3890 Federal Register / Vol. 87, No. 16 / Tuesday, January 25, 2022 / Proposed Rules 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–118250–20] 

RIN 1545–BP94 

Guidance on Passive Foreign 

Investment Companies and Controlled 

Foreign Corporations Held by 

Domestic Partnerships and S 

Corporations and Related Person 

Insurance Income 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking 

and partial withdrawal of notice of 

proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations regarding the 

treatment of domestic partnerships and 

S corporations that own stock of passive 

foreign investment companies (‘‘PFICs’’) 

and their domestic partners and 

shareholders (the ‘‘proposed 

regulations’’). The proposed regulations 

also provide guidance regarding the 

determination of the controlling 

domestic shareholders of foreign 

corporations, the owner of a controlled 

foreign corporation (‘‘CFC’’) or qualified 

electing fund (‘‘QEF’’) that makes an 

election under section 1411, the 

treatment of S corporations with 

accumulated earnings and profits under 

subpart F of part III of subchapter N of 

chapter 1 of the Internal Revenue Code 

(‘‘subpart F’’ of the ‘‘Code’’), and the 

determination and inclusion of related 

person insurance income (‘‘RPII’’) under 

section 953(c). The proposed regulations 

affect United States persons that own, 

directly or indirectly, stock in certain 

foreign corporations. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by April 25, 2022. Requests 

for a public hearing must be submitted 

as prescribed in the ‘‘Comments and 

Requests for a Public Hearing’’ section. 

ADDRESSES: Commenters are strongly 

encouraged to submit public comments 

electronically. Submit electronic 

submissions via the Federal 

eRulemaking Portal at 

www.regulations.gov (indicate IRS and 

REG–118250–20) by following the 

online instructions for submitting 

comments. Once submitted to the 

Federal eRulemaking Portal, comments 

cannot be edited or withdrawn. The IRS 

expects to have limited personnel 

available to process public comments 

that are submitted on paper through 

mail. Until further notice, any 

comments submitted on paper will be 

considered to the extent practicable. 

The Department of the Treasury 

(‘‘Treasury Department’’) and the IRS 

will publish for public availability any 

comment submitted electronically, and 

to the extent practicable on paper, to its 

public docket. Send hard copy 

submissions to: CC:PA:LPD:PR (REG– 

118250–20), Room 5203, Internal 

Revenue Service, P.O. Box 7604, Ben 

Franklin Station, Washington, DC 

20044. 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations 

under §§ 1.958–1(d), 1.964–1, 1.1291–1, 

1.1291–9, 1.1293–1, 1.1295–1, 1.1296–1, 

1.1297–0, 1.1297–3, 1.1298–1, 1.1298–3, 

and 1.1411–10, Edward Tracy at (202) 

317–6934; concerning proposed 

regulation § 1.958–1(e), Jennifer N. 

Keeney at (202) 317–5045; concerning 

proposed regulation § 1.953–3, Raphael 

Cohen at (202) 317–3756 or Josephine 

Firehock at (202) 317–6938; concerning 

submissions of comments or requests for 

a public hearing, Regina Johnson at 

(202) 317–5177 (not toll free numbers). 

SUPPLEMENTARY INFORMATION: 

Background 

I. Regulations Addressing the 

Treatment of Domestic Partnerships for 

Purposes of Sections 951(a) and 951A 

On October 10, 2018, the Treasury 

Department and the IRS published in 

the Federal Register proposed 

regulations under section 951A (REG– 

104390–18, 83 FR 51072) (‘‘2018 

proposed regulations’’). The 2018 

proposed regulations provided a hybrid 

approach to the treatment of a domestic 

partnership that is a United States 

shareholder, as defined in section 951(b) 

(‘‘U.S. shareholder’’), with respect to a 

CFC (‘‘U.S. shareholder partnership’’). 

Under the hybrid approach, a U.S. 

shareholder partnership would 

determine its section 951A inclusion, 

and the partners of the partnership that 

were not also U.S. shareholders of the 

CFC (‘‘non-U.S. shareholder partners’’) 

would take into account their 

distributive share of the inclusion. See 

proposed § 1.951A–5(b), 83 FR 51072, 

51101. Partners that were themselves 

U.S. shareholders of a CFC (‘‘U.S. 

shareholder partners’’) would not take 

into account their distributive share of 

the partnership’s global intangible lowtaxed income (‘‘GILTI’’) inclusion 

amount and instead would be treated as 

proportionately owning the stock of the 

CFC within the meaning of section 

958(a) as if the domestic partnership 

were a foreign partnership. See 

proposed § 1.951A–5(c), 83 FR 51072, 

51101–51102. 

On June 21, 2019, the Treasury 

Department and the IRS published final 

regulations (TD 9866) in the Federal 

Register (84 FR 29288, as corrected at 84 

FR 44223, 84 FR 44693, and 84 FR 

53052) under sections 951, 951A, 1502, 

and 6038 that include guidance with 

respect to the treatment of domestic 

partnerships that own stock in CFCs for 

purposes of section 951A (the ‘‘final 

section 951A regulations’’). The final 

section 951A regulations did not adopt 

the hybrid approach set forth in the 

2018 proposed regulations and instead 

generally treat a domestic partnership as 

an aggregate of all of its partners for 

purposes of computing income 

inclusions under section 951A (and 

other provisions that apply by reference 

to section 951A). The final section 951A 

regulations apply to taxable years of 

foreign corporations beginning after 

December 31, 2017, and to taxable years 

of U.S. shareholders in which or with 

which such taxable years of foreign 

corporations end. § 1.951A–7. On the 

same date, the Treasury Department and 

the IRS published proposed regulations 

(REG–101828–19) in the Federal 

Register (84 FR 29114) that extended 

this aggregate treatment of domestic 

partnerships for purposes of computing 

subpart F inclusions under section 951 

(the ‘‘2019 proposed regulations’’). 

In the preamble to the 2019 proposed 

regulations, the Treasury Department 

and the IRS requested comments on the 

application of sections 1291 and 1293 

through 1298 of the Code (the ‘‘PFIC 

regime’’) to domestic partnerships that 

directly or indirectly own PFIC stock 

and their domestic partners, including 

the operation of the PFIC regime with 

respect to non-U.S. shareholder partners 

of domestic partnerships under section 

1297(d). 84 FR 29120. The 2019 

proposed regulations are issued, with 

modifications, as final regulations in the 

Rules and Regulations section of this 

issue of the Federal Register (the ‘‘final 

regulations’’). 

On August 22, 2019, the Treasury 

Department and the IRS released Notice 

2019–46, 2019–37 I.R.B. 695, 

announcing the intention to issue 

regulations that will permit a domestic 

partnership or S corporation to apply 

the hybrid approach set forth in 

proposed § 1.951A–5 for taxable years 

ending before June 22, 2019 (that is, the 

hybrid approach set forth in the 2018 

proposed regulations, which was 

revised in the 2019 final section 951A 

regulations to reflect an aggregate 

approach for purposes of section 951A). 

The notice also addressed the 

applicability of penalties in the case of 

a domestic partnership or S corporation 

that consistently applied proposed 


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§ 1.951A–5 on or before June 21, 2019, 

but filed a tax return consistent with the 

final section 951A regulations under 

§ 1.951A–1(e). The notice was issued to 

address the compliance burden, and 

related penalty exposure, of domestic 

partnerships and S corporations that 

filed returns based on the hybrid 

approach set forth in the 2018 proposed 

regulations for taxable years ending 

before June 22, 2019, but later became 

subject to the aggregate approach of 

§ 1.951A–1(e) for those years. 

II. Treatment of Domestic Partnerships 

as Entities or Aggregates of their 

Partners—In General 

For purposes of applying a particular 

provision of the Code, a partnership 

may be treated as either an entity 

separate from its partners or as an 

aggregate of its partners. Under the 

aggregate approach, the partners of a 

partnership, and not the partnership, are 

treated as owning the partnership’s 

assets and conducting the partnership’s 

operations. Under the entity approach, 

the partnership is respected as separate 

and distinct from its partners, and 

therefore the partnership, and not the 

partners, is treated as owning the 

partnership’s assets and conducting the 

partnership’s operations. Whether the 

aggregate or entity approach applies 

depends on which approach is more 

appropriate to carry out the scope and 

purpose of a particular Code provision. 

See H.R. Rep. No. 83–2543, at 59 (1954) 

(Conf. Rep.) (‘‘Both the House 

provisions and the Senate amendment 

provide for the use of the ‘entity’ 

approach in the treatment of 

transactions between a partner and a 

partnership . . . . No inference is 

intended, however, that a partnership is 

to be considered as a separate entity for 

the purpose of applying other 

provisions of the internal revenue laws 

if the concept of the partnership as a 

collection of individuals is more 

appropriate for such provisions.’’); see 

also Holiday Village Shopping Center v. 

United States, 5 Cl. Ct. 566, 570 (1984), 

aff’d 773 F.2d 276 (Fed. Cir. 1985) 

(‘‘[T]he proper inquiry is not whether a 

partnership is an entity or an aggregate 

for purposes of applying the internal 

revenue laws generally, but rather 

which is the more appropriate and more 

consistent with Congressional intent 

with respect to the operation of the 

particular provision of the Internal 

Revenue Code at issue.’’); Casel v. 

Commissioner, 79 T.C. 424, 433 (1982) 

(‘‘When the 1954 Code was adopted by 

Congress, the conference report . . . 

clearly stated that whether an aggregate 

or entity theory of partnerships should 

be applied to a particular Code section 

depends upon which theory is more 

appropriate to such section.’’); § 1.701– 

2(e)(1) (‘‘The Commissioner can treat a 

partnership as an aggregate of its 

partners in whole or in part as 

appropriate to carry out the purpose of 

any provision of the Internal Revenue 

Code or the regulations promulgated 

thereunder.’’). 

Consistent with this authority under 

subchapter K, the Treasury Department 

and the IRS have previously adopted the 

aggregate approach to partnerships to 

carry out the purpose of various 

provisions, including international 

provisions, of the Code. In addition to 

applying the aggregate approach for 

purposes of determining section 951 

and section 951A inclusions in the final 

section 951A regulations and the final 

regulations, regulations under section 

871 apply the aggregate approach in 

applying the 10 percent shareholder test 

of section 871(h)(3) to determine 

whether interest paid to a partnership 

would be considered portfolio interest 

under section 871(h)(2). § 1.871– 

14(g)(3)(i). The aggregate approach was 

also adopted in regulations issued under 

section 367(a) to address the transfer of 

property by a domestic or foreign 

partnership to a foreign corporation in 

an exchange described in section 

367(a)(1). See § 1.367(a)–1T(c)(3)(i)(A). 

Similarly, the Treasury Department and 

the IRS adopted the aggregate approach 

for purposes of applying the regulations 

under section 367(b). See § 1.367(b)– 

2(k); see also §§ 1.367(e)–1(b)(2) 

(treating stock and securities of a 

distributing corporation owned by or for 

a partnership (domestic or foreign) as 

owned proportionately by its partners) 

and 1.861–9(e)(2) (requiring certain 

corporate partners to apportion interest 

expense, including the partner’s 

distributive share of partnership interest 

expense, by reference to the partner’s 

assets). 

III. PFIC Rules 

A. Section 1291 

Under section 1291, a United States 

person (‘‘U.S. person’’) may be subject 

to ordinary income treatment and an 

interest charge when it receives an 

‘‘excess distribution’’ from a PFIC or 

recognizes gain on the sale or 

disposition of PFIC stock (the ‘‘excess 

distribution rules’’). These charges are 

determined based on the person’s 

holding period and the years in which 

the foreign corporation qualified as a 

PFIC. The excess distribution rules do 

not apply, however, if a shareholder 

makes certain elections with respect to 

the PFIC for its entire holding period of 

the PFIC stock. 

The Treasury regulations under 

section 1291 apply the excess 

distribution rules to ‘‘shareholders’’ of a 

PFIC. See § 1.1291–1(b)(2)(v). Under 

§ 1.1291–1(b)(7), a ‘‘shareholder’’ of a 

PFIC generally is defined as a U.S. 

person that owns PFIC stock directly or 

indirectly through certain corporations 

or pass-through entities (an ‘‘indirect 

shareholder’’), within the meaning of 

section 1298(a) and § 1.1291–1(b)(8) 

(collectively, a ‘‘PFIC shareholder’’). For 

purposes of sections 1291 and 1298, 

neither a domestic partnership nor an S 

corporation is treated as a PFIC 

shareholder except for purposes of any 

information reporting requirements 

(including the requirement to file an 

annual report under section 1298(f)) or 

where otherwise explicitly provided in 

regulations. Section 1.1291– 

1(b)(8)(iii)(A) and (B) provides that if a 

domestic partnership or S corporation 

owns PFIC stock, the partners or S 

corporation shareholders, respectively, 

are considered to own the PFIC stock 

proportionately in accordance with their 

ownership interests. As a result, if a 

domestic partnership or S corporation 

owns PFIC stock, the excess distribution 

rules apply at the partner or S 

corporation shareholder level. 

B. Qualified Electing Funds 

A PFIC shareholder may elect to treat 

the PFIC as a QEF (a ‘‘QEF election’’) 

under the rules in sections 1293 through 

1295 (the ‘‘QEF rules’’). Under the QEF 

rules, provided the PFIC complies with 

certain information reporting 

requirements, the PFIC shareholder 

includes its pro rata share of the 

ordinary earnings and net capital gain 

generated by the QEF on a current basis 

under section 1293(a) (‘‘QEF 

inclusions’’), and any gain on a future 

disposition of the QEF shares may be 

treated as capital gain not subject to the 

excess distribution rules. Unlike for the 

excess distribution rules, under 

§ 1.1295–1(j) domestic partnerships and 

S corporations are treated as PFIC 

shareholders for purposes of the QEF 

rules. A PFIC shareholder making a 

valid QEF election effective as of the 

beginning of its holding period in the 

PFIC stock is not subject to the excess 

distribution rules with respect to that 

PFIC (a ‘‘pedigreed QEF’’). Conversely, 

a PFIC shareholder that makes a QEF 

election effective after the beginning of 

its holding period in the PFIC stock is 

simultaneously subject to the excess 

distribution rules and the QEF rules 

with respect to that PFIC (an 

‘‘unpedigreed QEF’’). 

A domestic partnership or S 

corporation that owns PFIC stock 

generally makes the QEF election with 


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3892 Federal Register / Vol. 87, No. 16 / Tuesday, January 25, 2022 / Proposed Rules 

1Although the PFIC regulations use the term 

‘‘section 1297(e)’’ PFIC, the term refers to CFC/ 

PFICs under current section 1297(d). The 

regulations were issued before section 1297(e) was 

redesignated as section 1297(d) by the Tax 

Technical Corrections Act of 2007, Public Law 110– 

172, sec. 11(a)(24)(A), Dec. 29, 2007, 121 Stat 2473. 

respect to the PFIC under § 1.1295– 

1(d)(2)(i)(A) and (d)(2)(ii). Section 

1.1293–1(c)(1) provides that the 

domestic partnership or S corporation 

recognizes any QEF inclusions at the 

entity level, and each U.S. person that 

is an interest holder in the domestic 

partnership or S corporation takes into 

account its pro rata share of the 

inclusions. 

C. Mark-to-Market PFICs 

Under section 1296 (the ‘‘mark-tomarket (MTM) rules’’), if stock in a PFIC 

is marketable stock (‘‘section 1296 

stock’’), a U.S. person owning that stock 

can make a mark-to-market election 

with respect to the PFIC (an ‘‘MTM 

election’’). For this purpose, pursuant to 

section 1296(g)(1), U.S. persons may be 

deemed to own certain marketable stock 

held by foreign partnerships, trusts, or 

estates. Section 1296(a) provides that if 

a U.S. person makes an MTM election 

with respect to a PFIC, the U.S. person 

is treated as if it sold the section 1296 

stock at the end of each year, with any 

gain being recognized as ordinary 

income (‘‘MTM gain’’) and any loss 

potentially resulting in a deduction 

(‘‘MTM loss,’’ and together with MTM 

gains, ‘‘MTM amounts’’). 

If a domestic partnership or an S 

corporation owns, or is treated as 

owning under § 1.1296–1(e) (providing 

ownership rules for PFIC stock owned 

through certain foreign entities), section 

1296 stock, the domestic partnership or 

S corporation can make an MTM 

election with respect to the PFIC 

because the election is made by the U.S. 

person owning or treated as owning the 

stock. See § 1.1296–1(h)(1)(i). The 

domestic partnership or S corporation, 

by virtue of being a U.S. person, 

includes or deducts any MTM amounts 

at the entity level. See § 1.1296–1(c)(1) 

and (3). 

D. CFC/PFIC Overlap 

Section 957(a) defines a CFC as any 

foreign corporation in which U.S. 

shareholders own (within the meaning 

of section 958(a)), or are considered as 

owning by applying the ownership rules 

of section 958(b), more than 50 percent 

of the total combined voting power or 

value of the stock of the corporation on 

any day during the taxable year of the 

corporation. Under section 951(b), a 

U.S. shareholder is a U.S. person that 

owns (within the meaning of section 

958(a)), or is considered as owning by 

applying the ownership rules of section 

958(b), at least 10 percent of the total 

combined voting power of all classes of 

stock entitled to vote or at least 10 

percent of the total value of all classes 

of stock of a foreign corporation. Section 

957(c) defines a U.S. person by 

reference to section 7701(a)(30), which 

defines the term as a citizen or resident 

of the United States, a domestic 

partnership, a domestic corporation, 

and certain domestic estates and trusts. 

Under section 1297(d), a foreign 

corporation that is both a CFC and a 

PFIC (a ‘‘CFC/PFIC’’) is not considered 

to be a PFIC with respect to a 

shareholder during the shareholder’s 

qualified portion (as defined in section 

1297(d)(2)) of its holding period (the 

‘‘CFC overlap rule’’). The term 

‘‘qualified portion’’ generally means the 

portion of the shareholder’s holding 

period during which the shareholder is 

a U.S. shareholder with respect to the 

PFIC and during which the PFIC is also 

a CFC. Generally, this means that the 

PFIC regime should not apply to a U.S. 

person that is subject to the subpart F 

rules. The legislative history to the CFC 

overlap rule indicates that it was 

enacted due to concern about the 

simultaneous application of the subpart 

F and PFIC regimes to the same 

shareholders, explaining that ‘‘a 

shareholder that is subject to current 

inclusion under the subpart F rules with 

respect to stock of a PFIC that is also a 

CFC generally is not subject also to the 

PFIC provisions with respect to the 

same stock.’’ H.R. Rep. 105–148, at 534 

(1997). 

E. PFIC Purging Elections 

1. Section 1291(d)(2) Purging Elections 

Under section 1291(d)(2), a PFIC 

shareholder that owns, or is treated as 

owning, shares in an unpedigreed QEF 

may make certain elections to ‘‘purge’’ 

the PFIC taint and thereby no longer be 

subject simultaneously to the excess 

distribution and QEF rules with respect 

to that PFIC. Under section 

1291(d)(2)(A) and § 1.1291–10, a PFIC 

shareholder may elect to recognize any 

gain on a deemed disposition of its PFIC 

stock with the gain being subject to the 

excess distribution rules. Alternatively, 

under section 1291(d)(2)(B) and 

§ 1.1291–9, if the unpedigreed QEF is 

also a CFC (that is, it is a CFC/PFIC), the 

PFIC shareholder may elect to include 

its share of the CFC/PFIC’s post-1986 

accumulated earnings and profits 

(‘‘E&P’’) as a dividend subject to the 

excess distribution rules (together with 

the election described in the preceding 

sentence, the ‘‘section 1291 purging 

elections’’). The section 1291 purging 

elections are made by a PFIC 

‘‘shareholder’’ as defined in § 1.1291– 

9(j)(3), which is a U.S. person that is a 

shareholder or indirect shareholder, as 

defined in § 1.1291–1(b)(7) or (8), 

respectively. If the PFIC shareholder 

makes one of the section 1291 purging 

elections, the QEF is a pedigreed QEF 

with respect to the shareholder. 

2. Section 1298(b)(1) Purging Elections 

Pursuant to section 1298(b)(1) and 

§ 1.1298–3, a PFIC shareholder may 

make certain purging elections with 

respect to a foreign corporation that 

qualifies as a ‘‘former PFIC’’ or a 

‘‘section 1297(e) PFIC.’’ These purging 

elections result in the foreign 

corporation no longer being treated as a 

PFIC as to the shareholder. 

Under § 1.1291–9(j)(2)(iv), a ‘‘former 

PFIC’’ is a foreign corporation that 

satisfies neither the income test nor the 

asset test under section 1297(a), but its 

stock held by the PFIC shareholder is 

treated as stock of a PFIC as a result of 

section 1298(b)(1) (that is, the 

corporation was a PFIC that was not a 

QEF at some time during the PFIC 

shareholder’s holding period). Pursuant 

to § 1.1291–9(j)(2)(v), a foreign 

corporation is a ‘‘section 1297(e) PFIC’’ 1

if it (i) qualifies as a PFIC under section 

1297(a) on the first day on which the 

‘‘qualified portion’’ (as defined in 

section 1297(d)(2)) of the PFIC 

shareholder’s holding period in the 

foreign corporation begins (as 

determined under section 1297(e)(2)); 

and (ii) the stock of the foreign 

corporation held by the PFIC 

shareholder is treated as stock of a PFIC 

pursuant to section 1298(b)(1) because 

at any time during the PFIC 

shareholder’s holding period of the 

stock, other than the qualified portion, 

the corporation was a PFIC that was not 

a QEF. 

Similar to the section 1291 purging 

elections, under §§ 1.1297–3 and 

1.1298–3, a PFIC shareholder can make 

either a deemed sale election or deemed 

dividend purging election with respect 

to either a former PFIC or section 

1297(e) PFIC (the ‘‘section 1298 purging 

elections’’ and, together with the section 

1291 purging elections, the ‘‘PFIC 

purging elections’’). The rules 

applicable to the section 1298 purging 

elections in §§ 1.1297–3(a) and 1.1298– 

3(a) are substantially the same as those 

applicable to the section 1291 purging 

elections, including that each section 

1298 purging election is made by a PFIC 

‘‘shareholder’’ as defined in § 1.1291– 

9(j)(3). 


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Federal Register / Vol. 87, No. 16 / Tuesday, January 25, 2022 / Proposed Rules 3893 

F. PFIC Information Reporting 

Requirements Under Section 1298(f) 

Under section 1298(f), each U.S. 

person that is a PFIC shareholder as 

defined in § 1.1291–1(b)(7) must file an 

annual report with respect to the PFIC 

containing the information required by 

the IRS. Generally, pursuant to 

§ 1.1298–1(b)(1), a U.S. person that is a 

PFIC shareholder must file Form 8621, 

‘‘Information Return by a Shareholder of 

a Passive Foreign Investment Company 

or Qualified Electing Fund,’’ if, during 

the shareholder’s taxable year, it is (i) a 

direct PFIC shareholder; (ii) an indirect 

PFIC shareholder that holds any interest 

in the PFIC through one or more foreign 

entities; or (iii) an indirect PFIC 

shareholder that is treated as the owner 

of any portion of a domestic grantor 

trust that owns stock of a PFIC directly 

or through one or more foreign entities. 

Certain other indirect PFIC 

shareholders are also required to file 

Form 8621. Specifically, under 

§ 1.1298–1(b)(2)(i), an indirect PFIC 

shareholder that owns stock of a PFIC 

through one or more U.S. persons must 

file Form 8621 with respect to the PFIC 

if, during the indirect shareholder’s 

taxable year, it is (i) treated as receiving 

an excess distribution with respect to 

the PFIC; (ii) treated as recognizing gain 

that is treated as an excess distribution 

as a result of a disposition of the PFIC; 

(iii) required to recognize QEF 

inclusions under section 1293(a); (iv) 

required to include or deduct MTM 

amounts under section 1296(a); or (v) 

required to report the status of an 

election under section 1294 with respect 

to the PFIC. However, under § 1.1298– 

1(b)(2)(ii), an indirect PFIC shareholder 

that is required to either recognize QEF 

inclusions under section 1293(a) or 

MTM amounts under section 1296(a) is 

generally not required to file Form 8621 

if another PFIC shareholder through 

which the indirect PFIC shareholder 

owns its interest in the PFIC timely files 

Form 8621. Thus, if an indirect PFIC 

shareholder is treated as owning an 

interest in a PFIC by reason of an 

interest in a domestic partnership or S 

corporation and the domestic 

partnership or S corporation recognizes 

QEF inclusions or MTM amounts and 

timely files Form 8621, the indirect 

PFIC shareholder is generally not 

required to file Form 8621. Pursuant to 

§ 1.1298–1(b)(2)(ii), this exception does 

not apply to a PFIC shareholder that 

transfers stock in a PFIC subject to a 

QEF election to a domestic partnership 

or S corporation if the domestic 

partnership or S corporation does not 

make a QEF election with respect to the 

PFIC after the transfer, in which case the 

transferor-PFIC shareholder is still 

required to file Form 8621. 

G. Section 1298 Attribution of 

Ownership Provisions 

For purposes of the entire PFIC 

regime, section 1298(a) contains various 

attribution rules that generally apply to 

treat stock of a PFIC as owned by a U.S. 

person. However, pursuant to section 

1298(a)(1)(B), except as provided in 

regulations, section 1298(a) does not 

apply to treat stock owned (or treated as 

owned) by a U.S. person as owned by 

any other person. Under section 

1298(a)(3), stock owned directly or 

indirectly by a partnership, estate, or 

trust is considered as being owned 

proportionately by its partners or 

beneficiaries. 

IV. Subpart F Rules 

A. Controlling Domestic Shareholders 

The controlling domestic 

shareholders of a foreign corporation 

take certain actions with respect to the 

foreign corporation, such as electing the 

method of calculating its E&P under 

section 964(a). See § 1.964–1(c)(3). 

