72908 Federal Register / Vol. 70, No. 235 / Thursday, December 8, 2005 / Rules and Regulations 

IV. Environmental Impact 

The agency has carefully considered 

the potential environmental effects of 

this final rule. FDA has concluded that 

the action will not have a significant 

impact on the human environment, and 

that an environmental impact statement 

is not required. The agency’s finding of 

no significant impact and the evidence 

supporting that finding, contained in an 

environmental assessment, may be seen 

in the Division of Dockets Management 

(see ADDRESSES) between 9 a.m. and 4 

p.m., Monday through Friday. 

V. Paperwork Reduction Act of 1995 

This final rule contains no collection 

of information. Therefore, clearance by 

the Office of Management and Budget 

under the Paperwork Reduction Act of 

1995 is not required. 

VI. Objections 

Any person who will be adversely 

affected by this regulation may file with 

the Division of Dockets Management 

(see ADDRESSES) written or electronic 

objections. Each objection shall be 

separately numbered, and each 

numbered objection shall specify with 

particularity the provisions of the 

regulation to which objection is made 

and the grounds for the objection. Each 

numbered objection on which a hearing 

is requested shall specifically so state. 

Failure to request a hearing for any 

particular objection shall constitute a 

waiver of the right to a hearing on that 

objection. Each numbered objection for 

which a hearing is requested shall 

include a detailed description and 

analysis of the specific factual 

information intended to be presented in 

support of the objection in the event 

that a hearing is held. Failure to include 

such a description and analysis for any 

particular objection shall constitute a 

waiver of the right to a hearing on the 

objection. Three copies of all documents 

are to be submitted and are to be 

identified with the docket number 

found in brackets in the heading of this 

document. Any objections received in 

response to the regulation may be seen 

in the Division of Dockets Management 

between 9 a.m. and 4 p.m., Monday 

through Friday. 

VII. References 

The following references have been 

placed on display in the Division of 

Dockets Management (see ADDRESSES) 

and may be seen by interested persons 

between 9 a.m. and 4 p.m., Monday 

through Friday. 

1. ‘‘Toxicology and Carcinogenesis Studies 

of 1,3-Butadiene (CAS No. 106–99–0) in 

B6C3F1 Mice (Inhalation Studies),’’ National 

Toxicology Program, Technical Report Series, 

No. 434. 

2. Owen, P.E. et al., ‘‘Inhalation Toxicity 

Studies with 1,3-Butadiene. 3 Two Year 

Toxicity/Carcinogenicity Studies in Rats,’’

American Industrial Hygiene Association 

Journal, 48: 407–413, 1987. 

3. Owen, P.E. and J.R. Glaister, ‘‘Inhalation 

Toxicity and Carcinogenicity Study of 1,3- 

Butadiene in Sprague-Dawley Rats,’’

Environmental Health Perspectives, 86: 19–

25, 1990. 

4. Memorandum dated February 23, 2001, 

from the Division of Product Policy, 

Scientific Support Branch to the Division of 

Product Policy, Regulatory Policy Branch, 

‘‘Food Additive Petition 4A4419—Kuraray 

America Inc. (formerly Kuraray International 

Corporation)/Keller & Heckman. n-Octanol, a 

currently cleared synthetic fatty alcohol 

produced by a new manufacturing process, 

for use as an ingredient in food. Submissions 

dated 4–7–1994 and 4–12–1994.’’

5. Memorandum dated May 3, 1994, from 

the Chemistry Review Branch to the Indirect 

Additives Branch, ‘‘FAP 4A4419 (MATS 

#763, M2.1.1)—Kuraray International 

Corporation. Submission dated 4–7–94. 

Request of 4–20–94 from Indirect Additives 

Branch: Estimated exposure to 1,3-butadiene 

from the use of synthetic n-octanol.’’

6. Memorandum dated July 26, 1994, from 

the Chemistry Review Branch to the Indirect 

Additives Branch, ‘‘FAP 4A4419 (MATS 

#763, M2.1)—Kuraray International 

Corporation/Keller & Heckman. Submissions 

dated 4–7–94 and 4–12–94. n-Octanol via a 

new manufacturing process.’’

List of Subjects in 21 CFR Part 172 

Food additives, Incorporation by 

reference, Reporting and recordkeeping 

requirements. 

■ Therefore, under the Federal Food, 

Drug, and Cosmetic Act and under 

authority delegated to the Commissioner 

of Food and Drugs, 21 CFR part 172 is 

amended as follows: 

PART 172—FOOD ADDITIVES 

PERMITTED FOR DIRECT ADDITION 

TO FOOD FOR HUMAN 

CONSUMPTION 

■ 1. The authority citation for 21 CFR 

part 172 continues to read as follows: 

Authority: 21 U.S.C. 321, 341, 342, 348, 

371, 379e. 

■ 2. Section 172.864 is amended by 

adding paragraph (a)(3) to read as 

follows: 

§ 172.864 Synthetic fatty alcohols. 

* * * * * 

(a) * * * 

(3) n-Octyl; manufactured by the 

hydrodimerization of 1,3-butadiene, 

followed by catalytic hydrogenation of 

the resulting dienol, and distillation to 

produce n-octyl alcohol with a 

minimum purity of 99 percent. The 

analytical method for n-octyl alcohol 

entitled ‘‘Test Method [Normaloctanol]’’ dated October 2003, and 

printed by Kuraray Co., Ltd., is 

incorporated by reference. The Director 

of the Office of the Federal Register 

approves this incorporation by reference 

in accordance with 5 U.S.C. 552(a) and 

1 CFR part 51. You may obtain a copy 

from the Office of Food Additive Safety, 

5100 Paint Branch Pkwy., College Park, 

MD 20740, or you may examine a copy 

at the Center for Food Safety and 

Applied Nutrition’s Library, Food and 

Drug Administration, 5100 Paint Branch 

Pkwy., College Park, MD 20740, or at 

the National Archives and Records 

Administration (NARA). For 

information on the availability of this 

material at NARA, call 202–741–6030, 

or go to http://www.archives.gov/ 

federal_register/ 

code_of_federal_regulations/ 

ibr_locations.html. 

