Guidance on Passive Foreign Investment Company (PFIC) Purging Elections, 54820-54825 [E7-18988]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 72, Number 187 (Thursday, September 27, 2007)]
[Rules and Regulations]
[Pages 54820-54825]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-18988]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9360]
RIN 1545-BC37


Guidance on Passive Foreign Investment Company (PFIC) Purging 
Elections

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of the temporary regulations.

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SUMMARY: This document contains final regulations that provide certain 
elections for taxpayers that continue to be subject to the PFIC excess 
distribution regime of section 1291 of the Internal Revenue Code even 
though the foreign corporation in which they own stock is no longer 
treated as a PFIC under section 1297(a) or (e) of the Code. 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.

DATES: Effective Date: These regulations are effective on September 27, 
2007.
    Applicability Date: For dates of applicability, see Sec. Sec.  
1.1291-9(k), 1.1297-3(f), 1.1298-3(f).

FOR FURTHER INFORMATION CONTACT: Paul J. Carlino 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 reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-1965.
    The collection of information in these final regulations is in 
Sec.  1.1297-3(c)(5)(ii). This information is required to enable the 
IRS to verify that a taxpayer is reporting the correct amount of income 
or gain or is claiming the correct amount of losses, deductions or 
credits 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.
    Books or records relating to a collection of information must be 
retained as long as their contents might 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

    On December 8, 2005, the IRS and the Treasury Department published 
final regulations under section 1298(b)(1) and removal of temporary 
regulations (TD 9231) in the Federal Register (70 FR 72914). The final 
regulations provided rules for a shareholder of a former PFIC (as 
defined in Sec.  1.1291-9(j)(2)(iv)) to make a deemed dividend or 
deemed sale election to purge the PFIC taint of the stock of the 
foreign corporation (that is, to end treatment of the stock of the 
foreign corporation as PFIC stock with respect to the shareholder). On 
December 8, 2005, the Internal Revenue Service and the Treasury 
Department also published temporary regulations (TD 9232) under 
sections 1291(d)(2), 1297(e) and 1298(b)(1) in the Federal Register (70 
FR 72908). A notice of proposed rulemaking (REG-133446-03) cross-
referencing the temporary regulations was published in the Federal 
Register for the same day (70 FR 72952). The temporary and proposed 
regulations provided guidance to shareholders of section 1297(e) PFICs 
(as defined in Sec.  1.1291-9(j)(2)(v)) on making a deemed sale or 
deemed dividend election to purge the PFIC taint of the stock of the 
foreign corporation. The temporary and proposed regulations also 
provided guidance to shareholders of section 1297(e) PFICs and 
shareholders of former PFICs on making late purging elections (provided 
certain requirements are met).
    No public hearing was requested or held. A comment responding to 
the notice of proposed rulemaking was received. After consideration of 
the comment, the proposed regulations are adopted as amended by this 
Treasury decision, and the corresponding temporary regulations are 
removed. The comment and revision is discussed in this preamble.

Summary of Comments and Explanation of Revisions

1. Multiple Purging Elections

    Sections 1.1297-3 and 1.1298-3 provide guidance for a shareholder 
of a section 1297(e) PFIC and a shareholder of a former PFIC, 
respectively, to make a deemed sale or a deemed dividend election to 
purge the PFIC taint of the stock of the foreign corporation. A section 
1297(e) PFIC is 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 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 qualified electing fund (QEF) under section 1295. (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.) A former 
PFIC is a foreign corporation that

[[Page 54821]]

satisfies neither the income nor the asset test of section 1297(a), but 
whose stock held by a 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.
    Sections 1.1297-3(e) and 1.1298-3(e) provide rules for making late 
purging elections when the time prescribed for making timely purging 
elections under Sec. Sec.  1.1297-3(b)(3) or (c)(4) and 1.1298-3(b)(3) 
or (c)(4) has elapsed.
    One commentator requested that the final regulations clarify 
whether multiple late purging elections can be made under Sec. Sec.  
1.1297-3(e) and 1.1298-3(e). The IRS and the Treasury Department 
believe that multiple late purging elections should be allowed to the 
same extent such multiple purging elections could have been made if 
filed timely. The final regulations are amended to clarify this rule.

