Guidance on Passive Foreign Investment Company (PFIC) Purging Elections, 72914-72917 [05-23629]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 70, Number 235 (Thursday, December 8, 2005)]
[Rules and Regulations]
[Pages 72914-72917]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-23629]


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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.

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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 Sec.  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 
Sec.  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 Sec.  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 Sec.  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 Sec.  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

[[Page 72915]]

Sec.  1.1291-9(j)(2)(iv). In addition, the deemed dividend election 
provisions were added and the deemed sale election provisions were 
revised to conform generally the elections under section 1298(b)(1) to 
the deemed dividend and deemed sale election provisions contained in 
Sec. Sec.  1.1291-9 and -10 (purging elections in connection with 
election to treat PFIC as a QEF).

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. It has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and, because the 
regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding this regulation was 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 this regulation 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.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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

0
Par. 2. Section 1.1291-9 is amended as follows:
0
1. Paragraph (i)(1) is removed.
0
2. The paragraph heading of paragraph (i)(2) is removed.
0
3. The text of paragraph (i)(2) is redesignated as paragraph (i).
0
4. Paragraph (j)(2)(iv) is revised.
0
5. Paragraph (j)(2)(v) is added.
    The revision and addition reads as follows:


Sec.  1.1291-9  Deemed dividend election.

* * * * *
    (j) * * *
    (2) * * *
    (iv) Former PFIC. A foreign corporation is a former PFIC with 
respect to a shareholder if the corporation satisfies neither the 
income test of section 1297(a)(1) nor the asset test of section 
1297(a)(2), but its stock, held by that shareholder, is treated as 
stock of a PFIC, pursuant to section 1298(b)(1), because the 
corporation was a PFIC that was not a QEF at some time during the 
shareholder's holding period of the stock.
    (v) Section 1297(e) PFIC. [Reserved]. For further guidance, see 
Sec.  1.1291-9T(j)(2)(v).
* * * * *

0
Par. 3. Section 1.1297-0 is revised to read as follows:


Sec.  1.1297-0  Table of contents.

    This section contains a listing of the paragraph headings for Sec.  
1.1297-3.


Sec.  1.1297-3  Deemed sale or deemed dividend election by a U.S. 
person that is a shareholder of a section 1297(e) PFIC. [Reserved]. For 
further guidance, see the entries in Sec.  1.1297-3T.

0
Par. 4. Section 1.1297-3 is added to read as follows:


Sec.  1.1297-3  Deemed sale or deemed dividend election by a U.S. 
person that is a shareholder of a section 1297(e) PFIC.

    [Reserved]. For further guidance, see Sec.  1.1297-3T.

0
Par. 5. Sections 1.1298-0 and 1.1298-3 are added to read as follows:


Sec.  1.1298-0  Table of contents.

    This section contains a listing of the paragraph headings for Sec.  
1.1298-3.


Sec.  1.1298-3  Deemed sale or deemed dividend election by a U.S. 
person that is a shareholder of a former PFIC.

    (a) In general.
    (b) Application of deemed sale election rules.
    (1) Eligibility to make the deemed sale election.
    (2) Effect of 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) Termination date.
    (e) Late purging elections requiring special consent. 
[Reserved]. For further guidance, see Sec.  1.1298-0T.
    (f) Effective date.


Sec.  1.1298-3  Deemed sale or deemed dividend election by a U.S. 
person that is a shareholder of a former PFIC.

    (a) In general. A shareholder (as defined in Sec.  1.1291-9(j)(3)) 
of a foreign corporation that is a former PFIC, (as defined in Sec.  
1.1291-9(j)(2)(iv)) 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 making either 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 former 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 deemed sale election. A shareholder making the deemed 
sale election with respect to a former PFIC shall be treated as having 
sold all its stock in the former PFIC for its fair market value on the 
termination date, as defined in paragraph (d) of this section. A deemed 
sale is treated as a disposition subject to taxation under section 
1291. Thus, gain from the deemed sale is taxed under section 1291 as an 
excess distribution received on the termination 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 foreign

[[Page 72916]]

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, the 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 termination 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 deemed 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, but 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 day following the termination, 
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 former PFIC with respect to such shareholder may 
make the deemed dividend election under the rules of this paragraph (c) 
provided the foreign corporation was a controlled foreign corporation 
(as defined in section 957(a) (CFC)) during its last taxable year as a 
PFIC. A shareholder may make the deemed dividend election without 
regard to whether the shareholder is a United States shareholder within 
the meaning of section 951(b). 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 
termination date is zero.
    (2) Effect of the deemed dividend election. A shareholder making 
the deemed dividend election with respect to a former 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 termination date, as defined in 
paragraph (d) of this section. The deemed dividend is taxed under 
section 1291 as an excess distribution received on the termination 
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 termination 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 foreign corporation thereafter 
qualifies as a PFIC under section 1297(a).
    (3) Post-1986 earnings and profits defined: (i) In general. 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 
close of the taxable year that includes the termination 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, without regard to whether the earnings relate 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 termination 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 
termination date and attributable, under the principles of section 1248 
and the regulations under that section, to the PFIC stock held on the 
termination 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 termination 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

[[Page 72917]]

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 
termination 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 day following the termination 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) Termination date. For purposes of this section, the termination 
date is the last day of the last taxable year of the foreign 
corporation during which it qualified as a PFIC under section 1297(a).
    (e) Late purging elections requiring special consent. [Reserved]. 
For further guidance, see Sec.  1.1298-3T(e).
    (f) Effective date. This section applies for taxable years of 
shareholders beginning on or after December 8, 2005. However, taxpayers 
may apply the rules of this section to a taxable year beginning prior 
to December 8, 2005, provided the statute of limitations on the 
assessment of tax has not expired.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 6. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

0
Par. 7. In Sec.  602.101, paragraph (b) is amended by adding an entry 
in numerical order to the table as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                                * * * * *
1.1298-3................................................       1545-1507
 
                                * * * * *
------------------------------------------------------------------------


    Approved: November 21, 2005.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.

Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury.
[FR Doc. 05-23629 Filed 12-7-05; 8:45 am]
BILLING CODE 4830-01-P