* * * * * 

Dated: November 29, 2005. 

Jeffrey Shuren, 

Assistant Commissioner for Policy. 

[FR Doc. 05–23745 Filed 12–7–05; 8:45 am] 

BILLING CODE 4160–01–S 

HOUSING AND URBAN 

DEVELOPMENT 

24 CFR Part 941 

Public Housing Development 

CFR Correction 

In Title 24 of the Code of Federal 

Regulations, parts 700 to 1699, revised 

as of April 1, 2005, on page 381, 

§ 941.207 is corrected by removing the 

parenthetical statement at the end of the 

section. 

[FR Doc. 05–55518 Filed 12–7–05; 8:45 am] 

BILLING CODE 1505–01–D 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1 and 602 

[TD 9232] 

RIN 1545–BD33 

Guidance on Passive Foreign 

Investment Company (PFIC) Purging 

Elections 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Temporary regulation. 

SUMMARY: This document contains 

temporary regulations that provide 

certain elections for taxpayers that 

Federal Register / Vol. 70, No. 235 / Thursday, December 8, 2005 / Rules and Regulations 72909 

continue to be subject to the PFIC excess 

distribution regime of section 1291 even 

though the foreign corporation in which 

they own stock is no longer treated as 

a PFIC under section 1297(a) or (e). The 

regulations are necessary to provide 

guidance about purging the PFIC taint 

for such foreign corporations. The 

regulations will affect U.S. persons that 

hold stock in a PFIC. The text of these 

temporary regulations also serves as the 

text of the proposed regulations set forth 

in the notice of proposed rulemaking on 

this subject in the Proposed Rules 

section in this issue of the Federal 

Register. 

DATES: Effective Date: These regulations 

are effective December 8, 2005. 

Applicability Date: For dates of 

applicability, see §§ 1.1297–3T(f), 

1.1298–3T(f). 

FOR FURTHER INFORMATION CONTACT: 

Ethan Atticks at (202) 622–3840 (not a 

toll-free number). 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

These temporary regulations are being 

issued without prior notice and public 

procedure pursuant to the 

Administrative Procedure Act (5 U.S.C. 

553). For this reason, the collection of 

information contained in these 

regulations has been reviewed and, 

pending receipt and evaluation of 

public comments, approved by the 

Office of Management and Budget under 

control number 1545–1965. Responses 

to this collection of information are 

required to obtain a tax benefit. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless the collection of information 

displays a valid OMB control number. 

For further information concerning 

this collection of information, and 

where to submit comments on the 

collection of information and the 

accuracy of the estimated burden, and 

suggestions for reducing this burden, 

please refer to the preamble of the crossreferencing notice of proposed 

rulemaking published in the Proposed 

Rules section of this issue of the Federal 

Register. 

Books or records relating to a 

collection of information must be 

retained as long as their contents may 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by 26 

U.S.C. 6103. 

Background 

This document contains amendments 

to regulations under sections 1291(d)(2), 

1297(e) and 1298(b)(1). The temporary 

regulations provide rules for a 

shareholder of a foreign corporation to 

make a deemed sale or a deemed 

dividend election under section 

1298(b)(1) when section 1297(e) applies 

to a portion of the holding period. The 

temporary regulations also provide rules 

for such shareholders, or shareholders 

of foreign corporations that no longer 

meet the income or asset tests of section 

1297(a), to make late deemed sale or 

deemed dividend elections. 

Section 1297(e), added by the 

Taxpayer Relief Act of 1997 (Pub. L. 

105–34, 111 Stat. 708), provides that a 

foreign corporation generally is not 

treated as a PFIC with respect to a 

shareholder during the qualified portion 

of the shareholder’s holding period in 

the stock of the foreign corporation. The 

‘‘qualified portion’’ is the portion of the 

shareholder’s holding period which is 

after December 31, 1997, and during 

which the shareholder is a U.S. 

shareholder (as defined in section 

951(b)) and the foreign corporation is a 

controlled foreign corporation. If the 

qualified portion of the U.S. 

shareholder’s holding period in the 

stock of the foreign corporation is less 

than the shareholder’s entire holding 

period, then, notwithstanding section 

1297(e), section 1298(b)(1) will apply to 

treat the foreign corporation as a PFIC 

with respect to the shareholder if at any 

time during the shareholder’s holding 

period of the stock, the corporation was 

a PFIC that was not a QEF, and the 

shareholder has not made an election 

under section 1298(b)(1) to purge the 

PFIC taint under rules similar to the 

rules of section 1291(d)(2). 

Section 1298(b)(1) provides that if a 

shareholder owns stock in a foreign 

corporation that, at any time during the 

shareholder’s holding period with 

respect to such stock, was a PFIC that 

was not a QEF, the stock will retain its 

character as PFIC stock, even if the 

corporation later ceases to qualify as a 

PFIC under section 1297(a), unless the 

shareholder elects to purge the PFIC 

taint under rules similar to the rules of 

section 1291(d)(2). 

On March 2, 1988, the IRS and 

Treasury Department published 

temporary regulations (TD 8178, 1988–

1 CB 313 [53 FR 6770]), and proposed 

regulations that cross-referenced the 

temporary regulations (INTL 941–86 [53 

FR 6781]), concerning the election 

under section 1298(b)(1) (then section 

1297(b)(1)) (1988 temporary 

regulations). The 1988 temporary 

regulations permitted a shareholder of a 

former PFIC, as defined in § 1.1291–

9(j)(2)(iv), to purge the PFIC taint by 

making a deemed sale election. On 

January 2, 1998, the IRS and Treasury 

Department published temporary 

regulations (TD 8750; 1998–8 IRB 4 [63 

FR 6]) and proposed regulations that 

cross-referenced the temporary 

regulations (REG 115795–97 [63 FR 39–

01]) that amended the 1988 temporary 

regulations. The 1998 temporary 

regulations provided that a shareholder 

of a former PFIC that was a controlled 

foreign corporation (as defined in 

section 957(a)) (CFC) during its last 

taxable year as a PFIC under section 

1297(a), may apply the rules of the 

deemed dividend election under section 

1291(d)(2)(B) and § 1.1291–9 to its 

section 1298(b)(1) election. The 1998 

temporary regulations expired on 

January 2, 2001, pursuant to section 

7805(e)(2). 

