§1291 — Interest on tax deferral
534 citing cases
Statute Text — 26 U.S.C. §1291
If a United States person receives an excess distribution in respect of stock in a passive foreign investment company, then—
the amount of the excess distribution shall be allocated ratably to each day in the taxpayer’s holding period for the stock,
with respect to such excess distribution, the taxpayer’s gross income for the current year shall include (as ordinary income) only the amounts allocated under subparagraph (A) to—
the current year, or
any period in the taxpayer’s holding period before the 1st day of the 1st taxable year of the company which begins after
December 31, 1986
, and for which it was a passive foreign investment company, and
the tax imposed by this chapter for the current year shall be increased by the deferred tax amount (determined under subsection (c)).
If the taxpayer disposes of stock in a passive foreign investment company, then the rules of paragraph (1) shall apply to any gain recognized on such disposition in the same manner as if such gain were an excess distribution.
For purposes of this section—
The taxpayer’s holding period shall be determined under section 1223; except that—
for purposes of applying this section to an excess distribution, such holding period shall be treated as ending on the date of such distribution, and
if section 1296 applied to such stock with respect to the taxpayer for any prior taxable year, such holding period shall be treated as beginning on the first day of the first taxable year beginning after the last taxable year for which section 1296 so applied.
The term “current year” means the taxable year in which the excess distribution or disposition occurs.
For purposes of this section, the term “excess distribution” means any distribution in respect of stock received during any taxable year to the extent such distribution does not exceed its ratable portion of the total excess distribution (if any) for such taxable year.
For purposes of this subsection—
The term “total excess distribution” means the excess (if any) of—
the amount of the distributions in respect of the stock received by the taxpayer during the taxable year, over
125 percent of the average amount received in respect of such stock by the taxpayer during the 3 preceding taxable years (or, if shorter, the portion of the taxpayer’s holding period before the taxable year).
For purposes of clause (ii), any excess distribution received during such 3-year period shall be taken into account only to the extent it was included in gross income under subsection (a)(1)(B).
The total excess distributions with respect to any stock shall be zero for the taxable year in which the taxpayer’s holding period in such stock begins.
Under regulations prescribed by the Secretary—
determinations under this subsection shall be made on a share-by-share basis, except that shares with the same holding period may be aggregated,
proper adjustments shall be made for stock splits and stock dividends,
if the taxpayer does not hold the stock during the entire taxable year, distributions received during such year shall be annualized,
if the taxpayer’s holding period includes periods during which the stock was held by another person, distributions received by such other person shall be taken into account as if received by the taxpayer,
if the distributions are received in a foreign currency, determinations under this subsection shall be made in such currency and the amount of any excess distribution determined in such currency shall be translated into dollars,
proper adjustment shall be made for amounts not includible in gross income by reason of section 959(a) or 1293(c), and
if a charitable deduction was allowable under section 642(c) to a trust for any distribution of its income, proper adjustments shall be made for the deduction so allowable to the extent allocable to distributions or gain in respect of stock in a passive foreign investment company.
For purposes of this section—
The term “deferred tax amount” means, with respect to any distribution or disposition to which subsection (a) applies, an amount equal to the sum of—
the aggregate increases in taxes described in paragraph (2), plus
the aggregate amount of interest (determined in the manner provided under paragraph (3)) on such increases in tax.
Any increase in the tax imposed by this chapter for the current year under subsection (a) to the extent attributable to the amount referred to in subparagraph (B) shall be treated as interest paid under section 6601 on the due date for the current year.
For purposes of paragraph (1)(A), the aggregate increases in taxes shall be determined by multiplying each amount allocated under subsection (a)(1)(A) to any taxable year (other than any taxable year referred to in subsection (a)(1)(B)) by the highest rate of tax in effect for such taxable year under section 1 or 11, whichever applies.
The amount of interest referred to in paragraph (1)(B) on any increase determined under paragraph (2) for any taxable year shall be determined for the period—
beginning on the due date for such taxable year, and
ending on the due date for the taxable year with or within which the distribution or disposition occurs,
by using the rates and method applicable under section 6621 for underpayments of tax for such period.
For purposes of this subsection, the term “due date” means the date prescribed by law (determined without regard to extensions) for filing the return of the tax imposed by this chapter for the taxable year.
This section shall not apply with respect to any distribution paid by a passive foreign investment company, or any disposition of stock in a passive foreign investment company, if such company is a qualified electing fund with respect to the taxpayer for each of its taxable years—
which begins after
December 31, 1986
, and for which such company is a passive foreign investment company, and
which includes any portion of the taxpayer’s holding period.
Except as provided in section 1296(j), this section also shall not apply if an election under section 1296(k) is in effect for the taxpayer’s taxable year. In the case of stock which is marked to market under section 475 or any other provision of this chapter, this section shall not apply, except that rules similar to the rules of section 1296(j) shall apply.
If—
a passive foreign investment company becomes a qualified electing fund with respect to the taxpayer for a taxable year which begins after
December 31, 1986
,
the taxpayer holds stock in such company on the first day of such taxable year, and
the taxpayer establishes to the satisfaction of the Secretary the fair market value of such stock on such first day,
the taxpayer may elect to recognize gain as if he sold such stock on such first day for such fair market value.
