION CONTACT:

Gayle Novig, (202) 622–3840 (not a tollfree 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 crossreferencing 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 shareholderby-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 longterm 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

§ 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 § 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 § 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 § 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

§ 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.
8 Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Rules and Regulations

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

§ 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 § 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,
Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Rules and Regulations 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 § 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

§ 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 § 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 § 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 § 1.1291–1(h)(3), the holding

period of stock acquired upon exercise

of an option treated as stock under

§ 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

§ 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.
10 Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Rules and Regulations

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

§ 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 § 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 § 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 shareholders 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 § 1.1291–1(e). Under

temporary regulation § 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 §§ 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,

§ 1.1295–1T(c) through (j) will apply to

taxable years of shareholders beginning

after December 31, 1997. As provided in

§ 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 § 1.1291–1T(e)

will apply on and after April 1, 1992.
Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Rules and Regulations 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 §§ 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 § 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 § 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

§ 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

§ 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 § 1.1295–3T(d),

as of the election due date, that the

foreign corporation was not a PFIC.

Temporary regulation § 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 § 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 § 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 § 1.1295–3T(e)

provides special rules for certain small

shareholders. A shareholder that

qualifies under § 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
12 Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Rules and Regulations

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 § 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

§ 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 § 301.9100

regulations. As described below,

temporary regulation § 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 § 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

§ 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 § 1.1295–3T

adopts the rules of temporary regulation

§ 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

§ 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 § 1.1295–1T(d). Temporary

regulation § 1.1295–3T(f)(4)(vi) sets

forth a similar rule for requests for

consent under the consent regime. In

addition, temporary regulation

§ 1.1295–3T(g)(3) provides for an entitylevel 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 § 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 § 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
Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Rules and Regulations 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 § 1.1291–

9(i)(1), which provides that the rules of

§ 1.1291–9, the deemed dividend

election, do not apply to an election

under section 1297(b)(1). The removal

of § 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

§ 1.1291–9(i)(1).

8. Section 1297

The temporary regulations amend

§ 1.1297–3T to provide that a

shareholder of a former PFIC, within the

meaning of § 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

§ 1.1291–9 to its section 1297(b)(1)

election made by the time and in the

manner provided in § 1.1297–3T(b). If

the time for making a section 1297(b)(1)

election, provided in § 1.1297–3T(b),

expired before January 2, 1998, a

shareholder that applied the rules of

section 1291(d)(2)(A) and § 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

§ 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).* * *

§ 1.1291–0 [Amended]

Par. 2. Section 1.1291–0 is amended

by removing and reserving the entry for

§ 1.1291–9(i)(1).

Par. 3. The section heading and

introductory text for § 1.1294–0 are

added to read as follows:

§ 1.1294–0 Table of contents.

This section contains a listing of the

headings for § 1.1294–1T.

Par. 4. The section heading and

introductory text for § 1.1297–0 are

added to read as follows:

§ 1.1297–0 Table of contents.

This section contains a listing of the

headings for § 1.1297–3T.

§ 1.1291–0T [Amended]

Par. 5. Section 1.1291–0T is amended

by:

1. Transferring the listing of the

section heading and entries for

§ 1.1294–1T to new § 1.1294–0.

2. Transferring the listing of the

section heading and entries for

§ 1.1297–3T to new § 1.1297–0.

3. Removing the section heading and

introductory text.

Par. 6. Section 1.1291–1T is added to

read as follows:

§ 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.

§ 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.

§ 1.1293–0 Table of contents.

This section contains a listing of the

headings for § 1.1293–1T.

§ 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.
14 Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Rules and Regulations

(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:

§ 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 § 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 § 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

§ 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 § 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:

§ 1.1295–0 Table of contents.

This section contains a listing of the

headings for §§ 1.1295–1T and 1.1295–

3T.

§ 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.

§ 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.
Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Rules and Regulations 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:

§ 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 § 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
16 Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Rules and Regulations

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 § 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 § 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

§ 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 § 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.
Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Rules and Regulations 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

§ 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 taxexempt organization that is not taxable

under section 1291, pursuant to

§ 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

§ 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 § 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
18 Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Rules and Regulations

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

§ 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 § 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
Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Rules and Regulations 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 § 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 § 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:

§ 1.1295–3T Retroactive elections

(temporary).

(a) In general. This section prescribes

the exclusive rules under which a

shareholder, as defined in § 1.1295–

1T(j), may make a section 1295 election

for a taxable year after the election due

date, as defined in § 1.1295–1T(e)

(retroactive election). Therefore, a

shareholder may not seek such relief

under any other provision of the law,

including § 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—
20 Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Rules and Regulations

(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

§ 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

§ 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

§ 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 (nonTEFRA 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 § 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 nonTEFRA 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 nonTEFRA 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
Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Rules and Regulations 21

similar to those applicable to nonTEFRA 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 nonPFIC 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 § 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.
22 Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Rules and Regulations

(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 § 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
Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Rules and Regulations 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

§ 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 § 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
24 Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Rules and Regulations

corporation for which the shareholder

makes a retroactive election will be

treated as an unpedigreed QEF, as

defined in § 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 § 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 §§ 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 § 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:

§ 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 § 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

§ 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

§ 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

§ 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 § 602.101, paragraph (c) is

amended by adding entries in numerical

order to the table to read as follows:

§ 602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part of section where

identified and described

Current OMB

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

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 40 and 48

[TD 8748]

RIN 1545–AU53

Gasoline and Diesel Fuel Excise Tax;

Special Rules for Alaska; Definitions

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to the application of

the diesel fuel excise tax to fuel used in

Alaska. This document also contains

final regulations relating to the gasoline

and diesel fuel excise tax definitions.

The regulations implement certain

changes made by the Omnibus Budget

Reconciliation Act of 1993 and the

Small Business Job Protection Act of

1996. They affect certain enterers,

refiners, retailers, terminal operators,

throughputters, wholesale distributors,

and users.

DATES: These regulations are effective

January 2, 1998. For dates of

applicability of these regulations, see

§§ 48.4082–5(h) and 48.6715–1(a)(3).

FOR FURTHER INFORMATION CONTACT:

Frank Boland, (202) 622–3130 (not a

toll-free call).

SUPPLEMENTARY INFORMATION:

Background

Section 4081 imposes a tax on certain

removals, entries, and sales of diesel

fuel. However, under section 4082, tax

is not imposed if, among other

conditions, the diesel fuel is indelibly

dyed in accordance with Treasury

regulations. Section 1801 of the Small

Business Job Protection Act of 1996

amends section 4082 to create an

exception to the dyeing requirement

that effectively applies only to diesel

fuel that is removed, entered, or sold in

Alaska.

Temporary regulations (TD 8693)

relating to this change were published

in the Federal Register on December 17,

1996 (61 FR 66215) along with a notice

of proposed rulemaking (REG–247678–

96) cross-referencing the temporary

regulations (61 FR 66246). The notice of

proposed rulemaking also proposed

other changes to the gasoline and diesel

fuel excise tax regulations that were not

contained in the temporary regulations.

A public hearing was neither

requested nor held. After consideration

of written comments, the proposed

regulations are adopted as revised by