Explanation of Provisions 

The regulations contained in this 

document provide guidance on making 

a deemed sale or a deemed dividend 

election for a shareholder of a section 

1297(e) PFIC. Section 1.1291–9T(j)(2)(v) 

defines a section 1297(e) PFIC as a 

foreign corporation that qualifies as a 

PFIC under section 1297(a) on the first 

day of the qualified portion of the 

shareholder’s holding period under 

section 1297(e), and is also treated as a 

PFIC with respect to the shareholder 

under section 1298(b)(1) because at any 

time during the shareholder’s holding 

period of the stock, other than the 

qualified portion, the foreign 

corporation was a PFIC that was not a 

QEF. 

The deemed sale and deemed 

dividend election rules contained 

herein generally conform to the deemed 

sale and deemed dividend election 

provisions under §§ 1.1291–9 and –10, 

which apply to shareholders making a 

purging election in conjunction with a 

QEF election. The deemed sale and 

deemed dividend election rules 

contained in these regulations, which 

apply to shareholders of section 1297(e) 

PFICs, however, differ from those 

contained in §§ 1.1291–9 and –10 in 

several minor respects. 

First, under the deemed dividend or 

deemed sale election rules contained in 

§§ 1.1291–9 and –10, the deemed 

dividend or the gain recognized on the 

deemed sale, is taxed as an excess 

distribution received by the shareholder 

on the qualification date, defined as the 

first day of the PFIC’s first taxable year 

as a QEF. See § 1.1291–9T(e). Under 

these regulations, for purposes of a 

deemed dividend or deemed sale 

election made by a shareholder of a 

section 1297(e) PFIC, the deemed 

dividend, or the gain recognized on the 

deemed sale, is taxed as an excess 

72910 Federal Register / Vol. 70, No. 235 / Thursday, December 8, 2005 / Rules and Regulations 

distribution received on the CFC 

qualification date. The ‘‘CFC 

qualification date’’ is defined in 

§ 1.1297–3T(d) as the first day on which 

the qualified portion of the 

shareholder’s holding period in the 

Section 1297(e) PFIC begins, as 

determined under section 1297(e)(3). 

Second, under § 1.1291–9(a)(2), the 

term ‘‘post-1986 earnings and profits’’ is 

defined as certain undistributed 

earnings and profits as of the day before 

the qualification date. These regulations 

contain a similar rule. Section 1.1297–

3T(c) provides, in general, that ‘‘post1986 earnings and profits’’ means 

certain undistributed earnings as of the 

day before the CFC qualification date. 

Unlike the qualification date under 

§ 1.1291–9, which is the first day of the 

taxable year, the CFC qualification date 

may be a day after the first day of the 

taxable year. Thus, § 1.1297–

3T(c)(3)(i)(B) also contains a special rule 

for determining post-1986 earnings and 

profits when the CFC qualification date 

is a day after the first day of the taxable 

year. In such instances, the 

undistributed earnings and profits will 

be determined at the close of the taxable 

year that includes the CFC qualification 

date. 

Finally, taxpayers have commented 

that, if a foreign corporation is a PFIC 

under the ‘‘once a PFIC, always a PFIC’’

rule of section 1298(b)(1) but the 

corporation has ceased to qualify as a 

PFIC under section 1297(a) or is a 

corporation to which section 1297(e) 

applies, and if the shareholder fails to 

make a timely purging election, the 

shareholder has no way to remove the 

PFIC taint. To address this situation, the 

IRS and Treasury Department also have 

included late election relief provisions 

in the regulations. These provisions, 

contained in §§ 1.1297–3T(e) and 

1.1298–3T(e), allow shareholders of a 

section 1297(e) PFIC or a former PFIC to 

make a late deemed dividend or deemed 

sale election with the consent of the 

Commissioner, provided certain 

requirements are met. Under this 

provision, the shareholder applies the 

rules of §§ 1.1297–3T and 1.1298–3T as 

if its purging election were timely made. 

If the taxable year for which the purging 

election is made (i.e., the taxable year 

that includes the CFC qualification date 

or the termination date) is a closed 

taxable year, the taxpayer must enter 

into a closing agreement to agree to 

eliminate any prejudice to the interests 

of the U.S. government as a 

consequence of the taxpayer’s inability 

to file an amended return. 

Special Analyses 

It has been determined that this 

Treasury decision is not a significant 

regulatory action as defined in 

Executive Order 12866. Therefore, a 

regulatory assessment is not required. 

For applicability of the Regulatory 

Flexibility Act (5 U.S.C. chapter 6), 

please refer to the Special Analyses 

section of the preamble of the crossreference notice of proposed rulemaking 

published in the Proposed Rules section 

in this issue of the Federal Register. 

Pursuant to section 7805(f) of the Code, 

this regulation will be submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business. 

Drafting Information 

The principal author of these 

regulations is Ethan Atticks, Office of 

Associate Chief Counsel (International). 

However, other personnel from the IRS 

and Treasury Department participated 

in their development. 

List of Subjects 

26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

26 CFR Part 602 

Reporting and recordkeeping 

requirements. 

Amendments to the Regulations 

■ Accordingly, 26 CFR part 1 is 

amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

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

■ Par. 2. New § 1.1291–9T is added to 

read as follows: 

§ 1.1291–9T Deemed dividend election 

(temporary). 

(a) through (j)(2)(iv) [Reserved]. For 

further guidance, see § 1.1291–9(a) 

through (j)(2)(iv). 