Under § 1.964–1(c)(5)(i), the controlling 

domestic shareholders of a CFC are 

defined as the United States 

shareholders, within the meaning of 

section 951(b) or section 953(c), that, in 

the aggregate, own (within the meaning 

of section 958(a)) more than 50 percent 

of the total combined voting power of 

all classes of stock of the CFC entitled 

to vote and that undertake to act on the 

CFC’s behalf. If the more than 50 

percent ownership requirement is not 

satisfied, the controlling domestic 

shareholders of the CFC are all of the 

U.S. shareholders that own (within the 

meaning of section 958(a)) stock of the 

CFC. Under § 1.964–1(c)(5)(ii), with 

respect to a noncontrolled section 902 

corporation (as defined in section 

904(d)(2)(E)), the controlling domestic 

shareholders are the majority domestic 

corporate shareholders, which are those 

domestic corporations that meet certain 

ownership requirements under section 

902(a) (as it existed before its repeal in 

2017) and that own, directly or 

indirectly, more than 50 percent of the 

combined voting power of the stock of 

the noncontrolled section 902 

corporation owned, directly or 

indirectly, by all domestic corporations. 

Under § 1.964–1(c)(3)(iii), a controlling 

domestic shareholder that takes actions 

with respect to a foreign corporation 

under § 1.964–1(c)(3) must provide 

notice of those actions to certain other 

domestic shareholders of the foreign 

corporation. 

With respect to a U.S. shareholder 

partnership, the 2019 proposed 

regulations provided that aggregate 

treatment does not apply for purposes of 

determining whether any U.S. 

shareholder is a controlling domestic 

shareholder. Proposed § 1.958–1(d)(2). 

In response to a request for comments 

on this rule in the preamble to the 2019 

proposed regulations, one comment was 

received. That comment recommended, 

on balance, that aggregate treatment 

should not apply for purposes of 

determining whether a U.S. shareholder 

is a controlling domestic shareholder for 

purposes of section 964. 

The final regulations do not extend 

aggregate treatment for purposes of 

determining controlling domestic 

shareholders of foreign corporations 

and, thus, adopt the exception included 

in the 2019 proposed regulations. 

§ 1.958–1(d)(2)(v). 

B. Treatment of S Corporation 

Distributions Under Section 1368 and 

Treatment of S Corporations and S 

Corporation Shareholders Under 

Section 1373 and Subpart F 

1. S Corporation Distributions 

Section 1368(b) and (c) provides for 

the treatment of distributions made by 

an S corporation (as defined in section 

1361(a)(1)) with respect to its stock to 

which section 301(c) would apply but 

for section 1368(a). Section 1368(b) 

addresses the treatment of those 

distributions by an S corporation that 

does not have accumulated E&P 

(‘‘AE&P’’). Section 1368(b)(1) provides 

that a distribution by an S corporation 

is not included in the gross income of 

an S corporation shareholder to the 

extent that the amount of the 

distribution does not exceed the 

shareholder’s adjusted basis in its S 

corporation stock. Section 1368(b)(2) 

provides that, if the amount of the 

distribution exceeds the shareholder’s 

adjusted basis in its S corporation stock, 

that excess is treated as gain from the 

sale or exchange of property. 

Section 1368(c) addresses the 

treatment of distributions by an S 

corporation that has AE&P (for example, 

if the S corporation generated E&P in 

years before its election to be treated as 

an S corporation) and therefore has an 

accumulated adjustments account 

(‘‘AAA’’), as defined by section 

1368(e)(1). AE&P does not include 

amounts that would increase an S 

corporation’s AAA. See section 1371(c). 

Accordingly, an S corporation’s AAA 

functions similarly to the stock basis 

adjustment rules of section 1367 and is 

increased to account for income taxed to 

its shareholders. See section 


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1368(e)(1)(A). AAA is limited to income 

generated by the corporation during its 

status as an S corporation and preserves 

the single-level-of-tax treatment to S 

corporation shareholders. 

With regard to distributions by S 

corporations with AE&P, section 1368(c) 

first applies the distribution to the S 

corporation’s AAA. Section 1368(c)(1) 

provides that the portion of the 

distribution that does not exceed the S 

corporation’s AAA is governed by 

section 1368(b) and is either not 

included in a shareholder’s gross 

income (if that amount does not exceed 

the shareholder’s adjusted basis in its S 

corporation stock) or is treated as gain 

from the sale or exchange of property (if 

that amount does not exceed the S 

corporation’s AAA but exceeds the 

shareholder’s adjusted basis in its S 

corporation stock). After the application 

of section 1368(c)(1), section 1368(c)(2) 

provides that any remaining portion of 

the distribution that exceeds the amount 

of the S corporation’s AAA is treated as 

a dividend (as defined in section 316) to 

the extent of the S corporation’s 

remaining AE&P. Lastly, under section 

1368(c)(3), the portion of the 

distribution remaining after the 

application of section 1368(c)(1) and (2) 

is governed by section 1368(b) and 

either not included in gross income or 

treated as gain, depending on the 

shareholder’s adjusted basis in its S 

corporation stock. 

2. Treatment of S Corporations for 

Purposes of Subpart F 

Section 1373(a) provides that an S 

corporation is treated as a domestic 

partnership and its shareholders as 

partners of a domestic partnership for 

purposes of subpart F of the Code, 

which includes sections 951, 951A, and 

958. Therefore, under § 1.958–1(d)(1) of 

the final regulations, for purposes of 

determining section 951 or section 951A 

inclusions with respect to a CFC owned 

by an S corporation, the S corporation 

is not treated as owning the CFC’s stock 

within the meaning of section 958(a). 

Instead, the CFC stock is treated as 

owned by a foreign partnership for 

purposes of determining the U.S. person 

that owns the CFC stock within the 

meaning of section 958(a). 

As a result, section 951 or section 

951A inclusions with respect to CFC 

stock held by an S corporation are 

determined and taken into account at 

the S corporation shareholder level but 

only if the S corporation shareholder is 

a U.S shareholder of the CFC. With 

respect to S corporations with AE&P, 

this aggregate treatment does not 

increase the S corporation’s AAA 

because any section 951 or section 951A 

inclusions are taken into account 

directly by the S corporation 

shareholders. An S corporation’s AAA 

generally is increased, however, by 

dividends received by the S corporation 

from a foreign corporation even if the 

E&P from which the dividend 

distributions are made is attributable to 

amounts that are, or have been, 

included in gross income of one or more 

shareholders of the S corporation under 

section 951(a) or 951A(a). See section 

1368(e)(1)(A). In contrast, if section 951 

and 951A amounts were included by a 

S corporation, the S corporation’s AAA 

would not be increased for distributions 

excluded from the S corporation’s gross 

income pursuant to section 959(a). 

3. Notice 2020–69 

In response to the final section 951A 

regulations, a comment asserted that 

aggregate treatment for purposes of 

computing section 951A inclusions is 

inappropriate for S corporations, 

notwithstanding the language of section 

1373(a) (treating an S corporation as a 

partnership and S corporation 

shareholders as partners of a 

partnership), particularly where an S 

corporation has AE&P. Specifically, the 

comment suggested that the aggregate 

approach creates a mismatch between 

when S corporation shareholders 

recognize income with respect to a CFC 

and the creation of AAA maintained by 

the S corporation. This mismatch can 

cause certain distributions out of AE&P 

made by an S corporation to be taxable 

to its shareholders despite the fact that 

the shareholders were already taxed on 

the CFC’s earnings under the final 

section 951A regulations. 

Notice 2020–69, 2020–39 I.R.B. 604, 

released on September 1, 2020, 

announced that the Treasury 

Department and the IRS intend to issue 

regulations under section 958 to ease 

the transition of S corporations with 

AE&P on September 1, 2020, from the 

historic entity treatment (and the hybrid 

treatment under proposed § 1.951A–5) 

to the aggregate treatment required 

under the final section 951A regulations 

(the ‘‘S corporation transition 

approach’’). Under the S corporation 

transition approach, an S corporation is 

subject to entity treatment with respect 

to a taxable year if (i) an election is 

made; (ii) the corporation has elected S 

corporation status before June 22, 2019; 

(iii) the S corporation would be treated 

as owning, within the meaning of 

section 958(a), stock of a CFC on June 

22, 2019, if entity treatment applied; (iv) 

the S corporation has ‘‘transition AE&P’’ 

on September 1, 2020, or on the first day 

of any subsequent taxable year; and (v) 

the S corporation maintains records to 

support the determination of the 

transition AE&P amount. Under this 

entity treatment, an S corporation that 

owns stock of a CFC is treated as 

owning, within the meaning of section 

958(a), the CFC stock for purposes of 

applying section 951A such that the S 

corporation determines its GILTI 

inclusion amount, and its shareholders 

take into account their distributive share 

of that amount. Generally, an electing S 

corporation is treated as an entity under 

the S corporation transition approach 

until the first taxable year for which it 

has no transition AE&P on the first day 

of that year, at which point it is treated 

as an aggregate of its shareholders for 

that year and each successive year. 

C. Related Person Insurance Income 

Section 952(a) provides that subpart F 

income includes insurance income, as 

defined in section 953. Under section 

953(c)(2), RPII is any insurance income 

(as defined in section 953(a)) 

attributable to a policy of insurance or 

reinsurance that directly or indirectly 

insures a United States shareholder (as 

defined in section 953(c)(1)(A)) of the 

controlled foreign corporation (as 

defined in section 953(c)(1)(B)), or a 

person related to that shareholder. 

Under section 953(c)(1)(A), the term 

‘‘United States shareholder’’ means, 

with respect to any foreign corporation, 

a U.S. person (as defined in section 

957(c)) who owns (within the meaning 

of section 958(a)) any stock of the 

foreign corporation (‘‘RPII U.S. 

shareholder’’). Section 953(c)(1)(B) 

provides that the term ‘‘controlled 

foreign corporation’’ has the meaning 

given to such term by section 957(a) 

determined by substituting ‘‘25 percent 

or more’’ for ‘‘more than 50 percent’’ 

(‘‘RPII CFC’’). 

On April 17, 1991, the Treasury 

Department and the IRS published in 

the Federal Register proposed 

regulations under section 953 (INTL– 

939–86, 56 FR 15540) (the ‘‘1991 

proposed regulations’’). Section 1.953–3 

of the 1991 proposed regulations 

contains, among other provisions, 

general rules for determining RPII and 

definitions that apply for RPII purposes. 

Section 1.953–3(b)(1) of the 1991 

proposed regulations defines RPII as 

premium and investment income 

attributable to a policy of insurance or 

reinsurance that provides insurance 

coverage to a related insured on risks 

located outside the RPII CFC’s country 

of incorporation and also provides an 

analogous rule for annuity contracts. 

Section 1.953–3(b)(5) of the 1991 

proposed regulations provides that 

insurance income attributable to a crossinsurance arrangement is treated as 


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RPII. In general, a cross-insurance 

arrangement is an arrangement in which 

a RPII CFC insures a person that is not 

a related insured and, as part of the 

same arrangement, another person 

insures a person that would be a related 

insured if insured by the RPII CFC. 

The cross-insurance rule was issued 

pursuant to section 953(c)(8)(A), which 

as the Conference Report states, 

‘‘requires the Secretary to prescribe such 

regulations as may be necessary to carry 

out the purposes of the new sub-part F 

rules for captive insurers, including 

regulations preventing the avoidance of 

the new rules through cross-insurance 

arrangements or otherwise.’’ H.R. Rep. 

No. 99–841 at II–620 (Sep. 18, 1986) 

(emphasis added). Congress recognized 

the need for regulations because crossinsurance can be used to replicate the 

economics and tax benefits of a captive 

insurance arrangement through 

cooperative risk sharing while 

improperly avoiding the application of 

section 953(c)(2). ‘‘The conferees do not 

believe that U.S. shareholders should be 

able to obtain the deferral of U.S. tax on 

income attributable to insurance of risks 

of U.S. persons who are in turn insuring 

the risks of those shareholders. 

Accordingly, under the regulations, the 

income of the two companies in the 

example attributable to the insurance 

business described [in a cross-insurance 

arrangement] is to be treated as related 

person insurance income.’’ Id. at II–621. 

Regulatory activity on the 1991 

proposed regulations was suspended in 

1999 due to the temporary enactment of 

changes to the definition of insurance 

income under section 953 and the 

temporary enactment of section 954(i) 

(together, the ‘‘Insurance Active 

Financing Exception’’). See Unified 

Agenda, 64 FR 21831 (Apr. 26, 1999). 

These statutory changes were adopted 

on a permanent basis by the Protecting 

Americans from Tax Hikes Act of 2015, 

Public Law 114–113 (Dec. 18, 2015). 

Although much of the 1991 proposed 

regulations requires modification to 

account for the Insurance Active 

Financing Exception, other provisions 

in the 1991 proposed regulations, 

including the cross-insurance rule, were 

not affected by the statutory changes. 

V. Net Investment Income Tax 

Section 1411 imposes a 3.8-percent 

tax on the net investment income of 

certain individuals, trusts, and estates. 

Under § 1.1411–10(g), an election can be 

made with respect to a CFC or PFIC that 

is a QEF to treat amounts included in 

income under section 951(a) or section 

1293(a)(1)(A) with respect to the CFC or 

QEF as net investment income for 

purposes of § 1.1411–4(a)(1)(i), and to 

take amounts included in income under 

section 1293(a)(1)(B) into account for 

purposes of calculating the net gain 

attributable to dispositions of property 

under § 1.1411–4(a)(1)(iii). Pursuant to 

§ 1.1411–10(g)(3), the election may be 

made by any individual, estate, trust, 

domestic partnership, S corporation, or 

common trust fund that owns the 

relevant CFC or QEF directly or 

indirectly through one or more foreign 

entities. In addition, if a domestic 

partnership, S corporation, estate, trust, 

or common trust fund that directly owns 

the CFC or QEF does not make the 

election, an individual, estate, trust, 

domestic partnership, S corporation, or 

common trust fund that owns the CFC 

or PFIC indirectly through the nonelecting entity may itself make the 

election. § 1.1411–10(g)(3). 

Explanation of Provisions 

I. PFIC Rules 

A. Definition of PFIC Shareholder 

The Treasury Department and the IRS 

have concluded that, because domestic 

partnerships and S corporations should 

be treated as aggregates of their partners 

and shareholders, respectively, for 

purposes of the QEF and MTM rules 

(see parts I.B.1 and I.C.1 of this 

Explanation of Provisions), the 

definition of shareholder under 

§ 1.1291–1(b)(7) should be updated to 

reflect aggregate treatment for purposes 

of the PFIC regime. Thus, under the 

proposed regulations, neither domestic 

partnerships nor S corporations are 

considered shareholders for purposes of 

making QEF or MTM elections, 

recognizing QEF inclusions or MTM 

amounts, making PFIC purging 

elections, or filing Forms 8621. 

Proposed §§ 1.1291–1(b)(7), 1.1295– 

1(j)(3), 1.1296–1(a)(4). 

B. QEF Rules 

1. Treatment of Pass-Through Entities 

for Purposes of Sections 1293 and 1295 

Various comments in response to the 

2019 proposed regulations addressed 

the treatment of domestic partnerships 

as aggregates of their partners for 

purposes of the QEF rules. Some 

comments requested that domestic 

partnerships continue to be treated as 

PFIC shareholders for purposes of 

making QEF elections and recognizing 

QEF inclusions based on 

administrability considerations 

(including reducing compliance 

burdens for small partners) and access 

to information. Other comments 

recommended an aggregate approach to 

QEFs, citing consistency with section 

951, section 951A, and other aspects of 

the PFIC regime (specifically sections 

1291, 1294, and 1297(d)). Additionally, 

comments recommended that, because 

QEF inclusions are taken into account 

in computing taxable income at the 

partner level, a partner should 

determine whether the QEF rules apply. 

One comment recommended a 

transition to an aggregate approach to 

QEFs with an alternative that would 

permit a domestic partnership to make 

a QEF election on behalf of its partners 

if permitted under the partnership 

agreement. 

The Treasury Department and the IRS 

have concluded that it is more 

appropriate to treat domestic 

partnerships and S corporations as 

aggregates of their partners and 

shareholders, respectively, for purposes 

of sections 1293 and 1295. Aggregate 

treatment is consistent with the general 

treatment of partnerships for purposes 

of the PFIC regime under section 

1298(a)(3) and aligns the QEF rules with 

the treatment of domestic partnerships 

and S corporations for purposes of the 

CFC overlap rule. It also provides 

partners and S corporation 

shareholders, the persons most affected 

by a QEF election, with the ability to 

decide whether to make the election. In 

addition, the new reporting by 

partnerships on Schedule K–2, 

‘‘Partners’ Distributive Share Items— 

International,’’ and Schedule K–3, 

‘‘Partner’s Share of Income, Deductions, 

Credits, etc.—International’’ is expected 

to facilitate a partner’s ability to make 

the QEF election. The Treasury 

Department and the IRS are aware that 

in limited circumstances, as a result of 

certain nonconforming tax years 

between a partner and a partnership, the 

partner may be required to file its return 

on which it makes a QEF election (and 

includes its QEF inclusion) before the 

deadline for the partnership to provide 

it with Schedule K–3. In such a case, the 

Treasury Department and the IRS expect 

that a partner seeking to make a QEF 

election will make arrangements with 

the partnership to provide the partner 

with the necessary information in a 

timely fashion. 

Accordingly, the proposed regulations 

provide that a partner or S corporation 

shareholder, rather than the domestic 

partnership or S corporation, 

respectively, makes a QEF election, and 

each electing partner or S corporation 

shareholder must notify the partnership 

or S corporation, respectively, of the 

election to assist the partnership or S 

corporation with information reporting 

and tracking basis in the QEF stock. 

Proposed § 1.1295–1(d)(2)(i)(A) and 

(d)(2)(ii)(A). Similarly, partners and S 

corporation shareholders include their 


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pro rata shares of ordinary earnings and 

net capital gain attributable to the QEF 

stock as if such shareholder owned its 

share of the QEF stock directly, and not 

as a share of the pass-through entity’s 

income. See proposed § 1.1293–1(c)(1). 

Contrary to the current regulations, 

however, a QEF election made under 

proposed § 1.1295–1(d)(2)(i)(A) or 

(d)(2)(ii)(A) by a partner or S 

corporation shareholder with respect to 

PFIC stock held indirectly through a 

domestic partnership or S corporation 

applies to all stock of that PFIC owned 

by such partner or S corporation 

shareholder, even if owned outside of 

the partnership or S corporation. 

In response to the comments’ 

concerns regarding the administrability 

of partner-level QEF elections, the 

Treasury Department and the IRS 

request comments on whether final 

regulations should permit a domestic 

partnership- or S corporation-level QEF 

election on behalf of its partners or 

shareholders, respectively, in 

conjunction with the general rule 

requiring the partner or shareholder to 

make the election. Comments should 

specifically address (i) the legal 

mechanism by which the domestic 

partnership or S corporation would be 

delegated the ability to make a QEF 

election on behalf of its partners or 

shareholders; (ii) the standard of 

delegation that should be required, 

including whether delegation should be 

based on the partnership agreement or 

the S corporation’s organizational 

documents, or some other instrument, 

and, if so, whether delegation should be 

explicit or implicit within the 

instrument; (iii) whether the domestic 

partnership or S corporation’s election 

should be binding on all partners or 

shareholders, or only on certain partners 

or shareholders; (iv) if binding on all 

partners or shareholders, whether 

certain partners or shareholders should 

be allowed to opt out and whether an 

opt-out is consistent with the current 

rules; and (v) the timing, filing, and 

notification requirements that should 

apply to a domestic partnership- or S 

corporation-level QEF election, taking 

into account the possibility of 

nonconforming taxable years among the 

partners and partnership (or 

shareholders and S corporation) and the 

QEF. 

2. Transfers of Stock to Domestic PassThrough Entities 

The current regulations include 

special rules that apply when stock of 

a PFIC subject to a QEF election is 

transferred to a domestic pass-through 

entity, depending on whether the 

transferee entity makes a QEF election 

with respect to the transferred PFIC. 

Under § 1.1293–1(c)(2)(i), if PFIC stock 

subject to a QEF election is transferred 

to a domestic pass-through entity of 

which the transferor is an interest 

holder, and the transferee pass-through 

entity makes a QEF election with 

respect to the PFIC, thereafter the 

transferor and other interest holders that 

become PFIC shareholders as a result of 

the transfer begin taking into account 

their pro rata shares of the pass-through 

entity’s QEF inclusions. However, under 

§ 1.1293–1(c)(2)(ii), if the transferee 

pass-through entity does not make a 

QEF election with respect to the 

transferred PFIC, the transferorshareholder (but not other indirect 

shareholders resulting from the transfer) 

continues to be subject to QEF 

inclusions with respect to the PFIC. 

To provide consistency with the 

aggregate treatment of domestic 

partnerships and S corporations under 

the QEF rules, the proposed regulations 

provide that, if a shareholder transfers 

stock of a PFIC with respect to which it 

has made a QEF election to a passthrough entity, the transferor continues 

to be subject to QEF inclusions with 

respect to the transferred stock, and the 

other interest holders of the passthrough entity are subject to QEF 

inclusions from the PFIC only if they 

make a QEF election with respect to the 

transferred stock. Proposed § 1.1293– 

1(c)(3)(i) and (ii). However, because 

domestic nongrantor trusts continue to 

be shareholders for purposes of the QEF 

rules, the proposed regulations retain 

the rule in current § 1.1293–1(c)(2)(i) 

but limit its application to domestic 

nongrantor trusts. Therefore, if stock of 

a PFIC subject to a QEF election is 

transferred to a domestic nongrantor 

trust, and the transferee trust makes a 

QEF election with respect to the stock, 

the electing trust includes its pro rata 

share of the QEF inclusions, and its 

beneficiaries account for such amounts 

according to the general rules applicable 

to inclusions of income from the trust. 

See proposed § 1.1293–1(c)(3)(iii). If the 

domestic nongrantor trust does not 

make a QEF election with respect to the 

transferred stock, only the transferor is 

subject to QEF inclusions with respect 

to the transferred stock. Id. 

3. Continuation of Preexisting QEF 

Elections 

The Treasury Department and the IRS 

have concluded that QEF elections 

made by a domestic partnership or S 

corporation that are effective for taxable 

years of a PFIC ending on or before the 

date of publication of the Treasury 

decision adopting these rules as final 

regulations in the Federal Register 

(such PFIC a ‘‘preexisting QEF,’’ and the 

election, a ‘‘preexisting QEF election’’) 

will continue for any partner or S 

corporation shareholder owning an 

interest in a preexisting QEF on that 

date. See proposed § 1.1295– 

1(d)(2)(i)(B), (d)(2)(ii)(B), and (f)(3). 

Treating the preexisting QEF elections 

as if they were effectively made by each 

partner or S corporation shareholder 

owning an interest in the preexisting 

QEF before the date of publication of the 

Treasury decision adopting these rules 

as final regulations in the Federal 

Register should minimize the number of 

additional QEF elections required by 

partners and S corporation 

shareholders, thus making the QEF rules 

more administrable for taxpayers and 

the IRS when transitioning from the 

historic entity approach to the aggregate 

approach of the proposed regulations. 

However, although a new election is not 

required to be made with respect to a 

preexisting QEF by partners or S 

corporation shareholders that indirectly 

owned the QEF before the finalization of 

the proposed regulations, they are 

subject to QEF inclusions under the new 

aggregate approach. See proposed 

§ 1.1293–1(c)(1). 

4. Additional Changes to QEF Rules 

The proposed regulations make 

several modifications to the rules that 

characterize stock held through a passthrough entity under § 1.1295– 

1(b)(3)(iv). First, consistent with the 

general aggregate approach to domestic 

pass-through entities under the QEF 

rules (other than domestic nongrantor 

trusts and domestic estates), the rule 

now governs how stock of a PFIC will 

be treated as stock of a pedigreed QEF 

to a shareholder, as defined in proposed 

§ 1.1295–1(j)(3), rather than all interest 

holders or beneficiaries of a passthrough entity as under the current 

provision. This paragraph is also 

modified to address both the treatment 

of PFICs as pedigreed QEFs to 

shareholders owning such PFICs 

through domestic partnerships and S 

corporations that have made preexisting 

QEF elections, and the treatment of 

PFICs owned through domestic passthrough entities (other than domestic 

nongrantor trusts and domestic estates) 

to shareholders making the QEF 

election. Further, the rule addresses the 

treatment of PFICs as pedigreed QEFs 

when PFIC stock is acquired by, or 

transferred to, pass-through entities. See 

proposed § 1.1295–1(b)(3)(iv)(A) 

through (C). Additionally, in order to 

ensure the proper application of 

proposed § 1.1295–1(b)(3)(iv), proposed 

§ 1.1295–1(b)(3)(iv)(A) and (B) do not 


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apply to transactions in which gain is 

not fully recognized. 

The proposed regulations also make 

several changes to conform § 1.1295–1 

to the general aggregate treatment of 

domestic pass-through entities (other 

than domestic non-grantor trusts and 

domestic estates) under the QEF rules. 

These changes include (i) limiting the 

application of paragraphs (b)(3)(i) and 

(ii) to domestic nongrantor trusts and 

domestic estates, which are the only 

domestic pass-through entities that may 

make a QEF election under the 

proposed regulations; (ii) applying the 

partnership termination rule only with 

respect to partnerships that have made 

preexisting QEF elections and their 

partners; (iii) revising rules governing 

the treatment of PFIC stock distributed 

by a partnership as stock of a pedigreed 

QEF to transferee partners; and (iv) 

providing that shareholders owning 

QEF stock through a domestic 

partnership or S corporation that has 

made a preexisting QEF election are 

required to file Form 8621 for such 

QEFs. Proposed § 1.1295–1(b)(3)(i) 

through (iii) and (v) and (f)(2)(i). In 

addition, the proposed regulations 

remove the rule in § 1.1295–1(i)(1)(ii) 

that allows the Commissioner to 

invalidate a pass-through entity QEF 

election with respect to a shareholder if, 

as a result of nonconforming taxable 

years between the shareholder and a 

pass-through entity, the QEF inclusion 

is not included in income within two 

years of the PFIC’s year end. The rule 

was removed because it specifically 

applies to pass-through entity QEF 

elections and inclusions, which, as a 

result of aggregate treatment, generally 

will only be relevant in limited 

circumstances involving domestic 

trusts. The Commissioner continues to 

have discretion to invalidate or 

terminate a shareholder’s QEF election 

in appropriate circumstances if the 

requirements of section 1295 are not 

met by a shareholder, an intermediary, 

or the relevant PFIC. § 1.1295–1(i)(1)(i). 