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 is hereby 
certified that these regulations will not have a significant economic 
impact on a substantial number of small entities. This certification is 
based upon the fact that these regulations affect only U.S. persons 
with stock ownership in a PFIC. There are not a substantial number of 
U.S. persons that are small entities that own stock in a PFIC. Further, 
the economic costs necessary to comply with the rule for the small 
entities that may be impacted are not significant. Therefore, a 
Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 
U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the 
Code, the notice of proposed rulemaking preceding this final 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 these regulations is Paul J. Carlino of the 
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 by revising paragraphs (i), 
(j)(2)(v) and (k) to read as follows:


Sec.  1.1291-9  Deemed dividend election.

* * * * *
    (i) Election inapplicable to shareholder of a former PFIC or of a 
section 1297(e) PFIC. A shareholder may not make the section 1295 and 
deemed dividend elections if the foreign corporation is a former PFIC 
(as defined in paragraph (j)(2)(iv) of this section) or a section 
1297(e) PFIC (as defined in paragraph (j)(2)(v) of this section) with 
respect to the shareholder. For the rules regarding the election by a 
shareholder of a former PFIC, see Sec.  1.1298-3. For the rules 
regarding the election by a shareholder of a section 1297(e) PFIC, see 
Sec.  1.1297-3.
    (j) * * *
    (2) * * *
    (v) Section 1297(e) PFIC. A foreign corporation is a section 
1297(e) PFIC with respect to a shareholder (as defined in paragraph 
(j)(3) of this section) 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.
    (k) Effective/applicability date. (1) The rules of this section, 
except for paragraph (j)(2)(v) of this section, are applicable as of 
April 1, 1995.
    (2) The rules of paragraph (j)(2)(v) of this section are applicable 
as of December 8, 2005.


Sec.  1.1291-9T  [Removed]

0
Par. 3. Section 1.1291-9T is removed.

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


Sec.  1.1297-0  Table of contents.

    This section contains a listing of the 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.

    (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 purging 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.
    (5) Multiple late elections.
    (f) Effective/applicability date.


Sec.  1.1297-0T  [Removed]

0
Par. 5. Section 1.1297-0T is removed.

0
Par. 6. 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.

    (a) In general. A shareholder (as defined in Sec.  1.1291-9(j)(3)) 
of a foreign corporation that is a section 1297(e) passive foreign 
investment company (PFIC) (as defined in Sec.  1.1291-9(j)(2)(v)) with 
respect to such shareholder, shall be treated for tax purposes as 
holding stock in a PFIC and therefore continues to be subject to 
taxation under section 1291 unless the shareholder makes a purging 
election under section 1298(b)(1). A purging election under section 
1298(b)(1) is made under rules similar to the rules of section 
1291(d)(2). Section 1291(d)(2) allows a shareholder to purge the 
continuing PFIC taint by either making a deemed sale election or a 
deemed dividend election.
    (b) Application of deemed sale election rules--(1) Eligibility to 
make the deemed sale election. A shareholder

[[Page 54822]]