If—
a passive foreign investment company becomes a qualified electing fund with respect to the taxpayer for a taxable year which begins after
December 31, 1986
,
the taxpayer holds stock in such company on the first day of such taxable year, and
such company is a controlled foreign corporation (as defined in section 957(a)),
For purposes of clause (i), the term “post-1986 earnings and profits” means earnings and profits which were accumulated in taxable years of such company beginning after December 31, 1986, and during the period or periods the stock was held by the taxpayer while the company was a passive foreign investment company.
For purposes of section 959(e), any amount included in gross income under this subparagraph shall be treated as included in gross income under section 1248(a).
the taxpayer may elect to include in gross income as a dividend received on such first day an amount equal to the portion of the post-1986 earnings and profits of such company attributable (under regulations prescribed by the Secretary) to the stock in such company held by the taxpayer on such first day. The amount treated as a dividend under the preceding sentence shall be treated as an excess distribution and shall be allocated under subsection (a)(1)(A) only to days during periods taken into account in determining the post-1986 earnings and profits so attributable.
In the case of any stock to which subparagraph (A) or (B) applies—
the adjusted basis of such stock shall be increased by the gain recognized under subparagraph (A) or the amount treated as a dividend under subparagraph (B), as the case may be, and
the taxpayer’s holding period in such stock shall be treated as beginning on the first day referred to in such subparagraph.
Except to the extent inconsistent with the regulations prescribed under subsection (f), rules similar to the rules of subsections (c), (d), and (e) of section 1246 (as in effect on the day before the date of the enactment of the American Jobs Creation Act of 2004) shall apply for purposes of this section; except that—
the reduction under subsection (e) of such section shall be the excess of the basis determined under section 1014 over the adjusted basis of the stock immediately before the decedent’s death, and
such a reduction shall not apply in the case of a decedent who was a nonresident alien at all times during his holding period in the stock.
To the extent provided in regulations, in the case of any transfer of stock in a passive foreign investment company where (but for this subsection) there is not full recognition of gain, the excess (if any) of—
the fair market value of such stock, over
its adjusted basis,
shall be treated as gain from the sale or exchange of such stock and shall be recognized notwithstanding any provision of law. Proper adjustment shall be made to the basis of any such stock for gain recognized under the preceding sentence.
If there are creditable foreign taxes with respect to any distribution in respect of stock in a passive foreign investment company—
the amount of such distribution shall be determined for purposes of this section with regard to section 78,
the excess distribution taxes shall be allocated ratably to each day in the taxpayer’s holding period for the stock, and
to the extent—
that such excess distribution taxes are allocated to a taxable year referred to in subsection (a)(1)(B), such taxes shall be taken into account under section 901 for the current year, and
that such excess distribution taxes are allocated to any other taxable year, such taxes shall reduce (subject to the principles of section 904(d) and not below zero) the increase in tax determined under subsection (c)(2) for such taxable year by reason of such distribution (but such taxes shall not be taken into account under section 901).
For purposes of this subsection—
The term “creditable foreign taxes” means, with respect to any distribution, any withholding tax imposed with respect to such distribution, but only if the taxpayer chooses the benefits of section 901 and such taxes are creditable under section 901 (determined without regard to paragraph (1)(C)(ii)).
The term “excess distribution taxes” means, with respect to any distribution, the portion of the creditable foreign taxes with respect to such distribution which is attributable (on a pro rata basis) to the portion of such distribution which is an excess distribution.
The rules of this subsection also shall apply in the case of any gain which but for this section would be includible in gross income as a dividend under section 1248.
Treasury Regulations
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Treas. Reg. §1.1291-0Treatment of shareholders of certain passive foreign investment companies; table of contents
This section contains a listing of the headings for §§ 1.1291-1, 1.1291-9, and 1.1291-10.
(a) through (b)(2)(i) [Reserved]
(ii) Pedigreed QEF.
(b)(2)(iii) and (iv) [Reserved]
(v) Section 1291 fund.
(3) through (6) [Reserved]
(7) Shareholder.
(8) Indirect shareholder.
(i) In general.
(ii) Ownership through a corporation.
(A) Ownership through a non-PFIC foreign corporation.
(B) Ownership through a PFIC.
(C) Ownership through a domestic corporation.
(iii) Ownership through pass-through entities.
(A) Partnerships.
(B) S Corporations.
(C) Estates and nongrantor trusts.
(D) Grantor trusts.
(iv) Successive application.
(v) Examples.
(A) Example 1.
(1) Facts.
(2) Results.
(i) Treatment of DC.
(ii) Treatment of A.
(B) Example 2.
(1) Facts.
(2) Results.
(C) Example 3.
(1) Facts.
(2) Results.
(D) Example 4.
(1) Facts.
(2) Results.
(c) Coordination with other PFIC rules.
(1) and (2) [Reserved]
(3) Coordination with section 1296: Distributions and dispositions.
(4) Coordination with mark to market rules under chapter 1 of the Internal Revenue Code other than section 1296.
(i) In general.
(ii) Coordination rule.
(d) [Reserved]
(e) Exempt organization as shareholder.
(1) In general.
(2) Ownership through certain tax-exempt organizations and accounts.
(f) through (i) [Reserved]
(j) Applicability dates.
(a) Deemed dividend election.
(1) In general.
(2) Post-1986 earnings and profits defined.
(i) In general.
(ii) Pro rata share of post-1986 earnings and profits attributable to shareholder's stock.
(A) In general.
(B) Reduction for previously taxed amounts.
(b) Who may make the election.