(j)(2)(v) Section 1297(e) PFIC. A 

foreign corporation is a section 1297(e) 

PFIC with respect to a shareholder (as 

defined in § 1.1291–9(j)(3)) if: 

(A) The foreign corporation qualifies 

as a PFIC under section 1297(a) on the 

first day on which the qualified portion 

of the shareholder’s holding period in 

the foreign corporation begins, as 

determined under section 1297(e)(2); 

and 

(B) The stock of the foreign 

corporation held by the shareholder is 

treated as stock of a PFIC, pursuant to 

section 1298(b)(1), because, at any time 

during the shareholder’s holding period 

of the stock, other than the qualified 

portion, the corporation was a PFIC that 

was not a QEF. 

(3) [Reserved]. For further guidance, 

see § 1.1291–9(j)(3). 

(k) Effective date. (1) The rules of this 

section are applicable as of December 8, 

2005. 

(2) The applicability of this section 

will expire on or before December 8, 

2008. 

■ Par. 3. Section 1.1297–0T is added to 

read as follows: 

§ 1.1297–0T Table of contents (temporary). 

This section contains a listing of the 

headings for § 1.1297–3T. 

§ 1.1297–3T Deemed sale or deemed 

dividend election by a U.S. person that is 

a shareholder of a section 1297(e) PFIC 

(temporary). 

(a) In general. 

(b) Application of deemed sale election 

rules. 

(1) Eligibility to make the deemed sale 

election. 

(2) Effect of the deemed sale election. 

(3) Time for making the deemed sale 

election. 

(4) Manner of making the deemed sale 

election. 

(5) Adjustments to basis. 

(6) Treatment of holding period. 

(c) Application of deemed dividend 

election rules. 

(1) Eligibility to make the deemed dividend 

election. 

(2) Effect of the deemed dividend election. 

(3) Post-1986 earnings and profits defined. 

(4) Time for making the deemed dividend 

election. 

(5) Manner of making the deemed dividend 

election. 

(6) Adjustments to basis. 

(7) Treatment of holding period. 

(8) Coordination with section 959(e). 

(d) CFC qualification date. 

(e) Late elections requiring special consent. 

(1) In general. 

(2) Prejudice to the interests of the U.S. 

government. 

(3) Procedural requirements. 

(4) Time and manner of making late 

election. 

(f) Effective date. 

■ Par. 4. Section 1.1297–3T is revised to 

read as follows: 

§ 1.1297–3T Deemed sale or deemed 

dividend election by a U.S. person that is 

a shareholder of a section 1297(e) PFIC 

(temporary). 

(a) In general. A shareholder (as 

defined in § 1.1291–9(j)(3)) of a foreign 

corporation that is a section 1297(e) 

PFIC (as defined in § 1.1291–9T(j)(2)(v)) 

with respect to such shareholder, shall 

be treated for tax purposes as holding 

stock in a PFIC and therefore continues 

to be subject to taxation under section 

Federal Register / Vol. 70, No. 235 / Thursday, December 8, 2005 / Rules and Regulations 72911 

1291 unless the shareholder makes a 

purging election under section 

1298(b)(1). A purging election under 

section 1298(b)(1) is made under rules 

similar to the rules of section 1291(d)(2). 

Section 1291(d)(2) allows a shareholder 

to purge the continuing PFIC taint by 

either making a deemed sale election or 

a deemed dividend election. 

(b) Application of deemed sale 

election rules: (1) Eligibility to make the 

deemed sale election. A shareholder of 

a foreign corporation that is a section 

1297(e) PFIC with respect to such 

shareholder may make a deemed sale 

election under section 1298(b)(1) by 

applying the rules of this paragraph (b). 

(2) Effect of the deemed sale election. 

A shareholder making the deemed sale 

election with respect to a section 

1297(e) PFIC shall be treated as having 

sold all of its stock in the section 

1297(e) PFIC for its fair market value on 

the CFC qualification date, as defined in 

paragraph (d) of this section. A deemed 

sale under this section is treated as a 

disposition subject to taxation under 

section 1291. Thus, the gain from the 

deemed sale is taxed as an excess 

distribution received on the CFC 

qualification date. In the case of an 

election made by an indirect 

shareholder, the amount of gain to be 

recognized and taxed as an excess 

distribution is the amount of gain that 

the direct owner of the stock of the PFIC 

would have realized on an actual sale or 

disposition of the stock of the PFIC 

indirectly owned by the shareholder. 

Any loss realized on the deemed sale is 

not recognized. After the deemed sale 

election, the shareholder’s stock with 

respect to which the election was made 

under this paragraph (b) shall not be 

treated as stock in a PFIC and the 

shareholder shall not be subject to 

taxation under section 1291 with 

respect to such stock unless the 

qualified portion of the shareholder’s 

holding period ends, as determined 

under section 1297(e)(2), and the foreign 

corporation thereafter qualifies as a 

PFIC under section 1297(a). 

(3) Time for making the deemed sale 

election. Except as provided in 

paragraph (e) of this section, a 

shareholder shall make the deemed sale 

election under this paragraph (b) and 

section 1298(b)(1) in the shareholder’s 

original or amended return for the 

taxable year that includes the CFC 

qualification date (election year). If the 

deemed sale election is made in an 

amended return, the return must be 

filed by a date that is within three years 

of the due date, as extended under 

section 6081, of the original return for 

the election year. 

(4) Manner of making the deemed sale 

election. A shareholder makes the 

deemed sale election under this 

paragraph (b) by filing Form 8621 

(‘‘Return by a Shareholder of a Passive 

Foreign Investment Company or 

Qualified Electing Fund’’) with the 

return of the shareholder for the election 

year, reporting the gain as an excess 

distribution pursuant to section 1291(a) 

as if such sale occurred under section 

1291(d)(2), and paying the tax and 

interest due on the excess distribution. 

A shareholder that makes the deemed 

sale election after the due date of the 

return (determined without regard to 

extensions) for the election year must 

pay additional interest, pursuant to 

section 6601, on the amount of 

underpayment of tax for that year. An 

electing shareholder that realizes a loss 

shall report the loss on Form 8621, but 

shall not recognize the loss. 