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 controlled foreign corporation (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 Internal 
Revenue Code (Code) and regulations of a shareholder of the stock of 
the PFIC, the adjusted basis of the direct owner of the stock of the 
PFIC is increased by the amount of gain recognized on the deemed sale. 
A shareholder shall not adjust the basis of any stock with respect to 
which the shareholder realized a loss on the deemed sale, which loss is 
not recognized under paragraph (b)(2) of this section.
    (6) Treatment of holding period. If a shareholder of a foreign 
corporation has made a deemed sale election, then, for purposes of 
applying sections 1291 through 1298 to such shareholder after the 
deemed sale, the shareholder's holding period in the stock of the 
foreign corporation begins on the CFC qualification date, without 
regard to whether the shareholder recognized gain on the deemed sale. 
For other purposes of the Code and regulations, this holding period 
rule does not apply.
    (c) Application of deemed dividend election rules--(1) Eligibility 
to make the deemed dividend election. A shareholder of a foreign 
corporation that is a section 1297(e) PFIC with respect to such 
shareholder may make the deemed dividend election under the rules of 
this paragraph (c). A deemed dividend election may be made by a 
shareholder whose pro rata share of the post-1986 earnings and profits 
of the PFIC attributable to the PFIC stock held on the CFC 
qualification date is zero.
    (2) Effect of the deemed dividend election. A shareholder making 
the deemed dividend election with respect to a section 1297(e) PFIC 
shall include in income as a dividend its pro rata share of the post-
1986 earnings and profits of the PFIC attributable to all of the stock 
it held, directly or indirectly on the CFC qualification date, as 
defined in paragraph (d) of this section. The deemed dividend is taxed 
under section 1291 as an excess distribution received on the CFC 
qualification date. The excess distribution determined under this 
paragraph (c) is allocated under section 1291(a)(1)(A) only to each day 
of the shareholder's holding period of the stock during which the 
foreign corporation qualified as a PFIC. For purposes of the preceding 
sentence, the shareholder's holding period of the PFIC stock ends on 
the day before the CFC qualification date. After the deemed dividend 
election, the shareholder's stock with respect to which the election 
was made under this paragraph (c) shall not be treated as stock in a 
PFIC and the shareholder shall not be subject to taxation under section 
1291 with respect to such stock unless the qualified portion of the 
shareholder's holding period ends, as determined under section 
1297(e)(2), and the foreign corporation thereafter qualifies as a PFIC 
under section 1297(a).
    (3) Post-1986 earnings and profits defined--(i) In general--(A) 
General rule. For purposes of this section, the term post-1986 earnings 
and profits means the post-1986 undistributed earnings, within the 
meaning of section 902(c)(1) (determined without regard to section 
902(c)(3)), as of the day before the CFC qualification date, that were 
accumulated and not distributed in taxable years of the PFIC beginning 
after 1986 and during which it was a PFIC, without regard to whether 
the earnings related to a period during which the PFIC was a CFC.
    (B) Special rule. If the CFC qualification date is a day that is 
after the first day of the taxable year, the term post-1986 earnings 
and profits means the post-1986 undistributed earnings, within the 
meaning of section 902(c)(1) (determined without regard to section 
902(c)(3)), as of the close of the taxable year that includes the CFC 
qualification date. For purposes of this computation, only earnings and 
profits accumulated in taxable years during which the foreign 
corporation was a PFIC shall be taken into account, but without regard 
to whether the earnings related to a period during which the PFIC was a 
CFC.
    (ii) Pro rata share of post-1986 earnings and profits attributable 
to shareholder's stock--(A) In general. A shareholder's pro rata share 
of the post-1986 earnings and profits of the PFIC

[[Page 54823]]

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 purging 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)(3) 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 
(IRS) raises upon audit the PFIC status of the foreign corporation for 
any taxable year of the shareholder;
    (ii) The shareholder has agreed in a closing agreement with the 
Commissioner, described in paragraph (e)(3) of this section, to 
eliminate any prejudice to the interests of the U.S. government, as 
determined under paragraph (e)(2) of this section, as a consequence of 
the shareholder's inability to file amended returns for its taxable 
year in which the CFC qualification date falls or an earlier closed 
taxable year in which the shareholder has taken a position that is 
inconsistent with the treatment of the foreign corporation as a PFIC; 
and
    (iii) The shareholder satisfies the procedural requirements set 
forth in paragraph (e)(3) of this section.
    (2) Prejudice to the interests of the U.S. government. The 
interests of the U.S. government are prejudiced if granting relief 
would result in the shareholder having a lower tax liability (other 
than by a de minimis amount), taking into account applicable interest 
charges, for the taxable year that includes the CFC qualification date 
(or a prior taxable year in which the taxpayer took a position on a 
return that was inconsistent with the treatment of the foreign 
corporation as a PFIC) than the shareholder would have had if the 
shareholder had properly made the section 1298(b)(1) election in the 
time prescribed in paragraph (b)(2) or (c)(3) of this section (or had 
not taken a

