Guidance on Passive Foreign Investment Company (PFIC) Purging Elections, 72908-72914 [05-23630]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 70, Number 235 (Thursday, December 8, 2005)]
[Rules and Regulations]
[Pages 72908-72914]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-23630]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9232]
RIN 1545-BD33


Guidance on Passive Foreign Investment Company (PFIC) Purging 
Elections

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulation.

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SUMMARY: This document contains temporary regulations that provide 
certain elections for taxpayers that

[[Page 72909]]

continue to be subject to the PFIC excess distribution regime of 
section 1291 even though the foreign corporation in which they own 
stock is no longer treated as a PFIC under section 1297(a) or (e). The 
regulations are necessary to provide guidance about purging the PFIC 
taint for such foreign corporations. The regulations will affect U.S. 
persons that hold stock in a PFIC. The text of these temporary 
regulations also serves as the text of the proposed regulations set 
forth in the notice of proposed rulemaking on this subject in the 
Proposed Rules section in this issue of the Federal Register.

DATES: Effective Date: These regulations are effective December 8, 
2005.
    Applicability Date: For dates of applicability, see Sec. Sec.  
1.1297-3T(f), 1.1298-3T(f).

FOR FURTHER INFORMATION CONTACT: Ethan Atticks at (202) 622-3840 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    These temporary regulations are being issued without prior notice 
and public procedure pursuant to the Administrative Procedure Act (5 
U.S.C. 553). For this reason, the collection of information contained 
in these regulations has been reviewed and, pending receipt and 
evaluation of public comments, approved by the Office of Management and 
Budget under control number 1545-1965. Responses to this collection of 
information are required to obtain a tax benefit.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid OMB control number.
    For further information concerning this collection of information, 
and where to submit comments on the collection of information and the 
accuracy of the estimated burden, and suggestions for reducing this 
burden, please refer to the preamble of the cross-referencing notice of 
proposed rulemaking published in the Proposed Rules section of this 
issue of the Federal Register.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains amendments to regulations under sections 
1291(d)(2), 1297(e) and 1298(b)(1). The temporary regulations provide 
rules for a shareholder of a foreign corporation to make a deemed sale 
or a deemed dividend election under section 1298(b)(1) when section 
1297(e) applies to a portion of the holding period. The temporary 
regulations also provide rules for such shareholders, or shareholders 
of foreign corporations that no longer meet the income or asset tests 
of section 1297(a), to make late deemed sale or deemed dividend 
elections.
    Section 1297(e), added by the Taxpayer Relief Act of 1997 (Pub. L. 
105-34, 111 Stat. 708), provides that a foreign corporation generally 
is not treated as a PFIC with respect to a shareholder during the 
qualified portion of the shareholder's holding period in the stock of 
the foreign corporation. The ``qualified portion'' is the portion of 
the shareholder's holding period which is after December 31, 1997, and 
during which the shareholder is a U.S. shareholder (as defined in 
section 951(b)) and the foreign corporation is a controlled foreign 
corporation. If the qualified portion of the U.S. shareholder's holding 
period in the stock of the foreign corporation is less than the 
shareholder's entire holding period, then, notwithstanding section 
1297(e), section 1298(b)(1) will apply to treat the foreign corporation 
as a PFIC with respect to the shareholder if at any time during the 
shareholder's holding period of the stock, the corporation was a PFIC 
that was not a QEF, and the shareholder has not made an election under 
section 1298(b)(1) to purge the PFIC taint under rules similar to the 
rules of section 1291(d)(2).
    Section 1298(b)(1) provides that if a shareholder owns stock in a 
foreign corporation that, at any time during the shareholder's holding 
period with respect to such stock, was a PFIC that was not a QEF, the 
stock will retain its character as PFIC stock, even if the corporation 
later ceases to qualify as a PFIC under section 1297(a), unless the 
shareholder elects to purge the PFIC taint under rules similar to the 
rules of section 1291(d)(2).
    On March 2, 1988, the IRS and Treasury Department published 
temporary regulations (TD 8178, 1988-1 CB 313 [53 FR 6770]), and 
proposed regulations that cross-referenced the temporary regulations 
(INTL 941-86 [53 FR 6781]), concerning the election under section 
1298(b)(1) (then section 1297(b)(1)) (1988 temporary regulations). The 
1988 temporary regulations permitted a shareholder of a former PFIC, as 
defined in 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)) (CFC) during its last taxable year as a 
PFIC under section 1297(a), may apply the rules of the deemed dividend 
election under section 1291(d)(2)(B) and 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).