(5) Adjustments to basis. A 

shareholder that makes the deemed sale 

election increases its adjusted basis of 

the PFIC stock owned directly by the 

amount of gain recognized on the 

deemed sale. If the shareholder makes 

the deemed sale election with respect to 

a PFIC of which it is an indirect 

shareholder, the shareholder’s adjusted 

basis of the stock or other property 

owned directly by the shareholder, 

through which ownership of the PFIC is 

attributed to the shareholder, is 

increased by the amount of gain 

recognized by the shareholder. In 

addition, solely for purposes of 

determining the subsequent treatment 

under the Code and regulations of a 

shareholder of the stock of the PFIC, the 

adjusted basis of the direct owner of the 

stock of the PFIC is increased by the 

amount of gain recognized on the 

deemed sale. A shareholder shall not 

adjust the basis of any stock with 

respect to which the shareholder 

realized a loss on the deemed sale, 

which loss is not recognized under 

paragraph (b)(2) of this section. 

(6) Treatment of holding period. If a 

shareholder of a foreign corporation has 

made a deemed sale election, then, for 

purposes of applying sections 1291 

through 1298 to such shareholder after 

the deemed sale, the shareholder’s 

holding period in the stock of the 

foreign corporation begins on the CFC 

qualification date, without regard to 

whether the shareholder recognized 

gain on the deemed sale. For other 

purposes of the Code and regulations, 

this holding period rule does not apply. 

(c) Application of deemed dividend 

election rules: (1) Eligibility to make the 

deemed dividend election. A 

shareholder of a foreign corporation that 

is a section 1297(e) PFIC with respect to 

such shareholder may make the deemed 

dividend election under the rules of this 

paragraph (c). A deemed dividend 

election may be made by a shareholder 

whose pro rata share of the post-1986 

earnings and profits of the PFIC 

attributable to the PFIC stock held on 

the CFC qualification date is zero. 

(2) Effect of the deemed dividend 

election. A shareholder making the 

deemed dividend election with respect 

to a section 1297(e) PFIC shall include 

in income as a dividend its pro rata 

share of the post-1986 earnings and 

profits of the PFIC attributable to all of 

the stock it held, directly or indirectly 

on the CFC qualification date, as 

defined in paragraph (d) of this section. 

The deemed dividend is taxed under 

section 1291 as an excess distribution 

received on the CFC qualification date. 

The excess distribution determined 

under this paragraph (c) is allocated 

under section 1291(a)(1)(A) only to each 

day of the shareholder’s holding period 

of the stock during which the foreign 

corporation qualified as a PFIC. For 

purposes of the preceding sentence, the 

shareholder’s holding period of the PFIC 

stock ends on the day before the CFC 

qualification date. After the deemed 

dividend election, the shareholder’s 

stock with respect to which the election 

was made under this paragraph (c) shall 

not be treated as stock in a PFIC and the 

shareholder shall not be subject to 

taxation under section 1291 with 

respect to such stock unless the 

qualified portion of the shareholder’s 

holding period ends, as determined 

under section 1297(e)(2), and the foreign 

corporation thereafter qualifies as a 

PFIC under section 1297(a). 

(3) Post-1986 earnings and profits 

defined: (i) In general—(A) General rule. 

For purposes of this section, the term 

post-1986 earnings and profits means 

the post-1986 undistributed earnings, 

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

(determined without regard to section 

902(c)(3)), as of the day before the CFC 

qualification date, that were 

accumulated and not distributed in 

taxable years of the PFIC beginning after 

1986 and during which it was a PFIC, 

without regard to whether the earnings 

related to a period during which the 

PFIC was a CFC. 

(B) Special rule. If the CFC 

qualification date is a day that is after 

the first day of the taxable year, the term 

post-1986 earnings and profits means 

the post-1986 undistributed earnings, 

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

(determined without regard to section 

902(c)(3)), as of the close of the taxable 

year that includes the CFC qualification 

date. For purposes of this computation, 

only earnings and profits accumulated 

72912 Federal Register / Vol. 70, No. 235 / Thursday, December 8, 2005 / Rules and Regulations 

in taxable years during which the 

foreign corporation was a PFIC shall be 

taken into account, but without regard 

to whether the earnings related to a 

period during which the PFIC was a 

CFC. 

(ii) Pro rata share of post-1986 

earnings and profits attributable to 

shareholder’s stock: (A) In general. A 

shareholder’s pro rata share of the post1986 earnings and profits of the PFIC 

attributable to the stock held by the 

shareholder on the CFC qualification 

date is the amount of post-1986 earnings 

and profits of the PFIC accumulated 

during any portion of the shareholder’s 

holding period ending at the close of the 

day before the CFC qualification date 

and attributable, under the principles of 

section 1248 and the regulations under 

that section, to the PFIC stock held on 

the CFC qualification date. 

(B) Reduction for previously taxed 

amounts. A shareholder’s pro rata share 

of the post-1986 earnings and profits of 

the PFIC does not include any amount 

that the shareholder demonstrates to the 

satisfaction of the Commissioner (in the 

manner provided in paragraph (c)(5)(ii) 

of this section) was, pursuant to another 

provision of the law, previously 

included in the income of the 

shareholder, or of another U.S. person if 

the shareholder’s holding period of the 

PFIC stock includes the period during 

which the stock was held by that other 

U.S. person. 

(4) Time for making the deemed 

dividend election. Except as provided in 

paragraph (e) of this section, the 

shareholder shall make the deemed 

dividend election under this paragraph 

(c) and section 1298(b)(1) in the 

shareholder’s original or amended 

return for the taxable year that includes 

the CFC qualification date (election 

year). If the deemed dividend election is 

made in an amended return, the return 

must be filed by a date that is within 

three years of the due date, as extended 

under section 6081, of the original 

return for the election year. 