C. MTM Rules 

1. Treatment of Pass-Through Entities 

for Purposes of Section 1296 

The Treasury Department and the IRS 

received comments addressing the 

treatment of domestic partnerships as 

aggregates of their partners for purposes 

of the MTM rules, which generally were 

similar to the comments received with 

respect to QEFs. For reasons similar to 

those noted for QEFs, some comments 

recommended maintaining entity 

treatment of domestic partnerships 

under the MTM rules for 

administrability reasons, such as 

reduced compliance burdens for small 

partners and limited access to 

information. Other comments 

recommended an aggregate approach to 

maintain consistency with sections 951 

and 951A and the PFIC regime 

(including the comments’ proposed 

aggregate treatment of domestic 

partnerships for the QEF rules) and to 

allow the persons most affected by a 

MTM election, the partners, to 

determine whether the MTM rules 

apply. The comment discussed in part 

I.B.1 of this Explanation of Provisions 

that recommended an alternative that 

would permit a domestic partnership to 

make a QEF election on behalf of its 

partners made the same 

recommendation with respect to MTM 

elections. 

For the reasons noted by the 

comments recommending an aggregate 

approach and to further consistency in 

the treatment of domestic partnerships 

and S corporations across the PFIC 

regime, the Treasury Department and 

the IRS have concluded that domestic 

partnerships and S corporations should 

also be treated as aggregates of their 

partners and shareholders, respectively, 

for purposes of the MTM rules. 

Accordingly, the proposed regulations 

extend aggregate treatment to domestic 

partnerships and S corporations for 

purposes of the MTM rules by providing 

that the MTM rules apply to PFIC 

shareholders, as defined in proposed 

§ 1.1291–1(b)(7), which term does not 

include domestic partnerships or S 

corporations. See proposed § 1.1296– 

1(a)(4) and (e). As a result, partners of 

a domestic partnership or S corporation 

shareholders make an MTM election 

with respect to PFIC stock owned 

through the partnership or S corporation 

and determine their own MTM gain or 

loss, rather than taking into account 

their distributive share of the domestic 

partnership or S corporation’s MTM 

gain or loss. See proposed § 1.1296– 

1(b)(1) and (c)(1) and (3). Partners and 

S corporation shareholders making an 

MTM election with respect to a PFIC 

held through a partnership or S 

corporation, respectively, must notify 

the partnership or S corporation of the 

election to assist the partnership or S 

corporation with information reporting 

and tracking basis in the PFIC stock. 

Proposed § 1.1296–1(h)(1)(i)(B). 

Incorporating the proposed § 1.1291– 

1(b)(7) definition of shareholder into 

§ 1.1296–1 also clarifies that the MTM 

rules apply to grantors of domestic 

grantor trusts that own PFIC stock, and 

that domestic nongrantor trusts and 

domestic estates continue to be treated 

as entities for purposes of the MTM 

rules. 

To reflect the transition to the 

aggregate treatment of domestic 

partnerships and S corporations for 

purposes of the MTM rules, various 

other conforming changes are made to 

apply the MTM rules to PFIC 

shareholders rather than U.S. persons. 

See proposed § 1.1296–1(b)(2) and (3); 

§ 1.1296–1(c)(5); § 1.1296–1(d)(1) and 

(2); § 1.1296–1(e) and (f); § 1.1296– 

1(g)(1) and (2); § 1.1296–1(h)(1)(i) and 

(ii); § 1.1296–1(h)(2)(ii); § 1.1296– 

1(h)(3); and § 1.1296–1(i)(1). 

Additionally, the rule in § 1.1296– 

1(g)(3), providing that when an MTM 

PFIC is owned through certain foreign 

pass-through entities any MTM gain or 

loss is determined as of the end of the 

foreign pass-through entity’s tax year, 

has been removed. Under the general 

aggregate treatment of pass-through 

entities (besides domestic nongrantor 

trusts and domestic estates) for purposes 

of the MTM rules, the appropriate 

taxable year with respect to which any 

MTM gain or loss is determined is the 

taxable year end of the shareholder that 

owns the MTM PFIC through a passthrough entity, not the pass-through 

entity’s taxable year. 

As in part I.B.1 of this Explanation of 

Provisions, the Treasury Department 

and the IRS request comments on 

whether a form of partnership- or S 

corporation-level MTM election could 

be accommodated in final regulations. 

Comments should address the same 

considerations noted in part I.B.1 of this 

Explanation of Provisions regarding the 

delegation of authority to make an MTM 

election to a domestic partnership or S 

corporation. 

2. Continuation of Preexisting MTM 

Elections 

The Treasury Department and the IRS 

have concluded that MTM elections 

made with respect to a PFIC by a 

domestic partnership or S corporation 

for taxable years of the PFIC ending on 

or before the date of publication of the 

Treasury decision adopting these rules 

as final regulations in the Federal 

Register (‘‘preexisting MTM election’’) 

should be treated as made by any 

partner or S corporation shareholder 

owning its interest on that date. This 

treatment should minimize the number 

of additional MTM elections that would 

be made by such partners or S 

corporation shareholders, thus making 

the MTM rules more administrable for 

taxpayers and the IRS as a result of the 

transition from the historic entity 

approach to the aggregate approach of 

the proposed regulations. Accordingly, 

MTM elections made by domestic 


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2Section 1.1291–1(b)(7) provides that a PFIC 

shareholder is a U.S. person that directly owns PFIC 

stock or that is an indirect shareholder under 

§ 1.1291–1(b)(8); further, it states that for purposes 

of sections 1291 and 1298, neither a domestic 

partnership nor an S corporation is treated as a 

PFIC shareholder, except for information reporting 

purposes. This definition of shareholder was first 

adopted as a temporary regulation, applicable to 

taxable years of shareholders ending on or after 

December 31, 2013 (T.D. 9650, 78 FR 79602, 79608 

(Dec. 31, 2013)) and was subsequently issued as a 

final regulation without substantive change with 

the same applicability date (T.D. 9806, 81 FR 95459, 

95465 (Dec. 28, 2016)). Both temporary and final 

§ 1.1291–1(b)(7) were issued after several private 

letter rulings (‘‘PLRs’’), such as PLR 201108020 

(Feb. 25, 2011) and PLR 200943004 (Oct. 23, 2009), 

which were issued with respect to the application 

of section 1297(d) to domestic partnerships. 

partnerships and S corporations 

effective for taxable years of a PFIC 

ending on or before finalization of the 

proposed regulations under proposed 

§ 1.1296–1(h)(1)(i)(A) continue to be 

valid and will be treated as made by the 

owners of such entities. As a result, 

going forward the owners of those 

entities will determine their MTM gain 

or loss as if they held the section 1296 

stock directly. 

3. Modifications to the MTM 

Coordination Rule 

Under section 1296(j) and § 1.1296– 

1(i), if a taxpayer makes an MTM 

election with respect to a foreign 

corporation that was a PFIC (other than 

a QEF) before the first taxable year to 

which the MTM election was effective, 

the excess distribution rules apply to 

any (i) distributions by the PFIC with 

respect to the section 1296 stock; (ii) 

disposition of the section 1296 stock; 

and (iii) MTM gain recognized on the 

last day of the U.S. person’s taxable year 

(the ‘‘MTM coordination rule’’). Before 

the proposed regulations, if section 1296 

stock subject to the MTM coordination 

rule was held by a domestic partnership 

or S corporation, it may have been 

unclear how to apply the MTM 

coordination rule since the excess 

distribution rules are not applied at the 

domestic partnership or S corporation 

level. 

Accordingly, to conform to the 

general transition to an aggregate 

approach under the MTM rules, the 

proposed regulations clarify that the 

MTM coordination rule is applied to a 

PFIC shareholder. See proposed 

§ 1.1296–1(i)(2) introductory text and 

(i)(2)(ii). To coordinate with MTM rules 

other than those under section 1296, the 

proposed regulations also modify 

§ 1.1291–1(c)(4)(ii) so that computations 

apply to PFIC shareholders. 

D. CFC Overlap Rule 

1. Application Based on Aggregate 

Treatment for Sections 951 and 951A 

The CFC overlap rule provides that, 

for purposes of the PFIC regime, a 

corporation is not treated as a PFIC with 

respect to a shareholder during the 

qualified portion of the shareholder’s 

holding period with respect to stock in 

the corporation. Section 1297(d)(1). 

Thus, this rule applies separately with 

respect to each shareholder of the 

foreign corporation, and the foreign 

corporation may be a PFIC with respect 

to one shareholder but not another. The 

CFC overlap rule was intended to 

eliminate the simultaneous application 

of the subpart F and PFIC regimes only 

for a shareholder that is ‘‘subject to 

current inclusion under the subpart F 

rules.’’ H.R. Rep. 105–148 at 534. 

Under the final regulations (and 

§ 1.951A–1(e) as applicable before the 

final regulations), domestic partnerships 

and S corporations do not have 

inclusions under section 951 or section 

951A and, because the inclusions are 

instead determined directly and solely 

by the partners or S corporation 

shareholders that are U.S. shareholders, 

partners and S corporation shareholders 

that are not U.S. shareholders do not 

have section 951 or section 951A 

inclusions. See § 1.958–1(d)(1). Thus, a 

U.S. person that is not a U.S. 

shareholder of a foreign corporation that 

would otherwise be a PFIC with respect 

to that person if held directly should not 

be permitted to rely on the CFC overlap 

rule to avoid the PFIC regime simply 

because the U.S. person owns its 

interest in the foreign corporation 

indirectly through a domestic 

partnership or S corporation. 

Although section 1297(d) does not 

define the term ‘‘shareholder’’ for this 

purpose, under § 1.1291–1(b)(7), a 

domestic partnership or S corporation is 

not a shareholder to which the CFC 

overlap rule applies.2 Thus, this 

regulation sets forth an exception to the 

general rule in section 1298(a)(1)(B), 

which provides that a U.S. person is not 

treated as constructively owning stock 

that is owned by another U.S. person 

(including, for example, a domestic 

partnership). Accordingly, under the 

general rule of section 1298(a)(1)(A), 

constructive ownership of PFIC stock 

under section 1298(a) applies to the 

extent that the effect is to treat PFIC 

stock held by a domestic partnership or 

S corporation as owned by partners and 

shareholders of the entities that are U.S. 

persons. The ownership provisions of 

section 1298(a), in turn, apply for 

purposes of sections 1291 through 1298, 

including section 1297(d). Thus, neither 

a domestic partnership nor an S 

corporation is a shareholder for 

purposes of section 1297(d) by 

operation of § 1.1291–1(b)(7), 

notwithstanding that, under § 1.958– 

1(d)(2)(i), a domestic partnership or an 

S corporation may be a U.S. shareholder 

of the foreign corporation within the 

meaning of section 951(b). Consistent 

with this aggregate approach to section 

951 and section 951A in applying the 

CFC overlap rule under the existing 

regulations, the proposed regulations 

confirm that for purposes of section 

1297(d), the term ‘‘qualified portion’’ 

does not include any portion of a 

domestic partner or S corporation 

shareholder’s holding period during 

which the partner or shareholder was 

not a U.S. shareholder with respect to 

the CFC/PFIC. Proposed § 1.1291– 

1(c)(5)(i). 

2. Transition Rule for Entity Treatment 

Although the CFC overlap rule, in 

conjunction with the shareholder 

definition in § 1.1291–1(b)(7), properly 

reflects the aggregate approach to 

subpart F (as discussed in part III.A of 

this Explanation of Provisions), the 

Treasury Department and the IRS have 

determined that the application of these 

rules could lead to inappropriate results 

under the entity approach to subpart F 

that applied under prior law. In 

particular, under entity treatment for 

subpart F, the CFC overlap rule would 

not apply with respect to partners or S 

corporation shareholders of the CFC/ 

PFIC that were not U.S. shareholders 

even though they would take into 

account their share of inclusions of the 

domestic partnership or S corporation 

under section 951 and, as applicable, 

section 951A. Thus, the CFC/PFIC 

would be treated as a PFIC with respect 

to such partners or S corporation 

shareholders even though the partner or 

shareholder was subject to current 

inclusions under the subpart F regime. 

Accordingly, the Treasury Department 

and the IRS have determined that it is 

appropriate to provide a transition rule 

that would apply to taxable years of 

shareholders beginning before the date 

of publication of the Treasury decision 

adopting these rules as final regulations 

in the Federal Register, or for taxable 

years of shareholders of an S 

corporation in which the S corporation 

elects to apply § 1.958–1(e). When this 

transition rule applies, the CFC overlap 

rule will benefit certain persons that are 

indirect PFIC shareholders, but not U.S. 

shareholders, due to owning stock of 

foreign corporations through domestic 

partnerships or S corporations, during 

periods when the shareholder was 

subject to current inclusions under 

section 951 or section 951A (for 

example, under the rules described in 

Notices 2019–46 and 2020–69) as a 


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share of a domestic partnership or S 

corporation’s income inclusions. 

Proposed § 1.1291–1(c)(5)(ii). 

E. PFIC Purging Elections 

Under the current regulations, it may 

be unclear whether a domestic 

partnership or an S corporation that 

owns PFIC stock is eligible to make a 

PFIC purging election, particularly with 

respect to the section 1291 purging 

elections, both of which require 

simultaneous QEF elections that are 

generally made by domestic 

partnerships and S corporations. 

Consistent with the aggregate 

treatment of domestic partnerships and 

S corporations for purposes of making 

elections and determining income 

inclusions within the PFIC regime, the 

Treasury Department and the IRS have 

determined that the PFIC purging 

elections with respect to PFICs owned 

by partnerships and S corporations 

should be made at the partner or 

shareholder level because each of the 

PFIC purging elections can result in the 

recognition of excess distributions 

under section 1291, and those 

inclusions are directly taken into 

account at the partner or shareholder 

level and rely on partner or shareholder 

specific tax attributes, such as holding 

period. Each PFIC purging election is 

made by a shareholder as defined in 

proposed § 1.1291–1(b)(7), which has 

been modified to make explicit that 

neither domestic partnerships nor S 

corporations are PFIC shareholders for 

any purpose. As a result, under the 

proposed regulations, PFIC purging 

elections are made at the partner or S 

corporation shareholder level. 

F. PFIC Information Reporting 

Consistent with the aggregate 

treatment of domestic partnerships and 

S corporations for purposes of the QEF 

and MTM rules, the Treasury 

Department and the IRS have concluded 

that domestic partnerships and S 

corporations should no longer be 

required to file an annual report (Form 

8621) under section 1298(f) and 

§ 1.1298–1. The requirement to file 

Form 8621 applies only to PFIC 

shareholders within the meaning of 

§ 1.1291–1(b)(7), which includes, for 

example, partners or S corporation 

shareholders that indirectly own PFICs 

through domestic partnerships or S 

corporations. § 1.1298–1(a). Domestic 

partnerships and S corporations will not 

be subject to this filing obligation due to 

the revised definition of shareholder in 

proposed § 1.1291–1(b)(7), under which 

domestic partnerships and S 

corporations are not PFIC shareholders 

for any purpose. 

To reflect this change, proposed 

§ 1.1298–1(b)(1) revises the general rule 

requiring a PFIC shareholder to file 

Form 8621 to clarify that the 

requirement applies to PFIC 

shareholders as defined in § 1.1291– 

1(b)(7). Additionally, proposed 

§ 1.1298–1(b)(1)(i) and (ii) provides that 

the general rule concerning who has to 

file Form 8621 with respect to a PFIC 

applies to a PFIC shareholder that is 

either (i) a direct PFIC shareholder or 

(ii) an indirect PFIC shareholder (within 

the meaning of § 1.1291–1(b)(8)) that 

holds an interest in a PFIC through one 

or more entities, each of which is not a 

PFIC shareholder within the meaning of 

§ 1.1291–1(b)(7). As a result, because a 

domestic grantor trust is not a PFIC 

shareholder within the meaning of 

§ 1.1291–1(b)(7), the proposed 

regulations remove § 1.1298–1(b)(1)(iii). 

Similarly, the proposed regulations 

remove § 1.1298–1(c)(6) because 

domestic partnerships are not PFIC 

shareholders under proposed § 1.1291– 

1(b)(7) and thus have no filing 

obligation under the proposed 

regulations. 

These changes limit the application of 

§ 1.1298–1(b)(2) (which currently 

requires certain indirect shareholders to 

file Form 8621 when those shareholders 

own an interest in a PFIC through one 

or more U.S. persons) to only 

beneficiaries of domestic estates and 

domestic nongrantor trusts, because an 

indirect PFIC shareholder owning stock 

in a PFIC through a domestic 

partnership, S corporation, or domestic 

grantor trust will be required to file a 

Form 8621 under proposed § 1.1298– 

1(b)(1)(ii). An indirect PFIC shareholder 

owning stock of a PFIC by reason of an 

interest in a domestic estate or domestic 

nongrantor trust that recognizes its 

share of the estate or trust’s QEF 

inclusions or MTM amounts would 

continue to be able to rely on the 

exception of § 1.1298–1(b)(2)(ii) if the 

domestic estate or domestic nongrantor 

trust files Form 8621 with respect to the 

QEF or MTM PFIC. The proposed 

regulations remove the last sentence of 

§ 1.1298–1(b)(2)(ii) regarding the 

inability to apply the exception with 

respect to stock in a QEF contributed to 

domestic partnerships or S corporations, 

because these entities cannot make a 

QEF election under the proposed 

regulations. 

The changes to the section 1298(f) 

information reporting requirements in 

proposed § 1.1298–1 reflect the general 

shift in the treatment of domestic 

partnerships and S corporations as 

aggregates for purposes of the PFIC 

regime. While these changes represent a 

change in the PFIC shareholders 

required to file an annual report under 

section 1298(f), a domestic partnership 

or S corporation will continue to have 

a responsibility to report information 

with respect to the PFICs it owns to its 

interest holders on Schedule K–3, 

‘‘Partner’s Share of Income, Deductions, 

Credits, etc.—International,’’ of Forms 

1065, ‘‘U.S. Return of Partnership 

Income,’’ and 1120–S, ‘‘U.S. Income Tax 

Return for an S Corporation,’’ 

respectively, when required. The 

general information reporting 

obligations of domestic partnerships 

and S corporations with respect to their 

interest holders should result in the 

interest holders receiving the 

information required to satisfy their 

filing obligations under section 1298(f). 

G. Other Changes 

1. Section 1297(e) PFICs 

The term ‘‘section 1297(e) PFIC’’ and 

other associated references to ‘‘section 

1297(e)’’ related to section 1297(e) 

before it was re-designated as current 

section 1297(d) by the Tax Technical 

Corrections Act of 2007. Accordingly, 

the proposed regulations change the 

defined term ‘‘section 1297(e) PFIC’’ to 

‘‘section 1297(d) PFIC’’ and replace 

references to ‘‘section 1297(e) PFICs’’ 

and ‘‘section 1297(e)(2)’’ with references 

to ‘‘section 1297(d) PFICs’’ and ‘‘section 

1297(d)(2),’’ respectively. 

2. Changes to Definition of Post-1986 

Earnings and Profits 

The term ‘‘post-1986 earnings and 

profits’’ is the basis upon which a 

deemed dividend under §§ 1.1291–9, 

1.1297–3, and 1.1298–3 is determined, 

and each of those sections generally 

defines the term by reference to the 

definition of ‘‘undistributed earnings, 

within the meaning of section 902(c).’’ 

However, because section 902 was 

repealed by the Tax Cuts and Jobs Act, 

Public Law 115–97, December 22, 2017, 

131 Stat 2054 (‘‘TCJA’’), the proposed 

regulations revise the definition of post1986 earnings and profits in §§ 1.1291– 

9(a)(2)(i), 1.1297–3(c)(3)(i)(A), and 

1.1298–3(c)(3)(i) to eliminate references 

to section 902(c) and to define the term 

by reference to earnings and profits 

computed in accordance with sections 

964(a) and 986. 

II. Subpart F Rules 

A. Modifications to § 1.964–1(c), 

Including Determination of Controlling 

Domestic Shareholders 

As discussed in part IV.A of the 

Background section of this preamble, 

the final regulations do not extend 

aggregate treatment for purposes of 

determining controlling domestic 


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3900 Federal Register / Vol. 87, No. 16 / Tuesday, January 25, 2022 / Proposed Rules 

3This comment also requested guidance to (i) 

clarify the determination of a partner’s 

proportionate share of CFC stock in accordance 

with the allocation of tested items under section 

951A to a U.S. shareholder that owns stock in a CFC 

through an interest in a partnership and (ii) provide 

rules on the allocation of tested items under section 

951A and on the maintenance of previously-taxed 

earnings and profits (‘‘PTEP’’) accounts. The longstanding issues of measuring a partner’s 

proportionate share of income under subpart F as 

well as the treatment of targeted capital accounts 

are outside the scope of these proposed regulations 

and therefore are not addressed. With respect to the 

request for guidance related to PTEP, the Treasury 

Department and the IRS intend to separately 

address certain issues pertaining to partnerships 

and S corporations. In particular, this guidance will 

include rules to address the transition of S 

corporations from entity treatment to aggregate 

treatment as noted in section 3.04 of Notice 2020– 

69. 

shareholders of foreign corporations. 

Nevertheless, the Treasury Department 

and the IRS have further considered the 

benefits of maintaining entity treatment 

of domestic partnerships for purposes of 

determining the controlling domestic 

shareholders of a CFC, including the 

administrative convenience of 

centralizing the various actions taken by 

controlling domestic shareholders, and 

have concluded that such actions 

should generally be taken by those 

persons whose tax liability is directly 

affected thereby. Accordingly, the 

Treasury Department and the IRS have 

concluded that domestic partnerships 

should be treated as aggregates for 

purposes of determining whether a U.S. 

shareholder is a controlling domestic 

shareholder of a CFC. This approach is 

consistent with the final regulations, 

which provide that neither section 951 

nor section 951A inclusions arise at the 

U.S. shareholder partnership level but 

instead arise directly to U.S. 

shareholder partners. In other words, 

actions that affect the determination of 

inclusions under sections 951 and 951A 

are determined by the same persons that 

have the direct inclusions under those 

provisions. 

Accordingly, proposed § 1.958–1(d)(1) 

provides that domestic partnerships are 

not considered to own stock of a foreign 

corporation under section 958(a) for 

purposes of § 1.964–1(c) as well as any 

provision that specifically applies by 

reference to § 1.964–1(c). As a result, 

domestic partnerships and S 

corporations (by virtue of section 

1373(a)) would be treated as aggregates 

of their partners and shareholders, 

respectively, for purposes of 

determining the controlling domestic 

shareholders of foreign corporations 

under the proposed regulations. 

In addition to applying for purposes 

of determining the controlling domestic 

shareholders of a foreign corporation, 

aggregate treatment also generally 

applies for purposes of the notice 

requirement of § 1.964–1(c)(3)(iii). 

Extending aggregate treatment to this 

notice requirement ensures that other 

persons known by the controlling 

domestic shareholders to be U.S. 

persons that own (within the meaning of 

section 958(a)) stock of a foreign 

corporation (‘‘domestic shareholders’’) 

through a domestic partnership (but that 

are not themselves controlling domestic 

shareholders) are made aware of any 

action undertaken by the controlling 

domestic shareholders under § 1.964– 

1(c)(3). However, proposed § 1.964– 

1(c)(3)(iii)(B) provides that a controlling 

domestic shareholder is deemed to 

satisfy the notice requirement with 

respect to domestic shareholders that 

are partners in a domestic partnership 

by providing the notice to the domestic 

partnership (known to the controlling 

domestic shareholder) through which 

the domestic shareholders own stock of 

the foreign corporation, which could 

then provide the notice to its partners 

that are domestic shareholders. 

Additionally, to help facilitate notice to 

the person that prepares and maintains 

the foreign corporation’s books and 

records for U.S. federal income tax 

purposes, notice is also required to be 

provided to any U.S. person (such as a 

domestic partnership) that controls, 

within the meaning of section 6038(e), 

the foreign corporation (in other words, 

any U.S. person that is a Category 4 filer 

of Form 5471, ‘‘Information Return of 

U.S. Persons With Respect to Certain 

Foreign Corporations,’’ with respect to 

the foreign corporation). 

Additionally, in light of the repeal of 

section 902 as part of the TCJA, the 

proposed regulations replace the term 

‘‘noncontrolled section 902 

corporation’’ in § 1.964–1(c)(5)(ii) with 

the term ‘‘noncontrolled foreign 

corporation,’’ which is defined as any 

foreign corporation (other than a CFC as 

defined in section 957 or section 953) as 

to which a U.S. shareholder owns stock 

within the meaning of section 958(a). 

Proposed § 1.964–1(c)(5)(ii). The 

proposed regulations similarly replace 

the term ‘‘majority domestic corporate 

shareholders’’ with the term ‘‘majority 

domestic shareholders,’’ to reflect the 

repeal of section 902. Id. 