Explanation of Provisions

    The regulations contained in this document provide guidance on 
making a deemed sale or a deemed dividend election for a shareholder of 
a section 1297(e) PFIC. Section 1.1291-9T(j)(2)(v) defines a section 
1297(e) PFIC as a foreign corporation that qualifies as a PFIC under 
section 1297(a) on the first day of the qualified portion of the 
shareholder's holding period under section 1297(e), and is also treated 
as a PFIC with respect to the shareholder under section 1298(b)(1) 
because at any time during the shareholder's holding period of the 
stock, other than the qualified portion, the foreign corporation was a 
PFIC that was not a QEF.
    The deemed sale and deemed dividend election rules contained herein 
generally conform to the deemed sale and deemed dividend election 
provisions under Sec. Sec.  1.1291-9 and -10, which apply to 
shareholders making a purging election in conjunction with a QEF 
election. The deemed sale and deemed dividend election rules contained 
in these regulations, which apply to shareholders of section 1297(e) 
PFICs, however, differ from those contained in Sec. Sec.  1.1291-9 and 
-10 in several minor respects.
    First, under the deemed dividend or deemed sale election rules 
contained in Sec. Sec.  1.1291-9 and -10, the deemed dividend or the 
gain recognized on the deemed sale, is taxed as an excess distribution 
received by the shareholder on the qualification date, defined as the 
first day of the PFIC's first taxable year as a QEF. See Sec.  1.1291-
9T(e). Under these regulations, for purposes of a deemed dividend or 
deemed sale election made by a shareholder of a section 1297(e) PFIC, 
the deemed dividend, or the gain recognized on the deemed sale, is 
taxed as an excess

[[Page 72910]]

distribution received on the CFC qualification date. The ``CFC 
qualification date'' is defined in Sec.  1.1297-3T(d) as the first day 
on which the qualified portion of the shareholder's holding period in 
the Section 1297(e) PFIC begins, as determined under section 
1297(e)(3).
    Second, under Sec.  1.1291-9(a)(2), the term ``post-1986 earnings 
and profits'' is defined as certain undistributed earnings and profits 
as of the day before the qualification date. These regulations contain 
a similar rule. Section 1.1297-3T(c) provides, in general, that ``post-
1986 earnings and profits'' means certain undistributed earnings as of 
the day before the CFC qualification date. Unlike the qualification 
date under Sec.  1.1291-9, which is the first day of the taxable year, 
the CFC qualification date may be a day after the first day of the 
taxable year. Thus, Sec.  1.1297-3T(c)(3)(i)(B) also contains a special 
rule for determining post-1986 earnings and profits when the CFC 
qualification date is a day after the first day of the taxable year. In 
such instances, the undistributed earnings and profits will be 
determined at the close of the taxable year that includes the CFC 
qualification date.
    Finally, taxpayers have commented that, if a foreign corporation is 
a PFIC under the ``once a PFIC, always a PFIC'' rule of section 
1298(b)(1) but the corporation has ceased to qualify as a PFIC under 
section 1297(a) or is a corporation to which section 1297(e) applies, 
and if the shareholder fails to make a timely purging election, the 
shareholder has no way to remove the PFIC taint. To address this 
situation, the IRS and Treasury Department also have included late 
election relief provisions in the regulations. These provisions, 
contained in Sec. Sec.  1.1297-3T(e) and 1.1298-3T(e), allow 
shareholders of a section 1297(e) PFIC or a former PFIC to make a late 
deemed dividend or deemed sale election with the consent of the 
Commissioner, provided certain requirements are met. Under this 
provision, the shareholder applies the rules of Sec. Sec.  1.1297-3T 
and 1.1298-3T as if its purging election were timely made. If the 
taxable year for which the purging election is made (i.e., the taxable 
year that includes the CFC qualification date or the termination date) 
is a closed taxable year, the taxpayer must enter into a closing 
agreement to agree to eliminate any prejudice to the interests of the 
U.S. government as a consequence of the taxpayer's inability to file an 
amended return.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. For applicability 
of the Regulatory Flexibility Act (5 U.S.C. chapter 6), please refer to 
the Special Analyses section of the preamble of the cross-reference 
notice of proposed rulemaking published in the Proposed Rules section 
in this issue of the Federal Register. Pursuant to section 7805(f) of 
the Code, this regulation will be submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Drafting Information