(c) Time for making the election.
(d) Manner of making the election.
(1) In general.
(2) Attachment to Form 8621.
(e) Qualification date.
(1) In general.
(2) Elections made after March 31, 1995, and before January 27, 1997.
(i) In general.
(ii) Exception.
(3) Examples.
(f) Adjustment to basis.
(g) Treatment of holding period.
(h) Coordination with section 959(e).
(i) Election inapplicable to shareholder of former PFIC.
(1) [Reserved]
(2) Former PFIC.
(j) Definitions.
(1) Passive foreign investment company (PFIC).
(2) Types of PFICs.
(i) Qualified electing fund (QEF).
(ii) Pedigreed QEF.
(iii) Unpedigreed QEF.
(iv) Former PFIC.
(3) Shareholder.
(k) Effective/applicability dates.
(a) Deemed sale election.
(b) Who may make the election.
(c) Time for making the election.
(d) Manner of making the election.
(e) Qualification date.
(1) In general.
(2) Elections made after March 31, 1995, and before January 27, 1997.
(i) In general.
(ii) Exception.
(f) Adjustments to basis.
(1) In general.
(2) Adjustment to basis for section 1293 inclusion with respect to deemed sale election made after March 31, 1995, and before January 27, 1997.
(g) Treatment of holding period.
(h) Election inapplicable to shareholder of former PFIC.
(i) Effective date.
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Treas. Reg. §1.1291-0(a)Deemed sale election.
Deemed sale election.
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Treas. Reg. §1.1291-0(b)Who may make the election.
Who may make the election.
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Treas. Reg. §1.1291-0(c)Time for making the election.
Time for making the election.
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Treas. Reg. §1.1291-0(d)Manner of making the election.
Manner of making the election.
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Treas. Reg. §1.1291-0(e)Qualification date.
Qualification date.
(1) In general.
(2) Elections made after March 31, 1995, and before January 27, 1997.
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Treas. Reg. §1.1291-0(f)Adjustments to basis.
Adjustments to basis.
(1) In general.
(2) Adjustment to basis for section 1293 inclusion with respect to deemed sale election made after March 31, 1995, and before January 27, 1997.
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Treas. Reg. §1.1291-0(g)Treatment of holding period.
Treatment of holding period.
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Treas. Reg. §1.1291-0(h)Election inapplicable to shareholder of former PFIC.
Election inapplicable to shareholder of former PFIC.
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Treas. Reg. §1.1291-0(i)Effective date.
Effective date.
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Treas. Reg. §1.1291-0(j)Definitions.
Definitions.
(1) Passive foreign investment company (PFIC).
(2) Types of PFICs.
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Treas. Reg. §1.1291-0(k)Effective/applicability dates.
Effective/applicability dates.
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Treas. Reg. §1.1291-0(v)Examples.
Examples.
(A) Example 1.
(1) Facts.
(2) Results.
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Treas. Reg. §1.1291-1Taxation of U.S. persons that are shareholders of section 1291 funds
(a) through (b)(2)(i) [Reserved]
(ii) Pedigreed QEF. A PFIC is a pedigreed QEF with respect to a shareholder if the PFIC has been a QEF with respect to the shareholder for all taxable years during which the corporation was a PFIC that are included wholly or partly in the shareholder's holding period of the PFIC stock.
(b)(2)(iii) and (iv) [Reserved]
(v) Section 1291 fund. A PFIC is a section 1291 fund with respect to a shareholder unless the PFIC is a pedigreed QEF with respect to the shareholder or a section 1296 election is in effect with respect to the shareholder.
(3) through (6) [Reserved]
(7) Shareholder. A shareholder is a United States person that directly owns stock of a PFIC (a direct shareholder), or that is an indirect shareholder (as defined in section 1298(a) and paragraph (b)(8) of this section), except as provided in paragraph (e) of this section. For purposes of sections 1291 and 1298, a domestic partnership or S corporation (as defined in section 1361(a)(1)) is not treated as a shareholder of a PFIC except for purposes of any information reporting requirements, including the requirement to file an annual report under section 1298(f). 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).
(8) Indirect shareholder—(i) In general. An indirect shareholder of a PFIC is a United States person that indirectly owns stock of a PFIC. A person indirectly owns stock when it is treated as owning stock of a corporation owned by another person, including another United States person, under this paragraph (b)(8). In applying this paragraph (b)(8), the determination of a person's indirect ownership is made on the basis of all the facts and circumstances in each case; the substance rather than the form of ownership is controlling, taking into account the purposes of sections 1291 through 1298.
(ii) Ownership through a corporation—(A) Ownership through a non-PFIC foreign corporation. A person that directly or indirectly owns 50 percent or more in value of the stock of a foreign corporation that is not a PFIC is considered to own a proportionate amount (by value) of any stock owned directly or indirectly by the foreign corporation.
(B) Ownership through a PFIC. A person that directly or indirectly owns stock of a PFIC is considered to own a proportionate amount (by value) of any stock owned directly or indirectly by the PFIC. Section 1297(d) does not apply in determining whether a corporation is a PFIC for purposes of this paragraph (b)(8)(ii)(B).
(C) Ownership through a domestic corporation—(1) In general. Solely for purposes of determining whether a person satisfies the ownership threshold described in paragraph (b)(8)(ii)(A) of this section, a person that directly or indirectly owns 50 percent or more in value of the stock of a domestic corporation is considered to own a proportionate amount (by value) of any stock owned directly or indirectly by the domestic corporation.
