Definitions and Reporting Requirements for Shareholders of Passive Foreign Investment Companies, 95459-95470 [2016-30712]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 81, Number 249 (Wednesday, December 28, 2016)]
[Rules and Regulations]
[Pages 95459-95470]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30712]



[[Page 95459]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9806]
RIN 1545-BK66


Definitions and Reporting Requirements for Shareholders of 
Passive Foreign Investment Companies

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 guidance 
on determining ownership of a passive foreign investment company (PFIC) 
and on certain annual reporting requirements for shareholders of PFICs 
to file Form 8621, ``Information Return by a Shareholder of a Passive 
Foreign Investment Company or Qualified Electing Fund.'' In addition, 
the final regulations provide guidance on an exception to the 
requirement for certain shareholders of foreign corporations to file 
Form 5471, ``Information Return of U.S. Persons with Respect to Certain 
Foreign Corporations.'' The regulations finalize proposed regulations 
and withdraw temporary regulations published on December 31, 2013. The 
final regulations affect United States persons that own interests in 
PFICs, and certain United States shareholders of foreign corporations.

DATES: Effective Date: These regulations are effective on December 28, 
2016.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.1291-1(j)(3), 1.1291-9(k)(3), 1.1298-1(h), 1.6038-2(m), and 1.6046-
1(l)(3).

FOR FURTHER INFORMATION CONTACT: Jeffery G. Mitchell at (202) 317-6934 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On December 31, 2013, the Treasury Department and the IRS published 
final and temporary regulations (2013 temporary regulations) under 
sections 1291, 1298, 6038, and 6046 (T.D. 9650) in the Federal Register 
(78 FR 79602, as corrected at 79 FR 26836). On the same date, the 
Treasury Department and the IRS published a notice of proposed 
rulemaking (REG-140974-11) in the Federal Register (78 FR 79650, as 
corrected at 79 FR 27230) cross-referencing the 2013 temporary 
regulations (2013 proposed regulations). No public hearing was 
requested or held. Written comments were received, and are available at 
www.regulations.gov or upon request.
    On April 28, 2014, the Treasury Department and the IRS issued 
Notice 2014-28 (2014-18 I.R.B. 990), which announced that the 
regulations under section 1291 would provide that a United States 
person that owns stock of a PFIC through a tax-exempt organization or 
account is not treated as a shareholder of the PFIC with respect to the 
stock. In addition, on September 29, 2014, the Treasury Department and 
the IRS issued Notice 2014-51 (2014-40 I.R.B. 594), which announced 
that the regulations under section 1298 would provide guidance 
concerning United States persons that own stock in a PFIC that is 
marked to market under a provision of chapter 1 of the Code other than 
section 1296.
    This Treasury decision adopts the 2013 proposed regulations with 
the changes described below as final regulations, including 
implementing the rules described in Notice 2014-28 and Notice 2014-51, 
and removes the corresponding 2013 temporary regulations.

Summary of Comments and Explanation of Revisions

    The final regulations retain the basic approach and structure of 
the 2013 temporary regulations, with certain revisions. This Summary of 
Comments and Explanation of Revisions section discusses those revisions 
as well as comments received in response to the solicitation of 
comments in the notice of proposed rulemaking accompanying the 2013 
temporary regulations. Several comments were received that did not 
pertain to the rules in the 2013 temporary regulations. These comments 
are beyond the scope of this rulemaking and are not addressed in this 
preamble. The Treasury Department and the IRS will consider these 
comments in connection with any future guidance projects addressing the 
issues discussed in the comments.

A. Definition of Shareholder and Indirect Shareholder in Sec.  1.1291-
1(b)(7) and (8)

1. Revision to Definition of Shareholder Announced in Notice 2014-28
    As described in Notice 2014-28, the application of the PFIC rules 
to a United States person treated as owning stock of a PFIC through a 
tax-exempt organization or account described in Sec.  1.1298-1(c)(1) 
would be inconsistent with the tax policies underlying the PFIC rules 
and the treatment of tax-exempt organizations and accounts. For 
example, applying the PFIC rules to a United States person that owns 
stock of a PFIC through an individual retirement account (IRA) 
described in section 408(a) would be inconsistent with the principle of 
deferred taxation provided by IRAs. Notice 2014-28 provides that the 
regulations incorporating the guidance described in the notice will be 
effective for taxable years of United States persons that own stock of 
a PFIC through a tax-exempt organization or account ending on or after 
December 31, 2013.
    The final regulations modify the definition of shareholder in Sec.  
1.1291-1 as announced in Notice 2014-28. Under new Sec.  1.1291-
1(e)(2), a United States person is not treated as a shareholder of a 
PFIC to the extent the person owns PFIC stock through a tax-exempt 
organization or account described in Sec.  1.1298-1(c)(1).
2. Indirect Shareholder as a Result of Attribution Through a Domestic 
Corporation
a. 1992 Proposed Regulations
    On April 1, 1992 (57 FR 11024) the Treasury Department and the IRS 
issued proposed regulations (1992 proposed regulations) that, among 
other things, included rules for determining when a United States 
person is treated as indirectly owning stock of a PFIC. Consistent with 
section 1298(a)(2)(A), Sec.  1.1291-1(b)(8)(ii)(A) of the 1992 proposed 
regulations provided that a United States person who directly or 
indirectly owns 50 percent or more in value of the stock of a foreign 
corporation that is not a PFIC is considered to own a proportionate 
amount (by value) of any stock (including PFIC stock) owned directly or 
indirectly by the foreign corporation. Thus, for example, if a United 
States person owned 100 percent of the shares of FC, a foreign 
corporation that is not a PFIC but that owns 50 shares of a PFIC, the 
United States person would be treated as indirectly owning the 50 PFIC 
shares under Sec.  1.1291-1(b)(8)(ii)(A) of the 1992 proposed 
regulations.
    By contrast, section 1298(a)(1)(B) provides that PFIC stock owned 
by a domestic corporation (which generally would be treated as a PFIC 
shareholder itself) is not attributed to any other person, except to 
the extent provided in regulations. Pursuant to this grant of 
regulatory authority, Sec.  1.1291-1(b)(8)(ii)(C) of the 1992 proposed 
regulations provided that, if stock of a section 1291 fund was not 
treated as owned indirectly by a United States person under the other 
attribution rules provided in the proposed regulations,

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but would be treated as owned by a United States person if the 
ownership rule of Sec.  1.1291-1(b)(8)(ii)(A) of the 1992 proposed 
regulations applied to domestic corporations (in addition to foreign 
corporations), then the stock of the section 1291 fund would be 
considered as owned by such United States person.
    Both Sec.  1.1291-1(b)(8)(ii)(A) and (C) of the 1992 proposed 
regulations were withdrawn and reissued under the 2013 temporary 
regulations as Sec.  1.1291-1T(b)(8)(ii)(A) and (C), respectively.
b. Intended Scope of Sec.  1.1291-1T(b)(8)(ii)(C)
    The purpose of Sec.  1.1291-1(b)(8)(ii)(C) of the 1992 proposed 
regulations and Sec.  1.1291-1T(b)(8)(ii)(C), as explained in the 
preamble to the 1992 proposed regulations, was to attribute stock 
through a domestic C corporation in certain circumstances if, absent 
such attribution, the stock of a PFIC would not be treated as owned by 
any United States person. In particular, because Sec.  1.1291-
1T(b)(8)(ii)(A) provides that a United States person who directly or 
indirectly owns 50 percent or more in value of the stock of a foreign 
corporation that is not a PFIC is considered to own a proportionate 
amount (by value) of any stock owned directly or indirectly by the 
foreign corporation, without Sec.  1.1291-1T(b)(8)(ii)(C), a United 
States person could interpose a domestic C corporation into an 
ownership structure to avoid shareholder status with respect to stock 
of a PFIC that the United States person indirectly owned through one or 
more foreign corporations that were not PFICs. In other words, Sec.  
1.1291-1T(b)(8)(ii)(C) provides guidance as to when a United States 
person is treated as indirectly owning stock of a foreign corporation 
through a domestic corporation for purposes of Sec.  1.1291-
1T(b)(8)(ii)(A).
    For example, assume that A, a United States person, owns 49 percent 
of the stock of FC1, a foreign corporation that is not a PFIC, and 
separately all the stock of DC, a domestic corporation that is not an S 
corporation. DC, in turn, owns the remaining 51 percent of the stock of 
FC1, and FC1 owns 100 shares of stock in a PFIC (which is not a 
controlled foreign corporation within the meaning of section 957(a)). 
DC is an indirect shareholder with respect to 51 percent of the PFIC 
stock held by FC1 under Sec.  1.1291-1T(b)(8)(ii)(A). Absent the 
application of Sec.  1.1291-1T(b)(8)(ii)(C), because A directly or 
indirectly owns less than 50 percent of the value of the stock of FC1 
and thus Sec.  1.1291-1T(b)(8)(ii)(A) does not apply, A would not be 
treated as an indirect shareholder with respect to any of the PFIC 
stock directly owned by FC1 when, from an economic perspective, A 
indirectly owns all the PFIC stock held by FC1. Therefore, without a 
rule treating A as owning DC's stock in FC1, the remaining 49 percent 
of the PFIC stock held by FC1 would not be treated as owned by any 
United States person.
    On the other hand, the literal language of Sec.  1.1291-
1T(b)(8)(ii)(C) could have been interpreted to create overlapping 
ownership by two or more United States persons in the same stock of a 
section 1291 fund. Thus, in the foregoing example, A may have been 
considered as owning 100 percent of the stock of FC1, and therefore as 
indirectly owning all 100 shares of the PFIC stock held by FC1, even 
though 51 of those shares are considered indirectly owned by DC, a 
United States person. This outcome is inconsistent with the intended 
purpose of the rule to attribute stock through a domestic C corporation 
in certain circumstances if, absent such attribution, the stock of a 
PFIC would not be treated as owned by any United States person.
c. Revisions to 2013 Temporary Regulations
    To address this concern, the final regulations include a non-
duplication rule. Specifically, the final regulations provide under 
Sec.  1.1291-1(b)(8)(ii)(C)(1) that, solely for purposes of determining 
whether a person owns 50 percent or more in value of the stock of a 
foreign corporation that is not a PFIC under Sec.  1.1291-
1(b)(8)(ii)(A), a person who directly or indirectly owns 50 percent or 
more in value of the stock of a domestic corporation is considered to 
own a proportionate amount (by value) of any stock owned directly or 
indirectly by the domestic corporation. However, the non-duplication 
rule in Sec.  1.1291-1(b)(8)(ii)(C)(2) states that a United States 
person will not be treated, as a result of applying Sec.  1.1291-
1(b)(8)(ii)(C)(1), as owning (other than for purposes of determining 
whether a person satisfies the ownership threshold of Sec.  1.1291-
1(b)(8)(ii)(A)) stock of a PFIC that is directly owned or considered 
owned indirectly under Sec.  1.1291-1(b)(8) by another United States 
person (determined without regard to Sec.  1.1291-1(b)(8)(ii)(C)(1)).
    Applying the non-duplication rule to the example above, to the 
extent that the 51 shares of PFIC stock are indirectly owned by DC (a 
United States person) under Sec.  1.1291-1(b)(8)(ii)(A), those shares 
are not also treated as indirectly owned by A (other than for purposes 
of determining whether A satisfies the ownership threshold of Sec.  
1.1291-1(b)(8)(ii)(A)). Only the remaining 49 shares of PFIC stock are 
considered to be indirectly owned by A.
d. Additional Revisions to 2013 Temporary Regulations
    Lastly, the final regulations make two additional clarifications 
with respect to this rule. First, the final regulations clarify, under 
Sec.  1.1291-1(b)(8)(ii)(C)(3), that the ownership rule of Sec.  
1.1291-1(b)(8)(ii)(C)(1) does not apply to stock owned directly or 
indirectly by an S corporation; rather, the indirect ownership rule 
under Sec.  1.1291-1(b)(8)(iii)(B) applies in those instances. Second, 
the final regulations clarify that the attribution rule in Sec.  
1.1291-1(b)(8)(ii)(C) applies to all PFICs and not only section 1291 
funds, in order to ensure that United States persons who are treated as 
indirect shareholders of PFICs are permitted to make qualified electing 
fund elections under section 1295.