    The principal author of these regulations is Ethan Atticks, Office 
of Associate Chief Counsel (International). However, other personnel 
from the IRS and Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is 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. New Sec.  1.1291-9T is added to read as follows:


Sec.  1.1291-9T  Deemed dividend election (temporary).

    (a) through (j)(2)(iv) [Reserved]. For further guidance, see Sec.  
1.1291-9(a) through (j)(2)(iv).
    (j)(2)(v) Section 1297(e) PFIC. A foreign corporation is a section 
1297(e) PFIC with respect to a shareholder (as defined in Sec.  1.1291-
9(j)(3)) if:
    (A) The foreign corporation qualifies as a PFIC under section 
1297(a) on the first day on which the qualified portion of the 
shareholder's holding period in the foreign corporation begins, as 
determined under section 1297(e)(2); and
    (B) The stock of the foreign corporation held by the shareholder is 
treated as stock of a PFIC, pursuant to section 1298(b)(1), because, at 
any time during the shareholder's holding period of the stock, other 
than the qualified portion, the corporation was a PFIC that was not a 
QEF.
    (3) [Reserved]. For further guidance, see Sec.  1.1291-9(j)(3).
    (k) Effective date. (1) The rules of this section are applicable as 
of December 8, 2005.
    (2) The applicability of this section will expire on or before 
December 8, 2008.

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


Sec.  1.1297-0T  Table of contents (temporary).

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


Sec.  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.

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


Sec.  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 Sec.  1.1291-9(j)(3)) 
of a foreign corporation that is a section 1297(e) PFIC (as defined in 
Sec.  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

[[Page 72911]]