(2) Non-duplication. Paragraph (b)(8)(ii)(C)(1) of this section does not apply to treat a United States person as owning (other than for purposes of applying the ownership threshold in paragraph (b)(8)(ii)(A) of this section) stock of a PFIC that is directly owned or considered owned indirectly within the meaning of this paragraph (b)(8) by another United States person (determined without regard to paragraph (b)(8)(ii)(C)(1)). See Example 1 of paragraph (b)(8)(iv) of this section.
(3) S corporations. The 50 percent limitation in paragraph (b)(8)(ii)(C)(1) of this section does not apply with respect to stock owned directly or indirectly by an S corporation. See paragraph (b)(8)(iii)(B) of this section for rules regarding stock owned directly or indirectly by an S corporation.
(iii) Ownership through pass-through entities—(A) Partnerships. If a foreign or domestic partnership directly or indirectly owns stock, the partners of the partnership are considered to own such stock proportionately in accordance with their ownership interests in the partnership.
(B) S Corporations. If an S corporation directly or indirectly owns stock, each S corporation shareholder is considered to own such stock proportionately in accordance with the shareholder's ownership interest in the S corporation.
(C) Estates and nongrantor trusts. If a foreign or domestic estate or nongrantor trust (other than an employees' trust described in section 401(a) that is exempt from tax under section 501(a)) directly or indirectly owns stock, each beneficiary of the estate or trust is considered to own a proportionate amount of such stock. For purposes of this paragraph (b)(8)(iii)(C), a nongrantor trust is any trust or portion of a trust that is not treated as owned by one or more persons under sections 671 through 679.
(D) Grantor trusts. If a foreign or domestic trust directly or indirectly owns stock, a person that is treated under sections 671 through 679 as the owner of any portion of the trust that holds an interest in the stock is considered to own the interest in the stock held by that portion of the trust.
(iv) Successive application. Stock considered to be owned by a person by reason of paragraphs (b)(8)(ii) or (iii) of this section is, for purposes of applying such paragraphs, considered to be actually owned by such person. Subject to the limitations provided in section 1298(a) and paragraphs (b)(8)(ii) and (b)(8)(iii) of this section, this paragraph applies by successively considering a person as actually owning its proportionate share of stock or other equity interest directly held by an entity directly owned by the person. Paragraph (b)(8)(ii)(C)(2) of this section applies after the other subparagraphs of paragraph (b)(8) of this section.
(v) Examples. The rules of this paragraph (b)(8) are illustrated by the following examples:
(A) Example 1—(1) Facts. A is a United States person who owns 49% of the stock of FC1, a foreign corporation that is not a PFIC, and separately all of the stock of DC, a domestic corporation that is not an S corporation. DC, in turn, owns the remaining 51% of the stock of FC1, and FC1 owns 100 shares of stock in a PFIC that is not a controlled foreign corporation (CFC) within the meaning of section 957(a). The remainder of the PFIC's shares are owned by unrelated foreign persons.
(2) Results—(i) Treatment of DC. Under paragraph (b)(8)(ii)(A) of this section, DC is considered to actually own 51 shares of the PFIC stock directly held by FC1 because DC directly owns 50% or more of the stock of FC1.
(ii) Treatment of A. In determining whether A is considered to own 50% or more of the value of FC1 for purposes of applying paragraphs (b)(8)(ii)(A) and (b)(8)(iv) of this section to the PFIC stock held through FC1, A is considered under paragraphs (b)(8)(ii)(C)(1) and (b)(8)(iv) of this section as indirectly owning all the stock of FC1 that DC directly owns, before the application of paragraph (b)(8)(ii)(C)(2) of this section. Because A also directly owns 49% of the stock of FC1, before the application of paragraph (b)(8)(ii)(C)(2) of this section A would be treated as owning all 100 shares of PFIC stock held by FC1. However, because 51 shares of the PFIC stock held by FC1 are indirectly owned by DC under paragraph (b)(8)(ii)(A) of this section, pursuant to the limitation imposed by paragraph (b)(8)(ii)(C)(2) of this section, only the remaining 49 shares of the PFIC stock are considered as indirectly owned by A under paragraph (b)(8) of this section.
(B) Example 2—(1) Facts. B, a United States citizen, owns 50% of the interests in Foreign Partnership, a foreign partnership treated as a partnership for U.S. federal income tax purposes, the remaining interests in which are owned by an unrelated foreign person. Foreign Partnership owns 100% of the stock of FC1 and 50% of the stock of FC2, the remainder of which is owned by an unrelated foreign person. Both FC1 and FC2 are foreign corporations that are not PFICs. FC1 and FC2 each own 50% of the stock of FC3, a foreign corporation that is a PFIC.
(2) Results. Under paragraphs (b)(8)(iii)(A) and (b)(8)(iv) of this section, for purposes of determining whether B is a shareholder of FC3, B is considered to actually own 50% (50% × 100%) of the stock of FC1 and 25% (50% × 50%) of the stock of FC2. Under paragraphs (b)(8)(ii)(A) and (b)(8)(iv) of this section, B is then considered to own 25% (50% × 100% × 50%) of the stock of FC3 indirectly through FC1, and thus is a shareholder of FC3 for purposes of the PFIC provisions. Because B is considered to own less than 50% of FC2, B is not considered to own any stock of FC3 indirectly through FC2.