B. Treatment of S Corporations With 

AE&P 

After the issuance of Notice 2020–69 

(announcing an intent to issue 

regulations adopting the S corporation 

transition approach), a comment 

requested additional guidance on issues 

applicable to S corporations under 

sections 951 and 951A. Specifically, the 

comment requested (i) transition rules 

for taxpayers that elected into the S 

corporation transition approach; (ii) 

guidance on the aggregate treatment of 

S corporations for purposes of sections 

951 and 951A; and (iii) the ability of all 

S corporations to elect entity treatment 

similar to the S corporation transition 

approach described in Notice 2020–69, 

regardless of whether the S corporation 

has AE&P.3

The proposed regulations adopt the S 

corporation transition approach, as 

described in Notice 2020–69. See 

proposed § 1.958–1(e). The Treasury 

Department and the IRS have concluded 

that the S corporation transition 

approach in the proposed regulations 

appropriately smooths the transition for 

S corporations to be on an equal footing 

with domestic partnerships. The S 

corporation transition approach ensures 

that amounts corresponding to income 

of a CFC already taxed to S corporation 

shareholders can, even without being 

distributed by the CFC, be distributed 

tax-free by the S corporation and have 

priority over distributions of C 

corporation AE&P, while the latter will 

continue to be taxed as dividends when 

distributed, consistent with section 

1368. Because section 951 and section 

951A inclusions at the entity level will 

generate AAA, S corporations with 

AE&P will be able to make distributions 

to shareholders with respect to those 

amounts rather than distributions of 

dividends out of AE&P. 

The proposed regulations do not 

extend the S corporation transition 

approach to all S corporations, 

regardless of AE&P. The Treasury 

Department and the IRS believe that 

permitting all S corporations to elect to 

be treated as an entity for purposes of 

sections 951 and 951A is inconsistent 

with section 1373(a) and the aggregate 

approach adopted in the final section 

951A regulations and the final 

regulations. Further, the Treasury 

Department and the IRS have 

determined that, in recognition of 

certain issues specific to S corporations 

with AE&P as of a certain date, the S 

corporation transition approach, with its 

conditions, sufficiently transitions those 

S corporations that elect entity 

treatment to the aggregate treatment 

provided in the final section 951A 

regulations and the final regulations. 

Accordingly, this comment is not 

adopted. 

C. Entity Treatment Under Section 951A 

and Inapplicability of Penalties 

The proposed regulations include the 

rules announced in Notice 2019–46 that 

permit domestic partnerships and S 


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corporations to apply the hybrid 

approach for taxable years ending before 

June 22, 2019. Consistent with Notice 

2019–46, to apply the hybrid approach, 

domestic partnerships and S 

corporations must satisfy certain notice 

requirements. Proposed § 1.951A– 

1(e)(2)(i) and (iii). In addition, if the 

domestic partnership or S corporation 

satisfies these notification requirements 

it will not be subject to certain penalties 

for failures to file or furnish statements 

to the extent such failures arise from 

acting consistently with the 2018 

proposed regulations before June 22, 

2019. Proposed § 1.951A–1(e)(2)(ii). 

D. Related Person Insurance Income 

1. Aggregate Treatment of Partnerships 

A comment in response to the 2019 

proposed regulations requested that 

aggregate treatment be applied to 

domestic partnerships for purposes of 

determining RPII and that domestic 

partnerships be treated the same way as 

foreign partnerships for this purpose. In 

addition, the Treasury Department and 

the IRS recognize that treating a 

domestic partnership as an entity for 

purposes of section 953(c) could 

produce disproportionate RPII 

inclusions in light of the special rules 

contained in section 953(c)(5). 

Therefore, proposed § 1.958–1(d)(1) 

modifies the list of provisions subject to 

aggregate treatment to include section 

953(c), and a domestic partnership is 

not treated as a RPII U.S. shareholder for 

the purpose of characterizing income as 

RPII. The proposed regulations, 

however, provide that § 1.958–1(d)(1) 

does not apply for purposes of section 

953(c)(1)(A) in determining whether any 

foreign corporation is a controlled 

foreign corporation as defined in section 

953(c)(1)(B), 953(c)(3)(E), or 

953(d)(1)(A). Proposed § 1.958– 

1(d)(2)(v). This approach is consistent 

with § 1.958–1(d)(2)(ii) (providing that 

§ 1.958–1(d)(1) does not apply for 

purposes of determining whether a 

foreign corporation is a controlled 

foreign corporation as defined in section 

957). 

Corresponding changes are made to 

the definition of RPII under proposed 

§ 1.953–3 to conform with the aggregate 

treatment of partnerships under 

proposed § 1.958–1(d)(1). RPII is 

generally defined as premium and 

investment income attributable to an 

annuity, insurance, or reinsurance 

policy that directly or indirectly 

provides coverage to a related insured. 

Proposed § 1.953–3(b)(1)(i). The new 

definition of RPII is modeled on the 

1991 proposed regulations but has been 

modified to account for the aggregate 

treatment of partnerships and the 

Insurance Active Financing Exception. 

Section 1.953–3(b)(1) of the 1991 

proposed regulations is withdrawn. 

A related insured is defined to 

include a RPII U.S. shareholder or a 

person related to a RPII U.S. 

shareholder. Proposed § 1.953– 

3(b)(1)(ii)(A) and (B). In addition, if a 

related insured indirectly owns stock in 

a RPII CFC through a partnership, the 

partnership is treated as a related 

insured. Proposed § 1.953–3(b)(1)(ii)(C). 

This rule applies to foreign and 

domestic partnerships (other than 

publicly traded partnerships) and to S 

corporations. 

Proposed § 1.953–3(b)(1)(ii)(D) also 

provides that a person (other than a 

publicly traded corporation or 

partnership) is treated as a related 

insured if it is more than 50 percent 

owned (directly, indirectly, or 

constructively) by RPII U.S. 

shareholders. This rule is intended to 

prevent the avoidance of RPII when the 

insured is held by multiple RPII U.S. 

shareholders (or their affiliates) and is 

issued pursuant to the authority granted 

in section 953(c)(8)(A). The Treasury 

Department and the IRS request 

comments on whether the final 

regulations should include a rule under 

which a U.S. person that holds an 

option to acquire stock (or another nonstock interest) in a RPII CFC also should 

be treated as a related insured. 

The term ‘‘related insured’’ describes 

those persons who, if insured, would 

cause a RPII CFC’s income to be 

characterized as RPII. A person who is 

not actually insured by a RPII CFC can 

meet the definition of a related insured 

for purposes of the proposed regulations 

(though a RPII CFC’s income will not be 

characterized as RPII unless it is 

attributable to a policy that provides 

coverage to a related insured). No 

inference is intended concerning the 

standard for determining whether a 

person is characterized as being insured 

for other tax purposes. 

When a partnership is insured by a 

RPII CFC, the amount of RPII is 

determined based on the portion of the 

premium that is allocated to related 

insureds (other than partnerships or S 

corporations). Proposed § 1.953– 

3(b)(1)(iii). In the case of tiered 

partnerships, the proposed regulations 

take into account the portion of the 

premium that is allocated to a partner 

who indirectly owns a partnership 

through one or more upper-tier 

partnerships. The proposed regulations 

provide that the premium allocated to 

the relevant partner is determined based 

on the partnership agreement and 

section 704(b). Proposed § 1.953– 

3(b)(1)(iii)(C)(1). The Treasury 

Department and the IRS are also 

considering whether, solely for 

purposes of determining the amount of 

RPII, another method of allocating the 

premium payments should be required 

under the authority provided in section 

953(c)(8). One potential method 

includes allocating the premium 

payments in proportion to each 

partner’s nonseparately stated share of 

partnership income or loss. Comments 

are requested on whether this or another 

alternative would be more appropriate. 

The Treasury Department and the IRS 

request comments on the appropriate 

application of aggregate principles to 

RPII. The Treasury Department and the 

IRS also are considering revising forms 

and instructions to facilitate information 

sharing and reporting between RPII U.S. 

shareholders, RPII CFCs, and 

partnerships and request comments in 

this regard. 

2. Cross-Insurance Rule 

The Treasury Department and IRS are 

aware of abusive marketed offshore 

captive insurance arrangements that, 

notwithstanding the directive in section 

953(c)(8)(A) and legislative history 

described in part IV.C of the 

Background section of this preamble 

and the 1991 proposed regulations, 

attempt to avoid the RPII rules through 

the use of cross-insurance. Consistent 

with the Congressional directive, the 

proposed regulations contain a special 

rule to address cross-insurance 

arrangements, which replaces the crossinsurance rule contained in the 1991 

proposed regulations. Proposed § 1.953– 

3(b)(5) provides that insurance income 

is treated as RPII if it is attributable to 

an arrangement in which a RPII CFC 

insures a person that is not a related 

insured and, as part of the same 

arrangement, another person insures a 

related insured of the RPII CFC. This 

rule applies to direct or indirect 

arrangements involving two or more 

insurance companies, and also covers 

other arrangements with a similar 

degree of cooperative risk sharing and 

applies regardless of whether the 

shareholders of each RPII CFC are 

engaged in a similar line of business. 

Section 1.953–3(b)(5) of the 1991 

proposed regulations is withdrawn. 

The Treasury Department and the IRS 

request comments with respect to other 

parts of the 1991 proposed regulations 

relating to RPII, including whether other 

parts should be reproposed, such as the 

exception for indirect ownership 

through publicly traded corporations 

under § 1.953–3(b)(2)(iii) of the 1991 

proposed regulations. 


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III. Net Investment Income Tax 

As discussed in part V of the 

Background section of this preamble, a 

domestic partnership or S corporation 

that directly or indirectly (through one 

or more foreign entities) owns a CFC or 

QEF may make an election under 

§ 1.1411–10(g) with respect to the CFC 

or QEF, and certain persons that own a 

CFC or QEF indirectly through a 

domestic partnership or S corporation 

may also make such an election, but 

only if the domestic partnership or S 

corporation does not make the election. 

Consistent with the transition to 

aggregate treatment and provisions in 

this rulemaking requiring QEF elections 

to be made (and QEF inclusions to arise) 

at the partner or S corporation 

shareholder level, the Treasury 

Department and the IRS have 

determined that elections under 

§ 1.1411–10(g) should no longer be 

permitted to be made by a domestic 

pass-through entity, but instead should 

be made only by an individual, estate, 

or trust that holds the CFC or QEF 

indirectly through the domestic passthrough entity. This rule permits the 

election to be made solely by the person 

whose tax liability is directly affected by 

the election. Accordingly, proposed 

§ 1.1411–10(g)(3)(i) generally requires 

the election to be made by an 

individual, estate, or trust that 

indirectly holds the relevant CFC or 

QEF indirectly through a partnership or 

S corporation. However, for taxable 

years that an S corporation elects to be 

treated as an entity under proposed 

§ 1.958–1(e), the S corporation may 

make the election under § 1.1411–10(g) 

with respect to CFCs it owns, directly or 

indirectly; if the S corporation does not 

make the election under § 1.1411–10(g), 

its shareholders that are individuals, 

estates, or trusts may make it instead. 

Proposed § 1.1411–10(g)(3)(ii). 

The proposed regulations also remove 

§ 1.1411–10(g)(2)(iii), which provided 

rules applicable when a partnership 

terminated under section 708(b)(1)(B), 

because section 708(b)(1)(B) was 

repealed as part of the TCJA. 

Finally, the Treasury Department and 

the IRS are considering providing 

additional guidance (perhaps in the 

finalization of these proposed 

regulations) under section 1411 on the 

calculation of net gain for indirect 

shareholders when, for example, PFIC 

stock is sold by a foreign partnership 

through which the indirect shareholder 

owns the PFIC stock in a year after the 

indirect shareholder includes MTM 

gain. Compare section 1296(b)(1)(A) 

(providing an increase to the basis of 

PFIC stock held by a direct shareholder), 

with section 1296(b)(2)(A) and proposed 

§ 1.1296–1(d)(2)(i) (providing, for 

purposes of chapter 1 of the Code, an 

increase to the basis of PFIC stock 

indirectly held). In light of this 

difference in wording, and the 

placement of section 1411 in chapter 2A 

of the Code, the question arises whether 

net gain under section 1411 could be 

overstated. But see section 

1411(c)(1)(A)(iii) and § 1.1411– 

4(a)(1)(iii) (providing that net 

investment income includes net gain 

attributable to the disposition of 

property but only ‘‘to the extent taken 

into account in computing taxable 

income.’’) Comments are requested on 

this issue. 

IV. Applicability Dates 

A. In General 

The regulations under sections 964, 

1291, 1293, 1295, 1296, 1298, and 1411 

and § 1.958–1(d) are proposed to apply 

to taxable years beginning on or after the 

date of publication of the Treasury 

decision adopting these rules as final 

regulations in the Federal Register. 

B. Entity Treatment of Certain Domestic 

Partnerships and S Corporations 

With respect to the rules relating to 

domestic partnerships and S 

corporations that applied the hybrid 

approach to determining section 951A 

inclusions contained in previously 

proposed § 1.951A–5 (83 FR 51072, 

51101–51104), proposed § 1.951A– 

1(e)(2) is proposed to apply to taxable 

years of foreign corporations ending 

before June 22, 2019, and to taxable 

years of U.S. shareholders in which or 

with which such taxable years end. 

Taxpayers may continue to rely on 

Notice 2019–46 until these regulations 

are finalized. 

C. Elective Entity Treatment for Certain 

S Corporations 

With respect to the rules relating to S 

corporations with AE&P, proposed 

§ 1.958–1(e) is proposed to apply to 

taxable years of S corporations ending 

on after September 1, 2020. However, 

taxpayers may rely on proposed 

§ 1.958–1(e) for taxable years of S 

corporations ending on or after June 22, 

2019, and ending before September 1, 

2020, provided that the S corporation 

and its shareholders that are U.S. 

shareholders consistently apply those 

rules with respect to all CFCs whose 

stock the S corporation owns with the 

meaning of section 958(a). 

D. RPII Provisions 

The general RPII rules in proposed 

§ 1.953–3(b)(1) apply to taxable years of 

foreign corporations beginning on or 

after the date of publication of the 

Treasury decision adopting these rules 

as final regulations in the Federal 

Register, and to taxable years of United 

States persons in which or with which 

such taxable years of foreign 

corporations end. 

The cross-insurance rule in proposed 

§ 1.953–3(b)(5) applies to taxable years 

of foreign corporations ending on or 

after January 24, 2022, and to taxable 

years of United States persons in which 

or with which such taxable years of 

foreign corporations end. As noted in 

part IV.C of the Background section of 

this preamble, section 953(c)(8)(A) and 

the legislative history refer to cross 

insurance in offshore captive insurance 

arrangements as avoidance transactions, 

and the legislative history states that 

deferral is not intended for such cases. 

The applicability date of the final 

regulations is not intended to address 

the effect of the statute and legislative 

history on taxpayers who participated in 

cross-insurance arrangements in years 

ending before January 24, 2022. 

Special Analyses 

I. Regulatory Planning and Review— 

Economic Analysis 

These regulations are not subject to 

review under section 6(b) of Executive 

Order 12866 pursuant to the 

Memorandum of Agreement (April 11, 

2018) between the Treasury Department 

and the Office of Management and 

Budget (‘‘OMB’’) regarding review of tax 

regulations. 

II. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(44 U.S.C. 3501–3520) (‘‘PRA’’) 

generally requires that a federal agency 

obtain the approval of the OMB before 

collecting information from the public, 

whether such collection of information 

is mandatory, voluntary, or required to 

obtain or retain a benefit. 

The collections of information 

included in these proposed regulations 

are in proposed § 1.951A–1(e)(2)(iii); 

proposed § 1.958–1(e)(1)(v) and (e)(2); 

proposed § 1.964–1(c)(3)(ii) and (iii); 

proposed § 1.1295–1(d)(2)(i)(A) and 

(d)(2)(ii)(A); proposed § 1.1296– 

1(h)(1)(i) introductory text and 

(h)(1)(i)(B); and proposed § 1.1298– 

1(b)(1) and (2). The information in the 

collections of information provided will 

generally be used by the IRS for tax 

compliance purposes or by taxpayers to 

facilitate proper reporting and 

compliance. 


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A. Collections of Information Under 

Existing Tax Forms 

1. Collections of Information in 

Proposed § 1.951A–1 

The collections of information in 

proposed § 1.951A–1(e)(2)(iii) are 

required to be provided by domestic 

partnerships and S corporations that 

elect to apply the rules in proposed 

§ 1.951A–5, as contained in the 2018 

proposed regulations (83 FR 51072, 

51101–51104), for taxable years ending 

before June 22, 2019. These collections 

of information are satisfied by the 

domestic partnership or S corporation 

attaching a statement to its return. In 

certain instances, the domestic 

partnership or S corporation must also 

file Form 8992, ‘‘U.S. Shareholder 

Calculation of Global Intangible LowTaxed Income (GILTI),’’ with its return 

and separately state each partner’s or 

shareholder’s share of any distributions 

of E&P received by the domestic 

partnership or S corporation that relate 

to the GILTI inclusion amount reflected 

on its Schedules K–1, ‘‘Partner’s Share 

of Income, Deductions, Credits, etc.’’ or 

Schedules K–1, ‘‘Shareholder’s Share of 

Income, Deductions, Credits, etc.,’’ as 

applicable. 

For purposes of the PRA, the 

reporting burden associated with the 

collections of information in proposed 

§ 1.951A–1(e)(2)(iii) will be reflected in 

the Paperwork Reduction Act 

Submissions associated with Forms 

1065 and 1120–S (OMB control number 

1545–0123). 

2. Collections of Information in 

Proposed § 1.958–1 

The collection of information in 

proposed § 1.958–1(e)(2) is a statement 

attached to Form 1120–S that identifies 

that the S corporation and its 

shareholders (where applicable) are 

electing for the S corporation to be 

treated as an entity for purposes of 

determining who is subject to income 

inclusions under sections 951 and 951A 

for the first taxable year ending on or 

after September 1, 2020, states the 

amount of the S corporation’s AE&P, 

and is signed (where applicable) by a 

person authorized to sign the S 

corporation’s Form 1120–S. A similar 

collection of information is required for 

taxpayers (certain S corporations and 

their shareholders) that elect for the S 

corporation to be treated as an entity for 

purposes of sections 951 and 951A for 

taxable years ending before September 

1, 2020, and after June 21, 2019. 

For purposes of the PRA, the 

reporting burden associated with the 

collection of information in proposed 

§ 1.958–1(e)(2) will be reflected in the 

Paperwork Reduction Act Submissions 

associated with Form 1120–S (OMB 

control number 1545–0123). 

Additionally, where an S corporation 

and its shareholders elect for the S 

corporation to be treated as an entity for 

taxable years ending before September 

1, 2020, and after June 21, 2019, the 

reporting burden associated with the 

collection of information in proposed 

§ 1.958–1(e)(2) will be reflected in the 

Paperwork Reduction Act Submissions 

associated with Form 1120–S (OMB 

control number 1545–0123), the Form 

1040 series (OMB control number 1545– 

0074), and the Form 1041 series (OMB 

control number 1545–0092). 

3. Collections of Information in § 1.964– 

1 and Proposed § 1.964–1 

The collection of information in 

proposed § 1.964–1(c)(3)(ii) applies to 

taxpayers that are controlling domestic 

shareholders of foreign corporations (as 

defined in § 1.964–1(c)(5)) and that 

make certain elections with respect to, 

or adopt or change methods of 

accounting or taxable years for, the 

foreign corporations. This collection of 

information is satisfied by the 

controlling domestic shareholder filing 

a statement containing certain 

prescribed information with its own tax 

return (or information return, if 

applicable) for its taxable year in which 

or within which the affected taxable 

year of the foreign corporation ends. 

The collection of information in 

proposed § 1.964–1(c)(3)(ii) applies to 

U.S. shareholder partners (and not to 

U.S. shareholder partnerships) as a 

result of proposed § 1.958–1(d)(1). 

The collection of information in 

proposed § 1.964–1(c)(3)(iii) requires 

controlling domestic shareholders of 

foreign corporations to notify certain 

U.S. persons known to them of actions 

taken with respect to the foreign 

corporation, such as certain tax 

elections and adoptions of or changes to 

the foreign corporation’s accounting 

methods or tax years. Under proposed 

§ 1.964–1(c)(3)(iii)(A), this collection of 

information is satisfied by the 

controlling domestic shareholder 

providing notice to prescribed U.S. 

persons known to the controlling 

domestic shareholder setting forth the 

name, country of organization, and U.S. 

employer identification number (if 

applicable) of the foreign corporation; 

providing the names, addresses, and 

stock interests of the controlling 

domestic shareholders of the foreign 

corporation; describing the nature of the 

action taken on behalf of the foreign 

corporation and the taxable year for 

which the action was taken; and 

identifying a designated shareholder 

that retains a jointly executed consent 

confirming that such action has been 

approved by all of the controlling 

domestic shareholders and containing 

the signature of a principal officer of 

each such shareholder (or its common 

parent). Proposed § 1.964–1(c)(3)(iii)(B) 

provides that a controlling domestic 

shareholder will be deemed to satisfy 

the general notice requirement with 

respect to U.S. persons known to the 

controlling domestic shareholder that 

own stock in the foreign corporation 

through a domestic partnership by 

providing the notice containing the 

same information to the partnership 

instead of to each U.S. person. 

For purposes of the PRA, the 

reporting burden associated with the 

collections of information in proposed 

§ 1.964–1(c)(3)(ii) and (iii) will be 

reflected in the Paperwork Reduction 

Act Submissions associated with the 

Forms for persons which can be 

considered controlling domestic 

shareholders under the proposed 

regulations, including individuals and 

certain domestic trusts, domestic 

estates, domestic corporations, certain 

tax-exempt entities. Thus, the reporting 

burden associated with these collections 

of information will be reflected in the 

Paperwork Reduction Act Submissions 

associated with the Form 990 series 

(OMB control number 1545–0047), the 

Form 1040 series (OMB control number 

1545–0074), the Form 1041 series (OMB 

control number 1545–0092), and the 

Form 1120 series (OMB control number 

1545–0123). 

4. Collections of Information in 

Proposed § 1.1295–1 

The collections of information in 

proposed § 1.1295–1(d)(2)(i)(A) and 

(d)(2)(ii)(A) apply to partners in 

partnerships and S corporation 

shareholders that make QEF elections 

with respect to a PFIC held through a 

partnership or S corporation. The 

collections of information in these 

sections are satisfied, in part, by the 

partners and S corporation shareholders 

filing Form 8621 to make the QEF 

election. For purposes of the PRA, the 

reporting burden associated with the 

collection of information in the Form 

8621 will be reflected in the Paperwork 

Reduction Act Submissions associated 

with Form 8621 (OMB control number 

1545–1002). 

5. Collection of Information in Proposed 

§ 1.1296–1 

The collections of information in 

proposed § 1.1296–1(h)(1)(i) apply to 

partners in partnerships and S 

corporation shareholders that make 

MTM elections with respect to PFICs 


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3904 Federal Register / Vol. 87, No. 16 / Tuesday, January 25, 2022 / Proposed Rules 

held through a partnership or S 

corporation. These collections of 

information are satisfied, in part, by the 

partners and S corporation shareholders 

filing Form 8621 to make the MTM 

election. For purposes of the PRA, the 

reporting burden associated with the 

collections of information in the Form 

8621 will be reflected in the Paperwork 

Reduction Act Submissions associated 

with Form 8621 (OMB control number 

1545–1002). 

6. Collections of Information in 

Proposed § 1.1298–1 

The collections of information in 

proposed § 1.1298–1(b)(1) apply to 

partners in partnerships and S 

corporation shareholders that own 

PFICs indirectly through partnerships 

and S corporations with respect to 

which they are required to file an 

annual report in their capacity as PFIC 

shareholders, as defined in proposed 

§ 1.1291–1(b)(7). The collections of 

information in proposed § 1.1298– 

1(b)(2) apply to certain beneficiaries of 

domestic estates and domestic 

nongrantor trusts that own PFICs 

indirectly through the domestic estate or 

domestic nongrantor trust. These 

collections of information are satisfied 

by annually filing Form 8621. For 

purposes of the PRA, the reporting 

burden associated with the collections 

of information in the Form 8621 will be 

reflected in the Paperwork Reduction 

Act Submissions associated with Form 

8621 (OMB control number 1545–1002). 

7. Estimated Number of Respondents 

The following table displays the 

number of respondents estimated to be 

required to satisfy the collections of 

information described in this part II.A of 

the Special Analysis. The ranges in the 

following table may be overstated in 

some cases for various reasons, 

including overcounting domestic 

partnerships or S corporations that are 

themselves partners in domestic 

partnerships and overestimating the 

number of taxpayers who will make an 

election or take a relevant action. 

TAX FORMS IMPACTED

Collection of information 

Number of 

respondents 

(estimated) 

Forms to which the 

information may be 

attached 

Proposed § 1.951A–1(e) (2)(iii): Election for domestic partnerships to apply the hybrid approach in proposed § 1.951A–5 of the 2018 proposed regulations.0–7,000 .................. Form 1065. 

Proposed § 1.951A–1(e)(2)(iii): Election for S corporations to apply the hybrid approach in proposed § 1.951A–5 of the 2018 proposed regulations.0–4,000 .................. Form 1120–S. 

Proposed § 1.958–1(e)(2): Election for S corporations with AE&P to apply entity treatment for 

purposes of sections 951 and 951A.

2,300–4,300 ........... Form 1120–S. 

Form 1040 series. 

Form 1041 series. 

Proposed § 1.964–1(c)(3)(ii) and (iii): Statement attached to tax return of controlling domestic 

shareholders of certain foreign corporations and notification to certain other U.S. persons.

6,600–7,000 ........... Form 990 series. 

Form 1040 series. 

Form 1041 series. 

Form 1120 series. 

Proposed § 1.1295–1(d)(2)(i)(A): QEF election made by partner that indirectly owns stock of a 

PFIC through a partnership.

1,200,000– 

1,400,000.

Form 8621. 

Proposed § 1.1295–1(d)(2)(ii)(A): QEF election made by shareholder of an S corporation that 

indirectly owns stock of a PFIC through the S corporation.