B. Exceptions to Section 1298(f) Reporting

    A number of comments requested that the final regulations expand 
the exceptions to section 1298(f) reporting provided in the 2013 
temporary regulations or add new exceptions.
1. Exception for PFIC Stock That Is Marked To Market Under a Non-
Section 1296 MTM Provision Announced in Notice 2014-51
    Two comments requested an exception to section 1298(f) reporting 
for PFIC stock that is marked to market under a provision of chapter 1 
of the Code other than section 1296 (a non-section 1296 MTM provision), 
such as section 475(f). In response to these comments, the Treasury 
Department and the IRS issued Notice 2014-51, which announced that the 
regulations under section 1298 would be amended to provide that United 
States persons that own stock in a PFIC that is marked to market under 
a non-section 1296 MTM regime generally are not subject to section 
1298(f) reporting. In addition, the notice states that the regulations 
would provide that a shareholder's PFIC stock that is marked to market 
under a non-section 1296 MTM provision is not taken into account in 
determining whether the shareholder qualifies for the exceptions from 
reporting set forth in Sec.  1.1298-1T(c)(2)(i)(A)(1) or (c)(2)(iii), 
which generally exempt certain shareholders from certain section 
1298(f) reporting requirements when their aggregate PFIC holdings do 
not exceed $25,000 (or, $50,000 in the case of a shareholder that files 
a joint return).

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Notice 2014-51 states that the regulations that incorporate the 
guidance described in the notice would be effective for taxable years 
of shareholders ending on or after December 31, 2013.
    The final regulations, in accordance with Notice 2014-51, add Sec.  
1.1298-1(c)(3), which provides that United States persons that own PFIC 
stock that is marked to market under a non-section 1296 MTM provision 
are not subject to section 1298(f) reporting unless they are subject to 
section 1291 under the coordination rule in Sec.  1.1291-1(c)(4)(ii). 
Generally, under Sec.  1.1291-1(c)(4)(ii), when a United States 
person's PFIC stock is marked to market under a non-section 1296 MTM 
provision in a taxable year after the year in which the United States 
person acquired the stock, the United States person is subject to 
section 1291 for the first taxable year in which the United States 
person marks to market the PFIC stock. Thus, the United States person 
is subject to section 1291 with respect to any unrealized gain in the 
stock as of the last day of the first taxable year in which the stock 
is marked to market, as if the person disposed of the stock on that 
day. See Sec.  1.1291-1(c)(4)(ii) and Sec.  1.1296-1(i)(2) and (3).
    Also consistent with Notice 2014-51, the final regulations add 
Sec.  1.1298-1(c)(2)(ii)(C), pursuant to which a United States person's 
PFIC stock that is marked to market under a non-section 1296 MTM 
provision is not taken into account in determining whether the person 
qualifies for the exceptions from section 1298(f) reporting set forth 
in Sec.  1.1298-1(c)(2)(i)(A)(1) or (c)(2)(iii), provided that the 
rules of Sec.  1.1296-1(i)(2) and (3) do not apply with respect to the 
PFIC stock pursuant to Sec.  1.1291-1(c)(4)(ii) for the taxable year. 
See Section B.7 of this preamble for a description of these exceptions.
2. Exception for Certain Domestic Partnerships
    A comment requested that the final regulations add a new exception 
from the section 1298(f) filing requirements for domestic partnerships 
in which all of the partners are tax-exempt organizations (or other 
partnerships, all of the partners of which are tax-exempt 
organizations) that are not subject to the PFIC rules with respect to a 
PFIC held by the partnership because any income derived with respect to 
the PFIC would not be taxable to the tax-exempt partners under 
subchapter F of Subtitle A of the Code. The comment pointed out that a 
tax-exempt organization is subject to section 1298(f) reporting with 
respect to PFIC stock under Sec.  1.1298-1(c)(1) only if the income 
derived by the organization with respect to the PFIC stock would be 
taxable to the organization under subchapter F of Subtitle A of the 
Code. However, under the 2013 temporary regulations, a domestic 
partnership (such as a domestic partnership that exclusively pools the 
funds of tax-exempt organizations to invest in PFICs) is required to 
file a Form 8621 with respect to PFIC stock even when none of its 
partners are subject to the PFIC rules with respect to the PFIC stock.
    Requiring reporting under section 1298(f) by a domestic partnership 
when none of its direct and indirect owners are subject to the PFIC 
rules may result in undue compliance costs and burdens. Accordingly, 
consistent with the exception in Sec.  1.1298-1(c)(1), the final 
regulations adopt and expand upon this comment and provide a final rule 
in Sec.  1.1298-1(c)(6) that exempts a domestic partnership from 
section 1298(f) reporting with respect to an interest in a PFIC for a 
taxable year when none of its direct or indirect partners are required 
to file Form 8621 (or successor form) with respect to the PFIC interest 
under section 1298(f) and these regulations because the partners are 
not subject to the PFIC rules.
    Thus, for example, if all the partners of a domestic partnership 
are tax-exempt organizations exempt from PFIC taxation under Sec.  
1.1291-1(e) with respect to PFIC stock held by the partnership, and 
accordingly are exempt from reporting pursuant to Sec.  1.1298-1(c)(1), 
the partnership, in turn, is exempt from filing Form 8621 under section 
1298(f) with respect to the PFIC stock held by the partnership. 
Likewise, if all the partners of a domestic partnership are foreign 
corporations that are not considered to be shareholders under Sec.  
1.1291-1(b)(7) of PFIC stock held by the partnership, and no United 
States person is an indirect shareholder of the PFIC stock under Sec.  
1.1291-1(b)(8), the partnership, in turn, is exempt from filing Form 
8621 under section 1298(f) with respect to the PFIC stock held by the 
partnership.
    In contrast, a domestic partnership is not exempt from filing Form 
8621 under Sec.  1.1298-1(c)(6) with respect to stock it holds in a 
section 1291 fund when some or all of its partners are exempt from 
filing Form 8621 with respect to that stock but otherwise would be 
subject to tax on distributions on, or dispositions of, that stock. 
PFIC information reporting by the domestic partnership in these 
circumstances is appropriate because it furthers PFIC tax compliance 
and enforcement.
3. Exception for PFIC Stock Held Through Certain Foreign Pension Funds 
That Are Covered by a U.S. Income Tax Treaty
    In general, Sec.  1.1298-1T(b)(3)(ii) exempts a United States 
person from section 1298(f) reporting with respect to PFIC stock that 
is owned by the United States person through a foreign trust that is a 
foreign pension fund operated principally to provide pension or 
retirement benefits, when, pursuant to the provisions of a U.S. income 
tax treaty, the income earned by the pension fund may be taxed as the 
income of the United States person only when, and to the extent, the 
income is paid to, or for the benefit of, the United States person.
    As a threshold matter, this rule applies only when the United 
States person owns the PFIC through a foreign pension fund that is 
treated as a foreign trust under section 7701(a)(31)(B). However, the 
applicable provisions of U.S. income tax treaties apply generally to 
foreign pension funds, regardless of whether the foreign pension fund 
is treated as a trust for U.S. income tax purposes.
    The Treasury Department and the IRS have concluded that the treaty-
based exception in Sec.  1.1298-1T(b)(3)(ii) should be expanded to 
apply to PFICs held by United States persons through all applicable 
foreign pension funds (or equivalents, such as exempt pension trusts or 
pension schemes referred to in certain U.S. income tax treaties), 
regardless of their entity classification for U.S. income tax purposes. 
Accordingly, the final regulations revise the treaty-based exception 
for PFIC stock held by a United States person through certain foreign 
pension funds under Sec.  1.1298-1T(b)(3)(ii) to eliminate the 
requirement that the foreign pension fund be treated as a foreign trust 
under section 7701(a)(31)(B). The final rule, which is renumbered Sec.  
1.1298-1(c)(4), clarifies that a foreign pension fund (or equivalent) 
covered by this exception may be any type of arrangement, including but 
not limited to one of the arrangements listed in Sec.  1.1298-1(c)(4). 
The final rule also applies in the case of an income tax treaty that 
provides the relevant benefit by election (or other procedure), such as 
under paragraph 7 of Article 18 of the U.S.-Canada income tax treaty, 
to the extent that the election is in effect (or other procedure 
properly satisfied).
4. Exception for Dual Resident Taxpayers
    A comment requested that an exception from the section 1298(f) 
filing