(C) Example 3—(1) Facts. The facts are the same as in paragraph (b)(8)(v)(B)(1) of this section (the facts in Example 2), except that B owns 40% of the interests in Foreign Partnership.
(2) Results. Under paragraph (b)(8)(iii)(A) and (b)(8)(iv) of this section, for purposes of determining whether B is a shareholder of FC3, B is considered to actually own 40% (40% × 100%) of the stock of FC1 and 20% (40% × 50%) of the stock of FC2, and thus is not considered to own 50% or more of the stock of FC1 or FC2. Under paragraphs (b)(8)(ii)(A) and (b)(8)(iv) of this section, B is not considered to own any stock of FC3 indirectly through FC1 or FC2.
(D) Example 4—(1) Facts. The facts are the same as in paragraph (b)(8)(v)(C)(1) of this section (the facts in Example 3), except that FP owns only 80% of FC1 and B also directly owns 20% of FC1.
(2) Results. Under paragraph (b)(8)(iii)(A) and (b)(8)(iv) of this section, for purposes of determining whether B is a shareholder of FC3, B is considered to own 32% (40% × 80%) of the stock of FC1 and 20% (40% × 50%) of the stock of FC2. Because B directly owns 20% of FC1, B is considered to actually own 52% (32% + 20%) of the stock of FC1 in total. Under paragraphs (b)(8)(ii)(A) and (b)(8)(iv) of this section, B is considered to own 26% (52% × 50%) of the stock of FC3 indirectly through FC1, and thus is a shareholder of FC3 for purposes of the PFIC provisions. B is not considered to own any stock of FC3 indirectly through FC2.
(c) Coordination with other PFIC rules.
(1)-(2) [Reserved]
(3) Coordination with section 1296: distributions and dispositions. If PFIC stock is marked to market under section 1296 for any taxable year, then, except as provided in § 1.1296-1(i), section 1291 and the regulations thereunder shall not apply to any distribution with respect to section 1296 stock (as defined in § 1.1296-1(a)(2)), or to any disposition of such stock, for such taxable year.
(4) Coordination with mark to market rules under chapter 1 of the Internal Revenue Code other than section 1296—(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 taxpayer or another person, then, except as provided in paragraph (c)(4)(ii) of this section, section 1291 and the regulations thereunder shall 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 taxpayer marks to market PFIC stock under section 475 or any other provision of chapter 1 of the Internal Revenue Code.
(ii) Coordination rule. (A) Notwithstanding any provision in this section to the contrary, the rule of paragraph (c)(4)(ii)(B) of this section shall apply to the first taxable year in which a United States person marks to market its PFIC stock 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, prior to such first taxable year, during the United States person'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 United States person.
(B) For the first taxable year of a United States person that marks to market its PFIC stock under any provision of chapter 1 of the Internal Revenue Code, other than section 1296, such United States person shall, in lieu of the rules under which the United States person marks to market, apply the rules of § 1.1296-1(i)(2) and (3) as if the United States person had made an election under section 1296 for such first taxable year.
(d) [Reserved]
(e) Exempt organization as shareholder—(1) In general. If the shareholder of a PFIC is an organization exempt from tax under this chapter, section 1291 and these regulations apply to such shareholder only if a dividend from the PFIC would be taxable to the organization under subchapter F.
(2) Ownership through certain tax-exempt organizations and accounts. To the extent a United States person owns stock of a PFIC through an organization or account described in § 1.1298-1(c)(1), that person is not treated as a shareholder with respect to the PFIC stock.
(f)-(i) [Reserved]
(j) Applicability dates. (1) Paragraphs (c)(3) and (4) of this section apply for taxable years beginning on or after May 3, 2004.
(2) Paragraph (e)(1) of this section is applicable on and after April 1, 1992.
(3) Except as otherwise provided in paragraph (j)(4) of this section, paragraphs (b)(2)(ii) and (v), (b)(7) and (8), and (e)(2) of this section apply to taxable years of shareholders ending on or after December 31, 2013.
(4) Paragraphs (b)(8)(iv) and (b)(8)(v)(A), (B), (C), and (D) of this section apply for taxable years of shareholders beginning on or after January 14, 2021. A shareholder may choose to apply such paragraphs for any open taxable year beginning before January 14, 2021, provided that, with respect to a tested foreign corporation, the shareholder consistently applies such paragraphs and the provisions of §§ 1.1297-1 (except that consistent treatment is not required with respect to § 1.1297-1(c)(1)(i)(A)), 1.1297-2, 1.1297-4, 1.1297-6, 1.1298-2, and 1.1298-4 for such year and all subsequent years.
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Treas. Reg. §1.1291-1(a)§1.1291-1(a)
through (b)(2)(i) [Reserved]
(ii) Pedigreed QEF. A PFIC is a pedigreed QEF with respect to a shareholder if the PFIC has been a QEF with respect to the shareholder for all taxable years during which the corporation was a PFIC that are included wholly or partly in the shareholder's holding period of the PFIC stock.
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Treas. Reg. §1.1291-1(b)§1.1291-1(b)
(2)(iii) and (iv) [Reserved]
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Treas. Reg. §1.1291-1(c)Coordination with other PFIC rules.
Coordination with other PFIC rules.