2,000 ...................... Form 8621. 

Proposed § 1.1296–1(h)(1)(i): MTM election made by partner that indirectly owns stock of a 

PFIC through a partnership.

75,000–200,000 ..... Form 8621. 

Proposed § 1.1296–1(h)(1)(i): MTM election made by shareholder of an S corporation that indirectly owns stock of a PFIC through the S corporation.200–300 ................. Form 8621. 

Proposed § 1.1298–1(b)(1): Annual report for partners that indirectly own stock of a PFIC 

through a partnership.

1,250,000– 

1,500,000.

Form 8621. 

Proposed § 1.1298–1(b)(1): Annual report for shareholders of S corporations that indirectly own 

stock of a PFIC through the S corporation.

2,300–2,500 ........... Form 8621. 

Proposed § 1.1298–1(b)(2): Annual report for certain beneficiaries of domestic estates or domestic grantor trusts that indirectly own stock of a PFIC through the estate or grantor trust.5,000 ...................... Form 8621. 

Source: Research, Applied Analytics and Statistics division (RAAS) (IRS), Compliance Data Warehouse (CDW) (IRS). 

8. Status of PRA Submissions 

The current status of the PRA 

submissions related to the tax forms on 

which reporting under these regulations 

will be required is summarized in the 

following table. The burdens associated 

with the information collections in the 

forms are included in aggregated burden 

estimates for the OMB control numbers 

1545–0047 (which represents a total 

estimated burden time for all forms and 

schedules for tax-exempt entities of 50.5 

million hours and total estimated 

monetized costs of $3.59 billion 

($2018)), 1545–0074 (which represents a 

total estimated burden time for all forms 

and schedules for individuals of 1.784 

billion hours and total estimated 

monetized costs of $31.764 billion 

($2017)), 1545–0092 (which represents a 

total estimated burden time for all forms 

and schedules for trusts and estates of 

307.8 million hours and total estimated 

monetized costs of $9.95 billion 

($2016)), and 1545–0123 (which 

represents a total estimated burden time 

for all forms and schedules for 

corporations of 3.157 billion hours and 

total estimated monetized costs of 

$58.148 billion ($2017)). The burden 

estimates provided in the OMB control 

numbers in the following table are 

aggregate amounts that relate to the 

entire package of forms associated with 

the OMB control number and will in the 

future include, but not isolate, the 

estimated burden of the tax forms that 

will be revised as a result of the 

information collections in these 

proposed regulations. These numbers 

are therefore unrelated to the future 

calculations needed to assess the burden 

imposed by these proposed regulations. 

To guard against over-counting the 

burden that international tax provisions 

imposed prior to the Act, the Treasury 

Department and the IRS urge readers to 

recognize that these burden estimates 

have also been cited by regulations 

(such as the foreign tax credit 

regulations, 84 FR 69022) that rely on 

the applicable OMB control numbers in 

order to collect information from the 

applicable types of filers. 


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In 2018, the IRS released and invited 

comment on drafts of Forms 990–PF 

(Return of Private Foundation or Section 

4947(a)(1) Trust Treated as Private 

Foundation), 990–T (Exempt 

Organization Business Income Tax 

Return), 1040 (U.S. Individual Income 

Tax Return), (U.S. Income Tax Return 

for Estates and Trusts), 1065 (U.S. 

Return of Partnership Income), 1120 

(U.S. Corporation Income Tax Return), 

and 8621 (Return by a Shareholder of a 

Passive Foreign Investment Company or 

Qualified Electing Fund). The IRS 

received comments only regarding 

Forms 1040, 1065, and 1120 during the 

comment period. After reviewing all 

such comments, the IRS made the forms 

available on December 21, 2018, for use 

by the public. 

No burden estimates specific to the 

forms affected by the proposed 

regulations are currently available. The 

Treasury Department and the IRS have 

not estimated the burden, including that 

of any new information collections, 

related to the requirements under the 

proposed regulations. The Treasury 

Department and the IRS request 

comments on all aspects of information 

collection burdens related to the 

proposed regulations, including 

estimates for how much time it would 

take to comply with the paperwork 

burdens for each relevant form and 

ways for the IRS to minimize the 

paperwork burden. In addition, drafts of 

IRS forms are posted for public review 

at https://apps.irs.gov/app/picklist/list/ 

draftTaxForms.htm. Comments on these 

forms can be submitted at https://

www.irs.gov/forms-pubs/comment-ontax-forms-and-publications. These 

forms will not be finalized until after 

they have been approved by OMB under 

the PRA. 

B. Collections of Information for Which 

New OMB Control Numbers Are Being 

Requested 

1. Collection of Information in Proposed 

§ 1.958–1 

The collection of information in 

proposed § 1.958–1(e)(1)(v) is required 

for certain S corporations to make valid 

elections under proposed § 1.958– 

1(e)(1)(i) to apply entity treatment for 

purposes of determining income 

inclusions under sections 951 and 

951A. This collection of information is 

satisfied by the S corporation 

maintaining sufficient records to 

support the determination of its AE&P 

amount. 

Estimated annual reporting burden: 

213. 

Estimated total annual monetized 

cost burden: $20,188. 

Estimated average annual burden 

hours per respondent: 0.5. 

Estimated number of respondents: 

425. 

Estimated annual frequency of 

responses: Once. 

2. Collections of Information in 

Proposed § 1.1295–1 

Part of the collection of information in 

proposed § 1.1295–1(d)(2)(i)(A) is for a 

partner to notify the partnership that the 

partner has made a QEF election with 

respect to a PFIC it owns indirectly 

through the partnership. This collection 

of information is satisfied by the partner 

notifying the partnership of the election 

no later than 30 days after filing the 

return with which the election is made. 

The partner may notify the partnership 

in any reasonable manner. 

Estimated annual reporting burden: 

650,000. 

Estimated total annual monetized 

cost burden: $61,750,000. 

Estimated average annual burden 

hours per respondent: 0.5. 

Estimated number of respondents: 

1,300,000. 

Estimated annual frequency of 

responses: One-time election. 

Part of the collection of information in 

proposed § 1.1295–1(d)(2)(ii)(A) is for 

an S corporation shareholder to notify 

the S corporation that the shareholder 

has made a QEF election with respect to 

a PFIC it owns indirectly through the S 

corporation. This collection of 

information is satisfied by the 

shareholder notifying the S corporation 

of the election no later than 30 days 

after filing the return with which the 

election is made. The shareholder may 

notify the S corporation in any 

reasonable manner. 

Estimated annual reporting burden: 

1,000. 

Estimated total annual monetized 

cost burden: $95,000. 

Estimated average annual burden 

hours per respondent: 0.5. 

Estimated number of respondents: 

2,000. 

Estimated annual frequency of 

responses: One-time election. 

3. Collection of Information in Proposed 

§ 1.1296–1 

The collection of information in 

proposed § 1.1296–1(h)(1)(i)(B) is for a 

partner or an S corporation shareholder 

to notify the partnership or S 

corporation, respectively, that the 

partner or shareholder has made an 

MTM election with respect to a PFIC it 

owns indirectly through the partnership 

or S corporation. This collection of 

information is satisfied by the partner or 

shareholder notifying the partnership or 

S corporation of the election no later 

than 30 days after filing the return with 

which the election is made. The partner 

or shareholder may notify the 

partnership or S corporation in any 

reasonable manner. 

Estimated annual reporting burden: 

35,500. 

Estimated total annual monetized 

cost burden: $3,372,500. 

Estimated average annual burden 

hours per respondent: 0.5. 

Estimated number of respondents: 

71,000. 

Estimated annual frequency of 

responses: One-time election. 

4. Submission to OMB and Request for 

Comments 

The collections of information 

contained in proposed §§ 1.958– 

1(e)(1)(v); 1.1295–1(d)(2)(i)(A) and 

(d)(2)(ii)(A); and 1.1296–1(h)(1)(i)(B) are 

either general recordkeeping or notice 

requirements and cannot be associated 

with existing OMB control numbers. 

These collections of information will be 

submitted to the Office of Management 

and Budget for review and, if approved, 

assigned new OMB control numbers in 

accordance with the PRA. Comments on 

the collections of information should be 

sent to the Office of Management and 

Budget, Attn: Desk Officer for the 

Department of the Treasury, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, with copies to 

the Internal Revenue Service, Attn: IRS 

Reports Clearance Officer, 

SE:W:CAR:MP:T:T:SP, Washington, DC 

20224. Comments on the collection of 

information should be received by 

March 28, 2022. Comments are 

specifically requested concerning: 

Whether the proposed collection of 

information is necessary for the proper 

performance of the duties of the IRS, 

including whether the information will 

have practical utility; 

The accuracy of the estimated burden 

associated with the proposed collection 

of information; 

How the quality, utility, and clarity of 

the information to be collected may be 

enhanced; 

How the burden of complying with 

the proposed collection of information 

may be minimized, including through 

the application of automated collection 

techniques or other forms of information 

technology; and 

Estimates of capital or start-up costs 

and costs of operation, maintenance, 

and purchases of services to provide 

information for the collections 

discussed in part II.B of this Special 

Analyses. 


khammond on DSKJM1Z7X2PROD with PROPOSALS2
3906 Federal Register / Vol. 87, No. 16 / Tuesday, January 25, 2022 / Proposed Rules 

III. Regulatory Flexibility Act 

Pursuant to the Regulatory Flexibility 

Act (5 U.S.C. chapter 6), it is hereby 

certified that the proposed regulations 

would not have a significant economic 

impact on a substantial number of small 

entities within the meaning of section 

601(6) of the Regulatory Flexibility Act 

(‘‘small entities’’). 

The Small Business Administration 

establishes small business size 

standards (13 CFR part 121) by annual 

receipts or number of employees. There 

are several industries that may be 

identified as small even through their 

annual receipts are above $25 million or 

because of the number of employees. 

The Treasury Department and the IRS 

do not have data indicating the number 

of small entities that will be 

significantly impacted by the proposed 

regulations. Nevertheless, regardless of 

the number of small entities potentially 

impacted, the Treasury Department and 

the IRS have concluded that the 

proposed regulations will not have a 

significant economic impact on small 

entities. 

First, the proposed regulations 

provide guidance with respect to 

domestic partnerships under the PFIC 

regime, which generally affects U.S. 

taxpayers that have ownership interests 

in certain foreign corporations that are 

not CFCs. To the extent that a foreign 

entity might be considered a small 

entity for purposes of the Regulatory 

Flexibility Act (because it has a place of 

business in the United States and makes 

a significant contribution to the U.S. 

economy, for example), because the 

proposed regulations would not affect 

foreign partnerships, foreign partners of 

the affected domestic partnerships, or 

the PFIC itself, there would be no 

economic impact on those foreign 

entities. Therefore, a small entity 

generally would not be affected by the 

proposed regulations unless it is a U.S. 

taxpayer that has an ownership interest 

in a foreign corporation. For purposes of 

the Regulatory Flexibility Act, natural 

persons are not considered small 

entities. 

Although data on U.S. businesses that 

invest in a PFIC is limited, data 

available to the IRS shows that 

individuals (Form 1040 filers) make up 

approximately 70 percent of those who 

report PFIC income while U.S. 

businesses of all sizes make up 

approximately 20 percent of Form 8621 

filers. To estimate the magnitude of the 

taxes currently collected as a result of 

U.S. businesses investing in PFICs, the 

Treasury Department and the IRS 

calculated the ratio of PFIC regime tax 

to (gross) total income for 2013 through 

2018 for corporations that filed Form 

1120 (‘‘C corporations’’) with a Form 

8621 attached. Total income was 

determined by matching each C 

corporation filing Form 8621 to its Form 

1120. Ordinary QEF income, QEF 

capital gains, and MTM income were 

assumed to be taxed at 35 percent (21 

percent for 2018), and the section 1291 

tax and interest charge tax were 

included as reported. Only those 

corporations where a match was found 

and that had positive total income were 

included in the analysis. For the 

approximately 150 to 300 C 

corporations for which a match was 

available in a given year, the average 

annual ratio of the calculated tax to total 

income was never greater than 0.00035 

percent. For the approximately 60 to 

200 C corporations per year with $25 

million or less for which a match was 

available, the average annual ratio was 

never greater than 1.068 percent. 

2013 

($ millions) 

2014 

($ millions) 

2015 

($ millions) 

2016 

($ millions) 

2017 

($ millions) 

2018 

($ millions) 

All C corporations 

Tax ....................... 5 12 14 8 22 42 

Total Income ........ 4,204,795 10,154,520 19,935,845 20,076,876 21,625,159 13,317,244 

Tax to Total Income ................. 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 

C corporations with total income of $25 million or less 

Tax ....................... (*) (*) 4 4 5 3 

Total Income ........ 463 563 627 573 460 741 

Tax to Total Income ................. 0.060% 0.014% 0.576% 0.689% 1.068% 0.400% 

Source: RAAS, CDW. * indicates less than $1 million. 

Thus, even if the economic impact of 

the proposed regulations is interpreted 

broadly to include the tax liability due 

under the PFIC regime, which small 

entities would be required to pay even 

if the proposed regulations were not 

issued, the tax-related economic impact 

should not be regarded as significant 

under the Regulatory Flexibility Act. 

A portion of the economic impact of 

the proposed regulations derives from 

the administration of the new rules and 

the collection of information 

requirements imposed by the PFICrelated provisions in proposed 

§§ 1.1295–1(d)(2)(i)(A) and (d)(2)(ii)(A), 

1.1296–1(h)(1)(i), and 1.1298–1(b)(1) 

and (2). For the collections of 

information in proposed §§ 1.1295– 

1(d)(2)(i)(A) and (d)(2)(ii)(A) and 

1.1296–1(h)(1)(i), the Treasury 

Department and the IRS have 

determined that the average burden is 

approximately half an hour per 

response. The IRS’s Research, Applied 

Analytics, and Statistics division 

estimates that the appropriate wage rate 

for this set of taxpayers is $95 per hour. 

Thus, the annual burden per taxpayer 

from the collection of information 

requirement for each of these provisions 

is approximately $48. Additionally, 

these requirements apply only if a 

taxpayer chooses to make an election. 

For the collections of information in 

proposed § 1.1298–1(b)(1) and (2), the 

Treasury Department and the IRS have 

determined that the average burden is 

approximately 49 hours per response. 

The IRS’s Research, Applied Analytics, 

and Statistics division estimates that the 

appropriate wage rate for this set of 

taxpayers is $95 per hour. Thus, the 

annual burden per taxpayer from the 

collection of information requirement in 

this provision is approximately $4,655. 

This requirement applies to taxpayers 

required to file Form 8621 with respect 

to a PFIC. In each case, the compliance 

burden associated with the PFIC-related 

provisions in the proposed regulations 

is generally shifted from the entity level 

to the owner level. For example, under 

proposed §§ 1.1295–1(d)(2)(i)(A) and 

1.1298–1(b)(1), a domestic partnership 

no longer makes a QEF election with 

respect to, and no longer files Form 


khammond on DSKJM1Z7X2PROD with PROPOSALS2
Federal Register / Vol. 87, No. 16 / Tuesday, January 25, 2022 / Proposed Rules 3907 

4The Treasury Department and the IRS 

determined that using section 951A inclusions, 

rather than section 951 inclusions, would serve as 

a better indication of the potential tax impact of the 

proposed regulations on small entities that own 

CFCs because the base upon which a U.S. 

shareholder’s section 951A inclusion is computed 

(a CFC’s gross income—with certain exceptions— 

less allocable deductions) is generally broader than 

the base upon which its section 951 inclusion is 

computed (a CFC’s income from specified 

transactions). 

8621 for, PFICs it owns; rather, the 

election and associated Form 8621 will 

be made and filed, respectively, by the 

partners. While this shift could result in 

some duplication of the overall 

compliance burden associated with the 

PFIC-related provisions in the proposed 

regulations, the Treasury Department 

and the IRS do not believe this shift 

should have a significant economic 

impact on taxpayers. 

Additionally, the proposed 

regulations provide guidance with 

respect to several statutory provisions 

within subpart F, which generally affect 

U.S. shareholders of CFCs. To estimate 

the magnitude of the tax impact of these 

provisions on small entities, the 

Treasury Department and the IRS 

examined the gross receipts of all 

taxpayers that e-filed Forms 5471 as a 

Category 4 or 5 filer for 2015 and 2016, 

which amounted to approximately 

25,000 to 35,000 taxpayers in each year. 

The Treasury Department and the IRS 

then determined the tax revenue 

generated from the approximately 

25,000 to 35,000 taxpayers’ section 

951A inclusions 4 estimated by the Joint 

Committee on Taxation for businesses of 

all sizes is less than 0.3 percent of gross 

receipts, as shown in the table that 

follows. Based on data for 2015 and 

2016, total gross receipts for all 

businesses with gross receipts under 

$25 million is $60 billion while those 

over $25 million is $49.1 trillion. Given 

that tax on section 951A inclusions is 

generally correlated with gross receipts, 

this results in businesses with less than 

$25 million in gross receipts accounting 

for approximately 0.01 percent of the 

tax revenue. Additionally, although data 

are generally not readily available to 

determine the sectoral breakdown of 

these entities, the number of domestic 

partnerships and S corporations subject 

to these provisions under the proposed 

regulations should make up only a 

portion of the totals. For example, the 

Treasury Department and the IRS 

estimate that there were approximately 

7,000 domestic partnerships that e-filed 

at least one Form 5471 as a Category 4 

or 5 filer in each of 2015 and 2016, 

amounting to 28 percent of the low-end 

estimate of all taxpayers filing Form 

5471 as a Category 4 or 5 filer and 20 

percent of the high-end estimate. Based 

on this analysis, the proposed 

regulations do not impose a significant 

economic impact on smaller businesses, 

in particular domestic partnerships and 

S corporations. 

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 

Joint Committee on Taxation (JCT) tax 

revenue.

7.7 billion 12.5 billion.9.6 billion 9.5 billion 9.3 billion 9.0 billion 9.2 billion 9.3 billion 15.1 billion.21.2 billion. 

Total gross receipts ................................. 30727 billion.53870 

billion.

566676 

billion.

59644 billion.62684 billion.65865 billion.69201 billion.72710 billion.76348 billion.80094 billion. 

Percent ..................................................... 0.03 ........ 0.02 ..... 0.02 ........ 0.02 ........ 0.01 ........ 0.01 ........ 0.01 ........ 0.01 ........ 0.02 ........ 0.03. 

Source: Research, Applied Analytics and Statistics division (IRS), Compliance Data Warehouse (IRS) (E-filed Form 5471, category 4 or 5, C and S corporations 

and partnerships); Conference Report, at 689. 

Thus, even if the economic impact of 

the proposed regulations is interpreted 

broadly to include the tax liability due 

under subpart F, which small entities 

would be required to pay even if the 

proposed regulations were not issued, 

the tax-related economic impact should 

not be regarded as significant under the 

Regulatory Flexibility Act. 

A portion of the economic impact of 

the proposed regulations derives from 

the collection of information 

requirements imposed by the provisions 

related to CFCs and other types of 

foreign corporations in proposed 

§ 1.951A–1(e)(2)(iii), proposed § 1.958– 

1(e)(1)(v) and (e)(2), and proposed 

§ 1.964–1(c)(3)(ii) and (iii). The Treasury 

Department and the IRS have 

determined that the average burden for 

each of these provisions is 

approximately half an hour per 

response. The IRS’s Research, Applied 

Analytics, and Statistics division 

estimates that the appropriate wage rate 

for this set of taxpayers is $95 per hour. 

Thus, the annual burden per taxpayer 

from the collection of information 

requirement for each of these provisions 

is approximately $48. These 

requirements apply only if a taxpayer 

chooses to make an election with 

respect to the CFC or other foreign 

corporation. In the case of proposed 

§ 1.964–1(c)(3)(ii) and (iii), the 

compliance burden is generally shifted 

from the U.S. shareholder partnership 

level to its U.S. shareholder partners. 

While this shift could result in some 

duplication of the overall compliance 

burden associated with these 

provisions, the Treasury Department 

and the IRS do not believe this shift 

should result in a significant economic 

impact on taxpayers. 

Accordingly, it is hereby certified that 

the proposed regulations would not 

have a significant economic impact on 

a substantial number of small entities. 

IV. Section 7805(f) 

Pursuant to section 7805(f), the 

proposed regulations have been 

submitted to the Chief Counsel for 

Advocacy of the Small Business 

Administration for comment on their 

impact on small businesses. The 

Treasury Department and the IRS also 

request comments from the public on 

the analysis in part III of the Special 

Analyses. 

V. Unfunded Mandates Reform Act 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 (UMRA) 

requires that agencies assess anticipated 

costs and benefits and take certain other 

actions before issuing a final rule that 

includes any Federal mandate that may 

result in expenditures in any one year 

by a state, local, or tribal government, in 

the aggregate, or by the private sector, of 

$100 million in 1995 dollars, updated 

annually for inflation. This rule does 

not include any Federal mandate that 

may result in expenditures by state, 

local, or tribal governments, or by the 

private sector in excess of that 

threshold. 

VI. Executive Order 13132: Federalism 

Executive Order 13132 (entitled 

‘‘Federalism’’) prohibits an agency from 

publishing any rule that has federalism 

implications if the rule either imposes 

substantial, direct compliance costs on 

state and local governments, and is not 

required by statute, or preempts state 

law, unless the agency meets the 

consultation and funding requirements 

of section 6 of the Executive order. 

These proposed regulations do not have 

federalism implications and do not 

impose substantial direct compliance 


khammond on DSKJM1Z7X2PROD with PROPOSALS2

I I I I I I I I I I 
3908 Federal Register / Vol. 87, No. 16 / Tuesday, January 25, 2022 / Proposed Rules 

costs on state and local governments or 

preempt state law within the meaning of 

the Executive order. 

Comments and Requests for Public 

Hearing 

Before the proposed amendments are 

adopted as final regulations, 

consideration will be given to any 

comments that are submitted timely to 

the IRS as prescribed in this preamble 

under the ADDRESSES section. The 

Treasury Department and the IRS 

request comments on all aspects of the 

proposed regulations. See also parts 

I.B.1 and I.C.1 of the Explanation of 

Provisions requesting comments related 

to the possibility of delegating authority 

to domestic partnerships and S 

corporations to make QEF and MTM 

elections on behalf of their owners; part 

II.D of the Explanation of Provisions 

requesting comments on (i) whether a 

U.S. person holding an option to acquire 

stock (or other non-stock interest) in a 

RPII CFC should be treated as a related 

insured, (ii) the allocation of premium 

payments made by a partnership, (iii) 

the general application of aggregate 

principles to RPII, (iv) necessary 

revisions to forms and instructions to 

facilitate information sharing and 

reporting for RPII purposes, and (v) 

other parts of the 1991 proposed 

regulations relating to RPII, including 

whether other parts should be 

reproposed (such as the exception for 

indirect ownership through publicly 

traded corporations); and part III of the 

Explanation of Provisions requesting 

comments on the calculation of indirect 

shareholders’ net gain for purposes of 

section 1411. Any electronic comments 

submitted, and to the extent practicable 

any paper comments submitted, will be 

made available at www.regulations.gov 

or upon request. 

A public hearing will be scheduled if 

requested in writing by any person who 

timely submits electronic or written 

comments. Requests for a public hearing 

are also encouraged to be made 

electronically. If a public hearing is 

scheduled, notice of the date and time 

for the public hearing will be published 

in the Federal Register. Announcement 

2020–4, 2020–17 IRB 1, provides that 

until further notice, public hearings 

conducted by the IRS will be held 

telephonically. Any telephonic hearing 

will be made accessible to people with 

disabilities. 

Drafting Information 

The principal authors of these 

regulations are Edward Tracy, Raphael 

Cohen, and Josephine Firehock of the 

Office of Associate Chief Counsel 

(International), and Caroline E. Hay and 

Jennifer N. Keeney of the Office of 

Associate Chief Counsel (Passthroughs 

and Special Industries). However, other 

personnel from the Treasury 

Department and the IRS participated in 

their development. 

Statement of Availability of IRS 

Documents 

IRS Revenue Procedures, Revenue 

Rulings, Notices, and other guidance 

cited in this document are published in 

the Internal Revenue Bulletin or 

Cumulative Bulletin and are available 

from the Superintendent of Documents, 

U.S. Government Publishing Office, 

Washington, DC 20402, or by visiting 

the IRS website at www.irs.gov. 

Partial Withdrawal of Proposed 

Regulations 

Under the authority of 26 U.S.C. 7805, 

proposed § 1.953–3(b)(1) and (5) 

contained in the notice of proposed 

rulemaking that was published in the 

Federal Register on April 17, 1991 (56 

FR 15540), is withdrawn. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1.The authority citation for 

part 1 is amended by: 

■ 1. Adding a sectional authority for 

§ 1.953–3 in numerical order; 

■ 2. Revising the sectional authorities 

for §§ 1.1293–1, 1.1295–1, and 1.1296– 

1; 

■ 3. Adding sectional authorities for 

§§ 1.1297–0 and 1.1297–3 in numerical 

order; 

■ 4. Arranging the sectional authority 

for § 1.1298–1 in numerical order and 

revising the authority; and 

■ 5. Adding a sectional authority for 

§ 1.1298–3 in numerical order. 

The additions and revisions read as 

follows: 

Authority: 26 U.S.C. 7805 * * * 

Section 1.953–3 also issued under 26 

U.S.C. 953(c)(8). 

* * * * * 

Section 1.1293–1 also issued under 26 

U.S.C. 1298(g). 

* * * * * 

Section 1.1295–1 also issued under 26 

U.S.C. 1295(b)(2) and 1298(g). 

* * * * * 

Section 1.1296–1 also issued under 26 

U.S.C. 1298(a)(1)(B) and (g). 

* * * * * 

Section 1.1297–0 also issued under 26 

U.S.C. 1298(g). 

* * * * * 

Section 1.1297–3 also issued under 26 

U.S.C. 1298(g). 