[[Page 95462]]

requirements be added for dual resident taxpayers who are treated as 
residents of another country (treaty country) pursuant to an income tax 
treaty between the United States and the treaty country. In general, a 
``dual resident taxpayer'' is an individual who is considered a 
resident of the United States under the Code, and is also considered a 
resident of a treaty country under the treaty country's internal laws. 
Sec.  301.7701(b)-7(a)(1). Certain U.S. income tax treaties contain 
provisions that resolve the conflicting claims of residence by both 
countries (tie-breaker rules), pursuant to which dual resident 
taxpayers are treated as residents of only one country for purposes of 
income taxation. A dual resident taxpayer may claim the benefit of 
treatment as a resident of a treaty country for U.S. income tax 
purposes under a tie-breaker rule of an applicable treaty provision by 
timely filing Form 8833, ``Treaty-Based Return Position Disclosure 
Under Section 6114 or 7701(b),'' with an appropriate income tax return, 
such as Form 1040NR, ``U.S. Nonresident Alien Income Tax Return.'' 
Sec.  301.7701(b)-7(b) and (c). A dual resident taxpayer who properly 
claims this benefit is taxed as a nonresident alien (as defined in 
section 7701(b)(1)(B)) for U.S. income tax purposes.
    Nonresident aliens are not subject to tax under the PFIC provisions 
(sections 1291 through 1298) because the PFIC rules apply only to 
``United States persons,'' and nonresident aliens are not United States 
persons within the meaning of section 7701(a)(30). However, dual 
resident taxpayers treated as residents of a treaty country for U.S. 
income tax purposes generally are treated as United States residents 
under the Code for purposes other than the computation of their income 
tax liability. Sec.  301.7701(b)-7(a)(3). Accordingly, dual resident 
taxpayers who are treated as residents of a treaty country under a tie-
breaker rule and who own PFICs are subject to the section 1298(f) 
reporting rules set forth in the 2013 temporary regulations even though 
they are not subject to tax under the PFIC provisions.
    The requirement to file Form 8621 under section 1298(f) increases 
taxpayer awareness of, and compliance with, the PFIC rules. However, 
because dual resident taxpayers treated as nonresident aliens for 
purposes of computing their U.S. tax liability are not subject to tax 
under the PFIC rules, section 1298(f) reporting by these dual resident 
taxpayers is not essential to the enforcement of the PFIC provisions. 
Thus, the Treasury Department and the IRS have determined that it is 
appropriate to provide an exception from the section 1298(f) reporting 
rules for dual resident taxpayers who are treated as residents of a 
treaty country, and, accordingly, not subject to tax under the PFIC 
provisions.
    Accordingly, the final regulations add Sec.  1.1298-1(c)(5), which 
sets forth an exception from section 1298(f) reporting for a dual 
resident taxpayer for a taxable year, or the portion of a taxable year, 
during which the dual resident taxpayer determines any U.S. income tax 
liability as a nonresident alien under Sec.  301.7701(b)-7, and 
complies with the filing requirements of Sec.  301.7701(b)-7(b) and (c) 
and, if applicable, Sec.  1.6012-1(b)(2)(ii)(b) (applicable when the 
dual resident taxpayer is treated as a resident of the treaty country 
on the last day of the taxable year), or Sec.  1.6012-1(b)(2)(ii)(a) 
(applicable when the dual resident taxpayer is treated as a resident of 
the United States on the last day of the taxable year). This new 
section 1298(f) reporting exception is consistent with Sec.  1.6038D-
2(e), which generally exempts a dual resident taxpayer who is taxed as 
a nonresident alien from section 6038D reporting for a taxable year, or 
the portion of a taxable year, during which the taxpayer is treated as 
a nonresident alien and properly files Form 8833.
5. Exception for Certain PFIC Stock Held for a Period of 30 Days or 
Less
    Under the 2013 temporary regulations, a shareholder who owns stock 
in a section 1291 fund for only a short period of time during a year, 
and does not recognize an excess distribution (or gain treated as an 
excess distribution) with respect to the section 1291 fund during the 
year may still have a filing obligation under section 1298(f). Assume, 
for example, that during a shareholder's taxable year, its section 1291 
fund (upper-tier PFIC) acquires all of the stock of another section 
1291 fund (lower-tier PFIC), which is liquidated into the upper-tier 
PFIC a few days after it is acquired. The lower-tier PFIC does not make 
any distributions to the upper-tier PFIC before the liquidation, and 
the upper-tier PFIC does not recognize any gain upon the liquidation of 
the lower-tier PFIC. On the last day of its taxable year, the 
shareholder owns PFIC stock with a value of more than $25,000, and thus 
the exception in Sec.  1.1298-1T(c)(2) is not applicable. (See Section 
B.7 of this preamble for an explanation of the reporting exception in 
Sec.  1.1298-1T(c)(2).) Accordingly, under the 2013 temporary 
regulations, the shareholder is required to report its ownership in the 
lower-tier PFIC, even though it only owned the PFIC for a few days 
during the year and did not recognize any income with respect to the 
PFIC.
    The Treasury Department and the IRS have concluded that compliance 
with, and enforcement of, the PFIC regime would not be adversely 
impacted by allowing a reporting exception for transitory ownership of 
section 1291 funds when there is no taxation under section 1291 with 
respect to the short period of ownership. Thus, the final regulations 
provide an exception for section 1298(f) reporting for certain 
shareholders with respect to PFICs that were owned for a short period 
of time during which no PFIC taxation was imposed on the shareholders. 
Specifically, under Sec.  1.1298-1(c)(7), a shareholder is not required 
to file a Form 8621 under section 1298(f) with respect to stock of a 
section 1291 fund that it acquired either during its taxable year or 
the immediately preceding year, when the shareholder (i) does not own 
any stock of the section 1291 fund for more than 30 days during the 
period beginning 29 days before the first day of the shareholder's 
taxable year and ending 29 days after the close of the shareholder's 
taxable year and (ii) did not receive an excess distribution (including 
gain treated as an excess distribution) with respect to the section 
1291 fund.
6. Exception for Certain Bona Fide Residents of U.S. Territories
    A bona fide resident (within the meaning of section 937(a)) of a 
possession of the United States (U.S. territories) (namely, American 
Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the United 
States Virgin Islands) may include an individual who is also a United 
States person, and thus the bona fide resident may be a shareholder of 
a PFIC.
    Under the 2013 temporary regulations, the general section 1298(f) 
reporting requirements in Sec.  1.1298-1T(b)(1) apply regardless of 
whether a shareholder is required to file a U.S. income tax return. As 
a result, under the 2013 temporary regulations, bona fide residents of 
U.S. territories who were shareholders of PFICs were subject to the 
section 1298(f) filing requirements set forth in the 2013 temporary 
regulations even when they were not required to file a U.S. income tax 
return. As described in greater detail in this Section B.6, the final 
regulations change this result for bona fide residents of Guam, the 
Northern Mariana Islands, and the United States Virgin Islands and, as 
provided in Sec.  1.1298-1(h)(1), the final regulations apply to 
taxable years

[[Page 95463]]