(1)-(2) [Reserved]
(3) Coordination with section 1296: distributions and dispositions. If PFIC stock is marked to market under section 1296 for any taxable year, then, except as provided in § 1.1296-1(i), section 1291 and the regulations thereunder shall not apply to any distribution with respect to section 1296 stock (as defined in § 1.1296-1(a)(2)), or to any disposition of such stock, for such taxable year.
(4) Coordination with mark to market rules under chapter 1 of the Internal Revenue Code other than section 1296—(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 taxpayer or another person, then, except as provided in paragraph (c)(4)(ii) of this section, section 1291 and the regulations thereunder shall 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 taxpayer marks to market PFIC stock under section 475 or any other provision of chapter 1 of the Internal Revenue Code.
(ii) Coordination rule. (A) Notwithstanding any provision in this section to the contrary, the rule of paragraph (c)(4)(ii)(B) of this section shall apply to the first taxable year in which a United States person marks to market its PFIC stock 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, prior to such first taxable year, during the United States person'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 United States person.
(B) For the first taxable year of a United States person that marks to market its PFIC stock under any provision of chapter 1 of the Internal Revenue Code, other than section 1296, such United States person shall, in lieu of the rules under which the United States person marks to market, apply the rules of § 1.1296-1(i)(2) and (3) as if the United States person had made an election under section 1296 for such first taxable year.
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Treas. Reg. §1.1291-1(d)§1.1291-1(d)
[Reserved]
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Treas. Reg. §1.1291-1(e)Exempt organization as shareholder—(1) In general.
Exempt organization as shareholder—(1) In general. If the shareholder of a PFIC is an organization exempt from tax under this chapter, section 1291 and these regulations apply to such shareholder only if a dividend from the PFIC would be taxable to the organization under subchapter F.
(2) Ownership through certain tax-exempt organizations and accounts. To the extent a United States person owns stock of a PFIC through an organization or account described in § 1.1298-1(c)(1), that person is not treated as a shareholder with respect to the PFIC stock.
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Treas. Reg. §1.1291-1(f)§1.1291-1(f)
-(i) [Reserved]
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Treas. Reg. §1.1291-1(j)Applicability dates.
Applicability dates. (1) Paragraphs (c)(3) and (4) of this section apply for taxable years beginning on or after May 3, 2004.
(2) Paragraph (e)(1) of this section is applicable on and after April 1, 1992.
(3) Except as otherwise provided in paragraph (j)(4) of this section, paragraphs (b)(2)(ii) and (v), (b)(7) and (8), and (e)(2) of this section apply to taxable years of shareholders ending on or after December 31, 2013.
(4) Paragraphs (b)(8)(iv) and (b)(8)(v)(A), (B), (C), and (D) of this section apply for taxable years of shareholders beginning on or after January 14, 2021. A shareholder may choose to apply such paragraphs for any open taxable year beginning before January 14, 2021, provided that, with respect to a tested foreign corporation, the shareholder consistently applies such paragraphs and the provisions of §§ 1.1297-1 (except that consistent treatment is not required with respect to § 1.1297-1(c)(1)(i)(A)), 1.1297-2, 1.1297-4, 1.1297-6, 1.1298-2, and 1.1298-4 for such year and all subsequent years.
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Treas. Reg. §1.1291-1(v)Examples.
Examples. The rules of this paragraph (b)(8) are illustrated by the following examples:
(A) Example 1—(1) Facts. A is a United States person who owns 49% of the stock of FC1, a foreign corporation that is not a PFIC, and separately all of the stock of DC, a domestic corporation that is not an S corporation. DC, in turn, owns the remaining 51% of the stock of FC1, and FC1 owns 100 shares of stock in a PFIC that is not a controlled foreign corporation (CFC) within the meaning of section 957(a). The remainder of the PFIC's shares are owned by unrelated foreign persons.
(2) Results—(i) Treatment of DC. Under paragraph (b)(8)(ii)(A) of this section, DC is considered to actually own 51 shares of the PFIC stock directly held by FC1 because DC directly owns 50% or more of the stock of FC1.
(ii) Treatment of A. In determining whether A is considered to own 50% or more of the value of FC1 for purposes of applying paragraphs (b)(8)(ii)(A) and (b)(8)(iv) of this section to the PFIC stock held through FC1, A is considered under paragraphs (b)(8)(ii)(C)(1) and (b)(8)(iv) of this section as indirectly owning all the stock of FC1 that DC directly owns, before the application of paragraph (b)(8)(ii)(C)(2) of this section. Because A also directly owns 49% of the stock of FC1, before the application of paragraph (b)(8)(ii)(C)(2) of this section A would be treated as owning all 100 shares of PFIC stock held by FC1. However, because 51 shares of the PFIC stock held by FC1 are indirectly owned by DC under paragraph (b)(8)(ii)(A) of this section, pursuant to the limitation imposed by paragraph (b)(8)(ii)(C)(2) of this section, only the remaining 49 shares of the PFIC stock are considered as indirectly owned by A under paragraph (b)(8) of this section.
(B) Example 2—(1) Facts. B, a United States citizen, owns 50% of the interests in Foreign Partnership, a foreign partnership treated as a partnership for U.S. federal income tax purposes, the remaining interests in which are owned by an unrelated foreign person. Foreign Partnership owns 100% of the stock of FC1 and 50% of the stock of FC2, the remainder of which is owned by an unrelated foreign person. Both FC1 and FC2 are foreign corporations that are not PFICs. FC1 and FC2 each own 50% of the stock of FC3, a foreign corporation that is a PFIC.