* * * * * 

Section 1.1298–1 also issued under 26 

U.S.C. 1298(f) and (g). 

* * * * * 

Section 1.1298–3 also issued under 26 

U.S.C. 1298(g). 

* * * * * 

■ Par. 2. Section 1.951A–1 is amended 

by revising paragraph (e) to read as 

follows: 

§ 1.951A–1 General provisions. 

* * * * * 

(e) Stock owned through domestic 

partnerships and S corporations—(1) 

Cross-references. See § 1.958–1(d) for 

rules regarding the ownership of stock 

of a foreign corporation through a 

domestic partnership (or S corporation, 

as defined in section 1361(a)(1), by 

reason of section 1373(a)) for purposes 

of section 951A and for purposes of any 

provision that specifically applies by 

reference to section 951A or the section 

951A regulations. See § 1.958–1(e) for 

rules regarding an election for certain S 

corporations to be treated as an entity 

for purposes of section 951A and the 

section 951A regulations. 

(2) Application of entity treatment for 

taxable years ending before June 22, 

2019—(i) General rule. If a domestic 

partnership or S corporation satisfies 

the notification and reporting 

requirements in paragraph (e)(2)(iii) of 

this section, the domestic partnership or 

S corporation may apply the rules in 

proposed § 1.951A–5 as if the 

amendments proposed on October 10, 

2018, had been finalized in their 

entirety (proposed GILTI rules), for 

taxable years ending before June 22, 

2019. 

(ii) Inapplicability of penalties. If a 

domestic partnership or S corporation 

satisfies the requirements of paragraph 

(e)(2)(iii) of this section, penalties for 

failures described in sections 6698(a), 

6699(a), 6722(a), or any similar 

provision will not apply to the domestic 

partnership or S corporation to the 

extent such failures arise from acting 

consistently with the proposed GILTI 

rules before June 22, 2019. 

(iii) Notification and reporting 

requirements—(A) Notification. To be 

eligible for the rules described in 

paragraphs (e)(2)(i) and (ii) of this 

section, a domestic partnership or S 

corporation must provide the 

notification described in paragraphs 

(e)(2)(iii)(A)(1) through (3) of this 

section to each partner of the 


khammond on DSKJM1Z7X2PROD with PROPOSALS2
Federal Register / Vol. 87, No. 16 / Tuesday, January 25, 2022 / Proposed Rules 3909 

partnership or shareholder of the S 

corporation. Such notification must be 

provided no later than the due date 

(taking into account extensions, if any, 

or any additional time that would have 

been granted if the domestic partnership 

or S corporation had made an extension 

request) of the domestic partnership’s or 

S corporation’s tax return for the last 

taxable year ending before June 22, 

2019, and may be provided through any 

reasonable method, including via mail, 

email, or posting on a website through 

which the domestic partnership or S 

corporation would ordinarily 

disseminate tax information to its 

partners or shareholders. The domestic 

partnership or S corporation must also 

attach the notification described in this 

paragraph (e)(2)(iii)(A) and Form 8992, 

‘‘U.S. Shareholder Calculation of Global 

Intangible Low-Taxed Income (GILTI),’’ 

reflecting computations under the 

proposed GILTI rules to any tax return 

with respect to which the rules 

described in paragraph (e)(2)(i) or (ii) of 

this section are being applied if the tax 

return has not been filed as of 

September 9, 2019. The notification 

required under this paragraph (e)(2)(iii) 

must provide— 

(1) That the Schedule K–1, ‘‘Partner’s 

Share of Income, Deductions, Credits, 

etc.,’’ or the Schedule K–1, 

‘‘Shareholder’s Share of Income, 

Deductions, Credits, etc.,’’ provided to 

the partner or shareholder, respectively, 

is consistent with the proposed GILTI 

rules; 

(2) Whether the domestic partnership 

or S corporation filed a Form 1065, 

‘‘U.S. Return of Partnership Income,’’ or 

Form 1120–S, ‘‘U.S. Income Tax Return 

for an S Corporation,’’ consistent with 

the proposed GILTI rules or this 

paragraph (e); and 

(3) That the notification is provided in 

accordance with Notice 2019–46, 2019– 

37 I.R.B. 695. 

(B) Schedule K–1 distribution 

reporting. If a domestic partnership or S 

corporation furnished a Schedule K–1 

based on the proposed GILTI rules, the 

domestic partnership or S corporation 

must separately state on Schedules K– 

1 for subsequent taxable years the 

partner’s or shareholder’s distributive 

share or pro rata share of a foreign 

corporation’s distributions to the 

domestic partnership or S corporation of 

earnings and profits that relate to the 

GILTI inclusion amount of the 

partnership or S corporation that was 

reflected on the initially provided 

Schedules K–1. This information must 

be provided for each taxable year of the 

domestic partnership or S corporation 

following the taxable year to which the 

first Schedule K–1 relates. 

* * * * * 

■ Par. 3. Section 1.951A–7 is amended 

by adding paragraph (e) to read as 

follows: 

§ 1.951A–7 Applicability dates. 

* * * * * 

(e) Entity treatment of domestic 

partnerships and S corporations. 

Section 1.951A–1(e)(2) applies to 

taxable years of foreign corporations 

ending before June 22, 2019, and to 

taxable years of United States 

shareholders in which or with which 

such taxable years end. 

■ Par. 4. Section 1.953–3 is revised to 

read as follows: 

§ 1.953–3 Related person insurance 

income. 

(a) [Reserved] 

(b) Related person insurance 

income—(1) Definition of related person 

insurance income—(i) In general. 

Insurance income under section 953(a) 

includes related person insurance 

income under section 953(c)(2). Related 

person insurance income is premium 

and investment income attributable to 

an annuity, insurance, or reinsurance 

policy that directly or indirectly 

provides coverage to a related insured as 

defined in paragraph (b)(1)(ii) of this 

section. For purposes of this section, the 

terms United States shareholder and 

controlled foreign corporation have the 

meaning provided in section 953(c)(1). 

(ii) Related insured. Except as 

provided in paragraph (b)(5)(ii) of this 

section, with respect to a foreign 

corporation, a related insured means 

any of the following— 

(A) A United States shareholder of the 

foreign corporation; 

(B) A person that is related to a 

United States shareholder within the 

meaning of section 953(c)(6); 

(C) A pass-through entity, if a related 

insured (other than a pass-through 

entity) owns stock in the foreign 

corporation indirectly (within the 

meaning of section 958(a)) through the 

pass-through entity; or 

(D) A person (other than a publicly 

traded corporation or publicly traded 

partnership) that is more than 50 

percent owned by United States 

shareholders of the foreign corporation 

as described in paragraph (b)(1)(v) of 

this section. 

(iii) Amount treated as related person 

insurance income with respect to a 

pass-through entity—(A) In general. In 

the case of a pass-through entity that is 

a related insured, the amount treated as 

related person insurance income is 

equal to the insurance income 

attributable to the policy that directly or 

indirectly provides coverage to the passthrough entity multiplied by the fraction 

described in paragraph (b)(1)(iii)(B) of 

this section. 

(B) Fraction. The fraction described in 

this paragraph (b)(1)(iii)(B) is equal to— 

(1) The total amount of premiums 

paid or accrued by the pass-through 

entity for the policy that is allocated 

(directly or indirectly, through one or 

more pass-through entities) to all related 

insureds (other than pass-through 

entities); divided by 

(2) The total amount of premiums 

paid or accrued by the pass-through 

entity for the policy. 

(C) Allocation—(1) Partnerships. For 

purposes of paragraph (b)(1)(iii)(B) of 

this section, the total amount of 

premiums paid or accrued by a 

partnership that is allocated to the 

related insureds is determined in 

accordance with the partnership 

agreement and section 704(b). 

(2) S corporations. For purposes of 

paragraph (b)(1)(iii)(B) of this section, 

the total amount of premiums paid or 

accrued by an S corporation that is 

allocated to the related insureds is 

determined on a pro rata basis. 

(iv) Pass-through entities. For 

purposes of paragraph (b)(1) of this 

section, a pass-through entity is an S 

corporation or a domestic or foreign 

partnership (other than a publicly 

traded partnership). 

(v) Ownership. The ownership 

threshold described in paragraph 

(b)(1)(ii)(D) of this section is met if 

United States shareholders collectively 

own (after applying the principles of 

section 958(a) and (b)) more than 50 

percent of the stock in a corporation (by 

vote or value), more than 50 percent of 

the capital or profits interests in a 

partnership, or more than 50 percent of 

the interests in a trust or estate. 

(vi) Stock owned through domestic 

partnerships or S corporations. See 

§ 1.958–1(d) for rules regarding the 

ownership of stock of a foreign 

corporation through a domestic 

partnership or S corporation for 

purposes of section 953(c) and for 

purposes of any provision that 

specifically applies by reference to 

section 953(c) or the regulations in this 

part under section 953 that relate to 

section 953(c). 

(vii) Examples. The following 

examples illustrate the rules of 

paragraph (b)(1) of this section. 

(A) Example 1—(1) Facts. FC is a 

foreign corporation engaged in the 

insurance business. FC is wholly owned 

by FP, a foreign partnership. DC, a 

domestic corporation, owns 25% of the 

interests in FP. The remaining interests 


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in FP are held by unrelated foreign 

corporations. Under the partnership 

agreement, all items of income, gain, 

loss, deduction, and credit are allocated 

25% to DC and 75% to the other 

partners. In Year 1, FC issues the FP 

policy, under which FP is insured. FP 

pays a premium of $80 for the FP 

policy. The insurance income 

attributable to the FP policy (including 

both premium and investment income) 

is $100. FC earns an additional $1,000 

of income that is treated as related 

person insurance income. Under section 

704(b), DC would be allocated $20 

(25%) of the premium paid or accrued 

by FP. 

(2) Result. Under paragraph 

(b)(1)(ii)(C) of this section, FP is treated 

as a related insured with respect to FC 

because it is a pass-through entity 

through which DC indirectly owns stock 

in FC. Therefore, under paragraph 

(b)(1)(i) of this section, a portion of the 

insurance income attributable to the FP 

policy is treated as related person 

insurance income. Under paragraph 

(b)(1)(iii)(A) of this section, the amount 

of related person insurance income with 

respect to FP is equal to the insurance 

income attributable to the FP policy 

($100) multiplied by the fraction 

described in paragraph (b)(1)(iii)(B) of 

this section. That fraction is equal to the 

portion of the premium paid by FP that 

is allocable to DC ($20) divided by the 

total premium paid by FP ($80), or 25%. 

Therefore, FC has $25 of related person 

insurance income under section 

953(c)(2) attributable to the FP policy in 

Year 1. 

(B) Example 2—(1) Facts. FC is a 

foreign corporation engaged in the 

insurance business. Two domestic 

corporations, DC1 and DC2, each own 

50% of the stock of FC. In addition, DC1 

and DC2 each own 50% of the stock in 

DC3, a domestic corporation. In Year 1, 

FC issues the DC3 policy, under which 

DC3 is insured. The insurance income 

attributable to the DC3 policy is $100. 

FC earns an additional $1,000 of income 

that is treated as related person 

insurance income. 

(2) Result. DC3 meets the 

requirements of paragraph (b)(1)(v) of 

this section because United States 

shareholders of FC (DC1 and DC2) 

collectively own all the stock of DC3. 

Therefore, under paragraph (b)(1)(ii)(D) 

of this section, DC3 is treated as a 

related insured with respect to FC. 

Consequently, under paragraph (b)(1)(i) 

of this section, all of FC’s $100 of 

insurance income attributable to the 

DC3 policy is treated as related person 

insurance income under section 

953(c)(2). 

(2) through (4) [Reserved] 

(5) Cross-insurance arrangements—(i) 

In general. Related person insurance 

income includes insurance income 

attributable to an arrangement (or a 

substantially similar arrangement with a 

similar degree of cooperative risk 

sharing) whereby a foreign corporation 

issues an insurance, reinsurance, or 

annuity contract to a person other than 

a related insured and, as part of the 

arrangement (involving one or more 

other persons), another person issues an 

insurance, reinsurance, or annuity 

contract to a related insured of the 

foreign corporation. 

(ii) Related insured. For purposes of 

applying paragraph (b)(5)(i) of this 

section before the applicability date 

described in paragraph (c)(1) of this 

section, the term related insured means, 

with respect to a foreign corporation, a 

United States shareholder of the foreign 

corporation or a person that is related to 

a United States shareholder within the 

meaning of section 953(c)(6). 

(iii) Example. Controlled foreign 

corporation X is owned by 30 unrelated 

United States shareholders. Controlled 

foreign corporation Y is owned by 30 

unrelated United States shareholders 

(that is, unrelated to X and Y and the 

shareholders of X and Y). X agrees to 

provide insurance protection to Y’s 

shareholders, and Y agrees to provide 

insurance to X’s shareholders. The 

insurance income of both X and Y that 

is attributable to insuring the 

shareholders of the other corporation 

constitutes related person insurance 

income. 

(c) Applicability date—(1) In general. 

Paragraph (b)(1) of this section applies 

to taxable years of foreign corporations 

beginning on or after [date of 

publication of the Treasury decision 

adopting these rules as final regulations 

in the Federal Register], and to taxable 

years of United States persons in which 

or with which such taxable years of 

foreign corporations end. 

(2) Cross-insurance rule. Paragraph 

(b)(5) of this section applies to taxable 

years of foreign corporations ending on 

or after January 24, 2022, and to taxable 

years of United States persons in which 

or with which such taxable years of 

foreign corporations end (in each case 

without regard to when the arrangement 

was entered into). 

■ Par. 5. Section 1.958–1, as amended 

in a final rule published elsewhere in 

this issue of the Federal Register, 

effective January 25, 2022, is amended 

by: 

■ 1. Revising the first sentence of 

paragraph (d)(1); 

■ 2. Revising paragraph (d)(2)(v); 

■ 3. Adding a sentence to the end of 

paragraph (d)(4)(i); and 

■ 4. Adding paragraph (e). 

The revisions and addition read as 

follows: 

§ 1.958–1 Direct and indirect ownership of 

stock. 

* * * * * 

(d) * * * (1) * * * Except as 

otherwise provided in paragraph (d)(2) 

of this section, for purposes of sections 

951, 951A, 953(c), and 956(a) and 

§ 1.964–1(c), and for purposes of any 

provision that specifically applies by 

reference to any of such sections or the 

regulations in this part under section 

951, 951A, 953, or 956 (but only as the 

regulations in this part under section 

953 or section 956 relate to section 

953(c) or section 956(a), respectively), a 

domestic partnership is not treated as 

owning stock of a foreign corporation 

within the meaning of section 958(a). 

* * * 

(2) * * * 

(v) Applying section 953(c)(1)(A) for 

purposes of determining whether any 

foreign corporation is a controlled 

foreign corporation as defined in 

sections 953(c)(1)(B), 953(c)(3)(E), or 

953(d)(1)(A). 

* * * * * 

(4) * * * 

(i) * * * Notwithstanding the prior 

sentences, paragraph (d)(2)(v) of this 

section and the inclusion of the 

references to section 953(c) and § 1.964– 

1(c) in paragraph (d)(1) of this section 

apply to taxable years of foreign 

corporations beginning on or after [date 

of publication of the Treasury decision 

adopting these rules as final regulations 

in the Federal Register], and to taxable 

years of United States persons in which 

or with which such taxable years of 

foreign corporations end. 

* * * * * 

(e) Elective entity treatment for certain 

S corporations—(1) In general. Except as 

otherwise provided in this paragraph 

(e), with respect to an S corporation (as 

defined in section 1361(a)(1)), paragraph 

(d)(1) of this section shall not apply, and 

such S corporation shall be treated as 

owning stock of a foreign corporation 

within the meaning of section 958(a), 

if— 

(i) The S corporation and its 

shareholders (where applicable) make 

the election described in paragraph 

(e)(2) of this section; 

(ii) The S corporation made its 

election under section 1362(a) before 

June 22, 2019; 

(iii) The S corporation would have 

been treated as owning stock of a 

controlled foreign corporation within 

the meaning of section 958(a) on June 

22, 2019, if § 1.951A–1(e) (as in effect 

and contained in 26 CFR part 1, as 


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revised April 1, 2021) did not apply to 

it; 

(iv) The S corporation had transition 

accumulated earnings and profits (as 

defined in paragraph (e)(3) of this 

section) on September 1, 2020, or on the 

first day of any subsequent taxable year; 

and 

(v) The S corporation maintains 

sufficient records to support the 

determination of the transition 

accumulated earnings and profits 

amount. 

(2) Election—(i) Time and manner of 

making election. With respect to the 

first taxable year ending on or after 

September 1, 2020, an S corporation 

may irrevocably elect to apply the 

provisions of paragraph (e)(1) of this 

section on a timely-filed (including 

extensions) original Form 1120–S, ‘‘U.S. 

Income Tax Return for an S 

Corporation,’’ by attaching a statement 

to such return including the contents of 

paragraph (e)(2)(ii) of this section. For 

taxable years of an S corporation ending 

before September 1, 2020, and after June 

21, 2019, the S corporation and all of its 

shareholders may irrevocably elect to 

apply the provisions of paragraph (e)(1) 

of this section on timely-filed (including 

extensions) original returns or on 

amended returns filed by March 15, 

2021, by attaching a statement including 

the contents of paragraph (e)(2)(ii) of 

this section thereto. An election 

described in Section 3.02 of Notice 

2020–69, 2020–39 I.R.B. 604 that is filed 

(in the time and manner specified in 

Section 3.02 of Notice 2020–69) on or 

before [date of publication of the 

Treasury decision adopting these rules 

as final regulations in the Federal 

Register] is deemed to satisfy the 

election requirement of this paragraph 

(e)(2). 

(ii) Contents of election statement. 

The statement described in paragraph 

(e)(2)(i) of this section must: 

(A) Identify that the S corporation and 

its shareholders (where applicable) are 

electing for the S corporation to be 

treated as owning stock of a foreign 

corporation within the meaning of 

section 958(a) under paragraph (e)(2) of 

this section; 

(B) Include the amount of transition 

accumulated earnings and profits (as 

defined in paragraph (e)(3) of this 

section); and 

(C) Where applicable, be signed by a 

person authorized to sign the S 

corporation’s return that is required to 

be filed under section 6037. 

(3) Transition accumulated earnings 

and profits—(i) In general. For purposes 

of this section, the term transition 

accumulated earnings and profits 

means, with respect to an S corporation 

and its shareholders, the amount of 

accumulated earnings and profits of the 

S corporation calculated as of 

September 1, 2020, reduced as 

described in paragraph (e)(3)(ii) of this 

section. Transition accumulated 

earnings and profits are not increased as 

a result of transactions occurring (or 

entity classification elections described 

in § 301.7701–3 of this chapter filed) 

after September 1, 2020. For purposes of 

this section, transition accumulated 

earnings and profits are not transferable 

to another person under any provision 

of the Code. 

(ii) Reduction solely by distributions. 

An S corporation with transition 

accumulated earnings and profits is 

treated as having no transition 

accumulated earnings and profits if, 

beginning after September 1, 2020, the 

S corporation distributes in one or more 

distributions a cumulative amount of 

accumulated earnings and profits equal 

to or greater than the amount of the S 

corporation’s transition accumulated 

earnings and profits as of September 1, 

2020. 

(4) Required aggregate treatment. In 

the case of an S corporation that has 

made an election under paragraph (e)(2) 

of this section and which satisfies the 

additional requirements of paragraph 

(e)(1) of this section, paragraph (d) of 

this section shall apply beginning with 

the S corporation’s first taxable year for 

which the S corporation has no 

transition accumulated earnings and 

profits on the first day of that year, and 

to each subsequent taxable year of the 

S corporation. 

(5) Examples. The following examples 

illustrate the application of paragraph 

(e). 

(i) Example 1—(A) Facts. Individual 

A and Individual B, each a United 

States citizen, respectively own 5% and 

95% of the single class of stock of SCX, 

an S corporation. SCX’s sole asset is 

100% of the single class of stock of FC, 

a controlled foreign corporation, which 

SCX has held since June 1, 2019. None 

of SCX, Individual A, or Individual B 

own shares, directly or indirectly, in 

any other controlled foreign 

corporation. Individual A, Individual B, 

SCX, and FC all use the calendar year 

as their taxable year. On January 1, 

2021, SCX has transition accumulated 

earnings and profits of $100x and AAA 

of $0. SCX elects to apply the transition 

rules under paragraph (e)(1) of this 

section. During the 2021 taxable year, 

FC has $200x of tested income (within 

the meaning of § 1.951A–2(b)(1)) and $0 

of qualified business asset investment 

(QBAI) (within the meaning of 

§ 1.951A–3(b)). 

(B) Analysis—(1) S corporation level. 

As an electing S corporation with 

transition accumulated earnings and 

profits on the first day of the taxable 

year (January 1, 2021), SCX is treated as 

owning (within the meaning of section 

958(a)) all the stock of FC for purposes 

of applying sections 951 and 951A and 

any provision that applies specifically 

by reference thereto. Accordingly, SCX, 

a United States shareholder of FC, 

determines its GILTI inclusion amount 

under § 1.951A–1(c)(1) for its 2021 

taxable year. SCX’s pro rata share of 

FC’s tested income is $200x, and its pro 

rata share of FC’s QBAI is $0. SCX’s net 

CFC tested income (within the meaning 

of § 1.951A–1(c)(2)) is $200x, and its net 

deemed tangible income return (within 

the meaning of § 1.951A–1(c)(3)) is $0. 

As a result, SCX’s GILTI inclusion 

amount for 2021 is $200x. At the end of 

2021, SCX increases its AAA by $200x 

to reflect the GILTI inclusion amount. 

Because SCX computes its income as an 

individual under section 1363(b), it 

cannot take a section 250 deduction for 

any GILTI inclusion amount. See 

§ 1.250(a)–1(c)(1). 

(2) S corporation shareholder level. 

Neither Individual A nor Individual B is 

treated as owning the stock in FC within 

the meaning of section 958(a). 

Accordingly, Individual A and 

Individual B include in gross income 

their pro rata shares of SCX’s GILTI 

inclusion amount as described in 

section 1366(a), which is $10x ($200x × 

5%) for Individual A and $190x ($200x 

× 95%) for Individual B. 

(ii) Example 2—(A) Facts. The facts 

are the same as in paragraph (e)(5)(i) of 

this section, except that, on December 

31, 2021, SCX distributes $300x to its 

shareholders. In addition, FC has an 

additional $200x of tested income 

(within the meaning of § 1.951A–2(b)(1)) 

and $0 of QBAI (within the meaning of 

§ 1.951A–3(b)) during the 2022 taxable 

year. 

(B) Analysis—(1) Determination of 

transition accumulated earnings and 

profits. Before taking into account the 

distribution on December 31, 2021, the 

results for taxable year 2021 are the 

same as in paragraph (e)(5)(i)(B) of this 

section. For 2021, $200x, the portion of 

SCX’s $300x distribution that does not 

exceed AAA, is subject to section 

1368(c)(1). The remaining distribution 

of $100x is treated as a dividend under 

section 316 to the extent of SCX’s 

accumulated earnings and profits. As of 

January 1, 2022, SCX has $0 of 

transition accumulated earnings and 

profits under paragraph (e)(3) of this 

section because the cumulative amount 

of SCX’s distributions out of 

accumulated earnings and profits after 


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September 1, 2020, equals or exceeds 

the amount of SCX’s transition 

accumulated earnings and profits as of 

September 1, 2020. 

(2) S corporation level. Because SCX 

has no transition accumulated earnings 

and profits as of January 1, 2022, 

paragraph (d) of this section applies to 

SCX for its taxable year 2022 and for 

each subsequent taxable year. As a 

result, for purposes of determining a 

GILTI inclusion amount in its taxable 

year 2022, SCX is not treated as owning 

(within the meaning of section 958(a)) 

the FC stock; instead, SCX is treated in 

the same manner as a foreign 

partnership for purposes of determining 

the FC stock owned by Individual A and 

Individual B under section 958(a)(2). 

Accordingly, SCX does not have a GILTI 

inclusion amount for its 2022 taxable 

year (or for any subsequent taxable year) 

and therefore will not increase its AAA 

as a result of GILTI inclusion amounts 

attributable to FC stock for its taxable 

year 2022 (or for any subsequent taxable 

year). 

(3) S corporation shareholder level. 

With respect to Individual A, for 

purposes of determining the GILTI 

inclusion amount for taxable year 2022, 

Individual A is treated as owning 5% of 

the FC stock under section 958(a). 

Individual A is not a United States 

shareholder of FC because Individual A 

owns (within the meaning of section 

958(a) and (b)) less than 10% of the FC 

stock. Accordingly, Individual A does 

not have a GILTI inclusion amount for 

taxable year 2022. With respect to 

Individual B, for purposes of 

determining the GILTI inclusion amount 

for taxable year 2022, Individual B is 

treated as owning 95% of the FC stock 

under section 958(a). In addition, 

Individual B is a United States 

shareholder of FC because Individual B 

owns (within the meaning of section 

958(a) and (b)) at least 10% of the FC 

stock. Accordingly, Individual B’s pro 

rata share of FC’s tested income is $190x 

($200x × 95%), and Individual B’s pro 

rata share of FC’s QBAI is $0. Individual 

B’s net CFC tested income is $190x, and 

Individual B’s net deemed tangible 

income return is $0. As a result, 

Individual B’s GILTI inclusion amount 

for taxable year 2022 is $190x. 

(6) Applicability date. This paragraph 

(e) applies to taxable years of S 

corporations ending on or after 

September 1, 2020. Taxpayers may 

choose to apply this paragraph (e) to 

taxable years of S corporations ending 

on or after June 22, 2019, provided that 

the S corporation and its shareholders 

that are United States shareholders 

consistently apply the rules set forth in 

this paragraph (e) with respect to all 

controlled foreign corporations whose 

stock the S corporation owns within the 

meaning of section 958(a). 