1291 unless the shareholder makes a purging election under section 
1298(b)(1). A purging election under section 1298(b)(1) is made under 
rules similar to the rules of section 1291(d)(2). Section 1291(d)(2) 
allows a shareholder to purge the continuing PFIC taint by either 
making a deemed sale election or a deemed dividend election.
    (b) Application of deemed sale election rules: (1) Eligibility to 
make the deemed sale election. A shareholder of a foreign corporation 
that is a section 1297(e) PFIC with respect to such shareholder may 
make a deemed sale election under section 1298(b)(1) by applying the 
rules of this paragraph (b).
    (2) Effect of the deemed sale election. A shareholder making the 
deemed sale election with respect to a section 1297(e) PFIC shall be 
treated as having sold all of its stock in the section 1297(e) PFIC for 
its fair market value on the CFC qualification date, as defined in 
paragraph (d) of this section. A deemed sale under this section is 
treated as a disposition subject to taxation under section 1291. Thus, 
the gain from the deemed sale is taxed as an excess distribution 
received on the CFC qualification date. In the case of an election made 
by an indirect shareholder, the amount of gain to be recognized and 
taxed as an excess distribution is the amount of gain that the direct 
owner of the stock of the PFIC would have realized on an actual sale or 
disposition of the stock of the PFIC indirectly owned by the 
shareholder. Any loss realized on the deemed sale is not recognized. 
After the deemed sale election, the shareholder's stock with respect to 
which the election was made under this paragraph (b) shall not be 
treated as stock in a PFIC and the shareholder shall not be subject to 
taxation under section 1291 with respect to such stock unless the 
qualified portion of the shareholder's holding period ends, as 
determined under section 1297(e)(2), and the foreign corporation 
thereafter qualifies as a PFIC under section 1297(a).
    (3) Time for making the deemed sale election. Except as provided in 
paragraph (e) of this section, a shareholder shall make the deemed sale 
election under this paragraph (b) and section 1298(b)(1) in the 
shareholder's original or amended return for the taxable year that 
includes the CFC qualification date (election year). If the deemed sale 
election is made in an amended return, the return must be filed by a 
date that is within three years of the due date, as extended under 
section 6081, of the original return for the election year.
    (4) Manner of making the deemed sale election. A shareholder makes 
the deemed sale election under this paragraph (b) by filing Form 8621 
(``Return by a Shareholder of a Passive Foreign Investment Company or 
Qualified Electing Fund'') with the return of the shareholder for the 
election year, reporting the gain as an excess distribution pursuant to 
section 1291(a) as if such sale occurred under section 1291(d)(2), and 
paying the tax and interest due on the excess distribution. A 
shareholder that makes the deemed sale election after the due date of 
the return (determined without regard to extensions) for the election 
year must pay additional interest, pursuant to section 6601, on the 
amount of underpayment of tax for that year. An electing shareholder 
that realizes a loss shall report the loss on Form 8621, but shall not 
recognize the loss.
    (5) Adjustments to basis. A shareholder that makes the deemed sale 
election increases its adjusted basis of the PFIC stock owned directly 
by the amount of gain recognized on the deemed sale. If the shareholder 
makes the deemed sale election with respect to a PFIC of which it is an 
indirect shareholder, the shareholder's adjusted basis of the stock or 
other property owned directly by the shareholder, through which 
ownership of the PFIC is attributed to the shareholder, is increased by 
the amount of gain recognized by the shareholder. In addition, solely 
for purposes of determining the subsequent treatment under the Code and 
regulations of a shareholder of the stock of the PFIC, the adjusted 
basis of the direct owner of the stock of the PFIC is increased by the 
amount of gain recognized on the deemed sale. A shareholder shall not 
adjust the basis of any stock with respect to which the shareholder 
realized a loss on the deemed sale, which loss is not recognized under 
paragraph (b)(2) of this section.
    (6) Treatment of holding period. If a shareholder of a foreign 
corporation has made a deemed sale election, then, for purposes of 
applying sections 1291 through 1298 to such shareholder after the 
deemed sale, the shareholder's holding period in the stock of the 
foreign corporation begins on the CFC qualification date, without 
regard to whether the shareholder recognized gain on the deemed sale. 
For other purposes of the Code and regulations, this holding period 
rule does not apply.
    (c) Application of deemed dividend election rules: (1) Eligibility 
to make the deemed dividend election. A shareholder of a foreign 
corporation that is a section 1297(e) PFIC with respect to such 
shareholder may make the deemed dividend election under the rules of 
this paragraph (c). A deemed dividend election may be made by a 
shareholder whose pro rata share of the post-1986 earnings and profits 
of the PFIC attributable to the PFIC stock held on the CFC 
qualification date is zero.
    (2) Effect of the deemed dividend election. A shareholder making 
the deemed dividend election with respect to a section 1297(e) PFIC 
shall include in income as a dividend its pro rata share of the post-
1986 earnings and profits of the PFIC attributable to all of the stock 
it held, directly or indirectly on the CFC qualification date, as 
defined in paragraph (d) of this section. The deemed dividend is taxed 
under section 1291 as an excess distribution received on the CFC 
qualification date. The excess distribution determined under this 
paragraph (c) is allocated under section 1291(a)(1)(A) only to each day 
of the shareholder's holding period of the stock during which the 
foreign corporation qualified as a PFIC. For purposes of the preceding 
sentence, the shareholder's holding period of the PFIC stock ends on 
the day before the CFC qualification date. After the deemed dividend 
election, the shareholder's stock with respect to which the election 
was made under this paragraph (c) shall not be treated as stock in a 
PFIC and the shareholder shall not be subject to taxation under section 
1291 with respect to such stock unless the qualified portion of the 
shareholder's holding period ends, as determined under section 
1297(e)(2), and the foreign corporation thereafter qualifies as a PFIC 
under section 1297(a).
    (3) Post-1986 earnings and profits defined: (i) In general--(A) 
General rule. For purposes of this section, the term post-1986 earnings 
and profits means the post-1986 undistributed earnings, within the 
meaning of section 902(c)(1) (determined without regard to section 
902(c)(3)), as of the day before the CFC qualification date, that were 
accumulated and not distributed in taxable years of the PFIC beginning 
after 1986 and during which it was a PFIC, without regard to whether 
the earnings related to a period during which the PFIC was a CFC.
    (B) Special rule. If the CFC qualification date is a day that is 
after the first day of the taxable year, the term post-1986 earnings 
and profits means the post-1986 undistributed earnings, within the 
meaning of section 902(c)(1) (determined without regard to section 
902(c)(3)), as of the close of the taxable year that includes the CFC 
qualification date. For purposes of this computation, only earnings and 
profits accumulated