(2) Results. Under paragraphs (b)(8)(iii)(A) and (b)(8)(iv) of this section, for purposes of determining whether B is a shareholder of FC3, B is considered to actually own 50% (50% × 100%) of the stock of FC1 and 25% (50% × 50%) of the stock of FC2. Under paragraphs (b)(8)(ii)(A) and (b)(8)(iv) of this section, B is then considered to own 25% (50% × 100% × 50%) of the stock of FC3 indirectly through FC1, and thus is a shareholder of FC3 for purposes of the PFIC provisions. Because B is considered to own less than 50% of FC2, B is not considered to own any stock of FC3 indirectly through FC2.
(C) Example 3—(1) Facts. The facts are the same as in paragraph (b)(8)(v)(B)(1) of this section (the facts in Example 2), except that B owns 40% of the interests in Foreign Partnership.
(2) Results. Under paragraph (b)(8)(iii)(A) and (b)(8)(iv) of this section, for purposes of determining whether B is a shareholder of FC3, B is considered to actually own 40% (40% × 100%) of the stock of FC1 and 20% (40% × 50%) of the stock of FC2, and thus is not considered to own 50% or more of the stock of FC1 or FC2. Under paragraphs (b)(8)(ii)(A) and (b)(8)(iv) of this section, B is not considered to own any stock of FC3 indirectly through FC1 or FC2.
(D) Example 4—(1) Facts. The facts are the same as in paragraph (b)(8)(v)(C)(1) of this section (the facts in Example 3), except that FP owns only 80% of FC1 and B also directly owns 20% of FC1.
(2) Results. Under paragraph (b)(8)(iii)(A) and (b)(8)(iv) of this section, for purposes of determining whether B is a shareholder of FC3, B is considered to own 32% (40% × 80%) of the stock of FC1 and 20% (40% × 50%) of the stock of FC2. Because B directly owns 20% of FC1, B is considered to actually own 52% (32% + 20%) of the stock of FC1 in total. Under paragraphs (b)(8)(ii)(A) and (b)(8)(iv) of this section, B is considered to own 26% (52% × 50%) of the stock of FC3 indirectly through FC1, and thus is a shareholder of FC3 for purposes of the PFIC provisions. B is not considered to own any stock of FC3 indirectly through FC2.
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Treas. Reg. §1.1291-10Deemed sale election
(a) Deemed sale election. This section provides rules for making the election under section 1291(d)(2)(A) (deemed sale election). Under that section, a shareholder (as defined in § 1.1291-9(j)(3)) of a PFIC that is an unpedigreed QEF may elect to recognize gain with respect to the stock of the unpedigreed QEF held on the qualification date (as defined in paragraph (e) of this section). If the shareholder makes the deemed sale election, the PFIC will become a pedigreed QEF with respect to the shareholder. A shareholder that makes the deemed sale election is treated as having sold, for its fair market value, the stock of the PFIC that the shareholder held on the qualification date. The gain recognized on the deemed sale is taxed under section 1291 as an excess distribution received on the 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 other disposition of the stock of the PFIC indirectly owned by the shareholder. Any loss realized on the deemed sale is not recognized. For the definitions of PFIC, QEF, unpedigreed QEF, and pedigreed QEF, see § 1.1291-9(j) (1) and (2).
(b) Who may make the election. A shareholder of an unpedigreed QEF may make the deemed sale election provided the shareholder held stock of that PFIC on the qualification date. A shareholder is treated as holding stock of the PFIC on the qualification date if its holding period with respect to that stock under section 1223 includes the qualification date. A deemed sale election may be made by a shareholder that would realize a loss on the deemed sale.
(c) Time for making the election. The shareholder makes the deemed sale election in the shareholder's return for the taxable year that includes the qualification date. If the shareholder and the PFIC have the same taxable year, the shareholder makes the deemed sale election in either the original return for the taxable year for which the shareholder makes the section 1295 election, or in an amended return for that year. If the shareholder and the PFIC have different taxable years, the deemed sale election must be made in an amended return for the taxable year that includes the qualification date. If the deemed sale election is made in an amended return, the amended 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 taxable year that includes the qualification date.
(d) Manner of making the election. A shareholder makes the deemed sale election by filing Form 8621 with the return for the taxable year of the shareholder that includes the qualification date, reporting the gain as an excess distribution pursuant to section 1291(a), 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 taxable year that includes the qualification date must pay additional interest, pursuant to section 6601, on the amount of the underpayment of tax for that year. A shareholder that realizes a loss on the deemed sale reports the loss on Form 8621, but does not recognize the loss.
(e) Qualification date—(1) In general. Except as otherwise provided in this paragraph (e), the qualification date is the first day of the PFIC's first taxable year as a QEF (first QEF year).
(2) Elections made after March 31, 1995, and before January 27, 1997—(i) In general. The qualification date for deemed sale elections made after March 31, 1995, and before January 27, 1997, is the first day of the shareholder's election year. The shareholder's election year is the taxable year of the shareholder for which it made the section 1295 election.
(ii) Exception. A shareholder who made the deemed sale election after May 1, 1992, and before January 27, 1997, may elect to change its qualification date to the first day of the first QEF year, provided the periods of limitations on assessment for the taxable year that includes that date and for the shareholder's election year have not expired. A shareholder changes the qualification date by filing amended returns, with revised Forms 8621, for the shareholder's election year and the shareholder's taxable year that includes the first day of the first QEF year, and making all appropriate adjustments and payments.