* * * * * 

■ Par. 6. Section 1.964–1 is amended 

by: 

■ 1. Revising the first sentence of 

paragraph (c)(2); 

■ 2. Removing the language ‘‘domestic 

shareholders’’ in the first sentence of 

paragraph (c)(3)(ii) and adding ‘‘United 

States persons’’ in its place; 

■ 3. Revising paragraph (c)(3)(iii); 

■ 4. Removing the language 

‘‘noncontrolled section 902 

corporation’’ in paragraphs (c)(4)(i)(B) 

and (c)(4)(ii) and adding ‘‘noncontrolled 

foreign corporation’’ in its place; 

■ 5. Revising paragraph (c)(5)(ii); 

■ 6. Redesignating paragraph (c)(8) as 

paragraph (c)(9); 

■ 7. Adding a new paragraph (c)(8); and 

■ 8. In paragraph (d): 

■ i. Revising the heading; 

■ ii. Removing ‘‘Paragraphs (c)(1)(v) 

through (c)(6),’’ ‘‘26 CFR 1.964– 

1T(c)(1)(v) through (c)(6),’’ and 

‘‘paragraphs (c)(1)(v) through (c)(6)’’ 

everywhere they appear and adding 

‘‘Paragraphs (c)(1)(v) and (vi) and (c)(2) 

through (6),’’ ‘‘26 CFR 1.964–1T(c)(1)(v) 

and (vi) and (c)(2) through (6),’’ and 

‘‘paragraphs (c)(1)(v) and (vi) and (c)(2) 

through (6)’’ in their places, 

respectively; and 

■ iii. Adding two sentences to the end 

of the paragraph. 

The revisions and additions read as 

follows: 

§ 1.964–1 Determination of the earnings 

and profits of a foreign corporation. 

* * * * * 

(c) * * * 

(2) * * * For the first taxable year of 

a foreign corporation in which such 

foreign corporation first qualifies as a 

controlled foreign corporation (as 

defined in section 957 or 953) or a 

foreign corporation (other than a 

controlled foreign corporation as 

defined in section 957 or 953) as to 

which a United States person that is a 

United States shareholder (within the 

meaning of section 951(b)) owns stock 

(within the meaning of section 958(a)) 

(such corporation, a ‘‘noncontrolled 

foreign corporation’’), any method of 

accounting or taxable year allowable 

under this section may be adopted, and 

any election allowable under this 

section may be made, by such foreign 

corporation or on its behalf 

notwithstanding that, in previous years, 

its books or financial statements were 

prepared on a different basis, and 

notwithstanding that such election is 

required by the Code or regulations in 

this chapter to be made in a prior 

taxable year. * * * 

(3) * * * 

(iii) Notice—(A) In general. Except as 

otherwise provided in paragraph 

(c)(3)(iii)(B) of this section, on or before 

the filing date described in paragraph 

(c)(3)(ii) of this section, the controlling 

domestic shareholders must provide 

written notice of the election made or 

the adoption or change of method or 

taxable year effected to all other persons 

known by them to be United States 

persons that own (within the meaning of 

section 958(a)) stock of the foreign 

corporation (domestic shareholders) and 

to any other United States person that 

is a ‘‘Category 4 filer’’ of Form 5471, 

‘‘Information Return of U.S. Persons 

With Respect to Certain Foreign 

Corporations,’’ with respect to the 

foreign corporation (that is, certain 

United States persons that control, 

within the meaning of section 6038(e), 

the foreign corporation). Thus, for 

example, this notice is required to be 

provided to domestic shareholders that 

own (within the meaning of section 

958(a)) stock in the foreign corporation 

through one or more domestic 

partnerships. The notice required in this 

paragraph (c)(3)(iii)(A) must set forth 

the name, country of organization, and 

U.S. employer identification number (if 

applicable) of the foreign corporation, 

and the names, addresses, and stock 

interests of the controlling domestic 

shareholders. Such notice must also 

describe the nature of the action taken 

on behalf of the foreign corporation and 

the taxable year for which made, and 

identify a designated shareholder that 

retains a jointly executed consent 

confirming that such action has been 

approved by all of the controlling 

domestic shareholders and containing 

the signature of a principal officer of 

each such shareholder (or its common 

parent). However, the failure of the 

controlling domestic shareholders to 

provide such notice to a person required 

to be notified does not invalidate the 

election made or the adoption or change 

of method or taxable year effected. 

(B) Special rule for domestic 

partnerships. A controlling domestic 

shareholder will be deemed to satisfy 

the notice requirement of paragraph 

(c)(3)(iii)(A) of this section with respect 

to any domestic shareholder that is a 

partner in a domestic partnership by 

providing notice to a domestic 

partnership (known to the controlling 

domestic shareholder) through which 

the domestic shareholder owns stock of 

the foreign corporation, instead of to the 

domestic shareholder. 

* * * * * 

(5) * * * 


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(ii) Noncontrolled foreign 

corporations. For purposes of this 

paragraph (c), the controlling domestic 

shareholders of a noncontrolled foreign 

corporation are its majority domestic 

shareholders. The majority domestic 

shareholders of a noncontrolled foreign 

corporation are those United States 

shareholders (within the meaning of 

section 951(b)) that own (within the 

meaning of section 958(a)) stock in the 

noncontrolled foreign corporation and 

that, in the aggregate, own (within the 

meaning of section 958(a)), or are 

considered as owning by applying the 

rules of section 958(b), more than 50 

percent of the combined voting power of 

all of the voting stock of the 

noncontrolled foreign corporation that 

is owned by all United States 

shareholders that own (within the 

meaning of section 958(a)), or are 

considered as owning by applying the 

rules of section 958(b), stock of the 

noncontrolled foreign corporation. 

* * * * * 

(8) Stock owned through domestic 

partnerships. See § 1.958–1(d) for rules 

regarding the ownership of stock of a 

foreign corporation through a domestic 

partnership for purposes of paragraph 

(c) of this section and for purposes of 

any provision that specifically applies 

by reference to paragraph (c) of this 

section. 

* * * * * 

(d) Applicability dates. * * * 

Notwithstanding the preceding 

sentences in this paragraph (d), 

paragraphs (c)(2), (c)(3)(ii) and (iii), 

(c)(4)(i)(B), (c)(4)(ii), (c)(5)(ii), and (c)(8) 

of this section apply to taxable years of 

foreign corporations beginning on or 

after [date of publication of the Treasury 

decision adopting these rules as final 

regulations in the Federal Register], and 

to taxable years of United States persons 

in which or with which such taxable 

years end. For taxable years of foreign 

corporations beginning before [date of 

publication of the Treasury decision 

adopting these rules as final regulations 

in the Federal Register], and to taxable 

years of foreign United States persons in 

which or with which such taxable years 

end, see § 1.964–1(c)(2), (c)(3)(ii) and 

(iii), (c)(4)(i)(B), (c)(4)(ii), and (c)(5)(ii) 

as in effect and contained in 26 CFR 

part 1, as revised April 1, 2021. 

■ Par. 7. Section 1.1291–1 is amended 

by: 

■ 1. Revising paragraphs (b)(7), (c)(4)(i), 

and (c)(4)(ii)(A) and (B); 

■ 2. Adding paragraph (c)(5); 

■ 3. Removing the language ‘‘Paragraphs 

(c)(3) and (4)’’ in paragraph (j)(1) and 

adding ‘‘Paragraph (c)(3)’’ in its place; 

■ 4. Removing the language ‘‘paragraphs 

(b)(2)(ii) and (v), (b)(7) and (8), and 

(e)(2) of this section’’ in paragraph (j)(3) 

and adding ‘‘paragraphs (b)(2)(ii) and 

(v), (b)(8), and (e)(2) of this section’’ in 

its place; and 

■ 5. Adding paragraph (j)(5). 

The revisions and additions read as 

follows: 

§ 1.1291–1 Taxation of U.S. persons that 

are shareholders of section 1291 funds. 

* * * * * 

(b) * * * 

(7) Shareholder. Except as otherwise 

provided in this paragraph (b)(7) or 

paragraph (e) of this section, a 

shareholder of a PFIC is a United States 

person that directly owns stock of a 

PFIC (a direct shareholder), or that is an 

indirect shareholder (as defined in 

paragraph (b)(8) of this section). 

Notwithstanding the previous sentence, 

neither a domestic partnership nor an S 

corporation (as defined in section 

1361(a)(1)) is treated as a shareholder of 

a PFIC. In addition, to the extent that a 

person is treated under sections 671 

through 678 as the owner of a portion 

of a domestic trust, the trust is not 

treated as a shareholder of a PFIC with 

respect to PFIC stock held by that 

portion of the trust, except for purposes 

of the information reporting 

requirements of § 1.1298–1(b)(3)(i) 

(imposing an information reporting 

requirement on domestic liquidating 

trusts and fixed investment trusts). 

* * * * * 

(c) * * * 

(4) * * * (i) In general. If PFIC stock 

is marked to market for any taxable year 

under section 475 or any other 

provision of chapter 1 of the Internal 

Revenue Code, other than section 1296, 

regardless of whether the application of 

such provision is mandatory or results 

from an election by the shareholder (as 

defined in paragraph (b)(7) of this 

section) or another person, then, except 

as provided in paragraph (c)(4)(ii) of this 

section, section 1291 and the 

regulations in this part thereunder do 

not apply to any distribution with 

respect to such PFIC stock or to any 

disposition of such PFIC stock for such 

taxable year. See §§ 1.1295–1(i)(3) and 

1.1296–1(h)(3)(i) for rules regarding the 

automatic termination of an existing 

election under section 1295 or section 

1296 when a shareholder marks to 

market PFIC stock under section 475 or 

any other provision of chapter 1 of the 

Internal Revenue Code. 

(ii) * * * (A) Notwithstanding any 

provision in this section to the contrary, 

with respect to a shareholder (as defined 

in paragraph (b)(7) of this section), the 

rule of paragraph (c)(4)(ii)(B) of this 

section applies to the first taxable year 

in which the shareholder’s PFIC stock is 

marked to market under a provision of 

chapter 1 of the Internal Revenue Code, 

other than section 1296, if such foreign 

corporation was a PFIC for any taxable 

year before the taxable year in which the 

PFIC stock is marked to market, which 

is during the shareholder’s holding 

period (as defined in section 

1291(a)(3)(A) and § 1.1296–1(f)) in such 

stock, and for which such corporation 

was not treated as a QEF with respect 

to such shareholder. 

(B) For the first taxable year of a 

shareholder in which the shareholder’s 

PFIC stock is marked to market under 

any provision of chapter 1 of the 

Internal Revenue Code, other than 

section 1296, such shareholder, in lieu 

of the rules under which the stock is 

marked to market, applies the rules of 

§ 1.1296–1(i)(2) and (3) as if an election 

had been made under section 1296 for 

such first taxable year. 

(5) Coordination with section 

1297(d)—(i) In general. For purposes of 

section 1297(d), with respect to a 

partner or S corporation shareholder 

that would be considered an indirect 

shareholder, through its ownership in a 

domestic partnership or S corporation, 

with respect to a foreign corporation 

that is a PFIC and a controlled foreign 

corporation (as defined in section 957), 

the term ‘‘qualified portion’’ does not 

include any portion of such indirect 

shareholder’s holding period during 

which it was not a United States 

shareholder (as defined in section 

951(b)) with respect to the foreign 

corporation. 

(ii) Transition rule. For taxable years 

of shareholders beginning before [date 

of publication of the Treasury decision 

adopting these rules as final regulations 

in the Federal Register], or for taxable 

years of shareholders of an S 

corporation in which the S corporation 

elects to apply § 1.958–1(e), for 

purposes of section 1297(d), a partner’s 

or S corporation shareholder’s qualified 

portion with respect to the foreign 

corporation includes the portion of its 

holding period during which it— 

(A) Is an indirect shareholder under 

paragraph (b)(8)(iii)(A) or (B) of this 

section with respect to the foreign 

corporation; and 

(B) Included in gross income its 

distributive or pro rata share of any 

amount that the domestic partnership or 

S corporation, respectively, included 

under sections 951(a)(1) and 951A(a) 

with respect to stock in the foreign 

corporation (treating the requirement in 

this paragraph (c)(5)(ii)(B) as not 

satisfied to the extent § 1.958–1(d)(1) 

through (3) is applied with respect to 


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the domestic partnership or S 

corporation before their general 

applicability date under § 1.958–1(d)(4) 

or the domestic partnership or S 

corporation relied on the earlier 

proposed version of such provisions). 

See, for example, § 1.951A–1(e)(2). 

* * * * * 

(j) * * * 

(5) Paragraphs (b)(7), (c)(4)(i), 

(c)(4)(ii)(A) and (B), and (c)(5) of this 

section apply to taxable years of 

shareholders beginning on or after [date 

of publication of the Treasury decision 

adopting these rules as final regulations 

in the Federal Register]. For taxable 

years of shareholders beginning before 

[date of publication of the Treasury 

decision adopting these rules as final 

regulations in the Federal Register], see 

§ 1.1291–1(b)(7), (c)(4)(i), and 

(c)(4)(ii)(A) and (B) as in effect and 

contained in 26 CFR part 1, as revised 

April 1, 2021. 

§ 1.1291–9 [Amended] 

■ Par. 8. Section 1.1291–9 is amended 

by: 

■ 1. Removing the language ‘‘the 

undistributed earnings and profits, 

within the meaning of section 902(c)(1)’’ 

in paragraph (a)(2)(i) and adding ‘‘the 

amount of the earnings and profits of 

the foreign corporation (computed in 

accordance with sections 964(a) and 

986)’’ in its place; 

■ 2. Removing the language ‘‘section 

1297(e) PFIC’’ in paragraphs (i) and 

(j)(2)(v) introductory text and adding 

‘‘section 1297(d) PFIC’’ in its place 

wherever it appears; and 

■ 3. Removing the language ‘‘section 

1297(e)(2)’’ in paragraph (j)(2)(v)(A) and 

adding ‘‘section 1297(d)(2)’’ in its place. 

■ Par. 9. Section 1.1293–1 is amended 

by: 

■ 1. Adding paragraphs (a)(3) and (4); 

■ 2. Revising paragraphs (c)(1) and (2); 

■ 3. Redesignating paragraph (c)(3) as 

paragraph (c)(4); 

■ 4. Adding a new paragraph (c)(3); and 

■ 5. Revising newly redesignated 

paragraph (c)(4). 

The additions and revisions read as 

follows: 

§ 1.1293–1 Current taxation of income 

from qualified electing funds. 

(a) * * * 

(3) Pass-through entity defined. For 

purposes of this section, the term passthrough entity has the meaning 

provided in § 1.1295–1(j)(2). 

(4) Applicability dates. Paragraph 

(a)(3) of this section applies to taxable 

years of shareholders beginning on or 

after [date of publication of the Treasury 

decision adopting these rules as final 

regulations in the Federal Register]. 

* * * * * 

(c) * * * (1) In general. Except as 

otherwise provided in this paragraph 

(c), a shareholder that makes a section 

1295 election as provided in § 1.1295– 

1(d)(2) with respect to stock in a PFIC 

that it is treated as owning by reason of 

an interest in a pass-through entity, or 

a shareholder that is treated as owning 

stock in a QEF by reason of an interest 

in a domestic partnership that has made 

a preexisting partnership section 1295 

election (within the meaning of 

§ 1.1295–1(d)(2)(i)(B)) or in an S 

corporation that has made a preexisting 

S corporation section 1295 election 

(within the meaning of § 1.1295– 

1(d)(2)(ii)(B)), includes in income its pro 

rata share of ordinary earnings and net 

capital gain attributable to the QEF 

stock as if the shareholder directly 

owned its share of the QEF stock held 

by the pass-through entity. 

(2) Section 1295 election made by 

domestic nongrantor trust or domestic 

estate. Notwithstanding paragraph (c)(1) 

of this section, if a domestic nongrantor 

trust or domestic estate makes a section 

1295 election as provided in § 1.1295– 

1(d)(2)(iii)(A)(1) with respect to PFIC 

stock that it owns, the domestic 

nongrantor trust or domestic estate 

includes in income its pro rata share of 

ordinary earnings and net capital gain 

attributable to the QEF stock. A 

shareholder that is treated as owning 

such QEF stock by reason of an interest 

in the domestic nongrantor trust or 

domestic estate accounts for its pro rata 

share of ordinary earnings and net 

capital gain attributable to such stock 

according to the general rules applicable 

to inclusions of income from the 

domestic nongrantor trust or domestic 

estate. 

(3) QEF stock transferred to a passthrough entity—(i) In general. Except as 

otherwise provided in this paragraph 

(c)(3), if a shareholder transfers stock in 

a PFIC subject to a section 1295 election 

to a pass-through entity in which it is 

an interest holder, such shareholder 

continues to include in income its pro 

rata share of ordinary earnings and net 

capital gain attributable to the QEF 

stock held by the transferee passthrough entity, under paragraph (c)(1) of 

this section. 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 passthrough entity. 

(ii) Shareholders other than the 

transferor. Except as otherwise provided 

in this paragraph (c)(3), if a shareholder 

transfers stock in a PFIC subject to a 

section 1295 election to a pass-through 

entity and such stock is not subject to 

a preexisting QEF election made by the 

pass-through entity, any other person 

that becomes a shareholder of such PFIC 

as a result of the transfer will be subject 

to the income inclusion rules of this 

section only if such person makes a 

section 1295 election with respect to the 

transferred PFIC stock under § 1.1295– 

1(d)(2). 

(iii) QEF stock transferred to domestic 

nongrantor trust. Notwithstanding 

paragraphs (c)(3)(i) and (ii) of this 

section, if a shareholder transfers stock 

in a PFIC subject to a section 1295 

election to a domestic nongrantor trust 

in which it is a beneficiary, and the 

transferee domestic nongrantor trust 

makes a section 1295 election with 

respect to that stock pursuant to 

§ 1.1295–1(d)(2)(iii)(A)(1), the domestic 

nongrantor trust, and the transferor and 

any person that becomes a shareholder 

of the QEF as a result of the transfer, 

take into account their share of ordinary 

earnings and net capital gain 

attributable to the QEF shares under 

paragraph (c)(2) of this section. If the 

transferee domestic nongrantor trust 

does not make a section 1295 election 

with respect to the transferred PFIC 

stock, the transferor continues to be 

subject, in its capacity as an indirect 

shareholder, to the income inclusion 

rules of paragraph (c)(1) of this section. 

(4) Applicability date. Paragraph (c) of 

this section applies to taxable years of 

shareholders beginning on or after [date 

of publication of the Treasury decision 

adopting these rules as final regulations 

in the Federal Register]. For taxable 

years of shareholders beginning before 

[date of publication of the Treasury 

decision adopting these rules as final 

regulations in the Federal Register], see 

§ 1.1293–1(c), as in effect and contained 

in 26 CFR part 1, as revised April 1, 

2021. 

■ Par. 10. Section 1.1295–1 is amended 

by: 

■ 1. Revising paragraph (b)(3); 

■ 2. Removing the language ‘‘are 

defined in paragraph (j) of this section’’ 

in paragraph (c)(1) and adding ‘‘are 

defined in paragraphs (j)(3) and (4) of 

this section, respectively’’ in its place; 

■ 3. Removing the language ‘‘(as defined 

in paragraph (j) of this section)’’ in 

paragraph (c)(2)(iv) and adding ‘‘(as 

defined in paragraph (j)(2) of this 

section)’’ in its place; 

■ 4. Revising paragraphs (d)(1), 

(d)(2)(i)(A) and (B), and (d)(2)(ii); 

■ 5. In paragraph (d)(2)(iii)(A)(1): 

■ i. Removing the language ‘‘§ 1.1293– 

1(c)(1)’’ and adding ‘‘§ 1.1293–1(c)(2)’’ 

in its place; and 

■ ii. Removing the language ‘‘domestic 

trust or estate’’ and adding ‘‘domestic 


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nongrantor trust or domestic estate’’ in 

its place; 

■ 6. Revising paragraph (f)(2)(i) 

introductory text; 

■ 7. Redesignating paragraph (f)(3) as 

paragraph (f)(5); 

■ 8. Adding a new paragraph (f)(3) and 

paragraph (f)(4); 

■ 9. Removing the language ‘‘as defined 

in paragraph (j) of this section’’ in 

paragraph (g)(3) and adding ‘‘as defined 

in paragraph (j)(1) of this section’’ in its 

place; 

■ 10. Removing the language ‘‘(as 

defined in paragraph (j) of this section)’’ 

and ‘‘§ 1.1295–1’’ in paragraph (h) and 

adding ‘‘(as defined in paragraph (j)(4) 

of this section)’’ and ‘‘this section’’ in 

their places, respectively; 

■ 11. Removing and reserving paragraph 

(i)(1)(ii); 

■ 12. Revising paragraph (j); and 

■ 13. In paragraph (k): 

■ i. Revising the heading; 

■ ii. Removing the language ‘‘(b)(3),’’ in 

the first sentence; 

■ iii. Removing the language ‘‘and (c) 

through (j) of this section’’ in the first 

sentence and adding ‘‘(c), (d)(2)(iv), 

(d)(3) through (d)(6), (e), (f)(1), (f)(2)(ii), 

(g), (h), (i)(1)(i) and (iii), and (i)(2) 

through (5) of this section’’ in its place; 

■ iv. Removing the language ‘‘(f) and (g) 

of this section’’ in the second sentence 

of and adding ‘‘(f)(1), (f)(2)(ii), and (g) of 

this section’’ in its place; 

■ v. Removing the third sentence; and 

■ vi. Adding two sentences at the end of 

the paragraph. 

The revisions and additions read as 

follows: 

§ 1.1295–1 Qualified electing funds. 

* * * * * 

(b) * * * 

(3) Application of general rules to 

stock held by a pass through entity—(i) 

Stock subject to a section 1295 election 

transferred to a domestic nongrantor 

trust or domestic estate. A shareholder’s 

section 1295 election will not apply to 

a domestic nongrantor trust or domestic 

estate to which the shareholder transfers 

stock subject to a section 1295 election, 

or to any other United States person that 

is a beneficiary of the domestic 

nongrantor trust or estate. 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 domestic 

nongrantor trust or domestic estate will 

continue to be subject to the section 

1295 election with respect to the stock 

indirectly owned through the domestic 

nongrantor trust or domestic estate and 

any other stock of that PFIC owned by 

the shareholder. 

(ii) Limitation on application of 

domestic nongrantor trust’s or domestic 

estate’s section 1295 election. Except as 

provided in paragraph (c)(2)(iv) of this 

section, a section 1295 election made by 

a domestic nongrantor trust or domestic 

estate does not apply to other stock of 

the PFIC held directly or indirectly by 

the beneficiary. 

(iii) Effect of partnership termination 

on preexisting partnership section 1295 

election. The termination of a 

preexisting partnership section 1295 

election (within the meaning of 

paragraph (d)(2)(i)(B) of this section) 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 (continuing 

partners). The stock of the PFIC of 

which a new partner (partners other 

than continuing partners) is an indirect 

shareholder will be treated as stock of 

a QEF with respect to such partner only 

if the new partner makes or has made 

a section 1295 election with respect to 

that stock under paragraph (d)(2)(i)(A) 

of this section. 

(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 a 

shareholder (as defined in paragraph 

(j)(3) of this section) that is treated as 

owning such stock by reason of an 

interest in the pass-through entity only 

if— 

(A) In the case of PFIC stock acquired 

(other than in a transaction in which 

gain is not fully recognized, including 

pursuant to regulations in this part 

under section 1291(f)) and held by a 

domestic pass-through entity, the 

domestic pass-through entity has made 

a preexisting section 1295 election 

under paragraph (d)(2)(i)(B) or 

(d)(2)(ii)(B) of this section, or makes an 

election under paragraph (d)(2)(iii)(A)(1) 

of this section, and the PFIC has been 

a QEF with respect to the pass-through 

entity for all taxable years that are 

included 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); 

(B) In the case of PFIC stock acquired 

(other than in a transaction in which 

gain is not fully recognized, including 

pursuant to regulations in this part 

under section 1291(f)) and held by a 

domestic pass-through entity, other than 

PFIC stock described in paragraph 

(b)(3)(iv)(A) of this section, through 

which the shareholder is treated as 

owning such PFIC stock, the 

shareholder makes the section 1295 

election under paragraph (d)(2)(i)(A), 

(d)(2)(ii)(A), (d)(2)(iii)(A)(2), or 

(d)(2)(iii)(B) of this section, and the 

PFIC has been a QEF with respect to the 

shareholder for all taxable years that are 

included in the shareholder’s holding 

period for the PFIC stock, and during 

which the foreign corporation was a 

PFIC within the meaning of § 1.1291– 

9(j)(1); or 

(C) 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 fully 

recognized (including pursuant to 

regulations in this part under section 

1291(f)), if the pass-through entity made 

a preexisting section 1295 election 

under paragraph (d)(2)(i)(B) or 

(d)(2)(ii)(B) of this section with respect 

to the PFIC stock, or the shareholder or 

pass-through entity, as applicable, 

makes a section 1295 election under 

paragraph (d)(2)(i)(A), (d)(2)(ii)(A), 

(d)(2)(iii)(A)(1) or (2), or (d)(2)(iii)(B) of 

this section, in each case for the taxable 

year in which the transfer was made, or 

the shareholder’s section 1295 election 

continues pursuant to paragraph 

(c)(2)(iv) of this section. If the foreign 

corporation was a PFIC within the 

meaning of § 1.1291–9(j) at the time of 

the transfer, the PFIC stock transferred 

will be treated as stock of a pedigreed 

QEF with respect to a transferor, 

however, only if that stock was treated 

as stock of a pedigreed QEF with respect 

to the transferor at the time of the 

transfer. In all cases subject to this 

paragraph (b)(3)(iv)(C), the PFIC stock 

will be treated as stock of a pedigreed 

QEF only if the PFIC has been a QEF for 

all taxable years of the PFIC that are 

included wholly or partly in the 

shareholder’s holding period of the PFIC 

stock during which the foreign 

corporation was a PFIC within the 

meaning of § 1.1291–9(j). 