[[Page 72912]]

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 Sec.  301.9100-3 of 
this chapter. A shareholder may request the consent of the Commissioner 
to make a late deemed sale or deemed dividend election for the taxable 
year of the shareholder that includes the CFC qualification date 
provided the shareholder satisfies the requirements set forth in this 
paragraph (e). The Commissioner may, in his discretion, grant relief 
under this paragraph (e) only if:
    (i) In a case where the shareholder is requesting consent under 
this paragraph (e) after December 31, 2005, the shareholder requests 
such consent before a representative of the Internal Revenue Service 
raises upon audit the PFIC status of the foreign corporation for any 
taxable year of the shareholder;
    (ii) The shareholder has agreed in a closing agreement with the 
Commissioner, described in paragraph (e)(3) of this section, to 
eliminate any prejudice to the interests of the U.S. government, as 
determined under paragraph (e)(2) of this section, as a consequence of 
the shareholder's inability to file amended returns for its taxable 
year in which the CFC qualification date falls, or an earlier closed 
taxable year in which the shareholder has taken a position that is 
inconsistent with the treatment of the foreign corporation as a PFIC; 
and
    (iii) The shareholder satisfies the procedural requirements set 
forth in paragraph (e)(3) of this section.
    (2) Prejudice to the interests of the U.S. government. The 
interests of the U.S. government are prejudiced if granting relief 
would result in the shareholder having a lower tax liability (other 
than by a de minimis amount), taking into account applicable interest

[[Page 72913]]

charges, for the taxable year that includes the CFC qualification date 
(or a prior taxable year in which the taxpayer took a position on a 
return that was inconsistent with the treatment of the foreign 
corporation as a PFIC) than the shareholder would have had if the 
shareholder had properly made the section 1298(b)(1) election in the 
time prescribed in paragraph (b)(2) or (c)(3) of this section (or had 
not taken a position in a return for an earlier year that was 
inconsistent with the status of the foreign corporation as a PFIC). The 
time value of money is taken into account for purposes of this 
computation.
    (3) Procedural requirements: (i) In general. The amount due with 
respect to a late purging election is determined in the same manner as 
if the purging election had been timely filed. However, the shareholder 
is also liable for interest on the amount due, determined for the 
period beginning on the due date (without extensions) for the 
taxpayer's income tax return for the year in which the CFC 
qualification date falls and ending on the date the late purging 
election is filed with the IRS.
    (ii) Filing instructions. A late purging election is made by filing 
a completed Form 8621-A, ``Return by a Shareholder Making Certain Late 
Elections to End Treatment as a Passive Foreign Investment Company.''
    (4) Time and manner of making late election: (i) Time for making a 
late purging election. A shareholder may make a late purging election 
in the manner provided in paragraph (e)(4)(ii) of this section at any 
time. The date the election is filed with the IRS will determine the 
amount of interest due under paragraph (e)(3) of this section.
    (ii) Manner of making a late purging election. A shareholder makes 
a late purging election by completing Form 8621-A in the manner 
required by that form and this section and filing that form with the 
Internal Revenue Service, DP 8621-A, Ogden, UT 84201.
    (f) Effective date. (1) The rules of this section are applicable as 
of December 8, 2005.
    (2) The applicability of this section will expire on or before 
December 8, 2008.

0
Par. 5. Section 1.1298-0T is added to read as follows:


Sec.  1.1298-0T  Table of contents (temporary).