(5) Manner of making the deemed 

dividend election: (i) In general. A 

shareholder makes the deemed dividend 

election by filing Form 8621 and the 

attachment to Form 8621 described in 

paragraph (c)(5)(ii) of this section with 

the return of the shareholder for the 

election year, reporting the deemed 

dividend as an excess distribution 

pursuant to section 1291(a)(1), and 

paying the tax and interest due on the 

excess distribution. A shareholder that 

makes the deemed dividend election 

after the due date of the return 

(determined without regard to 

extensions) for the election year must 

pay additional interest, pursuant to 

section 6601, on the amount of 

underpayment of tax for that year. 

(ii) Attachment to Form 8621. The 

shareholder must attach a schedule to 

Form 8621 that demonstrates the 

calculation of the shareholder’s pro rata 

share of the post-1986 earnings and 

profits of the PFIC that is treated as 

distributed to the shareholder on the 

CFC qualification date, pursuant to this 

paragraph (c). If the shareholder is 

claiming an exclusion from its pro rata 

share of the post-1986 earnings and 

profits for an amount previously 

included in its income or the income of 

another U.S. person, the shareholder 

must include the following information: 

(A) The name, address and taxpayer 

identification number of each U.S. 

person that previously included an 

amount in income, the amount 

previously included in income by each 

such U.S. person, the provision of law, 

pursuant to which the amount was 

previously included in income, and the 

taxable year or years of inclusion of 

each amount. 

(B) A description of the transaction 

pursuant to which the shareholder 

acquired, directly or indirectly, the 

stock of the PFIC from another U.S. 

person, and the provision of law 

pursuant to which the shareholder’s 

holding period includes the period the 

other U.S. person held the CFC stock. 

(6) Adjustments to basis. A 

shareholder that makes the deemed 

dividend election increases its adjusted 

basis of the stock of the PFIC owned 

directly by the shareholder by the 

amount of the deemed dividend. If the 

shareholder makes the deemed dividend 

election with respect to a PFIC of which 

it is an indirect shareholder, the 

shareholder’s adjusted basis of the stock 

or other property owned directly by the 

shareholder, through which ownership 

of the PFIC is attributed to the 

shareholder, is increased by the amount 

of the deemed dividend. In addition, 

solely for purposes of determining the 

subsequent treatment under the Code 

and regulations of a shareholder of the 

stock of the PFIC, the adjusted basis of 

the direct owner of the stock of the PFIC 

is increased by the amount of the 

deemed dividend. 

(7) Treatment of holding period. If the 

shareholder of a foreign corporation has 

made a deemed dividend election, then, 

for purposes of applying sections 1291 

through 1298 to such shareholder after 

the deemed dividend, the shareholder’s 

holding period of the stock of the 

foreign corporation begins on the CFC 

qualification date. For other purposes of 

the Code and regulations, this holding 

period rule does not apply. 

(8) Coordination with section 959(e). 

For purposes of section 959(e), the 

entire deemed dividend is treated as 

having been included in gross income 

under section 1248(a). 

(d) CFC qualification date. For 

purposes of this section, the CFC 

qualification date is the first day on 

which the qualified portion of the 

shareholder’s holding period in the 

section 1297(e) PFIC begins, as 

determined under section 1297(e). 

(e) Late elections requiring special 

consent: (1) In general. This section 

prescribes the exclusive rules under 

which a shareholder of a section 1297(e) 

PFIC may make a section 1298(b)(1) 

election after the time prescribed in 

paragraph (b)(2) or (c)(4) of this section 

for making a deemed sale or a deemed 

dividend election has elapsed (late 

purging election). Therefore, a 

shareholder may not seek such relief 

under any other provisions of the law, 

including § 301.9100–3 of this chapter. 

A shareholder may request the consent 

of the Commissioner to make a late 

deemed sale or deemed dividend 

election for the taxable year of the 

shareholder that includes the CFC 

qualification date provided the 

shareholder satisfies the requirements 

set forth in this paragraph (e). The 

Commissioner may, in his discretion, 

grant relief under this paragraph (e) only 

if: 

(i) In a case where the shareholder is 

requesting consent under this paragraph 

(e) after December 31, 2005, the 

shareholder requests such consent 

before a representative of the Internal 

Revenue Service raises upon audit the 

PFIC status of the foreign corporation 

for any taxable year of the shareholder; 

(ii) The shareholder has agreed in a 

closing agreement with the 

Commissioner, described in paragraph 

(e)(3) of this section, to eliminate any 

prejudice to the interests of the U.S. 

government, as determined under 

paragraph (e)(2) of this section, as a 

consequence of the shareholder’s 

inability to file amended returns for its 

taxable year in which the CFC 

qualification date falls, or an earlier 

closed taxable year in which the 

shareholder has taken a position that is 

inconsistent with the treatment of the 

foreign corporation as a PFIC; and 

(iii) The shareholder satisfies the 

procedural requirements set forth in 

paragraph (e)(3) of this section. 

(2) Prejudice to the interests of the 

U.S. government. The interests of the 

U.S. government are prejudiced if 

granting relief would result in the 

shareholder having a lower tax liability 

(other than by a de minimis amount), 

taking into account applicable interest 

Federal Register / Vol. 70, No. 235 / Thursday, December 8, 2005 / Rules and Regulations 72913 

charges, for the taxable year that 

includes the CFC qualification date (or 

a prior taxable year in which the 

taxpayer took a position on a return that 

was inconsistent with the treatment of 

the foreign corporation as a PFIC) than 

the shareholder would have had if the 

shareholder had properly made the 

section 1298(b)(1) election in the time 

prescribed in paragraph (b)(2) or (c)(3) 

of this section (or had not taken a 

position in a return for an earlier year 

that was inconsistent with the status of 

the foreign corporation as a PFIC). The 

time value of money is taken into 

account for purposes of this 

computation. 

(3) Procedural requirements: (i) In 

general. The amount due with respect to 

a late purging election is determined in 

the same manner as if the purging 

election had been timely filed. However, 

the shareholder is also liable for interest 

on the amount due, determined for the 

period beginning on the due date 

(without extensions) for the taxpayer’s 

income tax return for the year in which 

the CFC qualification date falls and 

ending on the date the late purging 

election is filed with the IRS. 