ending on or after the issuance of the 2013 temporary regulations.
    Three of the five U.S. territories (Guam, the Northern Mariana 
Islands, and the United States Virgin Islands) have a mirror code 
system of taxation, which means that their income tax laws generally 
are identical to the Code (except for the substitution of the name of 
the relevant territory for the term ``United States,'' where 
appropriate). Bona fide residents of U.S. territories that are mirror 
code jurisdictions have no income tax obligation (or related filing 
obligation) with the United States provided, generally, that they 
properly report income and fully pay their income tax liability to the 
tax administration of their respective U.S. territory. See sections 932 
and 935. Thus, for example, a bona fide resident of Guam who is a 
shareholder of a PFIC would generally not have a U.S. income tax 
obligation even in a year when the shareholder is treated as receiving 
an excess distribution (or recognizing gain treated as an excess 
distribution) with respect to the PFIC.
    Bona fide residents of non-mirror code jurisdictions (American 
Samoa and Puerto Rico) generally exclude territory-source income from 
U.S. federal gross income under sections 931 and 933, respectively. 
(American Samoa currently is the only territory to which section 931 
applies because it is the only territory that has entered into an 
implementing agreement under sections 1271(b) and 1277(b) of the Tax 
Reform Act of 1986.) However, unlike mirror code jurisdictions, these 
bona fide residents generally are subject to U.S. income taxation, and 
have a related income tax return filing requirement with the United 
States, to the extent they have non-territory-source income or income 
from amounts paid for services performed as an employee of the United 
States or any agency thereof. See sections 931(a) and (d) and 933. 
Further, under the 1992 proposed regulations, certain excess 
distributions (or gains treated as excess distributions) from a PFIC 
would be exempt from taxation with respect to a shareholder who is a 
bona fide resident of Puerto Rico if the amounts distributed were 
derived from sources in Puerto Rico. Section 1.1291-1(f) of the 1992 
proposed regulations. Accordingly, for example, if a bona fide resident 
of Puerto Rico is a shareholder of a PFIC and is treated as receiving 
an excess distribution (or recognizing gain treated as an excess 
distribution) with respect to the PFIC that is from sources outside of 
Puerto Rico, such shareholder would be subject to U.S. income tax under 
the PFIC provisions with respect to such amounts.
    The Treasury Department and the IRS have concluded that relieving 
section 1298(f) reporting for PFIC stock held by an individual who is a 
bona fide resident of a U.S. territory that is a mirror code 
jurisdiction who is not required to file a U.S. income tax return for 
one or more taxable years would not adversely impact tax enforcement 
efforts related to PFICs. This is because such individuals are not 
subject to U.S. income tax in such years, given that they have properly 
reported income and fully paid their income tax liability to the tax 
administration of their respective U.S. territory, and it is unlikely 
such individuals will ever be subject to tax under the PFIC provisions 
in the years they receive excess distributions (or recognize gain 
treated as excess distributions). As a result, these final regulations 
add Sec.  1.1298-1(c)(8) to provide an exception from reporting under 
section 1298(f) for a taxable year in which the individual is a bona 
fide resident of Guam, the Northern Mariana Islands, or the United 
States Virgin Islands and is not required to file a U.S. income tax 
return.
    However, no exception from reporting is provided with respect to 
bona fide residents of Puerto Rico and American Samoa. Bona fide 
residents of Puerto Rico and American Samoa who are not required to 
file U.S. income tax returns in a given year may still be subject to 
tax under the PFIC provisions if they are shareholders of a PFIC and 
receive excess distributions (or recognize gain treated as excess 
distributions) in a later year. Thus, PFIC information reporting by 
these individuals can reasonably be expected to further PFIC tax 
compliance and enforcement.
7. $25,000 and $5,000 Exceptions
    Under Sec.  1.1298-1T(c)(2)(i), a shareholder generally is not 
required to file Form 8621 with respect to a section 1291 fund when the 
shareholder is not treated as receiving an excess distribution (or 
recognizing gain treated as an excess distribution) with respect to the 
section 1291 fund stock, and, as of the last day of the shareholder's 
taxable year, either the value of all PFIC stock considered owned by 
the shareholder is $25,000 (or $50,000 for shareholders that file a 
joint return) or less, or, if the stock of the section 1291 fund is 
owned indirectly, the value of the indirectly owned stock is $5,000 or 
less. Stock in a PFIC that is indirectly owned through another PFIC or 
United States person that is a shareholder of the PFIC is not taken 
into account in determining if the $25,000 (or $50,000 for joint 
returns) threshold is met. Sec.  1.1298-1T(c)(2)(ii).
    A comment generally requested that the reporting exception 
thresholds in Sec.  1.1298-1T(c)(2)(i) be increased for U.S. 
individuals living abroad. The apparent concern underlying the comment 
is the commenter's view that such persons often are not aware of the 
PFIC provisions. The Treasury Department and the IRS have determined 
that adopting an exception to the reporting requirements on this basis 
would adversely affect compliance with, and enforcement of, the PFIC 
provisions, because such individuals remain subject to tax under 
section 1291 regardless of the value of their PFIC stock, and a benefit 
of requiring reporting with respect to a section 1291 fund in a year in 
which a shareholder is not subject to tax under section 1291 is to 
enhance the shareholder's awareness of the PFIC requirements with 
respect to the section 1291 fund. The Treasury Department and the IRS 
proposed the dollar amounts for the reporting exception thresholds in 
the 2013 temporary regulations in order to balance administrative 
burdens with compliance and enforcement concerns. No comments were 
submitted that recommended a specific higher dollar amount or that 
provided a basis, consistent with the purposes of the PFIC provisions, 
for increasing the monetary thresholds. Accordingly, the final 
regulations do not increase the monetary thresholds for these 
exceptions.
    A separate comment requested that the reporting exceptions under 
Sec.  1.1298-1T(c)(2) be expanded to apply when a United States person 
recognizes an excess distribution under section 1291 in a taxable year 
with respect to one or more PFICs, to the extent the PFICs are 
indirectly held through domestic pass-through entities and the total 
excess distribution income from the PFICs in the taxable year is less 
than $1,000, indexed for inflation. The comment explained that many 
United States persons hold indirect interests in section 1291 funds, 
particularly through partnerships, that generate only small amounts of 
excess distribution income, and exempting reporting for these PFIC 
shareholders would simplify PFIC reporting compliance. However, the 
section 1291 rules apply when a PFIC shareholder receives (or is 
treated as receiving) an excess distribution, regardless of the dollar 
amount of the excess distribution. After consideration of this comment, 
the Treasury Department and the IRS concluded that the request should 
not be adopted because of the potential for such a

[[Page 95464]]

reporting exception to reduce compliance with the substantive section 
1291 rules.

C. Manner of Filing Form 8621

1. Filing Form 8621 When a Shareholder Is Not Otherwise Obligated To 
File a Return
    Section 1.1298-1T(d) generally provides that a United States person 
required to file Form 8621 under section 1298(f) with respect to a PFIC 
for a taxable year must attach the form to the person's U.S. income tax 
return (or information return, if applicable) for the relevant taxable 
year. The instructions for Form 8621 further provide that a United 
States person who is required to file Form 8621 for a taxable year in 
which the person does not file an income tax return (or other return) 
must send the Form 8621 to the IRS at a mailing addressed designated in 
the instructions.
    These final regulations clarify how a United States person files a 
Form 8621 (or successor form) when the United States person is not 
otherwise required to file a U.S. income tax return (or information 
return, if applicable). Section 1.1298-1(d) of the final regulations 
states that a United States person that is not otherwise required to 
file a U.S. income tax return must file the Form 8621 (or successor 
form) in accordance with the instructions for the form.
2. Protective Filing Procedure for Form 8621
    A comment requested that the final regulations allow a 
``protective'' Form 8621 to be filed under section 1298(f) with respect 
to a foreign corporation when a shareholder is unsure of its PFIC 
status due to factors beyond the control of the shareholder that 
prevent access to the books and records of the corporation necessary to 
make a PFIC determination. The purpose of the protective filing is to 
defer any potential section 1298(f) filing requirements so that the 
assessment period for the shareholder's entire return under section 
6501(c)(8) would not be suspended if the foreign corporation is 
subsequently determined to have been a PFIC in the year to which the 
protective filing relates. The comment proposed that if the foreign 
corporation subsequently is determined to be a PFIC for a taxable year 
for which the protective filing was made, the shareholder would be 
subject to PFIC taxation in that year, and thus would be required to 
file Form 8621 for that year.
    The failure to file Form 8621 to properly report PFIC information 
under section 1298(f) for a taxable year suspends the period of 
limitation on assessment under section 6501(c)(8)(A) with respect to 
any tax return, event, or period to which the information relates until 
three years after the information is reported. However, if the failure 
to file the information is due to reasonable cause and not willful 
neglect, the period of limitation on assessment under section 
6501(c)(8)(B) is suspended only with respect to items related to such 
failure. The Treasury Department and the IRS have concluded that the 
reasonable cause exception under section 6501(c)(8)(B) provides 
appropriate relief for a failure to file Form 8621. When a taxpayer can 
establish reasonable cause for a failure to file Form 8621, the 
assessment period is suspended only with respect to items related to 
the PFIC that were required to be reported on the Form 8621. Thus, the 
recommendation to add a protective filing rule to the final regulations 
is not adopted.
3. Consolidated Filings for Forms 8621
    Two comments requested that the final regulations allow a United 
States person to file a consolidated Form 8621 that would include all 
of the person's PFICs and relevant information on a supporting schedule 
attached to the Form 8621. One of the comments explained that foreign 
investment partnerships commonly hold multiple PFIC investments, and, 
in such cases, a United States person who is a partner in the foreign 
partnership is required to file multiple Forms 8621 to report each 
underlying PFIC. This comment further noted that at least two commonly 
used commercial tax return preparation products, as of 2012, did not 
allow for electronic filing of a Form 1040 containing more than five 
Forms 8621, which is contrary to the IRS's goal of increasing e-filings 
of tax returns.
    The Treasury Department and the IRS have concluded that the 
expenditures needed to redesign and reprogram the IRS's processing 
system to gather, compile, and cross-reference information from a 
consolidated Form 8621 outweigh the marginal administrative burden for 
United States persons to file a separate Form 8621 with respect to each 
of their PFICs. Accordingly, the final regulations do not adopt the 
comment to permit consolidated filings.

D. Form 5471 Filing Obligations

    The final regulations adopt the 2013 temporary regulations with 
respect to the removal of the requirement under sections 6038 and 6046 
that certain United States persons file a statement in circumstances 
where the United States person qualifies for the constructive ownership 
exception, with certain clarifying changes to the language of the 
regulations.

Effect on Other Documents

    Notice 2014-28, 2014-18 I.R.B. 990, is obsolete as of December 28, 
2016.
    Notice 2014-51, 2014-40 I.R.B. 594, is obsolete as of December 28, 
2016.

Special Analyses

    Certain IRS regulations, including these, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory assessment is not 
required. Pursuant to section 7805(f) of the Code, the notice of 
proposed rulemaking preceding these regulations was submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small businesses.
    It is hereby certified that the collection of information in these 
regulations will not have a significant economic impact on a 
substantial number of small entities within the meaning of section 
601(6) of the Regulatory Flexibility Act (5 U.S.C. chapter 6). This 
certification is based on the fact that most small entities do not own 
an interest in a PFIC. Moreover, those small entities that are 
shareholders of a PFIC generally either make a qualified electing fund 
election under section 1295 or make a mark to market election under 
section 1296 and were therefore required to file Form 8621 with respect 
to the PFIC stock under the rules that preceded the 2013 temporary 
regulations. Thus, there is a limited class of small entities that are 
PFIC shareholders that were required to file Forms 8621 under the 2013 
temporary regulations and that were not required to do so prior to the 
issuance of those regulations. The final regulations, as compared to 
the 2013 temporary regulations, provide additional exceptions that 
exempt certain PFIC shareholders, some of which could include certain 
small entities, from filing Form 8621. Accordingly, the collection of 
information required by these final regulations does not affect a 
substantial number of small entities.
    Further, the collection of information required under these final 
regulations will not have a significant economic impact on a 
substantial number of small entities because neither the time nor the 
costs necessary for shareholders to comply with the collection of 
information requirements is significant. Therefore, a Regulatory 
Flexibility

[[Page 95465]]

Analysis under the Regulatory Flexibility Act is not required.

Drafting Information

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

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding 
entries for Sec. Sec.  1.1291-1, 1.1291-9, and 1.1298-1, Sec.  1.1298-
1, and Sec.  1.6046-1 in numerical order and revising the entry for 
Sec.  1.6038-2 to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Sections 1.1291-1, 1.1291-9, and 1.1298-1 also issued under 26 
U.S.C. 1298(a) and (g).
* * * * *
    Section 1.1298-1 also issued under 26 U.S.C. 1298(f).
* * * * *
    Section 1.6038-2 also issued under 26 U.S.C. 6038(d).
* * * * *
    Section 1.6046-1 also issued 26 U.S.C. 6046(b).
* * * * *


0
Par. 2. Section 1.1291-0 is amended by:
0
1. Revising the heading and entries for Sec.  1.1291-1.
0
2. Revising the entry for Sec.  1.1291-9(k).
    The revisions read as follows:


Sec.  1.1291-0  Treatment of shareholders of certain passive foreign 
investment companies; table of contents.