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


Sec.  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 Sec.  1.1298-
0, the entries for Sec.  1.1298-3T(a) through (d).
    (e) Late purging elections requiring special consent.
    (1) In general.
    (2) Prejudice to the interests of the U.S. government.
    (3) Procedural requirement.
    (4) Time and manner of making late election.
    (f) Effective date.

0
Par. 6. Section 1.1298-3T is added to read as follows:


Sec.  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 Sec.  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 Sec.  301.9100-
3 of this chapter. A shareholder may request the consent of the 
Commissioner to make a late purging election for the taxable year of 
the shareholder that includes the termination date provided the 
shareholder satisfies the requirements set forth in this paragraph (e). 
The Commissioner may, in his discretion, grant relief under this 
paragraph (e) only if:
    (i) In a case where the shareholder is requesting consent under 
this paragraph (e) after December 31, 2005, the shareholder requests 
such consent before a representative of the Internal Revenue Service 
raises upon audit the PFIC status of the foreign corporation for any 
taxable year of the shareholder;
    (ii) The shareholder has agreed in a closing agreement with the 
Commissioner, described in paragraph (e)(3) of this section, to 
eliminate any prejudice to the interests of the U.S. government, as 
determined under paragraph (e)(2) of this section, as a consequence of 
the shareholder's inability to file amended returns for its taxable 
year in which the termination date falls, or an earlier closed taxable 
year in which the shareholder has taken a position that is inconsistent 
with the treatment of the foreign corporation as a PFIC; and
    (iii) The shareholder satisfies the procedural requirements set 
forth in paragraph (e)(3) of this section.
    (2) Prejudice to the interests of the U.S. government. The 
interests of the U.S. government are prejudiced if granting relief 
would result in the shareholder having a lower tax liability (other 
than by a de minimis amount), taking into account applicable interest 
charges, for the taxable year that includes the termination date (or a 
prior taxable year in which the taxpayer took a position on a return 
that was inconsistent with the treatment of the foreign corporation as 
a PFIC) than the shareholder would have had if the shareholder had 
properly made the section 1298(b)(1) election in the time prescribed in 
paragraph (b)(2) or (c)(3) of this section (or had not taken a position 
in a return for an earlier year that was inconsistent with the status 
of the foreign corporation as a PFIC). The time value of money is taken 
into account for purposes of this computation.
    (3) Procedural requirement: (i) In general. The amount due with 
respect to a late purging election is determined in the same manner as 
if the purging election had been timely filed. However, the shareholder 
is also liable for interest on the amount due, determined for the 
period beginning on the due date (without extensions) for the 
taxpayer's income tax return for the year in which the CFC 
qualification date falls and ending on the date the late purging 
election is filed with the IRS.
    (ii) Filing instructions. A late purging election is made by filing 
a completed Form 8621-A, ``Return by a Shareholder Making Certain Late 
Elections to End Treatment as a Passive Foreign Investment Company.''
    (4) Time and manner of making late election: (i) Time for making a 
late purging election. A shareholder may make a late purging election 
in the manner provided in paragraph (e)(4)(ii) of this section at any 
time. The date the election is filed with the IRS will determine the 
amount of interest due under paragraph (e)(3) of this section.
    (ii) Manner of making a late purging election. A shareholder makes 
a late purging election by completing Form 8621-A in the manner 
required by that form and this section and filing that form with the 
Internal Revenue Service, DP 8621-A, Ogden, UT 84201.
    (f) Effective date. (1) The rules of this section are applicable as 
of December 8, 2005.
    (2) The applicability of this section will expire on or before 
December 8, 2008.

[[Page 72914]]

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

0
Par. 7. The authority citation of part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805

0
Par. 8. In Sec.  602.101, paragraph (b) is amended by revising an entry 
in the table for ``1.1297-3T'' as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where Identified and described       control No.
------------------------------------------------------------------------
 
                                * * * * *
1.1297-3T...............................................       1545-1965
 
                                * * * * *
------------------------------------------------------------------------


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

Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury.
[FR Doc. 05-23630 Filed 12-7-05; 8:45 am]
BILLING CODE 4830-01-P