(ii) Filing instructions. A late purging 

election is made by filing a completed 

Form 8621–A, ‘‘Return by a Shareholder 

Making Certain Late Elections to End 

Treatment as a Passive Foreign 

Investment Company.’’

(4) Time and manner of making late 

election: (i) Time for making a late 

purging election. A shareholder may 

make a late purging election in the 

manner provided in paragraph (e)(4)(ii) 

of this section at any time. The date the 

election is filed with the IRS will 

determine the amount of interest due 

under paragraph (e)(3) of this section. 

(ii) Manner of making a late purging 

election. A shareholder makes a late 

purging election by completing Form 

8621–A in the manner required by that 

form and this section and filing that 

form with the Internal Revenue Service, 

DP 8621–A, Ogden, UT 84201. 

(f) Effective date. (1) The rules of this 

section are applicable as of December 8, 

2005. 

(2) The applicability of this section 

will expire on or before December 8, 

2008. 

■ Par. 5. Section 1.1298–0T is added to 

read as follows: 

§ 1.1298–0T Table of contents (temporary). 

This section contains a listing of the 

paragraph headings for § 1.1298–3T. 

§ 1.1298–3T Deemed sale or deemed 

dividend election by a U.S. person that is 

a shareholder of a former PFIC (temporary). 

(a) through (d) [Reserved]. For further 

guidance, see § 1.1298–0, the entries for 

§ 1.1298–3T(a) through (d). 

(e) Late purging elections requiring 

special consent. 

(1) In general. 

(2) Prejudice to the interests of the 

U.S. government. 

(3) Procedural requirement. 

(4) Time and manner of making late 

election. 

(f) Effective date. 

■ Par. 6. Section 1.1298–3T is added to 

read as follows: 

§ 1.1298–3T Deemed sale or deemed 

dividend election by a U.S. person that is 

a shareholder of a former PFIC (temporary). 

(a) through (d) [Reserved]. For further 

guidance see § 1.1298–3(a) through (d). 

(e) Late purging elections requiring 

special consent—(1) In general. This 

section prescribes the exclusive rules 

under which a shareholder of a former 

PFIC may make a section 1298(b)(1) 

election after the time prescribed in 

paragraph (b)(2) or (c)(4) of this section 

for making a deemed sale or a deemed 

dividend election has elapsed (late 

purging election). Therefore, a 

shareholder may not seek such relief 

under any other provisions of the law, 

including § 301.9100–3 of this chapter. 

A shareholder may request the consent 

of the Commissioner to make a late 

purging election for the taxable year of 

the shareholder that includes the 

termination date provided the 

shareholder satisfies the requirements 

set forth in this paragraph (e). The 

Commissioner may, in his discretion, 

grant relief under this paragraph (e) only 

if: 

(i) In a case where the shareholder is 

requesting consent under this paragraph 

(e) after December 31, 2005, the 

shareholder requests such consent 

before a representative of the Internal 

Revenue Service raises upon audit the 

PFIC status of the foreign corporation 

for any taxable year of the shareholder; 

(ii) The shareholder has agreed in a 

closing agreement with the 

Commissioner, described in paragraph 

(e)(3) of this section, to eliminate any 

prejudice to the interests of the U.S. 

government, as determined under 

paragraph (e)(2) of this section, as a 

consequence of the shareholder’s 

inability to file amended returns for its 

taxable year in which the termination 

date falls, or an earlier closed taxable 

year in which the shareholder has taken 

a position that is inconsistent with the 

treatment of the foreign corporation as 

a PFIC; and 

(iii) The shareholder satisfies the 

procedural requirements set forth in 

paragraph (e)(3) of this section. 

(2) Prejudice to the interests of the 

U.S. government. The interests of the 

U.S. government are prejudiced if 

granting relief would result in the 

shareholder having a lower tax liability 

(other than by a de minimis amount), 

taking into account applicable interest 

charges, for the taxable year that 

includes the termination date (or a prior 

taxable year in which the taxpayer took 

a position on a return that was 

inconsistent with the treatment of the 

foreign corporation as a PFIC) than the 

shareholder would have had if the 

shareholder had properly made the 

section 1298(b)(1) election in the time 

prescribed in paragraph (b)(2) or (c)(3) 

of this section (or had not taken a 

position in a return for an earlier year 

that was inconsistent with the status of 

the foreign corporation as a PFIC). The 

time value of money is taken into 

account for purposes of this 

computation. 

(3) Procedural requirement: (i) In 

general. The amount due with respect to 

a late purging election is determined in 

the same manner as if the purging 

election had been timely filed. However, 

the shareholder is also liable for interest 

on the amount due, determined for the 

period beginning on the due date 

(without extensions) for the taxpayer’s 

income tax return for the year in which 

the CFC qualification date falls and 

ending on the date the late purging 

election is filed with the IRS. 

(ii) Filing instructions. A late purging 

election is made by filing a completed 

Form 8621–A, ‘‘Return by a Shareholder 

Making Certain Late Elections to End 

Treatment as a Passive Foreign 

Investment Company.’’

(4) Time and manner of making late 

election: (i) Time for making a late 

purging election. A shareholder may 

make a late purging election in the 

manner provided in paragraph (e)(4)(ii) 

of this section at any time. The date the 

election is filed with the IRS will 

determine the amount of interest due 

under paragraph (e)(3) of this section. 

(ii) Manner of making a late purging 

election. A shareholder makes a late 

purging election by completing Form 

8621–A in the manner required by that 

form and this section and filing that 

form with the Internal Revenue Service, 

DP 8621–A, Ogden, UT 84201. 

(f) Effective date. (1) The rules of this 

section are applicable as of December 8, 

2005. 

(2) The applicability of this section 

will expire on or before December 8, 

2008. 