* * * * *
Sec.  1.1291-1 Taxation of U.S. persons that are shareholders of 
section 1291 funds.

    (a) through (b)(2)(i) [Reserved]
    (ii) Pedigreed QEF.
    (b)(2)(iii) and (iv) [Reserved]
    (v) Section 1291 fund.
    (3) through (6) [Reserved]
    (7) Shareholder.
    (8) Indirect shareholder.
    (i) In general.
    (ii) Ownership through a corporation.
    (A) Ownership through a non-PFIC foreign corporation.
    (B) Ownership through a PFIC.
    (C) Ownership through a domestic corporation.
    (iii) Ownership through pass-through entities.
    (A) Partnerships.
    (B) S Corporations.
    (C) Estates and nongrantor trusts.
    (D) Grantor trusts.
    (iv) Examples.
    (c) Coordination with other PFIC rules.
    (1) and (2) [Reserved]
    (3) Coordination with section 1296: Distributions and 
dispositions.
    (4) Coordination with mark to market rules under chapter 1 of 
the Internal Revenue Code other than section 1296.
    (i) In general.
    (ii) Coordination rule.
    (d) [Reserved]
    (e) Exempt organization as shareholder.
    (1) In general.
    (2) Ownership through certain tax-exempt organizations and 
accounts.
    (f) through (i) [Reserved]
    (j) Applicability dates.


Sec.  1.1291-9  Deemed dividend election.

* * * * *
    (k) Effective/applicability dates.
* * * * *


Sec.  1.1291-0T  [Removed]

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

0
Par. 4. Section 1.1291-1 is amended by:
0
1. Revising the section heading.
0
2. Adding paragraphs (b)(2)(ii) and (v), (b)(7), and (b)(8).
0
3. Revising paragraphs (e)(2) and (j).
    The revisions and additions read as follows:


Sec.  1.1291-1  Taxation of U.S. persons that are shareholders of 
section 1291 funds.

* * * * *
    (b) * * *
    (2) * * *
    (ii) Pedigreed QEF. A PFIC is a pedigreed QEF with respect to a 
shareholder if the PFIC has been a QEF with respect to the shareholder 
for all taxable years during which the corporation was a PFIC that are 
included wholly or partly in the shareholder's holding period of the 
PFIC stock.
* * * * *
    (v) Section 1291 fund. A PFIC is a section 1291 fund with respect 
to a shareholder unless the PFIC is a pedigreed QEF with respect to the 
shareholder or a section 1296 election is in effect with respect to the 
shareholder.
* * * * *
    (7) Shareholder. A shareholder is a United States person that 
directly owns stock of a PFIC (a direct shareholder), or that is an 
indirect shareholder (as defined in section 1298(a) and paragraph 
(b)(8) of this section), except as provided in paragraph (e) of this 
section. For purposes of sections 1291 and 1298, a domestic partnership 
or S corporation (as defined in section 1361(a)(1)) is not treated as a 
shareholder of a PFIC except for purposes of any information reporting 
requirements, including the requirement to file an annual report under 
section 1298(f). In addition, to the extent that a person is treated 
under sections 671 through 678 as the owner of a portion of a domestic 
trust, the trust is not treated as a shareholder of a PFIC with respect 
to PFIC stock held by that portion of the trust, except for purposes of 
the information reporting requirements of Sec.  1.1298-1(b)(3)(i) 
(imposing an information reporting requirement on domestic liquidating 
trusts and fixed investment trusts).
    (8) Indirect shareholder--(i) In general. An indirect shareholder 
of a PFIC is a United States person that indirectly owns stock of a 
PFIC. A person indirectly owns stock when it is treated as owning stock 
of a corporation owned by another person, including another United 
States person, under this paragraph (b)(8). In applying this paragraph 
(b)(8), the determination of a person's indirect ownership is made on 
the basis of all the facts and circumstances in each case; the 
substance rather than the form of ownership is controlling, taking into 
account the purposes of sections 1291 through 1298.
    (ii) Ownership through a corporation--(A) Ownership through a non-
PFIC foreign corporation. A person that directly or indirectly owns 50 
percent or more in value of the stock of a foreign corporation that is 
not a PFIC is considered to own a proportionate amount (by value) of 
any stock owned directly or indirectly by the foreign corporation.
    (B) Ownership through a PFIC. A person that directly or indirectly 
owns stock of a PFIC is considered to own a proportionate amount (by 
value) of any stock owned directly or indirectly by the PFIC. Section 
1297(d) does not apply in determining whether a corporation is a PFIC 
for purposes of this paragraph (b)(8)(ii)(B).
    (C) Ownership through a domestic corporation--(1) In general. 
Solely for purposes of determining whether a person satisfies the 
ownership threshold described in paragraph (b)(8)(ii)(A) of this 
section, a person that directly or indirectly owns 50 percent or more 
in value of the stock of a domestic corporation is considered to own a 
proportionate amount (by value) of any stock owned directly or 
indirectly by the domestic corporation.
    (2) Non-duplication. Paragraph (b)(8)(ii)(C)(1) of this section 
does not apply to treat a United States person as owning (other than 
for purposes of

[[Page 95466]]

applying the ownership threshold in paragraph (b)(8)(ii)(A) of this 
section) stock of a PFIC that is directly owned or considered owned 
indirectly within the meaning of this paragraph (b)(8) by another 
United States person (determined without regard to paragraph 
(b)(8)(ii)(C)(1)). See Example 1 of paragraph (b)(8)(iv) of this 
section.
    (3) S corporations. The 50 percent limitation in paragraph 
(b)(8)(ii)(C)(1) of this section does not apply with respect to stock 
owned directly or indirectly by an S corporation. See paragraph 
(b)(8)(iii)(B) of this section for rules regarding stock owned directly 
or indirectly by an S corporation.
    (iii) Ownership through pass-through entities--(A) Partnerships. If 
a foreign or domestic partnership directly or indirectly owns stock, 
the partners of the partnership are considered to own such stock 
proportionately in accordance with their ownership interests in the 
partnership.
    (B) S Corporations. If an S corporation directly or indirectly owns 
stock, each S corporation shareholder is considered to own such stock 
proportionately in accordance with the shareholder's ownership interest 
in the S corporation.
    (C) Estates and nongrantor trusts. If a foreign or domestic estate 
or nongrantor trust (other than an employees' trust described in 
section 401(a) that is exempt from tax under section 501(a)) directly 
or indirectly owns stock, each beneficiary of the estate or trust is 
considered to own a proportionate amount of such stock. For purposes of 
this paragraph (b)(8)(iii)(C), a nongrantor trust is any trust or 
portion of a trust that is not treated as owned by one or more persons 
under sections 671 through 679.
    (D) Grantor trusts. If a foreign or domestic trust directly or 
indirectly owns stock, a person that is treated under sections 671 
through 679 as the owner of any portion of the trust that holds an 
interest in the stock is considered to own the interest in the stock 
held by that portion of the trust.
    (iv) Examples. The rules of this paragraph (b)(8) are illustrated 
by the following examples:

    Example 1. A is a United States person who owns 49 percent of 
the stock of FC1, a foreign corporation that is not a PFIC, and 
separately all the stock of DC, a domestic corporation that is not 
an S corporation. DC, in turn, owns the remaining 51 percent of the 
stock of FC1, and FC1 owns 100 shares of stock in a PFIC that is not 
a controlled foreign corporation (CFC) within the meaning of section 
957(a). DC is an indirect shareholder with respect to 51 percent of 
the PFIC stock held by FC1 under paragraph (b)(8)(ii)(A) of this 
section. In determining whether A owns 50 percent or more of the 
value of FC1 for purposes of applying paragraph (b)(8)(ii)(A) of 
this section, A is considered under paragraph (b)(8)(ii)(C)(1) of 
this section as indirectly owning all the stock of FC1 that DC 
directly owns. However, because 51 shares of the PFIC stock held by 
FC1 are indirectly owned by DC under paragraph (b)(8)(ii)(A) of this 
section, pursuant to the limitation imposed by paragraph 
(b)(8)(ii)(C)(2) of this section, only the remaining 49 shares of 
the PFIC stock are considered as indirectly owned by A under 
paragraph (b)(8) of this section.
* * * * *
    (e) * * *
    (2) Ownership through certain tax-exempt organizations and 
accounts. To the extent a United States person owns stock of a PFIC 
through an organization or account described in Sec.  1.1298-1(c)(1), 
that person is not treated as a shareholder with respect to the PFIC 
stock.
* * * * *
    (j) Applicability dates. (1) Paragraphs (c)(3) and (4) of this 
section apply for taxable years beginning on or after May 3, 2004.
    (2) Paragraph (e)(1) of this section is applicable on and after 
April 1, 1992.
    (3) Paragraphs (b)(2)(ii), (b)(2)(v), (b)(7), (b)(8), and (e)(2) of 
this section apply to taxable years of shareholders ending on or after 
December 31, 2013.


Sec.  1.1291-1T  [Removed]

0
Par. 5. Section 1.1291-1T is removed.

0
Par. 6. Section 1.1291-9 is amended by revising paragraphs (j)(3) and 
(k)(3) to read as follows:


Sec.  1.1291-9  Deemed dividend election.

* * * * *
    (j) * * *
    (3) A shareholder is a United States person that is a shareholder 
as defined in Sec.  1.1291-1(b)(7) or an indirect shareholder as 
defined in Sec.  1.1291-1(b)(8), except as provided in Sec.  1.1291-
1(e).
    (k) * * *
    (3) Paragraph (j)(3) of this section applies to taxable years of 
shareholders ending on or after December 31, 2013.


Sec.  1.1291-9T  [Removed]

0
Par. 7. Section 1.1291-9T is removed.

0
Par. 8. Section 1.1298-0 is amended by:
0
1. Revising the section heading and introductory text.
0
2. Adding a heading and entries for Sec.  1.1298-1.
    The revisions and additions read as follows:


Sec.  1.1298-0  Passive foreign investment company--table of contents.

    This section contains a listing of the paragraph headings for 
Sec. Sec.  1.1298-1 and 1.1298-3.