(f) Adjustments to basis—(1) In general. 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.
(2) Adjustment of basis for section 1293 inclusion with respect to deemed sale election made after March 31, 1995, and before January 27, 1997. For purposes of determining the amount of gain recognized with respect to a deemed sale election made after March 31, 1995, and before January 27, 1997, by a shareholder that treats the first day of the shareholder's election year as the qualification date, the adjusted basis of the stock deemed sold includes the shareholder's section 1293(a) inclusion attributable to the period beginning with the first day of the PFIC's first QEF year and ending on the day before the qualification date.
(g) Treatment of holding period. For purposes of applying sections 1291 through 1297 to the shareholder after the deemed sale, the shareholder's holding period of the stock of the PFIC begins on the 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.
(h) Election inapplicable to shareholder of former PFIC. A shareholder may not make the section 1295 and deemed sale elections if the foreign corporation is a former PFIC (as defined in § 1.1291-9(j)(2)(iv)) with respect to the shareholder. For the rules regarding the election by a shareholder of a former PFIC, see § 1.1297-3T.
(i) Effective date. The rules of this section are applicable as of April 1, 1995.
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Treas. Reg. §1.1291-10(a)Deemed sale election.
Deemed sale election. This section provides rules for making the election under section 1291(d)(2)(A) (deemed sale election). Under that section, a shareholder (as defined in § 1.1291-9(j)(3)) of a PFIC that is an unpedigreed QEF may elect to recognize gain with respect to the stock of the unpedigreed QEF held on the qualification date (as defined in paragraph (e) of this section). If the shareholder makes the deemed sale election, the PFIC will become a pedigreed QEF with respect to the shareholder. A shareholder that makes the deemed sale election is treated as having sold, for its fair market value, the stock of the PFIC that the shareholder held on the qualification date. The gain recognized on the deemed sale is taxed under section 1291 as an excess distribution received on the 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 other disposition of the stock of the PFIC indirectly owned by the shareholder. Any loss realized on the deemed sale is not recognized. For the definitions of PFIC, QEF, unpedigreed QEF, and pedigreed QEF, see § 1.1291-9(j) (1) and (2).
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Treas. Reg. §1.1291-10(b)Who may make the election.
Who may make the election. A shareholder of an unpedigreed QEF may make the deemed sale election provided the shareholder held stock of that PFIC on the qualification date. A shareholder is treated as holding stock of the PFIC on the qualification date if its holding period with respect to that stock under section 1223 includes the qualification date. A deemed sale election may be made by a shareholder that would realize a loss on the deemed sale.
534 Citing Cases
Accordingly, there was no need for Congress to change section 78 to confirm that section 78 dividends qualified for the deduction.15 14 In section 245A(f), Congress took the same approach with respect to amounts under section 1291, excluding those amounts from the deduction by providing that they “shall not be treated as a dividend for purposes of this section.” 15 For this reason, we also reject the Commissioner’s argument that the lack of a specific rule allowing the deduction for section 78 d
nation is sustained. B. UBS Investment Income Through Mrs. Fairbank’s beneficial ownership of UBS account 0857, she earned income from the trading of PFIC assets. See I.R.C. §§ 1297, 1298(a)(3). Respondent determined PFIC income and tax according to section 1291. Petitioners do not dispute the amount of PFIC income earned in the account but rather ask this Court to disallow the PFIC-related adjustments on the grounds that Xavana Establishment is properly classified as a CFC, therefore not subjec
PFIC assets, and unidentified deposits in domestic accounts. The revenue agent categorized domestic deposits as gross receipts from Schedule C unless substantiated with a nontaxable source. The revenue agent calculated PFIC gain and tax according to section 1291. The revenue agent decided to assert penalties under sections 6662 and 6663. He prepared Forms 4549, Income Tax Examination Changes, commonly known as a revenue agent report (RAR), asserting those penalties. The revenue agent’s immediate
Appellate Rule 18 does not define “court of the United States.” However, Appellate Rule 18(c) provides that certification “may be invoked by any of the federal courts upon * * * motion.” (Emphasis added.) This text suggests that Ap- pellate Rule 18 would embrace a question certified by the Tax Court.
time barred under section 6501 and (2) to the extent assessment is not time barred, whether petitioners are entitled to offset gains from sales ofstocks in passive foreign investment companies (PFICs) with losses from sales ofPFIC stocks, so as to reduce the total amount ofgain taxed under section 1291. Background The parties submitted this case fully stipulated pursuant to Rule 122. Petitioners resided in Virginia when they timely petitioned the Court. ¹Unless otherwise indicated, all section r
We hold that the funds now represent a payment of the estate’s Federal estate tax and are taken into account in calculating the estate’s overpayment of that tax.
The estate included as part of decedent’s final income tax return a Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualifying Electing Fund, reporting that decedent owed section 1291 tax of $562,633 and section 1291 interest of $498,386.
3 Sec. 3103(b)(1) of the IRS Restructuring and Reform Act of 1998, Pub. L. 105-206, 112 Stat. 685, 731, amended sec. 7436(c)(1) to increase the limit from $10,000 to $50,000 per quarter, effective for proceedings commenced after July 22, 1998. - 6 - Next, we consider whether our interpretation of section 7436 is altered by (1) it