72914 Federal Register / Vol. 70, No. 235 / Thursday, December 8, 2005 / Rules and Regulations 

PART 602—OMB CONTROL NUMBERS 

UNDER THE PAPERWORK 

REDUCTION ACT 

■ Par. 7. The authority citation of part 

602 continues to read as follows: 

Authority: 26 U.S.C. 7805 

■ Par. 8. In § 602.101, paragraph (b) is 

amended by revising an entry in the 

table for ‘‘1.1297–3T’’ as follows: 

§ 602.101 OMB Control numbers. 

* * * * * 

(b) * * * 

CFR part or section where 

Identified and described 

Current OMB 

control No. 

* * * * * 

1.1297–3T ............................. 1545–1965 

* * * * * 

Approved: November 21, 2005. 

Mark E. Matthews, 

Deputy Commissioner for Services and 

Enforcement. 

Eric Solomon, 

Acting Deputy Assistant Secretary of the 

Treasury. 

[FR Doc. 05–23630 Filed 12–7–05; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1 and 602 

[TD 9231] 

RIN 1545–BC49 

Guidance on Passive Foreign 

Investment Company (PFIC) Purging 

Elections 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations and removal of 

temporary regulations. 

SUMMARY: This document contains final 

regulations that provide specific 

elections that give relief to certain 

United States persons that continue to 

be subject to the PFIC excess 

distribution regime of section 1291 even 

though the foreign corporation in which 

they hold stock no longer satisfies the 

definition of a PFIC under section 

1297(a). The final regulations affect U.S. 

persons owning stock in a PFIC. 

DATES: Effective Date: These regulations 

are effective December 8, 2005. 

Applicability Date: For dates of 

applicability, see § 1.1298–3(f). 

FOR FURTHER INFORMATION CONTACT: 

Ethan Atticks at (202) 622–3840 (not a 

toll-free number). 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collection of information 

contained in these final regulations has 

been previously reviewed and approved 

by the Office of Management and 

Budget in accordance with the 

Paperwork Reduction Act (44 U.S.C. 

3507) under control number 1545–1028, 

which was later incorporated into 

control number 1545–1507. 

The collection of information in these 

final regulations is in § 1.1298–3(c)(5). 

This information is required to enable 

the IRS to verify that a taxpayer is 

reporting the correct amount of income, 

gain or loss from that taxpayer’s interest 

in the foreign corporation. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number assigned by the Office of 

Management and Budget. 

Books or records relating to a 

collection of information must be 

retained as long as their contents may 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by 26 

U.S.C. 6103. 

Background 

This document contains final 

regulations under section 1298(b)(1). 

Section 1298(b)(1) was originally 

enacted as section 1297 by the Tax 

Reform Act of 1986 (Pub. L. 99–514, 100 

Stat. 2085) and was redesignated as 

section 1298 by the Taxpayer Relief Act 

of 1997 (Pub. L. 105–34, 111 Stat. 788). 

Section 1298(b)(1) provides that if a 

shareholder owns stock in a foreign 

corporation that, at any time during the 

shareholder’s holding period with 

respect to such stock, was a PFIC that 

was not a qualified electing fund (QEF), 

the stock will retain its character as 

PFIC stock, even if the corporation later 

ceases to qualify as a PFIC under section 

1297(a), unless the shareholder elects to 

purge the PFIC taint under rules similar 

to the rules of section 1291(d)(2). 

On March 2, 1988, the IRS and 

Treasury Department published 

temporary regulations (TD 8178, 1988–

1 CB 313 [53 FR 6770]), and proposed 

regulations that cross-referenced the 

temporary regulations (INTL 941–86 [53 

FR 6781]), concerning the election 

under section 1298(b)(1) (then section 

1297(b)(1)) (1988 temporary 

regulations). The 1988 temporary 

regulations permitted a shareholder of a 

former PFIC, as defined in § 1.1291–

9(j)(2)(iv), to purge the PFIC taint by 

making a deemed sale election. On 

January 2, 1998, the IRS and Treasury 

Department published temporary 

regulations (TD 8750; 1998–8 IRB 4 [63 

FR 6]) and proposed regulations that 

cross-referenced the temporary 

regulations (REG 115795–97 [63 FR 39–

01]) that amended the 1988 temporary 

regulations. The 1998 temporary 

regulations provided that a shareholder 

of a former PFIC that was a controlled 

foreign corporation (as defined in 

section 957(a)) during its last taxable 

year as a PFIC under section 1297(a), 

may apply the rules of the deemed 

dividend election under section 

1291(d)(2)(B) and § 1.1291–9 to its 

section 1298(b)(1) election. The 1998 

temporary regulations expired on 

January 2, 2001, pursuant to section 

7805(e)(2). 

One written comment was received 

regarding the deemed sale election in 

response to the notice of proposed 

rulemaking published by cross-reference 

to the 1988 regulations. No public 

hearing was requested or held on the 

notice of proposed rulemaking. After 

consideration of the comment, the 1988 

temporary regulations, as modified by 

the 1998 temporary regulations that 

permit a deemed dividend election in 

certain circumstances, are adopted as 

final regulations with the changes 

discussed below. 

Summary of Comments and 

Explanation of Revisions 

A. Time and Manner of Making the 

Deemed Sale Election 

One comment was received on the 

1988 temporary regulations regarding 

the deemed sale election under 

§ 1.1297–3T. The comment 

recommended that the regulations 

permit a shareholder to make a deemed 

sale election without having to file an 

amended return in instances where an 

election could be filed by the due date 

of the shareholder’s original return for 

the last taxable year during which the 

foreign corporation continued to qualify 

as a PFIC under section 1297(a). This 

suggestion was adopted with respect to 

both the deemed sale and deemed 

dividend elections, and the regulations 

have been revised accordingly. 

B. Additional Revisions 

Additional revisions were made to the 

final regulations to reflect the 

redesignation of certain Code sections 

pursuant to the Taxpayer Relief Act of 

1997 (Pub. L. 105–34, 111 Stat. 788). 

Similar revisions were made to the 

definition of former PFIC contained in