Sec.  1.1298-1 Section 1298(f) annual reporting requirements for 
United States persons that are shareholders of a passive foreign 
investment company.
    (a) Overview.
    (b) Requirement to file.
    (1) General rule.
    (2) Additional requirement to file for certain indirect 
shareholders.
    (i) General rule.
    (ii) Exception to indirect shareholder reporting for certain QEF 
inclusions and MTM inclusions.
    (3) Special rules for estates and trusts.
    (i) Domestic liquidating trusts and fixed investment trusts.
    (ii) Beneficiaries of foreign estates and trusts.
    (c) Exceptions.
    (1) Exception if shareholder is a tax-exempt entity.
    (2) Exception if aggregate value of shareholder's PFIC stock is 
$25,000 or less, or value of shareholder's indirect PFIC stock is 
$5,000 or less.
    (i) General rule.
    (ii) Determination of the $25,000 threshold in the case of 
indirect ownership.
    (iii) Application of the $25,000 exception to shareholders who 
file a joint return.
    (iv) Reliance on periodic account statements.
    (3) Exception for PFIC stock marked to market under a provision 
other than section 1296.
    (4) Exception for PFIC stock held through certain foreign 
pension funds.
    (5) Exception for certain shareholders who are dual resident 
taxpayers.
    (i) General rule.
    (ii) Dual resident taxpayer filing as nonresident alien at end 
of taxable year.
    (iii) Dual resident taxpayer filing as resident alien at end of 
taxable year.
    (6) Exception for certain domestic partnerships.
    (7) Exception for certain short-term ownership of PFIC stock.
    (8) Exception for certain bona fide residents of U.S. 
territories.
    (9) Exception for taxable years ending before December 31, 2013.
    (d) Time and manner for filing.
    (e) Separate annual report for each PFIC.
    (1) General rule.
    (2) Special rule for shareholders who file a joint return.
    (f) Coordination rule.
    (g) Examples.
    (h) Applicability date.
* * * * *


Sec.  1.1298-0T  [Removed]

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

0
Par. 10. Section 1.1298-1 is added to read as follows:


Sec.  1.1298-1  Section 1298(f) annual reporting requirements for 
United States persons that are shareholders of a passive foreign 
investment company.

    (a) Overview. This section provides rules regarding the reporting 
requirements under section 1298(f) applicable to a United States person 
that

[[Page 95467]]

is a shareholder (as defined in Sec.  1.1291-1(b)(7)) of a passive 
foreign investment company (PFIC). Paragraph (b) of this section 
provides the section 1298(f) annual reporting requirements generally 
applicable to United States persons. Paragraph (c) of this section sets 
forth exceptions to reporting for certain shareholders. Paragraph (d) 
of this section provides rules regarding the time and manner of filing 
the annual report. Paragraph (e) of this section sets forth the 
requirement to file a separate annual report with respect to each PFIC. 
Paragraph (f) of this section coordinates the requirement to file an 
annual report under section 1298(f) with the requirement to file an 
annual report under other provisions of the Internal Revenue Code 
(Code). Paragraph (g) of this section sets forth examples illustrating 
the application of this section. Paragraph (h) of this section provides 
effective/applicability dates.
    (b) Requirement to file--(1) General rule. Except as otherwise 
provided in this section, a United States person that is a shareholder 
of a PFIC must complete and file Form 8621, ``Information Return by a 
Shareholder of a Passive Foreign Investment Company or Qualified 
Electing Fund'' (or successor form), under section 1298(f) and these 
regulations for the PFIC if, during the shareholder's taxable year, the 
shareholder--
    (i) Directly owns stock of the PFIC;
    (ii) Is an indirect shareholder under Sec.  1.1291-1(b)(8) that 
holds any interest in the PFIC through one or more entities, each of 
which is foreign; or
    (iii) Is an indirect shareholder under Sec.  1.1291-1(b)(8)(iii)(D) 
that is treated under sections 671 through 678 as the owner of any 
portion of a trust described in section 7701(a)(30)(E) that owns, 
directly or indirectly through one or more entities, each of which is 
foreign, any interest in the PFIC.
    (2) Additional requirement to file for certain indirect 
shareholders--(i) General rule. Except as otherwise provided in this 
section, an indirect shareholder that owns an interest in a PFIC 
through one or more United States persons also must file Form 8621 (or 
successor form) with respect to the PFIC under section 1298(f) and 
these regulations if, during the indirect shareholder's taxable year, 
the indirect shareholder is--
    (A) Treated as receiving an excess distribution (within the meaning 
of section 1291(b)) with respect to the PFIC;
    (B) Treated as recognizing gain that is treated as an excess 
distribution (under section 1291(a)(2)) as a result of a disposition of 
the PFIC;
    (C) Required to include an amount in income under section 1293(a) 
with respect to the PFIC (QEF inclusion);
    (D) Required to include or deduct an amount under section 1296(a) 
with respect to the PFIC (MTM inclusion); or
    (E) Required to report the status of a section 1294 election with 
respect to the PFIC (see Sec.  1.1294-1T(h)).
    (ii) Exception to indirect shareholder reporting for certain QEF 
inclusions and MTM inclusions. Except as otherwise provided in this 
paragraph (b)(2)(ii), the filing requirements under paragraph (b) of 
this section do not apply with respect to an interest in a PFIC owned 
by an indirect shareholder described in paragraph (b)(2)(i)(C) or (D) 
of this section if another shareholder through which the indirect 
shareholder owns such interest in the PFIC timely files Form 8621 (or 
successor form) with respect to the PFIC under paragraph (b)(1) or (2) 
of this section. However, the exception in this paragraph (b)(2)(ii) 
does not apply with respect to a PFIC owned by an indirect shareholder 
described in paragraph (b)(2)(i)(C) of this section that owns the PFIC 
through a domestic partnership or S corporation if the domestic 
partnership or S corporation does not make a qualified electing fund 
election with respect to the PFIC (see Sec.  1.1293-1(c)(2)(ii), 
addressing QEF stock transferred to a pass through entity that does not 
make a section 1295 election).
    (3) Special rules for estates and trusts--(i) Domestic liquidating 
trusts and fixed investment trusts. A United States person that is 
treated under sections 671 through 678 as the owner of any portion of a 
trust described in section 7701(a)(30)(E) that owns, directly or 
indirectly, any interest in a PFIC is not required under section 
1298(f) and these regulations to file Form 8621 (or successor form) 
with respect to the PFIC if the trust is either a domestic liquidating 
trust under Sec.  301.7701-4(d) of this chapter created pursuant to a 
court order issued in a bankruptcy under Chapter 7 (11 U.S.C. 701 et 
seq.) of the Bankruptcy Code or a confirmed plan under Chapter 11 (11 
U.S.C. 1101 et seq.) of the Bankruptcy Code, or a widely held fixed 
investment trust under Sec.  1.671-5. Such a trust itself is treated as 
a shareholder for purposes of section 1298(f) and these regulations, 
and thus, except as otherwise provided in this section, the trust is 
required under section 1298(f) and these regulations to file Form 8621 
(or successor form) with respect to the PFIC as provided in paragraphs 
(b)(1) and (2) of this section.
    (ii) Beneficiaries of foreign estates and trusts. A United States 
person that is considered to own an interest in a PFIC because it is a 
beneficiary of an estate described in section 7701(a)(31)(A) or a trust 
described in section 7701(a)(31)(B) that owns, directly or indirectly, 
stock of a PFIC, and that has not made an election under section 1295 
or 1296 with respect to the PFIC, is not required under section 1298(f) 
and these regulations to file Form 8621 (or successor form) with 
respect to the stock of the PFIC that it is considered to own through 
the estate or trust if, during the beneficiary's taxable year, the 
beneficiary is not treated as receiving an excess distribution (within 
the meaning of section 1291(b)) or as recognizing gain that is treated 
as an excess distribution (under section 1291(a)(2)) with respect to 
the stock.
    (c) Exceptions--(1) Exception if shareholder is a tax-exempt 
entity. A shareholder that is an organization exempt under section 
501(a) to the extent that it is described in section 501(c), 501(d), or 
401(a), a state college or university described in section 
511(a)(2)(B), a plan described in section 403(b) or 457(b), an 
individual retirement plan or annuity as defined in section 
7701(a)(37), or a qualified tuition program described in section 529, a 
qualified ABLE program described in 529A, or a Coverdell education 
savings account described in section 530 is not required under section 
1298(f) and these regulations to file Form 8621 (or successor form) 
with respect to a PFIC unless the income derived with respect to the 
PFIC stock would be taxable to the organization under subchapter F of 
Subtitle A of the Code.
    (2) Exception if aggregate value of shareholder's PFIC stock is 
$25,000 or less, or value of shareholder's indirect PFIC stock is 
$5,000 or less--(i) General rule. A shareholder is not required under 
section 1298(f) and these regulations to file Form 8621 (or successor 
form) with respect to a section 1291 fund (as defined in Sec.  1.1291-
1(b)(2)(v)) for a shareholder's taxable year if--
    (A) On the last day of the shareholder's taxable year:
    (1) The value of all PFIC stock owned directly or indirectly under 
section 1298(a) and Sec.  1.1291-1(b)(8) by the shareholder is $25,000 
or less; or
    (2) The section 1291 fund stock is indirectly owned by the 
shareholder under section 1298(a)(2)(B) and Sec.  1.1291-
1(b)(8)(ii)(B), and the value of the section 1291 fund stock indirectly 
owned by the shareholder is $5,000 or less;
    (B) The shareholder is not treated as receiving an excess 
distribution (within