(v) Characterization of stock 

distributed by a partnership. In the case 

of PFIC stock distributed by a 

partnership to one or more partners in 

a transaction in which gain is not fully 

recognized (including pursuant to 

regulations in this part under section 

1291(f)), the PFIC stock will be treated 

as stock of a pedigreed QEF by a 

shareholder only if that stock was 

treated as stock of a pedigreed QEF with 

respect to the shareholder immediately 

before the distribution, or, in the case of 

a distribution of PFIC stock by a 

partnership to one or more partners in 

the first year of the distributee partner 

or partners’ holding period of the PFIC 

stock, the distributee partner or partners 


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make an election as provided in 

paragraph (d)(2) of this section. 

* * * * * 

(d) * * * (1) General rule. Except as 

otherwise provided in this paragraph 

(d), any shareholder (as defined in 

paragraph (j)(3) 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 when 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. 

(2) * * * (i) * * * (A) In general. If 

a partnership (domestic or foreign) 

holds stock of a PFIC, the section 1295 

election with respect to such PFIC is 

made by a shareholder (as defined in 

paragraph (j)(3) of this section) 

indirectly owning the PFIC stock by 

reason of its interest in the partnership. 

A section 1295 election made by a 

shareholder under this paragraph 

(d)(2)(i)(A) applies to the stock of the 

PFIC indirectly owned by the 

shareholder by reason of its interest in 

the partnership and to any other stock 

of the PFIC owned by the shareholder. 

A shareholder making an election under 

this paragraph (d)(2)(i)(A) must do so in 

the form and manner provided in 

paragraph (f) of this section. The 

shareholder must also notify the 

partnership of the election no later than 

30 days after filing the return in which 

the election is made; the shareholder 

may notify the partnership in any 

reasonable manner. However, the failure 

of the shareholder to notify the 

partnership of its election does not 

invalidate an otherwise valid election 

under this paragraph (d)(2)(i)(A). A 

shareholder making an election under 

this paragraph (d)(2)(i)(A) accounts for 

its pro rata share of ordinary earnings 

and net capital gain attributable to the 

QEF stock as provided in § 1.1293– 

1(c)(1). 

(B) Preexisting section 1295 election 

by domestic partnership. Any section 

1295 election made by a domestic 

partnership with respect to a PFIC 

effective for taxable years of the PFIC 

ending on or before [date of publication 

of the Treasury decision adopting these 

rules as final regulations in the Federal 

Register] (preexisting partnership 

section 1295 election) will be treated as 

if it were made by each shareholder that 

is treated as owning stock in the PFIC 

by reason of its interest in the domestic 

partnership on or before such date, and 

the stock in the PFIC will continue to be 

treated as stock in a QEF to such 

shareholder; any partner that becomes a 

shareholder of the PFIC by acquiring an 

interest in the domestic partnership 

after [date of publication of the Treasury 

decision adopting these rules as final 

regulations in the Federal Register] and 

wishes to have a section 1295 election 

applicable with respect to the PFIC may 

make a section 1295 election under 

paragraph (d)(2)(i)(A) of this section 

with respect to stock treated as owned 

by reason of its interest in the domestic 

partnership. A shareholder that is 

treated as owning stock of a QEF by 

reason of an interest in a domestic 

partnership that has made a preexisting 

partnership section 1295 election 

accounts for its pro rata share of the 

ordinary earnings and net capital gain 

attributable to such QEF stock as 

provided in § 1.1293–1(c)(1). 

(ii) S corporation—(A) In general. If 

an S corporation holds stock of a PFIC, 

the section 1295 election with respect to 

such PFIC is made by a shareholder (as 

defined in paragraph (j)(3) of this 

section) indirectly owning the PFIC 

stock by reason of its interest in the S 

corporation. A section 1295 election 

made by a shareholder under this 

paragraph (d)(2)(ii)(A) applies to the 

stock of the PFIC held by the 

shareholder by reason of its interest in 

the S corporation and to any other stock 

of the PFIC held by the shareholder. A 

shareholder making an election under 

this paragraph (d)(2)(ii)(A) must do so in 

the form and manner provided in 

paragraph (f) of this section. The 

shareholder must also notify the S 

corporation of the election no later than 

30 days after filing the return in which 

the election is made; the shareholder 

may notify the S corporation in any 

reasonable manner. However, the failure 

of the shareholder to notify the S 

corporation of its election does not 

invalidate an otherwise valid election 

under this paragraph (d)(2)(ii)(A). A 

shareholder making an election under 

this paragraph (d)(2)(ii)(A) accounts for 

its pro rata share of ordinary earnings 

and net capital gain attributable to the 

QEF stock as provided in § 1.1293– 

1(c)(1). 

(B) Preexisting section 1295 election 

by S corporation. Any section 1295 

election made by an S corporation with 

respect to a PFIC effective for taxable 

years of such PFIC ending on or before 

[date of publication of the Treasury 

decision adopting these rules as final 

regulations in the Federal Register] 

(preexisting S corporation section 1295 

election) will be treated as if it were 

made by each shareholder that is treated 

as owning stock in the PFIC by reason 

of its interest in the S corporation on or 

before such date, and the stock in the 

PFIC will continue to be treated as stock 

in a QEF to such shareholder; any S 

corporation shareholder that becomes a 

shareholder of the PFIC by acquiring an 

interest in the S corporation after [date 

of publication of the Treasury decision 

adopting these rules as final regulations 

in the Federal Register] and wishes to 

have a section 1295 election applicable 

with respect to the PFIC may make a 

section 1295 election under paragraph 

(d)(2)(ii)(A) of this section with respect 

to stock treated as owned by reason of 

its interest in the S corporation. A 

shareholder that is treated as owning 

stock of a QEF by reason of an interest 

in an S corporation that has made a 

preexisting S corporation section 1295 

election accounts for its pro rata share 

of the ordinary earnings and net capital 

gain attributable to the QEF stock as 

provided in § 1.1293–1(c)(1). 

* * * * * 

(f) * * * 

(2) * * * (i) In general. A shareholder 

that makes a section 1295 election with 

respect to a PFIC, or a shareholder that 

is treated as owning stock in a QEF by 

reason of an interest in a domestic 

partnership that has made a preexisting 

partnership section 1295 election 

(within the meaning of paragraph 

(d)(2)(i)(B) of this section) or by reason 

of an interest in an S corporation that 

has made a preexisting S corporation 

section 1295 election (within the 

meaning of paragraph (d)(2)(ii)(B) of this 

section), for each taxable year to which 

the section 1295 election applies, 

must— 

* * * * * 

(3) Preexisting partnership or S 

corporation section 1295 election. A 

shareholder that is treated as owning 

stock in a QEF by reason of an interest 

in a domestic partnership that has made 

a preexisting partnership section 1295 

election or by reason of an interest in an 

S corporation that has made a 

preexisting S corporation section 1295 

election does not need to make a section 

1295 election with respect to such QEF 

under the rules of paragraph (f)(1) of 

this section. However, such shareholder 

must comply with the annual election 

requirements as provided in paragraph 

(f)(2) of this section. 

(4) Notice requirement for partners 

and S corporation shareholders. See 

paragraphs (d)(2)(i)(A) and (d)(2)(ii)(A) 

of this section for a notice requirement 

for partners and S corporation 

shareholders making a section 1295 

election under this section. 

* * * * * 


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(j) Definitions. For purposes of this 

section— 

(1) Intermediary. The term 

intermediary means 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. 

(2) Pass-through entity. The term 

pass-through entity means a 

partnership, S corporation, trust, or 

estate. 

(3) Shareholder. The term shareholder 

has the meaning provided in § 1.1291– 

1(b)(7). 

(4) Shareholder’s election year. The 

term shareholder’s election year means 

the taxable year of the shareholder for 

which it makes the section 1295 

election. 

(k) Applicability dates. * * * 

Paragraphs (b)(3), (d)(1), (d)(2)(i) and 

(ii), (f)(2)(i), (f)(3) and (4), and (j) of this 

section apply to taxable years of 

shareholders beginning on or after [date 

of publication of the Treasury decision 

adopting these rules as final regulations 

in the Federal Register]. For taxable 

years of shareholders beginning before 

[date of publication of the Treasury 

decision adopting these rules as final 

regulations in the Federal Register], see 

§ 1.1295–1(b)(3), (d)(1), (d)(2)(i) and (ii), 

(f)(2)(i), (i)(1)(ii), and (j) as in effect and 

contained in 26 CFR part 1, as revised 

April 1, 2021. 

■ Par. 11. Section 1.1296–1 is amended 

by: 

■ 1. Adding paragraph (a)(4); 

■ 2. Revising paragraph (e)(1); 

■ 3. Removing paragraph (g)(3); 

■ 4. Revising paragraphs (h)(1)(i) and (j); 

and 

■ 5. For each paragraph listed in the 

following table, removing the language 

in the ‘‘Remove’’ column and adding in 

its place the language in the ‘‘Add’’ 

column. 

Paragraph Remove Add 

(b)(1) ................................................................................. United States person ....................................................... shareholder. 

(b)(2), heading .................................................................. United States person ....................................................... shareholder. 

(b)(2), first sentence ......................................................... United States person ....................................................... shareholder. 

(b)(2), first sentence ......................................................... U.S. person ...................................................................... shareholder. 

(b)(2), second sentence ................................................... United States person’s .................................................... shareholder’s. 

(b)(3), second sentence ................................................... United States person’s .................................................... shareholder’s. 

(b)(3), second sentence ................................................... person owns directly ........................................................ shareholder owns directly. 

(c)(1) ................................................................................. United States person’s .................................................... shareholder’s. 

(c)(1) ................................................................................. United States person ....................................................... shareholder. 

(c)(3) ................................................................................. United States person’s .................................................... shareholder’s. 

(c)(3) ................................................................................. such person ..................................................................... such shareholder. 

(c)(5) ................................................................................. United States person ....................................................... shareholder. 

(d)(1) ................................................................................. United States person ....................................................... shareholder. 

(d)(2), heading .................................................................. certain foreign entities ..................................................... pass-through entities. 

(d)(2)(i), first and last sentences ...................................... United States person ....................................................... shareholder. 

(d)(2)(i), first sentence ...................................................... certain foreign entities ..................................................... pass-through entities. 

(d)(2)(i), first sentence ...................................................... foreign entity .................................................................... entity. 

(d)(2)(i), last sentence ...................................................... United States person’s .................................................... shareholder’s. 

(e), heading ...................................................................... foreign entities ................................................................. pass-through entities. 

(f) ...................................................................................... taxpayer ........................................................................... shareholder. 

(f) ...................................................................................... taxpayer’s ........................................................................ shareholder’s. 

(g)(1) ................................................................................. United States person ....................................................... shareholder. 

(g)(2), heading .................................................................. United States person ....................................................... shareholder. 

(g)(2)(i) .............................................................................. United States person ....................................................... shareholder. 

(h)(1)(ii) ............................................................................. controlling United States shareholders ............................ controlling domestic shareholders. 

(h)(2)(ii), first sentence ..................................................... United States person ....................................................... shareholder. 

(h)(2)(ii), last sentence ..................................................... United States person’s .................................................... shareholder’s. 

(h)(3)(i), first sentence ...................................................... United States person’s .................................................... shareholder’s. 

(h)(3)(i), first sentence ...................................................... United States person ....................................................... shareholder. 

(h)(3)(ii), second sentence ............................................... United States person ....................................................... shareholder. 

(i)(1) .................................................................................. United States person’s .................................................... shareholder’s. 

(i)(1) .................................................................................. United States person ....................................................... shareholder. 

(i)(2), introductory text ...................................................... United States person ....................................................... shareholder. 

(i)(2)(ii) .............................................................................. United States person’s .................................................... shareholder’s. 

(i)(2)(ii) .............................................................................. taxpayer’s ......................................................................... shareholder’s. 

The addition and revisions read as 

follows: 

§ 1.1296–1 Mark to market election for 

marketable stock. 

(a) * * * 

(4) Shareholder. The term shareholder 

has the meaning provided in § 1.1291– 

1(b)(7). 

* * * * * 

(e) * * * (1) In general. Except as 

provided in paragraph (e)(2) of this 

section, the following rules apply in 

determining stock ownership for 

purposes of this section. PFIC stock 

owned, directly or indirectly, by or for 

a partnership (domestic or foreign), S 

corporation, foreign trust (other than a 

foreign trust that is described in sections 

671 through 679), or foreign estate is 

considered as being owned 

proportionately by its partners, 

shareholders, or beneficiaries, 

respectively. PFIC stock owned, directly 

or indirectly, by or for a trust (domestic 

or foreign) described in sections 671 

through 679 is considered as being 

owned proportionately by its grantors or 

other persons treated as owners under 

sections 671 through 679 of any portion 

of the trust that includes the stock. The 

determination of a person’s 

proportionate interest in a partnership, 

S corporation, trust, or estate will be 

made on the basis of all the facts and 

circumstances. Stock considered owned 

by a person by reason of this paragraph 


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3918 Federal Register / Vol. 87, No. 16 / Tuesday, January 25, 2022 / Proposed Rules 

is treated as actually owned by such 

person for purposes of applying the 

rules of this section. 

* * * * * 

(h) * * * (1) * * * (i) Shareholders. 

Except as otherwise provided in this 

paragraph (h), a shareholder (as defined 

in paragraph (a)(4) of this section) that 

owns marketable stock in a PFIC, or is 

treated as owning marketable stock 

under paragraph (e) of this section, on 

the last day of the shareholder’s taxable 

year, must make a section 1296 election 

for such taxable year on or before the 

due date (including extensions) of its 

income tax return for that year. The 

section 1296 election must be made on 

the Form 8621, ‘‘Return by a 

Shareholder of a Passive Foreign 

Investment Company or Qualified 

Electing Fund’’ (or successor form), 

included with the original or 

superseding tax return of the 

shareholder for that year. 

(A) Preexisting section 1296 election. 

Notwithstanding paragraph (h)(1)(i) of 

this section, any section 1296 election 

with respect to a PFIC made by a 

domestic partnership or S corporation 

effective for taxable years of the PFIC 

ending on or before [date of publication 

of the Treasury decision adopting these 

rules as final regulations in the Federal 

Register] (preexisting section 1296 

election) will continue to apply, and any 

stock in the PFIC that a shareholder is 

treated as owning by reason of its 

interest in the domestic partnership or 

S corporation on or before such date 

will continue to be treated as section 

1296 stock to such shareholder; any 

person that becomes a shareholder of 

the PFIC by acquiring an interest in the 

domestic partnership or S corporation 

after such date that wishes for a section 

1296 election to apply with respect to 

the PFIC may make a section 1296 

election as provided in paragraphs (b)(1) 

and (h)(1)(i) of this section. A 

shareholder that is treated as owning 

section 1296 stock by reason of an 

interest in a domestic partnership or S 

corporation that has made a preexisting 

1296 election under this paragraph 

(h)(1)(i)(A) accounts for its share, 

through its ownership in the domestic 

partnership or S corporation, of any 

mark to market gain recognized under 

paragraph (c)(1) of this section and any 

mark to market loss under paragraph 

(c)(3) of this section as if it owned the 

section 1296 stock directly. 

(B) Notice. A shareholder that makes 

a section 1296 election with respect to 

section 1296 stock owned through a 

partnership or S corporation must notify 

the partnership or S corporation of the 

election no later than 30 days after filing 

the return in which the election is 

made; the shareholder may provide 

such notification in any reasonable 

manner. However, the failure of the 

shareholder to notify the partnership or 

S corporation of its election will not 

invalidate an otherwise valid section 

1296 election. 

* * * * * 

(j) Applicability date. Except as 

otherwise provided in this paragraph (j), 

the provisions in this section apply to 

taxable years beginning on or after May 

3, 2004. The provisions of paragraph 

(d)(4) of this section relating to section 

1022 apply on and after January 19, 

2017. The provisions of paragraphs 

(a)(4); (b)(1) through (3); (c)(1), (3), and 

(5); (d)(1) and (d)(2)(i); (e)(1); (f); (g)(1), 

(g)(2)(i), and (g)(3); (h)(1)(i) and (ii), 

(h)(2)(ii), and (h)(3)(i) and (ii); and (i)(1), 

(i)(2) introductory text, and (i)(2)(ii) 

apply to taxable years of shareholders 

beginning on or after [date of 

publication of the Treasury decision 

adopting these rules as final regulations 

in the Federal Register]. For taxable 

years of shareholders beginning before 

[date of publication of the Treasury 

decision adopting these rules as final 

regulations in the Federal Register], see 

§ 1.1296–1(b)(1) through (3); (c)(1), (3), 

and (5); (d)(1) and (d)(2)(i); (e)(1); (f); 

(g)(1), (g)(2)(i), and (g)(3); (h)(1)(i) and 

(ii), (h)(2)(ii), and (h)(3)(i) and (ii); and 

(i)(1), (i)(2) introductory text, and 

(i)(2)(ii) as in effect and contained in 26 

CFR part 1, as revised April 1, 2021. 

§ 1.1297–0 [Amended] 

■ Par. 12. Section 1.1297–0 is amended 

by removing the language ‘‘section 

1297(e) PFIC’’ from the heading for the 

entry for § 1.1297–3 and adding ‘‘section 

1297(d) PFIC’’ in its place. 

■ Par. 13. Section 1.1297–3 is amended 

by: 

■ 1. Revising the section heading; 

■ 2. Removing the language ‘‘section 

1297(e)’’ in paragraph (a) and adding 

‘‘section 1297(d)’’ in its place; 

■ 3. Removing the language ‘‘section 

1297(e) PFIC’’ in paragraphs (b)(1) and 

(2) and adding ‘‘section 1297(d) PFIC’’ 

in its place; 

■ 4. Removing the language ‘‘section 

1297(e)(2)’’ in paragraph (b)(2) and 

adding ‘‘section 1297(d)(2)’’ in its place; 

■ 5. Removing the language ‘‘section 

1297(e) PFIC’’ in paragraphs (c)(1) and 

(2) and adding ‘‘section 1297(d) PFIC’’ 

in its place; 

■ 6. Removing the language ‘‘section 

1297(e)(2)’’ in paragraph (c)(2) and 

adding ‘‘section 1297(d)(2)’’ in its place; 

■ 7. Removing the language ‘‘the post1986 undistributed earnings, within the 

meaning of section 902(c)(1) 

(determined without regard to section 

902(c)(3))’’ in paragraphs (c)(3)(i)(A) and 

(B) and adding ‘‘the amount of the 

earnings and profits of the foreign 

corporation (computed in accordance 

with sections 964(a) and 986)’’ in its 

place; and 

■ 8. Removing the language ‘‘section 

1297(e) PFIC’’ in paragraphs (d) and 

(e)(1) and adding ‘‘section 1297(d) 

PFIC’’ in its place. 

The revision reads as follows: 

§ 1.1297–3 Deemed sale or deemed 

dividend election by a U.S. person that is 

a shareholder of a section 1297(d) PFIC. 

* * * * * 

■ Par. 14. Section 1.1298–1 is amended 

by: 

■ 1. Revising paragraphs (b)(1), (b)(2) 

heading, (b)(2)(i) introductory text, and 

(b)(2)(ii); 

■ 2. Removing paragraph (c)(6); 

■ 3. Redesignating paragraphs (c)(7) 

through (9) as paragraphs (c)(6) through 

(8), respectively; 

■ 4. Removing the language ‘‘Except as 

provided in paragraph (h)(2) of this 

section’’ in paragraph (h)(1) and adding 

‘‘Except as provided in paragraph (h)(2) 

or (3) of this section’’ in its place; 

■ 5. Removing the language ‘‘Paragraph 

(c)(9)’’ in paragraph (h)(2) and adding 

‘‘Paragraph (c)(8)’’ in its place; and 

■ 6. Adding paragraph (h)(3). 

The revisions and addition read as 

follows: 

§ 1.1298–1 Section 1298(f) annual 

reporting requirements for United States 

persons that are shareholders of a passive 

foreign investment company. 

* * * * * 

(b) * * * (1) General rule. Except as 

otherwise provided in this section, a 

United States person that is a 

shareholder of a PFIC (as defined in 

§ 1.1291–1(b)(7)) must complete and file 

Form 8621, ‘‘Information Return by a 

Shareholder of a Passive Foreign 

Investment Company or Qualified 

Electing Fund’’ (or successor form), 

under section 1298(f) and this section 

for the PFIC if, during the shareholder’s 

taxable year, the shareholder— 

(i) Directly owns stock of the PFIC; or 

(ii) Is an indirect shareholder under 

§ 1.1291–1(b)(8) that holds any interest 

in the PFIC through one or more 

entities, domestic or foreign, each of 

which is not a shareholder of such PFIC 

within the meaning of § 1.1291–1(b)(7). 

(2) Additional requirement to file for 

certain beneficiaries of domestic estates 

and domestic nongrantor trusts—(i) 

General rule. Except as otherwise 

provided in this section, an indirect 

shareholder that owns an interest in a 

PFIC by reason of an interest in a 

domestic estate or domestic nongrantor 

trust (as described in § 1.1291– 


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1(b)(8)(iii)(C)) also must file Form 8621 

(or successor form) with respect to the 

PFIC under section 1298(f) and this 

section if, during the indirect 

shareholder’s taxable year, the indirect 

shareholder is— 

* * * * * 

(ii) Exception to indirect shareholder 

reporting for certain QEF inclusions and 

MTM inclusions. The filing 

requirements under paragraph (b)(2)(i) 

of this section do not apply with respect 

to an interest in a PFIC owned by an 

indirect shareholder described in 

paragraph (b)(2)(i)(C) or (D) of this 

section if the domestic nongrantor trust 

or domestic estate through which the 

indirect shareholder owns such interest 

in the PFIC timely files Form 8621 (or 

successor form) with respect to the PFIC 

under paragraph (b)(1) of this section. 

* * * * * 

(h) * * * 

(3) Paragraphs (b)(1) and (b)(2)(i) and 

(ii) of this section apply to taxable years 

of shareholders beginning on or after 

[date of publication of the Treasury 

decision adopting these rules as final 

regulations in the Federal Register]. For 

taxable years of shareholders beginning 

before [date of publication of the 

Treasury decision adopting these rules 

as final regulations in the Federal 

Register], see § 1.1298–1(b)(1) and 

(b)(2)(i) and (ii) as in effect and 

contained in 26 CFR part 1, as revised 

April 1, 2021. 

§ 1.1298–3 [Amended] 

■ Par. 15. Section 1.1298–3 is amended 

by removing the language ‘‘the post1986 undistributed earnings, within the 

meaning of section 902(c)(1) 

(determined without regard to section 

902(c)(3))’’ in paragraph (c)(3)(i) and 

adding ‘‘the amount of the earnings and 

profits of the foreign corporation 

(computed in accordance with sections 

964(a) and 986)’’ in its place. 

■ Par. 16. Section 1.1411–10 is 

amended by: 

■ 1. Removing paragraph (g)(2)(iii); 

■ 2. Revising paragraph (g)(3); 

■ 3. Removing paragraph (g)(4)(ii); 

■ 4. Redesignating paragraphs (g)(4)(iii) 

and (iv) as paragraphs (g)(4)(ii) and (iii), 

respectively; and 

■ 5. Revising newly redesignated 

paragraph (g)(4)(iii) and paragraph (i). 

The revisions read as follows: 

§ 1.1411–10 Controlled foreign 

corporations and passive foreign 

investment companies. 

* * * * * 

(g) * * * 

(3) Who may make the election—(i) In 

general. An individual, estate, or trust 

may make an election under paragraph 

(g) of this section with respect to each 

CFC or QEF that it holds directly or 

indirectly through one or more entities, 

each of which is a foreign entity or a 

domestic pass-through entity. The 

election, if made, for an estate or trust 

must be made by the fiduciary of the 

estate or trust. 

(ii) Special rule for certain S 

corporations. For taxable years in which 

an S corporation elects to apply § 1.958– 

1(e), the S corporation may make an 

election under this paragraph (g)(3)(ii) 

with respect to each CFC that it holds, 

directly or indirectly. If an S corporation 

does not make the election under this 

paragraph (g)(3)(ii), the election may be 

made by its shareholders that are 

individuals, estates, or trusts instead. 

(4) * * * 

(iii) Time for making election. The 

election under paragraph (g) of this 

section must be made in the manner 

prescribed by forms, instructions, or in 

other guidance on the individual’s, 

estate’s, or trust’s original or amended 

return for the taxable year for which the 

election is made. An election can be 

made on an amended return only if the 

taxable year for which the election is 

made, and all taxable years that are 

affected by the election, are not closed 

by the period of limitations on 

assessments under section 6501. 

Extensions of time to make the election 

are not available under any other 

provision of the law, including 

§ 301.9100 of this chapter. 

* * * * * 

(i) Applicability dates. Except as 

otherwise provided in this paragraph (i), 

this section applies to taxable years 

beginning after December 31, 2013. 

However, taxpayers may apply this 

section to taxable years beginning after 

December 31, 2012, in accordance with 

§ 1.1411–1(f). Paragraphs (g)(3) and 

(g)(4)(iii) of this section apply to taxable 

years beginning on or after [date of 

publication of the Treasury decision 

adopting these rules as final regulations 

in the Federal Register]. For taxable 

years beginning before [date of 

publication of the Treasury decision 

adopting these rules as final regulations 

in the Federal Register], see paragraphs 

(g)(3) and (g)(4)(iii) of this section as in 

effect and contained in 26 CFR part 1, 

as revised April 1, 2021. 

Douglas W. O’Donnell, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. 2022–00067 Filed 1–24–22; 8:45 am] 

BILLING CODE 4830–01–P 


khammond on DSKJM1Z7X2PROD with PROPOSALS2