[[Page 54824]]

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, pursuant to section 
6601, 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.
    (5) Multiple late elections--(i) General rule. A shareholder of a 
foreign corporation may make multiple late purging elections under the 
rules of this paragraph (e) or Sec.  1.1298-3(e) to the same extent 
such multiple purging elections could have been made if those purging 
elections had been filed within the time prescribed under paragraph 
(b)(3) or (c)(4) of this section or Sec.  1.1298-3(b)(3) or (c)(4).
    (ii) Example. The rule of this paragraph (e)(5) is illustrated by 
the following example:

    Example. (i) In 1991, X, a U.S. person, acquired a five percent 
interest in the stock of FC, a controlled foreign corporation, as 
defined in section 957(a). In years 1991, 1992, 1995, 1996 and 1997, 
FC satisfied either the income test or the asset test of section 
1297(a). X did not make a QEF election with regard to FC. In years 
1993 and 1994, FC did not satisfy either the income or the asset 
test of section 1291(a). In 1998, X acquired additional stock in FC 
such that X was a U.S. shareholder (as defined in section 951(b)) of 
FC.
    (ii) Because FC qualified as a PFIC in 1991, FC will be treated 
as a PFIC with respect to all of the stock held by X, under the 
``once a PFIC always a PFIC'' rule of section 1298(b)(1), unless X 
makes an election to purge the PFIC taint. Because X ceased to 
satisfy either the income or asset test in 1993, X could have made 
an election under Sec.  1.1298-3 to purge the PFIC taint of FC for 
that year if X had filed such an election within the time prescribed 
under Sec.  1.1298-3(b)(3) or (c)(4). If X had done so, the stock X 
held in FC would not be treated as stock in a PFIC for the years 
1993 and 1994. Because X became a U.S. shareholder of FC in 1998, X 
then could have made a deemed sale or deemed dividend election under 
this section to purge the PFIC taint of FC for the years 1995 
through 1997 if X had filed within the time prescribed under 
paragraph (b)(3) or (c)(4) of this section. Accordingly, X may make 
a late purging election to purge the PFIC taint of FC for the years 
1991 and 1992 under the rules of Sec.  1.1298-3(e) and may also make 
a late purging election to purge the PFIC taint of FC for the years 
1995 through 1997 under the rules of this paragraph (e).

    (f) Effective/applicability date. The rules of this section are 
applicable as of December 8, 2005.


Sec.  1.1297-3T  [Removed]

0
Par. 7. Section 1.1297-3T is removed.
0
Par. 8. Section 1.1298-0 is revised 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 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) Termination date.
    (e) Late purging 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.
    (5) Multiple late elections.
    (f) Effective/applicability date.


Sec.  1.1298-0T  [Removed]

0
Par. 9. Section 1.1298-0T is removed.

0
Par. 10. Section 1.1298-3 is amended by revising paragraphs (e) and (f) 
to read as follows:


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

* * * * *
    (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)(3) 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

[[Page 54825]]

(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 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, pursuant to section 
6601, determined for the period beginning on the due date (without 
extensions) for the taxpayer's income tax return for the year in which 
the termination 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.
    (5) Multiple late elections. For rules regarding the circumstances 
under which a shareholder of a foreign corporation may make multiple 
late purging elections under this paragraph (e) or Sec.  1.1297-3(e), 
see Sec.  1.1297-3(e)(5).
    (f) Effective/applicability date. The rules of this section are 
applicable as of December 8, 2005.


Sec.  1.1298-3T  [Removed]

0
Par. 11. Section 1.1298-3T is removed.

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

0
Par. 12. The authority citation of part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


0
Par. 13. In Sec.  602.101, paragraph (b) is amended by removing the 
entry for ``1.1297-3T'' from the table.

Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.

    Approved: September 17, 2007.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E7-18988 Filed 9-26-07; 8:45 am]
BILLING CODE 4830-01-P