[[Page 95468]]

the meaning of section 1291(b)) with respect to the section 1291 fund 
during the taxable year or as recognizing gain treated as an excess 
distribution under section 1291(a)(2) as the result of a disposition of 
the section 1291 fund during the taxable year; and
    (C) An election under section 1295 has not been made to treat the 
section 1291 fund as a qualified electing fund with respect to the 
shareholder.
    (ii) Determination of the $25,000 threshold in the case of indirect 
ownership. For purposes of determining the value of stock held by a 
shareholder for purposes of paragraph (c)(2)(i)(A)(1) of this section, 
the shareholder must take into account the value of all PFIC stock 
owned directly or indirectly under section 1298(a) and Sec.  1.1291-
1(b)(8), except for PFIC stock that is--
    (A) Owned through another United States person that itself is a 
shareholder of the PFIC (including a domestic partnership or S 
corporation treated as a shareholder of a PFIC for purposes of 
information reporting requirements applicable to a shareholder);
    (B) Owned through a PFIC under section 1298(a)(2)(B) and Sec.  
1.1291-1(b)(8)(ii)(B); or
    (C) Marked to market for the shareholder's taxable year under any 
provision of chapter 1 of the Internal Revenue Code other than section 
1296, provided the rules of Sec.  1.1296-1(i)(2) and (3) do not apply 
to the shareholder with respect to the PFIC stock pursuant to Sec.  
1.1291-1(c)(4)(ii) for the shareholder's taxable year.
    (iii) Application of the $25,000 exception to shareholders who file 
a joint return. In the case of a joint return, the exception described 
in paragraph (c)(2)(i)(A)(1) of this section shall apply if the value 
of all PFIC stock owned directly or indirectly (as determined under 
section 1298(a), Sec.  1.1291-1(b)(8), and paragraph (c)(2)(ii) of this 
section) by both spouses is $50,000 or less, and all of the other 
applicable requirements of paragraph (c)(2) of this section are met.
    (iv) Reliance on periodic account statements. A shareholder may 
rely upon periodic account statements provided at least annually to 
determine the value of a PFIC unless the shareholder has actual 
knowledge or reason to know based on readily accessible information 
that the statements do not reflect a reasonable estimate of the PFIC's 
value.
    (3) Exception for PFIC stock marked to market under a provision 
other than section 1296. A shareholder is not required under section 
1298(f) and these regulations to file Form 8621 (or successor form) 
with respect to a PFIC for any taxable year in which the PFIC is marked 
to market under any provision of chapter 1 of the Internal Revenue Code 
other than section 1296, provided the rules of Sec.  1.1296-1(i)(2) and 
(3) do not apply to the shareholder with respect to the PFIC pursuant 
to Sec.  1.1291-1(c)(4)(ii) for the taxable year.
    (4) Exception for PFIC stock held through certain foreign pension 
funds. A shareholder who is a member or beneficiary of, or participant 
in, a plan, trust, scheme, or other arrangement that is treated as a 
foreign pension fund (or equivalent) under an income tax treaty to 
which the United States is a party and that owns, directly or 
indirectly, an interest in a PFIC is not required under section 1298(f) 
and these regulations to file Form 8621 (or successor form) with 
respect to the PFIC interest if, pursuant to the applicable income tax 
treaty, the income earned by the foreign pension fund may be taxed as 
the income of the shareholder only when and to the extent the income is 
paid to, or for the benefit of, the shareholder.
    (5) Exception for certain shareholders who are dual resident 
taxpayers--(i) General rule. Subject to the provisions of paragraphs 
(c)(5)(ii) and (iii) of this section, a shareholder is not required 
under section 1298(f) and these regulations to file Form 8621 (or 
successor form) with respect to a PFIC for a taxable year, or the 
portion of a taxable year, in which the shareholder is a dual resident 
taxpayer (within the meaning of Sec.  301.7701(b)-7(a)(1) of this 
chapter) who is treated as a nonresident alien of the United States for 
purposes of computing his or her United States income tax liability 
pursuant to Sec.  301.7701(b)-7 of this chapter.
    (ii) Dual resident taxpayer filing as a nonresident alien at end of 
taxable year. If a shareholder to whom this paragraph (c)(5) applies 
computes his or her U.S. income tax liability as a nonresident alien on 
the last day of the taxable year and complies with the filing 
requirements of Sec.  301.7701(b)-7(b) and (c) of this chapter and, in 
particular, such individual timely files with the Internal Revenue 
Service Form 1040NR, ``U.S. Nonresident Alien Income Tax Return,'' or 
Form 1040NR-EZ, ``U.S. Income Tax Return for Certain Nonresident Aliens 
With No Dependents,'' as applicable, and attaches thereto a properly 
completed Form 8833, ``Treaty-Based Return Position Disclosure Under 
Section 6114 or 7701(b),'' and the schedule required by Sec.  1.6012-
1(b)(2)(ii)(b) (if applicable), such shareholder will not be required 
under section 1298(f) and these regulations to file Form 8621 (or 
successor form) with respect to the taxable year, or the portion of the 
taxable year, covered by Form 1040NR (or Form 1040NR-EZ).
    (iii) Dual resident taxpayer filing as resident alien at end of 
taxable year. If a shareholder to whom this paragraph (c)(5) applies 
computes his or her U.S. income tax liability as a resident alien on 
the last day of the taxable year and complies with the filing 
requirements of Sec.  1.6012-1(b)(2)(ii)(a) and, in particular such 
shareholder timely files with the Internal Revenue Service Form 1040, 
``U.S. Individual Income Tax Return,'' or Form 1040EZ, ``Income Tax 
Return for Single and Joint Filers With No Dependents,'' as applicable, 
and attaches a properly completed Form 8833 to the schedule required by 
Sec.  1.6012-1(b)(2)(ii)(a), such shareholder will not be required 
under section 1298(f) and these regulations to file Form 8621 (or 
successor form) with respect to the portion of the taxable year 
reflected on the schedule to such Form 1040 or Form 1040EZ required by 
Sec.  1.6012-1(b)(2)(ii)(a).
    (6) Exception for certain domestic partnerships. A shareholder that 
is a domestic partnership is not required under section 1298(f) and 
these regulations to file Form 8621 (or successor form) with respect to 
a PFIC directly or indirectly held by the domestic partnership for a 
taxable year if each person that directly or indirectly owns an 
interest in the domestic partnership for its taxable year in which or 
with which the taxable year of the partnership ends is either--
    (i) Not a shareholder of the PFIC as defined by Sec.  1.1291-
1(b)(7);
    (ii) A tax-exempt entity or account not required to file Form 8621 
with respect to the stock of the PFIC under paragraph (c)(1) of this 
section;
    (iii) A dual resident taxpayer not required to file Form 8621 with 
respect to the stock of the PFIC under paragraph (c)(5) of this 
section; or
    (iv) A domestic partnership not required to file Form 8621 with 
respect to the stock of the PFIC under this paragraph (c)(6).
    (7) Exception for certain short-term ownership of PFIC stock. A 
shareholder is not required under section 1298(f) and these regulations 
to file Form 8621 (or successor form) with respect to a section 1291 
fund (as defined in Sec.  1.1291-1(b)(2)(v)) for a taxable year when 
the shareholder--
    (i) Acquires the section 1291 fund in the taxable year or the 
immediately preceding taxable year;
    (ii) Is a shareholder of the section 1291 fund for a total of 30 
days or less during the period beginning 29 days before the first day 
of the shareholder's

[[Page 95469]]

taxable year and ending 29 days after the close of the shareholder's 
taxable year; and
    (iii) Is not treated as receiving an excess distribution (within 
the meaning of section 1291(b)) with respect to the section 1291 fund, 
including any gain recognized that is treated as an excess distribution 
under section 1291(a)(2) as a result of the disposition of the section 
1291 fund.
    (8) Exception for certain bona fide residents of certain U.S. 
territories. A shareholder is not required under section 1298(f) and 
these regulations to file Form 8621 (or successor form) with respect to 
a PFIC for a taxable year when the shareholder--
    (i) Is a bona fide resident (as defined by section 937(a)) of Guam, 
the Northern Mariana Islands, or the United States Virgin Islands; and
    (ii) Is not required to file an income tax return with the Internal 
Revenue Service with respect to such taxable year.
    (9) Exception for taxable years ending before December 31, 2013. A 
United States person is not required under section 1298(f) and these 
regulations to file an annual report with respect to a PFIC for a 
taxable year of the United States person ending before December 31, 
2013.
    (d) Time and manner for filing. A United States person required 
under section 1298(f) and these regulations to file Form 8621 (or 
successor form) with respect to a PFIC must attach the form to its 
Federal income tax return (or information return, if applicable) for 
the taxable year to which the filing obligation relates on or before 
the due date (including extensions) for the filing of the return, or 
must separately file the form in accordance with the instructions for 
the form when the United States person is not required to file a 
Federal income tax return (or information return, if applicable) for 
the taxable year. In the case of any failure to report information that 
is required to be reported pursuant to section 1298(f) and these 
regulations, the time for assessment of tax will be extended pursuant 
to section 6501(c)(8).
    (e) Separate annual report for each PFIC--(1) General rule. If a 
United States person is required under section 1298(f) and these 
regulations to file Form 8621 (or successor form) with respect to more 
than one PFIC, the United States person must file a separate Form 8621 
(or successor form) for each PFIC.
    (2) Special rule for shareholders who file a joint return. United 
States persons that file a joint return may file a single Form 8621 (or 
successor form) with respect to a PFIC in which they jointly or 
individually own an interest.
    (f) Coordination rule. A United States person that is a shareholder 
of a PFIC may file a single Form 8621 (or successor form) with respect 
to the PFIC that contains all of the information required to be 
reported pursuant to section 1298(f) and these regulations and any 
other information reporting requirements or election rules under other 
provisions of the Code.
    (g) Examples. The following examples illustrate the rules of this 
section:

