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:
§1.1297-3T 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
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 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 post-1986
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 June 30, 2006, 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 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
5, 2008.
Par. 5. Section 1.1298-0T 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 June 30, 2006, 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
5, 2008.