    Example 1. General requirement to file. (i) Facts. In 2013, J, a 
United States citizen, directly owns an interest in Partnership X, a 
domestic partnership, which, in turn, owns an interest in A Corp, 
which is a PFIC. In addition, J directly owns an interest in 
Partnership Y, a foreign partnership, which, in turn, owns an 
interest in A Corp. Neither J nor Partnership X has made a qualified 
electing fund election under section 1295 or a mark to market 
election under section 1296 with respect to A Corp. As of the last 
day of 2013, the value of Partnership X's interest in A Corp is 
$200,000, and the value of J's proportionate share of Partnership 
Y's interest in A Corp is $100,000. During 2013, J is not treated as 
receiving an excess distribution or recognizing gain treated as an 
excess distribution with respect to A Corp. Partnership X timely 
files a Form 8621 under section 1298(f) and paragraph (b)(1) of this 
section with respect to A Corp for 2013.
    (ii) Results. J is the first United States person in the chain 
of ownership with respect to J's interest in A Corp held through 
Partnership Y. Under paragraph (b)(1) of this section, J must file a 
Form 8621 under section 1298(f) with respect to J's interest in A 
Corp held through Partnership Y because J is an indirect shareholder 
of A Corp under Sec.  1.1291-1(b)(8) that holds PFIC stock through a 
foreign entity (Partnership Y), and there are no other United States 
persons in the chain of ownership. The fact that Partnership X filed 
a Form 8621 with respect to A Corp does not relieve J of the 
obligation under paragraph (b)(1) of this section to file a Form 
8621 with respect to J's interest in A Corp held through Partnership 
Y. J has no filing obligation under section 1298(f) and paragraph 
(b)(2) of this section with respect to J's proportionate share of 
Partnership X's interest in A Corp.
    Example 2. Application of the $25,000 exception. (i) Facts. In 
2013, J, a United States citizen, directly owns stock of A Corp, B 
Corp, and C Corp, all of which were PFICs during 2013. As of the 
last day of 2013, the value of J's interests was $5,000 in A Corp, 
$10,000 in B Corp, and $4,000 in C Corp. J timely filed an election 
under section 1295 to treat A Corp as a qualified electing fund for 
the first year in which A Corp qualified as a PFIC, and a mark-to-
market election under section 1296 with respect to the stock of B 
Corp. J did not make a qualified electing fund election under 
section 1295 or a mark to market election under section 1296 with 
respect to C Corp. J did not receive an excess distribution or 
recognize gain treated as an excess distribution in respect of C 
Corp during 2013.
    (ii) Results. Under paragraph (b)(1) of this section, J must 
file separate Forms 8621 with respect to A Corp and B Corp for 2013. 
However, J is not required to file a Form 8621 with respect to C 
Corp because J owns, in the aggregate, PFIC stock with a value of 
less than $25,000 on the last day of J's taxable year, C Corp is not 
subject to a qualified electing fund election or mark to market 
election with respect to J, and J did not receive an excess 
distribution in respect of C Corp or recognize gain treated as an 
excess distribution in respect of C Corp during 2013. Therefore, J 
qualifies for the $25,000 exception in paragraph (c)(2) of this 
section with respect to C Corp.
    Example 3. Application of the $25,000 exception to indirect 
shareholder. (i) Facts. E, a United States citizen, directly owns an 
interest in Partnership X, a domestic partnership. Partnership X, in 
turn, directly owns an interest in A Corp and B Corp, both of which 
are PFICs. Partnership X timely filed an election under section 1295 
to treat B Corp as a qualified electing fund for the first year in 
which B Corp qualified as a PFIC. In addition, E directly owns an 
interest in C Corp, which is a PFIC. C Corp, in turn, owns an 
interest in D Corp, which is a PFIC. E has not made a qualified 
electing fund election under section 1295 or a mark to market 
election under section 1296 with respect to A Corp, C Corp, or D 
Corp. As of the last day of 2013, the value of Partnership X's 
interest in A Corp is $30,000, the value of Partnership X's interest 
in B Corp is $30,000, the value of E's indirect interest in A Corp 
is $10,000, the value of E's indirect interest in B Corp is $10,000, 
the value of E's interest in C Corp is $20,000, and the value of C 
Corp's interest in D Corp is $10,000. During 2013, E did not receive 
an excess distribution, or recognize gain treated as an excess 
distribution, with respect to A Corp, C Corp, or D Corp. Partnership 
X timely files Forms 8621 under section 1298(f) and paragraph (b)(1) 
of this section with respect to A Corp and B Corp for 2013.
    (ii) Results. Under paragraph (b) of this section, E does not 
have to file a Form 8621 under section 1298(f) and these regulations 
with respect to A Corp because E is not the United States person 
that is at the lowest tier in the chain of ownership with respect to 
A Corp and E did not receive an excess distribution or recognize 
gain treated as an excess distribution with respect to A Corp. 
Furthermore, under paragraph (b)(2)(ii) of this section, E does not 
have to file a Form 8621 under section 1298(f) and these regulations 
with respect to B Corp because Partnership X timely filed a Form 
8621 with respect to B Corp. In addition, under paragraph 
(c)(2)(ii)(A) of this section, E does not take into account the 
value of A Corp and B Corp, which E owns through Partnership X, in 
determining whether E qualifies for the $25,000 exception. Further, 
under paragraph (c)(2)(ii)(B) of this section, E does not take into 
account the value of D Corp in determining whether E qualifies for 
the $25,000 exception. Therefore, even though E is the United States 
person that is at the lowest tier in the chain of ownership with

[[Page 95470]]

respect to C Corp and D Corp, E does not have to file a Form 8621 
with respect to C Corp or D Corp because E qualifies for the $25,000 
exception set forth in paragraph (c)(2)(i)(A)(1) of this section.
    Example 4. Indirect shareholder's requirement to file. (i) 
Facts. The facts are the same as in Example 3 of this paragraph (g), 
except that the value of E's interest in C Corp is $30,000 and the 
value of E's proportionate share of C Corp's interest in D Corp is 
$3,000.
    (ii) Results. The results are the same as in Example 3 of this 
paragraph (g) with respect to E having no requirement to file a Form 
8621 under section 1298(f) and these regulations with respect to A 
Corp and B Corp. However, under the facts in this Example 4, E does 
not qualify for the $25,000 exception under paragraph 
(c)(2)(i)(A)(1) of this section with respect to C Corp because the 
value of E's interest in C Corp is $30,000. Accordingly, E must file 
a Form 8621 under section 1298(f) and these regulations with respect 
to C Corp. However, E does qualify for the $5,000 exception under 
paragraph (c)(2)(i)(A)(2) of this section with respect to D Corp, 
and thus does not have to file a Form 8621 with respect to D Corp.
    Example 5. Application of the domestic partnership exception. 
(i) Facts. Tax Exempt Entity A and Tax Exempt Entity B are both 
organizations exempt under section 501(a) because they are described 
in section 501(c). Tax Exempt Entity A and Tax Exempt Entity B own 
all the interests in Partnership X, a domestic partnership, which, 
in turn, owns, an interest in Partnership Y, also a domestic 
partnership. The remaining interests in Partnership Y are owned by F 
Corp, a foreign corporation owned solely by individuals that are not 
residents or citizens of the United States. Partnership Y owns an 
interest in A Corp, which is a PFIC. Any income derived with respect 
to A Corp would not be taxable to Tax Exempt Entity A or Tax Exempt 
Entity B under subchapter F of Subtitle A of the Code. Tax Exempt 
Entity A, Tax Exempt Entity B, Partnership X, and Partnership Y all 
are calendar year taxpayers.
    (ii) Results. Under paragraph (c)(1) of this section, Tax Exempt 
Entity A and Tax Exempt Entity B do not have to file Form 8621 under 
section 1298(f) and these regulations with respect to A Corp because 
neither entity would be subject to tax under subchapter F of 
Subtitle A of the Code with respect to income derived from A Corp. 
In addition, under paragraph (c)(6) of this section, neither 
Partnership X nor Partnership Y is required to file Form 8621 under 
section 1298(f) and these regulations with respect to A Corp because 
all of the direct and indirect interests in Partnership X and 
Partnership Y are owned by persons described in paragraph (c)(1) of 
this section or persons that are not a shareholder of A Corp as 
defined by Sec.  1.1291-1(b)(7).

    (h) Applicability dates. (1) Except as provided in paragraph (h)(2) 
of this section, this section applies to taxable years of shareholders 
ending on or after December 31, 2013.
    (2) Paragraph (c)(9) of this section applies to taxable years of 
shareholders ending before December 31, 2013.


Sec.  1.1298-1T   [Removed]

0
Par. 11. Section 1.1298-1T is removed.

0
Par. 12. Section 1.6038-2 is amended by revising paragraphs (j)(3) and 
(m) to read as follows:


Sec.  1.6038-2  Information returns required of United States persons 
with respect to annual accounting periods of certain foreign 
corporations beginning after December 31, 1962.

* * * * *
    (j) * * *
    (3) Statement required. Any United States person required to 
furnish information under this section with his return who does not do 
so by reason of the provisions of paragraph (j)(1) of this section 
shall file a statement with his income tax return indicating that such 
requirement has been (or will be) satisfied and identifying the return 
with which the information was or will be filed and the place of 
filing.
* * * * *
    (m) Applicability dates. Except as otherwise provided, this section 
applies with respect to information for annual accounting periods 
beginning on or after June 21, 2006. Paragraphs (k)(1) and (5) Examples 
3 and 4 of this section apply June 21, 2006. Paragraph (d) of this 
section applies to taxable years ending after April 9, 2008. Paragraph 
(j)(3) of this section applies to returns filed on or after December 
31, 2013.


Sec.  1.6038-2T  [Removed]

0
Par. 13. Section 1.6038-2T is removed.

0
Par. 14. Section 1.6046-1 is amended by revising paragraph (e)(5) and 
adding paragraph (l)(3) to read as follows:


Sec.  1.6046-1  Returns as to organizations or reorganizations of 
foreign corporations and as to acquisitions of their stock.

* * * * *
    (e) * * *
    (5) Persons excepted from furnishing items of information. Any 
person required to furnish any item of information under paragraph (b) 
or (c) of this section with respect to a foreign corporation may, if 
such item of information is furnished by another person having an equal 
or greater stock interest (measured in terms of either the total 
combined voting power of all classes of stock of the foreign 
corporation entitled to vote or the total value of the stock of the 
foreign corporation) in such foreign corporation, satisfy such 
requirement by filing a statement with his return on Form 5471 
indicating that such requirement has been satisfied and identifying the 
return in which such item of information was included. This paragraph 
(e)(5) does not apply to persons excepted from filing a return by 
reason of the provisions of paragraph (e)(4) of this section.
* * * * *
    (l) * * *
    (3) Paragraph (e)(5) of this section applies to returns filed on or 
after December 31, 2013. See paragraph (e)(5) of Sec.  1.6046-1, as 
contained in 26 CFR part 1 revised as of April 1, 2012, for returns 
filed before December 31, 2013.


Sec.  1.6046-1T  [Removed]

0
Par. 15. Section 1.6046-1T is removed.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: December 13, 2016.
Mark D. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-30712 Filed 12-27-16; 8:45 am]
 BILLING CODE 4830-01-P